[Congressional Record Volume 141, Number 193 (Wednesday, December 6, 1995)]
[House]
[Pages H14039-H14052]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 CONFERENCE REPORT ON H.R. 1058, PRIVATE SECURITIES LITIGATION REFORM 
                              ACT OF 1995

  Mr. BLILEY. Mr. Speaker, pursuant to House Resolution 290, I call up 
the conference report on the bill (H.R. 1058) to reform Federal 
securities litigation, and for other purposes.
  The Clerk read the title of the bill.
  The SPEAKER pro tempore. Pursuant to rule XXVIII, the conference 
report is considered as having been read.
  (For conference report and statement, see proceedings of the House of 
Tuesday, November 28, 1995, at page H13692.)
  The SPEAKER pro tempore. The gentleman from Virginia [Mr. Bliley] and 
the gentleman from Massachusetts [Mr. Markey] each will be recognized 
for 30 minutes.
  The Chair recognizes the gentleman from Virginia [Mr. Bliley].
  Mr. BLILEY. Mr. Speaker, I yield myself 3 minutes.
  (Mr. BLILEY asked and was given permission to revise and extend his 
remarks.)
  Mr. BLILEY. Mr. Speaker, I rise today in strong support of the 
conference report on H.R. 1058, the Private Securities Litigation 
Reform Act of 1995.
  This is extremely important legislation for investors and for our 
economy. It is designed to curb frivolous and abusive securities 
litigation. This kind of litigation exacts a tax on this country's most 
productive and competitive companies and their shareholders.
  Job-creating, wealth-producing companies that have done nothing 
wrong, too often find themselves subject to class action lawsuits 
whenever their stock price drops. They are forced to pay extortionate 
settlements, because the costs of defending these lawsuits are 
prohibitive. And, when companies are forced to settle, their 
shareholders, ultimately, pay the costs. I am pleased that when this 
legislation was considered by the House earlier this year, majorities 
of both parties, Republicans and Democrats, supported it.
  This legislation puts control of class action lawsuits back in the 
hands of the real shareholders, where it belongs. Just as important, it 
gives judges the tools they need to dismiss frivolous cases before they 
turn into lengthy and costly fishing expeditions. I want to underscore 
this point. This legislation puts strong and effective tools in the 
hands of judges, and we expect them to use these tools to dismiss 
frivolous cases and to sanction those who bring them.
  Critics of this legislation think we should preserve the status quo--
or simply thinker with the present system. But we cannot allow the 
current system to continue, when those who benefit most from it are 
professional plaintiffs and lawyers. The cost of securities strike 
suits, to our economy in the form of lost jobs, to our investors in the 
form of diminished returns, and to our companies in the form of 
diminished competitiveness are too great.
  Let me explain how the conference report would address the flaws in 
the current system.
  First, it limits the kind of abusive class action lawsuits that are 
driven by entrepreneurial lawyers and their stable of professional 
plaintiffs. It permits courts to select as lead plaintiff the 
shareholder most capable of representing the class--not just the 
plaintiff who happens to file first because some law firm already has a 
compliant on its word processing machine ready to go. The legislation 
also requires full disclosure of settlement terms to investors. We no 
longer will permit lawyers to hide the facts from their real clients, 
something they have been doing for years.
  These are hardly radical reforms. But, they will ensure that real 
investors with real grievances are the ones driving the litigation, not 
those who only interest is in winning their share of attorney fees.
  Second, the conference report discourages frivolous lawsuits by 
imposing costs on those who initiate them. To accomplish this, it 
requires a court to impose sanctions on a party if the compliant, or 
any motion, constitutes a violation of rule 11(b) of the Federal Rules 
of Civil Procedure; in other words, if the complaint or a motion was 
filed to harass or cause unnecessary delays or costs. Again, this is 
hardly radical, but it is only fair. Those who abuse the system to 
inflict unnecessary costs on others should pay a price.
  The conference report seeks to encourage early dismissal of frivolous 
lawsuits and limit the costs of discovery. It requires lawyers who file 
a complaint to ``plead with particularity'' the facts that would 
support a charge of fraud. If you sue someone, you should be able to 
explain what they did, and why it was a fraud. And it prevents lawyers 
from launching ``fishing-expedition'' discovery while a motion to 
dismiss is pending.
  The conference report provides a cap on damages. We all have seen 
situations where an earnings surprising sends the price of a company's 
stock into a tailspin. The problem in the current system is that 
damages often are measured when the stock drops to its lowest point, 
even though it quickly rebounds and may even be higher within days, 
weeks, or months. This bill prevents a temporary drop in price from 
yielding huge awards for lawyers and professional plaintiffs.

  The conference report addresses the unfairness of joint and several 
liability, which now allows a plaintiff to seek 100 percent of his 
damages from a defendant whose actions may deserve only 1 percent of 
the blame. The legislation requires every defendant to pay his or her 
fair share of the damages, based on a finding by a judge or jury. But, 
except in special circumstances, a defendant cannot be held liable for 
100 percent of the damages unless a plaintiff proves the defendant 
acted with actual knowledge. Small investors, however, will be able to 
recover 100 percent of their damages even from those defendants whose 
participation was relatively minor.

[[Page H 14040]]

  The conference report is careful not to change standards of liability 
under the securities laws. Unlike the bill passed by the House, the 
conference report does not codify recklessness as a standard of 
liability under the securities laws. That question is left to the 
courts.
  The conference report encourages disclosure of forward-looking 
information by establishing a real safe harbor for companies and others 
who disclose this information. Forward-looking information is extremely 
important to investors, but companies are afraid to disclose it, 
because they may face a lawsuit if they fail to predict the future with 
total accuracy. The conference report prevents companies from being 
sued for forward-looking statements when they make it clear that they 
are talking about the future and accompany their statements with 
cautionary language. Statements that meet this statutory test should 
not be the basis of a lawsuit if intervening events make them 
inaccurate; the conference report makes it clear that the legislation 
imposes no duty to update projections.
  The conference report also clarifies that a plaintiff will have to 
prove a defendant had actual knowledge of the falsity of a forward-
looking statement before there will be liability.
  The conference report also amends the Racketeer Influenced 
and Corrupt Organization Act to prevent the unnecessary and unfair 
threat of RICO charges when a case involves conduct that should be 
prosecuted, instead, under the Federal securities laws.

  The legislation also gives the SEC new authority to bring aiding and 
abetting cases for knowing fraud under section 10(b) of the Exchange 
Act, and it imposes responsibilities on auditors to detect and disclose 
illegal activity they may find during an audit.
  It is clear that the conference report will take major steps toward 
ending the kind of abusive and frivolous private securities litigation 
that hurts the economy and burdens individual investors. But, as I 
noted earlier, these hardly are radical reform.
  Many of the criticisms that have been leveled at the bill stem, not 
from what is in the legislation, but from critics' desire to use it to 
change current law. For example, opponents criticize it for failing to 
provide a private cause of action for aiding and abetting violations of 
section 10(b) of the Exchange Act--but this is something the Supreme 
Court of the United States says the original drafters of the Exchange 
Act did not intend to include. It is criticized because it does not 
provide a longer statute of limitations for actions under section 
10(b)--again, something the Supreme Court says the original drafters of 
the Exchange Act did not intend to include.
  Mr. Speaker, this legislation may not have everything that every 
Member wants to see. It also may not end all unfairness and impropriety 
in private securities litigation. But it offers a realistic opportunity 
to improve current law, to help the economy, and to protect individual 
investors. I submit that it is rare that one piece of legislation does 
this much. I urge my colleagues to vote to pass this conference report.
  Mr. Speaker, I reserve the balance of my time.
  Mr. MARKEY. Mr. Speaker, I yield myself 3 minutes.
  Mr. Speaker, until a Supreme Court decision 18 months ago, aiding and 
abetting liability was the primary method through which professionals 
who assist securities fraud to succeed, lawyers, accountants and 
investment bankers, who were deemed to be responsible in defrauding 
investors, were made liable by aiding and abetting prosecution.
  Even the Supreme Court majority recognized the need for restoration 
of aiding and abetting liability. In the words of Justice Kennedy, to 
be sure, aiding and abetting a wrongdoer ought to be actionable in 
certain instances. The issue, however, is not whether imposing private 
liability on aiders and abettors is good policy but whether aiding and 
abetting liability is covered by the statute.
  This statute that we are debating here today has no aiding and 
abetting liability for those who have participated in the construction 
of fraud perpetrated against innocent investors.
  The SEC argued, in the Supreme Court, in favor of aiding and abetting 
liability. Since the court decision, the SEC has urged Congress to 
restore aiding and abetting liability. Chairman Levitt testified that 
of 400 pending SEC enforcement cases, 80 to 85 rely on aiding and 
abetting theories of liability. Not one shred of evidence was presented 
before the House or the Senate that called into question the legitimacy 
of these SEC cases. Yet this bill would jeopardize many of them, 
perhaps even all of them, because it fails to codify that the SEC has 
authority.
  The SPEAKER pro tempore. The time of the gentleman from Massachusetts 
[Mr. Markey] has expired.
  Mr. MARKEY. Mr. Speaker, I do not want to call into question the 
Chair, but I only read three paragraphs.
  The SPEAKER pro tempore. The gentleman from Massachusetts [Mr. 
Markey] may proceed.
  Mr. MARKEY. Mr. Speaker, the bill would jeopardize many of these 
cases, perhaps all of them, because it fails to codify.
  Now, a report in last week's National Law Journal highlighted a 
number of extraordinary statistics from fraud cases brought by the 
Government as a result of the S&L debacle. Four thousand directors or 
CEO's of failed S&L's or the professionals who work for them were sent 
to prison as a result of criminal frauds they perpetrated or assisted.
  In addition, 1,500 defendants were convicted but were not sent to 
prison. That is one of the most extraordinary and most disturbing 
statistics I have ever heard. Four thousand senior thrift executives 
and their key financial advisors were convicted and imprisoned for 
financial fraud and crimes.
  Mr. Speaker, I reserve the balance of my time.
  Mr. BLILEY. Mr. Speaker, I yield 4 minutes to the gentleman from 
Texas [Mr. Fields], the chairman of the subcommittee.
  (Mr. FIELDS of Texas asked and was given permission to revise and 
extend his remarks.)
  Mr. FIELDS of Texas. Mr. Speaker, in recent years, U.S. companies, 
particularly high technology companies, have become the target of 
speculative, abusive securities litigation which enriches lawyers at 
the expense of shareholders and the economy.
  Mr. Speaker, as the Subcommittee on Telecommunications and Finance 
learned over the past year, abusive securities lawsuits are brought by 
a relatively small number of lawyers specializing in initiating this 
type of litigation. In many cases, the plaintiffs are investors who own 
only a few shares of the defendant corporation. And the corporations 
are frequently high technology companies whose share price volatility 
precipitates lawsuits. The plaintiffs do not need to allege any 
specific fraud.

