Congressional Record, Volume 141 Issue 192 (Tuesday, December 5, 1995)

[Congressional Record Volume 141, Number 192 (Tuesday, December 5, 1995)]
[Senate]
[Pages S17933-S17962]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995--CONFERENCE REPORT

Mr. D'AMATO. Mr. President, I submit a report of the committee of
conference on H.R. 1058 and ask for its immediate consideration.
The PRESIDING OFFICER (Mr. Frist). The report will be stated.
The legislative clerk read as follows:

The committee on conference on the disagreeing votes of the
two Houses on the amendments of the Senate to the bill (H.R.
1058) to reform Federal securities litigation, and for other
purposes, having met, after full and free conference, have
agreed to recommend and do recommend to their respective
Houses this report, signed by a majority of the conferees.

The PRESIDING OFFICER. Without objection, the Senate will proceed to
the consideration of the conference report.
(The conference report is printed in the House proceedings of the
Record of November 28, 1995.)
Mr. D'AMATO. Mr. President, today, the Senate will vote on the
conference report to H.R. 1058, the Private Securities Litigation
Reform Act of 1995.
This legislation has been 4 years in the making. It is a thoughtful
and carefully crafted bill. The provisions in the conference report are
balanced to make the legal system fairer and better for investors. The
current system does not protect investors, it exploits them. Now, the
system is not fair to investors and is not fair to American business.
Plaintiffs' lawyers know that and take advantage. It is time to reform
the securities class action litigation from a moneymaking enterprise
for lawyers into a better means of recovery for investors.
The present system is a feeding frenzy for plaintiffs' lawyers who
prey on companies with volatile stock prices, eat up the companies'
profits with a strike suit and move on to the next victim. Lawyers are
now able to file a baseless securities class action lawsuit against a
company, claiming millions of dollars in damages, and coerce huge
settlements. About 300 securities class action lawsuits are filed each
year. The same lawyers, and in some cases the same plaintiffs, the
world's unluckiest investors, show up in these lawsuits time after
time.
Frequently, the same complaint comes out of a word processor barely
changed. In one infamous case, a lawsuit against Philip Morris claimed
fraud in the ``toy industry.'' In other words, the forms are set, the
stock price drops, and bang, the suit is filed with the same plaintiffs
hired--in many cases, the plaintiff owns only 10 shares of stock. We
have seen some cases where the same plaintiffs appears in as many as 13
lawsuits. They are professional plaintiffs.
A drop in a public company's stock price, a failed product
development project, or even adverse market conditions that affect
earnings, can trigger one or more securities fraud lawsuits. Many times
the complaint simply alleges that management's predictions about the
company's future did not come true.
Once discovery begins, plaintiffs' counsel begins a fishing
expedition for evidence. One witness told a securities subcommittee
that his company produced 1,500 boxes of documents during discovery in
this type of case. The discovery ended up costing the company $1.4
million.
The threat of a protracted securities class action lawsuit is
powerful. Companies pony up huge settlements rather

[[Page S 17934]]
than face the time and expense of a class action lawsuit. The lawyers
do not just go after the money in the company's pockets, they also name
other deep pockets--the company's lawyers, accountants, underwriters
and directors--as defendants to assure a hefty settlement will be paid
out. The plaintiffs' lawyers are rarely disappointed. Almost 93 percent
of the cases settle at an average settlement cost of $8.6 million.
In 1994 alone, companies or their insurers paid out $1.4 billion to
settle these cases. The so-called victims of the fraud recover pennies
on the dollar and the lawyers pocket the rest. While the lawyer's share
is taken out, the class members get about 6 cents on the dollar.
Frequently, the only egregious offense is committed when the company's
shareholders are forced to pick up the tab.
The conference report reforms the system for securities litigation.
First, the conference report makes it harder to file frivolous
complaints and sanctions attorneys who do.
The conference report stops abusive securities litigation before it
starts. It will help to weed out frivolous complaints before companies
have to start paying enormous legal bills.
The legislation creates a uniform standard for complaints that allege
securities fraud. This standard is already the law in New York. It
requires a plaintiff plead facts giving rise to a strong inference of
the defendant's fraudulent intent.
The conference report also provides a strong disincentive for lawyers
to file abusive lawsuits. The legislation does not contain a loser pays
provision, which would go too far. Instead, the bill requires courts to
make findings about whether an attorney filed a frivolous complaint,
motion or responsive pleading and to sanction attorneys who do.
Second, the conference report makes sure that the victims of
securities fraud bring the lawsuit--not professional plaintiffs.
The conference report puts control of the lawsuit into the hands of
the victims. Right now, there often is no victim, just a professional
plaintiff whose name appears in lawsuit after lawsuit.
Professional plaintiffs are paid well for their services, usually in
the form of a bounty payment. News accounts report that one individual,
a retired lawyer, appeared as lead plaintiff in 300-400 lawsuits. Last
year, an Ohio judge refused to permit class certification, noting that
the lead defendant had filed 182 class actions in the last 12 years.
The conference report discourages the use of professional plaintiffs
by eliminating bonus payments to name plaintiffs and prohibiting
referral fees.
The conference report encourages real investors, especially pension
funds and other institutional investors, to take control of the
lawsuit. It provides that the plaintiff with the largest financial
interest in the outcome of the case should be the lead plaintiff.
Third, the conference report allows companies to talk about the
future of the company without the threat of a lawsuit.
The conference report will get more information to shareholders about
the future prospects of a company. The conference report codifies
existing law to provide a safe harbor to companies that make forward-
looking statements accompanied by meaningful cautionary statements.
Now, corporate management is afraid to make statements about the
future of the company, knowing that incorrect projections will
inevitably lead to a lawsuit. One study found that over two-thirds of
venture capital firms were reluctant to discuss their performance with
analysts or the public because of the threat of litigation.
The conference report includes a safe harbor that fairly balances the
need for a free flow of information to the marketplace and the need for
investor protection.
The conference report creates a two-pronged safe harbor. The first
prong gives safe harbor protection if there is a good enough warning
about why the forward-looking statement may not come true.

The safe harbor does not give a license to lie. The second prong does
not give safe harbor protection when forward-looking statements are
made with actual knowledge that the statement is false or misleading.
The conference report safe harbor does not cover areas where there is
potential for abuse. For example, the safe harbor does not cover IPO's,
financial statement information, penny stocks or limited partnerships.
There is no safe harbor for brokers.
The conference report safe harbor is balanced. The conference
committee worked with the SEC to make sure the safe harbor is safe for
investors as well as companies. I would like to include in the Record
as if read in its entirety, a letter from the SEC to me, dated November
16, 1995, supporting the safe harbor provision.
Fourth, the conference report modifies the system of liability so
that deep pocket peripheral defendants cannot be coerced into paying
more than their share of the damages.
The conference report reduces the coercive effect of unlimited
liability by making peripheral defendants liable only for the share of
damages they caused. Now, all defendants are on the hook for 100
percent of the damages--even if they are only responsible for 1
percent.
In class action lawsuits with hundreds of plaintiffs, the potential
liability can be staggering. Deep pocket defendants who may only be 1
percent liable routinely settle for much more rather than face paying
100 percent of the damages.
The conference report changes that by requiring peripheral defendants
to pay for only the share of damages they caused under a system of
proportionate liability.
This bill does not leave small investors out in the cold. Small
investors are always compensated for 100 percent of their damages if
they have a net worth of $200,000 or less.
The conference report does not change the system of liability for
defendants who knowingly commit securities violations. Anyone who has
knowingly committed a securities violation will still be liable for 100
percent of the damages. That's fair.
Fifth, the conference report improves the settlement process by
getting more information to investors about a proposed settlement and
restricting the amount attorneys may recover in fees.
The conference report enables the plaintiffs to receive a favorable
settlement rather that the attorneys. All too often, plaintiffs'
lawyers take the money and run. The legislation requires counsel to the
class to inform investors about the terms of a proposed settlement and
to be available to answer questions about the settlement.
The conference report also restricts the percentage of the recovery
that goes to the lawyers. Lawyers fees now sometimes add up to more
than 50 percent of the entire settlement. This legislation puts more of
the settlement money into the pockets of investors by limiting the
lawyers portion to a reasonable percentage of the settlement amount.
Sixth, the conference report also contains other provisions that make
the system for securities litigation reform fairer and better for
investors.
The legislation requires auditors to be on the lookout for wrongdoing
and report any evidence of fraud to the SEC. The conference report also
reinstates the SEC's authority--which the Supreme Court put into
question in the Central Bank of Denver case--to bring actions against
defendants who knowingly aid and abet securities fraud.
The bill prohibits document destruction by making it unlawful for a
party to destroy documents once a complaint is filed. Finally, the bill
makes sure that small investors are always compensated for 100 percent
of their damages if they have a net worth of $200,000 or less.
In summary, the bill will put a stop to abusive securities
litigation. It will curtail the use of professional plaintiffs. It will
empower real investors, especially pension funds and other
institutional investors, to take control of the lawsuit.
This legislation is aimed at weeding out frivolous cases by making it
harder to file factually baseless complaints. It also provides that
each defendant is liable for only his or her fair share of the damages,
making it more difficult for lawyers to coerce settlements from the
deep pocket defendants--that is, the defendant that has some assets or
money. At the same time, it will make accountants report fraud to the
authorities.

[[Page S 17935]]

Finally, this bill creates a safe harbor from private lawsuits about
forward-looking statements. The legislation will solve the problem of
abusive securities litigation without preventing investors from
bringing meritorious lawsuits.
I congratulate my Senate colleagues for all the time and effort they
have put into this important legislation. I particularly would like to
thank Senators Dodd and Domenici, who introduced this legislation more
than 4 years ago.
I thank Senator Gramm, the chairman of the Securities Subcommittee,
for his leadership. And I thank the staff who has worked so hard on
this bill. Our staff director, Howard Menell; the Banking Committee
staff: Laura Unger, Bob Giuffra, Wayne Abernathy, Mitchell Feuer, and
Andrew Lowenthal; Senator Domenici's staff: Denise Ramonas and Brian
Benczkowski, and the other key staff members, including Robert
Cresanti, Dave Berson, Peter Hong, and Carol Grunberg, who have been
indispensable to this process.
I also want to thank the SEC, the Security and Exchange Commission,
its staff, and the judicial conference, and all the others who have
made this piece of legislation successful.
The conference report is balanced. It hits the bullseye of the
target, curtailing abusive securities litigation, while allowing
investors to bring meritorious lawsuits. Once this bill becomes law,
investors will have a system of redress that serves them and not
entrepreneurial lawyers.
Mr. President, let me take the time now to indicate that on November
15 I received a letter from the Securities and Exchange Commission,
signed by Chairman Levitt, and Steve Wallman, a Commissioner. And let
me ask that I be permitted to read the letter into the Record.

Dear Mr. Chairman: As we approach the end of the long road
traveled on securities litigation reform, you have asked we
provide our views of the current draft of the legislation. At
the outset, let us express our appreciation for your
willingness to heed the concerns of the Commission regarding
the draft conference report October 23, 1995. Together we
have sought to achieve the most responsible reform possible.
While the Commission has raised a number of concerns about
earlier versions of this legislation, we believe the draft
conference report dated November 9th responds to our
principal concerns. We understand the need for a greater flow
of useful information to investors in the markets and we
share your desire to protect companies and their shareholders
from the costs of frivolous litigation.
The safe harbor provisions of the draft bill have been of
particular interest to us. While we could not support earlier
attempts at a safe harbor compromise, the current version
represents a workable balance that we can support since it
should encourage companies to provide valuable forward-
looking information to investors while, at the same time, it
limits the opportunity for abuse. The need of legitimate
businesses to have a mechanism for early dismissal of
frivolous lawsuits argues in favor of codification of the
``bespeaks caution'' doctrine that has developed under the
case law. While the trade-off requires that class action
attorneys must have well written and carefully researched
pleadings at the outset of the lawsuit, we feel this is
necessary to create a viable safe harbor, given that it does
not prevent Commission enforcement actions, and excludes the
greatest opportunities for harm to investors.
Outside of the safe harbor provisions, we have consistently
advocated reversal of Supreme Court decisions of Lampf and
Central Bank. It is unfortunate that Congress has not
restored these investor protections that were removed by the
Supreme Court; however, we recognize that amendments on both
subjects were defeated in the course of this legislative
effort, thereby making it difficult to include such
provisions in the bill. The conference bill raises other
minor issues, but the language in the conference report
hopefully will prevent any unintended consequences. We remain
grateful to you and your staff, as well as the other members
and their staffs, for the willingness to engage in a dialogue
with us aimed at getting a better deal for investors.
Thank you for your consideration.

Signed Arthur Levitt, chairman.
Mr. President, I ask unanimous consent that this letter be printed in
the Record.
There being no objection, the letter was ordered to be printed in the
Record, as follows:

U.S. Securities and

Exchange Commission,

Washington, DC, November 15, 1995.
Hon. Alfonse M. D'Amato,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: As we approach the end of the long road
traveled on securities litigation reform, you have asked that
we provide our views of the current draft of the legislation.
At the outset, let us express our appreciation for your
willingness to heed the concerns of the Commission regarding
the draft conference report dated October 23, 1995. Together
we have sought to achieve the most responsible reform
possible.
While the Commission has raised a number of concerns about
earlier versions of this legislation, we believe the draft
conference report dated November 9th responds to our
principal concerns. We understand the need for a greater flow
of useful information to investors and the markets and we
share your desire to protect companies and their shareholders
from the costs of frivolous litigation.
The safe harbor provisions of the draft bills have been of
particular interest to us. While we could not support earlier
attempts at a safe harbor compromise, the current version
represents a workable balance that we can support since it
should encourage companies to provide valuable forward-
looking information to investors while, at the same time, it
limits the opportunity for abuse. The need of legitimate
businesses to have a mechanism for early dismissal of
frivolous lawsuits argues in favor of the codification of the
``bespeaks caution'' doctrine that has developed under the
case law. While the trade-off requires that class action
attorneys must have well written and carefully researched
pleadings at the outset of the lawsuit, we feel this is
necessary to create a viable safe harbor, given that it does
not prevent Commission enforcement actions, and excludes the
greatest opportunities for harm to investors.
Outside of the safe harbor provisions, we have consistently
advocated reversal of Supreme Court decisions of Lampf and
Central Bank. It is unfortunate that Congress has not
restored these investor protections that were removed by the
Supreme Court; however, we recognize that amendments on both
subjects were defeated in the course of this legislative
effort, thereby making it difficult to include such
provisions in this bill. The conference bill raises other
minor issues, but the language in the conference report
hopefully will prevent any unintended consequences. We remain
grateful to you and your staff, as well as the other members
and their staffs, for the willingness to engage in a dialogue
with us aimed at getting a better deal for all investors.
Thank you for your consideration.
Sincerely,
Arthur Levitt,
Chairman.
Steven M.H. Wallman,
Commissioner.

Mr. D'AMATO. Mr. President, let me conclude by simply saying that
this bill may not be the perfect solution and, indeed, there may be
some unintended consequences that create problems. This Senator and, I
know, Senator Dodd and Senator Domenici and all of my colleagues are
ready to deal with any problems that may come about.
But let me say this, too. First, in this bill we go after the
greatest abuse that is taking place, which is lawyers who do not
represent the general public but represent themselves. They have for
hire plaintiffs who are not really aggrieved, who own minimal, in some
cases as little as 10 shares, of stock. As soon as there is a price
variation, these lawyers race to the courthouse so that they can file a
claim so they will control the case. There is little regard for the
company, little regard for the real aggrieved investors. We have
changed that significantly. No longer will there be permitted
professional plaintiffs.
Second, for the first time we say that the court shall look at the
facts as they relate to the questions: Is there a pension fund? Is
there a large investor involved whose interests should be protected?
The court will look at these questions as they relate to the lawyer's
representation so that we have lawyers, who really represent the
aggrieved investors, controlling the case, not a string of
professional, sharks, sharks for hire.
Third, we have made it more difficult to bring suits that are aimed
at forcing settlements.
Fourth, we answer questions which are long overdue. Should we hold
somebody responsible for the total loss, if there is a loss, if they
have been minor participants and if they have been responsible for 1 or
2 or 3 or 4 percent of the loss, because they are wealthy or have a
member of the board of directors who has deep pockets? Do we want to
encourage people to participate in corporate governance, or do we want
to discourage it; do we want to make it impossible for large firms to
come in and use their expertise because they are afraid of being sued
so they say, ``No, I do not want to audit your books; the exposure is
too great''?
Do we really want to have a system where people are forced--forced--
to

[[Page S 17936]]
give up and settle a case because if there is even the slightest doubt
as it relates to liability, they may be facing huge, huge losses. These
companies, therefore, are forced to settle even when they know they
have not committed any tortious acts, but the risk of the jury finding
any evidence in the way of negligence, even a small, minute amount,
might jeopardize the company with huge claims?
So what you literally have is a group of bandits who force companies
into settlements of millions and millions of dollars. Is that fair to
those companies? Is that fair to the shareholders? I do not think so.
What we have said in this conference report is, if you are negligent,
if you have committed a tortious act, you should be held responsible
for the percentage of losses due to your tortious act, not that the
full consequences of somebody else's actions should fall on you simply
because you are a person who has some money and some resources. That is
wrong. That is not fair.
If you are intentionally defrauding investors? That is a different
matter. You will be held. I think this is fair. I think this is
reasonable.
I understand that there are some provisions that some of my
colleagues have some differences with, but I think overall we have
moved forward in a very conscientious manner in the attempt to have a
fair and balanced system, so that those who truly have committed
tortious actions will be held accountable for their actions, and they
will not be held accountable for other people's actions, nor will they
be forced to make settlements that are indeed unfair. We have
eliminated a terribly unscrupulous practice that I believe is a stain
on the legal profession.
I have stood up and I have battled on behalf of litigants and on
behalf of the attorneys who represent them, so that they may have a
level playing field. But the law as it exists today is not a level
playing field. And there have been and there are a handful who have
abused the system. We are attempting to deal with those abuses.
I want to thank my colleagues for their participation. I certainly
want to thank Senator Bennett for his job in terms of working with us.
I urge my colleagues to vote in favor of the final passage. And I thank
the Chair.
Mr. SARBANES addressed the Chair.
The PRESIDING OFFICER (Mr. Kyl). The Senator from Maryland.
Mr. SARBANES. Mr. President, later today the Senate will vote on the
final version of the securities litigation bill which has been brought
back from conference. Supporters of the bill argue that it is a
balanced response to a widespread problem; namely, frivolous securities
litigation. What should be clear to all Senators, however, is that this
bill is not--is not--a balanced response to that problem.
This legislation will affect far more than frivolous suits. When the
arguments are made for the legislation, the examples that are always
cited are examples of frivolous suits. And I do not know of any
difference in here, that we ought to find ways to get at those and that
those are an abuse of the system. But this bill goes way beyond that.
This bill will make it more difficult for investors to bring and
recover damages in legitimate fraud actions--legitimate fraud actions.
As the editors of Money magazine concluded, this legislation hurts
investors. In fact, the December editorial of Money magazine warns,
``Now only Clinton can stop Congress from hurting small investors like
you.''
At every stage of the legislative process, this bill has been amended
to make it more difficult for investors to bring legitimate suits. As
it has moved through the process, provisions favorable to investors
have been taken out. Balanced provisions in the legislation have been
made harmful to investors. Individual investors, local governments and
pension plans all will be hurt by this legislation. All will find it
more difficult to bring fraud actions and to recover full damages as a
result of the measure now before the Senate. That is why this bill is
opposed by a broad coalition of regulators, State and local government
officials, labor unions, consumer groups and investor organizations,
and by literally dozens and dozens of editorials in major newspapers
and magazines across the country.
I want to review just some of the areas in which this negative trend
took place in the course of the legislative consideration of this
legislation.
First, the statute of limitations. The process of hurting investors
began in the Banking Committee when it deleted the extension of the
statute of limitations. The bill originally introduced by Senators
Domenici and Dodd, who have had a keen interest in this matter, Senate
bill 240, that original bill as introduced by them extended the statute
of limitations for security fraud suits--that is, the period of time
available to investors to discover that they have been defrauded and to
file a claim. This was in fact the one clearly proinvestor provision in
that bill introduced by Senators Domenici and Dodd. It responded to the
experts in this area--the Federal and State securities regulators--all
of whom agree that the current statute of limitations is too short to
protect investors.
For over 40 years, courts held that the statute of limitations for
private rights of action under section 10(b) of the Securities Exchange
Act of 1934, the principal antifraud provision of the Federal
securities laws, was the statute of limitations determined by
applicable State law. While these statutes varied from State to State,
they generally afforded securities fraud victims sufficient time to
discover that they had been defrauded and sufficient time to bring
suit.
In 1991, in the Lampf case, the Supreme Court significantly shortened
the period of time in which investors may bring securities fraud
actions. By a 5-to-4 vote--in other words, a very closely divided
Supreme Court--the Court held that the applicable statute of
limitations is 1 year after the plaintiff knew of the violation and in
no event more than 3 years after the violation occurred. These time
periods are shorter than the statute of limitations for private
securities actions which existed under the law of 31 of the 50 States.
Regulators have testified unanimously that this shorter period does
not allow individual investors adequate time to discover and pursue
violations of securities law. Testifying before the Banking Committee
in 1991, SEC Chairman Richard Breeden stated, and I quote,

The timeframes set forth in the [Supreme] Court's decision
is unrealistically short and will do undue damage to the
ability of private litigants to sue.

Chairman Breeden pointed out that in many cases, and I quote,
``events only come to light years after the original distribution of
securities and the cases could well mean that by the time investors
discover they have a case, they are already barred from the
courthouse.'' In other words, if the perpetrator of the wrong can
conceal it long enough under this very shortened statute of
limitations, the victim will have no remedy.
The FDIC and the States securities regulators joined the SEC in favor
of overturning the Lampf decision. What happened to this provision that
was in the legislation as originally introduced by Senators Domenici
and Dodd? It disappeared when the Banking Committee met to consider
this bill. Despite the fact that all the securities regulators
recommended it, despite the fact that Senators Domenici and Dodd had
included it in their original bill, despite the fact that the Banking
Committee had approved this provision before in 1991, despite the fact
that it was the one clearly proinvestor provision in the bill, the
provision was dropped.
Let me make clear that the statute of limitations issue has nothing
to do with frivolous cases. The current statute of limitations keeps
worthy cases from the courthouse. Both Republican SEC chairmen and
Democratic SEC chairmen have told us that the statute of limitations
imposed by the Supreme Court in 1991 is too short. It allows con
artists to perpetrate frauds, and it prevents defrauded investors from
seeking restitution.
When the statute of limitations provision disappeared from the bill,
the bill moved down the path of being an unbalanced effort. At that
point, the bill began to tilt away from individual investors, away from
pension funds and county treasurers, in favor of corporate insiders and
the attorneys and accountants who advise them.
When the Banking Committee dropped the lengthening of the statute

[[Page S 17937]]
of limitations provision, it went beyond deterring frivolous lawsuits
and began hurting investors.
I want to underscore that because that is the basic point that must
be understood about this conference report. Again and again it goes
beyond deterring frivolous lawsuits and hurts investors.
Let me turn now to another example of this proposition, that is, the
aiding and abetting issue. Failure to include the extension of the
statute of limitations removed the balance from this bill and tilted it
toward corporate wrongdoers. The Banking Committee could have added
some balance to the bill by restoring the ability of investors to sue
the accountants and attorneys who aid and abet securities fraud. This
was recommended by the SEC, the State securities regulators, and
various bar associations. Again, however, the committee hurt investors
by leaving this key provision out of the bill.
Prior to 1994, courts in every circuit in the country had recognized
the ability of investors to sue aiders and abettors of securities
frauds. Most courts required that an investor show that a securities
fraud was committed, that the aider and abettor gave substantial
assistance to the fraud, and that the aider and abettor intended to
deceive investors or behaved recklessly toward the fraud. In other
words, the investor had to show that the aider and abettor either
intended to deceive the investors or behaved recklessly toward the
fraud. Aiding and abetting liability was most often asserted against
lawyers, accountants, appraisers, and other professionals whose
assistance is often crucial to perpetrating a fraud.
In 1994, in the Central Bank of Denver case, the Supreme Court
eliminated the right of investors to sue aiders and abettors of
securities fraud. Writing for the four dissenters--this was another 5-
to-4 opinion--Justice Stevens criticized the five-member majority for
``reach[ing] out to overturn a most considerable body of precedent.''
While the issue was not directly before the Court, Justice Stevens
warned that the decision would also eliminate the SEC's ability to
pursue aiders and abettors of securities fraud; in other words, not
only a private cause of action, but the SEC's ability as well.

One of the lead sponsors of this legislation, Senator Dodd, stated at
a Securities Subcommittee hearing in May 1994, and I quote:

Aiding and abetting liability has been critically important
in deterring individuals from assisting possible fraudulent
acts by others.

Testifying at that hearing, the Chairman of the SEC stressed the
importance of restoring aiding and abetting liability for private
investors, and I quote:

Persons who knowingly or recklessly assist the perpetration
of a fraud may be insulated from liability to private parties
if they act behind the scenes and do not themselves make
statements directly or indirectly that are relied upon by
investors. Because this is conduct that should be deterred,
Congress should enact legislation to restore aiding and
abetting liability in private actions.

