Congressional Record, Volume 144 Issue 145 (Tuesday, October 13, 1998)

[Congressional Record Volume 144, Number 145 (Tuesday, October 13, 1998)]
[House]
[Pages H10771-H10787]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

CONFERENCE REPORT ON S. 1260, SECURITIES LITIGATION UNIFORM STANDARDS
ACT OF 1998

Mr. BLILEY. Mr. Speaker, I move to suspend the rules and agree to the
conference report on the Senate 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 Clerk read the title of the Senate bill.
(For conference report and statement, see Proceedings of the House of
Friday, October 9, 1998, at page H10266.)
The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
Virginia (Mr. Bliley) and the gentleman from Michigan (Mr. Dingell)
each will control 20 minutes.
The Chair recognizes the gentleman from Virginia (Mr. Bliley).
Mr. BLILEY. Mr. Speaker, I yield myself 5 minutes.
(Mr. Bliley asked and was given permission to revise and extend his
remarks and include extraneous material.)
Mr. BLILEY. Mr. Speaker, I rise in support of the conference report
on the Senate bill, S. 1260, Securities Litigation Uniform Standards
Act of 1998. This legislation we are considering today will eliminate
State court as a venue for meritless securities litigation.
This legislation has broad bipartisan support. We recognize that the
trial bar should not make an end run around the work we did in 1995 in
overriding the President's veto of litigation reform in State court.
This legislation will protect investors from baseless securities class
action lawsuits in the capital markets.
The premise of this legislation is simple: lawsuits alleging
violations that involve securities that are offered nationally belong
in Federal court. This premise is consistent with the national nature
of these markets that we recognize in the National Securities Market
Improvement Act of 1995.
The legislative history accompanying the legislation makes clear that
we are not disturbing the heightened pleading standard established by
the 1995 Act.
The economic disruptions around the globe are reflected by the
volatility that affects our markets. Stock prices are up one day, down
the next. The prices are not falling due to fraudulent statements,
which are the purported basis of many strike suits. The fall is due to
economic conditions.
If there is intentional fraud, there is nothing in this legislation
or in the Reform Act to prevent those cases from proceeding. We do not
need to exacerbate market downturns by allowing companies to be dragged
into court every time their stock price falls. The 1995 Reform Act
remedied that problem for Federal courts, and this legislation will
remedy it for State courts.
I would like to thank the gentleman from Ohio (Mr. Oxley), the
chairman of the Subcommittee on Finance and Hazardous Materials, for
his hard work and leadership. I thank the gentleman from Michigan (Mr.
John Dingell), the ranking member of the committee, for his
constructive participation as we move the bill through committee.
I commend the gentleman from New York (Mr. Tom Manton), the ranking
member of the subcommittee, not only for his work on this legislation,
but his valued service on the committee. It has been a pleasure working
with him, and he will be missed.
I also commend the gentleman from Washington (Mr. Rick White), the
original cosponsor of the legislation, for his tireless efforts and
willingness to compromise that has kept this legislation on track to
becoming law.
Likewise, the gentlewoman from California (Ms. Anna Eshoo) has been a
leading proponent of this legislation, and has worked to ensure its
passage, and certainly the gentleman from California (Mr. Cox), the
chairman of the Republican policy committee who has been working on
this issue for many years.
Finally, I also commend our colleagues in the other body for their
work on this important legislation. Mr. Speaker, I urge my colleagues
to join me and support S. 1260.
Mr. Speaker, I ask unanimous consent to include for the Record a
complete copy of the conference report on S. 1260.
When the conference report was filed in the House, a page from the
statement of managers was inadvertently omitted. That page was included
in the copy filed in the Senate, reflecting the agreement of the
managers. We are considering today the entire report and statement of
managers as agreed to by conferees and inserted in the Record.
The SPEAKER pro tempore. Since the Chair is aware that the papers
filed in the Senate contain that matter as part of the joint statement,
its omission from the joint statement filed in the House can be
corrected by a unanimous consent request.
Is there objection to the request of the gentleman from Virginia?
There was no objection.
The text of the Conference Report on S. 1260 is as follows:

Conference Report (H. Rept. 105-803)

The committee of conference on the disagreeing votes of the
two Houses on the amendment of the House to the 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, having met,
after full and free conference, have agreed to recommend and
do recommend to their respective Houses as follows:
That the Senate recede from its disagreement to the
amendment of the House and agree to the same with an
amendment as follows:
In lieu of the matter proposed to be inserted by the House
amendment, insert 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 regulators
and not changing the current treatment of individual
lawsuits.

[[Page H10772]]

TITLE I--SECURITIES LITIGATION UNIFORM STANDARDS

SEC. 101. 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 covered 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 Covered Class Actions.--Any covered 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) Actions under state law of state of incorporation.--
``(A) Actions preserved.--Notwithstanding subsection (b) or
(c), a covered 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 covered 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 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.

``(2) State actions.--
``(A) 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 that are named plaintiffs, and that have
authorized participation, in such action.
``(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 the State or political subdivision thereof, or
by any agency or instrumentality thereof.
``(3) Actions under contractual agreements between issuers
and indenture trustees.--Notwithstanding subsection (b) or
(c), a covered class action that seeks to enforce a
contractual agreement between an issuer and an indenture
trustee may be maintained in a State or Federal court by a
party to the agreement or a successor to such party.
``(4) Remand of removed actions.--In an action that has
been removed from a State court pursuant to subsection (c),
if the Federal court determines that the action may be
maintained in State court pursuant to this subsection, the
Federal court shall remand such action to such State court.
``(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
one or more intermediaries, controls or is controlled by or
is under common control with, the issuer.
``(2) Covered class action.--
``(A) In general.--The term `covered class action' means--
``(i) any single lawsuit 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) one 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 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) Exception for derivative actions.--Notwithstanding
subparagraph (A), the term `covered class action' does not
include an exclusively derivative action brought by one or
more shareholders on behalf of a corporation.
``(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 one
person or prospective class member, but only if the entity is
not established for the purpose of participating in the
action.
``(D) Rule of construction.--Nothing in this paragraph
shall be construed to affect the discretion of a State court
in determining whether actions filed in such court should be
joined, consolidated, or otherwise allowed to proceed as a
single 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, except that such term shall not include any
debt security that is exempt from registration under this
title pursuant to rules issued by the Commission under
section 4(2).''.
(2) Circumvention of stay of discovery.--Section 27(b) of
the Securities Act of 1933 (15 U.S.C. 77z-1(b)) is amended by
inserting after paragraph (3) the following new paragraph:
``(4) Circumvention of stay of discovery.--Upon a proper
showing, a court may stay discovery proceedings in any
private action in a State court as necessary in aid of its
jurisdiction, or to protect or effectuate its judgments, in
an action subject to a stay of discovery pursuant to this
subsection.''.
(3) 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 covered 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.--
(1) Amendment.--Section 28 of the Securities Exchange Act
of 1934 (15 U.S.C. 78bb) is amended--
(A) in subsection (a), by striking ``The rights and
remedies'' and inserting ``Except as provided in subsection
(f), the rights and remedies''; and
(B) by adding at the end the following new subsection:
``(f) Limitations on Remedies.--
``(1) Class action limitations.--No covered 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 covered class actions.--Any covered 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) Actions under state law of state of incorporation.--
``(i) Actions preserved.--Notwithstanding paragraph (1) or
(2), a covered class action described in clause (ii) of this
subparagraph 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.
``(ii) Permissible actions.--A covered class action is
described in this clause 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--

``(aa) is made by or on behalf of the issuer or an
affiliate of the issuer to holders of equity securities of
the issuer; and
``(bb) 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.
``(B) State actions.--
``(i) 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 that are named plaintiffs, and that have
authorized participation, in such action.
``(ii) State pension plan defined.--For purposes of this
subparagraph, 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.
``(C) Actions under contractual agreements between issuers
and indenture trustees.--Notwithstanding paragraph (1) or
(2), a covered class action that seeks to enforce a
contractual agreement between an issuer and an indenture
trustee may be maintained in a State or Federal court by a
party to the agreement or a successor to such party.

[[Page H10773]]

``(D) Remand of removed actions.--In an action that has
been removed from a State court pursuant to paragraph (2), if
the Federal court determines that the action may be
maintained in State court pursuant to this subsection, the
Federal court shall remand such action to such State court.
``(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
one or more intermediaries, controls or is controlled by or
is under common control with, the issuer.
``(B) Covered class action.--The term `covered class
action' means--
``(i) any single lawsuit in which--

``(ii) any group of lawsuits 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) Exception for derivative actions.--Notwithstanding
subparagraph (B), the term `covered class action' does not
include an exclusively derivative action brought by one or
more shareholders on behalf of a corporation.
``(D) Counting of certain class members.--For purposes of
this paragraph, a corporation, investment company, pension
plan, partnership, or other entity, shall be treated as one
person or prospective class member, but only if the entity is
not established for the purpose of participating in the
action.
``(E) 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, except that such term shall
not include any debt security that is exempt from
registration under the Securities Act of 1933 pursuant to
rules issued by the Commission under section 4(2) of that
Act.
``(F) Rule of construction.--Nothing in this paragraph
shall be construed to affect the discretion of a State court
in determining whether actions filed in such court should be
joined, consolidated, or otherwise allowed to proceed as a
single action.''.
(2) Circumvention of stay of discovery.--Section 21D(b)(3)
of the Securities Exchange Act of 1934 (15 U.S.C. 78u-
4(b)(3)) is amended by adding at the end the following new
subparagraph:
``(D) Circumvention of stay of discovery.--Upon a proper
showing, a court may stay discovery proceedings in any
private action in a State court, as necessary in aid of its
jurisdiction, or to protect or effectuate its judgments, in
an action subject to a stay of discovery pursuant to this
paragraph.''.
(c) Applicability.--The amendments made by this section
shall not affect or apply to any action commenced before and
pending on the date of enactment of this Act.

SEC. 102. PROMOTION OF RECIPROCAL SUBPOENA ENFORCEMENT.

(a) Commission Action.--The Securities and Exchange
Commission, in consultation with State securities commissions
(or any agencies or offices performing like functions), shall
seek to encourage the adoption of State laws providing for
reciprocal enforcement by State securities commissions of
subpoenas issued by another State securities commission
seeking to compel persons to attend, testify in, or produce
documents or records in connection with an action or
investigation by a State securities commission of an alleged
violation of State securities laws.
(b) Report.--Not later than 24 months after the date of
enactment of this Act, the Securities and Exchange Commission
(hereafter in this section referred to as the ``Commission'')
shall submit a report to the Congress--
(1) identifying the States that have adopted laws described
in subsection (a);
(2) describing the actions undertaken by the Commission and
State securities commissions to promote the adoption of such
laws; and
(3) identifying any further actions that the Commission
recommends for such purposes.
TITLE II--REAUTHORIZATION OF THE SECURITIES AND EXCHANGE COMMISSION

SEC. 201. AUTHORIZATION OF APPROPRIATIONS.

Section 35 of the Securities Exchange Act of 1934 (15
U.S.C. 78kk) is amended to read as follows:

``SEC. 35. AUTHORIZATION OF APPROPRIATIONS.

``(a) In General.--In addition to any other funds
authorized to be appropriated to the Commission, there are
authorized to be appropriated to carry out the functions,
powers, and duties of the Commission, $351,280,000 for fiscal
year 1999.
``(b) Miscellaneous Expenses.--Funds appropriated pursuant
to this section are authorized to be expended--
``(1) not to exceed $3,000 per fiscal year, for official
reception and representation expenses;
``(2) not to exceed $10,000 per fiscal year, for funding a
permanent secretariat for the International Organization of
Securities Commissions; and
``(3) not to exceed $100,000 per fiscal year, for expenses
for consultations and meetings hosted by the Commission with
foreign governmental and other regulatory officials, members
of their delegations, appropriate representatives, and staff
to exchange views concerning developments relating to
securities matters, for development and implementation of
cooperation agreements concerning securities matters, and
provision of technical assistance for the development of
foreign securities markets, such expenses to include
necessary logistic and administrative expenses and the
expenses of Commission staff and foreign invitees in
attendance at such consultations and meetings, including--
``(A) such incidental expenses as meals taken in the course
of such attendance;
``(B) any travel or transportation to or from such
meetings; and
``(C) any other related lodging or subsistence.''.

SEC. 202. REQUIREMENTS FOR THE EDGAR SYSTEM.

Section 35A of the Securities Exchange Act of 1934 (15
U.S.C. 78ll) is amended--
(1) by striking subsections (a), (b), (c), and (e); and
(2) in subsection (d)--
(A) by striking ``(d)'';
(B) in paragraph (2), by striking ``; and'' at the end and
inserting a period; and
(C) by striking paragraph (3).

SEC. 203. COMMISSION PROFESSIONAL ECONOMISTS.

Section 4(b) of the Securities Exchange Act of 1934 (15
U.S.C. 78d(b)) is amended--
(1) by redesignating paragraph (2) as paragraph (3); and
(2) by inserting after paragraph (1) the following:
``(2) Economists.--
``(A) Commission authority.--Notwithstanding the provisions
of chapter 51 of title 5, United States Code, the Commission
is authorized--
``(i) to establish its own criteria for the selection of
such professional economists as the Commission deems
necessary to carry out the work of the Commission;
``(ii) to appoint directly such professional economists as
the Commission deems qualified; and
``(iii) to fix and adjust the compensation of any
professional economist appointed under this paragraph,
without regard to the provisions of chapter 55 of title 5,
United States Code, or subchapters II, III, or VIII of
chapter 53, of title 5, United States Code.
``(B) Limitation on compensation.--No base compensation
fixed for an economist under this paragraph may exceed the
pay for Level IV of the Executive Schedule, and no payments
to an economist appointed under this paragraph shall exceed
the limitation on certain payments in section 5307 of title
5, United States Code.
``(C) Other benefits.--All professional economists
appointed under this paragraph shall be eligible for coverage
under the Federal Civil Service System with respect to
employee benefits.''.
TITLE III--CLERICAL AND TECHNICAL AMENDMENTS

SEC. 301. CLERICAL AND TECHNICAL AMENDMENTS.

