[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\
---------------------------------------------------------------------------
     \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.
     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.*
---------------------------------------------------------------------------
     * 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.

  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.

                          ____________________