[Congressional Record Volume 144, Number 145 (Tuesday, October 13, 1998)]
[Senate]
[Pages S12444-S12450]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1998--CONFERENCE REPORT
Mr. THOMAS. Mr. President, I ask unanimous consent that the Senate
now proceed to the consideration of the conference report to accompany
S. 1260.
The PRESIDING OFFICER. The clerk will report.
The assistant legislative clerk read as follows:
The committee of conference on the disagreeing votes of the
two Houses on the amendment of the House to the bill (S.
1260), have agreed to recommend and do recommend to their
respective Houses this report, signed by a majority of the
conferees.
The PRESIDING OFFICER. Without objection, the Senate will proceed to
the consideration of the conference report.
(The conference report is printed in the House proceedings of the
Record of October 9, 1998.)
Mr. D'AMATO. Mr. President, I would like to encourage my Senate
colleagues to support the conference report on S. 1260, the Securities
Litigation Uniform Standards Act of 1998. The conference report is
closely modeled on the bill that the Senate passed by an overwhelming
bipartisan vote this spring, and that the Banking Committee reported by
a vote of 14 to 4.
Mr. President, I believe that the conference report will also enjoy
strong bipartisan support. The conference report is the result of a lot
hard work and thoughtful consideration. The House and Senate committee
staffs worked closely with the staff of the Securities and Exchange
Commission to ensure the Commission's continued support for the
legislation. Mr. President, I ask unanimous consent that the letter
from the S.E.C. be printed in the Record.
There being no objection, the letter was ordered to be printed in the
Record, as follows:
[[Page S12445]]
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\
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\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.
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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.
Isaac C. Hunt, Jr.,
Commissioner.
Paul R. Carey,
Commissioner.
Laura S. Unger,
Commissioner.
Mr. D'AMATO. Mr. President, the broadbased support that this bill
enjoys is a tribute to Senators Domenici, Gramm, and Dodd, the chief
cosponsors of its legislation. This bill provides a case study on how
to get legislation done. They focused on solving a specific serious
problem, and built a wide base of support for the bill. The problem to
which I referred is a loophole that strike lawyers have found in the
1995 private securities litigation reform bill.
Mr. President, the 1995 act was enacted in the last Congress in
response to a wave of harassment litigation that threatened the
efficiency and integrity of our national stock markets, as well as the
value of stock portfolios of individual investors. This threat was
particularly debilitating to so-called high-tech companies who
desperately need access to our capital markets for research,
development and production of cutting-edge technology. These companies
not only help to create jobs and drive our economic growth, they create
substantial wealth for their shareholders. As one witness before the
Securities Subcommittee testified:
The continuing specter of frivolous strike suits poses
still another threat to investors: the inordinate costs these
suits impose on corporations--and ultimately on their
shareholders.
Mr. President, that is a statement that bears repeating: that
ultimately the cost of strike suits are borne by shareholders,
including ordinary people saving for their children's education or
retirement. It is these people, the ordinary investor, who foot the
bill for high-price settlements of harassment litigation.
Now, let me make one thing clear--we are not talking about preventing
legitimate litigation. Real plaintiffs with legitimate claims deserve
their day in court. But we should not condone little more than a
judicially sanctioned shakedown that only benefits strike lawyers.
Companies that engage in fraudulent conduct should be held fully liable
for their actions; however, companies should not be forced to settle
cases that have no merit just to minimize their loses.
Mr. President, I want to express my gratitude to our colleagues in
the House, particularly Commerce Committee Chairman Bliley and
Subcommittee Chairman Oxley, for their continued cooperation and good
will in a truly bicameral partnership to protect investors.
Mr. DODD. Mr. President. I rise today to offer my strong support for
Senate passage of the conference report on S. 1260, the Securities
Litigation Uniform Standards Act of 1998. This important bill will help
to close a loophole that allows for the continuation of frivolous and
abusive securities class action lawsuits, while ensuring that investors
will still be able to bring suits when defendants have acted
recklessly.
In 1995, the Congress enacted legislation, the Private Securities
Litigation Reform Act, that was designed to curb the many abuses that
had cropped up in that system over the years. Ironically, it was the
very success of the 1995 act in shutting down avenues of abuse on the
Federal level that created a new home for that abusive and frivolous
litigation in state courts.
