[Congressional Record Volume 144, Number 60 (Wednesday, May 13, 1998)]
[Senate]
[Pages S4778-S4816]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




          SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1998

  The PRESIDING OFFICER. Under the previous order, the clerk will 
report S. 1260.
  The assistant legislative clerk read as follows:

       A bill (S. 1260) to amend the Securities Act of 1933 and 
     the Securities Exchange Act of 1934 to limit the conduct of 
     securities class actions under State law, and for other 
     purposes.

  The Senate proceeded to consider the bill, which had been reported 
from the Committee on Banking, Housing, and Urban Affairs, with an 
amendment to strike all after the enacting clause and inserting in lieu 
thereof the following:

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Securities Litigation 
     Uniform Standards Act of 1998''.

     SEC. 2. FINDINGS.

       The Congress finds that--
       (1) the Private Securities Litigation Reform Act of 1995 
     sought to prevent abuses in private securities fraud 
     lawsuits;
       (2) since enactment of that legislation, considerable 
     evidence has been presented to Congress that a number of 
     securities class action lawsuits have shifted from Federal to 
     State courts;
       (3) this shift has prevented that Act from fully achieving 
     its objectives;
       (4) State securities regulation is of continuing 
     importance, together with Federal regulation of securities, 
     to protect investors and promote strong financial markets; 
     and
       (5) in order to prevent certain State private securities 
     class action lawsuits alleging fraud from being used to 
     frustrate the objectives of the Private Securities Litigation 
     Reform Act of 1995, it is appropriate to enact national 
     standards for securities class action lawsuits involving 
     nationally traded securities, while preserving the 
     appropriate enforcement powers of State securities

[[Page S4779]]

     regulators and not changing the current treatment of 
     individual lawsuits.

     SEC. 3. LIMITATION ON REMEDIES.

       (a) Amendments to the Securities Act of 1933.--
       (1) Amendment.--Section 16 of the Securities Act of 1933 
     (15 U.S.C. 77p) is amended to read as follows:

     ``SEC. 16. ADDITIONAL REMEDIES; LIMITATION ON REMEDIES.

       ``(a) Remedies Additional.--Except as provided in 
     subsection (b), the rights and remedies provided by this 
     title shall be in addition to any and all other rights and 
     remedies that may exist at law or in equity.
       ``(b) Class Action Limitations.--No class action based upon 
     the statutory or common law of any State or subdivision 
     thereof may be maintained in any State or Federal court by 
     any private party alleging--
       ``(1) an untrue statement or omission of a material fact in 
     connection with the purchase or sale of a covered security; 
     or
       ``(2) that the defendant used or employed any manipulative 
     or deceptive device or contrivance in connection with the 
     purchase or sale of a covered security.
       ``(c) Removal of Class Actions.--Any class action brought 
     in any State court involving a covered security, as set forth 
     in subsection (b), shall be removable to the Federal district 
     court for the district in which the action is pending, and 
     shall be subject to subsection (b).
       ``(d) Preservation of Certain Actions.--
       ``(1) In general.--Notwithstanding subsection (b), a class 
     action described in paragraph (2) of this subsection that is 
     based upon the statutory or common law of the State in which 
     the issuer is incorporated (in the case of a corporation) or 
     organized (in the case of any other entity) may be maintained 
     in a State or Federal court by a private party.
       ``(2) Permissible actions.--A class action is described in 
     this paragraph if it involves--
       ``(A) the purchase or sale of securities by the issuer or 
     an affiliate of the issuer exclusively from or to holders of 
     equity securities of the issuer; or
       ``(B) any recommendation, position, or other communication 
     with respect to the sale of securities of the issuer that--
       ``(i) is made by or on behalf of the issuer or an affiliate 
     of the issuer to holders of equity securities of the issuer; 
     and
       ``(ii) concerns decisions of those equity holders with 
     respect to voting their securities, acting in response to a 
     tender or exchange offer, or exercising dissenters' or 
     appraisal rights.
       ``(e) Preservation of State Jurisdiction.--The securities 
     commission (or any agency or office performing like 
     functions) of any State shall retain jurisdiction under the 
     laws of such State to investigate and bring enforcement 
     actions.
       ``(f) Definitions.--For purposes of this section the 
     following definitions shall apply:
       ``(1) Affiliate of the issuer.--The term `affiliate of the 
     issuer' means a person that directly or indirectly, through 1 
     or more intermediaries, controls or is controlled by or is 
     under common control with, the issuer.
       ``(2) Class action.--
       ``(A) In general.--The term `class action' means--
       ``(i) any single lawsuit (other than a derivative action 
     brought by 1 or more shareholders on behalf of a corporation) 
     in which--

       ``(I) damages are sought on behalf of more than 50 persons 
     or prospective class members, and questions of law or fact 
     common to those persons or members of the prospective class, 
     without reference to issues of individualized reliance on an 
     alleged misstatement or omission, predominate over any 
     questions affecting only individual persons or members; or
       ``(II) 1 or more named parties seek to recover damages on a 
     representative basis on behalf of themselves and other 
     unnamed parties similarly situated, and questions of law or 
     fact common to those persons or members of the prospective 
     class predominate over any questions affecting only 
     individual persons or members; or

       ``(ii) any group of lawsuits (other than derivative suits 
     brought by 1 or more shareholders on behalf of a corporation) 
     filed in or pending in the same court and involving common 
     questions of law or fact, in which--

       ``(I) damages are sought on behalf of more than 50 persons; 
     and
       ``(II) the lawsuits are joined, consolidated, or otherwise 
     proceed as a single action for any purpose.

       ``(B) Counting of certain class members.--For purposes of 
     this paragraph, a corporation, investment company, pension 
     plan, partnership, or other entity, shall be treated as 1 
     person or prospective class member, but only if the entity is 
     not established for the purpose of participating in the 
     action.
       ``(3) Covered security.--The term `covered security' means 
     a security that satisfies the standards for a covered 
     security specified in paragraph (1) or (2) of section 18(b) 
     at the time during which it is alleged that the 
     misrepresentation, omission, or manipulative or deceptive 
     conduct occurred.''.
       (2) Conforming amendments.--Section 22(a) of the Securities 
     Act of 1933 (15 U.S.C. 77v(a)) is amended--
       (A) by inserting ``except as provided in section 16 with 
     respect to class actions,'' after ``Territorial courts,''; 
     and
       (B) by striking ``No case'' and inserting ``Except as 
     provided in section 16(c), no case''.
       (b) Amendments to the Securities Exchange Act of 1934.--
     Section 28 of the Securities Exchange Act of 1934 (15 U.S.C. 
     78bb) is amended--
       (1) in subsection (a), by striking ``The rights and 
     remedies'' and inserting ``Except as provided in subsection 
     (f), the rights and remedies''; and
       (2) by adding at the end the following new subsection:
       ``(f) Limitations on Remedies.--
       ``(1) Class action limitations.--No class action based upon 
     the statutory or common law of any State or subdivision 
     thereof may be maintained in any State or Federal court by 
     any private party alleging--
       ``(A) a misrepresentation or omission of a material fact in 
     connection with the purchase or sale of a covered security; 
     or
       ``(B) that the defendant used or employed any manipulative 
     or deceptive device or contrivance in connection with the 
     purchase or sale of a covered security.
       ``(2) Removal of class actions.--Any class action brought 
     in any State court involving a covered security, as set forth 
     in paragraph (1), shall be removable to the Federal district 
     court for the district in which the action is pending, and 
     shall be subject to paragraph (1).
       ``(3) Preservation of certain actions.--
       ``(A) In general.--Notwithstanding paragraph (1), a class 
     action described in subparagraph (B) of this paragraph that 
     is based upon the statutory or common law of the State in 
     which the issuer is incorporated (in the case of a 
     corporation) or organized (in the case of any other entity) 
     may be maintained in a State or Federal court by a private 
     party.
       ``(B) Permissible actions.--A class action is described in 
     this subparagraph if it involves--
       ``(i) the purchase or sale of securities by the issuer or 
     an affiliate of the issuer exclusively from or to holders of 
     equity securities of the issuer; or
       ``(ii) any recommendation, position, or other communication 
     with respect to the sale of securities of an issuer that--

       ``(I) is made by or on behalf of the issuer or an affiliate 
     of the issuer to holders of equity securities of the issuer; 
     and
       ``(II) concerns decisions of such equity holders with 
     respect to voting their securities, acting in response to a 
     tender or exchange offer, or exercising dissenters' or 
     appraisal rights.

       ``(4) Preservation of state jurisdiction.--The securities 
     commission (or any agency or office performing like 
     functions) of any State shall retain jurisdiction under the 
     laws of such State to investigate and bring enforcement 
     actions.
       ``(5) Definitions.--For purposes of this subsection the 
     following definitions shall apply:
       ``(A) Affiliate of the issuer.--The term `affiliate of the 
     issuer' means a person that directly or indirectly, through 1 
     or more intermediaries, controls or is controlled by or is 
     under common control with, the issuer.
       ``(B) Class action.--The term `class action' means--
       ``(i) any single lawsuit (other than a derivative action 
     brought by 1 or more shareholders on behalf of a corporation) 
     in which--

       ``(I) damages are sought on behalf of more than 50 persons 
     or prospective class members, and questions of law or fact 
     common to those persons or members of the prospective class, 
     without reference to issues of individualized reliance on an 
     alleged misstatement or omission, predominate over any 
     questions affecting only individual persons or members; or
       ``(II) 1 or more named parties seek to recover damages on a 
     representative basis on behalf of themselves and other 
     unnamed parties similarly situated, and questions of law or 
     fact common to those persons or members of the prospective 
     class predominate over any questions affecting only 
     individual persons or members; or

       ``(ii) any group of lawsuits (other than derivative suits 
     brought by 1 or more shareholders on behalf of a corporation) 
     filed in or pending in the same court and involving common 
     questions of law or fact, in which--

       ``(I) damages are sought on behalf of more than 50 persons; 
     and
       ``(II) the lawsuits are joined, consolidated, or otherwise 
     proceed as a single action for any purpose.

       ``(C) Counting of certain class members.--For purposes of 
     this paragraph, a corporation, investment company, pension 
     plan, partnership, or other entity, shall be treated as 1 
     person or prospective class member, but only if the entity is 
     not established for the purpose of participating in the 
     action.
       ``(D) Covered security.--The term `covered security' means 
     a security that satisfies the standards for a covered 
     security specified in paragraph (1) or (2) of section 18(b) 
     of the Securities Act of 1933, at the time during which it is 
     alleged that the misrepresentation, omission, or manipulative 
     or deceptive conduct occurred.''.

     SEC. 4. APPLICABILITY.

       The amendments made by this Act shall not affect or apply 
     to any action commenced before and pending on the date of 
     enactment of this Act.

  The PRESIDING OFFICER. The Senator from New York is recognized.
  Mr. D'AMATO. Mr. President, today we begin consideration of S. 1260, 
the Securities Litigation Uniform Standards Act of 1998.
  The Banking Committee reported this bill on April 29 by an 
overwhelming vote of 14-4. This bill has strong bipartisan support. It 
comes as no surprise to anybody who has followed the progress of this 
legislation. This bill is the product of a great deal of hard work. It 
has been refined through the incorporation of comments from many 
sources, including the Securities and Exchange Commission. As a result 
of this process, this bill not only has been improved, but it actually 
enjoys the support of the Securities Exchange Commission and the White 
House.
  Mr. President, I am not going to ask unanimous consent now that 
letters

[[Page S4780]]

from the SEC and the White House be printed in the Record as if read, 
which is something we generally do. I think it is so important that I 
am going to take the time to refer to both letters and read what has 
been said, so that my colleagues can hear, and those who are interested 
in this debate can follow.
  This is a letter, dated March 24, from the Securities and Exchange 
Commission, addressed to me as Chairman of the Banking Committee; 
Senator Gramm, Chairman of the Subcommittee; and Senator Dodd, who is 
the ranking member.
  Let me read it:

       Dear Chairman D'Amato, Chairman Gramm, and Senator Dodd:
       You have requested our views on S. 1260, the Securities 
     Litigation Uniform Standards Act of 1997, and amendments to 
     the legislation which you intend to offer when the bill is 
     marked up by the Banking Committee. This letter will present 
     the Commission's position on the bill and proposed 
     amendments.
       The purpose of this bill is to help ensure that securities 
     fraud class actions involving certain securities traded on 
     national markets are governed by a single set of uniform 
     standards.''

  I think that is important, Mr. President. We should understand that 
those securities traded on national exchanges are governed by a uniform 
standard. I think that makes ample sense.

       While preserving the right of individual investors to bring 
     securities lawsuits wherever they choose. . .

  So we should underscore that, as a premise, the SEC says, we are 
going to look for a single standard, but we will preserve the rights of 
individuals to bring securities lawsuits wherever they choose.

       . . . the bill generally provides that class actions can be 
     brought only in Federal Court where they will be governed by 
     federal law.
       As you know, when the Commission testified before the 
     Securities Subcommittee of the Senate Banking Committee in 
     October 1997, we identified several concerns about S. 1260. 
     In particular, we stated that a uniform standard for 
     securities fraud class actions that did not permit investors 
     to recover losses attributable to reckless misconduct would 
     jeopardize the integrity of the securities market. In light 
     of this profound concern, we were gratified by the language 
     in your letter of today agreeing to restate in S. 1260's 
     legislative history, and in the expected debate on the Senate 
     floor, that the Private Securities Litigation Reform Act of 
     1995 did not, and was not intended to, alter the well-
     recognized and critically important scienter standard.

  So, Mr. President, we have a concern that was expressed as it existed 
in the 1995 law, and what the Securities and Exchange Commission said 
is, look, we want in the new proposal, as it relates to uniform 
standards, to clearly identify that you did not do away with, but will 
recognize the scienter standards. That has been accomplished. And I 
will go back to that.
  Our October 1997 testimony also pointed out that S. 1260 could be 
interpreted to preempt certain state corporate governance claims, a 
consequence that we believe was neither intended nor desirable. In 
addition, we expressed concern that S. 1260's definition of class 
action appeared to be unnecessarily broad. We are grateful for your 
responsiveness to these concerns and believe that the amendments you 
propose to offer at the Banking Committee markup, as attached to your 
letter, will successfully resolve these issues.
  So I think it is obvious that there has been considerable ongoing 
dialog and work between the Chairman of the Subcommittee, Senator Gramm 
of Texas, the ranking member, Senator Dodd, the Banking Committee staff 
and the SEC, to look and to deal with what is not only the proposals 
that we put forth for the first time, but to deal with some of the 
imperfections and some of the unintended consequences that may have 
evolved as a result of the 1995 act.
  The ongoing dialog between our staffs has been constructive. The 
result of this dialogue, we believe, is an improved bill with 
legislative history that makes clear, by reference to the legislative 
debate in 1995, that Congress did not alter in any way the recklessness 
standard when it enacted the Reform Act. This will help to diminish 
confusion in the courts about the proper interpretation of that Act and 
add important assurances that the uniform standards provided by S. 1260 
will contain this vital investor protection.
  We support enactment of S. 1260 with these changes and with its 
important legislative history.
  We appreciate the opportunity to comment on the legislation, and of 
course remain committed to working with the Committee as S. 1260 moves 
through the legislative process.
  Sincerely, Arthur Levitt, Chairman; Isaac C. Hunt, Commissioner; 
Laura S. Unger, Commissioner.
  At this time, I ask unanimous consent that the letter be printed in 
the Record so that it can be viewed in its entirety.
  There being no objection, the letter was ordered to be printed in the 
Record, as follows:

       Dear Chairman D'Amato, Chairman Gramm, and Senator Dodd: 
     You have requested our views on S. 1260, the Securities 
     Litigation Uniform Standards Act of 1997, and amendments to 
     the legislation which you intend to offer when the bill is 
     marked up by the Banking Committee. This letter will present 
     the Commission's position on the bill and proposed 
     amendments.*
---------------------------------------------------------------------------
     * We understand that Commissioner Johnson will write 
     separately to express his differing views. Commissioner Carey 
     is not participating.
---------------------------------------------------------------------------
       The purpose of the bill is to help ensure that securities 
     fraud class actions involving certain securities traded on 
     national markets are governed by a single set of uniform 
     standards. While preserving the right of individual investors 
     to bring securities lawsuits wherever they choose, the bill 
     generally provides that class actions can be brought only in 
     federal court where they will be governed by federal law.
       As you know, when the Commission testified before the 
     Securities Subcommittee of the Senate Banking Committee in 
     October 1997, we identified several concerns about S. 1260. 
     In particular, we stated that a uniform standard for 
     securities fraud class actions that did not permit investors 
     to recover losses attributable to reckless misconduct would 
     jeopardize the integrity of the securities markets. In light 
     of this profound concern, we were gratified by the language 
     in your letter of today agreeing to restate in S. 1260's 
     legislative history, and in the expected debate on the Senate 
     floor, that the Private Securities Litigation Reform Act of 
     1995 did not, and was not intended to, alter the well-
     recognized and critically important scienter standard.
       Our October 1997 testimony also pointed out that S. 1260 
     could be interpreted to preempt certain state corporate 
     governance claims, a consequence that we believed was neither 
     intended nor desirable. In addition, we expressed concern 
     that S. 1260's definition of class action appeared to be 
     unnecessarily broad. We are grateful for your responsiveness 
     to these concerns and believe that the amendments you propose 
     to offer at the Banking Committee mark-up, as attached to 
     your letter, will successfully resolve these issues.
       The ongoing dialogue between our staffs has been 
     constructive. The result of this dialogue, we believe, is an 
     improved bill with legislative history that makes clear, by 
     reference to the legislative debate in 1995, that Congress 
     did not alter in any way the recklessness standard when it 
     enacted the Reform Act. This will help to diminish confusion 
     in the courts about the proper interpretation of that Act and 
     add important assurances that the uniform standards provided 
     by S. 1260 will contain this vital investor protection.
       We support enactment of S. 1260 with these changes and with 
     this important legislative history.
       We appreciate the opportunity to comment on the 
     legislation, and of course remain committed to working with 
     the Committee as S. 1260 moves through the legislative 
     process.
           Sincerely,
     Arthur Levitt,
       Chairman.
     Issac C. Hunt, Jr.,
       Commissioner.
     Laura S. Unger,
       Commissioner.

  Mr. D'AMATO. Mr. President, I took the time to go through this 
because I think it is important that we understand that this has not 
been the product of one staff or two staffs. This has not been the 
product of just the Banking Committee and those in industry who have 
come to express their concern as to how it is that their class actions 
are being brought in a frivolous manner, using the State courts to get 
around what Congress debated and what Congress voted overwhelmingly to 
bring, which is a standard of conduct that will discourage a race to 
the courthouse, simply to bring a suit and simply to extort moneys from 
those who have deep pockets, because these suits can be long, they can 
be frivolous, and they can be dragged out. The cost factor to the 
people being sued is enormous--the time, the distraction, particularly 
to startup companies, and particularly those who want to let people 
know what they are doing, but who felt restricted as a result of the 
suits that were brought.
  I am not going to bother going into the history and the comments that 
have been made by many. But indeed

[[Page S4781]]

there have been many, which clearly are a stain on the rightful 
practice of law to ensure the rights of those who have been aggrieved 
and would hold people responsible for actions that are not tortious, 
malicious, malevolent, and indeed when there are no actions that should 
be sustained under any court, but because of the cost involved would 
have insurance carriers, accountants firms, securities firms, 
manufacturers, and others, be held to a situation where they have to 
settle. Who do they settle with? They settle with the moneys that come 
from the little guy--their stockholders. So while we say ``stockholder 
derivative actions,'' the people hurt are indeed the stockholders.
  Mr. President, I mentioned two letters. Let me read a second letter.
  The second letter is dated a month later to myself as Chairman of the 
Banking Committee, Senator Gramm as Chairman of the Subcommittee on 
Securities, Senator Dodd as ranking Member of that Committee, from the 
White House, dated April 28, 1998.

       Dear Chairman D'Amato, Chairman Gramm, and Senator Dodd: We 
     understand that you have had productive discussions with the 
     Securities and Exchange Commission (SEC) about S. 1260, the 
     Securities Litigation Uniform Standards Act of 1997. The 
     Administration applauds the constructive approach that you 
     have taken to resolve the SEC's concerns.
       We support the amendments to clarify that the bill will not 
     preempt certain corporate governance claims and to narrow the 
     definition of class action. More importantly, we are pleased 
     to see your commitment, by letter dated March 24, 1998, to 
     Chairman Levitt and members of the Commission, to restate in 
     S. 1260's legislative history, and in the expected debate on 
     the Senate floor, that the Private Securities Litigation 
     Reform Act of 1995 did not, and was not intended to, alter 
     the Scienter standard for securities fraud actions.
       As you know, uncertainty about the impact of the Reform Act 
     on the scienter standard was one of the President's greatest 
     concerns. The legislative history and floor statements that 
     you have promised the SEC and will accompany S. 1260 should 
     reduce confusion in the courts about the proper 
     interpretation of the Reform Act. Since the uniform standards 
     provided by S. 1260 will provide that class actions generally 
     can be brought only in federal court, where they will be 
     governed by federal law, it is particularly important to the 
     President that you be clear that the federal law to be 
     applied includes recklessness as a basis for pleading and 
     liability in securities fraud class actions.
       So long as the amendments designed to address the SEC's 
     concerns are added to the legislation and the appropriate 
     legislative history and floor statements on the subject of 
     legislative intent are included in the legislative record, 
     the Administration would support enactment of S. 1260.
           Sincerely,
     Bruce Lindsey,
       Assistant to the President and Deputy Counsel.
     Gene Sperling,
       Assistant to the President for Economic Policy.

  Mr. President, I make note that the SEC informed the Banking 
Committee and the Subcommittee Chairman and ranking member on March 24. 
It was fully a month thereafter, on April 28, that again the President 
reaffirmed his support for this action, and in so doing went out of his 
way to point out that we, indeed, will improve the present state of the 
law because of the colloquy that will take place and because of the 
manner in which the law was written.
  So here the President of the United States and the SEC and his 
Commissioner are saying you are improving upon the law as it stands 
now, in addition--we will talk about that--to closing a loophole that 
has been used by those who rush to the courts to bring suits because 
they are looking to enrich themselves, not to protect the little guy or 
the small investors. They are costing the little guy and small 
investors money. I think the broad-based support that this bill enjoys 
is a tribute to Senator Gramm. I want to say that for the record. He is 
here. He worked hard. His staff has worked hard. They have been 
reasonable. The chief sponsors of this legislation, Senators Gramm and 
Dodd have put together a tight bill intended to address a specific 
serious problem.
  The problem to which I refer is a loophole that strike lawyers have 
found in the 1995 Private Securities Litigation Reform Bill which was 
fashioned again on the most part by Senators Gramm, Dodd, and Domenici.
  Mr. President, the 1995 Act was passed in the last Congress in 
response to a wave of harassment litigation that threatened the 
efficiency and the integrity of our national stock markets, as well as 
the value of stock portfolios of individual investors. That is what is 
being hurt--the little guy, the small individual investor in whose 
companies they had a share in were diminished in value as a result of 
these suits. This threat was particularly debilitating to the so-called 
high-tech companies who desperately needed access to our capital 
markets to raise the money needed for research, development, and 
production of cutting-edge technology. These companies, which have 
spearheaded our economy's resurgence, are particularly susceptible to 
strike suits because of the volatility of the price of their stock. 
Strike lawyers thrive on stock price fluctuations regardless of whether 
there is even a shred of evidence of fraud.
  Mr. President, this is the crux of the matter: That ultimately the 
cost of strike suits are borne by shareholders, including ordinary 
people saving for their children's education, or for their retirement. 
The average American goes into the stock market for long-term 
appreciation--i.e., to earn solid rates of return. They do not buy a 
stock simply to be positioned for a class action when the stock's price 
drops. It is those people, the ordinary investors, who foot the bill 
for high-priced settlements of harassment litigation.
  We are not talking about preventing legitimate litigation. Real 
plaintiffs with legitimate claims deserve their day in court. And we 
preserve that in this bill. But what we have seen in our Federal 
courts, and what we are now seeing in our State courts is little more 
than a judicially sanctioned shakedown that only benefits the lawyers. 
We are talking about lawsuits in which we have nominal plaintiffs, and 
the lawyers are the only real winners. One of these strike lawyers 
drove this point home best, one of the biggest and one of the largest, 
when he bragged that he had ``the perfect practice''. Why did he say 
that? He bragged about it. He said he has the ``perfect practice.'' 
This is the fellow who has the largest, has brought more suits, 
hundreds of millions of dollars, who said he has ``the perfect 
practice'' because he has ``no clients.''
  Isn't that incredible? He has no clients. He recovers hundreds of 
millions of dollars. When it is recovered, who gets most of it? The 
lawyers do. The so-called clients get hurt because the company which 
they have stock in loses value. It loses time. It pays millions of 
dollars. It has higher insurance costs, higher costs for auditing. The 
auditors have to charge more because they get sued. The insurance 
companies have to charge more for their premiums because they wind up 
paying more. Who do you think gets hurt? The little guy. Who benefits? 
The fellow who says ``I have got the perfect practice.''
  Now, let me say this to you. This is a very, very, very small part of 
the law practice, is very specialized, relatively a handful of 
attorneys who have this, but let me tell you they hold hostage the 
companies of America, the private sector of America, as a result of 
what they can do by bringing these suits, suits that have no merit.
  As I have previously mentioned, harassment lawyers found a loophole 
in which to ply their trade--the State court system. In the time since 
the 1995 Act was passed, we have seen these class-action lawyers rush 
to State courthouses. One witness before the Securities Subcommittee 
summarized this phenomenon well when he testified that the single fact 
is that State court class actions involving nationally traded 
securities were virtually unknown. In other words, prior to our 1995 
Act, they just were not known. Now they are brought with some 
frequency.
  This is a national problem. Regardless of where class actions are 
brought, they impact on the national stock markets. Money is moved away 
from job-creating, high-tech firms. Money is taken from shareholders in 
the form of stock price decline as a result of litigation. And where 
does this money go? It goes into the pockets of a very select cadre of 
these attorneys.
  In addition, these lawsuits have a chilling, a chilling effect on one 
of the most important provisions in the 1995 Act and that is called the 
safe harbor provision. Until this loophole is closed, no company can 
safely risk issuing any

[[Page S4782]]

forecast, even though the market desperately wants it. So you cannot 
get a company to say: ``This is what we predict; this is what we see,'' 
because they are subject to litigation. To do so is to invite a class 
action and a high-dollar settlement.
  If someone makes a prediction and he is off by a little bit, he is 
sued. If someone makes a prediction, he says: ``We think we are going 
to increase profits or sales by one-third,'' and he doesn't hit that 
target, he has a smaller than anticipated increase, that company is 
going to be sued. And so you cannot get the kind of advice that 
investors are looking for.
  That is not what we want today. The bill's detractors are wrong. It 
will not prevent shareholder derivative actions or individual lawsuits 
or lawsuits by school districts or municipalities or State securities 
regulator enforcement actions or lawsuits relating to ``microcap'' or 
``penny'' stock fraud. Those actions will still be permitted.
  This is important legislation, and it is narrowly drawn to address a 
specific and serious problem. Time is short. There are very few 
legislative days remaining in the session, and I encourage my 
colleagues on both sides of the aisle not only to support this bill and 
to support the sponsors of this bill, but also that we move forward in 
a manner which can see that it is speedily enacted. Every day that we 
delay occasions more of these suits which needlessly cost consumers and 
stockholders and the American public millions and millions of dollars.
  Again, I commend the architects of this legislation, Senators Dodd, 
Gramm, and Domenici, and I also, again, would point out that we have 
worked very closely with the Securities and Exchange Commission and 
with the White House in coming to this point.
  I yield the floor.
  Mr. SARBANES. Mr. President, I think it is important at the outset of 
this debate to try to dispel three misconceptions that surround S. 
1260. The first is that class-action lawsuits alleging securities fraud 
have migrated from Federal court to State court since 1995 and the 
enactment of the earlier legislation.
  In fact, as I will describe in some detail shortly, every study 
indicates that the number of securities fraud class actions brought in 
State courts, while it increased in 1996, then declined in 1997. So the 
numbers do not support that assertion.
  The next misconception is that this bill would preempt only class-
action lawsuits from being brought in State court. In fact, this bill 
likely will deprive individual investors of their own opportunities to 
bring their actions in State courts separate and apart from class 
actions.
  The final misperception about this bill, which is suggested, is that 
it enjoys widespread support. In reality, a broad coalition of State 
and local officials, senior citizen groups, labor unions, academics, 
and consumer groups oppose this bill. They oppose it because it goes 
too far. It will deprive defrauded investors of remedies.
  Once again, we have this classic example of being able to sort of try 
to address a problem and, instead of narrowly dealing with the problem, 
swinging the pendulum well beyond the problem and taking the so-called 
corrective legislation so far out that in and of itself it creates 
additional problems.
  Let me turn to the first misperception, the notion that securities 
fraud class actions are being brought in State court in order to avoid 
the provisions of the Litigation Act of 1995.
  It is correct that the number of such cases went up in 1996, the 
first year the Litigation Act was effective, but every available study 
shows that the number declined in 1997. For example, a study done by 
the National Economic Research Associates, a consulting firm, found 
that the number of securities class-action suits filed in State courts 
during the first 10 months of 1996 increased to 79 from 48 filed during 
the same period in 1995.
  In an update released in the summer of 1997, however, NERA found that 
the number of securities class actions filed in State courts during the 
first 4 months of 1997 declined to 19, down from 40 in the same period 
in 1996. So the number actually declined very significantly by more 
than half the first 4 months of 1997.
  These numbers are cited in a report that was prepared by the 
Congressional Research Service. In July 1997, Professors Joseph 
Grundfest and Michael Perino of Stanford University Law School 
testified before the Securities Subcommittee, and in their testimony 
they show that the number of issuers sued only in State class actions 
declined from 33 in 1996 to an annualized rate of 18 in 1997. A Price 
Waterhouse securities litigation study posted by that accounting firm 
on its Internet site corroborated NERA's findings. Using data compiled 
by Securities Class Action Alert, based on the number of defendants 
sued, Price Waterhouse reported that the number of State court actions 
increased from 52 in 1995 to 66 in 1996 but then declined to 44 in 
1997. That was lower than the number of such actions in 1991 or 1993.
  The study went on to find that the total number of cases filed in 
1997 showed little or no change--little or no change--from the average 
number of lawsuits filed in the period 1991 through 1995.
  Data provided to the committee by Price Waterhouse on February 20, 
1998, also demonstrated that State court filings declined in 1997. 
Measured by the number of cases filed, the number of State securities 
class actions declined from 71 in 1996 to 39 in 1997. So much for this 
assertion of a rising number of suits being brought in the State 
courts. This really is a piece of legislation in search of a problem. 
And when you look at the facts, when you look at the numbers, the 
problem is not there.
  Now let me turn to the notion that this bill addresses only class-
action lawsuits. I think most people understand a class-action lawsuit 
to refer to lawsuits brought by one person on behalf of himself and all 
other people similarly situated, an anonymous and potentially large 
group of people. For class actions to be certified in Federal court, 
the Federal Rules of Civil Procedure require that the class be so 
numerous that joinder of all members is impracticable. In Federal 
court, a judge normally must find that common questions of law and fact 
predominate over questions only affecting individual members.
  Class actions are a tool that allow plaintiffs to share the cost of a 
lawsuit when it might not be economical for any one of them to bring an 
action. But, because they can be brought on behalf of potentially an 
enormous class, they also carry with them the possibility of being 
misused to coerce defendants into settlement.
  This is the sort of situation that is ordinarily described by the 
proponents of such legislation as requiring a legislative enactment. 
But when you examine the legislation that comes in behind that 
assertion, you invariably find that the breadth of the legislation far 
exceeds this problem which they have identified, and which they 
constantly use in the discussion and the debate as the example of what 
they are trying to deal with. If we could limit the legislation to the 
examples that are cited, we might really come close to obtaining a 
consensus in this body about corrective measures. But the legislation 
goes far beyond the examples that are ordinarily used as constituting 
the basis for legislative enactment, and it is that expanded 
application of the legislative language, not the specific examples that 
are generally used, which creates the problem.
  This bill is another example of that. It addresses more than the type 
of class-action case which is ordinarily cited as constituting a 
potential abuse of the legal process. This bill contains a definition 
of class action broad enough to pick up individual investors against 
their will. The bill would amend the Federal Securities laws to include 
a new definition of class action. It would include as class action any 
group of lawsuits in which damages are sought on behalf of more than 50 
persons if those lawsuits are pending in the same court, involve common 
questions of law or fact, and have been consolidated as a single action 
for any purpose.
  Even if the lawsuits are brought by separate lawyers without 
coordination--in other words, you have 50 different investors who feel 
they have been cheated and want to bring a lawsuit--there is no 
interplay or interaction amongst them, even if the common questions do 
not predominate--

[[Page S4783]]

which is a requirement in class-action suits, but weakened in this 
legislation--those lawsuits, under this legislation, may qualify as a 
class action and thus be preempted.
  So if an individual investor chooses to bring his own lawsuit in 
State court, to bear the expenses of litigation himself, he can be 
forced into Federal court. He can be made to abide by the Federal Rules 
if 50 other investors make the same decision about bringing a lawsuit, 
50 other separate investors. Indeed, the bill provides an incentive for 
defendants to collude with parties to ensure that the preemption 
threshold is reached. Such a result goes well beyond ending abuses 
associated with class-action lawsuits. It deprives individual investors 
of their remedies.
  The definition of class action in the bill would preempt other types 
of lawsuits as well. It includes as a class action any lawsuit in which 
damages are sought on behalf of more than 50 persons and common 
questions of law or fact predominate. The bill specifies that the 
predomination inquiry be made without reference to issues of 
individualized reliance on an alleged misstatement or omission. This 
would ensure that the investor receives the worst of both worlds. While 
the investor could not bring a class action under State law, because 
each investor must prove his or her reliance, they nonetheless 
constitute a class action under the bill and their suit is preempted.
  Finally, let me turn to the assertion that there is little or no 
opposition to this bill. In fact, the bill is opposed by State and 
local officials very vigorously, as a matter of fact. I note there that 
Orange County has just begun the first of its recoveries, in terms of 
being defrauded. Senior citizens groups, labor unions, consumer groups, 
columnists and editors, legal practitioners and academics have all 
weighed in on this debate. The headline of a column by Ben Stein in USA 
Today on April 28, summarizes this opposition: ``Investors, beware: 
Last door to fight fraud could close.''
  ``Investors, beware: Last door to fight fraud could close.'' He wrote 
of this bill, the legislation before us:

       State remedies would simply vanish, and anyone who wanted 
     to sue would have to go into Federal court where impossible 
     standards exist.

  He warns:

       This is serious business for the whole investing public.

