[Congressional Record Volume 141, Number 134 (Thursday, August 10, 1995)]
[Senate]
[Pages S12201-S12207]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


        SECURITIES LITIGATION REFORM SETTING THE RECORD STRAIGHT

  Mr. DOMENICI. Mr. President, in June, we passed S. 240, the Private 
Securities Litigation Reform Act of 1995 by a 69-to-30 margin. It 
started out as a Domenici-Dodd bill with 51 cosponsors and then 
Chairman D'Amato and the Banking Committee worked hard to improve it. 
It is a bill supported by Senators with vastly differing political 
philosophies. Senators Kennedy, Mikulski, Harkin, Helms, Gramm, and 
Lott were among the 69 Senators voting for the Senate bill.
  Mr. President, I am going to spend time discussing some of the 
misstatements about this bill, but first I want to tell you that 69 
Senators voted for this bill because it is good for our economy and job 
creation, for our capital markets and all investors.
  Mr. President, S. 240 creates a better system for investors 12 ways:
  First, S. 240 requires that investors be notified when a lawsuit has 
been filed so that all investors can decide if they really want to 
bring a lawsuit. Frivolous shareholder suits hurt companies by 
diverting resources from productive purposes, and thus, harm 
shareholders. The shareholder-owners of the company, not some 
entrepreneurial lawyer, should decide if a lawsuit is necessary. Most 
investors know that stock volatility is not stock fraud, yet a stock 
price fluctuation is all that lawyers need to file a case.
  Second, the bill puts lawyers and clients on the same side. By 
changing the economic incentives behind bringing and settling these 
suits, investors will benefit.
  Third, it reforms an oppressive liability so that companies can 
attract capable board members, and hire the best accountants, 
underwriters, and other professionals. The two-tier liability system 
contained in the bill is perhaps the most misunderstood provision of 
the bill. I will go through the details later in my speech.
  Fourth, the bill prohibits special $15,000 to $20,000 bonus payments 
to named plaintiffs. These side-agreements between lawyers and their 
professional plaintiffs are unfair to shareholders not afforded the 
opportunity to act as the pet plaintiff. By prohibiting bonus payments, 
the bill will put more money in the pockets of all aggrieved investors. 
It stops brokers from selling investors' names to plaintiffs' lawyers. 
This practice is at least unethical, and should not be part of our 
judicial system.

[[Page S 12202]]

  Fifth, S. 240 contains several provisions which will put the 
investors with a real financial stake in the company, and not the 
lawyers, in control of these cases in an effort to restore the 
traditional lawyer-client relationship that currently does not exist in 
securities class actions.
  Under the current system lawyers hire individual professional 
plaintiffs who own a few shares of stock to act as the lead plaintiff 
in these cases. These individuals own a few shares in every company 
publicly traded on the various stock exchanges so they can always be a 
plaintiff. These individuals sell their names of the class action 
lawyer in exchange for a $15,000 or $20,000 bonus payment. These pet 
plaintiffs then allow the attorneys to exercise complete control over 
the litigation. Because there is no real plaintiff-client to exercise 
control over the lawyer, settlements in these cases are often
 extremely generous to the lawyers. According to SEC Chairman Levitt, 
the current system is characterized as one where ``class counsel may 
have incentives that differ from those of the underlying class 
members.'' According to Chairman Levitt, this means that class action 
lawyers ``may have a greater incentive than the members of the class to 
accept a settlement that provides a significant fee and eliminates any 
risk of failure to recoup funds already invested in the case.'' 
Chairman Levitt is absolutely correct, and S. 240 will realign the 
interests of the lawyers with those of their clients, the class of 
investors.

  In these multimillion dollar class action cases, S. 240 requires the 
court to appoint a willing investor with a significant financial 
interest in the outcome of the litigation as the lead plaintiff. The 
objective is to have real clients with real financial interests making 
the decisions about these cases. I view this as a little adult 
supervision over these entrepreneurial lawyers.
  As such, S. 240 encourages institutional investors--the people who we 
trust to mange pension funds and mutual funds on behalf of thousands of 
retirees and small investors--to take charge of these multimillion 
dollar cases. This doesn't mean that the small investor will not be 
able to file a securities suit on their own behalf. Under S. 240, 
anyone still may file a securities class action. However, if a case is 
going to be a class action suit, the people we trust to manage the 
pension funds will be encouraged to take a more active role in these 
cases, instead of the plaintiffs' lawyers. Why? Because they have a 
fiduciary duty--a very high level of trust--to look out for the best 
interest of all the investors and retirees. Because they have the 
greatest responsibility in these cases,
 institutional investors will be in a position to maximize the amount 
of money made available to compensate the group of investors. Because 
they can negotiate fees up front, attorneys' fees will be reasonable, 
leaving more money for the people who should benefit from these cases--
the investors. Because they have the greatest interest in the outcome, 
institutional investors will closely scrutinize settlement offers and 
they will reject the ones that benefit lawyers to the detriment of 
shareholders. This will lead to larger awards for investors when a case 
has merits.

  Sixth, the bill provides for simpler disclosure of settlement terms 
to investors, including how much investors will receive on a per share 
basis, and how much the lawyers have requested in attorneys' fees and 
costs. Currently settlement disclosures are shrouded in boilerplate 
legalese, making them difficult for investors to understand.
  Seventh, the bill prohibits settlements under seal, where attorneys 
can keep their fees a secret. Investors should know how much they have 
paid for legal services, and should be able to challenge them if they 
are excessive.
  Eighth, the bill also limits attorneys' fees to a reasonable 
percentage of the settlement fund as a result of the attorneys' 
efforts. Currently, courts and attorneys use a confusing formula called 
the lodestar.
  Ninth, S. 240 creates an environment where CEO's or chairmen of the 
board can, and will, speak freely about their company's future without 
fear of lawsuits if their predictions do not materialize. This will put 
more information in the hands of investors, who seek forward-looking 
projections in order to make informed investment decisions.
 This is another provision that has been misunderstood.