Prior to the enactment of the 1995 Reform Act, it was extremely
unusual for a securities fraud class action suit to be brought in a
state court. But by the end of 1996, it became clear from both the
number of cases filed in state court and the nature of those claims,
that a significant shift was underfoot as some lawyers sought to evade
those provisions of the Reform Act that made it much more difficult to
coerce a settlement.
John Olson, the noted securities law expert, testified in February
before the Subcommittee on Securities that:
In the years 1992 through 1994, only six issuers of
publicly traded securities were sued for fraud in state class
actions. In contrast, at least seventy-seven publicly traded
issuers were sued in state court class actions between
January 1, 1996 and June 30, 1997. Indeed, the increase in
state court filings may be even greater than indicated by
these dramatic statistics. Obtaining an accurate count of
state court class actions is extraordinarily difficult,
because there is no central repository of such data and
plaintiffs are under no obligation to provide notice of the
filing of such suits.
In April, 1997, the Securities and Exchange Commission staff report
to Congress and the President found that:
Many of the state cases are filed parallel to a federal
court case in an apparent attempt to avoid some of the
procedures imposed by the reform act, particularly the stay
of discovery pending a motion to dismiss. This may be the
most significant development in securities litigation post-
reform act.
Even though the number of state class actions filed in 1997 was down
from the high of 1996 it was still 50 percent higher than the average
number filed in the 5 years prior to the Reform Act and it represented
a significant jump in the number of parallel cases filed. 1998 looks to
maintain those historically high levels.
This change in the number and nature of cases filed in State court
has had two measurable, negative impacts. First, for those companies
hit with potentially frivolous or abusive state court class actions,
all of the cost and expense that the 1995 Reform Act sought to prevent
are once again incurred.
Some might question whether a state class action can carry with it
the same type of incentives that existed on the Federal level prior to
1995 to settle
[[Page S12446]]
even frivolous suits. In fact, they can and let me provide just one
example of how this is so.
Adobe Systems, Inc., wrote to the Senate Banking Committee on April
23, 1998, about its experience with state class action lawsuits. As
many of my colleagues know, one of the key components of the 1995
Reform Act was to allow judges to rule on a motion to dismiss prior to
the commencement of the discovery process. Under the old system, Adobe
had won a motion for summary dismissal but only after months of
discovery by the plaintiff that cost the company more than $2.3 million
in legal expenses and untold time and energy by company officials to
produce tens of thousands of documents and numerous depositions. With
the 1995 act in place, those kinds of expenses are far less likely to
occur on the federal level.
But in an ongoing securities class action suit filed in California
state court after passage of the 1995 act, Adobe has had to spend more
than $1 million in legal expenses and has had to produce more than
44,000 pages of documents, all before the State judge is even able to
entertain a motion for summary dismissal. In fact, in that April 23
letter to Banking Committee Chairman D'Amato, Colleen Pouliot, Adobe's
general counsel, noted that ``There are a number of California judicial
decisions which permit a plaintiff to obtain discovery for the very
purpose of amending a complaint to cure its legal insufficiencies.''
This one example makes clear that while Adobe, which has the
resources for a costly and lengthy legal battle, might fight a
meritless suit, these litigation costs provide a powerful incentive for
most companies to settle these suits rather than incur such expenses.
The second clear impact of the migration of class action suits to
state court is that it has caused companies to avoid using the safe
harbor for forward looking statements that was a critical component of
the 1995 Reform Act.
In this increasingly competitive market, investors are demanding more
and more information from company officials about where it thinkgs that
the company is heading.
The California Public Employees Pension System, one of the biggest
institutional investors, in the nation stated that ``forward-looking
statements provide extremely valuable and relevant information to
investors.'' SEC Chairman Arthur Levitt also noted in 1995, the
importance of such information in the marketplace:
Our capital markets are built on the foundation of full and
fair disclosure. . . . The more investors know and understand
management's future plans and views, the sounder the
valuation is of the company's securities and the more
efficient the capital allocation process.
In recent years, the Securities and Exchange Commission, in
recognition of this fact, sought to find ways to encourage companies to
put such forward-looking into the marketplace. Congress, too, sought to
encourage this and this effort ultimately culminated in the creation of
a statutory safe harbor, so that companies need not fear a lawsuit if
they did not meet their good-faith projections about future
performance.
Unfortunately, the simple fact is that the fear of state court
litigation is preventing companies from effectively using the safe
harbor.
