[Senate Report 105-182]
[From the U.S. Government Publishing Office]
105th Congress Report
2d Session SENATE 105-182
_______________________________________________________________________
Calendar No. 355
THE SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1998
__________
R E P O R T
OF THE
COMMITTEE ON BANKING, HOUSING,
AND URBAN AFFAIRS
UNITED STATES SENATE
to accompany
S. 1260
together with
ADDITIONAL VIEWS
May 4, 1998.--Ordered to be printed
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
ALFONSE M. D'AMATO, New York, Chairman
PHIL GRAMM, Texas PAUL S. SARBANES, Maryland
RICHARD C. SHELBY, Alabama CHRISTOPHER J. DODD, Connecticut
CONNIE MACK, Florida JOHN F. KERRY, Massachusetts
LAUCH FAIRCLOTH, North Carolina RICHARD H. BRYAN, Nevada
ROBERT F. BENNETT, Utah BARBARA BOXER, California
ROD GRAMS, Minnesota CAROL MOSELEY-BRAUN, Illinois
WAYNE ALLARD, Colorado TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming JACK REED, Rhode Island
CHUCK HAGEL, Nebraska
Howard A. Menell, Staff Director
Steven B. Harris, Democratic Staff Director and Chief Counsel
Douglas R. Nappi, Counsel
Mitchell Feuer, Democratic Counsel
______
Subcommittee on Securities
PHIL GRAMM, Texas, Chairman
RICHARD C. SHELBY, Alabama CHRISTOPHER J. DODD, Connecticut
WAYNE ALLARD, Colorado TIM JOHNSON, South Dakota
ROBERT F. BENNETT, Utah JOHN F. KERRY, Massachusetts
LAUCH FAIRCLOTH, North Carolina RICHARD H. BRYAN, Nevada
Wayne A. Abernathy, Staff Director
Andrew Lowenthal, Democratic Professional Staff Member
(ii)
C O N T E N T S
__________
Page
Introduction..................................................... 1
History of the Legislation....................................... 1
Purpose and Scope................................................ 3
Section-by-Section Analysis of S. 1260: ``The Securities
Litigation Uniform Standards Act of 1998''..................... 8
Section 1. Short title....................................... 8
Section 2. Findings and purposes............................. 8
Section 3. Limitation on remedies............................ 9
Section 4. Applicability..................................... 9
Regulatory Impact Statement...................................... 9
Cost of Legislation.............................................. 9
Changes in Existing Law.......................................... 10
Additional Views................................................. 11
(iii)
Calendar No. 355
105th Congress Report
SENATE
2d Session 105-182
_______________________________________________________________________
THE SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1998
_______
May 4, 1998.--Ordered to be printed
_______________________________________________________________________
Mr. D'Amato, from the Committee on Banking, Housing, and Urban Affairs,
submitted the following
R E P O R T
[To accompany S. 1260]
Introduction
The Committee on Banking, Housing and Urban Affairs, to
which was referred the bill (S. 1260), to amend the Securities
Act of 1933 and the Securities Exchange Act of 1934 to limit
the conduct of securities class actions under State law, having
considered the same, reports favorably thereon with an
amendment in the nature of a substitute, and recommends that
the bill as amended do pass.
History of the legislation
On July 24, 1997, the Subcommittee on Securities held an
oversight hearing on the operation of the Private Securities
Litigation Reform Act (hereinafter referred to as either the
``PSLRA'' or the ``1995 Act'') which was passed over
presidential veto during the 104th Congress (PL-104-67). At
this hearing testimony was received from: Arthur Levitt,
Chairman of the Securities and Exchange Commission; Keith Paul
Bishop, Commissioner, California Department of Corporations;
Dr. Joseph A. Grundfest, Professor, Stanford Law School and
former Commissioner, Securities and Exchange Commission; Mr.
Michael A. Perino Lecturer, Stanford Law School; Mr. Joseph
Polizotto, Managing Director, Office of the General Counsel,
Lehman Brothers (on behalf of the Securities Industry
Association); Mr. Kenneth Janke, Sr., President and Chief
Executive Officer, National Association of Investors
Corporation; Mr. Richard Miller, General Counsel, American
Institute of Certified Public Accountants; Mr. Leonard Simon,
Milberg Weiss Bershad Hynes and Lerach (on behalf of the
National Association of Securities and Commercial Law
Attorneys); Mr. Brian Dovey, President, National Venture
Capital Association and; Mr. Robert C. Hinckley, Vice
President, Strategic Plans and Programs, Xilinx (on behalf of
the American Electronics Association).
As a result of the testimony received at the July 1997
hearing, Senators Gramm, Dodd, Boxer, Faircloth, Hagel and
Moseley-Braun, together with seven other Senators who are not
members of the Committee introduced on October 7, 1997, S.
1260, the ``Securities Litigation Uniform Standards Act of
1997'' (hereinafter referred to as either ``Uniform Standards''
or ``S. 1260'') Subsequently, a total of forty Senators
cosponsored the legislation, including twelve from the
Committee (Senators Gramm. Dodd, Boxer, Faircloth, Hagel,
Moseley-Braun, Bennett, Grams, Kerry, Mack, Allard and Enzi).
On October 29, 1997 and on February 23, 1998, the
Subcommittee on Securities held legislative hearings on S.
1260. Witnesses testifying on October 29, 1997 included: U.S.
Representative Rick White; U.S. Representative Anna Eshoo;
Arthur Levitt, Chairman, the Securities and Exchange Commission
(SEC); Isaac C. Hunt, Jr., Commissioner, Securities and
Exchange Commission; Robert C. Hinckley, Vice President,
Strategic Plans and Programs, Xilinx, who testified on behalf
of the American Electronics Association; Harry Smith, Mayor of
Greenwood, Mississippi, who testified on behalf of the National
League of Cities; Herbert Milstein of Cohen, Milstein, Hausfeld
& Toll, who testified on behalf of the National Association of
Securities and Commercial Law Attorneys; Professor Michael
Perino, Stanford Law School; Thomas E. O'Hara, Chairman, Board
of Trustees, the National Association of Investors Corporations
and Daniel Cooperman, Senior Vice President, General Counsel,
and Corporate Secretary, Oracle Corporation, who testified on
behalf of the Software Publishers Association.
Witnesses testifying on February 23, 1998 included: Boris
Feldman, Wilson, Sonsini, Goodrich & Rosati; Professor Richard
W. Painter, Cornell Law School; Michael H. Morris, Vice
President and General Counsel, Sun Microsystems; Mary Rouleau,
Legislative Director, Consumer Federation of America; J. Harry
Weatherly, Director of Finance, Mecklenburg County, North
Carolina, on behalf of the Government Finance Officers
Association; and John F. Olson, Gibson, Dunn & Crutcher.
On April 29, 1998, the Committee met in Executive Session
to consider and adopt an amendment in the nature of a
substitute that was offered by Chairman D'Amato and Senators
Gramm and Dodd. The Committee also adopted an amendment, by
voice vote, providing two findings to the bill. The amendment
was offered by Chairman D'Amato and Senators Gramm and Dodd.
The amendment makes clear the Committee's intention to enact
this legislation in order to prevent state laws from being used
to frustrate the operation and goals of the 1995 Reform Act.
The legislation was ordered reported from Committee by a vote
of 14-4. Senators Shelby, Sarbanes, Bryan and Johnson voted
against this legislation.
Purpose and Scope of Legislation
The need for this legislation became apparent during a
Securities Subcommittee hearing on July 24, 1997. This hearing
was held to review the status of the implementation and impact
of the ``Private Securities Litigation Reform Act of 1995.''
1 During the course of that hearing one disturbing
trend became apparent; namely, that there was a noticeable
shift in class action litigation from federal to state courts.
At this hearing, one witness pointed out the dangers of
maintaining differing federal and state standards of liability
for nationally-traded securities:
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\1\ Pub Law No. 104-67 (Dec. 22, 1995).
Disparate, and shifting, state litigation procedures
may expose issuers to the potential for significant
liability that cannot easily be evaluated in advance,
or assessed when a statement is made. At a time when we
are increasingly experiencing and encouraging national
and international securities offerings and listings,
and expending great effort to rationalize and
streamline our securities markets, this fragmentation
of investor remedies potentially imposes costs that
outweigh the benefits. Rather than permit or foster
fragmentation of our national system of securities
litigation, we should give due consideration to the
benefits flowing to investors from a uniform national
approach.2
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\2\ Testimony of Stephen M.H. Wallman, Commissioner, Securities and
Exchange Commission; submitted to the Subcommittee on Securities'
``Oversight Hearing on the Private Securities Litigation reform Act of
1995'' (the ``Reform Act Hearing''), July 24, 1997, p. 1.
Former SEC Commissioner Joseph Grundfest summarized this
post 1995 Act increase in state securities class actions in
testimony co-authored with his fellow Stanford Law School
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faculty member Michael Perino:
The relative stability of the aggregate litigation
rate masks a significant shift of activity from federal
to state court * * *. There is widespread agreement
that these figures represent a substantial increase in
state court litigation. Two phenomena seem to explain
the bulk of this shift. First, there appears to be a
``substitution effect'' whereby plaintiff's counsel
file state court complaints when the underlying facts
appear not to satisfy new, more stringent federal
pleading requirements, or otherwise seek to avoid the
substantive or procedural provisions of the Act. Second
plaintiffs appear to be resorting to increased parallel
state and federal litigation in an effort to avoid
federal discovery stays or to establish alternative
state court venues for settlement of federal
claims.3
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\3\ Joint prepared statement of Joseph A. Grundfest and Michael A.
