[Congressional Record Volume 141, Number 206 (Thursday, December 21, 1995)]
[Senate]
[Pages S19037-S19060]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 SECURITIES LITIGATION REFORM ACT--VETO

  The Senate continued with the reconsideration of the bill.
  Mr. SARBANES. Mr. President, first I want to say that the logic of my 
colleague from Utah is absolutely right. I think he said right at the 
end of his remarks that I was against the bill and, therefore, he 
assumed that I would be in support of the veto. And he is obviously 
correct. I will not now--I may later--talk a bit about the broader 
defects which I see in the legislation. But I want to address now the 
items that were touched upon in the President's veto message as the 
basis for his vetoing the legislation.
  My own view is that there are other reasons as well that go well 
beyond what the President indicated. But I want to focus on that for 
the moment since it is the veto message, the veto, that is before us. 
And the issue, of course, would be whether to override the veto.
  I listened to my distinguished colleague from Utah as he talked, and 
to the various examples that he gave as a reason for why we should pass 
this legislation in terms of the kinds of suits that had been brought 
and the frivolousness of the actions. And I want to simply say to him 
that, if that is all the bill did, if the bill were crafted in a way to 
get at the kind of examples he was citing, I think the bill would have 
passed 99-0. So I do not really differ with him in the examples that he 
cited as being problems and saying that those are problems and measures 
ought to be taken in order to correct them. The problem is that this 
bill goes way beyond that. That is the problem.
  The President, since the conference report was passed 2 weeks ago, 
has now vetoed it. That actually reflects, I think, the overwhelming 
position taken by newspaper and magazine editors around the country who 
have analyzed this legislation and who have no vested interest in it. 
There are a number of interest groups who have an interest on either 
side of this legislation. But these are common indicators outside of 
that framework. They have by and large strongly come down against it.
  The President said in his message, ``Those who are victims of fraud 
should have recourse in our courts. Unfortunately, changes made in this 
bill during conference could well prevent that.''
  I hope that the Senate will sustain the President's veto so that we 
could get about the business of crafting legislation better targeted at 
the goal that I think we all share--deterring frivolous lawsuits. I 
want to emphasize that again. I know of no one who argues against 
reasoned measures to deter frivolous lawsuits.
  The President's veto message recognizes that this bill is not a 
balanced response to the problem of frivolous lawsuits. This 
legislation will affect far more than frivolous lawsuits. As I said at 
the outset, if the bill dealt only with the problem of frivolous 
lawsuits, I would be for it, and presumably the President would have 
signed it.
  Unfortunately, this bill that is before us will make it more 
difficult for investors to bring and recover damages in legitimate 
fraud actions. Investors will find it far more difficult to bring and 
to recover damages in legitimate fraud actions.
  The editors of Money magazine concluded that this legislation hurts 
investors, stating in their December editorial as follows: ``Now only 
Clinton can stop Congress from hurting small investors like you.'' That 
is Money magazine. The President has tried to do that through the veto. 
We should do our part now by supporting this veto.
  The President's message identified three areas of concern with the 
bill: The pleading standard, the safe harbor, and the rule 11 
provision. On the first point, the President said, and I quote him: 
``The pleading requirements of the 

[[Page S19038]]
conference report with regard to a defendant's state of mind impose an 
unacceptable procedural hurdle to meritorious claims being heard in 
Federal courts.''--``an unacceptable procedural hurdle to meritorious 
claims being heard in Federal court.''
  What are pleading standards? Some of this, of course, gets very 
lawyerly, but it has to get lawyerly because you are really talking 
about the basis on which people have access to the courts. That may 
appear to be a highly technical legal matter, and in some respects it 
is. But the practical result is very real for people who may have been 
defrauded or abused in terms of making their investment decisions.
  Pleading standards refer to what an investor must show in order to 
initiate a securities fraud lawsuit. In other words, what must you 
establish in order to get the lawsuit started? The bill that was 
reported by the Senate Banking Committee adopted the pleading standard 
used by the U.S. Court of Appeals for the Second Circuit. That standard 
says that investors seeking to file securities fraud cases must, and I 
quote: ``specifically allege facts giving rise to a strong inference 
that the defendant acted with the required state of mind.''
  In other words, the plaintiff in setting out his pleading has to 
specifically allege facts that give rise to a strong inference that the 
defendant acted with the required state of mind. This is a standard 
more stringent than the Federal Rules of Civil Procedure. It, in fact, 
is a minority view amongst the circuit courts in terms of the threshold 
that the plaintiff has to cross in order to initiate a securities fraud 
lawsuit.
  But that was a standard adopted in the committee, in the committee-
reported bill. When the bill came to the Senate floor, the Senate 
adopted an amendment to this provision that was offered by the 
distinguished Senator from Pennsylvania, Senator Specter. Senator 
Specter's amendment codified, brought into the statute, additional 
second circuit holdings clarifying this standard. These additional 
second circuit holdings state that a plaintiff may meet the pleading 
standard by alleging facts showing the defendant had motive and 
opportunity to commit fraud or constituting strong circumstantial 
evidence of state of mind. What the second circuit has done is they 
have enunciated this holding with respect to pleadings, and then in 
subsequent opinions they had clarified this standard to make it clear 
that motive and opportunity to commit fraud, or facts constituting 
strong circumstantial evidence of a state of mind, would also meet the 
pleading standard.
  The argument made was that, if you are going to take the second 
circuit standard, then you ought to take the second circuit's 
elaboration of its standard, which seems to me an eminently logical and 
reasonable position.
  I think it is probably safe to say that the only pro-investor 
amendment adopted on the Senate floor was the Specter amendment.
  I thought it was a constructive contribution to the legislation, and 
a majority of this body, I think on a vote of 57 to 42, agreed with 
that.
  Unfortunately, this amendment was dropped in conference, the Specter 
amendment. The conference report deleted the Specter amendment, leaving 
investors without the protection of the additional second circuit 
holdings. And the President in his veto message said the following:

       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.

  Mr. President, I think that President Clinton was well advised to 
object to that provision of the conference report. A number of eminent 
law professors, experts without any axe to grind, wrote to the 
President warning of the consequences of that provision.
  Professor Arthur Miller of the Harvard Law School, a nationally 
recognized expert on civil procedure, warned that the pleading standard 
adopted in conference, and I quote him, ``effectively will destroy the 
private enforcement capacities that have been given to investors to 
police our Nation's marketplace.''
  John Sexton, the very able and distinguished dean of the New York 
University School of Law, one of our Nation's preeminent law schools, 
and also an expert on civil procedure, wrote, ``It simply will be 
impossible for the plaintiff, without discovery, to meet the standard 
inserted by the conference committee at the last minute.'' Let me 
repeat that from Dean Sexton. ``It simply will be impossible for the 
plaintiff, without discovery, to meet the standard inserted by the 
conference committee at the last minute.''
  Joel Seligman, dean of the University of Arizona School of Law and an 
expert in securities law, also expressed concern that the pleading 
standard would ``prevent a significant number of meritorious lawsuits 
from going forward.''
  These are all very distinguished legal experts, very knowledgeable on 
this particular area of the law, and all expressing these very strong 
judgments about the impact of what was done in the conference with 
respect to this issue.
  I ask unanimous consent that those letters be printed in the Record 
at the end of my remarks.
  The PRESIDING OFFICER (Mr. Coverdell). Without objection, it is so 
ordered.
  (See exhibit 1.)
  Mr. SARBANES. Mr. President, sustaining the President's veto would 
give the Congress a chance to craft a more reasonable pleading 
standard. This is a very important issue. It may not appear to be so, 
but the end result of not having a reasonable pleading standard is that 
you will prevent people with meritorious claims from being able to 
initiate and carry through their suit. I wish to underscore, I am 
talking about people with meritorious claims.
  A reasonable pleading standard, as was in the original proposed bill 
and enhanced by the Specter amendment, would not provide any opening 
for frivolous lawsuits but it would ensure that meritorious lawsuits 
were not barred from the courtroom.
  Let me turn to safe harbor, which, of course, was an issue on which 
there was extended discussion in this Chamber in the course of the 
consideration of this legislation and then again on the conference 
report. The President stated with respect to the safe harbor 
provision--this is the President in the veto message:

       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.

  The safe harbor provision creates a statutory exemption from 
liability for so-called forward-looking statements. Forward-looking 
statements are broadly defined in the bill to include both oral and 
written statements--both oral and written statements. Examples include 
projections of financial items such as revenues and income for the 
quarter or for the year, estimates of dividends to be paid to 
shareholders, and statements of future economic performance such as 
sales trends and developments of new products. In short, forward-
looking statements include the type of information that is important to 
investors deciding whether to purchase a particular stock.
  I differ somewhat with the President on his analysis because I think 
the safe harbor language in the bill as well as the language in the 
statement of managers is troublesome. It is my very deep concern that 
the safe harbor provision in this legislation will, for the first time, 
protect fraudulent statements under the Federal securities law. The 
American Bar Association wrote the President that the safe harbor ``has 
been transformed not simply into a shelter for the reckless but for the 
intentional wrongdoer as well.''
  Think of that, not simply into a shelter for the reckless but for the 
intentional wrongdoer as well.
  Projections by corporate insiders will be protected, even though they 
may be 

[[Page S19039]]
unreasonable, misleading, and fraudulent, if accompanied by boilerplate 
cautionary language.
  The claim is made that the bill codifies a legal doctrine applied by 
the courts known as ``bespeaks caution.'' As I understand it, all 
courts that have applied this doctrine have required that projections 
be accompanied by disclaimers specifically tailored to the projections. 
If companies want to immunize their projections, they must alert 
investors to the specific risks affecting those projections.
  In other words, general boilerplate language will not do that. The 
bill before us today does not include--does not include--this 
requirement of specific cautionary language to investors.
  The Association of the Bar of the city of New York warned of this 
provision stating:

       . . . 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.

  Let me just repeat that because the Association of the Bar of the 
city of New York is a very distinguished organization and they do in-
depth studies of important legal issues. Their studies are widely 
respected and widely referred to in the legal profession.
  What they warned about in this safe harbor provision was that:

       . . . 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.

  This letter was signed for the bar association by Stephen Friedman, a 
former SEC Commissioner.
  Prof. John Coffee, a distinguished professor at the Columbia Law 
School, wrote to the President:

       . . . rather than simply codify the emerging `bespeaks 
     caution' doctrine, it is much closer to the truth to say that 
     the Act overrules that doctrine.

  Mr. President, I ask unanimous consent that the Coffee letter 
discussing this issue and another by him be printed in the Record at 
the conclusion of my remarks.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 2.)
  Mr. SARBANES. While I believe the safe harbor language in this bill 
is a problem, the President in his veto message has raised an 
additional valid point with respect to the safe harbor language in the 
statement of managers.
  The President points out that the language in the statement of 
managers attempts to weaken the cautionary language that the bill 
itself requires. The President received advice on this point from 
Professor Coffee, who wrote:

       . . . under the proposed legislative history there now 
     appears to be no obligation to disclose the most important 
     reasons why the forward-looking statement may prove false.

  And Professor Coffee went on to state:

       . . . no public policy justification can support such 
     selective disclosure of the less important facts while 
     withholding the most important.

  So I have difficulty with the provision in the legislation itself, as 
I have indicated, but on top of that you have this Statement of 
Managers seeking to create legislative interpretation which, as the 
President pointed out, attempts to weaken the cautionary language that 
the bill itself requires.
  So that a weak provision has been rendered, well, Professor Coffee, I 
guess, would say, nonexistent. He stated earlier:

       . . . rather than simply codify the emerging ``bespeaks 
     caution'' doctrine, it is much closer to the truth to say 
     that the Act overrules that doctrine.

  Sustaining the veto would give the Congress the chance to craft a 
more reasonable legislative approach on the safe harbor issue.
  Let me turn to the rule 11 provision. The President's veto message on 
this matter states:

       . . . 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.

  We had a discussion about this when we dealt with the conference 
report, I say to my colleagues. When we sent the bill to conference, 
the way we drafted the bill in the Senate, under Rule 11, we treated 
plaintiffs and defendants evenhandedly with respect to either bringing 
of frivolous suits or asserting a frivolous defense.
  It is clear to me that that is the way it ought to be done. Rule 11 
of the Federal Rules of Civil Procedure is the principal sanction 
against the filing of frivolous lawsuits in the Federal courts. It 
requires all cases filed in the Federal courts to be based on 
reasonable legal arguments and supported by the facts. As passed by the 
Senate, the bill required that courts include specific findings in 
securities class actions regarding compliance by all parties and 
attorneys with rule 11(b) of the Federal Rules of Civil Procedure.
  This is as passed by the Senate. If a court found a violation of rule 
11 by the plaintiff or the defendant, the court was required to impose 
sanctions. The provision was balanced. The sanctions would have applied 
equally to plaintiffs and defendants. This was intended as a deterrent 
to frivolous cases. I believe it would have worked well. In conference, 
this balance was removed so the legislation now applies more harshly to 
investors than to corporate insiders.
  The Senate bill as we passed it contained a presumption that the 
appropriate sanction for failure of the complaint or the responsive 
pleading or motion to comply with rule 11 was an award of reasonable 
attorneys fees and other expenses incurred as a direct result of the 
violation.
  The conference changed this presumption so it no longer applies 
equally to plaintiffs and defendants. I defy any of my colleagues to 
justify this either in logic or reason. This was a change made by the 
conference so that it no longer applies equally to plaintiffs and 
defendants. If the defendant substantially violates rule 11, he pays 
only reasonable attorneys fees and other expenses incurred as a direct 
result of the violation; this is the standard that was in the Senate-
passed bill. If the plaintiff is found to have substantially violated 
rule 11, he pays all attorneys fees incurred in the action, not just 
those resulting from the violation.
  This is a major and significant disparity. There is no justification 
for such disparate treatment. Of course, its result will be to scare 
investors from bringing meritorious fraud suits. The legal experts 
agree that that will be the result of this provision.
  Professor Miller, of Harvard Law School, wrote of this provision--and 
I quote him--and listen carefully to this quote:

       . . . It is inconceivable that any citizen, even one with 
     considerable wealth and a strong case on the merits, could 
     undertake securities fraud litigation in the face of the 
     risks created by these provisions.

  Dean Sexton, of New York University Law School, wrote:

       . . . the obvious effect of these provisions: who but a 
     fool would risk the remainder of his or her life savings, 
     having already been defrauded out of much of them? Even 
     wealthy interest will not expose their assets to the possible 
     onslaught of unlimited defense costs, or judicial fee-
     shifting excesses.

  Sustaining the President's veto would give Congress the chance to 
craft a more reasonable rule 11 provision, actually to go back to the 
provision that the Senate passed before it was mutilated in the 
conference committee.
  Sustaining the President's veto, of course, obviously would not be 
the end of this legislative effort. There is, obviously, very strong 
support in the Congress for dealing with the issue of frivolous 
lawsuits. The difference is not to go so far that you have an 
unbalanced product. The debate tends to be a citation of abusive 
instances, and I want to make it very clear that those of us who 
support the veto do not defend the abusive instances and would support 
legislation designed to deal with it.
  But this legislation goes too far, as I have indicated, in the three 
provisions the President focused on in his veto message: the pleading 
standard, the safe harbor and the now unbalanced rule 11 provision. In 
each instance, that would make it more difficult for innocent investors 
to bring lawsuits and to recover damages when they have been defrauded.
  This is a piece of legislation people are going to have to live with 
on their history, and I am prepared to predict here today that the 
consequence of this legislation will be that innocent people 

[[Page S19040]]
with meritorious claims will not be able to assert them in court; the 
people who have been defrauded will not be able to obtain a remedy; the 
Charles Keatings of the world will walk free; and senior citizens, 
pension plans, ordinary investors will have no recourse. The stories 
then that are going to be told are going to be the stories of predatory 
actions against innocent people, with them not having any way to obtain 
justice.
  The President said in the veto message:

       It is not appropriate to erect procedural barriers that 
     will keep wrongly injured persons from having their day in 
     court.

  The Congress ought to take the opportunity to rework this legislation 
to eliminate these defects, to get a piece of legislation that we could 
all agree on as being worthwhile and meritorious, that was not 
subjected to the sort of scathing criticism that is reflected in these 
letters from some very distinguished legal scholars with respect to 
this matter.
  These people do not argue against doing something about frivolous 
lawsuits, but they are saying in the course of trying to do that, do 
not go so far that you are ruling out meritorious lawsuits. There is 
plenty of time remaining in this Congress. It is not as though we are 
at the end of a Congress, so that if you do not act, you have to start 
all over again. There is plenty of time remaining in this Congress to 
deal with this matter.
  Other provisions in this legislation, which no one has raised an 
issue about, provide protection against the professional plaintiff, 
against class action lawyers who abuse investors who have been 
defrauded. Those provisions no one is questioning.
  Most of the debate focuses on extreme cases. The provisions in the 
legislation that address the extreme cases no one is arguing against. 
So I want it clearly understood, when we hear these various horror 
stories, the provisions that would get at those instances, no one is 
questioning. We are prepared to see those go into law.
  But I think we have to really narrow the focus down to what is at 
issue here.
  There is a great tendency to cite the extreme examples, but no one is 
contesting the extreme examples. We need to craft a piece of 
legislation, of which we can be proud, that stands legal scrutiny and 
that will not result in individual investors, pension funds, local 
governments suffering when they are defrauded in the securities markets 
and are denied their day in court.
  Sustaining the veto would enable us to do that, and I think the end 
result would be that we would have a better piece of legislation, and 
the end result then would be that we would not come back on another day 
citing the horror stories of investors who have been defrauded who, by 
any standard, ought to be able to obtain justice and are denied their 
day in court.
  Mr. President, I yield the floor.

