[Congressional Record Volume 144, Number 99 (Wednesday, July 22, 1998)]
[Extensions of Remarks]
[Pages E1390-E1391]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




          SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1998

                                 ______
                                 

                               speech of

                           HON. ANNA G. ESHOO

                             of california

                    in the house of representatives

                         Tuesday, July 21, 1998

  Ms. ESHOO. Mr. Speaker, it is with great pride that I rise in support 
of H.R. 1689, the Securities Litigation Uniform Standards Act of 1998. 
Over a year ago Representative White and I introduced this legislation. 
Since then there has been a groundswell of support for this 
legislation. The Senate approved the companion bill, S. 1260, by a vote 
of 79-21. The Securities and Exchange Commission and the Clinton 
Administration have endorsed the legislation. The House bill we are 
considering today has 232 cosponsors. Today, under Suspension of the 
Rules, the House will pass this important piece of legislation.
  I want to thank you Chairman Bliley for the open way you have worked 
to bring this bill to the floor. In the past few months both the 
majority and minority side have worked to tighten and clean up the bill 
language before us today. I believe it is a much improved product.
  As the primary Democratic sponsor, let me briefly discuss the need 
for this bill.
  In 1995, Congress passed the Private Securities Litigation Reform 
Act. This law represented a bipartisan attempt to deal with the problem 
of meritless ``strike suits'' filed against high-growth companies. In 
most instances, these cases were settled out of court because companies 
made the calculation that it was cheaper to pay off the strike suit 
lawyer than become engaged in a protracted legal fight.
  These class actions have had a considerable impact on the high 
technology industry, especially those in Silicon Valley which I have 
the privilege to represent. High technology companies account for 34% 
of all the securities issuers sued last year, and 62% of all cases are 
filed in California. It's ironic that the very companies that have 
contributed disproportionately to the economic health of our nation and 
have been a great source of wealth for investors are the ones being 
harassed. They are being penalized for success.
  The 1995 reforms are now being undermined by a shift to state courts 
of cases involving nationally traded securities, which prior to 1995 
were heard in federal courts. Analysis shows a clear motivation for 
this shift to state courts. The SEC staff report found that 53% of the 
cases filed cited claims based on forward-looking statements. Also, as 
Chairman Levitt pointed out in testimony last year before the House 
Commerce Committee, 55% of the cases filed at the state level are 
essentially identical to those brought by the same law firm in federal 
court.
  Migration to state courts is not a minor problem. It represents an 
undermining of core reforms implemented in the 1995 Reform Act, because 
the Reform Act relies on uniform application and enforcement of the law 
to be effective. Without this uniform standard, the law is undermined, 
the strike suits continue, and companies and investors are held 
hostage. This is particularly true for two key elements of the 1995 
Reform Act: Safe Harbor and Stay of Discovery.
  When companies refrain from disclosing information about their 
projected performance, investors are unable to make informed decisions. 
Most companies are eager to talk about what they are doing. But the 
threat of meritless suits places a chill on disclosure. This is because 
any Wall Street analyst's expectation can cause a company's stock to 
fluctuate, even if the company is growing at a rate of 20% or 30%. 
Those filing the strike suit then claim that any forward-looking 
statement, even if it was clearly an estimate and not a promise of 
stock performance, is grounds for a civil action.
  Companies responded by ceasing to make forward-looking statements. 
The 1995 Reform Act instituted a safe harbor for companies making 
forward-looking statements as long as those statements were not false 
or misleading. However, because of the threat of actions in state 
courts where there is no safe harbor, this provision still has yet to 
be implemented. I've received letters from hundreds of business leaders 
who say they will continue to refrain from making forward looking 
statements as long as the threat of litigation not covered by safe 
harbor remains. As a result the most investor and consumer-friendly 
portion of the 1995 Reform Act is not being used.
  The second key element of reform is the stay of discovery pending 
motions to dismiss. Discovery is often the most costly part of the 
litigation process. It's especially burdensome when plaintiff lawyers 
tie up executives' time and request, literally, millions of pages of 
documents. As long as this threat is present, companies will have a 
greater incentive to settle early and avoid the cost of discovery than 
fight--even if the case has no merit. To counter this problem we 
enacted a stay of discovery in the 1995 Act. This does not prohibit 
plaintiffs from filing their cases, nor does it prohibit cases that 
have merit from moving forward. It merely delays the discovery process 
until a judge can rule on a motion to dismiss.
  Because of the shift to state courts, the stay of discovery is not in 
place. The threat of huge legal costs remains and the incentive to 
settle meritless cases continues. Even worse, plaintiff lawyers are 
able to file a case in state courts, go through a process of 
discovery--basically a fishing expedition--and then take those 
documents into federal court.
  It is this undermining of the federal law that prompted 
Representative White and I to introduce our bill. I would like to make 
clear that the bill is not a federal power grab. We are returning to 
federal courts cases which until the 1995 Reform Act had always been 
heard in federal courts. It is limited in scope, and only extends to 
private class action lawsuits involving nationally-traded securities. 
State regulators and law enforcement officials maintain