Perino, ``Reform Act Hearing,'' July 24, 1997, p. 6.
While there was some disagreement as to the exact size of
the increase in state class-action filings, the overall
evidence received by the Committee is compelling.4
As one witness testified ``(t)he single fact is that state-
court class actions involving nationally traded securities were
virtually unknown prior to the [1995 Act]; they are brought
with some frequency now.'' 5
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\4\ ``* * * the apparent shift to state court may be the most
significant development in securities litigation post-Reform Act.''
Securities and Exchange Commission, Report to the President and the
Congress on the First Year of Practice Under the Private Securities
Litigation Reform Act of 1995, p. 69 (1997); see also Statement of
Senator Phil Gramm, Senate Subcommittee on Securities Hearing, February
23, 1998, entering into the record materials submitted by Price,
Waterhouse, LLP documenting both the rise in state securities class
action cases and the changing nature of those cases; see also Michael
A. Perino, Fraud and Federalism: Preempting Private State Securities
Fraud Causes of Action, Stanford Law Review (forthcoming 1998),
manuscript at 31, n. 127; see also Joseph A. Grundfest and Michael A.
Perino; Securities Litigation Reform: The First Year's Experience
(Release 97.1), Summary of Major Findings, p. ii-iii; Stanford Law
School; February 27, 1997.
\5\ Written testimony of John F. Olson of Gibson, Dunn & Crutcher,
``Hearing on S. 1260,'' February 23, 1998, p. 5.
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Further, the Committee has found that this state class-
action trend has had an impact beyond the number of, and dollar
amounts involved in, the class actions filed. This trend has
created a ripple-effect that has inhibited small, high-growth
companies in their efforts to raise capital, and has damaged
the overall efficiency of our capital markets.6
Specifically, the increased risk of state court class actions
has had a chilling effect on the use of the ``safe-harbor'' and
other important provisions of the 1995 Act.7 The
safe harbor was intended to help get valuable financial
forecasts and forward-looking information to investors, so that
these investors could make decisions with as much information
as possible; as Thomas O'Hara of the National Association of
Investors Corporation (``NAIC''), testified:
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\6\ Joint prepared statement of Joseph A. Grundfest and Michael A.
Perino, ``Reform Act Hearing,'' July 24, 1997, p. 6.
\7\ See, e.g., Prepared statement of Michael Morris, Vice President
and General Counsel, Sun Microsystems, ``Hearing on S. 1260,'' February
23, 1998.
The key to becoming successful with high-tech
investments is a willingness to recognize--and
tolerate--the inherent volatility of the business and
access to crucial forward-looking information so an
investor can make a wise decision.8
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\8\ Written statement of Thomas E. O'Hara, Chairman, NAIC,
``Hearing on S. 1260,'' October 29, 1997.
A number of witnesses at the July 1997 hearing advocated
legislation to establish uniform standards for private
securities class action litigation.9 This
legislation is an outgrowth of the July 1997 hearings and
subsequent investigation and oversight by the Committee.
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\9\ See, e.g., Grundfest and Perino, supra, note 2; Written
statement of Robert C. Hinckely, Vice President Strategic Plans and
Programs, XILINX, on behalf of The American Electronics Association,
the Reform Act Hearing, July 27, 1997, p. 17.
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Some critics of establishing a uniform standard of
liability have attacked such legislation as being an affront on
Federalism and contrary to the recent trend towards reinforcing
state rights.10 Proponents of the legislation have
argued that we live in an information age in which we have
truly national, if not international, securities markets and
that uniform standards are entirely consistent with Congress's
preeminent power over the regulation of interstate and foreign
commerce. The Committee, while sensitive to both these
considerations, found the interest in promoting efficient
national markets to be the more convincing and compelling
consideration in this context.
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\10\ Written statement of Hon. Harry Smith, Mayor, Greenwood,
Mississippi, on behalf of the National League of Cities, ``Hearing on
S. 1260,'' October 29, 1997, p. 8.
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We do have national markets for certain securities, and
fraudulent and abusive securities class action litigation
distorts the efficient operation of those markets and the
optimal allocation of available capital. Commissioner Keith P.
Bishop, then-California's primary state securities regulator,
testified before the Subcommittee on Securities in July, 1997,
that the preponderance of class action litigation in several
states is irrelevant to the true national nature of the
problem:
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.11
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\11\ Written statement of Hon. Keith Paul Bishop, Commissioner,
California Department of Corporations, ``Reform Act Hearing,'' July 27,
1998, p. 3.
The Committee emphasizes the important role that the local
``cop on the beat,'' i.e., the state securities regulators,
plays in a complementary state-federal securities regulatory
system. In recognition of this dual system, this legislation
uses the approach that the National Securities Markets
Improvement Act of 1996 (``NSMIA'') employed. The purpose of
NSMIA was described by SEC Chairman Levitt in testimony
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regarding that legislation:
The current system of dual federal-state regulation
is not the system that Congress or the Commission would
create today if we were designing a new system * * *.
An appropriate balance can be attained in the federal-
state arena that better allocates responsibilities,
reduces compliance costs and facilitates capital
formation, while continuing to provide for the
protection of investors. The bill's approach to the
division of responsibilities in the investment adviser
and investment company areas exemplifies such a
balance.
As introduced, the legislation incorporated the conceptual
framework of NSMIA (with respect to interplay of federal and
state regulation), while complementing, and hopefully giving
full force to the 1995 Act. The Committee strongly notes that
this legislation only covers precisely those securities defined
in the NSMIA, principally those securities that are traded on
national exchanges. During the course of the two hearings held
by the Subcommittee on Securities on this legislation, the
Subcommittee received a great deal of constructive advice about
how best to give effect to the 1995 Act.
Scienter
The Committee heard testimony from the Securities and
Exchange Commission and others regarding the scienter
requirement under a possible national standard of litigation
for nationally traded securities. The Committee understands
that this concern arises out of certain Federal district
courts' interpretation of the Private Securities Litigation
Reform Act of 1995 [PL 104-67]. In that regard, the Committee
emphasizes that the clear intent in 1995 and our continuing
intent in this legislation is that neither the PSLRA nor S.
1260 in any way alters the scienter standard in federal
securities fraud suits. It was the intent of Congress, as was
expressly stated during the legislative debate on the PSLRA,
and particularly during the debate on overriding the
President's veto, that the PSLRA establish a uniform federal
standard on pleading requirements by adopting the pleading
standard applied by the Second Circuit Court of Appeals. Indeed
the express language of the PSLRA 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'' (emphasis added). The Committee
emphasizes that neither the PSLRA nor S. 1260 makes any attempt
to define that state of mind.
Certain exceptions
The SEC, as well as other commentators,12 also
noted the need to exempt from the legislation shareholder-
initiated litigation based on breach of fiduciary duty of
disclosure, in connection with certain corporate actions, that
is found in the law of some states, most notably Delaware.
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\12\ See, e.g., Prepared statement of John F. Olson, ``Hearings on
S. 1260,'' Senate committee on Banking, Housing & Urban Affairs,
Subcommittee on Securities, February 23, 1998, pp. 8-13.
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The Committee is keenly aware of the importance of state
corporate law, specifically those states that have laws that
establish a fiduciary duty of disclosure. It is not the intent
of the Committee in adopting this legislation to interfere with
state law regarding the duties and performance of an issuer's
directors or officers in connection with a purchase or sale of
securities by the issuer or an affiliate from current
shareholders or communicating with existing shareholders with
respect to voting their shares, acting in response to a tender
or exchange offer, or exercising dissenters' or appraisal
rights.
In applying the uniform standards in this manner, the
Committee expressly does not intend for suits excepted under
this provision to be brought in venues other than in the
issuer's state of incorporation, in the case of a corporation,
or state of organization, in the case of an other entity.
Definition of ``Class Action''
The Subcommittee on Securities heard testimony from the
Securities and Exchange Commission and others that the
definition of class action originally drafted as part of S.
1260 would inadvertently include cases that were beyond the
intent of the legislation--such as certain types of individual
state private securities actions.
In response to these concerns, the Committee made several
significant changes to the definition of class action. Because
of the unique nature of the suits that the Committee has made
subject to the legislation's provisions, this definition cannot
simply track the exact language of Rule 23 of the Federal Rules
of Civil Procedure.
In order to ensure that individual state actions would not
be included as part of the bill's definitions, it was necessary
for the Committee to create a standard of demarcation between
individual actions appropriately brought in state court and
those actions that should be subject to the bill's provisions.
To address this goal, and to establish objective criteria in
the application of the definition, the Committee specifically
included a threshold number of fifty or more persons or
prospective class members as part of the definition of a class
action under this legislation.
Section 2(f)(1)(A)(i)(II) of the legislation provides a
definition that closely tracks the relevant provisions of Rule
23 of the Federal Rules of Civil Procedure in which a suit is
brought by representative plaintiffs on behalf of themselves
and other unnamed parties. Section 2(f)(1)(A)(i)(I), however,
provides that any single lawsuit is treated as a class action
if it seeks damages on behalf of more than fifty persons and
questions of law or fact common to the prospective class
predominate, without regard to questions of individualized
reliance. The predominance requirement, modeled on Rule 23, is
included to assure that claims that are not closely related,
but that are included in a single proceeding only for the
purposes of convenience are not treated as a class action. The
Committee is conscious, however, of the danger that the
predominance requirement could be used as a loophole to bring a
single suit that names many plaintiffs. If such a suit is
brought under a state law that requires proof of each
individual plaintiff's reliance on a defendant's alleged
misstatement or omission, the necessity of proving reliance on
an individual basis might mean that common questions would not
predominate and the suit accordingly would not be treated as a
class action.
