[Congressional Record Volume 141, Number 206 (Thursday, December 21, 1995)]
[Senate]
[Pages S19060-S19073]
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. D'AMATO. Mr. President, I urge my colleagues to remain firm in 
their support of this legislation, legislation that, just two weeks 
ago, was passed overwhelmingly in the Senate, legislation that was 
passed overwhelmingly in the House, legislation that was clearly, once 
again, approved by the House, when the President's veto was overturned 
by a huge majority, the vote was 319 to 100.
  It is here now for us to consider. Let me say, Mr. President, no one 
can argue that the current system is not broken because it is broken. 
Some of my colleagues raise some objections related to pleadings, the 
pleading requirements and some things of a very technical nature--
whether or not, for example, the second circuit opinion should be 
incorporated into this law--we are really getting into hair splitting. 

[[Page S19061]]

  But I will tell you an area where no one can split hairs, no one can 
divide. The system as it presently exists is shameful--shameful--
horrendous. This system does not protect investors. This is the Full 
Employment Opportunity Act for a handful of lawyers. They are out there 
mining, prospecting for gold. They do not protect the average citizen. 
They do not protect the small fry investor.
  Let me tell you what the leading advocate of this system says, as it 
relates to the practice of law. He says, and I quote, ``I have the best 
practice in the world.'' Do you know why he says that? It is amazing. 
Does he say it because he is able to help people? Because he is able to 
bring comfort to them? Because he is able to help widows and orphans 
who are in need, who have been ripped off? That he has helped? That 
would be laudable. Does he say that because he is able to go after 
those who have robbed, who have pilfered, who have cheated? That would 
be laudable.
  ``I have the best practice in the world,'' he says. And why? 
``Because I have no clients.''
  That is a heck of an attitude. And that is what exists. And he is 
working, working. I wonder how many millions of dollars--millions, he, 
himself, has pumped into the system to buy ads to scare people, to tell 
them they are going to take their rights away.
  What we are looking to do is see to it that investors are protected, 
not a handful of attorneys, and one in particular, an attorney who 
says, ``I have the best practice in the world because I have no 
clients.'' His words. Why does he not come to the floor and explain 
that? Let him come out here and tell us how he can justify that kind of 
sentiment to the Senators who are going to be voting.
  Does he care about widows? Orphans? Defrauded people? He cares about 
his pocketbook. He hires a bunch of people to file claims--hires them, 
professional plaintiffs we call them. Some of them get as much as 
$25,000, not based upon what the injury was to them.
  How would you like to be this stockholder? You have 10 shares--that 
is what some of these guys own, 10 shares. They buy shares in every 
company. If the stock of the company goes down, they are recruited, the 
same handful of professional plaintiffs. You see, each one of them buys 
a share, a couple of shares in each company. If the share goes down, 
four or five of them sign up and this lawyer runs into court. He is now 
representing all the shareholders. In most of those cases, his 
shareholders do not own anything worth anything. You cannot even say 
one-tenth of 1 percent. So, when he says he represents no clients, he 
means that.
  Now, he is in there representing, supposedly, all of the 
shareholders. Our bill says you cannot have professional plaintiffs 
anymore. You cannot have the same bunch of thieves, because that is 
what they are--thieves for hire. And we permit them, today, under the 
law. They should be banned, outlawed, they are robber barons.
  Here is this lawyer who is pumping in hundreds and hundreds of 
thousands to protest this bill. I have not heard anybody talking about 
him. I have not seen anybody talking about how much money he has 
siphoned into various groups, money he has funneled to them so they can 
run their phony ads, how they fund these little groups who say, ``Oh, I 
am for the little guy.''
  Little guy my foot. This millionaire lawyer is going around funding 
everybody. Why should he not? He makes tens of millions of dollars. 
Remember who his clients are--nobody. He is operating for himself. He 
is an entrepreneur--not my words, his words. ``I have the best practice 
in the world. I have no clients.''
  It is a disgrace. We should change this system. And that is what this 
bill does. It protects, for the first time, people who own shares. It 
allows the pension fund managers who are managing hundreds of millions 
of dollars to have a say as to who will be selected to lead in the 
representation of investors when there is fraud and exploitation. Has 
there been exploitation? Absolutely. We have operators like Charles 
Keating, where people unjustly have enriched themselves at the expense 
of shareholders, stockholders, and pensioners. Of course, we must get 
them and put them in jail.
  This legislation makes it easier for the Securities and Exchange 
Commission to do exactly that, to bring lawsuits. We created greater 
responsibility on the part of auditors and accountants for the first 
time in this bill. But, my gosh, let us not say that we have a system 
that is a good system when it is out of control, when we permit legal 
larceny because somebody may have some economic power, so, therefore, 
we permit someone else to hold them up and say, ``If you have even the 
tiniest bit of negligence, we are going to hold you liable for whatever 
the loss is even if you were not part of a conspiracy because you could 
have done better.'' Our laws should not work on that basis. It should 
be worked on the basis of fairness, what is fair and what is right.
  It is really long overdue, the need to reform this kind of litigation 
from a money-making enterprise for a handful of lawyers--and it is a 
handful of lawyers--into a better means of recovery for those who have 
lost out. Curtailing abusive securities litigation while allowing 
investors to bring meritorious lawsuits will permit investors to have a 
system of redress that serves them, not one that entraps them. This 
bill serves investors and not a handful of lawyers who are proud to 
claim that they have the best practice because they have no clients.
  I yield the floor.
  Mrs. FEINSTEIN addressed the Chair.
  The PRESIDING OFFICER. The Senator from California.
  Mrs. FEINSTEIN. Mr. President, I want to address the securities 
reform veto override. It is my intention to support the override 
effort, and I would like to summarize for the Record my views on the 
legislation and my reasons for supporting the bill. Because the senior 
Senator from Connecticut is here, I would like to ask him a series of 
questions, if I might, and see if I am correct in my assumptions, and, 
if I am not, give him the opportunity to clarify my concerns. As you 
know, the senior Senator is one of the main cosponsors of this bill.
  The first involves the so-called license to lie challenge to the safe 
harbor. I spent about 6 hours with various representatives of the high-
technology companies and representatives of the SEC on the safe harbor. 
At the time the SEC would not sign off on language that they wanted and 
included in the bill. Subsequently, SEC Chairman Arthur Levitt did sign 
off on the safe harbor legislation, a decision confirmed by letter from 
Chairman Levitt, that has already been introduced into the Record.
  I would like to state my understanding of the safe harbor and see if 
the senior Senator of Connecticut concurs.
  To claim the protection of the safe harbor, an individual company 
officer must clearly identify the statement, either written or oral, as 
a forward-looking statement. By forward-looking statement, I mean a 
statement that applies it to economic projections, estimates, or other 
future events. The safe harbor cannot be claimed by certain groups of 
individuals--and I will go into that shortly. This statement must be 
accompanied by meaningful cautionary statements, identifying important 
factors that could cause actual results to differ materially from the 
forward-looking statement. That is to say, the statement must be 
accompanied by a clear warning that identifies the risk that the future 
may not turn out as forecast. This warning cannot be routine warning 
language, but must be specific to the forward-looking statement.
  Is that a correct understanding of this bill?
  Mr. DODD. Mr. President, I say to my colleague from California that 
she is absolutely correct. This is exactly what the meaning of that 
safe harbor language is.
  Mrs. FEINSTEIN. I thank the Senator. If the statement is oral, it is 
my understanding that the individual must identify the statement as 
forward-looking; clarify that actual results may differ materially; 
and, state at the same time that additional information about the 
forward-looking statement is contained in a readily written available 
document with additional information which satisfies the same warning 
standard required of written standards.
  Mr. DODD. Mr. President, I further say to my colleague from 
California that is absolutely correct.
  Mrs. FEINSTEIN. Or, as a separate test, as I am led to believe, the 
safe 

