[Congressional Record Volume 141, Number 107 (Wednesday, June 28, 1995)]
[Senate]
[Pages S9320-S9322]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                PRIVATE SECURITIES LITIGATION REFORM ACT

  Mr. DODD. Mr. President, now that the Senate has completed action on 
S. 240, the Securities Litigation Reform Act, I wanted to take a few 
moments to focus on many of the salient provisions of this legislation 
that were not fully discussed during our 5 days of debate on 17 
different amendments.
  Of course, I am extremely pleased that the legislation received an 
overwhelming vote of support from my colleagues this morning, passing 
by a margin of 70 to 29.
  This vote is yet another confirmation of the very strong bipartisan 
support that the bill has received in the Senate and it also reflects 
the broad coalition of investor groups and businesses that have 
supported these reform efforts for the past 4 years.
  This is certainly an important day for American investors and the 
American economy. Passage of S. 240 puts us well on the road to 
restoring fairness and integrity to our securities litigation system.
  To some, this may sound like a dry and technical subject, but in 
reality, it is crucial to our investors, our economy and our 
international competitiveness. We are all counting on our high-
technology and bio-technology firms to fuel our economy into the 21st 
century. We are counting on them to create jobs and to lead the charge 
for us in the global marketplace.
  But those are the same firms that are most hamstrung by a securities 
litigation system that works for no one--save plaintiffs' attorneys.
  Over the past 1\1/2\ years, the intense scrutiny on the securities 
litigation system has dramatically changed the terms of debate, as we 
have seen on the floor for the past 5 days.
  We are no longer arguing about whether the current system needs to be 
repaired; we are now focused on how best to repair it.
  Even those who once maintained that the litigation system needed no 
reform are now conceding that substantive and meaningful changes are 
required if we are to maintain the fundamental integrity of private 
securities litigation.
  The flaws in the current system are simply too obvious to deny. The 
record is replete with examples of how the system is being abused and 
misused.
  While there has been much discussion of the position of the 
Securities and Exchange Commission, it is important to note that the 
Chairman of the SEC, Arthur Levitt, agrees with the fundamental notion 
that we must enact some meaningful reform:

       There is no denying that there are real problems in the 
     current system--problems that need to be addressed not just 
     because of abstract rights and responsibilities, but because 
     investors and markets are being hurt by litigation excesses.

  The legislation under consideration today is based upon the bill that 
Senator Domenici and I have introduced for the last two Congresses.
  There are some provisions from the original version of S. 240 that I 
would have liked to see included in this bill, such as an extension of 
the statute of limitations on private actions.
  In fact, I strongly supported an amendment offered by my good friend, 
Senator Bryan, that would have extended the statute of limitations from 
1 year after the fraud is discovered to 2 years and from 3 years after 
the actual perpetration of the fraud to 5 years.
  It is also important to note that the statute of limitations was 
decreased by the Supreme Court in last year's Central Bank decision, 
and not by any part of S. 240.
  But I certainly understand why this provision was taken out of the 
committee's product. It is excruciatingly difficult to produce a 
balanced piece of legislation, especially in such a complex and 
contentious area.
  But that is exactly what the Senate passed today, a bill that 
carefully and considerately balances the needs of our high-growth 
industries with the rights of investors, large and small. I am proud of 
the spirit of fairness and equity that permeates the legislation.
  I am also proud of the fact that this legislation tackles a 
complicated and difficult issue in a thoughtful way that avoids excess 
and achieves a meaningful equilibrium under which all of the interested 
parties can survive and thrive.
  As I stated earlier, this is a broadly bipartisan effort. This bill 
passed the Banking Committee with strong support from both sides of the 
aisle, and the 70 Senators from both parties who voted in favor of the 
bill this morning, represent all points on the so-called ideological 
spectrum.
  I believe that this morning's strong show of support displays the 
desire of the Senate to stand in favor of the balanced approach of S. 
240. In my view this vote also demonstrates the Senate's disagreement 
with the more extreme securities reform bill (H.R. 1058) that passed 
the other body in March.
  Those of us who have supported this legislation must be very mindful 
of the close vote that occurred on the second Sarbanes amendment to 
further limit the safe harbor provisions of the bill.
  I, for one, am committed to ensuring that as we move to a conference 
with the other body, we retain a safe harbor provision that is truly 
meaningful but that gives no aid and comfort to those who would try to 
defraud investors.
  And I would like to use this opportunity to reinforce the statement 
that I made earlier today: I will urge my colleagues to reject any 
conference report that includes safe harbor provisions --or any other 
provision for that matter--that are so broadly expanded that they 
breach the rights of legitimately aggrieved investors.
  Mr. President, H.L. Mencken once said that every problem has a 
solution that is neat, simple, and wrong. Believe me, if there were a 
simple solution to the problems besetting securities litigation today, 
we would have been able 