  Mr. President, I ask unanimous consent that this entire column be 
printed in the Record.
  There being no objection, the article was ordered to be printed in 
the Record, as follows:

                    [From USA Today, Apr. 28, 1998]

        Investors, Beware: Last Door To Fight Fraud Could Close

                             (By Ben Stein)

       If you come home from vacation and find that your house has 
     been broken into, you know who to call. You call the police 
     and then your insurance agent to make up the loss.
       If someone misuses your credit card, you also know what to 
     do. You call MasterCard or Visa or whoever it is, and the 
     company takes the fraudulent charge off your card.
       But what if you open the newspaper one day to find you have 
     been defrauded about the stocks and bonds you own? Who do you 
     call for help if management of a company in which you hold 
     stock has lied to the world about a product or its prospects, 
     induced you to buy stock, and then fled with your money?
       You can file a report with the Securities and Exchange 
     Commission, but we all know how slowly even the best 
     bureaucracies work. You can go to your state securities 
     commission. They might be great people, but they also work 
     slowly--in general taking years or decades--and they often 
     are geared more to punishing the wrongdoer than to getting a 
     recovery for the victims.
       Also, both the feds and state bureaucracies will be totally 
     overwhelmed and understaffed as a matter of course. You could 
     sue the fraudmeisters yourself, but that kind of suit costs a 
     fortune, literally millions of dollars, and that exceeds most 
     people's losses, not to mention their life savings.
       So, who will possibly stand up for you and sue to get your 
     money back? The private class-action securities bar.
       These people are not Matt Dillon or Wyatt Earp, but their 
     livelihood is wholly dependent upon getting results for 
     defrauded investors. They aggregate claims by all of the 
     cheated investors in a corporation and sue to get redress. 
     They almost never make any money unless they get a chunk for 
     the defrauded little guy. They are not angels, and they are 
     not saints. They do it for the money. But they get money when 
     you do, so they have to be persistent, aggressive and 
     ruthless against the cheaters.
       The people who have done the fraud hate class-action 
     lawyers. So, even more, do accountants and insurance 
     companies. Accountants have often been involved in the fraud 
     or at least ignored it or missed it. They're still around 
     when the business management has gone, so they--the 
     accountants--often get sued successfully. Likewise, the 
     companies that insure accountants for malpractice totally 
     hate the class-action bar for the same reason.
       In the 1980's, there was a national upheaval in fraud--junk 
     bonds, S&Ls high-tech fraud. There were some large federal 
     class-action suits under decades-old consumer protection laws 
     from New Deal days. Naturally, these upset the accountants, 
     the insurers and the high-tech firms. There were some large 
     recoveries.
       No surprise, then, that the accountants, high-tech firms 
     and insurance companies did what any smart and government-
     wise group of rich, unhappy people would do. They lobbied 
     Congress, giving immense contributions to representatives and 
     senators. And they got the federal law changed drastically so 
     that it became extremely hard to sue for securities fraud as 
     a class. There was a bar on suits against accountants except 
     in very rare cases, stringent limits on discovering evidence 
     of fraud, and an almost totally impossible level of pleading 
     about how much defendants had to have known.
       When those who wanted to protect the small investor--and 
     there were such principled men and women in Congress--
     complained, the friends of the accountants and fraud makers 
     said, ``Hey, maybe the federal law is a bit harsh, but no 
     problem. You can still sue in state court. You still have 
     state remedies.'' President Clinton vetoed the bill, but it 
     was passed, over his veto, by a Republican Congress that I 
     generally love but that sold out totally here. That was in 
     1995.
       There has yet to be a single recovery for investors in a 
     suit brought under the 1995 law. Now it's 1998, and guess 
     what's happening: congress is racing toward passage of a law 
     proposed by Chris Dodd, senator for Hartford, Conn., 
     insurance capital of the world. The bill, which Congress is 
     to vote on before summer, would spring the trap opened in 
     1995: It would bar all state class-action securities cases.
       The state remedies that were supposed to remain in place 
     would simply vanish, and anyone who wanted to sue would 
     have to go into federal court, where those same impossible 
     standards exist. The excuse of the accountants and high-
     tech pooh-bahs is that there has been a huge upsurge in 
     state class-action cases since the 1995 law went into 
     effect. The uncontroverted fact, however, is that the 
     number of state court cases of class-action suits has 
     fallen--not risen--since 1995 in the nation and has fallen 
     in all but three states since 1995.
       Of course, if you have money in Congress, you don't need no 
     stinking facts. And, the juggernaut of the accountants in 
     Congress is powerful, indeed. They have even managed to get 
     the chairman of the Securities and Exchange Commission, 
     Arthur Levitt, to change his mind. Levitt in recent weeks was 
     saying that state remedies should stay in place until he saw 
     how the 1995 law worked out. He now endorses closing the 
     state courthouse door to small class-action litigants if some 
     changes in the standard of reckless misconduct required for 
     liability are altered slightly.
       This is not abstruse stuff for law teachers. This is 
     serious business for the whole investing public. The goal of 
     the accountants and their pals in Hartford is to simply kill 
     the class-action bar. They're gambling that their 
     contributions, plus a general resentment against lawyers, 
     will do the trick. But if it does, next time you're 
     defrauded, you'll be plumb out of luck. You can call, but the 
     phone will just ring and ring and ring, and you'll be all 
     alone at 3 a.m., wondering how you can possibly have such a 
     bitter loss without anyone to help.

  Mr. SARBANES. A number of groups representing State and Government 
officials, including the National League of Cities, the National 
Association of Counties, the Government Finance Officers Association, 
and the U.S. Conference of Mayors, oppose this bill, as do the National 
League of Cities National Association of Counties, Government Finance 
Officers Association, and the U.S. Conference of Mayors. I ask 
unanimous consent that a May 11, 1998, letter from these and other 
groups be printed in the Record.
  There being no objection, the letter was ordered to be printed in the 
Record, as follows:

         Government Finance Officers Association (GFOA), Municipal 
           Treasurers' Association (MTA), National Association of 
           Counties (NACo), National Association of County 
           Treasurers and Finance Officers (NACTFO), National 
           Association of State Retirement Administrators (NASRA), 
           National conference on Public Employee Retirement 
           Systems (NCPERS), National League of Cities (NLC), U.S. 
           Conference of Mayors (USCM),
                                                     May 11, 1998.
     Hon. Paul S. Sarbanes,
     U.S. Senate, Hart Senate Office Building,
     Re: S. 1260, Securities Litigation Uniform Standards Act of 
           1998.
       Dear Senator Sarbanes: The state and local government 
     organizations listed above

[[Page S4784]]

     write in opposition to S. 1260, the Securities Litigation 
     Uniform Standards Act of 1998, as reported by the Senate 
     Committee on Banking, Housing and Urban Affairs, which we 
     understand will be considered by the full Senate this week. 
     We urge you to support amendments to the bill which would (1) 
     narrow the definition of class action to follow the Federal 
     Rules of Civil Procedure; (2) allow plaintiffs to carry state 
     statute of limitations laws with them in cases filed in state 
     court which are removed to federal court; and (3) provide an 
     exemption for classes comprised of state and local 
     governments. We also ask that you oppose this legislation if 
     the final version too closely resembles the current version 
     of S. 1260. Our most significant concerns are the following:
       The consequences for public pension funds and state and 
     local governments which are unable to recover losses in state 
     courts will be significant. If defrauded state or local 
     pension funds are barred from recovering from corporate 
     wrongdoers in state court (having already had many remedies 
     foreclosed in federal court), the state or local government 
     and its taxpayers may be required to make up losses in the 
     fund. Not only would this jeopardize general revenue, leading 
     to a likely loss of jobs and services to the public, but it 
     could also severely damage a jurisdiction's credit rating. 
     This could result in a higher cost of borrowing in the debt 
     market to fund capital and operating expenses.
       S. 1260 fails to reinstate liability for secondary 
     wrongdoers who aid and abet securities fraud. Despite two 
     opportunities to do so since the Supreme Court struck down 
     for private actions aiding and abetting liability for 
     wrongdoers who assist in perpetrating securities fraud, the 
     current version of S. 1260 does not reinstate such liability. 
     An amendment offered in the Banking Committee which would 
     have allowed defrauded investors to carry with their federal 
     claim the state law regarding aiding and abetting was 
     defeated.
       S. 1260 fails to reinstate more a reasonable statute of 
     limitations for defrauded investors to file a claim. As in 
     the case of aiding and abetting, Congress has now had two 
     opportunities to reinstate a longer, more reasonable statute 
     of limitations for defrauded investors to bring suit. Many 
     frauds are not discovered within this shortened time period, 
     but the Banking Committee again missed an opportunity to make 
     wronged investors whole by defeating an amendment that would 
     have allowed defrauded investors to carry with them in 
     federal suits the state statute of limitations.
       The definition of ``class action'' contained in S. 1260 is 
     overly broad. The definition of class action in S. 1260 would 
     allow single suits filed in the same or different state 
     courts to be rolled into a larger class action that was never 
     contemplated or desired by individual plaintiffs and have it 
     removed to federal court. Claims by the bill's proponents 
     that individual plaintiffs would still be able to bring suit 
     in federal court are belied by this provision.
       There have been few state securities class actions filed 
     since the Private Securities Litigation Act (PSLRA) passed. 
     Despite the claims of the bill's proponents, tracking by the 
     Price Waterhouse accounting firm shows that only 44 
     securities class actions were filed in state court for all of 
     1997, compared with 67 in 1994 and 52 in 1995. Most of these 
     cases were filed in California, indicating that, if there is 
     a problem in that state, it is one which should be dealt with 
     at the state level. Citizens of the other 49 states should 
     not be penalized as a result of a unique situation in a 
     single state.
       The PSLRA was opposed by state and local governments 
     because the legislation did not strike an appropriate 
     balance, and this legislation extends that mistake to state 
     courts. As both issuers of debt and investors of public 
     funds, state and local governments seek to not only reduce 
     frivolous lawsuits but to protect state and local government 
     investors who are defrauded in securities transactions. The 
     full impact of that statute on investor rights and remedies 
     remains unsettled because even now many parts of the PSLRA 
     have not been fully litigated; however, this untested law 
     would now be extended to state courts.
       The above organizations believe that states must be able to 
     protect state and local government funds and their taxpayers 
     and that S. 1260 inhibits these protections. We urge you to 
     oppose preemption efforts which interfere with the ability of 
     states to protect their public investors and to maintain 
     investor protections for both public investors and their 
     citizens.

  Mr. SARBANES. Why are these public officials concerned about this 
bill? Why are these associations that represent public officials all 
across our Nation concerned about this bill? Because these public 
officials invest taxpayers' funds and public employees' pension funds 
in securities. And they fear they will be left without remedies if they 
are defrauded.
  Testifying before the Senate Banking Committee, Mayor Harry Smith of 
Greenwood, MS, warned:

       The most potent protection investors have is the private 
     right of action. To remove that protection could have grave 
     consequences. We oppose taking such a risk. We oppose 
     preemption of traditional State and local rights created to 
     protect our citizens and taxpayers. This bill is inconsistent 
     with Congress' renewed commitment to the preservation of 
     federalism, and reduces protections for our retirees, 
     employees, and taxpayers.

  Over two dozen law professors, including such nationally recognized 
securities law experts as John Coffee, Jr., Joel Seligman and Marc 
Steinberg, expressed their opposition in a letter earlier this year. I 
ask unanimous consent that letter be printed in the Record.
  There being no objection, the letter was ordered to be printed in the 
Record, as follows:

                                                 January 23, 1998.
       Dear Senators and Members of Congress: We are professors of 
     securities regulation and corporate law at law schools 
     throughout the United States. Our teaching and scholarship 
     focus on the coexistent federal and state systems for the 
     regulation of securities, an extraordinary example of 
     cooperation between the public and private sectors that has 
     created for American businesses the largest capital market in 
     the world, and for investors one of the safest. As events 
     elsewhere in the world over the past few weeks so aptly 
     demonstrate, the stability and integrity of our capital 
     markets is one of our most important national 
     accomplishments.
       We are very concerned about legislation now pending in 
     Congress that would preempt private rights of action for 
     securities fraud in class actions brought under the statutes 
     and common law of all fifty states.\1\ This sweeping federal 
     preemption of state law is being proposed less than one year 
     after the National Securities Markets Improvement Act of 1996 
     preempted state ``merit review'' of most securities 
     offerings, and two years after the federal litigation system 
     itself was overhauled by the Private Securities Litigation 
     Reform Act of 1995 (the ``1995 Act''), which made it more 
     difficult for investors to recover for securities fraud in 
     federal court. Defendants in securities fraud suits now argue 
     that the 1995 Act contained a ``loophole'' because it did not 
     overturn Congress's decision in 1933 and 1934 to leave state 
     fraud remedies intact.\2\
---------------------------------------------------------------------------
     \2\ Footnoes at end of letter
---------------------------------------------------------------------------
       Arthur Levitt, the Chairman of the Securities and Exchange 
     Commission, however, has strongly urged Congress to wait 
     until more is known about the impact of the 1995 Act on 
     litigation in federal and state courts before considering 
     legislation preempting state rights of action.\3\ We also 
     believe that Congress should wait to ascertain the effects of 
     the 1995 Act, as well as the direction of state law, before 
     enacting any legislation that would undercut the longstanding 
     role that state law has had in protecting investors from 
     securities fraud. The complex relationship between federal 
     and state securities laws needs to be more fully understood 
     before investors are denied the protection of either body of 
     law.
       We therefore urge you and your colleagues at this time not 
     to support S. 1260, HR 1689, or any other legislation that 
     would deny investors their right to sue for securities fraud 
     under state law.
           Very truly yours,
         Ian Ayres, Yale University; Stephen M. Bainbridge, 
           University of California at Los Angeles; Douglas M. 
           Branson, University of Pittsburgh; William W. Bratton, 
           Rutgers University; John C. Coffee, Jr., Columbia 
           University; James D. Cox, Duke University; Charles M. 
           Elson, Stetson University; Merritt B. Fox, University 
           of Michigan; Tamar Frankel, Boston University; Theresa 
           A. Gabaldon, George Washington University; Nicholas L 
           Georgakopoulos, University of Connecticut; James J. 
           Hanks, Jr., Cornell Law School; Kimberly D. Krawiec, 
           University of Tulsa; Fred S. McChesney, Cornell Law 
           School; Lawrence E. Mitchell, George Washington, 
           University; Donna M. Nagy, University of Cincinnati; 
           Jennifer O'Hare, University of Missouri, Kansas City; 
           Richard W. Painter, University of Illinois; William H. 
           Painter, George Washington University; Margaret V. 
           Sachs, University of Georgia; Joel Seligman, University 
           of Arizona; D. Gordon Smith, Lewis and Clark; Marc I. 
           Steinberg, Southern Methodist University; Celia R. 
           Taylor, University of Denver; Robert B. Thompson, 
           Washington University; Manning G. Warren III, 
           University of Louisville; Cynthia A. Williams, 
           University of Illinois.

     \1\ See S. 1260, 105th Congress, 1st Sess. (1997) (the 
     Securities Litigation Uniform Standards Act of 1997) (the 
     ``Gramm-Dodd bill''); and HR 1689, 105th Congress, 1st Sess. 
     (1997) (the ``White-Eshoo bill'').
     \2\ See Section 16 of the 1933 Act, 15 U.S.C. Sec. 77p 
     (1996), and Section 28(a) of the 1934 Act, 15 U.S.C. 
     Sec. 78bb(a) (1996).
     \3\ Prepared Statement of Arthur Levitt, Chairman, U.S. 
     Securities and Exchange Commission Before the Senate 
     Committee on Banking, Housing and Urban Affairs Subcommittee 
     on Securities Concerning the Impact of the Private Securities 
     Litigation Reform Act of 1995, July 24, 1997.
  Mr. SARBANES. These distinguished law professors stated:

       We . . . believe that Congress should wait to ascertain the 
     effects of the 1995 Act, as well as the direction of state 
     law, before enacting any legislation that would undercut the 
     longstanding role that state law has had in protecting 
     investors from securities fraud.

  These distinguished academics oppose any legislation that would deny

[[Page S4785]]

investors their right to sue for securities fraud under State law.
  Similarly, the New York State Bar Association opposes this bill. A 
report prepared by the Bar Association Section on Commercial and 
Federal Litigation concluded: ``The existing data does not establish a 
need for the legislation,'' and, ``the proposed solution far exceeds 
any appropriate level of remedy for the perceived problem.''
  Let me repeat that quote from the report prepared by the New York 
State Bar Association Section on Commercial and Federal Litigation:

       The proposed solution far exceeds any appropriate level of 
     remedy for the perceived problem.

  The opposition goes on. As additional examples, I cite a March 30, 
1998, editorial from the National Law Journal entitled ``What's the 
Rush?'' This editorial concludes:

       The Senate should pause before it neutralizes State laws 
     that still stand as a bulwark protecting investors against 
     flimflam artists.

  Mr. President, I ask unanimous consent that this editorial from the 
National Law Journal entitled ``What's the Rush?'' and concluding by 
saying, ``The Senate should pause before it neutralizes State laws that 
still stand as a bulwark protecting investors against flimflam 
artists,'' be printed in the Record.
  There being no objection, the editorial was ordered to be printed in 
the Record, as follows:

             [From the National Law Journal, Mar. 30, 1998]

                            What's the Rush?

       You would expect Congress to think long and hard before 
     passing laws that foreclose the right of potential litigants 
     to bring their complaints in the courts. But Capitol Hill is 
     moving swiftly on legislation that would block investor class 
     actions in the state courts, though principles of federalism 
     are in themselves reasons for Congress to proceed with 
     caution.
       Bills to amend the Private Securities Litigation Reform Act 
     of 1995, which put strict limits on federal class actions, 
     have enormous support: The Senate bill, S. 1260, already has 
     30 sponsors, and a virtually identical bill in the House, 
     H.R. 1689, has 193 sponsors. The Senate Banking Committee is 
     expected to mark up the bill this month, and Senate Majority 
     Leader Trent Lott, R-Miss., has promised to bring the bill to 
     a floor vote before the Easter recess, which begins April 3.
       The Senate should slow down--and take a careful look at the 
     evidence. Lobbyists for the high-technology companies that 
     have been pushing for pre-emption claim that plaintiffs' 
     lawyers such as San Diego's William S. Lerach, of New York's 
     Milberg Weiss Bershad Hynes & Lerach L.L.P., are making an 
     ``end run'' around the federal law by bringing their lawsuits 
     in state court. But data collected by Price Waterhouse Inc., 
     a key supporter of pre-emption, show a steep drop in the 
     number of suits brought in state court: In 1996, 71 class 
     actions were filed; in 1997, the number dropped to 39.
       But this is more than a numbers story. The federal courts 
     have just begun to interpret the 1995 law, which passed after 
     rancorous debate in the House and Senate, and only after 
     Congress overrode a presidential veto. A ruling in one of the 
     first cases filed under the new law, a class action that Mr. 
     Lerach brought against Mountain View, Calif.'s Silicon 
     Graphics Inc., threatens to wipe out ``recklessness'' as a 
     sufficient standard of intent in securities fraud cases.
       The Securities and Exchange Commission is supporting Mr. 
     Lerach's appeal of this ruling to the 9th U.S. Circuit Court 
     of Appeals, but the court won't hear arguments until next 
     year. By then, Congress may have already blocked state court 
     suits, leaving plaintiffs in investor suits without a forum 
     to assert reckless conduct and, ergo, leaving corporate 
     wrongdoers free to behave irresponsibly.
       Other protections available in state court would also be 
     lost. In 33 states, the statutes of limitation on filing suit 
     are longer than the one-year federal limit. Liability for 
     ``aiding and abetting'' a securities fraud--which was 
     eliminated in federal court actions by a 1994 U.S. Supreme 
     Court ruling--also exists in most states.
       Before the Senate rushes to wipe out state fraud actions, 
     it should recall the words of Sen. Pete V. Domenici, R-N.M., 
     who co-sponsored the 1995 act. Addressing criticisms that the 
     new law would allow financiers like Lincoln Savings & Loan's 
     Charles V. Keating to escape liability, Senator Domenici 
     pointed out that Mr. Keating had been sued under many 
     provisions of state law--``laws untouched'' by his proposed 
     reforms.
       The Senate should pause before it neutralizes state laws 
     that still stand as a bulwark, protecting investors against 
     flimflam artists.

  Mr. SARBANES. Mr. President, I would like to point out also the 
opposition of the American Association of Retired Persons, the Consumer 
Federation of America, the AFL-CIO, the American Federation of State, 
County and Municipal Employees, and the United Mine Workers. I ask 
unanimous consent that letters from these groups expressing their 
opposition to this bill be printed in the Record.
  There being no objection, the letters were ordered to be printed in 
the Record, as follows:

                                                      AFL-CIO,

                                     Washington, DC, May 11, 1998.
       Dear Senator: Labor unions have an enormous stake in 
     protecting workers' hard-earned retirement savings from 
     securities fraud. Over $300 billion in union members' pension 
     assets are invested in the stock market. Thus, as 
     shareholders and investors, unions and employees count on the 
     protection of both state and federal laws and regulations to 
     protect their investments and to preserve the integrity of 
     the market. For this reason, the AFL-CIO urges you to oppose 
     S. 1260, the Securities Litigation Uniform Standards Act.
       State laws can and do provide even greater protection for 
     small investors than is provided by the federal securities 
     laws. Until now, it has been up to each state to decide 
     whether and how to offer enhanced antifraud protections to 
     its citizens.
       This well established, dual system of state and federal 
     protection is now threatened, however, S. 1260 preempts 
     investor-friendly state laws and substitutes the federal 
     Private Securities Litigation Reform Act (PSLRA), which would 
     significantly limit the liability of fraud defendants.
       In particular, the bill would hurt individual investors, 
     including workers and pensioners, by denying them the ability 
     to pursue effective redress through a class action. In 
     broadly held publicly traded companies, class action 
     litigation is the only economically feasible way in which 
     shareholders can bring security fraud claims. Generally, even 
     the largest institutional shareholders will not pursue a 
     valid claim individually, because their possible individual 
     benefit will not compensate for the costs incurred in 
     bringing such litigation. In light of the SEC's limited 
     resources, private class action litigation has always been 
     the primary means for both institutions and individual 
     shareholders to recoup losses from securities fraud and has 
     been a powerful deterrent to managerial impropriety.
       Tampering with the state's antifraud authority would place 
     at risk the retirement savings of tens of millions of 
     Americans. Aside from the obvious flaws, the proposed 
     legislation also disturbs the state/federal balance by 
     removing an important state role in the antifraud field 
     without any sound justification. The AFL-CIO asks you to 
     oppose this bill.
           Sincerely,

                                                 Peggy Taylor,

                                                         Director,
     Department of Legislation.
                                  ____

                                               Consumer Federation


                                                   of America,

                                          Washington, May 7, 1998.
       Dear Senator: It is our understanding that the Senate will 
     vote next week on S. 1260, ``The Securities Litigation 
     Uniform Standards Act of 1997.'' I am writing on behalf of 
     Consumer Federation of America to reiterate our strong 
     opposition to this anti-investor legislation and to urge you 
     to oppose it.
       Our opposition is based on a simple principle: Congress 
     should not extend federal standards to securities fraud class 
     action lawsuits being brought in state court until we know 
     whether those federal standards are preventing meritorious 
     cases from being brought or reducing victims' recoveries. 
     Caution is particularly warranted in this case since both the 
     Securities and Exchange Commission and the state securities 
     regulators opposed the Private Securities Litigation Reform 
     Act on the grounds that it would tip the balance too far in 
     favor of fraud defendants.
       The jury is still out on the PSLRA, since its major 
     provisions have yet to be defined in court and there has yet 
     to be a single recovery for investors under the 1995 law. It 
     would be nothing short of irresponsible, in our view, for 
     Congress to preempt state laws without first knowing the full 
     effects of the federal law on meritorious lawsuits.
       Supporters have made much of the fact that Securities and 
     Exchange Commission Arthur Levitt now supports S. 1260, 
     having announced his change of heart at his confirmation 
     hearing in April. It is important to understand that nothing 
     in the few cosmetic changes negotiated by Chairman Levitt 
     alters the fundamentally anti-investor nature of this bill.
       Furthermore, even as he made his unfortunate decision to 
     endorse the legislation, Chairman Levitt did not withdraw 
     earlier statements that the current federal law tilts the 
     balance too far in favor of securities fraud defendants. Nor 
     did he withdraw statements that this legislation is premature 
     based on the limited data now available. Most importantly, he 
     did not withdraw his assessment, expressed in October 
     testimony before the Senate Banking Committee ``. . . that 
     the bill would deprive investors of important protections, 
     such as aiding and abetting liability and longer statutes of 
     limitation, that are only available under state law'' and 
     that ``great care should be taken to safeguard the benefits 
     of our dual system of federal and state law, which has served 
     investors well for over 60 years.''

[[Page S4786]]

       During the Banking Committee's mark-up of the bill, 
     amendments were offered that would have allowed defrauded 
     investors to rely on longer statutes of limitations and 
     aiding and abetting liability where they were available in 
     state law and would have prevented state courts from 
     consolidating individual lawsuits brought against a common 
     defendant for the purposes of forcing the case into federal 
     court. While these amendments alone cannot alter the 
     fundamental flaws in this legislation, they would ameliorate 
     some of the bill's most onerous effects. CFA believes these 
     pro-investor changes are the minimum necessary to provide a 
     modicum of balance to the bill. Should similar amendments be 
     offered on the Senate floor, we urge you to support them.
       As you consider this legislation, keep in mind that just 
     under half of all American households now invest in the stock 
     market directly or through mutual funds. Their primary reason 
     for investing is to provide a decent standard of living for 
     themselves in retirement. When the current bull market comes 
     to its inevitable end, and the frauds that have been 
     perpetrated under its cover are exposed, investors who find 
     their retirement savings decimated by fraud should not be 
     left without any means of recovering those losses.
       Because it threatens to further restrict defrauded 
     investors' access to justice, CFA urges you to vote against 
     S. 1260.
           Respectfully submitted,
                                                    Barbara Roper,
                                  Director of Investor Protection.

  Mr. SARBANES. Mr. President, much will be made during the debate on 
this bill of the support it is asserted it enjoys from the Securities 
and Exchange Commission. But it seems to me that citing the support of 
the SEC tells only part of the story--only part of the story.
  First, SEC Commissioner Norman Johnson has written to express his 
opposition to the bill. His March 24, 1998, letter concludes:

       I believe that much more conclusive evidence than currently 
     exists should be required before state courthouse doors are 
     closed to small investors through the preclusion of state 
     class actions for securities fraud.

  I ask unanimous consent to have Commissioner Johnson's letter printed 
in the Record.
  There being no objection, the letter was ordered to be printed in the 
Record as follows:

                                                    Securities and


                                          Exchange Commission,

                                   Washington, DC, March 24, 1998.
     Hon. Alfonse M. D'Amato,
     Chairman, Committee on Banking, Housing and Urban Affairs, 
         U.S. Senate, Senate Hart Office Building, Washington, DC.

     Hon. Phil Gramm,
     Chairman, Subcommittee on Securities, U.S. Senate, Senate 
         Russell Office Building, Washington, DC.

     Hon. Christopher J. Dodd,
     Ranking Member, Subcommittee on Securities, U.S. Senate, 
         Senate Russell Office Building, Washington, DC.
       Dear Chairman D'Amato, Chairman Gramm, and Senator Dodd: It 
     is with regret that I find myself unable to join in the views 
     expressed by my esteemed colleagues in their letter of 
     today's date. For that reason I feel compelled to write 
     separately to express my own differing views.
       Consistent with the opinion the Commission and its staff 
     have repeatedly taken, I believe that there has been 
     inadequate time to determine the overall effects of the 
     Private Securities Litigation Reform Act of 1995, and that 
     the proponents of further litigation reform have not 
     demonstrated the need for preemption of state remedies or 
     causes of action at this time.
       In the last few years, we have experienced a sustained bull 
     market virtually unmatched at any time during this nation's 
     history. I therefore question the necessity of the 
     displacement of state law in favor of a single set of uniform 
     federal standards for securities class action litigation. The 
     Commission is the federal agency charged with protecting the 
     rights of investors. In my opinion, S. 1260, the Securities 
     Litigation Uniform Standards Act of 1997, does not promote 
     investors' rights. I share in the views of 27 of this 
     country's most respected securities and corporate law 
     scholars who have urged you and your colleagues not to 
     support S. 1260 or any other legislation that would deny 
     investors their right to sue for securities fraud under state 
     law.
       In addition, data amassed by the Commission's staff, 
     compiled in unbiased external studies, indicate that the 
     number of state securities class actions has declined during 
     the last year to pre-Reform Act levels. Indeed, a report by 
     the National Economic Research Associates concluded that the 
     number of state court filings in 1996 was ``transient.'' 
     Under these circumstances, S. 1260 seems premature at the 
     least.
       This country has a distinguished history of concurrent 
     federal and state securities regulation that dates back well 
     over 60 years. Given that history, as well as the strong 
     federalism concerns that S. 1260 raises, I believe that much 
     more conclusive evidence than currently exists should be 
     required before state courthouse doors are closed to small 
     investors through the preclusion of state class actions for 
     securities fraud.
           Sincerely,
                                                Norman S. Johnson,
                                                     Commissioner.

  Mr. SARBANES. Secondly, the SEC supports changes to the Federal 
antifraud standard to make it more protective of investors. In other 
words, if the SEC is going to be cited, as the proponents of this 
legislation have done, in support of their position, surely then they 
ought to pay attention to the SEC position which has been asserted 
seeking changes in the Federal antifraud standard to make it more 
protective. Let me give you a few examples.
  The SEC supports a longer statute of limitations so that fraud 
artists do not escape liability by successfully concealing their 
frauds. The SEC supports the restoration of liability for aiders and 
abetters of securities fraud so that those who give substantial 
assistance to fraud artists do not escape liability.
  The SEC supports codification of liability--codification of 
liability--for reckless conduct to ensure that professionals, such as 
accountants and underwriters, carry out their responsibilities under 
the Federal securities laws. In fact, Chairman Levitt reiterated his 
support for these provisions as recently as 6 weeks ago when he 
appeared before the Banking Committee for his renomination hearing. 
Nonetheless, these provisions are nowhere to be found in this bill.
  The supporters of this legislation argue the desirability of a 
uniform antifraud standard for securities traded on national securities 
exchanges, but they fail to address directly the question which we need 
to ask, whether the current Federal antifraud standard, as reflected by 
the 1995 act, deserves to be the uniform standard. Is the current 
antifraud standard, which they are now going to use to bring cases up 
from the State courts and deny investors the remedies under the State 
systems, is that standard adequate to protect investors?
  I voted against the 1995 act because I was concerned that it did not 
establish an appropriate standard. I was worried that it did not strike 
the proper balance between deterring frivolous securities suits and 
protecting investors who are victimized by securities fraud. None of us 
is in favor of frivolous securities suits, these so-called strike 
suits. But at the same time, I, for one, at least, do not want to go so 
far in trying to deal with that problem that I cease to protect 
investors who are victimized by securities fraud. There is a line in 
between, actually, I have asserted many times, I think, on which a 
consensus can be reached, but the legislation that keeps coming forward 
always overreaches--it overreaches--and therefore, I think, jeopardizes 
the protections that are available to investors who are innocent 
victims of securities frauds.
  A number of securities law experts warn that the safe harbor for 
forward-looking statements enacted by that act could protect fraud. In 
addition, the proportionate liability provisions leave innocent victims 
suffering a loss while shielding those who participate in securities 
fraud. Of course, the 1995 act omitted the statute of limitations in 
aiding and abetting provisions recommended by the SEC, still 
recommended by the SEC, and, of course, not included in this 
legislation.
  Since the reform act was enacted, another concern has developed. Some 
district courts have relied on the legislative history of that act in 
concluding that the act's pleading standards eliminated liability for 
reckless conduct. Imagine, eliminating liability for reckless conduct.
  If that view prevails in the circuit courts, and if the Congress 
preempts, as this legislation proposes to do, causes of action under 
State laws, investors will be left with no remedies--I underscore that, 
with no remedies--against those whose reckless conduct makes a 
securities fraud possible.
  It is for these reasons that the associations and various 
commentators I have cited are opposing this bill. They oppose this bill 
both because of its overly broad reach--clearly because of its overly 
broad reach--and because its sponsors fail to take this opportunity to 
correct the flaws of the earlier legislation. If the sponsors are going 
to eliminate recourse in the State courts, it becomes even more 
incumbent upon them to correct the Federal standard with respect to the 
shortcomings which

[[Page S4787]]

have been identified in it and continue to be identified by the 
Securities and Exchange Commission.
  Mr. BRYAN. Will the Senator yield for a question?
  Mr. SARBANES. I yield to my colleague.
  Mr. BRYAN. The question I have is with reference to the Senator's 
observation about standard for reckless misconduct.
  As I understand, we have actual knowledge, we can have simple or 
ordinary negligence, we can have gross negligence, and then we can have 
a standard of reckless conduct which is an utter disregard of the 
facts. Is the Senator saying that the legislation that we are 
processing today does not clarify in the findings of this committee 
that we want to reaffirm that reckless misconduct ought to be a cause 
of action for those who are defrauded by investors?
  Mr. SARBANES. I say to my colleague, as I understand it, this is what 
transpired. The 1995 act was being interpreted at the district court 
level, the Federal district court level--the legislative history of 
it--that the act's pleading standards eliminated liability for reckless 
conduct.
  Now, the SEC has come to us and said we should codify a reckless 
conduct right of action into the Federal standard. The legislation 
before us does not have such a codification.
  Now, there is language in the report, but we do not have a 
codification. So you have the problem about the legislative history for 
the 1998 act. And it is not quite clear to me how it will supplant the 
legislative history for the 1995 act. A codification would do that but 
that is not in this bill.
  Mr. BRYAN. We are talking about, if I understand, conduct that is 
more egregious even than gross negligence. We are talking about an 
utter disregard of the facts and the consequences that flow from that?
  Mr. SARBANES. That is right. If you want to talk about where you put 
the balance, how in the world would you drive the balance so far over 
that an investor who was the victim of reckless conduct would not have 
a remedy? It just defies any equitable striking of the balances with 
respect to, quote, ``frivolous'' lawsuits on the one hand, and investor 
protection on the other.
  Mr. BRYAN. So if I understand the Senator's position, if S. 1260 is 
passed, we preempt State class actions so that small investors would 
not have the advantage of a longer statute of limitations that a number 
of States--I believe 33 out of the 50--provide to investors suing at 
the State level class actions.
  We would deprive the small investor of his or her opportunity to go 
against the accomplices, the lawyers, the accountants, and others who 
conspired with the primary perpetrator of fraud. That protection is 
taken away. And we also eliminate the ability to move and to obtain a 
joint and several liability judgment against those offenders. They are 
all things which I understand currently exist to the benefit of small 
investors as class actions at the State level in most States, if I am 
not mistaken.
  Mr. SARBANES. The Senator is correct. Currently, what happened is we 
set a Federal standard in the 1995 act in the Federal courts. That 
still left to an investor the option of going into a State court to 
seek remedy.
  Now the proponents of this bill said, ``Well, everyone who is going 
into Federal court bringing the so-called frivolous suits are now going 
to migrate into the State courts.'' The numbers show that has not 
happened. You have a little increase in 1996. The numbers came back 
down in 1997. The projected numbers are down. So you do not have that 
flood of litigation into the State courts, and yet investors had 
available to them State court remedies.
  Well, now what they are going to do is they are going to preempt the 
ability to bring the action in the State courts. Well, then, the 
proponents will say, ``Well, we are just preempting it for these class 
actions. If you are an individual investor and you want to hire your 
lawyer, you will still be able to go into State court.'' But they 
define a class action in this bill in such a way, so broadly that it 
will sweep up individual investors who are really not part of a class-
action suit.
  Those individual investors will then discover--I mean, what is going 
to happen here, my prediction on this is that what is going to come 
before the Congress down the road, if this legislation passes, is small 
investors showing up in the Congress and saying, ``This happened to me. 
And now I discover, because of the legislation which you all enacted, I 
can't get any remedy. And this isn't right.'' And Members are going to 
be looking at that, and they are going to say it is not right.
  That is why we are urging Members to pause and take a careful look at 
this before they put it into law. You can have a situation in which an 
individual investor goes in under State law within the statute of 
limitations. Often you do not discover these things. They are 
concealed. That is what fraud is all about. So he is within the statute 
of limitations. Other investors do the same thing.
  So let us say it is New York or California or Illinois, and a whole 
wide group of people have been defrauded by some fraud artist. Well, if 
50 of them come in and bring some kind of suit against this artist, 
they can be swept up into a class action, removed into the Federal 
court. They will go over to the Federal court, and then they say to 
them, ``Well, our statute of limitations is shorter than your State 
statute of limitations under which you filed this action,'' which was 
timely filed in the State court.
  They acted on their rights within the time limitation of the State 
court. They had no idea they were going to get swept up the way this 
bill permits. And so all of a sudden they are over in Federal court, 
and they say to them ``It's too bad. The statute of limitations has 
run. And you don't have an action. You don't have a cause of action.'' 
You are shut out of the courthouse.
  Now, where is the fairness in that? I defy anyone to show me the 
fairness in that process.
  Mr. BRYAN. Is the Senator also suggesting that a remedy available at 
the State court level against an accomplice, whether it be a lawyer or 
an accountant, that would be available to the investor under State law, 
if removed under the process of the Federal court, which the Senator 
has just described, would preclude that small investor from a recovery 
against an accomplice who had participated in the fraud that resulted 
in the investor's loss?
  Mr. SARBANES. The Senator is exactly on point. That is exactly what 
would happen, which would be exactly what would be permitted to take 
place under this legislation.
  When the 1995 bill was passed, people said, ``Well, we are defining 
this Federal standard. People can still go into the State court, the 
individual investor, and get a remedy.''
  Now they come along and they say, ``Well, we're going to preempt the 
State courts in quote, `class actions,''' but then they define class 
actions so broadly that it will sweep up individual investors. It can 
sweep up people who are not bringing what we traditionally recognize 
and know as a class action.
  So it is once again an example of overreaching, as this mayor 
indicated from Greenwood, MS, that removing these protections would 
have grave consequences. This thing goes beyond anything that is 
required to deal with--the New York State Bar Association quote, I 
think, is the best on this very point when they said, ``The proposed 
solution far exceeds any appropriate level of remedy for the perceived 
problem.''
  I am saying to the opponents, look, let us examine what you assert as 
the problem. And we will hear examples of a problem that will be cited. 
Most of those examples, I am sure I would think something needs to be 
done about them. But the solution, the proposed solution here will far 
exceed the examples. What is going to happen is eventually--and that is 
why I think these people are opposing this legislation I have cited.
  I think Senators need to be cautious. This, in effect, is an 
investor's beware legislation--investors beware. I think in the future 
we are going to be petitioned or importuned in the Congress to correct 
this overreaching because innocent people will have been denied their 
remedy against fraud artists who have cheated them out of their life 
savings.
  Let me just note that we are at a time of record high in our Nation's

[[Page S4788]]

stock market. The current bull market is the longest in history. Stocks 
are trading at a price-earnings ratio that exceed even those reported 
in the 1920s. The level of participation in the stock market by 
America's families is also at a record level, both directly through 
ownership of stocks and indirectly through pension funds and mutual 
funds. History suggests that at some point the bull market will end, 
and history also suggests that when that occurs is when securities 
fraud will be exposed. You don't get that much exposure in a rising 
market.