                               Exhibit 1


                                           Harvard Law School,

                                 Cambridge, MA, December 19, 1995.
     Hon. William J. Clinton,
     President of the United States,
     The White House,
     Washington, DC.
       Dear Mr. President: On December 12 I wrote to you 
     concerning the so called ``securities reform'' legislation, 
     then embodied in Senate Bill 240. I urged you to oppose that 
     legislation because (1) it was based on a totally erroneous 
     assumption that there had been a sharp increase in securities 
     litigation in the recent past, which is completely belied by 
     every statistical measure available; (2) the federal courts, 
     exploiting a variety of procedural tools such as pretrial 
     management, summary judgment motions, sanctions, and enhanced 
     pleading requirements, were achieving many of the goals of 
     the so called reformists, most particularly the deterrence of 
     ``frivolous'' litigation; (3) recent history suggests that 
     the same vigilance is needed today to guard against market 
     fraud as was needed during the superheated activity in the 
     securities business in the mid-1980's; and (4) the SEC simply 
     is unable to perform the necessary prophylaxis to safeguard 
     the nation's investors, and private enforcement is an 
     absolutely integral part of policing the nation's 
     marketplaces.
       I am writing again because the latest version of the 
     legislation, H.R. 1058, contains provisions regarding 
     pleading in securities cases and sanction procedures that, if 
     anything, make the legislation even more draconian and 
     access-barring than Senate Bill 240. It simply is perverse to 
     consider it a ``reform'' measure.
       I have always taken great pride in the fact that the words 
     ``equal justice under law'' are engraved on the portico of 
     the United States Supreme Court. I fear, however, that if the 
     proposed legislation is signed into law, access to the 
     federal courts for those who have been victimized by illicit 
     practices in our securities markets will be foreclosed, 
     effectively discriminating against millions of Americans who 
     entrust their earnings to the securities markets. As 
     difficult as the existing Federals Rules of Civil 
     Procedure already make it to plead a claim for securities 
     fraud sufficient to survive a motion to dismiss, 
     especially given existing judicial attitudes toward these 
     cases, the passage in House Bill 1058 requiring that the 
     plaintiff ``state with particularity facts giving rise to 
     a strong inference'' that the defendant acted with 
     scienter, in conjunction with the automatic stay of 
     discovery pending adjudication of dismissal motions, 
     effectively will destroy the private enforcement 
     capacities that have been given to investors to police our 
     nation's marketplace. Despite misleading statements in the 
     Statement of Managers that this provision is designed to 
     make the legislation consistent with existing Federal Rule 
     9, the truth is diametrically the opposite, since the 
     existing Rule clearly provides that matters relating to 
     state of mind need not be pleaded with particularly. 
     Indeed, it would be more accurate to describe the proposal 
     as a reversion to Nineteenth Century notions of procedure. 
     The proposed legislation also does considerable damage to 
     notions of privilege and confidence by demanding that 
     allegations on information and belief must be accompanied 
     by a particularization of ``all facts on which that belief 
     is formed.''
       The situation is compounded by the proposed fee shifting 
     and bond provisions that relate to the enhanced sanction 
     language in the legislation. It is inconceivable that any 
     citizen, even one with considerable wealth and a strong case 
     on the merits, could undertake securities fraud litigation in 
     the face of the risks created by these provisions. As the 
     person who was the Reporter to the Federal Rules Advisory 
     Committee during the formulation and promulgation of the 1983 
     revision of Federal Rule 11, the primary sanction provision 
     in those Rules, I can assure you that no one on that 
     distinguished committee would have possibly supported what is 
     now so cavalierly inserted into the legislation.
       I use the word ``cavalierly'' intentionally, because, as I 
     indicated to you in my earlier letter, there is not one whit 
     of empiric research that justifies any of the procedural 
     aspects of this so called ``reform'' legislation. Not only 
     does every piece of statistical evidence available belie the 
     notion that there is any upsurge in securities fraud cases, 
     but these proposals, with their devastating impact on our 
     nation's investors, have completely bypassed the carefully 
     crafted structure established in the 1930's for procedural 
     revision that has enabled the Federal Rules to maintain their 
     stature as the model for procedural fairness and currency. 
     Thus, the proposed legislation represents a mortal blow both 
     to the policies that support the private enforcement of major 
     federal regulatory legislation and to the orderly 
     consideration and evaluation of all proposals for the 
     modification of the Federal Rules. From my perspective, which 
     is that of a practitioner in the federal courts, a teacher of 
     civil procedure for almost thirty-five years, and a co-author 
     of the standard work on federal practice and procedure, I 
     fear that all of this is extremely regrettable.
       I hope you will give serious consideration to vetoing the 
     legislation. If I can be of any further assistance to you or 
     your staff in considering these and related matters, please 
     do not hesitate to inquire. My telephone number is 617/495-
     4111.
       My very best to you and your family during this wonderful 
     holiday season.
           Sincerely yours,
                                                 Arthur R. Miller,
     Bruce Bromley Professor of Law.
                                                                    ____



                                    The University of Arizona,

                                    Tucson, AZ, December 13, 1995.
     Hon. William J. Clinton,
     The President,
     The White House,
     Washington, DC.
       Dear Mr. President: I am writing to urge you to veto 
     pending legislation, The Private Securities Litigation Reform 
     Act H.R. 1058.
       For the past 18 years, my principal work has been in the 
     field of federal Securities Regulation. I am the co-author 
     with Harvard Law School Professor Louis Loss of an 11 volume 
     treatise on Securities Regulation, published by Little, Brown 
     & Co., which is generally considered to be the leading 
     treatise in the field. I have written four other securities 
     regulation related books and over 25 Law Review articles in 
     this area. Earlier I had a discussion with respect to a 
     different version of H.R. 1050 with your General Counsel, 
     Abner Mikva.
       The current bill, while an improvement over legislation 
     that was introduced last January, is unduly heavy handed and 
     clumsily drafted and would prevent a significant number of 
     meritorious law suits from going forward. I am particularly 
     concerned no only about the safe harbor provisions, but also 
     about provisions concerning Rule 11, the pleading 
     requirements; and the extraordinarily one-side language that 
     appears in the legislative history. Legislative history may 
     not be a point many people have emphasized, but it is my 
     understanding that it was written without earlier review by 
     the Securities and Exchange Commission or its staff, and 
     reflects policy preferences more typical of what appeared in 
     the January 1995 version of this legislation. I take 
     legislative history very seriously, for having studied every 
     reported federal securities Law decision over 

[[Page S19041]]
     the past 12 or so years as a result of my work with Professor Loss, I 
     am well aware that it is frequently dispositive in questions 
     such as those addressed in this particular legislation.
       If this bill is vetoed, I am confident it will not be the 
     end of the road for this process. It is possible for Congress 
     if the veto is sustained to draft a more balanced and 
     appropriate bill within a matter of weeks. On the other hand, 
     if this bill is not vetoed, this will provide opportunity for 
     that small number of corporations that do engage in federal 
     securities fraud to feel a greater sense of immunity from 
     private litigation, and in many instances, given the 
     limitations of the SEC and Justice Departments budgets, from 
     any litigation deterrent at all.
           Sincerely,
                                                    Joel Seligman,
     Dean and Samuel M. Fegtly Professor of Law.
                                                                    ____

                                               New York University


                                                School of Law,

                                  New York, NY, December 13, 1995.
     President William J. Clinton,
     The White House,
     Washington, DC.
       Dear Mr. President: I am a student and teacher of Civil 
     Procedure and the principal active author of the most widely 
     used textbook on the subject. I approach matters of Civil 
     Procedure not as an advocate for particular parties, but as a 
     scholar interested in coherence, fairness and efficiency in 
     the system. I am imposing upon your time with this letter 
     because I feel compelled to convey my view that the 
     Conference Committee Securities Litigation Reform bill (which 
     in critical respects is dramatically different from the 
     Senate bill) is a procedural nightmare that will chill 
     meritorious litigation by victims of securities fraud--and 
     equally importantly, will provide a precedent for substantive 
     procedural rules which most certainly will be copied with 
     disastrous consequences in other areas (for example, in the 
     area of civil rights).
       The Conference Committee bill effects far-reaching 
     procedural changes that will govern both class and individual 
     litigation in one type of federal case--litigation under the 
     federal securities laws. These will affect not only 
     shareholder claims, but also insurance policyholders and 
     limited partnership claims, among others, which seek relief 
     under federal securities laws. The bill advances these 
     procedural changes, which undermine fifty years of procedural 
     reform, without consulting even a single judicial witness in 
     its hearings. Cumulatively, the reforms will impose obstacles 
     that will make it impossible for the average citizen to 
     pursue, let alone to prevail upon, virtually any securities 
     claims, no matter how valid.
       I will not examine every section of the bill; rather, I 
     will confine my comments to the provisions which, viewed from 
     the perspective of a proceduralist, seem most perverse.


                    Heightened Pleading Requirements

       Although the Senate bill purported to adopt the Second 
     Circuit's already elevated (beyond Rule 9) pleading 
     requirements for fraud, the Conference Report goes beyond 
     that, requiring that the complaint shall ``state with 
     particularity facts giving rise to a strong inference'' that 
     the defendant acted with scienter (emphasis supplied). In 
     addition, the Conference Report contains an automatic stay of 
     discovery pending adjudication of a motion to dismiss.
       In essence, the Conference Report establishes almost 
     insurmountable hurdles in the form of pleading requirements 
     as a barrier to federal court. Absent the most extraordinary 
     circumstances (such as a prior federal indictment), it simply 
     will be impossible for the plaintiff, without discovery, to 
     meet the standard inserted by the Conference Committee at the 
     last minute, which is to state ``with particularity'' facts 
     that give rise to a strong inference that a defendant acted 
     with the required state of mind at the outset of the case. 
     While the Statement of Managers recites that the words ``with 
     particularity'' were added to make this requirement 
     consistent with Federal Rule of Civil Procedure 9, that Rule 
     explicitly states that facts on state of mind need not be 
     specifically set forth. No other type of case requires such 
     precise pleading--because it was long ago recognized as 
     impossible to achieve except for those intimately involved in 
     an action, a status not enjoyed by people buying stock on the 
     open market.
       In addition, the pleading requirement states that ``if an 
     allegation regarding a fraudulent statement or omission is 
     made on information and belief, the complaint shall state 
     with particularity all facts on which that belief is 
     formed.'' That requirement would appear to provide that the 
     plaintiff would have to set forth all confidential sources in 
     the complaint, including the names of whistleblowers and 
     members of the media. This disclosure requirement deters pre-
     complaint investigation and completely reverses the attorney-
     work product protection afforded other types of litigants.


                Enhanced Sanctions and Bond Requirement

       I am opposed to fee-shifting, and I always have understood 
     that was your policy as well. Any significant chance of fee-
     shifting will deter all meritorious cases in which a 
     plaintiff has little to gain in potential recovery in 
     relation to the magnitude of the fees to be shifted, as is 
     frequently the case in securities class action litigation. In 
     these circumstances, any significant chance of fee-shifting 
     is going to be a major deterrent. The simple mathematics of 
     the situation suggests the obvious effect of these 
     provisions: who but a fool would risk the remainder of his or 
     her life savings, having already been defrauded out of much 
     of them? Even wealthy interests will not expose their 
     assets to the possible onslaught of unlimited defense 
     costs, or judicial fee-shifting excesses.
       Similarly the bond provision, which has no standard to 
     guide its administration, is completely inequitable and will 
     operate only against plaintiffs. The notion that such a bond 
     provision could run against defendants is preposterous, as it 
     is clearly unconstitutional to require an individual to post 
     a bond in order to defend himself or herself in court.


           perverse cumulative synergy of procedural changes

       The disastrous effects of all these changes on meritorious 
     litigation can be seen easily if one hypothetically shifts 
     the context to Title VII litigation--the likely next target 
     for the ``reformers'' if this bill becomes law. Given the 
     extraordinarily high economic exposure (resulting from the 
     possibility of sanctions), the necessity of a bond, and the 
     difficulty in meeting the pleading requirement without 
     discovery, is it possible to imagine many plaintiffs (even 
     those with what appear to be winning cases) taking the risk 
     even of initiating litigation? And, of course, this will be 
     the case in securities litigation as well. Essentially, 
     through ``procedural reform'' and a selective return to 
     Nineteenth Century pleading rules, real victims will be 
     prevented from seeking redress.
       Because much litigation will never come to be, it would be 
     wrong to assert that the courts will be able to ameliorate 
     these rules. Moreover, in the case of the highly problematic 
     pleading requirements, even in those suits which materialize 
     the courts would not have the power to overrule a directive 
     from a statute. Thus, though the Second Circuit could 
     promulgate its interpretation of the pleading requirement of 
     Rule 9 on matters other than intent, it could not have 
     applied its test in the area of intent, because the Rule (by 
     its terms) exempted intent; so also, if the Committee Bill 
     becomes law, the Second Circuit would not be free to exempt 
     intent, because the statute includes it.
       In my opinion, you should veto this bill. I would 
     appreciate any consideration you can give to my views. If any 
     member of your staff has questions, please do not hesitate to 
     call me at 212-998-6000.
       Best of luck in this and all things. Love to all.
           Sincerely,
                                                      John Sexton.

                               Exhibit 2

                                            Columbia University in


                                         the City of New York,

                                   New York, NY, December 6, 1995.
     The President,
     The White House,
     Washington, DC.
       Dear Mr. President: I am writing with regard to the 
     proposed ``Private Securities Litigation Reform Act of 1995'' 
     (the ``Act'') in light of the November 28, 1995 Proposed 
     Conference Report and the accompanying ``Statement of 
     Managers'', which constitutes its primary legislative 
     history.
       The special focus of my letter is on the proposed ``safe 
     harbor for forward-looking statements'' that the Act would 
     codify. Although there are other serious problems with the 
     Act, it is this area where its deficiencies are the most 
     glaring and where the recently drafted legislative history 
     most clearly distorts the original intent of the proponents 
     of such a safe harbor. Over the last two years, I have 
     repeatedly testified before Congressional committees on the 
     subject of securities legislation, have drafted a proposed 
     administrative ``safe harbor'' rule at the request of the 
     SEC, and have served as an informal consultant to attorneys 
     on the staff of the White House counsel on the subject to 
     such a safe harbor. Throughout this process, I have strongly 
     supported the desirability of such a safe harbor, believing 
     that it will encourage fuller disclosure from issuers who 
     would otherwise be chilled from making projections by the 
     threat of private civil liability. Unfortunately, I believe 
     the formulation of the proposed ``safe harbor'' in Section 
     102 of the Act, when read in light of its legislative 
     history, does the reverse. That is, its adoption would 
     seriously erode the quality of disclosure in our national 
     securities markets and, in some cases, would give issuers a 
     virtual ``license to lie''.
       Simply put the core problem is that the Act's safe harbor, 
     as finally drafted, does not require the issuer to identify 
     the substantive factors known to it that are most likely to 
     cause actual results to differ materially from projected 
     results. Rather, the issuer could simply provide a 
     representative list of ``important factors'' that could cause 
     actual results to differ materially from projected results. 
     Thus, for example, an issuer might be aware of ten factors 
     that could cause its projection to go awry and could 
     deliberately list only the third, fifth, seventh and tenth 
     most important factors, intentionally omitting the first, 
     second, fourth factors (or three out of the first four). This 
     outcome is very different from what would be tolerated today 
     by the federal courts, because these courts have crafted a 
     protective doctrine (known) as the ``bespeaks caution'' 
     doctrine) to shelter issuers from liability when their 
     projections prove materially inaccurate. However, this 
     judicial doctrine applies only when the projection is 
     accompanied by cautionary language that is ``specifically 
     tailored'' to the actual projection made and the 

[[Page S19042]]
     special risks faced by the issuer. Not only does the Act lack any 
     requirement that the cautionary statements be in any 
     respect ``tailored'' to the projections made, but its 
     legislative history now makes clear for the first time 
     (and at the last minute) that the issuer need only 
     disclose some of the reasons known to it why the 
     projection may prove false (and apparently not the most 
     important such reasons). In this light, rather than simply 
     codify the emerging ``bespeak caution'' doctrine, it is 
     much closer to the trust to say that the Act overrules 
     that doctrine.
       To understand this assessment, it is necessary to focus 
     briefly on the legislative language and its accompanying 
     legislative history. Under proposed Sec. 27A (and also under 
     a companion provision that amends the Securities Exchange Act 
     of 1934), a defendant cannot be held liable in a private 
     action with respect to a forward-looking statement if and to 
     the extent that either of the following occurs:
       (A) The forward-looking statement is identified as such and 
     ``is accompanied by meaningful cautionary statements 
     identifying important factors that could cause actual results 
     to differ materially from those in the forward-looking 
     statement;'' or
       (B) the plaintiff fails to prove that the defendant (or 
     certain officers thereof) had ``actual knowledge . . . [of] 
     an untrue statement of a material fact or omisssion of a 
     material fact. . .''
       Thus, even if knowingly false statement is made, the 
     defendant escapes liability if ``meaningful cautionary 
     statement'' are added to the forward-looking statement. This 
     is bad enough, but under the proposed legislative history 
     there now appears to be no obligation to disclose the most 
     important reasons why the forward-looking statement may prove 
     false (so long as some ``important factors'' are indicated). 
     Specifically, the Statement of the Managers directs:
       ``Failure to include the particular factor that ultimately 
     causes the forward-looking statement not to come true will 
     not mean that the statement is not protected by the safe 
     harbor. The Conference Committee specifies that the 
     cautionary statements identify ``important' factors to 
     provide guidance to issuers and not to provide the 
     opportunity for plaintiff counsel to conduct discovery on 
     what factors were known to the issuer at the time the 
     forward-looking statement was made. . . .The first prong of 
     the safe harbor requires courts to examine only the 
     cautionary statement accompanying the forward-looking 
     statement. Courts should not examine the state of mind of the 
     person making the statement.'' (at pp. 17-18).
       On this basin, a court would not be able to ascertain what 
     ``important factors'' the issuer was aware of but failed to 
     disclose. It is at least arguable than if the issuer 
     disclosed factors that were ``important'' but not among the 
     top four or five reasons why actual results might deviate 
     materially from predicted results, such disclosure would 
     still satisfy this standard. Simply put, no public policy 
     justification can support such selective disclosure of the 
     less important factors while withholding the most 
     important.
       Throughout the legislative drafting process, the managers 
     of the Act have argued that their safe harbor provision 
     largely codified the ``bespeaks caution'' doctrine, but just 
     avoided overly exacting (and litigation-promoting) terms, 
     such as ``specifically tailored.'' Perhaps, it was 
     understandable those fearful of an excessive incentive to 
     litigate would wish to avoid such a formulation. Thus a weak 
     compromise was reached under which the disclosures would only 
     have to include ``meaningful cautionary statements.'' Now, 
     however, with the appearance of the legislative history, even 
     that compromise has been undercut by language suggesting that 
     only a few representative factors need be disclosed.
       The impact of this change is shown by the following 
     entirely realistic examples:
       1. A biotech company, whose future depends on the 
     development of a new drug, projects that it will be in the 
     market within 18 months, but acknowledges that this 
     projection is subject to the uncertainties of FDA approval. 
     However, it fails to disclose that the FDA has just 
     questioned the adequacy of its tests and suggested that a new 
     round of testing may be necessary.
       2. A company projects a 50% increase in its earnings for 
     the next year and specifies that this projection is 
     conditioned on (i) the current level of interest rates, (2) 
     continued high demand for its products, (3) the availability 
     of certain scarce supplies, and (4) its ability to obtain 
     adequate financing from its lenders to exploit business 
     opportunities. Omitted from this list of important factors is 
     the critical factor that 50% of its sales come from a single 
     contract with a major customer, who has experienced major 
     business and financial difficulties and has sought to 
     renegotiate its future payments, claiming that it might be 
     unable to pay for future deliveries.
       In both these cases, some ``important factors'' are 
     disclosed, but the critical facts are omitted. Under current 
     law, the forward-looking statements would not be protected, 
     because the cautionary statements were not ``specifically 
     tailored.'' However, under the Act, they may be insulated 
     from private liability--with the result that the securities 
     market will become somewhat more ``noisy'' and less 
     transparent and investors will have to discount projections 
     for the risk that material information was not disclosed.
       So what should be done? Ultimately, the options at this 
     point are limited. Nonetheless, I suggest that there are two 
     options that do not require the sacrifice of the federal 
     securities laws' traditional objective of full and fair 
     disclosure:
       (1) Veto Plus An Administrative Rule. The President could 
     veto the Act, but simultaneously announce the promulgation by 
     the SEC of an administrative safe harbor rule that protects 
     forward-looking statements so long as the principal risk 
     factors known to management at the time the forward-looking 
     statement is made are disclosed (along with any material 
     facts bearing on these risk factors); or
       (2) Signature Plus An Administrative Rule. The President 
     could sign the Act, but instruct the SEC to adopt an 
     interpretative rule defining what constitutes adequate 
     ``meaningful cautionary statements'' for purposes of the 
     Act's safe harbor. This administrative definition would, of 
     course, require an issuer to identify the principal factors 
     known to it that are in its judgment most likely to cause 
     actual results to deviate from projected results.
       This second option deserves a brief word of explanation. 
     Although the legislative history in the Statement of Managers 
     is adverse, it is not decisive. Nothing in it clearly 
     prohibits an SEC interpretative rule along the lines 
     indicated above. In any event, the Supreme Court is divided 
     on the weight to be given to legislative history. 
     Particularly because the term ``meaningful cautionary 
     statements'' is not self-evident, but has soft edges, courts 
     are likely to give substantial discretion to an 
     administrative agency to define the critical terms in the 
     statute under which it operates. See Chevron, U.S.A. Inc. v. 
     Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) 
     (agency has substantial powers to resolve legal ambiguities 
     in its statute and federal court should give deference to its 
     greater expertise).
       The advantage of this latter approach is that allows the 
     other provisions of the Act to take effect. Although I and 
     many others also have problems with these provisions, they 
     are of a lesser order of magnitude.
       to sum up, the latest changes and associated legislative 
     history has made a bad provision worse. I, therefore, urge 
     you to either veto the Private securities Litigation Reform 
     Act of 1995, or sign it only after receiving the assurance of 
     the SEC that it can and will correct the excesses of the safe 
     harbor provision through administrative rule-making.
           Respectfully submitted,
     John C. Coffee, Jr.
                                                                    ____

                                            Columbia University in


                                         the City of New York,

                                  New York, NY, December 13, 1995.
     Re private Securities Litigation Reform Act of 1995 (the 
         ``Act'') Safe Harbor Provisions.