[[Page S9321]]
to pass a bill after 5 minutes, rather than 5 days, of floor debate.
  But these problems are so pervasive and complex that we have moved 
far beyond the point where the public interest is served by waiting for 
the courts or other bodies to fix them for us.
  The private securities litigation system is too important to the 
integrity and vitality of American capital markets to continue to allow 
it to be undermined by those who seek to line their own pockets with 
abusive and meritless suits.
  Let me be clear: Private securities litigation is an indispensable 
tool with which defrauded investors can recover their losses without 
having to rely upon Government action.
  I cannot possibly overstate just how critical securities lawsuits 
brought by private individuals are to ensuring public and global 
confidence in our capital markets. These private actions help deter 
wrongdoing and help guarantee that corporate officers, auditors, 
directors, lawyers, and others properly perform their jobs. That is the 
high standard to which this legislation seeks to return the securities 
litigation system.
  But as I said at the beginning of floor debate, the current system 
has drifted so far from that noble role that we see more buccaneering 
barristers taking advantage of the system than we do corporate 
wrongdoers being exposed by it.
  But there is more at risk if we fail to reform this flawed system. 
Quite simply, the way the private litigation system works today is 
costing millions of investors--the vast majority of whom do not 
participate in these lawsuits--their hard-earned cash.
  Mary Ellen Anderson, representing the Connecticut Retirement & Trust 
Funds and the Council of Institutional Investors, testified that the 
participants in the pension funds,

       . . . are the ones who are hurt if a system allows someone 
     to force us to spend huge sums of money in legal costs . . . 
     when that plaintiff is disappointed in his or her investment. 
     Our pensions and jobs depend on our employment by and 
     investment in our companies. If we saddle our companies with 
     big and unproductive costs . . . we cannot be surprised if 
     our jobs and raises begin to disappear and our pensions come 
     up short as our population ages.

  There lies the risk of allowing the current securities litigation 
system to continue to run out of control. Ultimately, it is the average 
investor, the retired pensioner who will pay the enormous costs clearly 
associated with this growing problem.
  Much of the problem lies in the fact that private litigation has 
evolved over the years as a result of court decisions rather than 
explicit Congressional action.
  Private actions under rule 10(b) were never expressly set out by 
Congress, but have been construed and refined by courts, with the tacit 
consent of Congress. But the lack of Congressional involvement in 
shaping private litigation has created conflicting legal standards and 
has provided too many opportunities for abuse of investors and 
companies.
  First, it has become increasingly clear that securities class actions 
are extremely vulnerable to abuses by entrepreneurs masquerading as 
lawyers. As two noted legal scholars recently wrote in the Yale Law 
Review:

       . . . The potential for opportunism in class actions is so 
     pervasive and evidence that plaintiffs' attorneys sometimes 
     act opportunistically so substantial that it seems clear that 
     plaintiffs' attorneys often do not act as investors' 
     ``faithful champions.''

  It is readily apparent to many observers in business, academia--and 
even Government--that plaintiffs' attorneys appear to control the 
settlement of the case with little or no influence from either the 
named plaintiffs or the larger class of investors.
  For example, during the extensive hearings on the issue before the 
Subcommittee on Securities, a lawyer cited one case as a supposed 
showpiece of how well the existing system works. This particular case 
was settled before trial for $33 million.
  The lawyers asked the court for more than $20 million of that amount 
in fees and costs. The court then awarded the plaintiffs' lawyers $11 
million and the defense lawyers for the company $3 million. Investors 
recovered only 6.5 percent of their recoverable damages. That is 6\1/2\ 
cents on the dollar.
  This kind of settlement sounds good for entrepreneurial attorneys, 
but it does little to benefit companies, investors or even the 
plaintiffs on whose behalf the suit was brought.
  A second area of abuse is frivolous litigation. Companies, 
particularly in the high-technology and bio-technology industries, face 
groundless securities litigation days or even hours after adverse 
earnings announcements.
  In fact, the chilling consequence of these lawsuits is that 
companies--especially new companies in emerging industries--frequently 
release only the minimum information required by law so that they will 
not be held liable for any innocent, forward-looking statement that 
they may make.
  Last week, I related to my colleagues the case of Raytheon Co., one 
of the Nation's largest high-tech, firms. This example warrants 
recapitulation here. Raytheon made a tender offer of $64 a share for E-
Systems, Inc., a 41 percent premium over the closing market price. Let 
me allow Raytheon to explain what happened next:

       Notwithstanding the widely held view that the proposed 
     transaction was eminently fair to E-Systems shareholders, the 
     first of eight purported class action suits was filed less 
     than 90 minutes after the courthouse doors opened on the day 
     that the transaction was announced. [Raytheon letter to 
     Senator Dodd; June 19, 1995.]