Again, the SEC's April 1997 study found that ``companies have been
reluctant to provide significantly more forward looking disclosure than
they had prior to enactment of the safe harbor.'' The report went on to
cite the fear of state court litigation as one of the principal reasons
for this failure.
Stanford Law School lecturer Michael Perino stated the case very well
in a recent law review article:
If one or more states do not have similar safe harbors,
then issuers face potential state court lawsuits and
liability for actions that do not violate federal standards.
. . . for disclosures that are . . . released to market
participants nationwide, the state with the most plaintiff-
favorable rules for forward looking disclosures, rather than
the federal government, is likely to set the standard to
which corporations will conform.
If the migration of cases to state court were just a temporary
phenomenon, then perhaps it would be appropriate for Congress to tell
these companies and their millions of investors to simply grin and bear
it, that it will all be over soon. But the SEC report contains the
warning that this is no temporary trend: ``if state law provides
advantages to plaintiffs in a particular case, it is reasonable to
expect that plaintiffs' counsel will file suit in state court.''
The plain English translation of that is that any plaintiffs' lawyer
worth his salt is going to file in state court if he feels it
advantageous for his case; since most state courts do not provide the
stay of discovery or a safe harbor, we're confronted with a likelihood
of continued state court class actions.
While the frustration of the objectives of the 1995 Reform Act
provide compelling reasons for congressional action, it is equally
important to consider whether the proposition of creating a national
standard of liability for nationally-traded securities makes sense in
its own right.
I certainly believe it does.
In 1996, Congress passed the National Securities Markets Improvement
Act which established a precedent of national treatment for securities
that are nationally traded. In that act, Congress clearly and
explicitly recognized that our securities markets were national in
scope and that requiring that the securities that trade on those
national markets comply with 52 separate jurisdictional requirements
afforded little extra protection to investors and while imposing
unnecessarily steep costs on raising capital.
Last July, then-SEC Commissioner Steven Wallman submitted testimony
to the Securities Subcommittee in which he said:
. . . disparate, and shifting, state litigation procedures
may expose issuers to the potential for significant liability
that cannot be easily evaluated in advance, or assessed when
a statement is made. At a time when we are increasingly
experiencing and encouraging national and international
securities offerings and listing, and expending great effort
to rationalize and streamline our securities markets, this
fragmentation of investor remedies potentially imposes costs
that outweigh the benefits. Rather than permit or foster
fragmentation of our national system of securities
litigation, we should give due consideration to the benefits
flowing to investors from a uniform national approach.
At the same hearing, Keith Paul Bishop, then-California's top state
securities regulator testified that:
California believes in the federal system and the primary
role of the states within that system. However, California
does not believe that federal standards are improper when
dealing with truly national markets. California businesses,
their stockholders and their employees are all hurt by
inordinate burdens on national markets. Our businesses must
compete in a world market and they will be disadvantaged if
they must continue to contend with 51 or more litigation
standards.
SEC Chairman Arthur Levitt, at his reconfirmation hearing before the
banking committee on March 26, 1998, said that the legislation we are
debating today:
[a]ddresses an issue that . . . deals with a certain level
of irrationality. That to have two separate standards is not
unlike if you had, in the state of Virginia, two speed
limits, one for 60 miles an hour and one for 40 miles an
hour. I think the havoc that would create with drivers is not
dissimilar from the kind of disruption created by two
separate standards [of litigation] and I have long felt that
in some areas a single standard is desirable.
The message from all of these sources is clear and unequivocal: a
uniform national standard of litigation is both sensible and
appropriate.
The conference report under consideration today accomplishes that
goal in the narrowest, most balanced way possible.
Before I discuss what the legislation will do, let me point out a few
things that it won't do: it will not affect the ability of any state
agency to bring any kind of enforcement action against any player in
the securities markets; it will not affect the ability of any
individual, or even a small group of individuals, to bring a suit in
state court against the issuer of any security, nationally traded or
not; it will not affect any suit, class action or otherwise, against
penny stocks or any stock that is not traded on a national exchange; it
will not affect any suits based upon corporate disclosure to existing
shareholders required by state fiduciary duty laws; and, it will not
alter the national scienter requirement to prevent shareholders from
bringing suits against issuers or others who act recklessly.
There has been a lot of talk about this last point, so let me address
it head-on.