                              {time}  1200

  Indeed, many of these suits are brought only because the market price 
on the securities dropped. The plaintiffs' attorneys name as individual 
defendants the officers and directors of the corporation and proceed to 
engulf management in a time-consuming and costly fishing expedition for 
the alleged fraud.
  When you ask the question, what drives these lawsuits, the answer is 
clear. Even when a company committed no fraud, indeed no negligence, 
there is still the remote possibility of huge jury verdicts, not to 
mention the cost of litigation. In the face of this exposure, defendant 
companies inevitably settle these suits rather than go to trial. I 
believe lawyers understand the coercive psychology of the system and 
many of these suits are filed without just cause and solely for the 
purpose of extracting judgments and settlements.
  Mr. Speaker, there are approximately 300 securities lawsuits filed 
each year. Nearly 93 percent of those suits settle for an average of 
$8.6 million apiece. That makes this a $2.4 billion industry, with a 
third of the amount plus expenses going to the lawyers. This is not a 
small cottage industry. As a result of the perverse economics driving 
these cases, meritless cases settle for far too much and meritorious 
cases settle for far too little.
  Mr. Speaker, one of the most compelling statistics for reform I 
believe comes from Silicon Valley, CA, where one out of every two 
companies have been the subject of a 10(b)(5) securities class action. 
Every single one of the top 10 companies in Silicon Valley, and 

[[Page H 14041]]
these are world class multinational competitors like Hewlett Packard, 
Intel, Sun Microsystems, and Apple Computer, have been accused of 
violating the antifraud provisions of the securities laws. Companies in 
Texas, like Compaq Computer and Texas Instruments, are equally as 
vulnerable to these kinds of suits.
  Mr. Speaker, the current securities litigation system is seriously 
impacting the competitiveness and productivity of America's technology 
companies. This is also affecting our ability to create jobs.
  In summary, I believe we have demonstrated that the current 
securities litigation system promotes meritless litigation, 
shortchanges investors, and costs jobs.
  Mr. Speaker, I want to commend the gentleman from Virginia [Mr. 
Bliley], our chairman, for moving this forward in an expeditious 
manner. I would also be remiss if I did not congratulate the gentleman 
from California [Mr. Cox], and the gentleman from Louisiana [Mr. 
Tauzin] for the hours that they have put in, not only in this session 
but in previous sessions, in advancing what I think is a very important 
and substantial reform in our legal system.
  The SPEAKER pro tempore. The Chair yields the gentleman from 
Massachusetts [Mr. Markey] an additional 1\1/2\ minutes, due to a 
little conflict up here.
  Mr. MARKEY. Mr. Speaker, I yield 4 minutes to the gentleman from 
Michigan [Mr. Dingell].
  (Mr. DINGELL asked and was given permission to revise and extend his 
remarks.)
  Mr. DINGELL. Mr. Speaker, this bill is a scandalous piece of 
legislation. It was conceived in the most scandalous and outrageous 
abuse of the legislative and conference process that I have ever seen 
in this institution. It sanctifies the most outrageous kind of fraud 
and misbehavior imaginable. It is a bill that would be beloved by Mike 
Milken, Ivan Boesky, and Charles Keating. And, by the great scoundrels 
of the past like Sam Insul and the greatest of all, Mr. Ponzi.
  It will permit the skinning of widows and orphans. It will permit 
raids on pension funds, on the funds at colleges, universities, and 
churches, and on the moneys held and managed by local governments and 
States for their pensions and other citizens. It undoes over 60 years 
of law that has enabled investors to take action to protect themselves 
against the worst kinds of misbehavior.
  How does it do this, Dingell, you may ask. Well, I am going to tell 
you.
  The safe-harbor provision provides civil immunity in private 
enforcement actions for any ``untrue--forward-looking--statement of 
material fact''--written or oral--so long as that predictive statement 
is ``accompanied by meaningful cautionary statements.'' Furthermore, 
the provision expressly eliminates the duty of corporate insiders to 
update their predictions if subsequent events make them false.
  In a word, this conference report therefore immunizes deliberate 
fraud. And, in a very sad day indeed, on November 15, 1995, the SEC--
reportedly under threats to have its budget cut--wrote a letter to the 
Senate saying not that SEC endorsed the provision, but only indicating 
withdrawal of opposition this provision, representing the first time in 
that agency's history, that I am aware of, that it has supported a 
national policy that immunizes deliberate fraud from civil liability.
  The conference report places highly burdensome pleading requirements 
on plaintiffs in securities cases, and deletes a key amendment proposed 
by Senator Specter and adopted by the Senate, which clarified that the 
heightened pleading standard could be satisfied by evidence of a 
defendant's motive and opportunity to commit securities fraud. The 
conference report also contains an automatic discovery stay.
  The bill's elevated pleading standard for scienter--i.e., the 
plaintiff must ``state with particularity facts giving rise to a strong 
inference that the defendant acted with the required state of mind''--
will require average investors without discovery to know and state 
facts in pleadings that are only knowable after discovery.
  The conference report does not restore aiding and abetting liability 
in private suits nor does it provide a reasonable extension of the 
statute of limitations.
  The conference report imposes a one-sided loser pays rule on 
plaintiffs which would require plaintiffs to pay the entire legal fees 
and expenses of corporate defendants, while a defendant who files 
spurious motions and pleadings would have to pay only reasonable 
attorney fees and other expenses incurred as a direct result of the 
violation.

  The conference report establishes an unconscionable discretionary 
bond requirement to cover the payment of fees and expenses, with no 
limitations on the amount of the bond. Asking a person who may have 
already lost their life savings to put up as collateral their house or 
money set aside for the college education of their children in a 
meritorious case is just plain wrong.
  This is a blue print for fraud: company executives can issue false 
predictive statements, promising investors anything they want, as along 
as they dress them up with cautionary statements. Investors can sue in 
the case of egregious, deliberate fraud, but they would have to meet 
the new pleading standards for intent, and the bill does not let them 
engage in discovery to get the facts. Moreover, if the fraudsters can 
hide the facts for 36 months, they are home free. And you may get stuck 
with the company's entire legal bill.
  Ooops! I almost forgot to tell you about the holy water that we 
sprinkled on accountants, lawyers, and investment bankers. The bill's 
failure to restore aiding and abetting liability, coupled with the 
bill's proportionate liability provision, means that the company can go 
bankrupt and the executives can hide their ill gotten gains in an 
offshore bank account and investors are out of luck.
  Accountants, lawyers, and investment bankers can look the other way, 
and engage in reckless behavior that assists the fraud, and not have to 
pay.
  In the Keating case, for example, of some $240 million that was 
ultimately recovered by some 23,000 innocent investors, about 70 
percent, or $168 million, was recovered against unscrupulous 
accountants, lawyers and brokers who were accessories to the fraud. 
Now, these rascals would be immunized under the law as a result of our 
failure to take this opportunity to restore aiding and abetting 
liability. These investors, totally devoid of any culpability, 
absolutely innocent, many of them elderly retirees, if this were the 
law at the time they brought their action, would have recovered some 
$16 million as opposed to the $240 million that they actually lost and 
recovered.
  This is an outrageous piece of legislation. It has been vigorously 
and strongly opposed by the well-respected Money magazine in four 
consecutive issues and by local and national newspaper editorials 
across the country. It is also opposed by the U.S. Conference of Mayors 
and the National League of Cities, the Fraternal Order of Police, the 
International Association of Firefighters, State Attorneys General, the 
Association of the Bar of the City of New York, the Consumer Federation 
of America, and the National Council of Individual Investors. I am 
including representative samples of their commentaries at the 
conclusion of my remarks for the Record.
  In closing, I say shame on the Congress for considering it. I say, 
greater shame upon us if we pass it and shame on anybody who has 
anything to do with it. If this abomination passes the Congress, I 
strongly urge President Clinton to veto this bill and send it back with 
instructions for us to craft balanced, bipartisan legislation that ends 
frivolous lawsuits without sanctifying fraud and undermining the legal 
rights of wronged investors.
  I include for the Record the following material.

                 [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 

[[Page H 14042]]
     investor 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 Houston Chronicle, Nov. 17, 1995]

                              Insecurities

       In testimony on a bill to curtail frivolous securities 
     fraud lawsuits, Sen. Robert Bennett, R-Utah, recalled that 
     his father once, as a director of a mutual fund board, had 
     been sued for looting assets, as directors had given 
     themselves a raise (in tandem with increased profits). The 
     suit was settled for $100,000, as had been the case each year 
     the attorney had filed the identical lawsuit. The meritless 
     suit would have been too costly to litigate, the senior 
     Bennett was told.
       Those familiar with the world of securities litigation know 
     these scenarios are not uncommon. Such lawsuits are 
     infuriating, harmful to business and investors alike, and 
     they deserve congressional attention to stamp them out.
       Charged with enacting laws to douse brush fires in the tort 
     system, Congress instead wants to burn the system to the 
     ground.
       Earlier this year, lawmakers passed bills in the House and 
     Senate that threatened to cripple the ability of even 
     legitimate plaintiffs to recoup money swindled by 
     unscrupulous corporate executives, lawyers and accountants. 
     More recently, in meetings to which bill opponents said they 
     were not invited, members of Congress and lobbyists worked 
     out a compromise that is as deadly to investor rights as the 
     original bills.
       The compromise guarantees small investors, defined as 
     having a net worth less than $200,000, full recovery if they 
     lose more than 10 percent of their assets in a securities 
     fraud. But why should a person who likely saved over most of 
     his or her life have to lose so much money before being 
     entitled to full compensation in court? And, while $200,000 
     may sound generous, many Americans in many areas of the 
     country would surpass that amount based solely on their home 
     value.
       The compromise allows the Securities and Exchange 
     Commission to sanction lawyers and accountants who knew of 
     fraud and did nothing to stop it, but it does not allow 
     defrauded investors to sue them. That is inadequate redress 
     and promises to shift the burden of policing such cases 
     entirely onto the government.
       Proponents brag that the compromise offers no lawsuit 
     protection to companies whose ``forward-looking statements'' 
     contain knowingly false information and do not contain 
     detailed warnings. What comfort can be gained from such 
     statements if inclusion of a ``cautionary statement'' 
     nullifies investor protections?
       Consumer groups oppose the compromise for the burdens it 
     will place on small investors. But attorneys general of 
     various states and associations of public finance officers 
     also are in opposition because they fear the legislation 
     would expose public funds, such as those invested by counties 
     and school districts, to greater fraud risks.
       Congress certainly must act against ``professional 
     plaintiffs'' and ``entrepreneurial attorneys'' who file 
     baseless securities fraud claims in pursuit of blackmailed 
     settlements. But lawmakers must work harder than they have to 
     cap lawsuit abuse without putting the life savings of small 
     investors at risk.
                                                                    ____


           [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 HR 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 the 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, individuals 
     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 Boesky would be severely hampered.
       In the name of the little guy, Clinton should not let that 
     happen.
                                                                    ____


                [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 provide 
     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 
     accounts for inattention that allows corporate fraud. Worse, 
     the bill limits the authority of the Securities and Exchange 
     Commission to sue 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 statute 
     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 sue accounts 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 the Bond Buyer, Dec. 4, 1995]

          Securities Litigation Reform: A Matter of Principle

                          (By Craig T. Ferris)

       Washington.--There are moments when an issue should be 
     decided solely on principle, not politics.
       One of those moments will occur late this week when the 
     House and Senate are expected to send President Clinton the 
     securities litigation reform legislation that a conference 
     committee finalized last week.
       When the bill arrives on his desk, Clinton should veto the 
     measure on principle because it is bad legislation that could 
     undermine investor confidence in the municipal market.
       Despite a few changes from the original House and Senate 
     bills, the final measure is still what state and local groups 
     have termed ``a bad bill that has resulted from bad House and 
     Senate bills.''
       While some backers of the measure say it is needed to curb 
     frivolous securities fraud 

[[Page H 14043]]
     lawsuits, state and local representatives, plus investor groups, 
     contend that it will hurt investors and prevent individuals, 
     local governments, and pension plans from filing legitimate 
     securities fraud lawsuits.
       The bill is substantially flawed, particularly because it 
     does not extend the statute of limitations for securities 
     fraud actions and does not restore the ability of investors 
     to sue aiders and abettors of securities fraud.
       Sen. Paul Sarbanes, D-Md., raised and excellent point last 
     Tuesday night when he told conferees that the final bill does 
     not do enough to protect local governments that invest the 
     money of taxpayers and retirees in securities.
       ``As any reader of the newspaper knows, local governments 
     are often victims of unscrupulous brokers. These government 
     officials want meaningful remedies if they are defrauded,'' 
     Sarbanes said.
       He also said 11 state attorneys general oppose the measure 
     because they argue it would ``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. 
     In a letter, the attorneys general told Sarbanes the 
     legislation ``is unwise public policy in light of rising 
     securities fraud and substantial losses suffered by states 
     and public institutions from high-risk derivatives 
     investments.''
       These are all excellent reasons why Clinton should veto the 
     measure. Unfortunately, politics may overshadow principle.
       Clinton and the Securities and Exchange Commission are 
     under pressure to support the measure--both from House and 
     Senate Republicans who will have a strong say in the funding 
     levels for the SEC and from Senate Republicans who are 
     considering whether to confirm Clinton's two pending nominees 
     for seats on the SEC.
       Those pressures appear to be major reasons why the SEC has 
     done little to push the conference committee to include 
     greater protection for investors, particularly state and 
     local governments.
       But even if Clinton ignores politics and vetoes the bill, 
     it is likely to become law anyway.
       The original House and Senate bill were approved by veto-
     proof 329-to-99 and 70-to-29 votes, and there is every reason 
     to believe that the final version of the legislation will be 
     approved by both chambers by similar margins.
       Despite those drawbacks, the president should stand on 
     principle and veto the measure. It is a bad bill and it 
     should not become law.
                                                                    ____


