[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:

       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.''

  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.

       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.

  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.

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