[[Page S12447]]
It is true that in 1995, Congress wrestled with the idea of trying to
establish a uniform definition of recklessness; but ultimately, the
1995 private securities litigation reform act was silent on the
question of recklessness. While the act requires that plaintiffs plead
``facts giving rise to a strong inference that the defendant acted with
the requisite state of mind * * *,'' the 1995 act at no point attempts
to define that state of mind. Congress left that to courts to apply,
just as they had been applying their definition of state of mind prior
to 1995.
Unfortunately, a minority of district courts have tried to read into
some of the legislative history of the reform act an intent to do away
with recklessness as an actionable standard. I believe that these
decisions are erroneous and cannot be supported by either the black
letter of the statute nor by any meaningful examination of the
legislative history.
There are several definitions of recklessness that operate in our
courts today, and some of them are looser than others. But I agree with
those who believe that reckless behavior is an extreme departure from
the standards of ordinary care; a departure that is so blatant that the
danger it presents to investors is either known to the defendant or is
so obvious that he or she must have been aware of it.
The notion that Congress would condone such behavior by closing off
private lawsuits against those who fall within that definition is just
ludicrous.
And if, by some process of mischance and misunderstanding, investors
lost their ability to bring suits based on that kind of scienter
standard, I would be the first, though certainly not the last, Senator
to introduce legislation to restore that standard.
The Statement of Managers that accompanies the conference report on
S. 1260 clarifies any misconception that may exist on the part of some
courts about congressional intent with unambiguous language:
It is the clear understanding of the Managers that Congress
did not, in adopting the Private Securities Litigation Reform
Act of 1995 [PL 104-67], intend to alter the standards of
liability under the Exchange Act.
Let me also address another issue that has been raised about
recklessness. Some have suggested that while the PSLRA did not remove
recklessness as a basis for liability, it was removed as a basis for
pleading a securities fraud class action. This is just plain wrong.
Again, the Statement of Managers accompanying this legislation is
instructive on this point:
It was the intent of Congress, as was expressly stated
during the legislative debate on the PSLRA, and particularly
during the debate on overriding the President's veto, that
the PSLRA establish a heightened uniform federal standard
based upon the pleading standard applied by the Second
Circuit Court of Appeals
The 1995 act clearly adopted the second circuit's pleading standards.
The Statement of Managers accompanying this conference report
definitively shows that it was also our intent that the application of
that standard was also based upon the second circuit's application.
While I agree that both this act and the 1995 act envision other courts
following the most stringent of the second circuit's cases applying the
pleading standard, we do expect other courts to look to the second
circuit for guidance. Under the second circuit's most stringent
application, the strong inference of the required state of mind may be
pled by either alleging circumstantial evidence of scienter, or by
alleging a rational economic motive and an opportunity to achieve
concrete benefits through the fraud. Where motive is not apparent, the
strength of the circumstantial allegations must be correspondingly
greater.
Anyone who claims that either the 1995 act or S. 1260 raises the
pleading standard beyond that point is engaged in wishful thinking--
that kind of statement simply cannot be borne out by even the most
cursory examination of either the statute or of the legislative
history.
As I mentioned a moment ago, Mr. President, S. 1260 is a moderate,
balanced and common sense approach to establishing a uniform national
standard of litigation that will end the practice of meritless class
action suits being brought in state court. This conference report keeps
a very tight definition of class action and applies its standards only
to those securities that have been previously defined in law as trading
on a national exchange.
That is why, on March 15, the Securities and Exchange Commission
stated that ``we support enactment of S. 1260''; and that is why again
on October 8, the Commission again voiced its support by stating: ``we
believe this bill and its Statement of Managers . . . will contribute
to responsible and balanced reform of securities class action
litigation.'' And that is why the Clinton administration has also
expressed its support for the legislation.
In the final analysis, it is the millions of Americans who have
invested their hard-earned dollars in these nationally traded companies
and the men and women who will hold the new jobs that will be created
as a result of newly available resources, whom we hope will be the real
beneficiaries of the action that we take here today.
I strongly urge my colleagues to join the Securities and Exchange
Commission, dozens of our colleagues, the Clinton administration,
dozens of Governors, State legislators, and State securities regulators
in supporting passage of the Securities Litigation Uniform Standards
Act of 1998.