                      [From Money, September 1995]

 Congress Aims at Lawyers and Ends Up Shooting Small Investors in the 
                                  Back

                   [By Frank Lalli, managing editor)

       Imagine a law that makes it much easier for crooks to 
     swindle investors and far more difficult for the victims to 
     sue to get their money back. A law so extreme that it would:
       Allow executives to deliberately lie about their firm's 
     prospects.
       Prohibit investors from suing the hired guns who assist a 
     fraudulent company, the so-called aiders and abettors, 
     including the accountants, brokers, lawyers and bankers.
       Ratify a court ruling that throws out any suit that isn't 
     filed within three years after the fraud took place, even if 
     no one discovers the crime until after that deadline.
       And potentially force investors and their lawyers who lose 
     a case to pay the winner's entire legal fees, if the judge 
     later rules that the suit was not justified.
       Sounds too radical to be real, doesn't it? Yet legislation 
     that would do all this and more has passed both the House and 
     Senate by overwhelming margins (325 to 99 and 69 to 30). It 
     is now headed for a conference committee where the relatively 
     minor conflicts are expected to be ironed out.
       The more responsible members of Congress who backed the 
     effort were looking for a way to discourage frivolous 
     securities suits. But several powerful financial lobbyists 
     and their pals ended up putting small investors in the 
     crosshairs instead. At a time when massive securities fraud 
     has become one of this country's growth industries, this law 
     would cheat victims out of whatever chance they may have of 
     getting their money back. For instance, had this law been on 
     the books thousands of fraud victims might not have collected 
     anything, rather than the billions they rightfully recovered 
     by suing the operators behind such notorious scams as Charles 
     Keating's $288 million savings and loan swindle, the $460 
     million Towers Financial fraud and Prudential Securities more 
     than $1.3 billion limited partnership hustle.
       Take Bill Ayers, 53, a Vietnam War vet who runs a 
     prosperous engineering consulting firm in Crystal City, Va. 
     In the mid-'80s, he plowed more than $1 million into bonds 
     issued by First Humanics, before realizing that the nursing-
     home chain was built on fraud. He wasn't alone. In all, at 
     least 4,000 people invested more than $80 million in 21 
     separate bond offers. Despite all that money, Humanics 
     declared bankruptcy in 1989, and the company head, Leo 
     (``Lee'') Sutliffe surfaced on his Florida yacht with the 
     nursing homes' former interior decorator.
       How did a sophisticated guy like Ayers get fooled? Simple, 
     really. He relied on the company projections, which turned 
     out to be phony, and on bond feasibility reports by Touche 
     Ross (now Deloitte & Touche), which were shoddy. ``In 
     reality,'' says Ayers, ``the accounting system was 
     nonexistent.'' For example, in one case, Touche Ross counted 
     closet space as patient rooms. Then to get the profit-per-
     room projections to actually work, at least one home slashed 
     its daily food budget to less than $3 per patient.
       When Ayers finally caught on five years later, he led a 
     successful class-action lawsuit that ultimately was settled 
     for $45 million from the accountants, lawyers and bank 
     trustees. Sutliffe, meanwhile, got 15 months in federal 
     prison for mail fraud and was fined $1 million.
       ``But I'd be out of luck under this new law,'' says Ayers. 
     Sutliffe's lies about the chain's profitability and the 
     bonds' 10 percent to 14 percent yields would have been 
     protected. His aiders and Abettors, principally Touche Ross, 
     also would have been shielded. And before Ayers could have 
     filed the class-action claim, he and his fellow plaintiffs 
     might have been forced to post a prohibitive multimillion-
     dollar bond to cover the defendants' legal fees just in case 
     the suit was later thrown out of court. What's worse, he 
     would not have been able to sue in any event because he did 
     not discover the fraud within the three-year time limit; in 
     fact, the statute of limitations would have run out on nearly 
     every Humanics' victim. As Ayers put it: ``This law will hurt 
     the people who've already been hurt by the frauds.''
       So how could such misguided legislation get this far? It's 
     an interesting tale that illustrates how thoroughly the 104th 
     Congress has become the Lobbyists' Congress. Ironically, one 
     of the original ideas behind this reform legislation last 
     year was to increase the three-year statute of limitations 
     imposed by an ill-advised Supreme Court decision. But after 
     the Republicans swept to power, major political contributors, 
     led by the Big Six accounting firms that are smarting over 
     billion-dollar judgments against them in the S&L scandals, 
     helped draft this legislation to attack what they called an 
     ``explosion'' of frivolous securities suits. They got their 
     way, despite the lack of evidence of any such explosion. The 
     true measure of indiscriminate litigiousness--the number of 
     companies sued each year--has remained relatively level for 
     the past 20 years. What's more, 80 percent of federal judges, 
     who are largely Reagan and Bush appointees, think frivolous 
     suits are a minor concern.
       In the final analysis, this legislation, which Sen. Alfonse 
     D'Amato (R-N.Y.), for one, has hailed as ``a big win for 
     American consumers,'' would actually be a grand slam for the 
     sleaziest elements of the financial industry at the expense 
     of ordinary investors.
       To make matters worse, this law will soon be followed by 
     other G.O.P.-backed reforms that aim to reduce the 
     information investors get while also curtailing securities 
     regulation. Former Securities and Exchange Commissioner Rick 
     Roberts, a Bush appointee, says he fears these initiatives 
     could undermine our securities markets. ``If you look at the 
     whole picture, Congress is taking away the right to bring an 
     action if there's a financial fraud; it's [cutting] the level 
     of information investors receive; and, third, [it] will try 
     to slash the SEC budget so there are no public remedies,'' 
     Roberts told Money's Ruth Simon. ``If I was an investor, I 
     would be getting very queasy about plugging my money into the 
     securities market.''
       But the financial fat cats haven't sung yet. There is still 
     time to stop these reckless efforts, starting with this 
     litigation reform bill. President Clinton's counsel, Abner 
     Mikva, told Money's Peter Keating: ``I think the President 
     would not sign it, [but] we use the word `veto' very 
     sparingly around here.'' If you would like to join Money in 
     urging the President to veto this litigation bill, please 
     send us your thoughts, and we will relay them with our 
     endorsement to the President and to key congressional 
     lawmakers. Write to: Protect Our Rights, Money, Room 32-38, 
     Time & Life Building, Rockefeller Center, New York, N.Y. 
     10020; or send electronic mail to: [email protected].
                                                                    ____


                  [From MONEY Magazine, October 1995]

 Let's Stop This Congress From Helping Crooks Cheat Investors Like You

       ``I never thought I would urge Bill Clinton to do anything 
     but retire,'' wrote Miles W. Haupt of Poulsbo, Wash. ``But 
     please add my name to your list of people requesting a 
     presidential veto of the small investor rip-off bill you 
     wrote about in September.'' Haupt is just one of more than 
     400 MONEY readers who have joined us in urging the President 
     to veto the litigation reform legislation steaming through 
     Congress. This misguided law would, in fact, help white-
     collar criminals get away with cheating investors. As I write 
     this on Sept. 1, we are receiving 60 letters of support a 
     day; we've gotten a grand total of six in opposition.
       The tone of the letters runs from dismay to disgust. The 
     largest number argue that the legislation would undermine 
     confidence in the securities markets. For example, Lester K. 
     Smith of De Kalb, Ill. wrote: ``For many years the government 
     has said that Americans do not save and invest enough. Now 
     they want to take away most of the legal safeguards which 
     allow us to save and invest without fear of being cheated.'' 
     Anastasia R. Touzet of Flora, Miss. concluded: ``Are we going 
     back to having to buy gold and silver coins and burying them 
     in the backyard? Is this the America everybody wants? I 
     don't.''
       Others focused on the special interests that helped draft 
     the bills, with Elizabeth J. Granfield of New Canaan, Conn., 
     for one, mocking the ``FOR SALE sign on the congressional 
     lawn.'' Bill Follek echoed that 

[[Page H 14044]]
     theme on the Internet: ``Congress is trying to flat out legalize white-
     collar crime; that's what this Congress means by reform.''
       But the angriest responses by far came from Republicans 
     denouncing their own party for pushing these bills. ``I am a 
     64-year-old lifelong Republican,'' wrote John A. Cline of 
     Virginia Beach, ``but I'm fed up with the party's assault on 
     the public. These acts will backfire. I very well may vote 
     for a third person or even for `what's his name' who's in 
     there now.'' Another lifelong Republican, 78-year-old George 
     W. Humm of New Richmond, Ohio, who spent 45 years in the 
     securities business and now arbitrates brokerage disputes, 
     said he was appalled and only hoped Clinton ``has the guts to 
     veto this monstrous bill.''
       Also, Thomas Denzler of New York City pointed out that 
     ``tort reform is not necessarily a bad idea'' and then 
     quickly added: ``But in the area of securities, it is a 
     stupid and venal idea. Shame on Robert Dole and Newt 
     Gingrich.'' And Donald J. Scott of Henderson, Nev. summed up 
     the tenor of the outcry in one sentence: ``The Contract with 
     America is going down the drain.''
       The legislation that swept through Congress this summer by 
     overwhelming margins (325-99 and 69-30) would do four things:
       Allow executives to deliberately lie about their firm's 
     prospects.
       Stop investors from suing hired guns who assist fraudulent 
     firms, including accountants, lawyers, brokers and bankers.
       Give investors just three years to sue, even if the fraud 
     isn't discovered until after that statute of limitations 
     expires.
       Make investors who lose a case potentially liable for the 
     winner's entire legal fees.
       As we noted in last month's column, lawmakers originally 
     intended to curb frivolous securities suits. But those good 
     intentions got picked clean by powerful lobbyists, led by 
     major accounting firms, who came swooping down on the bills 
     like hungry crows. The accounting firms and their pals want 
     to protect their wallets after being forced to pay billions 
     in fines and settlements in recent years for their part in 
     various scams--from the savings and loan scandals to the 
     notorious MiniScribe swindle.
       Operating through various political action committees and 
     other corporate fund-raising efforts, the major accounting 
     firms and their lobbyists contributed well over $3.3 million 
     to legislators' campaigns--50% more than they gave in '92. In 
     February, for instance, one so-called grass-roots operation 
     sent out software that let members customize letters to 
     selected lawmakers in ``a minute or two.'' In all, a quite 
     sophisticated and effective campaign.
       The two bills--HR 1058 and S 240--are now headed for a 
     conference committee to iron out minor conflicts. So at this 
     point, the only way this legislation will get stopped is if 
     the President vetoes it when it hits his desk, perhaps as 
     early as this month. (For more on other ill-advised 
     securities reforms, see ``How Washington Could Tip the Scales 
     Against Investors'' on page 122.)
       You can still make your voice heard. Send your thoughts to 
     us; we will relay them to the President and key lawmakers. 
     Write: Protect Our Rights, Money, Room 32-38, Time & Life 
     Building, Rockefeller Center, New York, N.Y. 10020; send E-
     mail to: [email protected].