[[Page S19062]]
harbor does not apply if the statement is made with ``actual 
knowledge'' that the statement was ``an untrue statement of a material 
fact or omission of a material fact necessary to make the statement not 
misleading.''
  Mr. DODD. Mr. President, the Senator from California is correct as 
well on that.
  Mrs. FEINSTEIN. I appreciate the Senator from Connecticut's comments, 
which, I believe helps clarify the scope of safe harbor.
  Let me go on.
  As I understand it, the protections of the safe harbor are not 
available to reduce the obligations of companies to disclose historical 
information or current information truthfully and accurately. For 
instance, if a company makes misleading statements about known facts, 
the safe harbor does not protect the company.
  Mr. DODD. That is correct, I say to my colleague.
  Mrs. FEINSTEIN. I further understand the safe harbor provisions do 
not apply to certain companies we may have reason to have some doubt 
about, such as penny stock companies, initial public offerings known as 
IPO's, blank check companies, roll-up transactions, or companies 
recently convicted of specific securities law violations. All of these 
types of companies are excluded, as I understand it, from the 
protection of the safe harbor provisions. The provisions are only 
available to companies with an established track record.
  Mr. DODD. Mr. President, I say to my colleague from California that 
is absolutely correct.
  Mrs. FEINSTEIN. I thank the Senator.
  As we discuss companies or individuals ineligible for the safe 
harbor, I would also want to clarify the safe harbor does not apply to 
brokers or analysts who may have an incentive to oversell a stock to 
obtain a sale. On this point, the safe harbor would not have applied to 
the financial concerns we experienced in Orange County, California. If 
Merrill Lynch is a broker selling derivatives to a county government, 
in my state of California or any other state, they are not protected by 
the safe harbor because the safe harbor does not protect brokers and 
does not address derivatives.
  Mr. DODD. The Senator from California is correct.
  Mrs. FEINSTEIN. I understand the safe harbor does not apply to a new 
company, but only applies to seasoned issuers. For instance, NetScape, 
a new high-technology company, which saw its stock explode from zero to 
$120 a share or more, can claim no protection under the safe harbor 
because it is an initial public offering.
  Mr. DODD. That is correct.
  Mrs. FEINSTEIN. Finally, I wish to clarify for the record that the 
safe harbor does not affect the jurisdiction of the Securities and 
Exchange Commission or the SEC's authority to work with the Justice 
Department to bring enforcement actions against wrongdoers for fraud, 
insider trading or any other enforcement action. So, in other words, 
the safe harbor cannot be used as a defense against the jurisdiction of 
the Securities and Exchange Commission.
  Mr. DODD. Mr. President, I say to my colleague from California that 
is absolutely correct.
  Mrs. FEINSTEIN. I very much thank the Senator. I would like to go on 
and specifically address the concerns of cities because I have received 
exactly some letters from various cities, 26 or so to be precise, 
indicating their concern. We have taken a good look at it.
  I think one of the core lessons about Orange County is that cities 
should not be investing in speculative investments. I know from my 
tenure as mayor of San Francisco for 9 years, and I served on the 
investment body which was then the retirement board, these kinds of 
speculative ventures were prohibited.
  We have heard some discussion about the financial concerns involving 
Orange County, CA, but as was discussed earlier, these circumstances 
would not be altered by the safe harbor under the bill. In Orange 
County, the treasurer was buying derivatives from Merrill Lynch. 
Derivatives are not protected by the safe harbor. Further, Merrill 
Lynch, serving as a broker, is ineligible to claim safe harbor 
protection. So you have protections built in two different ways. 
Derivatives are not protected, and a broker is not protected.
  I believe--and my vote is cast on this belief--that the cities' 
concern appears primarily to address the proportional liability section 
of the bill. Under the proportional liability rules adopted in the 
bill, an accountant from a big accounting company would not risk 
bearing the full cost of a plaintiffs' loss if it audits the books, 
certifies them and fraud causing loss to plaintiffs subsequently 
arises. However, even the proportional liability rule, as I understand 
it, has a significant protection built in.
  While the bill adopts a proportional liability rule, proportional 
liability will not limit the responsibility of a business or an 
individual who commits ``knowing securities violations.'' I think that 
is very important. Such an individual would remain responsible to pay, 
not the proportional loss, but the full loss, as I understand it.
  I know the senior Senator from Connecticut will correct me if he 
believes that is inaccurate.
  ``Knowing securities fraud'' includes any defendant who had actual 
knowledge, or operated under circumstances in which they should have 
had knowledge, the fraud occurred.
  So the provision will not permit accountants who commit knowing 
securities fraud to eliminate full liability for accountants who 
deserve to be fully liable. Would the Senator agree with that?
  Mr. DODD. The Senator from California is correct, I would say, Mr. 
President, with that observation.
  Mrs. FEINSTEIN. I think that is very important to the cities that are 
watching this debate.
  Further, special rules are provided to force proportionally liable 
defendants to pay more if a particular plaintiff suffers a high level 
of losses. A significant part of the debate revolves around our concern 
for poor and potentially vulnerable plaintiffs. Under this bill, if a 
plaintiff can claim damages exceeding 10 percent of their net worth, 
and their net worth is less than $200,000, then a defendant remains 
fully liable for that loss to the plaintiff and no proportional 
liability can be used to reduce that liability.
  Additionally, many of us have concerns with the application if this 
law in instances involving insolvent defendants. If a defendant cannot 
pay due to bankruptcy, the defendants who would otherwise be only 
proportionally liable must pay up to 50 percent more to make up the 
plaintiff's shortfall due to the bankruptcy. What this means is that if 
the battle comes down to an innocent plaintiff who loses and a 
proportionally liable defendant who feels it would be unfair to force 
them to bear the full loss, the defendant loses and the proportionally 
liable defendants must pay more.
  These are very important concepts to me, and I wanted to come to the 
floor to place my understanding with respect to legislative intent in 
the Record. I am very pleased that the senior Senator and author of 
this legislation is present and has corroborated these statements.
  I thank the Chair. I thank the Senator. I yield the floor.
  Mrs. BOXER addressed the Chair.
  The PRESIDING OFFICER. The Senator from California.
  Mrs. BOXER. Mr. President, I thank you very much.
  My senior Senator from California and I usually, when it comes to 
issues affecting our State, come down on the same side. We have clearly 
come down on opposing sides here. Before she leaves the floor, I just 
wanted--I do not ask her to stay because I know she has other pressing 
matters--to talk about the breadth and the depth of the opposition to 
this bill and the support for the President coming from local elected 
officials in our home State where she served, as we know, as an 
esteemed and extraordinary mayor of the city and county of San 
Francisco. I served on the board of supervisors in neighboring Marin 
County for 6 years and its president for a time.
  I think what is important here is that authors of the bill feel very 
strongly in their work product, what they do and their intentions. I 
have never once doubted the intentions of those who have brought this 
to us, that their prime intent was to make sure that frivolous lawsuits 
were a way of the past. But it is the people who invest in securities 
who have looked at this from the standpoint of protecting investors, 
and I have never seen such a 

[[Page S19063]]
list of county officials that I placed in the Record from almost every 
single county in California, from the county administrators to the 
treasurers, to tax collectors. These are the people who know that they 
need to have protection from those who would seek to take advantage of 
investors. This list is extraordinary.
  The League of California Cities wrote a letter to the President dated 
December 5, 1995:

       As representatives of municipal Government who oversee 
     billions of dollars in investments, we strongly urge you to 
     oppose the Securities Litigation Reform Act.

  And they say:

       Any securities litigation reform must achieve a balance 
     between protecting the rights of defrauded investors and 
     protecting honest companies from unwarranted litigation. 
     Abusive practices should be deterred and sternly sanctioned. 
     However, we believe that investors would be penalized and 
     become victims of security fraud and that wrongdoers would be 
     rewarded.

  And they call it ``an anti-investor bill which would impose new and 
blatantly unfair requirements on the victims of fraud, making it very 
difficult for them to seek redress through the courts.''
  Now, the number of California governments opposed to this is 
staggering--not only governments but agencies: The Alameda County 
Employees' Retirement Association, Amador County Treasurer/tax 
collector, the treasurer of the AFSCME local in Pasadena, the Calaveras 
County Board of Supervisors, California Association of Treasurers and 
Tax Collectors, California Association of County Treasurers--we have 
more than 50 counties in our State--California Council of Senior 
Citizens Clubs of San Diego and Imperial Counties, California County 
Administrative Officers Association--that is the association of the 
administrators of counties, over 50; I am just listing a few here--the 
California Labor Federation, the California Government Finance Officers 
Association, the California Municipal Treasurers Association, the 
California Public Interest Research Group, the California State 
Association of Counties, the city of Albany, the city of Arcadia, the 
city of Barstow, the city of Beverly Hills, the cities of Burbank, 
Burlingame, El Monte, Fairfield, Fremont, Glendale, Hayward, Hemet, 
Huntington Beach, Irvine, Long Beach, Manhattan Beach, Moreno Valley, 
Newport Beach, Oceanside, Ontario, Riverside, the city of San 
Bernardino, San Fernando, San Francisco, Mayor Frank Jordan; city and 
county of San Francisco board of supervisors, city of San Jose, Mayor 
Susan Hammer; city of Santa Ana, city of Santa Rosa, city of Santee, 
city of South Pasadena, city of Stockton, city of Thousand Oaks, city 
of Ventura.
  Why am I doing this? Because I am trying to make it clear that the 
opposition to this legislation is broad and it is deep. I will stop 
mentioning the cities, and I will shift to some of the counties: Del 
Norte County, El Dorado County, Fresno County, Glenn County, Humboldt 
County, Imperial County, Inyo County, Kern County, Kings County, Lake 
County, Lassen County treasurer/tax collector, Los Angeles County 
Employees Retirement, Los Angeles County Federation of Retired Union 
Members, Marin County--that is where I am from--Employees Retirement 
Corporation, Mariposa County, Mendocino County--I am at the M's. It 
goes on and on: San Diego County treasurer/tax collector, Sacramento 
County treasurer/tax collector, San Francisco Democratic County Central 
Committee, San Joaquin County, San Luis Obispo County, Santa Barbara 
County treasurer/tax collector, Senior Meals and Activities, Service 
Employees International.
  Then it goes to the T's and the U's and the V's, and it ends with 
Yuba County Supervisors, county administrator and the treasurer/tax 
collector. And the number of editorials has been just extraordinary 
from my State.
  One has to wonder why this has happened, and I think it is because 
this is a very complicated matter.
  My friend from California had several problems that she wanted to 
clarify, and she feels comfortable that they have been clarified. But 
when you are rewriting securities law, Mr. President, which has 
protected investors since the 1930's, it is very complicated, and as a 
former stockbroker I can tell you when people used to call me they 
trusted me. They trusted me. And the fact of the matter is I would lose 
sleep rather than give someone terrible advice. And that is one of the 
reasons I did not stay in that business. It was very, very difficult, 
because I worried every time the stock market went down and an elderly 
retiree called me the next day. I just felt it was an enormous 
responsibility. student. Unfortunately, in our great country, the 
greatest on Earth, with the greatest free market system and the 
greatest, frankly, laws protecting investors, there are people who 
would take advantage of the elderly and of people who really are not 
sophisticated. And it is easy to do.

  What this bill does, as you look at it and its transformation, 
unfortunately, is give people like the Charles Keating and people who 
really do not care about other people an opportunity to rip off people 
because the legal system will not go after them.
  The way the bill is written, the pleading requirements are so 
difficult plaintiffs would have a hard time even getting into court. 
And even if they get into court, you have a specter over your head that 
an unfriendly judge could decide, if you are an elderly, small 
investor, for example, that your lawsuit did not have merit and you are 
going to have to pay the bills of those on the other side. And that has 
a very chilling effect.
  Therefore, when the President vetoed this bill, he said very clearly 
that he would love to sign a securities reform bill. He wants to sign a 
securities reform bill. He wants to make sure that there are fewer 
frivolous lawsuits. He wants to make sure, in fact, that people in the 
Silicon Valley, my constituents, the senior Senator from California's 
constituents, are not hit with strike suits. None of us wants that.
  Unfortunately those with another agenda have prevented that. Instead 
of having a bill that goes after those lawyers that are filing 
frivolous lawsuits, to quote one of the newspapers, ``Instead, the bill 
stabs the small investor in the back.''
  That is why we have so many county treasurers and county 
administrators and boards of supervisors and mayors and the League of 
California Cities opposed to the bill as it is now written--these 
people know they want to protect their employees and retirees 
investments.
  Mr. President, as we enter the battle of the budget, and we fight 
hard--in my view, this is what the President is doing--fighting hard to 
protect the middle class, trying hard so that our elderly will have 
Medicare, and the seniors in nursing homes will have Medicaid when they 
need it, and we have student loans for our children, and we have the 
police on the beat for our middle-class and all communities--we cannot 
divorce this bill from that battle. Who would be hurt the most if we do 
the wrong thing, which the President thinks we are about to do, here?
  Many of the experts in this field warn us about this bill. Who will 
pay the price if we do the wrong thing? Not the very wealthy because, 
if the very, very wealthy get bilked in one investment, they are still 
on their feet. They are OK. They can survive. Not the very, very poor, 
because the very, very poor do not have money to invest.
  This bill is going to be aimed at the solid middle class, those 
people who saved for their retirement and suddenly find out when they 
are bilked that they have no recourse because the securities laws were 
reformed.
  Mr. President, there is a difference between reform and repeal. And I 
think the President has laid that out. He is opposed to the pleading 
requirements. He is opposed to the safe harbor. Many of us believe is 
not a safe harbor at all, but a pirate's cove because all you have to 
say to be immunized is, ``This is an estimate. This is just an estimate 
of future activity.'' Then you can hide behind that language.
  So I hope that we sustain the President's veto. It was a courageous 
thing for him to veto, in my opinion. It is going to be a very close 
vote one way or another, maybe one, two, or three votes. I just hope we 
will stand with the President because I think he is fighting for the 
middle class in this veto.
  I yield the floor at this time.
  Mrs. FEINSTEIN addressed the Chair.
  The PRESIDING OFFICER. The Senator from California, Senator 
Feinstein. 