  No one lawyer could possibly have investigated the facts this 
quickly. What the lawyers want here is to force a quick settlement.
  The Supreme Court in Blue Chip Stamps versus Manor Drug Store echoed 
this concern about abusive litigation, pointing out:

       [i]n the field of federal securities laws governing 
     disclosure of information, even a complaint which by 
     objective standards may have very little success at trial has 
     a settlement value to the plaintiff out of any proportion to 
     its prospect of success at trial . . . The very pendency of 
     the lawsuit may frustrate or delay normal business activity 
     of the defendant which is totally unrelated to the lawsuit.

  The third area of abuse is that the current framework for assessing 
liability is simply unfair and creates a powerful incentive to sue 
those with the deepest pockets, regardless of their relative complicity 
in the alleged fraud.
  The result of the existing system of joint and severable liability is 
that plaintiffs' attorneys seek out any possible corporation or 
individual that has little relation to the alleged fraud--but which may 
have extensive insurance coverage or otherwise may have financial 
reserves. Although these defendants could frequently win their case 
were it to go trial, the expense of protracted litigation and the 
threat of being forced to pay all the damages make it more economically 
efficient for them to settle with the plaintiffs' attorneys.
  The current Chairman of the SEC, Arthur Levitt, as well as two former 
Chairmen, Richard Breeden and David Ruder, have all spoken out against 
the abuses of joint and several liability. Chairman Levitt said at the 
April 6 hearing of the Securities Subcommittee that he was concerned, 
in particular, ``about accountants being unfairly charged for amounts 
that go far beyond their involvement in particular fraud.''
  Frequently, these settlements do not appreciably increase the amount 
of losses recovered by the actual plaintiffs, but instead add to the 
fees collected by the plaintiffs' attorneys.
  Again, the current system has devolved to a point where it favors 
those lawyers who are looking out for their own financial interest over 
the interest of virtually everybody else.
  At the beginning of debate on this bill, I spent a fair amount of 
time discussing, in some detail, the various provisions of the 
legislation. I would like to again return our focus to how the 
legislation that the Senate passed earlier today deals with the 
existing problems in the securities litigation system:
  First, the legislation empowers investors so that they, not their 
lawyers, have greater control over their class action cases by allowing 
the plaintiff with the largest claim to be the named plaintiff and 
allowing that plaintiff to select their counsel.
  Second, it gives investors better tools to recover losses and 
enhances existing provisions designed to deter fraud, including 
providing a meaningful safe harbor for legitimate forward-looking 
statements so that issuers are encouraged, instead of discouraged, 