                  [From Money Magazine, November 1995]

Your 1,000 Letters of Protest May Stop This Congress From Jeopardizing 
                               Investors

       You got through to the President. More than 1,000 money 
     readers so far have written us urging President Clinton to 
     veto this Congress' misguided securities litigation reform, 
     as this column proposed in September and October. Bette 
     Hammer of North Port, Fla. summed up your message: ``These 
     bills are legalizing white-collar crime.'' As we said we 
     would, we have been forwarding every one of your letters to 
     the President and to key Washington lawmakers.
       What will happen? Will the President veto the legislation? 
     Will lawmakers rework it into an acceptable form? Or will the 
     President back off to win favor with powerful business 
     interests, particularly those in California's Silicon Valley 
     that he may need so he can get re-elected?
       There were no clear answers as we wrote this column in 
     early October. But this much we do know: Your deep disgust 
     with this so-called reform is having a profound impact in 
     Washington. One source told Money Washington bureau chief 
     Tereas Tritch: ``To say `Money magazine' has become the 
     shorthand phrase for all the editorial opposition to these 
     bills.'' Furthermore, as we were preparing this column, the 
     President sent us the letter here expressing his serious 
     objections to the proposed law. It concludes with a promise: 
     ``As we seek to develop thoughtful, balanced reforms to our 
     nation's securities laws, I will keep your readers' views in 
     mind.''
       He would be wise to do that. There are a lot of votes at 
     stake. Take M.L. and A.H. Spratley of Chatsworth, Calif. They 
     describe themselves as ``registered Republican(s) for over 40 
     years who have never voted for a Democrat . . . but now have 
     no choice but to vote for Mr. Clinton in 1996.'' That is, 
     unless he fails to ``veto the outrageous bills.'' A 
     politically savvy source summed up the situation this way: 
     ``If the President vetoes this, he may win the vote of the 
     common man, but he may lose the money and support of high-
     tech that he needs to win in California.''
       Whatever the outcome, however, the struggle over the 
     securities litigation reform bills, H.R. 1058 and S. 240, 
     offers a picture-window view of how laws are being created by 
     the lobbyists and for the lobbyists in this 104th Congress. 
     And, more positively, it also provides a revealing peek at 
     the potentially enormous power that ordinary people have when 
     they find a way to amplify their voices, as they are doing on 
     this issue.
       A little background: Earlier this year, following a 
     multimillion-dollar lobbying effort by accountant, high-tech 
     and securities interests, the House and Senate passed 
     differing versions of securities litigation reform, each with 
     overwhelming bipartisan support (325 to 99, and 69 to 30). 
     Lawmakers said they wanted to discourage frivolous securities 
     suits. That is a fine goal. But as one moderating amendment 
     after another was voted down, the legislation the Republican 
     majority and the lobbyists produced went far beyond curbing 
     meritless lawsuits to all but legalizing securities fraud. 
     For example, though the Senate bill would have similar 
     effects, the House bill would definitely undercut investors 
     in at least two specific ways:)
       Defrauded investors could no longer collect damages from 
     company executives who tricked them out of their money by 
     deliberately lying about their firms' prospects.
       And if investors sued and lost, the judge could more easily 
     force them and their lawyers to pay the winners' entire legal 
     fees. As a consequence, a number of legitimate cases would 
     never get filed. Sen. Arlen Specter (R-Pa.), for one, 
     foresees ``a profoundly chilling effect on litigation brought 
     under the securities acts.''
       In addition, both bills failed to reinstate fundamental 
     investor protections stripped away by two recent, ill-advised 
     Supreme Court decisions:
       Defrauded investors can no longer sue hired guns who assist 
     a dishonest company, the firm's so-called aiders and 
     abettors, including accountants, brokers, lawyers and 
     bankers.
       And, worse, investors cannot sue at all if they fail to 
     file within three years after the fraud occurs, even when the 
     crime is not discovered until after the deadline.
       In his letter to Money, the President clearly rejects the 
     House version, which is more extreme than the Senate 
     alternative. ``I could not support that bill,'' he writes. 
     But he holds out hope that the Senate bill could get improved 
     enough for him to sign it into law. The horse-trading would 
     normally be done by a hand-picked committee of bipartisan 
     lawmakers from both houses. But partly because of your 1,000 
     letters of protest, the Republicans calling the procedural 
     shots are stalling on convening such a House-Senate 
     conference committee.
       Key Republicans, and some nervous lobbyists, fear that 
     House conservatives, notably Chris Cox (R-Calif.), would 
     insist on preserving a few of the House's most extreme 
     provisions in the committee's final compromise bill. If that 
     happened, odds would soar that the President would veto the 
     bill, and that many Senate Democrats and a few Republicans 
     who voted for the Senate version would switch over and 
     sustain the veto. Result: No securities litigation reform at 
     all.
       To avoid that scenario, Senate Republicans are trying to 
     convince House colleagues to accept the current Senate 
     version as the final bill. The President might veto that one 
     also. But chances are, he would not do that unless he was 
     sure enough Senate Democrats who supported that version--
     including Massachusetts' Edward Kennedy, New Jersey's Bill 
     Bradley and West Virginia's Jay Rockefeller--were willing to 
     flip-flop to sustain his veto.
       You can bet that the lobbyists who have been pressing for 
     years to protect their corporate clients from being sued for 
     fraud will have a lot to say about the Republican tactics and 
     the outcome. MONEY has learned that the big accountants, who 
     were shaken by the billion-dollar judgments against them in 
     the savings and loan scandal, would be more than satisfied to 
     get today's Senate bill. Securities industry lobbyists would 
     go along with it too; their hot-button issue is retaining the 
     truncated three-year statute of limitations on fraud suits. 
     Fortunately for them, Sen. Alfonse D'Amato (R-N.Y.), who has 
     accepted more than $800,000 in campaign contributions since 
     1989 from the securities industry, deleted a provision that 
     would have extended the time limit to five years. People 
     don't call him The Senator from Wall Street for nothing.
       However, only lobbying interests are demanding the House 
     bill's bullet-proof protection for lying executives. The 
     Senate language, though also ludicrously lax, does at least 
     allow for executives to get in trouble for statements 
     ``knowingly made with the purpose and actual intent of 
     misleading investors.'' The burden would be on the investors, 
     though; they would have to prove that the company official 
     actually intended to defraud them, rather than, say, simply 
     tried to entice them with recklessly inflated claims. If the 
     Senate version becomes law, Sen. Paul Sarbanes (D-Md) says, 
     ``A lot of very fast games by some very fast artists are 
     going to be played on the investing public.'' Still, a 
     Washington source says: ``Silicon Valley is insatiable. 
     Unless they're protected from fraud, they won't go along.''
       So what will the President do if today's Senate bill lands 
     on his desk as the final legislation? Or if he gets an only 
     slightly altered version?
       We can only hope that he stands up for small investors like 
     you by vetoing it. Anything less could undermine the public's 
     confidence in the financial markets. Why? Because while 
     Congress is trying to slam the 

[[Page H 14045]]
     courthouse door shut, it is also threatening to force securities cops 
     off the beat. Late in September, for example, the Senate 
     voted to cut the Securities and Exchange Commission's budget 
     by 10%, even though the reduction might well compel the SEC 
     to lay off enforcement agents.
       What should you do? Obviously, if you believe as we do that 
     today's securities litigation legislation foolishly 
     sacrifices investors' interests on the altar of radical 
     reform, keep writing to us. We will relay your thoughts to 
     the key lawmakers and to the President.
       Write to: Protect Our Rights. MONEY, Room 32-28, Time & 
     Life Building, Rockefeller Center, New York, N.Y. 10020. Send 
     a fax to: 212-522-0119. Or send E/mail to: 
     [email protected].
                                                                    ____


                  [From Money Magazine, December 1995]

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

       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:
       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 
     ruled 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. Accountants 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.
                                                                    ____

         Fraternal Order of Police, National Legislative Program,
                                Washington, DC, November 30, 1995.
     Hon. John D. Dingell,
     U.S. House of Representatives
     2328 Rayburn House Office Building
     Washington, D.C. 20515-2216
       Dear Congressman Dingell: The attached letter to President 
     Clinton reflects our strong opposition to the Securities 
     Litigation Reform Act (S240/HR1058).
       While the letter urges the President to veto the bill, we 
     haven't discarded the possibility that Congress will do the 
     right thing--that is, to protect investors from fraud, and, 
     where fraud occurs, protect the rights of investors to seek 
     redress.
       When a citizen needs protection, public safety personnel 
     are there. On behalf of the 270,000 rank and file police 
     officers who belong to the Fraternal Order of Police, we ask 
     for your help, and your protection, on this critically 
     important legislative issue.
           Sincerely,

                                          Gilbert G. Gallegos,

                                               National President,
     Fraternal Order of Police.
                                                                    ____

         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,
     Fraternal Order of Police.
                                                                    ____

         American Federation of Labor and Congress of Industrial 
           Organizations,
                                Washington, DC, November 29, 1995.
       Dear Representative: 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 
     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, Department of Legislation.
                                                                    ____

                                               National Council of


                                         Individual Investors,

                                Washington, DC, November 27, 1995.
     Hon. William J. Clinton,
     President of the United States,
     The White House, Washington, DC.
       Dear  Mr. President: We are writing to express  our 
     opposition to the recent draft conference report on the 
     Securities Litigation Reform legislation (H.R. 1058/S. 240). 
     We share the concerns of the bills' sponsors that truly 
     frivolous lawsuits harm all Americans. We believe the 
     framework for securities litigation should be improved to 
     more adequately protect the interests of individual 
     investors.
       Unfortunately, the draft conference report fails to treat 
     the American investor fairly. For example, as currently 
     drafted, the bill would have cost the victims of the Keating 
     savings and loan fraud over $200 million more than they 
     otherwise lost. Of particular concern to us are the failure 
     to increase the statute of limitations in securities fraud 
     cases, the ``safe harbor'' provisions that reduce the 
     standards for accuracy in forward looking statements, the 
     ``aiding and abetting'' provision which limits investors' 
     ability to recover fraud-created losses, and the ``most 
     adequate plaintiff'' provision naming the largest investor to 
     be the plaintiff.
       The National Council of Individual Investors (NCII) is an 
     independent, non-profit membership organization of individual 
     investors established to help them improve their investment 
     performance through education and advocacy.
       The fact that the draft conference report does not fairly 
     balance industry concerns with the needs of investors is best 
     demonstrated by its failure to extend the statute 

[[Page H 14046]]
     of limitations. Specifically, the draft conference report ignores 
     entirely the devastating practical effects of the U.S. 
     Supreme Court's 1991 Lampf decision. Although the Senate bill 
     as introduced included a provision to lengthen the statute of 
     limitations for investors to file securities fraud actions 
     from three years to five years, this provision was dropped.
       The result is that defrauded investors will continue to be 
     forced to file suit for redress within one year after 
     discovering the fraud, but in no case more than three years 
     after the fraud was committed. Virtually every law 
     enforcement official--including the SEC and state securities 
     administrators--supports a longer limitation period. The 
     failure to extend the limitation period will make it 
     virtually impossible for defrauded investors to recover in 
     cases of sophisticated and complex frauds that easily can 
     remain concealed for many years. For example, the current 
     statute of limitations for federal cases had to be waived in 
     the billion dollar fraud case against Prudential Securities, 
     Inc. to provide redress for the tens of thousands of victims 
     of securities fraud.
       Also of grave concern to us is the draft conference 
     report's safe harbor for forward looking statements. 
     Incredibly, the conference report prevents investors from 
     recovering losses created by reckless and even deliberately 
     fraudulent statements (including oral statements), so long as 
     the perpetrators accompany the fraudulent statements with 
     ``cautionary'' language saying actual results ``may differ.'' 
     Supporters of the expanded safe harbor claim that it will 
     result in an increased flow of market information. We 
     strongly favor increased investor access to information that 
     is truthful. Obviously however, investors are harmed, not 
     helped, by inaccurate information.
       Moreover, in a radical departure from existing law, the 
     draft conference report undermines companies' well-
     established ``duty to update'' information on their 
     performances. Under this doctrine, even if a statement or 
     prediction is true when made, there is a duty to correct such 
     a statement if it becomes materially misleading in light of 
     later events. The conference report takes language from the 
     House bill that was not in the Senate bill stating that 
     corporate insiders have no duty to update their predictions 
     even if they turn out to be false. Forcing investors to rely 
     on information known to be false is clearly unfair.
       Investors also need effective remedies when they become 
     victims of fraud. Particularly when swindlers have bankrupted 
     a company, investors must be able to look to those who 
     facilitated the fraud for compensation. Here again, the draft 
     conference report fails to protect individual investors. 
     Instead, it protects those who ``aid and abet'' frauds from 
     civil liability by letting the U.S. Supreme Court's decision 
     in the Central Bank case stand and from SEC action when their 
     conduct is reckless.
       We favor higher standards of ethics for those professionals 
     on whom investors rely for information and counsel. 
     Unfortunately, the draft conference report lowers those 
     standards and, by doing so, reduces the likelihood that 
     investors will have effective recourse when they are victims 
     of fraud.
       Finally, the conference report draft undermines the rights 
     of individual investors, particularly small ones, in class 
     action suits. Under current law, the court may name any 
     member of a class, to be a representative of the class, 
     regardless of whether he or she lost $1,000 or $1,000,000. 
     The draft conference report includes a provision from the 
     Senate bill defining the ``most adequate plaintiff'' as the 
     plaintiff with the ``largest financial interest'' in the 
     case. This provision compromises the rights of individual 
     investors by requiring the court to appoint the largest 
     investor, which in many instances will be an institutional 
     investor, whose interests may differ dramatically from the 
     small individual investor. For example, the largest investor 
     may be able to accept settlements with less than full 
     recoveries or may be more concerned with maintaining good 
     relations with corporate defendants.
       In the interest of protecting individual investors from 
     securities fraud, protecting the capital markets from 
     inaccurate information, and protecting the right to redress 
     for small investors, we strongly urge you to oppose, and if 
     necessary, veto this legislation.
           Sincerely,
                                                  Gerri Detweiler,
     Policy Director.
                                                                    ____

