[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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