     Bruce Lindsey, Esq.
     Associate White House Counsel, The White House,
     Washington, DC.
       Dear Mr. Lindsey: This is a follow-up to my letter to the 
     President of December 6, 1995, in which I voiced my 
     criticisms of the ``safe harbor for forward-looking 
     statements.'' While I stated (and continue to believe) that 
     the safe harbor provisions represent the most glaring 
     deficiency in the Act, I also suggested that these problems 
     could be substantially corrected by SEC rule-making. 
     Subsequently, I have been asked to clarify my views on the 
     SEC's authority to adopt a definitional rule in light of the 
     legislative history that will accompany the Act (which I had 
     reviewed but did not specifically discuss in my earlier 
     letter).
       Initially, it should be noted that both the Securities Act 
     of 1933 (in Section 19) and the Securities Exchange Act of 
     1934 (in Section 3(b)) delegate broad authority to the SEC 
     ``by rules and regulations to define technical, trade, 
     accounting, and other terms used in this title, consistently 
     with the provisions and purposes of this title.'' \1\ Indeed, 
     the Commission used this authority over a decade ago to adopt 
     a ``safe harbor for forward-looking information.'' See SEC 
     Rules 175 and 3b-6 (''Liability for Certain Statements by 
     Issuers'').
     \1\ This is the language of Sec.  3(b); Sec.  19(a) of the 
     1933 Act has some immaterial differences, which, if anything, 
     give broader authority to the SEC ``to make, amend, and 
     rescind such rules and regulations as may be necessary to 
     carry out the provisions of this title.
---------------------------------------------------------------------------
       My suggestion was that the SEC could adopt a new rule under 
     both the 1933 Act and the 1934 Act to define what constituted 
     ``meaningful cautionary statements.'' I asserted that the 
     Supreme Court's decision in Chevron, U.S.A. Inc. v. Natural 
     Resources Defense Council, Inc., 467 U.S. Sec. 837 (1984) 
     indicated that courts would be required to deter to such an 
     agency rule. As I understand it, some concern has been raised 
     as to whether the legislative history to the Act so clearly 
     indicates a contrary Congressional intent on this question as 
     to preclude such a rule. this letter is intended to address 
     this concern.
       Under the Chevron decision, judicial review of an agency's 
     construction of the statute that it administers has two 
     stages. First, the court considers ``whether Congress has 
     directly spoken to the precise question at issue.'' Id. at 
     842. Second, ``[i]f * * * the court determines Congress has 
     not directly addressed the precise question at issue,'' the 
     court determines ``whether the agency's answer is based on a 
     permissible construction of the statute.'' Id. at 843. In 
     this latter inquiry, substantial deference must be given to 
     the agency's greater institutional expertise.
     
[[Page S19043]]

       Let us suppose then that the SEC were to adopt a 
     definitional rule defining ``meaningful cautionary 
     statements'' so as to require the corporation seeking to rely 
     on the statutory safe harbor to ``identify those substantive 
     factors then known to the corporation's executive officers 
     that were in their judgment most likely to cause actual 
     results to differ materially from the results projected in 
     the forward-looking statement.''\2\
     \2\ Of course, this is intended only as a first 
     approximation, but I do not believe that such a rule would be 
     hard to draft.
---------------------------------------------------------------------------
       Obviously, the first issue is whether the legislative 
     history indicates that Congress has directly spoken to ``the 
     precise question at issue.'' Whether ``the precise question'' 
     be broadly defined as the meaning of ``meaningful cautionary 
     statements'' or more narrowly defined as whether such 
     statements should indicate the most important reasons why 
     actual results may deviate from predicted results, my answer 
     is the same: Congress has not spoken to either question. 
     Reviewing the Statement of Managers, one finds only two 
     statements that address these issues, even indirectly. First, 
     at p. 17, it states:
       ``The Conference Committee expects that the cautionary 
     statements identify important factors that could cause 
     results to differ materially--but not all factors. Failure to 
     include the particular factor that ultimately causes the 
     forward-looking statement not to come true will not mean that 
     the statement is not protected by the safe harbor.''
       This understandable position does not, however, conflict 
     with an SEC definition that required the issuer to identify 
     the most important factors then known to it. Logically, the 
     failure to identify the particular factor may have been 
     because that factor was remote and unlikely to occur (i.e. 
     number thirteen on a list of fifteen recognized factors). 
     Hence, there is no necessary conflict. Moreover, the proposed 
     rule could accommodate this point by expressly providing that 
     the failure to identify the particular factor would not be 
     decisive if the issuer had not perceived it to be among the 
     most important factors (ranked either in order of probability 
     of occurrence or magnitude of the consequences if it 
     occurred) or had identified several other factors that it 
     considered to be of greater importance. Put simply, a 
     Congressional intent to permit omission of the actual factor 
     does not preclude a rule requiring disclosure of the most 
     important factors.
       A second and more oblique statement of Congressional intent 
     may arguably be inferred from the Statement of Managers' 
     attempt to limit discovery. At pp. 17-18, that statement 
     directs:
       ``The Conference Committee specifies that the cautionary 
     statements identify `important' factors to provide guidance 
     to issuers and not to provide an opportunity for plaintiff 
     counsel to conduct discovery on what factors were known to 
     the issuer at the time the forward-looking statement was 
     made. * * * The first prong of the safe harbor requires 
     courts to examine only the cautionary statement accompanying 
     the forward-looking statement. Courts should not examine the 
     mind of the person making the statement.''
       Initially, it should be observed that the above language 
     addresses only discovery and not the substantive content of 
     the ``meaningful cautionary statements.'' Moreover, this 
     language may be in direct conflict with the statutory 
     language (in which case the statute should trump the 
     legislative history). Both Sections 27A((f) and 21E(f) 
     expressly authorize discovery ``specifically directed to the 
     applicability of the exemption provided for in this 
     Section.'' Nonetheless, someone may potentially argue that 
     this hostility to discovery as to issuer's state of mind 
     precludes a rule requiring the ``meaningful cautionary 
     statements'' to identify the most important risk factors then 
     known to the issuer. This seems a weak and very inferential 
     claim. Even without discovery addressed to the issuer's state 
     of mind, a court can assess whether the factors most likely 
     to cause a projection not to be realized have been disclosed. 
     Indeed, one possible answer to this objection is to frame the 
     definition in terms of disclosure of the factors that a 
     reasonable person in the corporation's position would have 
     foreseen as being most likely to cause actual and predicted 
     results to deviate materially. Then, the focus becomes 
     objective and not subjective, and there is no conflict with 
     the Congressional prohibition on discovery as to the 
     corporation's state of mind. Discovery could then focus on 
     whether the risk factors were generally recognized in the 
     relevant industry (without focusing on the issuer's state of 
     mind). In short, both objections to the proposed rule can be 
     easily outflanked.
       This then takes us to the second level of analysis: is the 
     SEC's interpretation ``based on a permissible construction of 
     the statute?'' See Chevron, U.S.A. v. Natural Resources 
     Defense Council, 467 U.S. at 843. If it is, ``a court may not 
     substitute its own construction of a statutory provision for 
     a reasonable interpretation made by the administrator of an 
     agency,'' Id. at 844. There seems no need to belabor the 
     reasonableness of requiring disclosure of the factors most 
     likely to cause the projection to go awry. Disclosure of 
     remote factors would indeed not be ``meaningful'' because it 
     would not convey an accurate sense of the relevant risk 
     level.
       Independently, I should note that respected legal 
     commentators have recently stressed the role of presidential 
     interpretations in the proper judicial construction of a 
     statute's meaning. See Thomas W. Merrill, Judicial Deference 
     to Executive Precedent, 101 Yale L.J. 969 (1992). While it is 
     not necessary to rely on this ``executive precedent model,'' 
     its availability could be strengthened by a contemporaneous 
     statement by the President as to how he believes the term 
     ``meaningful cautionary statements'' should be read. Such a 
     declaration is not necessary, but cannot hurt.
       I hope these comments are useful. If I can be helpful in 
     any way, please do not hestitate to contact me.
           Yours tryly,
                                               John C. Coffee, Jr.

  Mr. DOMENICI addressed the Chair.
  The PRESIDING OFFICER. The Chair recognizes the Senator from New 
Mexico.
  Mr. DOMENICI. Parliamentary inquiry, Mr. President. There are no time 
limits on this yet, are there?
  The PRESIDING OFFICER. There are no time limits.
  Mr. DOMENICI. Have we agreed on the time to vote yet?
  The PRESIDING OFFICER. We have not.
  Mr. DOMENICI. Mr. President, I am pleased to have an opportunity to 
speak before 1 o'clock, because I will not be back on the Senate floor 
for a few hours after that. I thank the floor manager for accommodating 
me, and I thank the Senate for giving me this chance to talk for just a 
few minutes.
  I think the issue is pretty simple, although my good friend from 
Maryland can, indeed, make it very complex with reference to rules of 
procedure, cites of precedent and Federal rule requirements. This issue 
is very simple, we have a situation in the country where many who want 
to sustain the President's veto talk about saving, protecting the 
investors so that lawsuits can be filed on their behalf against those 
who would perpetrate fraud against them as the management or executive 
part of a corporation. The scenario is ``people need protection because 
somebody is going to do them in.''
  Let me tell you, the basic problem is that the system we have right 
now does in the investor and it does in the company. It does the 
stockholder in, whether it is a small stockholder or somebody who is in 
one of the giant investment groups in the country as a stockholder. 
Remember, there are always shareholders on both sides of a case. The 
nonsuing shareholders receive lower dividends and lower stock prices 
when their companies are sued in these class actions. And the members 
of the plaintiff class don't do too well either. The ones who do well 
are the class action lawyers. The attorneys run these cases, decide who 
to sue and when to settle. According to the Millberg Weiss data that 
were submitted to the U.S. Senate, and it was not a submission that we 
easily obtained, the problem is that if you collect total damages in 
one of these suits and let us just say it is a dollar--it is never a 
dollar, it is more like $30 million--if it is a dollar, 14 cents of 
that goes to the investors. I am not saying that the entire 86 cents 
goes to the lawyers, but it does not go to the investor.
  Essentially, there is a lot going on behind that simple fact. There 
are many factors that affect what is going on in the litigation cosmos 
against corporations on the so-called behalf of the so-called 
stockholders. But, in essence, the system we have is not working. In 
fact, it is detrimental to the people we allege we are trying to 
protect by a Federal court-made rule, the private right of action under 
Section 10b.
  There is no statutory law in America that created class action 
lawsuits under section 10b of the Securities and Exchange Act of 1934.
  The courts created the implied private right of action as a method of 
getting justice and expediting matters so that each stockholder, in the 
case of these kinds of suits, did not have to file their own lawsuits. 
In the process, let me suggest that it is very simple to come to the 
floor and say we ought to fix that. It is very simple for my friend 
from Maryland to come to the floor and say, ``We agree on some 
things.''
  Mr. President, we have been trying to reform the system, in an active 
way, for at least 5 years. We probably have been trying to fix it for 
10 years. But, that I am aware of, we have been actively trying to fix 
it for 5 years--fix this problem, the problem that lawyers are no 
longer lawyers in the sense that people understand them to be. They are 
entrepreneurial lawyers. That means 

[[Page S19044]]
they are in the business of manufacturing lawsuits and making money, if 
they can find the situation where a stock price drops and the lawyers 
can allege fraud. Believe you me, they look for them, they find them, 
they recruit them, and they use the same plaintiff many times in many 
suits. They have their favorites. They are called professional 
plaintiffs or pet plaintiffs.
  In one set of facts before the committee last year, we found that a 
very elderly man--I think he was over 90--owned small amounts of stock 
in a whole in a large number of corporations because, if he had enough, 
he would be the favored plaintiff of this new breed of lawyers. In 
exchange for letting the lawyer use your name, the professional 
plaintiff gets a bonus payment of thousands of dollars. Entrepreneurial 
lawyers agree with statements that say, ``Once we get one of these 
suits, it is wonderful. We do not work for the stockholders, we work 
for ourselves because our interest becomes how much money can we 
finally get if a president of a company, an auditor who did part of the 
work, a CPA that did work, a board of directors that voted it--how many 
of these can we bring into a lawsuit?'' At some point, they all add up 
a little money and they have a nice pot, and it is looking good. ``Gee, 
we might make $10 million, $20 million out of this.'' And now we settle 
it. And this results, right here on this chart.
  My friend from Maryland would say, well, you have come a long way, 
and many of the provisions in this bill we agree with. But my question 
is: How long do we have to debate? How many hearings do we have to 
have? How many Senators do we have to have voting for this? How many 
House Members do we have to have voting on it--only to find that those 
that support the President's veto come to the floor and say there is 
something really bad with what is going on out there. And this is a 
good bill.
  Mr. SARBANES. Will the Senator yield?
  Mr. DOMENICI. But the opponents say we did not quite fix it right. 
Let me suggest to the Senators that are going to vote here tonight, we 
fixed it about as right as Democrat and Republican Senators--Democrat 
and Republican House Members, in large numbers--can do with a piece of 
legislation over a sustained period of time, with a lot of effort. And 
they did it. As a matter of fact, there has been more bipartisan 
participation on this bill, and from different spectrums of the 
ideological makeup of this Congress, than any bill I have seen since I 
have been here.
  It has Senators Helms, Lott, and Gramm voting for it, and it has 
Senators Mikulski, Kennedy, and Harkin on the bill and voting for the 
bill. And then when the bill came back from conference, a wide spectrum 
of Senators voted for it again.
  So, Mr. President, the truth of the matter is--I do not say this to 
my friend from Maryland, I make it as a broad statement--there are 
about 90 lawyers out there in the United States--maybe 110, or 
something like that--that you will never satisfy. They are powerful, 
they are strong, they have a lot of money, and they are listened to by 
a lot of people; they make huge political contributions, and everybody 
knows that. And you will never satisfy them because they like the 
system as it is.
  There is an old gypsy curse that goes like this: ``May you be the 
innocent defendant in a frivolous lawsuit.'' It is a curse stopping 
companies from creating good jobs, high-paying jobs. It is a curse for 
our economy. If it was not the most powerful around, we would probably 
easily find the enormous damage being done. It is so big and so strong 
that all we can do is add up all the horror stories and find out that 
``something is wrong in Denmark.'' It is a curse of the Silicon Valley, 
which breeds entrepreneurial companies that have scattered across 
America and made growth in jobs and competition a reality. All of the 
high-tech companies are concerned almost every day that the President 
makes any statements about their company--biotech and high-growth 
companies.
  This issue is the electronics industry's No. 1 issue.
  Frankly, you will find them listed by the hundreds--not a few, but by 
the hundreds--through their chief executive officers, begging the 
President to sign this legislation. I am sorry he did not. I think he 
made a very bad mistake.
  It has been a difficult job. This bill was first introduced--and it 
was not as good as it is now--by Senator Dodd and Senator Domenici 3\1/
2\ years ago. It was introduced by Senator Domenici and Senator Dodd, 
and there was a counterpart in the House sponsored by Congressman 
Tauzin. It has been dramatically improved and we are here with it 
today.
  Mr. SPECTER. Will the Senator yield for a question on the President's 
action?
  Mr. DOMENICI. Yes.
  Mr. SPECTER. The President, in his veto message, focused on one 
narrow question. Actually, he focused on three, but they boil down to 
one. That is, on the somewhat arcane question of pleading. The question 
goes to the distinguished Senator from New Mexico, whom I compliment 
for his laborious work here. He is an attorney himself, and he is the 
proud father of an attorney, as am I.
  Mr. DOMENICI. Three attorneys.
  Mr. SPECTER. He is the proud father of three attorneys. He only 
talked to me about one, so I will have to find out about the other two. 
I want to ask the Senator from New Mexico a question which relates to 
the core problem here about the requirements on proving state of mind, 
where the President's veto message takes up this question, with the 
conference report adopting the toughest standard in existence, the 
standard of the second circuit. But the conference report dropped an 
amendment which this Senator had offered, which was approved by a 
substantial majority, 57 to 42, codifying the second circuit's method 
of proving state of mind. And then the conference report also added the 
requirement that state of mind be pleaded with particularity, which is 
a direct contradiction to the general rule of civil procedure that 
state of mind be averred generally as opposed to fraud, which has to be 
pleaded with particularity.
  Now, this is classified as an arcane subject, which means very few 
people know anything about it. The President called me the night before 
last because I had written to the President--and I will go into this a 
little more when I seek the floor on my own behalf--but in the context 
where you have a short statute of limitations, where you have the 
unique--not unusual, but unique--provision in the law for a mandatory 
stay of discovery when a defendant files a motion to dismiss, so that 
you have a requirement that the plaintiff plead with particularity 
facts on the defendant's state of mind. Does that not go too far in 
closing the courthouse door to plaintiffs? I say that without an ax to 
grind, and with some substantial experience as a practicing lawyer, 
although not in class action fields for the plaintiff. I represented 
some defendants in securities act litigation.
  As I take a look at the current state of the bill, different from the 
bill passed by the Senate, the President raises three points which 
would change in the conference report, but they boil down to this 
extraordinarily high standard of pleading. Is it fair to require 
investors in a field where we have stock security transactions, 
approximating $4 trillion in this country each year, bearing in mind 
the gross national product in this country is----
  Mr. DOMENICI. I have great respect for the Senator, but I would like 
him to ask the question.
  Mr. SPECTER. Is it fair to have that kind of particularity required 
in that bill?
  Mr. DOMENICI. I think it is fair. My answer is briefer than your 
question but let me insert in the Record a letter dated October 31, 
from the U.S. Court of Appeals for the Third Circuit, Judge Scirica, 
circuit judge. He writes on behalf of the Judicial Conference.
  One portion of the concern you have, as expressed by the Senator from 
Pennsylvania, is that the Senate Banking Committee provision provided 
that the complaint must ``specifically allege facts giving rise to a 
strong inference.'' The conference report states that the complaint 
must ``state with particularity the facts giving rise to a strong 
inference.''
  The reason we put in ``state with particularity the facts giving rise 
to a strong inference'' is because that is what Judge Scirica, speaking 
on behalf of the Judicial Conference, asked Congress to do. He 
indicated in this letter 

[[Page S19045]]
that he thought--and he was speaking for many others that are concerned 
about pleadings--that it was more appropriate to say ``state with 
particularity facts giving rise to a strong inference'' as compared 
with ``specifically allege facts giving rise to a strong inference.'' 
That is the change made, and it was made at the suggestion of an 
eminent jurist.
  Now, let me complete my remarks. The point I want to make is that 
there have been many Senators on both sides of the aisle work on this 
legislation. I want to thank Senator Dodd, in particular, for the 
tremendous effort he made in behalf of this legislation. I am not sure, 
Mr. President, and I say this to all of those who are out there in 
America--and they are by the hundreds of the thousands--who were 
overjoyed when this bill passed the Senate and passed the House and who 
will be overjoyed tonight if we override the President. Without Senator 
Dodd, we would not have made it.
  Second, there is no doubt that without the tremendous efforts put 
forth by the chairman of that committee, the Senator from New York, 
Senator D'Amato, who started out skeptical and ended up powerfully on 
the side of common sense and protecting our investors while we protect 
our corporations from the abuses of a burgeoning entrepreneurial 
litigation complex out there where lawyers decide who get sued, when 
cases are settled, when they have gotten enough out of the system, to 
take it and run, and when the end product is that they and the process 
take most of the money.
  I am delighted that those two Senators--there are many others--
decided to take this thing to heart. I had an early role, and I can 
tell you my role came because I read about this litigation. I had no 
interest. I just have a lot of time traveling from here to New Mexico 
and occasionally I read--not often--and I read one story and it enticed 
me to read two, and finally I read three or four major stories, 
exposes, stories, about this burgeoning type of American litigation. I 
could not believe that nothing could be done about it.
  Frankly, I set about to draft a bill. Senator Dodd actually was not 
the first cosponsor. Actually, Senator Sanford was my first cosponsor. 
That only lasted 3 or 4 months, and then Senator Dodd came on board. We 
have had nothing since then but a difficult battle. We have had 
advertisements, we have had millions spent talking about what evil 
people we are, how we are taking things away from the small investors 
of America. Who are we trying to protect? Obviously, not average folks.
  I am very, very pleased that for once there was a countervailing 
message out there from people who know we have fixed some abuses that 
should not go on in this country under the name of using the courts to 
protect small investors. We do not have to have that kind of system. 
Today, if the vote goes right, we will strike--without question, we 
will restore integrity to our securities litigation reform system--a 
giant strike will be made for commonsense, reasonable litigation in 
America, instead of litigation that goes to the extreme as far as the 
minds of bright lawyers can carry. There are many who think that is the 
way the system ought to evolve. I do not believe so. I do not think we 
ought to put to work the genius of our minds in figuring out how to 
litigate to get something out of the system. That is what I think has 
happened. I think we will fix that.
  There are 182 Members of the House from both sides of the aisle as 
original cosponsors. There were 52 in the U.S. Senate as original 
cosponsors. I must say, in all honesty, the bill is much better now 
than when they cosponsored it. In fact, I must say it is even better 
for that portion of the plaintiff's bar that chooses to participate in 
this kind of litigation. It is better for them, too because they will 
be forced to be better lawyers and to make the merits matter.
  I came to the floor just to express a few remarks. We will be here 
for perhaps a few hours. I also want to say the President's veto 
message leads me to conclude that we ought to pass this legislation. I 
do not see in this message from the President a scathing attack on the 
legislation. I see some very technical points. Frankly, a statement 
that the managers report might go too far. I do not know--I say this 
with a degree of caution, but I am not sure that I have seen a 
President veto a bill on the basis of what is in the statement of 
managers, but maybe I am wrong. I would not think Presidents would do 
that. I do not think this President intended that. A statement of 
managers is not law, everyone knows that. Interpretation will evolve 
over time, without any question. There are more than 12,000 words in 
this bill and the President quibbled with 11 of them. I know this 
because Senator Dodd did the analysis.
  I ask unanimous consent that the October 31 letter from the third 
circuit be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                            U.S. Court of Appeals,


                                                Third Circuit,

                                                 October 31, 1995.
     Ms. Laura Unger,
     Mr. Robert Giuffra,
     Senate Committee on Banking, Housing and Urban Affairs, 
         Washington, DC
       Dear Laura and Bob: I have a few suggestions for your 
     consideration on the Rule 11 issue.
       Page 24, line 11: Insert ``complaint'' before ``responsive 
     pleading.''
       Page 24, line 19: Insert ``substantial'' before 
     ``failure.''
       ``Complaint'' would be added to item (i), so there is a 
     clear provision that reaches any failure of the complaint to 
     comply with Rule 11. A small offense would be met by 
     mandatory attorney fees and expenses caused by the offense; 
     if item (ii) is modified without this change, a gap is left 
     in the statutory scheme. The result still is a big change 
     from present Rule 11, which restricts an award of attorney 
     fees to a sanction ``imposed on motion and warranted for 
     effective deterrence.'' A serious offense--filing an 
     unfounded action--would be reached under item (ii).
       I also wish to confirm our prior conversation on scienter 
     and the pleading requirement.
       Page 31, line 5: Delete ``set forth all information'' and 
     insert in its place ``state with particularity.''
       Page 31, line 12: Delete ``specifically allege'' and insert 
     in its place ``state with particularity.''
       As I indicated, this would conform with the existing 
     language in Rule 9(b) which provides that ``the circumstances 
     constituting fraud or mistake shall be stated with 
     particularity.''
       Also, page 24, line 1: Delete ``entering'' and substitute 
     ``making.''
       Page 24, line 4: Delete ``of its finding.''
       Many thanks.
           Sincerely,
                                               Anthony J. Scirica.