                                        The Association of the Bar


                                      of the City of New York,

                                  New York, NY, November 15, 1995.
     The President,
     The White House,
     Washington, DC.
       Dear Mr. President: We are writing on behalf of the 
     Association of the Bar of the City of New York to urge that 
     certain changes be made in the proposed ``Private Securities 
     Litigation Reform Act of 1995'', as it currently appears in 
     the form of a Draft Conference Report dated October 23, 1995.
       The Association's Committee on Securities Regulation and 
     Committee on Federal Courts have studied intensively the 
     proposed legislation in its various versions, have submitted 
     detailed reports to Committees of both the House and 
     Senate,\1\ and have testified before both the House and 
     Senate subcommittees. There is much about the proposed 
     legislation that is commendable. It takes significant steps 
     to redress abuses identified by Congress, including 
     prohibition of the payment of referral fees to brokers, of 
     the making of bonus payments to individual plaintiffs, and of 
     the payment of attorneys' fees from SEC disgorgement funds. 
     Our prior reports recommended these steps and also supported 
     the enhanced disclosure of settlement terms to class members 
     now contained in Section 102 and the proportionate liability 
     concept contained in Section 202. The Association opposed 
     other proposals (e.g., ``loser pays'' provisions, provisions 
     modifying the fraud on the market theory, and provisions 
     redefining the recklessness scienter standard) that were 
     wisely deleted from the proposed legislation.
     \1\ ``Report on Private Securities Litigation Reform 
     Legislation'' (S. 1976, the Dodd-Domenici Bill), the Record 
     of the Association of the Bar of the City of New York (the 
     ``Record''), Vol. 50, No. 1, Jan/Feb 1995 and ``Report on 
     Title II of H.R. 10 (HR 1058) ``Reform of Private Securities 
     Litigation,'' The Record, Vol. 50, No. 5, June, 1995.
---------------------------------------------------------------------------
       Nevertheless, the proposed legislation should not become 
     law unless certain provisions are changed: certain provisions 
     relating to forward-looking statements that are fundamentally 
     inconsistent with the objectives of the securities laws and 
     the interests of investors, and other provisions relating to 
     Rule 11 of the Federal Rules of Civil Procedure that would be 
     even more onerous than a prior version of Rule 11 that was 
     found to be unworkable and an unreasonable burden on an 
     already burdened civil justice system, and that reflect a 
     lack of balance in certain respects. In addition, if the 
     foregoing changes are made, there are certain other 
     provisions of the proposed legislation that we believe should 
     be changed in order to improve the quality of the bill.


                     provisions that require change

     Safe Harbor for Forward-Looking Statements
       The safe harbor provision is at the heart of our concern 
     about the proposed legislation. 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.
       Existing law distinguishes between projections, expressions 
     of belief and other ``soft'' information, and statements of 
     existing facts. The former are protected by the ``bespeaks 
     caution'' doctrine if they are sufficiently hedged with 
     concrete warnings tailored to the uncertainties that affect 
     the outcome predicted. But a knowingly false statement or 
     omission of material facts known today would not be protected 
     by hedging language. For example, a prediction about the 
     future success of a new drug could be protected by the 
     bespeaks caution doctrine if the uncertainties that attend 
     the development and introduction of new drugs are adequately 
     described. But a failure to disclose that the company's tests 
     to date were already known to have raised substantial 
     questions about the drug's safety or efficacy would not be 
     protected by cautionary language about the necessity and 
     difficulty of securing FDA approval.
       The proposed legislation does not reflect this distinction 
     between statements about or omissions of currently existing 
     facts and projections and other soft information. Its 
     definition of ``forward-looking statement'' now covers any 
     ``statement of the assumptions underlying or relating to [a 
     projection or other forward-looking statement] . . .'' 
     [proposed Section 13A(i) of the 1933 Act]. Assuming that the 
     standards for protection discussed in the next paragraph are 
     met, even a knowingly false statement of an assumption would 
     not give rise to liability. And even an omission to state, 
     for example, the results of the company's testing would not 
     give rise to liability (again, assuming the standards are 
     met) because the proposed legislation protects any ``omission 
     of a material fact . . .  with respect to any forward-looking 
     statement . . .'' [proposed Section 13A(c)(1)(A) of the 1933 
     Act].
       Proposed Section 13A(c)(1) of the 1933 Act provides that a 
     defendant is not liable with respect to a forward-looking 
     statement if and to the extent that either of the following 
     occur:
       1. The forward-looking statement is identified as such and 
     ``is accompanied by meaningful cautionary statements 
     identifying substantive factors that could cause actual 
     results to differ materially from those projected in the 
     forward-looking statement.'' or
       2. The plaintiff fails to prove that the defendant (or an 
     officer of a defendant corporation) had ``actual knowledge . 
     . . that it was an untrue statement of a material fact or 
     omission of a material fact. . . .''
       Accordingly, under the proposed legislation, even if the 
     plaintiff proves that the statement or omission of a 
     currently existing material fact was known to be false, the 
     existence of cautionary language would be enough to protect 
     that knowing falsehood.
       Protecting knowingly false statements or omissions of 
     material existing facts is not consistent with the purposes 
     of the federal securities laws and encourages exactly the 
     kind of conduct those laws were designed to eliminate. There 
     is no public policy objective that justifies protecting that 
     kind of conduct in our capital markets. This significant 
     problem can be eliminated by simply adding language to make 
     it clear that the safe harbor does not protect misstatements 
     or omissions of existing material facts that would otherwise 
     give rise to liability.
       Finally, the statutory language does not require the 
     cautionary statement to be addressed to the risks that are 
     foreseeable or 

[[Page H 14047]]
     most likely to occur. The approach in federal case law has been to 
     require ``[not just any cautionary language . . . [but] 
     disclaimers . . . [that] relate directly to that on which 
     investors claim to have relied.'' Kline v. First Western 
     Government Securities, Inc., 24 F.3d 480, 489 (3d Cir. 1994); 
     see, e.g., Harden v. Raffensperger, Hughes & Co., 65 F.3d 
     1392 (7th Cir. 1995); In re Worlds of Wonder Securities 
     Litigation, 35 F.3d 1407 (9th Cir. 1994); In re Donald J. 
     Trump Casino Securities Litigation, 7 F.3d 357, 371-72 (3d 
     Cir. 1933), cert. denied, 114 S. Ct. 1219 (1994) 
     (``cautionary statements must be substantive and tailored to 
     the specific future projections, estimates or opinions in the 
     prospectus which the plaintiffs challenge'').
       Section 13A(c)(1)(A)(i) should be revised to make it clear 
     that cautionary statements are only ``meaningful'' if they 
     identify the substantive factors that are most likely to 
     cause actual results to differ materially--that is, they 
     should be ``tailored'' to the real risks associated with the 
     forward-looking statement.
     Sanctions Against Lawyers and Parties
       Section 103 of the proposed legislation provides for 
     mandatory findings, upon the final adjudication of any case, 
     as to whether each party and counsel has complied with Rule 
     11 of the Federal Rules of Civil Procedure. If the rule has 
     been violated, under the proposed legislation the imposition 
     of sanctions against an offending party or lawyer is 
     mandatory. There is a presumption that an offending plaintiff 
     or plaintiff's lawyer must pay all the legal fees and costs 
     of the entire action, while an adverse finding against a 
     defendant or defendant's lawyer creates a presumption that 
     the defendant or defense counsel must pay the fees and costs 
     directly caused by the dereliction. There are a number of 
     serious problems with Section 103.
       In its current form, Rule 11 authorizes federal courts to 
     impose sanctions for pleadings, motions, and other steps that 
     are taken for the purpose of harassment, are frivolous, are 
     without evidentiary support, or are otherwise abusive. There 
     is neither a mandatory finding nor mandatory sanctions. Prior 
     to 1993, the rule provided for mandatory sanctions, but 
     findings were made only upon the motion of an opposing party. 
     The result was a large volume of collateral litigation. The 
     Rule was changed in 1993 upon the recommendation of a 
     nonpartisan advisory committee and after approval by the 
     Supreme Court and the Congress. Those amendments to Rule 
     11 were designed, among other things, to reduce the 
     collateral litigation by clarifying the rule's standards 
     and removing the requirement of mandatory findings and 
     mandatory sanctions will bring back a high level of 
     collateral litigation in this area, a burden which the 
     justice system can ill afford. Indeed, a major purpose of 
     the proposed legislation is to reduce litigation.
       Earlier drafts of the proposed legislation had included a 
     ``loser pays'' provision, which was rejected by the Congress. 
     The proposed legislation, by creating a presumption that the 
     sanctions for violation of Rule 11 in connection with a 
     plaintiff's complaint should be payment of all the legal fees 
     and costs of the action, takes a significant step back in the 
     direction of a ``loser pays'' rule.
       While Section 103 permits the court to relieve counsel or a 
     litigant from such draconian sanctions upon proof by the 
     person seeking relief that the award would impose an 
     unreasonable burden or would be unjust, or that the Rule 11 
     violation was de minimis, the threat that a hostile judge 
     would impose sanctions that could wipe out a lawyer or 
     litigant would have a chilling effect on even the most 
     meritorious suits.
       We believe that Rule 11 should remain in its current form, 
     which accords substantial discretion to the parties in 
     deciding whether to request sanctions and to the trial judge 
     in tailoring the sanctions to the wrongdoing.


                             other comments

     Pleading Requirements
       The pleading requirement regarding the defendants' state of 
     mind is more demanding in the proposed legislation than in S. 
     240. The proposed legislation would require that in a private 
     action for money damages where the plaintiff must show that 
     the defendant acted with a particular state of mind, ``the 
     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.''
       This language is derived from the case law developed in the 
     United States Court of Appeals for the Second Circuit, but it 
     incompletely sets forth the Second Circuit standard. See 
     Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124, 1128 (2d 
     Cir. 1994). On the Senate floor, Senator Specter offered an 
     amendment, which was adopted by the Senate and contained in 
     S. 240, that was designed to adopt the complete Second 
     Circuit standard used by the courts: a strong inference that 
     the defendant acted with the required state of mind may be 
     established either--
       (A) by alleging facts to show that the defendant had both 
     motive and opportunity to commit fraud; or
       (B) by alleging facts that constitute strong circumstantial 
     evidence of conscious misbehavior or recklessness by the 
     defendant.
       Without the complete Second Circuit standard, courts would 
     be given no guidance by the proposed legislation as to how a 
     plaintiff can plead the required state of mind without the 
     benefit of access to the defendants' thought processes and 
     internal documents. Moreover, elimination of the Specter 
     amendment might constitute evidence of legislative intent 
     that such standard may not be used by the courts for 
     guidance.
     Enforcement Actions Based On Aiding and Abetting
       The proposed legislation ineffectively deals with the 
     consequences of the Supreme Court's decision in the Central 
     Bank case, in which the Court held that there is no implied 
     civil liability for aiding and abetting fraudulent conduct in 
     violation of Rule 10b-5 promulgated under the 1934 Act. While 
     its holding related to private litigation, the reasoning of 
     the Court in Central Bank has led some to question the SEC's 
     authority to prosecute aiders and abettors.
       The proposed legislation does not restore aiding and 
     abetting liability in private actions. In cases where the 
     issuer has gone bankrupt, even though others have acted 
     knowingly and in spite of the proposed legislation's adoption 
     of proportionate liability, injured investors may be left 
     with no recourse under the federal securities laws. The 
     proposed legislation confirms the SEC's authority to pursue 
     aiding and abetting claims, which we support. But the SEC can 
     only prevail if the defendant has ``knowingly provide[ed] 
     substantial assistance'' to the primary wrongdoer, thereby 
     probably barring the Commission from pursuing aiders and 
     abettors who act recklessly.
       As stated in our Report on S. 1976, we believe that this 
     restriction on the ability of the Commission to act is 
     unwise. Some recent notorious cases have involved 
     professional whose reckless conduct permitted unscrupulous 
     but ultimately judgment-proof promoters to defraud the 
     investing public of hundreds of millions of dollars. Since 
     liability in SEC actions would be limited to aiders and 
     abettors who know of the fraudulent conduct and render 
     substantial assistance anyway, the legislation could provide 
     an incentive to professionals to close their eyes to red 
     flags suggesting the existence of fraud in order to avoid 
     obtaining actual knowledge.
           Very truly yours,
     Stephen J. Friedman,
       Chairman,
       Committee on Securities Regulation.
     Edwin G. Schallert,
       Chairman,
       Committee on Federal Courts.

