[Congressional Record Volume 141, Number 206 (Thursday, December 21, 1995)]
[Senate]
[Pages S19083-S19086]
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. REID. Mr. President, I am here to speak on the securities 
litigation veto override. I want everyone in Nevada to know that this 
is the same issue that a few weeks ago Senator Bryan and I disagreed 
on. It is not a new issue. You see, in Nevada, Mr. President, it is 
news when Senator Bryan and Senator Reid disagree on an issue, so I 
repeat for the people of Nevada this is the same issue; it is not a new 
issue, because we vary so little in our outlook on what is good 
Government.
  Mr. President, there are a lot of issues today that perhaps I would 
rather be debating, but the parliamentary measure now before us is the 
securities litigation. A balanced budget or welfare reform would 
certainly be more timely. There are a number of other issues we should 
perhaps be dealing with. But the matter that is now before this body is 
a bipartisan piece of legislation designed to curtail the filing of 
frivolous security strike suits.
  Yesterday, in the House of Representatives, 83 Democrats voted to 
override, joining the Republicans to obtain, of course, over 300 House 
votes, significantly more than enough to override the President's veto.
  I am distressed that the President has decided to veto this moderate, 
centrist approach to litigation reform. I am concerned that he has 
vetoed this legislation for the wrong reasons.
  I have reviewed closely his veto message. It does not take very long 
to read. It would appear he has found very few substantive reasons for 
vetoing the measure. I believe that the President of the United States 
received very bad staff advice. One need only look at a number of 
editorials written this morning in the papers around the country. One 
in the Washington Times today says, among other things ``According to 
administration aides, the crucial moment came when New York University 
Law School Professor John Sexton visited the White House to personally 
argue that the legislation should be vetoed.''
  I do not know who John Sexton met with, whether it was staff in the 
White House or whether it was the President, but if it were staff and 
the message was carried to the President, it was pretty bad information 
because had the staff properly advised the President, they would have 
found that this man is not really a law professor in the true sense of 
the word but, rather, he is the dean of a law school. In fact, if this 
advice was delivered from a professor, as has been stated, without 
clear vested interests on either side of the hotly contested issue, 
then the staff gave the President some pretty bad advice, because 
according to The Wall Street 

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Journal that is what decided things for Mr. Clinton, because he 
received advice without clear vested interests on either side of the 
hotly contested issue.

  I believe the staff gave the President some very bad advice. Why? 
Because Mr. Sexton is not just a professor at New York University 
school of law, but rather he is the dean of the school of law.
  One of the prime functions of the dean of a law school is to raise 
money for the law school. It is interesting to note--and I think the 
President should have known this--and it is too bad that the staff did 
not tell him, that one of the first major donations to New York 
University School of Law during Mr. Sexton's tenure as dean of the law 
school was in 1990 when Mr. and Mrs. Melvin Weiss donated $1 million to 
the school, and then led a campaign to raise another $5 million.
  It is interesting to note, Mr. President, that this Mr. Weiss is the 
Weiss in Milberg, Weiss, Bershad, Haynes & Lerach.
  So it seems to me that the staff and the advisors that gave this 
information to the President failed to tell him that this man and his 
law school received $1 million from Mr. Lerach's law firm. Then the 
same partner in the law firm went ahead and helped raise $5 million. 
So, I think it goes without saying that he received some biased advice.
  None of the objections were raised by the White House prior to the 
vote on the conference report. I understand it is a large bill and that 
there may be parts the White House disagrees with, but the veto message 
was pretty skimpy, Mr. President. It makes little sense to reject this 
measure and all the bipartisan efforts that went into drafting it.
  The current system encourages plaintiffs to file strike suits at 
will.
  Mr. President, I think the President got some bad advice. I think 
what he should have done and what his staff should have shown to him is 
a memorandum that is dated December 19, directed to the President of 
the United States, to the Office of White House Counsel. In this, there 
would have been a clear statement as to answering the main problem the 
President said in his very brief veto statement.
  This memorandum was written by Prof. Joseph A. Grundfest, of Stanford 
School of Law. Professor Grundfest is a man who can speak with some 
authority. He is not only a professor at Stanford, one of the foremost 
law schools in the entire world, but he joined Stanford's faculty 5 
years ago after having served as Commissioner of the United States 
Securities and Exchange Commission. I will not go through his entire 
resume, but he knows something about securities.
  What he said to the President is that 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 
     need to retain a strong private right of action. Indeed, the 
     second circuit is widely respected for its legal 
     sophistication . . . .

