[Congressional Record Volume 144, Number 146 (Wednesday, October 14, 1998)]
[Senate]
[Pages S12589-S12590]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




            MISPRINT OF THE STATEMENT OF MANAGERS OF S. 1260

  Mr. SARBANES. Mr. President, I rise to address a question to the 
chairman of the Banking Committee, Senator D'Amato: it is my 
understanding that the joint explanatory statement of the committee of 
conference on S. 1260, as printed by the Government Printing Office in 
Report 105-803, and as it appeared in the Congressional Record for 
Friday, October 9, 1998, contained an error and was incomplete. Is that 
the Senator's understanding?
  Mr. D'AMATO. Yes, my colleague from Maryland, the ranking Democrat on 
the Banking Committee is correct. Due to a clerical error, the joint 
explanatory statement of the committee of conference on S. 1260, was 
printed without the final page. This page contained some essential 
explanatory information regarding the 1995 Securities Litigation Reform 
Act regarding scienter standards. Unfortunately, this same clerical 
error occurred in the version of the report language that appeared in 
the House Record at H10270. The official version of the joint 
explanatory statement was filed in the Senate on October 9th and did 
contain the page that was omitted by the GPO and the Congressional 
Record for October 9th.
  In order to clarify this situation, I ask for unanimous consent that 
the text of the explanatory statement be reprinted in its entirety.
  Mr. SARBANES. Is it the further understanding of the Chairman of the 
Banking Committee that page H10775 of the Congressional Record for 
October 13, 1998 contains a printing error?
  Mr. D'AMATO. The Senator from Maryland is correct. The Joint 
Explanatory Statement of the committee of conference begins on page 
H10774 of the

[[Page S12590]]

Congressional Record for October 13, 1998 and concludes on page H10775 
where the names of the House and Senate Managers appear. The material 
on page H10775 that follows the names of the Managers, although printed 
in the same typeface, is not part of the Joint Explanatory Statement. 
It does not represent the views of the Managers.
  Mr. SARBANES. So the correct version of the Joint Explanatory 
Statement is that which will appear in today's Senate Record?
  Mr. D'AMATO. The Senator is correct.
  There being no objection, the statement was ordered to be printed in 
the Record, as follows:

        The Securities Litigation Uniform Standards Act of 1998


                           Uniform Standards

       Title I of S. 1260, the Securities Litigation Uniform 
     Standards Act of 1998, makes Federal court the exclusive 
     venue for most securities class action lawsuits. The purpose 
     of this title is to prevent plaintiffs from seeking to evade 
     the protections that Federal law provides against abusive 
     litigation by filing suit in State, rather than in Federal, 
     court. The legislation is designed to protect the interests 
     of shareholders and employees of public companies that are 
     the target of meritless ``strike'' suits. The purpose of 
     these strike suits is to extract a sizeable settlement from 
     companies that are forced to settle, regardless of the lack 
     of merits of the suit, simply to avoid the potentially 
     bankrupting expense of litigating.
       Additionally, consistent with the determination that 
     Congress made in the National Securities Markets Improvement 
     Act \1\ (NSMIA), this legislation establishes uniform 
     national rules for securities class action litigation 
     involving our national capital markets. Under the 
     legislation, class actions relating to a ``covered security'' 
     (as defined by section 18(b) of the Securities Act of 1933, 
     which was added to that Act by NSMIA) alleging fraud or 
     manipulation must be maintained pursuant to the provisions of 
     Federal securities law, in Federal court (subject to certain 
     exceptions).
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     \1\ Public Law 104-290 (October 11, 1996).
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       ``Class actions'' that the legislation bars from State 
     court include actions brought on behalf of more than 50 
     persons, actions brought on behalf of one or more unnamed 
     parties, and so-called ``mass actions,'' in which a group of 
     lawsuits filed in the same court are joined or otherwise 
     proceed as a single action.
       The legislation provides for certain exceptions for 
     specific types of actions. The legislation preserves State 
     jurisdiction over: (1) certain actions that are based upon 
     the law of the State in which the issuer of the security in 
     question is incorporated \2\; (2) actions brought by States 
     and political subdivisions, and State pension plans, so long 
     as the plaintiffs are named and have authorized participation 
     in the action; and (3) actions by a party to a contractual 
     agreement (such as an indenture trustee) seeking to enforce 
     provisions of the indenture.
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     \2\ It is the intention of the managers that the suits under 
     this exception be limited to the state in which issuer of the 
     security is incorporated, in the case of a corporation, or 
     state of organization, in the case of any other entity.
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       Additionally, the legislation provides for an exception 
     from the definition of ``class action'' for certain 
     shareholder derivative actions.
       Title II of the legislation reauthorizes the Securities and 
     Exchange Commission (SEC or Commission) for Fiscal Year 1999. 
     This title also includes authority for the SEC to pay 
     economists above the general services scale.
       Title III of the legislation provides for corrections to 
     certain clerical and technical errors in the Federal 
     securities laws arising from changes made by the Private 
     Securities Litigation Reform Act of 1995 \3\ (the ``Reform 
     Act'') and NSMIA.
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     \3\ Public Law 104-67 (December 22, 1995).
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       The managers note that a report and statistical analysis of 
     securities class actions lawsuits authored by Joseph A. 
     Grundfest and Michael A. Perino reached the following 
     conclusion:
       The evidence presented in this report suggests that the 
     level of class action securities fraud litigation has 
     declined by about a third in federal courts, but that there 
     has been an almost equal increase in the level of state court 
     activity, largely as a result of a ``substition effect'' 
     whereby plaintiffs resort to state court to avoid the new, 
     more stringent requirements of federal cases. There has also 
     been an increase in parallel litigation between state and 
     federal courts in an apparent effort to avoid the federal 
     discovery stay or other provisions of the Act. This increase 
     in state activity has the potential not only to undermine the 
     intent of the Act, but to increase the overall cost of 
     litigation to the extent that the Act encourages the filing 
     of parallel claims.\4\
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     \4\ Grundfest, Joseph A. & Perino, Michael A., Securities 
     Litigation Reform: The First Year's Experience: A Statistical 
     and Legal Analysis of Class Action Securities Fraud 
     Litigation under the Private Securities Litigation Reform Act 
     of 1995, Stanford Law School (February 27, 1997).
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       Prior to the passage of the Reform Act, there was 
     essentially no significant securities class action litigation 
     brought in State court.\5\ In its Report to the President and 
     the Congress on the First Year of Practice Under the Private 
     Securities Litigation Reform Act of 1995, the SEC called the 
     shift of securities fraud cases from Federal to State court 
     ``potentially the most significant development in securities 
     litigation'' since passage of the Reform Act.\6\
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     \5\ Id. n. 18.
     \6\ Report to the President and the Congress on the First 
     Year of Practice Under the Private Securities Litigation 
     Reform Act of 1995, U.S. Securities and Exchange Commission, 
     Office of the General Counsel, April 1997 at 61.
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       The managers also determined that, since passage of the 
     Reform Act, plaintiffs' lawyers have sought to circumvent the 
     Act's provisions by exploiting differences between Federal 
     and State laws by filing frivolous and speculative lawsuits 
     in State court, where essentially none of the Reform Act's 
     procedural or substantive protections against abusive suits 
     are available.\7\ In California, State securities class 
     action filings in the first six months of 1996 went up 
     roughly five-fold compared to the first six months of 1995, 
     prior to passage of the Reform Act.\8\ Furthermore, as a 
     state securities commissioner has observed:

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

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


                                Scienter

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

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