  Tenth, S. 240 provides a uniform rule about what constitutes a 
legitimate lawsuit. The pleading reforms will ensure that cases filed 
in different parts of the country will be subject to the same rules. 
Predictability and uniformity are two hallmarks of an effective justice 
system, and the pleading reforms make the system more effective and 
predictable.
  The bill includes litigation cost containment provisions. A typical 
tactic of plaintiff lawyers is to request an extensive list of 
documents and to schedule an ambitious agenda of sworn testimony-taking 
that distracts the company CEO and other key officers and directors. 
These discovery costs comprise 80 percent of the expense of defending a 
securities class action lawsuit. To minimize the in terrorem impact of 
the frivolous cases, the bill would require the court to limit requests 
for documents during the pendency of any motion to dismiss unless 
factfinding is needed to preserve evidence or prevent undue prejudice. 
A stay of discovery puts such requests for documents and deposition 
taking on hold until the judge rules on whether the case should be 
kicked out of court.
  Eleventh, S. 240 will weed out frivolous cases while giving lawyers 
and judges more time to protect truly defrauded investors. By ending 
the race to the courthouse, cases are often filed within hours of when 
a company's stock price falls, this bill will ensure that the frivolous 
cases are dismissed quickly, giving companies more time and resources 
to focus on running the company. Investors will get higher stock prices 
and bigger dividends.
  The bill's attorney sanctions for filing frivolous securities fraud 
suits builds upon the existing rules of the Federal courts. Frivolous 
securities suits filed with little or no research into their merits can 
cost companies millions of dollars in legal fees and company time. 
According to a sample of cases provided by the National Association of 
Securities and Commercial Law Attorneys [NASCAT], 21 percent of the 
class action securities cases were filed within 48 hours of a 
triggering event, usually the announcement of a missed earnings 
projection.
  Innocent companies pay millions of dollars defending these frivolous 
cases. Even when firms are exonerated they have large defense 
attorney's bills to pay. Our current system is a winner pays system.
  Attorneys should be required to exercise due diligence before they 
file these expensive lawsuits. They should be sanctioned if they fail 
to exercise proper care. Accordingly, the Senate bill requires the 
judge, at the end of the case, to make specific findings regarding 
whether attorneys complied with the Court's rules, specifically, rule 
11(b) of the Federal Rules of Civil Procedure. Rule 11 provides 
sanctions for filing frivolous lawsuits. The bill requires the judge to 
discipline lawyers if the judge finds that the lawyer violated the 
rule. Under the bill, the judge would require an offending attorney to 
pay all the reasonable attorney's fees and costs of the innocent party 
as the consequence for filing a frivolous lawsuit if the case is kicked 
out of court on a motion to dismiss. This is the first step a defendant 
could take when he things the lawsuit is frivolous. For the defendant 
to win, the judge must rule that: first, the complaint failed to
 state a claim upon which relief can be granted and second, the 
complaint is frivolous on its face. The judge can sanction a defense 
lawyer who files frivolous motions.

  Twelfth, the bill will make the merits matter so that strong cases 
recover more than weak cases. It will ensure that people committing 
fraud compensate victims. It will ensure greater detection of fraud by 
requiring that professional advisors report corporate crime.
  By constructing a system which put investors, not the lawyers, in 
control of these cases and by making a greater share of the settlement 
fund available to defrauded investors, S. 240 will put an end to the 
current class action system that consumer rights advocates have called 
a joke and the Wall Street Journal called a Class Action Shakedown.
  I would like to talk about some of the stories that appeared about 
this 

[[Page S 12203]]
bill and set the record straight. The press has a very important role 
in reporting. As Justice Brandeis once said:

       The function of the press is very high. It is almost holy. 
     It ought to serve as a forum for the people, through which 
     the people may know freely what is going on. To misstate or 
     suppress the news is a breach of trust.

  As this bill moves to conference, I hope that the press will take a 
more careful look at this bill so that the people can know freely what 
is going on with securities litigation reform. This bill will benefit 
investors, and they ought to know it.
  If some press accounts about the bill were true no Senator would have
   cosponsored it. But 51 Senators did cosponsor S. 240, and 69 
Senators voted for it. These numbers are evidence that some press 
accounts must have missed the point on S. 240.

  In fact, during the debate on the floor my colleague, the chairman of 
the Banking Committee Senator D'Amato noted with some consternation 
that if we held the press to the same recklessness standard that we 
hold participants in our capital markets, then the press would not be 
able to print anything about our bill.
  If you read some of the articles printed during the floor debate on 
S. 240, you would think that the bill completely repealed the Federal 
securities laws. In actuality, the bill's primary focus is changes to a 
totally court-created type of lawsuit--the implied private right of 
action under section 10(b) of the Securities and Exchange Act. The 
courts created the private lawsuit under section 10(b) and yet 
recently, every time the Supreme Court has had a section 10(b) issue 
before it, the Court has scaled back the amount and scope of litigation 
that could be brought. I read the recent Supreme Court cases to be 
saying, ``Congress, we, the Supreme Court, created this type of 
lawsuit, but after several decades of experience we don't like how our 
court-created law is being abused, so fix it, Congress.'' That is what 
S. 240 does. It stops some of the abuses.
  On June 23, a Denver Post editorial said: ``Senate bill would give 
free ride to securities fraud.'' This editorial also stated that ``If 
S. 240 goes into effect, Americans will no longer have the option of 
suing cheats who run sophisticated investment schemes.'' S. 240 neither 
alters who can sue nor the standard of liability under the
 Federal securities laws. None of the 69 Senators who voted for this 
bill would give a free ride to securities fraud. The Sacramento Bee 
made a similar mistake in its July 13 editorial, and the Baltimore Sun 
repeated the mistake on June 26.