  Should this bill be enacted, at that time many investors will find 
their State court remedies eliminated. In too many cases investors will 
be left without any effective remedies at all. Such a result can only 
harm innocent investors, undermine public confidence in the securities 
market, and ultimately raise the cost of capital for deserving American 
businesses.
  I urge my colleagues to think long and hard about this legislation, 
to be very careful about it. It far exceeds what needs to be done in 
terms of addressing any perceived problem. I think we need to be 
extremely sensitive to it.
  I expect a number of amendments to be offered to this bill as we 
proceed with its consideration. I look forward to discussing those at 
the appropriate time as we seek to correct what I think are some of the 
more obvious and egregious flaws in this legislation.
  I yield the floor.
  The PRESIDING OFFICER (Ms. Collins). The Senator from Connecticut is 
recognized.
  Mr. DODD. Madam President, let me begin by thanking my chairman of 
the committee, Senator D'Amato, and Senator Gramm with whom I authored 
this particular proposal.
  Senator Domenici has been very involved in this issue, going back a 
number of years when the issue first arose, trying to deal with this 
sinister practice going on of strike lawsuits and predator law firms. I 
will share briefly some news out this morning as to how the law firms 
that we are trying to deal with operate, where the issue of fraudulent 
behavior is hardly their motivation; it has to do with simple stock 
fluctuation. Some Internet activity today will highlight that in 
categorical terms, as early as about 4 or 5 hours ago. This is a 
pervasive problem that needs to be addressed.
  We passed this bill out of our committee 14-4 on a strong bipartisan 
vote. The bill is endorsed by the Securities and Exchange Commission, 
supported by this administration, the Clinton administration. We will 
be happy to entertain the amendments as they are offered that come up 
that were raised in committee. We had hearings on this matter--not a 
lengthy markup, but an extensive markup--with an opportunity to vote a 
lot of the issues.
  I will pick up on some of the concluding comments and remarks of my 
two colleagues from Maryland and Nevada with regard to the recklessness 
standard. We received a letter of endorsement and support from the 
Securities and Exchange Commission, signed by Chairman Arthur Levitt, 
Isaac Hunt, and Laura Unger, March 24. This letter, I believe, has been 
introduced in the Record by Chairman D'Amato, but I am, at this 
juncture, going to highlight two paragraphs of this letter because they 
go right to the heart of what was raised a few moments ago when it 
comes to the recklessness standard. I will address this more directly 
in my remarks. Let me quote two paragraphs in this letter.

       As you know, when the Commission testified before the 
     Securities Subcommittee of the Senate Banking Committee in 
     October 1997, we identified several concerns about S. 1260. 
     In particular, we stated that a uniform standard for 
     securities fraud class actions that did not permit investors 
     to cover losses attributable to reckless misconduct would 
     jeopardize the integrity of the securities markets. In light 
     of this profound concern, we are gratified by the language in 
     your letter of today agreeing to restate in S. 1260's 
     legislative history, and in the expected debate on the Senate 
     floor, that the Private Securities Litigation Reform Act of 
     1995 did not, and was not intended to, alter the well-
     recognized and critically important scienter standard.

  Jumping down another paragraph,

       The ongoing dialog between our staffs has 
     been constructive. The result of this dialog, we believe, 
     is an improved bill with legislative history that makes 
     clear, by reference to the legislative debate in 1995, 
     that Congress did not alter in any way the recklessness 
     standard when it enacted the Reform Act.

  Then it goes on to complete the paragraph.
  I don't know if anything can be more clear in this letter. Certainly 
the intent, stated in committee, stated on the floor previously, stated 
in this letter, and we stated again here on the floor today as to what 
the intentions were of those of us who crafted this legislation when it 
comes to ``recklessness.''
  Now I agree. I mentioned earlier, some courts, a few district courts, 
have read otherwise. That happens. But we will try to make it clear 
that was aberrational behavior, erroneous behavior, in my view, rather 
than what we intended.
  I see my colleague from New York is rising.
  Mr. D'AMATO. If the Senator will yield for a question, is it not 
true, if we were to set aside this legislation and not go forward, 
there might be a question and that, indeed, what both the White House 
and the SEC are saying, as a result of our coming forward, we may be 
eliminating that question, that ambiguity, by moving forward in the way 
that we proposed in this legislation?
  Mr. DODD. I think the chairman of committee raises an excellent 
point, that in fact our legislative history included with S. 1260, the 
debate we have had, makes it quite clear what the intent of the 
committee was in 1995, what the intent of the committee in this 
legislation is today.
  In the absence of that, I think you might have courts ruling 
otherwise, even though we may have not drawn that conclusion in the 
earlier legislation.
  Mr. SARBANES. Will the Senator yield?
  Mr. DODD. I will make my comments, and then I will be glad to yield 
for a debate, but I want to finish my opening statement.
  Mr. SARBANES. Would the Senator have any objection to codifying this 
standard?
  Mr. DODD. I will do that in my remarks.
  There is a very difficult problem codifying the standard on 
recklessness. Congress has wrestled with this over the years. We were 
not the first committee to try. We thought leaving the standard as it 
has been in the courts, making sure we are not trying to make any 
change to that standard here, any way other than what has been an 
accepted standard, was a better way to proceed, based on the advice we 
received.
  We certainly did not change that standard, as has been the 
suggestion, either with this act or the act of 1995 despite the fact 
that some courts may have read it otherwise. I can't preclude a court 
from misinterpreting the decisions of a Congress.
  But the recklessness standard has been a good standard over the years 
and ought not to be tampered with, in my opinion.
  Mr. BRYAN. Will the Senator yield? I don't want to interrupt his 
presentation. I am always happy to wait, but we are talking of the 
reckless standard.
  If I might inquire of the Senator, the SEC, as I understand it, has 
sent over a definition of ``reckless.'' If that could be included in 
the findings of fact as opposed to the report language, I think it 
would strengthen what we all seek to do, and that is to retain the 
reckless standard, which I know is the objective of the Senator from 
Connecticut.
  As the Senator knows far better than I, report language is fairly 
thin gruel compared to the findings of fact which are included or other 
issues which the sponsors of the legislation--I wonder if the Senator 
would consider including that definition.
  Mr. DODD. The problem has been, as you start trying to codify, we--I 
will take a look at what the Senator has. I haven't seen it.
  The suggestion has been made--what I was trying to respond to, prior 
to rising here, was that the suggestion was made that somehow this 
piece of legislation and '95 Act had undone the standard of 
recklessness that had been used.

  We made it quite clear--at least I thought we did--in 1995 that we 
were not altering the standard. Certainly the SEC believes that was 
what we intend. This legislative history and this debate on today's 
bill makes it clear it

[[Page S4789]]

was not the intent. What I objected to was the suggestion that somehow 
we had changed the scienter standard. We had not done that. And the 
letter from the three members of the Securities and Exchange 
Commission, I think, reinforces the point--not whether or not you add 
something in the statement of facts or whether or not you have it in 
the legislative history where I believe it is most appropriate--about 
addressing the underlying concern and issue. And that is whether or not 
this legislation in any way, or the 1995 Reform Act in any way, tried 
to fool around with the standard of recklessness. We didn't then, and 
we aren't now.
  So what I am saying here today, what the chairman of the committee 
has said, and others, this is raising a red herring. It doesn't exist. 
It is difficult enough to debate where there is a legitimate 
disagreement, and there will be amendments offered where clearly there 
are provisions in the bill which my colleagues, including my 
distinguished friend from Nevada, disagree with. It is a fundamental 
difference here. Recklessness, as a matter of this legislation, is not 
a problem. It is trying to raise an issue that really does not exist. 
That is the reason I felt I should address that issue prior to making 
my general comments and statements about what I think is a valuable 
piece of legislation.
  Now, Madam President, let me, if I may, proceed here. It has been 
said, in the sense that we get the pendulum swings and the proposals 
are offered, in a sense, this is a very narrow bill. It is not designed 
to be all-encompassing and all-sweeping, yet it is being received by 
certain quarters as if it were a wide, sweeping piece of legislation. 
It is dealing with an underlying problem that still exists. The facts 
bear out the necessity of us trying to move with nationally traded 
securities on the national exchanges to see to it that we can set some 
standards here so we don't continue to end up with a proliferation of 
lawsuits chasing forums all over this country to satisfy a trial bar at 
the expense of jobs, investors in these companies out there. That is 
what has been happening. That is what we try to address with this bill.

  At the beginning of the debate today on S. 1260, the securities 
litigation reform standards, marks, in a sense, an anniversary, Madam 
President. It was almost 3 years ago that we took the floor of this 
body, many of my colleagues, in support of the Private Securities 
Litigation Reform Act of 1995. That bill, overwhelmingly enacted into 
law by Congress, was designed to curb abuses in the field of private 
securities class action lawsuits.
  Let me pause, if I can, to note just how important the private 
litigation system has been in maintaining integrity of our capital 
markets. It is highly questionable whether our markets would be as 
deep, as liquid, as strong, or as transparent were it not for our 
system of maintaining private rights of action against those who commit 
fraud. America's markets are the envy of the world because of the 
tremendous confidence that American and foreign investors have in the 
regulatory system that supports those markets.
  But it is precisely because of the vital importance of the private 
litigation system that the depths to which it had sunk by 1995 had 
become so damaging. The system was no longer an avenue for aggrieved 
investors to seek justice and restitution, but it had become, instead, 
a pathway for a few enterprising attorneys to manipulate its procedures 
for their own considerable profit, to the detriment of legitimate 
companies and investors all across our Nation.
  If we needed a reminder about how abusive that system had become, we 
received yet another example of it last week, with the conclusion of 
one of the last lawsuits filed under that old system. This litigation 
against a Massachusetts biotech company called Biogen, lasted more than 
3 years, cost that company, in direct litigation expenses alone, more 
than $3 million.
  But even more than the direct costs, the lawsuit enacted an untold 
loss on the company because of the time and resources devoted by its 
top management and their scientists to defending themselves.
  The conclusion to this litigation on May 6 came in swift contrast to 
the lengthy and expensive lawsuit itself, as reported by Reuters:

       A Federal jury has ruled as baseless a class-action 
     shareholder lawsuit accusing Biogen, Inc. and its chairman of 
     misleading investors . . . The 10-member jury took less than 
     three hours to reach their verdict. . . .

  So this week's debate marks not only the opening of Congress' effort 
to establish strong national standards of liability for nationally-
traded securities, but also allows us to mark the close of an era in 
securities litigation that perversely offered more comfort to those 
filing abusive and frivolous lawsuits than it offered to redress to 
those who had been legitimately defrauded.
  But the very success of the 1995 reform act in shutting down avenues 
of abuse on the Federal level has created a new home for such kinds of 
litigation in State courts.
  Throughout 1996, the first year of the reform act, reports were 
coming to Congress that there was a dramatic increase in the number of 
cases filed in State courts. Prior to enactment of the '95 reform act, 
it was extremely unusual, extremely unusual, for a securities fraud 
class action case to be brought in a State court anywhere in this 
country.
  But by the end of 1996, it had become clear from both the number of 
cases filed in State court, and the nature of those claims, that a 
significant shift was underfoot, as some attorneys sought to evade the 
provisions of the reform act that made it more difficult to coerce a 
settlement, which was what was going on.
  John Olson, the noted securities law expert, testified in February 
before the subcommittee on securities that:

       In the years 1992 through 1994, only six issuers of 
     publicly traded securities were sued for fraud in State court 
     class actions. In contrast, at least 77 publicly traded 
     issuers were sued in State court class actions between 
     January 1, 1996, and June 30, 1997. Indeed, the increase 
     in State court filings may even be greater than indicated 
     by these dramatic statistics. Obtaining an accurate count 
     of State court class actions is extraordinarily difficult, 
     because there is no central repository of such data and 
     plaintiffs are under no obligation to provide notice of 
     the filing of such suits.

  In April, 1997, the Securities and Exchange Commission staff reported 
to the Congress, and the President found that:

       Many of the State cases are filed parallel to a Federal 
     court case in an apparent attempt to avoid some of the 
     procedures imposed by the reform act, particularly the stay 
     of discovery pending a motion to dismiss. This may be the 
     most significant development in securities litigation post-
     reform act.

  Even though the number of State class actions filed in 1997 was down 
from the high of 1996, it was still 50 percent higher than the average 
number filed in the 5 years prior to the reform act, and it represented 
a significant jump in the number of parallel cases filed.
  So there was a significant increase. It did drop in 1997. But if you 
are going to use the bar of when the reform act was passed, it was 
still substantially higher. It was a rare occasion indeed when people 
ran to State courts. We didn't think we would need this bill. We 
honestly thought that dealing with this problem at the Federal level 
would work. That is where the cases were brought. Why are we here 
today? We are here because these enterprising attorneys, as the 
chairman of the committee pointed out--many without clients, by the 
way--discovered that if they ran into a State court here, they could 
avoid the legislation that we adopted and passed so overwhelmingly here 
in 1995. But there are other reasons as well. It isn't just an increase 
in the caseload. That would not, in my view, necessarily warrant moving 
today. There are other issues.
  This change in the number and nature of the cases filed has had two 
measurable, negative impacts that I think our colleagues ought to take 
very good note of.
  First, for those companies hit with potentially frivolous or abusive 
State court class actions, all of the cost and expense that the '95 
reform act sought to prevent are once again incurred. So, in effect, we 
did nothing. Today, all of that cost and discovery, and so forth, 
before a motion to dismiss could be filed--today you have to go do it 
all over again. It is as if the `95 act were never passed. That is what 
happened here.
  Some might question whether a State class action can carry with it 
the same type of incentives to settle even

[[Page S4790]]

frivolous lawsuits that existed on the Federal level prior to 1995.
  Allow me to provide one example of how this is so. Adobe Systems, 
Inc. wrote to the Banking Committee on April 23, 1998, this year, about 
its experience with State class action lawsuits.
  One of the key components of the 1995 reform act was to allow judges 
to rule on a motion to dismiss prior to the commencement of the 
discovery process. This is not precedent-setting procedure. That is 
normally, in many cases, how you deal with it, a motion to dismiss 
coming up early. Under the old system, Adobe had won a motion for 
summary dismissal, but only after months of discovery by the plaintiffs 
that cost the company more than $2 million in legal expenses and untold 
time and energy by officials to produce the tens of thousands of 
documents and numerous depositions.
  With the 1995 act in place, those kinds of expenses are far less 
likely to occur at the Federal level.
  But in an ongoing securities class action suit filed in California 
state court since 1995, Adobe has had to spend more than $1 million in 
legal expenses and has had to produce more than 44,000 pages of 
documents, all before the state judge is even able to entertain a 
motion for summary dismissal.
  In fact, in an April 23rd, letter to Chairman D'Amato, Colleen 
Pouliot, Adobe's General Counsel, noted that:

       There are a number of California judicial decisions which 
     permit a plaintiff to obtain discovery for the very purpose 
     of amending a complaint to cure its legal insufficiencies.

  This one example makes clear that while Adobe, which has the 
resources for a costly and lengthy legal battle, might fight a 
meritless suit, these costs provide a powerful incentive for most 
companies without that kind of wherewithal to settle these suits rather 
than incur such expenses.
  The second clear impact of the migration of class action suits to 
state court is that it has caused companies to continue to avoid using 
the safe harbor for forward looking statements that was a critical 
component of the `95 reform act.
  In this increasingly competitive market, investors are demanding more 
and more information from company officials about where it thinks that 
the company is going, and what is likely to happen.
  In fact, today we have more investors in our markets than ever 
before. People want more information. The safe harbor provisions which 
we crafted were designed to encourage companies to step forward and to 
tell us where they were going. Clearly, there can be some who decide it 
would be deceitful. In no way do we try to protect anybody who is lying 
or cheating in the process. We are trying to encourage companies to 
tell us more about where they are going so those investors can make 
good decisions. But what has happened as a result of this rush to State 
courts is that the very companies that said they need the safe harbor 
provisions are not writing the safe harbor provisions because they know 
they don't have the same protection in State court, which is where 
these cases are running.
  So after all the encouragement of the 1995 act to have the safe 
harbor, companies haven't been putting it in. So investors out there 
trying to make decisions of where to put their hard-earned dollars 
don't have the benefit of that safe harbor language, which may give 
them a better idea in which companies to make those investments.
  The California Public Employees Pension System, one of the biggest 
institutional investors in the Nation stated that ``forward-looking 
statements provide extremely valuable and relevant information to 
investors.''
  SEC Chairman Arthur Levitt also noted the importance of such 
information in the marketplace in 1995:

       Our capital markets are built on the foundation of full and 
     fair disclosure. . . . The more investors know and understand 
     management's future plans and views, the sounder the 
     valuation is of the company's securities and the more 
     efficient the capital allocation process.

  In recent years, the Securities and Exchange Commission, in 
recognition of this fact, sought to find ways to encourage companies to 
put such forward-looking statements into the marketplace. Congress too 
sought to encourage this and this effort ultimately culminated in the 
creation of a statutory safe harbor, so that companies need not fear a 
lawsuit if they did not meet their good-faith projections about future 
performance.
  Unfortunately, the simple fact is that the fear of State court 
litigation is preventing companies from effectively using the safe 
harbor.
  Again, the SEC's April 1997 study found that ``companies have been 
reluctant to provide significantly more forward looking disclosure than 
they had prior to enactment of the safe harbor.'' (p. 24); the report 
went on to cite the fear of State court litigation as one of the 
principal reasons for this failure.
  Stanford Law School lecturer Michael Perino stated the case very well 
in a forthcoming law review article:

       If one or more states do not have similar safe harbors, 
     then issuers face potential state court lawsuits and 
     liability for actions that do not violate federal standards. 
     . . . for disclosures that are . . . released to market 
     participants nationwide, the state with the most plaintiff-
     favorable rules for forward looking disclosures, rather than 
     the Federal Government, is likely to set the standard to 
     which corporations will conform.

  If the migration of cases to state court were just a temporary 
phenomenon, then perhaps it would be appropriate for Congress to tell 
these companies and their millions of investors to simply grin and bear 
it, that it will all be over soon.
  But the SEC report contains the warning that this is no temporary 
trend: ``If state law provides advantages to plaintiffs in a particular 
case, it is reasonable to expect that plaintiffs' counsel will file 
suit in state court.'' The plain English translation of that is that 
any plaintiffs' lawyer worth his salt is going to file in state court 
if he feels it advantageous for his case; since most state courts do 
not provide the stay of discovery or a safe harbor, we're confronted 
with a likelihood of continued state court class actions.
  While the frustration of the objectives of the 1995 Reform Act 
provide compelling reasons for congressional action, it is equally 
important to consider whether the proposition of creating a national 
standard of liability for nationally-traded securities makes sense in 
it's own right.
  I certainly believe it does.
  In 1996, Congress passed the ``National Securities Markets 
Improvement Act'' which established a precedent of national treatment 
for securities that are nationally-traded.
  In that act, Congress clearly and explicitly recognized that our 
securities markets were national in scope and that requiring that the 
securities that trade on those national markets comply with 52 separate 
jurisdictional requirements both afforded little extra protection to 
investors and imposed unnecessarily steep costs on raising capital.
  Last July, then-Securities Commissioner Steven Wallman submitted 
testimony to the Securities Subcommittee in which he said:

       Disparate, and shifting, state litigation procedures may 
     expose issuers to the potential for significant liability 
     that cannot be easily evaluated in advance, or assessed when 
     a statement is made. At a time when we are increasingly 
     experiencing and encouraging national and international 
     securities offerings and listing, and expending great effort 
     to rationalize and streamline our securities markets, this 
     fragmentation of investor remedies potentially imposes costs 
     that outweigh the benefits. Rather than permit or foster 
     fragmentation of our national system of securities 
     litigation, we should give due consideration to the 
     benefits flowing to investors from a uniform national 
     approach.

  That is what we are trying to do with this bill.
  At that same hearing, Keith Paul Bishop, then-California's top state 
securities regulator testified along the same lines that:

       California believes in the federal system and the primary 
     role of the states within that system. However, California 
     does not believe that federal standards are improper when 
     dealing with truly national markets. California businesses, 
     their stockholders and their employees are all hurt by 
     inordinate burdens on national markets. Our businesses must 
     compete in a world market and they will be disadvantaged if 
     they must continue to contend with 51 or more litigation 
     standards.

  SEC Chairman Arthur Levitt, at his reconfirmation hearing before the 
Banking Committee on March 26, 1998, said that the legislation we are 
debating today:

       Addresses an issue that . . . deals with a certain level of 
     irrationality. That to have to two separate standards is not 
     unlike if you

[[Page S4791]]

     had, in the state of Virginia, two speed limits, one for 60 
     miles an hour and one for 40 miles an hour. I think the havoc 
     that would create with drivers is not dissimilar from the 
     kind of disruption created by two separate standards [of 
     litigation] and I have long felt that in some areas a single 
     standard is desirable.

which is all we are trying to do here with this bill, to set one speed 
limit, if you will, on a national debate on trading securities and on 
markets. That is all, one speed limit, not two, to live up to the fact 
of what we tried to do with the 1995 bill.
  The message from all of these sources is clear and unequivocal: A 
uniform, national standard of litigation is both sensible and 
appropriate.
  The legislation under consideration today accomplishes that goal in 
the narrowest, most balanced way possible.
  Before I discuss what the legislation will do, let me point out a few 
things that it won't do:
  It will not affect the ability of any state agency to bring any kind 
of enforcement action against any player in the securities markets;
  It will not affect the ability of any individual, or even a small 
group of individuals, to bring a suit in state court against any 
security, nationally traded or not;
  It will not affect any suit, class action or otherwise, against penny 
stocks or any stock that is not traded on a national exchange.
  It will not affect any suits based upon corporate disclosure to 
existing shareholders required by state fiduciary duty laws;
  And it will not alter the national scienter requirement to prevent 
shareholders from bringing suits against issuers or others who act 
recklessly.
  There has been a lot of talk about this last point, so let me address 
it head-on.
  It is true that in 1995, Congress wrestled with the idea of trying to 
establish a uniform definition of recklessness; but ultimately, the 
1995 Private Securities Litigation Reform Act was silent on the 
question of recklessness. While the act requires that plaintiffs plead 
``Facts giving rise to a strong inference that the defendant acted with 
the requisite state of mind . . .''
  The act at no point attempts to define that state of mind. Congress 
left that to courts to apply, just as they had been applying their 
definition of state of mind prior to 1995.
  Unfortunately, a minority of district courts have tried to read into 
some of the legislative history of the reform act an intent to do away 
with recklessness as an actionable standard.
  I believe that these decisions are erroneous and cannot be supported 
by either the black letter of the statute nor by any meaningful 
examination of the legislative history.
  There are several definitions of recklessness that operate in our 
courts today, and some of them are looser than others. But I agree with 
those who believe that reckless behavior is an extreme departure from 
the standards of ordinary care; a departure that is so blatant that the 
danger it presents to investors is either known to the defendant or is 
so obvious that he or she must have been aware of it.

  The notion that Congress would condone such behavior by closing off 
private lawsuits against those who fall within that definition is just 
ludicrous.
  And if, by some process of mischance and misunderstanding, investors 
lost their ability to bring suits based on that kind of scienter 
standard, I would be the first, though certainly not the last, Senator 
to introduce legislation to restore that standard.
  As I mentioned a moment ago, Mr. President, S.1260 is a moderate, 
balanced and common sense approach to establishing a uniform national 
standard of litigation that will end the practice of meritless class 
action suits being brought in state court.
  This legislation keeps a very tight definition of class action and 
applies it's standards only to those securities that have been 
previously defined in law as trading on a national exchange.
  That is why the Securities and Exchange Commission has stated that 
``We support enactment of S. 1260;'' That is why the Clinton 
administration has also indicated it's support for the legislation.
  In the final analysis, it is both the millions of Americans who have 
invested their hard-earned dollars in these nationally-traded companies 
and the men and women who will hold the new jobs that will be created 
as a result of newly available resources, whom we hope will be the real 
beneficiaries of the action that we take here today.
  I strongly urge my colleagues to join the Securities and Exchange 
Commission, dozens of our colleagues, the Clinton administration, 
dozens of governors, state legislators and state securities regulators 
in supporting passage of the Securities Litigation Uniform Standards 
Act of 1998.
  Madam President, I see my colleague.
  How much time remains?
  The PRESIDING OFFICER. The Senator from New York controls the time. 
There are 10 minutes 30 seconds remaining.
  Mr. D'AMATO. I wonder if I might ask my friend and colleague. I know 
we are going to have some extended debate with some of the amendments. 
Senator Gramm, who has worked with the Senator from Connecticut, would 
like to be heard, and Senator Feingold has been waiting. He has an 
amendment that I believe is a very substantive amendment, and is one 
that might take hours to debate. But I believe we can dispose of it in 
a relatively short period of time if we were to permit the Senator to 
proceed.

  Mr. DODD. I didn't realize how much time had already gone on. My 
colleague from Texas is chairman of the Securities Subcommittee and the 
principal author of the bill, of which I am proud to be a cosponsor.
  While he is in the Chamber, let me commend and congratulate my 
colleague from Texas on this issue. This is a strong bipartisan bill, 
14 to 4, coming out of this committee. It took a long time to go 
through all of this. We have had extensive hearings on it. We have 
listened to an awful lot of people. This is a good piece of 
legislation. It is needed out there, if we are going to in this day and 
age, with so many people wanting to get into this market, get more 
information to them, having a single standard here. Jobs and investors 
are affected when you have a handful of attorneys out there deciding 
they are going to act in a way that really brings great danger to our 
markets. And so I urge adoption of the legislation.
  I yield the floor at this point.
  Mr. D'AMATO. Madam President, I yield up to 3 minutes to the Senator 
from Texas and ask unanimous consent that Senator Feingold from 
Wisconsin be recognized thereafter for the purposes of introducing an 
amendment.
  The PRESIDING OFFICER. Is there objection?
  Mr. BRYAN. Reserving my right to object.
  The PRESIDING OFFICER. The Senator from Nevada.
  Mr. BRYAN. I certainly do not want in any way to interfere with the 
presentation of the amendment of the Senator from Wisconsin, but we are 
in a time limit where we have an hour on each side and I want to make 
sure that I do not lose my----
  Mr. D'AMATO. It was never the Senator's intent nor would this impinge 
on the Senator's time. It was an effort to accommodate one of our 
colleagues.
  Mr. BRYAN. I am happy to do that. Can we include one proviso in the 
proposed unanimous consent that after the Senator from Texas is allowed 
the time as requested by my friend, the distinguished chairman, and 
after the Senator from Wisconsin is recognized for purposes of an 
amendment, will the Senator from Nevada then be next recognized, if 
that would be agreeable?
  The PRESIDING OFFICER. Is there objection? Without objection, it is 
so ordered.
  The Senator from Texas.
  Mr. GRAMM. Madam President, I often find myself having to speak at 
length in the Chamber when I do not have the votes. On this bill, I am 
in the happy position that we have the votes. We are going to win. We 
are going to defeat all of the amendments, because we have a good bill, 
and we have a very broad base of support. So I have often found that 
when you have the votes, it is best not to speak at length.
  However, as the author of the legislation, I wanted to say just a 
couple of things. First, I thank Chairman D'Amato for his leadership. I 
want people to know that without his principal leadership on this bill, 
we would not be here. He was instrumental in helping

[[Page S4792]]

us pull the coalition together. He set a time schedule on bringing the 
bill before the full committee, and I thank him for his leadership.
  I believe this legislation will benefit the country. I think we will 
create jobs, growth, and opportunity from enactment of the bill, and I 
think that Chairman D'Amato is due a lion's share of the credit.
  I thank Senator Dodd. I don't think anybody in the Senate has a 
better, more cooperative ranking member than I do as chairman of the 
Securities Subcommittee. I thank Senator Dodd for his leadership.
  The bottom line on this bill is that in 1995 we sought to act to deal 
with the problem of economic piracy through the courts. We had found 
ourselves in a position where lawsuits were being filed against 
companies if their stock price went up, if their stock price went down, 
if their stock price did not change. New, emerging companies were the 
special targets of these lawsuits. These are the companies that had 
great technical ideas but did not have a whole bevy of lawyers on their 
payroll, and they were finding themselves basically being extorted, as 
people filed lawsuits that often were just boilerplate documents. These 
suits were so boilerplate that at times the name of the company being 
sued was confused in the documents filed in the court.

  And so we stepped in to try to do something about it, and we passed a 
bill called the Private Securities Litigation Reform Act, Public Law 
104-67. That legislation basically did five things. No. 1, it said that 
you had to have a client; that you could not have a lawyer who filed a 
bunch of motions representing nobody in reality and just collecting a 
whole bunch of money. The legislation said that there had to be genuine 
clients, and the client that stood the most to gain could be the lead 
client and had the privilege to choose the lawyer, and the lawyer had 
to be accountable to the people who were filing the lawsuit.
  You all heard the statement that our chairman quoted, about the 
bragging of the lead lawyer in this area.
  Are my 3 minutes up?
  The PRESIDING OFFICER. The Senator's 3 minutes have expired.
  Mr. D'AMATO. I request an additional 2 minutes.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. GRAMM. So we required that you have real people filing a real 
lawsuit. We also required that if you are going to file a lawsuit, you 
have to say specifically what the company did wrong. We further 
established a procedure whereby you did not have to go through this 
lengthy and expensive discovery process while the court was considering 
whether there was even enough merit in the case to proceed further with 
it. We also eliminated the ability to go after the people that had deep 
pockets, even though they had no real, substantive liability. Finally, 
where it was clear that the lawsuit was frivolous, we gave the judge 
the responsibility to require that the people who filed the lawsuit 
paid the legal expenses of those who found themselves pulled into 
court.
  It was a good bill, and it is beginning to have an impact. Our 
problem is that in trying to circumvent it, the same people filing the 
same lawsuits started to move into State court. So we have written a 
bill that tries to set uniform national standards. It applies only to 
class-action suits. It applies only to stocks that are traded 
nationally.
  It is eminently reasonable. It is clearly within the purview of the 
interstate commerce clause of the Constitution. This is a bill that 
needs to be passed. I thank everybody who has been involved in it for 
their leadership.
  We will have a series of amendments. We voted on every one of them in 
committee. Every one of these amendments is aimed at killing the bill 
by undercutting the basic premise of the bill, which is when you are 
dealing with nationally traded securities, you need national standards. 
So I hope our colleagues will join us in the process of defeating these 
amendments and approving the bill.
  I thank the Chair.
  The PRESIDING OFFICER. The Senator from Wisconsin is recognized.
  Mr. FEINGOLD. I thank the Chair. I thank the manager, the Senator 
from New York.


                           Amendment No. 2394

(Purpose: To amend certain Federal civil rights statutes to prevent the 
   involuntary application of arbitration to claims that arise from 
unlawful employment discrimination based on race, color, religion, sex, 
      national origin, age, or disability, and for other purposes)

  Mr. FEINGOLD. At this point I send an amendment to the desk.
  The PRESIDING OFFICER. The clerk will report the amendment.
  The assistant legislative clerk read as follows:

       The Senator from Wisconsin [Mr. Feingold] proposes an 
     amendment numbered 2394.

  Mr. FEINGOLD. Mr. President, I ask unanimous consent that reading of 
the amendment be dispensed with.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment is as follows:

       At the appropriate place, add the following:

     SEC. ____. CIVIL RIGHTS PROCEDURES PROTECTIONS.

       (a) Short Title.--This section may be cited as the ``Civil 
     Rights Procedures Protection Act of 1998''.
       (b) Amendment to Title VII of the Civil Rights Act of 
     1964.--Title VII of the Civil Rights Act of 1964 (42 U.S.C. 
     2000e et seq.) is amended by adding at the end the following 
     new section:

     ``SEC. 719. EXCLUSIVITY OF POWERS AND PROCEDURES.