  This is the type of scholarly counsel the President should have been 
provided by the staff. In fact, they were directed to one of the law 
partners' donatees, someone who had given the law school large sums of 
money.
  Mr. President, the current system encourages plaintiffs to file 
strike suits at will. The system almost operates like a pyramid scheme 
where investors are encouraged to get in early but ultimately lose out 
to the operators of the scam--in this case, these attorneys. How quick 
are these suits filed? We heard statements this morning that they have 
been filed within minutes of the stock dropping. I heard a statement 
today of 90 minutes.
  In dismissing the Philip Morris securities litigation, the court in 
the Southern District of New York, noted that 10 lawsuits were filed 
within 2 business days of a drop in earnings being announced. In one 
case, a suit was filed within 5 hours of the announcement. They were 
slow. They have beaten that by at least 3\1/2\ hours. In that case, the 
court states:

       . . . in the few hours counsel devoted to getting the 
     initial complaints to the courthouse, overlooked was the fact 
     that two of them contained identical allegations, apparently 
     lodged in counsel's computer memory of ``fraud'' form 
     complaints, that the defendants here engaged in conduct to 
     prolong the illusion of success . . . .

  The judge, in that case, found it hard to believe that the 
shareholders could have contacted their lawyers to file suit so 
quickly. The speed with which they file these suits suggests that these 
attorneys are constantly on a hunt for any drop in a stock price. This 
is really a form of Wall Street ambulance chasing. The Philip Morris 
case is, unfortunately, not the unusual. It is a competitive business 
among a very small group of lawyers. Each attempts to get in on the 
bottom floor of each action. They follow the old Chicago corollary on 
elections: file early and file often. Why? Because the lawyer that is 
designated the lead counsel by the court is in the best position to 
collect attorney's fees.
  Mr. President, in a single 44-month period, one plaintiff's law firm 
alone filed 229 separate 10b-5 suits around the country, the equivalent 
of filing one 10b-5 every 4.2 business days. Almost 70 percent of the 
10b-5 class actions filed by Milberg Weis, the leading securities 
litigation plaintiffs firm, over a 3-year period were filed within 10 
days of when the stock price dropped.
  Now, if you look at the editorial today from the Wall Street Journal, 
you find it quite interesting. They ask rhetorically, why did President 
Clinton veto this? They say, among other things:

       So what is the big show-stopper? Mr. Clinton singles out 
     several minor clauses, especially the language on ``pleading 
     requirements.''

  I already addressed that:

       This is the part of the bill designed to ensure that 
     lawyers state a specific cause of action . . . before being 
     allowed to paw through a company's files. Mr. Clinton says he 
     is prepared to accept a higher pleading standard, just not as 
     high as the one called for here.

  They go on to say:

       This is why he vetoed the entire bill? Give us a break. 
     Even Sen. Dodd doesn't buy it. In a statement, he said, 
     [Senator Dodd] ``While I respect the President's decision, 
     frankly I'm surprised at the reasons, raised at the 11th 
     hour, which are relatively minor given the real scope and 
     degree of the strike-suit problem. In fact, they have been 
     resolved over the course of the more than four years it took 
     to carefully craft this compromise, bipartisan legislation.''

  That is a statement from Senator Chris Dodd.
  The Wall Street article goes on to say:

       If the Democrats are to put together a forward-looking, 
     next-century agenda that can attract widespread support, 
     they've got to get off their bended knee before groups like 
     the trial lawyers.

  Defrauded investors are not adequately compensated because attorneys, 
not investors, control these class actions. The average class action 
settlement gives investors only 14 cents for every dollar lost, while 
one-third of each settlement and more goes to the attorneys.
  The legitimacy of the plaintiffs must be examined. Some are clearly 
professional plaintiffs who lend their names to any class action suit. 
One study of 229 cases showed 81 people were plaintiffs more than once. 
These are not aggrieved, injured parties, but professional plaintiffs, 
and the lawyers know it.
  If you do not believe me, Mr. President, listen to the words of one 
of the plaintiff's attorneys who benefit from the status quo. An 
attorney by the name of William Barrett told Forbes Magazine, ``I have 
the best practice in the world because I have no clients.'' This might 
be funny if it were not so true and so costly.
  Just how expensive is maintaining the status quo? One report stated 
that it cost companies an average of $8.6 million in settlement fees, 
$700,000 in attorney's fees, and about 1,000 hours of management time 
to settle the typical frivolous securities suit.
  Status quo means companies will have to pay these costs rather than 
create new products and, I submit, new jobs.
  Mr. President, who pays for these costs? These costs are passed on to 
investors in the form of stock price devaluation and lower dividends. 
This undermines the confidence of all investors in our capital markets.
  Let us look at specific costs one company faced because of the 
current pro-