  Under current law, people who engage in securities fraud are jointly 
and severally liable. If a person is 1 percent responsible he can be 
required to pay for 100 percent of the damages. Former SEC Chairman 
Richard Breeden called joint and several liability inverted 
disproportionate liability. Former SEC Commissioner Carter Beese said 
that joint and several liability is unfair. The bill creates a two-tier 
liability system. It retains joint and several liability for people 
whose conduct is knowing. The bill goes a step further and requires 
that small investors be made whole.
  Those individuals found incidentally involved, are proportionately 
liable. For example, if a person is fond to be incidentally involved 
and 5 percent liable, he/she must pay 5 percent of the damages. This is 
called proportionate liability. Every former SEC Commissioner who 
testified at our hearings supported the concept of proportionate 
liability. Breeden testified, ``Paying your fair share, but no more 
than your fair share, of liability is hardly a radical proposal.''
  We created the two-tier system to stop plaintiffs' lawyers from 
naming people as defendants merely because they are deep pockets. We 
learned at our hearings that if a professional, like an accountant or 
underwriter is named as a defendant it adds one-third to the settlement 
value of the case regardless of whether or not the professional did 
anything wrong. Naming a lawyer, or an outside director also adds to 
the settlement
 value regardless of their role.

  A lot was said about Charles Keating. His name was mentioned over and 
over and over on the Senate floor and in the media during the debate on 
S. 240.
  On July 28 a St. Louis Post-Dispatch editorialized that under S. 240, 
Keating and his advisors would have gone free while investors would get 
no relief. The Post-Dispatch printed that under S. 240, ``joint and 
several liability would be abolished, which means that if the deceiving 
company has gone bankrupt, investors can't recover damages from the 
accounting firms, lawyers or stockbrokers who helped perpetrate the 
fraud.'' This is one statement with three errors. Error 1, the two-tier 
liability system does not abolish joint and several liability for 
people who commit knowing fraud. Error 2, accounting firms, lawyers, 
and others who are incidentally involved in the fraud will have to pay 
their share of the losses that their conduct caused--proportionate 
liability--the second tier of S. 240's liability scheme. Error 3, 
involves bankrupt codefendants. The bill provides that in the case of a 
bankrupt codefendant, the other codefendants are required to contribute 
an extra amount up to an additional 50 percent of their share to make 
up the uncollectible share. The bill also makes small investors whole.
  The St. Louis Dispatch editorial also states that ``accountants who 
detect fraud and keep quiet about it also would be helped'' by S. 240. 
The opposite is true. S. 240 requires auditors to speak up and expose 
corporate fraud. The bill requires accountants to report corporate 
fraud to the top management of the companies they audit. If management 
fails to expose and correct the fraud, the bill requires auditors to 
report the
 fraud to the Securities and Exchange Commission of face liability.

  This bill has nothing to do with Keating. No one in the Senate would 
support a bill that would allow an individual like Keating to get away 
with fraud. Keating knowingly lied and told investors that the junk 
bonds he sold were backed by the Federal Government. He should have 
been punished, and he was punished. Nothing in S. 240 would prevent 
that from happening. It is also important to note that Keating was sued 
under many provisions of both Federal and State law--laws untouched by 
S. 240.
  Instead, this bill has everything to do with a small coterie of 
securities class action attorneys who have become very rich by filing 
securities lawsuits against high-technology and other high-growth 
companies whenever their stock price drops or the company announces 
that it will be unable to meet analysis' earnings projections. 
Information provided during the 12 congressional hearings on this issue 
showed that there are approximately 300 securities lawsuits filed each 
year and that these suits normally settle for around $8.6 million each. 
Currently, the lawsuits take at least one-third of the settlement fund 
in the typical case, making the securities class action business a $2.4 
billion industry for these entrepreneurial lawyers.
  If you don't believe in that these lawyers are entrepreneurs, just 
look at how the typical securities class action suit gets started. 
Unlike the typical lawyer-client relationship, the lawyers hire their 
clients. These lawyers maintain a list of professional plaintiffs or 
pet plaintiffs who own a couple of shares of every stock traded on our 
stock exchanges. The lawyer agrees to pay the pet plaintiff a bonus of 
$10,000 or
 $15,000 if the person agrees to let the lawyer file the case on his/
her behalf. Often within hours after a stock's price drops as a result 
of a missed earnings projection, these lawyers file a lawsuit on behalf 
of a pet plaintiff. Some of these pet plaintiffs have appeared over and 
over again in these cases. By using these professional plaintiffs, the 
lawyers, not the investors, maintain control of the case. The lawyers 
decide who to sue, when to sue and when to settle. No wonder one of the 
most prominent securities class action attorneys told Forbes magazine 
``I have the greatest practice of law in the world, I have no 
clients.''

  Despite the fact that these lawyers admit that they have no clients, 
whenever Congress attempts to address the abuses the class action 
lawyers claim that if Congress enacts any legal reform, future Keatings 
could not be sued for damages. But as one plaintiff told us, she felt 
ripped off twice--once by the company and again by the class action 
lawyer.
  In the typical case, the real victims receive around 6 cents on the 
dollar of their claimed loss, while the lawyers 