The North American Securities Administrators Association, the
Association of States Securities Regulators, and the Association of the
Bar of the City of New York also endorsed restoration of aiding and
abetting liability in private actions.
This bill, unfortunately, restores only the SEC's ability to go after
aiders and abettors of violations of the securities laws and then only
in part--only in part. The provision in the bill is limited to
violations of section 10(b) of the Securities Exchange Act and to
defendants who act knowingly. It ignores the recommendation made by the
SEC, the States securities regulators and the bar association that
aiding and abetting liability be fully restored for the SEC and private
litigants as well. By ignoring the needs of individual investors, the
committee further tilted this bill toward the corporate insiders and
their professional advisers who abuse the investor.
The effort in the Banking Committee, which I have alluded to with
respect to the statute of limitation and the aiders and abettors
provision, which tilted this bill away from the investor, that effort
was continued in the conference committee. Consider what happened in
the conference committee to the provision that directly addresses the
filing of frivolous cases.
Rule 11 of the Federal Rules of Civil Procedure is the principal
sanction against the filing of frivolous lawsuits in the Federal
courts. Rule 11 requires all cases filed in the Federal courts to be
based on reasonable legal arguments and supported by facts. That is the
requirement of rule 11. The case is to be based on reasonable legal
arguments and supported by facts.
As passed by the Senate, this bill required the courts to include
specific findings in securities class actions regarding compliance by
all parties and attorneys with rule 11(b) of the Federal Rules of Civil
Procedure. That is the way the Senate passed it. If a court found the
violation of rule 11 by either the plaintiff or the defendant, the
court was required to impose sanctions. That provision was balanced.
The sanctions would have applied equally to plaintiffs and to
defendants. It was intended as a deterrent to frivolous cases, and it
might well have worked in an efficacious manner.
What happened to this balanced provision, between plaintiffs and
defendants, in conference? The balance was removed so that it now
applies more harshly to investors than the corporate insiders. The
Senate bill had contained a presumption that the appropriate sanction
for failure of the complaint or the responsive pleading or motion to
comply with rule 11 was an award of reasonable attorneys' fees and
other expenses incurred as a direct result of the violation. That was
the presumption: An award of reasonable attorneys' fees and other
expenses incurred as a direct result of a violation. That applied, in
the bill passed by the Senate, both to the plaintiff and to the
defendant.
The conference changed this presumption so that it no longer applies
equally to plaintiffs and defendants. Under the conference provision
now before us, if the defendant substantially violates rule 11, he pays
only reasonable attorneys' fees and other expenses incurred as a direct
result of the violation; namely, the provision that was in the Senate-
passed bill. But now under the conference-reported measure, if the
plaintiff substantially violates rule 11, he pays all attorneys' fees
incurred in the action, not just those resulting from the violation.
Disparate treatment. The bill, as sent out of the Senate, had
balanced treatment with respect to plaintiffs and defendants. Now we
have this disparate treatment, and there is no justification for it.
Its true purpose, I think, is to scare investors from bringing
meritorious fraud suits. When the conference removed the balance from
this provision, it was not deterring frivolous lawsuits, it was hurting
investors.
The conference further hurt investors by changing the pleading
standard provision of the bill. Pleading standard refers to what an
investor must show in order to initiate a securities fraud lawsuit. The
bill reported by the Senate Banking Committee codified the pleading
standard adopted by the U.S. Court of Appeals for the Second Circuit.
This standard says investors who seek to file securities fraud cases
must ``specifically allege facts giving rise to a strong inference that
the defendant acted with a required state of mind.'' This standard, it
should be noted, is more stringent than the Federal Rules of Civil
Procedure and is the minority view among the circuit courts.
Nevertheless, that was the standard adopted by the Banking Committee.

When the bill came to the Senate floor, the Senate adopted an
amendment to this provision offered by the distinguished Senator from
Pennsylvania, Senator Specter. Senator Specter's amendment codified
into the legislation additional second circuit holdings clarifying the
standard they had earlier enunciated. These additional holdings state
that a plaintiff may meet the pleading standard by alleging facts
showing the defendant had motive and opportunity to commit fraud, or
constituting strong circumstantial evidence of state of mind. In other
words, the second circuit laid down this standard and then had
subsequent opinions that elaborated upon it and developed it, and
Senator Specter said that if you are going to include the second
circuit standard as initially enunciated, you should also include the
further holdings by the second circuit clarifying this standard.
This, I think, was the one proinvestor amendment adopted on the
Senate

[[Page S 17938]]
floor. What happened to this amendment in conference? It disappeared.
It was dropped from the legislation. This is part of this process that
I have been outlining here of now you see it, now you don't. Of course,
the person who bears the brunt of that is the investor.
The draft conference report deleted the Specter amendment, leaving
investors without the protection of the additional second circuit
holdings. Once again, a proinvestor provision that would have provided
some balance to the bill was removed.
Let me turn briefly to the proportionate liability provisions of the
bill, which reduce the amount of damages that defrauded investors can
recover from people who have participated in committing the fraud. This
provision is not targeted at frivolous suits and never has been. It
affects even legitimate securities fraud suits and, therefore, is
harmful to all investors. The conference found a way, though, to tilt
the legislation even further away from the investor and toward the
corporate insider.
The legislation changes the rule for liability for securities fraud
from joint and several liability to proportionate liability. Under the
current rule of joint and several liability, all fraud participants are
liable for the entire amount of the victim's damages--both fraud
participants who intended to mislead investors and fraud participants
whose conduct was reckless. The rationale for this in the law, which
has been the traditional holding over the years, is that a fraud cannot
succeed without the assistance of each participant, so each wrongdoer
is held equally liable.
Let me just observe that the recklessness standard for liability is a
very demanding standard, and it is one usually applied to a company's
professional advisers, such as accountants, attorneys, and
underwriters.
The bill limits joint and several liability under the Federal
securities law to certain defendants, specifically excluding defendants
whose conduct was reckless. The bill, thus, reduces the accountability
of accountants and attorneys whose conduct is found to be reckless.
This change will hurt investors in cases where the principal framer of
the fraud is bankrupt, has fled, or otherwise cannot pay investors
damages. In those cases, the innocent victims of fraud will be denied
full recovery of their damages.
Unfortunately, this provision became even worse in conference for the
investors. The bill passed by the Senate did nothing to disturb
liability under the securities law for reckless conduct. The
conference, however, added language that could call liability for
reckless conduct into question. The language of the conference report
could be read as inviting the courts to eliminate all liability for
reckless conduct under the securities fraud provisions. The conference
further added language that could be read as applying the new
proportionate liability rules not just to suits brought under the
antifraud provisions of the Securities and Exchange Act of 1934, as
under the bill passed by the Senate, but to suits brought under the
Securities Act of 1933, as well. So the conference, again, took this
bill down the path of reducing protections and remedies for investors
and providing an additional sheltered area for those who practice
corporate fraud and abuse. In the areas, then, of the statute of
limitations, aiding and abetting liability, rule 11 sanctions, pleading
standards, and proportional liability, this legislation before us hurts
the investor, and it has been made significantly worse by the actions
in the conference.
Before I conclude the discussion of the substance of the bill, let me
now turn to the so-called safe harbor provision, and I underscore ``so-
called.'' This bill creates a statutory exemption from liability for
forward-looking statements. Forward-looking statements are broadly
defined in the bill to include both oral and written statements.
Examples include projections of financial items such as revenues and
income for the quarter or for the year, estimates of dividends to be
paid to shareholders, and statements of future economic performance,
such as sales trends and development of new products. In short,
forward-looking statements include precisely the type of information
that is important to investors deciding whether to purchase a
particular stock.
The SEC currently has a safe harbor regulation for forward-looking
statements that protects specified forward-looking statements that were
made in documents filed with the SEC. As originally introduced, the
bill could have allowed the SEC to continue its effort to conduct a
comprehensive review of safe harbor regulations. However, the committee
abandoned this approach in favor of enacting a statutory safe harbor.
I am aware of the letter that the chairman read from the SEC about
the safe harbor provision, but I remain concerned that the safe harbor
provision before us today will, for the first time, provide protection
for fraudulent statements under the Federal securities laws. For the
first time, fraudulent statements will receive protection under the
Federal securities laws.
The American Bar Association wrote the President last week that the
safe harbor ``has been transformed not simply into a shelter for the
reckless, but for the intentional wrongdoer as well.'' Projections by
corporate insiders will be protected no matter how unreasonable, no
matter how misleading, no matter how fraudulent, if accompanied by
boilerplate, cautionary language.
Let me just take a moment to explain this. It is claimed by its
supporters that this draft codified the legal doctrine applied by the
courts known as bespeaks caution.
Now, as I understand it, all courts that have applied this doctrine
have required that projections be accompanied by disclaimers
specifically tailored to the projections. The courts have not accepted
boilerplate disclaimers. They have required that the projections be
accompanied by disclaimers specifically tailored to the projections. If
companies want to immunize their projections, they must alert investors
to the specific risks affecting those projections.
The bill before the Senate today does not include this requirement of
specific cautionary language to alert investors. The Association of the
Bar of the City of New York warned of this provision:

The proposed statutory language, while superficially
appearing to track the concepts and standards of the leading
cases in this field, in fact radically departs from them and
could immunize artfully packaged and intentional
misstatements and omissions of known facts.

That letter was signed for the bar association by Stephen Friedman, a
former SEC Commissioner. Under this bill, fraud artists will be able to
shield themselves from liability simply by accompanying their
fraudulent statements with general cautions that actual results may
differ. I predict that this provision will come back to haunt us in the
years to come.
Because this bill hurts investors, because it makes it harder for
defrauded investors to bring suits, because it makes it harder for
defrauded investors to recover losses, dozens and dozens of newspapers
around the country have expressed their opposition. From the Bangor
Daily News to the Miami Herald, from the Minneapolis Star Tribune to
the San Francisco Chronicle, editorial pages have argued this bill is a
bad deal for investors and urged a Presidential veto. The headline of
the Wisconsin State Journal editorial sums up the argument nicely:
``The Securities Reform Act goes too far.'' I ask unanimous consent to
have printed at the end of my remarks some sampling of these editorial
comments.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit No. 1.)
Mr. SARBANES. A New York Times editorial last week stated:

Citing the failure to extend the statute of limitations and to
restore aiding and abetting liability, the Times warned that
``provisions threaten to shut off valid suits'' and suggested that ``a
well-targeted veto might force this bill back on the right track.''
No publication has editorialized more strongly against this bill than
Money magazine. For 4 months in a row, Money magazine has devoted
editorial columns to this bill. In September 1995, Money magazine
warned ``Congress aims at lawyers and ends up shooting

[[Page S 17939]]
small investors in the back.'' In October, they urged ``Let's stop this
Congress from helping crooks cheat investors like you.'' In November,
they were hopeful that ``Your 1,000 letters of protest may stop this
Congress from jeopardizing investors.'' This month they stated:

. . . the new bill jeopardizes small investors in several
ways. . . . The bill helps executives get away with lying. .
. . Investors who sue and lose could be forced to pay the
winner's court costs. . . . Even accountants who okay
fraudulent books will get protection.

Investors around the country agree with Money magazine's analysis
that this bill hurts investors and are voicing their opposition. The
National Council of Individual Investors, an independent membership
organization of individual investors, has written to the President to
``express opposition to the recent draft report,'' saying, ``The draft
conference report fails to treat the American investor fairly.''
The labor movement has said, ``This bill tips the scales of justice
in favor of the companies and at the expense of stockholders and
pension plans.''
The Fraternal Order of Police wrote the President urging him ``to
reject a bill which would make it less risky for white collar criminals
to steal from police pension funds * * *.''
A coalition of consumer groups, including the Consumer Federation of
America, Consumers Union, USPIRG, and Public Citizens also oppose this
bill.
But perhaps most telling about this bill is the opposition of
hundreds and hundreds of State and local government officials. The
National League of Cities, the National Association of Counties, and
the Government Finance Officers Association all oppose this
legislation.
Keep in mind that State and local investors issue securities--State
and local governments raise money through bond issues. As issuers of
securities, it is asserted by the supporters of this legislation, they
would stand to benefit from the bill. Why, then, do they oppose it?
Because they also purchase securities as well. They invest taxpayers'
money and retirees' money in securities and sometimes are victimized by
unscrupulous brokers.
Orange County, CA, lost over $2 billion in leveraged derivative
investments. In my own State of Maryland, Charles County lost nearly $3
million in derivatives. Orange County is currently suing the brokers
who sold it these securities. When such scandals occur again, and they
will, this bill will make it harder for taxpayers to bring securities
fraud actions and recover losses.
Let me quote further from the letter of these government officials
who are seeking meaningful remedies in case they are defrauded:

The following are the major concerns State and local
government have with the latest ``draft conference report'':
Despite changes in the safe harbor provision relating to
forward-looking statements, there are still loopholes in that
provision that would allow false predictions to be made and
that will shield a company from liability.
Aiders and abettors of fraud would still remain immune from
civil liability and would not have to pay back fraud victims
for the losses they suffer.
The ``draft conference report'' maintains the short three-
year statute of limitations that will allow a wrongdoer who
can conceal his fraud to be completely let off the hook.

Eleven State attorneys general wrote to express their opposition.
They said, ``If enacted, this legislation would severely curtail our
efforts to fight securities fraud and to recover damages for our
citizens if any of our State or local funds suffer losses due to
fraud.'' They went on to say, ``This is unwise public policy in light
of rising securities fraud and substantial losses suffered by States
and public institutions from high-risk derivatives investments.'' The
American Bar Association and the Association of the Bar of the City of
New York oppose this bill as well.
When this measure originally came to the Senate floor, I received a
communication from the securities commissioner of the State of
Maryland, Robert McDonald. I expect that most Senators received similar
letters from their State securities commissioners.
In that letter, Commissioner McDonald opposed the bill, writing:

Our financial markets depend not so much on money as on
public confidence. The confidence that investors have in the
American financial marketplace will be shattered if they
believe that they have little recourse against those who have
committed securities fraud.

Now, the managers of this bill in their conference report state at
the outset,

The overriding purpose of our Nation's securities laws is
to protect investors and to maintain confidence in the
securities markets, so that our national savings, capital
formation, and investment may grow for the benefit of all
Americans.

So, they pick up the first part of Commissioner McDonald's statement
about ``our financial markets depend not so much on money as on public
confidence,'' but the supporters of this bill ignore the second part of
Commissioner McDonald's warning that the confidence of investors will
be shattered ``if they believe they have little recourse against those
who have [committed] securities fraud.''
The editors of Money magazine wrote, ``this bill will undermine the
public's confidence in our financial markets. And without that
confidence, this country is nowhere.''
By making it harder for investors to bring legitimate securities
fraud suits, by reducing investors' recoveries when they win securities
fraud suits, by consistently hurting investors and helping corporate
insiders and their accountants and attorneys--in other words, by going
way beyond anything necessary to deal with the frivolous lawsuits--this
bill will end up rewarding con artists and punishing America's
individual investors, pension funds, and local governments.
For all of the reasons I have described, I oppose this legislation
and I urge my colleagues to vote against this bill.

Exhibit 1

[From the New York Times, Nov. 30, 1995]

Overdrawn Securities Reform

The securities bill that Congress is about to pass
addresses a nagging problem, frivolous lawsuits by investors
against corporations, but in such cavalier fashion that it
may end up sheltering some forms of fraud against investors.
President Clinton should veto the bill and demand at least
two fixes to protect truly defrauded investors.
The bill seeks with good reason to protect corporate
officials who issue honest but unintentionally optimistic
predictions of corporate profitability. In some past cases,
opportunistic shareholders have waited for a company's stock
price to fall, then sued on the grounds that their money-
losing investments were based on fraudulent
misrepresentations of the company's financial prospects.
Their game was to use these ``strike'' suits to threaten
companies with explosively expensive litigation in the
cynical attempt to win lucrative settlements.
Such suits are a real, if infrequent, problem that can
discourage responsible management from issuing information
that investors ought to know. The bill would stymie these
suits in part by immunizing predictions of corporate
profitability that are accompanied by descriptions of
important factors--like pending government regulatory
action--that could cause financial predictions to prove
false. But the language is ambiguous, leading critics to
charge that it would protect corporate officials who
knowingly issue false information. The President should ask
Congress for clarification.
Some provisions of the bill would protect investors by, for
example, requiring accountants to report suspected fraud. But
other provisions threaten to shut off valid suits. The bill
would prevent private litigants from going after lawyers and
accountants for inattention that allows corporate fraud.
Worse, the bill limits the authority of the Securities and
Exchange Commission to use accountants and others for aiding
fraud. The bill would also provide a short statute of
limitation that could easily run out before investors
discover they have been victimized.
Mr. Clinton should demand that Congress extend the statue
of limitations so that investors will have time to file suit
after they discover fraud. He should also demand that the
bill restore the S.E.C.'s full authority to use accountants
who contribute to corporate fraud. So far, Mr. Clinton has
been curiously restrained. A well-targeted veto might force
this bill back on the right track.
____

[From Money, December 1995]

Now Only Clinton Can Stop Congress From Hurting Small Investors Like
You

(By Frank Lalli)

The debate over Congress' reckless securities litigation
reform has come down to this question: Will President Clinton
decide to protect investors, or will he give companies a
license to defraud shareholders?
Late in October, Republican congressional staffers agreed
on a so-called compromise version of the misguided House and
Senate bills. Unfortunately, the new bill jeopardizes small
investors in several ways. Yet it will likely soon be sent to
Clinton for his signature. The President should not sign it.
He should veto it. Here's why:

[[Page S 17940]]

The bill helps executives get away with lying. Essentially,
lying executives get two escape hatches. The bill protects
them if, say, they simply call their phony earnings forecast
a forward-looking statement and add some cautionary boiler-
plate language. In addition, if they fail to do that and an
investor sues, the plaintiffs still have to prove the
executives actually knew the statement was untrue when they
issued it, an extremely difficult standard of proof.
Furthermore, if executives later learn that their original
forecast was false, the bill specifically says they have no
obligation to retract or correct it.
High-tech executives, particularly those in California's
Silicon Valley, have lobbied relentlessly for this broad
protection. As one congressional source told Money's
Washington, D.C. bureau chief Teresa Tritch: ``High-tech
execs want immunity from liability when they lie.'' Keep that
point in mind the next time your broker calls pitching some
high-tech stock based on the corporation's optimistic
predictions.
Investors who sue and lose could be forced to pay the
winner's court costs. The idea is to discourage frivolous
lawsuits. But this bill is overkill. For example, if a judge
rules that just one of many counts in your complaint was
baseless, you could have to pay the defendant firm's entire
legal costs. In addition, the judge can require plaintiffs in
a class action to put up a bond at any time covering the
defendant's legal fees just in case they eventually lose. The
result: Legitimate lawsuits will not get filed.
Even accountants who okay fraudulent books will get
protection. Accounts who are reckless, as opposed to being
co-conspirators, would face only limited liability. What's
more, new language opens the way for the U.S. Supreme Court
to let such practitioners off the hook entirely. If such a
lax standard became the law of the land, the accounting
profession's fiduciary responsibility to investors and
clients alike would be reduced to a sick joke.
Moreover, the bill fails to re-establish an investor's
right to sue hired guns, such as accountants, lawyers and
bankers, who assist dishonest companies. And it neglects to
lengthen the tight three-year time limit investors now have
to discover a fraud and sue.
Knowledgeable sources say the White House is weighing the
bill's political consequences, and business interests are
pressing him hard to sign it. ``The President wants the good
will of Silicon Valley,'' says one source. ``Without
California, Clinton is nowhere.''
We think the President should focus on a higher concern.
Our readers sent more than 1,500 letters in support of our
past three editorials denouncing this legislation. As that
mail attests, this bill will undermine the public's
confidence in our financial markets. And without that
confidence, this country is nowhere.
____

[From the Banger Daily News, Nov. 30, 1995]

Do No Harm

Among the most dramatic but least discussed spin-offs of
the Contract With America is securities litigation reform
legislation, which earlier this year quietly passed both
houses of Congress in different forms, but this week could
become part of a public spectacle, highlighted by a
presidential veto.
House Republicans argued in the contract, which set the
tone for the early months of this session, that accumulated
legal abuses cost American consumers $300 billion a year.
Proponents characterize H.R. 1058 and S. 240, the two bills
on which a conference compromise of the Securities Litigation
Reform Act is expected to be voted on this week, as antidotes
to costly, frivolous lawsuits pursued by greedy lawyers.
Opponents believe the critical elements of both bills, but
especially as reflected in the conference version, are
destructive of consumer interests. In the best Washington
hyperbole, they refer to it as ``The Crooks and Swindlers
Protection Act'' because of the manner in which it tilts the
courtroom in favor of corporate defendants in securities and
fraud cases.
From the perspective of those who are interested in
Congress making good choices in the public interest, the act
has two more problems. It is an extremely complex area of
policy--one that can cause the eyes of a CPA to glaze over--
and it is an extension of the catechism of the contract.
Consequently, it is an issue that has been exposed to very
little sunlight in open debate and it will be defended as
political gospel by some Republicans.
Sen. William Cohen voted against the Senate version of the
act. Sen. Snowe supported it. As a result, the campaign to
persuade the delegation is focused on her office. Critics of
the act make excellent arguments against specific provisions,
including loser-pays, which will discourage aggrieved small
investors from filing suit; and restrictions on legal
standards of liability, which limit plaintiffs' opportunities
to fully recover legitimate damages.
Another example, the provision of the act narrowing the
time window for bringing suit, was the target of a letter
from Stephen L. Diamond, securities administrator for the
state's Bureau of Banking to Sens. Cohen and Snowe. ``A good
portion of the several million dollars in restitution we have
obtained for Maine citizens during my tenure,'' Diamond wrote
in June, ``would have been irretrievably lost if we had been
subject to a three-year limitations period.''
Diamond pointed out that under Maine law, there ``is no
absolute outside limit'' for commencing a suit for securities
fraud.
The Securities Litigation Reform Act has the potential to
save consumers nothing, protect white-collar criminals and
add to the burden of the victims of fraud.
It could have serious consequences for Maine taxpayers,
investors and retirees. On record opposing the House version
are municipalities of all sizes, from the small, Clifton and
Berwick, to the state's largest, Portland and Lewiston.
The CMO (collaterized mortgage obligation) disaster that
struck Auburn, concern about the integrity and solvency of
government and private pension accounts and 401k plans, and
public awareness of the threats to the security of
investments of an aging population all are reasons for
members of the Maine delegation to treat this issue with
utmost respect, and caution: do no harm. This one could hurt.
____

[From the Miami Herald, Nov. 14, 1995]

Liars' Bill of Rights?

While most of the country is paying attention to the feud
over the federal budget, a sinister piece of legislation is
making its way through Congress unnoticed. This bill lets
companies report false information to investors. That's
right, it essentially licenses fraud. It has passed both
houses in slightly different forms. A compromise bill will be
written soon. If it passes, President Clinton ought to slay
it in its tracks.
This bill is a story of good intentions. Some companies
have been plagued by frivolous lawsuits from investors who
aren't happy with the company's performance. The investors
allege, in essence, that the company had forecast good
results and then didn't deliver. That, say the plaintiffs,
constitutes fraud.
Well, often it doesn't. Investing has risks, including
market downturns. When investors sue over mere bad luck, they
cost companies money, clog courts, and drain profits from
other investors.
Trouble is, by trying to stop this abuse, Congress mistook
a simple answer for the right answer. Its solution, in plain
terms, was to declare virtually all promises by all companies
to be safe from legal challenge. Under this ``remedy,''
company executives now can promise investors anything they
like, with not so much as a nod to reality.
They can't legally lie about the past, but if their claims
are ``forward-looking,'' they can promise you the moon to get
you to invest, and no one can sue them later for being
misleading.
Well, almost no one. The bill would allow legal action in
the case of egregious, deliberate fraud, but you'd have to
prove that it was intentional. And you'd have just three
years to discover the fraud and furnish your proof.
It's rare enough to prove outright intent under the best
circumstances, but under this bill, if executives can stiff-
arm you for just 36 months (not a big challenge), they'd be
home free. And then--in another hair-raising provision of the
bill--you'd be stuck for the company's entire legal bill.
Facing such a risk, no small investor, no matter how badly
cheated, would ever dare sue.
This bill evidently struck many members of Congress as a
simple answer to a nagging problem. It's nothing of the kind.
The problem is real enough, but its solution isn't simple.
And it certainly doesn't reside in a law authorizing phony
statements to investors.
President Clinton should veto this blunder. Then, when the
fight over the budget is over, Congress can take time to
think up a more rational solution to the problem.
____

[From the Star Tribune, Nov. 17, 1995]

Securities Bill

Give Sen. Richard Bryan, D-Nev., credit for being a good
friend to American investors. Since late October, Bryan has
stymied passage of ill-designed legislation that would curb
investors' rights to sue for securities fraud, Bryan's move
is buying time to marshal enough opposition to give the bill
the fate it deserves--either significant alteration or death.
What opponents need most, though, is support from the top--
President Clinton.
At first glance, the legislation appears reasonable. The
bill seeks to protect public companies and their underwriters
from frivolous lawsuits by disgruntled investors. It would
provide legal protection for companies whose earings
forecasts turn out to be inaccurate, and would limit the
liability of accounting firms, legal advisers and others who
fail to detect fraud. The bill also would ban ``professional
plaintiffs'' who repeatedly sue companies for even minor
losses.
Proponents argue that more and more investors are forsaking
the win-some-lose-some attitude of investing, opting instead
to sue if they lose money because of unexpected events,
particularly sudden and steep drops in stock prices. Recent
high-profile securities court cases seem to prove their
point. From the ongoing Orange County fiasco to Piper
Jaffray's stumblings a year ago, many investors, both
government and private, have gone to court to recoup losses.
However, securities cases gain notoriety mainly because
they rarely occur. The number of securities class-action
lawsuits nationwide has fallen to 290 in 1994 from 305 in
1974. In fact, such cases represented little more than 1
percent of new federal civil cases filed last year. The
statistics show that curbing investors' rights to sue amounts
to a solution in search of a problem.