(a) Securities Act of 1933.--The Securities Act of 1933 (15
U.S.C. 77 et seq.) is amended as follows:
(1) Section 2(a)(15)(i) (15 U.S.C. 77b(a)(15)(i)) is
amended--
(A) by striking ``3(a)(2) of the Act'' and inserting
``3(a)(2)''; and
(B) by striking ``section 2(13) of the Act'' and inserting
``paragraph (13) of this subsection''.
(2) Section 11(f)(2)(A) (15 U.S.C. 77k(f)(2)(A)) is amended
by striking ``section 38'' and inserting ``section 21D(f)''.
(3) Section 13 (15 U.S.C. 77m) is amended--
(A) by striking ``section 12(2)'' each place it appears and
inserting ``section 12(a)(2)''; and
(B) by striking ``section 12(1)'' each place it appears and
inserting ``section 12(a)(1)''.
(4) Section 18 (15 U.S.C. 77r) is amended--
(A) in subsection (b)(1)(A), by inserting ``, or authorized
for listing,'' after ``Exchange, or listed'';
(B) in subsection (c)(2)(B)(i), by striking ``Capital
Markets Efficiency Act of 1996'' and inserting ``National
Securities Markets Improvement Act of 1996'';
(C) in subsection (c)(2)(C)(i), by striking ``Market'' and
inserting ``Markets'';
(D) in subsection (d)(1)(A)--
(i) by striking ``section 2(10)'' and inserting ``section
2(a)(10)''; and
(ii) by striking ``subparagraphs (A) and (B)'' and
inserting ``subparagraphs (a) and (b)'';
(E) in subsection (d)(2), by striking ``Securities
Amendments Act of 1996'' and inserting ``National Securities
Markets Improvement Act of 1996''; and
(F) in subsection (d)(4), by striking ``For purposes of
this paragraph, the'' and inserting ``The''.
(5) Sections 27, 27A, and 28 (15 U.S.C. 77z-1, 77z-2, 77z-
3) are transferred to appear after section 26, in that order.
(6) Paragraph (28) of schedule A of such Act (15 U.S.C.
77aa(28)) is amended by striking ``identic'' and inserting
``identical''.
(b) Securities Exchange Act of 1934.--The Securities
Exchange Act of 1934 (15 U.S.C. 78 et seq.) is amended as
follows:
(1) Section 3(a)(10) (15 U.S.C. 78c(a)(10)) is amended by
striking ``deposit, for'' and inserting ``deposit for''.
(2) Section 3(a)(12)(A)(vi) (15 U.S.C. 78c(a)(12)(A)(vi))
is amended by moving the margin 2 em spaces to the left.

[[Page H10774]]

(3) Section 3(a)(22)(A) (15 U.S.C. 78c(a)(22)(A)) is
amended--
(A) by striking ``section 3(h)'' and inserting ``section
3''; and
(B) by striking ``section 3(t)'' and inserting ``section
3''.
(4) Section 3(a)(39)(B)(i) (15 U.S.C. 78c(a)(39)(B)(i)) is
amended by striking ``an order to the Commission'' and
inserting ``an order of the Commission''.
(5) The following sections are each amended by striking
``Federal Reserve Board'' and inserting ``Board of Governors
of the Federal Reserve System'': subsections (a) and (b) of
section 7 (15 U.S.C. 78g(a), (b)); section 17(g) (15 U.S.C.
78q(g)); and section 26 (15 U.S.C. 78z).
(6) The heading of subsection (d) of section 7 (15 U.S.C.
78g(d)) is amended by striking ``Exception'' and inserting
``Exceptions''.
(7) Section 14(g)(4) (15 U.S.C. 78n(g)(4)) is amended by
striking ``consolidation sale,'' and inserting
``consolidation, sale,''.
(8) Section 15 (15 U.S.C. 78o) is amended--
(A) in subsection (c)(8), by moving the margin 2 em spaces
to the left;
(B) in subsection (h)(2), by striking ``affecting'' and
inserting ``effecting'';
(C) in subsection (h)(3)(A)(i)(II)(bb), by inserting ``or''
after the semicolon;
(D) in subsection (h)(3)(A)(ii)(I), by striking
``maintains'' and inserting ``maintained'';
(E) in subsection (h)(3)(B)(ii), by striking
``association'' and inserting ``associated''.
(9) Section 15B(c)(4) (15 U.S.C. 78o-4(c)(4)) is amended by
striking ``convicted by any offense'' and inserting
``convicted of any offense''.
(10) Section 15C(f)(5) (15 U.S.C. 78o-5(f)(5)) is amended
by striking ``any person or class or persons'' and inserting
``any person or class of persons''.
(11) Section 19(c)(5) (15 U.S.C. 78s(c)(5)) is amended by
moving the margin 2 em spaces to the right.
(12) Section 20 (15 U.S.C. 78t) is amended by redesignating
subsection (f) as subsection (e).
(13) Section 21D (15 U.S.C. 78u-4) is amended--
(A) in subsection (g)(2)(B)(i), by striking ``paragraph
(1)'' and inserting ``subparagraph (A)''.
(B) by redesignating subsection (g) as subsection (f); and
(14) Section 31(a) (15 U.S.C. 78ee(a)) is amended by
striking ``this subsection'' and inserting ``this section''.
(c) Investment Company Act of 1940.--The Investment Company
Act of 1940 (15 U.S.C. 80a-1 et seq.) is amended as follows:
(1) Section 2(a)(8) (15 U.S.C. 80a-2(a)(8)) is amended by
striking ``Unitde'' and inserting ``United''.
(2) Section 3(b) (15 U.S.C. 80a-3(b)) is amended by
striking ``paragraph (3) of subsection (a)'' and inserting
``paragraph (1)(C) of subsection (a)''.
(3) Section 12(d)(1)(G)(i)(III)(bb) (15 U.S.C. 80a-
12(d)(1)(G)(i)(III)(bb)) is amended by striking ``the
acquired fund'' and inserting ``the acquired company''.
(4) Section 18(e)(2) (15 U.S.C. 80a-18(e)(2)) is amended by
striking ``subsection (e)(2)'' and inserting ``paragraph (1)
of this subsection''.
(5) Section 30 (15 U.S.C. 80a-29) is amended--
(A) by inserting ``and'' after the semicolon at the end of
subsection (b)(1);
(B) in subsection (e), by striking ``semi-annually'' and
inserting ``semiannually''; and
(C) by redesignating subsections (g) and (h), as added by
section 508(g) of the National Securities Markets Improvement
Act of 1996, as subsections (i) and (j), respectively.
(6) Section 31(f) (15 U.S.C. 80a-30(f)) is amended by
striking ``subsection (c)'' and inserting ``subsection (e)''.
(d) Investment Advisers Act of 1940.--The Investment
Advisers Act of 1940 (15 U.S.C. 80b et seq.) is amended as
follows:
(1) Section 203(e)(8)(B) (15 U.S.C. 80b-3(e)(8)(B)) is
amended by inserting ``or'' after the semicolon.
(2) Section 222(b)(2) (15 U.S.C. 80b-18a(b)(2)) is amended
by striking ``principle'' and inserting ``principal''.
(e) Trust Indenture Act of 1939.--The Trust Indenture Act
of 1939 (15 U.S.C. 77aaa et seq.) is amended as follows:
(1) Section 303 (15 U.S.C. 77ccc) is amended by striking
``section 2'' each place it appears in paragraphs (2) and (3)
and inserting ``section 2(a)''.
(2) Section 304(a)(4)(A) (15 U.S.C. 77ddd(a)(4)(A)) is
amended by striking ``(14) of subsection'' and inserting
``(13) of section''.
(3) Section 313(a) (15 U.S.C. 77mmm(a)) is amended--
(A) by inserting ``any change to'' after the paragraph
designation at the beginning of paragraph (4); and
(B) by striking ``any change to'' in paragraph (6).
(4) Section 319(b) (15 U.S.C. 77sss(b)) is amended by
striking ``the Federal Register Act'' and inserting ``chapter
15 of title 44, United States Code,''.

SEC. 302. EXEMPTION OF SECURITIES ISSUED IN CONNECTION WITH
CERTAIN STATE HEARINGS.

Section 18(b)(4)(C) of the Securities Act of 1933 (15
U.S.C. 77r(b)(4)(C)) is amended by striking ``paragraph (4)
or (11)'' and inserting ``paragraph (4), (10), or (11)''.
And the House agree to the same.
Tom Bliley,
M.G. Oxley,
Billy Tauzin,
Chris Cox,
Rick White,
Anna G. Eshoo,
Managers on the Part of the House.

Alfonse D'Amato,
Phil Gramm,
Chris Dodd,
Managers on the Part of the Senate.

Joint Explanatory Statement of the Committee of Conference

The managers on the part of the House and the Senate at the
conference on the disagreeing votes of the two Houses on the
amendment of the House to the 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, submit the following joint
statement to the House and the Senate in explanation of the
effect of the action agreed upon by the managers and
recommended in the accompanying conference report:

The Securities Litigation Uniform Standards Act of 1998

Uniform Standards

Title 1 of S. 1260, the Securities Litigation Uniform
Standards Act of 1998, makes Federal court the exclusive
venue for most securities class action lawsuits. The purpose
of this title is to prevent plaintiffs from seeking to evade
the protections that Federal law provides against abusive
litigation by filing suit in State, rather than in Federal,
court. The legislation is designed to protect the interests
of shareholders and employees of public companies that are
the target of meritless ``strike'' suits. The purpose of
these strike suits is to extract a sizeable settlement from
companies that are forced to settle, regardless of the lack
of merits of the suit, simply to avoid the potentially
bankrupting expense of litigating.
Additionally, consistent with the determination that
Congress made in the National Securities Markets Improvement
Act \1\ (NSMIA), this legislation establishes uniform
national rules for securities class action litigation
involving our national capital markets. Under the
legislation, class actions relating to a ``covered security''
(as defined by section 18(b) of the Securities Act of 1933,
which was added to that Act by NSMIA) alleging fraud or
manipulation must be maintained pursuant to the provisions of
Federal securities law, in Federal court (subject to certain
exceptions).
---------------------------------------------------------------------------
\1\ Public law 104-290 (October 11, 1996).
---------------------------------------------------------------------------
``Class actions'' that the legislation bars from State
court include actions brought on behalf of more than 50
persons, actions brought on behalf of one or more unnamed
parties, and so-called ``mass actions,'' in which a group of
lawsuits filed in the same court are joined or otherwise
proceed as a single action.
The legislation provides for certain exceptions for
specific types of actions. The legislation preserves State
jurisdiction over: (1) certain actions that are based upon
the law of the State in which the issuer of the security in
question is incorporated \2\; (2) actions brought by
States and political subdivisions, and State pension
plans, so long as the plaintiffs are named and have
authorized participation in the action; and (3) actions by
a party to a contractual agreement (such as an indenture
trustee) seeking to enforce provisions of the indenture.
---------------------------------------------------------------------------
\2\ It is the intention of the managers that the suits under
this exception be limited to the state in which issuer of the
security is incorporated, in the case of a corporation, or
state of organization, in the case of any other entity.
---------------------------------------------------------------------------
Additionally, the legislation provides for an exception
from the definition of ``class action'' for certain
shareholder derivative actions.
Title II of the legislation reauthorizes the Securities and
Exchange Commission (SEC or Commission) for Fiscal Year 1999.
This title also includes authority for the SEC to pay
economists above the general services scale.
Title III of the legislation provides for corrections to
certain clerical and technical errors in the Federal
securities laws arising from changes made by the Private
Securities Litigation Reform Act of 1995 \3\ (the ``Reform
Act'') and NSMIA.
---------------------------------------------------------------------------
\3\ Public Law 104-67 (December 22, 1995).
---------------------------------------------------------------------------
The managers note that a report and statistical analysis of
securities class actions lawsuits authored by Joseph A.
Grundfest and Michael A. Perino reached the following
conclusion:

The evidence presented in this report suggests that the
level of class action securities fraud litigation has
declined by about a third in federal courts, but that there
has been an almost equal increase in the level of state court
activity, largely as a result of a ``substition effect''
whereby plaintiffs resort to state court to avoid the new,
more stringent requirements of federal cases. There has also
been an increase in parallel litigation between state and
federal courts in an apparent effort to avoid the federal
discovery stay or other provisions of the Act. This increase
in state activity has the potential not only to undermine the
intent of the Act, but to increase the overall cost of
litigation to the extent that the Act encourages the filing
of parallel claims.\4\

\4\ Grundfest, Joseph A. & Perino, Michael A., Securities
Litigation Reform: The First Year's Experience: A Statistical
and Legal Analysis of Class Action Securities Fraud
Litigation under the Private Securities Litigation Reform Act
of 1995, Stanford Law School (February 27, 1997).
---------------------------------------------------------------------------
Prior to the passage of the Reform Act, there was
essentially no significant securities class action litigation
brought in State court.\5\ In its Report to the President and
the Congress on the First Year of Practice Under the Private
Securities Litigation Reform

[[Page H10775]]

Act of 1995, the SEC called the shift of securities fraud
cases from Federal to State court ``potentially the most
significant development in securities litigation'' since
passage of the Reform Act.\6\
---------------------------------------------------------------------------
\5\ Id. n. 18.
\6\ Report to the President and the Congress on the First
Year of Practice Under the Private Securities Litigation
Reform Act of 1995, U.S. Securities and Exchange Commission,
Office of the General Counsel, April 1997 at 61.
---------------------------------------------------------------------------
The managers also determined that, since passage of the
Reform Act, plaintiffs' lawyers have sought to circumvent the
Act's provisions by exploiting differences between Federal
and State laws by filing frivolous and speculative lawsuits
in State court, where essentially none of the Reform Act's
procedural or substantive protections against abusive suits
are available.\7\ In California, State securities class
action filings in the first six months of 1996 went up
roughly five-fold compared to the first six months of 1995,
prior to passage of the Reform Act.\8\ Furthermore, as a
state securities commissioner has observed:

\7\ Testimony of Mr. Jack G. Levin before the Subcommittee on
Finance and Hazardous Materials of the Committee on Commerce,
House of Representatives, Serial No. 105-85, at 41-45 (May
19, 1998).
\8\ Id. at 4.
---------------------------------------------------------------------------
It is important to note that companies can not control
where their securities are traded after an initial public
offering. * * * As a result, companies with publicly-traded
securities can not choose to avoid jurisdictions which
present unreasonable litigation costs. Thus, a single state
can impose the risks and costs of its pecular litigation
system on all national issuers.\9\

\9\ Written statement of Hon. Keith Paul Bishop,
Commissioner, California Department of Corporations,
submitted to the Senate Committee on Banking, Housing and
Urban Affairs' Subcommittee on Securities'' ``Oversight
Hearing on the Private Securities Litigation Reform Act of
1995,'' Serial No. 105-182, at 3 (July 27, 1998).
---------------------------------------------------------------------------
The solution to this problem is to make Federal court the
exclusive venue for most securities fraud class action
litigation involving nationally traded securities.