[[Page S 12204]]
take the lion's share of the settlement fund as their fee award.
  In an interview with ``CNN,'' a prominent class action attorney, the 
same one who said he had no clients, settled a case for $12 million and 
asked for the entire amount as his share. When asked whether he had a 
responsibility to his clients to justify his fee request, he responded 
``no.'' Instead, he said that he has a responsibility to the court to 
justify the request.
  The Boston Globe stated that ``S. 240 requires that plaintiffs pick 
up the costs of the defendant companies if a suit fails.'' S. 240 
contains no such English rule, no loser pays provision, or no fee 
shifting provision. Under the Senate bill, no investor could be 
required to pay the legal fees of an innocent company in the event that 
the judge determines that the suit lacked merit. Instead, the bill, as 
passed by the Senate, builds on the existing rules of the court, in 
particular rule 11 of the Federal Rules of Civil Procedure. The bill 
requires judges to sanction attorneys who bring frivolous cases. In the 
most egregious situations the judge could require the attorney to pay 
the companies fees. This incrementally addresses the current winner 
pays system, which requires innocent companies to spend millions of 
dollars to get frivolous cases dismissed. At one point in legal history 
it was against the law for lawyers to promote unnecessary litigation 
and this attorney sanction provision takes a step toward ensuring that 
lawyers will only file cases which possess some merit.
  The Las Cruces Bulletin in my home State of New Mexico stated that 
Domenici's bill contains a provision which restricts the rights of 
small investors by setting financial standards for who may or may not 
file class action suits. Nothing in S. 240 as introduced, or as passed 
by the Senate limits the right of anyone to bring a securities lawsuit. 
Under S. 240, as under current law, anyone may bring a securities suit.
  Most small investors are senior citizens and support the reforms 
contained in S. 240. A National Investor Relations Institute Study, in 
March 1995, found that 81 percent of senior citizens would like to see 
mandatory penalties for lawyers who bring frivolous
 lawsuits. The bill does this. Seventy-nine percent say defendants 
should only pay damage awards according to their percentage of fault. 
The bill does this, but retains joint and several liability for fraud 
instigators and if necessary to fully compensate small investors; 87 
percent are concerned that companies are spending millions of dollars 
defending themselves in lawsuits--money that could be spent on further 
research of new products. The current system does this, but the bill 
should weed out the cases lacking merit. And 88 percent are concerned 
that even when the lawsuits are settled, it is not the consumers who 
benefit but the attorneys. S. 240 seems to be on the same waive length 
as these senior citizen investors.

  On June 26, during the floor debate, the Miami Herald charged that S. 
240 grants a safe harbor to all statements of a forward-looking nature 
and essentially tells companies and brokers: Go ahead, lie about the 
future. As long as you're not misrepresenting the past, you can fleece 
investors in any way that your imagination allows. This statement is 
good prose but bad reporting. Nothing in S. 240 gives executives, 
brokers or anyone else connected to publicly traded companies safe 
harbor protection if they intentionally lie about the corporation's 
future prospects.
  There is, however, a problem with the flow of information in the 
marketplace particularly information in the form of predictions about 
the future. CEO's who make predictions about the future get sued if 
their predictions don't materialize--regardless of the reason. After 
news that an earnings projection won't be met, the stock price drops 
for a couple of weeks and the lawsuit gets filed. Consequently, CEO's 
are making fewer
 and fewer predictions. This is a very serious problem--not only for 
high-technology company CEO's, but also for our securities markets. Our 
securities laws are based on disclosure of information, yet the chill 
on information about the future caused by these lawsuits is undermining 
the efficiency of our markets.

  These lawsuits divert resources from companies' research and 
development budgets to their legal departments. One of these lawsuits 
costs as much as developing and bringing to market a high-technology 
product line. Jobs that should have been created aren't created, and we 
lose out to our international competitors. The race to innovate becomes 
a race to the courthouse. It is a costly detour increasing the cost of 
capital, professional services, and officers and directors' liability 
insurance. Some have called it a litigation tax.
  S. 240 restores the ability of CEO's to make available information 
about their companies' future. It protects from lawsuit abuse 
predictions about the future made by the company as long as the 
statements are clearly identified as forward-looking projections--a 
Miranda warning to investors: ``This is a prediction about the future 
and because the future is uncertain it may not come true''--and were 
not made with the purpose and intent to deceive investors. Simply put, 
the Senate bill's safe harbor protects only the good guys and 
encourages disclosure. It is neither a license to lie, nor a license to 
steal. It is an opportunity to disclose for the company and restores 
the investors right-to-know. The bill does recognize that a projection 
about the future is a prediction, not a promise, or an adequate basis 
upon which to bring a multimillion
 dollar lawsuit. The bill does take away the class action lawyers' 
license to extort a settlement when a prediction about the future 
doesn't quite materialize.

  My good friend and fellow Democratic sponsor of this bill, Senator 
Dodd, recently had to endure an op-ed in his home State's Hartford 
Courant in which a well-known consumer advocate condemned him for 
supporting securities lawsuit reform. The same piece alleged that the 
bill changed the standard of liability, when, in fact, the Senator had 
been the champion for retaining the current law standard.
  Mr. President, people can disagree on whether we need more lawsuits 
or more investors but we can all agree that we need more good 
reporting. I hope I have clarified what this bill does and does not do.
  Mr. President, I ask unanimous consent that op-eds written by Carter 
Beese, Ed McCracken, Jonathan Dickey, Robert Gilbertson, and J. Kenneth 
Blackwell appear in the Record following my remarks.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                [From the New York Times, June 27, 1995]

                        Stop Choking Wall Street

                          (By J. Carter Beese)

       Washington.--A bill to reform the nation's securities 
     litigation system is moving toward a vote in the Senate. 
     Critics argue that it will allow corporate America to take 
     small investors to the cleaners. Nothing could be further 
     from the truth.
       As a former commissioner of the Securities and Exchange 
     Commission, I believe that strict enforcement of securities 
     laws is vital for investors and the integrity of the market. 
     But today's litigation machine harms the very investors that 
     opponents of reform profess to help.
       A majority of the high-tech firms in the Silicon Valley 
     have been sued at least once by vociferous plaintiffs' 
     lawyers in class-action fraud lawsuits. One of the every 
     eight companies on the New York Stock Exchange is sued for 
     securities fraud every five years. Is fraud really that 
     rampant among our most successful public companies? Or is the 
     system allowing, even encouraging, the initiation of 
     litigation, even when there is no evidence of wrongdoing?
       Under current law, there is little downside to frivolous 
     litigation, while the potential rewards are enormous--the 
     deep pockets of corporations and their advisers.
       The prevailing legal doctrine of joint and several 
     liability, which makes all defendants fully liable for what 
     may or may not have been their wrongdoing, adds to the 
     potential pot.
       Meanwhile, the huge costs of litigation give defendants an 
     equally powerful incentive to settle. Though there may be a 
     high probability of winning in court, settling is often a 
     bottom-line business decision made in the best interest of 
     investors.
       As a result, most cases are settled on a formulaic basis, 
     with plaintiffs collecting a small fraction of their alleged 
     loss and with legal fees consuming the remainder of the 
     settlement account.
       The ultimate costs are passed on to all investors in lower 
     earnings and lower share prices. These costs also weigh 
     heavily on productivity and competitiveness. Every dollar 
     spent on frivolous litigation is a dollar less for research, 
     innovation, capital investment and jobs.