Indeed the Supreme Court stated in Basic, Inc. v. Levinson
[485 U.S. 224, 242, (1988)] that ``requiring proof of
individualized reliance from each member of the proposed
plaintiff class effectively would * * * prevent plaintiffs from
proceeding with a class action, since individual issues would *
* * overwhelm the common ones.'' To avoid this problem, the
definition provides that the predominance inquiry must be
undertaken without reference to issues of individualized
reliance, so that the necessity of proving reliance on an
individual basis would not defeat treatment of the suit as a
class action.
Section 2(f)(1)(A)(ii) is a definition of class action that
is intended to prevent evasion of the bill through the use of
so-called ``mass actions.'' These kinds of actions are now
brought in product liability, environmental tort and similar
cases. In practice, such suits may function very much like
traditional class actions and, because they involve many
plaintiffs, they may have a very high settlement value. They
accordingly may be abused by lawyers who seek to evade the
provisions of this Act in order bring coercive strike suits.
Subpart (A)(ii) addresses the Committee's concern by
including in the definition of class action any group of
lawsuits that are filed or pending in the same court, that in
the aggregate seek damages on behalf of more than fifty
persons, that involve common questions of law or fact, and
which are joined, consolidated, or otherwise proceed as a
single action for any purpose. The Committee does not intend
for the bill to prevent plaintiffs from bringing bona fide
individual actions simply because more than fifty persons
commence the actions in the same state court against a single
defendant.
However, the provisions of the bill would apply where the
court orders that the suits be joined, consolidated, or
otherwise proceed as a single action at the state level. The
Committee also notes that when such suits proceed as a single
action in state court, it is frequently at the request of the
plaintiffs.
The class action definition has been changed from the
original text of S. 1260 to ensure that the legislation does
not cover instances in which a person or entity is duly
authorized by law, other than a provision of state or federal
law governing class action procedures, to seek damages on
behalf of another person or entity. Thus, a trustee in
bankruptcy, a guardian, a receiver, and other persons or
entities duly authorized by law (other than by a provision of
state or federal law governing class action procedures) to seek
damages on behalf of another person or entity would not be
covered by this provision.
Finally, while the Committee believes that it has
effectively reached those actions that could be used to
circumvent the reforms enacted by Congress in 1995 as part of
the Private Securities Litigation Reform Act, it remains the
Committee's intent that the bill be interpreted broadly to
reach mass actions and all other procedural devices that might
be used to circumvent the class action definition.
section-by-section analysis
Section 1. Short title
The short title of the bill is the Securities Litigation
Uniform Standards Act of 1998.
Section 2. Findings
Congress finds that in order to avoid the thwarting of the
purpose of the Private Securities Litigation Reform Act of
1995, national standards for nationally traded securities must
be enacted, while preserving the appropriate enforcement powers
of state regulators, and the right of individuals to bring
suit.
Section 3. Limitation on remedies
Subsection 3(a) amends Section 16 of the Securities Act of
1933 as follows:
Subsection 16(a) is a savings clause.
Subsection 16(b) provides that no class action based on
State law alleging fraud in connection with the purchase or
sale of covered securities may be maintained in State or
Federal court.
Subsection 16(c) provides that any class action described
in Subsection (b) that is brought in a State court shall be
removable to a Federal district court, and may be dismissed
pursuant to the provisions of subsection (b).
Subsection 16(d) of the new section 16 provides for the
preservation of certain law suits brought under State law
affecting conduct of corporate officers with respect to certain
corporate actions, including tender offers, exchange offers or
the exercise of dissenter's or appraisal rights.
Subsection 16(e) of the new section 16 reemphasizes that
State securities commissions retain their jurisdiction to
investigate and bring enforcement actions.
Subsection 16(f) of the new section 16 provides for
definitions under the section, including definitions of ``class
action,'' ``covered security,'' and ``affiliate of the
issuer.'' ``Class action'' is defined so as to capture mass
actions, but to exclude shareholder derivative actions and
actions by a group of less than 50 individuals or entities.
``Covered securities'' includes securities satisfy the
definition of that term given in subsection 18(b)(1) and
18(b)(2) of the Securities Act of 1933.
Subsection 3(b) amends Section 28 of the Securities
Exchange Act of 1934 so as to effect the changes to that
section substantially similar to, and consistent with, the
amendments that subsection 3(a) makes to the Securities Act of
1933.
Section 4. Applicability
The changes in law made by the bill do not affect any court
action commenced before and pending on the date of enactment of
the legislation.
regulatory impact statement
This legislation is designed to address and unforeseen
``loophole'' in the 1995 Private Securities Litigation Act,
that has blocked that law from accomplishing its stated goal of
reforming private securities litigation. Because S.1260 seeks
to achieve further reforms in the private securities litigation
system, the Committee believes that this legislation will have
little or no regulatory impact.
cost of legislation
U.S. Congress,
Congressional Budget Office,
Washington, DC, May 1, 1998.
Hon. Alfonse M. D'Amato,
Chairman, Committee on Banking, Housing and Urban Affairs,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 1260, the Securities
Litigation Uniform Standards Act of 1998.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Kathleen
Gramp (for federal costs), and Pepper Santalucia (for the state
and local impact).
Sincerely,
June E. O'Neill, Director.
Enclosure.
congressional budget office cost estimate
S. 1260--Securities Litigation Uniform Standards Act of 1998
S. 1260 would amend existing law related to class actions
involving certain types of securities fraud. Under this bill,
certain class actions could not be based on state law and could
only be maintained in federal courts.
CBO estimates that implementing S. 1260 would have no
significant impact on the federal budget. Recent data on the
number of securities-related class actions brought under state
law suggest that fewer than 100 cases per year might shift to
federal courts as a result of this bill. Although class actions
often involve complex and time-consuming issues, CBO estimates
that the federal court system would not incur significant costs
to process that number of new cases. Because S. 1260 would not
affect direct spending or receipts, pay-as-you-go procedures
would not apply.
S. 1260 contains an intergovernmental mandate as defined in
the Unfunded Mandates Reform Act of 1995 (UMRA) because it
would preempt state securities laws. However, CBO estimates
that the impact on state budgets would not be significant. The
bill contains no private-sector mandates as defined in UMRA.
The CBO staff contacts for this estimate are Kathleen Gramp
(for federal costs), who can be reached at 226-2860, and Pepper
Santalucia (for the state and local impact), who can be reached
at 225-3220. This estimate was approved by Robert A. Sunshine,
Deputy Assistant Director for Budget Analysis.
changes in existing law
In the opinion of the Committee, it is necessary to
dispense with the requirements of paragraph or subsection 12 of
rule XXVI of the Standing Rules of the Senate in order to
expedite the business of the Senate.
ADDITIONAL VIEWS OF SENATORS SARBANES, BRYAN AND JOHNSON
i. introduction
In reporting the Securities Litigation Uniform Standards
Act (``Uniform Standards Bill'), the Senate Banking Committee
once again sends to the Senate floor a solution in search of a
problem. The Committee majority seeks to stem a supposed
epidemic of frivolous securities fraud suits being filed in
State court. The majority operates on the assumption that
securities fraud class actions filed in State court are being
used to evade the provisions of the Private Securities
Litigation Reform Act of 1995 (``Litigation Reform Act''). This
assumption is supported neither by empirical studies of State
court litigation nor by the record pace of securities
offerings. Undeterred by the evidence, the majority would
preempt securities fraud causes of action under State law. The
Uniform Standards Bill would establish the provisions of the
Litigation Reform Act as a uniform standard for litigation
involving securities traded on the national stock exchanges.
In so doing, the majority turns a blind eye both to the
shortcomings of the Litigation Reform Act and to the flaws of
the Uniform Standards Bill. We opposed the Litigation Reform
Act because we were concerned that it was not sufficiently
protective of investors. Developments since its enactment
heighten rather than lessen that concern. We oppose the Uniform
Standards Bill both because of its overly broad reach and
because its sponsors fail to take this opportunity to correct
the flaws of the Litigation Reform Act. Should the Uniform
Standards Bill be enacted, investors will find their State
court remedies eliminated. We fear that in too many cases,
investors will be left without any effective remedies at all.
Such a result can only harm innocent investors, undermine
public confidence in the securities markets, and ultimately
raise the cost of capital for deserving American businesses.
For these reasons, a broad coalition of groups representing
investors, public officials, workers and pension funds,
including AARP, AFSCME, Consumer Federation of America, the
Government Finance Officers Association, the National
Association of State Retirement Administrators, the National
League of Cities, the New York State Bar Association, the U.S.
Conference of Mayors, and the United Mine Workers, opposes this
Bill. Over two dozen law professors have expressed their
opposition as well.\1\
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\1\ See January 23, 1998 Letter to Senators and Members of Congress
from Professors Ian Ayres, Stephen M. Bainbridge, Douglas M. Branson,
William W. Bratton, John C. Coffee, Jr., James D. Cox, Charles M.
Elson, Merritt B. Fox, Tamar Frankel, Theresa A. Gabaldon, Nicholas L.
Georgakopoulos, James J. Hanks, Jr., Kimberly D. Krawiec, Fred S.