Scienter

It is the clear understanding of the managers that Congress
did not, in adopting the Reform Act, intend to alter the
standards of liability under the Exchange Act.
The managers understand, however, that certain Federal
district courts have interpreted the Reform Act as having
altered the scienter requirement. In that regard, the
managers again emphasize that the clear intent in 1995 and
our continuing intent in this legislation is that neither the
Reform Act nor S. 1260 in any way alters the scienter
standard in Federal securities fraud suits.
Additionally, it was the intent of Congress, as was
expressly stated during the legislative debate on the Reform
Act, and particularly during the debate on overriding the
President's veto, that the Reform Act establish a heightened
uniform Federal standard on pleading requirements based upon
the pleading standard applied by the Second Circuit Court of
Appeals. Indeed, the express language of the Reform Act
itself carefully provides that plaintiffs must ``state with
particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind.'' The
Managers emphasize that neither the Reform Act nor S. 1260
makes any attempt to define that state of mind.
The managers note that in Ernst and Ernst v. Hochfelder
\10\, the Supreme Court left open the question of whether
conduct that was not intentional was sufficient for liability
under the Federal securities laws. The Supreme Court has
never answered that question. The Court expressly reserved
the question of whether reckless behavior is sufficient for
civil liability under section 10(b) and Rule 10b-5 in a
subsequent case, Herman & Maclean v. Huddleston \11\, where
it stated, ``We have explicitly left open the question of
whether recklessness satisfies the scienter requirement.''
---------------------------------------------------------------------------
\10\ 425 U.S. 185 (1976).
\11\ 459 U.S. 375 (1983).
---------------------------------------------------------------------------
The managers note that since the passage of the Reform Act,
a data base containing many of the complaints, responses and
judicial decisions on securities class actions since
enactment of the Reform Act has been established on the
Internet. This data base, the Securities Class Action
Clearinghouse, is an extremely useful source of information
on securities class actions. It can be accessed on the world
wide web at http://securities.stanford.edu. The managers urge
other Federal courts to adopt rules, similar to those in
effect in the Northern District of California, to facilitate
maintenance of this and similar data bases.
Tom Bliley,
M.G. Oxley,
Billy Tauzin,
Chris Cox,
Rick White,
Anna G. Eshoo,

Managers on the Part of the House.

Alfonse D'Amato,
Phil Gramm,
Chris Dodd,
Managers on the Part of the Senate.
In 1995, during the consideration of the Private Securities
Litigation Reform Act and the override of the President's
veto of that Act, Congress noted that in Ernst and Ernst v.
Hochfelder,\1\ the Supreme court expressly left open the
question of whether conduct that was not intentional was
sufficient for liability under section 10(b) of the
Securities Exchange Act of 1934. The Supreme Court has never
answered that question. The Court specifically reserved the
question of whether reckless behavior is sufficient for civil
liability under section 10(b) and Rule 105-5 \2\ in a
subsequent case, Herman & Maclean v. Huddleston,\3\ where it
stated, ``We have explicitly left open the question of
whether recklessness satisfies the scienter requirement.''
Footnotes at end of article.
The Reform Act did not alter statutory standards of
liability under the securities laws (except in the safe
harbor for forward-looking statements). As Chairman of the
Conference Committee that considered the Reform Act and as
the bill's author, respectively, it is our view that non-
intentional conduct can never be sufficient for liability
under section 10(b) of the Exchange Act. We believe that the
structure and history of the securities laws indicates no
basis for liability under this section for non-intentional
conduct. The following is a discussion of the legal reasons
supporting our view that non-intentional conduct is
insufficient for liability under section 10(b) of the
Exchange Act.\4\
In Ernst & Ernst v. Hochfelder, the Supreme Court held that
scienter is a necessary element of an action for damages
under Section 10(b) and Rule 10b-5. The Supreme Court defined
scienter as ``a mental state embracing intent to deceive,
manipulate, or defraud.'' Hochfelder, 425 U.S. at 194 n. 12.

a. neither the text nor the legislative history of section 10(b)
support liability for reckless behavior

``The starting point in every case involving construction
of a statute is the language itself.'' \5\ Because Congress
``did not create a private Sec. 10(b) cause of action and had
no occasion to provide guidance about the elements of a
private liability scheme,'' the Supreme Court has been forced
``to infer how the 1934 Congress would have addressed the
issue[s] had the 10b-5 action been included as an express
provision in the 1934 Act.'' \6\
The inference from the language of the statute is clear:
Congress would not have created Section 10(b) liability for
reckless behavior. Section 10(b) prohibits ``any manipulative
or deceptive device or contrivance'' in contravention of
rules adopted by the Commission pursuant to Section 10(b)'s
delegated authority. The terms ``manipulative,'' ``device,''
and ``contrivance'' ``make unmistakable a congressional
intent to proscribe a type of conduct quite different from
negligence.'' Hochfelder, 425 U.S. at 199. The intent was to
``proscribe knowing or intentional misconduct.'' Id.
(emphasis supplied). In addition, the use of the word
manipulative is ``especially significant'' because ``[i]t is
and was virtually a term of art when used in connection with
securities markets. It connotes intentional or willful
conduct designed to deceive or defraud investors by
controlling or artificially affecting the price of
securities.'' Id. (footnote omitted).
Section 10(b) of the Exchange Act cannot be violated
through inadvertence or with lack of subjective
consciousness. Nor can one construct a device or contrivance
without willing to do so. The words ``manipulate,''
``device,'' or ``contrivance,'' by their very nature, require
conscious intent and connote purposive activity.\7\ The
mental state consistent with the statute can be achieved only
if a defendant acts with a state of mind ``embracing''--an
active verb--``intent''--requiring a conscious state of
mind--``to deceive, manipulate or defraud.'' \8\
The legislative history compels the same conclusion.
``[T]here is no indication that Sec. 10(b) was intended to
proscribe conduct not involving scienter.'' Hochfelder, 425
U.S. at 202; see also Aaron v. SEC, 446 U.S. 680, 691 (1980)
(same). Indeed, ``[i]n considering specific manipulative
practices left to Commission regulation . . . the
[Congressional] reports indicate that liability would not
attach absent scienter, supporting the conclusion that
Congress intended no lesser standard under Sec. 10(b).
``Hochfelder, 425 U.S. at 204. Congress thus ``evidenced a
purpose to proscribe only knowing and intentional
misconduct.'' Aaron, 446 U.S. at 690 (emphasis supplied).

B. The Structure of the Statute Underscores That There can be No
Section 10(b) Liability for Recklessness

In drafting the federal securities laws, Congress knew how
to use specific language to impose liability for reckless or
negligent behavior and how to create strict liability for
violations of the federal securities laws.\8\ But Congress
did not use such language to impose Section 10(b) liability
on reckless behavior. Therefore, just as there is no
liability for aiding and abetting a violation of Section
10(b) because Congress knew how to create such liability but
did not,\10\ and just as there is no liability under Section
12(l) of the Securities Act, 17 U.S.C. Sec. 771(l), for
participants who are merely collateral to an offer or sale
because Congress knew how to create such liability but did
not,\11\ and just as there is no remedy under Section 10(b)
for those who neither purchase nor sell securities because
Congress knew how to create such a remedy but did not,\12\
there can be no liability for reckless conduct under Section
10(b) because Congress clearly knew how to impose liability
for reckless behavior but did not.
The Supreme Court has, moreover, emphasized that the
securities laws ``should not be read as a series of unrelated
and isolated provisions.'' \13\ The federal securities laws
are to be interpreted consistently and as part of an
interrelated whole.'' \14\ In Virginia

[[Page H10776]]

Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), the Court
reserved ``the question whether scienter was necessary for
liability under Sec. 14(a).'' \15\ The Court nonetheless held
that statements of ``reasons, opinions or belief'' are
actionable under Sec. 14(a), 15 U.S.C. 78n(a), and Rule 14a-
9, 17 C.F.R. Sec. 240.14a-9, as false or misleading only if
there is proof of (1) subjective ``disbelief or undisclosed
motivation,'' and (2) objective falsity. 501 U.S. at 1095-96.
Justice Scalia explained the Court's holding as follows:
As I understand the Court's opinion, the statement ``In the
opinion of the Directors, this is a high value for the
shares'' would produce liability if in fact it was not a high
value and the Directors knew that. It would not produce
liability if in fact it was not a high value but the
Directors honestly believed otherwise. The statement ``The
Directors voted to accept the proposal because they believe
it offers a high value'' would not produce liability if in
fact the Directors' genuine motive was quite different--
except that it would produce liability if the proposal in
fact did not offer a high value and the Directors knew
that.\16\
If follows that, if: (A) a statement must be subjectively
disbelieved in order to be actionable under Section 14(a), a
provision that may or may not required scienter, then: (B) a
fortiori, under Section 10(b), a provision that clearly
requires scienter, plaintiffs must show subjective awareness
of a scheme or device.
Any other result would lead to the anomalous conclusion
that statements actionable under Section 10(b), the more
restrictive ``catchall'' provision of the federal securities
laws, Hochfelder, 425 U.S. at 203, would not be actionable
under Section 14(a). Indeed, ``[t]here is no indication that
Congress intended anyone to be made liable [under Sec. 10(b)]
unless he acted other than in good faith [and] [t]he catchall
provision of Sec. 10(b) should be interpreted no more
broadly.'' Id. at 206 \17\
The language of the text, the legislative history, and the
structure of the statute therefore each compel the conclusion
that intentional conduct is a prerequisite for liability
under Section 10(b).
Additionally, the Reform Act established a heightened
pleading standard for private securities fraud lawsuits. The
Conference Report accompanying the Reform Act stated in
relevant part:
The Conference Committee language is based in part on the
pleading standard of the Second Circuit. The standard also is
specifically written to conform the language to rule 9(b)'s
notion of pleading with ``particularity.''
Regarded as the most stringent pleading standard, the
Second Circuit requirement is that the plaintiff state facts
with particularity, and that these facts intern must give
rise a strong inference of the defendant's fraudulent intent.
Because the Conference Committee intends to strengthen
existing pleading requirements, it does not intend to codify
the Second Circuit's case law interpreting this pleading
standard. Footnote: For this reason, the conference Report
chose not to include in the pleading standard certain
language relating to motive, opportunity, or
recklessness.\18\
The Conference Report accompanying S. 1260 is consistent
with that heightened pleading standard articulated in 1995.
\1\ 425 U.S. 185 (1976).
\2\ 17 C.F.R. Sec. 240.10b-5.
\3\ 459 U.S. 375 (1983).
\4\ We are grateful to Professor Joe Grundfest and Ms. Susan
French of Stanford University for guidance to us on these
questions.
\5\ Hochfelder, 425 U.S. at 197 (quoting Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 756 (1975) (Powell, J.,
concurring). See also Gustafson v. Alloyd Co., 115 S. Ct.
1061, 1074 (1995) (Thomas, J., Dissenting). Central Bank, 114
S. Ct. at 1446; Landreth Timber Co. v. Landreth, 471 U.S.
681, 685 (1985); Santa Fe Indus., Inc. v. Green, 430 U.S.
462, 472 (1977).
\6\ Central Bank, 114 S. Ct. at 1441-42 (quoting Musick,
Peeler 113 S. Ct. at 2089-90).
\7\ See Hochfelder, 425 U.S. at 199 n. 20 (``device'' means
`` `that which is devised, or formed by design; a
contrivance; an invention; project; scheme; often a scheme to
deceive; a strategem; an artifice' '') (quoting Webster's
International Dictionary (2d ed. 1934)); id (defining
``contrivance'' as `` `[a] thing contrived or used in
contrivance; a scheme . . . .'').
\8\ Hochfelder, 425 U.S. at 193 n. 12. Cf. Santa Fe
Industries, 430 U.S. at 478; Schreiber v. Burlington Northern
Inc., 472 U.S. 1, 5-8 (1985).
\9\ Section 11 of the Securities Act of 1933, 15 U.S.C.
Sec. 77k. for example, imposes strict liability on the issuer
for material misstatements or omissions in a registration
statement and a ``sliding scale'' negligence standard on
other participants in the offering process. See Hochfelder,
425 U.S. at 208. Sections 17 (a)(2) and (3) of the Securities
Act, 15 U.S.C. Sec. 77q(a) (2),(3), impose liability for
negligent or reckless conduct in the sale of securities.
Aaron, 446 U.S. at 697.
\10\ Central Bank, 114 S. Ct. at 1448 (``Congress knew how to
impose aiding and abetting liability when it chose to do
so.'') (citing statutes).
\11\ Pinter v. Dahl,486 U.S. 622, 650 & n.26 (1988) (Congress
knew how to provide liability for collateral participants in
securities offerings when it chose to do so).
\12\ Blue Chip, 421 U.S. at 734 (``When Congress wished to
provide a remedy for those who neither purchase nor sell
securities, it has little trouble doing so expressly.'').
\13\ Gustafson v. Alloyd Co., 115 S. Ct. 1061, 1067 (1995).
\14\ See, e.g, Hochfelder, 425 U.S. at 206 (citing Blue Chip,
421 U.S. at 727-30; SEC v. National Sec., Inc., 393 U.S. 453,
466 (1969)).
\15\ 501 U.S. at 1090 n. 5 (citing TSC Indus. Inc. v.
Northway, Inc., 426 U.S. 438, 444 n. 7 (1976) (reserving the
same question).
\16\ 501 U.S. at 1108-09 (Scalia, J., concurring in part and
concurring in the judgment).
\17\ The Supreme Court has previously extended holdings from
Sec. 14(a)'s proxy antifraud provisions to Sec. 10(b)'s
general antifraud provision. See, e.g., Basic, Inc. v.
Levinson, 485 U.S. 224, 231-32 (1988) (adopting for purposes
of Sec. 10(b) liability the standard for materiality
initially defined under Sec. 14(a) by TSC, 426 U.S. at 445).
\18\ Conference Report accompanying the Private Securities
Litigation Reform Act of 1995, p. 41, 48.
Mr. BLILEY. Mr. Speaker, I reserve the balance of my time.
Mr. DINGELL. Mr. Speaker, I yield myself 7 minutes.
Mr. Speaker, I begin by expressing a great respect and affection for
my dear friend, the gentleman from Virginia (Mr. Bliley), the chairman
of the committee. I do, however, rise in opposition to the conference
report, and very frankly, I rise in opposition to the rather sorry
process by which this document has been presented to this body.
Last month the House appointed 5 Members from the other side of the
aisle and three Democrats as its conferees on this legislation.
There have been no meetings by the conferees. The staff of the
Republican conferees have had extensive conversations with their Senate
counterparts. No Democratic staff members were included or informed;
not even the staff of the gentlewoman from California (Ms. Eshoo), the
chief Democratic sponsor of the House bill.
To add insult to this injury, Republican staff informed us the day
before this report was filed that the only Democratic amendment adopted
by the conference committee, the DeGette amendment, which required the
SEC to monitor and report to the Congress on the consequences of this
legislation, had been unceremoniously dropped, without any
justification that I can discern.
Moreover, the original conference report included, at the behest of
the Senate, a rather curious nongermane study of the U.S. sheep and
wool industry. While that might be appropriate, it does not seem to
belong here.
I have also been told that the provision was taken out, but that is
quite beside the point. The process here was exclusionary, unfair and
outrageous. For that reason, I intend to vote against this conference
report, and I will be urging my colleagues to do likewise.
The substance of this legislation clearly merits a no vote. We are
not shearing sheep with this legislation. We are, very frankly,
shamelessly, fleecing investors.
A year or so ago, the Congress passed legislation which changed
startlingly the way in which ordinary investors may sue to protect
their rights, and it largely stripped them of rights to protect
themselves against corporate wrongdoings in the courts of the Federal
Government.
We were told at the time that legislation was passed that the
investors would still have access to State courts to protect their
rights as owners of the corporations and to protect their rights as
shareholders, and to assure that there was no wrongdoing which
adversely affected either the well-being of the corporation or their
interests therein.
This legislation very curiously terminates those rights. No longer
can a citizen form a class action in a State court. For some strange
reason, my colleagues on the other side of the aisle, great advocates
of States' rights, are now saying citizens cannot go into State courts.
They are changing State jurisprudence as well as Federal jurisprudence.
One of the remarkable things they do, if 50 citizens will go into
court and sue, under the requirements of this legislation those suits
must be combined into a class action, which is immediately then removed
to the Federal courts and then subject to all of the hostile and
constrictive constraints on the right of a citizen to sue to protect
his interests and his property; the corporation which he as a
shareholder happens to be the owner of.
This conference report nails the State courthouse door shut to little
investors then, who have to band together in class action lawsuits in
order to recover the money they have lost to securities fraud. By
making Federal courts the exclusive venue for most of the securities
class action lawsuits, the conference report imposes the standards of
the Private Securities Litigation Reform Act of 1955, to which I
referred earlier, on all securities class action lawsuits, except those
narrow instances specifically excluded by that report.
The 1995 act imposed heightened pleading standards on defrauded
investors, a stay of discovery so that the

