[Congressional Record Volume 141, Number 206 (Thursday, December 21, 1995)]
[Senate]
[Pages S19034-S19037]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 SECURITIES LITIGATION REFORM ACT--VETO

  Mr. BENNETT. Mr. President, I understand the veto message with 
respect to the securities litigation bill has arrived from the House.
  The PRESIDING OFFICER. The Senator is correct. 
  
[[Page S19035]]

  Mr. BENNETT. I ask unanimous consent that the veto message be 
considered as having been read and it be printed in the Record and 
spread in full upon the Journal.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The PRESIDING OFFICER laid before the Senate a message from the 
President of the United States to the House of Representatives, as 
follows:

To the House of Representatives:
  I am returning herewith without my approval H.R. 1058, the ``Private 
Securities Litigation Reform Act of 1995.'' This legislation is 
designed to reform portions of the Federal securities laws to end 
frivolous lawsuits and to ensure that investors receive the best 
possible information by reducing the litigation risk to companies that 
make forward-looking statements.
  I support those goals. Indeed, I made clear my willingness to support 
the bill passed by the Senate with appropriate ``safe harbor'' 
language, even though it did not include certain provisions that I 
favor--such as enhanced provisions with respect to joint and several 
liability, aider and abettor liability, and statute of limitations.
  I am not however, willing to sign legislation that will have the 
effect of closing the courthouse door on investors who have legitimate 
claims. Those who are the victims of fraud should have recourse in our 
courts. Unfortunately, changes made in this bill during conference 
could well prevent that.
  This country is blessed by strong and vibrant markets and I believe 
that they function best when corporations can raise capital by 
providing investors with their best good-faith assessment of future 
prospects, without fear of costly, unwarranted litigation. But I also 
know that our markets are as strong and effective as they are because 
they operate--and are seen to operate--with integrity. I believe that 
this bill, as modified in conference, could erode this crucial basis of 
our markets' strength.
  Specifically, I object to the following elements of this bill. First, 
I believe that the pleading requirements of the Conference Report with 
regard to a defendant's state of mind impose an unacceptable procedural 
hurdle to meritorious claims being heard in Federal courts. I am 
prepared to support the high pleading standard of the U.S. Court of 
Appeals for the Second Circuit--the highest pleading standard of any 
Federal circuit court. But the conferees make crystal clear in the 
Statement of Managers their intent to raise the standard even beyond 
that level. I am not prepared to accept that.
  The conferees deleted an amendment offered by Senator Specter and 
adopted by the Senate that specifically incorporated Second Circuit 
case law with respect to pleading a claim of fraud. Then they 
specifically indicated that they were not adopting Second Circuit case 
law but instead intended to ``strengthen'' the existing pleading 
requirements of the Second Circuit. All this shows that the conferees 
meant to erect a higher barrier to bringing suit than any now 
existing--one so high that even the most aggrieved investors with the 
most painful losses may get tossed out of court before they have a 
chance to prove their case.
  Second, while I support the language of the Conference Report 
providing a ``safe harbor'' for companies that include meaningful 
cautionary statements in their projections of earnings, the Statement 
of Managers--which will be used by courts as a guide to the intent of 
the Congress with regard to the meaning of the bill--attempts to weaken 
the cautionary language that the bill itself requires. Once again, the 
end result may be that investors find their legitimate claims unfairly 
dismissed.
  Third, the Conference Report's Rule 11 provision lacks balance, 
treating plaintiffs more harshly than defendants in a manner that comes 
too close to the ``loser pays'' standard I oppose.
  I want to sign a good bill and I am prepared to do exactly that if 
the Congress will make the following changes to this legislation: 
first, adopt the Second Circuit pleading standards and reinsert the 
Specter amendment into the bill. I will support a bill that submits all 
plaintiffs to the tough pleading standards of the Second Circuit, but I 
am not prepared to go beyond that. Second, remove the language in the 
Statement of Managers that waters down the nature of the cautionary 
language that must be included to make the safe harbor safe. Third, 
restore the Rule 11 language to that of the Senate bill.