McChesney, Lawrence E. Mitchell, Donna M. Nagy, Jennifer O'Hare,
Richard W. Painter, William H. Painter, Margaret V. Sachs, Joel
Seligman, D. Gordon Smith, Marc I. Steinberg, Celia R. Taylor, Robert
B. Thompson, Manning G. Warren III, and Cynthia A. Williams.
---------------------------------------------------------------------------
ii. myth of state court loophole
The rationale for this legislation rests on a misconception
of the facts. The sponsors of the Bill assert that securities
fraud class actions have migrated from Federal court to State
court in order to evade the provisions of the Litigation Reform
Act. In particular, the Bill's supporters maintain that class
actions are being brought in State court to avoid the Act's
stay of discovery and safe harbor for forward looking
statements. In fact, every empirical study of securities fraud
class action filings reaches the same conclusion: while State
court securities filings may have increased in 1996, they
decreased in 1997.
For example, a study done by the National Economic Research
Associates (NERA), a consulting firm, found that the number of
securities class action suits filed in State courts during the
first 10 months of 1996 increased to 79 from 48 filed during
the same period in 1995.\2\ In an update released in the summer
of 1997, however, NERA found that the number of securities
class actions filed in State courts during the first four
months of 1997 declined to 19, down from 40 filed in the same
period in 1996.\3\ In July 1997, Professor Joseph Grundfest and
Michael Perino of Stanford Law School testified that the number
of issuers sued only in State class actions declined from 33 in
1996 to an annualized rate of 18 in 1997.\4\ A ``Price
Waterhouse Securities Litigation Study'' posted by that
accounting firm on its Internet site corroborated NERA's
findings. Using data compiled by Securities Class Action Alert
based on the number of defendants sued, Price Waterhouse
reported that the number of State court securities class
actions increased from 52 in 1995 to 66 in 1996, but then
declined to 44 in 1997. That was lower than the number of such
actions in 1991 or 1993. The Study found ``the total number of
cases filed in 1997 shows little to no change from the average
number of lawsuits filed in the period 1991 through 1995.''
Data provided to the Committee by Price Waterhouse on February
20, 1998 also demonstrate that State court filings declined in
1997. Measured by the number of cases filed, the number of
State securities class actions declined from 71 in 1996 to 39
in 1997. As the SEC testified in October 1997, ``recent data *
* * tends to show that the migration of securities class
actions from federal to state court may have been a transient
phenomenon.''
---------------------------------------------------------------------------
\2\ See CRS Report for Congress, ``Securities Litigation Reform:
Unfinished Business?,'' April 4, 1998, at 2.
\3\ Id. at 6.
\4\ Joint Written Testimony of Joseph A. Grundfest and Michael A.
Perino before the Subcommittee on Securities, July 24, 1997, at Figure
1.
---------------------------------------------------------------------------
Not only do the Bill's supporters fail to address the
decline in State court securities actions in 1997, they fail to
recognize the geographic concentration of such actions. Many
securities class actions are brought under the ``fraud on the
market'' theory. Under this theory, each investor need not
prove his or her individual reliance on the fraudulent
statement.\5\ Appellate courts in just four States have
recognized the ``fraud on the market'' theory in securities
actions.\6\ The General Counsel of the SEC has suggested
``eliminating the requirement of reliance makes possible a
class action for securities suits.'' \7\ Securities fraud class
actions therefore may not be possible in the great majority of
States. California is one of the few States that recognizes the
``fraud on the market'' theory.\8\ Not surprisingly, the great
majority of securities fraud class actions filed in State court
are filed in California. According to the SEC, roughly 60% of
State securities class actions brought since enactment of the
1995 Act were brought in California.\9\ While we do not believe
that any one State should set a ``pro-plaintiff'' national
standard for securities fraud, we also do not believe that
Congress need second-guess the judgments of California at
balancing the interests of its local businesses versus those of
its local investors. If California law makes it too easy to sue
California businesses, then the California legislature should
change the law.
---------------------------------------------------------------------------
\5\ See Basic, Inc. v. Levinson, 485 U.S. 224 (1988), adopting the
``fraud on the market'' theory for Federal securities fraud actions.
\6\ Richard H. Walker, ``The New Securities Class Action: Federal
Obstacles, State Detours,'' 39 Ariz. L. Rev. 641, 678 & n.272 (Summer
1997).
\7\ Id. at 678.
\8\ Mirkin v. Wasserman, 858 P.2d 568, 580 (Cal. 1993).
\9\ Testimony of U.S. Securities and Exchange Commission before the
Subcommittee on Securities, October 29, 1997, at 12.
---------------------------------------------------------------------------
The record volume of securities offerings is further
evidence that investors feel they are receiving adequate
information on which to base investment decisions. The $39
billion raised by initial public offerings in 1997 is a record
second only to the nearly $50 billion raised in
1996.10 Total underwriting of corporate equities and
bonds in 1997 hit a record $1.3 trillion.11 Market
capitalization and trading volume on the national securities
exchanges are also at record highs. By every measure, the
nation's securities markets remain preeminent in the world.
Whatever the cost of securities litigation, at either the
Federal or State level, it does not interfere with the
functioning of America's securities markets.
---------------------------------------------------------------------------
\10\ ``IPO Market Shows its Muscle for a Second-Straight Year,''
Wall Street Journal, January 2, 1998.
\11\ ``An Overview of the Capital Markets and Securities Industry
in 1997,'' Securities Industry Association, January 23, 1998, at 4.
---------------------------------------------------------------------------
Unable to demonstrate a need for this legislation,
supporters of preemption next argue that the mere threat of
State litigation is a problem. In particular, they argue that
the threat of State litigation is deterring companies from
making the kind of ``forward-looking statements'' that would be
protected from Federal litigation under the ``safe harbor''
contained in the 1995 Act. We were concerned that the safe
harbor went too far and might very well protect fraudulent
statements from liability. Regardless of one's views of the
safe harbor, the evidence is that companies are in fact using
it. A study of 547 high-tech firms by Professors at the
University of Michigan and Stanford Business Schools found ``a
significant increase in both the frequency of firms issuing
forecasts and the number of forecasts issued following
enactment of the Reform Act.'' 12
---------------------------------------------------------------------------
\12\ Marilyn Johnson, Ron Kasznik and Karen K. Nelson, ``The Impact
of Securities Litigation Reform on the Disclosure of Forward-Looking
Information by High Technology Firms, January 5, 1998.
---------------------------------------------------------------------------
Proponents of preemption also cite the possibility that
State actions may be used to circumvent the stay on discovery
pending a motion to dismiss that was enacted by the Litigation
Reform Act. We agree that State court filings should not be
used by plaintiffs to ``game the system,'' to enjoy the best of
both the State and Federal securities laws. Discovery is an
extensive, expensive proposition and should not be used to
drive up the settlement value of weak cases. In fact, some
State courts have voluntarily imposed stays on discovery in
circumstances where the Federal courts would do
so.13 There is certainly no need to preempt State
law causes of action generally in order to effectuate the
discovery stay provisions of the Act.
---------------------------------------------------------------------------
\13\ See, e.g., Milano v. Auhll, No. SB 213 476 (Cal. Super. Court,
Santa Barbara County, Oct. 2, 1996; Sperber v. Bixby, No. 699812 (Cal.
Super. Court, San Diego County, Oct. 25, 1996)
---------------------------------------------------------------------------
A range of experts has concluded that the need for this
legislation has not been demonstrated. SEC Commissioner Norman
Johnson wrote on March 24, 1998:
Consistent with the opinion the Commission and its
staff have repeatedly taken, I believe there has been
inadequate time to determine the overall effects of the
Private Securities Litigation Reform Act of 1995, and
that the proponents of further litigation reform have
not demonstrated the need for preemption of state
remedies or causes of action at this time.
Perhaps the most telling debunking of the myth of an explosion
in State court actions was provided by Boris Feldman, a partner
in the Silicon Valley defendants' firm Wilson, Sonsini,
Goodrich & Rosati. In a report on ``Securities Litigation--
Recent Developments'' posted on his firm's Internet site, Mr.
Feldman stated:
In my opinion, plaintiffs' state court gambit has been
a failure and is over. Others may disagree. I base that
conclusion on three factors. First, plaintiffs'
attempts to broaden dramatically state laws that have
been on the books for years have not worked. Courts
have consistently rejected plaintiffs' attempts to
apply to shareholder disputes statutes that impose
lower burdens, or greater penalties, than do the
securities laws.
Second, I believe that plaintiffs have come to
realize that they will not be permitted to use courts
in a particular state (i.e., California) to litigate
the claims of shareholders around the country * * *
Finally, plaintiffs have not had much success milking
the state cases for discovery that they can then use to
file a federal complaint.
III. SHORTCOMINGS OF THE LITIGATION REFORM ACT
The Uniform Standards Bill would preempt State law
securities actions in favor of the provisions of the Litigation
Reform Act. As we considered the provisions of the Litigation
Reform Act insufficiently protective of investors to be an
appropriate Federal securities antifraud standard, we cannot
support establishing that Act as the sole, ``uniform'' standard
for nationally traded securities. At this juncture, it is
necessary briefly to review the shortcomings of the Litigation
Reform Act.
Safe harbor protects fraudulent statements
The Litigation Reform Act created a ``safe harbor'' for
forward looking statements, immunizing them from antifraud
liability. Forward looking statements are broadly defined under
the Act to include projections of financial items such as
revenues, income and dividends as well as statements of future
economic performance. Forward looking statements are thus
precisely the sort of information of most interest to investors
deciding whether to purchase or sell securities. Given this
broad definition, it is crucial that such statements not be
immunized when made with fraudulent intent. To do so is to
provide fraud artists with an incentive to tailor their frauds
to fit the statutory safe harbor and thereby defraud investors
with impunity.
