[Pages S9032-S9087]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

PRIVATE SECURITIES LITIGATION REFORM ACT

The PRESIDING OFFICER. Under the previous order, the Senate will now
resume consideration of S. 240, which the clerk will report.
The legislative clerk read as follows:

A bill (S. 240) to amend the Securities Exchange Act of
1934 to establish a filing deadline and to provide certain
safeguards to ensure that the interests of investors are well
protected under the implied private action provisions of the
act.

The Senate resumed consideration of the bill.

Pending:
Bryan Amendment No. 1469, to provide for a limitation
period for implied private rights of action.

Mr. BENNETT. Mr. President, I have listened to the debate on this
issue from both sides of the aisle with great interest and have several
observations that I would like to share with you and the others in the
Senate as we come to this point.
As is pointed out often to me, and sometimes as I have pointed out
during my political career, I am not a lawyer. I have not been blessed
with the experience of having gone through law school or passed the bar
or practiced law or any of the other kinds of experiences that go with
being an attorney, which so many of our colleagues in the Senate have.
Indeed, a majority, Mr. President, of the Members of this body are
lawyers.
I have not kept exact tally, but I believe that the vast majority, if
not 100 percent, of the people who have commented on this bill, have
been lawyers.
No, I must correct myself. Mr. President, the Senator from California
[Mrs. Boxer] is not a lawyer, and she has been very forthright in her
opposition to this bill. So I would back away from that. But most of
the people who have spoken on this have been lawyers. And I have
noticed that they have addressed this issue on the basis of what will
happen in court if S. 240 were to pass.
They have argued that back and forth, with lawyers saying: Oh, no, if
S. 240 were passed, why, then this is how the courts would be forced to
rule. And then other lawyers have risen and said: You are wrong; if S.
240 passes, the courts would not have that ruling at all; they would
rule this way. Back and forth, so the argument goes between those who
have had the experience of a legal education.
I wish to share with the Senate my view of this, which is based not
on a legal background but upon direct experience and observation with
what has been happening with strike suits as these have come to be
known.
My first experience is a vicarious one, but I do my best to make sure
that it is accurate. It is the experience that my father had after he
left the Senate and began his last career, which was back in the
business world serving on a variety of boards of directors.
I have told this story in the committee hearing, but I think it is
appropriate to repeat here because it makes the point I intend to make.
One of the boards that my father went on after he left the Senate was
a board of a mutual fund. The compensation of the directors was tied to
the performance of the mutual fund. This is the kind of thing people
are saying we ought to do with directors and chief executives, not just
set a compensation and let it stay there, but have a compensation tied
to the performance of the fund.
Once a year, the compensation of the directors would be adjusted as a
result of the better performance of the fund during the year, and since
the fund, at least during the time my father served

[[Page S9033]]

on the board, always did better each year, the compensation went up
each year.
My father received a stack of legal papers suing him for looting the
assets of that particular mutual fund. He was a little startled, and he
called the general counsel of the mutual fund and said, ``What is this
all about?''
``Oh,'' said the general counsel, ``don't worry about that, Senator,
it is just because `Bennett' comes before all of the other directors in
our alphabetical list, and there is a lawyer in New York who every year
sues us, sues all of the directors, for looting the fund by virtue of
the increase in compensation that comes as a result of the formula that
we have.'' He said, ``Because, as I say, your name is first
alphabetically, you are the one filed with the papers. You notice it
says `Wallace Bennett, et al.' The `et al.' means all of the other
directors. If we had another director whose name began with `A,' he
would be the one on whom the papers would be served. Don't worry about
it. We'll take care of it.''
Dad said, ``How are you going to take care of it? This is a very
impressive lawsuit.''
``Oh,'' he said, ``we have in the budget $100,000 to send to that
lawyer in settlement of this lawsuit. We do this every year. He files
the lawsuit, we send him a check for $100,000, he goes away. It is a
standard kind of thing that we have built into our budget.''
``Why in the world are we paying this man $100,000 simply to file the
lawsuit?''
``Well, Senator,'' he said, perhaps a little nonplused at my father's
naivete, ``the legal bills of our fighting this suit would be
substantially in excess of $100,000. So the financially responsible
thing for us to do for our shareholders is to settle it at the lowest
possible price, and we found that this fellow will go away if we send
him $100,000. And, therefore, we do the financially responsible thing
by sending him $100,000.''
Dad said, ``That's extortion, that's blackmail, that's like the
protection rackets, if you will, that the mafia runs when they come in
and say in a particular storefront, `You need some protection from
somebody who might bomb this place.' ''
He said, ``Well, Senator, we have better things to do than respond to
these kinds of lawsuits. The cheapest way out of this dilemma is simply
send the man his $100,000 every year.''
We are told during this debate, ``Oh, these are hypotheticals.'' We
are told, ``Oh, we have to look at what might happen here, what might
happen there.'' We are told, ``Oh, the proponents of the bill are
raising scare tactics of the worst possible case, and that is not the
normal procedure at all.''
I can assure you, Mr. President, this was an actual case, an actual
circumstance where automatically the lawyer, by simply hitting the
button on his word processor and turning out the same set of papers,
received a check for $100,000 every year.
As I understand the case, to finish the story, that particular lawyer
is no longer doing that, simply because he got greedy. He started to
overreach and do this not only with the funds where my father was
serving as a member of the board but other funds, assuming he would get
the same treatment. Finally, one of them, managed by Merrill Lynch,
decided to call his bluff and go to court with him.
Merrill Lynch had deeper pockets than the mutual fund on whose board
my father sat, and they decided to reach into those pockets and pay the
legal expenses necessary to close this operation down. So they called
the man's bluff. They forced him to come up with the legal fees
necessary to go to court, and he found he could not survive if he had
to pay all the legal fees to actually prosecute the lawsuit and, thus,
ultimately the whole thing was shut down.
I cite that because of the rhetoric that has surrounded this bill. We
are not talking about what will happen in court in a theoretical
lawsuit when we are talking about the impetus behind the writing and
filing of this bill. We are talking about the fact that the vast
majority of these lawsuits never get to court and do not intend to go
to court. They are filed not because the lawyer has discovered some
great evil on behalf of the investor. They are filed because the lawyer
knows full well that the company or mutual fund or pension fund, or
whatever it is that is being accused, will find it cheaper to settle
out of court than go through the legal hassle of paying all the bills
necessary to resolve the issue in the courts.
During the hearing on this bill, Ralph Nader made the statement: No
one settles out of court unless he has something to hide, and
challenged me personally on that issue saying, no CEO who is
responsible would ever settle a lawsuit out of court unless he had
something to hide, and he then proceeded to lecture me as to what my
duty would be assuming, perhaps erroneously, that I was a lawyer.
I said to him and I say here on the floor today, again, I am not a
lawyer but I was a CEO of a company who settled a suit out of court
about which we had nothing to hide. Indeed, all of the issues that were
involved in that lawsuit were clearly on the public record, but the
legal bills to prosecute that lawsuit were bankrupting our company.
Now, the company at the time was very, very small, it was very
fragile and our legal bills were running $25,000 a month. I spoke to
our lawyer and said, ``What happens if we go to trial?''
Our lawyer said, ``They will then go to a minimum of $25,000 a
week.''
There was no way that company could survive the drain of legal bills
of $25,000 a week. So I said, ``What will it take to settle?''
We signed an agreement settling that lawsuit that called upon us to
pay the other party $2,500 a month. Some of our shareholders did not
like it. They said, ``Oh, we think it is terrible we have to pay them
anything, because we're convinced we're right.''
I said, ``Look, you can be convinced you're right all you want. The
issue is, can we afford to continue to press our legal position at a
$25,000 a month tab all the way into court and then $25,000 a week?
Swallow your pride about saying we want our position absolutely
vindicated, take the $2,500 a month settlement and put this behind us
and get on with our business.''
It was one of the smartest business decisions we ever made.
I pointed this out to Mr. Nader in the hearing. I resent the
suggestion that the reason we settled out of court was that we had
something to hide. And I say absolutely that settlements out of court
are made, 90 percent of the time, on the basis of pure economics; it is
cheaper to settle than to continue to litigate. And if it is, swallow
your position about making a point, do the wise economic thing and
settle this suit.
That is where these strike suits come from--lawyers who recognize
that reality. Settlements out of court are made on the basis of
economics. They are not made on any other basis. That is why so many of
these suits are filed. That is why the vast bulk of these suits are
settled out of court, and that is why this has become--as the Senator
from New Mexico [Mr. Domenici], pointed out--a magnificent way for some
lawyers to practice because, as the Senator said, this is a practice
without clients. What could be more fun than to be a lawyer with a
practice without any clients, and with, in the case that I have cited
in my father's circumstance, a guaranteed $100,000 per year income
doing nothing more than mailing off a set of documents to a company
that will write out the check because it is easier to do that than to
go to court.
I point out to those who say, ``Oh, this is not very widespread,''
that we had some testimony in the committee from a lawyer who says this
is, in fact, never done. I asked him directly. I said, ``Are you
telling us that no lawyer ever files a strike suit solely on the belief
that he will get a settlement out of court and not have to litigate
it?'' He said, ``Senator, no lawyer ever does that.'' At that point,
the credibility of that witness disappeared, as far as I was concerned,
because I knew that it was done.
Well, this practice has created enough concern that we have a
bipartisan basis of support for this bill. Indeed, the initial
supporter, the initial mover and shaker on this bill was the Senator
from Connecticut [Mr. Dodd]--not known for his hard right-wing
propensities and leanings. He is one of my good friends. We disagree
about a number of things. He is a liberal Democrat and I am a
conservative Republican.

[[Page S9034]]

But I consider him one of the more thoughtful Members of this body. He
was the moving force behind this bill in the first instance. He knows
that these suits are filed for the purpose of getting settlements, not
ever going to court. He was joined by Senator Domenici.
Senator Domenici told me over the weekend--we were in Utah together--
he has been accused of the fatal sin of being a moderate by some
portions of the conservative press. I said, ``What did you do, plead
guilty?'' This is one of the more thoughtful Members of the Senate, as
well. He is a careful lawyer. He understands all of the legal issues.
He has pushed this bill right from the very beginning, and he, along
with Senator Dodd, is the principal cosponsor of the bill in this
Congress.
It is a smokescreen, in my view, to spend all of your time talking
about what may or may not happen in court if S. 240 passes, because
that ignores the fact that the purpose of S. 240 is to deal with those
people who file suits without any intention of going to court. We need
to understand that as we are debating this bill.
Now, there have been some things said about this bill that I would
like to set straight. One of the myths that has come out of this debate
is that if S. 240 had been law at the time of the failure of the
Lincoln Savings & Loan, Mr. Charles Keating would have gone scot-free
and his victims would have been denied any kind of recovery. That is
simply not the case, Mr. President. The safe harbor provisions of S.
240 would not have protected Keating and his codefendants.
Keating's statements that bonds were federally insured and as safe as
a bank deposit were fraudulent and obviously false and not covered by
the safe harbor. The safe harbor applies to forward-looking
projections, not to statements of fact that can be checked out in the
past. For Keating to say the bonds were federally insured is not a
forward-looking statement. Its very nature is a statement of past and
existing circumstances, and they did not happen to be true. That is one
of the reasons Mr. Keating is now out of the savings and loan business
and under the protection and custody of the Federal Government.
Mr. SARBANES. Will the Senator yield for a moment?
Mr. BENNETT. Yes, I am happy to yield.
Mr. SARBANES. I wonder if we can get the time situation straightened
out. Could I ask the Chair what time did we go on the bill?
The PRESIDING OFFICER. We resumed the bill at 12:16.
Mr. SARBANES. Mr. President, I ask unanimous consent that the time
between 12:16 and 2 o'clock be treated as equally divided between the
Senator from Utah and myself. When he completes his statement, I will
put down the amendment. But the time he is using would come out of his
side, and there will still be time left, unless he is going to go on
for a very long time. I think that would equalize the situation in
which we find ourselves.
Mr. BENNETT. I have no objection.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. BENNETT. I know that the Senator from Maryland was scheduled to
speak first, but no one was here, so I started. I would be happy to
yield now if the Senator wishes to speak.
Mr. SARBANES. If the Senator would yield, I was going to offer an
amendment on which the time would be equally divided. I am happy to
withhold offering the amendment until the Senator completes his general
statement. But I did not want the general statement to go on without
getting this straightened out because there might not be much time left
for the amendment.
Mr. BENNETT. I agree that the time of my statement will be charged
against our time on the amendment.
Mr. SARBANES. Thank you.
Mr. BENNETT. I shall conclude so that we can move to the amendment of
the Senator from Maryland.
We should understand that this debate and conversation about what may
or may not have been the case in the Keating circumstance had S. 240
been in place is, in fact, irrelevant to the purpose of this
legislation and to the direction that it will take in the future. The
Keating codefendants could remain fully liable if S. 240 had been in
place. The aiders and abettors would still be held accountable. The
Keating claims are within the current statute of limitations, and the
other 10(b)(5) reforms do not affect the recoveries.
So, Mr. President, I hope as we examine this whole circumstance, we
keep in mind the purpose for which S. 240 was written in the first
place. It is to deal with those people who file lawsuits without any
expectation that they will ever come to trial but in the hope that the
economics of the circumstance will force people to settle with them
short of a trial, so that they can enjoy what, as I say, the Senator
from New Mexico calls the ``perfect'' law practice--a law practice
without clients and a law practice that does not require you to ever go
to court, to ever hold discovery, to ever go through any procedure--
simply file a set of papers and wait, as the lawyer in New York did who
dealt with my father, for the check to arrive in the mail. That kind of
thing is bad--it is bad for investors, it is bad for the country. That
is the reason we are supporting S. 240.
I now yield the floor to the Senator from Maryland.

Amendment No. 1472

(Purpose: To amend the proportionate liability provisions of the bill)

Mr. SARBANES. Mr. President, I send an amendment to the desk and ask
for its immediate consideration.
The PRESIDING OFFICER. The clerk will report.
The legislative clerk read as follows:

The Senator from Maryland [Mr. Sarbanes] proposes an
amendment numbered 1472.

Mr. SARBANES. Mr. President, I ask unanimous consent that reading of
the amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:

On page 134, strike line 6, and insert the following:
``(A) Net financial worth.--Each
On page 134, strike lines 9 through 15, and insert the
following: ``that the net financial worth of the''.
On page 134, line 23, strike ``50 percent'' and insert
``100 percent''.

Mr. SARBANES. Mr. President, I ask the Chair to state the time
situation.
The PRESIDING OFFICER. The Senator from Maryland has 52 minutes. The
manager of the bill has approximately 30 minutes.
Mr. SARBANES. Mr. President, before I turn to the provisions of the
amendment, I want to make a few comments with respect to what my
distinguished colleague from Utah said in his opening remarks on the
consideration of this legislation today.
It is very important to understand that there are parts of this bill
that Members are trying to amend and there are parts we are not trying
to amend. There are parts which we think are desirable and worthwhile
having. There are other parts that we think are excessive. They
overreach. They go too far.
Those are the ones we are trying to correct. If we could get it
corrected, we would have a total package of which one could be
supportive.
Examples that are cited, many of them that are being cited, are, in
fact, things we are prepared to try to correct with the provisions of
this legislation, that we are not opposing. It is very important that
that be understood.
The New York Times on Friday has an editorial headed ``Protection for
Corporate Fraud.'' It says, speaking of the Senate security bill:

. . . goes far beyond their stated purpose of ending
frivolous litigation. The Senate securities bill sets out to
protect corporate officials from being sued when they issue
overly optimistic predictions of corporate profitability that
are simply innocent misjudgment. Sponsors cite cases for
opportunist shareholders who waited for a company's share
price to nosedive, then sued on the grounds that their
investment was based on fraudulent representations of the
company's health. But to solve this infrequent problem, the
bill would erect a nearly insurmountable barrier to suing
officials who peddle recklessly false information. It would
block suits against the accountants, lawyers, and other
professionals who look the other way when the companies they
serve mislead investors. The bill requires that suits be
filed within a short statute of limitations and threatens
plaintiffs who technically violate the court's procedures
with heavy fines, including payment of the defendant's legal
fees. These provisions would ward off frivolous suits. But
they just as surely ward off valid suits. Securities markets
work well when investors are confident that the data on which
they base

[[Page S9035]]

decisions is honest. The bill threatens that confidence.

Mr. President, I ask unanimous consent that that editorial be printed
at the end of my remarks.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit 1.)
Mr. SARBANES. The Baltimore Sun has an editorial ``Safe Harbors for
Financial Fraud.'' Let me quote very briefly from it:

In the wake of the Nation's savings and loan debacle, the
financial derivative shock to U.S. pension systems, the junk
bond manipulations of Mike Milken, one could expect Congress
to bolster the rights of investors in securities fraud cases.
Instead, Capitol Hill legislators are rallying to protect the
interests of corporate executives, securities dealers,
lawyers and accountants against the claims of victims of
financial crimes.

Further on it says:

Originally drafted to reduce the number of frivolous
investor lawsuits against corporations. . . .

And then it goes on to say:

But the sweeping protections included have fired the
opposition of investor groups, advocates for the elderly and
even the Federal Securities and Exchange Commission.

It closes by saying:

The arsenal of weapons against investors in the legislation
shows that it is more about protecting the shadowy dealings
of corporate leaders and their professional confederates than
in limiting frivolous class action lawsuits.

This is the question. No one is protecting the frivolous class action
lawsuit. The question is whether the provisions of the bill have gone
beyond that and are excessive. We submit that they are. Those are some
of the provisions we are now trying to change.
Mr. President, I ask unanimous consent that the Baltimore Sun
editorial be printed in the Record.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit 2.)
Mr. SARBANES. Mr. President, I made reference to an article that
appeared in the New York Times on Sunday, authored by Mark Griffin, the
director of the Utah securities division who is a board member of the
North American Securities Administrators Association, comprising the
securities regulators from the 50 States. Mr. Griffin is chairman of
the Securities Litigation Reform Task Force of the North American
Securities Administrators Association. In other words, all of the 50
State securities administrators.
That article entitled ``Securities Litigation Bill Is Reform in Name
Only.'' Just to quote briefly:

What's in a name? In the case of the Private Securities
Litigation Reform Act of 1995, consumers will find a world
class misnomer. Now before the Senate, the bill is more
accurately described as securities litigation repeal. For
millions of middle-class American investors, the fate of this
bill--and the even more radical version passed by the House
of Representatives in March--could spell the difference
between recovering or losing billions of dollars from
securities fraud.
Securities litigation reform began with the intent of
putting some weights around the ankles of a few fleet-footed
lawyers; but the measure now dangerously close to Senate
passage would wind up being a noose around the neck of
defrauded investors. While everyone agrees on the need for
reasonable reform, numerous public-minded groups are strongly
opposed to radical steps in the Senate bill, S. 240, that
would snuff out key investor rights.
If securities litigation reform was the real goal here, the
widespread support that exists for reasonable steps to curb
lawsuit abuses would have ensured easy passage. But the bill
now before the Senate would rein in frivolous lawsuits only
by making it virtually impossible for consumers to pursue
rightful claims.

He goes on later to say,

The reality is that the main intent of this legislation,
despite what its proponents say, is to provide a shield for
all but the most extreme cases of fraud.

Mr. President, I ask unanimous consent that this article be printed
in the Record at the close of my remarks.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit 3.)
Mr. SARBANES. I will come back to this article because I think it is
a perspective analysis of the situation in which we find ourselves.
Now, Mr. President, let me turn to the amendment which I sent to the
desk, which deals with the issue of proportional liability and the
departure from the concept of joint and several liability.
Let me recap very quickly the broader issue that was dealt with last
and then the more narrowly focused amendment which I have offered and
which I will then discuss. The bill changes the current system of joint
and several liability to a new system of proportionate liability. Joint
and several liability is the legal principle that says that each
participant in a fraud may be held liable for all of the fraud victim's
losses.

Under the Federal securities laws as they now are--not as they are
being changed in this bill but as they are right now--each participant
in a securities fraud--a corporate executive, an outside accountant,
lawyer, investment banker--may be held liable for all of a victim's
losses. In other words, if one of the fraud participants is bankrupt or
if one of the fraud participants has fled the country, the other fraud
participants make up the difference. So the burden, if one of the fraud
participants is bankrupt or flees, does not fall on the innocent
investor. It seems to me a rather simple concept. It is between those
who have participated in the fraud--perhaps in varying degrees but
nevertheless participated in it--they should be held accountable and
have to sustain the burden before it is thrust upon the innocent
investor. In fact, under the current system, the defrauded investors
are able to recover their entire losses against any of the participants
in the fraud. This bill will change that. The bill will change the
system from joint and several liability to proportional liability for
reckless defendants.
Who are reckless defendants under the securities laws as they now
exist? The Federal securities law currently punishes two types of
people who participate in a fraud: People who plan the fraud who
intended to deceive the investors, and people who acted recklessly, who
knew nothing about the fraud and did nothing about it--who knew about
the fraud and did nothing about it.
The standard of recklessness used in the courts is not--last week, in
fact, some of the people supporting this legislation talked about it as
though it was negligent or just by chance that one got involved. The
standard is--this is a quote out of the Sundstrand case:

. . . a highly unreasonable omission involving not merely
simple or even gross negligence but an extreme departure from
the standards of ordinary care and which present 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.

The recklessness liability, under Federal securities fraud, is
usually asserted against the fraud artist's professional advisers, his
lawyers, accountants, appraisers, investment bankers, and so forth.
Unfortunately, sometimes these people know about a fraud and do nothing
about it. In those instances, the law holds them jointly and severally
liable in that fraud. The bill changes that. It changes that. And the
reckless participant will be liable only for a proportionate share of
the investor's losses. If one of the fraud participants is bankrupt or
fled the country or cannot be found, the losses will no longer be made
up by other participants in the fraud. Instead, the innocent investor--
the innocent investor will not recover his losses, even when other
participants in the fraud are available to pay. Reckless participants
in a fraud will be favored over innocent victims of a fraud, over
individual investors, over State and local governments, over pension
plans, over charitable organizations.
Securities regulators, Government officials, consumer groups, and
others oppose this provision. The Chairman of the SEC wrote the
Congress saying:

The Commission has consistently opposed proportionate
liability.

The North American Securities Administrators Association, which
represents the 50 State securities regulators, wrote, urging the Senate
``to lift the severe limitations on joint and several liability so that
defrauded investors may fully recover their losses.''
The Government Finance Officers Association, representing thousands
of county treasurers, city managers, and so on, people who invest
taxpayer funds and pension funds, are opposed to this provision. They
wrote, on June 8, in a letter that was printed last week in the
Record--and I ask unanimous consent their letter, along with the one
from

[[Page S9036]]

the North American Securities Administrators Association, again be
printed at the conclusion of my remarks.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit 4.)
Mr. SARBANES. They wrote:

Fraud victims would find it exceedingly difficult to fully
recover their losses. S. 240 sharply limits the traditional
rule of joint and several liability for reckless violators.
This means the fraud victims would be precluded from fully
recovering their losses.

The National League of Cities, the Consumer Federation of America,
the U.S. Conference of Mayors have all opposed this version of
proportionate liability that puts fraud participants ahead of fraud
victims. On Friday, we received a letter from the American Association
of Retired Persons, which I would like to have printed in the Record.
I ask unanimous consent to do so.
There being no objection, the letter was ordered to be printed in the
Record, as follows:

American Association

of Retired Persons,

Washington, DC, June 23, 1995.
Re S. 240, the ``Private Securities Litigation Reform Act.''
U.S. Senate,
Washington, DC.
Dear Senator: The Senate will soon be voting on S. 240, the
Private Securities Litigation Act. While the American
Association of Retired Persons (AARP) supports efforts to
eliminate truly frivolous lawsuits, we cannot support this
bill as reported out of the Banking, Housing, and Urban
Affairs Committee. As currently written, many aggrieved
investors with legitimate claims will be vulnerable to
abusive practices in the securities marketplace.
More than 28 million Americans over the age of 65 rely in
part on investment income to meet expenses. Though older
investors once relied heavily on federally insured products
such as certificates of deposit or savings accounts, lower
interest rates have prompted many, including those who are
not financially sophisticated, to invest in securities. In
addition, because of the increasing use of defined-
contribution (versus defined-benefit) pension plans, more and
more people are using securities products when planning for
retirement.
Older Americans fall prey not only to financial fraud, but
also are injured by some practices within the ``legitimate''
investment industry. Some older investors are hit with hefty
fees or subjected to ``churning'' of accounts to maximize
profits for salespeople. Others routinely lose money in
regulated investments that are unsuitable to their needs, are
promoted in a misleading fashion, or are accompanied by
inadequate and unclear disclosures. This money may represent
a lifetime of savings, a lump sum pension payout, or proceeds
from the sale of a home. Financial losses for retirees can
mean a loss of basic support, with little opportunity to
recapture lost income.
As currently drafted, S. 240 will shield wrongdoers from
liability in a number of ways. As a result, the bill needs to
be improved to help strike a better balance between
protecting investors and eliminating claims without merit.
AARP urges you to support amendments which may be offered
calling for the following:
Maintenance of traditional joint and several liability
among defendants. Under the bill as currently drafted,
liability for reckless behavior would be narrowed to such an
extent that it would be difficult, if not impossible, for
small investors to be made whole for losses suffered. This
amendment would protect investors against jailed, missing, or
bankrupt malfeasors by restoring existing joint and several
liability; and
Replacement of the safe harbor provision in the bill with a
directive to the SEC to issue a rule which structures a safe
harbor that protects both legitimate businesses and
investors. S. 240 weakens current law by allowing an
expansive safe harbor for forward-looking corporate
statements that make exaggerated claims to attract investors,
even if these statements are made recklessly. Clearly, such
statements would harm investors greatly and should not be
immunized from liability.
If AARP can be of further assistance or if you have any
questions, please have your staff contact Kent Burnette at
(202) 434-3800.
Sincerely,
Horace B. Deets,
Executive Director.
Mr. SARBANES. That letter states:

As currently drafted, S. 240 will shield wrongdoers from
liability in a number of ways. As a result, the bill needs to
be improved to help strike a better balance between
protecting investors and eliminating claims without merit.

Last week, an amendment was offered by Senators Shelby, Bryan, Boxer,
and I, to try to strike a better balance with respect to the broad
issue of joint and several liability. That amendment was defeated. I
very much regret that was the case. The amendment that has just been
sent to the desk is, therefore, not dealing with the broader issue of
joint and several liability, which I have just outlined, but with a
more narrow aspect of it.
I urge my colleagues to focus very carefully on the fact situation.
Even the authors of the bill that is before us recognize that it is
unfair to favor reckless lawyers, accountants, and investment bankers
who participate in a fraud entirely over the individual investor
victimized by the fraud. In fact, the bill has two provisions, one that
would require reckless accountants and reckless lawyers to pay
investors more than the proportionate share of the reckless advisers
when a fraud artist is bankrupt or has fled the country, and another
provision designed to make up for the entire losses of so-called small
investors.
Let me examine these two provisions, and the amendment goes to these
two provisions. The first provision says that all the defendants shall
be jointly and severally liable for the uncollec-

tible share of the small investor, but only under these very limited
circumstances--first of all, only if the net worth of the investor is
under $200,000. The committee report says that net worth includes all
of the plaintiffs' financial assets including stocks, bonds, real
estate, and jewelry.
How many investors are we talking about here? People who are able to
buy stocks, are going to have a net worth under $200,000, particularly
when the net worth includes the value of their home? How many elderly
people who have saved for a lifetime have a net worth over $200,000?
Their home is usually paid for or close to it. They have some other
assets. For such a person, $200,000 is not a large net worth. I guess
they would have to value the engagement ring, value the wedding ring,
value the heirlooms. So it is a $200,000 net financial worth of the
plaintiff.
The other provision says that the plaintiff will be held whole only
if the recoverable damages are equal to more than 10 percent of the net
financial worth of the plaintiff. Listen to this. You are only going to
protect--the bill supposedly makes an effort to protect the small
investor. But the definition of the protection is that the investor's
net worth has to be under $200,000, and then you protect recoverable
damages only if they are equal to or more than 10 percent of the net
financial worth.
(Mr. THOMPSON assumed the Chair.)
Mr. SARBANES. Mr. President, let me just give you this example. A
retired person, a small investor, retired person has a $190,000 net
worth. A fraudulent stock scheme is practiced upon this person, and he
loses $17,000. The person who perpetrated the scheme, this scam artist,
has gone bankrupt. They flee the country, or whatever. The lawyer who
advised the scam artist knew about this or was reckless in terms of
knowing about this fraud, the standard I quoted earlier. Under current
law, that person would be jointly and severally liable and would have
to pay all of the damages. Under this provision, since the damages are
not 10 percent of the net worth, the investor does not get that
protection.
What is the meaning of this provision in the bill, if it has that
kind of exclusion that simply swallows up any meaning? Here is a small
investor, $190,000 net worth, loses $17,000 which is not 10 percent of
the $190,000, and the small investor is not protected in that
situation, and the participants in the fraud are able to avoid having
to make that small investor whole. If you really mean trying to provide
some protection for the small investor, this provision needs to be
corrected.
Clearly, as written, hardly anyone is going to be protected. And the
amendment that I have offered, one part of it, provides greater
protection to small investors, people of modest means. The bill says
you are protected only if you lose 10 percent of your net worth in a
fraud. In other words, you have to lose $20,000 of a $200,000 net worth
or $15,000 of a $150,000 net worth. My amendment deletes this 10
percent requirement. It says you do not have to lose 10 percent of your
net worth in the fraud. Regardless of how much you lose in the fraud,
if your net worth is $200,000 or less, you are protected.
So you have the very small investor who ought to be protected, not
the reckless advisers to the corporate scam artists who participated in
the fraud.
So we strike the provision in the bill that requires that the damages
be

[[Page S9037]]

equal to 10 percent of the net worth. So you have someone with a
$200,000 net worth. If they lose something to this scam artist, they
are going to be protected, and all the defendants will continue to be
held jointly and severally liable in that instance. If you really want
to talk about protecting small investors, you obviously have to make
that change.
The second provision that is in this legislation, in the course of
changing the joint and several liability scheme and shifting it to
proportionate liability, even the authors recognize that was a very
heavy weighting of the balance against the investors. So they said,
``Well, in all instances we are going to require the reckless
participants in the fraud to pay investors an additional amount over
their proportionate share.''
The additional amount, though, that is provided for is 50 percent.
Let me give you an example. A con artist perpetrates a fraud. He is
assisted by the reckless conduct of his lawyer or his accountant who
knows about the fraud but does nothing to stop it. When the fraud is
exposed, the con artist skips the country. The reckless adviser is
found to be 10 percent responsible for the investor's losses.
Under the bill, there is an overage, and the reckless adviser could
be held liable for up to 15 percent of the investor's losses; in other
words, a 50-percent overage. So you give some additional marginal
recovery to the investor.
The extra 50 percent payment required under the bill, in my judgment,
does not go far enough toward making the investor whole. So the other
part of this amendment increases the additional payment the reckless
defendants pay, when the con artist is bankrupt or flees, from 50
percent of their proportionate share to 100 percent.
Under the example I gave a moment ago, a reckless adviser, a lawyer,
investment banker, an accountant to the corporate swindler who did
nothing to stop it was later found responsible for 10 percent of the
fraud. As the bill is written, he could be held to 15 percent of it.
This amendment would raise that to 20 percent. It would allow investors
to recover a little bit more of their losses in cases of fraud.
I note that just on Friday when we were debating this bill my
distinguished colleague from New York said in speaking about addressing
this problem that we were outlining at the time:

If the fraudulent defendant is bankrupt and cannot pay, we
would double the liability of the other defendants. So if a
defendant was found 5 percent negligent but the main
defendant is not able to pay, the 5 percent negligent
defendant would be held responsible for 10 percent of the
damages.
Well, that is what my amendment is trying to accomplish. The bill as
written provides a 50 percent overage. So if you were 5 percent liable,
under the bill you would go to 7\1/2\ percent. I actually think that
this was, in effect, really the recognition of an appropriate increase,
and this would double it. In that instance, you go from 5 to 10. If
they were 10 percent liable, they would go to 20 percent liable.
So those are the two amendments here. I disagree with abandoning the
joint and several liability principle. That was voted on the other day.
What we are now trying to do is to take the provision in the bill and
to make it more reasonable with respect to the small investor. In some
respects, I regard this as the ``have-you-no-shame'' amendment in terms
of the provisions that are in the bill. We have provisions in this bill
that if you are a very small investor with a net worth of under
$200,000, you have to lose at least $20,000----
The PRESIDING OFFICER. The Senator has 20 minutes remaining.
Mr. SARBANES. Mr. President, I yield myself 1 minute.
You have to lose over $20,000 in order to be held whole by these
defendants who have participated in this fraudulent scheme. If you are
going to recognize the concept of the small investor and the need to
provide some additional protection, do not render it meaningless by
having this 10 percent requirement on losses. It is bad enough that you
have defined the small investor as $200,000 of net worth including,
including the person's home--including the person's home. Now, that is
an awful lot of people.
The PRESIDING OFFICER. The Senator has 19 minutes.
Mr. SARBANES. I yield 1 more minute.
And then, in addition, to require that they lose at least 10 percent
of their net worth, more than $20,000--you take a person, they have
$200,000 of net worth. They have a home worth $150,000, which is modest
in today's markets in most places in the country--worth $150,000. They
have $50,000 worth of items for net worth which the bill has defined as
including the jewelry and heirlooms and everything else. They are drawn
into a fraudulent scheme. They lose $19,500, not 10 percent of the
$200,000, and you are not going to hold them harmless. You are going to
put the fraudulent perpetrators, the perpetrators of the fraud, ahead
of the innocent investor.
Mr. President, it is an outrage. At a minimum we need to change this;
otherwise, there is no shame left whatever.
Now, Mr. President, I understand that the Senator from the other side
of the aisle has returned, and I will reserve the remainder of my time.

Exhibit 1

[From the New York Times, June 23, 1995]

Protection for Corporate Fraud

Two bills before Congress reveal how reckless the
Republicans have become in their zeal to reduce regulation.
The bills--which would ``reform'' laws governing securities
firms and banks--go far beyond their stated purpose of ending
frivolous litigation. What they would actually do is insulate
corporate officials who commit fraud from legal challenge by
their victims.
The Senate securities bill sets out to protect corporate
officials from being sued when they issue overly optimistic
predictions of corporate profitability that are simply
innocent misjudgments. Sponsors cite cases where
opportunistic shareholders waited for a company's share price
to nosedive, then sued on the grounds that their investment
was based on fraudulent representations of the company's
health.
But to solve this infrequent problem, the bill would erect
a nearly insurmountable barrier to suing officials who peddle
recklessly false information. It would block suits against
accountants, lawyers and other professionals who look the
other way when the companies they serve mislead investors.
The bill requires that suits be filed within a short statute
of limitations and threatens plaintiffs who technically
violate the court's procedures with heavy fines, including
payment of the defendant's legal fees.
These provisions would ward off frivolous suits. But they
just as surely ward off valid suits. Securities markets work
well when investors are confident that the data on which they
base decisions is honest. The bill threatens that confidence.
Banking legislation working its way through the House would
also cause damage, both socially and economically. It would
remove the Justice Department's authority to sue bankers and
realtors who systematically block blacks and other minorities
from renting apartments or getting mortgages. Apparently
Justice has been too vigilant fighting discrimination for the
G.O.P.'s taste. Astonishingly--in the wake of the fraud that
brought down savings and loan institutions during the
1980's--the bill would weaken regulatory oversight over bank
directors, requirements to provide independent audits and
prohibitions against preferential loans to bank officials.
The bill leaves few customer protections in place. It would
eliminate some requirements that banks report interest rates
on customer accounts in uniform, easy-to-compare terms. It
would also gut the Community Reinvestment Act, which requires
banks to lend money in the neighborhoods where they take
deposits or else possibly relinquish the right to merge or
open and close branch offices. The act requires reform
because enforcement is needlessly expensive. But the answer
is to clarify and tighten standards, the solution the
Administration has already taken.
The bill will make banks more profitable. But it will also
invite some of the sordid practices that contributed to the
$500 billion that the savings and loans failures cost
taxpayers.
The Administration has expressed opposition to many of the
banking provisions. But it has remained silent on the
securities bill. Apparently, powerful Democrats, like
Christopher Dodd of the insurance state of Connecticut, have
pressured the White House to remain mum.
President Clinton seems eager to run as a candidate who
could work with the Republican Congress but protect Americans
from G.O.P. excesses. He could demonstrate his worth by
vowing to veto the securities and banking bills--and any
others that would put the interests of deceptive executives
above those of ordinary voters.

