[Congressional Record Volume 148, Number 104 (Friday, July 26, 2002)]
[Senate]
[Pages S7418-S7421]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


[[Page S7418]]
LEGISLATIVE HISTORY OF TITLE VIII OF HR 2673: THE SARBANES-OXLEY ACT OF 
                                  2002

  Mr. LEAHY. Mr. President, yesterday during my floor remarks on the 
final passage of H.R. 2673, the Sarbanes-Oxley Act, I requested 
unanimous consent that a section by section analysis and discussion of 
Title VIII, the Corporate and Criminal Fraud Accountability Act, which 
I authored, be included in the Congressional Record as part of the 
official legislative history of those provisions of H.R. 2673. That 
unanimous consent request was granted, but due to a clerical error, 
this essential legislative history was not printed in yesterday's 
Congressional Record.
  It is my understanding that this document will appear in yesterday's 
Congressional Record when the historical volume is compiled. However, 
in order to provide guidance in the legal interpretation of these 
provisions of Title VIII of H.R. 2673 before that volume is issued, I 
ask unanimous consent that the same document be printed in today's 
Congressional Record and be treated as legislative history for Title 
VIII, offered by the sponsor of these provisions, as if it had been 
printed yesterday.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

    Section-by-Section Analysis and Discussion of the Corporate and 
      Criminal Fraud Accountability Act (Title VIII of H.R. 2673)

       Title VIII has three major components that will enhance 
     corporate accountability. Its terms track almost exactly the 
     provisions of S. 2010, introduced by Senator Leahy and 
     reported unanimously from the Committee on the Judiciary. 
     Following is a brief section by section and a legal analysis 
     regarding its provisions.