[[Page S 12205]]

       The critics of this bill claim that its main purpose is to 
     protect corporate officials who peddle overly optimistic 
     predictions of profitability. Under today's rules, however, 
     any positive forecast that does not materialize can and will 
     be held against you in court. Companies have thus become 
     reluctant to disseminate forward-looking projections crucial 
     to investment decision-making.
       The changes in securities law before the Senate would not 
     prevent defrauded investors from seeking redress. They would 
     simply require any action involving misleading statements to 
     specify each such statement, thereby eliminating the vague, 
     sweeping claims that characterize so many meritless cases.
       They would begin to hold plaintiffs' lawyers accountable 
     for the lawyers' actions by requiring the court to make 
     specific findings about whether the suit was frivolous.
       Finally, they would establish legal protections for 
     forward-looking information unless that information was 
     misleading or fraudulent.
       These measured reforms are surely a better deal for 
     investors and the economy. By addressing the imbalance in our 
     system, separating the serious from the frivolous, we will 
     have a tort system that provides protection from fraud 
     without subverting fairness and free enterprise.
                                                                    ____

           [From the San Francisco Chronicle, June 28, 1995]

                   The New Threat to High-Tech Firms

                           (By Ed McCracken)

       William Weinberger looked like any other retiree in Pompano 
     Beach, Fla. No one would have guessed that he was part of an 
     effort to undermine California's high-tech industry.
       But by the time he died in 1992, he had set a remarkable 
     record: He had been the plaintiff in an astounding 90 
     lawsuits in just under three years. Weinberger was what is 
     known as a ``professional plaintiff,'' merely a consenting 
     name on a lawsuit instigated and filed by a law firm chasing 
     dollar signs rather than principle. The pieces of litigation 
     filed in his name were securities or ``strike'' suits, in 
     which one profits from a company's misfortune--that is, a 
     down-turn in the stock market.
        This new breed of corporate raider claims stock fraud when 
     there is little or no evidence of wrongdoing--that is, 
     deliberate false or misleading statements by the company 
     about its potential--then tied a company up in litigation 
     long enough to force a profitable settlement. It is a 
     practice that costs people jobs and divert millions from 
     research and development, and California has felt the impact 
     more than any other state.
       The high-tech firms of Silicon Valley and the Bay Area's 
     bio-tech companies are the No. 1 target of these schemes, 
     because cutting-edge research and the risks inherent in 
     development make their stock prices volatile.
       The facts speak for themselves: More than one-third of the 
     state's computer companies have been sued at least once. And 
     while the list of victims reads like a who's who of 
     California's high-tech industry--Intel, Hewlett Packard, Sun 
     Microsystems, Apple, Silicon Graphics Computers--some of the 
     smaller, startup firms that are the growth companies of 
     tomorrow are being driven into bankruptey.
       Silicon Graphics has over the years been the subject of no 
     less than four securities class-action lawsuits. None of 
     these suits had merit. Of the four, two were dismissed one 
     resulted in summary judgment in Silicon Graphics favor after 
     years of litigation, and one was settled for a nominal amount 
     after having been initially dismissed. By way of example, the 
     last suit was trigged by a disappointing quarter caused by 
     the short-tem economic upheaval arising from the Gulf War.
       These cases have cost Silicon Graphics well above $5 
     million in expenses, and countless hours of management time 
     has been diverted. The wasted time and money could have been 
     devoted to increasing business and adding jobs at a faster 
     pace.
       To end this kind of abuse, the U.S. Senate has stepped 
     forward with a bipartisan bill, The Securities Litigation 
     Reform Act. John Kerry, Democrat-Mass., has declared that 
     ``speculative suits based on no evidence of wrongdoing are an 
     unwarranted threat to young growth companies.''
       Congress recently heard testimony stating that only a 
     handful of strike suits ever actually come to trial because 
     most companies cannot spend the time and money to defend 
     their innocence, and are ultimately forced to settle instead. 
     The people behind the suits know this, and are happy to walk 
     off with unfair bounty. It is what one prominent CEO has 
     called ``legalized extortion.''
       The new bill, if passed, would make it more difficult to 
     bring such suits without just cause. We applaud the efforts 
     of the senators and others who have worked to bring this bill 
     forward, and we urge California Senators Dianne Feinstein and 
     Barbara Boxer to join in supporting it.
       If the bill passes, attorneys filing securities suits 
     without proper evidence would be subject to sanctions, their 
     fees would be limited and profit-seeking plaintiffs would be 
     discouraged. Still, some have voiced concern over the bill 
     and worry that it limits the ability of investors to bring 
     suit in the event of actual stock fraud. It does not. The 
     bill makes any and all who engage in securities fraud fully 
     liable. It also explicitly protects the small investor--
     anyone with a net worth under $200,000--leaving intact the 
     full range of options for seeking damages from fraudulent 
     companies. What this bill takes away, however, is the 
     incentive for a greedy few to launch frivolous lawsuits.
       Meanwhile, the bill's passage will enable California's 
     high-tech companies to freely pursue the ground-breaking 
     technologies and new products that launched them to the 
     forefront of the industry. Our entrepreneurs will have one 
     less worry as they make their way in the marketplace. And the 
     money saved could be put into the jobs and opportunities 
     Californians so desperately need, which is far better than 
     losing millions to the wallets of a wealthy few.
                                                                    ____

     [From the San Francisco Examiner and Chronicle, July 23, 1995]

                   Final Inning for ``Strike Suits''?