Exhibit 2

[From the Baltimore Sun, June 26, 1995]

Safe Harbors for Financial Fraud

In the wake of the nation's savings and loan debacle, the
financial derivatives shock to U.S. pension systems, the junk
bond manipulations of Mike Milken, one could expect Congress
to bolster the rights of investors in securities fraud cases.

[[Page S9038]]

Instead, Capitol Hill legislators are rallying to protect
the interests of corporate executives, securities dealers,
lawyers and accountants against the claims of victims of
financial crimes.
Legislation approved by the House and awaiting a Senate
floor vote today would grant virtual immunity to these
participants in securities fraud lawsuits. Executives who
hype their companies' financial projections to jack up the
stock price would be sheltered from legal action.
Bondholders defrauded by Charles Keating and his S&L scam,
the largest in U.S. history, would find it almost impossible
to sue the co-defendants for relief under the pending bill.
They recovered $240 million from Keating's accountants,
lawyers and securities dealers, although still losing nearly
40 percent of their money.
Originally drafted to reduce the number of frivolous
investor lawsuits against corporations, the bill was pushed
by Silicon Valley companies whose fortunes are highly
volatile. But the sweeping protections included have fired
the opposition of investor groups, advocates for the elderly
and even the federal Securities and Exchange Commission.
The number of federal securities fraud cases has nearly
doubled over the past decade. But the SEC, which polices
securities fraud, says that investor lawsuits are important
in accomplishing its mission. A study released last month by
the Congressional Research Service finds the number of
securities suits against companies ``exceptionally small.''
The loudest complaints have come from the elderly, whose
retirement assets are most vulnerable to fraud. Senior
citizens account for over 30 percent of securities fraud
victims, according to a study by the Gray Panthers.
The House bill includes the chilling proviso that the
losers of a fraud lawsuit must pay lawyer bills of those they
sued. The Senate measure would limit defendant responsibility
in lawsuits only to their degree of proven guilt, instead of
making all parties liable for fraud settlements.
The arsenal of weapons against investors in the legislation
shows that it is more about protecting the shadowy dealings
of corporate leaders and their professional confederates than
in limiting frivolous class action lawsuits. If the integrity
of the marketplace is to be truly protected, the Senate will
vote down this invitation to expanded investor fraud.

Exhibit 3

[From the New York Times, June 25, 1995]

Securities Litigation Bill Is Reform in Name Only

(By Mark Griffin)

What's in a name? In the case of the ``Private Securities
Litigation Reform Act of 1995,'' consumers will find a world-
class misnomer. Now before the Senate, the bill is more
accurately described as securities litigation repeal. For
millions of middle-class American investors, the fate of this
bill--and the even more radical version passed by the House
of Representatives in March--could spell the difference
between recovering or losing billions of dollars from
securities fraud.
Securities litigation reform began with the intent of
putting some weights around the ankles of a few fleet-footed
lawyers; but the measure now dangerously close to Senate
passage would wind up being a noose around the neck of
defrauded investors. While everyone agrees on the need for
reasonable reform, numerous public-minded groups are strongly
opposed to radical steps in the Senate bill, S. 240, that
would snuff out key investor rights.
If securities litigation reform was the real goal here, the
widespread support that exists for reasonable steps to curb
lawsuit abuses would have insured easy passage. But the bill
now before the Senate would rein in frivolous lawsuits only
by making it virtually impossible for consumers to pursue
rightful claims. Here we see the financial world's equivalent
of the notorious Vietnam ``hamlet strategy'': we must destroy
this village in order to save it.
The reality is that the main intent of this legislation,
despite what its proponents say, is to provide a shield for
all but the most extreme cases of fraud. Have the members of
the Senate already forgotten the financial scandals of the
1980's that cost investors and taxpayers billions of dollars?
Is it really good public policy to erect protective barriers
around future wrongdoers who will be emboldened to emulate
Lincoln Savings and Loan and Prudential Securities?
At the heart of consumer concerns over this legislation are
two key problems.
Under current rules, public companies are prevented from
deceiving investors by reasonable restrictions on statements
concerning future corporate performance, known as ``forward-
looking statements.'' The original S. 240 created a limited
``safe harbor'' for such statements, but the harbor was
changed to an ocean. So now the Senate is considering a
measure that protects any reckless or irresponsible statement
by a company about its future as long as the statement is
represented as forward-looking and notes that actual results
may differ.
The Senate bill narrowly defines as fraudulent only those
statements ``knowingly made with the expectation, purpose and
actual intent of misleading investors.'' As if this was not a
loose enough standard the bill require that each of the three
conditions be proven separately in court.
Consequently, S. 240 is a dagger aimed at the heart of what
makes possible strong public confidence in the markets: full,
fair disclosure mandated under Federal securities law. Arthur
Levitt, Jr., the Securities and Exchange Commission chairman,
has noted: ``I cannot embrace proposals which allow willful
fraud to receive the benefit of safe harbor protection.''
Perhaps the clearest sign, however, that the bill's
proponents have sold middle-class investors down the river is
their refusal to lengthen the time in which consumers can
bring cases to court. The current rule derives from a 1991
Supreme Court decision that created a statute of limitations
for Federal securities law cases of one year from discovery
of a misdeed or three years from the commission of the act in
question. This represented a serious reduction in the time
available for such lawsuits, since Federal courts previously
had relied on state standards for statutes of limitation.
Currently, 31 states permit longer than the ``1 and 3''
standard for the filing of state securities cases. What
possible case can the backers of this bill make for keeping
the time limit as short as possible so that future swindlers
who cover their tracks carefully will get off the hook for
good?
Fortunately, efforts are under way to pull the measure back
toward the interests of small investors. Among the amendments
expected to be deliberated on the Senate floor this week are
measures that would: replace the expansive safe harbor for
forward-looking statements with a directive to the S.E.C. to
continue its rulemaking efforts in this area; lengthen the
statute of limitations for private securities fraud actions;
fully restore aiding and abetting liability under the
securities laws, an established concept that before it was
recently removed by a Supreme Court decision, made it
possible to sue even indirect participants in a fraud, and
lift the severe limitations the bill imposes on joint and
several liability, allowing investors to continue recovering
from all participants in the fraud.
The difference between reform and repeal of securities
litigation is an enormous one for middle-class investors in
America. Based on current payments to securities class-action
claimants, it should be expected that shutting the doors of
America's courthouses over the next five years to securities
fraud victims will result in 1.79 million investors losing
the right to recover approximately $2.87 billion. Even these
numbers may underestimate matters.
By loosening the Federal laws that now empower citizens to
go to court to restrain misconduct in our financial
marketplace, Congress has the potential to unleash a new,
painful era of financial fraud.

Exhibit 4

Government Finance

Officers Association,

Washington, DC, June 8, 1995.
Hon. Paul S. Sarbanes,
U.S. Senate, Washington, DC.
Dear Senator Sarbanes: I am writing on behalf of the more
than 13,000 state and local government financial officials
who comprise the membership of the Government Finance
Officers Association (GFOA) to bring to your attention
serious concerns we have with the Securities Litigation
Reform Act, S. 240, recently approved by the Senate Banking
Committee. As you know, the GFOA is a professional
association of state and local officials who are involved in
and manage all the disciplines of public finance. The state
and local governmental entities our members represent bring a
unique perspective to this proposed legislation because they
are both investors of billions of dollars of public pension
funds and temporary cash balances, and issuers of debt
securities as well.
We support efforts to deter frivolous securities lawsuits,
but we believe that any legislation to accomplish this must
also maintain an appropriate balance that ensures the rights
of investors to seek recovery against those who engage in
fraud in the securities markets. We believe that S. 240 does
not achieve this balance, but rather erodes the ability of
investors to seek recovery in cases of fraud.
The strength and stability of our nation's securities
markets depend on investor confidence in the integrity,
fairness and efficiency of these markets. To maintain this
confidence, investors must have effective remedies against
those persons who violate the antifraud provisions of the
federal securities laws. In recent years, we have seen how
investment losses caused by securities laws violations can
adversely affect state and local governments and their
taxpayers. It is essential, therefore, that we fully maintain
our rights to seek redress in the courts.
S. 240 would drastically alter the way America's financial
system has worked for over 60 years--a system second to none.
Following are the major concerns state and local governments
have with this ``reform'' legislation:
Fraud victims would face the risk of having to pay the
defendant's legal fees if they lost. S. 240 imposes a
modified ``loser pays'' rule that carries the presumption
that if the loser is the plaintiff, all legal fees should be
shifted to the plaintiff. The same presumption, however,
would not apply to losing defendants. The end result of this
modified ``loser pays'' rule is that it would strongly
discourage the filing of securities fraud claims by victims,
regardless of the merits of the cases. This is particularly
true for state and local governments that have lost taxpayer
funds through investments, involving

[[Page S9039]]

financial fraud in derivatives, for example, but who simply
cannot afford to risk further taxpayer funds by taking the
risk that they might lose their case and have to pay the
legal fees of large corporations. The argument is made that a
modified loser pays rule is necessary to deter frivolous
lawsuits, but we understand there are only 120 companies sued
annually--out of over 14,000 public corporations, and that
the number of suits has not increased from 1974.
Fraud victims would find it exceedingly difficult to fully
recover their losses. Our legal standard of ``joint and
several'' liability has enabled defrauded investors to
recover full damages from accountants, brokers, bankers and
lawyers who help engineer securities frauds, even when the
primary wrongdoer is bankrupt, has fled or is in jail. S. 240
sharply limits the traditional rule of joint and several
liability for reckless violators. This means that fraud
victims would be precluded from fully recovering their
losses.
Wrongdoers who ``aid and abet'' fraud would be immune from
cases brought by fraud victims. As you know, aiders had been
held liable in cases brought by fraud victims for 25 years
until a 5-4 Supreme Court ruling last year eliminated such
liability because there was not specific statutory language
in federal securities law. If aiders and abettors are immune
from liability, as issuers of debt securities, state and
local governments would become the ``deep pockets,'' and as
investors they would be limited in their ability to recover
losses. The Securities and Exchange Commission and the state
securities regulators have recommended full restoration of
liability of aiders and abettors and GFOA supports that
recommendation.
Wrongdoers would be let off the hook by a short statute of
limitations. We had supported the modest extension of the
statute--from one year from discovery of the fraud but no
more than three years after the fraud to two years after the
violation was, or should have been, discovered but not more
than five years after the fraud was committed--that was
contained in an earlier version of S. 240. We are
disappointed that this extension was removed in the
Committee's markup of the legislation and hope it will be
restored when the full Senate considers the bill.
Under S. 240, corporations could deceive investors about
future events and be immunized from liability in cases
brought by defrauded investors. Corporate predictions are
inherently prone to fraud as they are an easy way to make
exaggerated claims of favorable developments to attract
investors. The ``safe harbor'' in S. 240 is a very broad
exemption and immunizes a vast amount of corporate
information so long as it is called a ``forward-looking
statement'' and states that it is uncertain and there is risk
it may not occur. Such statements are immunized even if they
are made recklessly. We believe this opens a major loophole
through which wrongdoers could escape liability while fraud
victims would be denied recovery.
Access to fair and full compensation through the civil
justice system is an important safeguard for state and local
government investors, and is a strong deterrent to securities
fraud. We believe. S. 240 as written does not provide such
access to state and local governments or to other investors.
Just as state and local government investors are urged to use
extreme caution in investing public funds, the Senate should
use extreme caution in reforming the securities regulation
system.
We hope you will work to bring about needed changes in the
legislation when it is considered by the full Senate. If
there is any way we can help in this effort, please do not
hesitate to call on us.
Sincerely,
Catherine L. Spain,
Director, Federal Liaison Center.
____

North American Securities

Administrators Association, Inc.,

Washington, DC, June 20, 1995.
Re S. 240, the ``Private Securities Litigation Reform Act.''

Hon. Paul S. Sarbanes,
U.S. Senate, Hart Senate Office Building, Washington, DC.
Dear Senator Sarbanes: The full Senate may consider as
early as Wednesday or Thursday of this week, S. 240, the
``Private Securities Litigation Reform Act of 1995.'' On
behalf of the North American Securities Administrators
Association (NASAA), we are writing today to express the
Association's opposition to S. 240 as it was reported out of
the Banking Committee. In the U.S., NASAA is the national
voice of the 50 state securities agencies responsible for
investor protection and the efficient functioning of the
capital markets at the grassroots level.
While everyone agrees on the need for changes to the
current securities litigation system, not everyone is
prepared to deny justice to defrauded investors in the name
of such reform. Proponents of the bill make two claims:
first, that they have modified the bill to satisfy many of
the objections to the earlier version; and second, that the
bill will not prevent meritorious claims from going forward.
Neither claim is accurate. First, the changes made to the
bill do little to resolve the serious objections to S. 240
raised by NASAA and its members. In fact, it may be argued
that during the Banking Committee's deliberations the bill
was made less acceptable from the perspective of investors.
Second, it is NASAA's view that the bill succeeds in curbing
frivolous lawsuits only by making it equally difficult to
pursue rightful claims against those who commit securities
fraud.
The reality is that the major provisions of S. 240 will
work to shield even the most egregious wrongdoers among
public companies, brokerage firms, accountants and others
from legitimate lawsuits brought by defrauded investors. Do
we really want to erect protective barriers around future
wrongdoers?
NASAA agrees that there is room for constructive
improvement in the federal securities litigation process. The
Association supports reform measures that achieve a balance
between protecting the rights of defrauded investors and
providing relief to honest companies and professionals who
may unfairly find themselves the targets of frivolous
lawsuits. Regrettably, S. 240 as approved by the Senate
Banking Committee fails to achieve this necessary balance.
Although this bill has been characterized in some quarters
as an attempt to improve the cause of defrauded investors in
legitimate lawsuits, that simply is not the case. Attempts to
incorporate into the bill provisions that would work to the
benefit of defrauded investors were rejected when the Banking
Committee considered the bill. At the same time, the few
provisions in the original bill that may have worked to the
benefit of defrauded investors were deleted.
For example, during the Committee' deliberations: (1) the
rather modest extension of the statute of limitations for
securities fraud suits contained in the original version was
deleted; (2) attempts to fully restore aiding and abetting
liability under the securities laws were rejected; (3) a
regulatory safe harbor for forward-looking statements
contained in the original version of S. 240 was replaced with
an overly broad safe harbor for such information, making it
extremely difficult to sue when misleading information causes
investors to suffer losses; and (4) efforts to loosen the
strict limitations on the applicability of joint and several
liability were rejected, making it all but impossible for
more than a very few to ever fully recover their losses when
they are defrauded. The truth here is that this is a one-
sided measure that will benefit corporate interests at the
expense of investors.
As state government officials responsible for administering
the securities laws in our jurisdictions, we know the
important role private actions play in the enforcement of our
securities laws and in protecting the honesty and integrity
of our capital markets. The strength and stability of our
nation's securities markets depend in large measure on
investor confidence in the fairness and integrity of these
markets. In order to maintain this confidence, it is critical
that investors have effective remedies against persons who
violate the anti-fraud provisions of the securities laws.
When S. 240 is considered on the Senate floor, it is
expected that several pro-investor amendments will be offered
in an attempt to inject some balance into the measure. Among
the amendments we expect to be offered are those that would:
(1) extend the statute of limitations for private securities
fraud actions; (2) fully restore aiding and abetting
liability under the securities laws; (3) replace the
expansive safe harbor for foward-looking statements with a
directive to the Securities and Exchange Commission to
continue its rulemaking efforts and report back to Congress;
and (4) lift the severe limitations on joint and several
liability so that defrauded investors may fully recover their
losses.
On behalf of NASAA, we respectfully encourage you to vote
in favor of all such amendments when they are offered on the
Senate floor. If all four amendments are not adopted, we
respectfully encourage you to oppose S. 240 on final passage.
NASAA regrets that the Association cannot support the
litigation reform proposed as reported out of the Senate
Banking Committee. The Association believes that this issue
is an important one and one that should be addressed by
Congress. However, NASAA believes that is more important to
get it done right than it is to get it done quickly. S. 240
as it was reported out of the Banking Committee should be
rejected and more carefully-crafted and balanced legislation
should be adopted in its place.
If you have any questions about NASAA's position on this
issue, please contact Maureen Thompson, NASAA's legislative
adviser.
Sincerely,
Philip A. Feign,
Securities Commissioner, Colorado Division of Securities,
President, North American Securities Association.
Mark J. Griffin,
Director, Utah Securities Division, Chairman, Securities
Litigation Reform Task Force of the North American Securities
Administrators Association.

Mr. DOMENICI. Mr. President, we have 29 minutes on this amendment?
The PRESIDING OFFICER. There are 28 minutes 25 seconds.

[[Page S9040]]

Mr. DOMENICI. I yield myself 15 minutes.
Mr. President, I would like to speak to the Senate about this reform
measure and in my own way lead up to the amendment which is the subject
matter of today's discussion.
This new system--and that is what it is--builds a better system for
investors in 12 very succinct, easy to understand ways.
First, it puts investors with real financial interests, not lawyers,
in charge of the cases. It puts investors with real financial
interests, not professional plaintiffs with one or two shares of stock,
in charge of the case.
Second, it requires notification to investors that a lawsuit has been
filed so that all investors can decide if they really want to bring a
lawsuit. It is likely that people trusted to manage pension funds and
mutual funds, that is, institutional investors, will get more involved
under this new system. Actually, at this point, for the most part, they
sit on the sidelines and let the class action lawsuit affecting them
proceed, managed by the lawyer that filed it and the plaintiffs that
were with them.
Third, this bill puts the lawyer and his clients on the same side.
Reforms that change the economics of cases, proportionate liability,
settlement terms and disclosure, are part of that.
Fourth, it prohibits special side deals where pet plaintiffs get
$10,000, $15,000, or $20,000 for their part in a suit. It protects all
investors, not just the lawyers' pet plaintiffs so that settlements
will be fair to all investors.
Fifth, it stops brokers from selling names of investors to lawyers.
Sixth, it creates an environment where those running our
corporations, CEO's or chairmen of the board, can and will talk about
their predictions about the future without fear of being sued every
time they make a prediction that turns out to be not exactly what
happens to the company or somewhat off the mark. So it gives investors
a system with better disclosure of important information. And this has
to do with safe harbor, which will be discussed later today as we
proceed with this bill.
Seventh, it provides better disclosure of how much a shareholder
might get under a settlement and how much the lawyers will get so that
shareholders can challenge excessive lawyers' fees.
Eighth, it prohibits secret settlements where attorneys can keep
their fees a secret. This is a restriction on settlements under seal.
Ninth, limits the amount that attorneys can take off the top. Limits
attorney's fees to a reasonable amount instead of the confusing
calculations which are currently part of this system we want to amend
and modify.
Tenth, provides a uniform rule about what constitutes a legitimate
lawsuit. So that it will no longer matter where a case is filed.
Investors in Albuquerque, N.M.; Atlanta, GA; New York City; or
Nashville, TN, will have the same rules as investors in any of the
other cities. That is pleading reform. It stops fishing expeditions
where lawyers can force thousands of dollars, worth of discovery money
and demand thousands of company documents before a judge can decide if
the complaint really states a cause of action, so that it might be
dismissed before the costs of discovery are ever incurred.
Eleventh, the last two make merit matter so that strong cases recover
more than weak cases. It makes sure that people committing fraud
compensate victims. It improves upon the current system so that victims
will recover more than 6 cents on a dollar.
Twelfth, it will weed out frivolous cases. It gives lawyers and
judges more time to do a good job to protect investors in meritorious
cases. High-technology company executives can focus on running their
companies and growing their businesses. Investors will get higher stock
prices and bigger dividends.
This Senate bill, S. 240, which is before us does exactly what
Chairman Arthur Levitt said the system should do--protect all
investors, not just a few.
Having said that, obviously there are groups of Americans that may be
considered to be more vulnerable than others in the American profile of
people, but let me talk a little bit about senior citizen investors and
what we were able to find out about what they want and what they do not
want.
In March 1995, the National Investor Relations Institute commissioned
a poll of Americans age 50 and over who invest in either stock or
mutual funds.
Eighty-seven percent said they worried that lawsuits are diverting
resources that could be used on product research and business expansion
to create jobs; 79 percent said defendants should only pay damage
awards according to their percentage of fault, the very issue that is
partially at stake in the Sarbanes amendment; 81 percent said they
would like to see mandatory penalties against lawyers who aid in
bringing a frivolous suit; 70 percent said the lawyer of a frivolous
lawsuit should pay the legal fees of both sides; 70 percent said at
least one member of their household was a member of the American
Association of Retired Persons.
I state that because this is what they think when asked about these
subjects. Yet, the AARP seems somewhat on the other side, although it
is hard to tell exactly what it is they want.
Those polls are correct. The Banking Committee record backs up the
opinions of senior citizen investors.
Eighty-seven percent of senior citizen investors said lawsuits are
diverting resources that could be used on product research and business
expansion to create jobs. They are right. The Banking Committee hearing
revealed, and I can go through a whole series of situations where
precisely what that concern is, is revealed case by case by small- and
medium-size and startup American companies.
John Doerr, venture capitalist was involved in three law suits:
Settlement, $66 million; legal fees to defend, $12 million; management
time, 20 person years, total over 10 years, $120 million.
The sum of $120 million will employ 200 first-rate engineers for a
decade, creating faster, cheaper better products.
John G. Adler, CEO Adaptec, litigation costs of the ``million dollar
fishing expedition'' would have paid for 20 additional engineers.
Dennis W. Bakke, AES spent an amount equal to one-half its annual
budget for developing new power project throughout the world. Just one
plant creates 1,300 jobs and $4 billion in economic activity.
D&O increased sevenfold over last decade. Adept Technology, the only
U.S. robotics company, pays $450,000 for $5 million in D&O insurance. A
similar Canadian company pays $40,000 for a $4 million policy.
The litigation tax represents a team of five or six engineers, a new
product or new technology.
Ed McCracken, CEO Silicon Graphics: current system is ``uncontrolled
tax'' on innovation that is ``impacting real creation of jobs.''
Seventy-nine percent of senior citizen investors say defendants
should pay the damage award according to percentage of default. They
are right. Present and former SEC Chairmen Levitt, Breeden, and Ruder
agree with them, so do former SEC Commissioners Beese and Sommer.
Under current law, someone who is only 1 percent responsible can be
made to pay the entire amount, the entire judgment, the entire award.
Breeden, former SEC Chairman, called the present system ``inverted,
disproportionate liability.'' Parties who are central to perpetrating a
fraud often pay little, if anything. At the same time, those whose
involvement might be only peripheral and lacked any deliberation or any
knowing participation in the fraud often pay most of the damage.
Joint and several is the engine that drives abusive securities
lawsuits. Plaintiffs' class action lawyers know this and use it to
extract settlements. We should not turn professionals into insurers. We
should not turn accounting firms, lawyers, and others who are the
professionals involved in securities into insurers. Inclusion of deep
pocket defendants increase the likelihood of settlement. Including an
accounting firm or underwriter, they might add about one-third to the
expected settlement value of the case. That is what the National
Economic Research Associate study said.
One accounting firm was sued for $200 million, paid $999,000 in
settlement, spent $8.4 million in defense in a case growing out of
gross fees to that firm

[[Page S9041]]

of $91,000. No auditors for high-technology companies; hard-to-find
directors--all of these things are happening--no choice but to settle.
These are qualities that the current system is creating in our economic
environment. No auditors for high-technology companies; hard-to-find
directors; no choice but to settle.
These cases have a settlement rate between 85 and 95 percent. This is
because no one can chance going to trial. The settlement rate for most
civil litigation is 40 to 45 percent, a huge difference in these kinds
of cases. Limiting joint and several liability will significantly
reduce the number of frivolous suits brought against defendants who
have done nothing wrong but are seen as deep pockets. One of the most
active plaintiff class action lawyers wrote:

Class actions are judicial monstrosities.

Enacting two-tiered liability will make sure we have fewer frivolous
judicial monstrosities. This bill, S. 240, would retain current law for
defendants who engage in knowing fraud. So when we speak of safe harbor
and proportionate liability, let us understand that in this new law,
defendants who engage in knowing fraud are liable for the entire amount
and there is no safe harbor for them. Other defendants who have some
culpability are responsible for their share of the judgment, with two
exceptions, and they are two items we are speaking about on the floor
today.
Small investors: All defendants are jointly and severally liable for
small investors; that is, a net worth of $200,000 or less who lost 10
percent or more of their net worth.
In a very real sense, what we are doing there is providing some
insurance for them and saying that this system ought to provide that
kind of insurance.
Also, in the case of insolvent codefendants, we say the solvent
defendants must make an additional payment up to 50 percent of their
own liability.
All of these were efforts to make this bill unquestionably fair and
fair-intentioned.
Let us move on to 81 percent of the senior citizen investors said
they would like to see mandatory penalties against lawyers who aid in
bringing frivolous suits; 70 percent said the loser of a frivolous suit
should pay the legal fees of both sides. S. 240 makes a modest step to
do what the seniors want and what they want us to do. It makes the
judges--and I repeat, it makes the judges--look closer at these cases
and to discipline lawyers who file frivolous suits.
Whenever one of these lawsuits is finished, dismissed, settled, or
taken to trial, the judge is required to make a determination regarding
all attorneys: Did the attorneys comply with rule 11? Did the case have
some basis? Did the defense have some basis? If not, the judge must
impose penalties, and if the judge finds that rule 11 was violated, the
case was frivolous and the case was thrown out of court on a motion to
dismiss, the presumption is the class action attorney will pay the
prevailing attorney's legal fees. That is a far cry from loser pay but
a small step in the direction of trying to get what 81 percent of the
senior citizen investors said, and that is bring some accountability to
lawyers who file frivolous lawsuits in this area of the law.
Seniors in the poll thought Congress should go further. Frankly, I
would have preferred something stronger, but this is a good compromise
and it ought to be retained and clearly will be a step in the right
direction.
Seventy percent of the senior investors said at least one member of
their households was a member of the AARP. AARP wrote the committee a
letter on May 24. They oppose loser pay even though the poll showed
seniors said it was a good idea. The bill has no loser pay provision.
It has the provisions I have just described.
They oppose proportionate liability, yet the seniors polled thought
it was a good idea. Any attempt to raise scienter knowledge from the
standard of reckless to intentional omissions. The bill does not alter
the conduct actionable under the securities law.
The PRESIDING OFFICER. The Senator has consumed his 10 minutes.
Mr. DOMENICI. I yield myself 5 additional minutes. They added to
their opposition a concern about safe harbor which we will discuss
later.
I ask that as part of my discussion here this morning with the
Senate, that these poll results in detail be printed in the Record.
They are only 2\1/2\ pages long.
The PRESIDING OFFICER. Without objection, it is so ordered.
There being no objection, the material was ordered to be printed in
the Record, as follows:

New Poll Finds Senior American Investors Support Securities Litigation
Reform

Washington, March 22.--By an overwhelming margin, Americans
aged 50 and over who invest in stocks or mutual funds say
they favor legislation that would make it harder for lawyers
to file frivolous securities lawsuits against America's high
growth companies.
Nearly seven out of ten investors surveyed say they favor
legal reforms to crack down on lawsuit abuse. According to a
new survey conducted by Public Opinion Strategies for The
National Investor Relations Institute (NIRI), eight out of
ten (81 percent) say they would like to see mandatory
penalties against lawyers ``who aid in bringing a frivolous
lawsuit''; more than two-thirds (70 percent) say the loser of
a frivolous suit should pay the legal fees of both sides; and
79 percent say defendants should only pay damage awards
according to their percentage of fault. Only 21 percent of
those polled oppose litigation reform.
The survey, completed shortly after a 325-99 bipartisan
vote by the House of Representatives for securities
litigation reform, was released in advance of Senate
consideration of reform measures.
It shows that older investors are concerned that excessive
lawsuits hurt American competitiveness. Some (87 percent) say
they worry that lawsuits are diverting resources that could
be used on product research and business expansion to create
jobs.
A similar number (88 percent) believe lawyers, not
shareholders, are the primary beneficiaries of securities
lawsuits. Asked about a variety of legislative options,
investors favored measures to penalize those who abuse the
system:
Question. Please tell me whether you would FAVOR or OPPOSE
each of the following proposals.

[In percent]
------------------------------------------------------------------------
Don't
Total Total know/
favor oppose refused
to answer
------------------------------------------------------------------------
Requiring the loser of a frivolous 69 24 7
lawsuit to pay legal fees for both
sides.................................
Requiring mandatory penalties for 81 12 7
lawyers who aid in bringing a
frivolous lawsuit.....................
Forcing defendants to only pay damage 79 12 9
awards according to their percentage
of fault, instead of forcing them to
pay damages they are not responsible
for...................................
Limiting so-called professional 57 25 18
plaintiffs to five class action suits
every three years.....................
Prohibiting participation in a suit by 58 31 11
an attorney owning the stocks or
mutual funds at issue.................
------------------------------------------------------------------------

Louis M. Thompson, NIRI President & CEO, said the survey
demonstrates that many American investors are concerned that
lawsuits erode the value of their investment savings as they
near retirement age. More than one-third of those polled are
age 65 or older and 70 percent said that at least one member
of their household was a member of the American Association
of Retired Persons.
``Frivolous lawsuits pose a direct threat to the financial
well being of those Americans who are investing for their
future, including retirement,'' Thompson said. ``These
lawsuits don't just target companies, they paste a bulls eye
on American investors.''
Survey respondents also say stock price declines are a
normal investment risk and not, by themselves, evidence of
fraud or grounds for a lawsuit. Only 15 percent say an annual
decline of 50 percent in a stock's value was grounds for a
lawsuit, and only one in ten believe a 10 percent decline in
a few days is grounds for legal action. However, 85 percent
say a company that knowingly provides false information to
investors should be sued.
The survey of 800 American investors aged 50 or above was
conducted by Public Opinion Strategies on March 18-21. The
survey has a margin of error of plus or minus 3.5 percent.
All those surveyed reported investments in stocks or mutual
funds. Copies of the full study can be obtained by calling
NIRI at 703-506-3570.
The National Investor Relations Institute, now in its 25th
year, is a professional association of 2,650 corporate
officers and investor relations consultants responsible for
communication between corporate management, shareholders,
security analysts and other financial publics.
Mr. DOMENICI. Mr. President, S. 240 is good for small investors.
Investor empowerment increases control over lawsuits and settlements.
The current system involves class members who sign on the dotted line
to claim their share of a settlement or recovery, usually amounting to
6 to 8 cents on the dollar. Investors receive also insufficient
settlement information.
Lawyers often compromise the classes' best interests to maximize
lawyer

[[Page S9042]]

fees. Example: In the Prudential Insurance case, the attorneys wanted
to settle for $37 million. The California securities director, Gary
Mendoza, objected, and got the class $90 million. Then they wanted to
base their fees on the bigger settlement, even though they originally
were willing to settle the case for much less.
The bill shifts some of the power in these cases from the
entrepreneurial class action attorneys to the people who have an
expertise in managing retirement funds and other members of the class
who are not ``pet plaintiffs.'' It also vests more power in the judges
who have to be the final arbiter of these cases, including the money
that goes to the lawyers.
It requires lawyers to actually locate plaintiffs who genuinely are
aggrieved before filing the suit. Notice of settlement proposals have
to be sent to the class, be in a user-friendly format which they can
understand, provide clear and specific information relevant to
investors' decision whether to accept settlement, challenge legal fees,
opt out or say no thanks.
Under the current system, individuals can be bound by the settlement
without knowing anything about it. But under S. 240 investors will get
a phone number to call for information, and we can go on with more and
more details that make this a good bill for the investors of this
country. Small investors, large investors, institutional investors, I
hope, will be playing a more significant role in the future as we move
to the courts of our land on these kinds of class action suits.
Now, Mr. President, I ask unanimous consent that a statement I have
prepared regarding millions of dollars for the lawyers and coupons for
the plaintiffs be printed in the Record at this point.
There being no objection, the material was ordered to be printed in
the Record, as follows:

Millions for Lawyers, Coupons for Plaintiffs

Members of the plaintiff class each received a $400
nontransferable coupon good for a year toward a new Ford in
litigation concerning leaky roofs in Ford Mustangs. The
lawyers received about $1 million in fees and expenses and
``A Fistful of Coupons,'' New York Times, May 26, 1995.
Professors are known for their academic temperament.
Professors are thoughtful and scholarly in their writings.
Professor John Coffee of Columbia Law School wrote about
class action lawsuits where the plaintiffs get coupons and
the lawyer takes the cash:
``These script settlements tend to be used by lawyers who
are not zealous on behalf of the class.''
Plaintiffs weren't so scholarly in their commentary:
``The whole idea that the lawyer collects a million and the
person collects nothing is the most asinine thing that I have
ever heard.''
This plaintiff class would have benefited from S. 240: Most
adequate plaintiff; disclosure of settlement terms; and
attorney fee reform.

Mr. DOMENICI. Proportionate liability. According to Arthur Levitt,
the current system is bad for all investors. So let me talk about that
for a minute. Creating a sound liability scheme is a balancing
exercise, all investors versus the plaintiffs' class action lawyers and
investors who happen to be plaintiffs in the case. Investors who are
plaintiffs get 6 to 14 cents on the dollar. The current system
obviously is not working very well and, clearly, litigation has an
adverse impact on investors and on businesses.
The current system is working even worse than many think. Investors
are harmed when their company is frivolously sued. Stock prices are
depressed. Dividends are less than they would have been, and management
is sidetracked and loses much energy in figuring out what to do with a
lawsuit instead of making the company work, grow, and prosper. Small
companies cannot obtain outside directors and professional advisers;
directors' and officers' insurance gets more and more expensive. That
means they pay less for their company's activities. There would be
smaller raises, fewer new jobs, and fewer new products.
Arthur Levitt, in his April 6 written testimony, after discussing the
interest in compensating plaintiff/investors, said:

The Commission recognizes that there are competing policy
considerations that are also derived from concern with the
long-term interests of investors.

It is true that Chairman Levitt has made what I consider
``sequentially evolving statements.'' His three most recent
pronouncements indicate that he disagrees with the premise of the
Sarbanes amendment that joint and several liability is always
appropriate when a codefendant is insolvent.
Arthur Levitt supports modifying joint and several liability in
certain contexts. Support for a two-tier liability system is one
modification and S. 240 is a two-tier system.
In response to questions from Senators D'Amato and Sarbanes during
the April 6 hearing, Arthur Levitt said:

I think in those instances where conduct was willful fraud
or in those instances where we're talking about an issuer,
that joint and several liability should still apply.

The bill retains joint and several liability for knowing fraud.
Arthur Levitt said further:

I think when we're talking about other instances, a
proportionate liability scheme that was limited to fraud on
the market cases where the conduct may have been reckless, I
believe that would be a fair way of balancing it.