                      SECTION-BY-SECTION ANALYSIS

     Section 801.--Title. ``Corporate and Criminal Fraud 
         Accountability Act.''
     Section 802. Criminal penalties for altering documents
       This section provides two new criminal statutes which would 
     clarify and plug holes in the current criminal laws relating 
     to the destruction or fabrication of evidence and the 
     preservation of financial and audit records.
       First, this section would create a new 20-year felony which 
     could be effectively used in a wide array of cases where a 
     person destroys or creates evidence with the intent to 
     obstruct an investigation or matter that is, as a factual 
     matter, within the jurisdiction of any federal agency or any 
     bankruptcy. It also covers acts either in contemplation of or 
     in relation to such matters.
       Second, the section creates a new 10-year felony which 
     applies specifically to the willful failure to preserve audit 
     papers of companies that issue securities. Section (a) of the 
     statute has two sections which apply to accountants who 
     conduct audits under the provisions of the Securities and 
     Exchange Act of 1934. Subsection (a)(1) is an independent 
     criminal prohibition on the destruction of audit or review 
     work papers for five years, as that term is widely understood 
     by regulators and in the accounting industry. Subsection 
     (a)(2) requires the SEC to promulgate reasonable and 
     necessary regulations within 180 days, after the opportunity 
     for public comment, regarding the retention of categories of 
     electronic and non-electronic audit records which contain 
     opinions, conclusions, analysis or financial data, in 
     addition to the actual work papers. Willful violation of such 
     regulations would be a crime. Neither the statute nor any 
     regulations promulgated under it would relieve any person of 
     any independent legal obligation under state or federal law 
     to maintain or refrain from destroying such records. In 
     Conference language was added that further clarified that the 
     rulemaking called for under the (b) provision was mandatory, 
     and gave the SEC authority to amend and supplement such rules 
     in the future, after proper notice and comment.
     Section 803.--Debts nondischargeable if incurred in violation 
         of securities fraud laws
       This provision would amend the federal bankruptcy code to 
     make judgments and settlements arising from state and federal 
     securities law violations brought by state or federal 
     regulators and private individuals non-dischargeable. Current 
     bankruptcy law may permit wrongdoers to discharge their 
     obligations under court judgments or settlements based on 
     securities fraud and securities law violations. The 
     section, by its terms, applies to both regulatory and more 
     traditional fraud matters, so long as they arise under the 
     securities laws, whether federal, state, or local.
       This provision is meant to prevent wrongdoers from using 
     the bankruptcy laws as a shield and to allow defrauded 
     investors to recover as much as possible. To the maximum 
     extent possible, this provision should be applied to existing 
     bankruptcies. The provision applies to all judgments and 
     settlements arising from state and federal securities laws 
     violations entered in the future regardless of when the case 
     was filed.
     Section 804.--Statute of limitations
       This section would set the statute of limitations in 
     private securities fraud cases to the earlier of two years 
     after the discovery of the facts constituting the violation 
     or five years after such violation. The current statute of 
     limitations for most private securities fraud cases is the 
     earlier of three years from the date of the fraud or one year 
     from the date of discovery. This provision states that it is 
     not meant to create any new private cause of action, but only 
     to govern all the already existing private causes of action 
     under the various federal securities laws that have been held 
     to support private causes of action. This provision is 
     intended to lengthen any statute of limitations under federal 
     securities law, and to shorten none. The section, by its 
     plain terms, applies to any and all cases filed after the 
     effective date of the Act, regardless of when the underlying 
     conduct occurred.
     Section 805.--Review and enhancement of criminal sentences in 
         cases of fraud and evidence destruction
       This section would require the United States Sentencing 