Mr. DOMENICI. Mr. President, I rise today in strong support of the
conference report to S.1260, the ``Securities Litigation Reform Uniform
Standards Act of 1998'' and I want to commend the Majority Leader for
bringing this conference report to the floor for a vote prior to the
Senate's adjournment. Few issues are more important to the high-tech
community and the efficient operation of our capital markets than
securities fraud lawsuit reform.
So today, I want to congratulate Senators D'Amato, Dodd, and Gramm
for all of their hard work on this legislation to provide one set of
rules to govern securities fraud class actions.
This conference report completes the work I began more than six years
ago with Senator Sanford of North Carolina. Back in the early 1990's,
Senator Sanford and I noticed that a small group of entrepreneurial
plaintiffs' lawyers were abusing our securities laws and the federal
rules related to class action lawsuits to file frivolous claims against
high-technology companies in federal courts.
Often these lawsuits were based simply on the fact that a company's
stock price had fallen, without any real evidence of wrongdoing by the
company. Senator Sanford and I realized a long time ago that stock
price volatility- common in high tech stocks- simply is not stock
fraud.
But, because it was so expensive and time consuming to fight these
lawsuits, many companies settled even when they knew they were innocent
of the charges leveled against them. The money used to pay for these
frivolous lawsuits could have been used for research and development or
to create new, high-paying jobs.
So, we introduced a bill to make some changes to the securities fraud
class action system. Of course, the powerful plaintiffs' bar opposed
our efforts, and the bill did not move very far along in the
legislative process.
After Senator Sanford left the Senate, I found a new partner--the
senior Senator from Connecticut, Senator Dodd. Senator Dodd and I
continued to work hard on this issue and in 1995, with tremendous help
from Chairman D'Amato and Senator Gramm, we succeeded in passing a law.
The Private Securities Litigation Reform Act of 1995 passed Congress in
an overwhelmingly bi-partisan way--over President Clinton's initial
veto of the bill.
And since enactment of the 1995 law, we have seen great changes in
the conduct of plaintiffs' class action lawyers in federal court.
Because of more stringent pleading requirements, plaintiffs' lawyers no
longer ``race to the courthouse'' to be the first to file securities
class actions. Because of the new rules, we no longer have
``professional plaintiffs''--investors who buy a few shares of stock
and then serve as sham named plaintiffs in multiple securities class
actions. Other rules make it difficult for plaintiffs' lawyers to file
lawsuits to force companies into settlement rather than face the
expensive and time consuming ``fishing expedition'' discovery process.
From my perspective, it has begun to look like our new law has worked
too well. Entrepreneurial trial lawyers
[[Page S12448]]
have begun filing similar claims in state court to avoid the new law's
safeguards against frivolous and abusive lawsuits. Instead of one set
of rules, we now have 51--one for the federal system and 50 different
ones in the states.
According to the Securities and Exchange Commission, this migration
of claims from federal court to state court ``may be the most
significant development in securities litigation'' since the passage of
the new law in 1995.
In fact, prior to passage of the new law in 1995, state courts rarely
served as the forum for securities fraud lawsuits. Now, more than 25
percent of all securities class actions are brought in state court. A
recent Price Waterhouse study found that the average number of state
court class actions filed in 1996 (the first year after the new law)
grew 335 percent over the 1991-1995 average. In 1997, state court
filings were 150 percent greater than the 1991-1995 average.
So, there has been a tremendous increase in state securities fraud
class actions. In fact, trial lawyers have testified to Congress that
they have an obligation to file securities fraud lawsuits in state
court if it provides a more attractive forum for their clients. Believe
it or not, plaintiffs' lawyers actually admit that they are attempting
to avoid federal law.
The increase in state court lawsuits also has prevented high-tech
companies from taking advantage of one of the most significant reforms
in the 1995 law--the safe harbor for forward-looking statements. Under
the 1995 law, companies which make predictive statements are exempt
from lawsuits based on those statements if they meet certain
requirements. Companies are reluctant to use the safe harbor and make
predictive statements because they fear that such statements could be
used against them in state court. This fear stifles the free flow of
important information to investors--certainly not a result we intended
when we passed the new law.
So today, the Senate will vote to send to the President one set of
rules for securities fraud cases. One uniform set of rules is critical
for our high-technology community and our capital markets.