[[Page S 17941]]

Indeed, there would be problems if this legislation passed
unaltered. The bill would eliminate the current legal
standard of joint-and-several liability, which holds even
those peripherally involved in fraud to a high degree of
liability. Thus, firms providing accounting and other
services to corporate clients would have less incentive to be
alert to wrongdoing. In addition, this legislation would have
a chilling effect on even many valid complaints; it would
require a plaintiff who lost a case to pay the defendant's
court costs.
The bill's opponents have begun to make a stink. A couple
of weeks ago, Minnesota Attorney General Hubert Humphrey III
joined 13 other attorneys general in asking Clinton to veto
the bill in its current form. A day earlier a coalition
representing hundreds of state and local government officials
announced its opposition. Consumer groups have fought the
legislation all summer.
But the opponents need help. Though the Senate passed the
bill by a veto-proof margin, a veto threat from Clinton could
prompt needed changes in the measure. That threat should come
now, while political momentum favors the opposition.
____

[From the San Francisco Chronicle, Nov. 27, 1995]

Opening the Door to Fraud

If a House-Senate conference committee meeting tomorrow
does not result in significant changes to legislation
regarding investment fraud lawsuits, President Clinton should
quickly veto the bill.
Compromise has softened some of the anti-consumer aspects
of the legislation, which has the stated goal of eliminating
frivolous class-action securities fraud lawsuits. But despite
the worthwhile aim, the provisions of a draft conference
report on H.R. 1058 and S 240 go far beyond curbing trivial
court actions and instead would wipe out important
protections against hustlers of fraudulent securities.
In a letter asking Clinton to veto the bill, San
Francisco's chief administrative officer, Bill Lee, noted
that the legislation would ``erode investor protections in a
number of ways: it fails to restore the liability of aiders
and abettors of fraud for their actions; it limits many
wrongdoers from providing full compensation to innocent fraud
victims, by eroding joint and several liability; it could
force fraud victims to pay the full legal fees of large
corporate defendants if they lose; it provides a blanket
shield from liability for companies that make knowingly
fraudulent predictions about an investment's performance and
risks; and it would preserve a short, three-year statute of
limitations for bringing fraud actions, even if fraud is not
discovered until after that time.''
Securities fraud lawsuits are the primary means for
individuals, local governments and other investors to recover
losses from investment fraud--whether that fraud is related
to money invested in stocks, bonds, mutual funds, individual
retirement accounts, pensions or employee benefit plans.
As the draft report stands, investors would be the losers.
And their hopes of receiving convictions in suits similar to
those against such well-known con men as Michael Milken and
Ivan Boseky would be severely hampered.
In the name of the little guy, Clinton should not let that
happen.
____

American Federation of Labor, Congress of Industrial
Organizations,
Washington, DC, November 29, 1995.
Dear Senator: The AFL-CIO opposes the conference agreement
on H.R. 1058, the Securities Litigation Reform Act of 1995.
The conference agreement significantly weakens the ability of
stockholders and pension plans to successfully sue companies
which use fraudulent information in forward-looking
statements that project economic growth and earnings. There
is a new ``safe harbor'' provision in this conference
agreement that allows evidence of misleading economic
information to be discounted in court if it is accompanied by
``appropriate cautionary language.''
The AFL-CIO believes this compromise will vastly increase
the difficulties that investors and pension plans would have
in recovering economic losses. Similarly, the joint and
several liability provisions in this bill provide added, and
unwarranted, protection for unscrupulous companies,
stockbrokers, accountants and lawyers.
In short, this bill tips the scales of justice in favor of
the companies and at the expense of stockholders and pension
plans. Both of these latter groups are forced to rely
exclusively on information provided by these companies when
evaluating a stock, but this information would not be able to
be used in court to recover economic damages for misleading
information.
The Congress should reject the conference agreement on H.R.
1058.
Sincerely,
Peggy Taylor,
Director.
____

Securities and Exchange Commission,

Washington, DC.
Dear Chairman Levitt and Commissioner Wallman: On behalf of
a coalition of state and local government officials, the
above organizations wish to express our concern over your
November 15, 1995, letter to Senator Alfonse D'Amato
regarding your views on the most recent ``draft conference
report'' on securities litigation reform. Our organizations
have worked closely with the Commission over the years on
numerous issues of importance to the securities markets.
Although your letter did not specifically endorse the ``draft
conference report,'' proponents of this legislation are
already representing your letter as an SEC endorsement. We
remain opposed not only to the latest version of the safe
harbor provision in the legislation, on which your letter
focused, but to several other provisions in the bill which
are critical to us and which we understood were critical to
you as well.
We support efforts to deter frivolous securities lawsuits.
We believe, however, that any legislation to accomplish this
must also maintain an appropriate balance that ensures the
rights of investors to seek recovery against those who engage
in fraud in the securities markets. We believe that H.R.
1058, S. 240, and the various versions of the ``draft
conference report'' all fall short in achieving this balance,
and erode the ability of investors to seek recovery in the
cases of fraud.
The following are the major concerns state and local
governments have with the latest ``draft conference report:''
Despite changes in the safe harbor provision relating to
forward-looking statements, there are still loopholes in that
provision that would allow false predictions to be made and
that will shield a company from liability. Deliberately false
forward-looking statements are still immunized under this
draft as long as they are accompanied by cautionary language.
Aiders and abettors of fraud would still remain immune from
civil liability and would not have to pay back fraud victims
for the losses they suffer. If aiders and abettors are immune
from liability, as issuers of debt securities, state and
local governments would become the ``deep pockets,'' and as
investors they would be limited in their ability to recover
losses. In Chairman Levitt's letter of May 25, 1995, to
Chairman D'Amato and members of the Senate Banking Committee,
he indicated that failure to resolve this issue was one of
two ``important issues'' for the Commission. We are
disappointed that you have not unequivocally stated that this
is still a serious concern to the SEC, as it is to state and
local governments.
The ``draft conference report'' maintains the short three-
year statute of limitations that will allow a wrongdoer who
can conceal his fraud to be completely let off the hook. The
current statute of limitations is widely regarded as too
short. Despite the May 25, 1995, statements to the Senate
that this too was an ``important issue'' for the Commission,
the most recent draft does not include an extension.
The latest draft adds language opening the way for the
Supreme Court to eliminate any implied private right of
action under the federal securities laws for victims of fraud
by imposing a ``rule of construction'' stating that nothing
in the legislation ``shall be deemed to create or ratify any
implied right of action.'' Given the historic role of private
suits in keeping the markets honest, and the SEC's previous
support for such actions as a complement to its own
enforcement activities, we are surprised that no objection
was raised in your letter to the inclusion of this new
language.
The pleading standard has been changed in the new draft
from requiring that the complaint ``specifically allege''
facts giving rise to a state of mind--an already harsh
standard--to a ``state with particularity'' standard. This is
a much more difficult standard and will make it even more
difficult for plaintiffs to bring suit. Combined with the
deletion of the Specter amendment, this raises the pleading
standard to one different from that employed by the Second
Circuit.
Under the newest draft, fraud victims face a potential
``loser pays'' sanction and a possible bond requirement at
the beginning of a case, which could discourage many
investors from seeking a recovery of their losses. In
addition, the victim will now have to show that a shift of
full attorneys' fees and costs to the plaintiff would impose
an ``unreasonable burden'' on the plaintiff or his attorney
and that the failure to shift fees would not impose a greater
burden on the defendants.
The strength and stability of our nation's securities
markets depend on investor confidence in the integrity,
fairness and efficiency of these markets. To maintain this
confidence, investors must have effective remedies against
those persons who violate the antifraud provisions of the
federal securities laws. In recent years, we have seen how
investment losses caused by securities laws violations can
adversely affect state and local governments and their
taxpayers. Indeed, you, Chairman Levitt have addressed many
of our members personally over the past year to underscore
just this concern about the markets.
Access to full and fair compensation through the civil
justice system is an important safeguard for state and local
government issuers and investors alike and is a strong
deterrent to securities fraud. Because of the importance of
this issue, we are requesting a meeting with you to discuss
your recent letter to Senator D'Amato and to convey our
concerns about the unwise public policy outlined in the
``draft conference report.'' We stand ready to work with you
in vigorously opposing this legislation, particularly in
light of other efforts--budgetary and statutory--to further
weaken the regulatory protections provided to state and local
government investors and others. Betsy Dotson of GFOA will
follow up on our meeting request with your staff.
____

[[Page S 17942]]

Fraternal Order of Police,

National Legislative Program,

Washington, DC, November 29, 1995.
Hon. William Jefferson Clinton,
President of the United States,
Washington, DC.
Dear President Clinton: On behalf National the Fraternal
Order of Police, I urge you to veto the ``Securities
Litigation Reform Act'' (HR1058/S240). The recently released
draft of the House/Senate conference report clearly reflects
a dramatic reduction in the ability of private, institutional
and government investors to seek redress when victimized by
investor fraud.
As a matter of fact, the single most significant result of
this legislation would be to create a privileged class of
criminals, in that it virtually immunizes lawyers, brokers,
accountants and their accomplices from civil liability in
cases of securities fraud.
This bad end is reached because of several provisions of
the legislation: first, it fails to restore the liability of
aiders and abettors of fraud for their actions; second, it
limits wrongdoers from providing full compensation to victims
of fraud by eroding joint and several liability; third, it
could force fraud victims to pay the full legal fees of
corporate defendants if the defrauded party loses; and,
finally, it retains the short three year statute of
limitations for bringing fraud actions, even in cases where
the fraud is not discovered until after three years has
elapsed.
Mr. President, our 270,000 members stand with you in your
commitment to a war on crime; the men and women of the F.O.P.
are the foot soldiers in that war. On their behalf, I urge
you to reject a bill which would make it less risky for white
collar criminals to steal from police pension funds while the
police are risking their lives against violent criminals.
Please veto HR1058/S240.
Sincerely,
Gilbert G. Gallegos,
National President.
____

Attorney General of New Mexico,

Santa Fe, NM, October 27, 1995.
Hon. William J. Clinton,
The White House,
Washington, DC.
Dear President Clinton: As Attorneys General of our
respective states, we strongly oppose H.R. 1058/S240, the
Securities Litigation Reform Act. The ``draft conference
report,'' which is the basis of agreement between the House
and Senate bills, would severely penalize victims of
securities fraud--consumers, workers, senior citizens, state
and local governments. The principal effect of this
legislation would be to shield wrongdoers from liability for
securities fraud committed against an unsuspecting public.
Any securities litigation reform must achieve a balance
between protecting the rights of defrauded investors and
protecting honest companies from unwarranted litigation.
Abusive practices should be deterred and sternly sanctioned.
However, Congress must keep open the doorway to the American
system of civil justice for investors to seek recovery of
what has been wrongfully taken from them.
If enacted, this legislation would severely curtail our
efforts to fight securities fraud and to recover damages for
our citizens if any of our state or local funds suffer losses
due to fraud. There are several provisions in both bills that
would make it exceedingly difficult, if not impossible, for
consumers and state and local governments to use the federal
courts to recoup losses due to fraud:
Broad immunity from liability for fraudulent corporate
predictions and projections; Failure to reinstitute liability
for ``aiders and abettors'' under private actions, thereby
fully immunizing them from any responsibility for their
wrongful actions; A ``loser pays'' provision imposing a
significant risk of fraud victims having to pay the
defendants' full legal fees;
Severe restrictions on the joint and several liability of
wrongdoers, making it impossible for many victims to fully
recover their losses; Preservation of an inadequately short
statute of limitations (one year after discovery and three
years after the fraud was committed); Highly onerous pleading
standards; and Elimination of liability under the federal
racketeering statute, except after a criminal conviction.
Such extraordinary limitations on our states' ability to
recover citizens' tax dollars is of grave concern to us.
As our states' chief law enforcement officers, we cannot
countenance such a weakening of critical enforcement against
white-collar fraud. Private actions, as a complement to
government enforcement, have proven to be extremely effective
in deterring securities fraud and in compensating injured
investors. This longstanding practice has deterred even
greater fraud in the markets and has reduced the burdens that
would otherwise accrue as a result of the government having
to fully police the markets.
If investors are limited in their right to initiate private
causes of action, we fear that victims will turn more and
more to the state enforcement agencies, such as the Attorney
General, for solutions. There will be more demands on our
offices to pursue wrongdoers for fraud, thus increasing the
burden on our taxpayers' resources. The legislation would
simply force another unfunded mandate on the states.
Effective private enforcement of securities fraud rests on
the ability of defrauded investors to take legal action
against wrongdoers. Yet there is little, if anything, in the
draft conference report that would enhance the ability of
defrauded investors to seek redress in the courts, provide
enhanced protection for investors or ensure the continued
honesty and fairness of our markets. The major provisions of
the draft pose significant obstacles to meritorious fraud
actions.
While H.R. 1058/S240 would achieve its goal of affording a
measure of protection to large corporations and accounting,
banking and brokerage firms, it goes so far beyond what is
necessary for that goal that it would likely result in a
dramatic increase in securities fraud as the threat of
punishment declines. This would hurt our entire economy as
investors lose confidence in the integrity of our financial
markets. This is unwise public policy in light of rising
securities fraud and substantial losses suffered by states
and public institutions from high-risk derivatives
investments.
As custodians of the tax dollars of our citizens, our
states have a vested interest in keeping the securities
markets safe and secure for investors. The stakes could not
be higher for consumers since it is often their retirement
savings that are lost in securities frauds. Moreover, the
states' economic health, tied inexorably to the nation's
economy, depends on continued investor confidence. There must
be appropriate recourse to the courts for all investors.
We join the federal and state securities regulators, the
state and local government finance officers, mayors and other
public officials, labor groups, and all major senior citizen
and consumer groups in opposing H.R. 1058/S240.
Given the draft conference report released on October 24th,
we strongly urge you to veto the legislation if it is
presented to you without substantial amendment to the
provisions outlined above.
Sincerely,
Tom Udall,
Attorney General of New Mexico.
Winston Bryant,
Attorney General of Arkansas.
Robert A. Butterworth,
Attorney General of Florida.
Tom Miller,
Attorney General of Iowa.
Hubert H. Humphrey III,
Attorney General of Minnesota.
Jeremiah J. Nixon,
Attorney General of Missouri.
Joseph P. Mazurek,
Attorney General of Montana.
Frankie Sue Del Papa,
Attorney General of Nevada.
Heidi Heitkamp,
Attorney General of North Dakota.
Charles Burson,
Attorney General of Tennessee.
James Doyle,
Attorney General of Wisconsin.

The PRESIDING OFFICER. The Senator from Utah.
Mr. BENNETT. Mr. President, I understand the Senator from Nevada
wishes to speak. I will not take a great deal of time. I do want to
respond, however, while the walls are still ringing with the oratory of
my friend from Maryland, to some of the particular points that he made.
Then I will allow the Senator from Nevada to proceed.
I come at this with some background because I have been the CEO of a
company that has been involved in litigation, and I have members of my
family who have been involved in this circumstance. I also am not a
lawyer and have a little difficulty following the twists and turns of
the lawyers talking about the intricacies of rule this or rule that.
The overall point that I think has to be made here is simply this.
There is no division between companies and investors. Investors own the
company. That which damages the company, damages the owners of the
company, who are the investors. So, when the Senator from Maryland
talks about pitting investors against the company, he is talking about
pitting people against themselves. He implies that this bill helps the
company to the detriment of the investors. That, frankly, is
impossible. If the company thrives, who gets the money? The investors,
the stockholders. If the company survives a market problem and becomes
stronger as a result, who benefits? The stockholder, the owner of the
company. The two are not separate, in spite of the fact that we have
had all of this rhetoric implying that they are.
The most significant problem, from my perspective, with this whole
issue has been the attempt to divide the two and imply that the company
is doing something to damage the investor and doing it deliberately for
the benefit of

[[Page S 17943]]
the company. It simply does not wash. It simply does not track.
Where have these lawsuits come from? They have come from lawyers who
have not sought to protect investors and not sought to help the
company, but to enrich themselves. I will give you one example that
demonstrates the power of this circumstance. Let us say we have a
company with 100 shares. Let us keep it very simple. We have a company
with 100 shares. We have an investor who owns 1 of those 100 shares. We
have another investor who owns 99 of those shares. Keep it very, very
simple.
The lawyer would rush to court and file a class action suit on behalf
of the shareholder who owns one share on the grounds that the company
has been damaged. And when the shareholder who owns 99 shares shows up
and says, ``I would like to have a say in how this suit is prosecuted
because it is going to damage my 99 shares,'' under the present law we
are told, no, the investor with the one share got to the court before
you did and he controls the suit and therefore he can make all kinds of
claims he wants to in favor of the shareholders.
The shareholder who owns 99 percent of the stock says, ``Don't do me
any favors. Don't stand there and file this suit; it is going to damage
my interests and, frankly, damage the interests of the shareholder who
has one share as well, proportionately.'' Ah, but it does not matter,
because the shareholder who has one share as well has a side deal with
the lawyer and he is a professional plaintiff and the lawyer will pay
him for filing the suit so the lawyer will get the settlement. That is
inevitably what happens.
Finally, the company says, ``It is going to cost us $1 million to
fight this case.''

``OK,'' says the lawyer, ``you don't want to spend the $1 million?
That is fine with me. Let us settle it out of court for $750,000.''
Management says, ``We are not in the business of fighting lawsuits;
we are in the business of producing products. Faced with that kind of
blackmail, we have to do the best thing--for whom? We have to do the
best thing for our shareholders. It will damage our shareholders $1
million to go to court. We can save them $250,000 if we pay this guy
his blackmail and send him on his way.''
So they pay the $750,000. The lawyer takes his contingency fee, pays
off his professional plaintiff on the side deal, and walks away saying,
``I have protected shareholder rights,'' when what he has really done
is looted the company.
What this bill says, what this conference report says, is in a
circumstance like that the shareholder with 99 of those 100 shares can
go to court and say, ``I am in control of this suit, not the one who
has one share, and I move to dismiss.'' And the issue is over.
Who is damaged by this bill under that scenario? The lawyer. Not the
shareholder, not the investors; they are benefited by this bill.
One other point I will make and then we can hear from the Senator
from Nevada. This bill says there will be a proportionate liability,
saying if someone was involved in a loss that was 3 percent that
someone's fault, that someone is only liable for 3 percent of the
damages.
Oh, that is terrible, we are told. What a chilling effect that will
have. Why, accountants and lawyers supporting the company will be
immediately up to their eyeballs in fraud because they know they are
only liable for a proportionate amount.
That makes for interesting rhetoric on the floor of the Senate. It
has little or no relevance to the real world. Let me give an example
out of my own experience.
I was an investor in a company that was trying to develop a
particular mining project in the Western States. Unfortunately for me
and my fellow investors, we did not do very well. For a variety of
reasons, a variety of problems, we ultimately had to close down the
operation. In the process of doing that whole activity we engaged the
services of a very fine lawyer in Los Angeles, one of the premier
lawyers of Los Angeles. And he gave us sound legal advice. He helped us
through.
A disgruntled supplier working with us on that circumstance kept
trying to find some way to drag the lawyer who was helping us into a
management role. He kept pushing and probing. I could not understand
why. What in the world did he want to get the lawyer involved in the
management kinds of decisions of this company that did not go anywhere?
Finally, the fellow leveled with me. He said, ``If we can get into
that lawyer's errors and omissions policy and prove that somehow he was
involved in a management decision we think was a mistake, his insurance
company will pay us a big payoff just to keep it out of court.''
The lawyer we were dealing with was careful enough that did not
happen. But that was the motivation. Not to try to solve the problem,
but to tap into the deep pocket of the insurance company for errors and
omissions insurance that this lawyer prudently carried for his firm.
So they were looking for every possible technicality to get past the
management of the firm--the firm, being bankrupt, had no money to
offer--and into the errors and omissions policy and the insurance
policy of the lawyer. As I say, fortunately he was not successful. But
that kind of attitude is the kind of attitude that causes lawyers to
say, ``I will not help you,'' which causes his accountant to say, ``I
will not take your account, I will not give you the expert advice you
will need because I will get caught up in this.'' And it is to protect
who? It is the investors who need the services of that lawyer and who
need the services of that accountant that this bill is written as it
is.
So, Mr. President, I intend to come back to this theme often as we go
through this debate. Let us not lose sight of what it is we are trying
to do here. We are trying to protect the investor, and the investor, by
definition, is the person who owns the company. Anything that damages
the company damages the investor. Anything that chills the company's
access to sound legal advice and sound accounting counsel damages the
investor. Anything that causes the company to pay blackmail, out-of-
court settlements damages the company, which damages the investor.
So let us understand through this whole debate what the conference
report does, what the bill does, what the committee approach does is to
protect the investor. As we listen to rhetoric, saying let us protect
the investor and punish the company, let us always keep that basic
principle in mind: The owner of the company is the investor.
With that, Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The bill clerk proceeded to call the roll.
Mr. BRYAN. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. BRYAN. I thank the Chair. I reserve to myself such time as I may
need at this point.
Mr. President, the Senate today is considering the legislation that
may well have dramatic consequences for the operations of our
securities markets. America's securities markets are the envy of the
world. Our markets are the safest, and they enjoy universal investor
confidence.
American companies have been able to prosper in large part because of
their ability to raise capital in our financial markets. We should all
be proud of these markets, yet, at the same time, we must be extremely
careful not to jeopardize this investor confidence.
Even though our securities markets are the world's safest, we still
have our share of bad apples. There will always be people who feel it
is necessary to cut corners, or that they can get away with financial
wrongdoing. We have not seen the last of the Keatings, the Boeskys, the
Milkens, the Icahns of the 1980's, who penalize the American public by
their commitment to greed and avarice, and with horrendous cost to the
investors, to the public, and to public institutions as a result of
their actions.
The legislation we are considering today will make it more difficult,
in my judgment, to bring legitimate fraud cases and will make it more
difficult to recover stolen assets.
That having been said, Mr. President, let me be clear that the
legislation before us today, although it purports to

[[Page S 17944]]
deal with the issue of frivolous lawsuits, is in point of fact a
smokescreen, if you will, the Trojan horse, as I have characterized it,
to really get at the heart and substance of this legislation, which is
to insulate and immunize perpetrators of fraud from legitimate investor
recovery. If this legislation were about frivolous lawsuits, sign me
up; count me as being on board. There are some provisions that enjoy
universal support. They are incorporated in this bill. Let me mention a
couple of them.

There are included in the provisions a requirement that plaintiffs
certify individually in each of these securities actions that the
actions are brought in good faith, that they are not acting in a
frivolous fashion, that, indeed, they are not part of the referral
process, all of which I think make a lot of sense and deal with some of
the concerns that have been raised by my colleagues on the other side
of the aisle.
There are further provisions that prohibit the payment of referral
fees to brokers. That, in my judgment, is legitimate and is designed
specifically to deal with the issue of potential frivolous lawsuits.
The concern is that we should not give stockbrokers, or anyone else,
incentives for referral of potential securities fraud cases, and,
indeed, these actions ought to be prohibited and the legislation does
that.
The legislation also deals with the issue of banning bonus payments
to class plaintiffs, and I think this, too, deals with the issue of
frivolous lawsuits. It requires the lawyer who has an interest in
securities, who brings the action, to have his actions reviewed for
potential conflict of interest. That, I think, is highly appropriate,
and it calls for improved settlement notice to class members in terms
of the proposed terms of the settlement. It contains provisions that
limit attorneys fees.
In the original version of this bill, as it passed the Senate, it
dealt with the sanction provisions of rule 11, saying that those
persons, whether they be attorneys on behalf of plaintiffs or
defendants, who take frivolous actions, can, indeed, have the full
sanction of the law brought against them.
And this was done in an even and fair-minded way. That, Mr.
President, in my judgment, deals with the bona fide, legitimate
question of frivolous lawsuits. If that is what this legislation was
all about, we would not be having this debate on the floor today. I
concur and I suspect that all of my colleagues want to work to
eliminate some of the abuses that have occurred in the system. But, Mr.
President, that requires a laser-like action to specifically craft
legislation that deals with some of the practices that have been
abused.
The referral fees to brokers, the bonus payments, the potential
conflicts of interest, the improved notice to class members of the
terms of a settlement, the limitation of attorney fees and the
strengthened sanction provisions of rule 11. That, my friends, is what
frivolous lawsuit legislation reform ought to be about. But this goes
so much further and, in my judgment, is more about protecting
misconduct and fraud than it is about frivolous lawsuits.
Let me point out first, for those who may not be familiar with what
is involved in bringing a securities action, let me make a disclosure
at the outset I have neither been plaintiff, defendant, nor as a lawyer
have I represented anyone in a securities action. But this is what is
involved in bringing a securities fraud case.
First, a person must prove that he or she actually purchased the
securities. The person must prove that the fraud, the manipulation or
deception was in connection with the purchase or sale of a security.
The person must prove that a defendant acted with scienter, that is, an
intent to deceive or a reckless disregard for the truth or the falsity
of the statement.
It needs to be emphasized that negligence, simple ordinary
negligence, is not the kind of misconduct that is a predicate for a
securities action. So anyone who makes a statement inadvertently or is
involved in negligent action does not come within the purview of the
provisions of the Securities Act of 1934.
A person must prove a defendant's misstatement or nondisclosure was
material, not just incidental, but material. A person must prove that
he or she reasonably relied on the defendant's misstatement. A person
must prove how he or she was damaged. And, finally, a person must prove
a defendant's conduct caused the damages.
Now, those are reasonably difficult things to prove. And they ought
to be. They ought to be. I do not have any quarrel with that. These
actions ought not to be taken lightly. Our colleagues point out that
there is a great expense involved in defending class actions. I
acknowledge that. But that is the burden of proof that plaintiffs must
submit themselves to under the current law. And it is a rather
substantial burden of proof, Mr. President. As I have indicated, with
respect to frivolous actions this Senator has no sympathy, and the full
provisions of rule 11 under the Federal rules, as strengthened by the
version passed by the Senate before this bill went into conference,
appropriately deals in a balanced fashion when there has in fact been a
finding that a lawsuit has been filed frivolously by a plaintiff or
actions by defendants' attorneys are frivolous.