[[Page H10777]]

special facts necessary to meet those heightened pleading standards
could not be reached. As a matter of fact, one of the interesting
things is that neither a discovery proceeding nor a lawyer would
protect an investor under the law as it is now written under the
statute I am referring to.
It would probably be in the interest of the investor to be
represented by a psychiatrist because he literally must examine the
mind of the person who has defrauded him in order to prevail in a
lawsuit of that sort.
These are extraordinarily high pleading standards, far higher than
necessary, and that legislation also imposed an unreasonably short
statute of limitations or time limit for filing a fraud claim. It
included no ability under the law to fully recover from professionals,
such as accountants and lawyers, who had aided and abetted in stealing
funds from innocent investors.
Those same standards and shortcomings are now extended across the
board by fiat of the Federal Government so that a citizen who now finds
the Federal court doors nailed shut to him cannot go to the State to
seek redress in a State court from wrongdoing.
Why? I do not know, but one can suspect that the scoundrels, rogues,
rascals and thieves that infest our capital markets have now dressed
themselves up in sheep's clothing and convinced many of the Members of
this body that they are not wolves but, rather, are hapless and
helpless victims of a litigation explosion. I would note that that
litigation explosion does not exist.
There is no litigation explosion, particularly given the amount of
securities fraud that the bull market has engendered.
There has also been a covered attempt on the part of some Members
here to obliterate the ability of the SEC and defrauded investors to
sue on the basis of recklessness. This is like eliminating manslaughter
from the criminal laws. It would be like saying that one has to prove
intentional murder or the defendant gets off scott-free. If we were to
lose the reckless standard, we would leave substantial numbers of the
investing public naked to attacks by schemers.
That is the remarks of Chairman Leavitt, who testified before us,
speaking as chairman of the SEC last October.
Mr. Speaker, I am willing to support responsible reform. I do not
think that this constitutes responsible reform. This is the active
sheltering of wrongdoing. It is going to support those who would skin
the American investing public. It is going to raise great questions of
the trust that Americans can put in the securities market, because we
have provided now a blanket of protection for wrongdoing and for
wrongdoers who are engaged, on a continuing basis of taking advantage,
of those who cannot protect themselves. This is a bad bill. I urge a no
vote.
Mr. Speaker, I submit the dissenting views on this legislation for
inclusion in the Record, to expand and provide data on these points.
Mr. Speaker, I rise in opposition to this conference report and the
sordid process by which it was conceived.
Last month, the House appointed its conferees on this legislation, 5
Members from the other side of the aisle and 3 Democrats. There have
been no meetings of the conferees. The staff of the Republican
conferees have had extensive conversations with their Senate
counterparts. No Democratic staff were informed or included, not even
the staff of Representative Eshoo, the chief Democratic sponsor of the
House bill. To add insult to injury, Republican staff informed us the
day before this report was filed that the only Democratic amendment
adopted by the Commerce Committee--the DeGette amendment to require the
SEC to monitor and report to Congress on the consequences of this
legislation--has been unceremoniously dropped without justification.
However, the original conference agreement included, at the behest of
the Senate, a nongermane study of the U.S. sheep and wool industry. I
have been told that provision has been taken out, but that is beside
the point. This process was unfair and outrageous. For that reason, I
am voting against this conference report and urging my colleagues to do
likewise.
The substance of this legislation also merits a ``no'' vote. We are
not shearing sheep with this legislation. We are shamelessly fleecing
investors.
This conference report nails the State courthouse door shut to little
investors who have to band together in class action lawsuits in order
to recover the monies they have lost to securities fraud.
By making Federal courts the exclusive venue for most securities
class action lawsuits, the conference report imposes the standards of
the Private Securities Litigation Reform Act of 1995 on all securities
class action lawsuits except those narrow instances specifically
excluded by the report. The 1995 Act imposed heightened pleading
standards on defrauded investors, a stay of discovery so that the
special facts necessary to meet those heightened pleading standards
could not be reached, and an unreasonably short statute of limitations
or time limit for filing a fraud claim. It included no ability under
that law to fully recover from professionals such as accountants and
lawyers who aided and abetted in stealing funds from innocent
investors. Those same standards and shortcomings are now extended
across the board by fiat of the Federal Government.
Why? Because the scoundrels, rogues, rascals, and thieves that infest
our capital markets dressed themselves up in sheep's clothing and
convinced too many Members that they were not wolves but rather
helpless and helpless victims of a litigation explosion.
My colleagues, there is no litigation explosion, particularly given
the amount of securities fraud that the bull market has engendered. I
ask unanimous consent that the Dissenting Views on this legislation be
included in the Record following my remarks to expand and provide data
on these points.
There also has been a covert attempt on the other side of the aisle
to obliterate the ability of the SEC and defrauded investors to sue on
the basis of recklessness. Shame on my Republican colleagues. Shame,
shame. As SEC chairman Levitt testified before us in October last year:
``[E]liminating recklessness * * * would be tantamount to eliminating
manslaughter from the criminal laws. It would be like saying you have
to prove intentional murder or the defendant gets off scot free * * *
If we were to lose the reckless standard * * * we would leave
substantial numbers of the investing public naked to attacks by * * *
schemers.'' I ask unanimous consent to include a letter from Senator
Reed to the conferees on this point at the conclusion of my remarks.
Mr. Speaker, I want to support responsible reform. This is not reform
and it is not responsible. I urge a ``no'' vote.

U.S. Senate,

Washington, DC, October 2, 1998.
Ranking Member John D. Dingell,
Committee on Commerce, Rayburn House Office Building,
Washington, DC.
Dear Ranking Member Dingell: I write to you as a conferee
on the Securities Litigation Uniform Standards Act of 1998,
S. 1260. As you know, I supported Senate passage of this
legislation, and voted to override the President's veto of
the Private Securities Litigation Reform Act of 1995. While
class action suits are frequently the only financially
feasible means for small investors to recover damages, such
lawsuits have been subject to abuse. By creating national
standards, such as those in S. 1260, we recognize the
national nature of our markets and encourage capital
formation.
However, 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,
and many have. Many of our colleagues voted for the 1995
legislation knowing that if federal standards failed to
provide adequate investor protections, state law would
provide a necessary backup.
With passage of this legislation, Congress accepts full and
sole responsibility to ensure that fraud standards allow
truly victimized investors to recoup lost funds. Only a
meaningful right of action against those who defraud can
guarantee investor confidence in our national markets.
Recently, on the international stage, we have seen all too
clearly the problem of markets which fail to ensure that
consumers receive truthful, complete information.
Therefore, my support for this bill rests on the
presumption that the recklessness standard was not altered by
either the 1995 Act or this legislation. I strongly endorsed
the Senate Report which accompanies this legislation because
it stated clearly that nothing in the 1995 legislation
changed either the scienter standard or the most stringent
pleading standard, that of the Second Circuit. This language
was central to the legislation receiving the support of
Chairman Levitt of the Securities and Exchange Commission. It
was also central to my support.
As the Senate Banking Committee recognized at his second
confirmation hearing, Chairman Levitt has a lifetime of
experience as both an investor and regulator of markets. That
experience has led him to be the most articulate advocate of
the need for a recklessness standard concerning the scienter
requirement. In October 21, 1997 testimony before a
Subcommittee in the House of Representatives, Chairman Levitt
said, ``[E]liminating recklessness . . . would be

[[Page H10778]]

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 . . . we would leave
substantial numbers of the investing public naked to attacks
by . . . schemers.''
In testimony before a Senate Banking Subcommittee, on
October 20, 1997, Chairman Levitt further articulated his
position regarding the impact of a loss of the recklessness
standard. He said, ``A higher scienter standard (than
recklessness) 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.''
The danger posed by a loss of recklessness to our citizens
and markets is clear. We should not overrule the judgement of
the SEC Chair, not to mention every single Circuit Court of
Appeals that has adjudicated the issue. I would assume that
the motives which led the SEC and the Administration to
insist on the Senate Report language concerning recklessness
would also apply to their views of the Conference Report.
With regard to the pleading standard, some Members of
Congress, and, unfortunately, a minority of federal district
courts, have made much of the President's veto measure of the
1995 legislation. Specifically, some have pointed out that
the President vetoed the 1995 bill due to concerns that the
Conference Report adopted a pleading standard higher than
that of the Second Circuit, the most stringent standard at
that time. As I, and indeed a bipartisan group of Senators
and Representatives, made clear in the veto override vote,
the President overreached on this point. The pleading
standard was raised to the highest bar available, that of the
Second Circuit, but no further. In spite of the
Administration's 1995 veto, this preemption gained the
support of Chairman Levitt. It is, therefore, difficult to
understand how some can argue that the 1995 legislation
changed the pleading standard of the Second Circuit.
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.
Firms which advocate for S. 1260 do so based on the need to
eliminate the circumvention of federal standards and federal
stays of discovery through state court filings. They do not
argue for lessening of the obligations owed investors. I am
concerned that should the conference committee include
language which could be interpreted to eviscerate the ability
of plaintiffs to satisfy the scienter standard by proof of
recklessness or to require plaintiffs, barred from discovery,
to adhere to a pleading standard requiring conscious
behavior, the bill will loose the support of Chairman Levitt
and many Members of Congress. I urge the Conference to
support language included in the Senate Report and move
forward with a bill that a bipartisan group in Congress can
support and the President can sign.
Sincerely,
Jack Reed,
U.S. Senator.
____

Dissenting Views for H.R. 1689 on States Rights and Investor Protection

We abhor strike suits and frivolous litigation of any
stripe. We would enthusiastically support responsible and
balanced legislation narrowly targeted at ameliorating those
abuses. H.R. 1689 does not meet that standard. We dissent
from this bill.
As introduced, H.R. 1689 was an industry wish list devoid
of proper safeguards to protect the essential rights of
injured investors to pursue meritorious claims. The sponsors
and proponents of H.R. 1689 adopted several amendments during
Subcommittee and Full Committee markup to temper some of the
bill's harshest elements. We commend our colleagues. The
bill, nonetheless, is still flawed.
H.R. 1689 creates a national standard governing securities
fraud class actions involving ``covered securities'' which
are nationally traded securities and some that are not. The
bill requires these class actions to be brought in federal
court pursuant to federal law, where they would be subject to
the more stringent terms of the Private Securities Litigation
Reform Act of 1995. These terms include the double whammy of
heightened pleading standards along with a stay of discovery
pending a motion to dismiss, blocking the ability of
defrauded investors to gain the special facts needed to meet
the heightened pleading standards.
First, the bill is premature. The Securities and Exchange
Commission (SEC) concluded in its April 1997 report to the
President and Congress that: ``it is too early to assess with
confidence many important effects of the Reform Act 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 key
provisions, or for many court decisions (particularly
appellate court decisions) interpreting those provisions.''
The Chairman of the SEC testified before our finance
subcommittee on October 21, 1997, that his agency had ``not
had enough practical experience with the Act to produce the
data necessary for us to measure its success.'' That is still
the case.
Second, there is no national problem in need of a national
solution. Data compiled by unbiased sources shows that the
number of state securities class actions has declined during
the last year to pre-Reform Act levels. In 1997, there were a
total of 44 state class action securities cases, out of a
total of 15 million civil filings. By comparison, 67 state
class actions were filed in 1994, the year before the Reform
Act became law, and 66 cases were filed in 1996, the year
after the Reform Act was enacted. We note in passing that we
have been shown no convincing proof that any of these
lawsuits was without merit and was allowed to proceed
notwithstanding its lack of merit. Moreover, as the attached
map shows, the overwhelming majority of those cases were
filed in California, with most states having zero filings.
That being the case, shouldn't this ``problem'' be solved in
the California legislature? We believe that state
legislatures should be given time to consider laws of their
own to address the issues raised in this debate.
We find it curious indeed that the Republican-led Congress
that campaigns on returning power to the states and
protecting individual choice, would champion a federal
mandate abolishing important state prerogatives along with
protections and rights. Forty-nine states, as well as the
District of Columbia, allow for some form of aiding-and-
abetting liability. There is no aiding-and-abetting liability
in private actions for most federal securities fraud claims.
In addition, private actions under the federal securities
laws are subject to a short statute of limitations.
Specifically, private actions under Section 10(b) of the
Exchange Act must be brought within one year after discovery
of the alleged violation, and no more than three years after
the violation occurred. In contrast, 33 states allow for
longer limitations periods. These investor protection laws
available at the state level, as the attached list shows,
will no longer be available to class action plaintiffs upon
passage of H.R. 1689. The public should clearly understand
the investor protections being wiped out by the elected
representatives who vote yes on this bill.
Moreover, under H.R. 1689's unusual ``grouping'' provision,
any time more than 50 individuals file state court complaints
``in the same court and involving common questions of law or
fact,'' they will be deemed to be part of a ``class action''
subject to this bill, if ``the lawsuits are joined,
consolidated, or otherwise proceed as a single action for any
purpose.'' Individuals who bring suits in state court in
their own name may find, if others have brought similar
suits, that their claims are preempted. For instance, if an
investment adviser churns the accounts of or recommends
unsuitable securities to clients in a single state and more
than 50 of them seek to recover in the same court, each
filing their own individual action, they may be forced to
constitute a class action and have to pursue their claims--if
possible--in federal court. These investors may be left
without a remedy. This is broader preemption than we believe
is necessary or appropriate. There has been no showing that
these kinds of suits, either individually or in the
aggregate, present the kinds of potential abuses that have
been attributed to traditional class actions and strike
suits.
The debate on this legislation has been polar. It has
tarred all private securities fraud litigation as meritless
strike suits, and all defendant companies, accountants, and
broker-dealers as innocent victims of large-sum-settlement
highjackings. Through this lens, unintended harm to
legitimate lawsuits is viewed as a reasonable tradeoff. We
disagree on both counts.
The record shows that securities fraud is up. Many of those
cases involve accounting frauds. The SEC has always taken the
view that private lawsuits are a crucial adjunct to the SEC's
own enforcement program. They are the principle means by
which investors have recovered losses caused by fraud.
Proponents of H.R. 1689 argue that investors recover only
``10 cents on the dollar'' in these cases. We agree that we
need to put investors first. But nothing in this bill
addresses the recovery issue in any way.
For these reasons, we oppose this bill and urge the House
to do the same.
John D. Dingell.
Edward J. Markey.
Bart Stupak.
Diana DeGette.