Without this legislation, the productivity of the high-tech
industry--the fastest growing segment of our economy--will continue to
be hamstrung by abusive, lawyer-driven lawsuits. Rather than spend
their resources on R&D or creating new jobs, high-tech companies will
continue to be forced to spend massive sums fending off frivolous
lawsuits. That is unacceptable to this Senator.
When I first worked on this issue, executives at Intel Corporation
told me that if they had been hit with a frivolous securities lawsuit
early in the company's history, they likely never would have invented
the microchip. We should not let that happen to the next generation of
Intels.
This new law also will be important to our markets. Our capital
markets are the envy of the world, and by definition are national in
scope. Information provided by companies to the markets is directed to
investors across the United States and throughout the world.
Under the Commerce Clause of the U.S. Constitution, Congress has the
authority to regulate in areas affecting ``interstate commerce.'' I
cannot imagine a more classic example of what constitutes ``interstate
commerce'' than the purchase and sale of securities over a national
exchange.
Not only does Congress have the authority to regulate in this area,
it clearly is necessary and appropriate. Right now, in an environment
where there are 50 different sets of rules, companies must take into
account the most onerous state liability rules and tailor their conduct
to those rules. If the liability rules in one state make it easier for
entrepreneurial lawyers to bring frivolous lawsuits, that affects
companies and the information available to investors in all other
states. One uniform set of rules will eliminate that problem.
Mr. President, I again want to commend my colleagues for their work
on this important bill. I understand that this is a bi-partisan effort,
which has the support of the SEC and the Clinton Administration. I also
want to thank my colleagues over in the House--Chairman Bliley,
Representative Cox, and others who have worked so hard on this issue.
This is the culmination of a tremendous amount of work, and I think
that our capital markets, high-tech companies and our litigation system
will be better served because of it.
Mr. DODD. Mr. President, S. 1260, the Securities Litigation Uniform
Standards Act of 1998, is intended to create a uniform national
standard for securities fraud class actions involving nationally-traded
securities. In advocating enactment of uniform national standards for
such actions, I firmly believe that the national standards must be fair
ones that adequately protect investors. I hope that Senator D'Amato,
one of the architects of the Banking Committee's substitute, would
engage in a colloquy with me on this point.
Mr. D'AMATO. I would be happy to.
Mr. DODD. At a hearing on S. 1260 last October, the Securities and
Exchange Commission (SEC) voiced concern over some recent federal
district court decisions on the state of mind--or scienter--requirement
for pleading fraud that was adopted in the Private Securities
Litigation Reform Act of 1995 ('95 Reform Act or PSLRA). According to
the SEC, some federal district courts have concluded that the 1995
Reform Act adopted a pleading standard that was more rigorous than the
second circuit's, which, at the time of enactment of the PSLRA, had the
toughest pleading standards in the nation. Some of these courts have
also suggested that the '95 Reform Act changed not only the pleading
standard but also the standard for proving the scienter requirement. At
the time we enacted the PSLRA, every federal court of appeals in the
nation--ten in number--concluded that the scienter requirement could be
met by proof of recklessness.
Mr. D'AMATO. I am sympathetic to the SEC's concerns. In acting now to
establish uniform national standards, it is important that we make
clear our understanding of the standards created by the '95 Reform Act
because those are the standards that will apply if S. 1260 is enacted
into law. My clear intent in 1995, and my understanding today, is that
the PSLRA did not in any way alter the scienter standard in federal
securities fraud lawsuits. The '95 Reform Act requires plaintiffs, and
I quote, ``to state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.''
The '95 Reform Act makes no attempt to alter or define that state of
mind. In addition, it was my intent in 1995, and it is my understanding
today, that the 1995 Reform Act adopted the pleading standard applied
in the second circuit.
Mr. DODD. I agree with the comments of my colleague from New York. I,
too, did not intend for the PSLRA to alter the state of mind
requirement in securities fraud lawsuits or to adopt a pleading
standard more stringent than that of the second circuit. In fact, I
specifically stated during the legislative debates preceding and
following the President's veto that the 1995 Reform Act adopted the
second circuit's pleading standard. This continues to be my
understanding and intent today. Ensuring that the scienter standard
includes reckless misconduct is critical to investor protection.
Creating a higher scienter standard would lessen the incentives for
issuers of securities to conduct a full inquiry into potentially
troublesome areas and could therefore damage the disclosure process
that has made our markets a model for other nations. The U.S.
securities markets are the envy of the world precisely because
investors at home and abroad have enormous confidence in the way our
markets operate. Altering the scienter standard in the way envisioned
by some of these district court decisions could be very damaging to
that confidence.