Let me talk for a moment about what is happening in the market. And I
would invite my colleagues' attention to a recent Wall Street Journal
article. We are not just talking about some remote contingent fraud
that may occur in the marketplace. We are dealing with the reality in
which, as the Wall Street Journal fairly recently pointed out in a May
article earlier this year, in a front page story, the title of which is
``How Career Swindlers Run Rings Around SEC and Prosecutors,'' and the
subhead of the story ``White-Collar Crooks Serve Little Jail Time,
Leave Billions in Fines Unpaid, The Bad Guys Are Winning.''
Mr. President, this does not appear in the American Trial Lawyers
Association Journal. This appears in one of the icons of the business
publications in America, the Wall Street Journal. In effect, there is
more investor fraud, not less. And even with the resources available at
the SEC, this article concludes that the bad guys, in fact, are
winning. I offer this as a somber and hopefully sobering assessment
that there is massive fraud out there and that we have not seen the
last of the Ivan Boeskys and the Mike Milkens or the Charles Keatings.
Those are not just some part of a historic record that no longer
concerns us in America. There are folks out there every day who,
through whatever artifice and device, continue to perpetrate investor
fraud. And that ought to suggest to us in this deliberative body that
we ought to proceed with some caution as we approach securities
litigation reform.
Mr. President, I ask unanimous consent that the Wall Street Journal
article of Friday, May 12, 1995, be printed in the Record.
Mr. BRYAN. Let me just also invite my colleagues' attention, in a
similar vain--here is a similar business publication called Crain's New
York Business, the date of which is December 4th through the 10th,
1995. It cannot be much more contemporary than that. That is this very
week. And its headline indicates ``New Scams for a new generation.''
The subhead is, ``Driven by high-tech rip-offs, financial fraud is
soaring.'' That, Mr. President, is a publication of this very week,
``financial fraud is soaring.'' And I again ask unanimous consent that
this publication be printed in the Record.
There being no objection, the article was ordered to be printed in
the Record, as follows:

[From the Wall Street Journal, May 12, 1995]

How Career Swindlers Run Rings Around SEC and Prosecutors

(By John R. Emshwiller)

Santa Monica, CA.--For more than a quarter century, Ramon
D'Onofrio has been playing games with the law--and mostly
winning.
The 67-year-old Mr. D'Onofrio, operating out of a modest
office suite at the airport here, is a master stock swindler.
He is responsible for fleecing the public out of tens of
millions of dollars in the course of numerous stock
manipulations, say officials who have tangled with him in
about 20 civil and criminal investigations. A federal appeals
court once referred to him as ``ubiquitously criminal.''
Mr. D'Onofrio has been convicted of fraud-related crimes
five times and is once again under investigation, people
familiar with the case say. Yet he hasn't spent a day in
prison in the past 20 years--and he served only about a year
behind bars before that. His most recent criminal conviction
came in 1991; he received probation. While the Securities and
Exchange Commission has ``permanently'' enjoined Mr.
D'Onofrio from future

[[Page S 17945]]
violations of securities laws, it has done so seven different times.
Meanwhile, he has left unpaid about $11.5 million in fines
and civil judgments.

Billions in Uncollected Fines

Mr. D'Onofrio isn't alone. Hundreds of career swindlers,
many of whom have infiltrated legitimate industries ranging
from securities to health care, are laughing all the way to
the bank--with other people's money. ``If you have the
aptitude and you're enough of a sociopath, there are few
places where the pickings are as easy'' as swindling, says
Scott Stapf, investor-education adviser for the North
American Securities Administrators Association, a group of
state regulators.
Data gathered from government agencies show that it takes
far longer to bring white-collar criminals to justice than
perpetrators of other crimes. Once apprehended and convicted,
swindlers generally receive light sentences--frequently
nothing more than probation and a fine. Often, as with Mr.
D'Onofrio, they aren't compelled to pay back what they have
stolen; extraordinarily, about $4.48 billion in uncollected
federal criminal fines and restitution payments is currently
outstanding.
While nobody argues that high-priority battles against
drugs and street crime should be neglected, many white-
collar-crime investigators contend that the devastating
impact of fraud isn't sufficiently appreciated. Rough
estimates by government agencies and others indicate that
white-collar crime costs Americans more than $100 billion
annually. And increasingly, free-lance stock swindlers are
joining forces with organized crime, to the benefit of both.

Victim Committed Suicide

``These are people who are stealing millions from working-
class Americans. These are people who ruin lives,'' says John
Perkins, until recently Missouri securities commissioner. The
former regulator still recalls a Thanksgiving Day nearly 20
years ago when a local farmer, after having mortgaged his
property and lost the money in an investment swindle,
committed suicide by shooting himself in the head. Quinton
Darence Cloninger, who was convicted of helping run that
swindle, was out of prison after three years--and back in the
investment business. He couldn't be located for comment.
Over the years, Mr. D'Onofrio and his ilk have benefited
richly from the fact that civil authorities don't have much
enforcement clout without the backing of the criminal-justice
system. Criminal prosecutors, in turn, aren't always
interested in white-collar offenses--and may be becoming less
so.
Consider the SEC civil injunctions that Mr. D'Onofrio and
others so often ignore. Violations of such injunctions--which
often bar the individual from working in the securities
industry--can lead to criminal-contempt charges and jail
time. But, SEC officials concede, contempt is a rarely used
weapon. Records supplied by the SEC show that only a handful
of criminal-contempt cases have been brought in the past five
years.

Reluctant Prosecutors

For one thing, the agency has to persuade a U.S. attorney's
office to prosecute a contempt case. The chances of that
happening are usually ``slim to none,'' says one SEC
attorney, particularly since criminal-contempt cases usually
don't produce long sentences. Many prosecutors are loath to
put in time on a case where the potential payoff is small.
In 1990, at the SEC's request, the U.S. attorney's office
in Salt Lake City did bring a criminal-contempt case against
Mr. D'Onofrio. According to a complaint filed in federal
court there, Mr. D'Onofrio violated a 1982 court injunction
requiring disclosure of his significant stock holdings, an
order that resulted from an earlier SEC lawsuit over stock
manipulation. Mr. D'Onofrio pleaded guilty, was given
probation and continued his career unimpeded.
Mr. D'Onofrio declined numerous requests for an interview
for this article. ``Some people do talk to the press and some
people don't,'' says his attorney, Ira Sorkin, the former
head of the SEC's New York regional office. Mr. D'Onofrio
``falls into the latter category,'' adds Mr. Sorkin, who
won't talk about his client either. (As an assistant U.S.
attorney in New York 20 years ago, Mr. Sorkin helped
prosecute a criminal case in which Mr. D'Onofrio was an
unindicted co-conspirator.)
Contempt isn't the only criminal charge available in
swindling cases; frequently, scam artists can be prosecuted
criminally under fraud or racketeering laws. But Philip
Feigin, a Colorado regulator and current president of the
North American Securities Administrators Association, bemoans
a ``vicious cycle'' in which securities regulators,
investigators and prosecutors often relegate criminal
statutes to an ``afterthought.''

buried by documents

One reason is that white-collar criminal cases often eat up
enormous amounts of time and resources. Stewart Walz, a
veteran federal prosecutor and former head of the criminal
section of the U.S. attorney's office in Salt Lake City,
recalls one complex white-collar case several years ago that
required a quarter of his section's attorneys for a five-
month trial. Although multiple convictions resulted, Mr. Walz
asks: ``How many other cases went unprosecuted?''
On average, it takes more than 10 months for a white-collar
criminal case to be filed in court from the time it is
referred to a federal prosecutor's office, according to
national statistics gathered by the Transactional Records
Access Clearinghouse at Syracuse University in New York. That
is nearly three times as long as for the average drug case.
Complex, document-laden white-collar cases frequently take
years to complete.
When prosecutors do bring fraud charges, they often end up
disappointed with the sentences that result. The latest
federal prison statistics show that the median jail term for
fraud is just 12 months; even violators of pornography and
prostitution laws receive 33 months behind bars, while drug
traffickers are sent away for a median of 60 months. A check
of state sentencing statistics in California and Florida, two
centers of white-collar crime, also shows large disparities
in sentences between fraud and drug trafficking.
James Sepulveda, a prosecutor in the district attorney's
office of Contra Costa County in Northern California, says he
has helped convict hundreds of white-collar criminals during
the past 14 years. Some 90% of them, he estimates, received
probation: ``The bad guys are winning,'' he says.
Such experiences have made prosecutors increasingly
reluctant to take on many potentially promising cases. These
days, if a case is worth less than $1 million, some big-city
prosecutors won't even touch it, experts say.
A major factor is the nation's war on drugs, which has been
overwhelming prosecutors' offices, courts and prisons. In
1985, for instance, only 34% of the federal prison population
was serving time for drug-related crimes. Today, the figure
is 62%. As recently as the early 1980s, the average federal
prosecutor handled about the same number of white-collar and
drug cases each year, according to the Syracuse University
group. By 1993, that same prosecutor was handling nearly
twice as many drug matters as white-collar cases.
Of the thousands of white-collar cases filed by the federal
prosecutors annually, only several dozen involve alleged
securities fraud, according to records of various government
agencies. The SEC keeps only what an agency spokesman terms a
``spongy'' count of such cases.

poor record keeping

Though Justice Department officials agree that drug cases
have been getting more and more attention, they insist that
the agency's commitment to prosecuting white-collar cases
hasn't diminished. They note that in recent years the
department has focused increasingly on particularly complex
and time-consuming white-collar cases. While not great in
number, these prosecutions tend to have a significant impact,
they say.
Nonetheless, the scarcity of government record keeping in
this area seems to underscore the relatively low priority
given to white-collar crime. The Federal Bureau of
Investigation, for example, annually gathers from more than
16,000 local and state law-enforcement agencies detailed
statistics on crime ranging from murder to auto theft. That
survey doesn't include fraud, for which much less detailed
information is assembled. FBI officials say they are working
on a new reporting system that will gather more information
on white-collar crimes, but they don't expect it to be in
place before the end of the decade.
For its part, the SEC has established no formal system for
identifying or tracking repeat offenders. Nor does it always
know their whereabouts. During a recent interview, Thomas
Newkirk, an associate director for enforcement, proclaims
that Thomas Quinn is safely ensconced in a European jail. But
Mr. Quinn, one of the major stock manipulators of the 1980s--
who regulators say was responsible for as much as several
hundred million dollars in investor losses world-wide--has
been out of jail for months and is living on Long Island,
N.Y. Mr. Quinn says he isn't involved in the securities
business and ``never will be again. I am just trying to get
on with my life.''
William McLucas, the SEC's enforcement chief, says there
``should be a place in the system'' to deal ``harshly'' with
securities-law recidivist, and that the agency does its best
to make sure they are brought to justice. But he also notes
that the SEC has to regulate thousands of public companies
and investment advisers and a vast mutual-fund industry. ``We
have a whole lot of market realities we are trying to keep
pace with,'' he says. ``So we must make some hard judgments
about where to put resources.''

Cases Move Slowly

Some of these judgment calls have made life easier for Mr.
D'Onofrio. The two most recent SEC lawsuits against him--one
filed in Los Angeles federal court in 1993, the other in New
York federal court last September--were years in the making
and involve alleged stock manipulations that occurred, in
some cases, more than a half-decade earlier.
Such time lags aren't uncommon, SEC officials say. The
continuing criminal investigation, which involves some of the
same activities as the two civil cases, also seems to be
moving at a glacial pace. Hovhanness ``John'' Freeland, an
alleged D'Onofrio confederate in one of the civil cases,
pleaded guilty to criminal stock fraud in a related case in
New York federal court. He entered that plea more than two
years ago but hasn't been sentenced yet. Mr. Freeland, who is
back in the business world, declines to be interviewed, and
prosecutors won't comment on the criminal case.
When charges are brought against Mr. D'Onofrio, he is as
likely to quit as to fight.

[[Page S 17946]]
Indeed, Mr. D'Onofrio's success with the law has stemmed partly from
his willingness to cooperate when caught. This has helped
keep his incarceration time to a minimum, even though by the
early 1970s he was clearing as much as $1 million annually in
stock manipulations, according to one court ruling.
In one early instance of cooperation, Mr. D'Onofrio agreed
to be the main witness against his former business associate
and onetime state-court judge, Joseph Pfingst, in a
bankruptcy-fraud case in Brooklyn, N.Y. Mr. D'Onofrio was
sentenced to probation after helping get Mr. Pfingst
convicted; the former New York judge got a four-month term.

Making ``A Lot of Money''

In another case against an alleged co-conspirator, Mr.
D'Onofrio testified readily to his own role as a
``manipulator of stocks'' who causes ``the price of the stock
to rise by fraudulent means and in the process makes a lot of
money,'' according to a federal-court opinion. But Mr.
D'Onofrio has always been extremely secretive concerning
anything that might interfere with his continuing prosperity.
In one case, he was jailed 22 days for contempt rather than
discuss his overseas bank accounts.
Lately, Mr. D'Onofrio has been dabbling in new business
ventures, aided by a 1990 SEC rule change. ``Regulation S''
allows a company to sell stock overseas without going through
the time-consuming and expensive disclosure procedures
normally required to sell new stock in the U.S. The idea is
to give companies a tool for raising capital. Such is the
latitude of Regulation S that the SEC doesn't even track
which firms do such transactions.
Law-enforcement officials say they believe Mr. D'Onofrio
and others have been using Regulation S to obtain millions of
shares of stock, which they fail to pay for or buy at a deep
discount, then resell to the public before the price of the
stock crashes.
The SEC has voiced concern about possible Regulation S
abuses but has done little to curb them. In 1991, the agency
did file suit in Washington, D.C., federal court against
several defendants in a Regulation S transaction involving a
small Tucson, Ariz., company, Work Recovery Inc. The SEC
obtained injunctions and disgorgement orders against the
defendants, whom the agency charged with failing to pay for
1.5 million Work Recovery shares and then illegally selling a
substantial number of these shares to U.S. investors.
Though one of Mr. D'Onofrio's firms was Work Recovery's
investment banker, the SEC didn't name him or the firm in
its suit. The agency declines to say why. Work Recovery
later sued Mr. D'Onofrio and others in Denver federal
court and won a default judgment of nearly $9.5 million in
April 1993. It remains unpaid.
In a 1992 interview, Work Recovery President Thomas Brandon
recalled being impressed by Mr. D'Onofrio's plush office
suite, chauffeured limousine and seeming dedication to
helping small companies such as his raise capital through
Regulation S transactions. Mr. Brandon said the pitch ``was
almost evangelical in tone.''
Mr. D'Onofrio and his associates recently latched onto
another small publicly traded company, Madera International
Inc., a Calabasas, Calif., firm with a bizarre past that
included plans for an automatic-weapons factory in China. By
last year, Madera had a new business--exporting timber from
Nicaragua--and a new investment banker, First Capital Network
Inc.
Mr. D'Onofrio has been operating from First Capital's Santa
Monica office. According to several individuals who have done
business with the firm, he was involved in financing and
stock transactions for First Capital, despite an outstanding
court order barring him from ``acting as a promoter, finder,
consultant, agent or other person who engages in . . . the
issuance or trading of any security.'' Repeated requests for
comment from company officials, left by phone and in person
at the firm's office, received no response.

madera stock collapsed

Madera Chairman Daniel Lezak says of Mr. D'Onofrio that
``it was my impression that he helped run the firm.'' Mr.
Lezak says, and SEC filings confirm, that First Capital
arranged the transfer of millions of new shares of Madera
stock to itself or offshore buyers at no cost or at deep
discounts through Regulation S and other transactions. Mr.
Lezak says he believes much of that stock was quickly dumped
in the U.S., a move he believes contributed to Madera stock's
dropping to about 10 cents a share from a high last year of
more than $3. Mr. Lezak says he fired First Capital as
Madera's investment banker, but says he still sometimes
consults with firm officials,
Mr. D'Onofrio has had serious heart problems of late, law-
enforcement officials say. But he appears to be passing his
accumulated knowledge to others, including his 34-year-old
son Mark, who for the past several years has been working
with his father.
Already, the younger Mr. D'Onofrio has been the subject of
three SEC injunctions for alleged securities-law violations.
He recently pleaded guilty in connection with federal
conspiracy and fraud charges filed in Los Angeles federal
court as part of the criminal investigation that also
involves his father. Mark D'Onofrio remains free pending
sentencing, scheduled for later this year. His attorney, Mr.
Sorkin, says the son, like the father, doesn't talk to the
press.
But Mr. Brandon, the Work Recovery executive, recalls a
dinner conversation where Mark D'Onofrio talked of how he
``was proud of his father's doggedness'' and wanted ``to
follow in his father's footsteps.''

There being no objection, the article was ordered to be printed in
the Record, as follows:

[From Crain's New York Business, Dec. 4-10, 1995]

New Scams for a New Generation

driven by high-tech rip-offs, financial fraud is soaring

(By Judy Temes and Geri Willis)

John Chilelli believed in two things: technology and radio
talk show host Sonny Bloch.
Looking for a way off the rough-and-tumble docks of
Bayonne, N.J., the longshoreman, 37, plunged nearly half his
savings--$22,000--into a high-tech investment in paging
systems last fall. His dream was to earn enough to leave his
90-hour-a-week job operating a crane to buy a Pizza Hut
franchise.
``I figured if Bloch had his own show all these years, and
he's telling people to buy this, it's gotta be on the up-and-
up,'' explains Mr. Chilelli.
But federal authorities say Mr. Bloch lined his own pockets
working in collusion with a number of advertisers to hustle
ill-advised and fraudulent high-tech investments to loyal
listeners, ultimately stealing $21 million.
Mr. Bloch says he is innocent of any wrongdoing, but today
he sits in jail awaiting trial.
The Bloch case is emblematic of how technology has
unleashed an unprecedented wave of investment fraud that is
ripping off consumers for billions of dollars. Investors are
attracted to technology because they have seen the way it has
changed their own lives. Many are also searching for the next
Microsoft Corp. Instead, they are being lured into phony
deals in interactive video, mobile telephones, pager systems
and wireless cable.
Technology is not only transforming the products sold by
these investing hucksters; it is also dramatically changing
how they do business. Today's snake oil salesmen are reaching
more people than ever by broadcasting their message over the
Internet, as well as radio and television. They bounce their
offers off satellites and communicate via conference calls,
900 numbers and late-night infomercials.
Carefully mimicking legitimate providers of investment
advice, scam artists have mastered direct mail techniques,
lifting new headlines and even stories to make their appeals
sound authoritative.
Mr. Bloch went one important step further. He co-opted
legitimate media, employing 200 radio stations, satellite
technology and a telemarketing operation to broaden his
reach. Once in investors' living rooms, he studded his
show with noted experts. A string of book titles and
frequent public appearances cemented his credibility with
listeners desperate for a trustworthy, accessible
financial adviser.
By some estimates, people like Mr. Bloch are costing
Americans $100 billion a year. The Securities and Exchange
Commission's caseload has climbed 30% in five years, while at
the same time, criminal convictions by state regulators have
quadrupled. Investment fraud complaints to state and federal
agencies are soaring, with 50,000 logged by the Federal Trade
Commission in the past three years.

americans face life with fewer financial guarantees

Behind this rise in financial fraud is a sea change in
personal investing patterns. A new generation of Americans is
facing life with fewer financial guarantees. Many no longer
believe that Social Security will provide for their
retirement. Medicare programs are under siege. The number of
workers with fully company-funded pensions is dwindling. Home
values, once the foundation of a typical family's net worth,
are eroding.
Facing the prospect of outliving their savings, more people
are buying stocks, bonds and mutual funds--one in three
American families, compared with only one in 17 in 1980. Each
week, these newly minted investors plow some $9.6 billion
into mutual funds alone.
But most are ill-prepared for this new burden. Lacking
investing skills, the postwar generation confronts an array
of complex products and is dazzled by thousands of options.
For example, there are now twice as many mutual funds--
5,600--as there are stocks listed on the New York Stock
Exchange.
Investors are confused because even legitimate firms can't
be entirely trusted. Big brokerages still pay incentives to
salesmen to hype products. The media adds to this charged
environment by tantalizing investors with the possibility of
high returns. ``Quit young and enjoy the rest of your life,''
beguiles a recent Money magazine cover.
``Investors are clearly more vulnerable,'' says Arthur
Levitt, chairman of the SEC.
At stake is nothing less than the future prospects of
millions of investors: their retirement funds, their
children's college education money and the resources to care
for their aging parents.
The longshoreman, Mr. Chilelli, has been forced to put his
dreams on hold. ``I feel foolish,'' he says. But, he asks,
``How do you tell what to invest in? Who do you trust?''

[[Page S 17947]]

technology blinds investors

Bob Shifman was getting a sick feeling in the pit of his
stomach as he listened to a slick promoter pitch wireless
cable television to a roomful of retirees last June.
Richard Horne described wireless as the cellular telephone
of the 1990s, a technological miracle capable of providing
better service at lower costs. Why, he asked, would
reasonable people invest in an unpredictable stock market or
in real estate with such a ``tremendous opportunity''
available?
``This is an excellent place to park your money,'' Mr.
Horne concluded.
Even as the room erupted into applause, Mr. Shifman thought
of the $15,000 in savings he had sunk into the enterprise.
The Jersey City retiree had planned to give the money to his
two adult children and six grandchildren.
Eleven months later, the U.S. Attorney's office filed an
indictment charging the operators of the wireless venture,
known as Greater Columbia Basin, with defrauding consumers of
a total of $21 million.
Among those implicated were Sonny Bloch, James Barschow,
Joseph Glenski, Bruce Schroeder and Milton Sonneberg. Five
others have pleaded guilty to felony charges that they worked
with Mr. Bloch, including Steven Wiegner. Mr. Wiegner, who
was president of Mr. Bloch's Independent Broadcasters
Network, pleaded guilty last week and is cooperating with the
government.
Mr. Horne, meanwhile, has been named as a defendant in an
investor suit against Columbia, but lawyers representing
investors have been unable to track him down.
Crooks are selling schemes and products with a high-tech
spin to a generation that has eagerly watched laptop
computers, cellular phones and interactive multimedia change
the way people work and play.
Con artists use this fascination to lure investors into a
variety of ploys that use interactive video, mobile
telephones, pager systems and wireless cable. But the
smartest ones don't stop there. They pitch Wall Street's own
computer-based products and trading techniques--derivatives
and arbitrage--to a gullible public eager to emulate the
securities industry's savviest traders.
``Technology has the interest of people,'' says Stephen
Gurwitz, an attorney at the FTC. ``The schemes follow the
headlines.''

personally endorsed by sonny bloch

Wireless cable fraud alone costs investors half a billion
dollars each year, the FTC estimates. The SEC has filed 21
wireless cases in the past three years. The FTC, which
investigates instances of misrepresentation, has filed 14
high-tech cases since 1990, five this year alone.
Such a scam cost Ray LaCava $30,000--money he received from
a car accident that disabled him for life. Well invested, Mr.
LaCava thought, that money could buy his daughter an annuity,
or perhaps even set her up in business.
A paging license seemed ideal. The Long Island resident had
made a successful high-tech investment before; he says he
netted half a million dollars a decade earlier on a cellular
phone license.
``I knew paging was up and coming,'' recalls Mr. LaCava.
``I was noticing more and more people with beepers.''
When salesmen from Manhattan-based Breakthrough
Technologies Inc. called last fall, Mr. LaCava was primed to
listen. For $7,400 per license, Breakthrough would conduct
engineering studies and file an application for Mr. LaCava to
ensure him of a prime operating area. The company was
personally endorsed by Sonny Bloch, who described
Breakthrough President Michael Taylor as his ``good friend.''
Says Mr. LaCava. ``That clinched it for me.''
Salesmen from Breakthrough took Mr. LaCava and a dozen
other investors to a legitimate conference at the Newark
Marriott hotel held by paging equipment manufacturer
Motorola, which knew nothing about Breakthrough. A limo
ride and dinner were part of the package.
Mr. LaCava forked over $22,200 that night in a five-for-
three deal, buying licenses in Kansas City, Mo., Louisville,
Ky., and three other cities.