                          (By Jonathan Dickey)

       Securities fraud ``strike suits'' have overrun Silicon 
     Valley in the past decade--and for the past two years, 
     Silicon Valley has been fighting back. Now, legal reforms 
     curtailing these ``strike suits'' are about to become a 
     reality.
       Late last month, 70 members of the United States Senate 
     joined a broad coalition of industry trade groups, Silicon 
     Valley CEO's, securities industry representatives, and 
     institutional investors to finally bring sanity back to our 
     federal securities laws. The reform of those laws is aimed at 
     preventing further proliferation of ``strike suits'' alleging 
     securities fraud against public companies.
       In these suits, plaintiffs' lawyers make millions by 
     bringing frivolous securities claims with a high ``ransom'' 
     value to the companies forced to defend them. In just two 
     years, these strike suits have generated settlements totaling 
     over $1.3 billion, a huge percentage of which was paid by 
     California-based high-tech companies.
       The action in the Senate followed a lopsided vote earlier 
     this year in the House of Representatives approving a similar 
     reform bill, where Republicans and Democrats joined together 
     in large numbers to reject amendments offered by lobbyists 
     for plaintiffs' lawyers designed to weaken the bill, or kill 
     it altogether. Similar eleventh-hour lobbying efforts 
     occurred during the Senate debate.
       Contrary to many stories circulating in the business press, 
     the securities law reform legislation will not open the 
     floodgates to fraud, or deprive investors of their day in 
     court in cases of real fraud. In fact, the legislation passed 
     by the Senate contains several ``proinvestor'' provisions, 
     including:
       Restoring SEC authority to pursue ``aiders and abettors.'' 
     It used to be common practice to sue individuals, 
     accountants, and legal and financial advisors whose indirect 
     involvement in a company's securities offerings was alleged 
     to have made the company's ``fraud'' possible. Last year, the 
     U.S. Supreme Court ruled that the SEC did not have the power 
     to bring such claims under the main statute of the Securities 
     Exchange Act. The Senate bill would expressly authorize such 
     suits.
       Authorizing auditors to report accounting irregularities to 
     the SEC. Under existing accounting rules, auditors who 
     discover irregularities in a company's financial statements 
     are required to report such items to the company's audit 
     committee, but not to the public. The Senate bill would allow 
     auditors to ``blow the whistle'' to the SEC if the company's 
     board of directors fails to take corrective action when 
     irregularities are reported.
       Preventing companies from destroying critical evidence. The 
     Senate bill includes a ``preservation of evidence'' provision 
     which would make it a violation of federal law if a company 
     that is sued subsequently fails to preserve company records 
     relevant to the suit.
       Allowing courts to sanction lawyers who engage in bad faith 
     tactics in litigation. Investors sometimes complain about the 
     long wait for a case to be resolved. Defense lawyers who 
     engage in conduct which is found by the court to 
     unnecessarily delay or needlessly increase the cost of the 
     litigation may be forced to pay the plaintiffs' lawyers' 
     legal fees.
       Giving investors the right to determine who should 
     represent their interests in any litigation. Currently, 
     plaintiffs' lawyers engage in an unseemly ``race to the 
     courthouse'' to be the first to sue a company which reports 
     an earnings surprise. The first lawyer to sue normally gets 
     the ``lead counsel'' position, and the lion's share of the 
     fees. The Senate bill would abolish this practice, and 
     authorize investors to decide who their legal representative 
     should be.
       Protecting small investors by requiring ``joint and 
     several'' liability if the target defendant is bankrupt. The 
     Senate bill adopts a ``proportionate fault'' standard of 
     liability, which says that where multiple defendants are 
     sued, each will pay according to his or its share of the 
     blame. But the Senate bill will protect small investors if 
     the main ``bad guy'' is bankrupt, and will require the 
     solvent defendants to make up the difference.

[[Page S 12206]]

       Likewise, the House bill passed earlier this year--part of 
     the ``Contract with America''--contained several ``pro-
     investor'' provisions, including:
       Establishing plaintiff ``steering committees'' to supervise 
     litigation. The House bill allows shareholders with a 
     significant financial stake in the company to form a 
     committee, and make decisions on the conduct of the case. 
     Right now, plaintiffs' lawyers make all these decisions by 
     themselves.
       Eliminating any legal requirement that investors need to 
     prove reliance on fraudulent statements. The House bill would 
     codify the so-called ``fraud on the market'' doctrine, which 
     presumes that everything a company says is absorbed by the 
     market, and reflected in the stock price. Investors can't be 
     thrown out of court because they haven't read a company's 
     press releases, analyst reports, and the like.
       Setting a standard of liability which requires only proof 
     of recklessness, not actual intent to defraud. The House bill 
     also codifies a rule that investors don't have to prove 
     actual fraud. They only have to establish that a company 
     departed from ``standards of ordinary care'' in some extreme 
     way.
       What is it, then, that makes business groups, and Silicon 
     Valley in particular, so happy about the reform legislation? 
     As a lawyer who defends technology companies in these suits, 
     I see three major benefits to the legislation:
       Stronger protection to companies which issue earnings 
     projections or other ``forward looking'' statements.
       A higher standard for pleading fraud claims in court, 
     requiring courts to give more careful scrutiny to borderline 
     cases, and to dismiss those that are clearly frivolous.
       A more national standard for determining damages in these 
     cases, instead of the wide-open, ``anything goes'' manner in 
     which losses are currently computed.
       Will the legislation end securities strike suits? Not 
     entirely. What the legislation hopefully will do is level the 
     playing field, and allow companies to litigate appropriate 
     cases, instead of settling cases out of fear of catastrophic, 
     runaway jury verdicts.
       Ironically, some of the stronger criticisms of the reform 
     legislation have come from lawyers who defend companies in 
     these suits. Nationally, technology companies wonder about 
     this. In their view, lawyers who defend public companies 
     should embrace these reforms.
       Personally, I support any reform which will change the 
     current litigation climate, which forces many boards of 
     directors to spend millions of dollars to settle these cases 
     rather than gamble with a jury. The current laws foster this 
     climate by allowing too many meritless cases to be brought. 
     Although the legislation now pending in Congress is far from 
     perfect. I am convinced it will substantially reduce the 
     number of strike suits brought against technology companies 
     which experience momentary--and innocent--stock price 
     declines. At the same time, the legislation still will allow 
     legitimate fraud cases to be brought.
       Although the plaintiffs' lawyers so far have struck out in 
     Congress, the game isn't over. The Senate and House still 
     have to work out a compromise bill to send to President 
     Clinton for signature. No one should underestimate the 
     possibility that back-room politics will undo some of the 
     more important reforms before they reach the president's 
     desk. The next few months will see plaintiff's lawyers 
     ``swinging for the seats'' as the strike suit game heads into 
     the final innings.
                                                                    ____