STATE BY STATE COMPARISON OF STATUTE OF LIMITATIONS AND AIDING AND
ABETTING LIABILITY
------------------------------------------------------------------------
Aiding and
Locality Statute of limitations abetting
------------------------------------------------------------------------
Federal................. 1 year after discovery/3 No.
years from sale.
Alabama................. 2 years after discovery of Yes.
the facts.
Alaska.................. 3 years from the contract Yes.
of sale.
Arizona................. 2 years after discovery of Yes.
the facts.
Arkansas................ 5 years after discovery... Yes.
California.............. 1 year after discovery/4 Yes.
years from sale.
Colorado................ 3 years after discovery/5 Yes.
years from sale.
Conneciticut............ 1 year after discovery/3 Yes.
years from sale.
Delaware................ 3 years form the contract Yes.
for sale.
D.C..................... 2 years from the Yes.
transaction upon which it
is based.
Florida................. 2 years after discovery/5 Yes.
years from sale.
Georgia................. 2 years from the Yes.
transaction upon which it
is based.
Hawaii.................. 2 years after discovery/5 Yes.
years from sale.

[[Page H10779]]

Idaho................... 3 years from the contract Yes.
of sale.
Illinois................ 3 years after discovery/5 Yes.
years from sale.
Indiana................. 3 years after discovery of Yes.
the facts.
Iowa.................... 2 years after discovery/5 Yes.
years from sale.
Kansas.................. 3 years after discovery of Yes.
the facts.
Kentucky................ 3 years from the contract Yes.
for sale.
Louisiana............... 2 years from the Yes.
transaction upon which it
is based.
Maine................... 2 years after discovery of Yes.
the facts.
Maryland................ 1 year after discovery/3 Yes.
years from sale.
Massachusetts........... 4 years after discovery... Yes.
Michigan................ 2 years after discovery/4 Yes.
years from sale.
Minnesota............... 3 years from the contract Yes.
for sale.
Mississippi............. 2 years after discovery of Yes.
the facts.
Missouri................ 3 years from the contract Yes.
for sale.
Montana................. 2 years after discovery/5 Yes.
years from sale.
Nebraska................ 3 years from the contract Yes.
for sale.
Nevada.................. 1 year after discovery/5 Yes.
years from sale.
New Hampshire........... 6 years from the contract Yes.
for sale.
New Jersey.............. 2 years after discovery of Yes.
the facts.
New Mexico.............. 2 years after discovery/5 Yes.
years from sale.
New York................ 6 years after sale........ N/A.
North Carolina.......... 2 years after discovery of Yes.
the facts.
North Dakota............ 5 years after discovery of Yes.
the facts.
Ohio.................... 2 years after discovery/4 Yes.
years from sale.
Oklahoma................ 2 years after discovery/3 Yes.
years from sale.
Oregon.................. 2 years after discovery/3 Yes.
years from sale.
Pennsylvania............ 1 year after discovery/4 Yes.
years from sale.
Rhode Island............ 1 year after discovery/3 Yes.
years from sale.
South Carolina.......... 3 years from the contract Yes.
for sale.
South Dakota............ 2 years after discovery/3 Yes.
years from sale.
Tennessee............... 1 year after discovery/2 Yes.
years from sale.
Texas................... 3 years from discovery/5 Yes.
years from sale.
Utah.................... 2 years after discovery/4 Yes.
years from sale.
Vermont................. 6 years from the contract Yes.
for sale.
Virginia................ 2 years from the Yes.
transaction upon which it
is based.
Washington.............. 3 years after discovery of Yes.
the facts.
West Virginia........... 3 years from the contract Yes.
for sale.
Wisconsin............... 3 years after discovery of Yes.
the facts.
Wyoming................. 2 years from the Yes.
transaction.
------------------------------------------------------------------------

Additional Dissenting Views of Congressman Ron Klink on H.R. 1689,
Securities Litigation Uniform Standards Act

H.R. 1689 is a solution in search of a problem.
In 1995, the Commerce Committee developed and Congress
approved, over a presidential veto, the Private Securities
Litigation Reform Act, which put strict limits on federal
investor class action lawsuits. I opposed that legislation
because I was concerned about preventing defrauded investors
from being made whole again. But my side lost, and we all
moved on.
One of the arguments when we debated the 1995 Act was that
truly victimized investors could still seek redress in state
court. So there was some comfort in that; retirees who lost
their life savings to securities fraud could still pursue
legal action.
Now, however, I fear that the Committee is moving to cut
off the state avenue for class action securities suits. That
could mean that investors would have no ability to seek
relief from securities wrongdoers, and that is unacceptable
to me.
There appears to be no explosion of state securities class
actions, so I see no real need for this bill. Last year there
were only 44 throughout the entire country, the lowest number
in five years.
Furthermore, at a time when there are more investors than
at any time in history, many of them unsophisticated
investors, we should not be making it easier to get away with
securities fraud. We owe that to our investor constituents
and we owe that to the capital markets in this country, which
remain the strongest in the world.
Additionally, though the bill contains a provision similar
to the Sarbanes amendment in the Senate bill, which provides
for an exemption from the bill for state and local entities,
this provision goes beyond Sarbanes to require those entities
to be named plaintiffs in and authorize participation in
state securities class actions. This assumes a level of
sophistication that may be lacking in these investors.
I will provide an example. Last year, the SEC alleged that
Devon Capital Management had defrauded 100 municipal clients
in Pennsylvania and elsewhere. Those clients included 75
school districts, mostly in Western and Central Pennsylvania.
Devon and the SEC reached a settlement, and those school
districts are expected to recover a little over half of the
$71 million that Devon lost.
Now how can we say that these same school districts and
local governments that were unsophisticated enough to have
invested with Devon in the first place and lost all this
money, are, at the same time, sophisticated enough to
recognize the steps they need to take to preserve their
rights to bring a state securities class action under this
bill?
I would prefer that, at the very least, the Sarbanes
amendment exempting state and local governments and pension
plans be maintained as it passed the Senate.
Finally, I am disturbed by the trend I am seeing in the
Committee and Congress as a whole in our attitude toward
investors, especially the mom and pop investors we all
represent. As I said, I opposed the 1995 Securities
Litigation Reform Act. That was followed closely by the
Fields Securities Reform bill, which threatened to severely
limit the ability of state securities regulators, the local
cops on the beat in the securities world, to protect
investors. In Committee and in conference, we were able to
temper this legislation so that investors would not be left
vulnerable.
We are at a point in time when Members of Congress and
others are talking about privatizing Social Security. That
will lead to even more unsophisticated investors and hundreds
of billions of dollars going into the marketplace. And yet we
continue to talk about reducing investor protections.
Another question I have is, are we now saying to the states
that we in Washington, DC, know better than the states what
cases should go through state courts and which should not.
Are we next going to tell the states that they can't hear
real estate cases? Are we going to tell them they can't hear
tobacco cases? What comes next?
I never thought I would see the day when my Republican
colleagues would want to dictate from on high in Washington,
DC, what state law should be.

{time} 1515

Mr. BLILEY. Mr. Speaker, I yield 3 minutes to the gentleman from Ohio
(Mr. Oxley), chairman of the subcommittee.
(Mr. OXLEY asked and was given permission to revise and extend his
remarks.)
Mr. OXLEY. Mr. Speaker, I obviously rise in strong support of the
conference report. If fraud were the only reasons that stock prices
dropped, then today's volatile markets would suggest that there is not
an honest company out there. That is simply not the case.
Publicly traded companies, their shareholders, and their employees
lose every time a company has to pay off and their lawyers have to
settle a lawsuit that is based on one fact only, that the company stock
dropped in value.
In 1995, the Congress approved, with an overwhelmingly bipartisan
majority that overrode a presidential veto, legislation to stop these
``blackmail settlements.'' The Private Securities Litigation Reform Act
of 1995 was designed to put an end to frivolous lawsuits that drain
values from public companies and wastefully diverted their resources.
This conference report closes a loophole that has enabled plaintiffs'
lawyers to continue to extract settlements from companies that have
done absolutely nothing wrong.
The conference report prevents lawyers from evading the protections
of the Reform Act by filing their lawsuit in State court. The
conference report creates a national standard under which securities
class actions must be filed and that standard is the one that Congress
resoundingly approved back in 1995.
The conference report preserves the ability of individual investors
to file suits that are appropriately brought in State courts, while
preventing lawyers from using securities class actions filed in State
court for their personal gains.
This legislation represents a bipartisan effort to work through our
political differences and reach compromises that are responsible public
policy. In fact, over the last 4 years, the Committee on Commerce has
produced a number of bills which have made a significant improvement to
the laws governing our financial institutions and that have enjoyed
support from both sides of the aisle. I am very proud of these
accomplishments. This legislation should be added to that list.
There are many who deserve credit for bringing this legislation to
the floor today. Several Committee on Commerce members, including the
gentleman from Washington (Mr. White), the original cosponsor of the
House bill, and the gentlewoman from California (Ms. Eshoo), the other
original cosponsor. They not only started the ball rolling, but have
worked incessantly to keep this legislation on track and have driven us
crazy at the same time.
I commend our counterparticipants in the Senate for their fine work
improving upon the bill as originally introduced by the gentleman from
Washington (Mr. White) and the gentlewoman from California (Ms. Eshoo),
and for their cooperation during the conference.
I thank our full committee chair, the gentleman from Virginia (Mr.
Bliley), whose leadership and perseverance has ensured that this
conference report is a strong win for American investors and American
businesses and, therefore, American jobs. Thanks to his hard work, as
well as that of the other conferees supporting this measure, the
conference report ratifies the heightened pleading standard that was
adopted in the 1995 Reform Act.
While we may disagree on this particular initiative, I appreciate the
constructive work done by the gentleman from Michigan (Mr. Dingell),
who, as always, has been a true legislative craftsman in this area.
Finally, on a personal note, I would like to thank the gentleman from
New York (Mr. Manton), our retiring ranking minority member of my
subcommittee, not only for his work and

[[Page H10780]]

support for this legislation, but for his years of friendship to me and
dedication to the Committee on Commerce and the House. I wish him the
best. We will all miss him.
Mr. DINGELL. Mr. Speaker, I yield 3 minutes to the distinguished
gentlewoman from California (Ms. Eshoo).
(Ms. ESHOO asked and was given permission to revise and extend her
remarks.)
Ms. ESHOO. Mr. Speaker, I rise today in support of the conference
report on the Securities Litigation Uniform Standards Act. I am very
proud to have been the chief Democratic sponsor of this legislation
which is narrowly focused and a bipartisan bill that closes a loophole
in the 1995 Private Securities Litigation Reform Act.
With the overwhelming support, which was bipartisan in the last
Congress, we passed that act. That bill significantly curbed the filing
in Federal courts of costly and meritless suits against fast-growing
companies. ``Strike suits'' forced companies to settle, and they did so
rather than face drawn out expensive court proceedings.
These frivolous suits, traditionally filed in Federal courts, are now
being filed in State courts circumventing the intent of the Congress in
the 1995 legislation. Studies have shown that over a quarter of these
cases were filed in State courts where the Federal reforms do not
apply. The Securities Litigation Uniform Standards Act closes this
loophole by assuring that lawsuits involving nationally traded
securities remain in Federal courts where they have always been heard.
This legislation is limited in scope and only affects class action
lawsuits involving nationally traded securities. Lawsuits traditionally
heard in the Federal courts will continue to be heard there under the
Federal law. State regulators would continue to have the ability to
enforce State laws and bring civil actions.
The Securities Litigation Uniform Standards Act is supported by the
Securities and Exchange Commission, the Clinton administration, and 231
House cosponsors. I urge the passage of this legislation.
Mr. Speaker, let me just say in closing that I would like to offer my
thanks to the gentleman from Virginia (Mr. Bliley), chairman of the
full committee, who has been a wonderful partner. And I also have to
acknowledge and thank him for putting up with my constant cajoling and
prodding and partnering on this.
Certainly to a worthy opponent, the gentleman from Michigan (Mr.
Dingell), ranking member of the Committee on Commerce, and to my
cosponsor, worthy cosponsor on the other side of the aisle, the
gentleman from Washington (Mr. White), to the gentleman from Louisiana
(Chairman Tauzin) of the subcommittee and the gentleman from Ohio (Mr.
Oxley), thanks for their help and accepting my prodding.
I have to say that I think all of us are ready to leave town. I am
beginning to start to pack my bag this evening. I know we have some
other things on the agenda. This, Mr. Speaker, has been the daily work
not only of my office and staff, but also from the other side of the
aisle. I want to acknowledge all that have been involved in this. I
think that this Congress is distinguishing itself by the passage of
this bill, and I urge passage and I thank all that have been involved
in it.
Mr. Speaker, I want to add to today's debate my voice on a particular
section of the Conference Report regarding scienter.
The Statement of the Managers indicates that ``it was the intent of
Congress, as was expressly stated during the legislative debate on the
Reform Act, and particularly during the debate on overriding the
President's veto, that the Reform Act establish a heightened uniform
Federal standard on pleading requirements based upon the pleading
standard applied by the Second Circuit Court of Appeals. Indeed, the
express language of the Reform Act itself carefully provides that
plaintiffs must `state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.'
The Managers emphasize that neither the Reform Act nor S. 1260 makes
any attempt to define that state of mind.''
As the chief Democratic sponsor of the Securities Litigation Uniform
Standards Act and of the PSLRA of 1995, and a signatory of the
conference report on S. 1260, the pleading standards referred to in the
Report state with great clarity the intent of Congress with respect to
scienter and are ones which I wholeheartedly support.
Mr. BLILEY. Mr. Speaker, I yield 5 minutes to the gentleman from
California (Mr. Cox), the chairman of the Republican Policy Committee.
Mr. COX of California. Mr. Speaker, I thank the gentleman from
Virginia (Mr. Bliley) for yielding me this time.
Mr. Speaker, if the gentleman from Virginia will entertain one, I
would like to engage him in a colloquy.
As the gentleman knows, I was the principal author of the 1995
Securities Litigation Reform Act. During consideration of the
Securities Litigation Uniform Standards Act, which will extend the 1995
act to State courts, some questions have been raised about the pleading
standard that we adopted in 1995. Specifically, some have argued post
facto that we adopted the pleading standard of the Second Circuit Court
of Appeals rather than a higher standard derived from it, but without
the Second Circuit caselaw.
The same questions have been raised in a different way concerning the
so-called Specter amendment to the 1995 act, which would have added
language related to motive, opportunity, and recklessness. The House
strongly disagreed with the Specter amendment and insisted that it be
dropped before we would agree to the conference report.
Since we were both conferees in 1995, I would ask the gentleman his
views on both points. Specifically, I would ask the gentleman whether
he agrees that in 1995 we adopted a pleading standard higher than any
in existing law. Although it was based on the standard from the Second
Circuit, it was significantly higher because our hearings showed that
even in the Second Circuit the existing standards were failing to
screen out abusive cases.
As the 1995 Statement of Managers stated, ``the House and Senate
hearings on securities litigation reform included testimony on the need
to establish uniform and more stringent pleading requirements to
curtail the filing of meritless lawsuits.'' For that reason, the 1995
Managers' Statement explained that the act incorporated a pleading
standard derived from, but higher than, the highest standard in
existing law, the Second Circuit standard.
Mr. Speaker, let me quote from the 1995 Managers' Statement, the most
authoritative construction of the 1995 act: ``The Conference Committee
language is based in part on the pleading standard of the Second
Circuit . . . Because the Conference Committee intends to strengthen
existing pleading requirements, it does not intend to codify the Second
Circuit's caselaw interpreting this pleading standard.''
The 1995 Managers' Statement went on to explain that this was the
very reason the conferees dropped the so-called Specter amendment on
motive, opportunity, and recklessness, because we wanted the standard
higher than the Second Circuit's, not because the Specter language
authorizing shortcuts to pleading rigor was somehow implicit in the
act's language. The House prevailed on this point.
Again, I quote, ``For this reason, the Conference Report chose not to
include in the pleading standard certain language relating to motive,
opportunity, and recklessness.''
So, the record in 1995 is clear: we adopted a higher standard than
the Second Circuit and in particular we rejected the Second Circuit
caselaw embodied in the Specter amendment regarding motive,
opportunity, and recklessness. Indeed, the President's veto, according
to his own veto message, was based on the fact that the 1995 act
adopted a higher pleading standard than the Second Circuit standard,
and rejected existing Second Circuit caselaw embodied in the Specter
amendment. Both bodies of Congress overrode that veto.
In the conference report Managers' Statement for the bill that is
before us today, the House expressly rejected Senate report language
that would have rewritten the 1995 legislative history on the pleading
standard. That language is not in this conference report Managers'
Statement.
Mr. BLILEY. Mr. Speaker, will the gentleman yield?
Mr. COX of California. I yield to the gentleman from Virginia.
Mr. BLILEY. Mr. Speaker, I thank the gentleman from California. His
recollection of both points is the same