Big fees for useless licenses

He never received the licenses. Principal Michael
McGuinness, using the name Michael Taylor, put off Mr. LaCava
for two months, cancelling meetings and blaming the delays on
government bureaucrats. Investors finally stopped buying the
excuses and reported Breakthrough to postal inspectors last
December. Mr. McGuinness pleaded guilty to charges of mail
fraud earlier this year.
Like Mr. LaCava, many investors have made millions off such
new technologies as cellular telephones, heightening interest
in high technology. Holding out the promise of similar huge
returns, hustlers charge unsophisticated investors as much as
$7,500 to file a license application that could be filed with
the Federal Communications Commission for as little as $50.
They justify the expense by promising engineering, and
population studies.
Often, the studies are never delivered. When they are
delivered, they usually prove worthless. And that's just the
beginning of the subterfuge.
Investors are often misled about the capability of the
technology or simply the location of the licenses that they
apply for. Little is said about the heavy responsibilities
that accompany the ownership of a license, such as a
requirement that owners build transmission towers and
stations costing hundreds of thousands of dollars.
Investors in Manhattan-based Metropolitan Communications
Corp. were told that their specialized mobile-radio licenses
would become part of a nationwide wireless telephone network,
according to an FTC complaint. For an initial investment of
$7,000, investors were allegedly told, they could make as
much as $58,000 a year before expenses.
In less than two years, roughly 2,500 investors funneled
$28 million into the deal. About half of them signed separate
agreements to lease their licenses to a manager, expecting
the manager in turn to pay them a stream of income that would
resemble an annuity.
The manager was really a sister company of Metropolitan.
Both companies, authorities say, lacked the capital to
properly build the towers that would make the system work.
The company tired to mislead regulators by building at
least 300 temporary towers, according to Danny Goodman, who
was appointed by the U.S. District Court to take over the
company last year. In each location, the company would
broadcast for a day or two, pull down the tower, shove it
into a van and move it to the location of the next license,
where workers would go through the same motions.
``Metropolitan thought it would fool investors,'' says Mr.
Goodman. It did--until the FTC stepped in. The agency filed a
complaint against Metropolitan in January 1994 and froze the
assets of its central players.
Metropolitan principal Sheldon Jackler signed a consent
order last year agreeing to cease operations. But he has
since decided to fight the government's case and disputes
some of the government's claims. His lawyer, Stephen Hill,
says Metropolitan had every intention of making the system
operable, but its plan was interrupted by the court-imposed
receivership.

Targeting the savings of retirees

Some investors are so mesmerized by the promise of high-
tech products that they even entrust their retirement money
to these products.
In an elaborate ruse, Jerry Allison and Qualified Pension
Investments Inc. of Scottsdale, Ariz., convinced retirees to
sign over their entire retirement accounts to the ``IRA
approved'' pension administrator.
``There is no such legal statement as `IRA approved,' ''
says Kenneth Lench, SEC branch chief, whose Washington office
filed a QPI complaint.
QPI should have acted as a disinterested third party in
administering the accounts. Instead, Mr. Allison's company
allowed backers of phony wireless cable operations to mail
QPI brochures to prospects alongside their own promotional
materials. In return, the Scottsdale company stuffed those
retirement accounts full of worthless wireless cable
investments. The company took in $270 million of retirement
money from 14,500 people nationwide between 1991 and 1994.
Mr. Allison faces a trial on the SEC complaint that he
misappropriated at least $4.5 million in retirement funds. A
subsequent receiver's report shows that as much as $9.5
million may be missing.

Scam artists imitate Wall Street

Scam artists also have followed Wall Street into complex
financial instruments. Chuckles Kohli of Princeton-based
Sigma Inc. said he could make investors returns of 10% a
month using derivatives and exchange-traded options to
develop lucrative currency arbitrages.
``All the banks are getting rich doing swap derivatives,''
an elderly investor later told authorities. ``I wanted to
share in it.''
Another individual pumped more than $100,000, just about
all of his retirement fund, into a portfolio managed by Mr.
Kohli.
``There were these people I knew who were living a lot
better than I was, driving nicer cars, without the income I
had,'' says the 52-year-old father of three. ``I said, `Oh
shoot, I could live like that, too.' ''
Mr. Kohli took in about $40 million from investors,
according to court documents filed by the Commodity Futures
Trading Commission and the U.S. Attorney's office in Newark.
He allegedly violated a host of securities rules: He never
registered as a commodity pool operator, and he mingled
investor dollars. During his four years in business, he never
filed a single tax return. And to top it all off, he lost $20
million of investors' money while telling them they were
reaping huge returns.
He squandered another $5 million on expenses, which
included a personal limo driver, go-go dancers and a strip
bar.
He was indicted for mail fraud and is now in jail awaiting
trial.

The underside of the Internet

Forget the old boiler rooms were high-pressure swindlers
pitched penny stocks and other risky investments. Today's
hustlers have jettisoned the phone banks for computers,
modems and the Internet to broaden their audience and lower
their costs. They're using computer-generated mailing lists,
satellite transmissions and radio networks to appeal to
millions of potential targets.
The new scam artist appears on late-night television and
uses desktop technology to produce pitches that mimic those
of legitimate personal investing experts.
These tools have made financial fraud so easy to perpetrate
that one search for cyber-crooks nabbed a 19-year-old hacker
peddling an investment in eel farms. His tools: a personal
computer and an active imagination.

[[Page S 17948]]

Nowhere does the possibility for abuse loom larger than on
the Internet and on-line services, where investor chat lines
burn 24 hours a day with stock tips and ideas.
While activists criticize on-line services for their
unwitting role as purveyors of pornographic pictures, the
real smut is often financial. A recent visit to America
Online found these dubious offers:
Stop Paying Income Taxes Legally . . . Get a letter from
the IRS stating: ``You are not liable for income taxes.''
This is honest, legal and REAL.
$250,000 by Christmas or Sooner!!! Call the World's Most
Profitable Number.
Get out of the DEBT Cycle! . . . Stop putting your banker's
kids through school or paying for his new swimming pool!
Investors who would be wary of a telemarketer are less
suspicious of an electronic pitch--particularly when it is
personalized.
``There is a clubby mentality. It's like hanging out at the
campfire at Malibu,'' says Mark S. Herr, New Jersey consumer
affairs director.
A recent SEC case shows how electronic schemers get close
to their prospects. The initial hook was an ad on Compuserve,
where subscribers were promised ``High Returns for
Investors!!'' last July. People who responded to that pitch
were mailed an authentic-looking contract describing a
$12,000 ``prime bank'' investment.
Gene Block, a Durham, N.C., business consultant, gained the
trust of investors by chatting with them through e-mail. He
promised that their investments would double in just six
months and were protected by top bank guarantees, says the
SEC in a complaint.
But Mr. Block was really a member of an international ring
that marketed these phony investments, scoring $1 million for
their efforts. So far, the SEC has recovered $250,000 from
the bank accounts of the scheme's originator, Renate Haag,
who is believed to have fled to her native Germany.
But the scheme is noting new. The SEC has 24 other prime
bank cases on the books, and more are on the way.
``In the old days, you had the boiler rooms where you had
to hire 20 people to make thousands of phone calls to sell
fraudulent securities. Now one person can do this by the push
of a button,'' says James B. Adelman, former head of
enforcement of the SEC's Boston office.
Mr. Block faces a trial on the SEC complaint. His attorney,
Paul Prew, doesn't deny that his client participated, but
says, ``He was used as a pawn by people who knew better or
should've known better.''
Con artists are combining PC power with other technology.
Richard Welch, formerly the operator of a fantasy telephone
sex line, drew on his knowledge of 900 numbers to develop a
Ponzi scheme in which people were invited to invest in a
worldwide lottery service said to be sponsored by North
American Indian tribes.
The con was a one-two punch that started with telephone and
fax solicitations. Early investors in the ruse then used e-
mail and computer bulletin boards to recruit others,
according to a complaint filed by the SEC.
By harnessing the power of these technologies, Mr. Welch
and his coconspirators drew in 20,000 people in a four-month
period. The agency is still trying to locate Mr. Welch, who
has not responded to the complaint.

Scam artists dialing for dollars

But crooks don't have to be experienced Net surfers to
benefit from technology: Simple PC desktop publishing
software allows stock front-runners, for example, to design
professional-looking newsletters to push up the prices of the
stocks they hold.
Others are also using computers to find and track good
targets. In one of the fastest-growing telemarketing ploys,
``recovery rooms,'' fraud artists use computers to build
lists of people who have already been defrauded so they can
be tapped again.
According to an FTC complaint, Meridian Capital Management
Inc. promised to recover money that victims had lost in
telemarketing schemes, sometimes passing itself off as a
regulatory agency. For 10% of their original loss, the Las
Vegas firm told investors, it would launch a class-action
suit, or tap a performance bond said to be posted by the
first round of crooks.
``The idea was to entice consumers to send good money after
bad,'' says FTC staff attorney James Reilly Dolan.
Meridian collected $1.6 million from 800 people, many of
them New Yorkers, in just eight months.
Acting on a request from the FTC, a court froze Meridian's
assets in August, and the company is no longer in business.
Mr. Dolan says such pitches are particularly convincing
because the swindlers know details about the victims, often
including the exact amounts they have lost.
Lists of potential targets cost $5 a name for initial
leads, but $15 for the names of people who've already been
fooled once.
Hackers' use of technology is also giving them a leg up in
evading their trackers. Once a cyber-huckster gets a hint
that someone is on his tail, he can easily move on.
``You cancel your account with your on-line service and
vaporize,'' says Richard Lee, assistant regional director in
the SEC's New York office.
Regulators lack the tools to go after some of the more
subtle misrepresentation that occurs on the Internet.
Investor bulletin board postings are singed only by names
similar to CB handles. Because of the anonymity, people can
easily camouflage their identities. A stock touter, for
example, can be a broker, a savvy penny-stock promoter or
even the president of the company.
Mr. Herr, the New Jersey consumer affairs director,
concedes that regulators are playing catch-up.
``We are in the embryonic stage,'' he says. ``Right now,
the bad guys are ahead of the good guys.''

Mr. BRYAN. With that background, one might rightly inquire, why
should the Congress be considering legislation that makes it more
difficult for defrauded investors to bring and win cases? The simple
answer is that those who advocate this conference report in its present
form, in my judgment--and I say this with all due respect--are
legislating by anecdote and clearly lawyer bashing.
I understand that lawyers are a difficult group to love. I fully
acknowledge that some of my lawyer friends have been guilty of
misconduct and that there are indeed frivolous lawsuits filed. But in
our effort to focus on frivolous lawsuits, in my judgment, the
provisions of this piece of legislation effectively emasculate private
investor protection.
During the debate today, we will hear repeatedly how often our high-
technology companies are sued. What we will not hear a lot about is
suits brought by one company against another. Mr. President, this
legislation does nothing and says nothing about one company's right to
sue another company. The sole focus of this legislation is lawsuits
brought by private investors as part of a class action proceeding.
Let me again invoke the Wall Street Journal, if I may. This was an
article that appeared in December 1993. Its premise was ``Suits by
Firms''--that is other companies--``Exceed Those by Individuals.'' Let
me just read one paragraph, if I may, that I think illustrates the
thrust of this article.

Preliminary data in the first-ever study of litigation
patterns of Fortune 1000 companies show that businesses'
contract disputes with each other constitute the largest
single category of lawsuits filed in federal court.

Let me repeat that because I know that it tends to run counter to the
prevailing myth about what is actually occurring in the so-called
litigation explosion.

I know that is not the accepted view, and it goes contrary to the
conventional wisdom that is being espoused on the floor that there is
this explosion of class action lawsuits. But that is what the Wall
Street Journal has to say.
Mr. President, I ask unanimous consent that the Wall Street Journal
article to which I have made reference, of Friday, December 3, 1993, be
printed in the Record.
There being no objection, the article was ordered to be printed in
the Record, as follows:

[From the Wall Street Journal, Dec. 3, 1993]

Suits by Firms Exceed Those by Individuals

(By Milo Geyelin)

Businesses may be their own worst enemies when it comes to
the so-called litigation explosion.
Preliminary data in the first-ever study of litigation
patterns of Fortune 1000 companies show that businesses'
contract disputes with each other constitute the largest
single category of lawsuits filed in federal court. Trailing
behind are personal-injury suits and product-liability cases
brought by individuals.
This result--while limited to federal courts--seems to
challenge companies' frequent claims that personal-injury
plaintiffs' lawyers are the main engines of litigation in
America. And it may force some companies to review their own
penchant for using the courts to resolve commercial disputes.
The finding is part of an ongoing study by University of
Wisconsin sociologist Joel Rogers and RAND Institute for
Civil Justice senior researcher Terence Dunworth. Ultimately,
by looking at 1,908 companies that have been ranked among the
Fortune 1000 from 1971 to 1991, the study will chart federal
trends industry by industry and company by company.
The results so far, presented in draft form at a symposium
at the University of Wisconsin's Institute for Legal Studies
two weeks ago, also show that the once-steady annual
increases in overall legal filings involving Fortune 1000
companies peaked in 1987 and have declined 21% since then.
Similarly, business litigation involving smaller companies
and individuals peaked in 1986 and has since dropped 12%.

[[Page S 17949]]

When cases are broken down by category, the study shows
that labor and civil-rights claims have increased in recent
years. So have filings involving a single product such as
asbestos-related injuries. Otherwise, product-liability suits
against Fortune 1000 companies have actually dropped, from a
high of 3,500 in 1985 to 1,500 in 1991.
``I know that business doesn't want to hear that, but these
data don't seem to lie,'' says Mr. Rogers.
The reasons for the various litigation patterns are far
from clear, however. For example, says Mr. Rogers, the high
incidence of commercial legal disputes among businesses may
be the result of their litigiousness or may just reflect the
increase in the number of contracts in effect--and thus
potentially subject to dispute--in a growing economy.
In either event, the results suggest that by pointing the
finger at plaintiffs' lawyers, business leaders and advocates
of legal reform may be bypassing other contributors to the
overburdened civil-justice system, at least in the federal
courts.
In response to the study's finding, legal-reform advocates
voiced skepticism about what the federal-court results may
mean. ``The overwhelming majority of product-liability claims
are filed in state courts,'' says Victor Schwartz, a lawyer-
lobbyist in Washington, D.C., who represents backers of a
proposed federal law to rein in some product-liability
claims.
State courts are generally regarded by plaintiffs' lawyers
as friendlier forums for personal-injury and product-
liability claims than federal courts, and most suits against
local businesses and manufacturers would more likely be
filed in local courts. But comprehensive state-court data
are nearly impossible to compile. So studies of state
systems have been confined to a limited number of courts.
Thus, few useful comparisons can be made with the federal
numbers.
Responds RAND researcher Mr. Dunworth: ``It's better to
light a candle than to curse the darkness. Even if that's all
you're doing by looking at federal courts, you're further
ahead than you were.''
Messrs. Rogers and Dunworth relied on a computer database
of more than four million federal lawsuits between 1971 and
1991 to identify 2.48 million suits that involved at least
one business entity. Fortune 1000 companies were involved
either as plaintiffs or defendants in 457,358 of those suits,
or nearly 20%, according to the study. Not surprisingly, they
were defendants in virtually all personal-injury cases (95%)
and in most labor and civil-rights cases (85%). In contract
disputes, Fortune 1000 companies sued each other as often as
they were sued.
To get a more detailed look at how Fortune 1000 companies
compared with other litigants--such as other businesses,
governments and individuals--the study examined 405,908 cases
that landed in federal court solely because the parties came
from different states, thus creating so-called diversity of
jurisdiction. Since 1985, records in such cases have
indicated whether either party is a corporation, large or
small.
According to these records, 43% of the civil lawsuits
involving Fortune 1000 companies between 1985 and 1991 were
contract disputes. For smaller corporations, the percentage
was even higher--51%. Taken together, business disagreements,
whether among individuals, companies or corporations, made up
nearly half of all federal litigation in this sample. Federal
suits over contracts outpaced any other single category of
litigation.
Yet even these cases are on the decline now. Contract
lawsuits peaked at 10,253 in 1987 and dropped 30% to 7,182 in
1991. A key reason, corporate legal experts say, is
companies' growing willingness to settle disputes through
arbitration and mediation. ``When you have businesses suing
businesses,'' says Shelby R. Rogers Jr., general counsel for
the Texas Medical Association, in Houston, ``you find that
getting to the courthouse takes a number of years . . . and
as a result we see many more businesses going to different
forms of alternative dispute resolution.''
But Mr. Rogers, of the Texas Medical Association, says he
is yet to be persuaded that federal litigation trends bear
any relation to what's happening in jurisdictions such as the
Texas state courts, long regarded as among the most pro-
plaintiff in the country. And even Mr. Dunworth concedes
there's ``a great deal of uncertainty about what's taken
place in state courts.'' But he adds: ``if there are
significant trends at work (generally), they surely must be
evident in federal courts.''
Lawyers at big firms nationwide rank Cravath, Swaine &
Moore as their toughest competitor, followed by Skadden,
Arps, Slate, Meagher & Flom and Wachtell, Lipton, Rosen &
Katz. The three New York-based firms are followed by Wilmer,
Cutler & Pickering, of Washington, D.C.
The survey of about 1,300 large-firm lawyers at 158 firms
was conducted by Global Research, an arm of London-based
Euromoney Publications PLC, as part of a larger study of law-
firm management practices.
In addition to leading the overall rankings, Cravath was
first choice in three of the 19 subspecialties in which
respondents also were asked to nominate blockbuster
competitors. The hard-charging Wall Street firm, whose
partners have been known to boast that its cafeteria is as
crowded at dinner as it is at lunch, was seen as dominating
in tax, securities and asset finance.
Skadden eclipsed others in mergers and acquisitions, while
Wachtell led in banking; the second-ranked firm in both
categories was New York-based Shearman & Sterling. Other
champions included Fulbright & Jaworski, Houston (arbitration
and litigation); Weil, Gotshal & Manges, New York
(bankruptcy); Simpson, Thacher & Bartlett, New York
(antitrust); O'Melveny & Myers, Los Angeles (corporate); and
Sidley & Austin, Chicago (environment).

(Mr. CAMPBELL assumed the chair.)
Mr. BRYAN. Mr. President, there are a number of reasons why I oppose
this legislation, and I would like to very briefly make reference to
some of the primary reasons. My colleague, Senator Sarbanes, indicated
in a very thoughtful and very comprehensive statement why he was
opposed, and I share and associate myself with his comments.
If this was designed to be balanced legislation, something that
fairly dealt with the frivolous lawsuit problem in America, and yet at
the same time protecting private investors who have been defrauded, I
think it would be very easy to craft a piece of legislation.
Every regulating body that I know of, from the Securities and
Exchange Commission to the North American Association of Securities
Administrators, all have urged upon us to deal with a serious problem
concerning an unduly restrictive and shortened statute of limitations.
The Lampf case of 1991 shortened the statute of limitations for class
action suits to 1 year from the point of discovery, a 3-year bar.
Everyone who is involved in protecting investors from fraud
acknowledges that this is too short, and, indeed, when we discussed
changes in this legislation in 1993, my colleagues on the Banking
Committee said, ``Yes, we would be willing to go along with this change
in the statute of limitations, but it must be done in the broader
context of overall reform.''
Mr. President, that is what we are purporting to do today. Disagree
as I may with the thrust of much of which, in my judgment, undermines
the ability of innocent private investors to recover from fraud, this
is a comprehensive review, but I think it is indicative of the bias
that infects this legislation, that this has nothing to do with
protecting investors, this purports in no way to be fair and balanced.
This is simply designed to immunize perpetrators of wrongdoing from
legal responsibility, from their reckless misconduct that has caused
great loss to individual investors, to pension funds, to securities
portfolios held by cities, counties, States, and universities and
colleges in America, because although we have tried, there has been an
unwillingness, a refusal to right the statute of limitations problem.
That has nothing to do with being frivolous--nothing to do with being
frivolous. The statute of limitations bar that currently operates
prevents the most meritorious of cases from being brought if it exceeds
the current 1 year from the point of detection, 3 years overall bar.
The Securities and Exchange Commission has testified that even with the
enormous resources brought to bear by the Federal Government, all of
the investigators, all of the staff, that it takes them more than 2
years to conduct such an investigation before they are prepared to
bring an action involving investor fraud under the Securities Act. How
much longer does it take a private investor without all of the
resources available to the Federal Government to, indeed, conduct such
an investigation and make a determination whether individually or as a
class they have been subjected to investor fraud.
Aiding and abetting. The great case, and we will say more about this
later this afternoon, but the Keating case is one that has become a
symbolic case involving the amount of investor fraud by Mr. Keating's
actions. Ultimately, $262 million was recovered in that case on behalf
of investors. That is recovered. That means that there has been a
determination that, indeed, investor fraud occurred and that the
individuals bringing that action were, indeed, damaged to that extent.

Seventy percent of the recovery in that case--70 percent--was by
those who are aiders and abettors. Mr. Keating himself, having become
bankrupt, or judgment proof, was unable to respond in damages. That is,
plaintiffs filing against him could not recover from Mr. Keating
because he did not have any money, and yet there were those who were
involved in this very

[[Page S 17950]]
crafty, complicated, extensive, comprehensive and pervasive fraud--
lawyers, accountants, and others--whose actions substantially
contributed to this fraud who would be aiders and abettors who, under
this legislation, are now immunized.
We sought to restore the provisions of aiding and abetting, having
nothing to do, Mr. President, with a frivolous lawsuit. We are talking
about individuals who have been determined to have been guilty of
reckless misconduct that caused damage to private investors; they are
now going to be immunized from this liability. That has nothing to do
with the frivolous action, the proportionate liability that Senator
Sarbanes talked about extensively.
Again, the whole theory of our system of American jurisprudence is
one of balancing the scales of justice. On one hand, we are talking
about individuals who are totally innocent. All they did was to respond
to an entreaty or a sales approach to buy securities, subsequently
finding themselves defrauded as a result of the purchase of those
securities, and, subsequently, it is determined that individuals who
are reckless in their actions--ordinary negligence, there is no
liability for ordinary negligence. So those simple mistakes, mishaps
that all of us are aware of in life, we are not talking about that kind
of conduct. We are talking about reckless misconduct.
We are now saying that in terms of balancing, who should accept the
benefit, who should bear the burden, we are now saying, Mr. President,
that those individuals who are guilty of reckless misconduct, that
their liability is limited only to the proportion that the court finds
them to be responsible.
The practical consequences of that, as in the Keating case, for
example, where you have the primary perpetrator bankrupt, is that the
innocent investor is unable to secure full recovery, because what we
are talking about in this legislation is to limit that liability to the
proportionate amount.
So if the determination is made that there is only a 20-percent
liability or fault found with respect to the reckless defendant and
that the 80-percent liability under this hypothetical would be the
primary defender and the primary defender is bankrupt, that is it. That
is it, even though it is the conduct of the reckless defendant that
contributed to the loss. That, Mr. President, has absolutely nothing to
do with a frivolous lawsuit. That is a value judgment as to who ought
to be protected: the innocent investor or the individual whose reckless
conduct contributed to the loss.
For eons of time under the common law, in those situations the public
policy has always been weighing these scales of justice that the burden
ought to fall on the individual whose reckless conduct contributed to
the loss rather than to have that burden borne by the innocent investor
who was not responsible in any way at all. Again, this has nothing,
absolutely nothing, to do with a frivolous lawsuit.

Rule 11 is the provision under the Federal Rules of Civil Procedure
that is available to sanction lawyers who bring frivolous lawsuits. I
believe that the proponents of this legislation, in the Senate version,
hit it right on the mark. Whether one is a plaintiff's lawyer or a
defendant's lawyer, if that lawyer is involved in frivolous action, the
full sanction of the law ought to attach, and that lawyer ought to pay
the cost as a result of undertaking that frivolous action. I have no
quarrel with that at all. That is the way it was when it left the
Senate, Mr. President. But what has occurred is part of this ongoing
and skewing process, having nothing to do with frivolous lawsuits.
Everything is weighted in this legislation toward protecting those who
perpetrate fraud and those attorneys who represent them, because now
the full force of the sanction only applies to plaintiffs' lawyers.
Defendants' lawyers who are guilty of frivolous actions are not
subjected to the same standard. It has been pointed out by Senator
Sarbanes that the pleading requirements are more difficult. That, too,
has nothing to do with frivolous lawsuits.
Finally, although it is a bit arcane, are the so-called safe harbor
provisions. I want to comment for a moment on safe harbor. Prior to
1979, one could not make what is called a forward-looking statement--
that is, predictive conduct about the security because such and such is
going to happen next week, next month, or next year. The reason why
that is the rule is that because those kinds of future predictions have
been the subject, historically, of overstatements, making it very easy
to mislead people by false encouragement: ``Buy this stock and you are
going to be a big-time winner''--that type of thing.
In 1979, for the first time, they permitted forward-looking
statements. I do not come to the floor as a Member of this institution
as an expert in securities law. Whether that was a good provision in
the law, I do not know. But in doing so, the SEC did recognize that
there was great risk and great danger because those people who sell and
offer these securities oftentimes get carried away and make such
optimistic and rosy predictions that people are misled. And so the
standard that was employed was that you could make these forward-
looking statements and you were protected from liability if your
statements were made, first, in good faith and, second, with a
reasonable basis.
As I say, I am not an expert in this area, but that strikes me as
being a pretty reasonable standard. There is no liability, even though
the statements may be inaccurate or misleading, if they were made in
good faith and with a reasonable basis.
Now, Mr. President, as a result of the action taken by the
conference, even statements that are false, totally false--we are not
talking about misleading or inaccurate; we are talking about totally
false statements--are protected. That is, those who offer those
statements now enjoy no liability if they simply add cautionary
language. ``Yes, this stock is going to triple, but there may be a
contingency out there in the future that if the economy goes sideways
on us, that may not happen.'' Just cautionary language. That is pretty
outrageous, in my view, once again, this having nothing to do, in my
view, with frivolous lawsuits but having everything to do with
protecting those individuals who make statements that turn out to
be inaccurate and misleading and immunizing them from liability.