A May 25 letter to Chairman D'Amato identifying problems with the
committee print did not mention joint and several liability.
In the SEC's submission to OMB, they did not oppose the joint and
several provision of S. 240 and did not argue for change sought by this
amendment.
The SEC did not indicate any dissatisfaction with the way
responsibility is allocated in the event of an insolvent codefendant.
Jane Bryant Quinn's article in Newsweek endorses proportionate
liability.
We have to be concerned about real world effect of these litigation
rules.
Mr. President, I ask unanimous consent that the Boston Globe
editorial called ``Stock Response,'' in which they end up saying the
bill, as modified, before the Senate is a bill that should be adopted,
be printed in the Record.
The PRESIDING OFFICER. Without objection, it is so ordered.
There being no objection, the article was ordered to be printed in
the Record, as follows:

[From the Boston Globe]

Stock Response

Younger, high-tech Massachusetts corporations give the
state much of its economic vitality. But their volatility has
provided fodder for litigants who exploit weaknesses in tort
law to make extra bucks from the vulnerable. A bill now
moving through Congress would tighten terms under which suits
could be brought against corporations when performance fails
to match expectations. It would also reverse the trend toward
reducing information available to genuine investors.
So-called strike suits sometimes follow sharp drops in
stock prices associated with unexpected bad news, usually
failure to meet predicted performance in sales or profits.
Such disappointments are more frequent among newer
corporations that are often dependent on a single product or
a narrow range of products. Performances are apt to be
erratic, and the loss of a single customer can inflict
serious but temporary injury to sales figures.
Enterprising lawyers specializing in identifying such
situations sometimes team with stockholders--some with minor
stakes--to bring quick suits when company officers had
predicted better results. Too often it is the business
equivalent of suing your tout sheet, or maybe the horse, if
you lose money at the track. Managements frequently settle
rather than engage in costly litigation, even though they
might ultimately win at trial. Furthermore, they have become
increasingly wary of making any projections, to the detriment
of the full disclosure that underlies a free market.
A move to make such suits more difficult while protecting
shareholders from fraud by unscrupulous managements has been
evolving in Congress for three years. It permits managements,
with important exceptions, to make forward-looking
projections that identify risks involved.
Recent improvements in the bill have eliminated a loser-
pays provision that would have chilled legitimate challenges
to management practices, an important concession that
preserves shareholder rights. It is essential that this
protection be preserved in the conference committee as the
bill inches toward final passage.

Mr. DOMENICI. Mr. President, State and local officials support
reform. There are about 14 quotes from State officials who support it.
Mr. President, supporters of the securities litigation--we have about
four sheets of them. And I just would like to call to the attention of
the Senate in submitting these that State pension fund administrators
and regulators from the States of Colorado, Delaware, Illinois,
Massachusetts, North Carolina, Ohio, Oregon, South Carolina, and
California are among those State supporters from the State regulatory
side.

[[Page S9043]]

I ask unanimous consent that all of these be made a part of the
Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

The Overwhelming Consensus in Favor of Securities Litigation Reform

investors want reform

There is no denying that there are real problems in the
current system--problems that need to be addressed not just
because of abstract rights and responsibilities, but because
investors and markets are being hurt by litigation
excesses.--SEC Chairman Arthur Levitt (``Between Caveat
Emptor and Caveat Vendor: The Middle Group of Litigation
Reform,'' Remarks at the 22nd Annual Securities Regulation
Institute, January 25, 1995).
Most shareholder suits are brought by people who care
little, if at all, for shareholders as a group. The
plaintiffs and their lawyers make grant statements about the
integrity of the markets, but the primary motivation--and the
primary outcome--is their own returns. Typically, plaintiffs
get a small award, and their lawyers get a large one.--Nell
Minow, LENS, Inc. (``Time to Wake the Sleeping Bear,'' Legal
Times, February 13, 1995).
Our nation's securities laws were enacted to protect
investors and to improve our capital markets. However, the
perverse incentive of attorneys to file meritless claims has
created the exact opposite of the intended effects of our
securities laws. Abusive lawsuits triggered by a small group
of lawyers, inflict tremendous harm on our nation's financial
system and on the individuals and organizations drawn into
them.--Richard A. Eckstom, State Treasurer, South Carolina
(Letter to Sen. Hollings, April 17, 1995).
. . . [T]he current system is not working and needs reform.
Under our current system, defrauded investors are receiving
too little compensation while plaintiffs' lawyers take the
lion's share of any settlement.--Managers of Ten Pension
Funds representing: The Massachusetts Bay Transportation
Authority; The Teachers Retirement System of Texas; New York
City Pension Funds; Champion International Pension Plan; The
Connecticut Retirement and Trust Funds; The Oregon Public
Employees Retirement System; The State of Wisconsin
Investment Board; State Universities Retirement System of
Illinois; Eastman Kodak Retirement Plan and The Washington
State Investment Board (Letter to Sen. Dodd and Sen.
Dominici, July, 1994).
[T]he amount of damages that plaintiffs have typically
recovered represents only a percentage of their initial
claim; but the lawyers who bring the claim extract
substantial fees from any lawsuit filed. A system that was
intended to protect investors now primarily benefits their
lawyers.--J. Kenneth Blackwell, Treasurer, State of Ohio
(Letter to Sen. D'Amato, March 10, 1995).
Because shareholders are on both sides of this litigation,
it merely transfers wealth from one group of shareholders to
another. However, it wastes millions of dollars in company
resources for legal expenses and other transaction costs that
otherwise could be invested to yield higher returns for
company investors.--Judy Baar Topinka, State Treasurer, State
of Illinois (Letter to Sen. Moseley-Braun, March 16, 1995).
Investors are also being harmed by the current system, as
it shortchanges people who are victimized by real fraud . . .
The plaintiffs' lawyers who specialize in these cases profit
from brining as many cases as possible and quickly settling
them, regardless of the merits. Valid claims are being
undercompensated in the current system because lawyers have
less incentive to vigorously pursue them.--Janet C.
Rzewnicki, Treasurer, State of Delaware (Letter to Sen.
D'Amato, March 21, 1995).
The current situation in the law permits and even
encourages the filing of lawsuits with very little merit
against corporations. The benefits derived from these suits
are going primarily to attorneys. However, the payments are
actually coming from the pockets of serious, lifetime owners
of the corporations like our members.--Thomas E. O'Hara,
Chairman, National Association of Investors Corporation
(Letter to Sen. Dodd, July 19, 1994).
Nearly seven out of ten investors surveyed say they favor
legal reforms to crack down on lawsuit abuse. According to a
new survey conducted by Public Opinion Strategies for the
National Investor Relations institute, . . . [s]ome (87
percent) say they worry that lawsuits are diverting resources
that could be used on product research and business expansion
to create jobs. A similar number (88 percent) believe
lawyers, not shareholders, are the primary beneficiaries of
lawsuits.--National Investor Relations Institute (Press
Release, March 22, 1995).
The system of penalties and incentives contemplated by
Congress is turned upside down. The winners in these suits
are invariable lawyers who collect huge contingency fees,
professional ``plaintiffs'' who collect bonuses and, in cases
where fraud has been committee, executives and board members
who use corporate funds and corporate owned insurance
policies to escape personal liability. The one constant is
that the shareholders pay for it all.--Ralph V. Whitworth,
President, United Shareholders Association (Testimony before
the Securities Subcommittee, Senate Banking Committee, July
23, 1993).
We are ones who are hurt if a system allows someone to
force us to spend huge sums of money in legal costs by merely
paying ten dollars and filing a meritless cookie cutter
complaint against a company or its accountants when that
plaintiff is disappointed in his or her investment. Our
pensions and jobs depend on our employment by and investment
in our companies. If we saddle our companies with big and
unproductive costs that other countries do not pay, we cannot
be surprised if our jobs and raises begin to disappear and
our pensions come up short as the population ages.--Mayellen
Andersen, Investor and Corporate Relations Director,
Connecticut Retirement and Trusts Funds (Testimony before the
Senate Banking Securities Subcommittee, July 21, 1993).
Shareholders . . . are likely to realize only a small
percentage of their claims and have little active involvement
in the lawsuit. Plaintiff's attorneys are clearly in the
drivers seat.--Kurt N. Schacht, General Counsel, State of
Wisconsin Investment Board (Letter to Sen. Domenici,
September 27, 1993).
[T]he plaintiffs typically recover only a small percentage
of their claim, as the lawyers extract large fees for
bringing the suit. A system that was intended to protect
investors now seems to benefit the lawyers.--Bill Owens,
State Treasurer, State of Colorado (Letter to Sen. D'Amato,
April 19, 1995).
The concern about, and the reaction to, meritless lawsuits
has caused industry, as well as accounting, law and insurance
companies, to increase their costs with price tags ultimately
paid by the consumer and the investing public, including a
large percentage of our retirees and pension holders.--Joseph
D. Malone, Treasurer and Receiver General, Commonwealth of
Massachusetts (Letter to Sen. D'Amato, March 22, 1995).
[M]eritless litigations cost companies millions of
dollars--money that could be generating greater profit for
the company and higher returns for investors.--Jim Hill,
Treasurer, State of Oregon (Letter to Sen. Dodd and Sen.
Domenici, June 21, 1994).
I believe there is a compelling need to reform the current
system of securities litigation. The problem with the current
system is two-fold. First, the current system too often
promotes the filing of meritless claims. Perhaps more
importantly, the current system does not adequately serve the
interest it is designed to protect--the interests of
defrauded investors.--Gary S. Mendoza, Commissioner of
Corporations, State of California (Letter to Representative
Fields, February 9, 1995).
Investors will be the beneficiaries of meaningful reform.
The current system fails to distinguish cases of actual fraud
from frivolous cases. Typical class members receive less than
$.14 for their losses. A system where private attorneys have
an incentive to seek out cases of genuine fraud and litigate
them to conclusion will compensate investors properly and
will not coerce settlements which are paid by the
shareholders of innocent companies.--Christopher J. Murphy,
Chairman, Association of Publicly Traded Companies (Testimony
before the Securities Subcommittee, Senate Banking Committee,
March 2, 1995, at 1).
[We] are all victims. The mere threat of a securities suit
makes us reluctant to provide the marketplace with voluntary
disclosures. This impedes the efficiency of the marketplace
by preventing investors from receiving full and complete
information. Investors are harmed because investment
decisions will not be made on a fully informed basis and
their stocks will be improperly valued. . . . Please help us
turn the securities litigation system right side up by
putting investors first and plaintiffs' attorneys last.--219
California High Tech Executives (Letter to Dianne Feinstein,
July 21, 1994).
Much has been said about the fact that investors receive
little, ``pennies on the dollar'', in terms of the actual
settlement between the company and plaintiffs' attorneys.
However, just as important is the point that the vast number
of investors lost in these cases because during the period an
emerging growth company is being sued its stock becomes
moribund. Investors, large and small, are forced to wait the
process out, sell off at a price that does not accurately
reflect the company's true status and potential or exert
pressure on company officials to settle the suit regardless
of the fact that the suit is meritless.--James Morgan,
President, National Venture Capital Association (Testimony
before the Securities Subcommittee, Senate Banking, March 2,
1995, at 7).
Investors are ill-served by the present system. Because
issuers fear abusive litigation, they have sharply curtailed
the amount of information they are willing to disclose,
leaving investors without information essential for
intelligent decision making. To the detriment of
shareholders, abusive securities litigation distracts
companies from their principal tasks, discourages the
development of new businesses and inhibits sound risk taking.
Finally, the existing litigation system encourages suit
regardless of merit and cost forces defendants to settle
regardless of merit.--Lynn D. Dudley, Director of Retirement
Policy, Association of Private Pension and Welfare Plans
(Letter to Sen. Domenici and Sen. Dodd, March 17, 1995).
[M]eritless law class actions have skyrocketed. The need to
defend unfounded litigation imposes a ``litigation tax'' on
capital formation that must ultimately be paid by the
investing public.--Marc E. Lackritz, President, Securities
Industry Association

[[Page S9044]]

(Testimony before the Securities Subcommittee, Senate Banking
Committee, March 2, 1995, at 3).
If a suit is filed, it should be to redress a legitimate
wrong. If a company pays a settlement, it should be because
the company did something wrong. If an injured investor sues,
that investor should get more than a few cents on the dollar.
I think it is fair to say that the views I express today are
held by a majority of institutional investors.--Joh Lukomnik,
Deputy Comptroller, City of New York (Testifying before the
Subcommittee on Telecommunications and Finance, House Energy
and Commerce Committee, August 10, 1994).

managers of private or public pension funds

Champion International Pension Plan: Champion International
Pension Plan controls over $1.8 billion in total assets.
Connecticut Retirement and Trust Fund: The Connecticut
Retirement and Trust Fund invests over $11 billion on behalf
of over 140,000 employees and beneficiaries.
Eastman Kodak Retirement Plan: Eastman Kodak Retirement
Plan manages over $10.9 billion in total assets and is ranked
as one of the largest 60 pension plans in the U.S.
Massachusetts Bay Transportation Association: With over
12,000 participants, the Massachusetts Bay Transportation
Association controls over $772 million in total assets.
New York City Pension Funds: Over $49 billion have been
invested in the fund to insure the retirement security of
227,000 retirees and 130,000 vested employees.
Oregon Public Employees' Retirement System: Assets
controlled by the fund total over $17.2 billion. The Oregon
Public Employees' Retirement System is ranked among the
largest 30 pension plans in the U.S.
State of Wisconsin Investment Board: One of the 10 largest
pension funds in the United States, the State of Wisconsin
Investment Board manages over $33 billion contributed by the
State's public employees.
State Universities Retirement System of Illinois: The State
Universities Retirement System is ranked as one of the
country's 100 largest pension funds with total assets of $5.3
billion.
Teachers Retirement System of Texas: The Teachers
Retirement System of Texas controls over $36.5 billion in
total assets on behalf of its 700,000 members.
Washington State Investment Board: With assets totaling
over $19.7 billion, the Washington State Investment Board is
ranked in the largest 25 pension funds.

state pension fund administrators and regulators

Commissioner of Corporations, State of California.
Treasurer, State of Colorado.
Treasurer, State of Delaware.
Treasurer, State of Illinois.
Treasurer, Commonwealth of Massachusetts.
Treasurer, State of North Carolina.
Treasurer, State of Ohio.
Treasurer, State of Oregon.
Treasurer, State of South Carolina.

Mr. SARBANES. What is the time situation, Mr. President?
The PRESIDING OFFICER. The Senator has 17 minutes, 30 seconds, with 6
minutes 48 seconds on the other side.
Mr. SARBANES. I yield myself 5 minutes. I say to my colleague that I
listened carefully to his statement and it really does not address this
amendment. The statement really addresses the overall bill and the
provisions of the overall bill.
There were some of the points he made with which I agree and some
with which I disagree, but it did not really get to the question of the
amendment before us. We had the debate on Friday on the joint and
several issue, on Thursday night and Friday on the broad principle. We
are now addressing the provision that is in the bill.
I want the Senator to explain to me the fairness or equity--
obviously, the proponents of this legislation have recognized a
necessity to protect the small unsophisticated investor. What they have
provided is that if a plaintiff has a net worth of less than $200,000,
he will be regarded as such a person--$200,000. This, by their own
statement, includes all of the plaintiff's financial assets, including
stocks, bonds, real estate, and jewelry. So if you own a home, that is
going to get an awful lot of people close to the $200,000 right there.
But in addition, it would be bad enough if they said if your net worth
is $200,000 or less--you have to have a net worth of $200,000 or less
in order to be fully protected. If you are slightly above that figure,
you do not get full protection.
In addition, there is also a requirement that to be fully protected
on recoverable damages, you have to have lost more than 10 percent of
your net worth by this fraudulent scheme. So, in other words, if you
are at the $200,000 figure, you have to have lost more than $20,000 in
order to be fully protected. Why should someone who has a net worth of
only $200,000 not be fully protected if they get caught in a fraudulent
scheme and they lose $12,000? Or $15,000? Or $18,000? Where is the
equity or the fairness in that?
If you are going to limit the small people--I think the limit is too
great at $200,000, but this amendment does not address that part of the
provision that is in the bill. This amendment addresses the provision
that in addition to being limited to a $200,000 net worth, you have to
have lost more than 10 percent of your net financial worth if you are
going to be fully protected in recovering your damages.
The small people are really going to be hit hard. The small people
are really going to be hit hard because someone who has a $200,000 net
worth, but only $5,000 of risk, loses it all.
We say, ``Well, that is too bad. You will not get full protection.''
I cannot, for the moment, begin to understand the equity of that
provision, and therefore the amendment that I have sent to the desk
seeks to change that in order to provide additional protection for the
small, unsophisticated investors who have been recognized in this bill
as requiring some form of special protection.
Mrs. BOXER. Will the Senator yield?
Mr. SARBANES. I yield for a question.
Mrs. BOXER. I want to thank the Senator for this amendment. I wonder
if the Senator has seen the extraordinary list of national, State,
county, and local public officials--it is really from A to W, from
Alabama to Wyoming--that opposes this bill in its current form.
I say to my friend that if some of these amendments are passed, this
is going to make a great difference to a lot of these people, and I
think to this administration, and certainly to this Senator.
We have the Government Finance Officers Association against it, the
Municipal Treasurers Association of the United States against it, the
National League of Cities, the National Association of County
Treasurers and Finance Officers, the North American Security
Administrators Association, and attorneys general from all over the
country, including, I notice, from New Mexico and others.
These are people that do not have an ax to grind. I wonder if my
friend has seen this incredible list. It is 10 pages, single spaced, of
all the people who oppose this bill, and I have not even mentioned the
consumer groups on this issue.
Mr. SARBANES. I am not sure I have seen the list, but I hope the
Senator will include it in the Record so your colleagues will have the
benefit of seeing the list.
We have a clash amongst interest groups, no question about it. We
have a group of lawyers who very much are involved in the securities
litigation which my colleagues on the other side say are abusing the
existing system. They are trying to address that. We also have a lot of
corporate people who want to shield themselves from liability on the
other hand.
So we have vested economic interests coming from both directions,
most of the judgment coming from groups that have no vested interest in
it, questioning the provisions of this bill as being excessive and as
going too far.
As the article in the New York Times on Sunday by Mark Griffin, the
director of the Utah Securities Division, states:

What's in the name? In the case of Private Securities
Litigation Reform Act of 1995, consumers will find a world-
class misnomer now before the Senate. The bill is more
accurately described as securities litigation repeal.

In effect, what we have is a situation in which this is excessive; it
goes too far. Even the proponents recognize that it went too far. They
put this provision in that I am now trying to change, in a rather
modest way, in order to make it have some meaning, rather than being
almost meaningless.
It has a double requirement. You have to be below $200,000 net worth,
and you have to lose 10 percent of your net worth. If you are some
small, unsophisticated person with very limited means, below $200,000
net worth--that is, your house, your jewelry, your real estate, any
stocks or bonds that you own, all of that added up gets you below
$200,000--you would think at least we will protect that person fully,
fully protect them.

[[Page S9045]]

Oh, no, no. In addition to having to be below the $200,000 net worth,
you have to lose in this stock swindle more than 10 percent of your net
worth. If your net worth is $195,000, all these things added up, you
have to lose more than $19,500.
Suppose you are a small investor with a net worth of $195,000, all of
these things I enumerated. Someone talks you into making an investment.
A lot of elderly people get fast-talked on the telephone or in person
and make an investment of $5,000. They lose it; they lose it. The stock
swindler goes bust, flees. There is no recovery there. The people
advise the stock swindler, who were participants in the fraud on a
reckless standard--on a reckless standard, the stock swindlers,
lawyers, accountants, investment advisor, people drawn into this
thing--they are protected ahead of this innocent investor who has lost
$5,000. I cannot understand it.
I said before that this is a ``have-you-no-shame amendment,'' I say
to my colleagues on the other side with respect to what you are doing
to these small investors. Senators recognize the problem of the small
investor, the unsophisticated person, and fail to adequately give them
any protection, is what it amounts to.
That is a very important aspect. I would like to get the response
from the other side focused on the provisions of the amendment. All we
do, we put the amendments forward, and then we hear a statement about
the bill as a whole.
We said earlier, at the very beginning of the debate, that we accept
certain aspects of this bill. The real question now is on the
amendments which go to particular provisions in the legislation.
I yield the floor. Perhaps we can get a focus on this particular
amendment and its provisions.
Mr. DOMENICI. Mr. President, I think the distinguished Senator knows
that I was one of the Senators, along with Senator Dodd, that
introduced this legislation. I did not serve on the Banking Committee
when this legislation was marked up.
Let me see if I can explain. I do not have any apologies for this. I
think the committee went, in one sense, too far. We are here to say,
``Okay, that is fine.'' Here is the theory: The Senator now would like
to say this bill has gone a long way to try to get rid of the problems
that joint and several liability brings to this kind of class action
suit.
Now, if one does not believe that joint and several has created any
problems for deep pockets who are almost in an infinitesimal amount
involved in this case and makes them liable for the whole thing; if one
does not believe that the accountants are not necessarily as liable
unless knowingly participating in the fraud, that they should not be
liable for the whole settlement or the whole verdict, if one does not
believe that, obviously, those Senators ought to be for the Sarbanes
amendment.
If a Member is for changing that--and I spent a considerable amount
of time, not necessarily as well as it can be done--explaining that the
unfairness of the application that law to cases of this type by lawyers
in America today, if a person does not believe it has been applied
unfairly, or that it is causing litigation to be filed that is
meaningless, putting huge burdens on America's startup companies, if
Members do not believe that and they want to go forward, then go with
Senator Sarbanes.
If you want to leave joint and several liability as it is, this
essentially means no matter how much of the culpability is yours, you
pay the whole amount whatever that amount is. We know what that is
doing to the system. It is not helping clean up the system at all.
It is causing everybody in the chain of this kind of activity to buy
huge insurance policies. We have an example here of one that I put in
the Record. If you were in business in the United States, and exactly
the same kind of business with exactly the same kind of activity in
Canada, in one country it would cost $40,000, and in America it would
cost $450,000.
That would not matter to some who do not think it matters what
business has to pay. If that is a medium-sized business, $450,000
versus $40,000 for insurance coverage is a pretty big deal. It is like
six to eight full-time engineers that could work at one of these
companies. But they pay it in insurance so you can have this liability
of joint and several. So every board of directors, every official,
everybody in the company, the CPA's and everyone else, can be liable
for the entire malfeasance of one.
If you do not agree with that statement, if you do not agree with
that position, which is basis of this new bill, S. 240, which
reformulates class action suits on securities, then you start
considering, who should we exclude? Who should we exclude from what is
now perceived to be a more fair system for everybody at large? I would
assume that if you want to change that joint and several, that you no
longer consider each and every possible defendant as the insurer of
stockholders--whether they are little stockholders or big
stockholders--they are not the insurer, that they will not lose money
because somebody in the chain of this company did something wrong.
So what did the committee do? I say to my fellow Senators, they said
OK, there could be some situations when we want to provide more than
the proportionate liability, when we want to give a little bit of a
break to some small investors who are poor. It did not mean that they
were throwing the new system out. In fact, they have gone to great
lengths in this bill saying the new system of proportionate liability
will be better for everyone.
The answer to Senator Sarbanes is much the same as one would give if
we were on the floor discussing a Federal statute. When I was
practicing law, if you stole $51 you committed a felony. If you stole
$48 it was a misdemeanor. So you would come to the floor and say why
$50? Or why did we not do $80? Or why did we not do $52? Why did we not
cover the next little step? Just $51 should not be guilty of a felony.
You have to draw the line somewhere.
So the committee said, we want to take care of a small group of
investors whom this change in the law might affect adversely. So they
drew some lines. That is all they did.
The Senator would like to draw the lines differently. Of course. The
Senator from Maryland would like to draw a line very differently. He
would like to throw this whole bill out. That is the line he would
like. He would like to leave it like it is with maybe a few little soft
amendments. He clearly does not want this bill to pass.
From my standpoint, there is no answer to why you draw lines of this
type. If you want to have a debate in the Senate and say instead of
$200,000 worth of net worth it should be $300,000, have the debate. If
you want to say it should be $250,000, have the debate. Sooner or later
you will draw the line somewhere or you will return to the old law.
Mr. SARBANES. Will the Senator yield on that point?
Mr. DOMENICI. I will be pleased to yield.
Mr. SARBANES. I have not tried to draw the line on the net worth
issue at all. The Senator says if you want to put it at $250,000 or
$300,000--I have not tried to change that line. I have not drawn that
line at all. I have left the line at $200,000.
That response does not go to the amendment in any respect.
Mr. DOMENICI. OK. So, I answer the Senator's question before he
finishes it by saying you delete the requirement that small investors
lose at least 10 percent of their net worth.
Mr. SARBANES. That is right.
Mr. DOMENICI. You say it does not matter how much they lose of their
net worth.
Mr. SARBANES. I am saying if you have a small investor, $200,000
worth of net worth--I am not trying to change the Senator's net worth--
it could be $300,000, could be $100,000--your net worth includes their
home, includes everything they have----
Mr. DOMENICI. So the Senator does not want any?
Mr. SARBANES. I am saying keep it at $200,000.
Mr. DOMENICI. Right.
Mr. SARBANES. But do not require, before they are held harmless they
lose 10 percent of their net worth. You have someone with a $200,000
net worth, they loose $5,000 and you say, ``Tough.'' That is a small
investor. It is an unsophisticated person who is taking a real
pounding. I am saying, why do you not let them at least collect what
they lost? You have limited it to a class of less than $200,000 net
worth. At least whatever they lose, let them recover.

[[Page S9046]]

Mr. DOMENICI. Let me just say, from this Senator's standpoint, as I
look at this law, proportionate liability is fair. It is better for the
entire system than the joint and several before. And there have been
hours of statements on the floor on why the new system is better for
the country, more fair and all the other things that have been said
about it.
If you want to start talking about changing that small group of
investors that, somehow or another, the committee in reporting out this
bill wanted to protect in some way, then I am not going to say the
committee was perfect in every one of its lines. But I do not believe
we ought to start with the premise that it is unfair when it could have
been that there would not have been any exceptions, and that would have
been a fair system. They decided to help small investors in some
specific way. What they have done is not unfair. It may be unfair to
you, Senator, and maybe to enough Senators to vote with you.
The PRESIDING OFFICER. The time of the Senator has expired.
Mr. SARBANES. I just point out to the Senator that the notion that it
was unfair was encompassed by the Senator when he put his bill in. This
was in the bill, put in by the Senator. So the Senator himself departed
from the absolutely rigorous application of moving to proportionate
liability because he recognized it was not fair.
I am just making the point, the way it has been defined makes it so
restrictive that these small, unsophisticated investors--which my
colleague is asserting he is providing some protection for --are not
going to get protection. I am urging my colleagues to change it in this
respect in order to provide protection for these small people.
The fact of the matter is, the shift the Senator is doing is he is
shifting the burden of uncollected damages off of the codefendant, who
has abused the system, over to the insolvent defendant, the victim.
The Senator used an example between a misdemeanor and a felony, and
he says you have to have a line. The line you have is you are still
punishing the wrongdoer. The shift from a misdemeanor to a felony does
not enable you to put the burden off on the victim of the crime. Here
we are throwing it off on the victims, and you are doing it in such a
way that they have no adequate protection. I think these small
investors ought to be protected. I think the proportionate liability
ought to be doubled. As the Senator from New York indicated the other
day himself in making a statement, that is what this is directed to do.
I say to my colleague, the way it is written now my colleague is going
to have someone with a small net worth, they lose a small amount of
money--he says, ``Too bad.''
They say, ``But this fellow was a participant in the fraud. They were
in this scheme that cheated me.''
``Tough. Very sorry.'' And Mr. and Mrs. Small investor, all across
the country, are going to feel the brunt. They are going to feel the
brunt of this.
I should have tried to amend the net worth as well. I think the
figure is much too low. But for the sake of drawing the distinctions we
left the net worth. We just said all right, you got $200,000 net worth,
you lose $15,000 in this fraudulent scheme. The person who directly
perpetrated the scheme has fled. But his lawyer is around, his
accountant is around, his investment counselor is around. And all of
them were so reckless that they became participants in the scheme. They
did not blow the whistle on this person and therefore you are entitled
to collect from them. And I think you ought to be able to collect if
you are the small person.
If you have lost less than 10 percent, you have a smaller loss--why
should they not? That may be the only investment funds these people
have. We are not talking about wealthy people here. And you are putting
the burden--it is very important to understand, the law to date has
been that all of the defendants can be held. If one of them goes
bankrupt, then the others can be brought in and made to pay. And the
victim is held harmless.
Now we are making the perpetrators of the fraud harmless as opposed
to the victims.
Mr. President, what is the time situation?
The PRESIDING OFFICER. The Senator's time has expired. The hour of 2
o'clock now having arrived, the Senator from California is recognized
to offer an amendment on which there will be 90 minutes debate.
The Senator from California.

Amendment No. 1473

(Purpose: To instruct the Securities and Exchange Commission to report
to the Congress on whether senior citizens and retirement plans need
enhanced protection from securities fraud)

Mrs. BOXER. Mr. President, I send an amendment to the desk and ask
for its immediate consideration.
The PRESIDING OFFICER. The clerk will report.
The assistant legislative clerk read as follows:

The Senator from California [Mrs. Boxer] proposes an
amendment numbered 1473.
At the appropriate place, insert the following:

SEC. . STUDY AND REPORT ON PROTECTIONS FOR SENIOR CITIZENS
AND QUALIFIED RETIREMENT PLANS.

(a) Findings.--The Congress finds that--
(1) senior citizens and qualified retirement plans are too
often the target of securities fraud of the kind evidenced in
the Charles Keating, Lincoln Savings & Loan Association, and
American Continental Corporation situations;
(2) this Act, in an effort to curb unfounded lawsuits,
changes the standards and procedures for securities fraud
actions; and
(3) the Securities and Exchange Commission has indicated
concern with some provisions of this Act.
(b) In General.--Not later than 180 days after the date of
enactment of this Act, the Securities and Exchange Commission
shall--
(1) determine whether investors that are senior citizens or
qualified retirement plans require greater protection against
securities fraud than is provided in this Act and the
amendments made by this Act; and
(2) if so, submit to the Congress a report containing
recommendations on protections that the Commission determines
to be appropriate to thoroughly protect such investors.
(c) Definitions.--For purposes of this section--
(1) The term `qualified retirement plan' has the same
meaning as in section 4974(c) of the Internal Revenue Code of
1986; and
(2) the term `senior citizen' means an individual who is 62
years of age or older as of the date of the securities
transaction at issue.

Mrs. BOXER. Mr. President, thank you very much.
The reason I had the wonderful employee of the Senate read the
amendment in its entirety is that it is pretty straightforward. As has
been stated before, I am not an attorney. Because I tend to see these
things in a very straightforward way, I have a rule that I have to
really be able to show my amendment to the people I represent and make
sure that they speak clearly to the point.
Is it not the case, Mr. President, that I have 45 minutes on my side,
and Senator Domenici has 45 minutes on his side?
The PRESIDING OFFICER (Mr. Frist). That is correct.
Mrs. BOXER. Mr. President, I yield myself such time as I might
consume, but I ask if the President will let the Senator know when she
has used about 20 minutes.
The PRESIDING OFFICER. The Senator from California.
Mrs. BOXER. Mr. President, since we are putting into the Record names
of people and organizations, I wanted to make the point that in
California a partial list of those who think this bill goes too far is
as follows: The California State Association of Counties, the county of
San Francisco, Napa County Deputy District Attorney, the Stanislaus
County Board of Supervisors by resolution, the city of Barstow Finance
Director, the city of El Monte Treasurer, the Glendale Treasurer, the
city of Whittier Clerk-Treasurer, the Modesto Irrigation District, and
that is a partial list.
I ask unanimous consent that be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

State-by-State Opponents to S. 240, as of June 22, 1995

alabama

City of Mobile, Investment-Treasury Officer Arthur J.
Barnes.
Pike County Commission, Administrator Steven W. Hicks.
State of Alabama, Securities Commission, Director Joseph P.
Borg.

arizona

City of Bullhead City.
City of Yuma, Accounting Director Gerald A. Zochowski.