       ``Notwithstanding any Federal law (other than a Federal law 
     that expressly refers to this title) that would otherwise 
     modify any of the powers and procedures expressly applicable 
     to a right or claim arising under this title, such powers and 
     procedures shall be the exclusive powers and procedures 
     applicable to such right or such claim unless after such 
     right or such claim arises the claimant voluntarily enters 
     into an agreement to enforce such right or resolve such claim 
     through arbitration or another procedure.''.
       (c) Amendment to the Age Discrimination in Employment Act 
     of 1967.--The Age Discrimination in Employment Act of 1967 
     (29 U.S.C. 621 et seq.) is amended--
       (1) by redesignating sections 16 and 17 as sections 17 and 
     18, respectively; and
       (2) by inserting after section 15 the following new section 
     16:

     ``SEC. 16. EXCLUSIVITY OF POWERS AND PROCEDURES.

       ``Notwithstanding any Federal law (other than a Federal law 
     that expressly refers to this Act) that would otherwise 
     modify any of the powers and procedures expressly applicable 
     to a right or claim arising under this Act, such powers and 
     procedures shall be the exclusive powers and procedures 
     applicable to such right or such claim unless after such 
     right or such claim arises the claimant voluntarily enters 
     into an agreement to enforce such right or resolve such claim 
     through arbitration or another procedure.''.
       (d) Amendment to the Rehabilitation Act of 1973.--Section 
     505 of the Rehabilitation Act of 1973 (29 U.S.C. 795) is 
     amended by adding at the end the following new subsection:
       ``(c) Notwithstanding any Federal law (other than a Federal 
     law that expressly refers to this title) that would otherwise 
     modify any of the powers and procedures expressly applicable 
     to a right or claim arising under section 501, such powers 
     and procedures shall be the exclusive powers and 
     procedures applicable to such right or such claim unless 
     after such right or such claim arises the claimant 
     voluntarily enters into an agreement to enforce such right 
     or resolve such claim through arbitration or another 
     procedure.''.
       (e) Amendment to the Americans With Disabilities Act of 
     1990.--Section 107 of the Americans with Disabilities Act of 
     1990 (42 U.S.C. 12117) is amended by adding at the end the 
     following new subsection:
       ``(c) Notwithstanding any Federal law (other than a Federal 
     law that expressly refers to this Act) that would otherwise 
     modify any of the powers and procedures expressly applicable 
     to a right or claim based on a violation described in 
     subsection (a), such powers and procedures shall be the 
     exclusive powers and procedures applicable to such right or 
     such claim unless after such right or such claim arises the 
     claimant voluntarily enters into an agreement to enforce such 
     right or resolve such claim through arbitration or another 
     procedure.''.
       (f) Amendment to Section 1977 of the Revised Statutes.--
     Section 1977 of the Revised Statutes (42 U.S.C. 1981) is 
     amended by adding at the end the following new subsection:
       ``(d) Notwithstanding any Federal law (other than a Federal 
     law that expressly refers to this section) that would 
     otherwise modify any of the powers and procedures expressly 
     applicable to a right or claim concerning making and 
     enforcing a contract of employment under this section, such 
     powers and procedures shall be the exclusive powers and 
     procedures applicable to such right or such claim unless 
     after such right or such claim arises the claimant 
     voluntarily enters into an agreement to enforce such right or 
     resolve such claim through arbitration or another 
     procedure.''.
       (g) Amendment to the Equal Pay Requirement Under the Fair 
     Labor Standards Act of 1938.--Section 6(d) of the Fair Labor 
     Standards Act of 1938 (29 U.S.C. 206(d)) is amended by adding 
     at the end the following new paragraph:

[[Page S4793]]

       ``(5) Notwithstanding any Federal law (other than a Federal 
     law that expressly refers to this Act) that would otherwise 
     modify any of the powers and procedures expressly applicable 
     to a right or claim arising under this subsection, such 
     powers and procedures shall be the exclusive powers and 
     procedures applicable to such right or such claim unless 
     after such right or such claim arises the claimant 
     voluntarily enters into an agreement to enforce such right or 
     resolve such claim through arbitration or another 
     procedure.''.
       (h) Amendment to the Family and Medical Leave Act of 
     1993.--Title IV of the Family and Medical Leave Act of 1993 
     (29 U.S.C. 2601 et seq.) is amended--
       (1) by redesignating section 405 as section 406; and
       (2) by inserting after section 404 the following new 
     section:

     ``SEC. 405. EXCLUSIVITY OF REMEDIES.

       ``Notwithstanding any Federal law (other than a Federal law 
     that expressly refers to this Act) that would modify any of 
     the powers and procedures expressly applicable to a right or 
     claim arising under this Act or under an amendment made by 
     this Act, such powers and procedures shall be the exclusive 
     powers and procedures applicable to such right or such claim 
     unless after such right or such claim arises the claimant 
     voluntarily enters into an agreement to enforce such right or 
     resolve such claim through arbitration or another 
     procedure.''.
       (i) Amendment to Title 9, United States Code.--Section 14 
     of title 9, United States Code, is amended--
       (1) by inserting ``(a)'' before ``This''; and
       (2) by adding at the end the following new subsection:
       ``(b) This chapter shall not apply with respect to a claim 
     of unlawful discrimination in employment if such claim arises 
     from discrimination based on race, color, religion, sex, 
     national origin, age, or disability.''.
       (j) Application of Amendments.--The amendments made by this 
     section shall apply with respect to claims arising on and 
     after the date of enactment of this Act.

  Mr. FEINGOLD. Madam President, I rise today to offer an amendment, 
which is actually a bill I have worked on for some time, the Civil 
Rights Procedures Protection Act, S. 63, a measure cosponsored by 
Senators Kennedy, Leahy, and Torricelli.
  What this legislation does is address the rapidly growing and 
troubling practice of employers conditioning employment or professional 
advancement upon their employees' willingness to submit claims of 
discrimination or harassment to arbitration, mandatory arbitration, 
rather than still having the right to pursue their claims in the 
courts. In other words, in too many cases employers are forcing their 
employees to ex ante agree to submit their civil rights claims to 
mandatory binding arbitration irrespective of what other remedies may 
exist under the laws of this Nation.
  So to address this growing trend of mandatory binding arbitration, 
this measure, the Civil Rights Procedures Protection Act, amends seven 
civil rights statutes to guarantee that a civil rights plaintiff can 
still seek the protection of the U.S. courts. The measure ensures that 
an employer cannot use his or her superior bargaining power to coerce 
her or his employees to, in effect, capitulate to an agreement which 
diminishes their civil rights protection.
  To be specific, this legislation affects civil rights claims brought 
under title VII of the Civil Rights Act of 1964, section 505 of the 
Rehabilitation Act of 1973, the Americans With Disabilities Act, 
section 1977 of the revised statutes, the Equal Pay Act, the Family and 
Medical Leave Act, and the Federal Arbitration Act. In the context of 
the Federal Arbitration Act, the protections in this legislation are 
extended to claims of unlawful discrimination arising under State or 
local law, and other Federal laws that prohibit job discrimination.

  Madam President, I want to be clear, because it is important that we 
promote voluntary arbitration in this country, that this is in no way 
intended to hinder or discourage or bar the use of arbitration on 
conciliation or mediation or any other form of alternative dispute 
resolution short of litigation resolving those claims. I think it is 
tremendous that we try to encourage people to voluntarily avoid 
litigation.
  I have long been a strong proponent of voluntary forms of alternative 
dispute resolution. The key, however, is that, in those cases that I 
can support alternative dispute resolution, it is truly voluntary. That 
is not what we are talking about here. What is happening here is that 
these agreements to go to arbitration are mandatory, they are imposed 
upon working men and women, and they are required prior to employment 
or prior to a promotion.
  Mandatory binding arbitration allows employers to tell all current 
and prospective employees, in effect, if you want to work for us, you 
will have to check your rights as a working American citizen at the 
door. Indeed, these requirements have been referred to recently as 
front-door contracts; that is, employers require that employees 
surrender certain rights right up front in order to get in the front 
door. Working men and women all across the country are faced with a 
very dubious choice, then, of either accepting these mandatory 
limitations of their right to redress in the face of discrimination or 
harassment, or being placed at risk of losing an employment opportunity 
or professional advancement.
  As a nation that values work and deplores discrimination, I don't 
think we can allow this situation to continue. The way I like to 
describe it is, what this expects a person to do is to sign an 
agreement that they will not go to court even before they feel the 
sting of discrimination. They have to sign this deal before they even 
sit down to their desk and do their first work for an employer.
  So, in conclusion, allow me to stress that this practice of mandatory 
binding arbitration should be stopped now. If people believe they are 
being discriminated against or sexually harassed, they should continue 
to retain all avenues of redress provided for by the laws of this 
Nation. This amendment will help restore integrity and balance in 
relations between hard-working employees and their employers. But I 
think more important, this amendment will ensure that the civil rights 
laws this Congress passes will continue to protect all Americans.
  I urge my colleagues to support this amendment.
  The PRESIDING OFFICER. The Senator from New York.
  Mr. D'AMATO. Madam President, I commend the Senator from Wisconsin 
for coming forth with this proposal. It is an amendment that he has 
been working on, for quite a period of time. As a matter of fact, it 
has been referred to the Judiciary Committee.
  Having said that, I think at the very least it should have, and 
requires, a thorough hearing. It is important, and it is important we 
understand the nuances. It is important that we get the case-by-case 
documentation as relates to those people who have suffered as a result 
of this area of the law. It is an area of great concern in terms of 
whether or not a person has to sign an agreement--and they do now--
prior to employment, that they give away or they agree that all matters 
will be settled by way of arbitration.
  Maybe it should not be ``all matters.'' Maybe there are certain 
matters that no one should ever be required to forfeit. I think we 
should look at that, because I think there are some very real 
questions. If there is a question of sexual harassment, do you mean to 
tell me that a person in that case should have to give up his or her 
right to bring a claim and that it will be settled in camera, behind 
the scenes, by way of arbitration? And there may be other areas where, 
indeed, the arbitration procedure should be the methodology of 
resolving a dispute.

  But I believe the Senator is correct, that there are some areas that 
really call into question whether or not a person must sign this 
agreement, otherwise he or she doesn't get the job. They just never get 
the job. They never get the promotion. So what do you think they are 
going to do? Of course they are going to sign. So this is serious.
  I believe we have an obligation to have a thorough, thoughtful 
analysis, and, indeed, the Judiciary Committee may want to look at 
certain aspects. But I believe since, indeed, the financial services 
community, the banking community, the securities community has to deal 
with this day in and day out, the proper jurisdiction does lie before 
the Banking Committee.
  With that in mind, I have indicated to the Senator that, before we 
leave, during the month of July or prior, it will be my intent to hold 
at least a full hearing, where witnesses to both sides, including the 
Securities and Exchange Commission--which I understand is studying this 
matter very carefully--will appear so we could have the benefit of 
their review, of their testimony,

[[Page S4794]]

of people who have written and people who have been involved in this, 
those who have been aggrieved as well as those who can testify to the 
merits of certain aspects of having arbitration in some limited cases.
  But I must say for the record, I believe the Senator has touched on 
something that is very important and I would not like to move to table 
at this time. I think it would be unfair to the importance of this 
legislation.
  With that in view, I have indicated to the Senator that I will call 
these hearings, so we can fully explore this and then bring it to this 
floor as legislation that has had the benefit of the totality of the 
input from the SEC, from our staffs, after listening and hearing and 
getting the kind of in-depth review that I know that not only I feel 
should take place, but that most of the members of my committee would 
support.
  The PRESIDING OFFICER. The Senator from Wisconsin.
  Mr. FEINGOLD. Madam President, I thank the Senator from New York who, 
I think, has given a very sympathetic listen to what we are trying to 
accomplish here. This issue, in fact, emanates in large part originally 
from his State and from some of the practices in his State that are now 
becoming nationwide.
  I think he has shown here, in his comments, already a keen 
understanding of what is involved here. Even though this issue has not 
been presented formally to his committee, he clearly understands that 
what is being requested of some of these individuals is simply 
unreasonable in light of American traditions of protection from 
discrimination and sexual harassment.
  So, even though I think this bill is a very appropriate vehicle to 
offer this amendment, I am grateful the chairman of the Banking 
Committee has agreed to hold a hearing in which he will be personally 
involved, in which I will have the opportunity to testify, prior to the 
end of July, on this bill.
  I look forward to being able to participate in helping to select some 
of the witnesses. I agree with the Senator very strongly that there are 
people on both sides, as well as those in the middle such as the SEC, 
who are seriously looking at this. This would be a useful hearing to 
move this issue along. I happen to be a member of the Judiciary 
Committee as well, so I certainly regard this as an appropriate forum 
as well. But I think this committee, in light of the fact these 
agreements started in securities firms, is a place where a hearing 
would be appropriate.
  I also understand the Senator does not expect in any way I would be 
prevented from offering this to other bills at any point.
  But, in light of all that and his assurances--which have always been 
extremely secure whenever I have dealt with him in the past, for the 
last 5\1/2\ years--in light of all that, I look forward to the hearing, 
I look forward to working with him. I hope that he can support this 
legislation after he has had a chance to review it.
  Given all that, at this point, Madam President, I withdraw the 
amendment.
  The PRESIDING OFFICER. Without objection, the amendment is withdrawn.
  The amendment (No. 2394) was withdrawn.
  Mr. D'AMATO. I thank my colleague and tell him that we look forward 
to working together in a cooperative way in helping to craft a package 
that will address the true abuses yet maintain the importance of 
arbitration where it is deemed appropriate, because I think in certain 
cases it is absolutely appropriate and I think in others it is 
absolutely indefensible.
  The PRESIDING OFFICER. Under the previous order, the Senator from 
Nevada is recognized.
  Mr. BRYAN. I thank the Presiding Officer.
  Just to be clear, in terms of the status, the 22 minutes that are 
reserved to the Senators in opposition is not affected by the colloquy 
between my two friends from New York and Wisconsin?
  The PRESIDING OFFICER. The Senator is correct.
  Mr. BRYAN. Madam President, this legislation that we are debating 
today, as I have said on previous occasions, is somewhat arcane and 
esoteric. It is not the sort of thing where, for people who are at home 
watching this debate, it causes them to move to the edge of their 
chairs and to hang on every word.
  It is, however, terribly important for the tens of millions of small 
investors who, in recent years, have invested in the future of America, 
and for their confidence in the market system that we have created, 
because they are the small investors, they are the ones who will be 
impacted by this legislation. The large investors, the large 
institutions, will still have options that heretofore the small 
investors have had but the small investors will be deprived of as a 
result of this legislation. So it is the view of the Senator from 
Nevada that this legislation plunges a dagger into the heart of every 
small investor in America.
  What we are talking about is not whether a case can be brought in 
State court or Federal court. We are talking about a system, which 
currently exists, that allows a private small investor to be part of a 
class action, and other small investors who have been defrauded as a 
result of the misconduct of others, to come together and file an action 
in State court and to avail themselves of statutes of limitations that 
are longer than are available to those of us who file in Federal court 
to provide, for joint and several liability, the ability to recover 
from accomplices--particularly important if the primary offender has 
bankrupted himself or herself or itself or has taken leave--and to 
avail himself or herself of triple damages under RICO.
  So this has a very practical impact. Actions that would be available 
to small investors at the State court level will no longer--no longer--
be available to those small investors, as a practical matter. So we 
continue a process which alarmed my good friend, the distinguished 
ranking member of this committee, the distinguished Senator from 
Maryland, that began with the Private Securities Litigation Reform Act 
of 1995 and, in our view, simply goes too far.
  Those of us who express strong reservations about this bill find no 
comfort with those who are filing strike suits, those who are involved 
in litigiousness for the sake of litigiousness. I believe it would be 
possible to craft a narrow provision that addresses the ostensible 
concerns that have been raised and yet not deprive small investors in 
this country of their rights under the law.
  The system for private enforcement of remedies has existed now for 
more than six decades. It is a dual system involving the State courts 
and the Federal courts. It has worked exceptionally well. The SEC has 
repeatedly testified as to the importance of private rights of actions 
as being absolutely essential to augment their own enforcement efforts. 
Indeed, they have said they have not the ability nor the resources to 
deal with the vast panoply of investor fraud, and they view the private 
cause of action as essential.
  Indeed, States were the first to enact these protections against 
fraud in the early 1900s, and when, in the mid-1930s, the statutes that 
essentially provided the framework for Federal securities regulation 
were put in place, it was expressly intended to supplement, not to 
supersede, to complement, not to wipe out, and the language of this 
legislation today specifically preempts the State cause of action for 
class actions. These State remedies are vitally important, and States 
have responded in a number of different ways by providing protections. 
I am going to talk about three primarily.
  The statute of limitations. Why is that important? Those who 
perpetrate fraud on small investors don't do so openly and nakedly; 
they try to conceal it to protect that activity. So the unfortunate 
decision of the court in the Lampf decision, which limits at the 
Federal level the right of an investor who has been defrauded 1 year 
from the point of discovery of the fraud, 3 years even though the 
investor never becomes aware of that fraud, is viewed by the Securities 
Commission as unreasonable because it takes them, with all of their 
resources, a minimum of 3\1/2\ years.
  The statute of limitation is not just an arcane debate about how long 
one should have, it is the ability of a small investor who has been 
defrauded without his knowledge and, never having learned of it within 
the 3-year period of time, is now precluded. Thirty-three States in 
this country, including my own in Nevada, provide for a longer statute 
of limitation. Some provide 2

[[Page S4795]]

years from the time of discovery of fraud, or 5 or 6 or even 10 years, 
and some provide no bar at all.

  In the vast majority of States in America, small investors filing 
class actions who do not discover the fraud until after 3 years are 
currently, under existing law, protected in at least 33 States. This 
legislation cuts off that right, and even though we all agree or, as 
the lawyers say, stipulate to the merit of the claim, it is barred--
barred--by the 3 years even though the small investor never became 
aware of the fraud. That is what we are talking about.
  Forty-nine of the 50 States provide liability for the accomplices--
those who conspired with the primary perpetrator of the fraud, whether 
they be lawyers, whether they be accountants, whether they be other 
investment advisers--to provide a cause of action--49 out of 50. 
Unfortunately, at the Federal level, there is no remedy for plaintiffs 
against aiders and abetters. So that means that if the primary 
offender, the perpetrator, becomes bankrupt, leaves the country, or is 
otherwise unable to respond in damages, historically at the State court 
level, the class-action plaintiffs could recover against those who 
conspired and aided in that fraud.
  The action that we take with S. 1260 deprives small investors filing 
class actions from this recovery. So now, if we pass this legislation, 
they are precluded from moving against those who conspired and actively 
participated in the fraud.
  Moreover, States, as a matter of providing protection to their own 
citizens, have provided in a number of jurisdictions for joint and 
several liability. That means if five or six are guilty of the fraud 
and only one has the ability to respond in damages, States have made 
the determination that as between the innocent investor, utterly 
blameless, that the innocent investor ought to be satisfied against the 
perpetrator of that fraud, even though there may have been several 
involved. That is wiped out.
  We have, in effect, a piece of legislation before us that 
dramatically limits the right of a small investor to pursue a class 
action in State court and to avail himself or herself of a whole host 
of remedies which States have provided on their own.
  I must say, the irony of this course of action by a Republican 
Congress that has proclaimed its devotion to State rights and has raged 
against preemption by a Congress at the Federal level of essentially 
State rights does not go unnoticed by this Senator.
  Why are class actions important? Again, it is pretty esoteric. Think 
for a moment. Tens of millions of small investors who may have been 
victimized by a fraud don't have the ability to hire a lawyer on their 
own to fight against entrenched special interests who have the ability 
to provide legal defenses and delays and delays. That is practically no 
remedy at all. It is only by binding together with other investors, 
small investors who are similarly situated, as the law says, that those 
costs can be spread and a recovery can be possible.
  When we say, as proponents of this legislation, ``Well, the small 
investor can still file in State court,'' that is true, but it is a 
hollow and transparent remedy because, as a practical matter, small 
investors simply do not have the ability to pay for the lawyer's fees 
and the costs that are involved in processing these kind of cases.
  That was the situation that 23,000 senior citizens who joined in a 
class action against Charlie Keating and Lincoln Savings and Loan found 
themselves in a few years ago. It was a class action, and they were 
ultimately able to recover 65 cents on the dollar of their losses.
  Had those plaintiffs been involved today with a shorter cause of 
action at the Federal level, with the cause of action unavailable at 
the State level for class actions, those plaintiffs would have not been 
able to recover that kind of money. The examples of these kinds of 
groups are not just small individuals, but they include school 
districts, municipalities, special improvement districts, pension funds 
at the State and municipal level. All of these are going to be affected 
by this legislation. As a practical matter, a class action provides the 
only realistic hope of recovery.

  As I pointed out, the SEC, with all its resources, says it takes them 
up to 3 years to compile the data to bring these securities fraud 
suits. So in effect, what we are doing now is we are providing for two 
classes of investors: Those who have been defrauded who are people of 
means, of wealth, so they can hire their own lawyers, they can still 
file at the State court level and take advantage of the longer statute 
of limitations, can take advantage of the provisions that provide 
liability against accomplices, can take advantage against the joint and 
several liability protections available at the State level. But if you 
are a small investor--and that is what most of those who are defrauded 
are, small investors--that remedy is no longer available to you.
  So the question arises: Why are we doing this? What is the problem? 
Well, frankly, to the great credit of our regulatory framework, we have 
the safest and the most efficient securities markets in the world.
  In 1990, there were 158 IPOs, totaling $4.6 billion. In 1997, 7 years 
later, there were 619 IPOs, totaling $39 billion. The stock market has 
recently set record highs. The Dow is over 9,000. And individuals 
confident in these markets are pouring in $40 billion a month in mutual 
funds. In 1980, 1 in every 18 households in America invested in the 
stock market. Less than 20 years later, it is more than one in three. 
That is a great tribute to the security and safety of this market.
  Why are we reducing the investor protections at a time when the stock 
market is surging and consumer confidence is growing?
  Investor confidence is crucial, and it is threatened by increasing 
fraud. I believe it was President Kennedy who made the observation, 
that, ``A rising tide''--referring to the economy--``raises all 
boats.'' And I think that is true. But it is equally true it also hides 
the shoals.
  Newsweek, in its October 6, 1997, edition: ``Scam Scuttling: The Bull 
Market is Drawing Con Artists. SEC Chairman Levitt summarized, ``In a 
market like this, parasites crowd in to feast on the bull's success.''
  Business Week, December 15: ``Ripoff! Secret World of Chop Stocks--
And How Small Investors--[and that is what we are talking about] Are 
Getting Fleeced.'' The article focuses on small-cap equities 
manipulated to enrich promotors and defraud thousands of small 
investors--a $10 billion-a-year business that regulators and law 
enforcement have barely dented.
  The New York Times of November 26 of last year: ``Lessons of Boesky 
and Milken Go Unheeded in Fraud Case.'' In one case, 1,600 investors 
were swindled out of $95 million.
  Yet Federal and State enforcement resources are shrinking as these 
fraudulent schemes are perpetrated upon the innocent small investors.
  Now is not the time, I would respectfully argue, to in effect rip 
from the investor his or her opportunity to recover that which has been 
lost as a result of being victimized by fraud. Our securities markets 
run on trust, Madam President--on trust--not money. There will be much 
less trust, I fear, if this legislation occurs.
  Look what has happened in countries around the world: ``Albania tries 
to regain control [of the Ponzi scheme].'' That can't happen in America 
with the system that we have created. ``Shanghai Stock Market Cited for 
Scandal.'' ``10,000 Stampede as Russian Stock [Market] Collapses.'' 
``Scandal Besets Chinese Markets.''

  My point being that we have devised a system to protect investors. 
And I fear, by reason of overly broad legislation, we are depriving 
small investors of the very opportunity to recover that which has 
provided the confidence in the market that has encouraged such a 
massive investment by small investors.
  Why? We are led to believe there is a massive influx of cases that 
must be preempted because everybody is going to the State court to 
bypass the provisions of the 1995 law.
  Price Waterhouse, in January of 1998, made a report, an evaluation. 
Forty-four State cases--44--were filed in all of 1997, a one-third 
decrease since 1996--I want to emphasize that, a decrease--when 66 were 
filed, and less than in the 3 years before the 1995 legislation. A 
followup Price Waterhouse study, in February, tells us 39 cases were 
filed.

[[Page S4796]]

  My point being, whether it is 39 or 44, I would not argue that with 
my colleagues, but that is, out of 15 million cases, civil cases--not 
criminal, not traffic, not domestic relations--we are talking about 44 
cases or 39 cases out of 15 million filed. That is a very, very small 
number. And although there are some problems, as has been pointed out 
by the proponents, none of the problems justifies the sweeping 
emasculation of investor protections that this legislation provides 
for.
  Now, what are the problems specifically in the act itself?
  If one believes that uniform standards are an essential public policy 
in the country--and, I must say, I have not been persuaded--then I 
think we would agree that a uniform standard that provides strong 
investor protections ought to be a part of that uniform standard.
  Unfortunately, what we have done, in each and every case, is opted 
for the lowest common denominator of protection. If the statute of 
limitations is longer at the State level, we have preempted it and 
limited the statute of limitations. If the State provides for liability 
against those who are accomplices, we take that cause of action away 
from the small investor. If the State allows for joint and several 
recovery against each and every one of those involved in the fraud, we 
take that away from the small investor.
  So it is my view that this is part of an ongoing process in which we 
have, in my judgment, left the small investor high and dry in many 
cases if this legislation passes.
  I must say that when you look at the trend line following the 1995 
legislative enactments, you can see that pattern unfold. The Lampf 
decision, which shocked the SEC and others, limited the statute of 
limitations to 1 year from the time of discovery of the fraud to 3 
years. The SEC recognized that that is an unreasonable period of time. 
And those who argued several years ago for comprehensive reforms said, 
``Look, we'll address the statute of limitations at that point.'' We 
tried, Madam President, in 1995 to address the statute of limitations, 
but we were rebuffed. Now this legislation takes the longer statute of 
limitations, available in 33 out of 50 States, away from those small 
investors.
  The Supreme Court, in the Central Bank case, held that there is no 
ability to hold accomplices liable. We tried to provide for aider and 
abetter coverage. The SEC strongly supports that. We were told that 
when we redid the Federal securities laws that that would be included. 
My colleague from Maryland and I tried, and we were rebuffed in that 
effort.
  Joint and several liability, eliminated in the 1995 act. Civil RICO, 
eliminated. Discovery provisions, limited. In 1996, we made a 
determination to divide some of the regulatory responsibility between 
State and Federal authorities.
  In 1998, we are here with S. 1260, which I think is the coup de grace 
in terms of small investor protection. So I must say that I am greatly 
disturbed by this threat. I believe that small investors ultimately 
will pay the price.

  It is often said that those of us who oppose this legislation must be 
working for those nefarious trial lawyers. Let's take a look at the 
groups who support the position that the senior Senator from Maryland 
and I take. The American Association of Retired Persons. When I attend 
one of their meetings, I haven't seen a single retired lawyer in 
attendance. The AFL-CIO, the American Federation of State County and 
Municipal Workers, Consumer Federation of America, Consumers Union, and 
many, many others, as you can see, particularly those involved with the 
State retirement associations, including the Public Employees 
Retirement System, the League of Cities, the National Association of 
Counties and Municipal Treasuries.
  Let me read a paragraph from a letter that the able Senator from 
Maryland introduced, coming from the Government Finance Officers 
Association, the Municipal Treasurers'Association, National Association 
of Counties, National Association of County Treasurers, National 
Association of State Retirement Administrators, National Conference on 
Public Employee Retirement System, National League of Cities, U.S. 
Conference of Mayors. They raise many of the same objections that I 
have outlined today, as has my colleague from Maryland.
  Here is their comment:

       The Private Securities Litigation Reform Act was opposed by 
     state and local governments because the legislation did not 
     strike an appropriate balance, and this legislation extends 
     that mistake to state courts. As both users of debt and 
     investors of public funds, state and local governments seek 
     to not only reduce frivolous lawsuits but to protect state 
     and local government investors who are defrauded in 
     securities transactions. . . .
       The above organizations believe that States must be able to 
     protect State and local government funds.

  We are talking about taxpayer dollars. We are not talking about 
litigious plaintiffs. We are talking about pension funds, municipal 
State funds in which those entities have been defrauded and now will be 
provided much less protection to recover tax dollars--dollars belonging 
to each and every citizen who is a part of that group.
  Let me address one final point here as we conclude this discussion. 
One of the concerns that has been expressed is that there is no 
adequate assurance that liability will continue to exist against those 
who are reckless in their conduct. Now, that is a standard more 
egregious than simple negligence, more egregious than gross negligence. 
We are talking about conduct that is reckless in nature.
  Prior to 1995, when the Private Securities Litigation Reform Act was 
enacted, 11 of 13 circuits in this country had addressed the issue and 
had concluded that there was a cause of action for those who are guilty 
of reckless misconduct. The 1995 legislation, because it talked about a 
specific pleading standard, has created some confusion. Following the 
1995 enactment, several district courts have concluded that no longer 
is there liability for reckless misconduct.
  Now, the proponents of this legislation say that they do not intend 
that as a consequence. And I accept their representation. However, we 
have tried to get into this bill a provision crafted by the SEC 
defining ``reckless'' to make it absolutely sure that ``reckless'' is 
protected. Their response? If the courts strike down ``reckless'' we 
will remedy it.
  I never impugn anyone's good faith, but I am a product of the 
experience that I have had in this legislation. We were told back in 
the 1990s that we would address the statute of limitation problem when 
we looked at comprehensive legislation to correct that. It did not 
occur. We were told after the Central Bank case that we will address 
the problem in which aiders and accomplices are no longer liable under 
the law. We were rejected in that effort. So I must say I find my 
comfort level not very high if the courts intend that. It seems to me 
if we are in earnest in wanting to protect that ``reckless'' standard, 
it is terribly important we use a definition which the SEC has 
provided. Let's make it part of this legislation.
  I am not unmindful of the fact that this bill is a train that is 
leaving the station. It will pass and it will be signed into law. But 
it would be a tragic mistake not to make absolutely sure that 
``reckless'' is included. I believe a fair reading of the 1995 
legislation should not give rise to an inference that ``reckless'' has 
somehow been changed. I don't believe that was the intent. The authors 
of this legislation say it is not true, but even when we try to get it 
moved into the findings of the legislation, we get resistance, so I 
have concern.
  Let me conclude by saying this is a piece of legislation which is a 
solution in search of a problem, overly broad and dangerous to millions 
of small investors in America.
  I yield the floor and reserve whatever time remains.
  (Mr. FAIRCLOTH assumed the chair.)
  Mrs. FEINSTEIN. Mr. President, I rise today to lend my support to S. 
1260, the Securities Litigation Uniform Standards Act. This 
legislation, introduced by Senator Gramm and Senator Dodd, is essential 
to my state of California, providing needed uniform national standards 
in securities fraud class actions.
  In 1995, with my support, Congress successfully passed the Securities 
Litigation Reform Act. The 1995 Act provided relief to American 
companies hit with frivolous, or nuisance, lawsuits.

[[Page S4797]]

 Specifically, the legislation adopted federal provisions to discourage 
nuisance securities lawsuits and increase the level of information 
provided for investors.
  This is very important to my state of California, where hundreds of 
burdensome lawsuits are filed each and every year. More than 60% of all 
California high tech firms have been sued at least once. Apple 
Computers executives stated they expect to be sued every two years. 
These lawsuits levy a heavy cost on businesses who have to pay for 
expensive legal battles, draining company resources which might 
otherwise be spent on growing and improving the health of the company. 
Securities litigation, as several high tech executives have described, 
is truly ``an uncontrolled tax on innovation.''
  The high-tech industry has been central to the successful economic 
recovery in California. As thousands of workers in the aerospace 
industry lost their jobs, and as the recession of the '90s stalled the 
economy, it was California's entrepreneurial spirit, the investment in 
new ideas, research and new technology which resulted in a rebounding 
economy.
  In California, there are over 20,000 established high-tech companies. 
With roughly 670,000 workers, California ranks 1st in the nation in 
high-tech employment. To put it in another way, for every 1,000 workers 
in my state, 62 are high-tech. That is significant when one considers 
that as the 7th largest economy in the world, California supports 
almost every kind of industry and business known to commerce.
  Start-up companies in the high-tech and biotech industries are most 
directly affected by securities lawsuits. These high-tech and biotech 
companies dedicate a large percentage of company funds for research and 
development. The average high tech firm invests between 16-20% of 
company revenues in research, with biotech firms often as high as 60%. 
This level of investment is integral to their business success. 
However, with the burden of frivolous lawsuits, California companies 
are not able to use their resource on developing innovative 
technologies and new products for the market place.
  The 1995 Securities Litigation Reform moved in the right direction. 
However, the 1995 legislation did not address recent actions by 
plaintiffs to file frivolous cases in state courts. Since the passage 
of the 1995 legislation, suits traditionally filed in federal courts 
are now being placed in state courts. The current law does not protect 
companies from this threat.
  The bill, which I have been pleased to support, will protect 
companies from this side-door tactic. The Securities Litigation Uniform 
Standards Act of 1997 establishes uniform national standards in 
securities fraud class action suits. It would permit a defendant, 
whether a company or individual, who is sued in state court to proceed 
into federal court. This legislation would in effect require that every 
large securities class action be brought into federal court.
  The creation of effective national standards will make it easier to 
protect companies from so-called nuisance shareholder lawsuits. 
Specifically, the legislation would provide for the shifting of 
securities lawsuits filed in a state court into the more appropriate 
federal court, a process called ``removal.'' The removal authority 
would only apply for class action suits involving nationally-traded 
securities, such as the New York Stock Exchange. Without removal 
authority, these companies, whose securities are traded throughout the 
fifty states, could face liability under federal securities laws in 
fifty state courts. This widespread liability would undermine the 
reforms enacted in the 1995 Securities Litigation Reform Act.
  Further, this legislation would prevent ``forum shopping,'' a method 
for nuisance lawsuits to be initiated in the most sympathetic state 
jurisdiction. This is a very real concern for California. According to 
a recent study by former Securities and Exchange Commissioner Joseph A. 
Grundfest, approximately 26% of litigation activity has moved from 
federal to state court since the passage of the 1995 law. The study 
elaborates:

       This increase in state court litigation is likely the 
     result of a `substitution effect' whereby plaintiffs' counsel 
     file state court complaints when the underlying fact appear 
     not to be sufficient to satisfy new, more stringent federal 
     pleading requirements.