[[Page E1391]]

their full range of options to take both criminal and civil action in 
state or federal court. It's a targeted approach to a specific problem.
  I want to emphasize that this legislation is not premature. In some 
instances, the impact of certain provisions of the Reform Act is not 
clear because the courts are just beginning to consider these cases. 
This may be true for cases involving the pleading standard or lead 
plaintiff reforms, but in the case of the stay of discovery and safe 
harbor provisions this concern does not apply. As long as the threat of 
state court actions remains, the safe harbor reform will never be 
implemented. Companies will refrain from making forward-looking 
statements and investors will be denied access to information. In 
short, there are no cases whose outcomes we can wait for, because there 
are no cases.
  The same is true for the stay of discovery provision. It is the 
threat of costly discovery that motivates companies to settle. As long 
as that threat remains at the state court level, we will never know if 
the stay of discovery will succeed in weeding out meritless cases.
  To build a strong base of support and increase the chances for 
approval, I have worked with supporters of the Uniform Standards 
legislation and SEC Chairman Levitt to address three specific concerns 
that he raised. First, the so-called ``Delaware Problem.'' The SEC was 
concerned that language in our bill would pre-empt, not only cases 
traditionally filed in federal courts prior to 1995, but also could 
pre-empt state laws regarding informing stockholders of mergers or 
other sell orders. These corporate actions are traditionally monitored 
by state regulators, and in the case of Delaware there is a long 
standing common law tradition. It was not our intention to undermine 
this state law, and working with the SEC, the American Bar Association 
and the Delaware Bar, I believe we have developed effective language to 
carve-out these cases from our bill.
  Second, the definition of Class Action is clarified. We attempted to 
close a loophole, and the language of H.R. 1689 encompassed a large 
category of private actions. The SEC asked that the bill be modified to 
define class action as something closer to the current federal 
understanding. This language, along with the Delaware language, was 
added during the Senate consideration and House Commerce Committee 
mark-up of the Uniform Standards bill.
  The third issue is that of recklessness. During the Senate 
consideration of the S. 1260 the companion bill to H.R. 1689, language 
was included during the debate and the committee report. This language 
was inserted to clarify what was intended by the Congress in its 
passage of the 1995 Reform Act. As part of the House debate 
Representative Cox and I engaged in a colloquy that ``Congress, did not 
in adopting the Reform Act, intend to alter standards of liability 
under the Exchange Act.''
  Congress heard testimony from the Securities and Exchange Commission 
and others regarding the scienter requirement under a possible national 
standard of litigation for nationally-traded securities. I understand 
this concern arises out of certain Federal district courts' 
interpretation of the Private Securities Litigation Reform Act of 1995 
(PL 104-67). In that regard I want to emphasize that the clear intent 
in 1995 and our continuing intent in this legislation is that neither 
the PSLRA nor H.R. 1689 in any way alters the scienter standard in 
federal securities fraud suits. It was the intent of Congress, as we 
expressly stated during the debate on overriding the President's veto, 
that the PSLRA establish a national uniform standard on pleading 
requirements by adopting the pleading standard applied by the Second 
Circuit Court of Appeals. Indeed the express language of the PSLRA 
itself carefully provides that plaintiffs must ``state with 
particularity facts given rise to a strong inference that the defendant 
acted with the required state of mind.'' Neither the PSLRA nor H.R. 
1689 makes any attempt to define that state of mind.
  As Senator Dodd, the primary Democratic sponsor of this bill and the 
Reform Act, has said, ``the recklessness standard has been a good 
standard over the years and ought not to be tampered with, in my 
opinion.'' I couldn't agree more.
  Before I conclude I would also like to pay special tribute to 
subcommittee ranking member Thomas Manton. The grace and dignity with 
which he has conducted himself as a Member of this body is a model for 
those of us who remain, and he will be sorely missed. During Commerce 
Committee consideration of H.R. 1689, he included language related to 
extending SEC's ability to enforce. I support his amendment and pledge 
to work with him as this bill goes forward to restore his amendment.
  Lastly, I would like to thank all those involved in bringing this 
bill to the floor for a vote today, including Chairman Bliley, Ranking 
Member Oxley, Representative Tauzin, and Ranking Member Manton, I would 
especially like to thank Ranking Member Dingell and Representative 
Markey, even though they oppose the legislation; the constructive and 
helpful contributions they made have improved this bill. I would also 
like to commend my partner, Representative White, for all of his work 
and attention to this bill.
  I thank my colleagues for their support and look forward to this bill 
becoming law.

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