[Congressional Record Volume 144, Number 151 (Wednesday, October 21, 1998)]
[Senate]
[Pages S12906-S12907]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
THE SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1998
Mr. REED. Mr. President, I speak today about passage of the
conference report on the Securities Litigation Uniform Standards Act of
1998, S. 1260. Recently, the report was agreed to by both chambers of
Congress and sent to the President for his signature.
I supported the Private Securities Litigation Reform Act of 1995 as
well as S. 1260. I did so because I recognize the national nature of
our markets as well as the need to encourage capital investment. I am
pleased that we have been able to further these goals through this
legislation. However, I am concerned by the attempt of a few to lessen
the obligations owed investors.
Particularly troubling has been the incorrect use of legislative
history to imply that a defrauded investor, now barred from discovery
prior to the adjudication of a motion to dismiss, must include, in a
pleading, evidence of conscious attempts to defraud by the defendant.
First, no such implication was made by the 1995 bill. Second, no bill
would have passed if such implications were included in the 1998
legislation. Thus, allegations of motive, opportunity, and
recklessness, as well as conscious fraud, continue to satisfy the
requirements of a 10b(5) pleading. This is the rigorous, but time-
tested standard for pleading which has been applied in the Second
Circuit. This is the standard that we adopted in 1995, and the national
standard created by S. 1260.
The legislative history most frequently cited incorrectly is the
Presidential veto message which accompanied his rejection of the 1995
bill; a veto which was overridden. I cannot understand why any weight
would be given to the President's interpretation of a bill he vetoed.
The purpose of any veto message is to portray the bill as negatively as
possible, to avoid a veto override. Accusations the President made
about the pleading standard were not only overblown, they were
specifically rejected during debate after the veto and prior to the
veto override.
Mr. President, as the Senate considered partially preempting state
law, many Senators, including the primary sponsors of the bill, made
clear that preemption would only occur if the federal standard insured
investors protections from fraud. Most importantly this means a proper
pleading standard and scienter requirement. This view was shared by
Chairman Levitt of the Securities Exchange Commission. This is
reflected in Chairman Levitt's testimony before Congress, in
correspondence between the SEC and the Senate sponsors of the bill, as
well as in statements by Banking, Housing and Urban Affairs Committee
Chairman D'Amato and the Ranking Member of the Securities Subcommittee,
Senator Dodd.
Recent events in foreign markets have made all too clear the havoc
that results when investors are not fully apprized of substantial risks
and rewards associated with investments. The Senate made clear that, in
enacting partial preemption, it would not tolerate implementation of
untested standards concerning the obligations owed investors. Nor,
might I add, did industry proponents of the bill ask for a lessening of
these standards.
In order to better illustrate this point, Mr. President, I ask that a
letter I sent to Members of the Conference Committee on S. 1260 be
printed in the Record.
The letter follows:
U.S. Senate,
Washington, DC, October 2, 1998.
Chairman Alfonse M. D'Amato,
Committee on Banking, Housing, and Urban Affairs, Washington,
DC.
Dear Mr. Chairman: I write to you as a conferee on the
Securities Litigation Uniform Standards Act of 1998, S. 1260.
As you know, I supported passage of this legislation, and
voted to override the President's veto of the Private
Securities Litigation Reform Act of 1995. While class action
suits are frequently the only financially feasible means for
small investors to recover damages, such lawsuits have been
subject to abuse. By creating national standards, such as
those in S. 1260, we recognize the national nature of our
markets and encourage capital formation.
However, it is essential to recognize that preemption marks
a significant change concerning the obligations of Congress.
When federal legislation was enacted to combat securities
fraud in 1933 and 1934, federal law augmented existing state
statutes. States were free to provide greater protections,
and many have. Many of our colleagues voted for the 1995
legislation knowing that if federal standards failed to
provide adequate investor protections, state law would
provide a necessary backup.
With passage of this legislation, Congress accepts full and
sole responsibility to ensure that fraud standards allow
truly victimized investors to recoup lost funds. Only a
meaningful right of action against those who defraud can
guarantee investor confidence in our national markets.
Recently, on the international stage, we have seen all too
clearly the problem of markets which fail to ensure that
consumers receive truthful, complete information.