[[Page S9047]]

arkansas

City of Stuttgart, Finance Officer Jane W. Jackson.
Craighead County, Treasurer Russell H. Patton III.
State of Arkansas, Attorney General Winston Bryant.

california

ACC Bond Holders.
California State Association of Counties, Executive
Director Steven C. Szalay.
California Labor Federation--AFL-CIO.
City of El Monte, Treasurer Henry J. Velasco.
City of Barstow, Finance Director Evelyn Radel.
City of Glendale, Treasurer Elizabeth W. Evans.
City of Whittier, Clerk-Treasurer Gertrude L. Hill.
Congress of California Seniors, President Lois Wellington.
Congress of California Seniors--Los Angeles.
County of San Francisco, Chief Administrative Officer
William L. Lee.
Gray Panthers of Marin, Convenor John Kouns.
Modesto Irrigation District, General Manager Allen Short.
Napa County, Deputy District Attorney Daryl A. Roberts.
Stanislaus County Board of Supervisors, Chairman Paul W.
Caruso (resolution).
Contra Costa Times editorial opposing S. 240 (April 17,
1995).

colorado

Abbey of St. Walburga, Boulder.
Adams County, Treasurer Helen HIll.
Alamosa County, Treasurer Charlene Cockrum.
Arapahoe County, Treasurer Bernie Ciazza.
Benet Hill Monastery, Colorado Springs.
Capuchin Province of North America, Denver.
City of Denver, District Attorney A. William Ritter, Jr.
City of Denver, Employees Retirement Plan, Executive
Director Michael Heitzman.
Chafee County Board of Commissioners, County Administrator
Frank M. Thomas.
Colorado AFL-CIO, Jack Hawkins.
Colorado AFSCME, Cathy Bacino.
Colorado County Treasurers' Association, President Sherry
M. Rose (resolution).
Colorado Public Interest Research Group, Rich McClintock.
Colorado Senior Organization of Active Retirees of
International Steelworkers (SOAR), President Matt Peulen.
Colorado Seniors Lobby, President Richard Tucker.
Denver Federation of Teachers, Local 858, President Fleta
Nockels.
Eagle County, Treasurer Sherry Brandon.
Freemont County, Treasurer Jenny Woltemath.
Gray Panthers of Colorado, President Eric Boyer.
Gunnison County, Treasurer Alva May Dunbar.
Jefferson County, Treasurer Bob Bammerlin.
La Plata County, Treasurer Edward Murray.
Machinists Union, District Lodge 86, President Ray Rivera.
Mesa County, Treasurer Gena Harrison.
Moffat County, Treasurer Joy Hammat.
Morgan County, Treasurer Robert Sagel.
National Council of Senior Citizens, Region 8, Director
Matt Peulen.
Oil, Chemical & Atomic Workers Union of Colorado, Robert
Wages.
Otero County, Treasurer Dennis Smith.
Ouray County, Treasurer Ramona Radcliff.
Retired Mens' Organization of International Steelworkers of
Colorado, President Mike Baca (resolution).
Rio Grande County, Treasurer Peggy Kern.
San Miguel County, Treasurer Sherry Rose.
Sisters of St. Francis of Colorado Springs.
Sisters of St. Francis of Penance, Denver.
State of Colorado, Division of Securities, Commissioner
Philip A. Feigin.
Summit County, Treasurer Larry Galliland.
Weld County, Treasurer Arthur Willis.
Yuma County, Treasurer Mary Lou Rose.

connecticut

City of New Britain, Finance Director John Jedrzejczyk
City of Shelton, Finance Director Louis M. Marusici
Connecticut Government Finance Officers Association,
President Glenn S. Klocko
Newington Public Schools, Business Administrator Alfred L.
Villa
Town of Darien, Finance Director Kathleen A. Clarke
Town of Stonington, First Selectman David S. Burdge
Town of Waterford, Finance Director Arthur H. Davis III

delaware

City of Dover, Finance Director Mike Karia
City of Newark, Finance Director Patrick E. McCullar
Delaware Association of Government Finance Officers,
President Patrick E. McCullar

florida

Benedictine Sisters of Florida
Broward AFL-CIO
Consumer Fraud Watch
Dade County Board of Commissioners (resolution)
Dade League of Cities, President Helen L. Miller
(resolution)
Delray Senior Citizens
Escambia County Board of Commissioners, Chairman Willie J.
Junior (resolution)
Florida AFL-CIO
Florida AFSCME
Florida Association of Court Clerks and Comptrollers
Florida Association of Tax Collectors
Florida Chapter, National Bar Association
Florida Coalition to Protect Investor's Rights, Coordinator
Susan Glickman
Florida Consumer Action Network
Florida Education Association
Florida Government Finance Officers Association, President
Rick Atkinson
Florida Public Interest Research Group
Florida Silver Haired Legislature, Inc.
Florida State Council of Machinists
Florida State Council of Senior Citizens
Gray Panthers of Sarasota-Manatee
Gray Panthers of South Dade
Northeast Florida Area Council of Senior Citizens
Palm Beach County Sheriff's Office, Sheriff Charles A.
McCutcheon
South Florida Water Management District, Director of
Finance E. Barrett Atwood, Sr.
United Faculty of Florida
United Teachers of Dade
Palm Beach Post editorials opposing S. 240 (June 3 and 5,
1995)

georgia

City of Albany, Controller Chuck Olmsted
City of Columbus, Mayor Bobby G. Poters
City of Forest Park, Finance Director Sarah Davis
Gwinett County, Director of Financial Services Charlotte J.
Nash
Municipal Electric Authority of Georgia, President and
General Manager Frank L. Olson
Municipal Gas Authority of Georgia, Executive V.P. and CFO
Richard W. McCullough
State of Georiga, Employees' Retirement System, Director
Rudolph Johnson

hawaii

State of Hawaii, Employees Retirement System, Administrator
Stanley Siu
City and County of Honolulu, Finance Director Russell W.
Miyake

idaho

City of Pocatello, Clerk-Treasurer Peter B. McDougall

illinois

American Province of Little Company of Mary Sisters,
Provincial Offices, Evergreen Park
Benedictine Sisters, Chicago
Chicago and Suburbs Senior Senate, President Joseph Ramski
Christian Brothers of Ireland, Chicago
City of Alton, Treasurer Daniel V. Beiser
City of Chicago, Mayor Richard Daley
City of Danville, Comptroller Ron E. Neufeld
City of Darien, Accoutant Marie Plunkett
City of Decatur, Treasurer Beth B. Couter
City of Galena, City Administrator Richard A. Schutlz
City of Joliet, Management and Budget Director Robert D.
Fraser
City of Moline, Finance Officer Kathleen A. Carr
City of Peoria, City Treasurer Mary A. Ulrich
City of Rolling Meadows, Acting City Manager Gerald Aponte
City of West Chicago, Director of Finance W.C. Warren
Coalition of Active and Retired Employees P.A.C. (Police &
Firemen)
Cook County, Assessor Thomas C. Hynes
Felician Sisters, Mother of Good Council Province, Chicago
Illinois Government Finance Officers Association, Executive
Director William Stafford
Illinois Municipal Treasurers Association, President Judith
E. Madonia
Illinois State Council of Senior Citizens' Organizations,
President Gerald Prete
LaSalle County, Treasurer Thomas C. Setchell
Madison County, Chief Deputy-Treasurer Robert H. Chappell
Missionary Sisters of St. Charles Borrome, Melrose Park
Passionist Community, Holy Cross Province, Rev. Michael J.
Hoolahan
School Sisters of St. Francis of Christ the King, Lemont
Servants of the Holy Heart of Mary, Provincial
Administration Kankakee
Sisters of Mercy of the Americas, Regional Community of
Chicago
Sisters of St. Casimir, Chicago
Sisters of St. Francis, Joliet
Village of Bolingbrook, Deputy Village Treasurer Harriet C.
Allbee
Village of Carol Stream, Finance Director Stan W. Helgerson
Village of Carpentersville, Finance Director A. Donald
Mazza
Village of Niles, Finance Director/Treasurer George R. Van
Geem
Village of Sauk Village, Finance Officer Bev Sterrett

indiana

Conference on Corporate Responsibility of Indiana and
Michigan, Chairperson Mary John Walsh

iowa

Iowa Association of Counties, Executive Director Bill
Peterson
Iowa Municipal Finance Officers Association, President
Marian K. Karr
Jackson County Board of Supervisors, Chair John J. Wiley

[[Page S9048]]

City of Cedar Rapids, Controller-Auditor Robert E. McMahan
City of Iowa City, Finance Director Donald J. Yucuis

kentucky

Commonwealth of Kentucky, Kentucky Retirement Systems,
General Manager Pamela S. Johnson

louisiana

Parish of St. Charles, President Chris A. Tregre
Parish of Terrebonne Consolidated Government, Chief
Administrative & Financial Officer Doug Maier

maine

City of Lewiston, Finance Director Richard T. Metivier
Maine Council of Senior Citizens, President John H. Marvin
Maine Municipal Association, State and Federal Relations
Director Kenneth C Young, Jr.
Maine Retired Teachers Association, Vice President Philip
A. Gonyar
Maine State AARP, Legislative Committee, Chair William H.
Layman
Maine State Employees Association, Retirees Steering
Committee Chair Eunice Cotton
Southern Maine Area Agency on Aging, Executive Director
Laurence W. Gross

maryland

Howard County, Director of Finance Raymond F. Servary, Jr.
Marianist Provincial House, Baltimore
State of Maryland, Office of the Attorney General,
Securities Division, Commissioner Robert N. McDonald

massachusetts

AFSCME Council 93, Executive Director Joseph M. Vonavita
Augustinians of the Assumption, Brighton
Citizen Action of Massachuetts, Director Edward Kelly
Essex County, Retirement Board, Chairman-Treasurer
Katherine O'Leary
Fraternal Order of Police, Greater Boston Lodge, President
Michael Giannetti
Hampshire County Commission, Legislative, Charter, and Code
Committee, Chairman Vincent J. O'Connor
Industrial Cooperative Association Group, Director James
Megson
Massachusetts Association of County Commissioners,
President Robert Stone
Massachusetts Consumers' Coalition, Chairman Paul J.
Schlaver
Massachusetts Jobs with Justice, Director Rand Wilson
Massachusetts Public Interest Research Group, Executive
Director Janet Domenitz
Massachusetts Teachers Association, Vice President Melanie
Kasperian
Norfolk County Board of Commissioners, President William
O'Donnell (resolution)
Plymouth County Board of Commissioners, Chair John R.
Buckley, Jr.
Sons of Mary, Framingham
State of Massachusetts, Attorney General Scott Harshbarger
Tax Equity Alliance for Massachusetts, Director Jim Braude
Teamsters Local 25, Recording Secretary/Field
Representative Richard Reardon
Teamsters Local 122, Secretary/Treasurer John Murphy
Teamsters Local 504, Secretary/Treasurer Dave Robbins
Town of Concord, Finance Director Anthony T. Logalbo
Town of Wellesley, Treasurer/Collector Marc V. Waldman
Xaverian Brothers, American Northeastern Province, Milton

michigan

City of Ann Arbor, Finance Director Allen D. Moore
City of Bay City, Treasurer Judy M. Volk
City of Berkeley, Clerk/Treasurer Leona M. Garrett
City of Grayling, Treasurer Verna M. Meharg
City of Kalamazoo, Administrative and Financial Services
Managing Director R. Keith Overly
City of Mount Pleasant, Finance Director Rick L. Sanborn
City of Southfield, Treasurer Roman J. Gronkowski
Charter Township of Ada, Treasurer Soberberg
Charter Township of Delta, Board of Trustees (resolution)
Charter Township of Garfield, Treasurer Judy McManus
Charter Township of Independence, Treasurer John Lutz
Charter Township of Van Buren, Treasurer Helen Foster
Conference on Corporate Responsibility of Indiana and
Michigan, Chairperson Mary Joan Walsh
Genesee County, Controller Leonard D. Smorch
Grand Rapids Dominicans, Prioress Barbara Hansen
Macomb County Treasurer Association, President Pamela
Kondziolka
Michigan Association of Counties, Executive Director
Timonthy K. McGuire
Passionist Community, St. Paul of the Cross, Rev. Michael
Hoolahan
Saginaw County, Treasurer Marvin D. Hare
State of Michigan, Auditor General Ramona Henderson Pearson

mississippi

State of Mississippi, Office of the Secretary of State,
Assistant Secretary of State for Securities and Business
Services Susan Shands

missouri

Boone County, Treasurer Kay Murray
Chesterfield Fire Protection Distric, District
Administrator John W. Klos
City of Blue Springs, Director of Financial Isabel
Stocklein
City of Brentwood, Finance Officer Susan L. Zimmer
City of Des Peres, Director of Finance Brett Vuagniaux
City of Ellisville, Director of Finance David S Daniels
City of Ferguson, Director of Finance Jo Ann Bordeleau
City of Fulton, Chief Financial Officer Jerry D. Ponder
City of Harrisonville, Mayor C. A. ``Chuck'' Jones
City of Lee's Summit, Treasurer Kathy VanGordom
City of Lexington, City Administrator Abigail Tempel
City of Macon, Finance Clerk Cathay Swan
City of Manchester, Director of Finance C. Lynn Wei
City of Moberly, Director of Finance and Personnel Nick
Burton
City of O'Fallon, Director of Finance Laura Lashley Chiles
City of Richard Heights, City Manager Carl L. Schwing
City of Rolla, Finance Director Daniel L. Murphy
City of Sedalia, City Controller/Treasurer Pamela
Burlingame
City of Shelbina, City Clerk Charlette Schwieter
City of Sugar Creek, City Clerk/Finance Officer Veronica A.
Powell
City of Webster Groves, Acting City Manager Milton W.
Matthews
Clay County, Treasurer Beverly Corum
Communication Workers of America District 6, Vice President
Vic Crawley
Hickory County Commission, Presiding Commissioner Bob
Breshears
Jesuits of the Missouri Province, St. Louis
Little Blue Valley Sewer District, Finance Director Jay
Sells
Missouri AFL-CIO, State Director Daniel J. ``Duke'' McVey
Missouri AFSCME, Council 72, Bob Carico
Missouri Citizen Action
Missouri Council of Senior Citizens
John R. Perkins, Former Securities Division Director,
Missouri Secretary of State
Municipal Finance Officers and Treasurer Association of
Missouri, President Daniel L. Murphy
Society of the Sacred Heart, United States Province, St.
Louis
St. Charles County, Finance Director Joseph M. Kernell
St. Louis County Municipal League, Executive Director Tim
Fischesser
St. Mary's Institute, O'Fallon
Sistors of the Most Precious Blood, O'Fallon
State of Missouri, Attorney General Jeremiah W. (Jay) Nixon
Union of American Hebrew Congregations--Missouri
United Auto Workers, Region 5
St. Louis Post Dispatch editorial opposing S. 240 (May 9,
1995)

montana

Butte Area Chapter of AARP, President Harold Kammerer
Butte Human Rights Coalition, Chair George Waring
Carbon County, Commissioner Mona Nutting (MACO resolution)
Coalition of Montanans Concerned with Disabilities,
President Michael Regnier
Custer County Commission, Commissioner Janet Kelly (Custer
resolution)
Dawson County, Treasurer Cindi Byron
Fergus County, Commissioner Vern Petersen (MACO resolution)
Flathead County, Commissioner Howard Gipe (MACO resolution)
Gallatin County Commission, Chairman Kris Dunn (resolution
and MACO resolution)
Gallatin County, Treasurer Stan Hughes
Hotel Employees & Restaurant Employees Union, Local 427,
Organizer Secky Fascione
Montana Association of Counties, Executive Director Gordon
Morris (Resolution)
Montana Coalition For Nursing Home Reform, President Alice
Campbell
Montana People's Action, Executive Director Jim Fleischman
Montana Public Interest Research Group, Executive Director
Linda Lee
Montana Trial Lawyers, Executive Director Russel Hill
State of Montana, State Auditor Mark O'Keefe
Stillwater County, Commission Chairman Vicki Hyatt (MACO
resolution)
Yellowstone County, Commissioner Mike Mathew (MACO
resolution)

nebraska

General Drivers and Helpers, Local Union No. 554, Secretary
Treasurer Jerry Younger
Nebraska Association of Public Employees, Executive
Director Bill Arfman
Nebraska Citizen Action, Director Walt Bleich
State of Nebraska, Department of Banking and Finance,
Assistant Director Jack E. Herstein

nevada

City of Las Vegas, Treasurer Michael K. Olson
City of Wells, Clerk Michael T. Cosgrove
Clark County School District, Treasurer Kenneth D. Selch

new jersey

Consumers for Civil Justice

[[Page S9049]]

New Jersey Conference of Mayors, Executive Director Don
Fauerbach
New Jersey Fraternal Order of Police, President Richard
Whelan
New Jersey Government Finance Officers Association,
President Barry Eccleston
Tax Collectors and Treasurers Association of New Jersey,
President Vincent A. Belluscio

new mexico

City of Farmington, Mayor Thomas C. Taylor
New Mexico Federation of Labor, President George ``Jeep''
Gilliland
New Mexico Pro-PAC, President Gerry Bradley
Progressive Alliance for Community Empowerment, President
Pablo Trujillo
New Mexico Public Interest Research Group, Executive
Director Matthew White
San Juan County, Treasurer Sid Martin
State of New Mexico, Attorney General Tom Udall
State Representative Mimi Stewart (Bernadillo)

new york

AFSCME, District Council 37, Executive Director Stanley
Hill
AFSCME, New York State, Political and Legislative Director
Edward F. Draves
American Military Retirees Association, National and New
York President Thomas E. Burton
Citizen Action of New York
City of Newburgh, Director of Finance/Comptroller Hargovind
S. Patel
City of New York, Public Advocate Mark Green
Congregation of Christian Brothers, Eastern American
Province, New Rochelle
Interfaith Center on Corporate Responsibility, Executive
Director Tim Smith
Long Island Progressive Coalition, Executive Director David
Sprintzen
New York Government Finance Officers' Association,
President Michael A. Gealto
New York Hotel Trades Council, AFL-CIO, Pensioners Society
New York Public Interest Research Group, Legislative
Director Blair Horner
New York State Council of Senior Citizens, Executive
Director Maureen H. Campbell
New York Statewide Senior Action Council, Board of
Directors President Max Berman
Presbyterian Senior Services, Executive Director Dave
Taylor
Sisters of Mary Reparatrix, Bronx
State of New York, State Comptroller H. Carl McCall

north carolina

Raleigh News & Observer editorial opposing S. 240 (May 27,
1995)

north dakota

North Dakota AFL-CIO, President David L. Kamnicz
North Dakota AFSCME, Kevin Riconas
State of North Dakota, Treasurer Kathi Gilmore
State of North Dakota, Securities Commissioner Cal
Hoovestol

ohio

Ashtabula County, Treasurer Robert L. Harvey
City of Barberton, Finance Director Raymond E. Flickinger,
Jr.
City of Cleveland, Treasurer Mary Christine Jackman
City of Dublin, Finance Director Marsha I. Grigsby
City of Jackson, Auditor Carl Barnett
City of Lyndhurst, Finance Director Joseph G. Mirtel
City of Mansfield, Finance Director Sandra L. Converse
City of Painesville, Director of Finance James W. Onello
City of Tallmadge, Treasurer Steven C. Brunot
City of Upper Arlington, Finance Director Pete Rose
City of Vandalia, Finance Director Linda Chapman
City of West Carrolton, Finance Director Roberta A.
Donaldson
City of Zanesville, Treasurer Walter K. Norris
County Commissioners Association of Ohio, Executive
Director Larry L. Long
County Treasurers Association of Ohio, President John
Donofrio
Cuyahoga County Board of Commissioners, President Mary O.
Boyle
Euclid City Schools, Treasurer Lowell B. Davis
Glenmary Home Missioners, Director Robert Knueven
Greene County, County Auditor Luwanna A. Delaney
Lake County, Treasurer John C. Crocker
Municipal Treasurers Association of the United States and
Canada, Ohio Chapter, Chairman Anthony L. Ianiro
Montgomery County Board of Commissioners, President Vicki
Pegg
Summit County, Treasurer John A. Donofrio
Village of Edgerton, Clerk-Treasurer Kathleen Whitman
Village of North Kingsville, Clerk-Treasurer Barbara R.
Lambert
Village of Richfield, Finance Director Eleanor Lukovics
Dayton Daily News editorial opposing S. 240 (5/10/95)

oregon

City of Astoria, Finance Director John J. Snyder
City of Coos Bay, Finance Director Gail George
City of Coquille, Recorder/Finance Director Shirley J.
Patterson
City of Gresham, Financial and Information Services Manager
Axel Bergman
City of Rouge River, City Recorder/Treasurer Leahnette M.
York
City of West Lynn, Finance Director Willie Gin
Crook County, Treasurer Mary J. Johnson
Curry County, Treasurer Trudi J. Sthen
Deschutes County, Treasurer Helen Rastovich
Douglas County, Treasurer Joanne L. Motschenbacher
Gray Panthers of Salem, Convener Nate Davis
Jefferson County, Treasurer Bonnie K. Namenuk
Josephine County, Treasurer Jan Elsnasser
Lincoln County, Treasurer Linda Pitzer
Linn County, Treasurer Shannon Willard
Malheur County, Treasurer Janice L. Belnap
Multnomah County, County Auditor Gary Blackmer
Northwest Oregon Labor Council, AFL-CIO, Executive
Secretary Ron Fortune
Oregon Public Employees Union/Local 503, President Karla
Spence
Oregon State Council of Senior Citizens, Secretary Lois
Prince
Oregon State Public Interest Research Group
Oregon Trial Lawyers Association, President A. Michael
Adler
Polk County, Treasurer Carolyn Wall

pennsylvania

City of Philadelphia, Mayor Edward G. Rendell
Commonwealth of Pennsylvania, Securities Commission,
Chairman Robert M. Lam
Lehigh County Authority, General Manager Aurel M. Arndt
Pennsylvania State Council of Senior Citizens President
David M. Lockhardt
Vincentian Sisters of Charity
Philadelphia Inquirer op-ed opposing S. 240 (June 4, 1995)

south carolina

Aiken County, Administrator William M. Shepherd
Berkeley County, Supervisor James H. Rozier, Jr.
City of Columbia, Mayor Robert D. Coble
City of Greer, Finance Director Mary P. Greer
City of Mount Pleasant, Cheryll N. Woods-Flowers
City of Sumter, Mayor Stephen M. Creech
City of Union, Mayor T. Burton Williamson, Sr.
Lexington County, Treasurer William O. ``Bill'' Rowell
State of South Carolina, State Comptroller General Earle A.
Morris, Jr.
South Carolina Association of Counties, Executive Director
Michael B. Cone

south dakota

Charles Mix County, Auditor Norman Cihak
Marshall County, Treasurer Nelva Kristofferson
South Dakota AFL-CIO, President Jack Dudley
South Dakota AFSCME, President Paul Aylward
State of South Dakota, Department of Commerce and
Regulation, Division of Securities, Director Debra M.
Bollinger
Yankton County, Commissioner Kathleen Piper

tennessee

East Tennessee International UAW Retired Workers Council,
President James W. Renshaw
Hamilton County, County Executive Claude Ramsey
Tennessee Association of County Executives, Executive
Director Fred E. Congdon
Tennessee State Senate Majority Leader Ward Crutchfield

texas

City of Cleburne, Finance Director Greg Wilmore
City of Meadows, Secretary/Treasurer Elaine Herff

utah

State of Utah, Division of Securities, Director Mark J.
Griffin
City of Bountiful, Treasurer Galen D. Rasmussen
City of Ferron, Treasurer Brenda S. Bingham
City of Ogden, Department of Management Services, Treasury
Division, Fiscal Operations Manager J. Norman Burden

vermont

AFSCME Council 93, Vermont Coordinator George A. Lovell,
Jr.
Central Vermont Council on Aging
City of Burlington, Mayor Peter Clavelle
Council of Vermont Elders
Older Women's League
Southwestern Vermont Council on Aging
State Representative Jerry Kreitzer, Chair, House
Government Operations Committee
State Representative Kathleen Keenan, Chair, House Commerce
Committee
Teamsters Union Local 597
Vermont Labor Forum
Vermont NEA, President Marlene R. Burke
Vermont Public Interest Research Group
Vermont State Labor Council, AFL-CIO
Vermont Trial Lawyers Association

virginia

Benedictine Sisters of Virginia, Bristow

[[Page S9050]]

City of Falls Church, Treasurer H. Robert Morrison
City of Hopewell, Finance Director Elesteen Hager
City of Roanoke, Finance Director James D. Grisso
City of Suffolk, Finance Director Carroll L. Acors
City of Waynesboro, City Auditor Frank Fletcher
Commonwealth of Virginia, State Corporation Commission,
Division of Securities and Retail Franchising, Director
Ronald W. Thomas
Henrico County, Finance Director Dennis W. Kerns
Montgomery County Board of Supervisors, County
Administrator Betty Thomas
Town of Rocky Mount, Finance Director Don E. Fecher
Town of Warrenton, Mayor J. Willard Lineweaver
Vinginia Association of Counties, General Counsel C. Flippo
Hicks

washington

Association of Washington Cities, President Judy Boekholder
City of Anacortes, Finance Director George Khtaian
City of Chelais, Finance Director Jo Ann Hakola
City of Spokane, Mayor Jack Geraghty
Clark County, Treasurer Doug Lasher
Cowlitz County, Treasurer Donna Rolfe
King County, County Executive Gary Locke
King County Union Retirees Council, AFL-CIO, President E.G.
Kroener
Seattle Community College District, Edward Woodel
Skagit County, Treasurer Judy Menish
Thurston County, Treasurer Michael J. Murphy
State of Washington, Department of Financial Institutions,
Securities Administrator Deborah R. Bortner
State of Washington, Department of Retirement Systems,
Director Sheryl Wilson
State of Washington, Treasurer Daniel K. Grimm
The Seattle Times editorial opposing S. 240 (May 29, 1995)
Seattle Post-Intelligencer editorial opposing S. 240 (June
2, 1995)

west virginia

City of Bridgeport, Finance Director Keith L. Boggs
State of West Virginia, Treasurer Larrie Bailey
State of West Virginia, Board of Investments, Executive
Director H. Craig Slaughter

wisconsin

City of Green Bay, Assistant Finance Director Brian C.
Ruechel
City of Horicon, Clerk-Treasurer David J. Pasewald
City of Hudson, Clerk-Treasurer Gerald P. Berning
City of Oak Creek, Treasurer Barbara R. Davison
City of Oshkosh, Finance Director Edward A. Nokes
Holy Cross Sisters, Merrill
Milwaukee County, Treasurer Thomas W. Meaux
School Sisters of St. Francis, Milwaukee
Sisters of the Divine Savior, Milwaukee
Sisters of the Sorrowful Mother, Brown Deer
Town of Delavan, Treasurer Dorothy Fladten
Village of Greendale, Clerk-Treasurer Dianne S. Robertson
Wisconsin State Council of Senior Citizens, President
Charlie Williams

wyoming

Wyoming Association of Municipal Clerks and Treasurers,
President Kathleen Whitney.

Mrs. BOXER. Mr. President, my amendment takes a very conservative
approach to what I think could be a terrible, unintended consequence of
this bill.
Many times when we pass legislation with the best of intentions, with
the best of minds, we come up short and we find out that in fact we
hurt people instead of helping them. Since I know that every one of us
is here to help people, every one of us is here to protect investors,
every one of us is here to show that we are fair, reasonable and that
we are just, I think the amendment I am offering ought to be accepted
by the other side. I hope it will be.
It simply asks the SEC to report to us in 180 days as to whether
senior citizens and qualified retirement plans need more protection
than that which is called for under S. 240.
All I am doing in this amendment is ensuring that the most vulnerable
targets of securities fraud, the elderly, are not going to be even more
vulnerable as a result of this bill, S. 240. Frankly, I am afraid that
they will be. This is not just my opinion; many senior groups oppose
this bill in its current form. They want us to amend it. They are very
concerned about the impact of this bill on their retirement plan, on
their ability to not become a burden to their families.
This bill's entire focus is to make it more difficult to bring a
class action lawsuit involving fraud. That is its purpose. I understand
it. We want to make sure there are no frivolous lawsuits filed. We do
not like these strike suits. We want to get rid of them. But I am
concerned that, if the proconsumer amendments continue to be beaten
back in this Senate as they were in committee and the first one which
was here in the Senate, clearly the ones who will be hurt the most are
the ones who are the clearest targets for crooks.
I want to share with my colleagues a couple of articles that appeared
in the recent press showing that senior citizens are, in fact, the
target of crooks. I am going to show you a couple of articles. Here we
have an article from the AARP Bulletin, a publication of the American
Association of Retired Persons.
``Targeting the Vulnerable.''
``Stock Schemes a New Peril.''
I am going to read it.

To Earl Bonsey of Dover, Maine, it sounded almost too good
to be true. As it turned out, it was. The 69-year-old retired
carpenter thought he was investing $15,000 in a safe, high-
yield mutual fund. Instead, he got a high-risk junk bond fund
and lost a third of his money.
Thousands of older Americans now find themselves in similar
situations, and the problem is worsening, experts say.
``Although there are no firm statistics, we know that
countless numbers of older persons are being bilked out of
millions of dollars every year--dollars that often represent
the savings of a lifetime.''

Here is an article from the New York Times just last month.
``If the Hair is Grey, Con Artists See Green.'' ``The Elderly Are
Prime Targets.''
I am going to read just a portion of this.

Finding victims is simple. Older people are fairly easy to
contact, either through zip codes or mailing lists. Sometimes
they are taken for a ride by a parent or friend, whether it
is young people who turn up on their doorsteps offering to
carry groceries, or middle-aged people . . . in church
groups. Even trusted local business people can turn into
predators. The elderly ``just like the Marcus Welby view of
the world, believe that people in business are basically
honest,'' says Philip Feigin, Colorado's Communities
Commissioner and President of the North American Securities
Administrators Association which tracks investor fraud.
And I might add that that organization, the North American Securities
Administrators Association, opposes S. 240. This is what he says:

So many times when we track a scam the investors who call
us are absolutely furious that we broke it up. Of course, any
investment made at any age can go sour, but if you blow it
when you are 30, you have 35 years to make it up before you
retire. If you blow it at 65, you may have to go back to work
for the rest of your life.

Now, my God, the last thing we want to do here is send people back to
work at age 65 and 70 when they have lost their life savings or part of
their life savings. That is just what happened in the Keating case, so
let us be careful with what we do here.
Now, the next chart shows the Keating scam in all its beauty. It is a
draft; it is actually used here as a salesman's training course where
they showed their scam artists how to go after the elderly and it just
shows how they look at the elderly: ``Edna Snidlip, 1 Geriatric Way,
Retiredville, CA.''
That is the person they put up as the target here, and they are
trying to get her to write a $20,000 check, and that is how they refer
to her. And I think more important than that is the next chart which
shows what Keating said to his staff.

Capitalize On This.
And always remember the weak, meek and ignorant are always
good targets.

It is unbelievable what goes on with certain bad apples in this
country, who would target the elderly and call them the ``weak, meek
and ignorant.'' That is why senior citizens oppose this bill, and they
are going to remember what we do with this bill. To me, that is the
most extraordinary thing. This is the way they talk about our grandmas
and grandpas--``the weak, meek and ignorant.'' They are going to target
them, and they are going to get them into some scheme. And then, if we
do not strengthen this bill, they are not going to be able to recover.
And so Senator Sarbanes is offering some amendments, I will be offering
some amendments, Senator Shelby, Senator Bryan, and others. I hope we
will get some support.

[[Page S9051]]

Let me give you some of the stories of the senior citizens who were
hoodwinked by Charles Keating, and let us be clear. The laws we are
amending in S. 240 are the very laws that were used by these seniors to
go after Keating and his cohorts.
Last week, Senator Bryan was questioned by the chairman of the
committee, who said: How does this have anything to do with the Keating
people? It is very clear. We have the pleadings of the people who were
hoodwinked by Keating, collected under these very laws. So when you
change it--and by the way, there were forward-looking statements put
out by Charles Keating which I will show later in the debate.
When you change the laws, you make it harder for these people,
whether it is on the proportionate liability or the safe harbor or the
pleading requirements or any of the other things that we change by S.
240. That is why. SEC has problems with this. The SEC has many problems
with many of the provisions--with the safe harbor provision, with the
lead plaintiff provision--and we are trying to fix this bill so that it
is, indeed, a good bill and what it winds up doing is making sure we
protect the good business people, not the bad ones. I wish to protect
the good business people of California, of which there are many, most.
But there are some who are not. And I used to be a stockbroker, and I
can tell you this from that experience. People are very nervous when
they give you their money to invest. It is a sacred trust. And to call
these people ``weak, meek and ignorant'' does not deserve to be
rewarded by legislation that makes it easier for these crooks.
We should be careful. These seniors are warning us not to go too far.
The seniors who were bilked by Keating showed up here in Washington,
DC, to stand with some of us. Here is one of their stories. Barbara
Marks of Burbank, CA. Here is what she says.

I have my home. I have my car, but I have no savings. I
invested my savings but Charles Keating swindled it from me.
I lost $25,000 in American Continental Corporation bonds I
bought at Keating's Lincoln Savings. I've received about 50
percent back from class action lawsuits. It's made things
much more difficult. I hate having no money,

she says.

I live check to check. If I didn't have any pension and
Social Security, I'd be on skid row. If a check doesn't show
up, I have nothing. Everything I do I have to pay on time. If
my battery goes, I have to pay. I cannot go to the bank and
draw out money if I don't have food or coffee. I have to wait
until the next check. Last week I had no money for 3 days.

This is a woman who was swindled out of her money. Why would we want
to do anything to make it harder for her to recover, or others like
her? I ask that question. Now, I know my friends on the other side and
my friends on this side who support S. 240 say I am wrong on this
point. I say do not listen to me. Listen to the hundreds and hundreds
of people and organizations and consumer groups that absolutely oppose
S. 240 in strong form. Join with me in this amendment so that we can
have a study done by the SEC to tell us if we have gone too far and we
are hurting seniors. Let us see what else she says.

As an older person you want to think people are honest. I
thought everything was protected and everything was on the up
and up. I thought my investment was insured. People should be
able to collect the money taken from them from all who are
responsible,

she says.
This goes to Senator Sarbane's amendment.

We should benefit from those who benefit from taking from
us. The money belongs to us. The Senate shouldn't take away
our rights.

I ask unanimous consent to have printed in the Record the statement
of Ms. Jeri Mellen and Ms. Joy Delfosse, both of Nevada, Don and Judy
Maxfield of Arizona, John and Ethel Rabkin, Granada Hills, CA, and
Evangeline Ivy of Glendale, CA.
There being no objection, the material was ordered to be printed in
the the Record, as follows:

People Who Were Swindled by Charles Keating and Who Oppose S. 240
Washington, D.C. Visit, June 13, 14, 1995

nevada

1. Ms. Jeri Mellon, Henderson, NV.
Jeri Melon lost $40,000 in American Continental Corp. (ACC)
bonds, which she purchased at Lincoln Savings & Loan in
Sherman Oaks, California in the last 1980's.
She says, ``The bank had set aside a desk near the front of
the bank so that you were seen coming and going. The
individual selling the bonds was always a well-dressed, young
college graduate. He was charismatic, charming, good-looking,
attentive, and very well versed in his approach to clients.
``The tellers advised you to put your money in the bonds
rather than a CD. Lincoln Savings was insured, so I felt that
if the bank was endorsing these bonds, they would have to be
insured.''
2. Ms. Joy Delfosse, Henderson, Nevada.
Joy Delfosse lost $21,000 in ACC bonds that she purchased
at Lincoln Savings & Loan in Sherman Oaks, Ca. She had been a
customer of Lincoln Savings since 1969; and when a CD of hers
came due, the Lincoln tellers she trusted convinced her to
put her money into ACC bonds.

arizona

1. Don and Judy Maxfield,
Don and Judy Maxfield lost $21,000 in ACC bonds, when they
were living in Lakewood, CA. in the 1980's. They purchased
the bonds at their local Lincoln Savings bank in the Lakewood
Mall. when their CD's came due, Lincoln tellers persuaded
them to put their money into ACC bonds. At the time, the
Maxfields were looking forward to retirement and felt the
bonds were an attractive investment, since they were being
sold by Lincoln Savings.

California

1. Sam and Ethel Rabkin, Granada Hills, CA.
Sam and Ethel Rabkin lost $100,000 in ACC bonds, which they
purchased at the Lincoln Savings & Loan where they banked at
Granada Hills, CA. They said, ``Lincoln was a family bank
with all the tellers knowing you by your first name and they
made you feel part of the family.''
2. Evangeline (Van) Ivy, Glendale, CA.
Evangeline (Van) Ivy and her husband lost $100,000 in ACC
bonds, which they brought at the Lincoln Savings & Loan in
their town of Glendale CA. They were regular customers of the
Lincoln Savings in Glendale; they purchased their bonds when
their CDs came due, based on information from Lincoln sales
people that the bonds were safe.

Mrs. BOXER. Sam and Ethel Rafkin lost $100,000 in junk bonds. They
said:

Lincoln was a family bank with all the tellers knowing you
by your first name and they made you feel part of the family.

Sure, they did. But in the back rooms they laughed at them and called
them the ``weak, meek and ignorant.''
We better be careful when we change our securities laws that we do
not as an unintended consequence--I do not think anyone, of course,
intends to do that--reward that kind of crook. We know Charles Keating
targeted the elderly. We know many others target the elderly. I showed
you some of those articles. Charles Keating ran afoul of the securities
laws. The securities laws that this bill will change will be changed
deeply and adversely: 18,000 of the 23,000 people who bought Charles
Keating's junk bonds were elderly--well, we know why; they targeted the
elderly; junk bonds that did not drop 10, 20, or 30 percent in value
but junk bonds that became 100 percent worthless; 18,000 people
swindled. That is a small city. Make no mistake, the elderly are the
target, and that is why my amendment is such a good amendment, because
it simply says to the SEC: Take a look at what the Senate has done and
the House has done with S. 240 and let us know in 180 days. Should we
take some actions to make sure that senior citizens are better
protected?
Mr. President, have I used up the 20 minutes at this time?
The PRESIDING OFFICER. The Senator has used 16 minutes.
Mrs. BOXER. I say we better make sure we know what we are doing. We
better make sure that at the end of the day, as the proponents of S.
240 celebrate their victory, it is not a short lived victory, because I
will tell you, Mr. President, there is no wrath like the wrath of the
elderly. There is no wrath like the wrath of people who took their
hard-earned retirement money and invested it, only to turn around and
find out they were swindled. And that wrath will come down on those
people who changed the laws in such a way that good people like this
could not invest.

Let me give you another unintended consequence, and it is something
that my friend, Chris Dodd, has said over and over and over again, and
he is right on this particular point. We have to make sure that people
are interested in making investments in this Nation. We want to make
sure they feel good about it, they feel protected. Or what will happen?
Money will dry up. They will buy a Government bond. Why would they not?
At least they know it is protected by the FDIC and that the full

[[Page S9052]]

faith and credit of the Treasury stands behind it.
But we want people to invest in the business world. We want the
capital to flow to innovation, to new technology so that jobs are
created. So what I am saying is, as an unintended consequence of this
bill, we better be careful that we do not go so much to one side
because we do not want frivolous lawsuits that we, in fact, make people
afraid that the protections are not there, that they will never collect
if they are swindled and, therefore, they refuse to invest their money
in the private sector. And they might very well.
I will tell you, I would have a lot of pause. I know a lot about this
rewrite of securities laws, and I am very concerned.
Investment schemes that target the elderly are not the exception;
they are the rule. The Senate Committee on Aging held hearings 2 years
ago on elderly and retirement investor fraud. The assistant
commissioner from my State securities regulators testified. Let me
quote from his testimony:

If I were conducting a seminar on investment fraud
techniques for aspiring con artists, lesson one would be:
Target the elderly and the retired.

