[Congressional Record Volume 154, Number 82 (Monday, May 19, 2008)]
[Senate]
[Pages S4376-S4377]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. CORNYN:
  S. 3033. A bill to protect investors by fostering transparency and 
accountability of attorneys in private securities litigation; to the 
Committee on Banking, Housing, and Urban Affairs.
  Mr. CORNYN. Mr. President, today I am proud to introduce the 
Securities Litigation Attorney Accountability and Transparency Act. The 
Bill promotes transparency and court oversight in the selection and 
compensation of class counsel in securities class action litigation. As 
a result, this legislation helps to ensure that the lawyer for 
shareholder plaintiffs in securities class action lawsuits truly and 
faithfully represents the interests of the entire class, and not just 
their own interests and those of the large investors who are the lead 
plaintiffs. It has been said that the lead attorney in a class action 
suit serves a quasi-governmental role in that he seeks to enforce the 
law on behalf of a broad group of ordinary citizens and the investor 
community at large. Bringing transparency and accountability to 
securities class action litigation is important to protect the rights 
and interests of every American who owns stock.
  When a class action lawsuit is brought against a company for 
defrauding shareholders, one of the first steps is the selection of the 
lead plaintiff. The lead plaintiff is the shareholder who will actually 
sit in the courtroom and represent the interests of all of the 
shareholders in the litigation. The lead plaintiff selects the lawyer 
who will represent the class in the lawsuit, subject only to approval 
by the court.
  Under the Private Securities Litigation Reform Act of 1995, the lead 
plaintiff is supposed to be the shareholder ``that the court determines 
to be most capable of adequately representing the interests of class 
members.'' 15 U.S.C. 78u-4(a)(3)(B)(i). The PSLRA creates a presumption 
that, in general, the lead plaintiff should be the plaintiff with the 
``largest financial interest in the relief sought by the class.'' 15 
U.S.C. 78u-4(a)(3)(B)(iii)(bb). The theory behind this rule is that the 
party with the most at stake will most vigorously defend the interests 
of the entire class. In general, this theory has proven true, and the 
PSLRA is a substantial improvement over the law before the PSLRA, in 
which the lead plaintiff was generally whoever first filed the lawsuit.
  However, as recent events have shown, the PSLRA has itself proven 
subject to abuse. The Bill that I introduce today has been made 
necessary by recent scandals in which lawyers entered secret 
arrangements with lead plaintiffs to keep an unfair amount of

[[Page S4377]]

the lawsuit's proceeds between them, while shutting out ordinary 
investors. Essentially, the lead plaintiff agreed to an unreasonably 
high attorneys' fee, with the understanding that the law firm would 
funnel a portion of that fee back to the lead plaintiff. Thus, the 
lawyers were overcompensated and the lead plaintiffs received a 
disproportionate share of the proceeds of the lawsuit. Ordinary 
investors, who the class action system is designed to protect, bore the 
costs of these illegal arrangements.
  Today, William Lerach, once a name partner at the law firm of 
Milberg, Weiss, Bershad, Hynes & Lerach LLP, reports to the United 
States Penitentiary in Lompoc, California, after pleading guilty to 
entering into this type of illegal kickback arrangement with lead 
plaintiffs. Next month, his former law partner Melvyn Weiss will be 
sentenced for the same crime. But there is reason to believe that this 
criminal activity is not limited to a few bad actors. Indeed, Mr. 
Lerach, unrepentant about having defrauded thousands of investors out 
of millions of dollars, has tried to defend himself on the basis that 
``everybody does it.'' ``Believe me,'' Mr. Lerach told the Wall Street 
Journal, ``it was industry practice.''

  There have been many calls for reform to address this potentially 
widespread criminal practice. Last month, The Washington Post 
editorialized in response to the Milberg Weiss scandal that ``What is 
needed now is a sober discussion about how best to achieve a fairer, 
more balanced legal system through comprehensive tort reform.... Smart 
and ethical businesspeople and lawyers--and, yes, there are many who 
fit the bill--would be wise to start working together to craft such a 
fix.'' This bill opens that discussion.
  The bill that I introduce today seeks to prevent securities 
litigation abuse by making two major reforms that directly address the 
two core problems that have led to this scandal--the potential for 
backdoor arrangements between lead plaintiffs and class counsel, and 
the resulting risk that lead plaintiffs will enter fee agreements that 
pay the lawyers more than the market rate.
  The bill would require sworn certifications from lead plaintiffs and 
their attorneys disclosing: (a) any payments or promises of payment 
made by the attorney to the plaintiff in connection with the action; 
(b) any other legal representations of the plaintiff by the attorney; 
(c) any campaign contributions the attorney has made to any elected 
official with authority to retain counsel for the plaintiff; and (d) 
any other conflicts of interest. This disclosure would put an end to 
secret agreements where plaintiffs' lawyers pay kickbacks to the lead 
plaintiffs who retain them. These secret arrangements divorced the 
interests of both the lawyers and the lead plaintiffs from the 
interests of the class as a whole. Full disclosure will prevent this 
situation from recurring.
  The bill would also require courts to employ a competitive bidding 
process as one of the criteria in the approval of the lead class 
counsel. In current practice, courts usually defer to the lead 
plaintiff's choice of class counsel after reviewing the prospective 
lead counsel's prior work on the case, experience, knowledge, and 
resources. The bill would require that courts also consider the 
prospective lead counsel's fees, and have courts solicit competitive 
bids so that those fees are based on market rates. The class members 
deserve to be represented at a reasonable market rate. Money that goes 
to the lawyers is money that never makes it to the ordinary 
shareholders who are the victims of securities fraud. Currently, courts 
review attorneys' fees for reasonableness before the fees are paid at 
the conclusion of the case. This provision would allow courts to 
negotiate a reasonable fee at the threshold of the litigation.
  Finally, the bill would commission a study of the last 5 years of fee 
awards in securities class actions to determine the average hourly rate 
for lead counsel. Courts may be able to use this information to better 
rein-in excessive attorneys' fees.
  It is important that corporations be held accountable through 
securities fraud litigation when they cheat ordinary shareholders out 
of their hard-earned money. But it is equally important that attorneys 
be held accountable when they do the same thing. The recent securities 
litigation kickback scandals ought to spur Congress to action, 
especially because, at least according to Mr. Lerach, defrauding 
shareholders has become ``industry practice'' for securities 
plaintiffs' lawyers. Fortunately, Mr. Lerach and Mr. Weiss have been 
brought to justice, but their shareholder victims will never see all of 
the money out of which they were cheated by these attorneys' crimes. 
The Securities Litigation Attorney Accountability and Transparency Act 
will help prevent these crimes against ordinary Americans from being 
repeated in the future. I urge my Senate colleagues to quickly convene 
hearings on this very serious problem and move this new legislation 
forward.

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