  California is the home to one-third of the nation's biotechnology 
companies and medical device companies. These firms have been the 
source of tremendous growth. Yet these high tech firms are the very 
ones who face one of every four strike suits and who have had to pay 
hundreds of millions of dollars in settlements. National standards will 
address this problem effectively and fairly.
  By establishing a uniform system for the movement of cases from state 
to federal court, Congress can limit abusive lawsuits that inhibit 
economic and job growth. The Securities Litigation Uniform Standards 
Act of 1997 will offer important protection for American companies from 
nuisance lawsuits.
  I appreciate the efforts of the Banking Committee and the sponsors, 
Senator Gramm and Senator Dodd, for their work on this issue and 
encourage my fellow Senate colleagues to support this legislation.
  Mr. JOHNSON. Mr. President, I rise today in opposition to S. 1260, 
the Securities Litigation Uniform Standards Act. This bill seeks to 
prevent states from protecting their own citizens from unscrupulous 
actions by a small minority in the securities industry. We must allow 
states to protect their own investors, and this further intrusion into 
states rights is unwarranted by the evidence.
  Preempting state remedies now--and requiring fraud victims to seek 
relief solely under the federal standards promulgated in 1995--could 
leave investors with severely limited ability to protect themselves 
against fraud. We should permit the 1995 Private Securities Litigation 
Reform Act to be interpreted by the courts before we embark on this 
effort to anticipate future problems with the PSLRA that have not yet 
arisen. Several federal district courts have issued rulings on the 1995 
law that are so restrictive that they threaten almost all private 
enforcement of securities law--including holding that reckless 
wrongdoers are no longer liable to their victims under the PSLRA.
  The SEC has warned in briefs filed in these cases that such a result 
would essentially end private enforcement of the federal securities 
laws. By eliminating state remedies for fraud before knowing whether 
the courts will finally interpret the PSLRA in a way that provides 
victims with a viable means to recover their losses, S. 1260 risks not 
only harming innocent investors but undermining public confidence in 
our securities markets.
  There is no need for any federal action inasmuch as there have been 
few state securities class actions filed since the PSLRA passed, and 
most have been in one state. Preemption proponents cite an imaginary 
``explosion'' of state suits filed to ``circumvent'' the PSLRA in the 
two years since its enactment. But the mere handful of state securities 
class actions filed in 1997--only 44 nationwide--represents a one-third 
decrease since 1996 and is less than in the three years before the 
PSLRA was passed. It also is an infinitesimally small percentage of the 
roughly 15 million civil cases filed in state courts each year. No 
state other than California has had more than seven securities class 
actions filed in the two years since enactment of the PSLRA. Given 
these small numbers, there is no reason why states should not be left 
free to decide how best to protect their own citizens from fraud.
  State laws against securities fraud are part of a dual enforcement 
system that has served the country exceptionally well since the 
Depression. States enacted protections against financial schemes in the 
early 1900s. Congress passed federal securities laws in 1933 and 1934 
to complement--not replace--state laws and to stop abuses that caused 
the 1929 crash. Many states have chosen to provide more expansive 
investor protections than federal law currently provides--through 
accountability for aiders and abettors, realistic time limits for 
filing a fraud claim, and the ability to recover fully from 
professionals who help perpetrate frauds (like lawyers and accountants) 
when the main wrongdoer is bankrupt, in jail, or has fled the country. 
For example, according to the SEC, 49 of the 50 states provide 
liability for aiders and abettors now unavailable under federal law and 
33 states provide longer statutes of limitations for securities fraud 
actions than current federal law. S. 1260 would

[[Page S4798]]

take away these important state remedies.
  This effort has been underway virtually since the PSLRA passed. It is 
not based on the new realities created by the PSLRA, but rather to 
eliminate another form of protection for investors. The SEC has 
repeatedly expressed concern that federal legislation to preempt state 
laws is premature. In an April 1997 letter to the President forwarding 
a lengthy SEC report on the operation of the PSLRA, Chairman Arthur 
Levitt stated, ``The Commission endorses the ultimate conclusion of 
this report: it is too early to assess with great confidence many 
important effects of the [PSLRA] and therefore, on this basis, it is 
premature to propose legislative changes. . . The one-year time frame 
has not allowed for sufficient practical experience with the Reform 
Act's provisions, or for many court decisions (particularly appellate 
court decisions) interpreting those provisions.'' The SEC reiterated 
this view in October 1997 testimony before both the House and Senate 
and has specifically criticized the pending preemption legislation, 
stating that it ``would deprive investors of important protections.'' 
SEC Commissioner Norman Johnson, a Republican, has been especially 
critical: ``Given the possible adverse affect on investor confidence, 
as well as the long history of effective and concurrent federal and 
state securities regulation, and the strong federalism concerns raised 
by preemption . . . extreme caution should be exercised before state 
courthouse doors are closed to small investors through the preclusion 
of state class actions for securities fraud.'' While three of the five 
SEC Commissioners no longer oppose S. 1260, there has been no change in 
any of the underlying facts that led to the SEC's earlier report and 
testimony. Commissioner Johnson continues to oppose S. 1260.
  With more and more Americans participating in the stock market boom, 
it is more imperative that we maintain these investor protections, not 
weaken them. According to a front-page article in the November 30, 
1997, New York Times, ``Investment Fraud Is Soaring Along with the 
Stock Market.'' This was only one in a long line of recent articles 
reporting on widespread fraud in the financial markets--a fact 
acknowledged by federal and state enforcement officials nationwide. The 
National White Collar Crime Center reports that corporate financial 
crime costs $565 billion annually, nearly 12 times the amount of street 
crime. The New York Attorney General has reported that investor 
complaints have risen 40% per year in the past two years; the U.S. 
Attorney in New York City has stated that she has witnessed an 
``explosion'' of securities fraud; and the mob has now infiltrated Wall 
Street. Yet, federal and state enforcement resources are shrinking. As 
SEC Chairman Levitt observed in December 1997: ``In a market like this, 
parasites crowd in to feast on the bull's success.'' In light of all 
this, Congress should strengthen, not weaken, existing deterrents.
  This premption of state law is opposed by a broad coalition, 
including the American Association of Retired Persons; American 
Federation of State County and Municipal Workers; Consumer Federation 
of America; Consumers Union; Gray Panthers; Government Finance Officers 
Association; Municipal Treasurers' Association; National League of 
Cities; National Association of Counties; National Association of 
County Treasurers and Finance Officers and many, many others.
  Mr. President, I urge my colleagues to join me in opposing this 
unnecessary and unwarranted federal intrusion into what should 
appropriately be state law.
  Mr. DODD. Mr. President, S. 1260, the Securities Litigation Uniform 
Standards Act of 1998, is intended to create a uniform national 
standard for securities fraud class actions involving nationally-traded 
securities. In advocating enactment of uniform national standards for 
such actions, I firmly believe that the national standards must be fair 
ones that adequately protect investors. I hope that Senator D'Amato, 
one of the architects of the Banking Committee's substitute, would 
engage in a colloquy with me on this point?
  Mr. D'AMATO. I would be happy to.
  Mr. DODD. At a hearing on S. 1260 last October, the Securities and 
Exchange Commission (SEC) voiced concern over some recent federal 
district court decisions on the state of mind--or scienter--requirement 
for pleading fraud was adopted in the Private Securities Litigation 
Reform Act of 1995 ('95 Reform Act or PSLRA). According to the SEC, 
some federal district courts have concluded that the '96 Reform Act 
adopted a pleading standard that was more rigorous than the Second 
Court's, which, at the time of enactment of the PSLRA, had the toughest 
pleading standards in the nation. Some of these courts have also 
suggested that the 95 Reform Act changed not only the pleading standard 
but also the standard for proving the scienter requirement. At the time 
we enacted the PSLRA, every federal court of appeals in the nation--ten 
in number--concluded that the scienter requirement could be met by 
proof of recklessness.
  Mr. D'AMATO. I am sympathetic to the SEC's concerns. In acting now to 
establish uniform national standards, it is important that we make 
clear our understanding of the standards created by the '95 Reform Act 
because those are the standards that will apply if S. 1260 is enacted 
into law. My clear intent in 1995, and my understanding today, is that 
the PSLRA did not in any way alter the scienter standard in federal 
securities fraud lawsuits. The '95 Reform Act requires plaintiffs, and 
I quote, ``to the state with particularity facts giving rise to a 
strong inference that the defendant acted with the required state of 
mind.'' The '95 Reform Act makes no attempt to alter or define that 
state of mind. In addition, it was my intent in 1995, and it is my 
understanding today, that the '95 Reform Act adopted the pleading 
standard applied in the Second Circuit.
  Mr. DODD. I agree with the comments of my colleague from New York. I 
too, did not intend for the PSLRA to alter the state of mind 
requirement in securities fraud lawsuits or to adopt a pleading 
standard more stringent than that of the Second Circuit. In fact, I 
specifically stated during the legislative debates preceding and 
following the President's veto that the '95 Reform Act adopted the 
Second Circuit's pleading standard. This continues to be my 
understanding and intent today. Ensuring that the scienter standard 
includes reckless misconduct is critical to investor protection. 
Creating a higher scienter standard would lessen the incentives for 
issuers of securities to conduct a full inquiry into potentially 
troublesome areas and could therefore damage the disclosure process 
that has made our markets a model for other nations. The U.S. 
securities markets are the envy of the world precisely because 
investors at home and abroad have enormous confidence in the way our 
markets operate. Altering the scienter standard in the way envisioned 
by some of these district court decisions could be very damaging to 
that confidence.
  Mr. D'AMATO. My friend from Connecticut is correct. The federal 
securities laws must include a scienter requirement that adequately 
protects investors. I was surprised and dismayed to learn that some 
district court decisions had not followed the clear language of the '95 
Reform Act, which is the basis upon which the uniform national standard 
in today's legislation will be created.
  Mr. DODD. It appears that these district courts have misread the 
language of the '95 Reform Act's ``Statement of Managers.'' As I made 
clear in the legislative debate following the President's veto, 
however, the disputed language in the Statement of Managers was simply 
meant to explain that the Conference Committee omitted the Specter 
amendment because that amendment did not adequately reflect existing 
Second Circuit caselaw on the pleading standard. I can only hope that 
when the issue reaches the federal courts of appeals, these courts will 
undertake a more thorough review of the legislative history and correct 
these decisions. While I trust that the courts will ultimately honor 
Congress' clear intent, should the Supreme Court eventually find that 
recklessness no longer suffices to meet the scienter standard, it is my 
intent to introduce legislation that would explicitly restore 
recklessness as the pleading and liability standard for federal 
securities fraud lawsuits. I imagine that I would not be alone in this 
endeavor, and I ask my good friend from New York whether he would join 
me in introducing such legislation?

[[Page S4799]]

  Mr. D'AMATO. I say to the Senator from Connecticut that I would be 
pleased to work with him to introduce such legislation under those 
circumstances. I agree that investors must be allowed a means to 
recover losses caused by reckless misconduct. Should the court deprive 
investors of this important protection, such legislation would be in 
order.
  Mr. DODD. I want to thank the Senator from New York, the Chairman of 
the Banking Committee, for his leadership on this bill and for engaging 
in this colloquy with me. In proceeding to create uniform national 
standards while some issues concerning the '95 Reform Act are still 
being decided by the courts, we must act based on what we intended and 
understand the '95 Reform Act to mean. As a sponsor of both the Senate 
bill that became the '95 Reform Act and the bill, S. 1260, that we are 
debating today, I am glad that we have had this opportunity to clarify 
how the PSLRA's pleading standards will function as the uniform 
national standards to be created in S. 1260, the Securities Litigation 
Uniform Standards Act of 1998.
  Mr. REID. Mr. President, in 1995, we passed the Private Securities 
Litigation Reform Act or PSLRA, as it became known. Our intent was to 
prevent abusive filings by a group of trial attorneys who were using a 
loophole in our laws. These lawsuits were often entirely without merit 
and really amounted to strong-arm efforts to get money out of small 
start-up companies. Our legislation was aimed at putting an end to 
these strike suits and to a large extent it has succeeded.
  Many of these companies could take the capital they were expending on 
litigation and settlement costs and invest in research in development. 
They could provide greater returns to their shareholders. They could 
create more jobs.
  Unfortunately, the small group of attorneys who were involved in this 
loophole found another way to get their frivolous strike suits heard in 
court. They shifted their efforts to state courts.
  The SEC has noted this development saying that this ``apparent shift 
to state court may be the most significant development in securities 
litigation'' since the '95 legislation was enacted. Before the '95 Act, 
few, if any, securities class actions were filed in state court. Since 
it's enactment, the number of state claims has exploded.
  A study by Price Waterhouse found that the average number of state 
court securities class actions filed in 1996 grew 355 percent over the 
1991-1995 average. In 1997, filings were 150 percent greater than the 
1991-1995 average. While the number of state court filings dropped 
slightly in 1997 compared to 1996 it is believed this is due to a 
strategic desire by plaintiffs' lawyers to undercut the underlying 
legislation.
  According to Stanford Law School official Michael Perino:

       It is possible that plaintiffs' attorneys may simply have 
     strategically chosen not to pursue a significant number of 
     state cases in order to decrease the apparent necessity for 
     Congress to pass a federal preemption statute. Past 
     experience * * * indicates that plaintiffs respond 
     strategically to legislative initiatives that might alter the 
     costs and benefits of securities litigation.

  The State court litigation is a loophole around the PSLRA. This is 
undermining the bipartisan efforts we made in passing the PSLRA to give 
companies the ability to disclose more information to investors without 
the fear of being sued. But the threat of being sued in 50 states 
chills the disclosure of company information to investors.
  People are understandably reluctant to make disclosures under the 
Federal law's ``safe harbor'' provision when their statements can be 
used against them in state court. According to the SEC, fear of state 
court liability for forward looking statements was inhibiting the use 
of the PSLRA's safe harbor.
  The time to act on this is now. Delay undermines one of the main 
policy goals of the PSLRA--greater information flow to investors. 
Delays will cause a proliferation of litigation in state courts. Delay 
forces all parties to spend millions of dollars arguing about matters 
that uniform standards legislation can put to rest.
  As time goes on, states will reach different legislative and judicial 
results--this just furthers the confusion. As President Clinton wrote 
last year, ``the proliferation of multiple and inconsistent standards 
could undermine national law.''
  We need to prevent this confusion by putting a stop to this end run 
around Congress. A patchwork system of securities laws undermines 
America's capital markets. Capital formation is inhibited by 
overlapping the duplicative legal rules governing securities 
litigation. Uniform standards legislation ensures that purchasers and 
sellers of nationally traded securities have similar remedies in 
securities lawsuits regardless of their state of residence.
  It is time to close this loophole and put an end to this high priced 
extortion that seems to be benefitting only a few trial attorneys.
  Mr. LIEBERMAN. Mr. President, I rise today to say a few brief words 
of support for the bill we are now considering, the Securities 
Litigation Uniform Standards Act of 1998. I was an original co-sponsor 
of this important legislation. Through its passage, we in Congress can 
continue to send the strong message to the nation's securities markets 
and the country's investors that we first articulated in 1995 with the 
enactment of the Private Securities Litigation Reform Act: we will not 
let frivolous lawsuits disrupt our nation's securities markets, devalue 
our citizens' investments or cut off the free flow of information we 
all need to make reasoned and well-informed investment decisions.
  I was a proud supporter of the 1995 Act, which restored some 
rationality and common sense to the laws regulating federal securities 
litigation. That bill set specific standards for federal private class 
actions alleging securities fraud, so that those deserving of 
compensation received it, while those seeking only to profit from the 
filing of an abusive suit did not. Unfortunately, in the wake of that 
Act, some enterprising plaintiffs' attorneys have turned to State 
courts to file abusive suits. Through these State court actions, 
plaintiffs' attorneys have effectively circumvented the reforms the 
1995 Act put in place, reforms we in Congress overwhelmingly embraced 
in the 1995 Act.
  Were the regulation of nationally traded securities a matter of 
purely local concern, I might agree with those who see nothing wrong 
with this phenomenon--who argue that each State should be free to set 
for itself the laws governing actions in its courts. But we clearly are 
not dealing here with something of only local concern. To the contrary, 
the securities governed by this bill--and it is important to emphasize 
this point--are by definition trading on national exchanges. As we all 
know, securities traded on national exchanges are bought and sold by 
investors in every State, and those investors rely on information 
distributed on a national basis. It simply makes no sense to open those 
who make statements about national securities on a national basis to 
class actions brought under 50 separate State regulatory regimes--not 
if we want efficient and well-functioning securities markets, that is. 
In short, not only is a uniform standard appropriate in this case; it 
provides perhaps the quintessential example of something that should be 
subject to one set of standards nationwide.
  For this reason, it is not surprising that this bill has the support, 
not only of a significant portion of the Congress, but also of both the 
SEC and the Administration. As someone involved for many years in 
efforts to reform our nation's litigation system, I can say with 
confidence that the fact that both the SEC and the Administration 
support this bill speaks volumes to the merits of this bill.
  Let me close, Mr. President, by thanking the principal sponsors of 
this bill, particularly Senators Dodd, D'Amato, Gramm and Domenici. 
They have worked hard to accommodate all legitimate concerns raised 
about this bill, working particularly closely with both the SEC and the 
Administration, and making significant changes to the bill as it moved 
to the floor. I join with them in urging my colleagues to pass this 
important legislation today.
  Mr. WELLSTONE. Mr. President, I rise today to oppose S. 1260, the 
``Securities Litigation Uniform Standards Act of 1997.''
  Mr. President, we are considering legislation that would risk 
imperiling the financial security of those individuals most susceptible 
to fraud. The American Association of Retired Persons opposes this 
legislation based on

[[Page S4800]]

the bill's anti-investment character and the heightened dependence of 
senior citizens on investment. I find it very odd that in a time when 
the stock market is doing so well that some of my colleagues are 
considering exposing Social Security to the vagaries of the booms and 
busts of Wall Street, we are preventing the states from protecting 
their citizens from securities fraud. In a time when more Americans are 
relying on investments for financial security--especially retirees--we 
are rolling back protections.
  Many states, my own included, have laws which provide for increased 
penalties for fraud perpetrated against Seniors and the disabled--the 
Minnesota statute mentions securities specifically--and Congress has 
always given the states great leeway in protecting their consumers. In 
Minnesota, there is an additional civil penalty of $10,000 for each 
violation where deceptive trade practices, false advertising, or 
consumer fraud are perpetrated against elderly and disabled persons.
  Not only are seniors and the disabled at great risk for fraud, they 
are increasingly becoming investors and they are least able to recoup 
the income lost. It is devastating for anyone to lose their life 
savings through a lie, to have their pension wiped out, but for 
Americans on a fixed income--it will destroy them, Mr. President.
  I cannot support this legislation. It is bad for investors, it is 
terrible for seniors and the disabled, and it addresses a problem which 
does not exist at the expense of consumers.
  I urge its rejection.
  Mr. REED. Mr. President, as a supporter of the Private Securities 
Litigation Reform Act of 1995 I am pleased to support S. 1260, the 
Securities Litigation Uniform Standards Act of 1998.
  The bill will create a uniform standard for securities class action 
lawsuits against corporations listed on the three largest national 
exchanges.
  Class action suits are frequently the only financially feasible means 
for small investors to recover damages.
  Yet, such lawsuits have also been subject to abuse, draining 
resources from corporations while inadequately representing the 
interests of investor plaintiffs.
  Mr. President, in 1995, I voted to curtail such abusive litigation. 
It was obvious then that some class action suits were being filed after 
a precipitous drop in the value of a corporation's stock, without 
citing specific evidence of fraud.
  These lawsuits inflict substantial costs upon corporations, harming 
the business and its shareholders. Unfortunately, since passage of 
federal procedures protecting corporations from such suits there has 
been some attempt by class action plaintiffs to circumvent these 
safeguards by filing similar lawsuits in state courts.
  Mr. President, this Act will preempt this circumvention, creating a 
national standard for class action suits involving nationally traded 
securities. I favor this legislation because it recognizes the national 
nature of our securities markets, provides for more efficient capital 
formation, and protects investors.
  However, Mr. President, it is essential to recognize that preemption 
marks a significant change concerning the obligations of Congress.
  When federal legislation was enacted to combat securities fraud in 
1933 and 1934, federal law augmented existing state statutes. States 
were free to provide greater protections from fraud to their citizens, 
and many have.
  The Chairman of the Securities and Exchange Commission has testified 
concerning the traditional system by which securities have been 
regulated: through both public and private lawsuits in both state and 
federal courts.
  Many of my colleagues voted for the 1995 legislation knowing that if 
federal standards failed to provide adequate investor protections, 
state suits would provide a necessary backup.
  With passage of this legislation, my colleagues and I have now 
accepted full and sole responsibility to ensure that fraud standards 
allow victimized investors to recoup lost funds.
  Only a meaningful right of action against those that defraud 
guarantees investor confidence in our national markets.
  A uniform national standard concerning fraud provides no benefit to 
markets if issuers can, with impunity, fail to ensure that consumers 
receive truthful, complete information on which to base investment 
decisions.
  Specifically, my support rests on the presumption that the liability 
standard was not altered by either the 1995 Act or this legislation.
  I strongly endorse the Report which accompanies this legislation, 
which states clearly that nothing in the 1995 legislation changed 
either the scienter standard or the previous pleading standards 
associated with the most stringent rules, those of the Second Circuit.
  The reason such standards were not changed in 1995 is that they are 
essential to providing adequate investor protection from fraud.
  I have been deeply troubled by the ruling of several federal district 
courts which, ignoring the clear legislative history of the 1995 Act, 
have either changed the requirements of scienter in a fraud case or 
have invalidated the proper pleading standard for a 10b-5 action.
  Mr. President, let me be clear: nothing in the act addressed the 
scienter standard: which has quite rightly been held by every Circuit 
to rule on the issue to include recklessness.
  With regard to proper pleadings: the PSLRA requires plaintiffs to 
plead specific facts ``giving rise to a strong inference'' that the 
defendants acted with the required state of mind. Prior to the 1995 
legislation, some circuit courts allowed scienter to be averred 
generally. However, the PSLRA's heightened standard was specifically 
linked to the most stringent pleading standard at the time, that of the 
Second Circuit. That standard allows a plaintiff to establish a case by 
either pleading motive and opportunity or recklessness.
  Mr. President, I believe that SEC Chairman Levitt, who has a lifetime 
of experience as both an investor and regulator of markets, has been 
the most articulate concerning the need for a recklessness standard 
concerning the scienter requirement.
  In October 21, 1997 testimony before the Subcommittee on Finance and 
Hazardous Materials of the House's Committee on Commerce, Chairman 
Levitt said:

       In my judgment, eliminating recklessness from the 
     securities anti-fraud laws would be tantamount to eliminating 
     manslaughter from the criminal laws. It would be like saying 
     you have to prove intentional murder or the defendants gets 
     off scot free. . . . If we were to lose the reckless 
     standard, in my judgement, we would leave substantial numbers 
     of the investing public naked to attacks by fraudsters and 
     schemers.

  In testimony before the Banking Subcommittee Chair by Senator Gramm, 
on October 29, 1997, Chairman Levitt further articulated his position 
regarding the impact a loss of recklessness would have. He said:

       A uniform federal standard that did not include 
     recklessness as a basis for liability would jeopardize the 
     integrity of the securities markets, and would deal a 
     crippling blow to defrauded investors with meritorious 
     claims. A higher scienter standard would lessen the 
     incentives for corporations to conduct a full inquiry into 
     potentially troublesome or embarrassing areas, and thus would 
     threaten the disclosure process that has made our markets a 
     model for nations around the world.

  I think the danger that a loss of recklessness posses to our citizens 
and our markets is clear.
  Mr. President, equally important is a pleading standard that allows 
victimized investors to recover their losses. The reason for allowing a 
plaintiff to establish scienter through a pleading of motive and 
opportunity or recklessness is clear. As one New York Federal District 
Court has stated, ``a plaintiff realistically cannot be expected to 
plead a defendant's actual state of mind.''
  Since the 1995 Act allows for a stay of discovery pending a 
defendant's motion to dismiss, requiring a plaintiff to establish 
actual knowledge of fraud or an intent to defraud in a complaint raises 
the bar far higher than most legitimately defrauded investors can meet.
  The SEC has been clear on this point and it has been well recognized 
by the supporters of both the 1995 and 1998 Acts that neither changed 
the preexisting standards.
  Mr. President, I am pleased that the Chairman of the Committee and 
the Ranking Member of the Subcommittee, a prime sponsor of this 
legislation, have today articulated their belief that including 
reckless behavior in the definition of fraud is essential to the 
protection of our markets. I join them in

[[Page S4801]]

their pledge to sponsor legislation should such protections be 
threatened.
  As a result, the legislative history of both bills well establishes 
that the scienter standard, as well as the pleading standard of the 
Second Circuit Court of Appeals, remains totally intact. Therefore, it 
is now clear that federal district court rulings that have held 
otherwise are clearly in error.
  Mr. President, I ask unanimous consent to have printed in the Record 
an analysis, preformed for me by the staff of the SEC, of cases 
adjudicated under the 1995 Act.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                               U.S. Securities and


                                          Exchange Commission,

                                   Washington, DC, April 20, 1998.
     Ted Long,
     Legislative Counsel, Offices of Senator Jack Reed, Hart 
         Senate Office Building, Washington, DC.
       Dear Mr. Long: The attached responds to your request for 
     staff technical assistance with respect to S. 1260, the 
     ``Securities Litigation Uniform Standards Act of 1997.'' This 
     technical assistance is the work of the staff of the 
     Securities and Exchange Commission; the Securities and 
     Exchange Commission itself expresses no views on this 
     assistance.
       I hope the attached is responsive to your request.
           Sincerely,
                                                Richard H. Walker,
                                                  General Counsel.
       Attachment.

                      Pleading Standard Scorecard

                         (As of April 17, 1998)

       I. Cases Applying the Second Circuit Pleading Standard:
       1. City of Painesville v. First Montauk Financial Corp., 
     1998 WL 59358 (N.D. Ohio Feb. 8, 1998).
       2. Epstein v. Itron, Inc., No. CS-97-214 (RHW), 1998 WL 
     54944 (E.D. Wash. Jan. 22, 1998).
       3. In re Wellcare Mgmt. Group, Inc. Sec. Lit., 964 F. Supp. 
     632 (N.D.N.Y. 1997).
       4. In re FAC Realty Sec. Lit., 1997 WL 810511 (E.D.N.C. 
     Nov. 5, 1997).
       5. Page v. Derrickson, No. 96-842-CIV-T-17C, 1997 U.S. 
     Dist. LEXIS 3673 (M.D. Fla. Mar. 25, 1997).
       6. Weikel v. Tower Semiconductor Ltd., No. 96-3711 (D.N.J. 
     Oct. 2, 1997).
       7. Gilford Ptnrs. L.P. v. Sensormatic Elec. Corp., 1997 WL 
     757495 (N.D. Ill. Nov. 24, 1997).
       8. Galaxy Inv. Fund, Ltd. v. Fenchurch Capital Management, 
     Ltd., 1997 U.S. Dist. LEXIS 13207 (N.D. Ill. Aug. 29, 1997).
       9. Pilarczyk v. Morrison Knudsen Corp., 965 F. Supp. 311, 
     320 (N.D.N.Y. 1997).
       10. OnBank & Trust Co. v. FDIC, 967 F. Supp. 81, 88 & n.4 
     (W.D.N.Y. 1997).
       11. Fugman v. Aprogenex, Inc., 961 F. Supp. 1190, 1195 
     (N.D. Ill. 1997).
       12. Shahzad v. H.J. Meyers & Co., Inc., No. 95 Civ. 6196 
     (DAB), 1997 U.S. Dist. LEXIS 1128 (S.D.N.Y. Feb. 6, 1997).
       13. Rehm v. Eagle Fin. Corp., 954 F. Supp. 1246, 1252 (N.D. 
     Ill. 1997).
       14. In re Health Management Inc., 970 F. Supp. 192, 201 
     (E.D.N.Y. 1997).
       15. Marksman Partners, L.P. v. Chantal Pharmaceutical 
     Corp., 927 F. Supp. 1297, 1309-10, 1309 n.9 (C.D. Cal. 1996).
       16. Fischler v. AmSouth Bancorporation, 1996 U.S. Dist. 
     LEXIS 17670 (M.D. Fla. Nov. 14, 1996).
       17. STI Classic Fund v. Bollinger Industries, Inc., No. CA 
     3:96-CV-0823-R, 1996 WL 866699 (N.D. Tex. Nov. 12, 1996).
       18. Zeid v. Kimberley, 930 F. Supp. 431 (N.D. Cal. 1996).
       II. Cases Applying a Stricter Pleading Standard than the 
     Second Circuit:
       A. Cases Holding that Motive and Opportunity and 
     Recklessness do not Meet Pleading Standard.
       1. Mark v. Fleming Cos., Inc., No. CIV-96-0506-M (W.D. 
     Okla. Mar. 27, 1998).
       2. In re Silicon Graphics Sec. Lit., 970 F. Supp. 746 (N.D. 
     Cal. 1997).
       3. In re Comshare, Inc. Sec. Litig., Case No. 96-73711-DT, 
     1997 U.S. Dist. LEXIS 17262 (E.D. Mich. Sept. 18, 1997).
       4. Voit v. Wonderware Corp., No. 96-CV. 7883, 1997 U.S. 
     Dist. LEXIS 13856 (E.D. Pa. Sept. 8, 1997).
       5. Powers v. Eichen, No. 96-1431-B (AJB), 1997 U.S. Dist. 
     LEXIS 11074 (S.D. Cal. Mar. 13, 1997).
       6. Norwood Venture Corp. v. Converse Inc., 959 F. Supp. 
     205, 208 (S.D.N.Y. 1997).
       7. Friedberg v. Discreet Logic, Inc., 959 F. Supp. 42, 48-
     49 (D. Mass. 1997).
       8. In re Glenayre Technologies, Inc., 1997 WL 691425 
     (S.D.N.Y. Nov. 5, 1997).
       9. Havenick v. Network Express, Inc., 1997 WL 626539 (E.D. 
     Mich. Sep. 30, 1997).
       10. Chan v. Orthologic Corp., et al., No. CIV-96-1514-PHX-
     RCB (D. Ariz. Feb. 5, 1998) (dicta).
       B. Cases Holding only that Motive and Opportunity do not 
     Meet Reform Act's Pleading Standard:
       1. Novak v. Kasaks, No. 96 Civ. 3073 (AGS), 1998 WL 107033 
     (S.D.N.Y. Mar. 10, 1998).
       2. Myles v. MidCom Communications, Inc, No. C96-614D (W.D. 
     Wash. Nov. 19, 1996).
       3. In re Baesa Securities Litig., 969 F. Supp. 238 
     (S.D.N.Y. 1997).
       4. Press v. Quick & Reilly Group, Inc., No. 96 Civ. 4278 
     (RPP), 1997 U.S. Dist. LEXIS 11609, at *5 (S.D.N.Y. Aug. 8, 
     1997).
       III. Examples of Cases with Language Questioning 
     Recklessness as a Basis of Liability (All Cases Previously 
     Listed Above):
       1. In re Silicon Graphics Sec. Lit., 970 F. Supp. 746 (N.D. 
     Cal. 1997).
       2. Friedberg v. Discreet Logic, Inc., 959 F. Supp. 42, 49 
     n.2 (D. Mass. 1997).
       3. Norwood Venture Corp. v. Converse Inc., 959 F. Supp. 
     205, 208 (S.D.N.Y. 1997).

  Mr. REED. Mr. President, as this legislation makes clear, those 
rulings that reject the reckless standard, or the Second Circuit's 
pleading standard are clearly wrong and a threat to the security of our 
markets.
  Mr. President, with assurances that proper protections for investors 
will remain in place, I am pleased to support the 1998 Act, thus moving 
toward an efficient, national uniform standard for securities class 
action lawsuits.
  I trust that higher courts will adhere to current principles of 
legislative history and case law to rule that the pleading and scienter 
standards continue to protect investors and that we will remain true to 
our commitment and fix any error.
  Additionally, as expressed in votes during the mark-up of this 
legislation, I am concerned that the definition of class action, as 
currently included in the bill, is too broad.
  Specifically, by defining a class as those whose claims have been 
consolidated by a state court judge, the bill infringes upon the rights 
of individual investors to bring suit; a situation sponsors have sought 
to avoid. I hope that this issue can be resolved today on the floor.
  Finally, I have appreciated the expert analysis that the Chair, 
Commissioners, and staff of the Securities and Exchange Commission have 
provided on this issue. I thank them for their assistance.
  Ms. MIKULSKI. Mr. President, I rise to support the Securities 
Litigation Uniform Standards Act. I supported the 1995 Private 
Securities Litigation Reform Act for three reasons: to stop the bounty 
hunters, to put the person who had lost the most money in charge of 
class action suits, and to penalize people who commit fraud.
  I have been very disturbed and disappointed to hear from many 
Maryland biotechnology and high technology companies that the 1995 
reforms are being circumvented and, that in some respects, nothing has 
changed.
  Why has nothing changed even though we enacted those important 
reforms? Because some have refused to accept the law of the land. 
Rather than abide by congressional efforts to protect small companies 
that create jobs and help to maintain our robust economy, a small group 
of specialized lawyers have simply shifted their filings to state 
courts.
  Enacting this uniform standards legislation would close this loophole 
and enable Congress to finish the job of eliminating abusive securities 
litigation that hampers and harms our economic future
  Uniform standards would only involve class action suits with at least 
50 plaintiffs involving nationally traded securities. These claims were 
rarely filed in state courts until federal reform became law in 
December 1995.
  This exposure of national companies and their shareholders to 
lawsuits by 50 different sets of rules amounts to a balkanization of 
securities law that boosts legal fees, distracts companies from 
creating jobs, and erodes the value of shareholder investments.
  I have heard from Maryland CPAs, venture capitalists, and Maryland 
companies along the I-270 High-Tech Highway that these uniform 
standards are needed.
  I believe that much of our economic future is in new and developing 
industries such as high technology and bio-technology. New, high-tech 
jobs are created only when companies generate capital to allow them to 
move into new fields. Without a balanced and uniform legal system free 
of loopholes, these companies must spend too much on frivolous 
litigation and not enough on investments to generate jobs.
  Mr. President, this legislation is about perfecting the important 
reforms we passed in 1995 to protect our emerging industries as they 
strive to innovate and create jobs. Promoting job creation is one of my 
economic principles, and I am pleased to support this legislation 
today.
  Mr. HATCH. Mr. President, I rise today to speak about S. 1260, the 
Securities Litigation Uniform Standards Act of 1998. I am pleased that 
this bill

[[Page S4802]]

is being acted upon today. Enactment of this bill will implement the 
underlying purpose of the Private Securities Litigation Reform Act of 
1995 by establishing uniform standards governing private securities 
litigation.
  The Private Securities Litigation Reform Act of 1995 provided a 
``safe harbor'' for forward-looking statements in order to encourage 
companies to make voluntary disclosures regarding future business 
developments. This objective was important to provide an environment in 
which companies could provide more information to potential investors 
without undue risk of litigation.
  Since passage of the 1995 Act, however, actions are often filed in 
state courts in order to circumvent these very protections. The 
resulting threat of frivolous lawsuits and liability under state law 
discourages corporate disclosure of forward-looking information to 
investors, eroding investor protection and jeopardizing the capital 
markets that are so important to the productivity of the fast-growing 
sectors of our economy.
  Uniform liability standards eliminate this threat and the drag on our 
economy which it causes. The enactment of this bill will, I believe, be 
a great impetus for new businesses, especially those in the rapidly 
growing high-tech and bio-tech fields of our economy. This bill thereby 
creates a business atmosphere that encourages, rather than inhibits 
economic growth.
  I hope my colleagues will join me in supporting passage of S. 1260, 
the Securities Litigation Uniform Standards Act of 1968.
  Mr. GRAMS. Mr. President, I rise in strong support of S. 1260, the 
Securities Litigation Uniform Standards Act, which is necessary to 
preserve the intent of the Public Securities Litigation Reform Act of 
1995. This bipartisan legislation is narrowly drafted to correct an 
unexpected consequence of the Public Securities Litigation Reform Act 
and is supported by the White House and the Securities and Exchange 
Commission (SEC).
  Following enactment of the 1995 Act, it became apparent that trial 
lawyers were up to their old tricks by circumventing the intent of the 
law by bringing frivolous class action law suits in state courts, 
rather than in Federal court. Although brought in a different forum, 
this action yields the same result--namely raising the cost to 
investors, workers, and customers. As a member of the conference 
committee on the 1995 Act, I can assure you that this is not the intent 
of Congress.
  As its name implies, S. 1260 preserves the 1995 Act by establishing 
uniform standards governing private class actions involving nationally 
traded securities. This bill does not interfere with the ability to 
bring criminal suits in state courts or for individuals to seek relief 
in state courts. Rather, this Act simply requires that class action 
lawsuits against nationally traded securities be filed in Federal 
court.
  I urge my colleagues to support this legislation and hope that it 
will be approved expeditiously so as to preserve the intent of the 1995 
Act.
  Mr. KERRY. Mr. President, I would like to thank the Senators Dodd and 
Gramm for their work in bringing this legislation before us today. I 
support this effort to reestablish the reasonable limitations the 
Congress established in 1995 with respect to class action lawsuits 
alleging the commission of securities fraud in connection with the 
purchase or sale of a covered security. This was a warranted and 
important step, and the efforts to effectively nullify it by bringing 
such suits in state courts must be halted, which this legislation does 
by requiring all class action suits of this type be brought in federal 
courts.
  While fraudulent actions by a company's management can destroy an 
individual investor's retirement nest egg, a frivolous suit filed 
against a start-up high-technology company can stop that business dead 
in its tracks. We need to protect the rights and interests of both 
shareholders and entrepreneurs. Although no law can do that perfectly, 
I believe this legislation will bring us as close as possible to the 
correct balance.
  The high technology sector has played an important part in the 
economic development of Massachusetts and the nation. This sector, 
which has been the most frequent target of securities strike suits, is 
critical to our future economic growth and the creation of highly 
skilled, family-wage jobs. Frivolous strike suits have had a chilling 
effect on start-up high-technology, biotechnology, and other growth 
businesses.
  After the growth of frivolous strike suits during the first part of 
this decade, passage of the Securities Litigation Reform Act in 1995 
was successful to a large degree in limiting strike suits in federal 
court. But litigants are too often circumvented its impediments to 
frivolous lawsuits by bringing actions in state court, reinvigorating 
the threat to emerging companies.
  The Securities Litigation Reform Act's limits on discovery fishing 
expeditions, until a court rules on the merits of a case, does not 
apply in state court, and plaintiffs have begun to file state lawsuits 
in order to gain access to important company information--too often 
this has permitted ``fishing expeditions'' into corporate files to try 
to find evidence of fraud. Actions such as these frustrate the intent 
of the reform law. Moving these cases to federal court should eliminate 
these meritless ``fishing expeditions.''
  Strike suits in state courts also have had a chilling effect on the 
number of companies which have released forward-looking statements on 
earnings. Companies fear that if the information on earnings that they 
release proves to be inaccurate, they will be held liable in state 
court. The lack of accurate, forward-looking information on companies 
makes it more difficult for investors to make informed judgments about 
their future. Reducing suits to those that can meet federal court 
standards should give these companies the confidence to release 
voluntarily their future earnings estimates, which should increase the 
efficiency of capital and reduce future stock volatility in our 
markets.
  Finally, the Securities Litigation Reform Act included important 
provisions which restrict the use of ``professional plaintiffs,'' 
eliminate bounty payments, limit attorneys' fees, assure class action 
lawsuit members receive notice of settlement terms, and restrict secret 
agreements under seal. None of these protections is available for class 
action suits brought in state courts.
  Moving all class action securities lawsuits to federal court should 
lead to the creation of a more favorable, stable climate for businesses 
while preserving important remedial means for shareholders with 
legitimate complaints about inappropriate corporate activities. 
Investors should gain better information about the marketplace. A 
diminished threat of abusive strike suits will strengthen the ability 
of businesses to provide investors with more information.
  I believe this helps to restore the balance we seek on behalf of all 
Americans, both those who are investors and those who are entrepreneurs 
and managers. I will support its passage and complement those who have 
brought it to passage.
  The PRESIDING OFFICER. The time of the Senator from Maryland has 
expired.
  The Senator from New York.
  Mr. D'AMATO. Mr. President, I know there are a number of amendments. 
I ask my colleagues, in the interest of moving forward if they would 
submit those amendments so we can start working on them.
  The PRESIDING OFFICER. The Senator from New York has 2 minutes 36 
seconds remaining. The time has expired on the side of the Senator from 
Maryland.
  Mr. SARBANES. Once an amendment is sent to the desk we can have time 
to proceed; is that correct?
  The PRESIDING OFFICER. That is correct.


