[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.
____________________