[Congressional Record Volume 144, Number 101 (Friday, July 24, 1998)]
[Extensions of Remarks]
[Page E1440]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


[[Page E1440]]
          SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1998

                                 ______
                                 

                               speech of

                         HON. EDWARD J. MARKEY

                            of massachusetts

                    in the house of representatives

                         Tuesday, July 21, 1998

  Mr. MARKEY. Mr. Speaker, pursuant to the gentleman from Virginia's 
unanimous consent request of July 21, 1998 that all Members be given 5 
legislative days within which to revise and extend their remarks on 
H.R. 1689 and to insert extraneous material, I wish to take the 
opportunity to extend upon my earlier remarks regarding this 
legislation and to respond to some rather incredible--and I believe 
inaccurate--remarks made by some of my distinguished colleagues 
regarding this legislation.
  As I have indicated, I oppose this bill. If this bill is to become 
law, however, it is imperative that we clarify what the scienter 
requirement will be under the national standards created by H.R. 1689. 
My colleague from California--Representative Cox--seems to believe that 
standard should not include recklessness. I strongly disagree.
  The federal courts have long recognized that recklessness satisfies 
the scienter requirement of Section 10(b) and Rule 10b-5--the principal 
antifraud provisions of the federal securities laws. It is true, as 
some of my colleagues have noted, that in Ernst & Ernst v. Hochfelder, 
the Supreme Court left open the question of whether recklessness could 
satisfy the scienter requirement of Section 10(b) and Rule 10b-5. My 
colleague from California, however, omits to state that the Court 
explicitly recognized that ``in certain areas of the law recklessness 
is considered to be a form of intentional conduct for purposes of 
imposing liability for some act.'' My colleague from California also 
neglects to state that since Hochfelder was decided, every court of 
appeals that has considered the question -- ten in number -- has 
interpreted the text of Section 10(b) and Rule 10b-5 to impose 
liability for reckless misconduct.
  And these courts had good reason to so hold. Recklessness is vital to 
protect investors and the integrity of the disclosure process. Without 
liability for reckless misstatements, injured investors would be able 
to recover only if they were able to prove that a defendant had 
intentionally lied. This would enable defendants who deliberately 
disregarded available information to avoid liability for investor 
losses, and would encourage corporate chieftains to bury their heads in 
the sand.
  The recklessness standard promotes meaningful disclosure. Our 
securities laws are premised on disclosure. Issuers of securities must 
make full and fair disclosure of material facts to investors when 
offering their securities. If issuers of securities are liable for 
misstatements and omissions only when they consciously make false 
disclosures, they will have less incentive to conduct a probing inquiry 
into any potentially troublesome areas they discover in the course of 
preparing their disclosure documents. The recklessness standard helps 
ensure that disclosure is thorough and meaningful because it encourages 
issuers to know what is taking place in their own companies.
  Finally, the recklessness standard helps bring deliberate securities 
violators to justice by preventing them from hiding behind evidentiary 
hurdles. Proving a defendant's actual knowledge of fraud in a 
securities case is often not possible. Defendants in securities fraud 
cases do not as a matter of course admit their fraudulent intent. 
Proving actual knowledge is particularly daunting when, as is often 
true in securities cases, the evidence relating to the defendant's 
state of mind is entirely circumstantial. As the U.S. Court of Appeals 
for the Second Circuit--one of the ten courts of appeals to have put 
their stamp of approval on recklessness--has noted: ``Proof of a 
defendant's knowledge or intent will often be inferential . . . and 
cases thus of necessity [are] cast in terms of recklessness. To require 
in all types of 10b-5 cases that a factfinder must find a specific 
intent to deceive or defraud would for all intents and purposes 
disembowel the private cause of action under Sec. 10(b).''
  I do agree with my colleague from the state of California that the 
1995 Private Securities Litigation Reform Act did not change the 
scienter requirement for liability. I am deeply troubled, however, by 
his attempt to attribute to the Reform Act Conference Committee--of 
which I was a member--an intention to raise the pleading standard 
beyond that of the Second Circuit--which, at the time of the Reform Act 
was the strictest pleading standard in the nation. That clearly was not 
my understanding nor my intent. Indeed, not only is my colleague 
attempting to revise history, he is doing so in a manner that would 
create an illogical result. Because the antifraud provisions allow 
liability for reckless misconduct, it follows that plaintiffs must be 
allowed to plead that the defendants acted recklessly. To say that 
defrauded investors can recover for reckless misconduct, but that they 
must plead something more than reckless misconduct defies logic.
  Likewise, I must take strong exception to the suggestion of my 
colleague from California about the Conference Committee's intentions 
regarding a footnote in the Statement of Managers. That footnote, 
inserted at the last minute without my knowledge and without any 
discussion of the matter by the Members during the Conference Committee 
meetings, states that the Committee chose ``not to include in the 
pleading standard certain language relating to motive, opportunity, or 
recklessness.'' Contrary to my colleague's statements, this footnote--
and make no mistake about it, that's all it is, merely a footnote--does 
not mean that recklessness has been eliminated either as a basis for 
liability or as a pleading standard. Existence of this footnote in no 
way mandates that courts not follow the Second Circuit approach to 
pleading. The Conference Committee and the Congress that passed the 
Reform Act also chose not to expressly include conscious behavior in 
the pleading standard. Yet surely no one would suggest that in doing 
so, the Conference Committee and Congress intended to eliminate 
liability for conscious misconduct.
  My colleague points to the fact that the President vetoed the bill 
because of his concerns that the conferees intended to adopt a pleading 
standard higher than the Second Circuit's. Members in both the House 
and the Senate following the veto made clear that we did no more than 
adopt the Second Circuit standard. In this regard, I strongly agree 
with my colleague from California, Congresswoman Lofgren, who stated in 
the legislative history following President Clinton's veto: ``The 
President says he supports the second circuit standard for pleading. So 
do I. That is what is included in this bill.''
  I would suggest that it is the gentleman from California, rather than 
myself and other opponents of this legislation, that are trying to 
rewrite history. I continue to feel that both the Reform Act of 1995 
and the present legislation are bad for investors and bad for our 
financial markets. We do not need to compound the harm done by this 
legislation with revisionist histories that seek to surreptitiously 
eliminate liability for reckless behavior.

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