     Commission (``Commission'') to review and consider enhancing, 
     as appropriate, criminal penalties in cases involving 
     obstruction of justice and in serious fraud cases. The 
     Commission is also directed to generally review the U.S.S.G. 
     Chapter 8 guidelines relating to sentencing organizations for 
     criminal misconduct, to ensure that such guidelines are 
     sufficient to punish and deter criminal misconduct by 
     corporations. The Commission is asked to perform such reviews 
     and make such enhancements as soon as practicable, but within 
     180 days at the most.
       Subsection 1 requires that the Commission generally review 
     all the base offense level and sentencing enhancements under 
     U.S.S.G. Sec. 2J1.2. Subsection 2 specifically directs the 
     Commission to consider including enhancements or specific 
     offense characteristics for cases based on various factors 
     including the destruction, alteration, or fabrication of 
     physical evidence, the amount of evidence destroyed, the 
     number of participants, or otherwise extensive nature of the 
     destruction, the selection of evidence that is particularly 
     probative or essential to the investigation, and whether the 
     offense involved more than minimal planning or the abuse of a 
     special skill or position of trust. Subsection 3 requires the 
     Commission to establish appropriate punishments for the new 
     obstruction of justice offenses created in this Act.
       Subsections 4 and former subsection 5 of the Senate passed 
     bill, which was moved to Title 11 in Conference, require the 
     Commission to review guideline offense levels and 
     enhancements under U.S.S.G. Sec. 2B1.1, relating to fraud. 
     Specifically, the Commission is requested to review the fraud 
     guidelines and consider enhancements for cases involving 
     significantly greater than 50 victims and cases in which the 
     solvency or financial security of a substantial number of 
     victims is endangered. New Subsection 5 requires a 
     comprehensive review of Chapter 8 guidelines relating to 
     sentencing organizations. It is specifically intended that 
     the Commission's review of Section 8 be comprehensive, and 
     cover areas in addition to monetary penalties, additional 
     punishments such as supervision, compliance programs, 
     probation and administrative action, which are often 
     extremely important in deterring corporate misconduct.
     Section 806.--Whistleblower protection for employees of 
         publicly traded companies
       This section would provide whistleblower protection to 
     employees of publicly traded companies. It specifically 
     protects them when they take lawful acts to disclose 
     information or otherwise assist criminal investigators, 
     federal regulators, Congress, supervisors (or other proper 
     people within a corporation), or parties in a judicial 
     proceeding in detecting and stopping fraud. If the employer 
     does take illegal action in retaliation for lawful and 
     protected conduct, subsection (b) allows the employee to file 
     a complaint with the Department of Labor, to be governed by 
     the same procedures and burdens of proof now applicable in 
     the whistleblower law in the aviation industry. The employee 
     can bring the matter to federal court only if the Department 
     of Labor does not resolve the matter in 180 days (and there 
     is no showing that such delay is due to the bad faith of the 
     claimant) as a normal case in law or equity, with no amount 
     in controversy requirement. Subsection (c) governs remedies 
     and provides for the reinstatement of the whistleblower, 
     backpay, and compensatory damages to make a victim whole, 
     including reasonable attorney fees and costs, as remedies if 
     the claimant prevails. A 90 day statute of limitations for 
     the bringing of the initial administrative action before the 
     Department of Labor is also included.
     Section 807.--Criminal penalties for securities fraud
       This provision would create a new 10-year felony for 
     defrauding shareholders of publicly traded companies. The 
     provision would supplement the patchwork of existing 
     technical securities law violations with a more general and 
     less technical provision, with elements and intent 
     requirements comparable to current bank fraud and health care 
     fraud statutes. It is meant to cover any scheme or artifice 
     to defraud any person in connection with a publicly traded 
     company. The acts terms are not intended to encompass 
     technical definition in the securities