Prominent legal scholars have warned that the Litigation
Reform Act's safe harbor did precisely that. A body of expert
opinion suggests that the language of the safe harbor indeed
protects deliberate falsehoods. Professor John Coffee of
Columbia Law School wrote, ``even if a knowingly false
statement is made, the defendant escapes liability if
meaningful cautionary statements are added to the forward-
looking statement.'' 14 (emphasis added) The
Association of the Bar of the City of New York stated the safe
harbor ``could immunize artfully packaged and intentional
misstatements and omissions of known facts.'' 15
(emphasis added)
---------------------------------------------------------------------------
\14\ December 6, 1995 Letter to President Clinton.
\15\ November 15, 1995 Letter to President Clinton.
---------------------------------------------------------------------------
To date, no Federal circuit court has had an opportunity to
address the Litigation Reform Act's safe harbor. The danger
that the statutory language immunizes deliberate fraud remains
strong.
Proportionate liability penalizes innocent investors
The Litigation Reform Act eliminated the rule of ``joint
and several'' liability that has been applied in fraud cases
for hundreds of years and that had been applied in Federal
securities fraud cases. The Act substituted a system of
``proportionate liability,'' which transferred responsibility
for bearing the results of a fraud from participants in the
fraud to innocent victims of the fraud. This change was opposed
and continues to be opposed by a host of consumer groups, labor
unions, and government officials.16
---------------------------------------------------------------------------
\16\ May 23, 1995 Letter to Senate Banking Committee Members from
American Council on Education, California Labor Federation--AFL-CIO,
Congress of California Seniors--LA County, Consumer Federation of
America, Consumers for Civil Justice, International Brotherhood of
Teamsters, Government Finance Officers Association, Gray Panthers,
National League of Cities, New York State Council of Senior Citizens,
North American Securities Administrators Association, and U.S. PIRG;
May 24, 1995 Letter to Members from Citizen Action, Consumer Federation
of America, Consumers Union, Public Citizen, U.S. PIRG, and Violence
Policy Center.
---------------------------------------------------------------------------
Under joint and several liability, each person who
participates in a fraud is liable for the entire amount of the
victim's damages. Mark Griffin, Securities Commissioner for the
State of Utah, testified before the Securities Subcommittee on
March 22, 1995 on behalf of the 50 State securities
commissioners. He explained why the law held all parties who
participate in a securities fraud jointly and severally liable:
``Under current law, each defendant who conspires to
commit a violation of the securities law is jointly and
severally liable for all the damages resulting from the
violation. The underlying rationale of this concept is
that a fraud will fail if one of the participants
reveals its existence and, as a result, all wrongdoers
are held equally culpable if the fraud achieves its
aims.'' (emphasis in original)
In practice, defendants bear the burden of proving their
relative fault. Through a contribution action, a defendant in a
securities fraud action can seek reimbursement from another
party that he believes to be more at fault.
The Litigation Reform Act transferred this burden to
investors. The Act limited joint and several liability under
the Federal securities laws to persons who commit ``knowing
securities fraud.'' All other violators generally are liable
only for their proportionate share of the fraud victim's
losses. ``Knowing securities fraud'' is defined in the Act
specifically to exclude reckless conduct. The Litigation Reform
Act thus reduced the liability for reckless violators from
joint and several liability to proportionate liability.
When investors' damages can be paid by a violator who is
jointly and severally liable, this change will not affect the
recovery available to investors. In many cases, though, the
architect of the fraud is bankrupt, has fled, or otherwise
cannot pay the investors' damages. In those cases, this change
will harm investors: innocent victims of fraud will be denied
full recovery of their damages. In a February 23, 1995 letter
to House Commerce Committee Chairman Thomas J. Bliley, Jr.,
Chairman Levitt wrote, ``[t]he Commission has consistently
opposed proportionate liability.'' Testifying before the
Securities Subcommittee on April 6, 1995, Chairman Levitt said
``Proportionate liability would inevitably have the
greatest effect on investors in the most serious cases
(e.g., where an issuer becomes bankrupt after a fraud
is exposed).''
The Litigation Reform Act thus transferred responsibility
for bearing the results of a fraud from participants in the
fraud to innocent victims of the fraud. It provided that those
who commit fraud are no longer responsible for the results of
their conduct. Instead, innocent investors must bear the losses
if a portion of their damages are uncollectible. In so doing,
the Litigation Reform Act seriously undermined the
effectiveness of the Federal securities laws as a remedy for
defrauded investors.
No extension of statute of limitations
We were concerned about the provisions of the Litigation
Reform Act described above, which harm investors bringing
meritorious fraud suits. We were also disappointed that the Act
did not contain provisions necessary to aid investors bringing
meritorious suits. The first omission was the Act's failure to
extend the statute of limitations for private rights of action
under Section 10(b) of the Securities Exchange Act of 1934, the
principal antifraud provision of the Federal securities laws.
In Lampf v. Gilbertson, 501 U.S. 350 (1991), the Supreme
Court significantly shortened the period of time in which
investors may bring such securities fraud actions. By a five to
four vote, the Court held that the applicable statute of
limitations is one year after the plaintiff knew of the
violation and in no event more than three years after the
violation occurred. This is shorter than the statute of
limitations for private securities actions under the law of 33
of the 50 States.17
---------------------------------------------------------------------------
\17\ Testimony of the U.S. Securities and Exchange Commission
before the Subcommittee on Securities, October 29, 1997, at 20.
---------------------------------------------------------------------------
Testifying before the Banking Committee in 1991, SEC
Chairman Richard Breeden stated ``the timeframes set forth in
the [Supreme] Court's decision is unrealistically short and
will do undue damage to the ability of private litigants to
sue.'' Chairman Breeden pointed out that in many cases,
``events 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.''
The FDIC and the State securities regulators joined the SEC in
1991 in favor of overturning the Lampf decision. Chairman
Levitt testified before the Securities Subcommittee in April
1995, ``[e]xtending 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.'' Chairman Levitt reaffirmed his support for a longer
statute of limitations before the Committee as recently as
March 25, 1998.\18\
---------------------------------------------------------------------------
\18\ Senate Banking Committee Hearing, March 25, 1998, Transcript
at 30.
---------------------------------------------------------------------------
This shorter period does not allow individual investors
adequate time to discover and pursue violations of securities
laws. Ignoring these recommendations, the Litigation Reform Act
left intact the shorter statute of limitations adopted by
Lampf.
No restoration of aiding and abetting
A final major shortcoming of the Litigation Reform Act was
its failure to restore liability in private actions under the
Federal securities laws for aiders and abettors of securities
fraud. Prior to 1994, courts in every circuit in the country
had recognized the ability of investors to sue aiders and
abettors of securities frauds. The courts derived aiding and
abetting liability from traditional principles of common law
and criminal law. To be held liable, most courts required that
an investor show that a securities fraud was committed, that
the aider and abettor gave substantial assistance to the fraud,
and that the aider and abettor had the intent to deceive or
behaved recklessly.\19\
---------------------------------------------------------------------------
\19\ See, e.g., IIT v. Cornfeld, 619 f.2d 909, 992 (2nd Cir. 1980).
---------------------------------------------------------------------------
In Central Bank of Denver v. First Interstate Bank of
Denver, 511 U.S. 164 (1994), again by a five to four vote, the
Supreme Court eliminated the right of investors to sue aiders
and abettors of securities fraud. Testifying at a May 12, 1994
Securities Subcommittee hearing, Chairman Levitt stressed the
importance of restoring aiding and abetting liability for
private investors:
``persons who knowingly or recklessly assist the
perpetration of a fraud may be insulated from liability
to private parties if they act behind the scenes and do
not themselves make statements, directly or indirectly,
that are relied upon by investors. Because this is
conduct that should be deterred, Congress should enact
legislation to restore aiding and abetting liability in
private actions.''
The North American Securities Administrators Association and
the Association of the Bar of the City of New York also
endorsed restoration of aiding and abetting liability in
private actions. Chairman Levitt recently testified that he
continues to support restoration of aiding and abetting
liability.\20\
---------------------------------------------------------------------------
\20\ Senate Banking Committee Hearing, March 25, 1998, Transcript
at 30.
---------------------------------------------------------------------------
The Litigation Reform Act ignored the recommendation of the
SEC, the State securities regulators and the bar association
that aiding and abetting liability be restored for private
litigants. The deterrent effect of the Federal securities laws
thus remains weakened.
Pleading standard may have eliminated liability for reckless conduct
In addition to the concerns we identified at the time the
Litigation Reform Act was passed, another concern has developed
since its enactment: a number of Federal District Courts have
interpreted the pleading standards enacted by the Act as
eliminating liability for reckless conduct under the Federal
securities antifraud provision. No Circuit Court has yet ruled
on the issue and the majority of District Courts have ruled
that the Act did not eliminate recklessness as a state of mind
sufficient to satisfy the requirements for fraud. If, however,
the view of the minority of District Courts should prevail, the
effectiveness of the Federal securities laws as a deterrent to
and remedy for fraud will be compromised.