[[Page S19064]]

  Mrs. FEINSTEIN. If I might briefly respond to my respected colleague.
  It is interesting, I guess, in a State as big as California one can 
have some different constituencies. My mail is, oh, maybe over 100 to 1 
for the legislation rather than opposed to it. When I read the letters 
from the counties, that is when I saw they were functioning under a 
misimpression of what the safe harbor actually did. That is why, in my 
colloquy with Senator Dodd, I tried to clarify these concerns. As I 
stated earlier, first, the stockbroker who sold the derivatives to 
cities or counties would not gain the protection of the safe harbor 
because brokers are ineligible; and, second, derivatives would not be 
protected by the safe harbor. So I tried to straighten that part out.
  I want to point out that in California we are going through an 
economic change. High technology and biotechnology is a big source of 
jobs now and in the future. It is estimated that 62 percent of the 
high-technology companies that went public from 1988 to 1993 have faced 
securities lawsuits. And 62 percent of the companies that have gone 
public in the last 5 years have faced securities lawsuits in the State 
of California. That alone indicates that there is a problem that needs 
to be addressed.
  What has concerned me in the legislation is a desire to address the 
problem and not throw out the goose that laid the golden egg. I want to 
protect the small investor, protect the county, and yet do away with 
the kind of lawsuit that happens because a companies' stock drops, a 
suit is filed, they press discovery and they move and collect a large 
settlement from the company, when the suit may be baseless.
  Those kinds of frivolous suits concern me. I think it is a legitimate 
function of government to attempt to reform that. I also think it is 
important that this legislation strikes a balance and protects the 
consumer. Based on what I have seen, I believe it does.
  More fundamentally, if it is proven to have a flaw or a problem, that 
flaw or problem can in fact be corrected. As I understand, it this 
legislation has taken some 5 or 6 years now to develop. The bill has 
been refined and refined over time. The bill has finally passes both 
Houses, the veto override has been supported in the House of 
Representatives. It seems to me it is time to get on with it and give 
the kind of necessary reform that I believe this bill provides in an 
evenhanded manner. I thank the Chair.
  Mrs. BOXER. Will my friend yield to me for just a comment? And that 
is, I respect her completely for coming down on the other side. Of 
course, there are two sides to every story. I was just pointing out 
that as a former stockbroker myself and having felt that responsibility 
on my shoulders, the people who I really do tend to listen to in these 
matters are people who do not have a stake in it, and that is the 
people who are the investors.
  All they want is a safe securities market. I agree with my friend, we 
may be back here fixing this bill. I think that the President has given 
us a road map to do that. I do not want to go on except to close, and I 
know my friend from North Carolina has been so patient.
  Money magazine has really taken this issue on. And I think they make 
a very good point here when they say,

       The President should not sign [the bill]. . . . Here's why: 
     The bill helps executives get away with lying. Essentially, 
     lying executives get two escape hatches. The bill protects 
     them if, say, they simply call their phony earnings forecast 
     a forward-looking statement and add some cautionary 
     boilerplate language.

  And they talk about the fact that legitimate lawsuits would not get 
filed. So reasonable people come down on different sides. I want 
reform, but I want to see it done in a way that we stop these frivolous 
lawsuits but we still protect the small investors. Thank you very much 
for your patience, I say to my friend from North Carolina. I yield the 
floor.
  The PRESIDING OFFICER. The Senator from North Carolina is recognized.
  Mr. FAIRCLOTH. I rise in strong support of the motion to override the 
President's veto of H.R. 1058.
  Mr. President, securities litigation reform is extremely important to 
the future of our economy. Obviously, the President disagrees. It is 
unfortunate. The President pretends that he supports our high-
technology industry, but his veto showed that he cares more about trial 
lawyers than the growth of business in this country.
  The Wall Street Journal may have called it right. They said Bill 
Clinton could be the President of torts.
  Mr. President, the irony of this is that it is not a partisan issue. 
The lead sponsor of this bill is my friend from Connecticut, who is 
chairman of the Democratic National Committee. Republicans and 
Democrats alike have recognized the strike suits are very serious 
problems.
  Mr. President, America is the undisputed leader in technology. No 
other country comes close to our leadership in this area. But a small 
cadre of lawyers have found a way to make a living by launching these 
strike suits against companies.
  This is wrong. It is hurting America, it is hurting our economic 
growth, it is slowing our job growth, and it has to stop. It is hurting 
our fastest growing high-technology business. This bill is a good 
start.
  Mr. President, these lawsuits that have been filed against these 
companies have little to no merit, but they are filed for the purpose 
of blackmailing companies into settling rather than going to court. In 
other words, it is cheaper to buy them off than it is to fight it in 
court.
  The cost of these suits to the American economy is no small matter. 
At the end of 1993, class action lawsuits were seeking $28 billion in 
damages--$28 billion--which is a staggering amount, and most of these 
lawsuits are totally worthless.
  The committee has had example after example of how absurd the cases 
can be. For example, one individual has filed against 80 companies in 
which he held stock and, in most cases, an infinitesimal amount of 
stock. Another individual has filed 38 lawsuits, 14 of them with the 
same law firm.
  Another man, a retiree since 1990, 5 years, has filed 92 lawsuits, 
one for every year of his age. He is 92.
  One law firm files a securities suit every 5 working days, one a 
week. They are just churning them out, whether there is any validity or 
not. That is how much it takes to meet the payroll, so they churn out 
one a week. In many cases, these lawsuits are filed within hours of 
price stock drops. The National Law Journal reported that of 46 cases 
studied, 12 were filed within 1 day and another within a week of 
publication of unfavorable news about a company.
  Anybody that has ever run a company knows that all the news is not 
always favorable, no matter how hard you work at it. Mr. President, a 
point to remember in this debate is that investors are not helped by 
these lawsuits. If the President vetoed this bill for the small 
investor, then he missed the point in what the bill was about, and he 
is wrong. He is not protecting the little investor, he is only 
protecting a cottage industry of trial lawyers who make a living out of 
these lawsuits, and they have made a very plush living.
  Study after study shows that lawyers get the lion's share of the 
settlements. We had testimony that the average investor receives 6 or 7 
cents for every dollar lost in the market because of these suits, and 
this is before the lawyers are paid and they get the lion's share of 
it.
  A couple of weeks ago, Fortune magazine had a picture of two lawyers 
who said, ``Beware of this type of lawyers, they will destroy your 
company.'' That was the cover story. So this is going on and the 
business investment community is aware of it.

  One of the significant parts of the bill allows courts to determine 
who the lead plaintiff is, one that is most adequate to represent the 
class, not a person who ran to the courthouse and got there first, and, 
in many cases, the way these suits have been filed, it is simply who 
got to the courthouse first, not who had the real vested interest.
  If the President wants to protect investors, this is the bill to do 
it. The lead plaintiff must file a sworn statement that he or she did 
not buy the securities at the direction of counsel. Too often, many of 
these plaintiffs are straw men acting on behalf of the lawyers who 
instructed them to buy the stock in order that they could file the 
suit, and they make a profession out of filing the suits. 

[[Page S19065]]

  This provision will encourage institutional investors to be the lead 
plaintiff, the people who have a real vested interest. After all, they 
have the most at stake in these lawsuits. Institutional investors have 
$9.5 billion in assets. They account for 51 percent of the equity 
market. Further, pension funds $4.5 trillion in assets.
  These funds--mutual funds and pension funds--represent the holdings 
of millions of Americans, many of them small savers. They have every 
right to have fraudulent lawsuits brought fairly and correctly, not 
just because a certain lawyer jumped in front of him and got to the 
courthouse first.
  Mr. President, the conference report will punish lawyers that file 
frivolous lawsuits. The bill requires a mandatory review by the court 
of whether a lawyer filed frivolous motions and pleadings, known as 
rule 11 under the Federal Rules of Civil Procedure. What could be the 
problem with this provision--enforcing the Rules of Civil Procedure?
  The veto message was concerned with the pleadings standards, but a 
key part of this bill is stopping lawsuits that allege no specific 
wrongdoing but just generally allege fraud, just blanket fraud, because 
the stock price dropped. We have seen some pretty sharp stock price 
drops lately and not because anybody committed fraud. These kinds of 
suits get the plaintiff into court and then they can start demanding 
settlement.
  The bill requires that an attorney in a private action must allege 
facts giving rise to a strong inference that the defendant had the 
required state of mind to make an untrue statement. At the very least, 
this provision requires that lawyers have more to go on than just 
generally alleging fraud.
  The President's veto message also objected to the discovery process. 
To put it plainly, once a lawyer files a frivolous lawsuit, with little 
or no facts, he gets the ability to engage in discovery. This allows 
him or her to rifle through the records of a company looking for 
anything with any particular spin that smacks of fraud. He does not 
have to have anything when he starts. He gets it after he files his 
suit.