[[Page H10781]]

as mine. I view the legislative history accompanying S. 1260 as
consistent with that understanding.
Mr. COX of California. Mr. Speaker, reclaiming my time, I thank the
gentleman. I agree with the gentleman's understanding of S. 1260's
legislative history. I also note that courts correctly treat so-called
post-enactment legislative history as virtually worthless. But to the
extent that courts have any interest in what the 105th Congress thinks
the 104th Congress did in 1995, I trust they will compare this year's
Senate Banking Committee report language with what both Houses
ultimately agreed to in this conference committee Managers' Statement.
Where the Senate report on S. 1260 states that the 1995 act
``establish[ed] a uniform Federal standard on pleading requirements by
adopting the pleading standard adopted by the Second Circuit Court of
Appeals'', the more authoritative Managers' Statement states that in
1995 we ``establish[ed] a heightened uniform Federal standard based
upon the pleading standard applied by the Second Circuit Court of
Appeals.''
The House managers insisted on these changes to reaffirm what the
conferees said in 1995: We adopted a pleading standard higher than the
then-existing Second Circuit standard.
Mr. Speaker, once more, Congress is making huge strides toward
protecting investors and workers in public companies. I'm pleased that
the House will today complete work on S. 1260, the Securities
Litigation Uniform Standards Act of 1998. I want to congratulate my
colleagues, Mr. White and Ms. Eshoo, for their leadership in
introducing this legislation, as well as Chairmen Mike Oxley and Tom
Bliley for their tireless efforts on behalf of this issue.
S. 1260 builds on two landmark achievements of the 104th Congress:
the 1995 Private Securities Litigation Reform Act, a key element of the
Contract With America, and the 1996 National Securities Markets
Improvement Act. In the 1995 Reform Act, we acted to stop the egregious
perversion of federal securities laws into weapons to injure investors
and companies rather than safeguards to protect investors from
securities fraud. Trial lawyers, using professional plaintiffs, were
filing class action lawsuits against publicly traded companies alleging
fraud, often with no more evidence than a drop in the price of these
companies' stock--something quite common in the highly volatile high-
technology markets. Indeed, over half of the top 150 companies in
California's Silicon Valley were hit by such suits. Due to the
considerable cost involved in fighting such a lawsuit, innocent
employers were routinely forced to pay investors' money as tribute to
the trial bar. Yet the enormous price they had to pay--according to one
study, on average nearly $9 million for each settlement--did little for
defrauded investors. The plaintiffs, the supposed beneficiaries of this
system, on average received between 6 and 14 cents on the dollar.
A strong bipartisan majority of the House and Senate acted in 1995 to
reorient federal securities litigation to encourage investors to bring
meritorious claims while protecting innocent employers from meritless
extortion suits. We acted to protect the millions of innocent investors
who were bearing the cost of abusive lawsuits while gaining little or
no recompense for genuine fraud.
In 1996, strong bipartisan majorities of the House and Senate again
turned to the issue of securities law, this time addressing the
appropriate division of labor between state and federal securities
regulators. In that historic bill we determined that ``covered
securities''--basically, those traded on national exchanges--would be
subject to federal regulation, while non-covered securities would be
regulated by the states.
Today we are going to continue our work in this field of law by
protecting the gains we made in the 1995 Reform Act from circumvention
by entrepreneurial trial lawyers, and by harmonizing the 1995 Reform
Act and the 1996 National Markets legislation.
Trial lawyers have sought to get around our 1995 reforms by bringing
their suits in state courts, where those reforms do not apply. Yet as
our capital markets are national, and thus investors may live in any of
the 50 states, bringing a suit in one state unfairly imposes a
financial burden on residents of another state. To address this
inequity and assert that national markets require nationally applied
rules, this legislation will make federal courts the exclusive venue
for large-scale securities fraud lawsuits involving securities subject
to federal regulation under the 1996 National Markets Act.
Like the 1995 and 1996 enactments, Representative White's bill enjoys
wide bipartisan support. Throughout the process leading up to
enactment, we have sought to address the concerns of majority and
minority members in the legislation. Our success in so doing is
reflected in the wide bipartisan support this legislation received in
the House and Senate.
In addition, I want to particularly thank Chairman Bliley and
Chairman Oxley for including in the bill a technical correction to the
1996 Fields national markets legislation. This correction restores the
viability of Section 3(a)(10) of the Securities Act of 1933, which
provides a voluntary state-law alternative to federal securities
registration. This provision--which has been an unamended part of the
1933 Act since the enactment of that legislation, exempts from federal
registration securities issued in exchange for other securities,
claims, or property interests, if the terms and conditions of the
issuance and exchange have been approved as fair by state authorities.
It is purely voluntary; issuers may still seek federal registration if
they wish. Although the 1996 Act does not amend Section 3(a)(10), it
inadvertently impeded its operation. I appreciate the Chairmen's
consideration in including in the bill a curative technical amendment
endorsed by the California Department of Corporations.
I look forward to final passage of this conference report, and I
thank the Chairmen and my colleagues, Rick White and Anna Eshoo, for
their tireless efforts on behalf of this legislation.
Mr. DINGELL. Mr. Speaker, I yield 6 minutes to the distinguished
gentleman from Massachusetts (Mr. Markey).
Mr. MARKEY. Mr. Speaker, one of the most shameful things that has
occurred during the course of the debate on this bill was the covert
attempt that was made to eviscerate the ability of the SEC and
defrauded investors to sue reckless wrongdoers.
In the Silicon Graphics case, a Federal District Court in California
actually ruled that the act had eliminated recklessness as a standard
for liability under the Federal securities laws, subsequently
concluding that only deliberate recklessness, a legal oxymoron, would
meet the Reform Act's pleading standards.
Now, while I oppose this bill, I also feel quite strongly that if
this bill is to become law, we needed to make it absolutely clear that
we had not changed the scienter requirements in either the Reform Act
or in this legislation.
During floor consideration of the House version of this bill, my
colleague from California articulated his view that the standard did
not include recklessness. I strongly disagree, and believe that this
mischaracterized the intent of Congress in both the Securities and
Exchange Act of 1934, and the Reform Act of 1995, for which I was a
conferee, along with the gentleman from Michigan (Mr. Dingell), and the
currently pending legislation.
I am pleased to see that the Statement of Managers, which was
provided to my office by the Committee on Commerce majority staff and
which bears the signatures of the conferees to this act, has recognized
that neither the Reform Act nor S. 1260 alters the scienter standard of
the Exchange Act.
I must note with some dismay, however, that the Statement of Managers
on this bill, which was filed in the Congressional Record on October 9,
does not contain essential legislative history from the original
Statement of Managers provided to my office. I am informed that this
was due to a clerical error, which resulted in the inadvertent deletion
on page 4 of the Joint Statement. While some Members on this side,
including myself, find it rather curious that this particular page
mysteriously turned up missing, given how much time and effort was
given to working this language out, I will accept this explanation at
face value and I am pleased that the gentleman has made it clear that
the version has been corrected and will be filed in the Record in
connection with today's debate.

{time} 1530

There should be absolutely no ambiguity with respect to the intent of
the Congress with respect to the fact that recklessness is and always
has been a part of the scienter standard.
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 securities laws. It is true, as the
statement of managers notes, that in Ernst & Ernst v. Hochfelder, the
Supreme Court left open the question of whether the recklessness could
satisfy the scienter requirement of section 10(b) and rule 10b-5.
However, the statement of managers

[[Page H10782]]

failed to note 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. So I agree
with the statement of the managers that the 1995 Private Securities
Litigation Reform Act, that the gentleman from Michigan (Mr. Dingell)
and I were conferees on, did not change the scienter requirement for
liability.
I am deeply troubled, however, by attempts which were made, some late
in the course of the debate on S. 1260, to suggest that the reform act
had in fact raised the pleading standard beyond that of the Second
Circuit which at the time the reform act was passed was the strictest
pleading standard in the Nation. That clearly was not my understanding
in 1995, nor the gentleman from Michigan (Mr. Dingell).
I am pleased to that this erroneous interpretation has been rejected
today. To have done otherwise would have created 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 defauded investors can
recover for reckless misconduct but that they must plead something more
than reckless misconduct would have defied logic.
During the course of the debate on this bill, it has been suggested
by some that a footnote in the statement of managers from the 1995
reform act proves that Congress had adopted in 1995 a pleading standard
different from the Second Circuit court standard. This footnote, which
was inserted at the last minute without our knowledge, the gentleman
from Michigan (Mr. Dingell) or I, stated that the committee chose not
to include in the pleading standard certain language relating to
motive, opportunity or recklessness. This footnote, and make no mistake
about it, that is all it is, merely a footnote in a statement of
managers drafted by a staffer without the full consideration of all the
House and Senate Members appointed as conferees at that time to the
1995 act, including myself, 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 mandated the 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 so doing the conference
committee and Congress intended to eliminate liability for conscious
misconduct. As the statement of managers for S. 1260 clearly indicates,
it was the intent of Congress when it passed the reform act back in
1995 to adopt the Second Circuit standard.
Mr. Speaker, I insert this and additional material to clarify any
misinterpretation or misunderstanding that might exist on this issue,
and I must conclude in saying that I find the colloquy that just took
place between the gentleman from California (Mr. Cox) and the gentleman
from Virginia (Mr. Bliley) does not comport with the facts as we
understand them on our side and is not in fact the intent of the law.
Mr. BLILEY. Mr. Speaker, I yield 3 minutes to the gentleman from
Washington (Mr. White), one of the chief sponsors of this legislation.
Mr. WHITE. Mr. Speaker, I thank the gentleman for yielding me the
time.
In the 18 months or so since the gentlewoman from California and I
introduced this bill, I believe it was in May of 1997, we have had lots
and lots of debate on the merits of this bill. Suffice it to say, it is
a very good bill. It fixes a loophole that we left in the 1995 act, and
I think we have had a lot of discussion today about why that is a good
thing.
Admittedly there are some Members who did not like the 1995 act. They
do not like this bill either. I think the gentleman from Massachusetts
and the gentleman from Michigan fall into that category. But there were
300 some plus of us who did like the 1995 act, who do like this act,
who passed it before, and I think it is time for us to go forward.
Rather than spending any more time talking about the merits, I think
this is a time for thanks. I would like to thank some Members who have
been very important in passing this bill. First and foremost, the
gentlewoman from California who has been an absolutely diligent and
persuasive and persevering advocate for this bill. I never minded it. I
thought that was our job, and I think she did a really good job.
Second, the chairman of our committee, the gentleman from Virginia (Mr.
Bliley), who always took up our case with the leadership, always made
sure we had time to debate this, always was a good supporter and helper
on this bill. Thirdly, the gentleman from Ohio (Mr. Oxley) who listened
to our pleas that he schedule in our committee plenty of time for
hearings and was very supportive once the hearings got going, a very
good supporter of this bill. I thank them all for getting this done.
I should also make sure that some of the people who did the real
work, the staff, are also recognized. Here I cannot say enough about
David Cavicke and Linda Rich on our side of of the aisle. I know there
were many members on the minority side who also worked hard on this. I
could not leave the floor without thanking Leslie Dunlap on my staff
and Josh Mathis who worked very hard on this.
Mr. Speaker, I am very pleased we are at this point. It has been a
long, hard road, but I think we have done something good for our
country.
Mr. DINGELL. Mr. Speaker, I yield such time as he may consume to the
gentleman from Michigan (Mr. Stupak).
(Mr. STUPAK asked and was given permission to revise and extend his
remarks and to include extraneous material.)
Mr. STUPAK. Mr. Speaker, I rise in strong opposition to the bill
before us today.
Two years ago, Congress passed the Private Securities Litigation
Reform Act--that changed all the rules for investors, like people who
invest in today's stock market. Now, proponents want to extend an
untested federal system that will supersede state law. If we pass this
bill, Congress--will place all investors into a largely untested new
federal system, that will make it very difficult for investors to prove
fraud.
Many of the proponents of this bill claim that it corrects an
oversight from the Private Securities Litigation Reform Act of last
Congress. This claim is disingenuous and false. These same members
claimed during the 1995 debate over the Private Securities Litigation
Reform Act that investors would continue to have protection through the
state courts. The prime sponsor of the legislation explicitly stated
that state courts would continue to be an avenue for defrauded
investors. Now, these members are seeking to pre-empt these laws.
If this legislation passes, it will over-rule, do away, with the
aiding and abetting liability in 49 states. It will do away with 33
state statute of limitation provisions--we are now telling the states
they have to protect their citizens with an untried, untested federal
system--the federal government will now tell you what protections,
states can afford their citizens.
It is important to remember that the state ``blue sky laws'' predate
the existent of federal securities law. When Congress wrote the
Securities Act of 1933 and the Securities Exchange Act of 1934, they
did not impose liability and aiders and abettors or insert an adequate
statute of limitations. Congress declined to take these steps because
Congress felt it was necessary to allow the states to decide these
state issues. Today, if you vote for this bill you will take away from
investors protections they have enjoyed under state law.
Chairman Levitt of the Securities Exchange Commission, consumer
groups, municipal officers all supported maintaining these provisions,
but they were denied by the supporters of this bill.
Record numbers of small investors are entrusting their life savings
to the stock market. There are a number of proposals to allow the
Social Security Trust Fund to be invested in the stock market. Now more
than ever, these small investors need to be protected from fraudulent
securities transactions. 28 million Americans over the age of 65 depend
on investment income to meet part of their expenses.
In fact, a number of articles that recently appeared in newspapers
across the country have highlighted continuing concerns with the
``gimmicks,'' ``hocus pocus'' and ``illusions'' that companies use in
their accounting practices. I am inserting into the Record three
articles describing this problem at the end of my statement.
Proponents of this bill claim its passage will benefit investors. I
am amazed/bemused by this statement because consumer groups,
institutional investors, state pension boards and retirement plan
administrators, county officials and many other groups oppose this
bill.