The Litigation Reform Act enacted a strict pleading
standards for Federal securities fraud suits. Following a
standard applied by the U.S. Court of Appeals for the Second
Circuit, the Act requires a complaint to ``state with
particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.'' Federal
District Courts have disagreed on how to interpret this
provision, based primarily on different readings of the Act's
legislative history. According to the SEC, 14 District Courts
have interpreted this provision to allow plaintiffs to plead
facts giving rise to a strong inference that the defendants
acted either knowingly or recklessly, or that the defendants
had a motive and opportunity to commit the fraud.\21\ However,
a minority of District Courts have held that the Act eliminated
recklessness as conduct sufficient to constitute fraud.\22\
---------------------------------------------------------------------------
\21\ See Testimony of the U.S. Securities and Exchange Commission
before the Senate Securities Subcommittee, October 29, 1997, at 13.
\22\ See, e.g., ``In re Silicon Graphics, Inc. Securities
Litigation,'' C 96-0393, 1997 WL 337580 (N.D. Cal. June 5, 1997).
---------------------------------------------------------------------------
This issue is currently pending in the Courts of Appeal for
the Sixth and Ninth Circuits.\23\ The Securities and Exchange
Commission has filed an amicus brief in the Ninth Circuit case,
urging the view that the Litigation Reform Act did not
eliminate recklessness as the standard for antifraud liability.
The Commission warned the Securities Subcommittee that
elimination of liability for reckless conduct ``would
jeopardize the integrity of the securities markets, and would
deal a crippling blow to defrauded investors with meritorious
claims.'' \24\ The Litigation Reform Act has thus
unintentionally placed the effectiveness of the Federal
securities laws at risk.
---------------------------------------------------------------------------
\23\ Hoffman v. Comshare, Inc., No. 97-2098 (6th Cir.); Zeid v.
Kimberly, No. 97-16070 (9th Cir.).
\24\ Testimony of the U.S. Securities and Exchange Commission
before the Senate Securities Subcommittee, October 29, 1997, at 13.
---------------------------------------------------------------------------
IV. FLAWS OF THE UNIFORM STANDARDS BILL
We oppose the Uniform Standards Bill firstly because of the
shortcomings of the Litigation Reform Act described above. The
Uniform Standards Bill would preempt securities fraud class
actions brought under State law. Investors seeking to file
class action lawsuits would be forced to file under the Federal
securities laws. They would have to endure the objectionable
provisions we have cited: the safe harbor and proportionate
liability provisions enacted by the Litigation Reform Act and
the shorter statute of limitations and the elimination of
aiding and abetting liability left intact by the Litigation
Reform Act. Because these provisions prevent investors from
bringing meritorious securities fraud class actions, we cannot
support the preemption of all State law provisions without
which investors might have no remedies at all.
But the Uniform Standards Bill contains shortcomings of its
own, apart from those already present in the Federal securities
laws. These include a definition of ``class action'' that is
overly broad; an unfair application of the statute of
limitations; and a failure to codify liability for reckless
conduct.
Definition of class action is too broad
Although narrowed by the Substitute Amendment adopted by
the Committee, the Bill's definition of ``class action'' is
still too broad. It may include State court actions brought by
separate individual investors, or by groups of public investors
such as school districts or local governments. They risk being
dragged into Federal court against their will, potentially
depriving them of more favorable State statutes of limitations,
pleading standards, joint and several liability, and so on.
The term ``class action'' is commonly understood to refer
to cases brought by one plaintiff on behalf of all other
unnamed plaintiffs similarly situated. Under Rule 23 of the
Federal Rules of Civil Procedure, common questions of law and
fact must predominate before a judge can certify a case as a
class action. This is the type of case about which the
proponents of the legislation complain: a case brought by an
attorney with just one actual investor as lead plaintiff, in
order to force a company to pay a large settlement.
The Bill, however, contains a definition of ``class
action'' broad enough to pick up individual investors against
their will. The Bill would amend Section 16 of the Securities
Act of 1933 and 28 of the Securities Exchange Act of 1934 to
define class action. New Sections 16(f)(1)(A)(ii) and
28(f)(5)(A)(ii) include as a class action any group of lawsuits
in which damages are sought on behalf of more than 50 persons,
if those lawsuits are pending in the same court, involve common
questions of law or fact, and have been consolidated as a
single action for any purpose. Even if the lawsuits are brought
by separate lawyers, without coordination, and common questions
do not predominate, they may qualify as a class action and thus
be preempted. So, if an individual investor chooses to bring
his own lawsuit in State court, to bear the expenses of
litigation himself in order to avoid the provisions of the
Litigation Reform Act, he can be forced into Federal court and
made to abide by the Federal rules if 50 other investors each
make the same decision. Indeed, the Bill provides an incentive
for defendants to collude with parties to ensure that the
preemption threshold is reached. Such a result does not merely
end abuses associated with class action lawsuits, it deprives
individual investors of their remedies.
The definition of ``class action'' in the Bill would
preempt other types of lawsuits as well. New Sections
16(f)(1)(A)(i)(I) and 28(f)(5)(A)(i)(I) include as a class
action any lawsuit in which damages are sought on behalf of
more than 50 persons and common questions of law or fact
predominate. The Bill specifies that the predomination inquiry
be made ``without reference to issues of individualized
reliance on an alleged misstatement or omission * * *'' This
ensures that investors receive the worst of both worlds. While
the investors could not bring a class action under State law
because each investor must prove his or her reliance, they
nonetheless constitute a ``class action'' under the Bill and
their suit is preempted.
Suits brought by local government investors, such as
cities or school districts, are likely to be preempted under
this provision. For example, Mayor Harry Smith of Greenwood,
Mississippi testified last October, ``[i]n August, we learned
that at least 22 cities and 12 counties might have been misled
with regard to a series of investments.'' \25\ Should 16 more
cities and counties be found to have been victimized, these
Mississippi local governments could not bring a suit under
Mississippi law. There is no reason for such a suit to be shut
out of State court. Such suits are not the vague, open-ended
class actions about which the supporters of the Bill complain.
Whatever the merits of preempting those cases, individual
investors who forego filing such class actions should retain
the right to bring a case in either Federal or State court.
---------------------------------------------------------------------------
\25\ Testimony of Harry Smith, Mayor, City of Greenwood,
Mississippi, on behalf of the National League of Cities before the
Senate Securities Subcommittee, October 29, 1997, at 3.
---------------------------------------------------------------------------
Application of statute of limitations is unfair
The overly broad definition of ``class action'' leads
directly to another of the bill's flaws. The Federal statute of
limitations, which the SEC considers unduly short, will now
apply in an unfair manner to State cases as well. Cases that
were timely filed under State statutes of limitations may now
be removed to Federal court and dismissed under the shorter
Federal statute of limitations.
As described above, actions brought by individual investors
in State court could constitute a ``group'' and be removable to
Federal court. Similarly, an action brought by more than 50
identified investors, such as school districts or
municipalities, could fall within the definition. The bill
provides that in such instances the suits may be removed to
Federal court. Once there, no action based upon State statutory
or common law may be maintained. The investors must be able to
maintain a suit under Federal law, including the Federal
statute of limitations. Since most States have a statute of
limitations longer than the Federal time period, it is likely
that most investors will have to satisfy a shorter statute of
limitations. In other words, investors who filed timely
lawsuits under State law may find their lawsuits dismissed for
failure to meet a shorter time requirement that they could not
have known would be applied to them. Such a result goes far
beyond discouraging frivolous suits. It can deprive defrauded
investors of any opportunity to seek a remedy.
Failure to codify liability for recklessness
A final shortcoming of this Bill is its failure to codify
liability under the Federal antifraud provisions for reckless
conduct. Liability for reckless conduct is crucial to ensure
that professionals such as accountants and underwriters perform
the responsibilities assigned to them by the Federal securities
laws. The SEC has stated, ``a uniform standard for securities
fraud class actions that did not permit investors to recover
losses attributable to reckless misconduct would jeapordize the
integrity of the securities markets.'' \26\ (emphasis added)
---------------------------------------------------------------------------
\26\ Letter from Chairman Levitt and Commissioners Hunt and Unger
to Senators D'Amato, Gramm and Dodd, March 24, 1998.
---------------------------------------------------------------------------
As described above, a minority of Federal district courts
have interpreted the Litigation Reform Act and its legislative
history as eliminating such liability. We recognize and support
the statements made in the Committee Report that Congress did
not and does not intend to eliminate such liability. We hope
these statements are sufficient to preserve recklessness as the
substantive standard for liability under the Federal antifraud
provisions.
While such legislative history is helpful, however, is not
a substitute for legislative language. Federal courts do not
uniformly consider legislative history when deciding questions
of statutory interpretation. Even those courts that do may not
consider legislative history prepared in a succeeding Congress
when interpreting a statute enacted in a preceding Congress.
Chairman Levitt testified that he would prefer legislative
language that explicitlycodified liability for reckless
conduct.\27\ Nonetheless, the Uniform Standards Bill fails to include
such language. The Bill therefore would preempt State class actions in
favor of a uniform Federal standard potentially containing a disastrous
flaw, namely no imposition of liability for reckless conduct.
---------------------------------------------------------------------------
\27\ Senate Banking Committee Hearing, March 25, 1998, Transcript
at 34.
---------------------------------------------------------------------------
V. CONCLUSION
Requiring true class actions regarding securities traded on
national exchanges to conform to an appropriate uniform
standard is not without some intellectual appeal. But this bill
fails on both counts. First, it would reach beyond true class
actions to rob investors of their opportunity to bring
individual actions in State court. Second, it would impose the
current Federal standard as the uniform standard without
rectifying its shortcomings.