  Mr. President, 80 percent of the cost of litigation is in the 
discovery process. This bill would stop the discovery process while a 
motion to dismiss is being deliberated. In other words, the court has 
to find that the complaint has merit before the company has to spend 
time and money responding to voluminous document requests.
  This goes to the heart of this bill: File a lawsuit and then ask for 
the world in discovery and hope that the company settles the suit to 
avoid the cost of litigation. The lawyers take home a tidy sum of money 
for very little work. This is what we are trying to stop, and that is 
the blackmailing of corporate America.
  Let me just say a word about the safe harbor provision. This is 
critically important to the flow of information for investors. Right 
now, companies are literally frightened to project their earnings, or 
anything else for that matter, because if they do and it happens to 
turn out wrong, then they are going to be sued for fraud. They cannot 
even give an honest projection of what they might make, because if it 
happens to be wrong, if a change in circumstances, events, business 
down, up, they are subject to fraud.
  Big investors and small ones alike, mutual funds, pension funds, 
anybody that is investing needs this kind of information projection to 
make wise and prudent investment decisions. It is a shame that due to 
the actions of a small group of parasitic lawyers that the free flow of 
information has been muzzled, that you simply cannot find out what a 
company plans to do or can do.
  Mr. President, another important reform that is being made by H.R. 
1058 is reform of proportionate liability rules. This bill requires 
that those who are responsible for causing a loss pay their fair share 
of the loss but no more. If they cause 1 percent of the loss, they pay 
1 percent. This is the way it should be.
  Too many lawyers have gone after companies looking for the deep 
pockets, and this can be anybody that had anything to do with the 
operation of the company. It can be lawyers, accounting firms--anyone 
that was touched. So they are simply looking for the deep pockets. In 
many cases, a lawyer would not even bother to file the suit but for the 
deep pockets of the attorney firm or accountants, whoever might be 
involved.
  Despite this provision, there are some circumstances when individuals 
will pay more than they really owe. For example, we have a so-called 
widows and orphans provision that imposes joint and several liability 
on everyone to cover the losses for persons with net worth below 
$200,000. In other words, it is protecting those people of less than 
$200,000, and everyone has to pony up to pay their claim.
  Further, if a defendant is insolvent, other parties have to 
contribute another 50 percent of their liability to make up for the 
insolvent defendant.
  On this particular point, the conference report goes a long way 
toward protecting small investors financially. They will not be left 
out in the cold if the principal target is insolvent. Small investors 
will be fully protected. Those who have a net worth over $200,000 will 
be fairly compensated.
  Finally, anyone who knowingly commits fraud will be fully liable. 
There is no retreat from this. If they knowingly commit fraud, they are 
fully liable.
  Mr. President, I am a strong supporter of securities litigation 
reform, and I am a supporter of overall legal reform. I hope this is 
just the beginning. Some have suggested that the indirect cost of all 
this litigation is $300 billion a year.
  This is a heavy price for American business and industry to pay. It 
is a heavy tax on the American public for the rights of a few lawyers 
who engage in these frivolous strike suits.
  Mr. President, the SEC has sent a letter to the committee in which 
they state that the conference report addresses their ``principal 
concern.''
  Mr. President, the Washington Post called it a truly useful piece of 
legislation.
  As I said earlier, this bill is too important to our economy not to 
override the President's veto. I urge the Senate to vote to override 
this veto. I simply feel that American industry and American business--
particularly the high-technology businesses--have simply fallen victim 
to the piranha-type lawyer who goes after them whether there is any 
justification to his claim or not. But because of the cost of the 
lawsuit, he gleans a lot of money.
  With that, I yield the floor.
  Mr. DODD addressed the Chair.
  The PRESIDING OFFICER (Mr. Gorton). The Senator from Connecticut [Mr. 
Dodd] is recognized.
  Mr. DODD. Mr. President, this is a moment of some unease, obviously, 
for this particular Senator from Connecticut to be in a disagreement 
with my President on this issue. But I am going to be urging my 
colleagues to override the President's veto. I do so because I believe 
this bill, passed previously in this body and adopted again in a 
conference report, is a good bill and one that deserves support.
  I appreciate the arguments raised by the President. I have had the 
privilege of discussing them with him and his staff over a number of 
months. And the President arrived at a different conclusion. I respect 
that.
  Much has been made of the fact that I have a second hat that I wear 
from time to time, that is called the general chairmanship of the 
Democratic Party. I am very proud of that hat. As I said at the outset 
when I accepted that position, there would be times, I suspected, where 
my President, the leader of my party, and I would disagree on issues. 
This happens to be one of those moments. I hope there are not many, but 
it is one of those moments. So I regret that. Nevertheless, I feel that 
this is an important bill, one that I have spent a great deal of time 
on going back to 1991, when my colleagues--principally Senator Domenici 
of New Mexico--and others, began to work on this legislation in this 
body, and through a process of numerous hearings and the like, we 
arrived at the point we are at today.
  I would like to take a few minutes, if I can, and discuss the matters 
of particular controversy at this moment and why I think that an 
override is appropriate.
  First of all, I point out to my colleagues--and I think I heard my 
colleague from New Mexico make this point when he was addressing the 
Chamber earlier this morning--this is 

[[Page S19066]]
truly a bipartisan bill, Mr. President. I realize that may not sound 
like much. It is certainly not a justification for supporting it. 
Unfortunately, there are fewer and fewer occasions when we have truly 
bipartisan bills like this. It is worthy of note because an awful lot 
of people on both sides of the aisle here have worked very hard to put 
this bill together. Is it a perfect bill? I suspect not. I have never 
seen one of those in my tenure here in Congress. Have we done 
everything exactly right? Probably not. Only time will tell where we 
have to make some corrections. But we have addressed some fundamental 
underlying problems that, by most people's comments, admittedly needed 
to be corrected. Those are the principal concerns.
  I am grateful, in fact, that the President in his veto statement 
acknowledges that. We are no longer debating safe harbor, which was a 
matter of great controversy, or proportionate liability. We are no 
longer debating an issue my colleague from North Carolina pointed out a 
few moments ago, the right of the most injured plaintiffs to have at 
least the opportunity--it does not require it--but at least the 
opportunity to be the lead plaintiffs in the case, to require that in 
settlements or in judicial conclusions that the plaintiffs have an 
opportunity to get the award, and that the attorneys will take a second 
seat to the plaintiffs when it comes to divvying up the money that may 
come to them as a result of settlements, or a judicial award.
  These are the principal matters in this piece of legislation. And the 
President, in his veto message, agrees with us on virtually all of 
them. In fact, in his comments--and I commend him for them--he has said 
this is a good bill. He has problems with two areas: pleadings and rule 
11. I do not say they are unimportant, but certainly when you weigh 
them in the context of the overall bill, it amounts to just a handful 
of words--a fraction, if you will, of the overall achievement in the 
legislation.
  So the bipartisan nature of this legislation, I think, is very, very 
important, and shortly I will discuss the specific concerns that I have 
mentioned, the pleadings area and the rule 11 area.
  As I mentioned earlier, we have been debating this bill for going on 
more than 4 years now, into our third Congress on this legislation. 
Some 1,600 days have passed since the legislation was first introduced 
in 1991. There have been 12 public congressional hearings on this bill. 
That is an inordinately high number of congressional hearings on any 
single piece of legislation. Yet, that is how many have been held on 
this bill.
  We have had 95 witnesses appear before congressional committees, 
representing all the different points of view, on securities litigation 
reform. We have had more than 4,000 pages of testimony, been a part of 
the legislative history that has led us to this bill that is now before 
us under these procedural circumstances.
  There have been a half dozen staff and committee reports issued on 
the substance of the legislation, and, in fact, we have debated this 
piece of legislation for 7 full days over this past year here on the 
floor of the U.S. Senate.
  Given this lengthy history, it is particularly disappointing that a 
veto of the bill has occurred, based on the issues that, frankly, have 
never previously been the subject of most of the contention and most of 
the debate. In fact, the President has stated his support, as I said 
earlier, for many of the most discussed and central issues, like the 
safe harbor provisions, proportionate liability provisions, the new 
lead plaintiff provisions, prohibitions on professional plaintiffs, and 
the discretionary bonding provisions. None of those issues should be 
the topic of our discussion today because, candidly, the President said 
he agrees with these issues.
  What we are talking about are the issues he says he is in 
disagreement with. It is not an overstatement to say that his veto 
message indicates his support for about 95 percent of this legislation, 
and his veto is based on somewhere between 5 percent and 1 percent of 
the issues that are included in this bill.
  In fact, when you boil it down, Mr. President, we are having a fight 
over 11 words--11 words out of over 11,000 words in the bill itself. 
Eleven words are the subject of the veto.
  So the President vetoed this bill because of a relatively small 
percentage of the matters included in the legislation and apparently 
some wording in the statement of managers. It is somewhat rare that a 
veto would involve a statement of managers, but nonetheless, that was 
included in the veto message as well. So, Mr. President, I intend, 
obviously, no disrespect at all to the President, but this is the first 
veto I can recall where part of a veto message was based on a statement 
of managers.
  As we discuss the issues upon which the President vetoed the 
conference report, it is important to remember some of the official 
statements that the administration has previously made, some of which 
directly contradict the veto message itself. Let me begin with the 
pleading standards, if I may.
  Back in May of this year the Senate Banking Committee codified the 
essence of the pleading standards of the U.S. Second Circuit Court of 
Appeals. Then on June 23 of this year, S. 240, the bill before us moved 
to the floor. The administration, as administrations do, issued its 
statement of policy in which it praised the pleading standards ``as 
sensible and workable.'' That was the administration's statement of 
policy regarding the pleading standards in June of this year. The only 
difference between those pleading standards that were applauded in June 
and those endorsed by the administration, the ones before us today, are 
three words--the only difference between what was in the bill in June 
when the statement of policy came out and what is before you today are 
three words that have changed, and the words represent a technical 
change requested, by the way, by the Judicial Conference of the United 
States Federal Judiciary. These are not words we came up with. They 
were not words of the opponents or proponents, but they were altered at 
the recommendation of the Judicial Conference, in a letter from Judge 
Anthony Scirica to the committee staff when asked to give their 
comments on the pleading standards.
  I know it has been included in the Record, but I ask unanimous 
consent that the letter dated October 31, 1995, 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,

                               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 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. DODD. Mr. President, let me describe what the three words are so 
my colleagues know what we are talking about. The words that we had in 
the bill were ``specifically allege facts giving rise to a strong 
inference of fraud.'' That was the language we had--``specifically 
allege facts giving rise to a strong inference of fraud.'' What the 
Judicial Conference recommended was that we change that language to 
``state with particularity facts giving rise to a 

