[Congressional Record Volume 144, Number 146 (Wednesday, October 14, 1998)]
[Senate]
[Pages S12579-S12580]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




            RETENTION OF RECKLESSNESS STANDARD OF LIABILITY

  Mr. CLELAND. Mr. President, in the wake of final passage of S. 1260, 
the Securities Litigation Uniform Standards Act, I wish to emphasize my 
interest in the retention and reinforcement of the recklessness 
standard of liability and the Second Circuit Court of Appeals pleading 
standard in federal securities fraud cases. Securities law experts, 
including officials of the Securities and Exchange Commission, have 
recognized that the continued vitality of the federal securities laws 
and the health of the financial markets depend on the reaffirmation of 
this standard.
  It is essential that we be clear that reckless wrongdoing satisfies 
the scienter standard under the federal securities laws. The current 
standard that provides liability for reckless behavior should be 
explicitly reaffirmed; any suggestion that a victimized investor must 
establish actual knowledge by a defendant is not only legally incorrect 
but would undermine the integrity of our financial markets. The SEC has 
repeatedly stated in legal filings and Congressional testimony that the 
recklessness standard is critical to investor protection. Every federal 
appellate court that has considered this issue has held that 
recklessness suffices. The text of the 1995 Private Securities 
Litigation Reform Act did not change the scienter standard; Members of 
Congress

[[Page S12580]]

understood that raising the standard would have not only a chilling 
effect on private actions by defrauded individuals, but on regulatory 
actions by the SEC.
  Since the 1995 Reform Act, there has been some disagreement in the 
courts about whether Congress intended to elevate the pleading standard 
in securities fraud class actions above the previously existing Second 
Circuit pleading standard. It is clear to me that the answer to the 
question must be ``no''. I am pleased that the Senate Banking Committee 
Report on S. 1260, as well as the recorded colloquy on the Senate floor 
about the Second Circuit pleading standard, reaffirm this point.
  As I mentioned in my floor statement during debate on this 
legislation, I am not convinced that the federal preemption of state 
anti-fraud protections is a necessary step. I support the right of 
investors to seek legal remedies against those persons selling 
fraudulent securities. While I worked to streamline the regulatory 
process in Georgia, I opposed amendments to federal regulations that 
would have impaired the ability of a state to protect its investors. 
Here in the Senate, my focus remains the same. For this reason, I 
opposed S. 1260 during its initial Senate consideration. Nevertheless, 
if passage of this legislation is inevitable, let us at least make it 
absolutely clear that an investor's right to seek redress through civil 
litigation is not eliminated due to a failure to reaffirm the existing 
standard of recklessness in federal securities fraud cases.

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