  Mr. SPECTER. Mr. President, I have sought recognition to amplify some 
of the comments and some of the issues which I had raised in the 
question I posed to the distinguished Senator from New Mexico.
  The narrow issue which has been raised in the President's veto 
message is one of enormous importance but is generally not understood 
unless someone has delved into the intricacies of the legal pleadings, 
which are, candidly, not well known, not of very great interest, but 
are very, very important. The issue arises in a historical context 
where at common law lawsuits which had great merit on the substance 
were thrown out of court because lawyers did not put in an adequate 
written pleading--a pleading is a document that is filed to start a 
lawsuit--because lawyers, acting on behalf of clients, did not put 
enough in the pleading to satisfy the requirements of law.
  Most people do not really understand what the litigation process, the 
civil litigation process is all about. There is enormous publicity on 
the O.J. Simpson case, and television and radio and books talk a lot 
about criminal trials, but very few really go into detail on what 
happens in a civil lawsuit. But that is a process where one person sues 
another, or corporations may be involved as parties, in order to assert 
a cause of action or a claim for relief based on a civil wrong, where a 
remedy is sought. It may be money damages or an injunction to stop 
someone from doing something.
  In the old common law, many people who had been severely injured were 
not given a day in court because their lawyers did not put down the 
proper words. There is a famous textbook, Chitty on Pleading, to tell 
you how to write the pleadings. These problems have been carried over 
to the present day. As a younger lawyer, I went to the prothonotary's 
office in Philadelphia. On many occasions I had my complaints returned 
for failure to go into the kind of specificity needed.
  The leading architect, the draftsman of the Federal Rules of Civil 
Procedure, 

[[Page S19046]]
was a Yale Law School professor named Charles E. Clark. Charles E. 
Clark later became the dean of the Yale Law School and he later became 
a distinguished judge on the Court of Appeals for the Second Circuit 
and ultimately was the Chief Judge there. Judge Clark felt so strongly 
about civil procedure that he took time from his busy schedule to 
continue to teach a class at the Yale Law School long after he left as 
dean and was a distinguished Federal judge. I had the good fortune to 
have Judge Clark as a professor on civil procedure.
  Judge Clark, in a very eloquent way--and I wish he were on the floor 
today to talk about his deep feelings about procedure and the work that 
he had done--spoke about the unfairness of having highly technical 
rules of pleadings which stop people who have valid claims from getting 
into court. He developed, in the Federal Rules of Civil Procedure, what 
is called ``notice pleading.'' It was a very famous case, DiGuardia 
versus Gurney, that involved a man who was injured, wrote something on 
a slip of paper and filed it in Federal court, and that was sufficient 
to start a lawsuit, start the process. The defendant obviously 
objected. He wanted a lot more specification. What he really wanted to 
do was to win the lawsuit. He wanted to get the plaintiff, DiGuardia, 
out of court. But that is why we have judges who make decisions.
  The distinguished Senator from New Mexico made a statement that ``the 
lawyers decide when cases are settled.'' It is not true. These class 
action cases are not settled until judges decide when the cases are 
going to be settled and when the cases are going to be concluded. These 
actions all require court approval. If one person sues another, he can 
discontinue the lawsuit by simply filing a praecipe, or paper saying 
the lawsuit is over. But in class actions the lawyers do not decide 
these matters, they are decided by judges. The Federal Rules of Civil 
Procedure were set up in an elaborate way to provide fairness, to give 
both parties a fair chance.
  There is an interesting editorial in today's USA Today, commenting 
about this arcane, esoteric subject. The caption of it is, ``Sorry 
Securities Law.'' The key sentence is, ``President Clinton did 
something smart this week. He sided with investors and taxpayers in a 
battle for fair securities litigation reform.''
  I ask unanimous consent this editorial be printed in the 
Congressional Record, following my remarks.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 1.)
  Mr. SPECTER. The essence of my concern, albeit narrow, is very, very 
important, and that is what this conference report coming back from the 
conferees provides on how pleadings are articulated, bearing in mind 
that this has an enormous impact, a controlling impact on the 
litigation.
  When this bill was before the Senate, I offered an amendment which 
would give some direction to how plaintiffs met a very strong pleading 
requirement, which was taken from the Federal Court of Appeals for the 
Second Circuit. It has jurisdiction over New York, Vermont, and 
Connecticut, and many of the big security cases are brought there. 
Everybody agrees that the Second Circuit has articulated the toughest 
standard around. That has been accepted.
  When I read the decisions of the court of appeals, I noted that the 
court of appeals had pointed out how this tough standard could be 
satisfied, and I offered an amendment, which was opposed by the 
managers. I had a little discussion with the distinguished Senator from 
Utah, Senator Bennett, who was managing the bill that day. And my 
amendment was adopted by the Senate by a pretty convincing vote, 57 to 
42--which is a big vote around here, when the managers are opposed to 
it and you have about 60 cosponsors.
  That amendment provided as follows:

       The required state of mind may be established either by 
     alleging facts to show the defendant had both motive and 
     opportunity to commit fraud, or by alleging facts that 
     constitute strong circumstantial evidence of conscious 
     misbehavior or recklessness by the defendant.

  That was adopted by a strong vote in this body. Why was it adopted? 
Because, while the Senate agreed that we ought to have a tough standard 
on pleading, the Senate said we ought to look to the same court which 
established that pleading standard which explained how the proof would 
be made. But this important provision was dropped in the conference. 
That means the conferees did not like it. There was a little feeding 
frenzy as to how this legislation is finally crafted, in my opinion. 
There is a little feeding frenzy going on in a lot of subjects in the 
Congress today.
  Not only was this important provision dropped, but the conference 
report came back and made it even tougher, saying that plaintiff had to 
plead ``with particularity'' the facts giving rise to a strong 
inference that the defendant acted with a certain state of mind.
  This is a little tough, but I hope my colleagues, who will be voting 
on this matter, will follow this, will listen to it--or the staffs 
will.
  In the context of what the Federal Rules of Civil Procedure provide, 
and these are worked out by the judges and by the rules committee of 
the Judicial Conference after years of experience as to what is fair, 
rule 9(b) of the Federal Rules of Civil Procedure requires that fraud 
be pleaded with particularity. That is where you have fraud.
  But the same rule, when dealing with state of mind, says that the 
particularity pleading is not required because it is unrealistic. That 
rule says that state of mind can be ``averred generally.'' Here we come 
back with legislation on this subject which virtually closes the 
courthouse door to plaintiffs in legitimate cases, where there are very 
important issues and very important damages.
  When the distinguished Senator from New Mexico, Senator Domenici, was 
saying that hundreds of thousands of people will be pleased with 
overriding the President's veto, I would respond that millions of 
Americans will be displeased when they understand that what the Senate 
has done here is to make it virtually impossible for them to get a case 
into Federal court.
  These are not trivial matters. It is hard to comprehend the enormous 
billions and trillions of dollars which we talk about in the Senate. 
The gross national product of the United States of America--that is 
what everybody produces, all the cars, washing machines, and the 
services--what everybody produces in this country amounts to $7 
trillion, everything that goes on in this country. The transactions on 
the stock exchanges, the sale of stock, approximate $4 trillion.
  We are not talking about a small group of lawyers, or a hundred 
thousand people who Senator Domenici says will be pleased if we 
override the President's veto. We are talking about millions of people 
in America who invest in stocks and bonds and who need to be treated 
fairly. We are talking about the greatest country in the world with an 
economic development which has developed a corporate mechanism, the 
corporate machine for acquiring capital by stock offerings on the basis 
of fairness where we have laws which say what the offerors must do in 
terms of honest representations. These are matters involving enormous 
sums of money.
  Just a few of the cases are:
  Wedtech, which involved a matter where investors recovered $77 
million of their losses which had exceeded more than $100 million in a 
class action suit;
  Platinum Software, where investors lost over $100 million, recovered 
$22 million in a class action suit against the company for overstating 
revenues;
  The famous Charles Keating, American Continental, Lincoln Savings 
case where a jury awarded $4.4 billion against Mr. Keating and others 
for fraud;
  The Drexel Burnham Lambert case where a New York securities law firm 
settled the claims of 40,000 class members who had invested in 
municipal bonds underwritten by Drexel for $26.5 million. Drexel 
subsequently went bankrupt in the aftermath of the Michael Milken 
insider trading scandal;
  A matter pending today involving investors in Orange County municipal 
bonds who lost more than $1.5 billion due to the high-risk trading and 
investment strategy pursued by Orange County, and suit is currently 
pending;
  Hedged Investments Associates, a $40 million settlement against 
Kidder, Peabody and Morgan Stanley to resolve a class action brought on 
behalf 

[[Page S19047]]
of 1,000 investors, mostly elderly retirees who had sustained losses of 
$72 million where there was a Ponzi-like scheme;
  The case of LA Gear, an athletic equipment maker, a class action 
settled for over $35 million to resolve a suit over allegations of a 
false public statement about stock value;
  Chambers Development suit settled for $75 million on allegations of 
false statements by management over corporate earnings and accounting 
methods;
  The Washington Public Power Supply System, 26,000 investors were 
defrauded of over $2 billion for fraud in selling bonds using false 
information, and over $800 million was recovered in a class action 
suit.
  This is a very brief statement illustrating the kind of problems for 
which these cases are brought.
  Let me point out, Mr. President, that President Clinton has committed 
to signing the bill with three changes which would leave the reform 
program provisions essentially intact.
  There would be reform of joint liability, which has been urged by 
many. That stays in. Safe harbor for forward-looking nonfraudulent 
statements which turn out to be incorrect--that change stays in. The 
elimination of liability under RICO, something which should have been 
changed a long time ago, stays in. Procedural changes to make certain 
that the plaintiffs, rather than their attorneys, control the 
litigation stays in.
  The Wall Street Journal has an interesting comment in today's edition 
saying that only one of the three major--let me read a paragraph. It is 
relatively brief. ``While supporters [that is, supporters for the bill] 
weren't admitting it publicly yesterday, only one of the three major 
interest groups pushing the bill, the high technology companies often 
targeted for fraud suits, regard the bill's strict pleadings standards 
as essential. The other two groups, accounting and securities firms, 
are more interested in other aspects of the lawsuit-limiting bill such 
as limits on their financial liability.'' And those would all be 
retained.
  President Clinton went into this pleading issue in some detail. He 
filed a short three-page veto message. But I can personally attest to 
the thoroughness of the President's analysis of this issue because he 
called me on Tuesday night, night before last, rather late, 10:15 at 
night, and told me that he was issuing a veto message and made a 
comment that a letter which I had written him on December 8 this year 
had brought to his attention matters that he had not previously 
understood.
  The letter which I wrote to him said, in part, that I urged the veto 
because of the restrictive method of pleading scienter; that is, 
knowledge on the behalf of the defendants, and talking about the 
sanctions which could be applied and the strong limitations on 
plaintiffs' suits where you have this extraordinary standard of 
pleading, the short statute of limitations, and the mandatory review 
for sanctions under rule 11, which would so discourage any litigation 
from being brought. And, at the bottom of the letter, I printed in 
longhand this note: ``Going back to my roots on studying this issue at 
the Yale Law School, I think that my Federal procedure professor--Judge 
Charles Clark--would roll over in his grave to see the specific 
pleading standard in this bill, prohibition on discovery until a motion 
to dismiss is denied, and the chilling sanctions. Your veto would send 
it back for important revisions.''
  When the President called--and we had a conversation lasting about 
half an hour--he went in into these pleading provisions in detail, and 
talked about his own procedure professor at the Yale Law School, fully 
understood precisely what he was doing, and said in his veto message 
that he was prepared to sign the bill and supported the goals of the 
bill but thought it unfair to virtually close the courthouse door with 
these requirements.
  Mr. President, I ask unanimous consent that the following documents 
be printed in the Record following my statement:
  No. 1. My letter to the President dated December 8, 1995;
  No. 2. The President's veto message dated December 19;
  No. 3. My ``Dear Colleague'' letter dated December 20;
  No. 4. The article in the Wall Street Journal of today, December 21; 
and
  No. 5. The editorial in USA Today dated December 21, today.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibits 1, 2, 3, 4, and 5.)
  Mr. SPECTER. Mr. President, in conclusion, the two most popular words 
of any speech, I ask my colleagues and the staffs just to take a look 
at what we are doing here. The President is prepared to sign a bill and 
to sign into law very substantial changes in the securities fields 
which have been urged and would become law--limitations on joint 
liability, reforms, so-called, in the safe harbor provisions, the 
elimination of liability under RICO--and I have had many people, 
especially the accountants, urge that change be made--procedural 
changes to ensure plaintiffs, not their attorneys, control the 
litigation; really very major and enormous changes.
  But this one provision as to how you state your case is just 
unfairly, unduly restrictive in this bill because it turns the Federal 
Rules of Civil Procedure on their head. It turns in a revolutionary 
way--more than revolutionary, really destructively revolutionary--the 
established rules of notice pleading. It strikes the amendment which 
this body had adopted on my introduction telling people how to meet the 
tough standard of specific pleading and then adds to it a particularity 
requirement which makes it a virtual impossibility that sufficient 
facts can be alleged and in a unique way cuts off discovery. The only 
situation like it that I know about. It mandates the cut off of 
discovery when a motion to dismiss is pending, because 
characteristically and especially when you want to get inside 
somebody's head you cannot do it unless you ask them a question or two.
  So this is something of really enormous importance. What we would be 
doing in effect is returning to a common law pleading standard, the 
common law of ancient England, probably even tougher than common law in 
ancient England, which would be closing the courthouse doors on 
millions of Americans who invest their money. And the long-range effect 
of what it does to the lawyers is minuscule but not what it will do to 
investors and what it will do to capital formation in the United 
States. So I think that if we make these changes, simple but critical, 
as the President has said he will sign this law and we can move forward 
in a fair way.
  I thank the Chair. I yield the floor.

                               Exhibit 1

                    [From USA Today, Dec. 21, 1995]

                          Sorry Securities Law

       Caught between two big Democratic Party contributors--trial 
     attorneys and new high-tech companies, President Clinton did 
     something smart this week. He sided with investors and 
     taxpayers in a battle for fair securities-litigation reform.
       Clinton vetoed a bill aimed at limiting frivolous lawsuits 
     against corporations that simply went too far.
       As passed last week, the legislation gave a deserving slap 
     to a group of trial attorneys who've literally paid people to 
     start class-action suits against companies whose stocks 
     decline dramatically.
       To defend against such suits, companies on average pay 
     $700,000 in attorney fees and lose nearly a half-year's worth 
     of top managers' time. Such high costs especially threaten 
     new high-tech firms. All of Silicon Valley's young 
     electronics companies report being hit by so-called strike 
     suits.
       Legitimate investors aren't helped either when lawsuits 
     harass a company in which they've put money.
       The bill would benefit investors and business by allowing 
     executives to speak more freely about their plans with less 
     fear of suits if the plans go sour.
       That's what securities reform was supposed to be about. But 
     the legislation Clinton vetoed leapt beyond that with 
     provisions that would open the door to fraud.
       For example, the bill would allow executives to knowingly 
     deceive investors as long as they included general cautions 
     while hyping products. Thus, a drug company executive talking 
     up a new drug could keep from investors the fact that the 
     government had denied approval of it without risking suit as 
     long as he noted the uncertainty of the drug approval 
     process.
       Worse, the legislation also would require investors to 
     provide proof of intent to commit fraud when a complaint is 
     filed. That standard would have kept the government from 
     recovering money from Charles Keating and other savings and 
     loan crooks for their billions of dollars in fraud against 
     depositors and taxpayers.
       Those problems are easily remedied. As Sen. Arlen Specter, 
     R-Pa., argues, plaintiffs aren't mind readers. They should 
     only have to show motive and opportunity to commit 

[[Page S19048]]
     fraud to lodge a complaint. And honest executives and businesses don't 
     need a safe harbor for lies.
       Wednesday, the House foolishly rejected those quick Clinton 
     fixes to the bill and voted to override the veto. The Senate 
     should take Clinton up on them.
       Securities laws need to be fair to all, starting with 
     investors and taxpayers.

                               Exhibit 2

                                                      U.S. Senate,


                                   Committee on the Judiciary,

                                 Washington, DC, December 8, 1995.
     The President,
     The White House, Washington, DC.
       Dear Mr. President: This week, both the Senate and the 
     House of Representatives passed the conference report to H.R. 
     1058, the Private Securities Litigation Reform Act of 1995.
       I urge you to veto this conference report. While the bill 
     contains some reasonable provisions to eliminate frivolous 
     securities suits, it goes too far. The bill fails to extend 
     the statute of limitations shortened by the Supreme Court 
     several years ago. It imposes a highly restrictive method for 
     pleading scienter. It provides a mandatory stay of discovery 
     when a motion to dismiss is filed, thereby preventing 
     plaintiffs from discovering salient facts that would allow 
     them to amend their complaints to satisfy the new pleading 
     standard. It requires mandatory review at the completion of 
     each case for sanctions under Rule 11 of the Federal Rules of 
     Civil Procedure and, in what amounts to fee-shifting, 
     provides a presumption that the remedy for any Rule 11 
     violation in the complaint is reimbursement of the 
     defendants' attorneys' fees.
       As a practical matter, this combination of factors will 
     choke off many important law suits to protect innocent 
     investors. In very few cases will either potential plaintiffs 
     or their lawyers have a sufficient interest to justify 
     risking sanctions because, after the fact, a judge decides 
     that they may have violated a stringent and arbitrary 
     pleading standard. I fear that enactment of this bill would 
     represent the end of the private enforcement of the nation's 
     securities laws, which have provided the most stable markets 
     in the world.
       I assure you that in the event that you veto this bill, I 
     will support your veto and work to defeat any override 
     effort.
       Thank you for your consideration.
           Sincerely,
                                                    Arlen Specter.

                               Exhibit 3

       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 up 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 resource 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 defendant's state of mind 
     impose an unacceptable procedural hurdle to meritorious 
     claims being heard in Federal courts. I am prepared to 
     support the 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.