[[Page S19067]]
strong inference of fraud.'' So the change went from ``specifically 
allege'' to ``state with particularity.''
  That is the change that occurred from the language that was applauded 
in June by the administration and in its statement of policy as to 
where it stood on the bill and what was adopted in the conference 
report. The change occurred without a great debate or a thunder and 
lightning storm or a conference in which the sides were in contentious 
argument. This recommendation of the Judicial Conference was accepted 
as something the conferees felt made sense.
  So we did what the judges asked us to do, which is, I thought, how 
you normally proceed. You ask people who will be sitting on these 
matters to give us their recommendations--they are not Democrats, 
Republicans, named in a partisan debate--but merely their 
recommendations to the conference report.
  Mr. SARBANES. Will the Senator yield?
  Mr. DODD. If I could complete my whole comment because I want to get 
to the Specter amendment.
  Mr. SARBANES. I was not clear what conference the Senator was 
referring to about thunder and lightning.
  Mr. DODD. In the conference between the House and the Senate.
  Mr. SARBANES. There was no legitimate conference. There were meetings 
of all the same-thinking types, and then a meeting of the conference 
committee was called to which everyone came, including people who had a 
different point of view, and the thing was simply railroaded through.
  Obviously, there was not thunder and lightning and this so-called 
conference--there was no such conference.
  Mr. DODD. If I may regain the floor, maybe my colleague was not at 
the same conference meeting I was, but I certainly recall a lot of 
thunder and lightning in the meeting about statements being made about 
what was in the bill.
  Mr. SARBANES. But no discussion of substance. The true thinkers had 
worked all the substance out at other secret meetings before they ever 
came to the conference. The Senator knows that as well as I do.
  Mr. DODD. If this were the decision of my colleague from Maryland to 
have vetoed this bill, he would have vetoed the bill, but he would not 
have vetoed the bill on the basis of pleadings. He would have vetoed 
the bill because he fundamentally disagrees with the legislation. I 
respect that.
  But I was talking about the administration's position when it comes 
to the veto. The administration's position in June, when it came to the 
pleadings, was ``to support the pleading standards that were included 
in the bill'' that came out of the Banking Committee. When we went to 
conference there were no comments made by the administration that they 
disagreed at all with the change of language of ``specifically allege'' 
to ``state with particularity.''
  That is the point in the veto message. I expect my colleagues have 
much more fundamental disagreements with the bill than the President, 
but we are talking about the Presidential veto.
  The judges, I might point out, did not request out of thin air that 
the language be changed. The requested change in the language of the 
statute, we were told, was to conform with the language of rule 9(b) of 
the Federal Rules of Civil Procedure, which governs how attorneys 
should draft fraud complaints.
  Mr. President, there is absolutely no substantive difference between 
the phrase ``specifically allege'' and the phrase ``state with 
particularity.'' The only difference, and the reason that the Federal 
judges wanted the change, is that ``particularity'' already has a 
meaning under law and ``specifically allege'' does not. Therefore, this 
change would produce a clearer, more consistent standard in the 
pleadings section of the legislation.
  I also note, Mr. President, in April of this year the Chairman of the 
Securities and Exchange Commission, Arthur Levitt, urged the Banking 
Committee to adopt--and I quote from the testimony before the 
committee--``the second circuit pleading requirement that plaintiffs 
plead with particularity''--he said--``facts that give rise to strong 
inference of fraudulent intent by the defendant.''
  I think it is particularly distressing, Mr. President, that the 
administration has reversed course on the pleading standards based on 
this technical change requested by the impartial Judicial Conference of 
the United States.
  A final note, if I can, regarding this particular section, on the 
legislative history to which the White House has objected. The White 
House has endorsed the pleading standards for the same language in the 
Banking Committee report on S. 240. Neither bill codifies the entire 
case law of the second circuit, as the administration says it wishes it 
did, and that is one of the reasons it has expressed its objection. The 
White House has also raised the issue of the Specter amendment, which 
was added to S. 240 several days after the administration endorsed the 
pleading standards in the bill that came to the floor of the U.S. 
Senate.
  Now, our good friend from Pennsylvania, I gather, has already 
addressed this issue on the floor of the Senate earlier today and, of 
course, at the time he offered the amendment and at the time we adopted 
the conference report. As he claimed, his amendment would codify 
guidance on how plaintiffs who establish the strong inference of fraud. 
The difference was not over the issues of ``state with particularity'' 
or ``specifically allege'' wording, but rather, how do you establish 
the strong inference of fraud?
  Unfortunately, because the Specter amendment failed to include key 
guidance from the second circuit, it would have had the effect of 
totally undermining the pleading standards that we were seeking to 
establish and that have been supported by both the Securities and 
Exchange Commission and the White House in its earlier statements.
  Let me go into this, if I may. First, I want to read to my 
colleagues, if I can, a memorandum sent to the President of the United 
States from Prof. Joseph Grundfest of the Stanford Law School and 
previously a Commissioner with the Securities and Exchange Commission, 
on the subject of pleadings standards and pending securities reform 
legislation. He is one of the most knowledgeable people in this 
particular area:

       The pleading standard articulated by the Second Circuit 
     Court of Appeals is intended simply to require the plaintiff 
     to allege facts sufficient to give rise to a strong inference 
     of motive to defraud. Plaintiffs must do more than make bald 
     assertions as to motive, but are not required to develop the 
     entire case in the pleadings. While this standard differs 
     from the standard applied in some more lenient circuits, 
     particularly the Ninth Circuit, it has not resulted in over-
     deterrence in the Second Circuit or in excessive dismissals. 
     Indeed, the Second Circuit remains one of the most active in 
     the country for 10b-5 claims.
       As I read the securities litigation conference report, the 
     pleading standard is faithful to the Second Circuit's test. 
     Indeed, I concur with the decision to eliminate the Specter 
     amendment language, which was an incomplete and inaccurate 
     codification of case law in the circuit.
       As is stated in a recent Harvard Law Review article, 
     codification of a uniform pleading standard in 10b-5 cases 
     would eliminate the current confusion among circuits. The 
     Second Circuit standard is among the most thoroughly tested, 
     and it also balances deterrence of unjustified claims with 
     the need to retain a strong private right of action. Indeed, 
     the Second Circuit is widely respected for its legal 
     sophistication and acumen in matters relating to securities 
     and business litigation. The fact that the Second Circuit 
     evolved the strong inference standard is therefore worthy of 
     particular deference and respect.
       In short, I support the pleading provision of the 
     conference report.

  Mr. President, I ask unanimous consent the memorandum from Professor 
Grundfest at Standford Law School be printed in the Record at this 
point.
  There being no objection, the memorandum was ordered to be printed in 
the Record, as follows:

                               Memorandum

     To: President Clinton, Through Elena Kagan, Office of the 
         White House Counsel.
     From: Professor Joseph A Grundfest, Stanford Law School, 
         Commissioner, Securities and Exchange Commission, 1985-
         1990.
     Subject: Pleading Standard in Pending Securities Reform 
           Legislation.
     Date: December 19, 1995.
       The pleading standard articulated by the Second Circuit 
     Court of Appeals is intended simply to require the plaintiff 
     to allege facts sufficient to give rise to a strong inference 
     of motive to defraud. Plaintiffs must do more than make bald 
     assertions as to motive, but are not required to develop the 
     entire case in the pleadings. While this standard differs 
     from the standard applied in some more lenient circuits, 
     particularly the Ninth Circuit, it has not resulted in over-
     deterrence in 

[[Page S19068]]
     the Second Circuit or in excessive dismissals. Indeed, the Second 
     Circuit remains one of the most active in the country for 
     10b-5 claims.
       As I read the securities litigation conference report, the 
     pleading standard is faithful to the Second Circuit's test. 
     Indeed, I concur with the decision to eliminate the Specter 
     amendment language, which was an incomplete and inaccurate 
     codification of case law in the circuit.
       As is stated in a recent Harvard Law Review article, 
     codification of a uniform pleading standard in 10b-5 cases 
     would eliminate the current confusion among circuits. The 
     Second Circuit standard is among the most thoroughly tested, 
     and it also balances deterrence of unjustified claims with 
     the need to retain a strong private right of action. Indeed, 
     the Second Circuit is widely respected for its legal 
     sophistication and acumen in matters relating to securities 
     and business litigation. The fact that the Second Circuit 
     evolved the strong inference standard is therefore worthy of 
     particular deference and respect.
       In short, I support the pleading provision of the 
     conference report.

  Mr. DODD. Mr. President, our colleague from Pennsylvania, when he 
offered his amendment on the floor of the Senate, said that what he 
wanted to do was to take the guidance from the second circuit and 
codify that as well.
  With all due respect to my colleague from Pennsylvania, the language 
of his amendment did not really cover all of the guidance. His 
amendment stated that ``strong inference of fraudulent intent for 
purposes of paragraph 1, a strong inference that the defendant acted 
with the required state of mind, may be required, either, A, by 
alleging facts to show that the defendant had both motive and 
opportunity to commit fraud or, B, by alleging facts that constitute 
strong circumstantial evidence of conscious misbehavior or recklessness 
by the defendant.''
  What is my problem with that? The problem with it is that is not the 
guidance. He omits what Judge Newman has included as his guidance, and 
the guidance that was not included in the amendment says, for part B, 
``where motive is not apparent.'' Where motive is apparent, you do not 
have to make any allegations of a lot of circumstances. If you have a 
clear motive, you do not have to worry about the circumstances or the 
alleged strong facts. Where you do not have motive, apparently, and 
that can be a case where it is hard to get at that motive, then you are 
going to allege circumstances. There Judge Newman says, ``Where motive 
is not apparent, it is still possible to plead scienter by identifying 
circumstances indicating conscious behavior by the defendant, though 
the strength of the circumstantial allegations must be correspondingly 
greater.'' Greater. The Specter amendment did not distinguish at all 
between the circumstances in part A or part B of his amendment, and 
therefore did not really follow the guidance of the second circuit. So 
that is the reason that amendment was taken out.
  You could have gone in, I suppose, and said why did you not include 
the other language here? The problem was, in a sense, by codifying 
guidance you get into an area where you can get some differences of 
opinion on this. And arguably it could have, I suppose, gone back and 
included all of it, but the decision was to take it out on the 
assumption that courts will look to the guidance.
  We have established the standard clearly. We have clearly established 
the standard of alleging facts with particularity, showing a strong 
inference of motive. Then the guidance of the court would be followed.
  But the suggestion that the standard and--the guidance, rather, was 
included in the Specter amendment, omits--omits that where a motive is 
not apparent, the strength of circumstantial allegations must be 
correspondingly greater. That was omitted. And that is the reason that, 
with all due respect to the administration, they are, I think, hanging 
their hat on the wrong issue here.
  We have met the second circuit standard here, as indicated by the 
memorandum from Judge Grundfest, Professor Grundfest at Stanford. We 
have met that standard. We have left out the guidance. That does not 
mean you disregard it. But if you are going to follow the guidance, as 
Senator Specter suggested, then the guidance must include, in part B, 
that you have circumstantial allegations that are correspondingly 
greater than they would be if the motive was apparent.
  So that is the first issue and frankly it is a marginal issue, I 
would say. It has some importance. I do not disregard it. But to 
suggest somehow this bill ought to be vetoed over that, I think is not 
correct.
  I am not going to dwell at length on the rule 11 issues, except to 
make the following applications. The intent and application of the rule 
11 provisions of the conference report are identical to the rule 11 
provisions from S. 240 that the administration states in the veto 
message that it now has difficulty with. In fact, the only difference 
in the configuration of this provision in S. 240 is the Senate adopted 
a sanction for rule 11 that allowed a victim of a violation to collect 
the legal fees and costs incurred as a direct result of the violation. 
The conference report simply makes clear that it was our intent, that a 
substantial violation, a substantial violation in the initial complaint 
could trigger sanctions that included all attorney's fees and costs for 
the entire action.
  That was our intent anyway. If you file a complaint that does not 
meet--that would fall under rule 11, and I will not read all four areas 
where a motion or a complaint would be deficient in terms of rule 11--
but, if you have initiated a complaint and at the end of the action the 
judge goes back and says that complaint that you brought--and these 
have to be substantial violations--did not meet that standard, it is 
logical that it would have to apply to the entire proceeding.
  If you brought a frivolous lawsuit, initiated a frivolous lawsuit, 
then all of the costs come thereafter.
  You do not apply that same standard with motions, obviously, assuming 
the complaint does not violate rule 11. But if a defense lawyer brings 
a motion that is frivolous, then the costs associated with that, 
obviously would have to be borne by the defense lawyers as well, 
regarding that motion. So, logic would indicate that there is a 
difference here.
  Mr. SARBANES. Will the Senator yield?
  Mr. DODD. I will be glad to yield.
  Mr. SARBANES. The defense would not be held liable for all the costs? 
Plaintiff would but not the defense?
  Mr. DODD. Yes, they would be. My point was this: if--Let us assume 
for a second that the initial complaint is a frivolous complaint. The 
initiation of the action, what begins it, violates rule 11, is a 
substantial violation of rule 11, and then at the end of that case the 
judge finds that there was a substantial violation of that, then the 
costs associated with that entire case, because the initiation of the 
action was wrong.
  Whereas, if a defense lawyer, in the process of handling the case, 
files a motion that violates rule 11, then the costs associated with 
that motion, as I understand it, would then be borne by the defense 
counsel incurring plaintiff's attorney's fees.
  Mr. SARBANES. If the Senator will yield, I find that an absolutely 
staggering assertion, saying that you should have this disparity in 
treatment between plaintiff and the defense.
  The Senate-passed bill contained a presumption that the appropriate 
sanction was an award of reasonable attorney's fees and other expenses 
incurred as a direct result of the violation, and it applied that to 
both plaintiff and the defendant, as the bill went out of the Senate.
  The conference changed that. So they imposed a much more onerous 
burden upon plaintiff as compared with the defendant. There is no basis 
in logic or reason to do that.
  Mr. DODD. Oh, absolutely there is. Absolutely there is.
  The costs associated are a direct result of the complaint. If you 
have initiated the complaint here, and all the costs then come after, 
that is the action that initiated the activity, it seems to me. That is 
the reason. That was certainly--for those of us who were working on it, 
that was the intent. At any rate, that is why. And then of course 
thereafter there is a balance.
  But there is a distinction, obviously. If you start an action and you 
violate rule 11 here--and for the sake of discussion you have brought 
an action which, to pick out in the first instance here, let us say No. 
1, under rule 11, ``under circumstance that is not being presented for 
any improper purpose such as to harass or cause unnecessary delay or 
needless increased costs''--let us say ``to harass.'' You violated 
paragraph 1 