[[Page S7419]]

     laws, but rather are intended to provide a flexible tool to 
     allow prosecutors to address the wide array of potential 
     fraud and misconduct which can occur in companies that are 
     publicly traded. Attempted frauds are also specifically 
     included.


                               discussion

       Following is a discussion and analysis of the Act's Title 8 
     provisions.
       Section 802 creates two new felonies to clarify and close 
     loopholes in the existing criminal laws relating to the 
     destruction or fabrication of evidence and the preservation 
     of financial and audit records. First, it creates a new 
     general anti shredding provision, 18 U.S.C. Sec. 1519, with a 
     10-year maximum prison sentence. Currently, provisions 
     governing the destruction or fabrication of evidence are a 
     patchwork that have been interpreted, often very narrowly, by 
     federal courts. For instance, certain current provisions make 
     it a crime to persuade another person to destroy documents, 
     but not a crime to actually destroy the same documents 
     yourself. Other provisions, such as 18 U.S.C. Sec. 1503, have 
     been narrowly interpreted by courts, including the Supreme 
     Court in United States v. Aguillar, 115 S. Ct. 593 (1995), to 
     apply only to situations where the obstruction of justice can 
     be closely tied to a pending judicial proceeding. Still other 
     statutes have been interpreted to draw distinctions between 
     what type of government function is obstructed. Still other 
     provisions, such as sections 152(8), 1517 and 1518 apply to 
     obstruction in certain limited types of cases, such as 
     bankruptcy fraud, examinations of financial institutions, and 
     healthcare fraud. In short, the current laws regarding 
     destruction of evidence are full of ambiguities and technical 
     limitations that should be corrected. This provision is meant 
     to accomplish those ends.
       Section 1519 is meant to apply broadly to any acts to 
     destroy or fabricate physical evidence so long as they are 
     done with the intent to obstruct, impede or influence the 
     investigation or proper administration of any matter, and 
     such matter is within the jurisdiction of an agency of the 
     United States, or such acts done either in relation to or in 
     contemplation of such a matter or investigation. The fact 
     that a matter is within the jurisdiction of a federal agency 
     is intended to be a jurisdictional matter, and not in any way 
     linked to the intent of the defendant. Rather, the intent 
     required is the intent to obstruct, not some level of 
     knowledge about the agency processes of the precise nature of 
     the agency of court's jurisdiction. This statute is 
     specifically meant not to include any technical requirement, 
     which some courts have read into other obstruction of justice 
     statutes, to tie the obstructive conduct to a pending or 
     imminent proceeding or matter by intent or otherwise. It is 
     also sufficient that the act is done ``in contemplation'' of 
     or in relation to a matter or investigation. It is also meant 
     to do away with the distinctions, which some courts have read 
     into obstruction statutes, between court proceedings, 
     investigations, regulatory or administrative proceedings 
     (whether formal or not), and less formal government 
     inquiries, regardless of their title. Destroying or 
     falsifying documents to obstruct any of these types of 
     matters or investigations, which in fact are proved to be 
     within the jurisdiction of any federal agency are covered by 
     this statute. Questions of criminal intent are, as in all 
     cases, appropriately decided by a jury on a case-by-cases 
     basis. It also extends to acts done in contemplation of such 
     federal matters, so that the timing of the act in relation to 
     the beginning of the matter or investigation is also not a 
     bar to prosecution. The intent of the provision is 
     simple; people should not be destroying, altering, or 
     falsifying documents to obstruct any government function. 
     Finally, this section could also be used to prosecute a 
     person who actually destroys the records himself in 
     addition to one who persuades another to do so, ending yet 
     another technical distinction which burdens successful 
     prosecution of wrongdoers.1 6
       Second, Section 802 also creates a 10 year felony, 18 
     U.S.C. Sec. 1520, to punish the willful failure to preserve 
     financial audit papers of companies that issue securities as 
     defined in the Securities Exchange Act of 1934. The new 
     statute, in subsection (a)(1), would independently require 
     that accountants preserve audit work papers for five years 
     from the conclusion of the audit. Subsection (b) would make 
     it a felony to knowingly and willfully violate the five-year 
     audit retention period in (1)(a) or any of the rules that the 
     SEC must issue under (1)(b). The materials covered in 
     subsection (1)(b), which contains a mandatory requirement for 
     the SEC to issues reasonable rules and regulations, are 
     intended to include additional records which contain 
     conclusions, opinions, analysis, and financial data relevant 
     to an audit or review. Specifically included in such 
     materials are electronic communications such as emails and 
     other electronic records. The Conference added the ability of 
     the SEC to update its rules to specifically allow it to 
     capture additional types of records that could become 
     important in the future as technologies and practices of the 
     accounting industry change. The regulations are intended to 
     cover the retention of all such substantive material, whether 
     or not the conclusions, opinions, analyses or data in such 
     records support the final conclusions reached by the auditor 
     or expressed in the final audit or review so that state and 
     federal law enforcement officials and regulators and victims 
     can conduct more effective inquiries into the decisions and 