                               Exhibit 4

                                                      U.S. Senate,


                                   Committee on the Judiciary,

                                Washington, DC, December 20, 1995.
       Dear Colleague: I urge you to sustain the President's veto 
     on the Securities Bill.
       The President vetoed the Conference Report because it 
     significantly changed the Senate's version of the Bill. If 
     the Senate changes three provisions, the President has 
     committed to signing a revised Bill which would contain most 
     of the legislative reforms such as: reform of joint 
     liability; safe harbor for forward-looking nonfraudulent 
     statements which turn out to be incorrect; elimination of 
     liability under RICO; procedural changes to insure that 
     plaintiffs, not their attorneys, control cases.
       The President vetoed the Conference Report because it 
     established virtually impossible pleading requirements. The 
     President accepted the toughest pleading standard of the 
     Second Circuit on the defendant's state of mind, but the 
     President wanted the Bill to include my amendment (adopted by 
     the Senate 57 to 42) which codified the Second Circuit's 
     standard on how that state of mind could be proved.
       That tough pleading standard becomes even more important in 
     the context that the Bill prohibits discovery while the 
     defendant's motion to dismiss is pending. That means that the 
     plaintiff must specify his entire case without the benefit of 
     discovery. That is a virtually impossible pleading standard 
     which turns the Federal Rules of Civil Procedure on their 
     head.
       The Conference Report's safe harbor provision excludes 
     liability for knowingly false forward-looking statements. The 
     President would sign a bill which retained the Senate's 
     version.
       Sustaining the President's veto would retain most of the 
     reform measures in the Conference Report but will not close 
     the courthouse door to legitimate claims by these draconian 
     pleading standards.
       Transactions on the stock exchanges now approximate $4 
     trillion annually which is more than half the U.S. gross 
     national product.
       Fairness to investors requires these revisions in the final 
     bill which would follow the Senate's sustaining the 
     President's veto.
           Sincerely,
                                                    Arlen Specter.

                               Exhibit 5

             [From the Wall Street Journal, Dec. 21, 1995]

          House Votes To Override Veto of Securities-Suit Bill

                          (By Jeffrey Taylor)

       Washington.--The House voted 319-100 to override President 
     Clinton's unexpected veto of a bill restricting investors' 
     securities-fraud lawsuits, but the bill's supporters may find 
     an override harder to come by in the Senate
       Late Tuesday night, Mr. Clinton stunned a coalition of 
     publicly owned companies, accountants and securities firms 
     advocating the bill by vetoing the legislation--after 
     indicating earlier that he planned to sign it. The bill would 
     make it harder for investors to file lawsuits seeking damages 
     when companies' stock prices drop and would limit the 
     liability of accountants and underwriters for fraud by their 
     corporate clients.
       An override vote in the Senate may come as early as today. 
     White House aides expressed confidence that Mr. Clinton's 
     legislative staff could muster enough votes to defeat it. The 
     Senate approved the final version of the bill two weeks ago 
     by a 65-30 vote, barely enough for the two-thirds margin 
     needed for an override. Both sides in the debate spent much 
     of yesterday lobbying five senators who voted for the bill 
     but are seen as swing votes.
       In addition to his usual Republican adversaries, the 
     president faces some unaccustomed opponents in the override 
     fight including Sen. Christopher Dodd (D., Conn.), the 
     Democratic National Committee chairman who aggressively 
     supports the bill. In a speech to House Democrats yesterday 
     morning, Sen. Dodd urged them to vote for their body's 
     override. And in a terse public statement, Mr. Dodd vowed to 
     ``work hard . . . to enact this legislation into law,'' which 
     would amount to a defeat for his own party's president.
       If the Senate override effort fails, the bill's supporters 
     may be forced to reshape the bill to conform with some of Mr. 
     Clinton's concerns about it. The first of these, the 
     president said in his veto message, was that the bill's so-
     called pleading standards--or the facts investors must 
     establish so courts will let their lawsuits proceed--impose 
     ``an unacceptable procedural hurdle'' to many worthy lawsuits 
     in the federal-court system. Thus, he concluded, the 
     standards would damage the legal rights of defrauded 
     investors.
       While supporters weren't admitting it publicly yesterday, 
     only one of the three major interest groups pushing the 
     bill--the high-technology companies often targeted for fraud 
     lawsuits--regards the bill's strict pleading standards as 
     essential. The other two groups--accounting and securities 
     firms--are more interested in other aspects of the lawsuit-
     limiting bill, such as its limits on their financial 
     liability.
       Mr. Clinton appears to have counted on that fact in 
     crafting his veto message. In it, he calls for restoration of 
     an amendment introduced by Sen. Arlen Specter (R., Pa.), who 
     opposes the bill, which would have softened 

[[Page S19049]]
     the pleading standards. The amendment was approved by the Senate in 
     June but was dropped in subsequent negotiations to merge the 
     Senate bill with its House counterpart.
       In a letter to Mr. Clinton this month, Sen. Specter urged 
     Mr. Clinton to veto the bill and, if he did, promised to help 
     defeat any override effort in the Senate. Sen. Specter, who 
     like Mr. Clinton is an alumnus of Yale Law School, said in 
     his letter that his former federal-procedure professor at 
     Yale would ``roll over in his grave to see the specific 
     pleading standard in the bill.''
       In a statement issued before yesterday's House vote, Rep. 
     Christopher Cox (R., Calif.), one of the bill's architects 
     and most ardent supporters, dismissed the concerns raised in 
     Mr. Clinton's message and painted the veto as a concession to 
     class-action trial lawyers who oppose the bill. Mr. Clinton 
     vetoed the bill, Rep. Cox asserted, ``at the bidding of 
     securities lawyers who are some of his and the Democratic 
     Party's biggest donors.''
       The President's message also criticized the managers' 
     statement that accompanied the bill, in which its 
     congressional supporters explained what their intentions were 
     in drafting it. Mr. Clinton complained about how the 
     managers' statement described a key provision of the bill 
     protecting companies from legal liability for their forecasts 
     about earnings and other matters. The statement, he said, 
     ``attempts to weaken the cautionary language'' the bill 
     requires for companies to describe factors that might skew 
     their forecasts.

  Mr. BENNETT addressed the Chair.
  The PRESIDING OFFICER (Mr. Kyl). The Senator from Utah is recognized.
  Mr. BENNETT. Mr. President, I thank my colleague from Pennsylvania.
  If we were not in the veto circumstance we are in, we might well be 
able to work out some of the issues that he raises. My only comment 
with respect to some of the comments he made is to remind Senators that 
this bill deals with forward-looking statements, not with fraud that is 
committed in terms of reporting inaccurate stock prices, earnings, 
asset value, et cetera. I hope Members of the Senate and any who are 
listening will understand the point we have made over and over again, 
that had this bill been in place at the time of Charles Keating's 
defalcations this bill would not have prevented a class action suit 
against Charles Keating. Had this bill been in place at the time of the 
class action suit brought in Orange County, this bill would not have 
prevented those class action suits.
  There is a clear difference between fraud when one is making a false 
statement about the performance in the past and forward-looking 
statements where one is making predictions about the future. That is 
one of the cruxes here of this argument that has been lost. People have 
stood in the Chamber again and again and said to those of us who are in 
support of this legislation, how can you support fraud on the part of 
corporate executives? The answer is, we do not support fraud on the 
part of corporate executives. We have never supported fraud on the part 
of corporate executives.
  If I may be somewhat predictive in my forward statements, Mr. 
President, I see charts that are being set up in the Chamber that we 
have seen before which make this point, that investors are being 
defrauded and therefore how can you support legislation that would 
support this kind of defrauding.
  The fact is, stating it once again for the record, we are not talking 
about the Charles Keatings of this world. We are not talking about that 
for which Michael Milken was sent to jail, acts where information is 
hidden from investors or information is distorted to defraud and 
mislead investors. We are talking about the circumstance where an 
executive is asked a question about the future and gives his best 
answer, and then after the fact, if the future does not come to pass 
the way that executive had speculated, he gets sued.
  If I may, Mr. President, I would like to put that in the context of 
the present budget debate because that is so much on everybody's mind. 
We are seeing estimates of the future that are coming out of the Office 
of Management and Budget. We are seeing estimates of the future that 
are coming out from the Congressional Budget Office. We are seeing 
estimates of the future that are coming out of the Mainstream 
Bipartisan Coalition, with whom I met yesterday, about what the economy 
is going to do and what the budget is going to do. Without the 
protection contained in this bill, if the Members of the Senate and the 
House, if, indeed, the President himself, were corporate executives 
making these estimates about the future, we would all be subject to 
class action lawsuits if it turned out we were wrong.

  I guarantee you, Mr. President, we are all wrong. The only thing I 
know about the Congressional Budget Office projections for the future 
and the Office of Management and Budget projections for the future and 
the President's projections for the future and my projections for the 
future is that we will all be wrong. The future is not knowable with 
any degree of certainty. If it were, we would all be rich because we 
would all bet on the right side of every football game. We would all 
make the right choices for every stock that was purchased. We would all 
be rich because we could all predict the future with certainty.
  None of us can, and yet that is the standard to which too many 
executives have been held in this arena: You said you were going to 
have product x ready for us by September and you missed it by 30 days. 
We are going to sue you for misleading us.
  What protection does the executive have in that circumstance when 
they say, Mr. Executive, when do you expect to have product x ready for 
market? He says, I will not tell you because if I say September and it 
turns out to be October, you are going to sue me. And if I say 
September and it turns out to be August, you are going to sue me. So I 
will not tell you. Well, how can I make an intelligent guess as to 
whether or not I should invest in your company if you will not even 
tell me what you expect to happen? Tough luck.
  That is what we have now, Mr. President. In the name of protecting 
the investor, we are depriving the investor of the very best guesses so 
labeled, estimates so labeled, conjectures so labeled, of the people 
who know the most about the company. We are asking the investor to fly 
even more blind than they would be if they had those guesses.
  So let us understand as we debate this that we are talking about 
protecting people from lawsuits based on their inability to guess the 
future, not about protecting people from liars, cheats, and thieves. 
The liars, cheats, and thieves will still be subjected to class action 
lawsuits and the class action lawsuits will still end up recovering 
millions of dollars for investors. But if this legislation passes, 
honest executives who want to share their best guesses of the future 
with investors will be able to do so with the knowledge that if they 
happen to be wrong and product x comes out in October rather than 
September, they will not have to spend millions of the investors' money 
to pay off some professional plaintiff that has brought a suit against 
them on the technicality that exists in the present circumstance.
  Mr. President, I see that my colleagues are now prepared. I am happy 
to yield the floor to those who have a differing point of view.
  Mrs. BOXER addressed the Chair.
  The PRESIDING OFFICER. The Senator from California.
  Mrs. BOXER. Thank you very much, Mr. President.
  I think we have an opportunity here to make a bill better, to fix 
some flaws in a bill that had the best of intentions when it started 
out, to make sure that we let people know if they are even thinking of 
filing fraudulent, frivolous lawsuits that they should not even think 
about it because they are not going to succeed in the end.
  That is something I care a lot about. I represent a State that has a 
lot of businesses which have been hit by lawsuits that in many cases 
should not have been filed. On the other hand, many of them should have 
been filed.
  My concern here is for small investors. I do not worry about the 
giant, wealthy investors who, frankly, can take a hit or two and not 
have any problem. I am worried about those people who save for their 
retirement, who are basically in the middle class of this country, who 
count on--the truth in deciding where to put their money so it is there 
for their retirement.
  If they do get hit with one of these problems, it means big trouble. 
We saw it coming home to roost in the case of those who were defrauded 
by Charles Keating. We certainly do not want to pass a bill here--I do 
not think any of us would--that would make it easier for the Charles 
Keatings of the world to succeed in defrauding unsuspecting investors. 
Nobody wants that--nobody. 

[[Page S19050]]

  Yet, we know that as this bill has been analyzed by the experts, by 
the people in academia, by the people who know the law, by people who 
are really charged with protecting small investors, they are suggesting 
to us in very strong language that this is not a good bill.
  The President heard those people, and I think it took some courage 
for him to veto this legislation. I think this override vote is going 
to be very, very close. I do not know where it is going to come out. 
But I hope, if Senators are making up their minds on this matter, that 
they would read the President's veto statement. I think it is very 
clear as to what problems he sees. I hope, also, they will read some of 
the many, many newspaper editorials that have appeared all across the 
country warning this Congress not to move forward with this bill.
  Here is Money magazine. This is not a magazine of lawyers. As the 
Senator from New Mexico, Senator Domenici, said, ``Well, it is only the 
lawyers.'' This is Money magazine. It is very interested in this 
editorial in warning investors about this bill. ``Congress Aims at 
Lawyers and Ends Up Shooting Small Investors in the Back.'' I just 
think that sums it up.
  We want to stop frivolous lawsuits. We want to stop anyone who would 
put a company through a lawsuit where there was no foundation for it. 
But we do not want to in the end shoot small investors in the back. 
They say:

       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 * * *. In the final analysis, this legislation * * 
     * would actually be a grand slam for the sleaziest elements 
     of the financial industry at the expense of ordinary 
     investors.

  Mr. President, that is strong language. What they are saying here is 
what I said when I began: we had a reason to take a look at all this. 
Our reason was frivolous lawsuits. And what we wound up doing is 
hurting small investors and creating a climate where the lowest of the 
low, the people who prey on others, who count on information to make 
investment decisions, are going to be rewarded by this bill. We do not 
want to do that, I believe.
  I think what the President has done is to call our attention to the 
failings of this bill. I was a stockbroker many, many years ago. I was 
quite young at the time. But the one thing I understood was that people 
relied on me. It was a big responsibility. I often thought, you know, 
if you really did not have the best interests of the people in mind, 
you could get these people in an awful lot of trouble. You could churn 
their investments so that you would get a commission. You could hurt 
people.
  It seems to me that type of person certainly is not the majority, but 
they do exist. As a matter of fact, if you look at current trends, 
unfortunately, there are more and more of these people than we would 
like to believe.
  Here are some other newspapers. These are editors who have absolutely 
no stake in this from a financial point of view. As a matter of fact, 
most newspapers tend to be more conservative, more conservative, more 
probusiness than others. But look what they say.
  ``Protecting Investors From Securities Fraud.'' This is the Oakland 
Tribune.

       Say you have a spare $1,000 or so, and don't want to salt 
     it away in a simple savings account. You hear about a 
     company's stock that is touted to go up because executives 
     are forecasting greatly increased earnings. You decide to use 
     your $1,000 to buy that company's stock based on the rosy 
     predictions of future earnings, but the earnings forecasts 
     turn out to be bogus. You learn the executives knew their 
     earnings forecast was unattainable, yet they hyped their 
     stock anyway. The stock price does not rise as the company's 
     executives hinted it would, and your $1,000 is not worth 
     $1,000 anymore, but less. And if you want to sue to recover 
     your losses--

  They point out--

     you can now. But if a House-Senate conference bill passes--

  And that is what is before us, Mr. President--he basically says:

     it will be much more difficult to do so--

  Meaning to sue. And they call on President Clinton to veto the 
measure--

     because it leaves individual investors and an array of 
     institutional investors, like pension funds, municipalities 
     and other Government units without enough protection from 
     manipulators like Charles Keating, Ivan Boesky and Michael 
     Milken.

  They go on to explain the bill. And they talk about how in fact these 
charlatans would really be popping their champagne in their boardrooms, 
in their homes tonight if we in fact do not sustain this veto.
  Another editorial, the San Francisco Chronicle. The reason I think it 
is important, Mr. President, to read these is because, again, the way 
this bill is presented to us by the people who want to pass it is as if 
there were 90 lawyers in the entire country who really care about this, 
that they control this debate. Clearly, I am going to prove by the type 
and number of examples that I raise here that is not the case.
  ``Opening The Door To Fraud.'' And this says:

       Legislation would wipe out important consumer protections. 
     Securities fraud lawsuits--

  This is in the San Francisco Chronicle--

       Securities fraud lawsuits are the primary means for 
     individuals, local governments and other investors to recover 
     losses from investment fraud, whether that fraud is related 
     to money, invested in stocks, bonds, mutual funds, individual 
     retirement accounts, pensions or employee benefit plans. As 
     the draft report stands--

  That is essentially what is before us--

     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.

  Our President did not let that happen. Now there is a chance for us 
to stand up and be counted on behalf of the little guy, the little guy, 
the small investor, those of us in America--and that is most of us--who 
are really in the middle class, who would be greatly hurt if in fact we 
did not have the ability to go to court and to, if we were defrauded, 
have a chance at recovering even some of our investment.
  This is a Michigan headline, and I think it is pretty strong. ``How 
Come GOP's `Contract' Allows Ripoffs Of Investors?'' The reason they 
talk about it as the ``GOP contract''--and it is in many ways certainly 
supported on both sides of the aisle--is that the contract contains 
language that is in many ways the father of this bill. The Michigan 
paper says:

       . . . let the bill's backers explain to the rest of us why 
     stock swindlers need to be ``protected'' from lawsuits.

  This is in the Muskegon Chronicle in Michigan.
  The fact is we can stop this bill now. We can start all over again 
with a better bill. We can follow the advice of President Clinton. He 
has given us for the record, many, many letters from experts in this 
field who really convinced him that, in the end, this bill, as written, 
would hurt middle-class investors.
  We have a road map from the President of some of the things that we 
can fix.
  I would like to read a letter from the Fraternal Order of Police that 
I have to read before on this floor. It is a letter to the President:

       On behalf of the National Fraternal Order of Police, I urge 
     you to veto the ``Securities Litigation Reform Act.'' The 
     single most significant result of this legislation would be 
     to create a privileged class of criminals. . . our 270,000 
     members stand with you in your commitment to war on crime. 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.

  I think this really says it all. Here is a letter written by police 
who are protecting our lives, they are on the line, and they are 
worried that their pensions will not be protected because this bill 
would make it possible for their pension plan to be raided and for them 
to lose their retirement funds.
  Those who present this as an issue about special interests have a 
perfect right to do that, but I say to you, what we are doing goes 
quite beyond that. It termed called reform, but it overturns legal 
protections that have been there for investors since the thirties. How 
quickly we seem to forget history, that people, small investors deserve 
and need this protection.
  We do not need to do this so much for those who are wealthy. They are 
not too worried about their being defrauded. But it is our small 
investors, 

[[Page S19051]]
it is our people, particularly the elderly, who count on getting their 
retirement from these investments, that we should be protecting. The 
wealthiest do not need us to worry about them and, frankly, the very 
poor simply do not have the funds to make these investments. So I think 
this is a vote on whether you are going to stand behind the middle 
class, the small investor, or are you going to abandon them in the name 
of frivolous lawsuits, which is a wonderful and noble objective which, 
frankly, has just gone awry.
  The President vetoed this bill because I think he wants to stand with 
the middle class. He is certainly standing with them in this budget 
fight, and there is a connection. When you fight for the elderly to 
protect their Medicare, you are saying you care about these people. But 
at the same time, if you leave their pension plans open to raiding by 
people like Keating and Boesky, and we know the cast of characters we 
have seen come out of the eighties, then you are harming them. If you 
protect their Medicare on the one hand, but you leave their pension 
plans and retirement savings prey to those that, frankly, would take 
advantage of them only too quickly if they knew that the legal 
protections have been changed, you abandon them.
  So I say the bill, as it is currently, is against the middle class. 
The bill targets small investors, the elderly and those saving for old 
age through their retirement.
  Again, I do not think we can really bifurcate this argument from the 
rest of what we are trying to do. We stand here and we say we fight for 
the middle class. We are fighting against those Medicare cuts, those 
Medicaid cuts to our elderly in nursing homes and to make sure that 
kids have access to college loans so their middle-class families can 
afford to send them to college. Protecting them from securities fraud 
is part of standing up and fighting for people who count on us and who 
rely on us.
  Many of us stand up here and say we are not going to see a budget go 
into effect that gives large tax cuts to the wealthiest among us while 
we hurt our middle class by cutting all these other programs. There is 
a nexus here. We should stand proudly for the small investor and those 
who need us.
  The President's three objections, I think, are very clearly stated in 
his veto message. First of all, he talks about the bill's pleading 
standards which he believes would make it virtually impossible for 
those who have been defrauded to even bring a lawsuit in the first 
place. I think this is very important, because the bill, as it 
currently stands, requires defrauded investors to know the state of 
mind of the people who defrauded them before they even file a lawsuit.
  How can you possibly know what is in the heads of people you have 
never even met? How can you prove what was in their minds before you 
have had a chance to find out what, in fact, they did have on their 
minds when defrauding you? You cannot. That is an impossible standard.
  The President was willing to accept a bill which adopted the most 
difficult pleading standards adopted by any Federal Circuit Court of 
Appeals, and that is the second circuit. But what the President was not 
willing to do, was to make those standards even more difficult.
  That is very important. The President is not saying in his veto 
message this is a terrible thing, we should not even be looking at this 
bill. He is saying there are things wrong with it. One of them is its 
pleading standards. In the President's own words,

       the bill would erect a barrier 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.