Mr. D'AMATO. My friend from Connecticut is correct. The federal
securities laws must include a scienter requirement that adequately
protects investors. I was surprised and dismayed to learn that some
district court decisions had not followed the clear language of the
1995 Reform Act, which is the basis upon which the uniform national
standard in today's legislation will be created.
Mr. DODD. It appears that these district courts have misread the
language of the 1995 Reform Act's ``Statement of
[[Page S12449]]
Managers.'' As I made clear in the legislative debate following the
President's veto, however, the disputed language in the Statement of
Managers was simply meant to explain that the conference committee
omitted the Specter amendment because that amendment did not adequately
reflect existing second circuit caselaw on the pleading standard. I can
only hope that when the issue reaches the federal courts of appeals,
these courts will undertake a more thorough review of the legislative
history and correct these decisions. While I trust that the courts will
ultimately honor Congress' clear intent, should the Supreme Court
eventually find that recklessness no longer suffices to meet the
scienter standard, it is my intent to introduce legislation that would
explicitly restore recklessness as the pleading and liability standard
for federal securities fraud lawsuits. I imagine that I would not be
alone in this endeavor, and I ask my good friend from New York whether
he would join me in introducing such legislation?
Mr. D'AMATO. I say to the Senator from Connecticut that I would be
pleased to work with him to introduce such legislation under those
circumstances. I agree that investors must be allowed a means to
recover losses caused by reckless misconduct. Should the courts deprive
investors of this important protection, such legislation would be in
order.
Mr. DODD. I thank the Senator from New York, the chairman of the
Banking Committee, for his leadership on this bill and for engaging in
this colloquy with me. In proceeding to create uniform national
standards while some issues concerning the 1995 Reform Act are still
being decided by the courts, we must act based on what we intended and
understand the 1995 Reform Act to mean. As a sponsor of both the Senate
bill that became the 1995 Reform Act and the bill, S. 1260, that we are
debating today, I am glad that we have had this opportunity to clarify
how the PSLRA's pleading standards will function as the uniform
national standards to be created in S. 1260, the Securities Litigation
Uniform Standards Act of 1998.
Mr. SARBANES. Mr. President, I opposed the securities litigation
preemption bill when it was before the Senate. I am sorry to see that
the conference report now before us is no better. I continue to believe
that this bill is a solution in search of a problem, and that it will
do more harm than good.
Why do I call this bill a solution in search of a problem? Because
there has been no explosion in frivolous lawsuits filed in State court.
The supporters of this bill allege that class action lawsuits alleging
securities fraud have migrated from Federal court to State court since
1995. In fact, as I have pointed out previously, every study indicates
that the number of securities fraud class actions brought in State
court increased in 1996 but then declined in 1997.
Why do I say this bill will do more harm than good? Because this bill
likely will deprive individual investors of their opportunities to
bring their own actions in State court, separate and apart from class
actions. Although the bill's supporters suggest that it deals only with
class actions, in fact the scope of the bill is much broader. The
bill's definition of ``class action'' will pick up, against their will,
individuals who choose to file their own lawsuits under State law.
These shortcomings were not remedied in conference. Indeed, the one
improvement made to the bill on the Senate floor was weakened in
conference. Senators will remember that the Senate adopted an amendment
to this bill, offered by Senators Bryan, Johnson, Biden, and myself.
The amendment exempted State and local governments and their pension
funds from the coverage of the bill. The conference report now before
us weakens this provision. The conference report contains the House-
passed version, which requires that State and local governments be
named plaintiffs and authorize participation in the specific suit. This
version offers scant protection to State and local officials. The
Government Finance Officers Association, Municipal Treasurers
Association, National Association of Counties, National League of
Cities wrote to us concerning this provision on September 28, 1998.
Their letter states, ``many smaller governments and small pension plans
are unable to keep abreast of pending actions. Thus, any affirmative
steps on their part may not occur simply because they are unaware of
the existence of such a case.'' These organizations expressed their
strong support for the Senate version of this provision, only to be
ignored by the conference committee.