So we have proof from people who are out there that the elderly,
senior citizens, and retirement plans are the focus of some of these
bad appeals, these swindlers, these crooks, these corrupt people who
have no heart at all. I used to call them hard-hearted. I do not think
they have a heart. How do you have a heart when you take a grandma's
money, a widow? She has $20,000. You imply that it is safe, as I read
to you before the case of that elderly person. How do you take that
money and lose it knowing all along that is what was going to happen
and then even claim to have a heart?
No. 1, target the elderly and the retired.
The State securities regulators announced what they described as an
alarming surge in investment schemes targeting IRA's.
The PRESIDING OFFICER. The Senator has used 20 minutes.
Mrs. BOXER. Mr. President, I yield myself 5 minutes. They reported
that tens of thousands of unwary Americans already have invested
hundreds of millions of dollars of their savings for old age through
IRA's and other tax-deferred savings.
So we know who the targets are. And the Boxer amendment simply says
to the SEC, ``Help us out a little. After S. 240 is the law of the
land, take a special look, from the standpoint of our seniors and
retirement plans, and let us know if there is something we should do to
strengthen the law.''
I would be surprised if people fight us on this amendment. If they
do, I will listen to their arguments, but it is hard for me to
understand why we would not want to have this information.
Mr. President, today I took an early morning walk around the Capitol
on the west front, and I do not know if you have ever seen the statue
of John Garfield. It was put up there by his Army buddies.
For the first time, I decided to take a look at it. It is surrounded
by five classical sculptures, and one of them is a man who is holding a
tablet, and the tablet has three words on it: Law, justice, prosperity.
Those three words--law, justice, prosperity.
I thought to myself, how interesting that I happened to look at that
this morning. Law, justice, and prosperity. What we are trying to do
here is to make sure in S. 240 that our companies can be prosperous by
protecting them from frivolous lawsuits. Law, justice, prosperity. But,
on the other hand, there is a balance. Are we going to go too far and
take prosperity away from our seniors or, shall I say, survival away
from our seniors? So, law, justice and prosperity. We are dealing with
those words today. We do not want to protect the bad guys; we want to
help the good guys, and we certainly do not want to hurt the senior
citizens and those who are saving diligently for their retirement.
I know lawyer bashing is the latest thing of the nineties. We bash
everything in the nineties, but particularly we bash lawyers, and I am
against lawyers who file frivolous lawsuits. I will do whatever I can
to stop that.
But let us be clear, we are doing a lot more here. We are going very
far, as this Congress has done on a number of issues, we are going too
far. We are going to hurt our grandmas and grandpas and average, decent
people who deserve to be protected and they do not deserve to have a
law that protects them literally torn apart--torn apart--so that they
can be sitting targets: ``the weak, the meek and the ignorant with no
laws to help them.'' That is wrong.
We are changing many rules about securities laws in S. 240. The least
we can do--the least we can do--is require that the SEC come back to us
in 180 days telling us what they believe the impact of these changes
are on senior citizens and retirement plans. I hope my colleagues on
both sides of the aisle can support the Boxer amendment.
I retain the remainder of my time, Mr. President. I yield the floor
at this time.
I suggest the absence of a quorum and ask unanimous consent that the
time be charged equally to both sides.
The PRESIDING OFFICER. Without objection, it is so ordered. The clerk
will call the roll.
The legislative clerk proceeded to call the roll.
Mr. D'AMATO. Mr. President, I ask unanimous consent that the order
for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. D'AMATO. Mr. President, I was listening to the concern my
colleague from California raised that senior citizens might be
particularly vulnerable to unscrupulous predators who prey on them
because of their lack of sophistication and, in many cases, take
advantage of an established fiduciary relationship to defraud senior
citizens of their savings.
I agree with my colleague that, in the case of Charles Keating and
his bank, it is hard to imagine that a large and reputable institution,
insured by the Federal Deposit Insurance Corporation, would engage in
the kind of reprehensible activities which defraud depositors and
investors of hundreds of millions of dollars. People often think that
banks have the Federal Government's stamp of approval and that they are
therefore protected from these kinds of fraudulent practices, because
of the various supervisory agencies--the Federal Reserve, the Office of
the Comptroller--which review these banks. However, I reject the
Senator's contention that S. 240 would open the door to this kind of
activity. Fraud is not countenanced by this bill. Indeed, deliberate or
intentional misstatements do not receive the safe harbor or any other
protections. In fact, those who make intentional misstatements can be
held liable, potentially, for all of the damages, even damages beyond
those which they are found to be directly responsible. Further, the
Securities and Exchange Commission is empowered under this legislation
to bring suits that before now they did not have the authority to
bring.

This legislation's purpose is to control the race to the courthouse
by greedy, avaricious lawyers, who look not to the benefit of innocent
investors or the elderly who have been defrauded, but look only to
enrich themselves. They have become legal holdup artists. Ninety-three
percent of these cases are settled because it costs less for defendants
to settle them than the millions of dollars they cost to try. The
lawyers win their settlements by alleging fraud; they do not prove
fraud.
It is about time that we say we are not going to allow the American
judicial system to be used in this manner; to allow lawyers to pirate
profits from companies who have done nothing wrong, whose only mistake
is that they are in business and that they are subject to the
marketplace fluctuations. It is about time that we stood up to the
lawyers who have made filing these cases a business. These lawyers are
not concerned with the interests of the investors who have been abused.
I do not want to see people's rights to seek redress limited.
However, this bill does not do that. Later, I intend to refer to a
statement by Mr. Levitt, in which he is highly complimentary of many of
the provisions of S. 240. Also I intend to point to a comparison
between our bill and the bill that was passed in the House of
Representatives.
I have not heard anybody point out that this bill does stop these
attorneys from racing to the courthouse, and prohibits them from hiring
plaintiffs so

[[Page S9053]]

that the people with real financial interests are represented. These
attorneys would rather file suit on behalf of a person who owns 10
shares of stock and who the lawyer selects than have to consider the
interests of the defrauded investor. S. 240 stops this abusive behavior
and it should be complimented for that. S. 240 would also legislate
that if you are an accountant, and you discover fraud, you have an
obligation to bring that up to the board of directors. However, S. 240
goes further than that; it requires that your obligation does not end
with the board of directors. If the board of directors does not act,
you have to go one step further, and report the fraud to the SEC. These
provisions protect the senior citizens.
I am tired of hearing this nonsense that this legislation will just
open up the doors to take advantage of people. People are being taken
advantage of, this legislation tries to put a stop to that. Where do
you think those senior citizens invest their money? They invest in
pension funds that account for 25 percent of all the moneys invested.
However, I did not hear my colleagues say, you have done a good thing
by giving to these pension funds the authority to pick their lawyers
and control their litigation. While I share my colleagues' concern that
senior citizens not be hurt, I think it is unfair, that it is beyond
the pale, to say that this bill protects fraud. I have heard that
statement a half dozen times from my colleagues. But this bill does not
protect fraud. I ask my colleagues to show me where in this legislation
we protect fraud. Any intentional misstatement and you can be held
liable. There is no safe harbor for fraud. It is neither right nor
accurate to say that we protect fraud in this bill, and I resent the
fact that my colleagues continue to make these statements.
For several weeks, my colleague has been talking about offering
amendments to help protect senior citizens. I have yet to see those
amendments. This is the first amendment that has been introduced. It
calls for a study. I believe that it is reasonable, and I am prepared,
under certain circumstances, to accept this amendment. But I do not
think it is unreasonable for me to ask what other amendments are going
to be offered so that they are not just sprung on us. I hope that my
colleagues are willing to share their amendments so that we can see if
we might be able to accept them. I would like to be able to do that,
but I certainly cannot accept amendments blindly.
I yield the floor.
Mrs. BOXER. Mr. President, how much time do I have left?
The PRESIDING OFFICER. Twenty minutes.
Mrs. BOXER. Before I yield to my good friend from Alabama, I want to
respond to my friend from New York. My friend from New York, the
chairman of the committee, worked very hard on S. 240. He simply has a
different view of the consequences. You know, if it all was exactly the
way my friend said it was, everyone would be supporting S. 240. But I
have already put into the Record the names of hundreds of people from
Alabama to Wyoming, people who are there to look out for the people,
who have said S. 240 goes too far.
I already mentioned the Congress of California Seniors. Listen to
what they said, and they are smart people:

Dear Senator Boxer: In behalf of the Congress of California
Seniors, I want to reiterate our strong opposition to S. 240
as it emerged from the Senate on May 25. This bill threatens
the retirement savings of every Californian.

My friend can pound the podium all he wants. He is effective when he
does that. But so can I.
Listen:

This bill threatens the retirement savings of every
Californian. It is one of the most anti-senior citizen pieces
of legislation to be considered by the Congress in recent
years.

That is such strong talk from the Congress of California Seniors.
So I just have to say there is a legitimate disagreement here. I am
very hopeful that my friend, the chairman, will accept my amendment,
because I think that is the minimum we can do. I hope that he will. But
we can all pound the table and get upset because we see the bill
differently, which is what the legislative process is about. I hope my
friend will not take it personally that I see it in a different way
than he does.
At this time, I yield 10 minutes to my friend from Alabama, Senator
Heflin.
Mr. HEFLIN. Mr. President, I rise in support of the Boxer amendment
which basically is to require a study as to the effect of securities
litigation on senior citizens and to then come forward with ideas on
how basically they might be protected in the event there are
disadvantages that arise relative to the matters that are involved in
securities litigation.
I also rise in opposition to the bill. This bill has been called a
reform bill. I think that is really a misnomer. It has been called by
some--and they go, I think, a little too far--the crooks and swindlers
protection act. However, the bill which proclaims to curb frivolous
lawsuits would essentially put at a substantial disadvantage and
penalize the victims of securities fraud and give protection to
corporate wrongdoers and their aiders and abettors.
This bill has many opponents, including the very people who are
responsible for investor protection and overseeing capital formation in
the States, the North American Securities Administrators Association.
Also the Association for Retired People, AARP; the U.S. Conference of
Mayors, and the Government Finance Officers Association number among
those that are opposed to S. 240.
All oppose the bill for good reason, as noted by the Raleigh News
Observer, ``The bill is bad news for investors private and public and
it would tie victims in legal knots while immunizing white-collar
crooks against having to pay for their misdeeds.''
The sponsors of this bill claim, with very little supporting
evidence, that there is a litigation explosion in the securities class
action arena. The studies regarding the number of these types of cases
do not reflect anything close to an explosion. In fact, they prove that
the level of actual cases has remained constant for the past 20 years.
In 1993 alone there were only 140 companies sued; there are over 20,000
companies registered with the Securities and Exchange Commission. This
small number of companies sued, only 140, hardly amounts to a
litigation explosion.
The proponents of the bill also claim that most of the cases which
were filed are frivolous and that companies feel that they must settle
the cases to avoid protracted litigation expenses. Well, if we were to
base this reform bill only on what companies believe are frivolous
suits, we would believe that the charges filed against the accountants,
lawyers, and brokers involved in the Charles Keating, Lincoln Savings
fraud case were frivolous. Although they claimed the charges were
frivolous, they settled for ten's of millions of dollars with investors
who had lost considerably.
There probably are cases in which companies have been wrongly sued
for stock price decreases not due to fraud or based on actions for
which they should not be held accountable. Predominately this is not
the case. In fact, according to a study performed by the University of
California for 3 years ending in 1990, only 20 companies were hauled
into court of the 589 companies whose stocks dropped more than 20
percent in 5 days around the time of a disappointing earnings report.
In many of those 20 cases, executives were telling the public that
everything looks great, while bailing out of the company and selling
their own stock.
The amendments offered by Senators Bryan and Sarbanes will go far to
achieve a balance between protecting the rights of defrauded investors
and providing protection from frivolous lawsuits to honest companies.
These amendments include language which was part of the original
version of S. 240. I believe that the cosponsors of the original
version of S. 240 will agree that the bill as reported out of the
Banking Committee steeply tilts the playing fields against investors.
Without these amendments, I cannot support this legislation which will
strip the rights of defrauded investors.
The amendments are supported by the Securities Regulators
Association, Government Finance Officers Association, and many others.
Acceptance of them could resolve many concerns of these organizations.
One amendment would allow the SEC to fashion through its rulemaking an
effective

[[Page S9054]]

safe harbor for forward-looking statements. The SEC and others are
concerned that the safe harbor in the bill makes it possible for
defendants to avoid liability for false statements. Another amendment
would extend the statute of limitations to allow investors enough time
to file a securities fraud suit. Currently the bill provides for a time
period which is widely regarded as too short.
Other amendments which greatly improve this bill involve the ability
to pursue accountants, brokers, and other professionals who may have
aided in a securities fraud and the apportionment of damages to those
secondary violators. One amendment would return to prviate parties the
ability to pursue aiders and abetters in securities fraud suits. This
amendment is supported by State securities regulators as well as by the
SEC. Both of these enforcement agencies have limited resources
available and realize the need for private actions to pursue aiders and
abetters. The other amendment would allow the innocent victim to be
compensated rather than penalized due to the bankruptcy of the primary
violator. This amendment would simply restore joint and several
liability so that the equities are in favor of the innocent investor.
It seems odd that now we are moving to reform securities litigation
with a result that would protect those who may create investor scams.
If any reform needs to be addressed, based on the current actions on
Wall Street, it should come in the form of greater investor protection,
not making it easier for corporations and stockbrokers to mislead
investors. There is currently a recent frenzy of mergers and takeovers.
According to the New York Times securities regulators are opening
investigations into insider trading at a rate not seen since the
1980's. Unfortunately, I believe that if this bill were to become law,
many of its provisions would soon be tested to the detriment of
investors.
Our financial markets do not run on money, they run on public
confidence. The stock market is trading at all-time highs and companies
are earning record profits. This is greatly due to the confidence that
investors have in the marketplace. This confidence will be drastically
altered if investors come to believe that not only are they at risk of
being defrauded, but that they have no recourse to fight back against
those who defraud them.
I urge my fellow Senators to support all the amendments offered to
put investor protection back into this bill. If these amendments are
not adopted I will find it difficult to vote for a bill which supports
those involved in fraud while tearing down long-standing protection in
our securities law.

In closing I would like to quote from a letter I received from Mr.
Joe Borg, the director of the Alabama Securities Commission. In his
letter, Mr. Borg considers the question of whether this bill would
achieve a balance between protecting investors and granting relief to
honest companies and professionals. He concludes that ``the bill would
tilt the balance too far in favor of corporate interest and would have
the effect of depriving many defrauded investors of the ability to
recover their losses.'' He further states that ``I agree there is room
for constructive improvement of the Federal securities process.
However, S. 240 as reported by the Banking Committee goes beyond the
stated goal of curbing frivolous lawsuits and instead would in
practical effect, eradicate most private actions under the Federal
securities laws.''
Mr. President, I ask unanimous consent that the full letter be
printed in the Record at the conclusion of my remarks.
There being no objection, the material was ordered to be printed in
the Record, as follows:

Alabama Securities Commission,

Montgomery, AL, June 19, 1995.
Via facsimile: 202-224-3149.
Attn: Winston Lett.
Hon. Howell Heflin, U.S. Senate, Washington, DC.
Re: S. 240, the ``Private Securities Litigation Reform Act''.
Dear Senator Heflin: I understand that the Senate may
consider as early as this week S. 240, the ``Private
Securities Litigation Reform Act.'' In my capacity as the
Director of the Alabama Securities Commission, I am writing
today to express my serious concerns with S. 240 as it was
reported out of the Senate Banking Committee. As you know,
the Alabama Securities Commission is responsible for investor
protection and for overseeing the capital formation process
in Alabama.
In evaluating the variety of securities litigation reform
measures that have been introduced in the 104th Congress, I
applied one test: Does the bill achieve a balance between
protecting the rights of defrauded investors and provide
relief to honest companies and professionals who may find
themselves the target of a frivolous lawsuit?
Regrettably, S. 240, as it was reported by the Senate
Banking Committee, does not achieve this balance. Instead,
the bill would tilt the balance too far in favor of corporate
interests and would have the effect of depriving many
defrauded investors of the ability to recover their losses.
It is my understanding that pro-investor amendments will be
offered at the time S. 240 is considered on the Senate floor.
Among the amendments expected to be offered are the
following: Extending the statute of limitations for civil
securities fraud actions; fully restoring liability for
aiding and abetting securities fraud; narrowing the scope of
a safe harbor for forward looking statements so that the
Securities and Exchange Commission (SEC), which has the
necessary expertise, is directed to engage in rulemaking to
develop a reasonable and effective safe harbor without giving
corporate executives free rein to make misleading statements;
and modifying the severe limitations on joint and several
liability so that innocent defrauded investors have a chance
to fully recover their losses.
The Securities and Exchange Commission, the North American
Securities Administrators Association (the organization
representing the 50 state securities regulators of which I am
a member), and others generally have expressed concerns over
the bill's treatment of these issues. The amendments expected
to be offered on the floor (as discussed above) respond to
those concerns and are deserving of your support. Please vote
in favor of these amendments when they are offered on the
floor.
If these amendments are offered and rejected, I
respectfully encourage you to vote against S. 240 on final
passage.
I want to emphasize that I agree there is room for
constructive improvement of the federal securities litigation
process. However, S. 240 as reported by the Banking Committee
goes beyond the stated goal of curbing frivolous lawsuits and
instead would, in practical effect, eradicate most all
private actions under the federal securities laws.
In closing, I want to stress that our financial markets do
not run on money; they run on public confidence. It is my
view that the confidence that investors have in the
marketplace will be dramatically altered if they come to
believe that not only are they at risk of being defrauded,
but that they have no recourse to fight back against those
who have defrauded them. I urge you to support balanced and
targeted reform measures and to reject S. 240 if it does not
incorporate the amendments discussed above.
You may reach me at 334-242-2984 should you have any
questions or need additional information.
Sincerely,
Joseph P. Borg,
Director.

Mr. HEFLIN. Mr. President, I yield my remaining time to the
distinguished Senator from California, Senator Boxer.
Mrs. BOXER. Mr. President, I reserve the balance of my time.
The PRESIDING OFFICER. The Senator from California will have 8
minutes, with 36 minutes on the other side.
Mr. D'AMATO. I would like to take a moment to state, as I indicated
to the Senator from California, that we certainly would like to review
her amendment. While I might have difficulty with the language used in
the amendment, I do not have a problem asking the Securities and
Exchange Commission to look at the impact this legislation would have,
particularly as it relates to senior citizens.
Certainly, I think that is reasonable. I say that in the spirit of
cooperation I hope that we can iron out our differences. I would also
like to point out, Mr. President, that I have a statement from the
chairman of the Securities and Exchange Commission, who indicates that
he, as a businessman, finds there is a need for a stronger safe harbor.
I quote from Chairman Levitt:

The current rules have largely been a failure and I share
the disappointment of issuers that the rules have been
ineffective in affording protection for forward-looking
statements.

He goes on to say:

. . . I know all too well the punishing costs of meritless
lawsuits--costs that are ultimately paid by investors.
Particularly galling are the frivolous lawsuits that ignore
the fact that a projection is inherently uncertain even when
made reasonably and in good faith.

That is the Chairman of the Securities and Exchange Commission who my
colleagues like to quote so often.

[[Page S9055]]

My colleagues would have us believe that all is well with the
securities industry. All is not well. All is not well when you have a
band of lawyers who literally hire the people they represent, race to
the courthouse to file the suit and allege fraud, and are then selected
as lead counsel.
The statement that we are protecting fraud, gets the hackles up on
this Senator. Not only are we not protecting fraudulent conduct, but we
are making sure that people are held liable for intentionally making a
misstatement. Again, I say there is no safe harbor anyplace for fraud.
There were other legislative proposals that would have brought such a
safe harbor, but not this bill. It is a disservice to this legislation
to say it protects fraud. There is neither intent nor language in this
bill nor is there any way to interpret this bill to say that fraudulent
conduct is protected under S. 240.
The cost of these abusive cases is incalculable. It has cost business
the ability to communicate and to give the information to people to
which they are entitled. This inability is particularly troublesome to
the small startup business in the high-technology area. It has a
chilling impact on these firms and it is wrong.
The fact is that there were $1.3 billion worth of settlements,
settlements in 1993-94, that is 93 percent of the cases filed. No one
can afford to stand up defend themselves in these cases. Do we really
believe out of all 300 cases that were brought, every one of them
engaged in fraudulent conduct? That is absurd. Those cases were not
tried they were settled. What we are attempting to do in S. 240 is to
seek balance; to demonstrate that those who truly commit fraud will not
be let off the hook, but by the same token, we will not expose an
entire class of people who are associated with the securities business
to meritless suits. That is what this legislation does, and it does
strike a balance.
Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The bill clerk proceeded to call the roll.
Mr. FRIST. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER (Mr. Grams). Without objection, it is so
ordered.
The Senator from Tennessee.
Mr. FRIST. Mr. President, I rise to speak today in support of S. 240,
the Private Securities Litigation Reform Act of 1995, and against the
proposed amendment.
S. 240 is a moderate and carefully balanced compromise bill that
permits investors in securities to continue to file and win legitimate
lawsuits. However, the bill does something that is much needed at this
time: It gives issuers of securities the ability to quickly dismiss
meritless and abusive lawsuits.
The current system of securities litigation is clearly broken. Why?
Because it makes millionaires out of attorneys who repeatedly file
frivolous lawsuits. As a matter of fact, securities litigation costs
American industry $2.4 billion a year, one-third of this amount being
paid to plaintiffs' attorneys. This results in companies being forced
to lay off workers and consumers paying higher prices for goods and
services.
The bottom line is that the current system of securities litigation
does not benefit investors or consumers: It benefits a handful of
attorneys.
Here is how this perverse system of securities litigation currently
works: There are a handful of plaintiff law firms in this country today
that specialize in filing securities class action lawsuits. This is
shown by the fact that seven plaintiff law firms in this country
receive 63 percent of the legal fees generated by securities class
action cases. That is seven law firms receiving 63 percent of all of
these legal fees.
These law firms monitor the stock prices of businesses with computers
every day. When a corporation stock price suffers a major drop, the
plaintiff's law firm immediately files a lawsuit. Indeed, some 20
percent--or one out of five--of these securities lawsuits are filed
within 48 hours of a major drop in the stock price.
The reason these law firms are able to file their lawsuits so quickly
is that they sue on behalf of professional plaintiffs. These
professional plaintiffs actually receive a fee, in many cases, for
permitting themselves to be named in the lawsuit. The Securities
Subcommittee found that there were some plaintiffs who had as many as
14 securities action lawsuits filed on their behalf.
These law firms justify the filing of these lawsuits by generally
alleging that the drop in the stock price was caused by the corporation
or its management acting fraudulently or recklessly. The lawsuits seek
the corporation to pay to its shareholders damages in the amount of the
difference between the stock price before and after the stock's drop in
value.
Even if the lawsuit is meritless, the corporation is forced to
settle, even if it is meritless, even if it does not make sense? Why?
First, litigating a lawsuit is costly--even if your only goal is to get
the lawsuit dismissed for failing to state a cause of action. This is
because it is very difficult to dismiss such lawsuits, and defense
expenses for complex securities class action lawsuits can total between
$20,000 and $100,000 a month.
Second, the depositions and extensive document review associated with
these lawsuits are so time consuming that they disrupt the management
of the business. On average, companies that are sued devote as much as
1,000 management and employee hours per case per suit.
The end result is that it is worthwhile for a business to settle even
a frivolous securities litigation lawsuit because there is rarely, if
ever, any cheap way of dismissing it.
Opponents to securities litigation reform are going to tell you that
notwithstanding all of the foregoing, investors still benefit from the
current system of securities litigation. But I submit that the current
system actually harms investors.
The first problem, as was stated by former SEC Commissioner Carter
Beese, is that the current system encourages, and I quote Mr. Beese,
``. . . counsel to settle for amounts that are too low for fees that
are too high.'' The plaintiffs in a securities class action have a
conflict of interest with their lawyers. The lawyers' incentive is for
an uncomplicated settlement and avoidance of a trial. This is because
the difficulty and time-consuming work for the plaintiffs' attorneys
comes at the trial phase. If it can be avoided by a settlement, the
lawyers still get their percentage for relatively little effort. Thus,
the lawyer-driven nature of these lawsuits tends to shortchange
investors who have truly been defrauded and would benefit from
litigating the lawsuit to conclusion.
The second problem is that in securities class action lawsuits, when
a corporation makes a settlement payment to a class of shareholders,
the shareholders who still own the corporation's stock are not really
getting any tangible benefit in return. If the settlement amount is
coming from the corporation's money, then it is no more than a type of
quasi-dividend, with a law firm taking on average a 33-percent cut for
giving the shareholder the privilege of having the quasi-dividend
occur.
This will generally cause the corporation's stock price to drop,
which indeed nullifies the benefit of the settlement. If the settlement
amount comes from the corporation's directors and officers liabilities
insurance, the corporation will be faced with partly paying it back
through a staggeringly high premium the very next year. Either way, an
investor who continues to own a share of stock in a sued corporation
does not gain much from settlement of the lawsuit.
The third and final problem is that investors can no longer get
useful forward-looking information about corporations. As former SEC
Commissioner Carter Beese testified before the Securities Subcommittee:

Companies go out of their way to disclose every conceivable
bit of innocuous information, but very little useful forward-
looking information. At the same time, legions of lawyers
scrub required filings to ensure that disclosures are as
milquetoast as possible, so as to provide no grist for the
litigation mill.

With all of these problems we have with our current system of
securities litigation, the moderate relief offered by S. 240 is
necessary to protect investors, to protect consumers, and to protect
jobs.
I urge all of my colleagues to vote against amendments which weaken
the

[[Page S9056]]

very carefully balanced aspect of S. 240 and to vote for S. 240's final
passage.
I thank the Chair. I yield the floor.
Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The bill clerk proceeded to call the roll.
Mrs. BOXER. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mrs. BOXER. Mr. President, do I have 8 minutes remaining? Is that
accurate?
The PRESIDING OFFICER. That is correct.
Mrs. BOXER. I will not take but 2 minutes of my time.
My friend from New York is going to yield back his time so we can get
to a very important amendment by the Senator from Nevada.
I am very pleased that the chairman has indicated to me, although he
has not said it definitively, that he may well be supporting my
amendment.
I think that we have pointed out by virtue of charts and some very
serious examples that I do not think I need to repeat because they are
very, very difficult here in this Chamber where senior citizens have
been the target of fraud.
I believe, because we are changing so many aspects of the law in this
bill, that the SEC ought to take a look at what we have done and all
the amendments that we have incorporated or turned down should this
bill become the law of the land, and then tell us whether or not senior
citizens are as well protected as they should be.
So I think that this amendment should have broad support. It will
give me some comfort to know that in 180 days, we will have a report
from the SEC which has expressed reservations about this bill.
I ask unanimous consent to have printed in the Record at this time
some of the comments they have made regarding many aspects of this
bill. They have questions about a lot of areas, including the safe
harbor, which is the basic provision of the bill, proportionate
liability, appointment of lead plaintiff, aiding and abetting, and
damages.
There being no objection, the material was ordered to be printed in
the Record, as follows:

Response to OMB Request for Views of the Securities and Exchange
Commission Regarding S. 240

The Securities and Exchange Commission submitted testimony
on S. 240, as introduced by Senators Domenici and Dodd, on
April 6, 1995.\1\ As noted in the testimony, the Commission
supported many of the provisions of S. 240 as introduced. The
Commission views S. 240 as ordered reported on May 25, 1995
by the Committee on Banking, Housing, and Urban Affairs as a
significant improvement over its counterpart in the House,
H.R. 1058. However, the Commission has significant concerns
regarding certain provisions of S. 240 as reported, and also
believes that the legislation should address certain
additional issues not included in S. 240.
---------------------------------------------------------------------------
Footnotes at the end of article.
---------------------------------------------------------------------------
Provisions of S. 240 endorsed by the Commission--The
Commission supports, or does not oppose, the following
measures:
Class Action Reform Provisions: Except as discussed below,
the Commission supports, or does not oppose, the measures set
forth in Section 101, ``Elimination of Certain Abusive
Practices,'' and Section 102, ``Securities Class Action
Reform.''
Requirements for Securities Fraud Actions: The Commission
supports, or does not oppose, the measures set forth in
Section 104, ``Requirements for Securities Fraud Actions,''
and Section 106, ``Written Interrogatories.''
RICO: The Commission supports the provision of Section 107,
eliminating the overlap between private remedies under RICO
and the Federal securities laws.
Contribution and Settlement Discharge: The Commission
supports those provisions of Section 202 that provide for a
right or proportionate contribution among defendants, and for
the reduction of a judgment upon a settlement by an amount
equal to the greater of the settling defendant's percentage
of responsibility or the amount of the settlement.
Fraud Detection and Disclosure: The Commission supports
Section 301,``Fraud Detection and Disclosure.''
Limitation on Rescission under Section 12(2): The
Commission does not oppose the amendment offered by Senator
Bennett that would allow a defendant to avoid rescission
under Section 12(2) of the Securities Act and reduce the
damages upon proof that part of the plaintiff's loss was the
result of factors unrelated to the fraud.
Provisions that should be included in S. 240--The
Commission has recommended that Congress adopt the following
measures, which are not included in S. 240:
Statute of Limitations: The Commission recommends extending
the statute of limitations for private securities fraud
actions to five years after a violation occurs. Although S.
240 as originally introduced addressed this issue, the
provision was deleted from the reported bill.
Aiding and Abetting in Private Actions: The Commission has
recommended restoring liability for aiding and abetting in
private actions. As discussed below, Section 108 of S. 240
only provides authority for the Commission to bring actions
based on aiding and abetting under the Exchange Act, and
limits such actions to persons who act knowingly.
Recklessness: The Commission has recommended that Congress
expressly provide that recklessness is sufficient for
liability under Section 10(b), and codify the definition of
recklessness which was enunciated by the Seventh Circuit in
the Sundstrand case.\2\ S. 240 provides that defendants are
proportionately liable unless they commit ``knowing
securities fraud,'' which necessarily implies that there is
liability for reckless conduct, but does not expressly
provide that recklessness is sufficient.
Provisions of S. 240 that the Commission does not support--
The Commission opposes the following measures as currently
set forth in S. 240:
Safe Harbor Scienter Standard: Section 105 creates a safe
harbor for forward-looking statements. The Commission
believes that the complex task of fashioning an effective
safe harbor for forward-looking statements would be better
addressed through Commission rulemaking pursuant to express
statutory authority. The safe harbor in S. 240 contains
important exclusions, not present in H.R. 1058, that address
some areas of particular concern. However, the measure might
make it possible for some defendants to avoid liability for
certain false statements.
We believe that the safe harbor scienter standard would be
better if modified to include the following exclusions.
(c) Exclusions--The exclusion from liability under
subsection (a) with respect to a ``forward--looking
statement'' that is materially false or misleading is not
available: (i) for a natural person, if such person made such
statement knowing that such statement was materially false or
misleading when made; or (ii) for an issuer, if such
statement was made by or with the approval of an executive
officer (as defined by the Commission) of that issuer, if
such executive officer made, or approved the making of, such
statement knowing that such statement was materially false or
misleading when made.\3\
Provisions of S. 240 that cause concern or that need
clarification--The following provisions raise concerns or
need clarification and may require some adjustment in order
to achieve the desired effect:
Proportionate Liability: Section 202 generally limits the
application of joint and several liability to defendants
determined to have committed knowing securities fraud. Other
defendants would be proportionately liable; except that, if a
defendant's share of the damages were uncollectible, each
proportionately liable defendant would be liable for a
proportionate share of the uncollectible amount, up to an
additional amount equal to 50% of his own share.
The Commission has recommended that Congress first enact
other reform measures before adopting any form of
proportionate liability under which the burden of
uncollectible damages owned by an insolvent defendant must be
borne by the defrauded investor, rather than by solvent co-
defendants who violated the federal securities laws. If
Congress determines to adopt a system of proportionate
liability, such as that provided in S. 240, the Commission
has recommended that it not include issuers (who should
remain liable for all damages suffered) and that it be
limited to fraud-on-the-market cases, rather than applying
also to cases of direct, considered reliance.
Damages: Section 201 limits a plaintiff's damages to the
difference between the price paid by the plaintiff and the
value of the security during the 90-day period following
correction of the misstatement or omission. This provision
should be limited to fraud-on-the-market cases. In other
cases, this measure of damages may be wholly inappropriate.
In addition, the 90 day period should be shortened since
losses attributable to fraudulent statements may be offset by
price rises that are unrelated to the fraudulent activity.
Aiding and Abetting in Commission Actions: Section 108
clarifies the availability in Commission actions under the
Exchange Act of liability for ``knowingly'' aiding and
abetting. This provision should also cover reckless aiding
and abetting and should be extended to the Securities Act,
and the Investment Company Act.
Appointment of Lead Plaintiff in Class Action: One
provision of Section 102 requires the court generally to
appoint as lead plaintiff the class member that has the
largest financial interest in case. While this approach has
merit, it may create additional litigation concerning the
qualifications of the lead plaintiff, particularly when the
class member with the greatest financial interest in the
litigation has ties to management or interests that may be
different from other class members. The Commission believes
that there should be greater clarification as to how this
concept will work in practice.

[[Page S9057]]

footnotes

\1\ Testimony of Arthur Levitt, Chairman, U.S. Securities and
Exchange Commission, Concerning Litigation Reform Proposals,
Before the Subcommittee on Securities, Committee on Banking,
Housing, and Urban Affairs, United States Senate (April 6,
1995).
\2\ In Sundstrand Corporation v. Sun Chemical Corporation,
553 F.2d 1033, 1045 (7th Cir.), cert denied, 434 U.S. 875
(1977), the court used the following definition of
recklessness: ``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.''
\3\ If the scienter standard is modified as suggested, the
Commission would support the safe harbor in S. 240. If,
however, the scienter standard is not so modified, the
Commission believes that the definition of forward-looking
statement in the safe harbor should be further narrowed,
although Commissioner Wallman believes that certain forward-
looking elements of the financial statements should receive
safe harbor protection, such as stock option valuation
disclosures.