            [From the Hartford Currant (CT), July 13, 1995]

               Yes: Bill Would Protect Growing Companies

                       (By Robert G. Gilbertson)

       For investors and businesses, the Senate's overwhelming 69-
     30 vote for the Domenici-Dodd bill to crack down on frivolous 
     securities lawsuits is a light at the end of the tunnel.
       For too long, baseless lawsuits have eroded earnings 
     potential and restricted business expansion by diverting 
     money from productive resources to legal fees and by cutting 
     off options for raising capital.
       Too many publicly traded companies have been sued for no 
     greater offense than that their stock price dropped. 
     Virtually all these lawsuits were filed by a small group of 
     law firms. Virtually none of the lawsuits came to trial, but 
     fighting such lawsuits distracted managers and cost millions 
     of dollars in legal fees.
       The threat of frivolous securities lawsuits has been one of 
     the biggest obstacles to growth for many ambitious companies.
       At a time when Connecticut has lost so many jobs, we need 
     to encourage companies to expand jobs and opportunities. The 
     legal system has the exact opposite effect. Many companies 
     have even decided to forgo the capital that could be raised 
     by selling stock to the public for fear of being caught in a 
     senseless legal system that can bankrupt emerging companies 
     even though they have done nothing wrong.
       Now--thanks to U.S. Sen. Christopher J. Dodd, the initial 
     cosponsor of the Senate bill, and his colleagues in both 
     parties--our economy may soon be free from meritless 
     securities lawsuits. That means businesses such as mine can 
     again consider selling stock to the public to finance 
     expansion. It also means shareholders' investments will rise 
     and fall on their own merits--without fear that a frivolous 
     lawsuit will cramp growth.
       I know. I am chief executive officer of CMX Systems, a 
     small high-tech company in Wallingford that manufactures 
     precision measuring devices for the disk drive and 
     semiconductor industry. By any objective measure, CMX has 
     been ripe for expansion for some time.
       We grew more than 2,000 percent in the four years from 1990 
     through 1993, and our sales exceeded $8.6 million in 1993. To 
     continue this extraordinary growth, CMX needed to sell stock 
     to the public in early 1994 to finance a $4 million research-
     and-development plan. However, we were deterred from this 
     option after watching other small companies get whiplashed by 
     frivolous securities lawsuits.
       Therefore, we were forced to scale back in 1994. This cost 
     jobs, profits and taxes to Connecticut and the U.S. 
     government.
       Most new public companies, especially in the volatile high-
     tech industry, experience wide swings in profitability. The 
     sharp moves in revenues and earnings often lead to similar 
     volatility in stock prices.
       Under the existing securities litigation system, those 
     stock-price movements have been the signal for a small group 
     of specialized lawyers to file class-action lawsuits alleging 
     fraud. Filed without any evidence of wrongdoing other than 
     stock-price movements, these lawsuits expose the companies to 
     millions of dollars impossible damages. In addition, fighting 
     even the weakest lawsuit requires staggering legal fees that 
     can themselves reach or exceed the $1 million mark.
       Pursued to trial, such lawsuits can run for years--drawing 
     hundreds of thousands of dollars from the corporate treasury 
     and thousands of hours of management time. Faced with that 
     reality, most companies find it cheaper to pay large 
     settlements to make the lawyers go away.
       The Domenici (Sen. Pete Domenici, R-N.M.)-Dodd bill, 
     approved by the Senate on June 28, would greatly reduce the 
     probability of such frivolous lawsuits--and free companies 
     such as mine to enter the equity markets for needed 
     investment capital. That means economic growth and more jobs 
     in Connecticut and throughout the United States.
       The bill bans the bounty payments that some lawyers use to 
     entice shareholders to file lawsuits. It requires lawsuits to 
     include specific evidence of fraud. It empowers judges to 
     terminate frivolous lawsuits before enormous legal fees 
     exhaust the resources of small companies. Finally, it 
     restores vital investor protection by giving control of 
     class-action lawsuits to shareholders.
       Where real fraud exists, shareholders will retain the 
     ability to pursue legal redress. But where the only winners 
     are likely to be plaintiffs' lawyers (who have taken in as 
     much as $250 million a year in questionable securities 
     lawsuits), the Senate bill gives shareholders the power to 
     pull the plug on that kind of frivolous litigation.
       Connecticut business leaders and investors owe a debt to 
     Dodd for having the courage to consider the merits of 
     securities litigation reform--and not discard it for solely 
     partisan reasons. All Americans owe thanks to the senators of 
     both parties who put common sense ahead of partisanship and 
     voted to restore sanity to the securities litigation systems.
                                                                    ____