     determinations made by accountants in auditing public 
     corporations. Non-substantive materials, however, such as 
     administrative records, which are not relevant to the 
     conclusions or opinions expressed (or not expressed), need 
     not be included in such retention regulations. The language 
     of the provision is clear. The SEC ``shall'' and ``is 
     required'' to promulgate regulations relating to the 
     retention of the categories of items which are specifically 
     enumerated in the statutory provision. ``Reviews,'' as well 
     as audits are also recovered by both (a) and (b). When a 
     publicly traded company is involved, the precise name which 
     the auditor chooses to give to an engagement is not 
     important. Documents pertinent to the substance of such 
     financial audits or review should be preserved. Willful 
     violation of these regulations will also be a crime under 
     this section.
       In light of the apparent massive document destruction by 
     Andersen, and the company's apparently misleading document 
     retention policy, even in light of its prior SEC violations, 
     it is intended that the SEC promulgate rules and regulations 
     that require the retention of such substantive material, 
     including material which casts doubt on the views expressed 
     in the audit of review, for such a period as is reasonable 
     and necessary for effective enforcement of the securities 
     laws and the criminal laws, most of which have a five-year 
     statute of limitations. It should also be noted that criminal 
     tax violations, which many of these documents relate to, have 
     a six-year statute of limitations and the regulatory portion 
     of the Act requires a 7 year retention period. By granting 
     the SEC the power to issue such regulations, it is not 
     intended that the SEC be prohibited from consulting with 
     other government agencies, such as the Department of Justice, 
     which has primary authority regarding enforcement of federal 
     criminal law or pertinent state regulatory agencies. Nor is 
     it the intention of this provision that the general public, 
     private or institutional investors, or other investor or 
     consumer protection groups be excluded from the SEC 
     rulemaking process. These views of these groups, who often 
     represent the victims of fraud, should be considered at 
     least on an equal footing with ``industry experts'' and 
     others who participate in the rulemaking process at the 
     SEC.
       This section not only penalizes the willful failure to 
     maintain specified audit records, but also will result in 
     clear and reasonable rules that will require accountants to 
     put strong safeguards in place to ensure that such corporate 
     audit records are retained. Had such clear requirements and 
     policies been established at the time Andersen was 
     considering what to do with its audit documents, countless 
     documents might have been saved from the shredder. The idea 
     behind the statute is not only to provide for prosecution of 
     those who obstruct justice, but to ensure that important 
     financial evidence is retained so that law enforcement 
     officials, regulators, and victims can assess whether the law 
     was broken to begin with and, if so, whether or not such was 
     done intentionally, or with or without the knowledge or 
     assistance of an auditor.
       Section 803 amends the Bankruptcy Code to make judgments 
     and settlements based upon securities law violations non-
     dischargeable, protecting victims' ability to recover their 
     losses. Current bankruptcy law may permit such wrongdoers to 
     discharge their obligations under court judgments or 
     settlements based on securities fraud and other securities 
     violations. This loophole in the law should be closed to help 
     defrauded investors recoup their losses and to hold 
     accountable those who violate securities laws after a 
     government unit or private suit results in a judgment or 
     settlement against the wrongdoer. This provision is meant to 
     prevent wrongdoers from using the bankruptcy laws as a shield 
     and to allow defrauded investors to recover as much as 
     possible. To the maximum extent possible, this provision 
     should be applied to existing bankruptcies. The provision 
     applies to all judgments and settlements arising from state 
     and federal securities laws violations entered in the future 
     regardless of when the case was filed.
       State securities regulators have indicated their strong 
     support for this change in the bankruptcy law. Under current 
     laws, state regulators are often forced to ``reprove'' their 
     fraud cases in bankruptcy court to prevent discharge because 
     remedial statutes often have different technical elements 
     than the analogous common law causes of action. Moreover, 
     settlements may not have the same collateral estoppel effect 
     as judgments obtained through fully litigated legal 
     proceedings. In short, with their resources already stretched 
     to the breaking point, state regulators must plow the same 
     ground twice in securities fraud cases. By ensuring 
     securities law judgments and settlements in state cases are 
     non-dischargeable, precious state enforcement resources will 
     be preserved and directed at preventing fraud in the first 
     place.
       Section 804 protects victims by extending the statute of 
     limitations in private securities fraud cases. It would set 
     the statute of limitations in private securities fraud cases 
     to the earlier of five years after the date of the fraud or 
     two years after the fraud was discovered. The current statute 
     of limitations for most such fraud cases is three years from 
     the date of the fraud or one year after discovery, which can 
     unfairly limit recovery for defrauded investors in some 
     cases. It applies to all private securities fraud actions for 
     which private causes of actions are permitted and applies to 
     any case filed after the