Mrs. BOXER. Mr. President, the SEC has questions about this bill.
I look at the Boxer amendment as a way to say OK, in 180 days, let us
have a written report from the SEC to tell us if in fact this bill puts
a greater burden on our seniors, takes away some of their privileges
and their rights.
Mr. President, I am going to retain the remainder of my time,
although I will not use it unless some of my colleagues make some
comments that I feel I must respond to. So I will reserve the remainder
of my time only to be used in case that does occur.
Mr. D'AMATO addressed the Chair.
The PRESIDING OFFICER. The Senator from New York.
Mr. D'AMATO. Mr. President, I intended to yield back our time because
I believe that we will accept the Senator's amendment as it relates to
the study of the SEC. That will be my recommendation. Having said that,
I know Senator Dodd, who is a cosponsor of this amendment, would like
to speak to it so I yield such time as he will need.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. I thank the Chair. Let me thank my colleague from New York.
Let me just say to my very good friend--and those words are used
lightly around here; when I speak of my colleague from California, they
are meant as more than just a collegial gratuity--my very good friend
from California has offered a good amendment. My intention is to
support it because none of us, as I said the other day, Mr. President,
can say with absolute certainty every time we change the law what the
implications will be. We think over 4 years and more than 4,000 pages
of congressional hearings and testimony, having put together what we
think is a balanced bill here, we know what the implications will be.
We made strong efforts in this legislation to try and protect those
who are truly defrauded, and hence proportionate liability does not
apply in those cases. We try and take care of smaller investors with a
net worth of $200,000 or less, so that they are protected as well.
I would like to say to my colleagues I am absolutely 100 percent
certain that there will not be some implications here for smaller
investors and seniors. I think the amendment covers seniors and smaller
investors.
Mrs. BOXER. Seniors and retirees.
Mr. DODD. Looking at this makes some sense. I think they would have
done it anyway but requiring it here in the law is not a bad provision
to have. If I may point out to my colleague--and I do not know whether
she is interested in doing it--I do not know what the timeframe on the
study is.
Mrs. BOXER. It is 180 days.
Mr. DODD. It is 180 days from passage. I might suggest that not only
you do it then, but it may be done every 6 months for a space of 2 or 3
years because I would suggest that in just 6 months you may not get a
picture. It may not be an adequate picture. You may need a bit longer
time to get at various increments along the way as to what the
implications are. Sometimes in 180 days you may not see any indication
and you may get a false reading as to whether or not we have done
something here that has a negative implication.
So the Senator may want to modify the amendment to require it at
various stages along the way here so we do get snap shots taken at
various milestones over the next several years. So I appreciate the
comments of my colleague from New York that this is an amendment we
ought to accept, and I would concur in that conclusion and thank my
colleague from California for offering the amendment.
Let me if I can just briefly, Mr. President, also address, while I
have the floor, the amendment raised by our colleague from Maryland.
Let me first of all point out here when we set a net worth figure of
$200,000 or less, we did it with the understanding that the average
median net worth of people in this country is quite a bit less. We had
two different studies, I would say to my colleagues. One study done by
the Census Bureau in 1993 has the median net worth of all people in
this country at $37,587. Another study done by the Federal Reserve has
the median net worth--this is a 1992 study--at $52,200 a year. So when
Senator D'Amato, myself, and Senator Domenici set a net worth of
$200,000 or less a year, we are going extensively beyond the median net
worth of families in this country. Depending on which study, either the
Census Bureau or the Federal Reserve at $37,000 or $52,000, our figure
at 200,000 goes well beyond the median income of people in this
country, to try and protect the smaller investor. In fact, it goes four
times beyond the median net worth.
I do not know the percentage of families, but I suspect it is in the
top 5 percent or so, maybe less, who would have net worth in excess of
$200,000 a year.
So we made a significant effort here to not only just protect smaller
investors. Now, maybe the people who live in Washington and those of us
who serve in Government with our incomes being what they are fail to
recognize that most people in this country have net worth substantially
less than what people in Washington, DC, might accept as a reasonable
net worth.
At any rate, we set it at that level, and anyone who has a net worth
less than that and has a loss of 10 percent of their net worth,
obviously, is protected by the joint and several and not proportionate
liability.
Now, with regard to the 10-percent figure, let me suggest that if we
were to eliminate that, you are in effect eliminating proportionate
liability because, as I said, it is such a high level that you
basically exempt almost everybody in the country except for maybe 5
percent of the population. So you really have not done anything in
terms of trying to inject proportionate liability into the process,
which is what the goal of S. 240 is, to apply proportionate liability
where you do not have the kind of intentional fraud and you have people
who are not that wealthy.
Now, why did we do that? Why proportionate liability? Is this some
gratuitous favor to try and bail out some people here who would
otherwise be held fully accountable?
It is not that at all, Mr. President. I would say the core, central
issue here, aside from one of simple fairness, where someone who is
marginally, marginally involved gets saddled with the full load of
paying up all of these costs--and as we have pointed out over and over
again over the last several days of debate--it is not that we are
getting litigated results. It is not litigated results; 93 to 98
percent of these cases are settled. Why are they settled? They are
settled because your company lawyer says, ``Let me tell you something,
Mr. CEO, or Ms. Chief Executive Officer, or Mr. Chief Financial
Officer, or Ms. Chief Financial Officer. You run the risk here of
losing everything. If you go to trial on this, you lose everything.''
You have a choice of settling or losing everything. And they opt to
say, ``Look, we will settle.'' That is what they do in 93 to 98 percent
of the cases. They settle.
Now, you say, well what is so terrible about all of that? I would
draw my colleagues' attention to an article in today's Wall Street
Journal, which is entitled ``Big Accounting Firms Weed Out Risky
Clients.'' The article points out the problem, and my colleagues ought
to come to appreciate why there is a sense of urgency about trying to
deal with this problem. Lee Berton, the author of the article, points
out that the large accounting firms--and the large accounting firms,
particularly in this country, are like the Good Housekeeping seal of
approval for a firm-- are abandoning these clients.
They are not picking them up, and there is a real economic danger, I
think, in this country to have that trend line continue.

[[Page S9058]]

I quote from the article:

Big accounting firms say they have begun dropping risky
audit clients to lower their risk of lawsuits for allegedly
faulty audits. New companies, which have a particularly high
chance of failure, are affected most, because almost nothing
triggers lawsuits against accountants faster than company
failures.
. . . Peat Marwick, the fourth-biggest U.S. accounting
firm, is currently dropping 50 to 100 audit clients annually,
up from only zero only 20 years ago. . .. ``When a client we
audit goes bust . . . it costs a bundle in court if we're
sued by investors, whether we win or lose the case.''
. . . Mr. Lambert says that legal costs were ``staggering''
for a lawsuit filed in a Federal court in Texas, alleging a
faulty review of a bank's books by Peat [Marwick]. The bank
was taken over by the Federal Government in 1992 after big
losses. The jury ruled in Peat's favor in 1993.

So you had a lawsuit that did not end up going anywhere--actually, it
went to trial in this particular case, and the decision was for Peat
Marwick. Then listen to what happens.

The jury ruled in Peat's favor in 1993, but the firm had to
spend $7 million to defend itself.

The contract to handle the account that got them involved in the
lawsuit was $15,000. That was the contract, but the lawsuit cost them
$7 million, even though they won in the end. The intelligent business
decision here is to say, ``Look, stay away from these firms, these new
technologies that are emerging where there is a lot of volatility in
them, don't go near them.''
The net effect of all this is we are losing the benefit of having the
top accounting firms in this country get in where they can make a huge
difference in these firms, but because of the fear of expending amounts
vastly in excess of what the contracts are worth to them, they stay
away.
Arthur Andersen ``has either dropped or declined to audit over 100
companies'' in the past 2 years.
I ask unanimous consent that this article be printed in the Record.
There being no objection, the article was ordered to be printed in
the Record, as follows:

[From the Wall Street Journal, June 26, 1995]

Big Accounting Firms Weed Out Risky Clients

(By Lee Berton)

If you have a big-name auditor, hold on tight. It's getting
tougher to find--and keep--prestigious outside auditors to
certify annual financial statements.
Big accounting firms say they have begun dropping risky
audit clients to lower their risk of lawsuits for allegedly
faulty audits. New companies, which have a particularly high
chance of failure, are affected most, because almost nothing
triggers lawsuits against accountants faster than company
failures.
But established companies are getting the ax too. KPMG Peat
Marwick, the fourth-biggest U.S. accounting firm, is
currently dropping 50 to 100 audit clients annually, up from
only zero to 20 five years ago, says Robert W. Lambert, the
firm's new director of risk management. ``When a client we
audit goes bust,'' he says, ``it costs us a bundle in court
if we're sued by investors, whether we win or lose the
case.''
Mr. Lambert says that legal costs were ``staggering'' for a
lawsuit filed in a federal court in Texas alleging a faulty
review of a bank's books by Peat. The bank was taken over by
the federal government in 1992 after big losses. The jury
ruled in Peat's favor in 1993, but the firm had to spend $7
million to defend itself ``even though the fee for the job
was only $15,000,'' Mr. Lambert says. ``We just can't afford
to take on risky audit clients anymore.''
Lawrence Weinbach, managing partner of Arthur Andersen &
Co., another leading accounting firm, says his organization
has either dropped or declined to audit more than 100
companies over the past two years. ``When a company has a
risky profile and its stock price is volatile, we're just not
going to jump in and do the audit and invite a lawsuit,''
says Mr. Weinbach.
Audit clients dropped by the Big Six are often furious
because investors tend to feel safest with companies audited
by the biggest accounting firms. A Big Six opinion is ``like
the Good Housekeeping Seal of Approval on Wall Street,''
maintains Chriss Street, chairman and chief executive of
Comprehensive Care Corp., a Newport Beach Calif., medical-
rehabilitation center operator that Andersen recently
dropped.
But the accounting firms say they have no choice.
Litigation settlement costs of the Big Six accounting firms
now exceed $1 billion a year. The firms say that even after
insurance reimbursement, these costs equal 12% of their
annual audit and accounting revenue.
No risky client can pay us enough money to defend ourselves
after the client develops problems,'' asserts J. Michael
Cook, chairman of Deloitte & Touche, the third biggest U.S.
accounting firm. ``We must reduce our legal risks to remain
viable.''
And he and other heads of Big Six firms say that if
Congress doesn't pass pending legislation reducing
accountants' litigation exposure, the firms will turn down
even more audit clients.
The biggest legal drain on accounting firms involves
settling lawsuits brought by disgruntled investors against
the auditors of collapsed companies. These suits usually
accuse the auditors of professional negligence in failing to
warn the public of the problems of a troubled client company.
To protect his firm against these costs, Mr. Cook says,
Deloitte has begun weeding out audit clients with potential
problems and refusing to handle the audits of companies
making initial public offerings, or IPOs, because so many of
them fail. And all of his competitors among the Big Six are
doing likewise. The portion of all IPOs audited by these
prestigious firms declined to 75% last year from 84% in 1992,
according to Emerson's Audit Change Report, a trade
publication.
Andersen's Mr. Weinbach says his firm uses new computer
software to measure the litigation risk of an audit client.
The software looks at the company's financial health,
industry performance, stock fluctuations and financial
controls among other information. Other firms have begun
asking clients to agree to arbitration or mediation rather
than filing lawsuits in case of disputes over fees or
performance.
Andersen now asks tax and consulting clients to sign
indemnification clauses that require the client to pay
Andersen's court costs if the accounting firm is sued by a
third party. For instance, litigation might arise if a real-
estate buyer got into a dispute over a project's performance
or price with the seller and Andersen had provided a
financial projection for the project. ``If the client doesn't
agree to indemnify us, we generally won't do the work,'' says
Mr. Weinbach.
BDO Seidman, the ninth-biggest U.S. accounting firm, two
years ago began asking clients of five U.S. offices to agree
to arbitrate disputes over fees and service quality rather
than go to court. And Ernst & Young, the second biggest U.S.
accounting firm, says that later this year it will begin
asking clients to agree to resolve disputes with it through
arbitration or mediation rather than by court suits. Philip
Laskawy, Ernst's chairman, says this shift will save Ernst
and its clients ``millions of dollars in legal fees.''
The accounting firms are swinging hardest at companies that
have actually experienced financial trouble. For instance,
Mr. Street of Comprehensive Care is irate that his company
recently got a terse letter from Andersen saying the company
no longer meets Andersen's audit profile and should seek
another auditor.
Andersen had been Comprehensive's auditor for three years
for an annual fee of $125,000. But in the past two years,
Andersen has ``qualified'' the company's annual report,
questing whether Comprehensive could continue as a ``going
concern.'' The company has reported losses in each of its
past five years, totaling close to $100 million.
Mr. Street, who was brought into Comprehensive about a year
ago, says that Andersen gave no warning that it planned to
drop the company. ``We were caught completely off guard and
were in the midst of restructuring and recapitalizing the
company with Andersen's help,'' he says. ``We feel that
Andersen abandoned us when we most needed them.''
Andersen won't comment specifically on why it dropped
Comprehensive as an audit client. But it says that ``in the
current litigious business environment, accounting firms are
forced to assess risks associated with current and future
clients.'' It adds: ``Comprehensive's historic performance
speaks for itself.''
Mr. DODD. Mr. President, it goes to the very heart of why we put this
bill together. We saw the trend lines where we are losing the expertise
and ability. One of the provisions, by the way, we put in this bill is
to require these accounting firms, if everything else is adopted, to
seek out a report when they discover problems of fraud. That has not
been a requirement in the law in the past, to actually serve as a
quasi-governmental agency, if you will.
Obviously, the Federal Government cannot go around and audit every
firm in the country to determine whether it is doing its job or not.
But having these accounting firms do it, requiring them to report when
they discover any kind of wrongdoing, I think, is going to enhance
tremendously our ability to pursue those firms where you have the
intentional fraud, but also cause these firms to be far more careful
about how they do their business.
So if we adopt the Sarbanes amendment by eliminating the 10 percent,
in effect, it is just the median income of $200,000, you have just
destroyed the whole purpose of proportionate liability. It goes right
to the heart of what this Wall Street article points out today--the
fact you are seeing these firms leave these audits, audits that serve
all of us and also serve the investor.
That investor making the decision about where to put those hard-
earned dollars is going to be less inclined to

[[Page S9059]]

invest in these firms that may be, in the overwhelming number of cases,
highly deserving of that investment, because they do not have that
``Good Housekeeping seal of approval.'' The investor would probably shy
away from it. Everybody loses in that kind of situation.
We are trying to help solve that problem by the provisions we have
included in S. 240. Is it perfect? Is it guaranteed success? Absolutely
not. I would be the first one to tell you, no guarantees here. We think
it will go to the heart of the problem, maybe help us solve it. But as
the Senator from California has offered with her amendment to take a
good look and see what the implications of this are, I think, makes
good sense, is sound judgment.
For those reasons, I support her amendment. But I oppose the
amendment offered by our colleague from Maryland. I would rather there
be an amendment offered eliminating proportionate liability, just
striking all proportionate liability because that is the net effect of
the amendment.
If you just have a net worth of $200,000, you have only 5 percent of
your investors at that, so it is really gone, in effect. It seems to me
when median net worth is either $37,000 or $52,000--we have set it at
$200,000--it is really going, to a large extent, beyond what many have
suggested we ought to do here. But I thought, and the Senator from New
York did, that by setting that higher bar, as well as including the 10-
percent loss, that what we were trying to protect against with this
provision is the total economic devastation of someone. Again,
obviously, if you eliminate that 10 percent, you lose that altogether.
So with that, Mr. President, I urge, with all due respect to my
friend and colleague from Maryland, rejection of his amendment, that we
accept the amendment by the Senator from California, and I gather next
we will be talking about an amendment which I support, which is the
amendment being offered by the Senator from Nevada dealing with the
statute of limitations.
With that, Mr. President, I will be happy to yield the floor.
Mrs. BOXER. Mr. President, I ask for the yeas and nays on my
amendment.
The PRESIDING OFFICER. Is there a sufficient second?
There is a sufficient second.
The yeas and nays were ordered.
Mrs. BOXER. I yield back the remainder of my time.
The PRESIDING OFFICER. The Senator from New York.
Mr. D'AMATO. Mr. President, at a later time, I will ask the Senator
from California to consider whether she really wants to vote on this
amendment, because we are willing to accept it. Having said that, I
want to commend my colleague, the prime sponsor of this legislation,
Senator Dodd, for very eloquently and very cogently stating the
incredible burden that has been placed on the fine accounting firms of
America.
I might refer those who are interested to the report of the
committee. I quote:

Accounting firms particularly have been hard hit by
securities litigation. The six largest firms face $10 billion
worth of 10b-5 claims. Their gross audit-related litigation
costs amounted to $783 million in 1992--more than 14 percent
of their audit revenues for that year. Former SEC
Commissioner Sommer, who heads the Public Oversight Board,
the independent body that oversees the accounting
profession's self-regulatory efforts, testified that, in view
of ``some recent judgments and the amounts being sought in
pending cases, it is not beyond the pale to believe, and some
responsible people do believe--that one or more major
[accounting] firms may ultimately be bankrupted.''

But the problem goes beyond just bankruptcy. The accounting firms are
being priced out of the marketplace. They cannot afford, as Senator
Dodd indicated, to give their services to clients due to the great
exposure they face, through no fault of their own, to being brought in
to suits because they are the deep pockets, particularly where there is
a small firm or small company as the primary defendant.
That small firm then, or many small firms, are being deprived of
having the best accounting firms; the American public are being
deprived of having the audit capacity and functions of our best; and,
third, the accounting profession is placed unnecessarily under a great,
great strain.
It is just simply intolerable and unfair. Part of this bill is
crafted to eliminate that unfairness. It will eliminate the situation
where people have no choice but to surrender to these lawsuits--
something that happens in 93 percent of these suits. They cannot afford
to go to trial and I do not think that is what the capital system
should be about.

amendment no. 1472

Mr. McCONNELL. Mr. President, the doctrine of joint liability permits
an injured plaintiff to collect the full judgment from any defendant
found liable for any part of the injury. It means that no matter how
remotely connected a defendant is to the events leading to plaintiff's
injury, a defendant could be required to satisfy the entire judgment.
The result is that lawyers for the plaintiffs add a whole host of
defendants to a lawsuit in an effort to ensure the plaintiff can get
the full judgment paid. With joint liability, it doesn't matter if you
had anything to do with the events leading up to the plaintiff's
injury. Instead, the chances of your getting sued depend upon how deep
your pockets are. The deeper the pocket, the more likely to be sued.
I'll illustrate with a negligence case: if a drunk driver injures an
individual on someone else's property, the property owner will be
joined in the lawsuit. It happened to the Cincinnati Symphony
Orchestra, only it wasn't even the property owner. The accident
happened near one of the orchestra's performance facilities. And the
orchestra, a nonprofit entity, was needlessly dragged into a $13
million lawsuit and put at risk for the judgment.
Nonprofit organizations, municipalities and small businesses can be
hardest hit by joint liability. Although we don't think of these
defendants as wealthy or rich, they are usually adequately insured,
which also makes them good candidates to be deep pockets. New York City
spends more on personal injury awards and settlements--$270 million--
than it spends on funding public libraries.
In securities litigation, accountants, bankers, and insurers are
targets of abusive suits because of their deep pockets. One Big Eight
accounting firm, Laventhol & Horwath, went bankrupt because the cost of
fighting these suits became too prohibitive. The consequence of
dragging these professional firms into these kinds of lawsuits is
obvious: it becomes increasingly difficult for new businesses to get
advice from business professionals. And, it gets harder to find people
to serve on corporate boards due to the fear of lawsuits.
This litigation explosion burdens the economy, retarding economic
growth. It is essentially a tax imposed on every American. And every
potential defendant has to take account, in the prices they set, for
the possibility of being dragged into a lawsuit.
During the product liability debate, I received a letter from the
Institute for the National Black Business Council, an association of
minority business owners. Mr. Lou Collier, the president of the
council, wrote in support of expanding the product liability bill.
Without an expansion of the joint and several liability reform, Mr.
Collier states, ``Millions of small businesses--restaurants, gas
station owners, hair stylists, nearly every small business you can
think of, would still face the threat of bankruptcy. That includes most
African-American firms.'' The latest census data shows that 49 percent
of all black-owned firms are service firms, and Mr. Collier, on behalf
of minority small business owners, asked us to improve the climate for
small business, ``Small business owners and entrepreneurs have to
overcome staggering odds to build a successful company. They shouldn't
have to face a legal system where one frivolous lawsuit can force them
to close their doors.''
The same arguments ring true in the context of securities litigation.
This amendment must be defeated because restoring joint liability means
little improvement in the litigation climate.
Injured plaintiffs will still recover their full economic loss. But
for the subjective noneconomic loss, each defendant would be
responsible only for his or her proportionate share of harm caused.
This bill is fair and consistent with principles of individual
responsibility. It will put an end to the gamble taken

[[Page S9060]]

by the trial bar when they join everyone in sight of an alleged harm. I
urge that the amendment be rejected.

Amendment No. 1469

The PRESIDING OFFICER. The pending business is the Bryan amendment
No. 1469.
Mr. BRYAN. Mr. President, am I correctly informed? I believe we have
a time agreement of 1\1/2\ hours equally divided. Am I correct, I
inquire of the Chair?
The PRESIDING OFFICER. The Senator is correct.
Mr. BRYAN. Since I am the advocate of the amendment, may the Senator
from Nevada presume that he controls 45 minutes of the time that is
allotted to those who are in support of the amendment?
The PRESIDING OFFICER. That is correct.
Mr. BRYAN. I yield myself 15 minutes at this point, Mr. President.
My colleagues will recall that we began the debate on this amendment
last Friday shortly before we recessed for the weekend. I want to make
just a couple of points in general about this. There are a number of
things that have divided us as we have debated S. 240, but there are
some things in which the prime sponsor of this legislation, Senator
Dodd, and I are in agreement, and I acknowledge, as he has previously
indicated on the floor, Senator Dodd, as the prime sponsor of S. 240,
is in support of the amendment, which I will describe in a moment.
But first let me give a little bit of background. My colleagues will
recall in 1991 the Supreme Court of the United States decided the Lampf
case, as it was called--and the Lampf case, in effect, imposed a
statute of limitations which is a bar to securities litigation 1 year
from the point that the plaintiff discovers the fraud and in no event
more than 3 years in the actual occurrence of the fraud.

Now, that came as quite a shock and surprise to those that are in the
securities business, because the accepted interpretation prior to that
had been that you looked to the statute of limitations in the State in
which the action originated. Immediately, as a result of that, because
the Court's decision was retroactive; that is, there were a number of
cases pending, as well as prospective; that is, to place a bar on any
actions to be filed in the future, a number of us came to the floor,
and the Senate Banking Committee at that time unanimously reported out
the 2-to-5-year statute of limitations proposal--2 years from the date
of discovery of the fraud, in no event beyond 5 years. That is what
this amendment does. Under the current print, 1-to-3 is the statute of
limitations timing. Under the Bryan amendment, it could be 2 to 5
years. This is what the Banking Committee, in 1991, had unanimously
agreed should go forward.
Moreover, I think it is important for my colleagues--and there are
approximately 50 of them who have signed onto this legislation--S. 240,
as introduced, contains the 2-year/5-year statute of limitations. So
this amendment, somewhat of an anomaly, does not change the original
language of S. 240 but seeks to restore to the bill the language which
was originally in the bill at the time it was introduced and language,
at least by implication, that 50 of our colleagues, as cosponsors of
the legislation, have supported.
So this is not something that comes as after the fact--2-to-5 years.
Why is the 2-to-5 years important? I realize that people are not
literally hanging over the edges of their seats in the galleries as we
discuss what appears to be a very abstract legal issue. First, let me
say that it has absolutely nothing about frivolous lawsuits--not one
thing. We are talking about a lawsuit which, by definition, is
meritorious but cannot be filed under the current law if indeed it is
after the 1-year point in which the plaintiff discovers the fraud, or
in no event beyond 3 years.
So this does not have a thing to do with frivolous litigation. I
understand the concern of my colleagues and I share it. We ought to act
against frivolous lawsuits, and there are provisions in S. 240 that
deal with rule 11 and some other provisions that I think are
meritorious. So no one who is approaching this amendment ought to be
misled that somehow a vote against this amendment protects the innocent
from frivolous litigation. This simply gives you the right to get into
the courthouse door. Without this amendment, you are saying 1 year, 3
years, and you are barred.
Now, who supports the amendment? Well, first, let me indicate to my
colleagues that the Chairman of the Securities and Exchange Commission
has repeatedly testified in favor of extending the statute of
limitations. Most recently, on April 6, 1995, Chairman Levitt testified
before the subcommittee that:

Extending the statute of limitations is warranted because
many securities frauds are inherently complex, and the law
should not reward a perpetrator of a fraud who successfully
conceals its existence for more than three years.

So the present Chairman of the Securities and Exchange Commission
says that it is important to protect innocent investors who have been
defrauded from those who are inherently clever enough to conceal it to
provide for a longer statute of limitations. Then he went on by way of
explanation to say that even with all of the resources that are
available to the SEC, the staff that is available with the expertise
that they have, with all of the kind of background information they
have as to what is happening in the marketplace generally, that it
takes approximately 2.25 years to complete an investigation. Now, that
is beyond the period of time that the 1-to-3 year statute would
provide. This is not partisan, this is not a Democratic chairman and
the Republican SEC under President Bush who felt differently. The
former chairman, the last Republican chairman was Richard Breeden. He
had this to say about the proposed 2-to-5 year statute, and
specifically about the unfairness and the limiting ability of a 2-year
statute:

Had a 3-year statute of limitations been in effect and had
it been applied to the SEC, approximately one-half of the
cases against Drexel Burnham, a large part of the case of
Equity Funding, one of the largest frauds in the history of
the United States, and the entire case against E.F. Hutton
for check kiting would have been barred from the courthouse.

Again, these were meritorious cases. The recovery would have been
prevented because the statute of limitations would have constituted a
bar. In that period of the 1980's where we have talked about Charles
Keating and we talked about Ivan Boesky, another name has had
prominence and that is Michael Milken. Here is what the sentencing
judge had to say to him with respect to the complexity of securities
matters and their difficulty:

You may have committed only subtle crimes--

This was being addressed to Mr. Milken at the time of sentencing.

. . . not because you were not disposed to any criminal
behavior but because you were willing to commit only crimes
that were unlikely to be detected. We see often in this court
individuals who would be unwilling to rob a bank, but who
readily cash Social Security checks that are not theirs when
checks come to them in the mail because they are not likely
to be caught in doing so . . . You also committed crimes that
are hard to detect, and crimes that are hard to detect
warrant greater punishment in order to be effective in
deterring others from committing them.

These are crimes that are very hard to detect and are particularly
very difficult to detect when we are talking about small plaintiffs who
do not have the resources available to them that the Securities and
Exchange Commission, the North American Association of Securities
Dealers and others might have.
In the Lampf case itself, which was a very narrowly divided case, 5-
4, one of the dissenting Justices, Justice Kennedy, had this to say:

Concealment is inherent in most securities fraud cases. The
most extensive and corrupt schemes may not be discovered
within the time allowed for bringing an express cause of
action under the 1934 act. Ponzi schemes, for example, can
maintain the illusion of a profit-making enterprise for
years, and sophisticated investors may not be able to
discover the fraud until long after its perpetration. The
practicalities of litigation, indeed the simple facts of
business life, are such that the rule adopted today--

Referring to the majority of the court that adopted the more limiting
1 and 3 year statute of limitations.

will ``thwart the legislative purpose of creating an
effective remedy'' for victims of securities fraud. By
adopting a 3-year period of repose, the Court makes a section
10(b) action all but a dead letter for injured investors who
by no conceivable standard of fairness or practicality can be
expected to file a

[[Page S9061]]

suit within 3 years after the violation occurred.

In its brief before the Supreme Court, the SEC pointed out the
difficulty that the shorter limitation period ``would deprive many
defrauded investors of a satisfactory opportunity to vindicate their
rights.'' Here is what the SEC, in the brief, went on to say:

Especially in complex cases, plaintiffs often ``do not
discover the fraud until long after its perpetration.''
Violations involving financial fraud, for instance, often go
undetected until the enterprise fails, an event that may
occur years after the violation. Moreover, as the
securities markets have grown in size and complexity,
frauds have become increasingly difficult to discover.

An example of that, Mr. President, is the municipal bond. They are
particularly susceptible to concealment. In a typical municipal bond
offering, 2 to 3 years of interest payable to the bondholder is placed
in an escrow account, so the bondholders can have no inkling anything
has gone awry until they do not receive an interest payment--oftentimes
many years after the closing of the offering. The average timespan
between issue date in municipal bonds and the date of default in
repayment is approximately 4.5 years.
Limited partnerships have the same susceptibility. Again, as the
North American Securities Administrators Association--and some of my
colleagues may not have had the opportunity to interface with them;
these are the securities administrators of the 50 States, who are
charged with enforcement of securities law at the State level--as they
have testified, limited partnerships in which investors have poured
more than $150 billion since 1980--

. . . often run for as many as 7 to 10 years. Customer
account statements--a primary means of detecting fraud or
misconduct--reflect only the original purchase price of the
partnership, not the current market value. Therefore, it may
only be at the expiration of the partnership that an investor
uncovers misconduct or wrongdoing. Under Lampf, [the 1- to 3-
year statute decided in that case] that investor would be
precluded from seeking redress in the courts, for no reason
other than the decision to purchase a long-term investment.
Holders of zero coupon bonds will face similar difficulties
in uncovering fraud in the short period of time allowed under
Lampf.

The point, I think, that is to be made here is that we have talked a
great deal about balance. Every provision that I can see that is
contained in S. 240 is designed to provide additional protection for
securities underwriters. Aiders and abetters are not included. Safe
harbor statements are made more generous.
The wealthiest investor, in effect, becomes the chief of the last,
and one can go on and on. Of all of the provisions contained in this
legislation, in its original form, only the extension of the statute of
limitations could be fairly said to benefit the innocent investor.
For those of my colleagues who are truly seeking balance as they
approach this legislation, and who support and will vote for the final
version of S. 240, this is really your only opportunity at this stage
to provide that kind of balance by extending the statute of
limitations.
Here is what Mark Griffin, who is the head of the Utah Securities
Division, had to say in testimony before the Banking Committee. He said
the current period for filing fraud actions is ``unduly short.'' Going
on, he said:

. . . [it] is the experience of State securities regulators
that victims of investment fraud often have no way of
knowing, nor reason to suspect for what may be many years,
the truth about the mishandling or abuse of their
investments.

That comes from the security administrator in the State of Utah.
Mr. President, in looking at what States have done, the testimony is
that 60 percent of the jurisdictions have longer statutes, and ``13
States recognize the concept of equitable tolling, in which the
limitations period starts running only after the fraud is discovered.''
Among those States are Alabama, Arizona, Kansas, Massachusetts, New
Jersey, Washington, and Wisconsin. Many other States have longer
statutes, as well, including California, Pennsylvania, my own state of
Nevada, Michigan, Ohio, Florida, Texas, Illinois, and New York.
It seems to me that in an era in which we believe that not all wisdom
resides in the banks of the Potomac, looking at the experiences at the
State level could be particularly instructive as we process this
statute of limitations amendment.
The effect of the shortened statute of limitations is simply
devastating, and has absolutely nothing, Mr. President, to do with
frivolous lawsuits.
For example, had the Lampf rule been in effect, investor cases with
respect to such notorious fraud as Lincoln Savings and Loan, Washington
Public Power Supply System, Executive Life Insurance, Home-Stake
Production Co., and Crazy Eddie would have been barred.
Mr. President, I yield myself an additional 10 minutes.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. BRYAN. Mr. President, I thank the Chair for keeping me cognizant
of the time.
In fact, Charles Keating attempted to have his case dismissed on
Lampf grounds, and that was the genesis of our effort to keep those
cases alive. The Congress responded by making sure that the Court's
decision did not have a retroactive effect on those cases that were
pending. According to a study released by the House Subcommittee on
Telecommunications and Finance in 1991 after the Lampf decision, over
$5 billion in pending fraud claims were dismissed or threatened with
dismissal based on the shortened statute of limitations.
This amendment tracks the exact formula that is urged upon us by the
SEC, an extension that would allow cases to be filed up to 5 years
after violation has occurred, provided they are brought within 2 years
after discovery of the violation.
As I pointed out at the outset, S. 240 in its original form contained
an extension of the statute of limitations. I commend my colleague and
good friend, the distinguished senior Senator from Connecticut, who has
taken a lead on this case. He has long supported the longer statute of
limitations. I commend his effort.
I might say that in previous Congresses, subsequent to the Lampf
decision, efforts to make changes in the securities litigation system
have all recognized the wisdom of the longer statute of limitations of
2 to 5 years.
I note it is somewhat anomalous--we have the situation in which the
amendment on the floor is designed to restore what the introducer of
the bill must surely have intended, because they cast it in the
identical language that we are seeking to place back into the bill.
In addition to the securities regulators at the national level and
the State level, this amendment enjoys the support of the Consumer
Federation of America, the Public Citizen, the Council of Institutional
Investors, the United Shareholders Association, the Bond Investors
Association, the U.S. Conference of Mayors, the Government Finance
Officers Association, and the National Association of County Treasurers
and Finance Officers, to list but a few.
So for my colleagues who may have some motivation in saying ``Look,
the lawyers are responsible for all of the ills in America and have
done terrible things with respect to the securities litigation,'' they
have an opportunity to support other provisions in the law.
Please, in the interest of striking back at these securities lawyers,
do not deprive, do not undermine the right of innocent investors to
simply present their case, to simply present their case; simply give
them the key to get into the courthouse door. And all these other
provisions that are included with respect to lawyer sanctions, which I
happen to agree with if it is a frivolous case, then they can come into
place and operate to serve as a bar to the frivolous case.
This is a case that deprives the innocent investor with a meritorious
cause of action from ever having his or her case presented because of
the cleverness of the wrongdoer, the defrauder. We ought not, it seems
to me, as a matter of public policy, say, ``Look, we ought to provide
the benefits in our society to those who are clever enough to conceal
their wrongdoing and perpetrate frauds before the victims find out.''
I do not think any Member of the Senate can defend that kind of a
public policy.
I note the distinguished majority leader is on the floor and may seek
recognition. I reserve the balance of my time.

[[Page S9062]]

The PRESIDING OFFICER. Who yields time on the pending amendment?
The Senator from New York.
Mr. D'AMATO. Mr. President, let me point out that one of the finest,
most skilled, and eloquent lawyers, when it comes to interpretation of
the law, is my friend, the Senator from Nevada. I find myself at a
distinct disadvantage when having to take any position that is contrary
to one that he is expounding on. Such is the case here. I do not
pretend to be his equal.
However, I will attempt to explain a concern to my colleagues
regarding the extension of the statute of limitations. That concern is
that if we extend the statute of limitations we will open the door to
more mischief.
At first, I was ambivalent on this particular question, as to whether
the statute of limitations should be 1 and 3 years or 2 and 5; I
considered extending the time as is done in some of the State statutes.
My friend and colleague explained how this came about, how we had,
actually, no statutory law until the Supreme Court in its Lampf
decision in 1991 said: the 1-year and 3-year statute of limitations is
rooted in common law and should be the uniform limit.
Some said that this statute would preclude meritorious suits. Indeed,
there may be some curtailment of individual investor suits, However,
having said that, this statute of limitations will not preclude suits
being brought under longer State statutes, nor will it preclude the
Securities and Exchange Commission from bringing suits in cases of
fraud, where the SEC has no statute of limitations.
There are examples of the SEC bringing suits, after the statute of
limitations has expired; suits in which large settlements have been
recovered. In one rather recent case, the Prudential case, there the
settlement was $660 million. The SEC has recovered notable settlements
in some other large cases--the Drexel-Burnham-Lambert case brought $400
million in disgorgement. Again, the statute of limitations is not a bar
for the SEC.
So, while the statute of limitations may be a bar to some individuals
are aggrieved, if there is a serious case there is no doubt in my mind,
nor, I think, in anybody's mind, that the Securities and Exchange
Commission will bring a suit. My staff has reviewed some of the
historical debate on the general question of how long the statute of
limitations should be.
Back in 1934, when this issue was first debated in the context of the
need for a fraud statute, Senator Kean made a statement on what he felt
was the reason we should limit the filing of suits to within 1 year
from the actual time of discovery. I quote from Senator Kean:

If a man buys something today and discovers tomorrow that
some mistake has been made and perhaps he has grounds to sue
because of fraud, under the terms of the bill he must bring
the suit within 1 year. But suppose he thinks perhaps the
bonds I have bought will go up. I will not bring suit
until I find out about that. If the bonds go down, then I
will have the option of suing these people and trying to
recover. If the bonds go up, then I will not sue because I
can get a profit on them.

Mr. President, I suggest to you that by extending the statute of
limitations, what we do is open the door for those people who wait and
see if anything comes out over time. It becomes much easier to create a
lawsuit and to force a settlement if we allow a longer period of time
for something, anything, to be discovered. This extended statute of
limitations opens the door to the kinds of litigation we see now, but
these enterprising entrepreneurial lawyers will have a longer period of
time in which to bring their claim. Certainly this Senator does not
want to protect anyone who has been involved in fraud. Again, if there
has been an egregious fraud, there is no doubt in this Senator's mind
that the Securities and Exchange Commission will do the business of the
people, which they have done in the past.
But businesses are entitled to some certainty that they will not be
sued. I think my friend, Senator Dodd, quite aptly stated his argument
as it relates to the inventive, creative entrepreneurial petitioner of
the law. I believe my friend called them buccaneering barristers. I
think extending the statute of limitations just gives them a longer
period of time to practice their craft of filing suits without merit.
If there is a legitimate fraud, even if it is discovered and 10 years
down the road and it has brought harm, then as far as I am concerned I
want the situation to be rectified. I know that there is a body who can
do that; that is, the Securities and Exchange Commission.
Let me say again this is an area where I think reasonable people can
have some differences. I, myself, have gone back and forth on this
issue. It was only when I was convinced that there was the opportunity
to close down some of the people who are not practicing law as they
should, who are more interested in creating situations where they force
settlement, and at the same time we would not leave that door open for
defrauded people to be further victimized, that I decided on the
statute of limitations in this legislation.
That is why I will be forced to oppose my colleague's amendment, as
thoughtfully and as articulately as he has presented it.
I yield the floor.
The PRESIDING OFFICER. Who yields time?
Mr. BRYAN. Mr. President, I yield time to the distinguished senior
Senator from Connecticut, after which I hope to be able to respond to
the debate of my good friend, the distinguished chairman.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Mr. President, will the Senator from Nevada yield to me 5
minutes?
Mr. BRYAN. I do.
The PRESIDING OFFICER. The Senator from Connecticut is recognized.
Mr. DODD. Mr. President, I rise to support this amendment by my
colleague from Nevada.
Like my good friend from New York, I understand the arguments on the
other side. I suppose one might say in this debate what is magical
about 1 and 3 or 2 and 5? I presume that if we made it 2 and 5, there
would be those who would say it ought to be 3 and 7, or 4 and 8. You
could run the string out. Then there are some who think you should not
have any statute of limitations, I say to the distinguished Presiding
Officer. So you are never going to satisfy everybody with some of these
provisions.
Senator Domenici and I originally offered this bill back several
years ago, and we included an extension of the statute of limitations
here to 2 and 5 years on the theory that it contributed to the balance
of the legislation. It is a crucial part of the balance between
investor's and defendant's rights, plaintiff's and defendant's rights.
Our colleague from Nevada has promptly pointed out the legislative or
legal history of this.
The Supreme Court decision in Lampf versus Gilbertson established the
limits of 3 years after fraud occurred, or 1 year after it was
discovered. It is simply too little time, in my view, to ensure that
investors have the necessary time to bring an action. Justice Anthony
Kennedy, in his dissent in the Lampf decision said, and I think it is
worth noting: ``Concealment is inherent in most of the securities fraud
cases.'' And it is tough fraud to find, I point out to the Chair.