On a positive note, I am pleased that the Statement of the Conference
Committee makes clear that neither this bill nor the Litigation Reform
Act of 1995 alter the scienter standard applied by the courts under the
Securities Exchange Act of 1934. Courts in every Federal circuit in the
country hold that reckless conduct constitutes scienter sufficient to
establish a violation of section 10(b) and rule 10b-5, the principal
antifraud provision of the 1934 act. Chairman Levitt of the SEC has
described the recklessness standard as ``critically important'' to
``the integrity of the securities markets.''
For the reasons I have described, a broad coalition of State and
local officials, senior citizen groups, labor unions, academics, and
consumer groups oppose this bill. They oppose it because it may deprive
defrauded investors of remedies. The headline of a column by Ben Stein
in the USA Today newspaper of April 28, 1998, summarizes this
opposition: ``Investors, beware: Last door to fight fraud could
close.'' He wrote of this bill, ``state remedies . . . would simply
vanish, and anyone who wanted to sue would have to go into federal
court, where . . . impossible standards exist.'' He warned, ``this is
serious business for the whole investing public.'' the associations of
public officials I have cited are concerned about this bill because
they invest taxpayers' funds and public employees' pension funds in
securities, and fear they will be left without remedies if they are
defrauded. Over two dozen law professors, including such nationally
recognized securities law experts as John Coffee, Joel Seligman, and
Marc Steinberg, expressed their opposition in a letter earlier this
year. They oppose any legislation ``that would deny investors their
right to sue for securities fraud under state law.'' Similarly, the New
York State Bar Association opposes this bill. A report prepared by the
bar association's section on commercial and Federal litigation
concluded, ``the existing data does not establish a need for the
legislation'' and ``the proposed solution far exceeds any appropriate
level of remedy for the perceived problem.'' I would also like to point
out the opposition of the American Association of Retired Persons, the
Consumer Federation of America, the AFL-CIO, the American Federation of
State, County and Municipal Employees, and the United Mine Workers.
I urge Senators, out of caution, to vote against this conference
report. The recent bull market was the longest in history, and bull
markets tend to conceal investment frauds. Should the decline in stock
market values continue, it is likely that frauds will be uncovered. The
level of participation in the stock market by America's families is at
a record level, both directly through ownership of stocks and
indirectly through pension funds and mutual funds. Should this bill be
enacted, investors will find their State court remedies eliminated. In
too many cases, investors will be left without any effective remedies
at all. Such a result can only harm innocent investors, undermine
public confidence in the securities markets, and ultimately raise the
cost of capital for deserving American businesses.
Mr. President, I ask that an exchange of correspondence between
Chairman Levitt and Senators D'Amato, Gramm, and Dodd be printed in the
Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
U.S. Senate,
Washington, DC, March 24, 1998.
Hon. Arthur 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
[[Page S12450]]
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 & 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
amendment.*
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* We understand that Commissioner Johnson will write
separately to express his differing views. Commissioner Carey
is not participating.
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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.
Mr. THOMAS. Mr. President, I ask unanimous consent that the
conference report be agreed to, the motion to reconsider be laid upon
the table, and any statements relating to the conference report appear
at this point in the Record.
The PRESIDING OFFICER. Without objection, it is so ordered.
The conference report was agreed to.
Mr. THOMAS. I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. DASCHLE. Mr. President, I ask unanimous consent that the order
for the quorum call be rescinded.
The PRESIDING OFFICER (Mr. Thomas). Without objection, it is so
ordered.
Mr. DASCHLE. Mr. President, I want to congratulate the Presiding
Officer for his work in disposing of the conference report on S. 1260,
the securities litigation legislation. I appreciate very much that at
long last this legislation is now going to become law. This is a bill
that is widely supported on both sides of the aisle.
A number of Senators have had a lot of opportunities to take some
responsibility for the fact that this passed. I want to cite one
Senator, in particular, who deserves great credit. That is the Senator
from California, Senator Boxer. She has been a persistent advocate and
one who has been extraordinarily engaged in this matter now for some
time. I talked with her again this morning because she was calling
about the status of the legislation. I was able to report that it was
my expectation we would be able to finish our consideration of the bill
today, and thanks to the agreement we have been able to reach on both
sides of the aisle with Senators who have been as involved as the
Senator from Wyoming has, we have now reached this point.
I congratulate all who have had a part to play in our success, and
particularly the Senator from California, for her persistence, for her
leadership, and the effort she has made to bring us to this point.
I yield the floor and I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. DeWINE. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
____________________