[[Page S7420]]

     date of enactment, no matter when the conduct occurred. As 
     Attorney General Gregoire testified at the Committee hearing, 
     in the Enron state pension fund litigation the current short 
     statute of limitations has forced some states to forgo claims 
     against Enron based on alleged securities fraud in 1997 and 
     1998. In Washington state alone, the short statute of 
     limitations may cost hard-working state employees, 
     firefighters and police officers nearly $50 million in 
     lost Enron investments which they can never recover.
       Especially in complex securities fraud cases, the current 
     short statute of limitations may insulate the worst offenders 
     from accountability. As Justices O'Connor and Kennedy said in 
     their dissent in Lampf, Pleva. Lipkind, Prupis, & Petigrow v. 
     Gilbertson, 111 S. Ct. 2773 (1991), the 5-4 decision 
     upholding this short statute of limitations in most 
     securities fraud cases, the current ``one and three'' 
     limitations period makes securities fraud actions ``all but a 
     dead letter for injured investors who by no conceivable 
     standard of fairness or practicality can be expected to file 
     suit within three years after the violation occurred.'' The 
     Consumers Union and Consumer Federation of America, along 
     with the AFL-CIO and other institutional investors, strongly 
     support the bill, and views this section in particular as a 
     needed measure to protect investors.
       The experts agree with that view. In fact, the last two SEC 
     Chairmen supported extending the statute of limitations in 
     securities fraud cases. Former Chairman Arthur Levitt 
     testified before a Senate Subcommittee in 1995 that 
     ``extending the statute of limitations is warranted because 
     many securities frauds are inherently complex, and the law 
     should not reward the perpetrator of a fraud, who 
     successfully conceals its existence for more than three 
     years.'' Before Chairman Levitt, in the last Bush 
     administration, then SEC Chairman Richard Breeden also 
     testified before Congress in favor of extending the statute 
     of limitations in securities fraud cases. Reacting to the 
     Lampf opinion, Breeden stated in 1991 that ``[e]vents only 
     come to light years after the original distribution of 
     securities, and the Lampf cases could well mean that by the 
     time investors discover they have a case, they are already 
     barred from the courthouse.'' Both the FDIC and the State 
     securities regulators joined the SEC in calling for a 
     legislative reversal of the Lampf decisions at that time.
       In fraud cases the short limitations period under current 
     law is an invitation to take sophisticated steps to conceal 
     the deceit. The experts have long agreed on that point, but 
     unfortunately they have been proven right again. As recent 
     experience shows, it only takes a few seconds to warm up the 
     shredder, but unfortunately it will take years for victims to 
     put this complex case back together again. It is time that 
     the law is changed to give victims the time they need to 
     prove their fraud cases.
       Section 805 of the Act ensures that those who destroy 
     evidence or perpetrate fraud are appropriately punished. It 
     would require the Commission to consider enhancing criminal 
     penalties in cases involving obstruction of justice and 
     serious fraud cases where a large number of victims are 
     injured or when the victims face financial ruin.
       The Act is not intended as criticism of the current 
     guidelines, which were based on the hard work of the 
     Commission to conform with the goals of prior existing law. 
     Rather, it is intended to join the provisions of the Act 
     which substantially raise current statutory maximums in the 
     law as a policy expression that the former penalties were 
     insufficient to deter financial misconduct and to request the 
     Commission to review and enhance its penalties as appropriate 
     in that light.
       Currently, the U.S.S.G. recognize that a wide variety of 
     conduct falls under the offense of ``obstruction of 
     justice.'' For obstruction cases involving the murder of a 
     witness or another crime, the U.S.S.G. allow, by cross 
     reference, significant enhancements based on the underlying 
     crimes, such as murder or attempted murder. For cases when 
     obstruction is the only offense, however, they provide little 
     guidance on differentiating between different types of 
     obstruction. This provision requests that the Commission 
     consider raising the penalties for obstruction where no cross 
     reference is available and defining meaningful specific 
     enhancements and adjustments for cases where evidence and 
     records are actually destroyed or fabricated (and for more 
     serious cases even within that category of case) so as to 
     thwart investigators, a serious form of obstruction.
       This provision and Title 11, also require that the 
     Commission consider enhancing the penalties in fraud cases 
     which are particularly extensive or serious, even in addition 
     to the recent amendments to the Chapter 2 guidelines for 
     fraud cases. The current fraud guidelines require that the 
     sentencing judge take the number of victims into account, but 
     only to a very limited degree in small and medium-sized 
     cases. Specifically, once there are more than 50 victims, the 
     guidelines do not require any further enhancement of the 
     sentence. A case with 51 victims, therefore, may be treated 
     the same as a case with 5,000 victims. As the Enron matter 
     demonstrates, serious frauds, especially in cases where 
     publicly traded securities are involved, can affect thousands 
     of victims.
       In addition, current guidelines allow only very limited 
     consideration of the extent of devastation that a fraud 
     offense causes its victims. Judges may only consider whether 
     a fraud endangers the ``solvency or financial security'' of a 
     victim to impose an upward departure from the recommended 
     sentencing range. This is not a factor in establishing the 
     range itself unless the victim is a financial institution. 
     Subsection (5) requires the Commission to consider requiring 
     judges to consider the extent of such devastation in setting 
     the actual recommended sentencing range in cases such as the 
     Enron matter, when many private victims, including individual 
     investors, have lost their life savings. Finally this 
     provision requires a complete review of the Chapter 8 
     corporate misconduct guidelines, which should include not 
     only monetary penalties but other actions designed to deter 