[[Page S19069]]
of rule 11. The sole purpose of your lawsuit was to harass. That is 
what you would have to be found guilty of. So you filed a complaint for 
sole purpose to harass a defendant. That is the reason you brought the 
action. If the court finds in fact that was the reason, I think the 
attorney who brought the action not for good cause but solely to harass 
a defendant, and incurred costs thereafter that the defendant had to 
pay to defend an action brought solely to harass the defendant--yes, I 
do think that attorney should have to pay the cost of that entire case, 
if the sole purpose was to harass the defendant.
  Mr. SARBANES. That would be the direct result of a violation under 
the language of the Senate-passed bill. In the conference, they changed 
this language.
  Mr. DODD. No. I do not know.
  Mr. SARBANES. They changed it in such a way that you get a disparate 
treatment of the plaintiff and the defendant. There is no basis to do 
that.
  Mr. DODD. Let me finish my thought, if I can. Let me tell you what 
the change is.
  Mr. SARBANES. I apologize to the Senator.
  Mr. DODD. Nevertheless, Mr. President, we also provided some 
protections for plaintiffs, a presumptive sanction for initiating 
illegal litigation. It is not triggered unless the complaint 
substantially violates rule 11. So we added that part to it. There are 
plaintiffs who violate rule 11. Only plaintiffs file complaints, 
obviously, and so plaintiffs get the benefit of this heightened rule 11 
threshold. Plaintiffs face sanctions only if they committed, as I said, 
a substantial violation.
  So my point here again is that that was certainly our intent to begin 
with. Again, I have stated earlier, I do not like the idea--my 
colleagues may recall, and I see my friend from New Mexico is on the 
floor here--that initially you had proposals that would have said, 
``Well, if you lose the case, you pay.'' That is the British rule.
  I stated on this floor that I would vehemently oppose this 
legislation if we had a ``loser pays'' provision. A person could have a 
good case and lose the case. I would vehemently oppose any legislation 
that would have such a chilling effect. A plaintiff who thinks they 
have a good case--who thinks they have been harmed and injured because 
of a defendant's actions--and loses the case, we should make that 
defendant pay the cost to the plaintiff.
  That is a very different situation from a violation of rule 11, where 
the action or the complaint is frivolous, or instances in which the 
plaintiff is out to harass defendants. In that case, frankly, I think 
the attorney should pay. I think that is the best weapon we have here 
to discourage these frivolous lawsuits. You had better think twice. If 
you are just going to file these things, make wild accusations not 
based on fact, and in some cases just designed to harass people, by God 
you ought to be asked to pay. And that is what people are angry about 
in this country because that is what has happened too often. 
Unfortunately, it is not usually the named defendants who pay. It is 
the people that insure--the insurance companies--the people who work in 
these places who end up paying. It usually is not the big guys at the 
top. It is other people who work in these facilities, people who invest 
in them, or others who end up paying the bill. When that happens, there 
ought to be a cost associated with it. Remember, it has to be a 
substantial violation in those particular matters.
  Mr. President, let me also make abundantly clear that in making this 
change, as I said earlier, we imposed a higher burden of proof in 
violation of the complaint by a requirement of substantial. The entire 
intent of the legislation is to deter frivolous litigation from the 
beginning.
  As I said a moment ago, why should there not be some significant 
sanction for initiating an action that violates the standards of the 
Federal Rules of Civil Procedure? Why have rule 11? Maybe we should 
have struck rule 11 entirely. If you are going to have rule 11 that 
says if you harass people or bring frivolous lawsuits, rule 11 has 
existed for decades. The problem is, it has only been a piece of paper. 
It has hardly ever been invoked at all. It has never been a threat to 
anybody. Maybe we should have gotten rid of it altogether. Maybe we 
should have done that to satisfy some people. If you are going to have 
it, make sure it means something. If you harass or bring a suit without 
any basis in fact, think twice about it. If there is no economic 
penalty to it, I do not know how to clean up the mess these frivolous 
suits have created. That is why it is included.
  Those are more protections, by the way. As I said earlier, we should 
not forget that the conference report also gives the judge in these 
cases broad discretion to waive the sanction against the violating 
party if the judge finds that the violation was de minimis or it would 
be an unjust burden for the violator to pay the sanctions. Some might 
argue that we should not have included that. But, nevertheless, it is 
in there to have the judge find it is an unjust burden. We are not 
going to ask you to pay. You have to violate rule 11. There has to be 
finding that you have violated this rule of bringing frivolous 
lawsuits--not that you lost or won the case, but that you violated rule 
11.
  As I said, those are more protections for plaintiffs than currently 
exist in rule 11, which give no discretionary power to a judge to waive 
the sanctions when he or she finds a violation of rule 11. Under 
present law, if a judge found a violation of rule 11, then he or she 
has to impose the sanctions. We provide some protection here for these 
plaintiffs' attorneys if in fact the judge does find that they have 
violated--a substantial violation.
  Mr. President, I am sure there will be ample opportunity to debate 
some of these highly technical matters. I hope we would get to a vote 
on this. I do not enjoy belaboring this issue. We spent days on this 
bill.
  Let me say again that there are a number of my colleagues who 
fundamentally disagree with this bill. I respect that. I disagree with 
them, but I understand their objections. But I have to repeat: I do not 
understand having been through this process now.
  I was asked months ago--my colleagues ought to know this--to address 
some concerns that the administration had with the bill, particularly 
with safe harbor. There were a couple of other areas the administration 
had problems with--aiding and abetting and the statute of limitations. 
I offered the amendment on the statute of limitations to give a longer 
period of time. I lost that in committee, and I lost it here on the 
floor.
  In the aiding abetting provisions, we provided half a loaf here by 
allowing the SEC to deal with the class actions. We did not go as far 
as some would like, even I would like. But it was a major point of 
contention for the administration. In conversation after conversation 
after conversation, it was safe harbor--fix safe harbor, Senator. Get 
that safe harbor straightened out.
  I cannot tell you the hours spent on the safe harbor issue because I 
wanted the President to sign this bill. I kept on telling them that if 
we did fix safe harbor, I felt confident that the bill would be signed. 
We worked for days on this, and ended up with language that was 
supported by the Securities and Exchange Commission. It met their 
concerns. In fact, the President in his veto message applauded us for 
having done it. He supports the safe harbor provision. And then I find 
out after the conference report is voted on that all of a sudden there 
are a couple of issues--not issues that are not of concern to my 
colleagues on the floor who object to the bill. I understand that. But 
I must say to my colleagues, the issue of pleadings and rule 11 was 
never a major issue, not to the administration. I was never asked by 
the administration to address the pleadings or the rule 11 issue. The 
only thing I was asked to address was safe harbor, aiding, abetting, 
and the statute of limitations. And on those two, there was an 
appreciation that we had done the best we could. But you do not veto a 
bill for what is not in the legislation.
  I do not disagree that my colleagues here have difficulty with the 
pleadings in rule 11, but we are talking about a veto here today and 
the veto message. The veto message was on pleadings and rule 11 and 
some language in the statement of managers. That is a very small 
percentage of this bill. It is 11 words out of 11,800 words in this 
bill--11 words. After 4 years, 12 congressional hearings, 100 
witnesses, 5,000 pages of testimony, we are down here about to lose 
that kind of an effort over 11 words.
  Mr. President, we did not write the Ten Commandants here. This is not 