Therefore, my support for this bill rests on the
presumption that the recklessness standard was not altered by
either the 1995 Act or this legislation. I strongly endorsed
the Senate Report which accompanies this legislation because
it stated clearly that nothing in the 1995 legislation
changed either the scienter standard or the most stringent
pleading standard, that of the Second Circuit. This language
was central to the legislation receiving the support of
Chairman Levitt of the Securities and Exchange Committee. It
was also central to my support.
As the Senate Banking Committee recognized at his second
confirmation hearing, Chairman Levitt has a lifetime of
experience as both an investor and regulator of markets. That
experience has led him to be the most articulate advocate of
the need for a recklessness standard concerning the scienter
requirement. In October 21, 1997 testimony before a
Subcommittee in the House of Representatives, Chairman Levitt
said, ``[E]liminating recklessness . . . would be tantamount
to eliminating manslaughter from the criminal laws. It would
be like saying you have to prove intentional murder or the
defendant gets off scot free. . . . If we were to lose the
reckless standard we would leave substantial numbers of the
investing public naked to attacks by . . . schemers.''
In testimony before a Senate Banking Subcommittee, on
October 29, 1997, Chairman Levitt further articulated his
position regarding the impact of a loss of the recklessness
standard. He said, ``A higher scienter standard (than
recklessness) would lessen the incentives for corporations to
conduct a full inquiry into potentially troublesome or
embarrassing areas, and thus would threaten the disclosure
process that has made our markets a model for nations around
the world.''
The danger posed by a loss of recklessness to our citizens
and markets is clear. We should not overrule the judgement of
the SEC Chair, not to mention every single Circuit Court of
Appeals that has adjudicated the issue. I would assume that
the motives which led to SEC and the Administration to insist
on the Senate Report language concerning recklessness would
also apply to their views of the Conference Report.
With regard to the pleading standard, some Members of
Congress, and, unfortunately, a minority of federal district
courts, have made much of the President's veto measure of the
1995 legislation. Specifically, some have pointed out that
the President vetoed the 1995 bill due to concerns that the
Conference Report adopted a pleading standard higher than
that of the Second Circuit, the most stringent standard at
that time. As I, and indeed a bipartisan group of Senators
and Representatives, made clear in the veto override vote,
the President overreached on this point. The pleading
standard was raised to the highest bar available, that of the
Second Circuit, but no further. In spite of the
Administration's 1995 veto, this preemption gained the
support of Chairman Levitt. It is, therefore, difficult to
understand how some can argue that the 1995 legislation
changed the pleading standard of the Second Circuit.
The reason for allowing a plaintiff to establish scienter
through a pleading of motive and opportunity or recklessness
is clear. As one New York Federal District Court has stated,
``a plaintiff realistically cannot be expected to plead a
defendant's actual state of mind.'' Since the 1995 Act allows
for a stay of discovery pending a defendant's motion to
dismiss, requiring a plaintiff to establish actual knowledge
of fraud or an intent to defraud in a complaint raises the
bar far higher than most legitimately defrauded investors can
meet.
Firms which advocate for S. 1260 do so based on the need to
eliminate the circumvention of federal standards and federal
stays of discovery through state court filings. They do not
argue for a lessening of the obligations owed investors. I am
concerned that should the conference committee include
language which could be interpreted to eviscerate the ability
of plaintiffs to satisfy the scienter standard by proof of
recklessness or to require plaintiffs, barred from discovery,
to adhere to a pleading standard requiring conscious
behavior, the bill will lose the support of Chairman Levitt
and many Members of Congress. I urge the Conference to
support language included in the Senate Report and move
forward with a bill that a bipartisan group in Congress can
support and the President can sign.
Sincerely,
Jack Reed,
U.S. Senator.
Mr. REED. Mr. President, I respectfully point out that the letter was
sent during the Conference Committee negotiations on the bill and
illustrates
[[Page S12907]]
the fact that the Senate was unwilling to alter positions it
established in Senate passage of S. 1260. I appreciate the opportunity
to clarify the debate surrounding this issue. I commend Chairman
D'Amato and Senator Dodd for their work on this bill. They have
furthered the goal of capital formation while ensuring proper
protections for consumers.
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