     organizational crime, such as probation and compliance 
     enforcement schemes.
       Section 806 of the Act would provide whistleblower 
     protection to employees of publicly traded companies who 
     report acts of fraud to federal officials with the authority 
     to remedy the wrongdoing or to supervisors or appropriate 
     individuals within their company. Although current law 
     protects many government employees who act in the public 
     interest by reporting wrongdoing, there is no similar 
     protection for employees of publicly traded companies who 
     blow the whistle on fraud and protect investors. With an 
     unprecedented portion of the American public investing in 
     these companies and depending upon their honesty, this 
     distinction does not serve the public good.
       In addition, corporate employees who report fraud are 
     subject to the patchwork and vagaries of current state laws, 
     even though most publicly traded companies do business 
     nationwide. Thus, a whistleblowing employee in one state 
     (e.g., Texas, see supra) may be far more vulnerable to 
     retaliation than a fellow employee in another state who takes 
     the same actions. Unfortunately, companies with a corporate 
     culture that punishes whistleblowers for being ``disloyal'' 
     and ``litigation risks'' often transcend state lines, and 
     most corporate employers, with help from their lawyers, know 
     exactly what they can do to a whistleblowing employee under 
     the law. U.S. laws need to encourage and protect those who 
     report fraudulent activity that can damage innocent investors 
     in publicly traded companies. The Act is supported by groups 
     such as the National Whistleblower Center, the Government 
     Accountability Project, and Taxpayers Against Fraud, all of 
     whom have written a letter placed in the Committee record 
     calling this bill ``the single most effective measure 
     possible to prevent recurrences of the Enron debacle and 
     similar threats to the nation's financial markets.''
       This provision would create a new provision protecting 
     employees when they take lawful acts to disclose information 
     or otherwise assist criminal investigators, federal 
     regulators, Congress, their supervisors (or other proper 
     people within a corporation), or parties in a judicial 
     proceeding in detecting and stopping actions which they 
     reasonably believe to be fraudulent. Since the only acts 
     protected are ``lawful'' ones, the provision would not 
     protect illegal actions, such as the improper public 
     disclosure of trade secret information. In addition, a 
     reasonableness test is also provided under the subsection 
     (a)(1), which is intended to impose the normal reasonable 
     person standard used and interpreted in a wide variety of 
     legal contexts (See generally Passaic Valley Sewerage 
     Commissioners v. Department of Labor, 992 F. 2d 474, 478). 
     Certainly, although not exclusively, any type of corporate or 
     agency action taken based on the information, or the 
     information constituting admissible evidence at any later 
     proceeding would be strong indicia that it could support such 
     a reasonable belief. The threshold is intended to include all 
     good faith and reasonable reporting of fraud, and there 
     should be no presumption that reporting is otherwise, absent 
     specific evidence.
       Under new protections provided by the Act, if the employer 
     does take illegal action in retaliation for such lawful and 
     protected conduct, subsection (b) allows the employee to 
     elect to file an administrative complaint at the Department 
     of Labor, as is the case for employees who provide assistance 
     in aviation safety. Only if there is not final agency 
     decision within 180 days of the complaint (and such delay is 
     not shown to be due to the bad faith of the claimant) may he 
     or she may bring a de novo case in federal court with a jury 
     trial available (See United States Constitution, Amendment 
     VII; Title 42 United States Code, Section 1983). Should such 
     a case be brought in federal court, it is intended that the 
     same burdens of proof which would have governed in the 
     Department of Labor will continue to govern the action. 
     Subsection (c) of this section requires both reinstatement of 
     the whistleblower, backpay, and all compensatory damages 
     needed to make a victim whole should the claimant prevail. 
     The Act does not supplant or replace state law, but sets a 
     national floor for employee protections in the context of 
     publicly traded companies.
       Section 807 creates a new 25 year felony under Title 18 for 
     defrauding shareholders of publicly traded companies. 
     Currently, unlike bank fraud or health care fraud, there is 
     no generally accessible statute that deals with the specific 
     problem of securities fraud. In these cases, federal 
     investigators and prosecutors are forced either to resort to 
     a patchwork of technical Title 15 offenses and regulations, 
     which may criminalize particular violations of securities 
     law, or to treat the cases as generic mail or wire fraud 
     cases and to meet the technical elements of

[[Page S7421]]

     those statutes, with their five year maximum penalties.
       This bill, then, would create a new 25 year felony for 
     securities fraud--a more general and less technical provision 
     comparable to the bank fraud and health care fraud statutes 
     in Title 18. It adds a provision to Chapter 63 of Title 18 at 
     section 1348 which would criminalize the execution or 
     attempted execution of any scheme or artifice to defraud 
     persons in connection with securities of publicly traded 
     companies or obtain their money or property. The provision 
     should not be read to require proof of technical elements 
     from the securities laws, and is intended to provide needed 
     enforcement flexibility in the context of publicly traded 
     companies to protect shareholders and prospective 
     shareholders against all the types schemes and frauds which 
     inventive criminals may devise in the future. The intent 
     requirements are to be applied consistently with those found 
     in 18 U.S.C. Sec. Sec. 1341, 1343, 1344, 1347.
       By covering all ``schemes and artifices to defraud'' (see 
     18 U.S.C. Sec. Sec. 1344, 1341, 1343, 1347), new Sec. 1348 
     will be more accessible to investigators and prosecutors and 
     will provide needed enforcement flexibility and, in the 
     context of publicly traded companies, protection against all 
     the types schemes and frauds which inventive criminals may 
     devise in the future.

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