[[Page S19070]]
etched in marble. I said this to my colleagues elsewhere. I have been 
mystified. Nobody would stand up with a bill and say that we have 
offered you the perfect piece of legislation. I cannot say that. I 
think we have done a good job here in both Chambers of the Congress, 
the House and the Senate, with Democrats and Republicans, and with 4 
years of effort. We have put together a good bill, and in my view we 
have done it the way a bill ought to be adopted. Do we know it is 
perfect? No, we do not. If something comes up a year or two from now 
where there is a problem, you fix it.
  We have had this problem of frivolous law suits for years, and we are 
trying to fix it. We may lose the opportunity to do that because of 
some people's concerns about things that I think, frankly, should not 
be matters of concern, but if they turn out to be, we can correct them. 
But you do not squander the opportunity to change a situation so 
fundamentally awry it screams out for solution.
  Today, with great regret, with great regret, I urge my colleagues to 
override this veto and to adopt this legislation by that action, and 
let us get on with the business of other matters that are before this 
body.
  With that, Mr. President, I yield the floor.
  Mr. SARBANES addressed the Chair.
  The PRESIDING OFFICER. The Senator from Maryland.
  Mr. SARBANES. Mr. President, I observe for my colleague from 
Connecticut that the two words ``I do''--it is only two words--but they 
have tremendous, far-reaching significance. So the fact that there are 
only 11 words, you know, if they are critical 11 words they can make a 
tremendous difference, and in the lives of people there are the two 
words ``I do.'' They can make an enormous difference in our lives.
  Mr. DODD. If my colleague will yield, I will not disagree on that, 
having said ``I do'' on occasion. Some of our colleagues have said ``I 
do'' on many occasions. But I appreciate the significance of what he is 
saying. I am merely trying to put it into balance.
  Mr. SARBANES. If there are only 11 words, why do you not take this 
bill and rewrite it and meet the objections?
  It is interesting. I find it very interesting that this is being 
treated as though Congress were about to end. The fact of the matter is 
that there is an opportunity to address these problems, eliminate them. 
Actually, I am not going to go at great length here because I 
understand the distinguished Senator from Minnesota wishes to speak.
  I can address this problem later, but I am going to quote from some 
of these leading law professors in the country about the problems they 
see in this legislation. Now, I just want to make a couple of points 
here though because we were trying to have an exchange and I wish to 
register them at this point in the Record.
  It is interesting; there is a lot in this legislation that those of 
us who have opposed its support. We do not disagree with trying to 
fashion legislation to deal with the problem of frivolous lawsuits, and 
there is much in this legislation that we would support. There are 
other things that are not in it that we think ought to be in it, which 
we have debated, and there are things in it which we think ought not to 
be in it, which is the focus obviously of the current attention.
  Mr. DOMENICI. Could I ask the Senator one question?
  Mr. SARBANES. I yield to the Senator for a question.
  Mr. DOMENICI. I listened to the Senator's remarks to my friend, 
Senator Dodd, when we talked about 11 words.
  Why does the Senator not draft a bill with those 11 words. It ought 
to be easy to pass an 11-word bill.
  Mr. SARBANES. I am not sure it will be because--first of all, I do 
not know that it is only 11 words that are at issue, and I do not think 
that is correct. But, in any event, those provisions were not included 
in this legislation and were resisted very strongly by those, whoever 
brought the measure to the floor, and yet they have a significant 
impact on what the effect of this legislation will be.
  Mr. DOMENICI. I mean, would it not be a pretty good debate on 11 
words? The Senator could get that to our committee, and we could debate 
the 11 words instead of killing the bill.
  Mr. SARBANES. Well, the President sent the veto here, and the issue 
is whether to sustain the veto. I think we should sustain the veto.
  Mr. DOMENICI. I thank the Senator.
  Mr. SARBANES. Yes, indeed.
  Now, let me address a couple of other things. The Senator from 
Connecticut spoke about the thunder and lightning at the conference on 
this legislation. And I say to the Senator, I was a member of the 
conference committee. I only remember it meeting once. Am I erroneous 
in that remembrance?
  Mr. DODD. Far be it for the Senator from Connecticut to challenge the 
Senator's remembrances. I do not know if the Senator is erroneous or 
not in his remembrance. I do not know how many actual meetings 
occurred. There were a lot of conferences.
  Mr. SARBANES. Of the conference committee.
  Mr. DODD. I would suggest this is not a unique event. It is common to 
have back and forth, and so forth, at meetings. Rather than having 
Members sit, staff does this. I know the Senator from Maryland, having 
chaired committees and conferences, knows it is not uncommon in these 
meetings to have staffs work back and forth to try to resolve matters 
without Members sitting there. It is not unique. Is that a unique 
occurrence?
  Mr. SARBANES. I say to my colleague from Connecticut, the procedure 
here that was unusual and somewhat unique, although it is becoming more 
frequent--I regret to say in the workings of this Congress, it is 
becoming more frequent--was that all the true believers gathered 
together to try to work out the House and Senate differences but did 
not include in those discussions the people who were on the other side.
  Now, that is not a good way to legislate, in my opinion, because 
sometimes by having the people on the other side, you have a dialog and 
a discussion, and you are able to work out measures and improve them.
  Now, what happened here, that never took place. What finally took 
place that encompassed everybody including those who were critical of 
this legislation was the final meeting where they simply railroaded 
through what the conference agreement was, and it is the conference 
agreement that has provoked the President's veto in this instance. The 
President, in fact, has indicated that if he had been given a bill as 
it had passed the Senate, he would have signed it, as I understand it. 
So it is conference action that did it, and the conference action was 
taken by all, any meaningful action on the substance was taken simply 
by those on one side of issue.
  Mr. DODD. If my colleague will yield further----
  Mr. SARBANES. Certainly.
  Mr. DODD. The bill that is before us, except for a couple of 
provisions, some of which we would argue improve the bill, is virtually 
what the Senate adopted. This is not a bill that even remotely looks 
like the House-passed bill. In fact, it is the Senate-passed bill. I 
know my colleague from Maryland was opposed to even the Senate-passed 
bill. But in terms of from the administration's standpoint, again I 
point out that in June on the pleading standards and the statement of 
policy from the administration, they endorsed what came out of the 
Senate bill. And regarding the rule 11----
  Mr. SARBANES. If the Senator will yield on that very point, it was 
changed then in the conference. The fact that the administration----
  Mr. DODD. The only thing that was changed, the only thing that was 
changed was at the recommendation of the Judicial Conference, and it 
was regarding the words ``effectively allege" or ``state with 
particularity.'' Those words were recommended by the Judicial 
Conference.
  Mr. SARBANES. No, two other things were done. In the conference, they 
removed the Specter amendment that had been adopted in the Senate that 
carried with it further elaborations, carried with it further 
elaborations by the second circuit with respect to the pleading 
standard, and second--and this is something the President focused on in 
his veto message--the statement of managers about the pleading standard 
in effect sought to put a legislative interpretation spin on it which 
raised the standard even higher, and some of the law school deans 

[[Page S19071]]
who have written in about this matter have focused on that very fact.
  In other words, what you did is you changed the standard as it passed 
the Senate to make it more difficult and then the statement of managers 
put a further spin on it.
  Mr. DODD. If my colleague will yield, let me go back. I tried to do 
this earlier. The Specter amendment said he was codifying the guidance 
in the second circuit, and that is not the case. That is where the 
problem occurred here.
  Mr. SARBANES. I listened to the Senator's comments on that subject, 
and the distinguished Senator from Pennsylvania will have to speak for 
himself, but even assuming the accuracy of what the Senator stated--and 
I am not in a position to do that. The Senator from Pennsylvania, I am 
sure, will be able to do so. Assuming the accuracy, then the way to 
have corrected it would have embraced all the guidance, not to 
eliminate that guidance, which was designed to provide some additional 
protection for the investors as the second circuit elaborated their 
standard.
  Mr. DODD. If my colleague will yield further--I appreciate him 
yielding--you can make that case.
  Mr. SARBANES. Yes, you can.
  Mr. DODD. I understand that. But the suggestion that somehow the 
courts are going to disregard the guidance because it is no longer in 
the bill itself, it has not been codified, I think overstates the case, 
when you come down to vetoing this whole bill on that particular 
question. My point simply has been that I do not think the Specter 
amendment was--I think it was an effort to get recklessness in, which 
would have changed the standard from the second circuit. Nonetheless, 
putting that aside, the guidance is still going to be there. The 
guidance would still be there. And you do not veto the whole bill over 
the issue of guidance.
  Mr. SARBANES. If the Senator will yield, you not only took the 
guidance out of the statute from the second circuit but you sought to 
give the courts a different guidance contained in the statement of 
managers in the conference report. So you committed, as it were, a 
double violation. You took out the guidance of the second circuit. Then 
you say, well, if it is not there, the courts will look to the guidance 
in any event. Ah, but what you did is you then interjected in as 
guidance with respect to this provision a statement of managers.
  Mr. DODD. First of all, Mr. President, I say to my colleague, it was 
the guidance of the second circuit, No. 1. And by taking it out, the 
statement of managers is--again, one I have never heard. Maybe my 
colleague can cite examples where there is some confusion over what was 
intended there, but you do not veto a whole bill over the statement of 
managers.
  Mr. SARBANES. Well, this bill with respect to the statement of 
managers is obviously an effort to in part rewrite the bill at that 
level of consideration.
  Now, Mr. President, let me make one other point while my colleague is 
still here. My colleague made a lot about the number of hearings that 
were held, but I have to submit to you that those hearings were in a 
sense ignored.
  My distinguished friend from Connecticut earlier stated that with 
respect to one provision--I think it was on safe harbor. He quoted 
Arthur Levitt, the Chairman of the Securities and Exchange Commission. 
But let me just show you how these hearings are ignored. And so the 
fact that you have a lot of hearings may make no difference at all.
  On May 12, 1994, the Securities Subcommittee held a hearing, which 
the distinguished Senator from Connecticut chaired.
  The Senator himself stated at that hearing:

       Aiding and abetting liability has been critically important 
     in deterring individuals from assisting possible fraudulent 
     acts by others.

  That is my colleague from Connecticut speaking at this hearing. 
Testifying at that hearing, Chairman Levitt, whom he cited earlier for 
another provision in terms of supporting it, stressed the importance of 
restoring aiding and abetting liability for private investors.

       Persons who knowingly or recklessly assist in the 
     perpetration of a fraud may be insulated from liability to 
     private parties if they act behind the scenes and do not 
     themselves make statements directly or indirectly that are 
     relied upon by investors. Because this is conduct that should 
     be deterred, Congress should enact legislation to restore 
     aiding and abetting liability in private actions.

  And the North American Securities Administrators Association, the 
Association of the Bar of the City of New York, also endorse 
restoration of aiding and abetting liability in private actions.
  So what good does the hearing do us? We have the hearing. This is 
what the testimony is. The distinguished Senator himself, in a sense, 
led off that hearing by underscoring the importance of aiding and 
abetting liability. And it ends up not being in the legislation.
  So you can have all the hearings you want. It does not necessarily 
demonstrate that an appropriate and reasonable piece of legislation has 
been crafted.
  Mr. DODD. If my colleague would yield on that, as I said earlier, he 
may have missed my statement. He may want to bring up the statute of 
limitations issues as well. It is not in the bill. I offered the 
amendment on that particular instance to include the legislation, as my 
colleague well knows.
  Mr. SARBANES. That is accurate. And I commend the Senator for doing 
that.
  Mr. DODD. As the saying goes, you make the perfect the enemy of the 
good. We are a body of 100 Members here. There is not the political 
will to do what the Senator from Maryland and I would like to do on 
aiding and abetting. But let us consider what happens if the President 
prevails today and the veto is sustained.
  What happens to the statute of limitations and aiding and abetting? 
Obviously the statute of limitation does not change. The Supreme Court 
has ruled on it, so there is no difference. It is not affected by this. 
But on aiding and abetting we have made a substantial gain in aiding 
and abetting by restoring to the Securities and Exchange Commission the 
right to bring class actions. Without this legislation you even lose 
that aiding and abetting.
  So I regret deeply we do not have aiding and abetting here. The 
majority of our colleagues have rejected that. But the suggestion that 
I ought to lose everything else I have achieved because I was not able 
to get a statute like the statute of limitations or aiding and abetting 
is not a reason to be against the bill.
  I hope we can convince a number of people in the next couple months, 
in a separate bill, to expand the aiding and abetting and the statute 
of limitations. But I cannot see why I should be opposed to the whole 
bill here, when on portion of liability, on safe harbor, on lead 
plaintiffs and on aiding and abetting, where we do get half a loaf at 
least, that the SEC wanted, and I am confident my colleague from 
Maryland wanted, and I wanted, that we would not have been able to get 
that without this piece of legislation. I thank my colleague for 
yielding.
  Mr. SARBANES addressed the Chair.
  The PRESIDING OFFICER. The Senator from Maryland has the floor.
  Mr. SARBANES. Mr. President, let me just close out by including in 
the Record a letter from the ABA, from the President of the American 
Bar Association, to President Clinton opposing key provisions of the 
legislation, H.R. 1058, and urging the President to veto the 
legislation.
  Let me just quote it very briefly:

       The ABA continues to believe that this proposed legislation 
     can and should be corrected by the Congress to correct the 
     significant difficulties that it would cause in its current 
     state. We agree that underlying problems in the area of 
     securities litigation must be addressed, but that must happen 
     without unduly barring access to the courts to parties who 
     are defrauded.