  Mr. BLILEY. Mr. Speaker, I yield 2 minutes to the gentlewoman from 
California [Ms. Harman].
  (Ms. HARMAN asked and was given permission to revise and extend her 
remarks.)
  Ms. HARMAN. Mr. Speaker, I thank the gentleman from Virginia, Mr. 
Bliley, for yielding and commend him, my colleague and friend from 
Orange County, Mr. Cox, and the bipartisan group in both bodies who 
have worked so hard to bring the securities litigation reform 
conference report to the floor. I join them in strong support of the 
conference report and urge the House to vote for it.
  Early in March, the House began the process of enacting a much needed 
reform of our securities laws. Today's conference report builds on that 
effort and melds the best features of both the House and Senate-passed 
bills into a measure worthy of support.
  As many of my colleagues have already stated, the future of our 
Nation's competitive advantage lies in our ability to develop products 
that are on the cutting edge of technology and research. The business 
ventures which undertake such activities are among the fastest growing 
segments of our economy. Indeed, they are the pride of our economy and, 
for many of us, the pride of our districts and States.
  As a corporate lawyer, I am well aware that many of these business 
ventures are saddled by the costs and distractions of unwarranted and 
meritless lawsuits, filed when stock prices fluctuate for reasons 
beyond the control of business management. The consequences of these 
abusive suits are costly legal proceedings that, in virtually every 
10b-5 case, lead to settlements. Despite the absence of wrongdoing by 
management or management's advisers, corporations are essentially 
forced to pay large sums to avoid even larger expenses associated with 
putting on a legal defense.
  During our debate in March, for example, I cited several cases, 
including that of Sun Microsystems, the world's leading manufacture of 
computer work stations, Silicon Graphics of Mountain View, and Rykoff-
Sexton of Los Angeles. They are only a few of the many examples of the 
huge waste in resources defending, as well as prosecuting, meritless 
cases.
  Also targeted without regard to their actual culpability are deep 
pocket defendants, including accountants, underwriters, and individuals 
who may be 

[[Page H 14048]]
covered by insurance. As a consequence, the increased costs they suffer 
are passed along to businesses. Indeed, American companies pay higher 
premiums for director and officers insurance. One high-technology 
company had its premiums increased from $29,000 per year for $2 million 
in coverage when it was privately held, to $450,000 per year for $5 
million in coverage when it went public. Its Canadian competitor pays 
$40,000 for $4 million in coverage.
  It is critical to remember that investors are on both sides of these 
lawsuits. For one side, the return on their investments is reduced by 
the costs borne by the securities industry generally and the company in 
which they invested.
  On the other side, even where they are legitimate claims investors 
are inadequately compensated because, under the current scheme, lawyers 
have incentives to settle quickly and move on to the next case.
  These costs have consequences. Companies targeted because of their 
volatility of their stock prices have resources diverted from research 
and development, new product development, and market expansion. 
Millions of dollars that could be used for productive business purposes 
are consumed by wasteful lawsuits. Jobs are lost or never created.

  The conference report before us ends abusive practices and restores 
investor control over lawsuits. Most importantly, it removes the 
incentives for abusive lawsuits, and requires courts to sanction 
parties for frivolous or factually unsupported arguments and motions.
  Mr. Speaker, if our Nation is to continue to compete in the global 
market and to excel in those technologies that improve our living 
standard and that of the world, we need to reform our securities 
litigation system. We need to ensure that small high-technology and 
emerging growth companies can devote their resources to research and 
product development and promotion, instead of paying for the ill-gotten 
gains derived from abusive lawsuits.
  I encourage my colleagues to support H.R. 1058.
  Mr. MARKEY. Mr. Speaker, I yield 3 minutes to the gentleman from 
Michigan [Mr. Conyers], the ranking member on the Committee on the 
Judiciary.
  (Mr. CONYERS asked and was given permission to revise and extend his 
remarks.)
  Mr. CONYERS. Mr. Speaker, I thank the distinguished gentleman from 
Massachusetts for yielding me this time. As the distinguished gentleman 
from Michigan and dean of the House, Mr. Dingell, has pointed out, this 
is classic special interest legislation of, for, and by special 
interest lobbyists. Among the many outrageous provisions of the 
legislation is the 3-year statute of limitations. Unless a victim 
brings suit within 3 years, that victim can be forever barred, even if 
circumstances prevented his or her knowledge of the cause of action. 
That could leave those who would rob our seniors and other investors 
laughing all the way to the bank.
  Witness the Washington Public Power System nuclear reactor case. In 
that case, there was a highly complex scheme to defraud relying on 
borrowed money, obscured by delayed construction, and eventually 
resulting in a massive bond default. A 3-year statutory bar in that 
case could have let the wrongdoers go scott free, because the discovery 
of the actual wrongdoing took years.
  In the Prudential Securities case, in which over $1 billion was paid 
to bondholders, the settlement required an actual waiving of the 
statute of limitations. That tells us that, if anything, the current 
law is already too burdensome for victims. Making it even more 
restrictive, as this measure proposes, is an outrage.
  We also conveniently eliminate the civil RICO law that provides 
treble damages for securities fraud. It is a law that is continually 
relied on by our Nation's seniors and others who invest their life 
savings in retirement accounts only to have those accounts then stolen 
through fraud.
  We create a safe harbor for misleading corporate statements about 
future investments which lure unsuspecting investors; in effect it's a 
license to lie. We also create immunization for all those wonderful 
middlemen in securities fraud schemes--lawyers, accountants, and 
brokers--who represented more than half of the legal judgments in the 
Keating scandal. We also create a wonderful new trick in the law, a 
loser pays provision, so that a fraud victim that dares sue a big 
corporation could end up paying the corporation's legal bill.
  Then we eliminate joint and several liability, just to further 
prevent full recovery for even more fraud victims--that is if victims 
can still bring suit after the civil RICO and statutory limitation 
bars. This is the biggest rip-off that we are perpetrating.
  This is no longer about the crooks in the investment and securities 
fraud. This is about what we are going to do. Keep a straight face if 
you can, but I believe that the Members of this House can do a little 
better in protecting the needs of our seniors and average investors 
than that very distinguished other body.
  Mr. BLILEY. Mr. Speaker, I yield 3 minutes to the gentleman from Ohio 
[Mr. Oxley].
  Mr. OXLEY. Mr. Speaker, I thank the gentleman for yielding.
  Mr. Speaker, I rise in support of the conference report on securities 
litigation reform.
  Legislation to curb abusive securities-fraud lawsuits was approved by 
veto-proof margins by both Houses of Congress earlier in the year.
  The conference report before us takes a moderate approach to the 
problem of frivolous securities class-action lawsuits, also known as 
strike suits.
  I would not suggest for a moment that all shareholder lawsuits are 
frivolous. Certainly, real cases of fraud do occur.
  However, there is a collection of class-action lawyers out there who 
are filing meritless fraud suits against publicly traded companies, 
especially high-technology firms, whenever their stock prices fall.
  A relatively small group of lawyers is responsible for the bulk of 
these suits, characterized by professional plaintiffs and victims on 
retainer. They have used the securities laws to win billions from 
corporations and their accountants.
  Strike suits force American companies large and small to squander 
time and money defending unsubstantiated allegations. Even through 93 
percent of these cases never go on trial, each lawsuit cost an average 
of 1,000 hours of management time and almost $700,000 in legal defense 
fees. The average settlement costs a company $8.6 million.
  Meanwhile, defrauded mom and pop investors recover only 7 cents for 
every dollar lost in the market.
  The reforms under consideration will return the focus of securities 
laws to their original purpose--protecting investors and and helping 
actual victims of fraud.
  This legislation has been described as a boom for securities firms, 
accounting firms, and public companies. I might add that it is a boon 
for employees of those companies, as well as anyone who invests in them 
in the hope that their stock will go up, not down.
  These reforms are long overdue. They're good for American business, 
they're good for American competitiveness, and they're good for 
American investors.

                              {time}  1215

  Mr. MARKEY. Mr. Speaker, I yield 2 minutes to the gentleman from New 
Jersey [Mr. Torricelli].
  Mr. TORRICELLI. Mr. Speaker, I thank the gentleman for yielding me 
time. There are few Members of this House, Mr. Speaker, who represent 
more of the financial community than I do in the communities in my New 
Jersey district. And so when this House originally considered 
securities reform, I thought it would make a real contribution. I was 
wrong.
  There was an opportunity to deal with the abuses. Instead, we have 
raised an enormous new threat to the economy in the innovation and 
technology of our country. The American economy rests on the confidence 
of small family investors, retirees, and small business people who feel 
comfortable putting their life's savings in these markets, knowing if 
they are defrauded that they have recourse; that the little man and the 
big corporate leader have equal standing. Today, we 