  While it is true that innocent companies are hurt by frivolous 
lawsuits and that valuable information may be withheld from investors 
when companies fear the risk of such suits, it is also true that there 
are innocent investors who are defrauded and who are able to recover 
their losses only because they can go to court. It is appropriate to 
change the law to ensure that companies can make reasonable statements 
and future projections without getting sued every time earnings turn 
out to be lower than expected or stock prices drop. But it is not 
appropriate to erect procedural barriers that will keep wrongly injured 
persons from having their day in court.
  I ask the Congress to send me a bill promptly that will put an end to 
litigation abuses while still protecting the legitimate rights of 
ordinary investors. I will sign such a bill as soon as it reaches my 
desk.
                                                  William J. Clinton.  
  The White House, December 19, 1995.

  The Senate proceeded to reconsider the bill (H.R. 1058) to reform 
Federal securities litigation, and for other purposes, returned to the 
House by the President on December 19, 1995, with his objections, and 
passed by the House of Representatives, on reconsideration, on December 
20, 1995.
  The question is, Shall the bill pass, the objection of the President 
of the United States to the contrary notwithstanding? Who yields time?
  Mr. BENNETT. Mr. President, we had a long, I think, careful and 
reasoned debate on this issue. It passed the Senate by a very 
substantial margin, indeed by a margin, which, if it had been the final 
vote, would have been sufficient to override a Presidential veto.
  I am not sure what purpose will be served by our spending a great 
deal of time repeating the arguments that were made, but I am sure we 
will. The procedure and tradition in the Senate being what it is, we 
will go over this one more time.

  I believe the President has made a mistake in vetoing this bill. I 
believe the House of Representatives has made the right decision in 
overriding the veto. I know the bill has been characterized as an issue 
between investors and corporations. The President, in his veto message, 
indicated that he was going to strike a blow for the investors.
  Mr. President, I need to point out once more, perhaps, that the 
owners of corporations are the investors, and anything which damages 
the economic health of the corporation damages the investors who place 
their money in that corporation. Anything that prohibits the 
corporations' ability to earn a return on investment damages the 
investors who are seeking that return on investment.
  I find it difficult to understand, therefore, those who say that we 
are going to help investors by supporting activities which damage the 
profitability of the corporation in which the investors have placed 
their money.
  The key provisions of this bill are proinvestor provisions. I think 
the most significant provision of this bill is the one that allows the 
investors to determine who will prosecute the lawsuit when a class 
action suit is brought. Let me illustrate the importance of that, Mr. 
President, with an example that is admittedly overdrawn, but we need to 
overdraw these issues because some people do not seem to understand 
them when they are not overdrawn.
  Let us assume that the ABC Corp. has 100 shares outstanding; let us 
assume that one investor has purchased one of those shares, and another 
investor has purchased the other 99. When a class action suit is 
brought, it is brought on behalf of all members of the class. In the 
circumstance I have just described, there are two members of the 
class--the class being the investors: One who has one share, the other 
who has 99 shares. If a class action suit is brought by the investor 
who has one share and the effect of that class action suit is to damage 
the ability of that corporation to perform, who is most damaged by the 
suit? It is the shareholder who owns the other 99 shares.
  Yet the way the thing is structured now, the shareholder who owns one 
share can bring a class action suit on behalf of the entire class, and 
if he gets 