               [From the Washington Times, June 28, 1995]

                  The Urgency of Securities Law Reform

                       (By J. Kenneth Blackwell)

       Orange County's recent bankruptcy is making the nation's 
     public funds and pension-fund managers mighty concerned about 
     the riskiness of their investments. I know; I'm one of them. 
     In 1988, I was a trustee for the $800 million Cincinnati 
     Employees Retirement System Fund. And today I'm Ohio's State 
     Treasurer with custodial responsibilities covering five state 
     pension funds valued at more than $105 billion.
       But the kind of bad investments that devastated Orange 
     County isn't what keeps me up at night. What worries me--and 
     what should worry the millions of retirees who have money in 
     stock funds--is what might happen to the good investments of 
     public-pension-fund managers. Those stocks, and the sound, 
     well-managed companies they represent, are increasingly 
     vulnerable to frivolous and baseless lawsuits. Which is why 
     the Senate is now debating securities litigation reform: to 
     protect such companies--and their ordinary investors. It's 
     good, necessary legislation. I hope it passes.
       The securities litigation system was initially designed to 
     protect investors from corporate fraud. In percentage terms, 
     it produces only a small fraction of the nation's multi-
     million-dollar lawsuit annual federal caseload. But as a 
     financial and administrative matter, securities class-action 
     suits filed against public companies are a monster. One of 
     every eight stocks traded on the New York Stock Exchange has 
     been subject to class-action challenge. Most high-tech firms 
     in California's Silicon Valley--companies that produce a 
     disproportionate share of America's job and profit growth, 
     making them obviously attractive pension fund investments--
     have been targets of such lawsuits.
       Defending such a lawsuit is often a nightmare. Securities 
     litigation is unusually complicated. The discovery process it 
     involves is long and arduous. Individual cases can take 

[[Page S 12207]]
     years to resolve in court, and even when a sued company wins, its 
     liability insurance premiums generally go up--a lot. So it's 
     become standard practice for securities class-action 
     defendants to settle these lawsuits pre-emptively, in a 
     struggle to avoid massive legal expenses and business 
     distractions.
       Settlement still hurts, of course. A study by the National 
     Venture Capital Association found that companies embroiled in 
     securities litigation--whether they settle or go to court--
     must spend an average of nearly $700,000 and 1,055 hours of 
     management time. But they really have no choice, because the 
     merits of an individual securities class-action suit are, at 
     least under current law, essentially irrelevant. Innocence is 
     no protection against a lawsuit. And real fraud too often 
     goes unpunished; genuinely guilty companies are encouraged to 
     settle, too.
       Rules of legal standing in the securities field are very 
     broad--and very thin. Acceptable evidence of corporate 
     wrongdoing barely extends beyond an unexpected stock price 
     change; roughly 20 percent of securities suits are filed 
     within 48 hours of a major stock decline. Or a stock 
     increase, for that matter--since it's not unknown for lawyers 
     to file suite against a company whose market position has 
     improved, claiming that information about a merger or 
     expansion has been fraudulently withheld.
       Given such juicy opportunities for standing, it's no 
     surprise that speculative securities litigation has become a 
     lucrative sub-specialty in the American plaintiffs' bar. The 
     small group of lawyers who concentrate on such law made a 
     1994 average of $1.4 million in fees and expenses on every 
     case. But America's pension funds who are shareholders in 
     these companies and in whose interest our securities laws are 
     intended to protect, get stuck with the short end of the 
     stick.
       Lead attorneys--usually the first lawyer to sign up a 
     single ``defrauded'' shareholder and rush his papers to the 
     courthouse--are generally granted wide latitude over pretrial 
     procedure. They're allowed to set settlement terms and 
     establish their own contingency fee rates with minimal 
     consultation and judicial supervision. After all expenses are 
     accounted for, plaintiff shareholders, even ``successful'' 
     ones, generally receive just a tiny fraction of the market 
     loss their lawyers claim for them: pennies on the dollar, in 
     fact. And when the process is concluded, shareholder 
     investments are very often in worse shape then when it began. 
     The companies involved are out big money, and their business 
     plans have been distorted by a tortuous legal entanglement.
       The life of a careful fund manager is seriously complicated 
     by the frivolous securities lawsuit phenomenon. If lawyers 
     are so broadly encouraged to seize on predictive corporate 
     earnings statements as ``evidence'' of an intention to 
     mislead, corporate officers will have a huge incentive to 
     dumb those statements down--or stop talking about future 
     profits at all. In Silicon Valley in particular, for example, 
     the trend is minimal disclosure. But intelligent investment 
     strategy requires maximum possible disclosure. And if I'm not 
     offered frank assessments of various companies' future 
     potential how can I rest assured that Ohio's pensioners' 
     hard-earned money is being invested wisely?
       My fiduciary responsibility compels me to act. And the U.S. 
     Senate also should act. As the final days of this debate wind 
     down, trial lawyers are digging in their heels and calling in 
     old chits. Securities litigation remains a fat chunk of their 
     practice, one they dearly want to protect. But Congress is 
     charged with protection of the public interest generally. And 
     the public interest, in this case, is best advanced in simple 
     and straightforward fashion.
       We must make deliberate acts of corporate fraud clearly 
     illegal, and easier and less costly to pursue. And we must 
     make high-dollar, meritless securities lawsuits--legal 
     devices that are threatening the retirement savings of 
     millions of ordinary Americans, and acting as a brake on the 
     engine of American economic growth--vastly more difficult to 
     pursue.
       The American system of law should be our country's greatest 
     treasure. But one part of that treasure is now mortgaged to 
     the narrow financial interest of a small group of specialized 
     attorneys. Enough is enough. The Senate reform legislation 
     has 50 co-sponsors from both parties. Not one of them should 
     waver.
     

                          ____________________