The most extensive and corrupt schemes may not be
discovered within the time allowed. Ponzi schemes, for
example, can maintain the illusion of a profit-making
enterprise for years, and sophisticated investors may not be
able to discover the fraud until long after its perpetration.

The SEC and the Council of Institutional Investors support extending
the statute of limitations, and, frankly, I am concerned that unlike S.
240, this amendment does not contain language that requires an investor
to use reasonable diligence.
This is the one point on which I have some disagreement with on the
amendment offered by my colleague from Nevada. Even though we disagree
on this point, I still intend to support the amendment. I think
requiring reasonable diligence on the part of investors is not asking
too much. There has to be some burdens and responsibilities people
assume when they engage in this activity. In our original bill that
included an extension of the statute of limitations, we required
reasonable diligence on the part of the investor. That reasonable
diligence is no longer included in the amendment being offered by the
distinguished Senator

[[Page S9063]]

from Nevada. The reason I say that is because I think it ought to be a
distinction made between the lazy investor and the diligent investor.
We make no distinction with this amendment; that is, the current
standard in most private actions under our securities laws.
Frankly, I am concerned that the unintended impact of this amendment,
should it be adopted, will be to grant more time in effect to investors
who know nothing about their investments or care nothing about them and
those who exercise reasonable care.
I think we ought to be trying to inject responsibility on the part of
everybody involved in these activities. While this is a significant
departure from the original Domenici-Dodd language on the statute of
limitations, as I mentioned a moment ago, I will not oppose the
amendment on that basis alone.
So when this amendment is considered and voted on, I will cast a vote
for it for the reasons I have identified. I think in this day and age
of technology, being what it is with the sophistication that is out
there, it is an awful lot to expect even a knowledgeable investor to be
able to pick up on some of these activities, as they might have even a
few short years ago, in the absence of high technology.
So trying to keep pace with that high technology, providing a bit
more time here, is not an unreasonable request in my view.
For that reason, I commend the Senator from Nevada for his comment. I
urge my colleagues to support it.
I yield the floor.
Mr. BRYAN addressed the Chair.
The PRESIDING OFFICER. The Senator from Nevada.
Mr. BRYAN. Mr. President, may I inquire how much time do I have under
my control?
The PRESIDING OFFICER. The Senator controls 20 minutes and 4 seconds.
Mr. BRYAN. I thank the Chair. I yield myself 7 minutes.
The able distinguished chairman of the Banking Committee, who is my
friend, raised two objections as I understand the thrust of his
argument. I must just say as an aside, it makes me very, very nervous
when the able chairman lavishes great praise upon a more junior member
of the committee because no one is more sophisticated than the
distinguished chairman in making his point. He speaks in the idiomatic
language of the street and people understand where he is coming from,
and he speaks with clarity that every lawyer in America can only hope
to equal. So I am quite concerned when I receive this praise.
He made two points. One, he said that by extending the statute of
limitations as we propose to do in this amendment we would thereby
increase the amount of litigation.
Let me just suggest that the experience shows quite to the contrary.
My colleagues will note that I have had a chart prepared tracing the
experience of the past 20 years, from 1974 to 1993. As my colleagues
will note, that represents a fairly level activity. In fact, the most
number of cases filed in any one year was 315. Last year was 290. And
as you will note, the statute of limitations case was not cited until
1991. Prior to that, the longer statute of limitations existed. There
were actually in many years fewer cases than had been filed since the
statute of limitations result.
So may I say, with all due respect, I think the experience is
contrary to his assertion that more cases would be filed. In point of
fact, I think an argument can be made that the shorter statute of
limitations may encourage haste in filing such actions which is clearly
contrary to the purpose that he and I and I think all of our colleagues
have in terms of trying to discourage such litigation.
Second, he makes the point that the SEC is available, and he is quite
correct, but I think it is important to point out that when the SEC
brings an action, it brings an action to impose a fine, penalty or
sanction, but it does not--I think this is a very important
distinction--seek to recover money that investors have lost. So it is a
philosophically different role. One is akin to a prosecutorial agency
in which sanctions, fine and imprisonment may result. The purpose of
the individual filing is to recover his or her loss.
Even if one thought the SEC might do an adequate job, the testimony
by Mr. Breeden, the former chairman, was that it would require another
800 to 900 people serving in that office to offset the inability of
private causes of action to be brought under S. 240 as constituted, and
in the committee report on this particular bill it indicates that the
cost of providing those additional resources to the SEC would be
another $250 million over the previous 5 years.
Let me say that I think, like most of us, we gain considerable
insight over the years as we have served, and I was pleased to have my
friend's support and his leadership in 1991 when we sought to do the
very thing we are seeking to do in the Chamber this afternoon, and that
is to extend the statute of limitations from 1 to 3 to 2 to 5. And I
wish to give my friend an opportunity to engage me in a colloquy if he
chooses to do so. But may I respectfully say I think the Senator from
New York was absolutely right in 1991, as we sought to process the
corrective legislation in the aftermath of the Lampf case by supporting
then a 2- to 5-year statute of limitations, and I hesitate to say he
has not grown in wisdom over the intervening years but I think that he
clearly was more correct then than he is now.
I would be happy to engage my colleague in any conversation he might
care to in terms of this debate. I just do not see that there is any
reason today, of course, not to go for the 2- to 5-year statute of
limitations. The same circumstances exist, it seems to me, and I want
to give my good friend a chance to share with me the benefit of his
additional wisdom.
Mr. D'AMATO. I appreciate the opportunity to engage my friend in
dialog in the spirit of the Senate. As I said, I was ambivalent on this
issue. I have had numerous constituents and groups who have come to me
and said: Senator, we are very much concerned that leaving the door
open, particularly extending the statute of limitations to 5 years,
will just create added exposure to these suits. We cannot extend the
statute of limitations, unfortunately, because of those individuals who
do not and have not practiced law with the same spirit and
enlightenment of my colleague from Nevada.
I understand he has joined with us and voted with us on a number of
matters, which some might consider procedural but are awfully
important, aimed at reducing the abuses in this system; the race to the
courthouse, the buying of people to put oneself in a position to bring
these suits, and the plaintiffs for hire who let their names be used
for bonuses.
When my colleague says to me he wants to stop this abuse, I know that
to be the case. But those in the industries, in the emerging companies
say, ``You know, if you keep that door open, there is just a stronger
likelihood that there will be that inventive lawsuit later on that
holds them harmless.''
I feel I must be supportive of those companies and that theory. We
must not abandon these firms. Let me say once again, even if there has
been fraud and it is discovered only 5 years or 6 years after the
statute of limitations has expired the Securities and Exchange
Commission can bring suit.
Nor have we placed a disproportionate burden on the SEC. They have
repeatedly said that they do not want to be in the position where they
have to be the eyes and ears for all, that, there is a proper place for
individuals and their lawyers to bring these class action cases.
I think that by limiting private rights of action to 1 and 3 years
and yet having no limit, no statute of limitations for the Securities
and Exchange Commission, that we strike a proper balance. It was in
that spirit that I came to this decision.
Second, it was also in that spirit that I could put together a
majority----
Mr. BRYAN. May I interrupt my friend?
Mr. D'AMATO. To pass out this bill. I want to be candid.
Mr. BRYAN. And I appreciate that. The concern that I have is that we
are engaging in this discussion and the time may run out.
Mr. D'AMATO. I yield to my friend any time that he may need.
Mr. BRYAN. Will the Senator be willing to take part of his time to
engage in the colloquy?
Mr. D'AMATO. Oh, yes. I ask unanimous consent that the last 5 minutes
be charged to myself.

[[Page S9064]]

Mr. BRYAN. I thank the Senator.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. D'AMATO. I finished my statement, and I will be glad to yield to
my friend any additional time. How much time remains, might I inquire
of the Chair?
The PRESIDING OFFICER. The Senator from New York has 31 minutes 40
seconds remaining and the Senator from Nevada has 17\1/2\ minutes
remaining with the exchange of time conceding 5 minutes.
Mr. BRYAN. I think we are going to be fine. Let me say, I appreciate
his fairness. He did not have to do that, and I think that speaks well
for him. I did not want to cut him off. I did not want to be precluded
from making final comments. If the Senator has concluded, I would like
to make a response and yield the floor back to him.
Mr. D'AMATO. I had completed my observations how we find ourselves in
this position. And there is that necessity, in any attempt to craft
legislation--I have to say that my colleague is offering amendments
because he is not happy with all the provisions of this bill and wants
to make it better, to enhance the bill--to put together a package that
can build a coalition, and this was a major concern to quite a few
Senators on my side, a very, very big concern.
I can see their point. If I had my druthers, I might say what is
wrong with 2 and 5, but I heard from many groups, and numerous
associations, who were quite persuasive as to why this would be a
retreat.
One last observation. In this legislation we are attempting to reduce
the exposure to unfair suits; it sends a very different message if we
extend the statute of limitations. How can we say this cuts down on
frivolous suits when people think ``My gosh, you are broadening the
time to bring them.''
The Supreme Court has said 1 year and 3 years is sufficient, and now
we have amendments to extend it to 2 and 5. We cannot support that. I
must tell you there are a number of my colleagues who felt very, very
strongly, that 1 year and 3 years was the right statute of limitations
and that is why, given the fact I knew we had the support of the SEC, I
supported this position. I share that with my friend and colleague.
Mr. BRYAN. I thank the distinguished chairman. I ask unanimous
consent to yield 2 additional minutes to myself.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. BRYAN. Let me say, I appreciate the explanation the chairman has
given. It is a matter of balance. Again, I respond with great respect
that the role of the SEC is not to recover those losses, and that is
something that greatly troubles me, that individuals who have lost
money, who are totally innocent, although the SEC would not be
precluded from bringing an action, that action is not to recover money
for them but simply to impose the appropriate fine, penalty, sanction,
that may exist for the violation.
Second, I, too, was exposed to the arguments made by those who reach
a different conclusion than I do that the shorter statute of
limitations protects them from some lawsuits.
On the other hand, I must say that in balancing, I found the
arguments of the securities regulators--the SEC, the States securities,
the State and local government finance officials--who all argued that
the 2 to 5 was necessary. We all put into the scales of justice our
individual component parts, and I would just respectfully say, engaging
my good friend in colloquy, that ultimately that is what persuaded me
on the longer statute.
Mr. SARBANES. Will the Senator yield?
Mr. BRYAN. I will be pleased to yield.
Mr. SARBANES. I would like to ask the Senator, as I understand it,
not only the SEC but the FDIC and State securities regulators all
joined the SEC in seeking to, in effect, overturn the Lampf decision
and go to the 2-and-5-year standard for the statute of limitations; is
that correct?
Mr. BRYAN. That is correct. The distinguished ranking member from
Maryland is correct. They all uniformly support that position.
Mr. SARBANES. And, in fact, I have a quote from SEC Chairman Breeden.
This was in 1991. This is the Republican Chairman of the Securities and
Exchange Commission, in which he said:

The timeframe set forth in the Supreme Court's decision is
unrealistically short and will do undue damage to the ability
of private litigants to sue.

He then went on to point out that in many cases:

Events only come to light years after the original
distribution of securities and the cases could well mean that
by the time investors discover they have a case, they are
already barred from the courthouse.

Will the Senator yield me just 3 minutes?
Mr. BRYAN. I will be pleased to yield to the distinguished ranking
member such time as he needs.
Mr. SARBANES. Mr. President, what is the time situation?
The PRESIDING OFFICER (Mr. D'Amato). The Senator from Nevada has
14\1/2\ minutes; the Senator from Minnesota has 30 minutes 27 seconds.
Mr. SARBANES. I will defer and let the Senator from Minnesota proceed
before we use the time on this side.
Mr. GRAMS addressed the Chair.
The PRESIDING OFFICER. The Senator from Minnesota.
Mr. GRAMS. Mr. President, I rise in opposition to the amendment
offered by the Senator from Nevada. In Lampf versus Gilbertson, the
U.S. Supreme Court established the period of time in which attorneys
may file claims under the implied right of action found in 10b-5, and
that was 1 year after the plaintiff knew of the alleged violation and 3
years after the alleged violation occurred.
While critics of this legislation have seized upon the statute of
limitations as a wedge to defeat this important reform measure, they
have failed to present a convincing case of why this period should be
extended. In the years since the Lampf decision, we have not seen a
surge in the number of actions dismissed because of the limitation
period. Instead, the evidence points to just the opposite conclusion.
Since the Lampf decision, we have witnessed an increase in the number
of complex claims filed within days, even hours, after a movement in
the market.
Plaintiffs with meritorious claims have more than enough time to file
their claims, but, unfortunately, so do strike suit attorneys. There
are a number of reasons, however, why the current statute of
limitations should be preserved. For example, a longer period of
limitations makes it more difficult for innocent defendants to defend
themselves in court. As a result, strike suit attorneys will have an
easier time forcing these defendants into exorbitant settlements.
These settlements, by the way, rarely benefit any real injured class
of investors. They simply go to enrich an attorney and, worse, the
result of these settlements are higher prices for consumers, lost jobs
for workers, and a weaker economy. In other words, consumers lose, it
is the workers who lose, victims of real valid securities fraud actions
lose--everyone loses, again, except for the attorneys.
S. 240 is designed to reverse this trend, to weed out the frivolous
litigation that robs consumers of their hard-earned dollars, to make it
easier for innocent parties to defend themselves against meritless
charges, to free our economy from the litigation bonanza that has made
us less competitive in the global marketplace.
If the Senate adopts this amendment, it will do the opposite, and we
will do a major disservice to the people we represent.
Again, for these reasons, I urge my colleagues to reject this
amendment.
The PRESIDING OFFICER. Who yields time?
Mr. SARBANES. Will the Senator from Minnesota yield for a question?
Mr. GRAMS. Yes.
Mr. SARBANES. The chart that the Senator from Nevada put up back
there indicates that there was no major number of lawsuits filed
subsequent to the Lampf decision. I do not know where, in fact, the
highest figure preceded the Lampf decision. As I understand it, that
was 315, and since then, it is now 290. On what basis does the Senator
make the assertion that following the Lampf decision there was an
upsurge in the number of cases filed?
Mr. GRAMS. Well, I hate to differ, but the statistics, according to
some of the research that we have done, do not correspond with the
statistics that the

[[Page S9065]]

Senator from Nevada has produced. So we still maintain that the 1 and
3----
Mr. SARBANES. These figures, as I understand it, are from the
Administrative Office of the U.S. Courts. What figures is the Senator
using? What are they, and where do they come from?
Mr. GRAMS. I was talking with my staff, and that is according to the
SEC and, I guess, also the Judicial Conference begs to differ with the
numbers that the Senator from Nevada presented. I also wanted to
comment on what the Senator from Connecticut had mentioned in talking
about the new technologies and the speed with which things are done and
the complexity of the programs.
That also gives an advantage to those who are able to find fault, or
to find fraud, or to find these problems and have a real advantage then
in trying to file these claims within a year or within the 3 years. So
the technology has probably worked in favor of those, as well as
against them. And this timetable, if I am not mistaken, was adopted in
1934, and has served those years since. That would also provide
adequate time. The main thing is that it would weed out the frivolous
lawsuits and, as the Senator from New York pointed out, even if these
time periods elapse and real fraud is found, they can still be
rectified in the courts.
Mr. SARBANES. How would they be rectified in the courts if the
statute of limitations had run? That is the whole problem. See, the
people who file a----
Mr. GRAMS. The SEC would be able to bring the suits.
Mr. SARBANES. The people who file the frivolous suits, by the
Senator's own statement, would file them within the 1-year period. He
was just complaining about that, and he said subsequent to Lampf, the
numbers jumped because they were doing exactly that. Our numbers do not
show that.
In fact, the SEC used these numbers when they testified before the
committee in 1993. But the frivolous suits, the persons that are doing
these things with a cookie-cutter, they can file them within the 1-year
period. The people that are going to be blocked out by the 1 and 3
requirement are people who really have reasonable claims and do not
find out about them. By definition, there is a lot of deception that
goes on here, and a lot of people with meritorious claims are going to
be blocked out by the failure to adopt this 2 and 5-year amendment,
which I think is a very constructive proposal.
Mr. GRAMS. I wanted to make one note, that all these what we would
consider frivolous lawsuits are not filed within hours, but some wait 3
to 5 years, requiring businesses to produce even more records, which
would make it even more expensive to debate or fight this in court.
Mr. BRYAN. Would the Senator yield for a question?
Mr. SARBANES. Mr. President, what is the time situation?
The PRESIDING OFFICER. The Senator from Maryland has 14 minutes 15
seconds, and the Senator from Minnesota 23 minutes.
Mr. SARBANES. Is this colloquy on the time of the Senator from
Minnesota?
The PRESIDING OFFICER. Yes. Who yields time?
Mr. GRAMS. I will yield to the Senator from Nevada for a question.
Mr. BRYAN. If I might inquire of my good friend. The Senator from
Minnesota made the point that a 2-year statute of limitations will help
investors and disadvantage lawyers. If that were the case, I would
argue on behalf of his position. But if in his State of Minnesota, or
in my State of Nevada, an innocent victim of fraud, because of the
cleverness of the perpetrator of the fraud, does not discover that
fraud until after 3 years from the date of its occurrence, would not
the Senator agree that, in that situation, the investor recovers not at
all? The SEC can bring an action, but it is not brought to recover on
behalf of the investor. The investor may be penalized civilly or
criminally, but the recovery is not on behalf of the investor. I would
be interested in the Senator's response.
Mr. GRAMS. Sometimes all the cleverness is not on behalf of the
defendant but on behalf of the plaintiff who is bringing the suit. This
is basically the attorney. So I believe that with the speed and
technology, this always can be a debate or an argument of who benefits
most from that. But I do believe that in the far majority of the cases,
the plaintiff has adequate time, and in the serious cases where real
fraud has been perpetrated by such a company, would always have an
opportunity, if I am not mistaken, for the SEC to bring legal action.
Mr. SARBANES. If the Senator will yield on that point, the SEC can
bring action against the bad actor to punish the bad actor, but that
action would not recover the damages for the innocent investor. I ask
the Senator from Nevada, is that not correct?
Mr. BRYAN. That is the point.
Mr. SARBANES. For the private party to recover the damages, the
private party must bring this suit. So your private party would be
left, in effect, holding the bag.
Mr. GRAMS. I was just advised that the plaintiff can recover from the
disgorgement fund if this were the case.
Mr. BRYAN. If the Senator might answer one other question about
frivolous litigation----
The PRESIDING OFFICER. Does the Senator yield on his time?
Mr. GRAMS. Yes.
Mr. BRYAN. If I might engage in a continuing dialog, we all agree--
and there is no disagreement--with respect to taking the appropriate
action against the frivolous lawsuits, as I have commended the chairman
of the Banking Committee. There are provisions in there that I agree
with, as do the Senator from Minnesota and the Senator from Maryland,
with respect to the sanction provisions under rule 11. But I must say--
and I ask the Senator this--when you have the SEC, the Securities and
Exchange Commission, the State Securities Administrators, the North
American Association of Securities Administrators, you have the State
Government Finance Officers, the local government finance officers, all
of whom advocate the 2- and 5-year statute, is it the Senator's view
that they are advocating that on behalf of the Nation's trial lawyers
as opposed to the public? Unless there is a conspiracy I am not aware
of, I would be interested in the Senator's response.
Mr. GRAMS. I think as you noted in your colloquy, there have been
arguments on both sides. And in weighing the differences in those two
arguments, you might agree with the group that you have just mentioned.
But I also agreed with some of the others and agree that the 1 and 3
still provides adequate protection.
Mr. BRYAN. I respect the response of the Senator. I yield the floor,
reserving the remainder of my time.
The PRESIDING OFFICER. Who yields time?
Mr. SARBANES. What is the time situation?
The PRESIDING OFFICER. The Senator from Nevada has 14 minutes 15
seconds.
Mr. SARBANES. Will the Senator yield 4 minutes?
Mr. BRYAN. The Senator from Nevada will be happy to yield 4 minutes.
Mr. SARBANES. I thank the Senator.
Mr. President, first of all, I want to have printed in the Record a
letter from the American Bar Association expressing its opposition to
S. 240, and stating:

In its present form the ABA opposes S. 240 since many of
the provisions of the legislation would dramatically reduce
the protection now afforded shareholders who are defrauded.
The ABA agrees that some adjustments to existing procedures
and securities class actions are warranted.

They are making a very important point. I say to my distinguished
colleagues, I hear the assertions, the people proposing the amendments
want no changes made. That is not the case.
From the very first in this debate, we agreed to the proposition that
some changes needed to be made. The question now is, what changes, how
far? We are trying to cut back on the excesses.
Here is a letter--and many others I have quoted take exactly the same
position--which concludes by saying, urging us:

. . . to amend many of the proposals in S. 240. Instead of
accomplishing the laudable purposes that the proponents
assert, the legislation in its present form will have a
fundamental negative effect upon private enforcement of the
securities law which is an essential and effective ingredient
to maintaining the integrity of our markets.

Mr. President, I ask unanimous consent that the full text of the
letter be printed in the Record at the end of my statement.

[[Page S9066]]

The PRESIDING OFFICER (Mr. Grams). Without objection, it is so
ordered.
(See exhibit 1.)
Mr. SARBANES. Mr. President, I very strongly support the amendment
offered by the Senator from Nevada. I think it is important to restore
some balance to this bill.
The statute of limitations governs a period of time that an investor
has to bring a securities fraud lawsuit. If it is not brought within
that period of time, it cannot be brought at all, no matter how valid
the claim is.
So, it is very important to understand the impact the statute of
limitations will have upon all suits. It is being portrayed here as
impacting only frivolous suits. It will, in fact, impact all suits,
including meritorious suits.
For over 40 years, the courts held that the statute of limitations
for security fraud actions is the State statute of limitations
determined by analogous State law. While these statutes varied, they
afforded securities fraud victims sufficient time, generally speaking,
to discover fraud and to file suits. More than 60 percent of the States
had statutes of limitations longer than what has now been provided in
the Lampf case and that is in this bill.
That was a 5-to-4 decision, that the lawsuit must be brought within a
year after learning of the fraud, and in no event, more than 3 years
after it takes place, even if you do not know about it --even if you do
not know about it.
There are two standards. One, you know; how soon must you bring your
suit? The other is, you do not know about it; how many years must
transpire before you are closed out? If you find out about it 7 years
later, even under the old statute of limitations, well, it is too long.
Now that is being cut from 5 to 3 years.
The time period in this bill is shorter than the statute of
limitations for private security actions under the law of 31 of the 50
States. Security law experts say the statute of limitations imposed by
the Supreme Court is too short. It does not provide investors with
enough time to discover a fraud and then to file a lawsuit.
I quoted earlier a quote from Chairman Breeden, in which he said that
it could ``well mean that by the time investors discover they have a
case, they are already barred from the courthouse.''
As my distinguished colleague from Nevada has pointed out, not only
the SEC but State securities administrators and the FDIC have all
agreed that the shorter period as reflected in this legislation does
not allow individual investors adequate time to discover and pursue
violations of securities law. In fact, the State securities regulators
said about the shorter statute of limitations, that it:

. . . effectively forecloses any means of recovery for
defrauded investors whose only mistake may be to not discover
a concealed fraud.

We are talking about people who are the victims of fraud. Their only
mistake is they have not discovered this concealed fraud.
I want to commend Senator Bryan for offering this amendment. It is a
matter he has pursued before. In fact, it was without opposition,
adopted as an amendment to a banking bill in 1991. Many here thought it
was important. In fact, this bill, as initially introduced by Senator
Domenici and Senator Dodd, contained this provision. In fact, it was
put right in the title:

To amend the Securities and Exchange Act of 1934 to
establish a filing deadline.

Obviously, it was regarded as an important matter, since it was put
front and center.
As I indicated, the objective, independent parties have all testified
that the 2 and 5 years is the standard that we ought to have. The
Government Finance Officers Association wrote:

Wrongdoers would be let off the hook by a shorter statute
of limitations.

Mr. President, I very strongly support this.
Let me close with this observation: Extending the statute of
limitations has nothing to do with frivolous cases. It will allow
individual investors more time to bring legitimate cases, time they
need, because fraud artists often conceal their fraud. The experts in
this area, the securities regulators, know more than anyone about
bringing securities fraud cases. They have been supportive of the
proposition being offered by my distinguished colleague from Nevada.
I very much hope my colleagues will support this amendment. I yield
the floor.

Exhibit 1

American Bar Association,

Governmental Affairs Office,

Washington, DC, June 26, 1995.
Hon. Christopher J. Dodd,
Committee on Banking, Housing and Urban Affairs, U.S. Senate,
Washington, DC.
Dear Senator Dodd: I write on behalf of the American Bar
Association concerning legislation entitled Reform of Private
Securities Litigation--S. 240--presently before the United
States Senate. In its present form the ABA opposes S. 240
since many of the provisions of the legislation would
dramatically reduce the protection now afforded shareholders
who are defrauded.
The ABA agrees that some adjustments to existing procedure
in securities class actions are warranted. Legislative
amendments which require full disclosure of settlement terms,
promote finality in settlements and encourage voluntary and
non-binding ADR foster those goals without sacrificing the
integrity of our markets and the interests of public
investors. Accordingly, we support provisions of S. 240 which
contain such reforms.
The ABA's concerns are directed to those provisions in
proposed legislation which would, in effect, eviscerate the
remedy which makes the capital market in the United States
the envy of the world. In particular, we oppose the ``Loser
Pays'' provisions, the change in the long-standing principle
of joint and several liability, and the expanded ``safe-
harbor'' which will not protect even fraudulent forward
looking statements. In addition, we oppose the mandating of
heightened requirements for pleading scienter, and mandatory
stay of discovery when a motion to dismiss is filed, the
limitations on discovery even after a complaint has been
sustained, and the limitation to a single amendment to a
complaint in a securities class action.
The legislation detailed above, if enacted, would not
simply, as proponents assert, prevent frivolous litigation.
It would dramatically undermine the ability of public
shareholders who have been injured through violations of the
federal securities laws to achieve redress. In our view, the
federal class action for securities fraud remains a vital and
necessary component of the federal regulatory scheme.
Moreover, the present trend in the case law to eliminate
frivolous claims and to ensure adherence to relatively
stringent pleading and proof requirements, calls into
question the need for many of the provisions of S. 240.
At a minimum, any proposed changes to Federal rules of
Civil Procedure should follow the Rules Enabling Act in which
Congress specified such changes will go to the Judicial
Conference of the United States which receives input from the
public, the bench and the bar. The need for this review by
the Judicial Conference is particularly compelling given the
provisions of the legislation which seek to have different
pleading, proof and discovery rules for federal securities
fraud cases, a dramatic departure from the uniform approach
to all claims taken by the Federal Rules of Civil Procedure
ever since their enactment in 1937.
The reasons for our objections to particular provisions of
S. 240 are detailed below:

modified ``loser pays'' under rule 11

The requirements of Section 103 (a) and (b) requires the
court (i) to make specific findings on compliance by all
parties and all attorneys with regard to each requirement of
Rule 11(b) and (ii) mandating sanctions for any violations.
The court is also directed to presume that the appropriate
sanction is reasonable attorneys' fees and expenses of the
opposing party. Although this presumption may be rebutted by
evidence that such sanctions would impose an undue burden on
the violator, we agree with Chairman Levitt of the SEC that
this section ``may have the unintended effect of imposing a
`Loser Pays' scheme''.
The in terrorem effect of such a change in the law will
largely close the Federal courts to securities class actions
including the most meritorious of cases because the vast
majority of litigants are unable to run the risk of being
forced to pay for the other side's fees. The merits of
litigation are rarely, if ever, clear at the outset and what
is one side's clearly meritorious case is often the other
side's frivolous litigation. Thus, in the absence of
assurances from counsel, which counsel will be unable to
provide, all but the very wealthy likely will be prevented
from bringing a securities action in Federal court and no one
likely will ever bring a class action.
If any ``Loser Pays'' provision is enacted, securities
class actions in the federal courts will largely become a
thing of the past, and private securities litigation in
general may all but disappear, except for disputes between
wealthy adversaries. The resulting loss in accountability,
investor confidence, and the proper functioning of our
capital markets would be wholly against the public interest.
A major deterrent to corporate wrongdoing would be lost. This
cannot be the desire of Congress and we urge you to reject
these proposals.

[[Page S9067]]

excessive safe harbor for forward looking statements

S. 240, in Section 105, adopts a sweeping exemption from
fraud liability for forward looking statements by including a
scienter standard which, in the words of Chairman Levitt of
the SEC, ``may be so high as to preclude all but the most
obvious frauds.'' S. 240 should be amended to assure that
there is no safe harbor for a forward looking statement that
is materially false or misleading.

ending of joint and several liability

The ABA strongly supports the existing joint and several
liability principles of today's laws. As SEC Chairman Levitt
stated, ``[t]he Commission has consistently opposed
proportionate liability, because [u]nder the existing system
of joint and several liability, the solvent defendants [in
cases where one of the wrongdoers in insolvent] must bear the
share of the bankrupt defendants. Under a system of strict
proportionate liability, the defrauded investors would be
required to absorb the loss.'' As he elaborated: ``although
the traditional doctrine of joint and several liability may
cause defendants to bear more than their proportional share
of liability in particular cases, this is because the current
system is based on equitable principles that operate to
protect innocent investors. Joint and several liability is
based on the equitable principle that, as between defrauded
investors and defendants who are found to have knowingly or
recklessly participated in a fraud, the risk of loss should
fall on the latter. The goal of ensuring that defrauded
investors are fully compensated for their losses, in other
words, overrides any distinction based on the relative
culpability of the defendants. . . .
S. 240 should therefore be amended to restore the joint and
several liability princples.

pleading and discovery, and limitations on amended pleadings and
discovery

S. 240 mandates a number of procedural requirements none of
which have serious merit and all of which represent a
violation of the procedures established by the Rules Enabling
Act. Simply put, the cumbersome nature of these proposals and
their unintended consequences demonstrate anew why the far
more thoughtful process established by Congress in the Rules
Enabling Act ought to be followed here.
Rule 23 contains ample safeguards today to assure that
named plaintiffs adequately represent the class and their
lawyers pursue the cases vigorously. The new pleading and
discovery proposals of S. 240 are troublesome in that for the
first time under the Federal Rules special requirements are
established for a particular class of cases. Moreover, the
proposals contradict the present Rule 9(b) of the Federal
Rules of Civil Procedure. Given the evidence that courts are
already enforcing heightened pleading requirements today, the
proposal is not only mischievous but unnecessary. The last
thing Congress should be endorsing is the dismissal of
meritorious cases at the pleading state. The pleading
standards in S. 240 require a plaintiff to plead the ``state
of mind'' of each defendant, which is impossible to do prior
to any discovery.
Finally, the limitations on the ability of plaintiffs to
amend their pleadings and to pursue discovery while
undoubtedly having the effect of preventing frivolous claims
from going forward, also has the pernicious effect of barring
claims with substantial merit. It is only through significant
discovery and repleading that these important claims get
adjudicated, an unlikely result if these proposals are
adopted.
In sum, the American Bar Association urges you to amend
many of the proposals in S. 240. Instead of accomplishing the
laudable purposes that their proponents assert, the
legislation in its present form will have a fundamental
negative effect upon private enforcement of the securities
law, which is an essential and effective ingredient to
maintaining the integrity of our markets.
Sincerely,
Robert D. Evans.

Mr. D'AMATO. Mr. President, the question before us, on the statute of
limitations, is an interesting one.
I think we really have to ask whether or not you really cannot
discover a fraud in the 3 years?
Now, there have been some Ponzi schemes and other schemes that have
gone on and worked for a long time. There have been some fraudulent
investment practices at large, very well respected, institutions, where
it has taken a period of time for people to bring them to the bar. In
those cases, I suggest that it has been the SEC who has brought these
cases. They have done it because people have broken the law, people
have committed fraud. They have not filed specious, frivolous suits.
That does not mean every time they bring a suit, the are right; but
more often than not, they are. Indeed, where people have defrauded
investors and have made profits unfairly, the SEC has been quite
successful in gaining penalties and fines, and in some cases
disgorgement of those ill-gotten gains. Again I state that the SEC is
not precluded by the statute of limitations. In the Prudential case the
SEC got $660 million in disgorgement. The wonderful thing is that when
the SEC recovers in a case those moneys go to the people who have been
victimized. It is not a case where they recover pennies on the dollar.
If we look at most of the successful cases that have not been brought
by the SEC, the cases brought by the private sector bar, they literally
recover pennies, pennies on the dollar of lost investment. As a matter
of fact, there have been a series of articles that after these cases
have been settled--most of these cases end in settlements being made--
the people who the lawyers settle on behalf of get literally nothing,
in some cases box tops, or the ability to receive even more products
that they do not want. They say, ``What was this? What did I gain from
this suit?'' But, the lawyers got millions and millions of dollars.
We are really here making a statement, saying, we will put into law
what the Supreme Court, in its wisdom, feels is right. Of course we
have a right to disagree, but they said 3 years is plenty of time in
which to discover that fraud; 1 year after the time of discovery and I
agree.
Let me raise a question. Why should it take 2 years to bring a
lawsuit after the time of discovery?
Mr. SARBANES. Will the Senator yield?
Mr. D'AMATO. Why, after 1 year upon discovery, can you not bring a
suit?
Mr. SARBANES. Will the Senator yield on that point?
Mr. D'AMATO. I am happy to yield. But on my colleague's time, because
we are pretty much even now. I have done that deliberately, evened it
up.
Mr. BRYAN. I yield such time as the Senator needs.
Mr. SARBANES. As I understand it, the Senator from Nevada said it
takes the SEC 2.2 years from the time they start working on it to bring
the case. So if it takes the SEC 2.2 years, I do not think it is
unreasonable that a private party ought to have 2 years.
The SEC cannot recover. The disgorgement which the Senator made
reference to is only for illegal gains that a party realizes. Then you
can force them to disgorge it. They may not have illegal gains, or the
disgorgement may not be enough to pay the private parties. The private
party suit goes against the wrongdoer with respect to all of their
assets. The disgorgement only gets at some bonanza which they have hit
upon which you force them to give back and then you can allocate that
out. That does not begin to cover the problem of the plaintiff
recovering.
But, in any event, on the particular point, the SEC takes 2.2 years.
I do not think it is unreasonable to give private parties 2 years to
bring their suit.
Mr. D'AMATO. If I might, the point is, if after the discovery of a
fraud it takes more than a year to bring that case I think we are just
really holding captive and in bondage, so to speak, a small business
entrepreneur who is the possible plaintiff of a suit. Also, I think
that the SEC does not take 2.2 years to bring that case; but I believe
to finish that case; not to just investigate that case.
Let me suggest that, extending the statute of limitations makes it
possible to hold this sword of alleged fraud over someone; I have found
it or someone will find it. Instead of bringing a case within a year
they dangle it over the company for 18 months, 2 years, attempting to
get a settlement, then maybe file the papers just before that 2 years
is up--I do not think we want to do that. How is that advancing the
cause of justice?
If there is wrongdoing this Senator wants to see the people who have
undertaken that wrongdoing punished. I want to see their illegal
profits given back. And again, there is a procedure whereby those who
have gotten ill-gotten gains who have profited by defrauding others can
be brought to justice by the Securities and Exchange Commission. And
the SEC has used that authority. They have done it in the case of
Prudential, and, I daresay, that in other cases where outrageous
practices have taken place they will continue to bring suit.
Mr. President, what we are seeking here is a balance. I think to
basically double the statute of limitations will not bring about the
kind of balance we are looking for. I think it would be a mistake.