                           Amendment No. 2395

(Purpose: To provide that the appropriate State statute of limitations 
        shall apply to certain actions removed to Federal court)

  Mr. SARBANES. I send an amendment to the desk for myself, Senator 
Bryan and Senator Johnson.
  The PRESIDING OFFICER. The clerk will report.
  The legislative clerk read as follows:

       The Senator from Maryland [Mr. Sarbanes], for himself, Mr. 
     Bryan and Mr. Johnson, proposes an amendment numbered 2395.

  Mr. SARBANES. Mr. President, I ask unanimous consent reading of the 
amendment be dispensed with.

[[Page S4803]]

  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment is as follows:
       On page 9, between lines 9 and 10, insert the following:
       ``(d) Applicability of State Statute of Limitations.--
     Notwithstanding subsection (b), an action that is removed to 
     Federal court under subsection (c) shall be subject to the 
     State statute of limitations that would have applied in the 
     action but for such removal.
       On page 9, line 10, strike ``(d)'' and insert ``(e)''.
       On page 10, line 12, strike ``(e)'' and insert ``(f)''.
       On page 10, line 17, strike ``(f)'' and insert ``(g)''.
       On page 14, between lines 10 and 11, insert the following:
       ``(3) Applicability of state statute of limitations.--
     Notwithstanding paragraph (1), an action that is removed to 
     Federal court under paragraph (2) shall be subject to the 
     State statute of limitations that would have applied in the 
     action but for such removal.
       On page 14, line 11, strike ``(3)'' and insert ``(4)''.
       On page 15, line 15, strike ``(4)'' and insert ``(5)''.
       On page 15, line 20, strike ``(5)'' and insert ``(6)''.

  Mr. SARBANES. Mr. President, Senator Cleland has been here for some 
time on the floor. I know he wishes to speak to the bill, and in the 
course of those remarks would be speaking to this amendment, so I yield 
the floor. I hope that Senator Cleland will be recognized.
  The PRESIDING OFFICER. The Chair recognizes the distinguished Senator 
from Georgia.
  Mr. CLELAND. Mr. President, I rise today to express my reservations 
about the merits of S. 1260.
  I served as Georgia's Secretary of State and Commissioner of 
Securities for many years. I was responsible for administering 
Georgia's securities laws and providing investor protection for Georgia 
residents.
  We are all aware that the securities markets are an integral part of 
our nation's economy and that we have experienced tremendous growth in 
these markets. Nearly half of all American households now invest in the 
stock market either directly or through mutual funds. These are not 
just rich people trying to become richer. These are primarily middle 
class Americans seeking to fund their children's education, to save up 
for a down payment on a home, and to provide a decent standard of 
living for themselves in retirement. In 1990, only 17.8 percent of all 
Americans invested in equities but that figure has grown dramatically, 
and one in three households now own securities.
  Unfortunately, these successes have led to a tremendous increase in 
fraud and abuse. Recently, top securities watchdogs in the United 
States have warned that the explosion in the stock market has led to a 
sharp rise in securities sales fraud and stock price manipulation. 
Several studies have shown that many Americans lack the financial 
sophistication to protect themselves from fraud. At a town meeting in 
Los Angeles, SEC Chairman Levitt cautioned that investors are ``more 
vulnerable than ever to fraud.'' This concern has been echoed by others 
who point to a disturbing rise in the level of securities fraud and 
there are many allegations that organized crime is seeking a foothold 
in certain sectors of the securities marketplace.
  It is unclear whether there is any means for defrauded investors to 
recover stolen money under federal law following the passage of the 
1995 PSLRA, which severely limits the rights of defrauded investors. 
Preemption of state remedies under S. 1260 could lead investors with no 
ability to protect themselves against fraud. Several federal district 
courts have issued rulings on the 1995 law that are so restrictive that 
they threaten almost all private enforcement--including holding that 
reckless wrongdoers are no longer liable to their victims under the 
PSLRA. I strongly disagree with this interpretation because Congress, 
when it crafted the PSLRA, it did not intend to eliminate recklessness 
as a standard of liability. On the contrary, it is my understanding 
that the PSLRA did not, in any way, alter the scienter standard in 
federal securities fraud suits.
  Let us be clear about who suffers in the cases of securities fraud--
it is retirees living on fixed incomes, young families struggling to 
make ends meet and save for their children's education, teachers, and 
factory workers. Each day, devastating cases are brought to the 
attention of securities regulators and law enforcement officers. 
Indeed, financial fraud is a serious and growing problem. No discussion 
about securities litigation reform is complete without serious 
consideration of the potential impact on small investors across the 
country. The elimination of state remedies against fraud could be 
catastrophic for millions of Americans. The fundamental purpose of 
securities law is to protect investors, something that S. 1260 does not 
adequately address. In fact, S. 1260 is designed merely to protect big 
business.
  The confidence in our securities markets results, in part, because of 
the cooperative enforcement system that has served the United States 
exceptionally well since the Depression. Substantive securities 
regulation in this country began at the state level. In 1911, the State 
of Kansas enacted the nation's first Blue Sky Law. Other states quickly 
adopted their own version of such legislation. Congress passed federal 
securities laws in 1933 and 1934 to complement--not replace--state laws 
and to stop abuses that caused the 1929 crash.
  Many states have chosen to provide more expansive investor 
protections than federal law currently provides--through accountability 
for aiders and abettors, realistic time limits for filing a fraud 
claim, and the ability of investors to recover fully from professionals 
who help perpetrate frauds when the primary wrongdoer is bankrupt, in 
jail, or has fled the country.
  In the late 1980s as Secretary of State, I conducted a series of 
public hearings to focus on securities fraud taking place in Georgia. 
This led me to recommend a number of changes to strengthen Georgia's 
securities laws. These changes established significant disclosure 
requirements for those dealers offering and selling certain stocks 
within or from the state of Georgia. These recommendations were 
unanimously enacted as amendments to the Georgia Securities Act, and 
gave my staff more tools to effectively deal with securities fraud. The 
Georgia legislature also installed securities fraud as a predicate 
offense for purposes of liability under the RICO statute. I am pleased 
to report that the efforts of the Georgia General Assembly are the rule 
rather than the exception. According to the SEC, 49 of the 50 states 
provide liability for aiders and abettors now unavailable under federal 
law, and 33 states provide longer statutes of limitations for 
securities fraud actions than current federal law. Mr. President, S. 
1260 would undermine these important state remedies.
  Simply put, S. 1260 is an affront to the efforts of state governments 
across the country to locally protect their public investors from 
fraudulent securities transactions. For example, this bill reinforces 
the unduly short statute of limitations in federal law. In effect, 
federal law rewards those perpetrators of fraud who successfully 
conceal the fraud for more than three years. A majority of states have 
statutes of limitations that are longer than the federal statute. As 
currently written, S. 1260 would preempt those state laws. Furthermore, 
the definition of ``class action'' contained in this bill is overly 
broad. I have been informed that the definition of ``class action'' in 
S. 1260 would allow single suits filed in the same or different state 
courts to be rolled into a larger federal class action, and this was 
never contemplated or desired by individual plaintiffs.

  Another cause for concern is that under S. 1260, defrauded state and 
local pension funds are barred from recovering from corporate 
wrongdoers in state court. Since many remedies have already been 
foreclosed in federal court, the state or local government and its 
taxpayers may be required to make up losses in the pension fund 
resulting from fraudulent securities transactions. If state and local 
governments are creatures of state law, shouldn't they be entitled to 
pursue state remedies?
  State and local government representatives are unequivocal in their 
opposition to S. 1260. The National League of Cities, the U.S. 
Conference of Mayors, the Government Finance Officers Association, and 
the National Association of State Retirement Administrators all reject 
the bill in its current form.
  Mr. President, I am not convinced that the federal preemption of 
state

[[Page S4804]]

anti-fraud protections is a necessary step. Preemption supporters 
emphasize an ``explosion'' of state suits filed to circumvent the PSLRA 
in the two years since its enactment. Yet the number of state 
securities class actions filed in 1997--only 44 nationwide--represents 
a 33 percent decrease since 1996 and is lower than the number filed in 
any of the three years before the PSLRA was passed. In addition, most 
of the state court cases have been filed in California. No state other 
than California has had more than seven securities class actions filed 
in the two years since the enactment of the PSLRA. Mr. President, if a 
problem exists, then it should be addressed in Sacramento, not 
Washington, and I understand that California has already established a 
legislative commission to study its laws and make changes if necessary. 
Other states should be free to decide how to protect their own citizens 
from fraud.
  Mr. President, I support the right of investors to seek legal 
remedies against those persons selling fraudulent securities. I have 
supported an investor's right to seek redress through mediation, 
arbitration, and civil litigation. While I worked to streamline the 
regulatory process in Georgia, I opposed amendments to federal 
regulations that would have impaired the ability of a state to protect 
its investors. Here in the Senate, my focus remains the same. For this 
reason, I oppose S. 1260.
  Thank you Mr. President. I yield the floor.
  Mr. D'AMATO addressed the Chair.
  The PRESIDING OFFICER. The distinguished Senator from New York is 
recognized.
  Mr. D'AMATO. Mr. President, I believe that my colleague, the Senator 
from Maryland, is going to speak to this amendment. This amendment 
would indeed promote forum shopping for those lawyers to look for the 
State that had the longest statute of limitations.
  I point out the Lampf decision, which will be referred to. After that 
decision, in a sample of actions brought in the State courts, 43 of 
them were filed within the 4-year period of time--43 out of a total of 
44. So we do not believe this amendment will do anything other than to 
promote forum shopping for the longest period of time, and that it 
really counteracts the Supreme Court's decision, which has not worked a 
hardship on plaintiffs who have a legitimate suit or seek to bring it.
  Mr. SARBANES addressed the Chair.
  The PRESIDING OFFICER. The Chair recognizes the Senator from 
Maryland.
  Mr. SARBANES. Mr. President, this amendment, as the Senator from New 
York has indicated, goes to the question of the statute of limitations, 
and it seeks to preserve the State statutes of limitations.
  Let me quickly review the history. In the Lampf case, which my 
colleague referred to, the Supreme Court significantly shortened the 
period of time in which investors may bring securities fraud actions. 
On a 5 to 4 vote--in other words, in a very closely divided Court--the 
Supreme Court held that the applicable statute of limitations is 1 year 
after the plaintiff knew of a violation, and in no event more than 3 
years after the violation occurred. In other words, once the violation 
occurs, if the plaintiff never finds out about it and 3 years pass, you 
can't do anything about it, even though, of course, one of the 
hallmarks of securities fraud is concealment and deception specifically 
designed to keep them from finding it out.
  The other aspect was 1 year after the plaintiff knew of the 
violation. Now, this is shorter--this statute of limitations --than 
those that exist in private securities actions in the law in 33 of the 
50 States, as my distinguished colleague illustrated earlier with his 
map.
  Testifying before the Banking Committee in 1991, SEC Chairman Richard 
Breeden stated:

       The timeframe set forth in the Court's decision is 
     unrealistically short and will do undue damage to the ability 
     of private litigants to sue.

  Chairman Breeden went on to point out that many cases come to light 
only after the original distribution of securities. The Lampf cases 
could well mean that, by the time investors discover they have a case, 
they are already barred from the courthouse. The FDIC and the State 
securities regulators joined the SEC in 1991 in favor of overturning 
the Lampf decision. In fact, Chairman Levitt testified before the 
Securities Subcommittee of our committee in April of 1995:

       Extending the statute of limitations is warranted because 
     many securities frauds are inherently complex and the law 
     should not reward the perpetrator of a fraud who successfully 
     conceals its existence for more than 3 years.

  Chairman Levitt reaffirmed his support for a longer statute of 
limitations before the committee as recently as March 25, 1998. I 
continue to believe that this time period in the Federal legislation 
does not allow individual investors adequate time to discover and 
pursue violations of securities law, but we raised that issue before 
and that issue was decided.
  So this amendment isn't trying to change the time period for 
securities fraud actions brought in Federal court. This amendment seeks 
to fix a related problem that will be created by this bill. Because of 
the overly broad definition of a class action, this bill creates a 
flaw; namely, that the Federal statute of limitations will now apply in 
an unfair manner to State cases. Cases that were timely filed under 
State statute of limitations may now be removed to Federal court and 
then dismissed under the shorter Federal statute of limitations.
  Mr. BRYAN. Mr. President, will the Senator from Maryland yield for a 
question?
  Mr. SARBANES. I yield to my colleague.
  Mr. BRYAN. Is the Senator indicating that an investor who files in a 
State court in a timely fashion after having consulted with legal 
counsel that said, yes, this is a timely action--and we shall assume 
for the sake of the discussion meritorious--can have his action, in 
effect, dismissed by having it removed to the Federal court and the 
shorter statute of limitations of 1 to 3 years as is required under 
Federal law?
  Mr. SARBANES. Exactly.
  Mr. BRYAN. It will wipe them out.
  Mr. SARBANES. Investors who file in a timely fashion under State law 
may find their lawsuits dismissed because, contrary to their intention, 
and in many instances unbeknownst to them that this would happen, they 
find themselves lifted out of a State court, put into the Federal 
court, and at that point the shorter statutes of limitations apply. So 
their suit is dismissed for failure to meet a shorter time requirement 
that they couldn't have known was going to be applied to them.
  This problem is created in part because of the broad definition of 
what is a class action that is in this legislation. So you could have 
an individual investor who finds himself classified as part of a group, 
although he was not part a group. He filed it on his own. He had his 
own lawyer, and he wasn't in collusion with anybody else in doing this. 
Or you could have 50 identified investors--say, school districts, or 
water and sewer districts--that get defrauded. If there are more than 
50, they can be lifted out of the State court and put into the Federal 
court. When they went into the State court, they met the statute of 
limitations. But when they get lifted out of the State court and put in 
the Federal court, they then have to comply with this shorter statute 
of limitations, and they find themselves dismissed for failure to meet 
the shorter time requirement.
  Mr. BRYAN. So the perpetrator of the fraud, if I understand what the 
Senator from Maryland is saying, has the ability to wipe out the small 
investor by removing the cause of action to the Federal court, even 
though that case was filed timely under State law and even though the 
small investor says, Look, I want to have this action continued at the 
State level. So the Senator is saying, if I understand the Senator from 
Maryland correctly, that the power to wipe out this cause of action, to 
wipe out any possibility for relief, are now providing that to the 
perpetrator of the fraud?
  Mr. SARBANES. That is correct.
  Mr. BRYAN. The perpetrator of the fraud is allowed to do that under 
this?
  Mr. SARBANES. That is right. What this amendment does, very simply, 
is it provides that when the investors are removed from the State court 
to the Federal court, they can bring their State statute of limitations 
with them. If they filed in the State court, and

[[Page S4805]]

they complied with the statute of limitations, they ought not to find 
themselves taken into Federal court and then being told they do not 
comply with the shorter statute of limitations and they are out of the 
courthouse when they, in fact, complied at the State level with the 
State statute of limitations.

  This is to deal with this unfairness whereby an investor can file a 
timely suit under State rules and without advance warning later be 
dismissed under a different set of rules. Anyone who wished to bring 
the suit in the Federal court would have to abide by the 1- and 3-year 
limitation of Lampf. But this is clearly unfair to an investor who is 
acting in a reasonable manner.
  This amendment is supported by a broad coalition of government 
officials and consumer groups. The National League of Cities, the 
National Association of Counties, the U.S. Conference of Mayors, and 
others have written to express their support for an amendment to allow 
plaintiffs to carry State statute of limitations with them in cases 
filed in State court which are removed to Federal court. The Consumer 
Federation of America has joined as well.
  I hope my colleagues will support this amendment. It is an effort to 
deal with what, I think, is a very specific and definable flaw in this 
legislation. I don't think investors going into a State court, timely 
under State law--and I refer back to the comments of Chairman Breeden 
and others about the complexities of these cases, the difficulty of 
discovering the fraud, the difficulty of bringing the suit once the 
fraud is discovered--that they then ought to find themselves foreclosed 
altogether from any equitable relief simply by removal to the Federal 
court and the application of the shorter statute of limitations.
  Mr. DODD addressed the Chair.
  The PRESIDING OFFICER. The Senator from Connecticut.
  Mr. DODD. Mr. President, I rise in opposition to the amendment. The 
purpose of this amendment is, obviously, to thwart the underlying 
rationale for the legislation.
  My colleagues have already pointed out that there are 50 
jurisdictions with different statutes of limitations in them. My 
colleague from Nevada has worked long and hard on the issue of trying 
to extend the statute of limitations at the Federal level, which is an 
effort that I applaud and support. After the Lampf decision, I thought 
it is worthwhile. I don't disagree with him on that. I disagree with my 
colleague from Maryland. That is not the issue.
  The issue, of course, is not whether or not there is a statute of 
limitations at the Federal level but whether or not you are going to 
allow 50 different individuals to apply State statute of limitations on 
nationally traded securities accounts on national markets. The purpose 
of this bill is a uniform standard for which nationally traded 
securities are traded on national markets.
  If you are going to allow 50 different jurisdictions to apply 50 
different statutes of limitations, you have just destroyed the very 
purpose of the legislation. Vote against the bill if you want. But you 
can't very well vote for this amendment and then vote for the bill. It 
doesn't make any sense at all.
  Of course, this idea that this has been a great disadvantage, let me 
share some hard facts with my colleagues about what has happened, 
because in order to make this amendment a Federal limit, you have to 
have information backing it, supporting it, underlying it, which 
indicates there is a problem here.
  The evidence since 1991, when the Lampf decision was rendered, 
clearly refutes the contention that State courts are necessarily a 
safety net for meritorious claims. The evidence of that would lead one 
to the opposite conclusion. The statute of limitations was shortened, 
as my colleague from Nevada and the Senator from Maryland pointed out, 
by a Supreme Court decision in 1991. That was 4 years, between 1991 and 
1995, before we passed the 1995 litigation reform bill.
  So it is kind of an interesting 4 years to look at. You have the 
Lampf decision in 1991. We passed in 1995 the litigation reform bill. 
What happened between 1991 and 1995? There is almost no evidence, none, 
that plaintiffs brought securities fraud cases in class actions against 
nationally traded securities in State courts during 1991 and 1995--no 
evidence of it at all. That would be the time you might do it because 
there the law said, of course, you could go into State courts and use 
the State statute of limitations. If you want to take advantage of it, 
that period of time would certainly be an indication of what was going 
on.
  There is evidence that many of the suits brought in State courts 
since the 1995 act are well within the 1 to 3 years. Again, let me 
emphasize that I don't have any difficulty with the notion of having a 
longer period. I agree with my colleague on that.
  But he knows and I know we have been through that. We haven't been 
successful in extending it. Now, maybe someday we can. Maybe we can 
convince others. But that is a different debate--an important debate 
but a different debate. The debate here raised by this amendment is, do 
we allow the 50 different jurisdictions, 33 States which do better, 17 
which do worse--by the way, in 17 States you would be disadvantaged 
between what the Federal law provides and what the State courts do. So 
you get a mixed bag on this.
  But since 1995, most of the actions that have been brought in the 
statute of limitations were brought well within the 1 year of the 
discovery or 3 years of when the fraud was committed, which is what the 
Lampf decision allowed and provided for. In fact, it is worthwhile to 
note that in some of these cases the suggestion somehow that the 
statute of limitations is a problem is ludicrous on its face. Three 
suits were filed against Intel Corporation within 48 hours of an 
adverse earnings announcement--48 hours; three lawsuits were filed 
within 48 hours. One in 3 years. It is ridiculous; these lawsuits are 
being filed almost momentarily in many cases.
  We have a second case of the EMC corporation. A case was filed within 
20 hours of an adverse announcement. The notion somehow that this a 
great effort to discover fraud in these cases--the notion somehow that 
those of us in support of this bill in any way want to discourage 
investors from bringing legitimate lawsuits as plaintiffs is totally 
wrong.
  And part of what we rest our case on, Mr. President--let me share 
with my colleagues what you could find on your Internet this morning, 
not a year ago or 5 years ago or 6 months ago. It is entitled ``Stock 
Disasters.'' ``Stock Disasters'' it is called. That might suggest we 
have had some real fraud going on--``Stock Disasters.'' You hit on your 
little mouse here, and you hit on ``Top Stock Losers of the Day.'' 
Boom, this page pops up. You have to get this one, and then you get 
this one.
  What does it show you? It lists stock fluctuations, stocks that lost 
money, stocks that gained money. That is all.
  Mr. D'AMATO. Will the Senator yield for a question?
  Mr. DODD. I am happy to yield to my colleague.
  Mr. D'AMATO. Let me ask the Senator, does the underlying legislation 
in any way limit the Securities and Exchange Commission from bringing 
any action to recover for disgorgement where there is fraud?
  Mr. DODD. None whatsoever.
  Mr. D'AMATO. There is no statute of limitations?
  Mr. DODD. Absolutely none.
  Mr. D'AMATO. So the SEC can bring these actions but the strike 
lawyers can't wait indefinitely and pick a forum. That is what the 
Senator is saying. But certainly the SEC can still bring these actions 
at any time that it discovers fraud.
  Mr. DODD. My colleague from New York is absolutely correct. The point 
we have been trying to make here is that if you go here --and ``Stock 
Disasters'' is the title of this, Mr. President--and then you switch on 
``Stock Disasters''--and the stocks decline in a couple cases, some 
stocks going up--there is no allegation here of fraud or mismanagement, 
merely stock fluctuations.
  Stock disasters? That is not a disaster. It is 10:52 this morning. 
That is how these suits are filed. It is ludicrous to somehow suggest 
we are talking about deep fraud in these cases. All we are trying to do 
is slow this down so that legitimate plaintiffs can bring lawsuits, and 
also legitimate investors particularly--and a lot of these companies, 
by the way, I point out, Mr. President, a lot of these companies, if 
you look at the losers as of 10:52 this morning, are your small high-
tech firms.

[[Page S4806]]

That is the future of our economy, by the way. That is the knowledge-
based economy of our country for the 21st century. Let some predator 
law firm go out there because they get a slight stock fluctuation and 
bring a lawsuit against them, having to spend millions of dollars to 
defend the company, you lose the company. Who benefits from that? I 
tell you who does. The law firm. That is who does. That is all this is 
about, the bottom line. That is all this is about.

  So we talk here about the statute of limitations. Again, I am all for 
extending it. I think there is a case to be made on that. But to say 
here with nationally traded securities on national markets, these 
exchanges, that you are going to have to go through 50 different 
jurisdictions is to defeat the very purpose of what we are trying to do 
here. And that is, with nationally traded securities and national 
exchanges, we ought to have a uniform standard. I would have it be a 
bit longer, but that is not the issue before us. What is before us is 
whether or not we are going to have one standard here so that we can 
try to have some predictability and a little fairness in this process.
  Certainly what we have seen, of course, is a rush to the courthouse, 
and that is why I think this amendment is unnecessary. And if its 
adoption were to occur, it would destroy the very purpose which has 
brought us here at this point in our debate.
  For those reasons, Mr. President, I urge rejection of the amendment.
  The PRESIDING OFFICER. The Chair recognizes the distinguished Senator 
from Maine.
  Ms. COLLINS. Mr. President, I rise in support of the amendment to 
preserve the state statute of limitations for cases removed to Federal 
court under this legislation.

  I intend to vote for this bill. But in doing so, I think it important 
to be straightforward about what S. 1260 does. This is a bill that 
preempts state law. Specifically, it preempts securities antifraud 
statutes for certain types of class action cases.
  I generally oppose preemption, as I think it overlooks the 
considerable wisdom that exists at the local level. Not without some 
measure of discomfort, I am nonetheless inclined to vote for this bill, 
because I find considerable merit to the contention that large class-
action cases against companies whose securities are sold in the 
national marketplace may well belong in the Federal courts. Otherwise, 
Congress' ability to regulate our national securities markets in an era 
of international investing is arguably impeded.
  I feel strongly, however, that if we are going to preempt state law 
and impose a single federal standard, it must be a fair one, and that 
is not the case with the federal statute of limitations. Under federal 
law, a securities fraud suit must be brought within one year of when 
the fraud was or should have been discovered, but in no instance after 
more than three years have elapsed.
  I served for five years as the head of the Maine department that 
regulates financial institutions, and I can tell you from personal 
experience that a three-year limitations period is too short. The 
reality is that, even with due diligence, some frauds are not 
discovered within that time frame. Indeed, the very object of a fraud 
is to deceive the other party to the transaction for as long as 
possible.
  The limited partnership cases of the last decade illustrate my point. 
The victims of those frauds were largely elderly, largely trusting, and 
largely lacking in financial sophistication. It is no wonder that in 
many of those instances, they did not, and even within reasonable care, 
could not have, discovered the fraud within three years of its 
commission.
  It is not just my opinion that the Federal limitations period is 
inadequate. The Securities and Exchange Commission has taken the 
position that the period is too short.
  This is an instance in which the Maine Legislature has shown more 
wisdom than the Federal Government. Under the law of my state, the 
limitation period is two years from the date the fraud was, or with 
reasonable care, should have been discovered, with no outside limit. 
That gives innocent investors the opportunity to obtain redress for 
fraud as long as they act with reasonable diligence.
  I can understand the argument for a single, Federal standard in this 
area, but I cannot accept preempting a state standard that is far more 
consistent with reality. While the best remedy would be to change the 
Federal limitations period for all securities fraud cases, that issue 
is not before us today. Thus, we should take the next best step, which 
is to preserve the state statutes for cases that are removed to Federal 
court under this legislation.
  What this amendment will not do is harm high-tech companies. What it 
will do--maybe not this year or next, but at some point--is to protect 
innocent, unsuspecting investors, who are victimized by a securities 
scam that could not reasonably have been discovered within three years. 
Thus, I urge my colleagues not to wait until we have such victims, but 
to stop the problem before it occurs by supporting this amendment.
  I thank you, Mr. President. I yield the floor.
  The PRESIDING OFFICER. The Chair recognizes the distinguished Senator 
from Nevada.
  Mr. BRYAN. Mr. President, I commend the Senator from Maine for her, I 
think, most illuminating statement in terms of the problem that we face 
with the shorter statute of limitations. She is absolutely correct. Her 
State--and my own--apparently, if I understood the distinguished 
Senator, has a 1- and 5-year statute; 5 years is the outside. That is 
what we have in Nevada as well.
  The testimony beyond refutation is that a 3-year statute is simply 
too short. The Securities and Exchange Commission, which has all of the 
resources available to the Federal Government, much more so than any 
individual investor, tells us that on average it takes more than 3 
years to do the investigation, to bring the cause of action. Certainly 
the small investor is seriously disadvantaged here, so I thank her for 
her comment and her leadership.
  Let me just make a couple of comments. I know we have talked about 
this in the context of the debate on the bill, but the unfairness of 
this legislation to the small consumer can best be described: Heads the 
perpetrator of the fraud wins; tails the small investor loses. This is 
a ``no win'' proposition for the small investor.
  The thrust of this legislation is to say that the traditional class 
action lawsuit should no longer be available at the State court level. 
And, by ``traditional class actions'' we mean individual plaintiffs who 
are bound together by a common lawyer who files on behalf of a lot of 
people who have been victimized by the identical fraud. That is really 
what a class action traditionally has been.
  Our friends on the other side say there have been some abuses. I 
acknowledge that there may have been some abuses there. I would be 
willing to work with them in dealing with the abuses. But here is the 
ingenious and unfair part of this. The proponents say, ``The individual 
has a right to file an action at the State court level, would have all 
the rights currently available under State law--the longer statute of 
limitations, the accomplice liability, the joint and several, the RICO 
provisions.'' OK, that sounds somewhat fair, although as we have 
pointed out, most small investors simply don't have the resources to 
bring such a case. But let's suppose that your teachers' pension fund, 
or what we have in Nevada, the public employee retirement system--
suppose they bring an action at the State level: One plaintiff, one 
lawyer, and, lo and behold, they have discovered 4 years after the fact 
of fraud that the public employee retirement system fund has been 
ripped off by a monstrous fraud. They file suit in State court.
  Surely you would think it would be possible for that one plaintiff to 
pursue a remedy under State law. But here is how the bill is crafted. 
Without the permission or consent of that public employee retirement 
system, if there are 49 other plaintiffs who file against the 
perpetrator of the fraud, then involuntarily, without the permission of 
the public employee retirement system, they can be forcibly removed 
from the State court and those rights that exist under State law are 
effectively divested from them. So in the hypothetical that I cite, a 
monstrous fraud,

[[Page S4807]]

which may have cost the public employee retirement system literally 
millions and millions of dollars, discovered sometime after 3 years for 
the first time and filed timely under the law--it would be possible for 
the perpetrator of the fraud to actually get other plaintiffs to file 
to build up a number of 50, thereby removing the case from State 
jurisdiction. And once it gets to the Federal court, lo and behold, 
what happens: the hammer falls because at the Federal level, because of 
the Lampf decision, the statute of limitations is 3 years, the outside 
bar.