Now, our securities investor protection system in America is really
predicated on three individual pillars--two of them governmental, one
in the private sector. Clearly, the Securities and Exchange Commission
at the Federal level has the ability to assist in protecting the
marketplace from fraud and to provide the measure of investor
confidence that has characterized the American securities market. Many
of my colleagues who have had State experience know that each of the
States have securities offices which also serve as an adjunct to
protect the public from investor fraud. But recognized as being
extremely important in policing the market and providing for that
investor confidence that characterizes and distinguishes the American
securities market as no other securities market in the world is the
ability of private investors, through class actions, to bring cases
themselves. The SEC fully acknowledges that, and so it is that
protection which is being undermined by this legislation.
In fact, the Congressional Budget Office, which is invoked with a
level of respect and devotion that I have not seen in my previous 6\1/
2\ years here in this institution, has estimated that as a result of
what this piece of legislation does in terms of preventing access by
private investors who are victimized by fraud, it would require another
$25 to $50 million a year in addition to the existing budget of the SEC
to offset that loss. That is, it is recognized under the current system
that the SEC cannot adequately police the securities market, and its
philosophical predicate is that the private investor, through the class
action mechanism, is a very important function. We now, in my judgment,
render that private class of action much less viable in protecting the
marketplace. Some 11 attorneys general have complained about these
changes and have characterized this as an unfunded mandate.
We hear repeatedly, and we will hear during the course of the day,
that this legislation is absolutely necessary because the mainspring of
the private enterprise system that all of us respect and acknowledge as
having created the highest standard of living for us in America, or
anyplace in the world, is

[[Page S 17951]]
that as a result of these lawsuits, private investor actions, the
securities market has been limited in terms of the ability of the
entrepreneur, the startup company, to generate the kind of capital
needed to bring new products and services into the marketplace. We will
hear that ad nauseam.
Here are the facts. The Dow Jones industrial average recently
exceeded the 5,000 mark. In 1995, we have seen the Dow Jones rise
higher in 1 year than at any previous year in its history. Initial
public offerings--that is, the mechanism used to generate this capital
by new companies and other companies who are wishing to develop a new
product or service--have risen by 9,000 percent in the last 20 years.
The capital raised as a consequence of those new offerings has
increased by 58,000 percent. That is good news for Americans. I am
pleased to hear it. I think all of my colleagues should be. But it does
not make the argument that the proponents of this bill assert that this
legislation--to immunize this whole category of malefactors--is
necessary in order that businesses can generate the kind of capital
needed to bring new products into the marketplace.
We will also hear that investors invariably sue every time the stock
drops to any degree, regardless of their reasons. Let me again make the
point, Mr. President, that the evidence simply does not support this.
In fact, the University of California study of 589 stocks that
dropped more than 20 percent in 5 days showed that only 3 percent were
sued by investors. This is a far cry from the perception that
proponents of this legislation will try to paint.
We will also hear investor suits are filed just to get a quick
settlement. Here again, the evidence is to the contrary. The SEC
testified that surveys show most judges in these cases believe
frivolous litigation is not a major problem and could be dealt with
adequately through prompt dismissals.
We have also heard there has been an explosion of these class
actions. Mr. President, that is simply not true. Of all of the civil
actions brought in the Federal court system--all of them, from soup to
nuts, all of them--about 0.1 percent involve class action security
cases--0.12 percent is the precise number.
If you look at a table over the last 20 years from 1974 to 1993, you
will see that the number of cases filed have remained essentially the
same. This is a document prepared by the Office of the U.S. Courts,
indicating that about 270, 260 are actions filed a year--no change--
even though in the past 20 years the population in America has grown
substantially.
Of the 14,000 companies listed on the exchange, about 120 each year
find themselves being sued; about 120.
I think we just need to put that in perspective as we go through
legislation here that radically changes the system that has worked
essentially well for us in America, admittedly requiring the fine
tuning I alluded to in those provisions that, in my opinion, deal
legitimately with the frivolous lawsuits.
This is a meat ax approach. Make no mistake, its purpose is not to
protect against frivolous lawsuits. It is to limit liability or to
insulate liability from a whole category of persons whose conduct
caused the investor loss.
The conference report would preclude many consumer institutions and
State and local governments from recovering their losses in Federal
courts when they are defrauded in the financial market.
The conference report takes the worst features of the Senate bill and
combines them with many of the most dangerous provisions in the House
version.
This legislation will harm consumers, consumers who have savings in
retirement funds, stocks, bonds, mutual funds, or other investments. In
fact, it will harm taxpayers who depend on the financial stability of
their State and local governments in places like Orange County, as an
example.
That is why, notwithstanding the efforts of the proponents of this
bill to portray this--if you are for starting entrepreneurial
companies, if you are for eliminating frivolous lawsuits in the
marketplace, you should support this legislation; if you want to help
the trial lawyers, you should be opposed to it. That is not what this
is all about.
That is why the National Association of State Financial Officers--
those would be the State treasurers, comptrollers, however the State
financial portfolio is managed--the national association of these
groups has expressed its strong opposition. So, too, has the National
Association of County Treasurers and Financial Officers. The national
association that deals with municipal financial officers and the
national association that deals with the portfolios and securities
managed by America's universities and colleges also oppose this
legislation.
Also, the National Council of Senior Citizens, the National League of
Cities, the National Association of Counties--I will not belabor the
record with all of these--the Fraternal Order of Police, all have
expressed their strong opposition, and for the same reason that I have
alluded to, because it is far, far beyond what is needed to address the
legitimate concern of frivolous lawsuits as it relates to securities
actions.
I know there are a number of my colleagues who need to speak. I will
just be very brief. Let me say I will comment in more detail. Some of
you who voted for this legislation when it passed the Senate--some said
on the floor and to a number of us, ``Look, if this thing moves in the
wrong direction in conference, I will reconsider my position.'' To
those of my colleagues who voted albeit somewhat reluctantly for this
legislation when it passed the Senate, let me say that it is materially
worse now than it was as it left the floor of the Senate.
With respect to the provisions dealing with the safe harbor
provisions, the pleading requirements, the balance of equity and
fairness of rule 11, the proportionate liability provisions have been
made much more onerous. All of these provisions, including the RICO
provisions which, as the bill left the Senate, concluded that, if any
individual were convicted of a RICO fraud, then all that were involved
would be subject to RICO sanctions in terms of the measure of damages
that can be recovered--that has been greatly eliminated.
Perhaps even more perniciously, the provision that left the Senate
dealt with the Securities Act of 1934. Now we have brought in the
Securities Act of 1933 which deals with a whole different category of
actions and we have applied many if not all of the provisions of that.
I invite my colleagues' attention to that.
I yield the floor.
Mr. BENNETT. Mr. President, I will allow my colleagues to proceed,
but I did want to respond briefly to some of the comments made by the
Senator from Nevada, having been on the floor through his entire
statement. I think there are a few points we need to make and then I
will sit down and let my colleague proceed.

As I took notes from the comments of the Senator from Nevada, his
first point listed how difficult it is to prove fraud. He gave us seven
things he said are hard to prove. I agree with him completely. These
are hard to prove. They are also very easy to allege and an alleging of
these things is what leads to the settlements out of court that are the
problem for many of the companies we are dealing with.
Second, he quotes from the Wall Street Journal. He quotes from
Crain's, saying fraud is soaring; the Wall Street Journal headline,
``The Bad Guys are Winning.''
My only comment is if indeed that is so, why are not the Bill
Lerach's of this world going after those bad guys instead of conducting
the kind of practice that we have seen described here on the floor in
the previous debate?
Third, he makes the point that the biggest number of suits are
between companies, not class action suits on behalf of the individual
investors. He says this bill does not address that.
I agree with him, this bill does not address that. If he feels that
is a problem that needs to be addressed, he can file a bill that
addresses that. The fact this bill does not address that does not mean
that the issues the bill does address are not meritorious and need not
be addressed.
Then he talks about the statute of limitation. There has been a lot
of debate about that. I only make the point that this bill does not
change the present level of the statute of limitation. We are not
talking about putting a heavier statute of limitation burden

[[Page S 17952]]
than currently exists. We are talking about allowing the current law to
continue.
Fifth, he talks about the great loss to cities and pension funds that
cannot be recovered if we cannot go after the aiders and the abettors.
Earlier in his statement he said we are being given evidence by
anecdote on the part of those of us in support of this bill, but he
gives us no anecdote to show the great loss by cities and pension funds
except the anecdote that we hear again and again--and he brought it up
under these circumstances--of Charles Keating.
Well, I take some time to make the record very clear on Charles
Keating, because we hear that again and again as the anecdote of what
we will lose if this bill is passed. I will make these points, Mr.
President.

Most of the losses from the savings and loan scandal did not result
from securities fraud. They resulted from outright criminal activity
and looting the assets of the companies. They do not fall under the
purview of this bill at all. They are simply irrelevant to this
discussion. Even those S&L losses that did result in part from
securities fraud would have been recoverable under this bill. It does
not in any way, ex post facto, go back and say, if this bill had been
in law at the time, you could not have gotten this recovery, you could
not have gotten this recovery.
Why do I say that? Here are the reasons. Statements by Keating and
his cohorts would have failed every one of the stringent preconditions
in the conference report safe harbor provision for forward-looking
statements. Every one of Keating's statements and his people's
statements would have been actionable had this report been law.
Second, the conference report would not have immunized the alleged
aiders and abettors because the conference report authorizes the SEC to
take enforcement action against aiders and abettors, and the Keating
investors would have recovered fully even without those aiding and
abetting claims.
Third, the conference report would not have rendered Keating's
actions time barred. It would have no impact on the statute of
limitations in those areas because, as I say, it does not change
current law, and all of the actions under Keating were brought within
the applicable timeframe. Therefore, the Keating thing does not apply
there as an anecdote.
We must understand that Keating's fraud did not apply to forward-
looking statements. They made flat statements of error about the past.
They lied flat out about what had been done. This bill does not protect
anybody who is going to lie flat out about the past.
The conference report would not have empowered Keating's cohorts to
control the litigation. Under this bill, they would be as liable as
they were in previous law. It would not have delayed or imposed any
obstacles to the actions that were taken. The conference report does
not, as some claim, inflexibly require courts to stay discovery every
time a motion to dismiss is filed. It would have had no effect if this
bill had passed--it would have no effect on the damage awards. Joint
and several liability would still have been available under the fact
circumstance of Keating.
I could go on and on. The point I want to make is very clear. It is a
red herring in this debate to talk about Charles Keating and the S&L
disaster because this legislation would have had no impact whatsoever
on the Government's ability to proceed in criminal action or an
individual investors' ability to proceed in class actions against
Charles Keating.
The comment was made that the safe harbor will now allow people to
lie. No, it will not. If you make a false statement, the one referred
to as an example by the Senator from Nevada, ``The stock is going to
triple,'' this bill does not protect you because you cannot make a
prediction about what is going to happen to the stock under current SEC
regulations and not be called in violation of those regulations for
that.
What you can say is we believe we will be able to make the
marketplace with our widget on such and such a date, and that we will
have X numbers of copies of that widget.
But why would any executive make that statement if he did not believe
it were the case? Nothing could be more damaging to his company or his
reputation or his credibility as an executive than for him to make that
kind of statement, meeting in front of securities analysts at the time
of an IPO. You want to be very careful to preserve your credibility
with the investment community.
No, this is not the problem, CEO's making statements to securities
analysts. I will tell you what the problem is and why we need a safe
harbor. Let us say, within your company you have two engineers who are
examining your product. Engineer A says, ``I do not like the way this
thing works. I would like to fine tune it.'' Engineer B says, ``I
disagree with you. I think it works just fine and it is ready for
market.'' Along comes one of these strike suits and the discovery
starts and the lawyer gets ahold of engineer A's position and
immediately he stands up and says, ``Mr. Chairman,'' speaking to the
CEO of the company, ``you have within your files a document where one
of your employees told you absolutely this product was defective.'' He
is quoting engineer A. He conveniently does not quote engineer B, who
disagrees with him. And, there you are, you have made a false
statement. And, ``If you did not know the product was defective, you
should have known the product was defective.''
That is the problem. That is the kind of thing that happens over and
over again in these circumstances, and that is why people settle. We
are not talking about CEO's standing up and predicting the stock will
triple when we talk about a safe harbor. We are talking about safe
harbor for people who make statements that they believe are true at the
time and then will get trapped in this kind of activity that I have
described later on.
Finally, we come to the point where the Senator from Nevada says
there is no need for this. There has been no explosion of these strike
suits. This is not a phenomenon that has suddenly hit us.
I close by quoting. He quotes from appropriate publications. I have a
few that I would like to quote from. The first one, the Washington Post
on the 18th of November, 1995. Referring, in an editorial, to this bill
it says:

The bill was a response to a genuine outrage. A small
number of lawyers have developed a technique of pouncing on
any company whose stock price suddenly drops sharply. They
then comb through past statements by the company to find the
conventional expressions of hope for the future--and sue on
grounds that those statements have misled and defrauded
investors. That's a highly strained definition of fraud, but
the present state of law makes this kind of suit very
dangerous to a company. Although these are nominally
shareholders' suits, they generally are instigated and
controlled entirely by the lawyers. The companies most
vulnerable to this destructive tactic are a particularly
valuable kind--small, recently established high-tech firms
whose stock prices tend to be volatile.

And then from the Economist magazine dated December 2, 1995, in
another editorial, ``Suits or Straitjackets,'' the subhead says ``The
American Congress wants to make it harder for some shareholders to sue
companies for fraud. This would be a good thing.''
The editorial says the following:

Class-action lawsuits, in which a bunch of investors join
together to sue a firm whose shares have fallen sharply, are
a growing problem for America's high-tech companies. More
than 650 such suits have been filed in the past four years
alone, including ones against each of the ten biggest firms
in Silicon Valley. There is nothing wrong with investors
using the courts to protect their rights. But a growing
number of these suits are being brought by those who are
victims not of corporate misinformation, but of their own
(and their lawyers') greed. As a result, many managers now
hesitate to offer investors any predictions at all, lest they
end up in court.
That is why Congress is about to pass a measure that would
make frivolous securities lawsuits harder to bring. Among
other things, the bill, which should clear both the House and
Senate easily, does three things. First, it allows firms to
issue forecasts to investors providing that they list all of
the important factors--a change in interest rates, say, or a
slump in the consumer-electronics industry--that could affect
them. Second, a defendant's auditors and equity underwriters
would no longer be liable for the full extent of
shareholders' losses, but only for those that are caused by
their own misbehavior. Third, the bill encourages judges to
slap fines on lawyers who bring groundless suits.

The final paragraph of the editorial summarizes it very well. It
says:

As a general rule, it is a good idea to allow shareholders
to protect themselves. This would not change under the
proposed legislation. And in exchange for reform, they would

[[Page S 17953]]
get more (and better) corporate information on which to base their
investment decisions. Mr. Clinton faces a choice. Either he
can veto the bill on the mistaken ground that he is
protecting shareholders' rights, or he can sign it and help
put more money in their pockets.

Mr. President, I ask unanimous consent that the full text of both
editorials be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

[From the Washington Post, Nov. 18, 1995]

Antidote to the Strike Suit

It started off last winter as a flamboyant ideological
statement. But the bill to curb shareholders' strike suits
has now been whittled and sanded by many hands into a truly
useful piece of legislation. An intemperate initiative is
turning out to be much more promising than seemed possible
last March, when the House originally passed it.
The bill was a response to a genuine outrage. A small
number of lawyers have developed a technique of pouncing on
any company whose stock price suddenly drops sharply. They
then comb through past statements by the company to find the
conventional expressions of hope for the future--and sue on
grounds that those statements have misled and disfrauded
investors. That's a highly strained definition of fraud, but
the present state of the law makes this kind of suit very
dangerous to a company. Although these are nominally
shareholders' suits, they generally are instigated and
controlled entirely by the lawyers. The companies most
vulnerable to this destructive tactic are a particularly
valuable kind--small, recently established high-tech firms
whose stock prices tend to be volatile.
The new Republican majority in the House rushed to defend
them. It was one of the promises in the Contract With
America. But they overdid it. In their zeal to do away with
constraints on the entrepreneur, they wrote sweeping language
that would have protected a lot of real fraud--and would also
have protected those lawyers and accountants who earn fees by
turning a blind eye to it.
The Securities and Exchange Commission objected vigorously.
To their credit, the congressional Republicans slowed down
and took another look. After months of negotiation the SEC's
chairman, Arthur Levitt, has now given his assent to a much-
modified version of the bill. It would succeed in making
spurious fraud suits much riskier to the plaintiff, but
without hampering investors who have real grievances.
Before President Clinton signs it, the administration needs
to address one remaining point. The statute of limitations in
these cases is now only three years. With highly complex
investments increasingly common, it can easily be a matter of
years before customers discover a fraud. Five years is a more
reasonable limit. With that further improvement, this bill
would make securities law much fairer both to companies and
to shareholders.
____

[From the Economist, Dec. 2-8, 1995]

Suits or Straitjackets?

It is a familiar story. Soaraway Shares Inc, a budding
Silicon Valley firm, launches a sexy new software product for
the Internet. Its managers predict booming sales and
boundless profits. Suitably impressed, investors pile in and
the firm's share price takes off. But a year later the
product flops, the shares plummet--and disgruntled investors
head for the nearest courtroom.
Class-action lawsuits, in which a bunch of investors join
together to sue a firm whose shares have fallen sharply, are
a growing problem for America's high-tech companies. More
than 650 such suits have been filed in the past four years
alone, including ones against each of the ten biggest firms
in Silicon Valley. There is nothing wrong with investors
using the courts to protect their rights. But a growing
number of these suits are being brought by those who are
victims not of corporate misinformation, but of their own
(and their lawyers') greed. As a result, many managers now
hesitate to offer investors any predictions at all, lest they
end up in court.
That is why Congress is about to pass a measure that would
make frivolous securities lawsuits harder to bring. Among
other things, the bill, which should clear both the House and
Senate easily, does three things. First, it allows firms to
issue forecasts to investors providing that they list all of
the important factors--a change in interest rates, say, or a
slump in the consumer-electronics industry--that could affect
them. Second, a defendant's auditors and equity underwriters
would no longer be liable for the full extent of
shareholders' losses, but only for those that are caused by
their own misbehaviour. Third, the bill encourages judges to
slap fines on lawyers who bring groundless suits.
Although the bill has broad support in Congress, President
Clinton may still be tempted to veto it, party because it is
bitterly opposed by two of his biggest supporters: consumer
advocates and trial lawyers. Not only will the bill give
managers a license to lie, these groups say, but firms'
auditors and underwriters will no longer have any incentive
to catch them in the act. The bill's critics also fear that
when shareholders do have a legitimate gripe against a
company, lawyers may be deterred from bringing the case by
the threat of a penalty if it is ultimately thrown out.

uninformed

These fears sound reasonable enough. But they ignore a
crucial fact: financial markets thrive on information. The
more investors know about what managers are thinking, the
better they are able to gauge the risk of investing, and to
commit their resources accordingly. They need not (and should
not) treat the views they receive as gospel. Indeed, firms'
shareholders have proven time and again that they can be
better than managers at deciding what is important. The
problem with the explosion of frivolous lawsuits is that it
is discouraging companies from giving out much-needed
information. As a result, the entire market suffers.
Admittedly, striking the right balance between protecting
shareholders' rights and encouraging more openness is tricky.
But the bill's trade-off is a good one. Although the reforms
make it harder to bring groundless lawsuits, they do not
prevent regulators from prosecuting swindlers. Nor do they
let auditors and underwriters off the hook--though by
limiting their liability they make it harder for class-action
lawyers to win settlements from firms that have simply fallen
on hard times. A mere drop in a company's share price usually
is not evidence of fraud but the consequence of plan bad
luck.
As a general rule, it is a good idea to allow shareholders
to protect themselves. This would not change under the
proposed legislation. And in exchange for reform, they would
get more (and better) corporate information on which to base
their investment decisions. Mr. Clinton faces a choice.
Either he can veto the bill on the mistaken ground that he is
protecting shareholders' rights, or he can sign it and help
put more money in their pockets.

Mr. BENNETT. Mr. President, I thank the Chair. I thank my colleagues.
The distinguished Senator from Connecticut, one of the original
cosponsors of this bill and one of leaders of this fight for more years
than I have been in the Senate, is now on his feet, and I am delighted
to yield to him such time as he may require.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Mr. President, first of all, I would like to thank my
colleague from Utah for his eloquent statement in response to some of
the charges that were raised about this piece of legislation and the
inclusion of editorial comment and note of major publications about the
worthiness of this legislation.
Mr. President, let me begin by laying out for our colleagues some
idea of the amount of labor and work that has gone into this bill. We
are here today debating a conference report, the final step in the
legislative process before this bill is either sent to the President
for his signature or veto. I think it is important to note how much
effort and how much work have gone into producing this bill that our
colleagues will be asked to vote on later today.
Mr. President, Senator Domenici and I began this effort more than 4
years ago. In fact, the effort and discussion began even earlier than
that, but the first bill was introduced 4 years ago, and the House bill
was introduced at roughly the same time. So we have been at this for
some 1600 days, if you want to put it in category of days. This is not
something that just sort of came up a few weeks ago. I know that it was
mentioned in this so-called Contract With America, but the bill has a
history that predates that by several years. It has been considered, in
fact, Mr. President, in three Congresses now. This will be the first
time in three Congresses we are actually going to vote on a bill that
will allow it to go to the executive branch.
We have had 12 congressional hearings on the bill before us. We have
heard from almost 100 witnesses on this legislation. We have almost
5,000 pages of testimony that have been accumulated. We have had a
total number of six staff reports totaling 300 pages. We have had some
103 submissions to the record, and we have had testimony from eight
Members of Congress both pro and con on this. The SEC, the Securities
and Exchange Commission, has testified on 13 different appearances. The
Chairman of the Securities and Exchange Commission has testified four
times and his predecessor has testified four times.
So, Mr. President, what we are talking about here today is a piece of
legislation that has been considered in great detail. The bill passed
the U.S. Senate by a vote of 69 to 30 several months ago and by a vote
of 325 to 90 in the other body after extensive hearings there. And
obviously, with those vote totals, it was passed on a bipartisan basis
in both Chambers.

[[Page S 17954]]

So I think it is important for our colleagues and the public at large
to know that this is how the Congress ought to do its business. This
bill has been changed, it has been worked upon, it has been reformed,
it has been analyzed, and in 1,000 different ways, over the past 4
years.
We have put a great deal of time and effort into producing a bill
that we think--those of us who have authored it and supported it--by
and large deals with what everyone now admits and acknowledges is a
serious problem. Prior to this, Mr. President, when we first offered
the legislation, there was the threshold debate of whether or not there
was any problem at all. In fact, many of the people who have spoken
here today against this bill argued initially very strenuously that
there was no problem at all--none whatsoever.
So I am encouraged at least that we have put aside the debate and
discussion about whether or not we are addressing a legitimate problem.
Even the opponents of this legislation now admit that there was a
serious problem that needed to be addressed. They disagree with certain
provisions here. Most of their disagreements deal with what we were not
able to include in the legislation. I will get to this in more detail
in a moment.
But as one who offered a number of the suggestions, two particularly
that did not make it into the bill, you do not make the good the enemy
of the perfect here. We have a very sound piece of legislation that
deals with a legitimate issue, and that does not deal with every single
problem Members would like. But there is certainly no reason whatsoever
to disregard and to reject this legislation in its entirety. That would
be a huge mistake. Even editorial comment that disagrees with the bill,
Mr. President, acknowledges the tremendous work product and the
positive things included in this legislation.
So, Mr. President, again, because at the end of these debates
sometimes the people who have done such a tremendous amount of work are
rarely noted or recognized, let me begin by thanking my colleague from
New Mexico with whom I have worked so very, very closely on this
legislation, our colleague and the chairman of the Banking Committee,
Senator D'Amato, for his leadership on this and moving aggressively in
this Congress to see to it that we complete the hearing process and the
legislative business of the Senate, and, of course, my colleague from
Utah, who has been tremendously helpful on this bill as well.
Let me also compliment and thank my colleagues who disagree with us.
Senator Sarbanes has been tremendously cooperative and helpful in
seeing to it that we would have a debate and has not engaged in the
kind of procedural tactics that were available to him to delay
consideration of this legislation. Senator Bryan, whom our colleagues
had the privilege of hearing just a few moments ago, while he disagrees
with this bill, has brought very worthwhile ideas and suggestions and
note to the legislative process; Senator Boxer of California, as well,
who disagrees with the bill but who has offered some positive insight
as to how we might proceed.
I also would be remiss if I did not recognize those people who work
for these Members, who spent literally hundreds of hours in
negotiations. I mentioned the amount of time spent at hearings and
pages of testimony. I cannot even begin to calculate the number of
legislative staff hours spent in negotiations and efforts to work on
this product that now is before us in this conference report.
Certainly, Andy Lowenthal of my office, who is seated to my left, has
done a tremendous job on this bill, along with Diana Huffman of my
office and Courtney Ward; from Senator D'Amato's office, Howard Menell,
Bob Guiffra, and Laura Unger have done a tremendous amount of work; and
Senator Domenici's office, Denise Ramonas and Brian Benczkowski have
done tremendous work; Mitchell Feuer in Senator Sarbanes' office, along
with Brian McTigue in Senator Boxer's office.
There are many others. I apologize for not referencing all of them,
but I want our colleagues to know and others that, again, in addition
to the work the Members do, the staff's participation and involvement
has been significant.
So, Mr. President, I am very pleased to be standing here this morning
as the Senate begins the final consideration of the conference report
on S. 240 and the House companion bill, H.R. 1058, the Private
Securities Litigation Reform Act. This legislation is fundamentally
important not only for thousands of American businesses, but more
importantly I think to literally tens of millions of American
investors. That is what this bill is all about. It is not about the
businesses. It is not about the trial bar. It is about the investors,
the people who take their hard-earned money and invest it in American
business and industry that provide the quality of life and growth in
this country that we have seen over the past number of decades.