[[Page S19036]]
to the courtroom first, he is determined to be the lead plaintiff in 
this suit. Now, the investor who owns the 99 shares sits down with him 
and says, ``Sam, this is stupid. This is going to damage the 
corporation. This is going to damage all of us.''
  Sam smiles sweetly at Joe and says, ``Joe, what is it worth to you to 
get me to drop my suit?''
  Joe says, ``Well, Sam, you know you will lose if we get in court.''
  And Sam says ``Joe, that's not the point. What's it worth to you?''
  Sam says, ``It will cost the corporation a million dollars to defend 
against your suit.''
  Joe says, ``Fine, offer me half a million and I go away.''
  It is blackmail, Mr. President, pure and simple.
  So Joe finally says, ``OK, Sam, here is your $500,000. Drop your 
suit.''
  Sam takes his $500,000 and he goes away until the next time.
  I have told this story before. I have to repeat it again because I 
think it is an important part of the point I am trying to make. We are 
often told here, ``No, the only reason lawsuits are settled out of 
court is when the management has something to hide.'' Well, the story I 
am about to tell you is a real story. It really happened. It happened 
to my father. He served here in the Senate for some 24 years. When he 
retired from the Senate he was not ready to retire from life so he got 
himself another life and another series of activities. One of them was 
serving on boards of directors. He was on a number of boards. Some were 
charitable, some were nonprofit, some were very much profit.
  On one of the boards he served, he would go to the board meetings and 
take his duty seriously--as my father always did--and then one day he 
received a stack of papers in the mail notifying him that he was being 
sued. The suit was made out to Wallace F. Bennett, et al., and the suit 
was claiming all kinds of things. My father looked through this. He was 
quite disturbed. It became clear to him that the ``et al.'' in this 
case were the other directors of the corporation. He called the legal 
division of the corporation whose board he was serving on and said, 
``What is this all about?"
  The lawyer said to him ``Oh, don't worry about that, Mr. Bennett. The 
reason you are named is because the directors are listed alphabetically 
and ``B'' comes before the letters of any of the other directors so 
they are suing you and all of the directors, but it is just a 
coincidence that your name comes first, that you are named in the suit. 
The entire board is being sued.''
  Dad said, ``That is a little bit of comfort, but what are we being 
sued for? What did we do wrong?''
  Well, the lawyer says ``You raised your salary.''
  Dad said, ``Pardon me?''
  And he said, ``Well, remember, the way this thing is structured, the 
compensation of the directors are tied to the profitability of the 
organization. So when the organization makes more money the directors' 
compensation goes up.''
  Dad says, ``That is logical. That is proper. What is the basis of the 
suit?''
  ``There is a lawyer in New York who watches this, and whenever the 
compensation of the directors goes up for whatever reason, he 
automatically files a lawsuit against us claiming that the directors 
are looting the proceeds and assets of the corporation for their own 
profit.''
  Dad said, ``Well, that lawsuit is absolutely absurd. It is sound 
business practice to tie the directors' compensation to the 
profitability of the company. That means the directors will take the 
actions that will make the company more profitable.''
  ``Don't worry about it, Senator, this lawyer knows he will never win 
his suit. He knows we will never spend the money to take him to court. 
It would cost us about $500,000 to prosecute this suit and take him to 
court and win and it is cheaper for us to send him a $100,000 check to 
settle this.''
  So every time this happens, that is, there is a change in the 
compensation of the directors, he files the suit, we send him a 
$100,000 check, he goes away and the problem is solved. That is exactly 
what happened. They sent the lawyer a $100,000 check, he dropped his 
suit, and everybody went forward.
  My father was outraged. But they told him, ``Senator, you can be as 
outraged as you want to be, but our alternative is to prosecute this 
lawsuit, take him to court, beat him in court, see a $500,000 legal 
bill run up in the process. The logical thing for us to do for the 
shareholders, the investors, if you will, is to pay him his $100,000, 
and hope he will go away.''
  Now, my father was pleased when another member joined the board whose 
last name began with an ``A'' because then the papers were always filed 
on the new director rather than my father, but again and again they 
sent the $100,000 bribe money off to the lawyer in New York who had 
himself a really wonderful legal practice. All he had to do was file 
these papers and collect his check. There was no merit whatever in his 
claim and he knew it and everybody else knew it.
  There is an end to this story that I kind of like. The lawyer decided 
to expand his practice and he started suing other companies besides the 
one of which my father served as a director. One of the companies he 
decided to sue was owned by Merrill Lynch, and the Merrill Lynch 
lawyers looked at this and decided the time has come to put an end to 
it and we have deep enough pockets that we can take this man to court 
and ruin him in his legal costs, trying to defend himself.
  So the system that had worked for the lawyer in the one circumstance 
then turned against him. Merrill Lynch said, ``Whatever it takes in 
legal costs, it takes, but we are going to put a stop to this, force 
this man to go to court and force him to defend his position.'' And 
they ultimately did put a stop to it because when he was faced with 
actually proving his position in a court of law and running up the 
costs connected with that kind of litigation, the lawyer was finally 
forced to back down.
  I tell this story because I want to lay to rest, once and for all, 
the canard that is raised on the other side of this issue by those who 
say that by passing this legislation we are damaging investors for the 
benefit of big corporations. The investors in the company where my 
father served as a director were benefited by the actions of Merrill 
Lynch and their legal department when they finally stepped in. They 
would be benefited by the passage of this legislation, and Merrill 
Lynch investors would be benefited by the fact that Merrill Lynch would 
no longer have to spend that kind of money to clean up that sort of an 
outrage.
  If you want to vote on behalf of the investors, you vote for the 
override of the President's veto of this bill.
  I was sorry to hear that the President had vetoed. We were told 
informally on the floor when the bill was passed that the President 
would probably sign it. We were told that the President and the people 
advising him understood that this was proinvestor legislation and the 
President, obviously, wants to position himself as being proinvestor.
  I was also told by those who watch these kinds of things that the 
President would probably sign it because this legislation is very, very 
important in Silicon Valley. The companies that have been the target of 
these frivolous lawsuits are primarily located in the high-technology 
industry, and Silicon Valley in California is considered the seed bed 
of high technology in this country.
  I might, in a parochial way, Mr. President, note that there are more 
software companies in Utah Valley than there are in Silicon Valley, but 
that is a parochial comment made by the Senator from Utah.
  Why would it be important for the President to sign a bill that would 
benefit Silicon Valley? One need only look at the political map and the 
number of electoral votes that are contained in California to realize 
that anything that improves the California economy would be of 
political benefit to a politician who could take credit for improving 
the California economy. The California delegation as a whole has been 
most vigorous in their support of this bill. The senior Senator from 
California [Mrs. Feinstein] has been a supporter of this bill. But the 
President decided, apparently, that whatever political benefit would 
accrue to him by doing something that would be good for Silicon Valley 
might be offset by his ability to pose as the defender of the small 
investor.
  There have been many editorials written by people who perhaps do not 