[[Page S19085]]
trial lawyer's laws. After one company, called Adapt Technology, went 
public, it was advised to carry $5 million in director and officer 
liability insurance. This cost them $450,000 each year for premiums. 
Prior to going public they paid a few thousand dollars per year. To be 
exact, less than $29,000. The additional insurance is needed because of 
the virtual certainty that the company will be sued for securities 
fraud within a short time after going public, and then they have to be 
concerned about the different margins where the stock falls. If Adapt 
did not have to pay this additional liability insurance they say they 
could hire at least five new engineers.
  I know there have been mayors and other officials around the country 
who have been given information, mostly from these lawyers, that this 
is bad for them. They write to me and others, still talking about the 
original House version of the bill which certainly is not anything we 
have before us now, saying this is not what they want.
  I would like to refer to some people who support this legislation 
because there is lots of support of our people at home who want this 
legislation approved. They want this veto overridden.
  Bill Owens, State treasurer of the State of Colorado, in a letter 
states, ``The plaintiffs typically recover only a small percentage of 
their claims and the lawyers extract large fees for bringing the suit. 
A system that was intended to protect investors now seems to benefit 
the lawyers.''
  We also have a letter, part of a letter from the State treasurer of 
Delaware. Certainly Delaware--that is where most corporations are 
formed--I think we should give some credence to the treasurer of the 
State of Delaware, where she says, ``Investors are also being harmed by 
the current system as it shortchanges people who are being victimized 
by real fraud. The plaintiff's lawyers who specialize in these cases 
profit from bringing as many cases as possible and quickly settling 
them, regardless of the merits. Valid claims are being undercompensated 
in the current system because lawyers have less incentive to vigorously 
pursue them.''
  Another State treasurer, Judy Topinka, from the State of Illinois, in 
a letter to Senator Moseley-Braun writes, ``Because shareholders are on 
both sides of this litigation it merely transfers wealth from one group 
of shareholders to another. However it wastes millions of dollars in 
company resources for legal expenses and other transaction costs that 
otherwise could be invested to yield higher returns for company 
investors.''
  ``The concern about and reaction to meritless lawsuits has caused 
accountants, lawyers and insurance companies to insure their directors 
with price tags ultimately paid by the consumer and investing public 
including a large part of our retirees and pension holders.'' So says 
Joe Malone, Treasurer of the Commonwealth of Massachusetts.
  The treasurer of North Carolina: ``I agree,'' he says, ``that the 
current securities fraud litigation system is not protecting investors 
and needs reform.''
  The treasurer of the State of Ohio and the treasurer of the State of 
Oregon say similar things. The treasurer of the State of South 
Carolina, the treasurer of the State of Wisconsin, the treasurer of the 
State of California state similar things.
  So, if we look to our States for guidance we should follow what our 
treasurers say.
  But there are others who support this securities litigation reform 
and there would be many more that would support the securities 
litigation reform had they not been given such bad information early on 
that scared them to death. The information was given to them by these 
lawyers who make a fortune with these security litigation lawsuits. 
Supporters of the securities litigation reform, I will read off a few 
of the names: American Business Conference, American Electronics 
Association, American Financial Services Association, American 
Institute of Certified Public Accountants, Association for Investment 
Management and Research, Association of Private Pension and Welfare 
Plans, Association of Publicly-traded Companies, BIOCOM--formerly 
Biomedical Industry Council--Biotechnology Industry Association, 
Business Round Table, Commissioner of Corporations of the State of 
California, Champion International Pension Plan--one of the largest in 
the United States--Director of Revenues of the city of Chicago, 
Coalition to Eliminate Abusive Security Suits, Connecticut Retirement 
and Trust Fund, Eastman Kodak Retirement Plan, Electronics Industries 
Association, chief administrative officer of the State of Florida, 
Information Technology Association of America, Massachusetts Bay 
Transportation Association, National Association of Investors Corp., 
National Association of Manufacturers, National Investor Relations 
Institute, National Venture Capital Association, Governor of the State 
of New Mexico, Comptroller of the City of New York, New York City 
Pension Funds, Oregon Public Employees Retirement System, Public 
Securities Association, Securities Industries Association, 
Semiconductor Industry Association, Silicon Valley Chief Executives 
Association, Software Publishers Association, Teachers Retirement 
System of Texas, Washington State Investment Board--just to name a few 
of those that want something to happen, namely that this veto be 
overridden.
  There are a lot of good reasons to support this measure. Frivolous 
strike suits are not simply windfalls to unscrupulous attorneys, but 
they are costing our Nation jobs. They are inhibiting the development 
of high technology in every State in the Union. It is almost a 
certainty that start-up companies will get, with the formation of the 
company--a strong chance that soon thereafter there will be a 
securities class action lawsuit after they have gone public. The 
information provided to the Senate Banking Committee indicates that 19 
of the largest 30 companies in Silicon Valley have been sued since 
1988.
  According to another study, 62 percent of all entrepreneurial 
companies that went public since 1986 have been sued. This was by 1993, 
when the records were made available to us. In the last year and a 
half, I will bet we are nearing 80 or 90 percent. They file them almost 
as fast as they can. This is just in Silicon Valley.
  So, as one of the Senators from Nevada, I find this disappointing. 
There are other reasons for supporting this legislation. By 
discouraging frivolous security suits, companies can use their capital 
to increase shareholder returns. They could expand research and 
development. They could create new jobs. The conference report also 
ensures that victims of securities fraud and not their lawyers are 
winners.
  I think that one reason we are hearing the screaming from these 
lawyers is that under this conference report, under this legislation, 
the people who will benefit if they have been cheated will be the 
people who have been cheated, not the lawyers and the professional 
plaintiffs. Too often these attorneys collect millions of dollars while 
their clients collect only pennies.
  What about investors? Investors are harmed by the status quo because 
companies are reluctant to provide estimates about future performance 
for fear they will be sued. The conference report remedied this by 
providing for the safe harbor, while the Chairman of the SEC said he 
approved this.
  Let us also talk about the work done on this legislation by the 
senior Senator from the State of Connecticut. I remind my colleagues, 
my Democratic colleagues who voted for this measure originally, that 
this issue is not about supporting the President. This issue is about 
supporting the chairman of the Democratic National Committee, who has 
spent countless hours working on this legislation, drafting this 
legislation, debating this legislation, and who worked with the White 
House up to the very end to get their approval on what was done. So 
this is not a question about supporting the President. It is a question 
of those who originally supported this bill yanking the rug out from 
somebody who has worked very hard on this legislation. He has done so 
in consultation with the White House. The White House has been included 
from the very beginning. That is a tribute to the senior Senator from 
Connecticut.
  He was instrumental in including the White House in developing this 
legislation. There have been good-faith efforts to consult with the 
administration every step of the way. And when this legislation left 
the Senate, the senior Senator from Connecticut said, ``I will 