[[Page H10783]]

This federal pre-emption is not necessary. Proponents will also argue
that this bill is necessary because there has been an increase in the
number of suits in state courts since the passage of the Private
Securities Litigation Reform Act. Yet in 1997 there was a decrease in
private securities as compared to levels before the passage of the
PSLRA.
Nationwide, private security litigation state filings account for
less than (100th of 1) percent of state civil filings nationwide. I
believe that it is irresponsible and unnecessary to supersede the law
of 50 states. The joint system of state and federal causes of action
have existed for over 60 years, I do not believe we need to pre-empt 50
state laws with an untried, untested federal system.
Mr. Speaker, the process surrounding this so called ``conference''
has been nothing short of appalling. We held no conference meetings,
neither my staff nor Mr. Dingell's staff were consulted on the
substance of the Conference Report. Even at this point, I have not been
asked whether I would like to sign the Conference Report. It is
unfortunate that relations have sunk so low in this Congress, that the
majority would not extend the courtesy and professional respect that we
always extended them.
I want to make one final, important point this bill does not change
the see-enter standard in the Securities Act as the Statement of
Managers points out. In fact, Senate bill managers have made clear
their view that the see-enter is the appropriate standard. I am
inserting into the Record an exchange of letters between a number of
the Banking Committee Senators, Chairman Levitt and the White House
clarifying this point.
Mr. Speaker, I believe this bill will make it easier for charlatans
and ``rip off'' artists to defraud investors, especially senior
citizens. I hope I am wrong. But before we pass this bill, I ask all
members to contemplate whether or not they want to make it easier for
their constituents to become victims of fraud. I urge you to vote
against this bill and protect investors.

[From the Washington Post, Sept. 29, 1998]

Levitt Targets Profit Distortions

New York, Sept. 28.--Securities and Exchange Commission
Chairman Arthur Levitt Jr. complained today of widespread
company manipulation of financial reports and outlined a
series of steps to halt ``earnings management.''
``Increasingly, I have become concerned that the motivation
to meet Wall Street earnings expectations may be overriding
common sense business practices,'' Levitt said in a speech
prepared for delivery here this evening.
Corporate executives, auditors, and Wall Street analysts
are increasingly part of ``a game of nods and winks'' in
which financial reports are ``distorted'' to meet analysts'
projections, Levitt said.
In his broadest criticism of accounting problems, the top
U.S. securities regulator said these misleading results
jeopardize ``the credibility of our markets.''
Levitt said the SEC soon will issue new rules and provide
better guidance on existing rules to offer clear ``do's and
don'ts'' on revenue recognition, restructuring reserves,
materiality and disclosure.
In addition, the New York Stock Exchange and the National
Association of Securities Dealers will form a panel to issue
a report on improving the performance of the audit committees
of corporate boards and formulating ``best practices'' in the
accounting and auditing area. The panel, headed by John C.
Whitehead, former co-chairman of Goldman Sachs & Co., and
corporate governance expert Ira Millstein, will make its
recommendations within 90 days.
For accounting practices that aren't acceptable, Levitt
promised the SEC's enforcement staff will ``aggressively act
on abuses'' at public companies that appear to be managing
earnings through major write-offs, restructuring reserves or
other questionable practices.
Levitt described an array of accounting ``gimmicks,''
``hocus-pocus'' and ``illusions'' companies use to manipulate
earning reports. Specifically, he cited misuse of so-called
``big baths,'' which are large, one-time restructuring write-
offs companies use to disguise operating expenses.
Levitt conceded the problem isn't new, but he said
accounting gimmickry is on the rise, fueled by the bull
market.
____

[From the San Jose News, Sept. 29, 1998]

SEC Dings Tech Firms

It is upgrade time at America Online.
The Securities and Exchange Commission has ordered the
online service and the rest of the technology industry to
improve the way they account for mergers and acquisitions.
The issue is how technology companies have seized on a
footnote in the accounting rules related to research expenses
to write off most of the purchase price of companies as soon
as they acquire them. This prevents a continuing drag on
profits that would result from writing off the purchase price
over several years.
The SEC's move comes as it is cracking down on a number of
accounting practices it finds abusive. In comments at New
York University, commission Chairman Arthur Levitt Jr. said
his staff would immediately increase its scrutiny of
companies that use certain aggressive accounting techniques
to inflate their quarterly earnings.
In choosing to make an example of America Online, the
biggest Internet company, the commission took the extreme
step of blocking it from publishing its fiscal fourth-quarter
earnings for nearly two months.
America Online finally reached an agreement with the SEC
and published its earnings Monday. It wrote off $70.5 million
related to research at two companies it acquired,
representing 22 percent of the $316 million it had paid for
them. Previously the company had said it planned to write off
the vast majority of the purchase price, though it gave no
specific figures.
Separately, Lynn Turner, the SEC's chief accountant, called
on the accounting industry to tighten its rules related to
writing off the cost of research. In a letter to the American
Institute of Certified Public Accountants, he said that a
study by the SEC had found ``significant problems in the
recognition and valuation'' of the research write-offs.
The letter outlined a proposed standard for such write-offs
that is much stricter than accountants have been using. And
the commission threatened to make companies take the
embarrassing step of restating their published earnings
reports in cases where it deems their research write-offs to
be ``materially misleading.''
Analysts said the change could inhibit acquisitions,
especially by smaller technology companies.
``It has more significance for other companies besides
AOL,'' said Keith Benjamin, an analyst at Banc-Boston
Robertson Stephens Inc. ``You will see more young Internet
companies forced to take lower write-offs.'' America Online
is less affected, he said, because it has become big enough
to absorb the additional charges.
At issue is how companies account for the value of ``in-
process research and development''--research that has yet to
be turned into a marketable product--at companies they buy.
In an acquisition, companies estimate the value of all of the
assets they are buying, both tangible ones like buildings and
intangible assets like brand names and customer lists. If the
purchase price is higher than the value of all of these
assets--and it usually is--the remainder is added to a catch-
all item known as good will.
Companies are forced to write off the value of all of these
assets over a period of from three to 40 years, depending on
the useful life of the asset. The one exception is in-process
research, which is written off immediately.
Since technology companies are especially interested in
showing investors accelerating earnings growth, many have
started attributing the bulk of their acquisition costs to
in-process research.
The SEC letter listed a number of what it described as
``abuses'' in this practice. In one case, for example, a
company that the commission did not name wrote off nearly all
the purchase price of an acquisition as in-process research,
even though the target company had not spent a significant
amount of money on research or development.
``If a company didn't spend significant amounts on R&D, it
would raise questions in my mind,'' said Baruch Lev, a
professor of accounting at New York University. He conducted
a study of 400 acquisitions, mostly of technology companies,
and found that the buyers wrote off 75 percent of the
purchase price as in-process research.
Shares of America Online increased $2.38 Monday, to
$117.13.
Jonathan Cohen, an analyst with Merrill Lynch, said the
market was not concerned with the deductions from profits.
``Reported earnings is one small piece of a larger picture
at technology companies that includes revenue growth, market
position, audience size and brand equity,'' he said.
____

[From the New York Times, Sept. 29, 1998]

``Trick'' Accounting Draws Levitt Criticism

(By Melody Petersen)

Scolding America's companies and their accountants for
using ``accounting hocus-pocus,'' Arthur Levitt, the chairman
of the Securities and Exchange Commission, said yesterday
that his staff would crack down on businesses that used
certain controversial accounting methods to manipulate the
numbers reported to shareholders.
Mr. Levitt's surprisingly harsh criticism and his far-
reaching plan to stop the accounting abuses came after a
string of companies have announced that the profits they
previously reported were wrong. Among the companies where
such announcements have led to large declines in stock prices
are Cendant, Sunbeam, Livent and Oxford Health Plans.
``We see greater evidence of these illusions or tricks,''
Mr. Levitt said at a news conference at New York University.
``We intend to step in now and turn around some of these
practices.''
Although he did not name any corporations, Mr. Levitt said
his staff would immediately increase its scrutiny of
companies that used certain aggressive accounting techniques
to inflate their quarterly earnings and would soon issue new
accounting rules and guidelines intended to halt the abuses.
He also called for a review of how the nation's public
accounting firms audit financial statements, saying he feared
that auditors might not be doing enough to find their
clients' accounting shenanigans.

[[Page H10784]]

``We rely on auditors to put something like the Good
Housekeeping Seal of Approval on the information investors
receive,'' Mr. Levitt said in a speech prepared to be
delivered later at the university's new Center for Law and
Business. ``As I look at some of the failures today, I can't
help but wonder if the staff in the trenches of the
profession have the training and supervision they need to
insure that audits are being done right.''
The American Institute of Certified Public Accountants and
several large accounting firms praised Mr. Levitt's plan,
saying they shared his concerns and were eager to work with
the commission on the issue.
Mr. Levitt said that the commission's enforcement division
would focus on companies that use certain accounting methods
that allow them to ``manage earnings'' so that profits can be
increased or decreased at will in such a way that the bottom
line does not reflect actual operations.
He specifically said that the commission was frustrated
with companies that used a factory closing or a work force
reduction as an opportunity to take millions of dollars of
one-time charges for ``restructuring.'' By inflating those
write-offs, companies get the bad news out of the way at once
and can clear their balance sheets of expensive assets that
would otherwise reduce the bottom line for years to come. For
example, Motorola announced recently that it would cut 15,000
jobs and take a restructuring charge of $1.95 billion.
The commission has also been critical of companies that
acquire other companies and then write off much of the
purchase price by calling it ``research and development.''
For example, the commission had blocked America Online, the
biggest Internet company, from reporting its fiscal fourth-
quarter earnings for nearly two months because of
disagreements over how much the company should write off in
its acquisitions of Mirabilis and Net Channel. America Online
finally reached an agreement with the commission and
published its results yesterday, greatly scaling back the
size of the research write-off.
Mr. Levitt said that other companies were trying to bolster
their earnings by manipulating revenue numbers. For instance,
many of the companies forced to restate their financial
statements this year had reported revenues that later turned
out to be fictional or included sales transactions that were
not yet completed. In other cases, executives had inflated
earnings by manipulating the amounts set aside for future
costs like loan losses, sales returns or warranty costs.
To stop the accounting abuses, Mr. Levitt said that the
commission would write new accounting guidelines on the ``dos
and don'ts of revenue recognition.'' The commission will also
begin requiring detailed disclosures about how management
estimates the value of various write-offs or reserves and the
other assumptions made in preparing financial statements.
Mr. Levitt called on the Financial Accounting Standards
Board to pass new accounting rules quickly, including one
that would clarify when a company can record a liability. The
commission has already pressed the accounting board to change
the rule that allows companies to write off large amounts of
an acquisition as research and development.
And, he asked both the A.I.C.P.A. and the Public Oversight
Board to review whether auditors should change the procedures
they use in performing an annual audit.
A blue-ribbon panel--led by John C. Whitehead, a former
Deputy Secretary of State and a retired senior partner at
Goldman, Sachs & Company, and Ira M. Millstein, a corporate
governance expert at the law firm of Weil, Gotshal & Manges--
will also develop recommendations for audit committees to
follow so that investors are better protected.
``The motivation to meet Wall Street earnings expectations
may be overriding common sense business practices,'' Mr.
Levitt said. ``Too many corporate managers, auditors and
analysts are participants in a game of nods and winks.''