  So here you can have literally tens of thousands of public employees 
or teacher retirement funds or an Orange County type of investment in 
which you may have a million or more taxpayers who are unable to 
recover simply because the perpetrator of the fraud is allowed to 
remove the single case from State court jurisdiction. What is the 
fairness of that?
  The able and distinguished chairman of the committee says the SEC can 
bring the action. That is true. But we have been told on many, many 
occasions that the SEC simply does not have the resources; that both 
the current chairman and previous chairman, in the time I served with 
the distinguished chairman of the committee and my colleague and good 
friend from Connecticut, have repeatedly told us that the SEC simply 
does not have the resources to pursue all of the fraud out there, and 
therefore the private cause of action is an absolutely essential and 
critical part of the regulatory structure, the structure that has 
created the safest and most efficient market in the world.
  Why are we making these changes? Because we are told that we must 
worship at the shrine of uniformity, that there is a rush to the 
courthouse door; 44 cases out of 15 million is a rush to the courthouse 
door? Many, many States have had no cause of action filed at all, at 
all. I think in my own State of Nevada there has been one. A rush? I 
must say, I do not think that makes the argument.
  If uniformity is an end to itself, isn't it a fairly persuasive 
argument to say 49 of the 50 States have laws that hold aiders and 
abettors liable? These are the accomplices, these are the lawyers, the 
accountants, the investment advisers who participated with the primary 
individual involved in the fraud to create the loss to the innocent 
investor--49 out of 50 States say those people ought to be liable, too. 
They are not, under the 1995 legislation. So if uniformity is to be the 
standard by which this debate is to be judged, what is wrong with that 
uniformity?
  What we have here, and I regret to say this, it is a systematic 
attempt to close the courtroom door to innocent investors, small 
investors in this particular instance that we are debating here. We are 
talking about an institutional investor who could be taken 
involuntarily to the Federal court. I don't understand the public 
policy argument that says that is somehow meritorious. I concede that 
maybe you could argue preemption if you develop a broader statute of 
limitations at the Federal level to protect them. Maybe that is a 
possibility. Maybe we could reach a compromise there. Then maybe you 
could argue preemption.
  But the proponents of this measure--with due respect to my colleague 
from Connecticut, he does support a longer statute of limitation--but 
the primary thrust of getting this legislation, the folks who have 
opposed and resist this, have resisted the longer statute of 
limitations. So, in effect, we take two weapons away from the small 
investor: The right at the Federal level to a longer statute of 
limitations--Lampf took that weapon away from the small investor--and 
now we are going to go one step further and take it away from that 
small investor who is filing at the State level, not as part of a class 
action but as an individual. And I must say I think the unfairness of 
that is --all of this is being done in the name of, whether it is 39 
cases or 44 cases out of 15 million, filed annually.
  I come from a part of the country where we understand what ``rush'' 
is. The gold rush. There was an exodus of people coming out West. But 
44 people? I wouldn't call that a gold rush. That would be a trickle.
  So I must say, this is a terribly, terribly important investor 
protection. My colleague from Maryland and I, we know how to count the 
votes. We know this legislation is going to pass. But even if you are 
for this legislation, please, please, I implore you to consider what 
you do to the small investor who is filing in State court. He or she 
gets involuntarily wiped out by the perpetrator of fraud by removing 
that case to the Federal court system where the shorter statute of 
limitations prevails.
  I yield the floor.
  Mr. SARBANES. Mr. President, I understand that the leadership doesn't 
intend to have votes much beyond 6 o'clock or thereabouts, and I 
suggest to my colleague that we set aside this amendment and do the 
next amendment, which I will send to the desk, which actually is 
interrelated in concept with this amendment, and that we have a vote on 
the two amendments beginning about 5:40.
  Mr. D'AMATO. Mr. President, we cannot confirm that it is the 
intention of the leadership on both sides to curtail votes as of any 
specific time. However, it would seem to me to be appropriate, 
notwithstanding that, to move to support the Senator's request that we 
stack the two amendments with a vote starting at 5:40 for the first 
one, and thereafter undertake a vote on the second one. Then, of 
course, if the leadership has decided no further votes, we can put that 
matter over.
  We are looking to shop that right now. I believe that will be the 
case, but we are waiting for final confirmation. If the Senator wishes 
to make his request on the basis that we will proceed to our first vote 
at 5:40 on the pending amendment and that thereafter, immediately after 
that vote, take up the second amendment and seek a vote on that, I will 
certainly join in that request.
  Mr. SARBANES. For ordering votes, we should not have any second 
degree.
  Mr. D'AMATO. Yes.
  Mr. SARBANES. Just to sketch it out, it was my assumption then in the 
morning we will have one other amendment to offer. We will do that 
amendment and then final passage is my expectation.
  Mr. D'AMATO. That is my expectation, and I will make that 
recommendation to the leader. Subject to the concurrence of the 
leaders, I imagine we then will have debate, hopefully limited to, 
let's say, an hour equally divided on the third amendment, and then go 
to final passage. How much time does the Senator want in between the 
third vote and final passage?
  Mr. SARBANES. Of course, we have used up all the debate time. What 
should we have, 10 minutes on each side before final passage, or 30 
minutes equally divided before final passage?
  Mr. D'AMATO. We can work that out and make that request later, but I 
certainly will not be opposed to 30 minutes equally divided before 
final passage.
  Mr. SARBANES. Mr. President, I ask unanimous consent to set aside the 
current amendment, and I will send an amendment to the desk, and that 
no second-degree amendments be in order to either, and that the vote 
begin on the amendment to be set aside at 5:40, to be followed by a 
vote on the amendment which will be sent to the desk.
  Mr. D'AMATO. Mr. President, before that amendment is set aside, I ask 
for the yeas and nays and indicate that I will move to table at the 
appropriate time.
  The PRESIDING OFFICER (Mr. Coats). Is there a sufficient second on 
the request for the yeas and nays?
  Mr. DODD. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The bill clerk proceeded to call the roll.
  Mr. SARBANES. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. SARBANES. Mr. President, I withdraw the request.
  The PRESIDING OFFICER. The Senator's request is withdrawn.


                           Amendment No. 2396

(Purpose: To make amendments with respect to the definition of a class 
                    action, and for other purposes)

  Mr. SARBANES. Mr. President, I send an amendment to the desk.
  The PRESIDING OFFICER. If there is no objection, the pending 
amendment is set aside.

[[Page S4808]]

  Mr. SARBANES. I apologize to the Chair. I ask unanimous consent that 
the pending amendment be set aside.
  The PRESIDING OFFICER. Without objection, it is so ordered. The clerk 
will report.
  The bill clerk read as follows:

       The Senator from Maryland [Mr. Sarbanes], for himself, Mr. 
     Bryan and Mr. Johnson, proposes an amendment numbered 2396.

  Mr. SARBANES. Mr. President, I ask unanimous consent that the reading 
of the amendment be dispensed with.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment is as follows:
       On page 10, strike line 24 and all that follows through 
     page 12, line 11 and insert the following:
       ``(2) Class action.--
       ``(A) In general.--The term `class action' means any single 
     lawsuit (other than a derivative action brought by 1 or more 
     shareholders on behalf of a corporation) in which--
       ``(i) 1 or more named parties seek to recover damages on a 
     representative basis on behalf of themselves and other 
     unnamed parties similarly situated; and
       ``(ii) questions of law or fact common to those persons or 
     members of the prospective class predominate over any 
     questions affecting only individual persons or members.
       On page 16, strike line 3 and all that follows through page 
     17, line 13 and insert the following:
       ``(B) Class action.--
       ``(i) In general.--The term `class action' means any single 
     lawsuit (other than a derivative action brought by 1 or more 
     shareholders on behalf of a corporation) in which--

       ``(I) 1 or more named parties seek to recover damages on a 
     representative basis on behalf of themselves and other 
     unnamed parties similarly situated; and
       ``(II) questions of law or fact common to those persons or 
     members of the prospective class predominate over any 
     questions affecting only individual persons or members.

       On page 17, line 14, strike ``(C)'' and insert ``(ii)'' and 
     move the margin 2 ems to the right.
       On page 17, line 21, strike ``(D)'' and insert ``(C)''.

  Mr. SARBANES. Mr. President, this amendment interrelates with the 
other amendment that has been set aside on which a vote will occur 
later.
  The sponsors of this bill say their goal is to wipe out frivolous 
class-action lawsuits alleging securities fraud. What are class-action 
lawsuits? They are lawsuits brought by a single person, not just on his 
own behalf, but on behalf of other persons similarly situated. In other 
words, one person can bring a lawsuit on behalf of an anonymous and 
potentially enormous group of people.
  Why do we allow someone to bring such a lawsuit? Because in many 
situations, it is the only economical way people can pursue remedies. 
If a large number of people have each suffered a relatively small loss, 
it may not be economical for any one of them to pay the costs of a 
lawsuit. There are many examples of class-action suits by investors who 
have been defrauded. It is a tool that allows individuals to share the 
cost of a lawsuit when they are injured.
  Because they can be brought on behalf of a potentially enormous 
class, on occasion they can be misused to coerce defendants into 
settlement. This is the abuse about which the sponsors of the 
legislation complain. They argue that companies are coerced by flimsy 
securities fraud class-action suits, that it is cheaper for the company 
to settle rather than to fight them, and that these class actions are 
being misused.
  I share the view that frivolous securities fraud class-action suits 
should not be tolerated, either in Federal court or in State court, and 
lawyers who file worthless suits hoping to extort a settlement should 
not be able to pursue that practice. But this bill reaches beyond the 
frivolous class action.
  Here is the problem. The definition of class action in this bill is 
too broad.
  It will prevent investors from bringing individual actions solely on 
their own behalf in State court. Since they were enacted over 60 years 
ago, the Federal securities laws have preserved the right of individual 
investors to bring securities fraud suits under State law. This system 
has worked well. State remedies offer important protections to 
investors where Federal remedies fall short.
  But the definition that is contained in this bill for ``class 
action'' is too broad. The bill has a three-pronged definition of 
``class action.'' And these prongs permit individual investors to be 
brought into Federal court against their will. The bill includes, as a 
class action, any group of lawsuits in which damages are sought on 
behalf of more than 50 persons, even if the suits are brought by 
separate lawyers without coordination.
  So to tie it into the previous amendment, what happens is an investor 
goes into State court, in a timely fashion, he files an individual 
suit, and if 50 others do the same thing, they can be removed to 
Federal court as, quote, a ``class action,'' although it is not a class 
action as a class action is ordinarily considered or ordinarily 
defined. They lift them out of the State court and put them into the 
Federal court, and they are shut out because of the statute of 
limitations.
  Individual investors ought not to have to lose their remedies under 
State law in order to deal with the problem of frivolous class actions. 
And so the amendment that is offered narrows the bill's definition of 
``class action'' to a suit brought on behalf of unnamed parties 
similarly situated. We do not use this ``50 investor'' definition which 
means unwary people are going to be trapped and lose their remedy.
  Now a broad coalition of State and local government associations have 
written to us supporting this amendment--the National Association of 
State Retirement Administrators as well. Here is what they have to say 
about the definition of ``class action'' in the bill.

       The definition of ``class action'' contained in S. 1260 is 
     overly broad. The definition of ``class action'' in S. 1260 
     would allow single suits filed in the same or different 
     courts to be rolled into a larger class action that was never 
     contemplated or desired by individual plaintiffs and have it 
     removed to Federal court. Claims by the bill's proponents 
     that individual plaintiffs would still be able to bring suit 
     in Federal court are belied by this provision.

  If we can narrow the definition of ``class action'' to a proper class 
action, and then that is taken into Federal court, then the statute of 
limitations will apply, if that prevails.
  On the other hand, if you are going to have a definition of ``class 
action'' that is so broad that individual investors can be covered, 
they ought not be subjected to the risk of losing their suit altogether 
because it is removed in a Federal court and they are bound by a 
statute of limitations that they had no idea was going to come into 
play in their instance.
  So, Mr. President, I very strongly urge this amendment. I think it 
corrects a very important weakness in this legislation. We can narrow 
the definition of who is covered by the class action so we no longer 
have to worry about the individual investor being shut out unfairly. I 
think we ought to significantly improve this legislation and narrow it 
so it applies to what it is asserted it is meant to apply to, and does 
not apply to individual investors who I think need to have their 
remedies preserved in the State courts.
  Mr. D'AMATO addressed the Chair.
  The PRESIDING OFFICER. The Senator from New York.
  Mr. D'AMATO. Mr. President, let me tell you basically what this 
amendment would do. This amendment would have the unintended effect--
and I cannot believe that my colleague would want for that to happen--
of opening up the whole question of the class-action suits being able 
to be moved to State courts. It would effectively allow lawyers to 
circumvent the purpose, the very purpose of this bill since so-called 
``huge'' mass actions could still be brought in the State court.

  So what we have is the problem of high-growth companies, small high-
growth companies that traditional class actions may be brought against 
by the strike lawyers; namely, they are expensive and timely to defend, 
and the plaintiffs are often forced to settle, regardless of the 
merits, to avoid excessive litigation costs. That is exactly what we 
are trying to deal with. There should be a uniform standard, and there 
should be a uniform procedure. And that is why we moved these 
nationally traded securities.
  Senator Dodd spoke to this, the nationally traded securities going to 
a Federal forum. This amendment changes the predominance requirements 
in the bill's class action definition. This effectively would gut the 
bill by encouraging State actions which would not qualify as a class 
action contained in the act. As a result, these

[[Page S4809]]

class actions would not be able to be removed to the Federal court. And 
so you have mass action lawyers representing a large number of 
plaintiffs on an individual basis in either a single action or a group 
action.
  The ``class action'' definition in the bill was worked out with the 
SEC. We have worked that out, and it is comprehensive enough to close 
the loophole. But it also provides State courts with guidance. It says 
``up to 50 people.'' That is the bright line. When you get over 50 
people, OK, that is the class action. And so this bill does not prevent 
individual investors from pursuing State court remedies, nor will it 
prevent a small group of investors from pooling their resources to 
pursue a claim under State law, but it will stop the strike action 
suits, the forum shopping that we have attempted to limit, because we 
have seen that dramatic increase.
  I think Senator Dodd, when he pointed out what the record was, I 
think it was a handful, what, five or six cases in a period of years, 
in all of the years, ballooning up to 40-plus in 1 year. What was that?
  Mr. DODD. If my colleague would yield.
  Mr. D'AMATO. Yes.
  Mr. DODD. Our colleagues have made much of this notion that there has 
not been this great degree of activity. Try, if you will, to just keep 
these numbers in mind. These are the actions filed in State court for 
fraud in class actions against publicly traded companies.
  In 1992, there were four cases filed all across the country. In 1993, 
there was one case filed all across the country. In 1994, there was one 
case filed all across the country. I do not have numbers for 1995. But 
they are four, one, and one.
  Mr. D'AMATO. Six cases.
  Mr. DODD. Then in 1996--we passed a law in 1995--59 cases were filed 
in State court; and in 1997, 1998, the number did drop down to about 
38. But you compare that--they want to talk about how the number fell 
off to 38 from 59. What they do not want to mention to you is, in 1994 
and 1993 and 1992 you had a total of six cases; in 1993 and 1994, one 
case--one case. And then it jumps, as we see in these other examples of 
where it moves to.
  So I say to my colleague and the chairman of the committee, this is 
quite clear. And if they wanted to get to statute of limitations 
problems, why didn't they file more of those cases in that period?
  Mr. D'AMATO. Mr. President, I think my colleague, by answering the 
question, points out quite clearly--it was my impression heretofore 
that he had mentioned a number of cases, but six cases in 3 years, 
jumping to 10 times that, 59--slightly less than 10 times that in 1 
year--in 1 year--I think it proves the point. And that is why the 
necessity of seeing to it that we have a uniform standard, that you 
cannot go forum shopping. And that is why this Senator, at the 
appropriate time, will move to table the pending amendment.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Connecticut.
  Mr. DODD. Mr. President, this is a very complicated area of law. I 
know our colleagues are going to come to the floor and want to know 
what this is all about.
  In effect, this amendment would have the impact of creating even 
further uncertainty in the definition of a class action. It does not 
provide more certainty; it is less certainty. I think it would upset 
the very carefully crafted and very balanced definition worked out with 
the Securities and Exchange Commission.
  The reason it took us a little time to get this bill to our 
colleagues was because we took so much time working with the SEC to try 
and define these areas. What our colleagues are offering is an 
amendment that would disrupt the definition worked out with the SEC in 
this area.
  Clearly, with all due respect, the tremendous amount of expertise in 
crafting it--I am not going to suggest to my colleagues that we have a 
perfect definition in the bill. But certainly this one is not perfect 
either. But if you are going to trust one or the other, it seems to me 
the one worked out with the Securities and Exchange Commission, I urge 
my colleagues, makes a lot more sense.
  Neither of these definitions tracks word for word what is in rule 23. 
Rule 23--trust me when I tell you this rule 23 goes on for pages, 
pages. It is one of the more lengthy definitions of class actions that 
there is. So, we are not tracking that word for word. We are trying to 
pick up the essence of it. It is tremendously complicated.
  We think this definition we have worked out with the Securities and 
Exchange Commission provides the right kind of balance.
  The bill originally had a limit of 25 plaintiffs, now raised to 50 
for a single lawsuit. This is by no means an exact science. I am the 
first to say that if we find shortly that number is not working as well 
as we would like, we would change it. Anybody who claims they have a 
word on high as to what is the perfect number here is deluding 
themselves. It is a number we chose because we thought it made sense 
based, again, on our discussions with the SEC.
  With all due respect to the authors of this amendment, it does 
undercut what we have tried to achieve here. I want to emphasize to our 
colleagues, you don't have to agree with every agency and what it 
suggests and does. But on this definition worked out with the 
Securities and Exchange Commission, if you want some predictability and 
some knowledge-based definition, the one we have in the bill is the way 
to go. To come up all of a sudden with a new one here that I don't 
think enjoys the kind of expertise that we have been able to achieve 
through working with the SEC would be unfortunate and could create a 
lot more problems.
  For those reasons, I urge the defeat of this amendment.
  Mr. BIDEN. Mr. President, I opposed the 1995 Securities Litigation 
Act for several reasons--including the precedent-setting changes to 
this country's judicial system without the input of the Judiciary 
Committee.
  I support the Sarbanes amendment for similar reasons--relating both 
to procedure, and to substance.
  In the past, bills that made changes to the rules that govern 
citizen's access to State courts were referred to the Judiciary 
Committee, to enable the committee with expertise to review and work on 
the legislation.
  While my colleagues on the Banking Committee had the opportunity to 
examine the specific, substantive changes this bill would make to our 
Nation's securities laws, it seems to me that we have once again 
skipped a very important step in the process.
  The securities litigation bill we are considering on the floor today 
pre-empts State court statutes of limitations in securities fraud 
cases--and yet again the Judiciary Committee was not given the 
opportunity to examine the issue.
  In 1991, the Supreme Court significantly shortened the statute of 
limitations for Federal securities fraud actions--to the shorter of 3 
years after the fraud occurs or 1 year after it is discovered.
  Then-SEC Chairman Richard Breeden called the new time limit 
``unrealistically short.'' But, S. 1260 would compound the problem by 
applying the Federal time limit to State actions removed to Federal 
court--even though it is shorter than the time limit applicable to 
actions in 33 of the 50 States.
  This bill would not only leave investors without State court remedies 
when brokers and dealers make fraudulent statements when selling 
corporate stock--but it would also tell them that they need only 
conceal their fraud for 3 years before being absolved of responsibility 
in Federal court as well.
  And the new time limit will apply even though the 1995 Securities 
Litigation Act raised the standard investors must meet to win a class 
action suit--you now have to prove a falsehood was made with clear 
intent to deceive.
  That's incredibly tough to prove.
  I will admit, some frivolous lawsuits are filed. And some lawyers do 
make too much from a suit--leaving defrauded investors too little.
  But, immunizing Wall Street professionals who can successfully hide 
their lies for 3 years is not the answer.
  I support the Sarbanes amendment and urge my colleagues to do the 
same. We should protect the small investor--not let white collar 
criminals go unpunished.
  Mr. D'AMATO. Mr. President, I know my colleague from Nevada is going 
to speak to this issue, and I ask unanimous consent at 5:30 today the 
Senate proceed to a vote on or in relation to the Sarbanes amendment 
2395, to be

[[Page S4810]]

immediately followed by a vote on or in relation to amendment 2396, the 
matter we are now considering, with no amendments in order to the 
amendments. I finally ask that the time until 5:30 be equally divided 
between the proponents and opponents. I have no intention of using any 
of the time, but that all the time be yielded to my colleague.
  Mr. SARBANES. Reserving the right to object, and I do not object, 
subsequent to that, then, I take it what the leadership would like to 
do is try to finish, so we will offer a third amendment and debate 
that. We hope the time will not be too long on that. Then we would be 
able to vote on that amendment and then on final passage.
  Mr. D'AMATO. That is correct.
  Mr. SARBANES. I have no objection.
  The PRESIDING OFFICER. Is there objection to the request of the 
Senator from New York?
  Without objection, it is so ordered.
  The Senator from Nevada.
  Mr. BRYAN. I don't want to prolong this debate unnecessarily. I 
realize several of my colleagues have time constraints.
  Let me say I think the Senator from Maryland has crafted an amendment 
that is eminently fair. He is using the definition of the Federal Rules 
of Civil Procedure. The notion that we get involved in describing what 
is a class action based upon an arbitrary number of individual 
plaintiffs--some of whom could be private citizens, some could be 
pension funds, and could be State agencies--makes no sense to me.
  So I believe, in trying to provide some sense of balance and 
fairness--so we do not get a situation where we have discussed 
throughout a good part of the afternoon that an individual who files an 
action by himself or herself with his or her lawyer alone, no other 
coplaintiffs involved, immediately after the discovery of a fraud, that 
would be 3 to 3 years and 2 months after the fraud occurred--should be 
allowed to pursue that cause of action and not be involuntarily sucked 
up into Federal court because 49 other people may have filed similar 
action, and to give to the errant defendant, the perpetrator of the 
fraud, the ability to manipulate the process so that the perpetrator of 
the fraud can file some phony plaintiff's actions, getting up to the 
threshold of 50, and then have the case removed, the individual 
plaintiff, the individual pension fund, the individual retirement fund, 
then having been effectively deprived of pursuing a cause of action 
that may be meritorious without question.
  I certainly urge my colleagues to thoughtfully reflect. This is the 
Federal Rules of Civil Procedure. They have been around since 1939. Why 
should we craft some kind of a special rule as to what constitutes a 
class action, the effect of which deprives individuals--not people 
filing on behalf of a similarly situated class, but individuals--their 
opportunity to recover on a fraud perpetrated upon them.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Connecticut.
  Mr. DODD. Very briefly, the essence of this comes down to this, 
because this is very complicated.
  How does this work? It is a State court judge that has to make this 
determination as to whether or not these individual suits get 
consolidated. It is not a Federal judge; it is a State court judge. 
Obviously, a State court judge has broad discretion in making that 
determination. Even if he does do that, if an individual feels he does 
not belong in that grouping--obviously, we are trying to avoid a case 
where there are 50 or more individual actions that effectively operate 
as a single action, which would thus gut the bill and the uniform way 
in which we are attempting to deal with litigation issues.
  As I said, the decision to consolidate these individual actions must 
be with a State court judge, and then if the individual feels as though 
they really don't belong in that case, the State court judge has broad 
discretion to take that individual out.
  There are a lot of protections here. This is not heavy handed at all. 
It is a way to try and avoid exactly creating new loopholes where 
plaintiffs seek to consolidate individual cases and thus evade the 
provisions of this legislation.
  But that decision is the State court judges' decision and to their 
broad discretion. And secondly, the individual has the opportunity to 
go to that State court judge and make the case that they don't really 
belong in that class action. That State court judge has the broad 
discretion of keeping that person out of that class.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from New York.
  Mr. D'AMATO. Mr. President, I don't know if it is appropriate at this 
time, if all time is yielded back, and I know at 5:30 we will vote.


              Vote on Amendment No. 2395--Motion to Table

  Mr. D'AMATO. Mr. President, if it is appropriate now, I move to table 
the Sarbanes amendment and I ask for the yeas and nays.
  The PRESIDING OFFICER. Is there a sufficient second? There is a 
sufficient second.
  The yeas and nays were ordered.
  The PRESIDING OFFICER. The question is on agreeing to the motion to 
lay on the table the amendment of the Senator from Maryland. The yeas 
and nays have been ordered.
  The clerk will call the roll.
  The assistant legislative clerk called the roll.
  Mr. McCAIN (when his name was called). Present.
  The result was announced--yeas 69, nays 30, as follows:

                      [Rollcall Vote No. 133 Leg.]

                                YEAS--69

     Abraham
     Allard
     Ashcroft
     Baucus
     Bennett
     Bingaman
     Bond
     Boxer
     Brownback
     Burns
     Campbell
     Chafee
     Coats
     Cochran
     Coverdell
     Craig
     D'Amato
     Daschle
     DeWine
     Dodd
     Domenici
     Enzi
     Faircloth
     Feinstein
     Frist
     Gorton
     Gramm
     Grams
     Grassley
     Gregg
     Hagel
     Harkin
     Hatch
     Helms
     Hutchinson
     Hutchison
     Inhofe
     Jeffords
     Kempthorne
     Kerry
     Kohl
     Kyl
     Landrieu
     Leahy
     Lieberman
     Lott
     Lugar
     Mack
     McConnell
     Mikulski
     Moseley-Braun
     Murkowski
     Murray
     Nickles
     Reid
     Robb
     Roberts
     Roth
     Santorum
     Sessions
     Smith (NH)
     Smith (OR)
     Stevens
     Thomas
     Thompson
     Thurmond
     Torricelli
     Warner
     Wyden

                                NAYS--30

     Akaka
     Biden
     Breaux
     Bryan
     Bumpers
     Byrd
     Cleland
     Collins
     Conrad
     Dorgan
     Durbin
     Feingold
     Ford
     Glenn
     Graham
     Hollings
     Inouye
     Johnson
     Kennedy
     Kerrey
     Lautenberg
     Levin
     Moynihan
     Reed
     Rockefeller
     Sarbanes
     Shelby
     Snowe
     Specter
     Wellstone
  The motion to lay on the table the amendment (No. 2395) was agreed 
to.


             Vote on Amendment No. 2396 -- Motion to table

  Mr. D'AMATO. Mr. President, what is the pending business?
  The PRESIDING OFFICER. The question is on agreeing to Amendment No. 
2396 offered by Mr. Sarbanes.
  Mr. D'AMATO. Mr. President, I move to table and ask for the yeas and 
nays.
  The PRESIDING OFFICER. Is there a sufficient second?
  There is a sufficient second.
  The yeas and nays were ordered.
  The PRESIDING OFFICER. The question is on agreeing to the motion to 
lay on the table the amendment. The yeas and nays have been ordered. 
The clerk will call the roll.
  The legislative clerk called the roll.
  Mr. McCAIN (when his name was called). Present.
  The result was announced--yeas 72, nays 27, as follows:

                      [Rollcall Vote No. 134 Leg.]

                                YEAS--72

     Abraham
     Allard
     Ashcroft
     Baucus
     Bennett
     Bingaman
     Bond
     Boxer
     Breaux
     Brownback
     Burns
     Campbell
     Chafee
     Coats
     Cochran
     Collins
     Coverdell
     Craig
     D'Amato
     Daschle
     DeWine
     Dodd
     Domenici
     Enzi
     Faircloth
     Feinstein
     Ford
     Frist
     Gorton
     Gramm
     Grams
     Grassley
     Gregg
     Hagel
     Harkin
     Hatch
     Helms
     Hutchinson
     Hutchison
     Inhofe
     Jeffords
     Kempthorne
     Kerrey
     Kohl
     Kyl
     Landrieu
     Leahy
     Lieberman
     Lott
     Lugar
     Mack
     McConnell
     Mikulski
     Moseley-Braun
     Murkowski
     Murray
     Nickles
     Reid
     Robb
     Roberts
     Roth
     Santorum
     Sessions
     Smith (NH)
     Smith (OR)
     Snowe
     Specter
     Stevens
     Thomas
     Thurmond
     Warner
     Wyden

                                NAYS--27

     Akaka
     Biden
     Bryan
     Bumpers
     Byrd
     Cleland
     Conrad
     Dorgan
     Durbin
     Feingold
     Glenn
     Graham

[[Page S4811]]


     Hollings
     Inouye
     Johnson
     Kennedy
     Kerry
     Lautenberg
     Levin
     Moynihan
     Reed
     Rockefeller
     Sarbanes
     Shelby
     Thompson
     Torricelli
     Wellstone
  The motion to lay on the table the amendment (No. 2396) was agreed 
to.
  Mr. SARBANES addressed the Chair.
  The PRESIDING OFFICER (Mr. Hagel). The Senator from Maryland.


                           Amendment No. 2397

 (Purpose: To preserve the right of a State or a political subdivision 
    thereof or a State pension plan from bringing actions under the 
                            securities laws)

  Mr. SARBANES. Mr. President, I send an amendment to the desk and ask 
for its immediate consideration.
  The PRESIDING OFFICER. The clerk will report.
  The legislative clerk read as follows:

       The Senator from Maryland [Mr. Sarbanes], for himself, Mr. 
     Bryan, Mr. Johnson and Mr. Biden, proposes an amendment 
     numbered 2397.

  The amendment is as follows:

       On page 10, between lines 16 and 17, insert the following:
       ``(f) State Actions.--
       ``(1) In general.--Notwithstanding any other provision of 
     this section, nothing in this section may be construed to 
     preclude a State or political subdivision thereof or a State 
     pension plan from bringing an action involving a covered 
     security on its own behalf, or as a member of a class 
     comprised solely of other States, political subdivisions, or 
     State pension plans similarly situated.
       ``(2) State pension plan defined.--For purposes of this 
     paragraph, the term `State pension plan' means a pension plan 
     established and maintained for its employees by the 
     government of the State or political subdivision thereof, or 
     by any agency or instrumentality thereof.
       On page 10, line 17, strike ``(f)'' and insert ``(g)''.
       On page 15, between lines 19 and 20, insert the following:
       ``(5) State actions.--
       ``(A) In general.--Notwithstanding any other provision of 
     this subsection, nothing in this subsection may be construed 
     to preclude a State or political subdivision thereof or a 
     State pension plan from bringing an action involving a 
     covered security on its own behalf, or as a member of a class 
     comprised solely of other States, political subdivisions, or 
     State pension plans similarly situated.
       ``(B) State pension plan defined.--For purposes of this 
     paragraph, the term `State pension plan' means a pension plan 
     established and maintained for its employees by the 
     government of a State or political subdivision thereof, or by 
     any agency or instrumentality thereof.
       On page 15, line 20, strike ``(5)'' and insert ``(6)''.
  Mr. SARBANES. Mr. President, I offer this amendment on behalf of 
myself, Senator Bryan, Senator Johnson, and Senator Biden. I will be 
very quick, because the manager has indicated he will accept this 
amendment.
  This amendment preserves the right of State and local governments and 
their pension plans to bring securities fraud suits under State law. 
They have never been professional plaintiffs. They have never abused 
the system. They have to go through an elaborate process to even bring 
suit. They obviously are concerned with protecting the public and the 
taxpayers, and it seems to me a reasonable exemption from the 
provisions of this bill as it applies to these governmental units.
  Mr. D'AMATO addressed the Chair.
  The PRESIDING OFFICER. The Senator from New York.
  Mr. D'AMATO. Mr. President, we have no objection. As the Senator has 
indicated, these classes are comprised solely of States, counties, and 
other public entities. There is no record of such class-action suits 
being brought. I might add, local governments, for the most part, 
school districts in particular, are typically precluded from investing 
in stocks, particularly in these stocks. We accept the amendment.
  The PRESIDING OFFICER. Without objection, the amendment is agreed to.
  The amendment (No. 2397) was agreed to.
  Mr. D'AMATO. Mr. President, I am aware of no further amendments, but 
I ask unanimous consent that the Senator from Oklahoma be recognized 
for the purpose of propounding a unanimous-consent request, and that 
the Senator from California--I think I have 2\1/2\ minutes left. I 
yield 1 minute to the Senator from California.
  Mr. BIDEN. Will the Senator yield? I believe a unanimous-consent 
agreement had room for me to offer an amendment at sometime, and I 
intend on doing that, although I will not ask for a rollcall vote. I 
will be a very good boy if you listen for 5 minutes, and then I will 
withdraw the amendment.
  Mr. D'AMATO. I have no objection. I ask that the Senator be 
recognized to offer an amendment.


                           amendment no. 2398

  (Purpose: To amend the bill with respect to title 18, United States 
                                 Code)

  Mr. BIDEN. Mr. President, I send an amendment to the desk.
  The PRESIDING OFFICER. The clerk will report.
  The legislative clerk read as follows:
  The Senator from Delaware [Mr. Biden] proposes an amendment numbered 
2398.
  Mr. BIDEN. Mr. President, I ask unanimous consent that the reading of 
the amendment be dispensed with.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment is as follows:

       At the appropriate place, insert the following new section:

     SEC.  . FRAUD AS PREDICATE OFFENSE.

       Section 1964(c) of title 18, United States Code, is amended 
     by striking ``, except'' and all that follows through 
     ``final''.