  The President was particularly concerned that the conference dropped 
an amendment overwhelmingly adopted by the U.S. Senate, an amendment 
offered by Senator Specter. I know Senator Specter was on the floor 
talking about his amendment. It would have remedied the problem that 
too draconian a pleading standard would have created. The Specter 
amendment would have allowed lawsuits to be filed if the defrauded 
investors could show that the defendant had the ``motive and 
opportunity'' to defraud them.
  After that standard was met, the plaintiffs would be allowed to go 
forward and test whether the defendants actually defrauded them. But 
the operative language here, ``motive and opportunity,'' would be the 
standard, instead of the impossible standard where you have to describe 
the mind of people you do not even know who have defrauded you, proving 
what was their state of mind before you can even get into the 
courthouse.
  That is not what American justice is all about. We are proud of our 
legal system because its doors are open. They are open to the 
wealthiest. They are open to the poorest. This really would slam that 
door on the small investor. That is wrong.
  The President also opposes the bill's draconian safe harbor which 
permits outright frauds as long as they are couched as predictions and 
estimates of future profits and income. The President is saying, if you 
allow companies who do not tell the truth to cover over outright lies 
using ``predictions'' and ``estimates,'' then you are not giving these 
companies a safe harbor, but rather, what has been described on this 
floor, as a ``pirate's cove'' filled with sharks and barracudas. You 
are going to have sharks and barracudas hiding in the safe harbor, 
calling something a prediction and the investor, who is not 
sophisticated making an investment based on this very misleading 
language.
  Fraudulent future predictions and estimates would be permitted under 
this bill if those defrauding attach ``some'' possible reasons why the 
prediction might not come true. Those defrauding can hide the real 
reason that their fraudulent prediction will not come true and they 
cannot be sued.
  In other words, they know that what they are saying to unsuspecting 
investors is not true, but they couch it in terms such as ``this is a 
prediction,'' ``this is an estimate.'' Then they are home free 
protected by the ``safe harbor'' from successful suit.
  The President has been reasonable. He is willing to allow greater 
protections for predictions and estimates of a company's prospects, but 
he is not willing to permit outright fraud.
  I think the President is being extremely reasonable when he says bill 
needs to be changed. The safe harbor is the one change and the pleading 
requirements are the other.
  The President is also opposed to the bill's unfairly treating 
plaintiffs more harshly than defendants. That moves us toward a loser-
pay standard which we all say we do not think is a good thing but, 
frankly, it is in this bill.
  The bill creates a presumption that small investors must pay all of 
the other side's legal fees if their initial fraud complaint violates 
rule 11 of the Federal Rules of Civil Procedure, but it does not 
require defendants who violate that same rule in similar situations to 
pay all of the plaintiff's legal fees. So what kind of justice is that? 
That is so blatantly unfair, I do not even know how to express my 
outrage at that particular provision.
  I do not happen to believe in loser-pays for either side. I just 
think that is a way to basically send a message to people that they 
could get stuck--mightily stuck--with large bills. They could be small 
investors or, frankly, small companies. I think that is totally wrong. 
The fact is, we have a legal system that has worked pretty well, and I 
am very fearful that if we start introducing a modified version of 
loser-pays in this bill, there is no stopping it. I think that would be 
a very dangerous thing to do.
  If you are a very small investor and you think you have a really good 
case, but you know if you have an unfriendly judge, for example, you 
could get stuck paying the other side's legal fees, you might walk away 
and allow a real swindler to get off the hook. So this troubles the 
President, as well it should, and it troubles me, as well.
  We believe, really, that small investors would be terrorized into not 
filing lawsuits for fear of having to pay these legal fees of large 
well-heeled corporate defendants who could run up very large legal 
bills. So for at least 100 years, the American court system has 
rejected loser-pays because it prevents aggrieved parties from 
asserting their rights.
  I have already put into the Record today a number of newspaper 
articles. But I have to say, Mr. President, again, to those who try to 
dismiss the opposition of this bill, they are really not 

[[Page S19052]]
being fair. It is true that everybody wants to stop frivolous lawsuits. 
So it was hard for many of us to stand up and oppose this bill. But I 
have to tell you, if you listen to some of the groups in the country 
who oppose this bill, I think it would be an impressive list:
  The Government Finance Officers Association [GFOA], a professional 
association of State and local government officials, both elected and 
appointed, whose duties include the investment of cash balances and 
pension funds and issuance of municipal debt. These are the people who 
know what is at stake here. The Government Finance Officers Association 
opposes this bill.
  The U.S. Conference of Mayors opposes this bill. Why? Because they 
have large security investments, including pension funds. For example, 
the city of San Jose in California was completely ripped off by an 
unscrupulous broker many years ago. They were able to recover because 
we had good laws on the books--laws that are going to be changed, and 
their city attorney came before our committee to testify and said it 
would be very dangerous to change these laws.
  Then there is the North American Securities Administrators 
Association, who represents the 50 States' securities regulators, 
responsible for investor protection, and the efficient functioning of 
the capital market at the grassroots level. The North American 
Securities Administrators Association opposes this.
  I have a letter from the California County Officials. They oppose 
this.
  The American Bar Association.
  I just, Mr. President, fear very much that we will be back on this 
floor if we cannot work this into a better bill, when the first scandal 
hits, with Senators saying, ``My God, I never knew, we did not mean it, 
and we have to take another look at this.'' You know that is going to 
happen.
  I think we should listen to the people in the local counties across 
our country. I think it is pretty effective. We have a letter signed by 
99 California government officials, including the mayors of San 
Francisco, San Jose, and officials in 43 of our State's 58 counties. 
Mr. President, I want to say that many of these counties who signed 
this letter are extremely conservative local government officials. It 
is rare that they call me and are so united on such an issue.
  I have, also, a letter signed by 34 county treasurers in Arkansas, 51 
public officials in Georgia, 58 public officials in Massachusetts, 
including the Massachusetts Association of County Commissioners. I have 
a letter signed by 39 officials in New Jersey, including the New Jersey 
Conference of Mayors and the New Jersey State League of Municipalities.
  So it is very important. In this letter signed by California county 
officials that I talked about, they say:

       In recent years, local California governments, most notably 
     Orange County, have lost more than $2 billion in the 
     securities markets, partly due to derivative investments. 
     Some of these governments have pending securities fraud 
     cases; others are still deciding whether to use the courts to 
     pursue recovery of losses.
       Now is not the time to weaken defrauded investors' rights 
     to pursue civil action, as would occur--

  Under the bill that is pending before us--

     unless institutional investors that are defrauded have the 
     ability to recover their losses in court, they will have to 
     make the unenviable choice [as Orange County did] between 
     cutting essential services, such as education programs, or 
     raising taxes.
       We urge you to do the right thing and protect taxpayers' 
     investments from securities fraud and oppose this unbalanced, 
     unnecessary and dangerous legislation.

  Again, this is from Fresno to Los Angeles to Riverside and Stanislaus 
County, Kings County, Tulare County, Yuba, Shasta, Monterey, Siskiyou, 
Sierra. I am talking about counties from the city to the rural areas--
everywhere. Inyo, Mariposa, Santa Ana, Fremont, Stockton, Riverside, 
Oceanside, Elmonte, Thousand Oaks, Westminster, Newport Beach, Arcadia, 
Barstow, Contra Costa Water District, South Pasadena, South Tahoe 
Public Utility District, city of Hemet, San Benito County, and others. 
My State has 31 million people in it--31 million people in it, Mr. 
President. Every time we do something here, it affects my State more 
than any other State just by virtue of that fact. To have these 
Republican and Democratic elected officials be so united in their 
opposition is very, very unusual. Retirement associations all 
throughout the State, including my home county of Marin, where I served 
on the county board of supervisors--they are very conservative--they do 
not want to see us weaken these laws.
  The American Bar Association, their new president, Roberta Ramo, has 
written an excellent letter to the President outlining their problems 
with this bill.
  I want to conclude my remarks, Mr. President, by saying this: Again, 
my State represents a lot of the companies that have legitimate 
problems with frivolous lawsuits. I promised those companies I would do 
everything I can to work on legislation that really addressed their 
problems. I do not want to see anything hurt decent business people. On 
the other hand, I want a balanced bill and one that does not go so far 
that the charlatans that may be stockbrokers, investment advisers, 
corporations--we have seen them so much in the 1980's, and we see more 
now--we do not want to open the door to that kind of investor fraud.
  I think the President took a strong stand to protect the middle-class 
investors. I applaud him. I hope we can in fact sustain that veto. I 
know if we do, it will be very close one way or the other, if we fail 
or if we succeed. But I have to say this: What is at stake here is 
really, I think, in the long run, the health of the securities markets. 
The worst thing we can do is have a situation where the laws on our 
books have been weakened to a point where they do not provide investor 
confidence. People will not invest their money, and we will have a 
situation where decent companies are going to have to pay a premium--it 
is really a premium--in order to convince people to invest with them. 
That will cost these good companies more money. They will have to pay 
more interest to these investors because many investors, as soon as we 
have that first scandal, are going to say, ``You know what? Maybe I am 
better off with Government bonds. Maybe I am just better off getting a 
certificate of deposit that is insured by the Federal Government.''
  So that would be the worst thing that could happen, in the long run--
if we try to address one problem, frivolous lawsuits, and weaken our 
laws to such a point that people do not have confidence to invest their 
money in the market.
  So I hope we will stand with the President. He has really laid out a 
clear path on how to fix this bill. I want to thank Senator Bryan and 
Senator Sarbanes.
  I have been proud to be on their time as we have tried to bring these 
issues to the President's attention, to our colleague's attention and 
frankly to the attention of the American people. I hope we will sustain 
this veto. I yield the floor.
  (Mr. CAMPBELL assumed the chair.)
  Mr. GRAMS. As a conferee for this bill, I am here on the floor today 
to also join those others in urging my colleagues to vote to override 
the President's--what I consider--ill-advised veto of the conference 
report on securities litigation reform.
  Back on December 5, 65 of us voted in favor of the conference report 
that the President has now vetoed. Mr. President, 69 of us voted for S. 
240, which was substantially similar to the conference report.
  Now, the principal authors of this legislation are Senators D'Amato, 
Senator Dodd, and Senator Domenici. These Senators put aside their 
political and partisan differences to do something right for small 
investors, for workers and for the consumer. All of us did. When you 
have legislation that is authored and supported by the general chairman 
of the Democratic National Committee and the chairman of the Republican 
Senatorial Committee, I believe that is what you would call compromise. 
When you have almost 70 Senators from both sides of the aisle voting 
for this legislation, that is also called compromise. So, why did the 
President veto this measure?
  Well, in his letter accompanying the veto, the President said that he 
wants to protect innocent investors from being defrauded. Well, this 
legislation protects those investors. It preserves the right of these 
investors who are truly victimized by securities fraud, but it does 
much more than that, as 

[[Page S19053]]
well. It also will protect the worker who is out there and worried 
about being laid off because his employer had to pay attorney's fees 
instead of being able to pay his salary.
  It will help the consumer who has to pay higher prices for products 
today because of the hidden costs of frivolous legislation and 
litigation.
  It will pay off for the legitimate investors and for the pensioners 
whose life savings are being jeopardized by strike-suit attorneys.
  Finally, it will also benefit the thousands of honest, hard-working 
attorneys who have watched the public image of their profession being 
tarnished by a few greedy quick change artists.
  It is also for the sake of those Americans that we have put in long 
hours of hard work to craft what I believe is a very balanced and 
reasonable bill.
  The only people who will lose under this legislation are the small 
class of attorneys who have used professional plaintiffs to file 
frivolous and meritless suits, again just to make a quick dollar. They 
use joint and several liability to bring secondary defendants into 
their cases simply to try and extort a higher settlement out of them as 
well.
  Now, the social costs of these suits are very, very high. Again, they 
would result in fewer jobs because employers would be paying high costs 
for frivolous litigation, rather than being able to put that money 
where it would make a difference, and that is in the higher salaries or 
more jobs. Higher prices for the consumers who end up having to pay 
these costs because they are passed along in the cost of doing 
business. They go into the products and the services that these people 
provide, so consumers end up paying more because, again, of the costs--
the hidden costs--of frivolous litigation, and it has diminished 
returns for the innocent investors. The very investors that the 
President says he wants to help protect are the ones who would benefit 
from this bill, as well.

  What do investors get in return for those abusive lawsuits? In the 
past they have received about 6 cents on the dollar that has gone back 
to the victims. The rest has gone into litigation, legal expenses and 
lawyer's fees. Who is the President really trying to protect? 
Investors, the consumers, or the workers, or a small group of unethical 
lawyers? I think that answer was obvious.
  Legislation is not meant to protect political constituencies. When we 
do the work of the people we should think of what the voters called for 
in the last election--not the commercials that consultants will be 
running in the next election. That is not what the President did when 
he vetoed this bill. We should not stand for it as well.
  For those reasons and for the sake of the small investors and the 
consumers, the job creators and the workers, we should override this 
veto, because if the White House will not stand up for these 
individuals, who will? We must. I believe that we will.
  Again, I urge my colleagues to override the veto and to enact the 
commonsense legal reform that is contained in this bill. I yield the 
floor.
  The PRESIDING OFFICER. The Senator from Utah [Mr. Hatch] is 
recognized.
  Mr. HATCH. I thank the Chair.
  Mr. President, on December 19, 1995, President Clinton vetoed the 
conference report to H.R. 1058, the Securities Litigation Reform Act of 
1995. This act represents a very modest step forward in addressing some 
of the egregious abuses present in our litigation system today. In 
doing so, I believe President Clinton has sided with a handful of very 
wealthy lawyers and against the interests of the American people at 
large. President Clinton is a tenacious defender of the status quo. I 
do not think the status quo is serving us well.
  The securities bill was developed over the past several Congresses by 
a dedicated, bipartisan, moderate group of reformers who have long seen 
the need to change our securities litigation system. Senators 
Christopher Dodd and Pete Domenici have led this effort for a number of 
years and finally saw the opportunity for meaningful reform in this 
Congress.
  The securities litigation conference report passed the Senate by a 
bipartisan vote of 65 to 30. A total of 19 of our colleagues on the 
other side of the aisle voted in support of this moderate and 
meaningful bill.
  The legislation sought to make securities litigation fairer by 
curbing the abusive litigation practices that have been employed by a 
small number of plaintiffs lawyers in securities litigation class 
action lawsuits. That very small group of trial lawyers who specialize 
in securities litigation lawsuits represents the only ones who are 
truly hurt by the securities litigation reform bill. Likewise, they are 
the only ones who are helped by the President's veto--just a few, very 
wealthy litigation lawyers in the field of securities law.
  The plaintiffs lawyers who benefit from the President's veto are the 
ones who perfected the so-called strike suits. Strike suits are filed 
against companies after a drop in the stock price, frequently without 
regard to whether there has been any fraud or wrongdoing on the part of 
the company. And by the time the suit really gets in full swing, the 
litigation is so expensive for the companies that many of these 
companies just settle for defense costs to get rid of the problem and 
the embarrassment, and to not have to take a chance with some of the 
juries in some of the more, shall we say, jury-liberal States in our 
country.
  For example, in 1990, when LA Gear, the sportswear and sneaker 
manufacturer, announced lower than expected earnings, one law firm 
filed 15 lawsuits just 3 days after the announcement.
  The Banking Committee heard testimony concerning other cases in which 
securities lawsuits were filed within 90 minutes of the drop in share 
prices. These kinds of filings without regard to the merits are 
ridiculous. They are hurting American businesses and consumers.
  I am particularly concerned because perhaps hardest hit have been 
high-technology companies. Those companies form a key part of the 
American economy and are vitally important to the economies of Utah and 
many other States. They are being disproportionately hurt by these 
lawsuits.
  A Stanford University law professor, conducting a study of securities 
class action lawsuits filed in the 1980's, most involving high-
technology firms, found that every single company, every single high-
technology firm that experienced a market loss in stock price of at 
least $20 million was sued. Every single company. Those kinds of abuses 
are an outrage and an affront to the legal system. These are some of 
the most successful American companies, and they are being besieged 
with lawsuits. Some think it should be called legal extortion. It 
simply cannot be that every single high-technology firm that has 
suffered a $20 million or more loss is engaged in securities fraud. It 
just is not true. But by the time the lawsuits start and the litigation 
begins, and the depositions start and the discovery becomes burdensome 
and onerous, a lot of companies just throw up their hands in the air 
and pay whatever they have to to get out of it because they know that 
kind of litigation is never ending.
  The current litigation system encourages wasteful and needless 
litigation even where there is absolutely no evidence of wrongdoing. 
The unavoidable fact is that because of current skewed incentives in 
the litigation system, the small group of lawyers who file most strike 
suits are not filing such suits to protect shareholders against 
corporate fraud and wrongdoing. They are doing so to line their own 
pockets.
  I happen to be a lawyer. I happen to understand securities law. And I 
can tell you that is what is happening. The Banking Committee heard 
testimony that plaintiffs in these suits typically receive only 14 
cents for every dollar while the trial lawyers collect a whopping 39 
percent of these settlements. That is abominable and everybody knows 
it. Other studies have suggested even lower plaintiff recoveries. We 
are talking about the people who are supposedly wronged getting 14 
cents out of every dollar while the attorneys get 39 cents out of every 
dollar.
  These lawyers are filing these lawsuits so that they can terrorize 
American companies into paying exorbitant settlements because they know 
these companies cannot afford the high legal fees that would be 
required to defend themselves even against meritless lawsuits.
  When companies must pay for needless litigation, settlement and 
insurance costs with dollars that could be 

[[Page S19054]]
going to create jobs or to further research and development, consumers 
and stockholders, virtually all Americans in fact are hurt. Due to 
wasted resources, profits and stock prices are lower than they would 
otherwise be and the shareholders in the end lose out. That should not 
be lost in this debate.
  The truth is that shareholders are very well protected under the 
securities laws and under this securities bill. This legislation 
ensures that the class action device remains available for those 
shareholders who have been in fact victims of securities fraud. In 
fact, it improves that device so that injured investors, not a small 
group of greedy lawyers, can control the litigation.
  Although the President pointed to what he claimed are a number of 
shortcomings in the bill that justify his veto, his excuses are just 
that--slender excuses for siding with some of these jackal lawyers.
  First, the President nitpicked with the bill's pleading requirements. 
However, legislative history in the House and Senate makes clear why a 
heightened standard requiring pleading with particularity is necessary 
to eliminate securities lawsuit abuses. The conference report sensibly 
requires a heightened pleading standard to weed out frivolous 
litigation and to free parties against whom claims are made from being 
subject to abusive and expensive discovery.
  Second, the President went after the safe harbor provision, which 
creates a safe harbor for forward-looking, predictive statements. Some 
companies have faced damaging lawsuits merely on the basis of vague but 
optimistic projections that the company would do well even though it 
was clear that the prediction was speculative and future oriented. The 
safe harbor provision sensibly addresses those problems.
  In fact, President Clinton notes that he supports the conference 
report language but is concerned with some language in the statement of 
the managers of the bill on this provision. Now, the Constitution gives 
the President the authority to veto legislation, but nowhere does it 
give the President authority to veto legislative history. I think a 
veto on the grounds of legislative history in this case is extreme, 
especially in light of the clear language of the bill.
  In short, President Clinton was stretching for excuses to veto this 
legislation. The only thing President Clinton has shown with his veto 
of the securities litigation reform bill is that he will side with a 
handful of trial lawyers against the interests of all Americans--
especially American consumers and shareholders. He has proven that he 
is not an agent of meaningful and needed change but instead a tenacious 
defender of the status quo.
  I encourage my colleagues to override his veto so we can provide 
meaningful change to Americans who are fed up with lawsuit abuse in 
this country. My good friend and colleague from Pennsylvania has joined 
the Clinton administration in questioning the pleadings standards 
contained in this bill. I should note, for the record, that in June of 
this year this very administration that has vetoed this bill called the 
bill's pleadings standards ``sensible'' or ``workable.'' I would also 
note that these pleadings standards were based, in part, on the 
recommendations of Judge Anthony Scirica of the Third Circuit Court of 
Appeals.
  Mr. President, I ask that the June administration policy statement 
and an October 31 letter from Judge Scirica be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                   Statement of Administration Policy