[[Page S9322]]
from volunteering much-needed disclosures.
  Third, it limits opportunities for frivolous or abusive lawsuits and 
makes it easier to impose sanctions on those lawyers who violate their 
basic professional ethics.
  Fourth, it rationalizes the liability of deep-pocket defendants, 
while protecting the ability of small investors to fully collect all 
damages awarded them through a trial or settlement.
  I would like to go into each of these provisions in more detail.
  The legislation ensures that investors, not a few enterprising 
attorneys, decide whether to bring a case, whether to settle, and how 
much the lawyers should receive.
  The bill strongly encourages the courts to appoint the investor with 
the greatest losses--usually an institutional investor like a pension 
fund--to be the lead plaintiff. This plaintiff would have the right to 
select the lawyer to pursue the case on behalf of the class.
  So for the first time in a long time, plaintiffs' lawyers would have 
to answer to a real client. We are bringing an end to the days when a 
plaintiffs attorney can crow to Forbes magazine that ``I have the 
greatest practice of law in the world. I have no clients.''
  The bill requires that notice of settlement agreements that are sent 
to investors clearly spell out important facts such as how much 
investors are getting--or giving up--by settling and how much their 
lawyers will receive in the settlement. This means that plaintiffs 
would be able to make an informed decision about whether the settlement 
is in their best interest--or in their lawyers' best interest.
  And the bill would end the practice of the actual plaintiffs 
receiving, on average, only 6 to 14 cents for every dollar lost, while 
33 cents of every settlement dollar goes to the plaintiffs' attorneys. 
This bill would require that the courts cap the award of lawyers fees 
based upon how much is recovered by the investors. Simply putting in a 
big bill will not guarantee the lawyers multimillion-dollar fees if 
their clients are not the primary beneficiaries of the settlement.
  Taken together, these provisions should ensure that defrauded 
investors are not cheated a second time by a few unscrupulous lawyers 
who siphon huge fees right off the top of any settlement.
  The bill mandates, for the first time in statute, that auditors 
detect and report fraud to the SEC, thus enhancing the reliability of 
independent audits. The bill maintains current standards of joint and 
several liability for those persons who knowingly engage in a 
fraudulent scheme, thus keeping a heavy financial penalty for those who 
would commit knowing securities fraud.
  The bill restores the ability of the Securities and Exchange 
Commission to pursue those who aid and abet securities fraud, a power 
that was diminished by the Supreme Court in last year's Central Bank 
decision.
  With regard to frivolous litigation, the bill clarifies current 
requirements that lawyers should have some facts to back up their 
assertion of securities fraud by adopting the reasonable standards 
established by the second circuit court of appeals. This legislation is 
therefore using a pleading standard that has been successfully tested 
in the real world; this is not some arbitrary standard pulled out of a 
hat.
  The bill requires the courts, at settlement, to determine whether any 
attorney violated rule 11 of the Federal Rules of Civil Procedure, 
which prohibits lawyers from filing claims that they know to be 
frivolous. If a violation has occurred, the bill mandates that the 
court must levy sanctions against the offending attorney. Though the 
bill does not change existing standards of conduct, it does put some 
teeth into the enforcement of these standards.
  The bill provides a moderate and thoughtful statutory safe harbor for 
predicative statements made by companies that are registered with the 
SEC. It provides no such safety for third parties like brokers, or in 
the case of merger offers, tenders, roll-ups, or the issuance of penny 
stocks. There are a number of other exceptions to the safe harbor as 
well. Importantly, anyone who deliberately makes false or misleading 
statements in a forecast is not protected by the safe harbor.
  By adopting this provision, the Senate will encourage responsible 
corporations to make the kind of disclosures about projected activities 
that are currently missing in today's investment climate.
  While almost everyone, including SEC chairman Arthur Levitt, 
recognizes the need to create a stronger safe harbor for forward-
looking statements, this is clearly one of the most controversial parts 
of the bill.
  I recognize the desire of my colleagues who have opposed this 
provision to clearly and firmly protect investors from fraudulent 
statements by corporate executives, and I am committed to maintaining 
the most balanced possible language on safe harbor as we enter into 
conference with the other body.
  I would point out that the legislation preserves the rights of 
investors whose losses are 10 percent or more of their total net worth 
of $200,000. These small investors would still be able to hold all 
defendants responsible for paying off settlements, regardless of the 
relative guilt of each of the named parties.
  And while the bill would fully protect small investors--so that they 
would recover all of the losses to which they are entitled--the bill 
establishes a proportional liability system to discourage the naming of 
deep-pocket defendants.
  The court would be required to determine the relative liability of 
all the defendants, and thus deep-pocket defendants would only be 
liable to pay a settlement amount equal to their relative role in the 
alleged fraud. A defendant who was only 10 percent responsible for the 
fraudulent actions would only be required to pay 10 percent of the 
settlement amount. In some circumstances, the bill requires solvent 
defendants to pay 150 percent of their share of the damages, to help 
make up for any uncollectible amount. By creating a two-tiered system 
of both proportional liability and joint-and-several liability, the 
bill preserves the best features of both systems.
  Mr. President, the legislation passed by the Senate today will keep 
the door to the courthouse wide open for those investors who 
legitimately believe that they are the victims of fraud, while slamming 
the door shut to those few entrepreneurial attorneys who file suit 
simply with the intent of enriching themselves through coercing 
settlements from as many defendants as possible.
  It has become clear that today's securities litigation system has 
become a system in which merits and facts matter little, in which 
plaintiffs recover less than their attorneys, and in which defendants 
are named solely on the basis of the amount of their insurance coverage 
or the size of their wallet; in short, we have a system in which there 
is increasingly little integrity and confidence. Mr. President, such a 
system of litigation is rendered incapable of producing the confidence 
and integrity in our Nation's capital markets for which it was 
originally designed.
  I am extremely pleased that this morning the Senate took the 
important step of repairing this ailing system by overwhelmingly 
passing the Securities Litigation Reform Act.


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