  Mr. BIDEN. Mr. President, I will be necessarily brief because I have 
over the years learned to count, and I do not believe I have the votes 
for this amendment, but I want to make two relatively brief points.
  First of all, in 1970, the Congress greatly assisted the fight 
against organized crime by adopting the Racketeering Influence and 
Corruption Organizations Act. We know it as RICO.
  RICO included a private civil enforcement provision with enhanced 
penalties, including triple damages for racketeering behavior in 
furtherance of a criminal enterprise engaged in certain, what they call 
predicate offenses, including murder, arson, bribery, wire fraud, 
bankruptcy fraud, and securities fraud--securities fraud.
  At the request of the Securities and Exchange Commission and the 
industry, though against the wishes of law enforcement and State 
regulators, in 1995, the Securities Litigation Act effectively 
eliminated securities fraud as a grounds for private civil RICO 
proceedings. Many of us disagreed with carving out the securities fraud 
for special status, Mr. President, and protection from application of 
the civil RICO statute. In fact, my amendment was intended to preserve 
many civil RICO securities fraud claims and was accepted last time by 
the full Senate. Unfortunately, it was dropped in committee.
  Last November, the Federal grand jury in Manhattan indicted 19 
individuals, including two reputed mob chieftains known as ``Rossi'' 
and ``Curly,'' for their role in the alleged plot to manipulate a 
thinly traded stock, so-called penny stocks, and for threatening 
brokers to drive up the prices.
  There is an article that was published that says ``The Mob on Wall 
Street.'' I ask unanimous consent that an except from this article be 
printed in the Record.
  There being no objection, the excerpt was ordered to be printed in 
the Record, as follows:

                  [From Business Week, Dec. 16, 1996]

                         The Mob on Wall Street

                            (By Gary Weiss)

       In the world of multimedia, Phoenix-based SC&T 
     International Inc. has carved out a small but significant 
     niche. SC&T's products have won raves in the trade press, but 
     working capital has not always been easy to come by. So in 
     December, 1995, the company brought in Sovereign Equity 
     Management Corp., a Boca Raton (Fla.) brokerage, to manage an 
     initial public offering. ``We thought they were a solid 
     second- or third-tier investment bank,'' says SC&T Chief 
     Executive James L. Copeland.
       But there was much about Sovereign that was known to only a 
     very few. There were, for example, the early investors, 
     introduced by Sovereign, who had provided inventory financing 
     for SC&T. Most shared the same post office box in the 
     Bahamas. ``I had absolutely no idea of who those people 
     were,'' says Copeland. He asked Sovereign. ``I was told, `Who 
     gives a s--. It's clean money.' '' The early investors cashed 
     out, at the offering price of $5, some 1,575 million shares 
     that they acquired at about $1.33 share--a gain of some $5.8 
     million.
       By mid-June, SC&T was trading at $8 or better. But for SC&T 
     shareholders who did not sell by then, the stock was an 
     unmitigated disaster. Sovereign, which had handled over 60% 
     of SC&T's trades early in the year, sharply reduced its 
     support of the stock. Without the backing of Sovereign and 
     its 75-odd brokers, SC&T's shares plummeted--to $2 in July, 
     $1 in September, and lately, pennies. The company's capital-
     raising ability is in tatters. Laments Copeland: ``We're in 
     the crapper.''
       A routine case of a hot stock that went frigid. Or was it? 
     Copeland didn't know it, but there was a man who kept a very 
     close

[[Page S4812]]

     eye on SC&T and is alleged by Wall Street sources to have 
     profited handsomely in the IPO--allegedly by being one of the 
     lucky few who sold shares through a Bahamian shell company. 
     His name is Philip Abramo, and he has been identified in 
     court documents as a ranking member, or capo, in the New 
     Jersey-based DeCavalcante organized crime family.
       James Copeland didn't know it. Nobody at SC&T could have 
     dreamed it. But the almost unimaginable had come true: 
     Copeland had put his company in the hands of the Mob.
       Today, the stock market is confronting a vexing problem 
     that, so far, the industry and regulators have seemed 
     reluctant to face--or even acknowledge. Call it what you 
     will: organized crime, the Mafia, wiseguys. They are the 
     stuff of tabloids and gangster movies. To most investors, 
     they would seem to have as much to do with Wall Street as the 
     other side of the moon.
       But in the canyons of lower Manhattan, one can find members 
     of organized crime, their friends and associates. How large a 
     presence? No one--least of all regulators and law 
     enforcement--seems to know. The Street's ranking reputed 
     underworld chieftain, Abramo, is described by sources 
     familiar with his activities as controlling at least four 
     brokerages through front men and exerting influence upon 
     still more firms. Until recently Abramo had an office in the 
     heart of the financial district, around the corner from the 
     regional office of an organization that might just as well be 
     on Venus as far as the Mob is concerned--the National 
     Association of Securities Dealers, the self-regulatory 
     organization that oversees the small-stock business.
       A three-month investigation by Business Week reveals that 
     substantial elements of the small-cap market have been turned 
     into a veritable Mob franchise, under the very noses of 
     regulators and law enforcement. And that is a daunting 
     prospect for every investor who buys small-cap stocks and 
     every small company whose stock trades on the NASDAQ market 
     and over the counter. For the Mob makes money in various 
     ways, ranging from exploiting IPOs to extortion to getting a 
     ``piece of the action'' from traders and brokerage firms. But 
     its chief means of livelihood is ripping off investors by the 
     time-tested method of driving share prices upward--and 
     dumping them on the public through aggressive cold-calling.
       In its inquiry, Business Week reviewed a mountain of 
     documentation and interviewed traders, brokerage executives, 
     investors, regulators, law-enforcement officials, and 
     prosecutors. It also interviewed present and former 
     associates of the Wall Street Mob contingent. Virtually all 
     spoke on condition of anonymity, with several Street sources 
     fearing severe physical harm--even death--if their identities 
     became known. One, a former broker at a Mob-run brokerage, 
     says he discussed entering the federal Witness Protection 
     Program after hearing that his life might be in danger. A 
     short-seller in the Southwest, alarmed by threats, carries a 
     gun.
       Among Business Week's findings:
       The Mob has established a network of stock promoters, 
     securities dealers, and the all-important ``boiler rooms''--a 
     crucial part of Mob manipulation schemes--that sell stocks 
     nationwide through hard-sell cold-calling. The brokerages are 
     located mainly in the New York area and in Florida, with the 
     heart of their operations in the vicinity of lower Broad 
     Street in downtown Manhattan.
       Four organized crime families as well as elements of the 
     Russian Mob directly own or control, through front men, 
     perhaps two dozen brokerage firms that make markets in 
     hundreds of stocks. Other securities dealers and traders are 
     believed to pay extortion money or ``tribute'' to the Mob as 
     just another cost of doing business on the Street.
       Traders and brokers have been subjected in recent months to 
     increasing levels of violent ``persuasion'' and punishment--
     threats and beatings. Among the firms that have been subject 
     to Mob intimidation, sources say, is the premier market maker 
     in NASDAQ stocks--Herzog, Heine, Gedule Inc.
       Using offshore accounts in the Bahamas and elsewhere, the 
     Mob has engineered lucrative schemes involving low-priced 
     stock under Regulations S of the securities laws. Organized 
     crime members profit from the runup in such stocks and also 
     from short-selling the stocks on the way down. They also take 
     advantage of the very wide spreads between the bid and ask 
     prices of the stock issues controlled by their confederates.
       The Mob's activities seem confined almost exclusively to 
     stocks traded in the over-the-counter ``bulletin board'' and 
     NASDAQ small-cap markets. By contrast, New York Stock 
     Exchange and American Stock Exchange issues and firms 
     apparently have been free of Mob exploitation.
       Wall Street has become as lucrative for the Mob that it is 
     allegedly a major source of income for high-level members of 
     organized crime--few of whom have ever been publicly 
     identified as having ties to the Street. Abramo, who may well 
     be the most active reputed mobster on the Street, has 
     remained completely out of the public eye--even staying 
     active on the Street after his recent conviction for tax 
     evasion.
       Mob-related activities on the Street are the subject of 
     inquiries by the FBI and the office of Manhattan District 
     Attorney Robert M. Morgenthau, which is described by one 
     source as having received numerous complaints concerning 
     mobsters on the Street. (Officials at both agencies and the 
     New York Police Dept. did not respond to repeated requests 
     for comment.)
       Overall, the response of regulators and law enforcement to 
     Mob penetration of Wall Street has been mixed at best. Market 
     sources say complaints of Mob coercion have often been 
     ignored by law enforcement. Although an NASD spokesman says 
     the agency would vigorously pursue reports of Mob 
     infiltration, two top NASD officials told Business Week that 
     they have no knowledge of Mob penetration of member firms. 
     Asked to discuss such allegations, another high NASD official 
     declined, saying: ``I'd rather you not tell me about it.''
       The Hanover, Sterling & Co. penny-stock firm, which left 
     12,000 investors in the lurch when it went out of business in 
     early 1995, is alleged by people close to the firm to have 
     been under the control of members of the Genovese organized 
     crime family. Sources say other Mob factions engaged in 
     aggressive short-selling of stocks brought public by Hanover.
       Federal investigators are said to be probing extortion 
     attempts by Mob-linked short-sellers who had been associated 
     with the now-defunct Stratton Oakmont penny-stock firm.
       Mob manipulation has affected the markets in a wide range 
     of stocks. Among those identified by Business Week are 
     Affinity Entertainment, Celebrity Entertainment, Beachport 
     Entertainment, Crystal Broadcasting, First Colonial Ventures, 
     Global Spill Management, Hollywood Productions, Innovative 
     Medical Services, International Nursing Services, Novatek 
     International, Osicom Technologies, ReClaim, SC&T, Solv-Ex, 
     and TJT. Officials of the companies deny any knowledge of Mob 
     involvement in the trading of their stocks, and there is no 
     evidence that company managements have been in league with 
     stock manipulators. These stocks were allegedly run up by 
     Mob-linked brokers, who sometimes used force or threats to 
     curtail short-selling in the stocks. When support by 
     allegedly Mob-linked brokerages ended, the stocks often 
     suffered precipitous declines--sometimes abetted, traders 
     say, by Mob-linked short-sellers. The stocks have generally 
     fared poorly (table, page 99).
       Not all of the stocks were recent IPOs, and they were often 
     taken public by perfectly legitimate underwriters. 
     International Nursing, for example, went public at $23 in 
     1994 and was trading at $8 in early 1996 before falling back 
     to pennies. Short-sellers who attempted to sell the shares 
     earlier this year were warned off--in one instance by a Mob 
     member--market sources assert. International Nursing Chairman 
     John Yeros denies knowledge of manipulation of the stock.
       What this all adds up to is a shocking tale of criminal 
     infiltration abetted by widespread fear and silence--and 
     official inaction. While firms and brokerage executives who 
     strive to keep far afield of the Mob often complain of NASD 
     inaction, rarely do such people feel strongly enough to share 
     their views with regulators or law enforcement. Instead, they 
     engage in self-defense. One major brokerage, which often 
     executes trades for small-cap market makers, keeps mammoth 
     intelligence files--to steer clear of Mob-run brokers. A 
     major accounting firm keeps an organized-crime expert on the 
     payroll. His duties include preventing his firm from doing 
     business with brokerages linked to organized crime and the 
     Russian Mob.

  Mr. BIDEN. Mr. President, they are not talking about legitimate 
traders; they are talking about the mob's attempt to infiltrate Wall 
Street. It seems to me for us to carve out of the original legislation 
an exemption from RICO predicate statutes securities fraud is a serious 
mistake. But it would also be a serious mistake for me to push this 
issue without the votes at this point, because I realize there is an 
attempt to bring this legislation to a close.
  I think it is bad legislation generally. I think it is a serious 
mistake to have done this, but I also have been here long enough, as I 
said, to be able to know where the votes are.
  I withdraw the amendment.
  The PRESIDING OFFICER. The amendment is withdrawn.
  The amendment (No. 2398) was withdrawn.
  Mr. D'AMATO. Mr. President, I ask unanimous consent that the Senator 
from California be recognized for 1 minute and thereafter, the sponsor 
of the legislation who has not spoken today, Senator Domenici, who has 
been tied up in committee, has asked to be recognized for up to 5 
minutes. Then I ask unanimous consent that we go to final passage.
  The PRESIDING OFFICER. Without objection, it is so ordered. The 
Senator from California is recognized for 1 minute.
  Mrs. BOXER. Thank you very much, Mr. President.
  The question before the Senate today is the following: How many 
securities litigation laws should there be relative to class-action 
lawsuits involving nationally traded securities?
  I believe the answer is one. And I believed the answer was one when 
we had

[[Page S4813]]

this debate in 1995. And even though I advocated for a stronger law at 
that time, I always thought there ought to be one law.
  We, as policymakers, must establish a regulatory environment in which 
investors have sufficient rights and remedies while also ensuring that 
the high-growth industries of our economy, many of which are located in 
my home State of California, are provided the stability and the 
certainty they need to expand, grow, and create jobs.
  This bill does just that. It is narrowly crafted to address only the 
issue of class action lawsuits and nationally traded securities--I 
think this is very important. It defines and limits class-action 
lawsuits. It applies only to nationally traded securities. It is a bill 
which I am proud to support.
  Chairman Levitt, who I respect greatly, Chairman of the SEC, is 
supportive of this legislation, and I think his words should carry a 
great deal of weight. We ought to give this law a chance to work in the 
Federal court and not see this law go to 50 different State courts. 
This would be very disruptive and it doesn't make sense for nationally 
traded securities.
  If, after a time, we feel the law isn't good enough, isn't strong 
enough, isn't working as we had envisioned, we can revisit it and 
address it as necessary. But I think today we ought to support this 
bill, as drafted, and assert there ought to be one law when it comes to 
class action lawsuits involving nationally traded securities.
  So, Mr. President, I am pleased to join the Chairman of the Banking 
Committee and the ranking member on the Securities Subcommittee, 
Senator Dodd, in support of this bill. I yield the floor, and I yield 
the time back to the Senator from New York.
  The PRESIDING OFFICER. The Senator from New Mexico has 5 minutes.
  Mr. DOMENICI. Mr. President, I will not use that amount of time.
  I just want to say how pleased I am that today we are going to close 
the loop and make sure that the small group of entrepreneurial 
plaintiff lawyers who were taking advantage of our securities laws are 
now going to follow a uniform law in the States and in the Federal 
courts.
  It was in 1990 that Senator Sanford of North Carolina, who passed 
away just recently, and I introduced the first legislation on this 
issue. We did so because we found that a small group of plaintiff's 
lawyers were engaged in the business of finding meritless lawsuits to 
file, but since they were class action lawsuits, they would have to get 
settled. We found a trend across the country where they settled all 
these cases rather than have jury trials. A small cadre of lawyers 
became rich, and, as far as we can find out, very few stockholders 
benefited.
  We passed the first bill to tighten up the rules in the Federal court 
system in 1995. It is the only bill where we overrode President 
Clinton's veto. And tonight I think we will pass, by an even more 
overwhelming number, the culmination of this effort. The bill will keep 
plaintiffs' lawyers from picking State courts to do what we have 
precluded them from doing in the Federal courts. This bill will stop 
them from doing what we know they already are doing--they look for a 
sympathetic state forum where they can get these lawsuits filed.
  This is legislation that helps the high-tech companies that get 
started in America. We have testimony that the Intel company--that 
great American company--had they faced one of these kinds of suits when 
they were in their infancy, they are almost certain that they would not 
exist today. We do not know how many other companies now do not exist 
because they faced these kinds of lawsuits.
  But essentially we are doing an exciting thing for growth, 
prosperity, and we are harming and hurting no one with legitimate 
complaints against corporations for fraud, misrepresentation, and 
malfeasance.
  As I said, I rise today in strong support of S. 1260, the 
``Securities Litigation Reform Uniform Standards Act of 1998'' and I 
want to commend the Majority Leader for bringing this bill to the floor 
this week. Few issues are more important to the high-tech community and 
the efficient operation of our capital markets than securities fraud 
lawsuit reform.
  I am pleased to serve as an original co-sponsor of this legislation 
with Senators D'Amato, Dodd, and Gramm--a bill to provide one set of 
rules to govern securities fraud class actions.
  As I said previously, this bill completes the work I began more than 
6 years ago with Senator Sanford of North Carolina. Back in the early 
1990's, Senator Sanford and I noticed that a small group of 
entrepreneurial plaintiffs' lawyers were taking advantage of our 
securities laws and the federal rules related to class action lawsuits 
to file frivolous and abusive claims against high-technology companies 
in Federal courts.
  Often these lawsuits were based simply on the fact that a company's 
stock price had fallen, without any real evidence of fraud. Senator 
Sanford and I realized a long time ago that stock price volatility--
common in high tech stocks--simply is not stock fraud.
  But, because it was so expensive and time consuming to fight these 
lawsuits, many companies settled even when they knew they had done 
nothing wrong. The money used to pay for these frivolous lawsuits could 
have been used for research and development or to create new, high-
paying jobs.
  So, we introduced a bill to make some changes to the securities fraud 
class action system. Of course, since we were up against the 
plaintiffs' lawyers, the bill didn't go anywhere for awhile.
  After Senator Sanford left the Senate, the senior Senator from 
Connecticut, Senator Dodd, and I continued to work hard on this issue. 
In 1995, with tremendous help from Chairman D'Amato and Senator Gramm, 
we passed a law. The Private Securities Litigation Reform Act of 1995 
passed Congress in an overwhelmingly bipartisan way--over President 
Clinton's veto of the bill.
  And since enactment of the Reform Act, we have seen great changes in 
the conduct of plaintiffs' class action lawyers in federal court. 
Because of more stringent pleading requirements, plaintiffs' lawyers no 
longer ``race to the courthouse'' to be the first to file securities 
class actions. Because of the new rules, we no longer have 
``professional plaintiffs''--investors who buy a few shares of stock 
and then serve as named plaintiffs in multiple securities class 
actions. Other rules make it difficult for plaintiffs' lawyers to file 
lawsuits to force companies into settlement rather than face the 
expensive and time consuming ``fishing expedition'' discovery process.
  Now, it looks like our new law has worked too well. Entrepreneurial 
trial lawyers have begun filing similar claims in State court instead 
of federal court to avoid the new law's safeguards against frivolous 
and abusive lawsuits. Instead of one set of rules, we now have 51--one 
for the Federal system and 50 different ones in the States.
  According to the Securities and Exchange Commission, this migration 
of claims from Federal court to State court ``may be the most 
significant development in securities litigation'' since the passage of 
the new law in 1995.
  In fact, prior to passage of the new law in 1995, State courts rarely 
served as the forum for securities fraud lawsuits. Now, more than 25 
percent of all securities class actions are brought in State court. A 
recent Price Waterhouse study found that the average number of State 
court class actions filed in 1996--the first year after the new law--
grew 335 percent over the 1991-1995 average. In 1997, State court 
filings were 150 percent greater than the 1991-1995 average.
  So, there has been an unprecedented increase in State securities 
fraud class actions. In fact, trial lawyers have testified to Congress 
that they have an obligation to file securities fraud lawsuits in State 
court if it provides a more attractive forum for their clients. Imagine 
that--plaintiffs' lawyers admit that they are attempting to avoid 
federal law.

  These State court lawsuits also have prevented high-tech companies 
from taking advantage of one of the most significant reforms in the 
1995 law--the safe harbor for predictive statements. Under the 1995 
law, companies which make forward-looking statements are exempt from 
lawsuits based on those statements if they meet certain requirements. 
Companies are reluctant to use the safe harbor and make predictive 
statements because they fear that such statements could be used

[[Page S4814]]

against them in State court. This fear chills the free flow of 
important information to investors--certainly not a result we intended 
when we passed the new law.
  So today, the Senate will vote to create one set of rules for 
securities fraud cases. One uniform set of rules is critical for our 
high-technology community and our capital markets.
  Without this legislation, the productivity of the fastest growing 
segment of our economy--high tech--will continue to be hamstrung by 
abusive, lawyer-driven lawsuits. Rather than spend their resources on 
R&D or creating new jobs, high-tech companies will continue to be 
forced to spend massive sums fending off frivolous lawsuits.
  When I first worked on this issue, executives at Intel Corporation 
told me that if they had been hit with a frivolous securities lawsuit 
early in the company's history, they likely never would have invented 
the microchip. We should not let that happen to the next generation of 
Intels.
  This bill also is important to our markets. Our capital markets are 
the envy of the world, and by definition are national in scope. 
Information provided by companies to the markets is directed to 
investors across the United States and throughout the world.
  Under the Commerce Clause of the U.S. Constitution, Congress has the 
authority to regulate in areas affecting ``interstate commerce.'' I 
cannot imagine a more classic example of what constitutes ``interstate 
commerce'' than the purchase and sale of securities over a national 
exchange.
  Not only does Congress have the authority to regulate in this area, 
it clearly is necessary and appropriate. Right now, in an environment 
where there are 50 different sets of rules, companies must take into 
account the most onerous State liability rules and tailor their conduct 
accordingly. If the liability rules in one State make it easier for 
entrepreneurial lawyers to bring frivolous lawsuits, that affects 
companies and the information available to investors in all other 
States. One uniform set of rules will eliminate that problem.
  Mr. President, I again want to commend my colleagues for their work 
on this important bill. I understand that this is a bi-partisan bill 
which has the support of the SEC and at least 40 Senators. I think by 
the end of the day, many, many more Senators will join us in supporting 
this bill. Thank you, Mr. President.
  Mr. D'AMATO. Mr. President, I have one more unanimous consent. The 
Senator from Nevada has asked to speak for up to 3 minutes. I ask 
unanimous consent that he be given that and then we go to final 
passage.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The Senator from Nevada.
  Mr. BRYAN. I thank the Presiding Officer.
  I thank the chairman for his courtesy.
  Mr. President, this is a vote that I believe that my colleagues who 
support the measure--and I am not unmindful of how the votes lie--will 
live to rue. At a time when investor fraud is mounting with billions 
and billions of dollars, we have a consistent, steady course of action 
where we are systematically depriving individual small investors from 
protections.
  This adds a further limitation to the statute of limitations. And 37 
out of the 50 States provide a greater remedy. This provides a 
limitation in terms of the ability of an investor to file an action 
against an accomplice. And 49 out of 50 States provide that remedy. We 
take that away in this course of action.
  Most States provide a remedy for joint and several liability so that 
an investor who is defrauded may recover the full amount of his or her 
loss from any one of the individual investors. If this legislation had 
been in place at the time of the Keating fraud, where Keating himself 
was, in effect, judgment proof, there would have been no ability to 
recover against the fraudulent activity of the accomplices--the 
accountants, the lawyers, and others.
  That is why, contrary to the assertion by the proponents, this is not 
a plaintiff's lawyer's argument that is being made in opposition to 
this. There are some abuses, and we should confine ourselves to that. 
That is why all of the governmental institutions who are charged with 
their public responsibility as stewards of investment funds, retirement 
funds, municipalities, school districts, States, all have expressed 
their opposition to the legislation, because they recognize that the 
taxpayer, himself or herself, is frequently defrauded by this course of 
action.
  So this is a bad piece of legislation. And we continue on a slippery 
slope in eliminating basic investor protections. The small guys get 
dealt out of the game with this legislation. The victims, they can take 
care of themselves. But for the millions and millions of small 
investors who have confidence in our markets, who are coming in--one 
out of every three in the country--they are the big losers in this 
legislation.
  Mr. SARBANES. Will the Senator yield?
  Mr. BRYAN. I am happy to yield.
  Mr. SARBANES. I want to commend the Senator from Nevada for a very 
powerful statement and for his very strong presentation of the 
arguments. All I want to say to my colleague is, I am confident in 
making the prediction that events down the road, when the investors 
come in, innocent people, and say, ``We didn't have a remedy,'' he will 
be proven correct.
  Mr. BRYAN. I thank the Senator from Maryland for his comments. He has 
stood tall, not only in this legislation but in the 1995 legislation on 
behalf of small investors. That is what this matter is all about. There 
is no sympathy for plaintiff lawyers. That is not the argument, as the 
Senator from Maryland and I and others who oppose this legislation 
know. We are talking about protecting small investors in America who, I 
believe, are left with fewer defenses as a result of this.

  I yield the floor.
  Mr. DODD addressed the Chair.
  The PRESIDING OFFICER. The Senator from Connecticut.
  Mr. DODD. I will be very brief on this. And we have been through 
this. The last time it was a 5-day debate. We ought to take some solace 
in the fact that we have done this in half a day. And let me commend my 
colleagues, all of them, who have been involved in this and over some 
period of time.
  But I say, Mr. President, this is a very sound piece of legislation 
that can make a huge difference today. That investor that my colleague, 
the distinguished Senator from Nevada, talks about, that is the 
investor that deposits their hard-earned money in the securities of 
struggling businesses, high-tech companies that are the primary targets 
of these lawsuits. And it is these industries that represent the 
knowledge-based economy of our 21st century.
  Too often we have seen predator lawyers out there go after them. What 
we are trying to do with this bill is to tighten up the loophole, to 
make it possible for these companies to grow while simultaneously--
simultaneously--seeing to it that investors can bring a rightful cause 
of action, as plaintiffs, where fraud has been committed.
  This is going to make for a far sounder system for people in this 
country. And I predict to my colleagues that we will see economic 
growth in these firms and businesses, where they can avoid the kind of 
tremendous expenditures that have had to be laid out to fight frivolous 
lawsuits and end up as settlements, costing fortunes with, of course, 
cases being thrown out of court.
  So I predict to my colleagues, this will be a vote they will be very 
proud of in the years ahead to avoid these frivolous lawsuits we have 
seen in the past. I urge passage of the legislation.
  Mr. D'AMATO. I ask unanimous consent that Senator Kohl be recognized 
for a request, and then I will call for the yeas and nays.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. KOHL. Thank you, I say to Senator D'Amato.


                 Change of Vote--Roll Call Vote No. 132

  Mr. KOHL. Mr. President, on rollcall vote No. 132, I voted no. It was 
my intention to vote aye. Therefore, I ask unanimous consent that I be 
permitted to change my vote. This will in no way change the outcome of 
the vote.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. D'AMATO. I ask for the yeas and nays.
  The PRESIDING OFFICER. Is there a sufficient second?
  There is a sufficient second.
  The yeas and nays were ordered.
  Mr. D'AMATO. I suggest the absence of a quorum.

[[Page S4815]]

  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. D'AMATO. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The PRESIDING OFFICER. The question is on agreeing to the committee 
amendment in the nature of a substitute, as amended.
  The committee amendment in the nature of a substitute, as amended, 
was agreed to.
  The PRESIDING OFFICER. The question is on the engrossment and third 
reading of the bill.
  The bill was ordered to be engrossed for a third reading and was read 
the third time.
  The PRESIDING OFFICER. The bill having been read the third time, the 
question is, Shall the bill pass?
  The yeas and nays have been ordered. The clerk will call the roll.
  The legislative clerk called the roll.
  The result was announced--yeas 79, nays 21 as follows:

                      [Rollcall Vote No. 135 Leg.]

                                YEAS--79

     Abraham
     Allard
     Ashcroft
     Baucus
     Bennett
     Bingaman
     Bond
     Boxer
     Breaux
     Brownback
     Burns
     Campbell
     Chafee
     Coats
     Cochran
     Collins
     Coverdell
     Craig
     D'Amato
     Daschle
     DeWine
     Dodd
     Domenici
     Enzi
     Faircloth
     Feinstein
     Ford
     Frist
     Gorton
     Graham
     Gramm
     Grams
     Grassley
     Gregg
     Hagel
     Harkin
     Hatch
     Helms
     Hollings
     Hutchinson
     Hutchison
     Inhofe
     Jeffords
     Kempthorne
     Kennedy
     Kerrey
     Kerry
     Kohl
     Kyl
     Landrieu
     Leahy
     Lieberman
     Lott
     Lugar
     Mack
     McConnell
     Mikulski
     Moseley-Braun
     Murkowski
     Murray
     Nickles
     Reed
     Reid
     Robb
     Roberts
     Rockefeller
     Roth
     Santorum
     Sessions
     Smith (NH)
     Smith (OR)
     Snowe
     Specter
     Stevens
     Thomas
     Thompson
     Thurmond
     Warner
     Wyden

                                NAYS--21

     Akaka
     Biden
     Bryan
     Bumpers
     Byrd
     Cleland
     Conrad
     Dorgan
     Durbin
     Feingold
     Glenn
     Inouye
     Johnson
     Lautenberg
     Levin
     McCain
     Moynihan
     Sarbanes
     Shelby
     Torricelli
     Wellstone
  The bill (S. 1260), as amended, was passed, as follows:

                                S. 1260

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Securities Litigation 
     Uniform Standards Act of 1998''.

     SEC. 2. FINDINGS.

       The Congress finds that--
       (1) the Private Securities Litigation Reform Act of 1995 
     sought to prevent abuses in private securities fraud 
     lawsuits;
       (2) since enactment of that legislation, considerable 
     evidence has been presented to Congress that a number of 
     securities class action lawsuits have shifted from Federal to 
     State courts;
       (3) this shift has prevented that Act from fully achieving 
     its objectives;
       (4) State securities regulation is of continuing 
     importance, together with Federal regulation of securities, 
     to protect investors and promote strong financial markets; 
     and
       (5) in order to prevent certain State private securities 
     class action lawsuits alleging fraud from being used to 
     frustrate the objectives of the Private Securities Litigation 
     Reform Act of 1995, it is appropriate to enact national 
     standards for securities class action lawsuits involving 
     nationally traded securities, while preserving the 
     appropriate enforcement powers of State securities regulators 
     and not changing the current treatment of individual 
     lawsuits.

     SEC. 3. LIMITATION ON REMEDIES.

       (a) Amendments to the Securities Act of 1933.--
       (1) Amendment.--Section 16 of the Securities Act of 1933 
     (15 U.S.C. 77p) is amended to read as follows:

     ``SEC. 16. ADDITIONAL REMEDIES; LIMITATION ON REMEDIES.

       ``(a) Remedies Additional.--Except as provided in 
     subsection (b), the rights and remedies provided by this 
     title shall be in addition to any and all other rights and 
     remedies that may exist at law or in equity.
       ``(b) Class Action Limitations.--No class action based upon 
     the statutory or common law of any State or subdivision 
     thereof may be maintained in any State or Federal court by 
     any private party alleging--
       ``(1) an untrue statement or omission of a material fact in 
     connection with the purchase or sale of a covered security; 
     or
       ``(2) that the defendant used or employed any manipulative 
     or deceptive device or contrivance in connection with the 
     purchase or sale of a covered security.
       ``(c) Removal of Class Actions.--Any class action brought 
     in any State court involving a covered security, as set forth 
     in subsection (b), shall be removable to the Federal district 
     court for the district in which the action is pending, and 
     shall be subject to subsection (b).
       ``(d) Preservation of Certain Actions.--
       ``(1) In general.--Notwithstanding subsection (b), a class 
     action described in paragraph (2) of this subsection that is 
     based upon the statutory or common law of the State in which 
     the issuer is incorporated (in the case of a corporation) or 
     organized (in the case of any other entity) may be maintained 
     in a State or Federal court by a private party.
       ``(2) Permissible actions.--A class action is described in 
     this paragraph if it involves--
       ``(A) the purchase or sale of securities by the issuer or 
     an affiliate of the issuer exclusively from or to holders of 
     equity securities of the issuer; or
       ``(B) any recommendation, position, or other communication 
     with respect to the sale of securities of the issuer that--
       ``(i) is made by or on behalf of the issuer or an affiliate 
     of the issuer to holders of equity securities of the issuer; 
     and
       ``(ii) concerns decisions of those equity holders with 
     respect to voting their securities, acting in response to a 
     tender or exchange offer, or exercising dissenters' or 
     appraisal rights.
       ``(e) Preservation of State Jurisdiction.--The securities 
     commission (or any agency or office performing like 
     functions) of any State shall retain jurisdiction under the 
     laws of such State to investigate and bring enforcement 
     actions.
       ``(f) State Actions.--
       ``(1) In general.--Notwithstanding any other provision of 
     this section, nothing in this section may be construed to 
     preclude a State or political subdivision thereof or a State 
     pension plan from bringing an action involving a covered 
     security on its own behalf, or as a member of a class 
     comprised solely of other States, political subdivisions, or 
     State pension plans similarly situated.
       ``(2) State pension plan defined.--For purposes of this 
     paragraph, the term `State pension plan' means a pension plan 
     established and maintained for its employees by the 
     government of the State or political subdivision thereof, or 
     by any agency or instrumentality thereof.
       ``(g) Definitions.--For purposes of this section the 
     following definitions shall apply:
       ``(1) Affiliate of the issuer.--The term `affiliate of the 
     issuer' means a person that directly or indirectly, through 1 
     or more intermediaries, controls or is controlled by or is 
     under common control with, the issuer.
       ``(2) Class action.--
       ``(A) In general.--The term `class action' means--
       ``(i) any single lawsuit (other than a derivative action 
     brought by 1 or more shareholders on behalf of a corporation) 
     in which--

       ``(I) damages are sought on behalf of more than 50 persons 
     or prospective class members, and questions of law or fact 
     common to those persons or members of the prospective class, 
     without reference to issues of individualized reliance on an 
     alleged misstatement or omission, predominate over any 
     questions affecting only individual persons or members; or
       ``(II) 1 or more named parties seek to recover damages on a 
     representative basis on behalf of themselves and other 
     unnamed parties similarly situated, and questions of law or 
     fact common to those persons or members of the prospective 
     class predominate over any questions affecting only 
     individual persons or members; or

       ``(ii) any group of lawsuits (other than derivative suits 
     brought by 1 or more shareholders on behalf of a corporation) 
     filed in or pending in the same court and involving common 
     questions of law or fact, in which--

       ``(I) damages are sought on behalf of more than 50 persons; 
     and
       ``(II) the lawsuits are joined, consolidated, or otherwise 
     proceed as a single action for any purpose.

       ``(B) Counting of certain class members.--For purposes of 
     this paragraph, a corporation, investment company, pension 
     plan, partnership, or other entity, shall be treated as 1 
     person or prospective class member, but only if the entity is 
     not established for the purpose of participating in the 
     action.
       ``(3) Covered security.--The term `covered security' means 
     a security that satisfies the standards for a covered 
     security specified in paragraph (1) or (2) of section 18(b) 
     at the time during which it is alleged that the 
     misrepresentation, omission, or manipulative or deceptive 
     conduct occurred.''.
       (2) Conforming amendments.--Section 22(a) of the Securities 
     Act of 1933 (15 U.S.C. 77v(a)) is amended--
       (A) by inserting ``except as provided in section 16 with 
     respect to class actions,'' after ``Territorial courts,''; 
     and
       (B) by striking ``No case'' and inserting ``Except as 
     provided in section 16(c), no case''.
       (b) Amendments to the Securities Exchange Act of 1934.--
     Section 28 of the Securities Exchange Act of 1934 (15 U.S.C. 
     78bb) is amended--
       (1) in subsection (a), by striking ``The rights and 
     remedies'' and inserting ``Except as provided in subsection 
     (f), the rights and remedies''; and
       (2) by adding at the end the following new subsection:

[[Page S4816]]

       ``(f) Limitations on Remedies.--
       ``(1) Class action limitations.--No class action based upon 
     the statutory or common law of any State or subdivision 
     thereof may be maintained in any State or Federal court by 
     any private party alleging--
       ``(A) a misrepresentation or omission of a material fact in 
     connection with the purchase or sale of a covered security; 
     or
       ``(B) that the defendant used or employed any manipulative 
     or deceptive device or contrivance in connection with the 
     purchase or sale of a covered security.
       ``(2) Removal of class actions.--Any class action brought 
     in any State court involving a covered security, as set forth 
     in paragraph (1), shall be removable to the Federal district 
     court for the district in which the action is pending, and 
     shall be subject to paragraph (1).
       ``(3) Preservation of certain actions.--
       ``(A) In general.--Notwithstanding paragraph (1), a class 
     action described in subparagraph (B) of this paragraph that 
     is based upon the statutory or common law of the State in 
     which the issuer is incorporated (in the case of a 
     corporation) or organized (in the case of any other entity) 
     may be maintained in a State or Federal court by a private 
     party.
       ``(B) Permissible actions.--A class action is described in 
     this subparagraph if it involves--
       ``(i) the purchase or sale of securities by the issuer or 
     an affiliate of the issuer exclusively from or to holders of 
     equity securities of the issuer; or
       ``(ii) any recommendation, position, or other communication 
     with respect to the sale of securities of an issuer that--

       ``(I) is made by or on behalf of the issuer or an affiliate 
     of the issuer to holders of equity securities of the issuer; 
     and
       ``(II) concerns decisions of such equity holders with 
     respect to voting their securities, acting in response to a 
     tender or exchange offer, or exercising dissenters' or 
     appraisal rights.

       ``(4) Preservation of state jurisdiction.--The securities 
     commission (or any agency or office performing like 
     functions) of any State shall retain jurisdiction under the 
     laws of such State to investigate and bring enforcement 
     actions.
       ``(5) State actions.--
       ``(A) In general.--Notwithstanding any other provision of 
     this subsection, nothing in this subsection may be construed 
     to preclude a State or political subdivision thereof or a 
     State pension plan from bringing an action involving a 
     covered security on its own behalf, or as a member of a class 
     comprised solely of other States, political subdivisions, or 
     State pension plans similarly situated.
       ``(B) State pension plan defined.--For purposes of this 
     paragraph, the term `State pension plan' means a pension plan 
     established and maintained for its employees by the 
     government of a State or political subdivision thereof, or by 
     any agency or instrumentality thereof.
       ``(6) Definitions.--For purposes of this subsection the 
     following definitions shall apply:
       ``(A) Affiliate of the issuer.--The term `affiliate of the 
     issuer' means a person that directly or indirectly, through 1 
     or more intermediaries, controls or is controlled by or is 
     under common control with, the issuer.
       ``(B) Class action.--The term `class action' means--
       ``(i) any single lawsuit (other than a derivative action 
     brought by 1 or more shareholders on behalf of a corporation) 
     in which--

       ``(I) damages are sought on behalf of more than 50 persons 
     or prospective class members, and questions of law or fact 
     common to those persons or members of the prospective class, 
     without reference to issues of individualized reliance on an 
     alleged misstatement or omission, predominate over any 
     questions affecting only individual persons or members; or
       ``(II) 1 or more named parties seek to recover damages on a 
     representative basis on behalf of themselves and other 
     unnamed parties similarly situated, and questions of law or 
     fact common to those persons or members of the prospective 
     class predominate over any questions affecting only 
     individual persons or members; or

       ``(ii) any group of lawsuits (other than derivative suits 
     brought by 1 or more shareholders on behalf of a corporation) 
     filed in or pending in the same court and involving common 
     questions of law or fact, in which--

       ``(I) damages are sought on behalf of more than 50 persons; 
     and
       ``(II) the lawsuits are joined, consolidated, or otherwise 
     proceed as a single action for any purpose.

       ``(C) Counting of certain class members.--For purposes of 
     this paragraph, a corporation, investment company, pension 
     plan, partnership, or other entity, shall be treated as 1 
     person or prospective class member, but only if the entity is 
     not established for the purpose of participating in the 
     action.
       ``(D) Covered security.--The term `covered security' means 
     a security that satisfies the standards for a covered 
     security specified in paragraph (1) or (2) of section 18(b) 
     of the Securities Act of 1933, at the time during which it is 
     alleged that the misrepresentation, omission, or manipulative 
     or deceptive conduct occurred.''.

     SEC. 4. APPLICABILITY.

       The amendments made by this Act shall not affect or apply 
     to any action commenced before and pending on the date of 
     enactment of this Act.

  Mr. GRASSLEY. Mr. President, I move to reconsider the vote by which 
the bill was passed.
  Mr. LOTT. I move to lay that motion on the table.
  The motion to lay on the table was agreed to.
  Mr. LOTT. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. LOTT. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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