       The Administration supports appropriate reforms of the 
     federal securities laws. The goal should be to and litigation 
     abuses and to clarify the law, without improperly limiting 
     the rights of investors to pursue civil actions against 
     financial fraud.
       As reported by the Senate Banking Committee, S. 240 
     contains a number of provisions designed to end litigation 
     abuses which the Administration endorses. A number of its 
     original provisions that had been the focus of committee 
     discussions have been modified appropriately or deleted. S. 
     240 is now a substantial improvement on H.R. 1058, which the 
     Administration could not support. For instance, S. 240 
     rejects certain of H.R. 1058's egregious provisions, such as 
     its ``loser-pays'' approach and its too-stringent definition 
     of recklessness. At the same time, S. 240 adopts several 
     sensible provisions, including a workable pleading standard 
     taken from the Second Circuit, and appropriate class action 
     reform provisions.
       The Administration recommends the following modifications 
     to two provisions in the bill:
       Safe Harbor--The Administration supports the Committee's 
     attempt to craft a statutory safe harbor that would encourage 
     the dissemination of forward--looking statements without 
     protecting statements made with an intent to mislead. The 
     Administration does not believe a safe harbor should protect 
     statements known to be materially false or misleading when 
     made. The Senate should clarify whether the safe harbor's 
     current language would protect such statements.
       Proportionate Liability--The Administration opposes the 
     bill's provision that would establish proportionate liability 
     for reckless defendants because in cases involving insolvent 
     defendants, the provision would leave investors unable to 
     recover their full damages. Culpable solvent defendants, 
     rather than defrauded investor, should at least bear a 
     substantial portion of this noncollection risk. Accordingly, 
     the Administration supports an amendment that would require 
     culpable solvent defendants to pay up to twice their 
     proportionate share of damages (rather than 150 percent as in 
     the Committee bill), when other defendants have gone bankrupt 
     or fled.
       The Administration recommends that the Senate adopt the 
     following measures, which are not included in S. 240:
       Private Aiding-and Abetting--The Committee bill explicitly 
     retains the SEC's authority to take action against those who 
     knowingly aid and abet securities fraud. Congress should also 
     restore this action for the SEC against reckless aiders and 
     abetters, as well as for private actions that follow a 
     successful SEC action.
       Status of Limitations--The Administration recommends 
     extending the statute of limitations for private securities 
     fraud actions to five years after a violation occurs. 
     Although S. 240 as originally introduced addressed this 
     issue, the Committee deleted it from the bill.
       It should be noted that the Securities and Exchange 
     Commission has expressed many of the same concerns with 
     respect to this legislation. The Administration encourages 
     the Senate to continue to work with the Securities and 
     Exchange Commission to ensure that S. 240 redresses 
     litigation abuses while preserving the ability of investors 
     to bring class-action lawsuits against financial fraud, a 
     legal device that is critical to the maintenance and 
     integrity of our financial markets.
       Pay-As-You-Go Scoring.
       S. 240 could affect receipts; therefore, it is subject to 
     the pay-as-you-go (PAYGO) requirement of the Omnibus Budget 
     Reconciliation Act of 1990. The preliminary OMB PAYGO 
     estimate is zero. Final scoring of this legislation may 
     deviate from this estimate.

                               United States Court of Appeals,

                               Philadelphia, PA, October 31, 1995.
     Ms. Laura Unger,
     Mr. Robert Giuffra,
     Senate Committee on Banking, Housing and Urban Affairs, 
         Dirksen Senate Office Building, Washington, DC.
       Dear Laura and Bob: I have a few suggstions for your 
     consideration on the Rule 11 issue.
       Page 24, line 11: Insert ``complaint'' before ``responsive 
     pleading.''
       Page 24, line 19: Insert ``substantial'' before 
     ``failure.''
       ``Complaint'' would be added to item (i), so there is a 
     clear provision that reaches any failure of the complaint to 
     comply with Rule 11. A small offense would be met by 
     mandatory attorney fees and expenses caused by the offense; 
     if item (ii) is modified without this change, a gap is left 
     in the statutory scheme. The result still is a big change 
     from present Rule 11, which restricts an award of attorney 
     fees to a sanction ``imposed on motion and warranted for 
     effective deterrence.'' A serious offense--filing an 
     unfounded action--would be reached under item (ii).
       I also wish to confirm our prior conversation on scienter 
     and the pleading requirement.
       Page 31, line 5: Delete ``set forth all information and 
     insert in its place ``state with particularity.''
       Page 31, line 12: Delete ``Specifically allege'' and insert 
     in its place ``state with particularity.''
       As I indicated, this would conform with the existing 
     language in Rule 9(b) which provides that ``the circumstances 
     constituting fraud or mistake shall be stated with 
     particularity.''
       Also, page 24, line 1: Delete ``entering'' and substitute 
     ``making.''
       Page 24, line 4: Delete ``of its finding.''
       Many thanks.
           Sincerely,
                                               Anthony J. Scirica.

  Mr. HATCH. Mr. President, this is an important bill. It is true 
reform. Having read and studied securities litigation, under the 
securities law true fraud can be prosecuted, true fraud can be brought.
  This bill is not going to interfere with those cases. What it does is 
stop the abuse and misuse of the class action litigation and even 
things out. This will stop the abuse of companies 

[[Page S19055]]
that have a downturn in their stocks, which happens to a lot of 
companies, and perhaps through no fault of their own or through some 
economic downturn that affects them, and will stop the litigation that 
is brought in many cases just to get defense costs. Too often, it costs 
more for companies to defend themselves, even though the case is 
meritless, than it would just to settle the case and get rid of the 
nasty hornet that has been buzzing around the company's head, for the 
use of these sometimes very greedy lawyers.
  Not all lawyers are greedy; not all lawyers are bad. Most of them are 
very good people. But there are abuses in the law. In this area it is 
particularly pronounced. This bill is brought to try and correct some 
of those pronounced abuses.
  Mr. BRYAN. Mr. President, I am looking around the gallery today, as 
citizens visit our Nation's Capitol, and those that are tuned in on 
television across the country are saying to themselves, ``I do not 
understand what this debate is all about. Are there not bigger problems 
that the Nation faces?"
  Clearly, we are in a state of paralysis here in Washington today. 
Part of the Federal Government is shut down. There is no clear path, as 
I speak at near 2 o'clock in the afternoon, eastern standard time, as 
to how we are going to break this gridlock or logjam that has gripped 
us in this confrontation as to how we balance the budget in 7 years, 
and the road we use to get it. That is a major issue. No question about 
that.
  Let me try to put this debate into some context because I acknowledge 
that the country's attention is focused on the macroeconomic picture, 
the kind of thing that will affect the future of our country and of our 
Nation.
  What is at stake here? Is this an argument between a handful of 
greedy lawyers, as the proponents of this legislation argue, in 
disagreement with a small group of people on Wall Street--brokers, 
accountants, entrepreneurs--who wish to access the capital markets of 
our country and issue stock? Is that what this thing is all about? I 
say to our visitors and Americans across the country, this is a far, 
far bigger issue.
  I acknowledge that it is terribly esoteric, arcane, highly technical. 
Why should somebody listening in on this debate have an interest or 
concern in the outcome? Anyone who has a single share of stock in any 
publicly traded corporation has an interest in the outcome of this 
legislation because that individual, he or she, could become a victim 
of a fraudulent action. The ability of that individual to recover as a 
consequence of that fraud is, in my judgment and those of us who have 
fought this legislation, severely limited and compromised. That is tens 
of millions of people. In addition, there are probably tens of millions 
of people more who do not own a direct interest and say, ``Look, I have 
never invested in the stock market. I have no money. My wife and I and 
my family are lucky if we have a few dollars in the local credit union 
or the bank. I don't deal with these Wall Street issues. What do I have 
at stake in this debate? You lawyer types and Senators have sure lost 
me in this debate. I do not understand what I have involved.''

  The answer, that there are tens of millions of people out there in 
this country, good people who have worked all of their lives, who have 
retirement funds--their security, their safety blanket--these people 
have tens and tens of millions of shares invested across America in 
retirement funds. Those retirement funds could be victimized by 
fraudulent actions, and as a consequence of that fraud, those 
retirement funds can be severely impaired financially, devastated, and 
depending upon the magnitude of the fraud could, conceivably, be wiped 
out.
  What does the average American have that interests him in this piece 
of legislation? His or her retirement could be at risk if they are not 
able to adequately recover against those malefactors, those that have 
been involved in perpetrating a fraud. So those who have money in a 
retirement out there, whether a company-sponsored family or one of the 
many variations of a 401(k), you have an interest in this debate and 
your children have an interest in this debate, because some of you are 
hoping that you have a little money put away, and maybe their 
inheritance can be affected, as well.
  Broadly stated, 260 million Americans have an interest in the outcome 
of this debate because we are all taxpayers, every single one of us, 
directly or indirectly. That is why such widely divergent groups such 
as State financial officials, State treasurers, State controllers, 
State financial officers--Democrat and Republican, East and West, big 
cities and small towns--have expressed their opposition and concern; 
because they know that their community, their village, their town, 
investing money on behalf of the taxpayers in a securities portfolio, 
that they can be victimized as well. They do not want to jeopardize 
their ability to recover on behalf of the taxpayers of their town or 
their community or village. That is why they have joined in opposition.
  I do not doubt relatively few if any are lawyers or stockbrokers or 
involved as entrepreneurs. So it is their interest on behalf of each of 
us as American citizens that has dictated that they write us to inform 
us they are gravely concerned and strongly oppose this bill. I will go 
into some of the reasons in a moment.
  University and college officials who are involved in the management 
of investment portfolios of American colleges and universities--whether 
they be private universities, private colleges, or the great State-
supported institutions in our country--they, too, have called and 
written. They strongly oppose this legislation because they know that 
the investment portfolio upon which their college or university depends 
can be impaired and financially wiped out if investor fraud occurs and 
they are unable to recover on behalf of those funds the losses 
sustained as a result of that fraud.
  So we are here today, not talking about 90 greedy lawyers or the 
entrepreneurs. I think all of us in this country, irrespective of our 
political leaning or philosophical inclination, are highly supportive 
of the entrepreneurs in America. They do provide the mainstream for our 
free enterprise system. But this issue is much broader than that 
debate. Every citizen in America has an interest in the outcome of what 
we do.
  It has been said that only the dead have seen the last of war. 
Tragically, I suspect that is true, as much as we would hope that is 
not the case. Let me just say that only the dead have seen the last of 
investor fraud in America. The Wall Street Journal, in a fairly recent 
publication, has told us that investor fraud has increased. In another 
article we are told that, notwithstanding the efforts of the Securities 
and Exchange Commission--no partisan commentary is intended--that 
indeed they have fallen behind. Maybe to some extent we are losing that 
fight, in terms of pursuing with the kind of diligence that every 
American would want us to pursue those individuals who practice fraud 
in the securities markets and who rip us off. So why are we here 
talking about this thing less than a week before Christmas? It is 
because every American is affected.

  Let me try to say a few words about our system, the system we have 
created, Democrats and Republicans alike, over a period of some six 
decades and a little more now, to protect investors, to protect them 
against fraud. To those people out there who are motivated by greed, 
who cut corners a little tightly and whose primary interest is to line 
their own pockets and who care not a whit about whom they hurt--there 
are still those people out there in America. Unfortunately, they are 
still involved in investor securities activities.
  We set up, over the years, a system that depends upon three pillars 
to protect the consumer, the investor, the American taxpayer in this 
broad sense. One, we have empowered the Securities and Exchange 
Commission. It is a Federal agency. They are out there monitoring the 
market, responding to complaints. That has been true under Republican 
and Democratic administrations alike. The agency traces its origin back 
into the aftermath of the collapse in the Great Depression in the 
1930's. And they are out there. By and large they do a good job. Sure, 
some of us may have some criticism of this or that. Criticism can be 
found with each of us. But they are out there doing a good job.
  But the system does not depend, in terms of the enforcement and the 
policing of the markets, solely upon the Securities and Exchange 
Commission. 

[[Page S19056]]
 Its premise and predicate contemplates that there are two additional 
pillars upon which investor protection is predicated.
  Another one of those is what we have done at the State level. If I 
might say for a moment, as my colleagues know, I have had some 
experience in the State level serving as the chief executive of my 
State. They are banded together in a group called the North American 
Association of Securities Administrators. Their job is to try to 
protect their citizens in each of the 50 States against the kinds of 
frauds that occur in our society with respect to the issuance of 
securities. By and large, I think they do a good job as well. They are 
not lawyers per se; accountants, per se. They are individuals 
appointed, by and large, by the respective Governors of their States to 
help to protect citizens of those States against the kind of securities 
fraud that occurs. So they, too, have written us in the strongest, most 
urgent, compelling language to say in our considered judgment this 
would limit the ability to protect the citizens of our State. We do not 
speak as lawyers. We do not speak as accountants. We speak as one who, 
like yourself, is impressed with the public trust to protect the 
citizens of our State. That is the way our system works.

  Finally, the system, contemplated and acknowledged by all, that 
notwithstanding the fact that we have people at the Federal level and 
at the State level who are part of our system of Federal and State 
government who are charged with protecting the consumer, particularly 
as it relates to investor fraud in the securities market--it is 
contemplated that the private investor, through his or her ability to 
file class actions in the Federal court system of America, is a very 
important adjunct to this system. It is absolutely indispensable; 
absolutely indispensable. Those statements can be heard from 
Republicans who have Chaired the Securities and Exchange Commission, by 
Democrats, and by all commentators, that the private sector is 
critically important in terms of monitoring the market and in terms of 
recovering for investors who are defrauded as a result of security 
fraud.
  In point of fact, that is going to be even more important. Whether 
one characterizes himself or herself as liberal or conservative or 
middle of the road, everyone in this Chamber, and I think most people 
in America, would acknowledge today that our budgets over the next few 
years are going to be tighter and tighter and tighter. And that means, 
no matter how much we would like to allocate to certain programs, there 
is going to be less money. So the notion that somehow we are going to 
be able to provide the Securities and Exchange Commission with more 
money to monitor and enforce in the marketplace so that there needs to 
be less reliance upon the private sector and its ability, through class 
actions, to bring lawsuits, is simply misplaced.
  Nobody in this Chamber and nobody in the other body believes for one 
moment that we are going to have those kind of resources, wish as we 
may. The budgets are going to be tighter next year and the year 
thereafter and the year after that. I say that, Mr. President, as one 
who recognizes that, who supports the need for that, who is one 
Democrat who believes that a constitutional amendment to require a 
balanced budget is a necessary and desirable objective. And I recognize 
that there are going to be some constraints. So there is going to be 
less money available.
  This legislation delivers a series of crippling blows to the small 
investor to recover through the process of a class action securities 
case. Having said that, is there no problem out there? Is nothing 
wrong? The answer to both of those questions is yes, there is a problem 
out there, yes, there are some things that need corrections. I 
acknowledge that. The focus ought to be the frivolous lawsuit.
  I am a lawyer. I am proud to be a lawyer. I was never involved in 
this type of work at all, have never represented plaintiffs in class 
actions, mercifully have never been sued as part of a class action, and 
have never defended anybody. But there are lawyers out there who abuse 
the process, and who abuse the courts, and I have absolutely no 
sympathy at all for those kind of lawyers. As I have said previously on 
the floor, let Heaven and Earth and the wrath of God Almighty fall upon 
those lawyers who abuse the system, and there are some.
  So the focus, it seems to me, ought to be to deal with the frivolous 
lawsuits and to deal with some of the problems that exist in our 
present regulatory structure. Let me tell you, there are some things 
that we can agree upon and that I think are good in this legislation, 
things that I have agreed to support, and indeed things that I have 
sponsored in other pieces of legislation and which my distinguished 
colleague from California, who spoke so eloquently a moment ago, would 
agree on. So there is some consensus. Let me talk about those for a 
moment because I am not opposed to legislation to correct the problems 
in the market. I support that enthusiastically.
  There has been a practice that has grown up that ought to be 
eliminated. That is the payment of referral fees to brokers. We ought 
not to give incentives to brokers to refer potential security fraud to 
class action lawyers.
  So this legislation, my friends, prohibits the payment of referral 
fees to brokers. That is a good and desirable reform. I am for that. 
There has been a practice that has grown up that sometimes in class 
actions certainly plaintiffs' lawyers are given bonus payments. That, 
too, is a practice which is wrong, and we ought to eliminate the so-
called ``bounty'' payments or bonuses.

  This legislation limits the class representative's recovery to his or 
to her pro rata share of the settlement for final judgment, no bonus 
payments, and I agree with that. That has been an abuse that we need to 
correct. And there are occasions in which lawyers are involved in a 
conflict of interest. This Senator has no sympathy for those lawyers, 
and we ought to eliminate that practice very wisely, and correctly. 
This legislation does so. I agree and wholeheartedly support that 
provision.
  We need to make sure that, before any settlement is effected, that 
the person for whose benefit the lawsuit was commenced in the first 
instance--that is, the investors themselves in the class who have lost 
money--ought to be adequately informed as to the proposed settlement 
and what it means for them. That is reasonable, is proper, and we ought 
to make sure that is done.
  This legislation improves the information requirements to make sure 
that meaningful information about the terms of the proposed settlement 
are included, that it would also include the average amount of damages 
per share that would be recoverable--and the settlement parties can 
agree on the proposed figure--and it also must explain the attorney 
fees and costs.
  Let me emphasize that point again. The lawyers have to be up front, 
and their clients ought to know what they are getting out of any 
recovery. I agree and support that as well.
  Finally, there is the provision which empowers the court to monitor 
and to limit attorney fees to make sure that no small investor is 
gouged as a consequence of lawyer fees. We agree with this. Let me go a 
little bit further.
  I have sponsored a piece of legislation called the Frivolous Lawsuit 
Prevention Act in which I believe that the provisions of rule 11--that 
is one of the Rules of Civil Procedure--which, in effect, requires a 
lawyer who files a lawsuit to, in effect, show that it is a meritorious 
lawsuit, not that the lawsuit will in fact be won. There are few 
certainties in life, and certainly filing lawsuits and being certain 
that you are going to win is not one of them. I tried a number of 
lawsuits in my time, not in this field. I have won cases that I thought 
I had very little chance of winning, and I have lost cases that I 
thought were about as certain as could be possible.
  So the standard is not whether you are going to win, but is it 
meritorious? There are some lawyers who file frivolous lawsuits. My 
friends who support this legislation and I would agree, as I have said 
previously, about strong sanctions. I favor enhanced sanctions through 
the rule 11 mechanism that would require a judge who finds that there 
has been frivolous conduct on the part of an attorney to impose 
sanctions, costs and fees. But let me say that not only plaintiffs' 
lawyers abuse the process in the system. Defense lawyers do as well. 
Those sanctions in the provisions that attach ought to apply equally to 
both sides. 