Passage of this legislation, we believe, will help restore integrity
and fairness to the country's private securities litigation system. And
through this reform, Mr. President, the bill will defer, we believe,
abusive and frivolous lawsuits that needlessly drain millions--in fact,
billions--of dollars out of our emerging industries, the biotech
industries, the high-tech firms that are the businesses and industries
that drive the engine of this country's economy in the 21st century.
These are not just small questions. Each dollar that a company must
spend on responding to America's meritless securities lawsuits, known
as strike suits, is a dollar that could instead go to improving
investor return, increasing research and development, expanding plants
and, most importantly, creating the jobs in this country, the good-
paying jobs that are critical for the health and well-being of this
Nation.
In other words, Mr. President, the consequences, in my view, of
failing to approve this conference report could not be higher. Mr.
President, we have gone well beyond the day, as I said earlier, when we
must argue about whether the securities litigation system is broken. It
is painfully clear, Mr. President, to almost everyone, including the
opponents, that the idea that there are no problems is just wrong, and
there are massive flaws in the system as it is currently operating.
In fact, just last January, Mr. President, Arthur Levitt, the
Chairman of the Securities and Exchange Commission stated--this is last
January at one of our hearings: ``There is no denying,'' he said,
``that there are real problems in the current system--problems that
need to be addressed not just because of abstract rights and
responsibilities but''--listen to this, Mr. President--``because
investors in markets are being hurt by litigation excesses.''
The problems in private securities litigation have become so deep,
Mr. President, and so deep rooted that we do not have the luxury, in my
view, of idly waiting for the courts or some regulatory body to fix
them for us. Everyone who knows anything about the present system--
everyone--will tell you it must be changed, that it does not work,
except for a few of the attorneys who benefit as a result of the
current system.
One of the core problems, Mr. President, afflicting private actions
under rule 10(b) is that such actions were never expressly authorized
by the Congress. This is not based on some laws we passed here but
instead have been construed, if you will, and refined by the court
systems in this country, with Congress sort of going along because we
never acted to change it. It was not as a result of legislation passed
through long and extensive debates but rather interpretations by the
courts over the years.
We all know what that leads to, Mr. President. It is precisely the
lack of congressional involvement that has created conflicting legal
standards for bringing such actions and has created so many holes
within the foundation of the private action that it threatens the very
system itself--unequal justice, a patchwork. Just watch where a lot of
the lawsuits are brought, and you will understand exactly what I am
talking about.
There is forum shopping going on all over the country because the
trial bar in this particular area of law knows that in certain
jurisdictions they are favored and others they are not. So you have
this tremendously unequal system all over the country because we have
not acted over the years to try and clarify the situation as to how
investors ought to be treated regardless

[[Page S 17955]]
of where they live in this country. That is one of the core problems
that we attempt to address with this legislation, for us as a body, the
legislative body, to speak clearly and intelligently as to how this
system ought to work across the country.
So, I would submit, Mr. President, to my colleagues, that Congress is
the only institution that is equipped to comprehensively address these
myriad problems in a thoughtful and moderate manner. My confidence in
the legislative process, Mr. President, is borne out by this conference
report before us today and the years we have spent in putting it
together. This legislation carefully and considerably balances the
needs of our emerging high-growth industries with the rights of
investors, large and small, Mr. President.

I am proud of the spirit of fairness and equity that permeates this
bill. In order to understand why so much time and effort is being
expended to fix the securities litigation system, I think it is
important to remember the vital role that private securities litigation
plays in ensuring the integrity and success of America's capital
markets. And I take no back seat to anyone in my determination to see
to it that the private litigation system is maintained, because it is a
vital ingredient to protecting consumer and investor confidence.
The private securities litigation system is far too important to
allow a few entrepreneurial lawyers to manipulate--that is what they
do--to manipulate and abuse the system to the degree that they have
done over recent years.
Let me be clear, Mr. President: Private securities litigation is an
indispensable tool with which defrauded investors can recover their
losses without having to rely on Government intervention. It is
precisely, Mr. President, because of this important role that the
legislation does not impinge on the ability of legitimate aggrieved
investors to file suits and, if successful, collect judgments or
settlements from the parties that defrauded them.
I have maintained from the outset, Mr. President, of this reform
effort that securities lawsuits brought by private investors are
critical to ensuring public and global confidence in our capital
markets. That is not the issue here. And it is to this high standard
which this conference report seeks to return private securities
litigation actions.
But, Mr. President, the current system has drifted. It has drifted so
far from its original goal that we see more opportunistic lawyers
profiting from abusive suits that take advantage of the system than we
see corporate wrongdoers exposed by it. While some have charged that
the beneficiaries of this legislation are just thousands of American
companies, the people who will be most harmed by our failure the enact
reforms will be the millions of investors who do not participate in
these class action lawsuits.
As Kenneth Janke, president of the National Association of Investors
Corp., which I might point out represents more than 325,000 individual
investors, said recently in a letter to President Clinton, ``Too many
times, class action suits are initiated against companies which result
in filling the coffers of lawyers with little or no benefit to
shareowners. Those types of `nuisance' suits,'' he says, ``do little to
enhance a return for shareowners.'' He says, ``The money spent by
corporations on frivolous lawsuits would better serve all shareowners
if it remained in the company, resulting in higher net profits
and earnings per share.''

Or take, if you will, Mr. President, the statement of Ralph Whitworth
of the American Shareholders Association, who told the Securities
Subcommittee more than 2 years ago in his testimony, ``The winners in
these suits are invariably the lawyers who collect huge contingency
fees, professional `plaintiffs' who collect bonuses, and, in cases
where fraud has been committed, executives and board members who use
corporate funds and corporate-owned insurance policies to escape
personal liability. The one constant,'' he says, ``is that the
shareholders pay for it all.'' And that is what we try to stop here.
Even institutional investors, Mr. President, who invest on behalf of
millions of individual Americans--in fact, most investors invest
through their institutional investor--these individuals, municipal,
State, or private pension funds, have expressed their concerns as well.
Mary-Ellen Anderson of the Connecticut Retirement & Trust Funds
testified before our committee that the participants in the pension
funds--and I quote her here:

. . . are the ones who are hurt if a system allows someone
to force us to spend huge sums of money in legal costs . . .
when the plaintiff is disappointed in his or her investment.

Our pensions and jobs, she says, depend upon our employment by and
investment in our companies. If we saddle our companies with large
unproductive costs, ``* * * we cannot be surprised if our jobs and our
raises come up short as our population ages.''
(Mr. ASHCROFT assumed the chair.)
Mr. DODD. Mr. President, one of the biggest vulnerabilities of the
securities class action lawsuits is that plaintiffs' attorneys appear--
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 for one of these firms
cited one case, and I quote him, as ``a showpiece''--those are his
words, not mine--``a showpiece of how well the existing system works.''
This particular case settled before trial for $33 million, Mr.
President. The lawyers asked the court--they asked the court--for $20
million, the lawyers did, of the $33 million settlement. Remember, this
is a lawyer saying this is a showpiece case. He picked this one out. I
did not pick it out. This is the attorney talking now. And $33 million
was in the settlement. They asked the court for $20 million of the $33
million. That is what they asked for. And they are claiming this is a
system that does not need to be fixed.
My God, what are they talking about here? So $20 million in request
of $33 million. They got $11 million, by the way. That is what the
courts gave them: $11 million. They asked for $20 million but got $11
million. Of course, the attorneys for the defense, they got $3 million.
The investors recovered 6.5 percent of the recoverable damages--6.5
percent--and this is a case identified by the trial bar as a showpiece
example of how well the system works. That is the best piece of
evidence they may offer, that is what they think. This kind of
settlement might well be satisfactory for the entrepreneurial
attorneys, but it does little to benefit companies, investors, or even
the plaintiffs on whose behalf these suits have been brought.

The second area of abuse is frivolous litigation. Companies,
particularly in the high-technology and biotech industries, face
groundless securities litigation days or even hours after announcements
are made. In fact, the chilling consequence of these lawsuits is that
companies, especially new companies, in emerging industries, in my view
the industries of the 21st century in this country, frequently only
release the minimum of information required by law so that they will
not be held liable for any innocent forward-looking statements that the
corporation may make.
These predatory lawsuits--and there is no other way to describe
them--have had the result of thwarting 15 years of efforts by the
Securities and Exchange Commission to encourage companies to provide
more information about their future expectations for earnings and
products. I refer my colleagues to the comments made by our colleague
from Utah in talking about the importance of these forward-looking
statements. It is precisely this kind of information that is demanded,
and rightfully so, by investors who are looking to make the most
prudent investment decisions.
The conference report, we think, provides a mechanism for investors
not only to obtain this positive information but to also obtain
information about what the company views as its important risk factors
in the coming months of their plans.
Let me quote the recent comments of J. Kenneth Blackwell, the State
Treasurer of Ohio. I might point out since the Presiding Officer--
excuse me, the Presiding Officer is not from Ohio, he is from Missouri.
That is the second time I made that mistake, but he may be interested
in this. J. Kenneth Blackwell manages more than $105 billion in pension
funds. These are his statements. He said:

[[Page S 17956]]

Intelligent investment strategy requires maximum possible
disclosure, and if I'm not offered frank assessments of
various companies' potential, how can I rest assured that
Ohio's pensioners' money is being invested wisely?

That statement, I think, deserves being listened to. In fact, the
safe harbor for forward-looking statements contained in the conference
report is strongly supported by the Securities and Exchange Commission
itself.
Let me quote a letter which we received from Arthur Levitt. It says:

The current version of this bill represents a workable
balance that we can support since it should encourage
companies to provide valuable forward-looking information to
investors while at the same time it limits the opportunity
for abuse.

The Supreme Court, in Blue Chip Stamps versus Manner Drugstore, has
also voiced serious concern about the vulnerability of securities class
action suits to abusive practices. Let me quote from the Supreme Court
decision in that case:

In 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--

Has a settlement value.

to the plaintiff out of any proportion to its prospect of
success at trial.

The decision goes on to say:

The very pendency of the lawsuit may frustrate or delay
normal business activity of the defendant which is totally
unrelated to the lawsuit.

Mr. President, a 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 current system of joint and several liability encourages
plaintiffs' attorneys to seek out any possible corporation or
individuals that may have extensive insurance coverage or deep pockets.
That is why they are brought in. It is not because even the plaintiffs'
attorneys think they are necessarily culpable, but it is because they
have the deep pockets, they have the insurance behind them that they
are brought into the lawsuits. That is why they are brought in--there
is no illusion about it--even if they have nothing to do with the
claimed alleged fraud.
Although these defendants could frequently win the case if it were to
go to trial, the expense of protracted litigation makes it more
economical for them to settle with plaintiffs' attorneys. That is what
they do, they settle, because going to court would be far more costly
down the road over an extended period of years.
One example was chronicled in a recent Wall Street Journal just this
past June. I quote from that story:

The jury ruled in Peat Marwick's favor in 1993, but the
firm spent $7 million to defend itself.

The court ruled in their favor. And what was this about? It was about
a $15,000 contract that Peat Marwick had to do some accounting for a
business--a $15,000 contract to do some accounting for the firm. They
ended up expending $7 million to defend themselves against a $15,000
contract. Of course, what has happened is these accounting firms are
not taking on these clients any longer. So you do not get the
accounting from the big seven or reputable accounting firms because of
this kind of problem. The minute they take on a client for $15,000,
they can look to end up paying a bill of $7 million, or more in some
cases.
The current Chairman of the SEC, Arthur Levitt, as well as two former
Chairmen, Richard Breeden and David Ruder, have all spoken out against
abuses of joint and several liability. Chairman Levitt said at the
April 6 hearing of our committee that he was concerned ``about
accountants being unfairly charged for amounts that go far beyond their
involvement in particular fraud.''
Again, this is borne out in a recent article in the Wall Street
Journal which chronicled the stunning number of audit clients dropped
by the big six accounting firms over the past few years. I quote the
article:

Peat Marwick, the fourth largest American accounting firm,
is dropping approximately 50 to 100 audit clients annually,
up from zero 5 years ago. . .
Arthur Anderson has either dropped or declined to audit
more than 100 companies over the past 2 years.

Does anyone believe that is sound, that is good, that is the way we
ought to be doing business, how to encourage these accounting firms to
be involved with these new industries starting up? I hope not.
Again, the current system has devolved to the point where it favors
those lawyers who are looking out for their own financial interests
over the interests of virtually everyone else.
As was the case with S. 240 that was passed by this body, the
conference report contains a number of significant and balanced
initiatives to deal with these complex problems. Let me address what we
attempt to do with this bill.
First, the conference report empowers investors so that they, not
their attorneys, have the greater control over the class action cases
by allowing the plaintiffs with the greatest claim to be named
plaintiff and allowing that plaintiff to select their counsel.
What an outrageous and radical thought this is, the idea that we
might insist that at least to offer--you do not have to force it--but
you offer to the plaintiff who is going to be most affected by the
lawsuit to have an opportunity to become the lead plaintiff. All you
have to do is offer it, Mr. President. We are not demanding, we are
encouraging, and they might be able to decide which law firm would
represent them.
That is considered a radical idea here, needless to say opposed by
the trial bar. They do not want that to happen at all.
Second, this legislation enhances existing provisions designed to
deter fraud and restores enforcement authority to the Securities and
Exchange Commission. That was lost, Mr. President, in the 1994 Supreme
Court case, the Central Bank case. We, in this bill, restore what the
Central Bank took away from the SEC here.
Third, the conference provides a meaningful safe harbor for
legitimate forward-looking statements so that issuers are encouraged
to--instead of discouraged from--make much-needed disclosures.
Fourth, it makes it easier to impose sanctions on those attorneys who
violate their basic professional ethics.
Fifth, 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.
Let me go over the points in a little more detail. First, on
empowering investors. The conference report--this bill--takes a number
of steps to guarantee that investors, not their marauding attorneys,
decide whether to, one, bring a case, two, whether to settle the case
and, three, how much the lawyer should receive. Again, I do not think
it is a terribly radical idea that we would allow them to decide
whether or not to bring a case--after all, they are the injured
parties, we are being told--or whether they want to settle it all or
not. Maybe they do not want to settle. Maybe they think they have such
a good case they would like to go to trial. That ought to be their
decision, not the lawyer's.
Third, how much the lawyers get, rather than being decided by the
lawyers, let the plaintiffs decide what their attorneys should be
receiving.
The conference report strongly encourages the courts--``encourages,''
I emphasize that--to appoint the investor with the greatest financial
interest in the case--often an institutional investor like a pension
fund--to be the lead plaintiff. After all, they are the ones who are at
the greatest risk. If there is real fraud, they have the most to lose.
If the lawsuit is frivolous and millions are going to be spent to
defend the suit, they lose as well. This plaintiff will have the right
to select their own counsel and to pursue the case on behalf of the
class.
So for the first time in a long time, Mr. President, securities
litigation attorneys will have a real client to answer to. We are
beginning to end the days when a plaintiff's attorney can crow--again,
I will quote such a plaintiff's attorney. In Forbes magazine, listen to
what this attorney said: ``I have the greatest practice of law in the
world because I have no clients.'' ``I have the greatest practice in
the world,'' he said, talking about securities litigation cases,
``because I have no clients.'' ``I bring the case,'' he says. ``I hire
the plaintiff. I do not have some

[[Page S 17957]]
client telling me what to do. I decide what I want to do.'' That is
what this is all about. That is why this bill is important. That is
what we want to stop here--we want to stop these situations in which a
bunch of attorneys decide what they are going to do, and we want to
have the aggrieved plaintiffs deciding what they are going to do. That
is why this bill is important. Of course, this presumption can be
challenged, as I said earlier--the presumption of the most injured
plaintiff being the lead plaintiff, if other class members feel that
the lead plaintiff is not fairly or accurately representing the class.
So we are not insisting or legally requiring it. We are just asking the
courts to step forward and ask the most injured party to come forward.
This change, we feel, Mr. President, will also end the unsavory
practice of rushing to the courthouse. That is what happens under the
present system. The first person to show up in the courthouse gets the
case--the first person. This is a hallmark of the current system of the
securities class action litigation.
Last June, I received a letter from Raytheon Co., one of the Nation's
largest high technology firms. Raytheon, Mr. President, made a tender
offer of $64 a share for E-Systems, Inc., another company. That is a 41
percent premium over the closing market price. Putting aside whether or
not you think that is fair or not, nonetheless, most people thought it
was a pretty fair offer. But I am not here to argue the fairness or
unfairness of the offer. Let me allow, if I can, Raytheon to explain
what happened next in a letter that I received from them:

Notwithstanding the widely held view that the proposed
transaction was eminently fair to E-System's shareholders,
the first of eight purported class action lawsuits was filed
within 90 minutes after the courthouse doors opened on the
day that the transaction was announced.

An hour and a half later, one of eight lawsuits was filed in court. I
do not care how good a lawyer you are, you do not go around and find
plaintiffs in an hour and a half with a public announcement about an
offer to buy another company. That is exactly what we are talking about
here, racing to the courthouse. Do not look at the facts and examine
whether or not it is right or wrong; file the lawsuit and immediately
trigger the kind of costs associated with it. What about investors in
that case, Mr. President? What happens to them in that case--the
investors in Raytheon, the investors in E-Systems? Do the lawyers think
about them at all, or the cost to those particular firms, and just
answer the pleadings once a lawsuit is filed? Does anybody care about
them at all under the present system? It does not appear so.
Mr. President, the conference report requires notice--a radical idea
here again--of settlement arrangements that are sent to investors, who
must clearly spell out important facts, such as how much investors are
getting or giving up by settling, how much their lawyers will receive
in the settlement. Again, let me emphasize here, in many cases,
settlement is the wrong conclusion. An aggrieved plaintiff may want to
go to court. They ought to have the right, these investors. Plaintiffs
ought to have the right to decide whether or not they want a settlement
and make the decision themselves after listening to intelligent
arguments about what is the best course of action.
This means, under this bill, plaintiffs will be able to make an
informed decision about whether or not the settlement is in their best
interest or in their lawyer's best interest. Currently, the actual
plaintiffs only receive, on average, 14 cents or less of every
settlement dollar. But the plaintiffs' attorneys receive 33 cents, on
average, of each settlement dollar. That is 14 cents for the
shareholders, the investors, and 33 cents for the lawyers. You do not
need to be a rocket scientist to understand that this system is broken,
when plaintiffs, investors, are getting that minor return in these
cases and the lawyers are collecting more than twice what they are
getting.
The conference report puts an end to this outrageous practice, called
the ``lodestar'' approach, by encouraging courts to award attorney's
fees based upon a reasonable percentage of the total amount of the
settlement or judgment.
The New York Times stated just 2 weeks ago in an article entitled
``Math of Class Action Suits; Winning $2.19 Cents Costs $91.33.''
It says:

Many class actions end with plaintiffs winning meager
awards, while their lawyers walk away with millions of
dollars in fees.

Taken together, Mr. President, these provisions should ensure that
defrauded investors are not cheated a second time by a few unscrupulous
lawyers who skim their exorbitant fees right off the top of any
settlement. One of the areas of the conference report that has received
too little attention, in my view, is the effort to deter fraud. We have
been talking about how you deal with it when fraud has arisen, when
there is an allegation of fraud. What we try to do with this bill that
we have worked on for more than 4 years now, through the number of
hearings we have held and the witnesses we have heard from, is
determine how we deter fraud from occurring in the first place so that
investors are really protected? One of the areas, as I said, that
received very little attention, in the midst of all of the hot air
blowing from the plaintiffs' bar are those provisions that provide new
protections, Mr. President, that have never existed before for
investors against fraud.
I commend my colleague, Senator Domenici, and others, for really
working to see to it that we have these provisions in the bill. For the
first time, Mr. President, auditors, under this bill, are required to
take additional new steps to detect fraud, and if they find fraud, they
must--not may, but must--be reported to the Securities and Exchange
Commission. They must look for the fraud--the auditors, the private
companies--and if they find any, they have to report it. That has never
been required before. That is a new standard, a new bar that we have
raised here to try and deter fraud in the first instance. Nobody has
mentioned that part. If they do, it is in just a passing way.
The conference report maintains current standards of joint and
several liability just for those persons who knowingly, Mr. President,
engage in a fraudulent scheme, thus keeping a heavy financial penalty
for those who would commit knowing securities fraud.

Perhaps most significant, the bill restores the ability of the
Securities and Exchange Commission to pursue those who knowingly aid
and abet securities fraud. My colleagues who oppose this bill talk
about our failure to get all of the aiding and abetting back in it. I
do not disagree.
But what we have been able to do in this bill which could not get
done--you would not get it done if you just had a freestanding aiding
and abetting provision. I do not think it would pass. I disagree with
that. I think we should.
To hear my colleagues say how bad this bill is because we do not deal
with all of the things they would like in aiding and abetting, yet we
get the class actions covered after the Supreme Court rules against us.
Instead of denouncing this bill, they ought to be adding far more
support to what we were able to accomplish here and make a major step
forward.
This is a power diminished by the Central Bank decision of last
year's Supreme Court case. In fact, some recent SEC enforcement actions
have been dismissed, Mr. President, because Federal courts are ruling
that the Commission had its aiding and abetting authority taken away by
the Central Bank decision. We are restoring that in this bill and
giving the SEC the power that they are being denied by lower court
rulings around the country.
The conference report clarifies current requirements that lawyers
should have some facts--again, a radical idea here--should have some
facts to back up their assertion of security fraud by adopting most of
the reasonable standards established by the U.S. Second Circuit Court
of Appeals.
This legislation, therefore, is using a pleadings standard that has
been successfully tested, Mr. President, in the real world. This is not
some arbitrary standard pulled out of a hat. Again, this is a standard
that has been used and tested and been tried. We include that in this
bill, as well.
Mr. SPECTER. Will the Senator yield?

[[Page S 17958]]

Mr. DODD. Let me finish my remarks, and I will be glad to yield. I am
almost through.
Furthermore, Mr. President, the bill requires the court's settlement
to determine whether any attorney had violated rule 11 of the Code of
Civil Procedure, which prohibits lawyers from filing claims that they
know to be false or frivolous.
Of course, the lawyers want the status quo for business and no
standards at all for themselves in this area.
In the event of a violation of the complaint, the bill requires that
the court find a substantial violation of rule 11 to have occurred in
order for any sanctions to be triggered.
Mr. President, let me emphasize what this does. This is in the filing
of a lawsuit. It turns out it is a tough standard to meet. But if the
court determines that the attorneys knew that this was a frivolous
lawsuit, that the allegations are false, then it can go after those
attorneys that bring the lawsuit.
Now, the same standard applies in the defense attorneys' response to
the pleadings. And they say that is unfair. It is not unfair at all. It
is the plaintiff's attorneys that are bringing the case in the first
instance. We are saying that if, in fact, the lawyers knew this was
frivolous and false, then they ought to be held accountable for doing
that. If attorneys on the other side in the filing of pleadings also
engage in any false or frivolous allegations, then, they, too, will be
held accountable for those statements. We think this is a fair and
adequate standard to be applied to the attorneys.
The conference report does not change existing standards of conduct.
It does put some teeth, however, into the enforcement of these
standards. I point out what has happened over the years. While the
rules have existed, nothing has ever been done with them in the past.
In fact, they have been sitting there almost as idle pieces of paper
with no real meaning at all.
The conference report provides a moderate and thoughtful statutory
safe harbor for predictive statements made by companies that are
registered with the SEC.
Mr. President, this is one of the most contentious parts of the bill.
It provides no such safety for third parties, like brokers, or in the
case of merger offers, tenders, rollups or issuance of penny stocks.
That is not where the safe harbor applies.
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.
Since the safe harbor has been the subject of so much attention, Mr.
President, it is worth spending a little time to delve into the details
of these provisions.
This reconfigured safe harbor that is in this conference report has
two parts to it. The first is that any forward-looking statement may be
accompanied by ``meaningful cautionary statements that identify
important factors that could cause'' the prediction not to come true,
or if a company or officer fails to meet that test, all that a
plaintiff must do is prove that the person actually knew that the
statement was false or misleading.
Mr. President, that is the very scienter standard written by our good
friend and colleague from Maryland, Senator Sarbanes, and proposed by
him during the Senate floor consideration of S. 240 in June.
Quite honestly, it is hard for this Member to envision how anyone
could lie in their predictive statements and still be covered by this
safe harbor; this insulation from abuse is no doubt a key reason why
the safe harbor is strongly supported by the Securities and Exchange
Commission in their letter of support of this bill.
As the Commission stated:

The need of legitimate businesses to have a mechanism for
early dismissal of frivolous lawsuits argues in favor of a
codification of the bespeaks caution doctrine that has
developed under the case law. While the trade-off requires
that class action attorneys must have well written and
carefully researched pleadings at the outset of the lawsuit,
we feel this is necessary to create a viable safe harbor.
Given that it does not prevent Commission enforcement
actions, and excludes the greatest opportunities for harm to
investors.