The SEC testified before the Securities Subcommittee on
October 29, 1997 that ``the bill would deprive investors of
important protections, such as aiding-and-abetting liability
and longer statutes of limitations, that are only available
under state law.'' This concern remains valid. Thirty-three of
50 States provide longer statutes of limitations for securities
fraud actions than do the Federal securities.\28\ Forty-nine of
50 States provide liability for aiders and abetters of such
fraud.\29\ In too many instances, these provisions would no
longer be available under the Uniform Standards Bill, leaving
investors without remedies.
---------------------------------------------------------------------------
\28\ Testimony of U.S. Securities and Exchange Commission before
the Senate Securities Subcommittee, October 29, 1997, at 20.
\29\ Id. at 19.
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For these reasons, State and local government officials,
unions, senior citizens, academics, consumer groups and others
oppose the Uniform Standards Bill. The New York State Bar
Association concluded in January 1998, ``the proposed solution
far exceeds any appropriate level of remedy for the perceived
problem.'' We urge the Senate carefully to consider the Bill's
impact on individual investors before approving it in its
current form.
Paul S. Sarbanes.
Richard H. Bryan.
Tim Johnson.
ADDITIONAL VIEWS OF SENATOR JACK REED
S. 1260 Securities Litigation Uniform Standards Act
introduction
As a supporter of the Private Securities Litigation Reform
Act of 1995 (hereafter ``PSLRA'' or ``1995 Act'') , I am
pleased to support S.1260, the Securities Litigation Uniform
Standards Act of 1998 (hereafter ``1998 Act''). This
legislation will create a uniform standard for securities class
action lawsuits against corporations listed on the three
largest national exchanges. While class action suits are
frequently the only financially feasible means for small
investors to recover damages, such lawsuits have also been
subject to abuse, draining resources from corporations while
inadequately representing the interests of investor plaintiffs.
In 1995, I voted for the PSLRA in order to curtail this
abusive litigation. At that time it was obvious that some class
action suits were being filed after a precipitous drop in the
value of a corporation's stock, without citing specific
evidence of fraud. Such lawsuits frequently inflict substantial
legal costs upon corporations, harming both the business and
its shareholders. Unfortunately, since passage of federal
litigation procedures protecting corporations from such suits
there has been some attempt by class action plaintiffs to
circumvent these safeguards by filing similar lawsuits in state
courts.
The 1998 Act will preempt this circumvention, creating a
national standard for class action suits involving nationally
traded securities. I favor this legislation because it
recognizes the national nature of our securities markets,
provides for more efficient capital formation, and protects
investors.
new responsibilities of congress
Preemption marks a significant change concerning the
obligations of Congress. When federal legislation was enacted
to combat securities fraud (the Securities Act of 1933 and the
Securities Exchange Act (SEA) of 1934, which included section
10(b), the antifraud provision upon which private actions are
now based 1), the federal law augmented existing
state statutes. States were still free to provide greater
protections to their citizens from fraud. Indeed, in 1995, the
Chairman of the Securities and Exchange Commission provided
testimony concerning the multifaceted system by which
securities were regulated: through both public and private
lawsuits in both state and federal courts.2 Many of
my colleagues voted for the 1995 legislation knowing that if
federal standards failed to provide adequate investor
protections, state suits would provide a necessary
backup.3
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\1\ 15 U.S.C. Sec. 77(l).
\2\ See Testimony of Securities and Exchange Commission, Hearings
on Securities Litigation Uniform Standards Act. Subcommittee on
Securities, United States Senate Committee on Banking, Housing and
Urban Affairs, October 29, 1997. (``* * * the benefits of our dual
system of federal and state law, which has served investors well for
over 60 years.)
\3\ See Testimony of Professor Richard W. Painter, Hearings on
Securities Litigation Uniform Standards Act. Subcommittee on
Securities, United States Senate Committee on Banking, Housing and
Urban Affairs, February 23, 1998, citing colloquy of Representative
Christopher Cox with Professor Daniel Fischel, Hearings Concerning the
Common Sense Legal Reform Act. Subcommittee on Telecommunications and
Finance, House Committee on Commerce, January 19, 1995, at 110 (Mr.
Cox. ``So if you were a plaintiff, who like any plaintiff has a choice
of forum, and if you were one of the investors who were defrauded in
Orange County, for example, you might file your suit in State court or
in Federal Court, depending on how you saw your advantage * * * '' Mr.
Fischel. ``Yes, you would still have the same choice of forums.').
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With passage of this legislation, my colleagues and I have
now accepted full and sole responsibility for securities traded
on the three national exchanges to ensure that standards
concerning fraud allow victimized, small investors to recoup
lost funds through class action suits. A meaningful right of
action against those that defraud guarantees the average
investor confidence in our national markets. A uniform national
standard concerning fraud provides no benefit to markets if
issuers having listed securities can, with impunity, fail to
ensure that consumers receive truthful, complete information on
which to base investment decisions.
My support for this legislation rests on the presumption
that the scienter standard was not altered by either the 1995
Act or this legislation. I strongly endorse the Report which
accompanies this legislation, which states clearly that nothing
in the 1995 legislation changed the scienter standard
4 or the previous case law, established by the
Second Circuit, concerning the means to successfully plead that
state of mind.5 The reason such standards were not
changed in 1995 is that they are essential to providing
adequate investor protection from fraud.
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\4\ See Time Warner, Inc. v. Ross, 9 F3d 259, 268-69 (2d Cir.
1993).
\5\ A plaintiff can plead scienter, without direct knowledge of the
plaintiff's state of mind, in two ways: ``The first approach is to
allege facts establishing a motive to commit fraud and an opportunity
to do so. The second approach is to allege facts constituting
circumstantial evidence of either reckless or conscious behavior.'' Id.
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I have been deeply troubled by the ruling of several
federal district courts 6 which, ignoring the clear
legislative history of the 1995 Act, have invalidated the
proper pleading standard for a 10b-5 action. With regard to
10(b) class action lawsuits, the PSLRA mandated stiffer
pleading requirements concerning the defenddant(s)'s state of
mind. See 15 U.S.C. Sec. Sec. 77z-1, 78u-4. The PSLRA requires
plaintiffs to plead specific facts ``giving rise to a strong
inference'' hat the defendants acted with the required state of
mind. See 15 U.S.C. Sec. 78u-4(b)(2). In contrast, some
circuits allowed scienter to be averred generally prior to
adoption of the PSLRA. (See In re Glenfed, Inc., 42 F.3d 1541,
1545-47 (9th Cir. 1994). However, the PSLRA's heightened
standard was specifically linked to the most stringent pleading
standard at the time, that of the Second Circuit. See The
Conference Committee Report (Report), 141 Cong. Rec. H13702
(daily ed. Nov. 28, 1995).
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\6\ See attached list of recent judicial adjudications of this
standard, prepared at my request, by the staff of the Securities and
Exchange Commission. The analysis indicates that of the thirty-two (32)
federal district courts which have ruled on the issue, eighteen (18)
have correctly upheld the previous Second Circuit Standard, whereas
fourteen (14) have not.
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pre-1995 standards
In Ernst & Ernst v. Hochfelder, the Court held that to
establish liability under Section 10(b) and Rule 10b-5, a
plaintiff must ``establish scienter on the part of a
defendant.'' 425 U.S. 185, 193 & n. 12 (1976). While in
Hochfelder the Court failed to address whether recklessness
satisfied the scienter requirement, subsequent decisions by
virtually all the courts of appeals held that recklessness did
meet the scienter requirement. Time Warner, supra. Sundstrand
v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)
(defining reckless conduct as ``a highly unreasonable omission,
involving not merely simple, or even inexcusable negligence,
but an extreme departure from the standards of ordinary care,
and which presents a danger of misleading buyers or sellers
that is either known to the defendant or is so obvious that the
actor must have been aware of it.'') (No Circuit Court has held
otherwise.)
With regard to the standards necessary to establish
scienter in a pleading, the Second Circuit developed the most
stringent requirement. That court required plaintiffs to allege
in the complaint ``facts that give rise to a strong inference
of fraudulent intent.'' Shields v. Citytrust Bancorp. Inc., 25
F.3d 1124, 1128 (2d Cir. 1994). Such a ``strong inference''
could be established in two ways: by ``alleging facts to show
that defendants had both the motive and opportunity to commit
fraud, or by alleging facts that constitute strong
circumstantial evidence of conscious misbehavior or
recklessness.'' Id. See also Beck v. Manufacturers Hanover
Trust Company, 820 F.2d 46 at (2d Cir. 1987), and Ross v. A.H.
Robins Co., 607 F.2d 545 (2nd Cir. 1979).
the need to preserve the recklessness standard
The court's reason for allowing a plaintiff to establish
scienter through a pleading of motive and opportunity or
recklessness is clear: ``a plaintiff realistically cannot be
expected to plead a defendant's actual state of mind.'' Cohen
v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994) (quoting
Connecticut Nat'l. Bank v. Fluor Corp., 808 F.2d 957, 962 (2d
Cir. 1987) (quoting Goldman v. Belden, 754 F.2d 1059, 1070 (2d
Cir. 1985)). 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. The SEC has been clear on this
point 7 and it has been well recognized by the
supporters of both the 1995 and 1998 Acts that neither changed
the preexisting scienter standard. Indeed, proponents of the
1995 Act were clear that the bill included recklessness.
William H. Kuehnle, Comment, ``On Scienter, Knowledge, and
Recklessness Under the Federal Securities'' Laws, 34 House. L.
Rev. 121, n. 93, citing 141 Cong. Rec. S17934 (daily ed. Dec.