[[Page S19037]]
  understand this bill, to say, no, this really does support the small 
investor, and the President decided to go with that rhetoric rather 
than with what I consider to be the true substantive benefit of this 
bill.
  So we are back again. We have gone through this argument in 
committee. The bill was reported out of committee by a strong 
bipartisan margin. We are back into it here on the floor. As indicated, 
the bill was passed by the Senate by a strong bipartisan margin. It has 
gone through the House. The override vote was 319 to 100, more than 3 
to 1. It needed only be 2 to 1, but it was more than 3 to 1. So that 
makes it very clear there is a strong bipartisan message here.
  I am interested that the authorship of this bill began on the 
Democratic side of the aisle with Senator Dodd, joined on the 
Republican side of the aisle by Senator Domenici. It was known as the 
Dodd-Domenici bill in the previous Congress. Now, given the results of 
the election, it is called the Domenici-Dodd bill. But it demonstrates 
the bipartisan nature, rising above partisan bickering, that has marked 
this entire effort. The effort has taken years, and in the years since 
Senator Dodd began his crusade to get this problem fixed, there have 
been millions, if not hundreds of millions of dollars wasted, investor 
dollars wasted in dealing with these frivolous lawsuits. If this veto 
is upheld, there will be millions, if not hundreds of millions of 
dollars wasted in the future.

  This legislation will ultimately pass. It will ultimately pass 
because it is the right thing to do and more and more people recognize 
that it is the right thing to do. The only question is whether it 
should pass in this Congress and become law in this year. I believe the 
time has gone long enough for us to debate this and repeat the 
arguments back and forth. The time has come for us to pass this bill.
  So I hope the Senate will respond, as the House has done, with a 
strong bipartisan majority to override the President's veto. I 
expressed my concern that I think the President was misguided by his 
advisers on this one, both those who advised him on the substance and 
those who may have advised him on the politics. I hope we will help 
correct this Presidential mistake by what we do here on the floor.
  Mr. President, I could go on and repeat all of the arguments that 
have been made in committee and on the floor on this issue, but I see 
the senior Senator from Maryland, who was the ranking member of the 
Banking Committee and who is opposed to this bill, and undoubtedly in 
support of the President's veto. He is on the floor, and I will be 
happy to yield to him for whatever opening statement he might have. 
Then we can go forward from there.
  Mr. President, I yield the floor.
  The PRESIDING OFFICER. The Senator from Maryland.
  Mr. SARBANES. Mr. President, as I understand it, the distinguished 
Senator from Tennessee would like to address the Senate for a short 
period of time. I ask unanimous consent the Senator from Tennessee be 
recognized, and at the conclusion of his remarks I then be recognized.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The Senator from Tennessee.

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