[[Page H 14049]]
break that balance and we raise the prospect that America, which 
uniquely has brought all Americans into its investment markets, can 
lose.
  This can be done right. I rise, Mr. Speaker, in support of the motion 
to recommit, in the belief that this time, if we have a legitimate 
conference, where the decisions are made by the conferees and not 
before they are even named, we can have a better bill.
  The examples are clear. This is weaker than the original bill written 
by the other body. The language of ``knowingly made with a purpose and 
actual intent of misleading investors'' was dropped. The one protection 
we had for the little investor, for our retirees in our districts, for 
our little businessmen, now has no recourse.
  House language was developed to provide there be no duty on corporate 
insiders to update their predictions, even if they are found to be 
false, but that language survived.
  Mr. Speaker, I advise Members that this is an important enough 
provision to do it right. Vote for the motion to recommit, and if it 
fails, defeat the bill. Let us do it right.
  Mr. BLILEY. Mr. Speaker, I yield 3 minutes to the gentleman from 
Louisiana [Mr. Tauzin].
  Mr. TAUZIN. Mr. Speaker, I thank the chairman. Members, first of all, 
there is no motion to recommit. The Senate had that motion, and the 
Senate has already acted on the conference report. There will be a 
straight up or down vote on the conference report, and I rise in strong 
support of that vote in favor of the conference report.
  There is a reason why a majority of the Democrats joined the majority 
of the Republicans in this House in passing this bill earlier this 
year. There is a reason why so many Democrats from California, who live 
in the high-tech communities, rise in support of this bill in this 
conference report. It is because this bill finally addresses a legal 
system out of control.
  The gentlewoman from California, Ms. Harman, said it best. There are 
two sets of stockholder investors at risk here. On the one hand, there 
are stockholders who honestly believe they have been defrauded. This 
bill protects their right to sue and to collect if, in fact, there has 
been a fraud committed against them. There is another group of 
stockholders. They are the stockholders who are left with the company 
who gets sued. They are the stockholders that have to lose money 
because their company has to buy exorbitant insurance coverage to 
protect themselves from these strike suits.
  If Members do not think it is high, let me cite one high-tech company 
which was paying $29,000 a year for $2 million worth of coverage. When 
they went public, their insurance immediately jumped to $450,000 a year 
for a $5 million policy. Their counterpart in Canada, their 
competition, pays only $40,000 a year for a similar policy. It is 
because of our legal system gone awry that insurance costs have risen 
so high because of these strike suits.
  The investors in America's companies should not have to pay these 
exorbitant insurance costs and these strike suit legal costs. We should 
fix this system.
  If Members do not think it is broke, let me cite one good example 
from California. A company in California was strike sued immediately 
when their stock prices changed. A lawyer in California brought a suit 
saying, oh, there must have been fraud, the price of the stock dropped. 
And all the parties to the lawsuit, including the accountants in the 
office of the company, the board of directors, everyone had to go 
through an extensive period of a year of discovery.
  It got so expensive, that in the interest of the shareholders, who 
still were invested in the company, they agreed to settle at 10 cents 
on the dollar, where 90 percent of these cases are settled. And so they 
settled it, because it was cheaper to pay the lawyers to go away than 
it was to continue fighting the lawsuit.
  Guess what? Immediately thereafter another lawyer representing the 
stockholders who were still with the company brought another lawsuit 
against the company, alleging that it should not have paid anything to 
these lawyers for this frivolous lawsuit. They got sued for settling; 
they got sued in the firsthand. Danged if you do, danged if you don't.
  The law creates that kind of awful situation where stockholders get 
burned on both ends. The legal profession benefits. We need to fix this 
law so stockholders are protected, not lawyers. I urge adoption of the 
conference report.
  Mr. MARKEY. Mr. Speaker, can we get a recap of the time at this 
point?
  The SPEAKER pro tempore. The gentleman from Massachusetts [Mr. 
Markey] has 19\1/2\ minutes remaining and the gentleman from Virginia 
[Mr. Bliley] has 17 minutes remaining.
  Mr. MARKEY. Mr. Speaker, I yield 2 minutes to the gentleman from 
Oregon [Mr. Wyden], the Democratic nominee for the Senate.
  (Mr. WYDEN asked and was given permission to revise and extend his 
remarks.)
  Mr. WYDEN. Mr. Speaker, I thank my good friend from Massachusetts for 
his courtesy, and I would only say to my colleagues that there are two 
ways in America to reduce fraud and protect investors and consumers. We 
can do it through litigation, and under any circumstances this involves 
playing catchup ball after a fraud has been perpetrated; or we can 
detect and deter fraud up front, and that is what this legislation 
requires.
  For the first time in America, under this bill, accountants would be 
affirmatively required to search for, attempt to detect fraud, and 
report it to management. If management did not correct it, it would 
then have to be passed on to Government regulators.
  I am of the view, and we saw this under the leadership of the 
gentleman from Michigan [Mr. Dingell] that had this requirement been in 
effect in America, Charles Keating could have been stopped in his 
tracks cold. Because in the Keating case, the auditors had the goods. 
And instead of reporting the fraud, they simply shrunk away.
  The fraud reporting requirement in this legislation, in my view, 
provides an opportunity to change the psychology in corporate board 
rooms all across America. Because in the future, management will know 
that they cannot have an auditor in their pocket. They will know that 
an auditor has a legal responsibility to report fraud when this 
legislation is signed.
  So I ask my colleagues to support the bill. It provides a chance to 
try a fresh approach. Litigation is appropriate where consumers are 
fleeced, but let us do more to prevent fraud up front by requiring the 
auditors to blow the whistle. That is what this legislation requires, 
and I thank my good friend for yielding me the time.
  Mr. BLILEY. Mr. Speaker, I yield myself such time as I may consume to 
say that I want to applaud the gentleman from Oregon and thank him for 
all his good work in the fraud section of this bill.
  Mr. Speaker, I yield 2 minutes to the gentleman from Florida [Mr. 
Deutsch].
  Mr. DEUTSCH. Mr. Speaker, I think something that has been pointed out 
previously but deserves to be pointed out again, is that this is a 
bipartisan bill in terms of over 50 percent of the Democrats supporting 
it.
  In a sense, speaking to my Democratic colleagues, what I think is 
important for us to realize is that just because something is good for 
public corporations does not mean it is bad for America. I think that 
is something we need to understand as individuals, but also as a party 
as well.
  If we talk about the specifics of this legislation, what occurs out 
there in the real world is that when a stock goes down, a company gets 
sued automatically, essentially. And there are professional plaintiffs 
out there that do this. The value added to the economy, to investors, 
to everyone in America of those lawsuits is negative. The effects are 
negative. The effects hurt America.
  As a party, we care about jobs. As individuals and all Americans, we 
care about jobs. The effect of this, the existing system, is to hurt 
access to capital. Hurting access to capital hurts existing businesses, 
growth businesses, upstart businesses, which are really the major 
creators of wealth in new jobs in this country.
  Mr. Speaker, in an era where we are competing in a world economy, to 
keep this shackle on us, especially when the value we are getting in 
terms of this focus of preventing fraud, and I think, as the gentleman 
from Oregon pointed out, this legislation, in terms of the real world, 
the real effect, will have a positive effect. This is not throwing 

[[Page H 14050]]
out protections at all. That is a hyperbole that has been discussed on 
the floor.
  When we look at the specifics of what this legislation does, both in 
terms of affirmative duties of accountants, but in terms of SEC 
regulations as well, it is that investors' protection is not strong. 
What is cut out in this bill is frivolous lawsuits that have cost 
investors and cost our economy across America untold adverse effects 
over the years.
  Mr. Speaker, I rise today in support of the conference agreement on 
securities litigation reform.
  Yesterday, the Senate overwhelmingly endorsed this proinvestor bill 
and today, I am confident that the House will echo its support with 
equal strength. Quite honestly, it behooves me that anyone who 
understands this bill could oppose it. It is a simple decision, a 
decision between stimulating growth or promoting frivolous, mercenary 
law suits.
  For far too long, economic growth and shareholder returns have been 
stifled by a ring of legal shackles that pumps the pockets of a few at 
the expense of many.
  This bill will right a terrible injustice: the abusive practice of 
hiring professional plaintiffs and holding other shareholders as pawns 
in meritless securities lawsuits.
  This bill will restore power to real investors in securities 
lawsuits, changing the rules so that actual investors, not predatory 
lawyers, call the shots. This bill will give the Government tough new 
powers to prevent securities fraud and to punish such fraud when it 
does take place.
  South Florida is home to a great number of dynamic enterprises--
growth companies. For these growth companies, passage of H.R. 1058 is a 
high priority, because H.R. 1058 is a jobs bill. When this bill becomes 
law, the innovators in my district will be able to spend more resources 
and effort in creating new jobs, and waste less time confronting 
frivolous lawsuits.
  There's a false notion that this bill weakens the law. THe fact is, 
this bill strengthens the law. It will strengthen the integrity of the 
law. It will strengthen the people's respect for the law. It will do 
this by putting fraudulent legal schemes by predatory lawyers out of 
business. H.R. 1058 will strengthen our capabilities for combating 
fraud.
  This is bipartisan legislation. THe majority of Members of my party, 
the Democratic Party, in this Chamber today will vote for this 
legislation. Progressive Democrats who also may be called New 
Democrats--Democrats who want innovative businesses to flourish and 
create jobs--support this bill.
  Mr. Speaker, America's capital markets grew to be the strongest in 
the world in no small part because of our legal system's honesty and 
integrity. Reforming securities litigation laws will correct an 
unfortunate flaw in our system and give it the full strength we need to 
stay competitive in the world. For the good of every American who 
invests in stock or a pension plan, I urge my colleagues to vote for 
this bill, and I urge the President to sign it.
  Mr. MARKEY. Mr. Speaker, I yield 3 minutes to the gentleman from 
California [Mr. Berman].
  (Mr. BERMAN asked and was given permission to revise and extend his 
remarks.)
  Mr. BERMAN. Mr. Speaker, the time will not allow me to tell the story 
of Z Best Carpet. I would need 10 minutes, but I will do the best I 
can, because I understand the motivation for this bill. I understand 
the problems that the proponents of this bill raise, but I would be 
interested, and maybe the gentleman from California [Mr. Cox], at some 
point, or one of the other proponents of the bill, could explain for me 
why they needed to go as far as they went.
  Why did the opponents of this want to immunize from liability a 
company that, with full knowledge, and with fraudulent intent, lies 
about their future prospects? Not makes a mistake, not makes a 
prediction which turns out to be wrong, not even is reckless in making 
a suggestion, but with full knowledge of the facts decides to lie about 
the future in order to attract investors, in order to drive up the 
stock, and in order to make ill-gotten gain.
  That provision goes too far in this bill, and that alone should force 
the Members of this body to reject this conference report.
  Z Best Carpet, a company started by a 20-year-old, just went 
bankrupt, after a guy who had a total con job, pretending to restore 
carpets, getting lawyers and accountants to certify what he was doing 
was real, having a public offering, putting out press releases with 
false statements, attracting tens of millions of dollars of investors, 
whose money was lost completely by virtue of this totally empty 
business. If this bill were in place with this provision that immunizes 
fraudulent statements about future predictions, where he would predict 
huge earnings based on the total phony statement of revenues that never 
existed, all the people who were involved in that future prediction 
would be immunized from liability.
  The safe-harbor provisions and the recitals of potential problems in 
the future do not do anything to take away from the fact that he 
decided to put something in writing which he knew to be false, and that 
is wrong.

                              {time}  1230

  What happened here was a settlement was made. The investors recovered 
55 cents on the dollar. If this bill were in place, they would have 
gotten nothing. I do not think that is right. I think in trying to deal 
with a serious problem, my colleagues have gone too far. I do hope that 
the body rejects this particular proposal.
  Mr. COX of California. Mr. Speaker, will the gentleman yield?
  Mr. BERMAN. I yield to the gentleman from California, but I will 
respond to the response, if the gentleman will make it short.
  Mr. COX of California. Mr. Speaker, I am not sure I understood the 
qualification, but if the gentleman is yielding to me I would be 
pleased to respond to the question that he earlier raised.
  Mr. Speaker, I have before me a letter from CALPERS, the California 
Public Employees Retirement System, which as you know is the largest 
publicly funded retirement system in the country.
  The SPEAKER pro tempore (Mr. LaHood). The time of the gentleman from 
California has expired.
  Mr. BLILEY. Mr. Speaker, I yield 1 minute to the gentleman from 
California (Mr. Cox).
  Mr. COX of California. Mr. Speaker, this is a comment by CALPERS, by 
our publicly funded retirement system in California, which takes care 
of the retirement assets of all of our workers. They are very concerned 
about the status quo, because right now there is not sufficient 
disclosure for them to make decisions about how to invest. They want to 
make sure that when a company tries to help them with what is called 
forward-looking information, that they do not risk a lawsuit.
  Mr. Speaker, it is impossible, if we are being fair in our definition 
of ``fraud,'' to say that when we are talking about future events 
someone did it fraudulently. Existing law requires that there be 
statements.
  Mr. BERMAN. Mr. Speaker, will the gentleman yield?
  Mr. COX of California. I yield to the gentleman from California.
  Mr. BERMAN. Mr. Speaker, I want to protect forward-looking statements 
and I want to protect that ability to attract investors. I am not 
asking that they be necessarily accurate all the time, or right, or 
correct. I am saying that when they know what they are saying in the 
future that their nonexistent revenue will grow by 30 percent each 
year, that that should not be immunized.
  Mr. MARKEY. Mr. Chairman, I yield myself 3 minutes.
  Mr. Speaker, the first and perhaps the most important overall 
criticism of this bill is it severely undercuts the deterrent function 
of the laws against fraud. Those are the first protections that the 
marketplace provides to investors to induce them into the marketplace 
so that, in fact, there are robust, long-term levels of investment in 
our economy.
  Let me give the specific concerns which we have about this bill. It 
is absolutely unbelievable. First, the new safe harbor provision. We 
should call it a safe ocean. By the way, the SEC is going to need a 
two-ocean navy to police this safe ocean which is constructed in this 
bill.
  It confers immunity from liability even for intentionally fraudulent 
forward-looking statements, intentional written misrepresentations 
about forward-looking information. Even if for the express purpose of 
defrauding investors, it may be entirely immunized from liability as 
long as they are accompanied by meaningful cautionary language.
  Second, the new safe harbor, safe ocean, may rescind the duty to 
update past projections, even if a company learns that they were false 
and misleading. A company's duty to provide 