5, 1995) (statement of Senator D'Amato) (``The legislation
creates a uniform standard for complaints that allege
securities fraud. This standard is already the law in New
York.''). Even after passage of the Conference Report of the
1995 Act and the President's veto and message were complete,
proponents of the legislation described the bill as retaining
recklessness. See, e.g., 141 Cong. Rec. S19150 (daily ed. Dec.
22, 1995) (statement of Senator Domenici) (``[I]t is the Second
Circuit's pleading standard.''); 141 Cong. Rec. S19067 (Dec.
21, 1995) (statement of Sen. Dodd) (``[P]leading standard is
faithful to the Second Circuit's test.''); and 141 Cong. Rec.
H15219 (daily ed. Dec. 20, 1995) (statement of Rep. Lofgren)
(``The President says he supports the Second Circuit standard
for pleading * * *. That is * * * included in this bill.'')
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\7\ See Testimony of Securities and Exchange Commission, Hearings
on Securities Litigation Uniform Standards Act. Subcommittee on
Securities, United States Senate Committee on Banking, Housing and
Urban Affairs, October 29, 1997. (``The Commission strongly believe
that recklessness must be preserved as the standard for liability
because it is essential to investor protection.)
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Thus, the legislative history well establishes that the
1995 Act retained the standards, as established by the Second
Circuit Court of Appeals, associated with pleading and
establishing scienter in a 10(b) action. Not only are the
standards clear, but it is clear that a weakening of such
standards threatens the security ofinvestors and the stability
of our markets.
The views of the Majority, as outlined in this Report, make
clear that interpretations which eviscerate a plaintiff's
ability to plead motive and opportunity or recklessness, as
defined by the Second Circuit prior to the 1995 Act, are both
incorrect and a threat to the security of our markets. Such
standards are under attack by both those who both misinterpret
the standards of the 1995 Act and those who argue that
recklessness fails to satisfy the scienter standard as
established in the 1933 and 1934 Acts.8 This later
interpretation is particulary dangerous in that it could
eliminate liability for recklessness in both private actions as
well as regulatory enforcement actions by the SEC.9
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\8\ See Amicus Curiae brief of American Institute of Certified
Public Accountants in the matter of Zeid v. Kimberely, (9th Cir.
1998)(No. 97-16070).
\9\ Four years after Hochfelder, in Aaron v. SEC, the Court, held
that the SEC must meet the same scienter standards as private
litigants, since the 1933 and 1934 Acts contained no distinctions in
the standards of proof that either private or public litigants must
meet. 446 U.S. 680 at 701 (1980).
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conclusion
With assurances of the Chair and sponsors of S. 1260 that
proper protections for investors will remain in place, I
supported the 1998 Act, thus moving toward an efficient,
national, uniform standard for securities class action
lawsuits. I trust that higher courts will adhere to current
principles of legislative history and case law to rule that the
pleading and scienter standards continue to protect investors.
Additionally, as expressed in votes during the mark-up of this
legislation, I am concerned that the definition of class
action, as currently included in the bill, is too broad.
Specifically, by defining a class as those whose claims have
been consolidated by a state court judge, the bill infringes
upon the rights of individual investors to bring suit; a
situation sponsors have sought to avoid. I hope that this issue
can be resolved before the bill reaches the Senate floor.
Finally, I have appreciated the expert analysis that the
Chairman, Commissioners, and staff of the Securities and
Exchange Commission have provided on this issue. I thank them
for their assistance.
Jack Reed.
Office of the General Counsel,
U.S. Securities and Exchange Commission,
Washington, DC, April 20, 1998.
Ted Long,
Legislative Counsel, Offices of Senator Jack Reed,
Hart Senate Office Building, Washington, DC.
Dear Mr. Long: The attached responds to your request for
staff technical assistance with respect to S. 1260, the
``Securities Litigation Uniform Standards Act of 1997.'' This
technical assistance is the work of the staff of the Securities
and Exchange Commission; the Securities and Exchange Commission
itself expresses no views on this assistance.
I hope the attached is responsive to your request.
Sincerely,
Richard H. Walker,
General Counsel.
Attachment.
Pleading Standard Scorecard
i. cases applying the second circuit pleading standard
1. City of Painesville v. First Montauk Financial Corp.,
1998 WL 59358 (N.D. Ohio Feb. 8, 1998).
2. Epstein v. Itron, Inc., No. CS-97-214 (RHW), 1998 WL
54944 (E.D. Wash. Jan. 22, 1998).
3. In re Wellcare Mgmt. Group, Inc. Sec. Lit., 964 F. Supp.
632 (N.D.N.Y. 1997).
4. In re FAC Realty Sec. Lit., 1997 WL 810511 (E.D.N.C.
Nov. 5, 1997).
5. Page v. Derrickson, No. 96-842-CIV-T-17C, 1997 U.S.
Dist. LEXIS 3673 (M.D. Fla. Mar. 25, 1997).
6. Weikel v. Tower Semiconductor Ltd., No. 96-3711 (D.N.J.
Oct. 2, 1997).
7. Gilford Ptnrs. L.P. v. Sensormatic Elec. Corp., 1997 WL
757495 (N.D. Ill. Nov. 24, 1997).
8. Galaxy Inv. Fund, Ltd. v. Fenchurch Capital Management,
Ltd., 1997 U.S. Dist. LEXIS 13207 (N.D. Ill. Aug. 29, 1997).
9. Pilarczyk v. Morrison Knudsen Corp., 965 F. Supp. 311,
320 (N.D.N.Y. 1997).
10. OnBank & Trust Co. v. FDIC, 967 F. Supp. 81, 88 & n.4
(W.D.N.Y. 1997).
11. Fugman v. Aprogenex, Inc., 961 F. Supp. 1190, 1195
(N.D. Ill. 1997).
12. Shahzad v. H.J. Meyers & Co., Inc., No. 95 Civ. 6196
(DAB), 1997 U.S. Dist. LEXIS 1128 (S.D.N.Y. Feb. 6, 1997).
13. Rehm v. Eagle Fin. Corp., 954 F. Supp. 1246, 1252 (N.D.
Ill. 1997).
14. In re Health Management Inc., 970 F. Supp. 192, 201
(E.D.N.Y. 1997).
15. Marksman Partners, L.P. v. Chantal Pharmaceutical
Corp., 927 F. Supp. 1297, 1309-10, 1309 n.9 (C.D. Cal. 1996).
16. Fischler v. AmSouth Bancorporation, 1996 U.S. Dist.
LEXIS 17670 (M.D. Fla. Nov. 14, 1996).
17. STI Classic Fund v. Bollinger Industries, Inc., No. CA
3:96-CV-0823-R, 1996 WL 866699 (N.D. Tex. Nov. 12, 1996).
18. Zeid v. Kimberley, 930 F. Supp. 431 (N.D. Cal. 1996).
ii. cases applying a stricter pleading standard than the second circuit
A. Cases holding that motive and opportunity and recklessness do not
meet pleading standard
1. Mark v. Fleming Cos., Inc., No. CIV-96-0506-M (W.D.
Okla. Mar. 27, 1998).
2. In re Silicon Graphics Sec. Lit., 970 F. Supp. 746 (N.D.
Cal. 1997).
3. In re Comshare, Inc. Sec. Litig., Case No. 96-73711-DT,
1997 U.S. Dist. LEXIS 17262 (E.D. Mich. Sept. 18, 1997).
4. Voit v. Wonderware Corp., No. 96-CV. 7883, 1997 U.S.
Dist. LEXIS 13856 (E.D. Pa. Sept. 8, 1997).
5. Powers v. Eichen, NO. 96-1431-B (AJB), 1997 U.S. Dist.
LEXIS 11074 (S.D. Cal. Mar. 13, 1997).
6. Norwood Venture Corp. v. Converse Inc., 959 F. Supp.
205, 208 (S.D.N.Y. 1997).
7. Friedberg v. Discreet Logic, Inc., 959 F. Supp. 42, 48-
49 (D. Mass. 1997).
8. In re Glenayre Technologies, Inc., 1997 WL 691425
(S.D.N.Y. Nov. 5, 1997).
9. Havenick v. Network Express, Inc., 1997 WL 626539 (E.D.
Mich. Sep. 30, 1997).
10. Chan v. Orthologic Corp., et al., No. CIV-96-1514-PHX-
RCB (D. Ariz. Feb. 5, 1998) (dicta).
B. Cases holding only that motive and opportunity do not meet Reform
Act's pleading standard
1. Novak v. Kasaks, No. 96 Civ. 3073 (AGS), 1998 WL 107033
(S.D.N.Y. Mar. 10, 1998).
2. Myles v. MidCom Communications, Inc., No. C96-614D (W.D.
Wash. Nov. 19, 1996).
3. In re Baesa Securities Litig., 969 F. Supp. 238
(S.D.N.Y. 1997).
4. Press v. Quick & Reilly Group, Inc., No. 96 Civ. 4278
(RPP), 1997 U.S. Dist. LEXIS 11609, at *5 (S.D.N.Y. Aug. 8,
1997).
iii. examples of cases with language questioning recklessness as a
basis of liability (all cases previously listed above)
1. In re Silicon Graphics Sec. Lit., 970 F. Supp. 746 (N.D.
Cal. 1997).
2. Friedberg v. Discreet Logic, Inc., 959 F. Supp. 42, 49
n.2 (D. Mass. 1997).
3. Norwood Venture Corp. v. Converse Inc., 959 F. Supp.
205, 208 (S.D.N.Y. 1997).