The idea that this conference report contains any license to lie is
simply and totally untrue and, particularly in light of the strong
support of the Securities and Exchange Commission, represents just a
last, in my view, desperate attempt by opponents of this legislation to
derail the process.
The legislation before us, Mr. President, preserves the rights of
investors whose losses are 10 percent or more of their total net worth
of $200,000. These small investors will still be able to hold all
defendants responsible for paying off settlements regardless of the
relative guilt of each of the named parties.
This is the modification for the joint and several sections. This
threshold, I think, should more than protect the vast majority of
individual investors participating in the markets today.
Let me tell you why I say that. A 1993 census report stated that the
average net worth, Mr. President, of an American family was about
$47,000. That is their net worth, $47,000. While in 1990, the New York
Stock Exchange study found the median income--the income, now, the
median income--for individual investors was $43,800 a year, which,
according to the census data extrapolates to a net worth of roughly
$150,200.
Let me explain that again. The words can be confusing. The average
American family has a net worth of something in excess of $47,000 a
year; the average of the median investor in the New York Stock Exchange
has an income of $43,000 a year; the Census Bureau extrapolates an
income of $43,800 to a net worth of those investors of $150,000.
That is why we chose the $200,000 level and below, so that the
majority of investors--the majority of investors, the small investors--
would not be adversely affected by the proportional liability standards
included in the bill. We tried in this bill to see to it that those
smaller investors would not be adversely affected.
While the bill will fully protect small investors so they will
recover all of the losses to which they are entitled, the bill
establishes a proportional liability system to discourage the naming of
the deep pocket defendants that I talked about earlier.
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 about equal to their relative role in the
alleged fraud. What a radical idea that is as well. A defendant who is
10 percent responsible for the fraudulent actions would be required to
pay 10 percent of the settlement amount. That is just fair. That is
equitable.
I would say, quickly, again, we protect smaller investors. We say,
for them we are going to have a different standard, but for those who
are above that line, to go after someone who is only fractionally
involved and say that you ought to pay the whole amount here ought to
strike every person in this country as fundamentally unfair, and that
is what we try to change in this bill. However, as I said, in the event
of an insolvent defendant, all the other defendants would be required
to contribute as much as an additional 50 percent of their proportional
share of a settlement to ensure that investors receive as close to 100
percent of their just settlements as possible. By creating a two-tiered
system of both proportional liability and joint and several liability,
the conference report preserves the best features of both systems.
Having spent so much time on what is in the conference report, let me
briefly spend a few minutes, if I can, discussing a few of the things
the conference report does not do.
The PRESIDING OFFICER. The Chair will advise the Senator from
Connecticut, under the previous order, the hour of 12:30 having
arrived, the Senate would stand in recess until 2:15 p.m.
Mr. DODD. Mr. President, I ask unanimous consent to proceed for 5
additional minutes, if I could, to complete the statement.
The PRESIDING OFFICER. Is there objection?
Mr. SPECTER. Reserving the right to object, under the procedural
statement, I ask unanimous consent that debate on the bill be extended
for 15 minutes beyond. I know that is an imposition on the Presiding
Officer. I have 15 minutes reserved, and I have been here for most of
the morning, a

[[Page S 17959]]
good part of the morning, waiting to speak.
The PRESIDING OFFICER. Is there objection?
Mr. FEINGOLD. Reserving the right to object, I ask if we could extend
that to 25 minutes so we could go straight to 1 o'clock?
Mr. LEAHY. Reserving the right to object, and to make life easier for
the distinguished Presiding Officer, I ask unanimous consent that
unanimous-consent request be amended to allow me to be recognized for
no more than 6 minutes at 2 o'clock, which I understand is the time we
are coming back in?
The PRESIDING OFFICER. The hour of 2:15 is the previously agreed upon
time.
Mr. LEAHY. I ask unanimous consent that unanimous-consent request be
amended so that I am recognized for 6 minutes at 2:15.
The PRESIDING OFFICER. Is there objection? Hearing no objection, the
following will be the order: an additional 5 minutes will be extended
to the Senator from Connecticut, and then 15 minutes will be extended
to the Senator from Pennsylvania, after which 10 minutes will be
extended to the Senator from Wisconsin, and, at 2:15, 6 minutes will be
extended to the Senator from Vermont.
Mr. BRYAN. Mr. President, I have no objection, just a parliamentary
inquiry. Those who are speaking with reference to the pending matter,
that will be in accordance with the practice that those speaking on
behalf, their time will be charged to the distinguished Senator from
Utah, the time of those speaking in opposition will be charged to the
time remaining of the Senator from Nevada; is that correct?
The PRESIDING OFFICER. That is correct.
The Senator from Utah.
Mr. BENNETT. Mr. President, I ask unanimous consent the unanimous-
consent agreement be modified further, that Senator Hatch be recognized
to speak following Senator Leahy when we come back after lunch, for 15
minutes.
The PRESIDING OFFICER. Without objection, it is so ordered.
The Senator from Vermont.
Mr. LEAHY. Mr. President, for clarification, my 6 minutes will be as
in morning business, so it will not be charged to either side.
The PRESIDING OFFICER. Without objection, it is so ordered. The
unanimous consent is so modified.
Mr. DODD. Mr. President, I think I just lost my 5 minutes so I will
ask you to be slow with that gavel.
First and foremost, Mr. President, here is what the bill does not do.
It is nothing like the legislation that was adopted in the House. Let
me say, had the House bill come back in this area, I would have voted
against it and spoken vehemently against it. This bill was much closer
to the bill that passed this body earlier this year and, in fact,
strengthens the legislation, as I mentioned earlier, with the inclusion
of language by our distinguished colleague from Maryland, Senator
Sarbanes. In my view, the House bill would have been a tragedy.
For instance, we do not have loser pay provisions here. My colleagues
know what that means. We took that out of the bill. That was part of
the House bill. The House legislation established pleading standards
that were so high, I would say--and I know my colleague from
Pennsylvania is interested in this--that it would have been impossible
to bring a suit, in my view, had the House language been adopted. We,
as I said earlier, adopt the Second Circuit Court of Appeals standard.
The House legislation contained no safety net for small investors. As
I have just described, we do. The conference report maintains joint and
several liability for small investors and requires, even in
proportional cases, where you have a totally insolvent plaintiff, the
conference report requires that defendants pay a total of 150 percent
of their proportionate share in the event of insolvent people. The
House legislation had a safe harbor provision that, frankly, you could
have parked the entire 7th Fleet in, if you had wanted to. That is not
the case here. We have strengthened safe harbor. The conference report
creates a narrow safe harbor that is strongly supported by the
Securities and Exchange Commission.
So, this conference report is a far cry from the intemperate measure
passed by the House. Instead, it reflects the moderate and balanced
approach adopted by the Senate when it passed this body by a margin of
69 to 30. In fact, a dramatic change from the original House bill was
recently noted in an editorial by the Washington Post, which is
entitled ``Antidote to the Strike Suit.''
``It started off,'' the editorial said, ``last winter as a flamboyant
ideological statement. But the bill to curb shareholders' suits has now
been whittled and sanded by many hands into a truly useful piece of
legislation. An intemperate initiative is turning out to be much more
promising than seemed possible last March when the House originally
passed it.''
So I think we put together a good package here. I urge my colleagues
to support this legislation. We are not writing the Ten Commandments
here. We are trying to address a serious problem. Time will tell
whether or not particular provisions here have done everything we would
like them to do. But, clearly, the system is broken and it needs to be
changed.
This bill has been well thought out. It has been worked on in a
bipartisan way. We have listened to the best experts in the country who
helped us put it together. And the Securities and Exchange Commission
endorses this bill and has worked with us to make it a good bill.
So, Mr. President, I urge my colleagues to be supportive of it. I
urge the President to sign it. I know he is considering whether or not
to lend his pen to this bill. I think he will sign it. I think we can
make a strong case that we have put together a sound piece of
legislation that will truly make a difference, particularly for those
businesses which must be the future economically for our country in the
21st century, those high-technology firms, those startup industries
that are the ones who are the prey of these attorneys who go out and
take advantage of their being in flux, that they are not quite stable
yet, that they are getting their legs. They are the ones that are
preyed upon. That is what we need to stop here. This bill does that, we
think, in a significant way, and I urge its adoption.
I yield the floor.
The PRESIDING OFFICER. The Senator from Pennsylvania.
Mr. SPECTER. Mr. President, I had sought to ask my distinguished
colleague from Connecticut a question relating to the pleading standard
when he had said, in his presentation, that the standard in this
statute is a tested standard. Then, later in his presentation, he made
reference to this Senator on the pleading issue.
The question that I have for my colleague from Connecticut turns on
what the pleading standard of the bill is, as having come back from
conference, which is significantly different from that which left the
Senate. The amendment which this Senator offered had incorporated into
the statute the second circuit language which would have clarified the
language in the Senate bill, which provided that, ``In any private
action arising under this title, the plaintiff's complaint shall, with
respect to each act or omission alleged to violate this title,
specifically allege facts giving rise to a strong inference that the
defendant acted with the required state of mind.''
That was the tough second circuit standard. This Senator offered an
amendment, which was accepted on the Senate floor, to incorporate what
the second circuit said was the way of establishing that strong
inference, to provide it by ``alleging facts to show the defendant had
both motive and opportunity to commit fraud, or by alleging facts that
constitute strong circumstantial evidence of conscious misbehavior or
recklessness by the defendant.'' The conference report struck out the
language which my amendment had inserted which would have given
guidance to how plaintiffs could meet that very stringent standard.
In addition, the conference report added that these facts had to be
``stated with particularity,'' which is an even tougher standard than
the language which had gone from the Senate bill.
So when the distinguished Senator from Connecticut talks about, in
his words, and he referred to the House

[[Page S 17960]]
measure as ``intemperate''--I will not seek to characterize it, but I
do know his characterization of the House measure was ``intemperate''--
contrasted with what he said the Senate action was, ``moderate,'' that
the bill that has come back from conference is a lot different than the
bill which the Senate sent out. I think there is an enormous
difference.
So the question that I have for my colleague from Connecticut is,
where has this language in the conference report on the pleading
standard for state of mind been tested in light of the fact that the
toughest standard in existence to this moment is the second circuit
standard, and this conference report toughens up the second circuit
standard in two important respects by striking out the way you plead
that tough state of mind standard and also by adding the requirement of
pleading with particularity?
Mr. DODD. Mr. President, let me respond to my colleague. I know he
has a great deal of interest in this whole area of competing standards.
Basically, what we intended to do here was to codify the second
circuit's pleadings standards, not to indicate disapproval of each
individual case that came before it. What we were driving at here was
to insist that facts be pleaded, that there be an explanation of where
these facts come from in these lawsuits that are being brought.
Indeed, the Banking Committee reported with its bill--and included
similar language in support--and said the committee does not intend
before we consider the bill to codify the second circuit's case law
interpreting this pleading standard, although courts may find this body
law instructive.
So, in response to my colleague from Pennsylvania, even before we
brought the matter up, we made it quite clear that we were, as I say,
taking every case that had come before the second circuit but rather
applying the pleading standard requirements there. That had been
tested.
Mr. SPECTER. I challenge that.
Mr. DODD. Let me respond. Even my colleague's amendment goes beyond
that in a sense. So you cannot, on the one hand, have us stick with it
rigidly and have the Senator's in the amendment.
Mr. SPECTER. I challenge that. If I have the floor, I challenge that.
In what respect does my amendment go beyond this? That simply is not
true.
What my amendment does is to take the second circuit language under
which a plaintiff can meet the tough state of mind standard, and put
that in the statute. This body agreed to that. And now it has come back
from the conference report deleted.
In what respect did my language go beyond the second circuit?
Mr. DODD. The Senator's amendment adopted the guidance of the second
circuit, but the amendment of the Senator from Pennsylvania completely
omits a critical qualification in the case law. The courts have held
that ``where motive is not apparent, a plaintiff may plead scienter by
identifying circumstances'' indicating wrongful behavior, but ``the
strength of the circumstantial allegations must be correspondingly
greater'' from the number of cases. If I may respond, the Senator's
amendment seriously, in the view of the----
Mr. SPECTER. From where is the Senator reading? In a circuit court
opinion?
Mr. DODD. The Senator's amendment seriously--
Mr. SPECTER. Where is the Senator reading from? Is it in a circuit
court opinion?
Mr. DODD. Yes.
Mr. SPECTER. From where?
Mr. DODD. There are several here.
Mr. SPECTER. Tell me where the citation is, because I have the
opinions here. I challenge that any language appears from the second
circuit opinion which was not incorporated in my amendment.
Mr. DODD. I am quoting here three different cases.
Mr. SPECTER. Tell me where.
Mr. DODD. The Three Crown Limited Partnership versus Caxton
Corporation.
Mr. SPECTER. What page?
Mr. DODD. Does the Senator want to go to 817 Federal Supplement 1033,
Beck versus Manufacturing Hanover Trust? There are two right there.
Mr. SPECTER. Mr. President, the language handed down by the second
circuit was articulated by Chief Judge Jon Newman as follows:
These facts or allegations must give rise to a strong
inference that the defendants possess the requisite
fraudulent intent. A common method for establishing a strong
inference of scienter is to allege facts showing a motive for
committing fraud and a clear opportunity for doing so. Where
motive is not apparent, it is still possible to plead
scienter by identifying circumstances indicating conscious
behavior by the defendant, though the strength of the
circumstantial allegations must be correspondingly greater.

The amendment which this Senator offered and was adopted by the
Senate followed the pleading requirement by saying that the required
state of mind may be established either by alleging facts to show the
defendant had both motive and opportunity to commit fraud or by
alleging facts that constitute strong circumstantial evidence of
conscious misbehavior or recklessness by the defendant.
I submit that the amendment which I offered and was adopted by the
Senate tracked the second circuit's language directly, and that by
striking the amendment which the Senate agreed to, by conceding to the
House, the conference report omits a very critical factor in giving
guidance as to how a plaintiff meets this tough standard for pleading
state of mind.
I would ask my colleague from Connecticut whether it is not true that
the conference report came back with an additional toughening factor
requiring that the facts going to state of mind be pleaded with
particularity.
Mr. DODD. I say to my colleague, what we are attempting to do here,
again, I think, is instead of trying to take each case that came under
the second circuit, we are trying to get to the point where we would
have well-pleaded complaints. We are using the standards in the second
circuit in that regard, then letting the courts--as these matters
will--test. They can then refer to specific cases, the second circuit,
otherwise, to determine if these standards are based on facts and
circumstances in a particular case. That is what we are trying to do
here.
I say to my colleague that I supported my colleague's amendment when
he offered it here in on the floor of the Senate back when the bill was
considered. Again, as I say, personally, it says the statute of
limitations and a few others. But we are dealing in conference here,
and the bulk of what came back from the conference report was what was
in the Senate bill.
My colleague would have preferred, I know, to have his amendment kept
in its entirety here. We are trying to strike a balance. As he knows,
he has been to conferences as often as I have been in the past and
knows the nature of well-pleaded complaints. That is the standard we
are trying to hold to that came out of the second circuit, not on a
case-by-case basis where they differed in some degree in
interpretation.
The PRESIDING OFFICER. Does the Senator from Pennsylvania reclaim his
time?
Mr. SPECTER. I do.
The PRESIDING OFFICER. The Senator has 4 minutes and 50 seconds.
Mr. SPECTER. I thank my colleague from Connecticut for responding.
When you have a dialog in debate it is invariably more instructive than
the speeches we make, however eloquent our individual speeches may be.
But I have very limited time remaining.
The point that I wanted to make is that regardless of what the
conference report intends--and the Senator from Connecticut talks about
what we are trying to accomplish--the plain truth of the matter is that
this is an impossible pleading standard, that where you take what was a
tough standard by the second circuit on pleading state of mind, and
then you delete the ways you prove state of mind, and then add in
addition a particularity requirement, you simply do not have a way that
a plaintiff realistically can go into the Federal court under the
securities acts and have a fair chance to state a case.
I say that with some substantial experience in the practice of law,
as a trial lawyer for some 10 years in the civil field and with
substantial practice in the criminal field, which has some bearing, and
my work in the past 15 years on the Judiciary Committee, that where you
have a situation here where there is a mandatory stay of discovery when
a motion to dismiss is

[[Page S 17961]]
filed, that you simply do not give an opportunity to plaintiffs to go
into court and have a chance to articulate a case.

We are dealing here, Mr. President, with enormous sums of money. In
1993, the most recent year available from the New York Stock Exchange
and NASDAQ, there was some $3.6 trillion traded, not even taking into
account the American Stock Exchange, more than half of the gross
national product of the United States. And we have had an enormous
number of very, very important fraud cases. The Keating case involved
some losses in excess of $4.4 billion. The Drexel Burnham case, the
Quorum case, the tremendous matter now pending involving the losses
incurred by Orange County.
So we are talking about gigantic interests. The bill that has come
back from conference, Mr. President, virtually forecloses a realistic
opportunity to bring a suit under these pleading standards. And what we
are not trying to do is what specifically has been done here. The
standard of review is especially problemsome in the context of the
mandatory rule 11 review required by the conference report.
In earlier argument on June 27 of this year, at page S9165 of the
Record, I put in an extensive listing of letters from judges who did
not want to have this mandatory rule 11 review, the Federal judges who
practice in it.
Then the conference report has a presumption that, after the
mandatory review, if there are sanctions against the complaint, the
costs of litigation and lawyers' fees will be imposed upon the
plaintiff. This is realistically more than a chilling effect. It will
have the effect really to virtually discourage litigation in an
important field where these private lawsuits have had a very important
impact on policing the field. The Securities and Exchange Commission
cannot possibly undertake it by themselves. The distinguished Senator
from Connecticut concedes that in his speech about the importance of
private rights of action to enforce the securities laws. But I am
concerned, as a person who has had experience in the field in
representing, under the Securities Act, defendants as well, that this
bill in its present form simply is unrealistic and unreasonably
restrictive----
Mr. DODD. Will my colleague yield on this point?
Mr. SPECTER. Not on my time. I will be glad to if we can get an
extension.
Where you have especially the problem compounded by the short statute
of limitations, which is 1 year from discovery and 3 years from
commission. Efforts were made to extend the time to 2 and 5 years,
favored by the Securities and Exchange Commission, but they failed. And
where you have the safe harbor provisions which have come back here
contrary to what has been asserted here, that there is no liability for
forward-looking statements with cautionary statements no matter what
the intent. The Senate bill said, if there was a knowing misstatement,
that it not be covered by the safe harbor. That has been turned around
by the conference report. What has come before us, Mr. President, I
submit, is unreasonable, unrealistic, and imposes restraints which do
not protect investors. It does not strike an appropriate balance.
I would be glad to yield to my colleague from Connecticut.
The PRESIDING OFFICER. The Senator's time has expired.
Mr. DODD. I thank my colleague. I was going to point out with regard
to my colleague----
The PRESIDING OFFICER. The Senator from Wisconsin has 10 minutes.
Mr. DODD. Will my colleague yield for 30 seconds?
The point we made from ``particularity'' to ``specificity''--we can
lose an audience here quickly in debate--that was recommended by the
judicial conference. They are really responding to what they thought
was a better use of language there than what we incorporated in the
bill. It was not a slight at all intended to be aimed at our colleague
from Pennsylvania. The judicial conference recommended that word
change. They felt it would be better. That is why we adopted it.
Mr. SPECTER. If my colleague would yield to me.
When you talk about particularity, it may not mean a lot on the
Senate floor, but it means a lot in litigation, and billions can be
affected by that kind of a pleading change.
The PRESIDING OFFICER. The Senator from Wisconsin.
Mr. FEINGOLD. I rise in opposition to H.R. 1058, the Private
Securities Litigation Reform Act, and do so because voting against the
conference report, I think, is in the best interests of the average
investor, not only in my home State of Wisconsin but all across the
country.
Mr. President, I think it is important to note that this bill was
proposed with the worthy goal of trying to limit frivolous litigation.
In particular, the goal was to stop the so-called strike suits that we
have heard so much about. I think there is no question that trying to
stop that is a legitimate goal that we can all support. However, the
evolution of this bill starting from its introduction to its
modification and initial passage in this body, to the conference report
before us today has, Mr. President, been marked by a steady and
unwarranted erosion of the basic protections the average investor in
this country expects and, in my opinion, deserves.
Simply calling this or any other piece of legislation a reform act
does not make it so. The term ``reform'' implies that change is taking
place that will serve the greater good. Sadly, this measure fails to
achieve this worthy goal. In fact, when one looks closely, it becomes
evident to me that this bill will work to the detriment of hard-working
Americans who depend upon the securities laws to protect their savings
and retirement and investments.
As many of my colleagues have noted, this bill seemingly gets worse
with each subsequent version that is placed before us. For example, the
conference report expands the already flawed safe harbor provision
which passed this body in July. The language of this bill protects
forward-looking statements by insulating the maker of those statements
from liability even if they are deliberately false, provided the
statement is accompanied by what is termed ``cautionary'' language.
Therefore, in the face of a disclaimer, investors will be left with no
recourse against a corporate insider who makes predictions which were
deliberately false.
Furthermore, the conference report includes language contained in the
House bill which explicitly states that there is absolutely no duty for
any individual to update a forward-looking statement. What that means
is even if it becomes apparent that a previously made forward-looking
statement is false, the person who made the statement has no legal
obligation to inform anyone of this new knowledge. It is difficult to
imagine that this provision can provide the average American investor
with any level of comfort or confidence.
Mr. President, beyond this baseless inequity, the bill also fails to
remedy the inadequate statute of limitations period for bringing these
very complex cases of securities fraud. The failure to extend the
statute of limitations in the face of evidence that these cases often
take a great deal of time to discover and develop and prosecute is, in
my view, counter to the notion that securities law exists to protect
the investor.
The practical result of this failure will be that legitimate
plaintiffs, through no fault of their own, will be turned away at the
courthouse door. This again, is hardly the kind of result you would
expect from something that has the label ``reform.''
There are other flaws in this legislation as well, including the
failure to hold liable those professionals, such as lawyers,
accountants and underwriters, who aid and abet in the perpetration of
securities fraud.
Additionally, the bill sets forth pleading thresholds that are very
difficult to attain. The effect is to require the establishment of
certain facts at the outset of a case, although the plaintiff, Mr.
President, has had no opportunity to conduct any discovery. In setting
this unusual standard, the conference elected to drop an amendment
offered by my colleague from Pennsylvania, Senator Specter, which
passed this body with 57 votes. It would have clarified that what was
required to constitute a well-pleaded complaint was evidence that the
defendant had motive and opportunity to defraud, not actual proof of
intent at that point.
The conference report, in making the plaintiff prove the case even
before the

[[Page S 17962]]
case has begun, goes a lot further than eliminating frivolous suits.
What it will do is have an adverse and potentially detrimental effect
on legitimate cases as well.
The fee-shifting provisions of this bill will actually establish a
harsher consequence for plaintiffs than for defendants who violate the
Federal rules.
As Ed Huck, the director of the Alliance of Cities, in the Wisconsin
State Journal, said:

Imagine city or county officials being swindled out of
millions of taxpayer dollars--and learning that they'll have
to risk millions more if they want to pursue a lawsuit.
That's what the ``loser-pays'' provision of this legislation
means--And, in a word, that's ``intimidation'' of crime
payers.

Mr. President, we should be wary of any legislation that has the
effect of intimidating victims of fraud.
In short, Mr. President, this bill is unbalanced, misguided, and will
harm thousands of Americans who bear no relation to the frivolous
lawsuits that this bill is supposed to target.
There is no doubt that frivolous litigation, in any area of the law,
is detrimental to our system of justice and to the society at large.
However, the answer to these types of suits is not to foreclose the
ability of legitimate plaintiffs to protect themselves against fraud,
nor is it to deprive them of the right to seek recovery in court when
they are defrauded.
In my opinion, the negative consequences of this unbalanced bill will
be significant and far reaching.
Mr. President, I note that the report that accompanied the original
S. 240 pointed out the simple, but important, goal of American
securities law, and that is to promote investor confidence in the
securities market. Sadly, the provisions of this bill fall very short
of attaining that fundamental goal.
We must be vigilant in our efforts to seek out and eliminate
frivolous litigation. However, equally as important is our obligation
not to lose sight of the average American investor, the person
investing for retirement or to put children through college or simply
to have a little better quality of life.
In our zeal to reform, it is protection of these people which must
guide and inform our efforts.
So it is unfortunate that the provisions of this bill provide little
more than hollow comfort to the American investor, but such is the case
with H.R. 1058. In my opinion, the bill offers its alleged reform at a
price that cannot be justified. Protecting the American investor should
not be sacrificed in the misapplied name of ``reform.''
The securities laws of this Nation are essential to hard-working men
and women all across America. Given that this conference report fails
to uphold the tradition of protecting these hard-working men and women,
I simply cannot support it. I intend to vote against this conference
report.
I thank the Senator from Nevada for his strong leadership on this
issue. I yield back the remainder of my time and yield the floor.
Mr. BENNETT addressed the Chair.
The PRESIDING OFFICER. The Senator from Utah.
Mr. BENNETT. Mr. President, I understand that under the previous
order, we now stand in recess for lunch?
The PRESIDING OFFICER. We stand in recess until 2:15.

Unanimous-Consent Agreement

Mr. BENNETT. Mr. President, prior to that action, I ask unanimous
consent that following Senator Hatch's presentation this afternoon,
that the senior Senator from South Carolina, Senator Thurmond, be
recognized for 15 minutes on a nongermane matter. This, I might note,
is the senior Senator's 93d birthday, and he has asked for this time. I
think anyone who lives to that age and retains the faculties that the
senior Senator from South Carolina has ought to be given whatever it is
he asks for on his birthday.
The PRESIDING OFFICER. Is there objection?
Mr. BRYAN. Mr. President, I have no objection, but I would further
like to amend the unanimous-consent request that following the 15
minutes of the distinguished senior Senator from South Carolina, to put
Senator Boxer for 30 minutes, I am told, although it is not on our
time. And I just seek to clarify, Senator Reid has sought time.
Mr. BENNETT. I ask unanimous consent to include Senator Reid for 15
minutes following Senator Boxer.
The PRESIDING OFFICER. The Chair inquires, is the time of Senator
Boxer and Senator Reid to be charged against----
Mr. BRYAN. Senator Boxer's time will be charged to the Senator from
Nevada; Senator Reid's time, as I understand, will be charged to the
Senator from Utah.
The PRESIDING OFFICER. Is there objection? Without objection, it is
so ordered.
Mr. BENNETT. I ask the Chair, how much time remains on each side?
The PRESIDING OFFICER. There are 2 hours and 24 minutes remaining for
the Senator from Utah; 2 hours and 13 minutes remaining for the Senator
from Nevada.
Mr. BENNETT. I thank the Chair.

____________________