[[Page H 14051]]
updated information if it learns that a previous forward-looking 
statement is false may be eliminated based on the language in the draft 
conference report.
  If so, the company would be free to leave false information in the 
public domain and to withhold, to withhold accurate, updated 
information even if its purpose is to deceive or mislead investors.
  Third, a new provision invites the courts to legalize reckless 
conduct. The conference report fails to codify the recklessness 
standard used by the Federal courts and expressly instructs the courts 
not to infer from the legislative history of this bill any 
congressional intent to endorse recklessness as a liability standard.
  The conference report, furthermore, eliminates the SEC's ability to 
prosecute those who recklessly aid and abet fraud. The conference 
report fails to restore any form of civil liability for those who aid 
and abet fraud.
  The conference report fails to restore a reasonable standard of 
limitations, only 3 years. It took years, many more than 3 years, to 
find out what frauds were perpetrated under Garn-St Germain that passed 
this House in 1981. We were learning in 1987 and 1988 and 1989. We are 
telling poor, innocent investors if they cannot find out what these 
malefactors are engaged in in 3 years, we are sorry, they have lost 
their life savings. That is wrong. It is an unreasonable number and the 
S&L crisis instructs us that it is wrong. We should do better by the 
investors of this country.
  The SPEAKER pro tempore. The gentleman from Virginia (Mr. Bliley) has 
14 minutes remaining, and the gentleman from Massachusetts (Mr. Markey) 
has 11\1/2\ minutes remaining.
  Mr. BLILEY. Do we have the right to close, Mr. Speaker?
  The SPEAKER pro tempore. The gentleman is correct.
  Mr. BLILEY. Mr. Speaker, I yield 2 minutes to the gentlewoman from 
California (Ms. Eshoo).
  Ms. ESHOO. Mr. Speaker, I rise in strong support of the conference 
report on securities litigation reform and as a member of the 
conference committee, I urge my colleagues to vote in favor of this 
revised and improved bipartisan legislation.
  Anyone looking at the growing number of strike suits being brought 
against American companies today can only conclude that our legal 
system needs repair. This conference report provides the necessary 
reforms to address and remedy these problems.
  As the Representative from Silicon Valley, I know that businesses in 
my region place themselves in of two categories: those that have been 
sued for securities fraud and those that will be. The vast majority 
have already been sued--resulting in hundreds of millions of dollars in 
needless expenses.
  This legislation provides companies with relief, but not a blank 
check. The right of investors to sue in cases of actual fraud is 
protected by this bill.
  It does this by eliminating fishing expedition lawsuits, ending the 
use of professional plaintiffs, stopping the practice of offering 
bounties to plaintiffs for signing their names to documents, and 
allowing companies to make forward-looking statements without liability 
as long as these statements are accompanied by specific warnings that 
their predictions may not come true.
  Further, this legislation has evolved greatly since we considered 
this issue last March. On nearly every point of contention, it has been 
modified to meet the concerns of the Senate, the SEC, and the 
administration to protect the consumers from actual fraud.
  Mr. Speaker, the securities litigation reform conference report is 
good for investors and businesses alike.
  I urge all my colleagues to support this important bipartisan 
legislation.
  Mr. MARKEY. Mr. Speaker, I yield myself 30 seconds.
  Mr. Speaker, I rise to compliment the work of Timothy Forde and 
Consuela Washington, who were the two counsels for the minority who 
worked on this bill throughout the course of this year. They developed 
an alternative bill which dealt fully with all of the frivolous 
lawsuits that had been brought over the past decade and would have 
cured the problem. I just want to recognize their good work at this 
time, and also mention the work of Jeffrey Duncan and Alan Roth and 
their help on this.
  Mr. Speaker, I yield 2 minutes to the gentleman from Pennsylvania 
(Mr. KLINK).
  Mr. KLINK. Mr. Speaker, a little earlier this afternoon, a previous 
speaker repeated a myth that I think is widely characterized, or could 
be widely characterized, as a scare tactic. Sometimes we are prone to 
repeat things over and over again in hopes that either we ourselves 
start to believe them, or that our colleagues will be scared into 
believing them.
  Mr. Speaker, what that speaker said is that lawsuits automatically 
are filed when a stock price falls 10 or 20 percent, and that is just 
simply not the truth.
  Three recent detailed studies document the falseness of this 
argument. In one, a comparison of the number of stock price drops of 10 
percent or more in 1 day between the years of 1986 and 1992, and the 
number of suits filed against those companies whose stocks dropped 
revealed that only 2.8 percent of those companies ever were sued.
  The second study was done by Baruch Lev of the University of 
California at Berkeley. It was completed in August 1994; in it, a test 
sample of 589 cases of large stock price declines following a quarter 
earnings announcement. Extensive research by Lev has revealed that only 
20 lawsuits amounting to 3.4 percent of the sample ever were sued.
  As Lev noted in his finding, it was hardly consistent with the 
widespread belief that shareholder litigations are automatically 
triggered by large stock price declines.
  Lev's study was consistent with a third study by academics at the 
University of Chicago. This was back in March 1993. That study took in 
51 companies that sustained 20 percent or greater declines in earnings 
or sales and that revealed that only one company was the target of a 
shareholder lawsuit.
  So, I will say, my colleagues can keep repeating these myths, they 
can hope that they can convince themselves and their colleagues to 
believe them, but the fact of the matter is when we look at these 
academic studies that it is simply not true, and this conference report 
should be voted down.
  Mr. BLILEY. Mr. Speaker, I yield 2 minutes to the gentleman from 
Washington (Mr. White).
  Mr. WHITE. Mr. Speaker, I would like to just respond to the previous 
speaker, because I can tell my colleagues that 11 months ago I was a 
lawyer in private practice in Seattle. Anybody who has been practicing 
law, or involved in this area in the real world recently, knows for 
sure that this stuff happens.
  Mr. Speaker, I can tell my colleagues that there are lawyers in 
Seattle, WA, who have computer hookups into the stock market and who 
look at those carefully to decide who to sue. I can tell my colleagues 
that, frankly, we are in a system right now that anybody who is 
familiar with it knows it is badly broken and needs to be fixed.
  Mr. Speaker, let me say a couple of words about why this system as it 
works now is so bad, because it is really counterproductive to the very 
goals we are trying to achieve. The current system prevents people from 
disclosing information investors would like to have because they can 
never be sure that they will not be sued for it.
  It hurts small companies, because those are the ones that have 
volatile stock prices. Those are just the companies that need to 
continue to prosper and who can least afford the cost of a big lawsuit. 
The worst thing, the thing that bothers me most about the current state 
of the law, is that it is turned into an elaborate game of chance, not 
based on right or wrong or justice or injustice, but based on a system 
that allows lawyers to extort companies and force them to go through a 
long procedure, even if they are totally innocent, before they can be 
proven to be innocent.
  Mr. Speaker, this law is badly needed. It frankly does not go far 
enough, but it is a step in the right direction. I urge all my 
colleagues to support the conference report.
  Mr. MARKEY. Mr. Speaker, I yield 3 minutes to the gentleman from 
Texas (Mr. Gonzalez), the ranking minority member of the Committee on 
Banking and Financial Services. 

[[Page H 14052]]

  Mr. GONZALEZ. Mr. Speaker, as has been emphasized at different times 
during this last year, particularly, legislation that jeopardizes the 
rights of honest investors will have a number of very negative 
consequences, of course.
  First, creating substantial obstacles to legitimate lawsuits will 
significantly diminish deterrence, arguably the most important function 
of the antifraud provisions of the securities laws. Of course, through 
the years, and my membership on the Committee on Banking and Financial 
Services since I came here in 1961, we have faced this repeatedly.
  Second, if deterrence is, in fact, diminished, then we are likely to 
see a significant increase in deceitful and dishonest activity in the 
market. We have witnessed that in the past.

                              {time}  1245

  It is human nature to do what you can and get away with it. If people 
know that they are unlikely to be caught or to be held accountable for 
their actions, the temptation is for many to push the frontiers of what 
they can get away with. This is especially true when the rewards can be 
immense. Indeed, this is why each of us supports reforms of the 
procedures governing securities class action suits.
  The argument that plaintiffs' lawyers will push the frontiers of what 
they can get away with if there are not proper mechanisms to hold them 
accountable for their actions does have merit. But plaintiffs' lawyers 
are not endowed with any qualities that we know of that makes them 
succumb to temptation more quickly or frequently than anyone else. And 
nowhere are the rewards as tempting as they are in the field of 
securities investments where companies, corporate executives, and 
financial professionals can potentially make immense profits merely by 
shading or withholding the truth.
  In fact, there have been so many massive financial frauds and 
scandals related to securities in recent years that they can be 
recalled by reference to a single name, Prudential, Salomon Brothers, 
Kidder Peabody, Drexel, the Washington Public Power Supply System, the 
famous or infamous Lincoln Savings, PharMor, Miniscribe, Centrust. All 
of these loom large in our memories or some of the older ones. To that 
list we can now add Orange County, Barings, Daiwa, New Era, and the 
Common Fund. It is remarkable that investor confidence in our markets 
has not been shaken by these events.
  Mr. BLILEY. Mr. Speaker, I yield 2 minutes to the gentlewoman from 
California [Ms. Lofgren].
  (Ms. LOFGREN asked and was given permission to revise and extend her 
remarks.)
  Ms. LOFGREN. Mr. Speaker, I rise in support of this legislation. When 
the bill came before the House last March, I was actually torn. The 
legislation brought before us then overreacted to what was a very real 
problem.
  I represent an area in California, Silicon Valley, that is home to 
numerous high-technology companies. These firms are high-growth, 
entrepreneurial companies with cutting edge new ideas. They are 
companies of the future. Due to the changeable nature of high-
technology industries, stock prices for enterprises can be somewhat 
volatile.
  Current law allows these price fluctuations to form the basis for 
lawsuits even when no real fraud has occurred. Our local newspaper has 
found that 19 of the 30 largest companies in Silicon Valley have fallen 
prey to securities suits. Most of the others expect to be sued soon. 
Many high-technology companies accordingly now refuse to provide any 
information about their future performance in order to avoid liability, 
which deprives all investors of important information.
  This is a problem for our economy. Although I was concerned about the 
original House version of this bill, I am very pleased with the 
conference report, as it resolves most of the issues I saw at that 
time.
  Unlike the House passed bill, the conference bill has no loser-pay 
provision, preserves joint and several liability, adopts fair changes 
to pleading requirements, which are already the law in one Federal 
circuit, and codifies what I believe is a reasonable safe harbor 
provision that has already been endorsed by the Securities and Exchange 
Commission.
  Mr. Speaker, I have opposed most of the extreme litigation reform 
measures pushed through this Congress, but this bill is quite different 
from those other proposals.
  Let me address one final point. This bill is not perfect. It does not 
address some issues that could have been addressed such as the issues 
of the statute of limitations and civil liability for aiding and 
abetting fraud. Those problems, if they are problems, can, if need be, 
be dealt with in subsequent legislation. But this bill does not create 
those problems. It does not solve those problems. It is neutral on 
those problems and is not a valid reason for not endorsing this very 
moderate, sensible bill that I hope our President will sign. I urge my 
colleagues to vote for it.
  Mr. MARKEY. Mr. Speaker, I reserve the balance of my time.
  Mr. BLILEY. Mr. Speaker, I yield 2 minutes to the gentleman from 
Massachusetts [Mr. Blute].
  Mr. BLUTE. Mr. Speaker, I thank the distinguished gentleman for 
yielding time to me.
  Mr. Speaker, the engine of economic growth in this country is under 
assault from some lawyers who give the term ``gone fishing'' an 
entirely new meaning. These lawyers are trolling for easy money won 
from vulnerable companies whose only crime is being subject to a 
volatile market.
  Small entrepreneurial high tech companies in Massachusetts are being 
hit with strike suits which seek damages for a loss in stock value. 
Since going public, recently a number of companies in Massachusetts 
have been subject to not just one but two and three such suits. One was 
filed less than 24 hours after this company disclosed quarterly 
earnings lower than the previous quarter.
  This is not unusual. Hundreds of suits are filed by lawyers and 
professional plaintiffs who prey on small high tech firms because their 
stocks tend to be more volatile and they are more inclined to settle. 
In fact, between 1989 and 1993, 61 percent of all strike suits were 
brought against companies with less than $500 million in annual sales 
and 33 percent against companies with less than $100 million in sales.
  The problem is critical because these high tech companies are the 
innovators where many of our cutting edge technologies are being 
discovered. Biotechnology companies, for example, in my district are 
developing treatments for cancer and AIDS. Strike suits are 
jeopardizing the development of those life saving products by holding 
companies hostage and forcing them to divert important resources to 
fighting these suits.
  I want to commend the gentleman from Virginia [Mr. Bliley], and the 
gentleman from Texas [Mr. Fields], for bringing this bill forward. I 
think it is a step in the right direction. It is going to help our 
country. It is going to help our entrepreneurial sector. I think it 
should be passed, and I think it should be supported by everyone in 
this House.
  Mr. BLILEY. Mr. Speaker, I yield myself 30 seconds.
  Mr. Speaker, first of all, I would like to thank the long and hard 
efforts of the majority staff, David Cavicke, Linda Rich, Brian 
McCullough and Ben Cohen.

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