U.S. Senate,

Washington, DC, March 24, 1998.
Hon. Archer Levitt,
Chairman, Securities and Exchange Commission, Washington, DC.
Dear Chairman Levitt and Members of the Commission: We are
writing to request your views on S. 1260, the Securities
Litigation Uniform Standards Act of 1997. As you know, our
staff has been working closely with the Commission to resolve
a number of technical issues that more properly focus the
scope of the legislation as introduced. We attach for your
review the amendments to the legislation that we intend to
incorporate into the bill at the Banking Committee mark-up.
On a separate but related issue, we are aware of the
Commission's long-standing concern with respect to the
potential scienter requirements under a national standard for
litigation. We understand that this concern arises out of
certain district courts' interpretation of the Private
Securities Litigation Reform Act of 1995. In that regard, we
emphasize that our clear intent in 1995--and our
understanding today--was that the PSLRA did not in any way
alter the scienter standard in federal securities fraud
suits. It was our intent, as we expressly stated during the
legislative debate in 1995, particularly during the debate on
overriding the President's veto, that the PSLRA adopt the
pleading standard applied in the Second Circuit. Indeed, the
express language of the statute itself carefully provides
that plaintiffs must ``state with particularity facts giving
rise to a strong inference that the defendant acted with the
required state of mind'': the law makes no attempt to define
that state of mind. We intend to restate these facts about
the '95 Act in both the legislative history and the floor
debate that will accompany S.1260, should it be favorably
reported by the Banking Committee.
Sincerely,
Alfonse M. D'Amato,
Chairman, Committee on Banking, Housing and Urban Affairs.
Phil Gramm,
Chairman, Subcommittee on Securities.
Christopher J. Dodd,
Ranking Member, Subcommittee on Securities.
____

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, Washington, DC.
Hon. Phil Gramm,
Chairman, Subcommittee on Securities, U.S. Senate,
Washington, DC.
Hon. Christopher J. Dodd,
Ranking Member, Subcommittee on Securities, U.S. Senate,
Washington, DC.
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.\1\
---------------------------------------------------------------------------
\1\ 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.
Isaac C. Hunt, Jr.,
Commissioner.
Laura S. Unger,
Commissioner.
____

The White House,

Washington, April 28, 1998.
Hon. Alfonse M. D'Amato,
Chairman, Committee on Banking, Housing and Urban Affairs,
U.S. Senate, Washington, DC.
Hon. Phil Gramm,
Chairman, Subcommittee on Securities, U.S. Senate,
Washington, DC.
Hon. Christopher J. Dodd,
Ranking Member, Subcommittee on Securities, U.S. Senate,
Washington, DC.
Dear Chairman D'Amato, Chairman Gramm, and Senator Dodd: We
understand

[[Page H10785]]

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.
____

Securities and Exchange Commission,

Washington, DC, October 9, 1998.
Hon. Alfonse M. D'Amato,
Chairman, Committee on Banking, Housing and Urban Affairs,
U.S. Senate, Washington, DC.
Hon. Paul S. Sarbanes,
Ranking Minority Member, Committee on Banking, Housing and
Urban Affairs, U.S. Senate, Washington, DC.
Dear Chairman D'Amato and Senator Sarbanes: You have
requested our views on S. 1260, the Securities Litigation
Uniform Standards Act of 1998. We support this bill based on
important assurances in the Statement of Managers that
investors will be protected.\1\
---------------------------------------------------------------------------
\1\ Commissioner Norman S. Johnson continues to believe that
this legislation is premature, at the least, for the reasons
stated in his May 1998 prepared statement before the House
Subcommittee on Finance and Hazardous Materials.
---------------------------------------------------------------------------
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. In
addition, the bill contains important legislative history
that will eliminate confusion in the courts about the proper
interpretation of the pleading standard found in the Private
Securities Litigation Reform Act of 1995 and make clear that
the uniform national standards contained in this bill will
permit investors to continue to recover losses attributable
to reckless misconduct.
We commend the Committee for its careful efforts to strike
an appropriate balance between the rights of injured
investors to bring class action lawsuits and those of our
capital market participants who must defend against such
suits.
As you know, we expressed various concerns over earlier
drafts of the legislation. In particular, we stated that a
uniform standard for securities fraud class actions that did
not permit investors to recover losses for reckless
misconduct would jeopardize the integrity of the securities
markets. We appreciate your receptivity to our concerns and
believe that as a result of our mutual efforts and
constructive dialogue, this bill and the Statement of
Managers address our concerns. The strong statement in the
Statement of Managers that neither this bill nor the Reform
Act was intended to alter existing liability standards under
the Securities Exchange Act of 1934 will provide important
assurances for investors that the uniform national standards
created by this bill will continue to allow them to recover
losses caused by reckless misconduct. The additional
statement clarifying that the uniform pleading requirement in
the Reform Act is the standard applied by the Second Circuit
Court of Appeals will likewise benefit investors by helping
to end confusion in the courts about the proper
interpretation of that Act. Together, these statements will
operate to assure that investors' rights will not be
compromised in the pursuit of uniformity.
We are grateful to you and your staffs, as well as the
other Members and their staffs, for working with us to
improve this legislation and safeguard vital investor
protections. We believe this bill and its Statement of
Managers fairly address the concerns we have raised with you
and will contribute to responsible and balanced reform of
securities class action litigation.
Sincerely,
Arthur Levitt,
Chairman.
Issac C. Hunt, Jr.,
Commissioner.
Paul R. Carey,
Commissioner.
Laura S. Unger,
Commissioner.

Mr. DINGELL. Mr. Speaker, I yield 4 minutes to the distinguished
gentlewoman from Colorado (Ms. DeGette).
Ms. DeGETTE. Mr. Speaker, I rise in opposition to this legislation,
the Securities Litigation Uniform Standards Act.
I have opposed this bill in committee and on the floor because I
think that it takes a Federal meat axe to a problem that States ought
to be able to solve with a State solution scalpel. I oppose this bill
today not only to protect investors and to give States time to deal
with this problem themselves but because along with many other
problems, the conference committee stripped out important language that
improved this bill.
One of the things that was stripped out, a noncontroversial or sort
of noncontroversial bipartisan amendment I passed in committee that
would direct the Securities and Exchange Commission to conduct an
analysis of the whole issue, including the extent to which the
preemption of State securities laws affects the protection of
securities investors of the public interest.
This study was important to determine both what the effect is on
securities investors and also to determine what the true effect is on
these lawsuits going into State courts. I am concerned just like
everybody else that many of these lawsuits are being pursued by a very
small number of attorneys who are only looking to make money for
themselves at the expense of newly emerging high tech firms.
These lawsuits can cost the company millions of dollars while they
are being settled and the result is the diversion of resources away
from designing of new products and the creation of jobs.
The trend is disturbing but the trend is not overwhelming. The issue
needs to be addressed but it needs to be addressed at the State level.
The alleged mass migration of securities fraud class action cases to
State court has actually been quite limited and as often happens in a
body like Congress, when I asked for statistics about this huge mass of
lawsuits going from Federal court to State courts, the evidence was
either nonexistent or surprisingly small.
The numbers of suits and the number of plaintiffs in the State courts
are actually quite small. Both the proponents and opponents of this
bill agreed that the numbers of suits have actually gone down at the
State level in the past year. I believe we would be setting a dangerous
precedent by blatantly preempting State securities laws, many of which
were enacted before the 1933 Federal Securities Act in order to address
a very discrete, small problem that exists in basically one State,
California.
Those who consider themselves supportive of State rights and those
who consider themselves to be Federalists should consider the very
dangerous precedent we would set if we pass this legislation.
If the industry is so concerned about the effect of going into State
court, I would suggest that they go to the State legislatures in these
very few States and ask the legislatures to change the law.
S. 1260 raises significant Federalism concerns and I think that it is
quite clear that more time is needed to assess the effects of
securities litigation reform before we willy-nilly eliminate all of the
State blue sky laws. Eliminating State remedies for fraud before
knowing whether the courts will end up consistently interpreting the
1995 act in a way that provides victims with a viable means to recover
their losses, this bill risks not only harming innocent investors but
also undermines public confidence in our securities markets. This is an
issue that needs to be addressed but it needs to be addressed on a
State-by-State level.
I urge my colleagues to vote against this legislation.

[[Page H10786]]

The SPEAKER pro tempore (Mr. Barrett of Nebraska). The gentleman from
Virginia (Mr. Bliley) has 6 minutes remaining.
Mr. BLILEY. Mr. Speaker, I yield the balance of my time to the
gentleman from Louisiana (Mr. Tauzin).
Mr. TAUZIN. Mr. Speaker, I thank the gentleman from Virginia (Mr.
Bliley) for literally being the shepherd who has brought not only this
legislation forward but the primary legislation on securities
litigation reform that became law several years ago.
I think it is important to put this issue in historical perspective.
I was the author of the first securities litigation reform bill in
1992. Interestingly enough, I was then a Democrat. Also interestingly
enough, the lead sponsor on the Senate side was Christopher Dodd, who
was then chairman of the Democratic Senate Campaign Committee. And
Christopher Dodd and I secured the cosponsorship not only of a majority
of Members of both the House and the Senate but a huge bipartisan
majority of Members on both sides. Unfortunately, we were never able to
work out our differences with my good friend, the gentleman from
Michigan (Mr. Dingell), or my good friend, the ranking minority member
of the subcommittee I now chair, the gentleman from Massachusetts (Mr.
Markey) but nevertheless, we literally have had interesting hearings
and interesting discussions as the years passed.
So popular was this issue of putting an end to these strike suits
every time the stock market prices changed on some company, so popular
both in the House and the Senate on the Democratic and Republican side
was this issue, that when it was finally passed in 1995, and the
President surprisingly vetoed it, this bill became the only issue that
this Congress overrode a presidential veto, two-thirds of the Members
of this House, two-thirds of the Senate concurring in an override to
make securities litigation reform the law of the land.
Why are we back here today? We are back here today because in spite
of the fact that we put an end to these strike lawsuits, these
shakedown lawsuits which were settled 94 percent of the time at 10
cents on the dollar, no grandmother ever got a dime out of this, just
the unscrupulous trial lawyers who brought these kinds of lawsuits,
even though we put an end to these lawsuits in Federal district court,
we learned that the unscrupulous members of the trial board who were
pressing these cases before simply did an end around. They went to
State court and increasingly used the authority of the State court to
do exactly what they used to do in Federal court, to shake down
companies, to shake down boards of directors, to shake down the
accountants, anybody else associated with a company whenever stock
market prices changed, alleging fraud and then suddenly, quickly, at 10
cents on the dollar.
In short, this bill puts an end to the end around. It says that the
law we passed in 1995, with over two-thirds support of Democrats and
Republicans, overriding the presidential veto, that law will have
effect in this land, that strike lawsuits should come to an end whether
they are brought in Federal court or in State court when they affect
nationally traded firms. And secondly, the bill is carefully designed
to make sure that other actions, indeed, can still be brought in State
courts and that States themselves and our own Securities Exchange
Commission can still exercise its authority to prevent abuses of fraud
in securities trading in America.

{time} 1534

In short, this is carefully tailored now to stop the end runs, to
make sure that the law we so successfully passed in 1995, with the
enormous help of the gentlewoman from California (Ms. Eshoo), the great
sponsorship of the gentleman from California (Mr. Cox), they did such a
good job in 1995 to make sure that that law now has real effect out
there; that people who trade and who invest their pension funds are not
going to lose those assets to strike lawsuits that shake down the value
of those companies and shake down the people who are trying to run them
successfully for this economy.
This bill will send the strongest message to those unscrupulous
lawyers, start behaving yourself, stop shaking people down, stop
bringing these frivolous lawsuits because they will not be permitted in
Federal court, and they will not be permitted now in State court.
Mr. Speaker, this bill deserves the same kind of support that the
original bill got in 1995. It deserves, as the gentlewoman from
California (Ms. Eshoo) said the bipartisan vocal support of Members on
both sides of this aisle so that we present it quickly to the President
who has said in California that, if we would do this, he would sign it
into law.
Let us send it to the President and let him have the chance to sign
this bill into law and to put an end to the end around that
unfortunately has tainted the great effort we made in 1995.
To all who made this bill possible today, I personally want to thank
you. As I said, when I authored this bill in 1992, I did not think it
was going to take this long for us to complete the journey.
But here we are today, this perhaps making the most important step in
that journey to end these frivolous lawsuits and to give the securities
trading of these high-tech firms which are bringing so much job and
opportunity to America to give them all the sense of security and to
protect them against these strike lawsuits.
Mr. KLINK. Mr. Speaker, I think this bill is a solution in search of
a problem.
In 1995, the Commerce Committee developed and Congress approved, over
a Presidential veto, the Private Securities Litigation Reform Act,
which put strict limits on Federal investor class action lawsuits. I
opposed that legislation because I was concerned about preventing
defrauded investors from being made whole again. But my side lost, and
we all moved on.
One of the arguments when we debated the 1995 act was that truly
victimized investors could still seek redress in State court. So there
was some comfort in that; retirees who lost their life savings to
securities fraud could still pursue legal action.
Now, however, I fear that Congress is moving to cut off the State
avenue for class action securities suits. That could mean that
investors would have no ability to seek relief from securities
wrongdoers, and that is unacceptable to me.
There appears to be no explosion of State securities class actions,
so I see no real need for this bill. Last year there were only 44
throughout the entire country, the lowest number in five years.
Furthermore, Mr. Speaker, at a time when there are more investors
than at any time in history, many of them unsophisticated investors, we
should not be making it easier to get away with securities fraud. We
owe that to our investor constituents and we owe that to the capital
markets in this country, which remain the strongest in the world.
Additionally, Mr. Chairman, though the conference report contains a
provision similar to the Sarbanes amendment in the Senate bill, which
provides for an exemption from the bill for State and local entities,
the provision before us goes beyond Sarbanes to require those entities
to be named plaintiffs in and authorize participation in State
securities class actions. This assumes a level of sophistication that
may be lacking.
I will provide an example. Last year, the SEC alleged that Devon
Capital management had defrauded 100 municipal clients in Pennsylvania
and elsewhere. Those clients included 75 school districts, mostly in
western and central Pennsylvania. Devon and the SEC reached a
settlement, and those school districts are expected to recover a little
over half of the $71 million that Devon lost.
Now, how can we say that these same school districts and local
governments that were unsophisticated enough to have invested with
Devon in the first place and lost all this money, are, at the same
time, sophisticated enough to recognize the steps they need to take to
preserve their rights to bring a State securities class action under
this bill?
I would have preferred that, at the very least, the Sarbanes
amendment exempting State and local governments and pension plans were
maintained as it passed the Senate.
Finally, Mr. Speaker, I am disturbed by the trend I am seeing in this
committee and Congress as a whole in our attitude toward investors,
especially the mom and pop investors we all represent. As I said, I
opposed the 1995 Securities Litigation Reform Act.
That was followed closely by the Fields securities reform bill, which
threatened to severely limit the ability of State securities
regulators, the local cops on the beat in the securities world, to
protect investors. In committee and in conference, we were able to
temper this legislation so that investors would not be left vulnerable.

[[Page H10787]]

Now however, comes this legislation. I really worry that we are going
down the road to where the small investor is the last thing we think
about, when they should be among the first.
We are at a point in time when Members of Congress and others are
talking about privatizing Social Security. That will lead to even more
unsophisticated investors and hundreds of billions of dollars going
into the marketplace. And yet we continue to talk about reducing
investor protections.
Another question I have is, are we now saying to the States that we
in Washington, DC, know better than the States what cases should go
through State courts and which should not. Are we next going to tell
the States that they can't hear real estate cases? Are we going to tell
them they can't hear tobacco cases? What comes next?
I never thought I would see the day when my Republican colleagues
would want to dictate from on high in Washington, DC, what State law
should be.
The conference report on S. 1260 is a solution in search of a
problem, and I strongly oppose it.
Mr. DINGELL. Mr. Speaker, I have no further requests for time, and I
yield back the balance of my time.
Mr. BLILEY. Mr. Speaker, I yield back the balance of my time.
The SPEAKER pro tempore. The question is on the motion offered by the
gentleman from Virginia (Mr. Bliley) that the House suspend the rules
and agree to the conference report on the Senate bill, S. 1260.
The question was taken.
Mr. KANJORSKI. Mr. Speaker, I object to the vote on the ground that a
quorum is not present and make the point of order that a quorum is not
present.
The SPEAKER pro tempore. Pursuant to clause 5, rule I, and the
Chair's prior announcement, further proceedings on this motion will be
postponed.
The point of no quorum is considered withdrawn.

____________________