[[Page S19057]]


  It is some indication of the bias of this legislation that the 
sanctions that we provide for, the enhanced sanctions, essentially 
apply in a very disparate way only with respect to the lawyers who 
represent the plaintiffs. Those lawyers should in fact be subject to 
the sanctions. But their counterparts who are involved in defending 
actions, if there are frivolous actions undertaken by the defendants' 
lawyers, those lawyers ought to be subject to similar sanctions. There 
is an old expression, ``What is sauce for the goose is sauce for the 
gander.'' I do not think you have to be a Harvard law graduate to 
understand the fairness and the soundness of that policy. 
Unfortunately, this legislation does not do that.
  What has happened as this legislation has been developed is something 
that is characteristic of what has happened in this Congress. Most of 
the legislation that has been introduced--not all, but most of it--is 
designed to deal with the problem in which in a very broad and generic 
sense there is some legitimacy. Yes, there is a problem there that 
requires action. But if this Congress is noted for anything, it is 
noted for its propensity to overreach. Yes, there is a problem. But 
rather than just addressing the problem, what occurs is that the gates 
are opened up, and those folks who, again, are motivated by greed see 
an opportunity to make them immune from liability, fail to address the 
statute of limitations which has nothing to do with the merits of the 
lawsuit, but just when can an injured or defrauded party be able to 
file the lawsuit under the law. And this is a classic case of 
overreaching, and it is, in my view, an extravagance.
  It is also, it seems to me, litigation that takes flight and lift 
only because of some of the myths that are repeatedly mentioned in this 
Chamber. Myth No. 1, securities class action suits are exploding in 
number.
  Mr. President, as I indicated earlier in my comments, this 
legislation derives much of its support from anecdotal evidence, 
information, and from what I call a number of myths that have 
circulated through the Chamber and around the country that have taken 
on a life of their own and have assumed the stature of uncontradicted 
fact. I want to take some of these myths for a moment and discuss them.
  We are told that we need this legislation with all of the 
overbreadth, in my view, that is contained in it because there is a 
securities class action lawsuit explosion crisis in America, that the 
courts are literally being overwhelmed by these actions that have been 
filed, and, therefore, the Congress must take action to address that 
situation.
  I want my comments to be placed in the context in which I earlier 
commented. I recognize the need, and do in fact agree with reforms 
addressed to the frivolous lawsuit. But here are the facts with respect 
to the assertions that there is a security class action lawsuit 
explosion crisis that is overwhelming and inundating our court system 
and that we must urgently address.
  The Administrative Office of the United States Courts--that is the 
organization that keeps the statistical records, what is happening in 
the court system. No one has suggested that it has any bias on behalf 
of plaintiffs' lawyers or investor fraud plaintiffs nor with respect to 
defense lawyers or securities folks. This is an outfit that collects 
the data. Here is what they have to say.
  According to the Administrative Office of the United States Courts 
there were 305 securities class action lawsuits filed nationwide 2 
decades ago in 1974. That would be 21 years ago. There were some 305 
security class actions filed. And slightly less--let me emphasize 
that--slightly less than that, some 290, in 1994. So rather than the 
class action explosion argument, in point of fact there is 
approximately a 5 percent decrease.
  This is at the same time in which the country has grown 
substantially. There are nearly 260 million people in this country. So 
our population has grown by millions and millions of people, and yet 
the number of lawsuits in this area have declined.
  They go on to say,
  ``These numbers count multiple filings in the same case before the 
actions are consolidated. So the actual number of new cases is far 
less. Over the last several years on average suits have been filed 
against approximately 120 companies annually''--about 120 companies 
annually--``out of more than 14,000 public corporations reporting to 
the Securities and Exchange Commission. Out of the total of 235,000 new 
Federal court civil filings,''--a civil filing is as opposed to a 
criminal proceeding--under this total of 235,000 new civil court 
filings, in fact even using the preconsolidation figure of 290 cases, 
``security class actions represent 0.12 of a percent of the new Federal 
civil cases filed in 1994.''
  Those are the facts. I know that sometimes my colleagues who are so 
much more eloquent than I, sort of from these lofty heights make it 
appear that we have had a litigation avalanche. But the facts are that 
there are in fact fewer cases filed today in this area than there were 
in 1974, and that approximately 120 companies annually, out of more 
than 14,000, are subjected to these filings, which represents about .12 
of the new Federal civil cases filed in 1994.
  I do not, by making that observation, suggest that all 120 may be 
meritorious. There may be indeed some frivolous lawsuits that indeed 
the reforms that I and I think all of our colleagues can agree upon--
there are some things we can do and we ought to do in that area.
  Let me just share a little insight. The Rand Corp. indicates that 
business-to-business contract disputes, that is one business filing a 
lawsuit against another business, constitutes by far the largest single 
category of lawsuits filed in Federal court.
  Although corporate executives claim that minuscule numbers by 
individual victims cause them to lose time, divert resources and lessen 
their ability to compete, I think it is fair to question why 120 suits 
nationwide are taking such a toll, while thousands upon thousands of 
suits brought by one business against another business presumably has 
no impact whatsoever.
  As The Wall Street Journal has noted:

       Businesses may be their own worst enemies when it comes to 
     the so-called litigation explosion.

  I think the Rand Corp.'s observation is of some insight here because 
this legislation before us, this conference report, does absolutely 
nothing with respect to business suits filed against other businesses. 
Its scope is designed to limit private lawsuits brought as class 
actions to recover for investors who have lost money as a result of a 
securities fraud.
  Here is another myth. We hear this, it is repeated, and the volume is 
overpowering: Securities class action suits are hurting capital 
formation, we are told, and that is a legitimate question. If it is 
hurting capital formation, we need to examine to see if it is true and, 
if it is true, what corrective action might be appropriate for us to 
consider.
  But here are the facts, Mr. President. The volume of initial public 
stock offerings has risen exponentially over the past several years, 
and the number and size of public securities offerings has been at an 
all-time high. The number of initial public securities offerings over 
the past 20 years has risen by 9,000 percent.
  That is the volume of the offerings, setting aside for a moment the 
amount of the capital that is sought to be raised through those 
offerings. So we have had an increase of 9,000 percent. Let me say, I 
think that is good for America, that is good for job creation, that is 
good for the economy, and I am pleased to see that.
  The proceeds raised during that period of time from 1974 to 1993 
increased by 58,000 percent from $98 million in 1974 to $57 billion in 
1993. So in slightly less than 20 years, or approximately 20 years, the 
amount of capital raised through these offerings has increased from $98 
million in 1974 to $57 billion in 1993, and during the same period of 
time, the number of securities class actions filed had actually 
declined by 2.3 percent.
  So, Mr. President, I would say that the notion that somehow capital 
formation has been impeded or restricted or limited simply does not 
bear out, under a careful analysis, for the data that is available, 
and, as I say, I think this is extraordinarily good news for 
entrepreneurial companies and their investors, for jobs, for the 
economy. 

[[Page S19058]]

  I note the distinguished chairman of the Senate Banking Committee has 
risen to his feet. If he needs to interject, I certainly would be happy 
to accommodate him, because I may be a bit longer.
  The PRESIDING OFFICER. The Senator from New York is recognized.
  Mr. D'AMATO. Mr. President, I want to thank my colleague for his 
graciousness, but as I only have several minutes of remarks, I can 
certainly wait. I would just as soon listen to my colleague, because I 
want him to know that even when we differ on subject matters, I find 
myself always learning when he speaks, particularly when he speaks on 
the subject of law. I have great respect for the cogent arguments that 
my colleague and friend presents.
  I might also say, that yesterday we heard some remarks as it relates 
to how members in this body, in particular, should treat each other. I 
daresay, that while my colleague and I probably had some very 
diametrically opposed positions, I hope that in the context of our 
discourse today, Mr. President, we understand that might even be 
encouraged and learn from these differences at times. I cannot ever 
recall an occasion where I have felt better about coming away with a 
slightly different opinion. If you keep your mind open, sometimes--even 
if you arrive at a different position--you learn something. You learn 
that there is something out there that maybe you have not factored in 
fully and later on if we have kept an open mind and are willing to 
learn, as this is not a static body and the law is not static, whether 
it is securities reform litigation or some other legislation, we can 
correct positions if they have to be corrected.
  I must say, Senator Bryan has been one of those Senators whose views 
have been very instructive to this Senator personally, and I thank him 
for the manner in which he has always conducted himself. It is 
exemplary.
  I do not ever envy or look forward to the opportunity of debating 
with the Senator. They are always good debates, but I have to tell you, 
he is one of the finest debaters, and he is a gentleman, in the truest 
sense, in terms of the great traditions of the Senate of the United 
States.
  I just thought during this season as we approach a very special 
holiday season, sometimes it would pay for us to reflect, that even 
though we have differences of opinion and, indeed, as is the case of 
the legislation that is before this body today, I look back at our 
differences and I think we have been able to maintain our position 
without losing a sense of balance.
  Mr. BRYAN. Mr. President, I am most grateful for the very generous 
and kind remarks. Let me just say by way of response before returning 
to the issue of the day, the Senator from New York, the very able 
chairman of this committee, takes a back seat to no Member in this 
institution or in the other body in terms of his tenacity, in terms of 
his persistence and effective advocacy on behalf of the causes in which 
he believes.
  I can recall when the Senator occupied a different chair on this 
floor, more to the rear of the Chamber, where he was absolutely 
dedicated to a proposition which affected the citizens of his State and 
spoke, I do not recall whether it was 10, 11 or 12 hours. This is the 
kind of advocate that you get.
  So I have learned from experience that he is always civil in 
disagreement, he has always been courteous and very fair to me, and we 
have worked together on a lot of issues. I acknowledge and appreciate 
that. I would rather have him on my side, because when he is with you, 
things not only happen on that committee but on the floor of the 
Senate. I appreciate his advocacy.
  Again, I pledge to him we are going to continue the discussion we 
have on this measure and any other on which we might find ourselves 
honestly and sincerely having a difference of opinion in the same 
spirit in which our relationship has always been, and I thank him for 
the very generous comments.
  We were talking about the underpinning of this legislation and what 
has been said as an arguable predicate for its enactment, and I shared 
a couple of myths. I think it would be helpful if I mentioned two or 
three more and then comment on a couple of things before yielding the 
floor to the distinguished chairman.
  It has been asserted in defense of the legislation that is before us 
that security suits are filed without reason. Every time a stock price 
goes down 10 percent or more, there is a lawsuit. We have heard the 
strike lawyers are out there kind of prowling, and any time there is a 
dip in the stock price, bam, they are out there and they have these 
suits. That may occur on occasion.
  I am not here to say there is no abuse. I reemphasize somewhat ad 
nauseam that when there is abuse, we need to change the law to make 
sure that kind of conduct is punished in a way which is most understood 
and that is a financial sanction.
  But here is the data, here are the facts, not the anecdotal 
information, not the story that someone heard about someone who had 
been sued in a securities suit. Here are the facts.
  The empirical data established that over 95 percent of the companies 
whose stock falls more than 15 percent in one day are not sued. These 
recent detailed studies document the falsity of the argument of the 
proponents of the legislation. A comparison of the number of stock 
price drops 10 percent or more in one day between 1986 and 1992, and a 
number of suits filed against those companies whose stock price dropped 
revealed that only 2.8 percent of those companies were sued.
  A second study by the University of California at Berkeley, completed 
in August of last year, 1994, tested a sample of 589 cases of large 
stock price declines following a quarters earnings announcement. 
Extensive research revealed that only 20 lawsuits, amounting to about 
3.4 percent of the sample, were filed. This finding is hardly 
consistent with the widespread belief that shareholder litigations are 
automatically triggered by large stock price declines.
  The study was consistent with yet a third study conducted by 
academics at the University of Chicago in March of 1993. That study 
revealed that out of 51 companies that had sustained 20 percent or 
greater declines in earnings and sales, only one company of those 51 
was the target of a shareholders' suit. Again, one of these myths that 
have assumed lifelike reality that is being asserted is that the suits 
are filed every time a stock price goes down. That simply is not borne 
out by the evidence.
  Let me address just a couple more of these myths. Another one is that 
securities class action suits do not help investors, and private 
litigation is, in fact, the only way for individual citizens to collect 
damages from those who commit fraud. For most small investors, who do 
not have the resources to file their own lawsuit, class action 
representation is the only hope they have of collecting damages from 
wrongdoers. The Securities and Exchange Commission may prosecute some 
securities frauds, but it does not have, as I indicated earlier, the 
resources to help all victims of fraud recover their losses. That is 
the province and responsibility of private legal actions, which the 
Securities and Exchange Commission has repeatedly termed a ``necessary 
supplement'' to its activities.
  Finally, let me just say the other myth that we hear a good bit is 
that plaintiff lawyers get all the money in these suits, and victims 
are left with pennies. The average attorney's fee and expense award is 
15.2 percent of recovery, according to the authoritative Journal of 
Class Action Reports. The Journal based its findings on a most 
comprehensive independent study of attorney's fees in class action 
lawsuits involving 334 securities class actions, in which $4.2 billion 
was recovered for victims of fraud. The same journal reported in 1993 
that, on average, for every dollar recovered in securities class 
actions, approximately 83 cents has been distributed to shareholders, 
and only 17 cents has gone to attorneys, including their expenses.
  Let me just say that I have heard the argument here from a number of 
my distinguished and very able colleagues that we have to do something, 
that innocent investors get only a small pittance of the amount 
recovered in these class actions. Let us assume, for the sake of 
argument, that were true--assuming but not conceding. Mr. President, 
not one single thing in this legislation would alter that--nothing. 
There is nothing in this legislation that would provide any type of 
change in our present system that would increase the amount of money 
that 

[[Page S19059]]
would be allocated in a recovery between plaintiffs' attorneys' fees 
and the amount of money that the individual plaintiff recovers.

  Now, it is argued that this legislation is being introduced on behalf 
of the small investor, that we are really doing this, the proponents 
assert, because the small investor needs protection out there; that we 
have all of these ravenous lawyers here taking advantage of the system 
and taking advantage of the small investors, and that we really strike 
a blow for truth, justice, and the American way, and small investors if 
we support this legislation.
  Regardless of how little or how much you may know about this area of 
law--and I am frank to disclaim any expertise other than what I have 
gleaned from my review of this legislation as it has been processed--I 
think it is fair to say, who would best represent small investors in 
protecting their interests? Let us set aside the lawyers for a moment 
because, hey, look, clearly they make money as a result of these 
lawsuits. There is no question about that. Let us set aside the 
accountants, let us set aside the brokerage folks, let us set aside the 
companies that are issuing stock. I think it can be conceded that each 
of those groups across the philosophical divide have a vested interest. 
No question about it. So let us look to other groups that are not 
lawyer-based or involved in securities industry work, or its allied 
fields, and let us see what those folks say about this legislation as 
it has been processed.
  I think it is fair to conclude that this legislation is proposed by 
every major consumer group--every one of them, including the Consumer 
Federation of America; all major senior citizens groups, including the 
AARP; all major State and local organizations responsible for investing 
taxpayer pension funds; the Conference of Mayors; the League of Cities; 
the Association of Counties; Government and Finance Officers; Law 
Enforcement Officials; the North American Securities Administrators 
Association; a good many State attorneys general; the Fraternal Order 
of Police; educational institutions, and others, all have opposed it.
  Now, any one of those groups may not be your cup of tea. You may have 
some reason, philosophically to disagree with positions they have taken 
on other matters of public policy, or other legislation before this 
Congress. But I think it taxes credibility beyond the point of being 
sustained to conclude that each and every one of these groups oppose 
this legislation, even in the conference form, unless they were 
asserting that in their own judgment, representing the organizational 
interests that they do, that they honestly and sincerely believe that 
this is not in the best interest of the small investor. These are the 
folks, unless we assert that there is some monstrous conspiracy 
organized by these ravenous plaintiff lawyers that has corrupted these 
organizations, ranging from the Consumer Federation to the Conference 
of Mayors, to the League of Cities, to the Association of Counties, to 
the Fraternal Order of Police--let me say, even those that are enamored 
with the Oliver Stone approach to life and film, I suspect, have some 
difficulty believing that--unless one subscribes to the conspiracy 
theories in history--there is a conspiracy of this magnitude involved. 
I respectfully submit, Mr. President, that these organizations express 
their opposition because they believe it is not in the best interests 
of consumers.
  The North American Securities Administrators Association is not a 
partisan group. There are 50 States--parenthetically, a majority of 
those States, I think, or a fair majority, are now States that have 
Republican Governors. So I offer this context so that it not be 
asserted that there is any partisan bias that may be reflected by this 
statement.
  Here is a letter sent by way of fax yesterday, December 20. I think 
it is worth sharing because, you will recall, I mentioned that in terms 
of the enforcement mechanisms that are provided to police for 
monitoring the securities markets in America--public protection, 
investor protection, if you will, are predicated upon three pillars: 
The Securities and Exchange Commission at the Federal level, the 
private class action investor lawsuit which we have talked about in our 
discussion this afternoon, and finally, at the State level, the North 
American Securities Administrators Association, which I would daresay, 
without having reviewed the legislative structure of each of the 
States, is subject to appointment through the executive branch of 
Government, either the Governor's office or the Attorney's General 
Office.
  Here is what that group has to say, representing the States. I think 
a State perspective, and rightly so, have taken on an enhanced 
appreciation in this Congress. I commend my colleagues on the other 
side of the aisle for focusing much attention in terms of what is 
occurring at the State level. I think we can gain considerable insight.
  Here is what their correspondence of yesterday said with respect to 
this legislation:

       Dear Senator: I am writing today on behalf of the North 
     American Securities Administrator's Association to urge you 
     to sustain President Clinton's veto of H.R. 1058, the 
     Securities Litigation Reform Act. In the U.S., NASAA is the 
     national organization of the 50 State securities agencies.
       While everyone agrees on the need for constructive 
     improvement in the Federal securities litigation process, the 
     reality is that the major provisions of H.R. 1058 go well 
     beyond curbing frivolous lawsuits and will work to shield 
     some of the most egregious wrongdoers from legitimate 
     lawsuits brought by defrauded investors. NASAA supports 
     reform measures that achieve a balance between protecting the 
     rights of defrauded investors and providing relief to honest 
     companies and professionals who may unfairly find themselves 
     the target of frivolous lawsuits.
       Unfortunately, H.R. 1058 does not achieve this balance. 
     NASAA is concerned with H.R. 1058 go beyond the concerns 
     articulated by President Clinton in his veto message. In sum, 
     NASAA has the following concerns with 1058.

  Mr. President, I will give these abbreviated treatment. The bill 
fails to incorporate a meaningful statute of limitations. I will say 
more about that later during the course of our discussion this 
afternoon and this evening. I assure my patient colleague that I will 
wind these comments up so he may have a chance to express his views.
  The bill's safe harbor lowers the standard for assuring truthfulness 
of predictive statements about future performance. My colleagues will 
recall it was not until 1974 that future or predictive statements were 
even permitted, because of the inherent risk and the temptation of 
those who were involved in selling and marketing, to overstate 
propositions to the decided disadvantage of prospective purchasers of 
securities.
  No. 3, the bill fails to include aiding and abetting liability for 
those who participate in fraudulent activity, and a provision of the 
bill's proportionate liability section is unworkable and disfavors 
older Americans.
  Mr. President, I am very interested, and I am sure that those who 
support the bill will be addressing themselves on this, but I do not 
know, how do we impeach the integrity of their comment? These are 50 
securities administrators who tell us that in their judgment small 
investors are losing a great deal in terms of protection by this 
legislation, while acknowledging, as do I, that we need some balance. 
That, clearly, frivolous lawsuits ought not to be tolerated. Some of 
that is occurring. We ought to come down with a heavy hammer, in my 
view, to preclude that activity. I think it is instructive to listen to 
what that group had to say.
  Let me be parochial for a moment and then I will leave the floor to 
my good friend. The State of Nevada, for whatever it is worth, a 
plurality of registered voters in my State are Republican. I offer that 
in the context of what I am about to say in terms of the kinds of 
letters that we are getting and the position taken.
  Churchill County, a small rural county in our State, expresses their 
opposition to this legislation; the city of Boulder City; the city of 
Carlin, through the mayor; the city of Las Vegas, expressing its 
opposition to the Treasurer; the city of Lovelock, another small 
community; the city of Mesquite, our newest incorporated city, through 
the mayor; the city of Reno; The city of West Wendover; Clark County, 
the largest county in our State, the county treasurer expresses his 
strong opposition; the Clark County school district; the Douglas County 
Board of Commissioners; the Elko County Board of Commissioners; the 
Eureka County Board of County Commissioners; the Nevada League of 

[[Page S19060]]
Cities; Nevada Public Agency Insurance Board; the Pershing County Board 
of Commissioners; the Reno Sparks Convention Visitors Authority; the 
Nevada Attorney General; the State of Nevada Employees Association in 
Washoe County school district, White Plain County, to name just a few.
  I find it incomprehensible to believe that all of these folks are 
simply tools of class action plaintiff lawyers. I just do not think 
that a fair analysis--just using our own intuitive judgments, why would 
all of those folks in our State, as many other States, have expressed 
those concerns? They have expressed those concerns, Mr. President, 
because cities and school boards rely upon the securities market. They 
have investor portfolios. They are potential victims of fraud.
  The Orange County situation is one that each of us is familiar with. 
They want to be sure on behalf of the local county or city or school 
district, whatever the entity might be, that if indeed they are 
victimized by fraud, they can be covered on behalf of the constituents 
whose money ultimately is what is at risk. That is why I have asserted 
every American has an interest in the outcome of this legislation.
  I yield the floor and I thank the chairman for his great courtesy in 
allowing me to proceed at some length when I know he has been waiting a 
while.
  Mr. D'AMATO. Mr. President, I ask unanimous consent for the purposes 
of bringing the Senate up to date, that I may be permitted to proceed 
for no longer than 5 minutes in morning business.
  The PRESIDING OFFICER (Mr. Smith). Without objection, it is so 
ordered.

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