  And then they enumerate the most objectionable parts of H.R. 1058, 
including the rule 11 changes about which my colleague from Connecticut 
has discussed, and particularly underscoring the fact that the 
provision now lacks balance in that it treats plaintiffs more harshly 
than defendants.
  They also discuss the pleadings rules about which he has spoken, and 
in effect point out the difficulty it would present to people in having 
their cases heard, in other words, the danger that meritorious cases 
will be dismissed at the pleadings stage. It goes on to make other 
criticisms as well. 

[[Page S19072]]

  Mr. President, later I intend to address these comments that we have 
received from some of our Nation's leading legal scholars----
  The PRESIDING OFFICER. Is the Senator from Maryland going to make a 
unanimous-consent request?
  Mr. SARBANES. Mr. President, I ask unanimous consent that the letter 
be printed in the Record at the end of my remarks that have been made 
with respect to the provisions that are before us, letters to the 
President urging the veto of the bill, which the President made.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 1.)

                               Exhibit 1


                                     American Bar Association,

                               Albuquerque, NM, December 17, 1995.
     President William Jefferson Clinton,
     The White House,
     Washington, DC.
       Dear Mr. President: I write on behalf of the American Bar 
     Association. The ABA opposes key provisions of legislation 
     presently before you entitled Reform of Private Securities 
     Litigation, H.R. 1058. I strongly urge you to veto the 
     legislation.
       The ABA continues to believe that this proposed legislation 
     can and should be corrected by the Congress to correct the 
     significant difficulties that it would cause in its current 
     state. We agree that underlying problems in the area of 
     securities litigation must be addressed, but that must happen 
     without unduly barring access to the courts to parties who 
     are defrauded. The most objectionable parts of H.R. 1058 
     include the following:
       1. ``Loser Pays'' or Rule 11 Changes.--The ABA opposes any 
     requirement that would impose responsibility on a non-
     prevailing party for the legal fees of the prevailing party 
     in securities actions. H.R. 1058 contains such a ``loser 
     pays'' provision and would materially change Federal Rule 11, 
     it is called a mandatory sanctions rule. That provision's 
     call for mandatory sanctions in the form of attorneys fees 
     and its lack of balance, treating plaintiffs more harshly 
     than defendants, are unacceptable.
       2. Other Mandated Changes in Federal Rules for Securities 
     Cases.--H.R. 1058 significantly amends Rule 9(b) on pleadings 
     and Rule 23 on class actions. These because for the first 
     time under the Federal Rules, they would establish special 
     requirements for a particular class of cases.
       Moreover, the proposals contradict the present Rule 9(b) of 
     the Federal Rules of Civil Procedure. In light of the 
     evidence that courts today already enforce heightened 
     pleading requirements. Federal laws should not endorse the 
     dismissal of meritorious cases at the pleading stage. The 
     pleading standards in H.R. 1058 require a plaintiff to plead 
     the ``state of mind'' of each defendant, something utterly 
     impossible to do prior to discovery.
       The ABA further opposes the proposed limitations on the 
     ability of plaintiffs to amend their pleadings and to pursue 
     discovery. Such limitations while undoubtedly preventing 
     frivolous claims from going forward, would also bar claims 
     with substantial merit. Only through significant discovery 
     and repleading do these important claims get adjudicated; 
     H.R. 1058 would subvert that process.
       The ABA supports the process called for in the Rules 
     Enabling Act. No amendments to the federal rules should ever 
     occur except after the deliberative process of the Rules 
     Enabling Act has been followed. H.R. 1058 wreaks havoc with 
     that principle and violates the important principle that the 
     Federal Rules of Civil Procedure apply uniformly to all 
     causes of action.
       3. Immunization of Intentional and Reckless Conduct.--The 
     ABA House of Delegates adopted policy at its last meeting in 
     February that opposed any legislation that eliminates the 
     concept of recklessness from that which is required to be 
     pled or proved in private actions under Rule 10 b-5. H.R. 
     1058 will compromise the principle that those who engage in 
     reckless conduct, to say nothing of intentional conduct, 
     should be held responsible under the federal securities acts. 
     The ABA opposes this legislation's grant of a safe harbor to 
     both intentional and recklessly issued misleading and false 
     statements.
       4. Choice of Class Plaintiff and Joint and Several 
     Liability.--H.R. 1058 specifies that a wealth qualification 
     directs both the choice of class plaintiff provision and the 
     operation of the joint and several liability section. In one 
     case, you have to be rich enough to be named the class 
     representative and, in the other case, you have to be poor 
     enough to receive the benefits of joint and several liability 
     for reckless conduct. The ABA believes this provision of H.R. 
     1058 would bar access to the courts to shareholders with 
     small holdings.
       On behalf of the American Bar Association, I urge you to 
     veto H.R. 1058. A veto would motivate Congress to make 
     changes needed so that the many laudable provisions of the 
     legislation may quickly become law.
           Respectfully,
                                              Roberta Cooper Ramo.

  Mr. SARBANES. Mr. President, I yield the floor.
  Mr. CHAFEE addressed the Chair.
  The PRESIDING OFFICER. The Senator from Rhode Island.
  Mr. CHAFEE. Mr. President, I know the Senator from Minnesota is next. 
And my question to the Chair is, whether--I ask unanimous consent that 
I might follow the Senator from Minnesota when he has completed, and 
speak as in morning business for 10 minutes.
  Mr. REID addressed the Chair.
  The PRESIDING OFFICER. Is there objection?
  Mr. REID. Mr. President, I reserve the right to object. If I can 
enter a colloquy through the Chair to my friend from Rhode Island, 
there are a number of us that have been wandering around here for 
several hours this afternoon. I am wondering if we might find out how 
long people want to speak before we go into this situation where we 
give the floor----
  Mr. CHAFEE. I did not know the Senator was----
  Mr. REID. Senator Pell is here.
  Mr. PELL. I would like 2 minutes.
  Mr. CHAFEE. How long might people be?
  Mr. REID. It would be 2 minutes for the senior Senator from Rhode 
Island. And the junior Senator from Nevada----
  Mr. CHAFEE. I will follow the Senator from Nevada.
  Mr. REID. How long is the Senator going to be?
  Mr. CHAFEE. Senator Breaux and I were going to have a little colloquy 
for 10, 15 minutes, so we would just as soon follow the Senator from 
Nevada.
  Mr. REID. Then if we could--so people know that are watching--if the 
Senator from Minnesota would speak, the senior Senator from Rhode 
Island, and then the Senator from Nevada.
  Mr. President, I ask that the unanimous-consent request be amended, 
that following that there be the time allotted to the Senator from 
Rhode Island and the Senator from Louisiana.
  The PRESIDING OFFICER. Is that request in the form of a unanimous-
consent?
  Mr. REID. It is.
  Mr. SARBANES. Reserving the right to object, how long does the 
Senator from Minnesota intend to speak?
  Mr. GRAMS. About 10 minutes. I would defer to the Senator from Rhode 
Island making a statement dealing with this pending business ahead of 
my statement.
  Mr. PELL. I thank my colleague.
  Mr. CHAFEE. Which Senator from Rhode Island?
  Mr. GRAMS. The senior Senator.
  Mr. REID. I ask unanimous consent the request be amended as reflected 
by the Senator from Minnesota.
  The PRESIDING OFFICER. Is there objection?
  Mr. CHAFEE. Could I ask a question?
  The Senator from Nevada, how long does he think he might be?
  Mr. REID. About 20 minutes.
  Mr. CHAFEE. I thank the Senator.
  The PRESIDING OFFICER. Without objection, it is so ordered. Under the 
unanimous-consent agreement, the senior Senator from Rhode Island is 
recognized.
  Mr. PELL. I thank the Chair.
  Mr. President, today the Senate is considering overriding President 
Clinton's veto of the securities litigation reform bill. After careful 
reflection, I have decided to continue my long history of support for 
this legislation.
  In doing so, I wish to point out that I do not do so lightly. I 
admire and honor our President immensely and have always respected the 
prerogative of our President in his use of the veto power and 
especially so when this power is responsibly and sparingly used, as has 
been the case with President Clinton. I do believe the President has 
acted upon personal principle with regard to this bill and that his 
decision was arrived at in a thoughtful and deliberate manner. 
Nevertheless, I respectfully disagree and believe that this particular 
bill should become law.
  I have been a longtime supporter of legal reform, especially measures 
which seek to reduce the excess and frivolous litigation so prevalent 
in our society. On this measure, I was one of the first Democrats to 
join as a cosponsor some 4 years ago and have been active in promoting 
it ever since. As with any piece of legislation, the final product is 
one of compromise and, indeed, does not contain every provision that I 
would like. Nevertheless, it is a good, carefully considered, 
bipartisan effort 

[[Page S19073]]
at addressing the very real and growing problems associated with 
excessive and frivolous lawsuits besieging publicly held companies. As 
such, this bill deserves to be implemented into law.
  I do regret being in the opposition in this matter but as a longtime 
advocate for this legislation, I believe that this bill is both 
responsible and necessary to address the need for litigation reform 
with regard to our securities industry.
  I yield the floor.
  The PRESIDING OFFICER. Under the previous order, the Chair now 
recognizes the Senator from Minnesota.
  Mr. GRAMS. Mr. President, I want to thank the Chair very much, and I 
ask unanimous consent that I be allowed to speak as in morning business 
for up to 10 minutes.
  The PRESIDING OFFICER (Mr. Abraham). Without objection, it is so 
ordered.

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