[[Page S19086]]
support this legislation when it comes back from conference only if it 
matches what we have done here in the Senate.'' That is, that it 
follows what we have done here in the Senate.
  Certainly that is what it did. The Senate position was what was 
adopted. The President's weak ideas for vetoing this, we have gone 
over.
  There are people who do not like this legislation, and I respect them 
for that. I respect them for that. But those people who supported this 
legislation initially should understand that one of our leaders, 
Senator Dodd, has spent a great deal of time and effort on this 
legislation and he does not deserve any of the 18 Democratic Senators 
who voted for this to have jerked the rug out from under him. He 
deserves more than that. He works on a daily basis for all Democratic 
Senators. But certainly let us not do this to him. As chairman of the 
DNC, he is probably more in sync with the desires of the body politic 
than the rest of us. He knows what direction our party should be 
headed, and he realizes that the centrist commonsense proposals, such 
as we are now asking of the majority of this Senate should be given our 
support.

  I ask my Democratic colleagues to consider this when voting on the 
override. Consider the work that has gone into this by the senior 
Senator from Connecticut.
  This is needed legislation that will do much good. This will put some 
lawyers out of the kind of work they have been doing making fortunes. 
They may have to get another practice, or another type of law, or maybe 
start doing work in which they get paid on an hourly basis. But in the 
long run, it will also create many new jobs and benefit small 
investors. It represents the moderate centrist approach to legislating 
that we ought to be engaged in here.
  I respect the opposition to this legislation. There are some people 
who simply did not like it to begin with. It is a very small minority. 
But I respect them for that. But those that supported this legislation 
on this side of the aisle should stick with our leader on this issue, 
that is, Senator Dodd who has spent so much time on this legislation.
  This legislation does not represent the ideology of the liberal left 
or the radical right. It represents a commonsense, bipartisan 
consensus, and I believe that is what the voters sent us here to do.
  There is speculation as to why it was vetoed. I am not going to 
engage in that other than to say that the President got some real bad 
advice. The absence of persuasion in the veto message does little to 
quell any speculation.
  I must say, however, that the death of this legislation only benefits 
a very small group of lawyers who have ruthlessly exploited current 
laws. They do so to the detriment of small investors and those who have 
legitimate claims. Their access to money has endowed them with 
tremendous influence in this debate, and I believe that is regrettable.
  I believe, Mr. President, that this legislation is fair. I think it 
is directly going to help clear up an area of law that needs clearing 
up.
  To those people who are talking about investors not being protected, 
I repeat that Senator Dodd went to great lengths to work with the vast 
majority of people on the other side of the aisle, with the White 
House, and a number of Senators on this side, making sure that 
investors would still be protected. Investors will be protected, but 
the lawyers who have been getting these exorbitant fees will not be 
protected if this veto is overridden, which I hope it is.

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