[[Page S9068]]

Again, this Senator has been willing to look at this question
carefully but I think the overwhelming body of opinion in the business
community, in the legal community, and in the Congress, is that 3 years
is a sufficient period of time given the fact that the SEC has
authority to bring suit.
By the way, there may be cases that the SEC should not undertake,
which it does, but there is the difference. I have some trust in them.
I do not have any trust in the entrepreneurial spirit of a handful of
lawyers who have managed to hold captive, to a certain extent,
legitimate business activities in this country. When the accountants of
this country are placed in the position that some of them may go out of
business because of the incredible liability that they face in
practicing their profession as a result of these type lawsuits, then it
is time to say, ``Enough is enough. We have to change this.''
That is what we are attempting to do with this legislation, and that
is why the 1 and 3 years statute of limitations is the provision we
used. I recognize reasonable people may disagree, but I hope I have
been able to lay out the methodology and the motive, for why we have
chosen what we think is a fair balance. One year from the time the
fraud is discovered, 3 years from the time the fraud has been
committed; I think that is very, very reasonable.
I yield the floor.
Mr. BRYAN. May I inquire of the Chair, how much time remains?
The PRESIDING OFFICER. The Senator from Nevada has 4 minutes and 45
seconds remaining. The Senator from New York has 12 minutes and 7
seconds remaining.
Mr. BRYAN. Mr. President, it is my understanding that a motion will
be made shortly to seek unanimous consent, to which I have no
objection, to have the rollcall begin at 5:30. If in fact the Senator
from Nevada is correctly informed of that, I inquire of the
distinguished chairman of the Banking Committee whether he would be
agreeable to providing a little additional time for us to engage in
discussion?
Mr. D'AMATO. May I ask if my colleague might like an additional 15
minutes or half-hour equally divided?
Mr. BRYAN. That I would think would be fair. If we do not need it
all, we can yield it back.
Mr. D'AMATO. Mr. President, I ask unanimous consent we be given an
additional 30 minutes to debate, 15 minutes on each side.
The PRESIDING OFFICER. There is about 15 minutes remaining in the
debate.
Mr. D'AMATO. I am asking an additional 15 minutes and extend the time
for voting an additional half-hour.
The PRESIDING OFFICER. Without objection, it is so ordered.
The Senator from Nevada.
Mr. SARBANES. Mr. President, will the Senator yield for just a
moment?
Mr. BRYAN. The Senator from Nevada will be happy to yield.
Mr. SARBANES. Will the Chair indicate the parliamentary situation for
us now?
The PRESIDING OFFICER. Will the Senator repeat the question, please?
Mr. SARBANES. Will the Chair repeat the parliamentary situation now?
The PRESIDING OFFICER. There was just consent given for an additional
30 minutes of debate.
Mr. SARBANES. Equally divided?
The PRESIDING OFFICER. Equally divided, 15 minutes for each side.
Mr. D'AMATO. That would bring us to 5:45.
Mr. SARBANES. Then when would the vote occur?
Mr. D'AMATO. At 5:45.
The PRESIDING OFFICER. Right, under the time that was just consented
to, it would be at 5:45.
Mr. SARBANES. As I understood the request, it was to move the vote to
5:30 and have half an hour equally divided. The vote is now scheduled
for 5:15, is that correct?
The PRESIDING OFFICER. The request was for an additional 30 minutes
of debate time and there was 15 minutes remaining on the clock between
the two sides, so that would now give 45 minutes debate remaining,
equally divided between both sides.
Mr. SARBANES. That was not my understanding.
Mr. BRYAN. Mr. President, if I might?
The PRESIDING OFFICER. The Senator from Nevada.
Mr. BRYAN. If I misspoke myself I apologize.
What I was seeking to do was to get a combined 30, which was the time
that, as I understood it, the vote was to occur, and the use of
additional time. I am not trying to preclude my friend from New York
from exercising the full amount of his time.
Mr. D'AMATO. Mr. President, might I ask that the two votes that are
scheduled after the Bryan vote be limited to 10 minutes each?
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. SARBANES. When will the first vote occur under this request?
The PRESIDING OFFICER. According to the unanimous-consent agreement,
it would be at 5:45.
Mr. SARBANES. The subsequent two votes would be 10 minutes each; is
that correct?
The PRESIDING OFFICER. That is correct.
Mr. SARBANES. The time between now and 5:45 will be divided equally?
The PRESIDING OFFICER. The additional time is divided equally. The
Senator from Nevada would now have 16 minutes and 57 seconds; the
Senator from New York would have 28 minutes and 1 second. But the
additional 30 minutes was equally divided between the two sides.
Mr. BRYAN. Mr. President, again, I think I created some confusion. I
apologize. It was my intent to get additional time but to begin our
voting at 5:30. The reason I say that to my friend from New York is to
try to accommodate him. I intend to offer several amendments this
evening. I think the sooner that we get to those probably the better
off we are.
So somehow the state of the Record might reflect that whatever time
the Senator needs, I would like a little bit more time, and start
voting at 5:30. It is not my intent by some parliamentary artifice to
reduce or limit his time. But I need a little bit more time. That is
why I was requesting that be done in that fashion.
Mr. SARBANES. Mr. President, I think maybe we can work this out if we
begin the vote at 5:45, and divide the time between now and then
equally and make the two votes after the first vote 10-minute votes.
Mr. D'AMATO. I have no objection.
The PRESIDING OFFICER (Mr. Abraham). Is there objection? But the time
is still not divided equally with the 45 minutes remaining.
Mr. D'AMATO. Let me ask that the time from this time on be divided
equally; that both sides start off with the same time, and we commence
our first vote at 5:45.
Mr. SARBANES. And then the subsequent two votes will be 10-minute
votes.
The PRESIDING OFFICER. Is there objection? Without objection, it is
so ordered.
The PRESIDING OFFICER. Who yields time?
Mr. BRYAN addressed the Chair.
The PRESIDING OFFICER. The Senator from Nevada.
Mr. BRYAN. Mr. President, I think this has been an interesting and a
constructive debate.
Let me just say that this is an issue that I know is dry as dust, but
I think it is important to point out that across the country there is
some understanding that we are not just talking about legalisms, and
what we are about to do will have a serious impact on millions and
millions of Americans.
I invite my colleagues' attention to a number of editorial responses
from across the United States, from a broad number of newspapers, not
regionally focused, not philosophically on one side, but I think a
broad spectrum. They raise very, very legitimate concerns about S. 240
in its present print.
The Miami Herald, ``License to Steal''; the Bergen County Record,
``Protection for Con Artists''; the News & Observer, ``Safe Harbor for
Fraud''; the New York Times, ``Protection for Corporate Fraud'';
Jonesboro Sun, ``Bad Measure''; the Denver Post, ``Senate Bill Would
Give Free Ride to Securities Fraud''; the Seattle Post-Intelligencer,
``Securities Bill Hurts Investors''; the Napa Valley Register,
``Securities Fraud Bill is a Fraud''; the Palm Beach Post, ``One Big
Stock Swindle''; North Sioux City Times, ``Your Money At Risk''; the
Seattle Times, ``Congress is Wrong to Limit Investor Suits''; Dayton
Daily News, ``Securities `Reform' Bill Backwards''; St.

[[Page S9069]]

Louis Post-Dispatch, ``Don't Protect Securities Fraud''; Contra Costa
Times, ``Shielding Securities Fraud''; Los Angeles Times, ``This Isn't
Reform--It's a Steamroller''; and, again, the Palm Beach Post, ``Making
the Nation Safe for Fraud.''
So the notion that somehow this is an argument that only involves
those who are involved as securities lawyers I think can misstate the
scope and the concern of this provision.
Let me say that if you look at the history of what has occurred since
the last case in 1991, that issue was brought before the Congress. At
that time, my good friend, the distinguished chairman of the Banking
Committee, was a cosponsor with me in trying to extend the statute of
limitations from 1 to 3 years, as that court decided the case, to 2 to
5. The distinguished Senator from Connecticut was a supporter of that
change, as well. He continues to support the 2-to-5-year statute of
limitations.
His very able cosponsor, the distinguished senior Senator from New
Mexico, Senator Domenici, also expressed his support in 1991. The only
concern the Senator had was that he felt that the statute of
limitations issue ought not to be considered in an isolated sense. This
is what he had to say on the floor of the U.S. Senate on November 19,
1991.
First, I am not opposed to the extension or retroactivity if we are
able to attach some amendments that address the issues of attorney
fees, who pays the cost for these various lawsuits which are going to
be extended, all of which is done in S. 240.
So we have those people who have been over the years most actively
involved at one time or another, all of whom supported S. 240 with a 2-
to-5-year statute of limitations.
Those who know the circumstances best, those who investigate fraud at
the State level and at the Federal level, the North American Securities
Administrators Association and the Securities and Exchange Commission,
all say that one fact that is central to securities fraud is the
cleverness of the defrauders in concealing their fraud. They have from
time to time pointed out the Ponzi scheme, in which you do not know
until at the very end that you have been a victim of a fraud; or
municipal bond fraud, which has front loaded an escrow account in which
payments are made for several years so the unwary investor is totally
unaware that he or she has been defrauded. You have limited
partnerships, in which those frauds are not detected for years, and the
SEC itself saying that to conduct an investigation takes an average of
2.25 years.
That strikes me as a very persuasive argument for a 2-to-5-year
statute of limitations.
In addition, you have the State financial officers and local
government financial officers. Now, I am not unmindful of the fact that
accountants and securities underwriters and others do not like the
longer statute of limitations, and they are obviously entitled to make
their point. But I do not think it would shock anybody on the floor to
suggest that their positions are tinged with self-interest.
Who speaks for the public? The Congress of the United States ought to
speak for the public. And those who represent the public interest in
both Republican and Democratic administrations, the Chairmen of the
SEC, each have expressed their support for a 2- to 5-year statute of
limitations. State securities administrators, many of whom, I suspect,
probably most, are appointed by Governors directly representing the
people of their respective States, have also spoken in behalf of the 2-
to 5-year statute of limitations. State financial officers, many of
whom are directly elected by the people, others of whom may be
appointed by the Chief Executive of the respective States, again
representing the public interest, have expressed their support. And the
same thing is true with local government financial officers.
Mr. SARBANES. Will the Senator yield on that very point?
Mr. BRYAN. The Senator would be happy to yield.
Mr. SARBANES. In just yesterday's New York Times an article appeared
written by Mark Griffin, the director of the Utah Securities Division.
He is a board member of the North American Securities Administrators
Association, which comprises the 50 States' securities regulators. In
fact, he is the chairman of the Securities Litigation Reform Task Force
and testified in front of our committee, and I think, in fairness, all
members of the committee would agree that he was a very rational,
thoughtful witness. Now, he in this article, in which he takes a very
strong position, says, ``The securities litigation bill is reform in
name only.'' But on this very point that the Senator is now arguing,
having addressed other provisions of the bill that he thought were
deficient, he said, and I quote him:

Perhaps the clearest sign, however, that the bill's
proponents have sold middle class investors down the river is
their refusal to lengthen the time in which consumers can
bring cases to court. The current rule derives from a 1991
Supreme Court decision that created a statute of limitations
for Federal securities law cases of 1 year from discovery of
a misdeed or 3 years from the commission of the act in
question. This represented a serious reduction in the time
available for such lawsuits since Federal courts previously
had relied on State standards for statute of limitations.
Currently 31 States permit longer than the 1 and 3 standard
for the filing of State securities cases.

And then he closes this discussion on this very point with this
question:

What possible case can the backers of this bill make for
keeping the time limit as short as possible so that future
swindlers who cover their tracks carefully will get off the
hook for good?

Mr. President, this is not a party to the issue. This is not someone
who has a vested economic interest on one side or another of this. This
is a State director of the State securities division.
I thank the Senator for yielding.
Mr. BRYAN. I think the Senator makes a very compelling point, and I
think he speaks on behalf of the Nation's security regulators at the
State level. And that view is shared by his counterpart at the Federal
level.
I would yield the floor and reserve the remainder of my time.
The PRESIDING OFFICER. Who yields time?
Mr. D'AMATO addressed the Chair.
The PRESIDING OFFICER. The Senator from New York.
Mr. D'AMATO. Mr. President, I think we just have a fundamental
difference of opinion. There are those people who advocate extending
the period of time to 5 years to detect fraud. To them I say, look at
the sophistication to study markets and to review documents that we
have today. Given the ability to learn more about a company, more about
its activities, given all of the information that is available, I think
that extending the statute of limitations gives this group of hawks--
that is a kind word; more descriptive would be ``vultures''--who look
at every turn to seize an opportunity to bring suit, not on behalf of
the poor or the downtrodden but on behalf of themselves, too much time
and opportunity to find something with which to bring a frivolous suit.
There is a page in the Committee report on S. 240 which quotes a lawyer
who talks about his clientele. He is one of those lawyers who brings
these meritless suits, and he describes it.
I do not pretend, nor do I suggest at all, all lawyers operate in
this manner, because they do not. That would be wrong. That would be a
disservice. But a sufficient number operate in this way in this
particular area. I have asked if we could get some figures on this. It
would be very interesting to ascertain, for example, in the second
circuit, where one law firm in particular brings all these suits, how
many of the plaintiffs are the same. I mean, they are the same people
and they own almost no stock whatsoever--sometimes as little as 10
shares each. They just get shares in every company. And if stock in
that company goes up or down--even if it goes up--then they sue. They
say: You did not tell us; you withheld information from us; and we
should have known; and I am injured. They sue, and they get paid. They
get paid for loaning their names. These lawyers, these same lawyers pay
these individuals. This one lawyer said--I do not want to give the
wrong name:
``I have the greatest practice of law in the world,'' this one lawyer
said. He acknowledges once telling a meeting of corporate directors--
imagine telling this to a group of corporate directors--``I have the
greatest law practice in the world.'' And why? Why? Senator Boxer talks
about the aged, the sick, the infirm, the poor investors, here is what

[[Page S9070]]

he thinks about them. Here is what he thinks about them; he said, ``I
have no clients.''
He is operating for himself. He is just looking to make money, pile
it up. Here it is on page 6 of the committee report, which has been
submitted, ``Report of the Committee of Banking, Housing and Urban
Affairs,'' I knew it was here because I did read it. The comment by one
plaintiff's lawyer:

I have the greatest practice in the world. I have no
clients.

``William T. Barrett, `I have no clients,' Forbes, October 11,
1993.'' The fellow's name was Bill Barrett. Mr. Barrett was a partner
in the law firm that brings most of these suits perhaps even more than
anybody else. And he is proud of that. He is proud of that.
I do not think that is something to be proud about. If you want to
say I recover on behalf of the little guy, and I take on those who have
inveigled them and swindled them, I understand that. But when you brag:
I have the greatest practice of law in the world--``I have no
clients''--that is a heck of an admission.
I do not want to give Mr. Barrett and those who practice with that
kind of attitude an additional period of time to chum up the waters, to
try to create situations, to try to look for that which does not exist.
I will support them if they are bring cases that involve fraud
absolutely, that involve deliberately giving misinformation,
absolutely, but I will not support the creation of specious lawsuits,
lawsuits that are not well grounded and only designed to shake down--
shake down--businesses, shake down insurers, shake down people, to make
them pay.
That is wrong, and we have got to stop it. The fact is we are paying
billions of dollars out and consumers are paying because we have
allowed this practice to continue, and it has become a very
sophisticated art form. Look at the record. Just look at the record.
Ninety-three percent of those cases are settled, and they are not
settled because anybody was going to prove fraud. They are settled
because a small company or even a large successful company cannot
afford to carry that litigation on for many years; litigation that
costs them millions of dollars. Even if they win, they lose.
You heard my friend, Senator Dodd, bring up the case where the
accounting firm was sued and won, they won the lawsuit. It cost them $6
million to win. They were only paid on the initial contract $15,000.
That probably epitomizes the worst of what takes place, but it takes
place too often.
Open the door longer? No, I do not see what benefit that would hold.
And I really have a difficult time understanding, and I do not refer to
my colleagues, those in the media who say we are trying to give a
license to people to commit fraud. Why do they not wake up? They could
not operate under the same standards that business does. They are given
a shield. We are simply saying, in this legislation, that you ought to
be able, if you discover the fraud within a year, to bring the suit.
Why would you need 2 years?
Now, it is true that at the Securities and Exchange Commission, once
they have completed all their depositions; they go through very
thoroughly; takes 2-plus years to bring suit.
But in 2.2 years their suit is absolutely totally ready, they have
laid the cupboard bare and have made all their discoveries, they use
the power of their office to bring suit where there is fraud and they
can recover for the investors. So, indeed, it may take them 2 years to
completion. We are not saying somebody has to complete their lawsuit in
2 years, but certainly, they should be able to start it within 1 year
if they believe a fraud has really taken place. Extending it to 2 years
just goes beyond the realm of reason.
I yield the floor.
The PRESIDING OFFICER. Who yields time?
Mr. BRYAN. Mr. President, may I inquire how much time remains?
The PRESIDING OFFICER. On your side, 11 minutes 30 seconds, and
Senator D'Amato has 12 minutes 56 seconds.
Mr. BRYAN. I yield as much time as the Senator from Maryland desires.
Mr. SARBANES. If the Senator will just yield me 3 minutes.
The PRESIDING OFFICER. The Senator from Maryland.
Mr. SARBANES. Mr. President, I want to again commend the Senator from
Nevada for offering this amendment. It is a very important amendment.
This is an issue he has dealt with over the years with a great deal of
attention and understanding and thought.
The distinguished Senator from Nevada is, of course, a former
Governor of that State, and prior to that the attorney general of the
State of Nevada, and before that a member of the Nevada Legislature on
the judiciary committee. So he has had experience in dealing with these
issues, and I am sure out of his tenure as attorney general can
appreciate what small investors come up against when they are
confronted with these fraud situations.
This provision to extend the statute of limitations does not reach
the kind of horror examples that people on the proponents of this
legislation are asserting.
This statute of limitations issue affects meritorious suits as well
as frivolous suits. There are other ways in the bill that we are trying
to do away with the frivolous suits, to which the Senator from New York
was just making reference. And, in fact, many of us trying to amend
this bill have indicated that we support many of the provisions aimed
at dealing with the frivolous suits. But we have to draw the line when
the provisions are carried to excess, when you have overreaching and,
in effect, you are negatively going to impact upon the small investor
who has been bilked, who has been taken gross advantage of.
This statute of limitations we previously dealt with here with
relatively little controversy. As a matter of fact, most people, when
we previously considered it, were supportive of the 2- to 5-year
period, which is what the standard has been for 40 years under the
securities laws, for 40 years.
The 1- to 3-year standard that is now in this bill is shorter than
what applies in over 60 percent of the States. If you know about the
fraud, you ought to be able to bring a suit within a year. The SEC
takes over 2 years to bring a suit once it knows about it. So I think
it is unfair to expect the private party to meet a higher standard than
you expect the Securities and Exchange Commission to meet with all the
expertise and with all the resources that it has.
The 3 years, in effect, says if you perpetrate a fraud and no one
finds out about it and 3 years go by, you are scot-free.
The PRESIDING OFFICER. The Senator's time has expired.
Mr. SARBANES. Will the Senator yield me 1 more minute?
Mr. BRYAN. I will be pleased to.
Mr. SARBANES. What that says is if you do a fraud, you are a fast
operator, you perpetrate a fraud, and you manage to conceal it for 3
years, that under this statute, you are then scot-free. What the
distinguished Senator from Nevada is saying is that period at least
ought to be 5 years.
Some say why should it not even be longer and some States, in fact,
have a longer period. The argument for having a statute of limitations
generally speaking in the law is that at some point you want to have
finality, you want to bring things to an end, you do not want to have
always open the prospects of a lawsuit. So you try to have a reasonable
statute of limitations. The one we have always used in this area now
for more than four decades has been 5 years in terms of the period that
could run in which you could then find out about the fraud.
Now it is proposed to cut that back to 3 years. So if the fast
operator can conceal and deceive his fraud for a 3-year period, then he
escapes, he comes out scot-free.
I say to my colleagues, I suggest to you this is a very meritorious
amendment, and I very much hope the Members will support it.
Mr. President, I yield the floor.
The PRESIDING OFFICER. Who yields time?
Mr. D'AMATO. How much time remains?
The PRESIDING OFFICER. Twelve minutes fifty-six seconds.
Mr. D'AMATO. I yield the Senator 5 minutes.
The PRESIDING OFFICER. The Senator from Utah.

Amendment No. 1472

Mr. BENNETT. Mr. President, I appreciate the opportunity to come--and
I understand there will be stacked

[[Page S9071]]

votes--and talk on several amendments, one that was the subject of
debate earlier. I asked my distinguished chairman if I could make a
quick comment on it, and he agreed that might be appropriate.
There is an article in today's Wall Street Journal that I think has
bearing on the debate, today's news today, if you will, which says:
``Big Accounting Firms Weed Out Risky Clients.''

If you have a big-name auditor, hold on tight. It's getting
a lot tougher to find--and keep--prestigious outside auditors
to certify annual financial statements.

The statement that I think is appropriate in this article, to this
debate, referring to a partner at Peat Marwick, is where he talks
about:

When a client we audit goes bust . . . it costs us a bundle
in court if we're sued by investors, whether we win or lose
the case.
Mr. Lambert says that legal costs are ``staggering'' for a
lawsuit filed in a Federal court in Texas alleging a faulty
review of a bank's books by Peat. The bank was taken over by
the Federal Government in 1992 after big losses. The jury
ruled in Peat's favor in 1993, but the firm had to spend $7
million to defend itself even though the fee for the job was
$15,000. Mr. Lambert says, ``We just can't afford to take on
risky audit clients anymore.''

That is what will happen if we do not pass this legislation, Mr.
President. People are going to be denied access to accountants, who
will not run the risk of a $7 million legal fee, even when they are
exonerated, for a $15,000 auditing fee. They will simply not be
available, and the end that we are all seeking in this legislation,
which is to protect investors, will be frustrated if the amendment
dealing with the joint and several liability is adopted.
Mr. SARBANES. Will the Senator yield on that point?
Mr. BENNETT. I will be happy to.
Mr. SARBANES. The other day, we rejected the amendment that would
have restored joint and several. So the bill now has proportionate
liability in it. The only thing the amendment offered earlier addresses
is a provision in the bill that would still keep joint and several for
small investors.
So if you had a small investor with a net worth of under $200,000--
and that figure is retained--we would drop out of it the requirement
that that small investor had to lose at least 10 percent of his net
worth, namely $20,000. So if he lost $15,000 or $5,000, he could be
held whole instead of the participant in the fraud escaping the burden.
Mr. BENNETT. Mr. President, we are talking about strike suits on
behalf of professional plaintiffs, and a professional plaintiff could
easily fit within the category of the Senator's amendment.
Mr. DODD. Will my colleague yield?
Mr. BENNETT. I will be happy to yield.
Mr. DODD. My colleague from Maryland was not here when I expressed my
remarks. I will say to the Senator from Utah, I submitted that article
for the Record.
Mr. BENNETT. I apologize.
Mr. DODD. If you go to the Census Bureau and Federal Reserve study on
what the median net worth is in this country, you get two different
numbers. The Census Bureau says the median net worth is $37,000. The
Federal Reserve said in 1992 it is $52,000.
When you set the standard at $200,000 of net worth, which we do,
basically, you are including about 95 percent of the people in this
country. Only a small percentage is left that have a net worth in
excess of $200,000. So if you then do not have some of the standard
here, then de facto--not de jure, but de facto--you have eliminated
proportionate liability.
Mr. SARBANES. I ask the Senator from Connecticut, what is the net
worth of the median investor?
Mr. DODD. I do not have that statistic.
Mr. SARBANES. I know, but you are----
The PRESIDING OFFICER. The Senator from Utah has the floor.
Mr. BENNETT. I think my time has probably expired. I thank my
colleague from Connecticut. I apologize that I was not listening to him
when that was put into the Record. I will not ask that it be printed in
the Record.
Mr. D'AMATO. I yield another 2 minutes to the Senator from Utah.

Amendment No. 1469

Mr. BENNETT. The amendment before us is on the statute of
limitations. We have heard all of these arguments. I do not want to
repeat them over and over again. Simply, from my business experience, I
tell you the impact of the statute of limitations which is hanging over
business. If you have a statute of limitations that is 5 years, you
have to keep all your records for 5 years; you have to be concerned
about what is going to happen to you in 5 years, even though you know
nothing has gone wrong, and you get yourself into that circumstance.
If there were time, I could describe circumstances where the lawyers
wait until the last moment before the expiration of the statute, no
matter when it is, in order to panic the situation. It becomes a
device, if you will, that plays into the hands of the people that are
seeking to do the kinds of things we are talking about here.
I believe 3 years is long enough. I believe that it is a salutary
thing to say to the lawyers, if you suspect there is fraud, get on with
it quickly and do not play the game of playing it out those extra 2
years and hoping in that extra 2-year period that people will be a
little sloppy in recordkeeping and you will be able to create greater
uncertainty than you would if you acted in a timely fashion. Memories
fade after 3 years, legal suits become much more difficult to pursue
after 3 years. I think the 3 years that are in the bill are
appropriate. For that reason, I am opposing the amendment. I thank the
Chair.
The PRESIDING OFFICER. Who yields time?
Mr. D'AMATO. The Senator from North Carolina would like 3 minutes.
I yield to the Senator from North Carolina.
Mr. FAIRCLOTH. Mr. President, I want to address some of the
amendments that have been discussed on the Senate floor today. First, I
oppose extending the statute of limitations for securities private
rights of action. I think the current 3-year statute is quite adequate.
The Securities and Exchange Commission Act of 1934 put this into law.
That was 60 years ago. It has been unchanged ever since.
Certainly, in this age of computers, fax machines, and the rapid
communications that we have, particularly in the financial community, I
do not see the need to extend the statute that has been more than
adequate for 60-plus years.
Mr. President, there is little evidence that a longer period is
needed. Three years from the discovery of a securities fraud violation
is adequate.
The problem has not been a longer period--the problem has been that
class action suits are now filed literally within hours of a stock
price dropping. I cannot understand why anyone would think that a
longer period is justified with the current practices that we are
dealing with.
I am also concerned that by extending the statute to 5 years, we make
it harder for firms to defend themselves against lawsuits that are
totally baseless to begin with.
Companies will have to search business records that have not been
used for years. They will have to interview employees whose
recollections are hazy. Moreover, they will have to track down
employees that probably no longer work for the firm and probably are on
the other side of the country. All of this is to defend themselves
against a possible claim for 5 years. Business records and
recollections get hazy, and 5 years gets to be a long time.
In my home State of North Carolina, we have a 2-year statute of
limitations, and to my recollection, no one has ever suggested that it
needed to be changed.
With respect to Mr. Sarbanes' amendment, I think the Senate has
covered this ground already. On Friday, the Senate defeated Mr.
Shelby's amendment by a large margin.
Mr. President, S. 240 already has an extremely balanced and
reasonable proportionate liability section. First, it requires that in
the case where other defendants are insolvent, every other defendant
must pay an additional 50 percent of the losses he caused to help pay
the plaintiffs.
Also, the bill takes care of small investors. It covers those with a
financial net worth of under $200,000.
Mr. President, this covers 90 percent of the families in the United
States. There is no need to go further, as Senator Sarbanes is
suggesting. Yes, there are many victims and some victims who are not
made whole. But there are

[[Page S9072]]

very few. If, however, we do not leave this provision alone, there will
be many victims on the other side of the equation, those companies that
are sued simply because they have deep pockets.
These companies are often forced into settling because large lawsuits
loom and it is cheaper to settle. They, too, are victims of a flawed
legal system and untrustworthy lawyers. This needs to be changed. S.
240 changes this, and that is why I am opposed to the Sarbanes
amendment.
The PRESIDING OFFICER. Who yields time?
Mr. BRYAN. I yield to the Senator from Connecticut.
Mr. DODD. I will take 1 minute. Again, for the purpose of debate and
discussion here, my colleagues will not be surprised. The original bill
we put in, of course, did include a statute of limitations very much
along the lines being offered by the Senator from Nevada. I support
this amendment. There is one major difference here between this
amendment and what was originally proposed, and that is the requirement
of reasonable diligence on the part of the investor to determine
whether or not there has been any fraud. Reasonable diligence is not
included in this amendment. I regret that because I think there is a
difference between the investor who must bear a responsibility to keep
an eye out for what is going on and the one that does not pay any
attention whatsoever. The absence of that language is not so fatal that
I oppose the amendment. There is a difference between the original
language and the language here. So you treat both investors alike and
people who engage in this activity bear a responsibility to watch out
for themselves in many ways, which is not included in the amendment.
I think that technology being what it is, the world having changed to
the point where you can actually have pretty sophisticated operations
today, makes it difficult for the average investor to be aware of what
is going on. I support the language Senator Domenici and I originally
had in the bill and, for that reason, I support this amendment.
The PRESIDING OFFICER. Who yields time?
Mr. D'AMATO. How much time is remaining?
The PRESIDING OFFICER. Two minutes two seconds, and Senator Bryan has
4 minutes 44 seconds.
Mr. BRYAN. Thank you very much, Mr. President. This has been an
interesting discussion. Because the time is running out, let me be
brief on several points. For my colleagues who are concerned about the
abuses that lawyers visit upon the system, let me suggest that this
amendment is not at issue. The able chairman and the sponsor of the
bill have crafted a number of provisions--prohibition of referral fees
to brokers, prohibition on attorney's fees paid from SEC disgorgement
funds, and several others.
Let nobody be misled that this bill or debate is about whether you
favor reforms in the litigation system as it deals with attorney abuse.
We have dealt with that issue. I find myself a bit confused. The
distinguished Senator from Utah is arguing against my amendment and he
says if the statute of limitations is extended, those lawyers who file
suits will wait until the last minute. He has extensive experience in
business, and I greatly respect him. The distinguished Senator from
North Carolina, also experienced in business, tells us that the problem
is that lawyers file instantaneously when the stock prices go down. I
must say, I do not think it can be both ways.
The basic problem here is one of concealment. The very nature of
these frauds that are perpetrated upon the investment public involve
the concealment of fraud through any artifice or device possible, and
although there is much new technology out in the market, the technology
changes are not a response to the basic cleverness of those who
perpetrate these frauds in keeping their frauds from the victim.
The North American Association of Securities Administrators and the
SEC point out to a number of those cases--municipal bond frauds,
limited partnership, to cite just two.
Mr. President, I think it also needs to be made note of those who
have looked at this over the years, as Senator D'Amato, Senator
Domenici, and Senator Dodd have all at one point taken the position the
statute of limitations ought to be extended from 2 to 5 years.
I recognize there are those that have a vested financial interest who
want to preclude suits from being filed. I understood that. That ought
not to dictate policy response.
Those who have the public interest and the public trust at issue as
to their only responsibility, the SEC, State Securities Association,
the State Financial Officers, Local Government Financial Officers, all
are together. All of the regulators agreed that in the interest of
fairness, the statute of limitations ought to be extended from 2 to 5
years. That represents both a national perspective, a State
perspective, and a local government perspective.
Unless we subscribe to a conspiracy in history, all cannot be in
league with trial lawyers. They have reached the conclusion, as I have,
based upon the compelling evidence before us, concealment is the
problem, and 2 to 5 years is a reasonable time to provide an
opportunity for plaintiffs to file.
Mr. D'AMATO. Mr. President, this is admittedly incomplete, but let me
just share some statistics from one law firm in New York between 1990
and 1992. One plaintiff was a plaintiff in 14 cases--14. The second
plaintiff was in 10; the third fellow, 7; another fellow, 7; another
fellow, 7. I will not mention the names of these plaintiffs, because I
want to be respectful and not embarrass them. But, I should mention
their names, because I am sure these plaintiffs are not legitimately
aggrieved. It is incredible. I would like to find out how many shares
they owned in each of these firms--I bet not more than one owns more
than 10 shares. These plaintiffs buy shares in multiple companies so
the firm can be designated lead counsel, and then the plaintiffs get
paid a bonus.
That is the kind of practice we have had taking place. I do not think
we should keep this door open for 5 years for these lawyers to find
supposed frauds so they can bring these kinds of cases. That is why I
have to oppose this amendment.
Do I want to hurt those who truly have been hurt? Absolutely not.
When I see one plaintiff in 14 cases in 3 years, and another plaintiff
in 10, and 1, 2, 3, 4, 5, 6 others who have been involved in a
multiplicity of cases during this same period, I say it is time to
change things.
I yield the floor.
The PRESIDING OFFICER. The Senator from Nevada has 1 minute and 18
seconds remaining.
Mr. BRYAN. I think this perhaps has been discussed fully. I want to
acknowledge the leadership the ranking member, Senator Sarbanes,
provided in viewing this legislation. I thank him very much for his
leadership; and the courtesy of the chairman of the committee. Although
we find ourselves in disagreement, his courtesy is much appreciated.
Mr. D'AMATO. I ask for the yeas and nays.
The PRESIDING OFFICER. Is there a sufficient second? There is a
sufficient second.
The yeas and nays were ordered.
Mr. D'AMATO. I move to table.
The PRESIDING OFFICER (Mr. Brown). The question is on agreeing to the
motion to table the amendment numbered 1469, offered by the Senator
from Nevada [Mr. Bryan].
The clerk will call the roll.
The assistant legislative clerk called the roll.
Mr. LOTT. I announce that the Senator from Texas [Mr. Gramm] and the
Senator from Pennsylvania [Mr. Santorum] are necessarily absent.
Mr. FORD. I announce that the Senator from Illinois [Ms. Moseley-
Braun], the Senator from New York [Mr. Moynihan], and the Senator from
Illinois [Mr. Simon] are necessarily absent.
I further announce that the Senator from Rhode Island [Mr. Pell] is
absent on official business.
I further announce that, if present and voting, the Senator from
Illinois [Ms. Moseley-Braun] would vote ``aye.''
I further announce that, if present and voting, the Senator from
Rhode Island [Mr. Pell] would vote ``nay.''
The PRESIDING OFFICER. Are there any other Senators in the Chamber
desiring to vote?
The result was announced--yeas 52, nays 41, as follows:

[[Page S9073]]

[Rollcall Vote No. 283 Leg.]

YEAS--52

Abraham
Ashcroft
Baucus
Bennett
Brown
Bumpers
Burns
Campbell
Chafee
Coats
Cochran
Coverdell
Craig
D'Amato
DeWine
Dole
Domenici
Exon
Faircloth
Feinstein
Frist
Gorton
Grams
Grassley
Gregg
Hatch
Hatfield
Helms
Hutchison
Inhofe
Jeffords
Kassebaum
Kempthorne
Kyl
Lott
Lugar
Mack
McConnell
Murray
Nickles
Packwood
Pressler
Pryor
Robb
Simpson
Smith
Snowe
Stevens
Thomas
Thompson
Thurmond
Warner

NAYS--41

Akaka
Biden
Bingaman
Boxer
Bradley
Breaux
Bryan
Byrd
Cohen
Conrad
Daschle
Dodd
Dorgan
Feingold
Ford
Glenn
Graham
Harkin
Heflin
Hollings
Inouye
Johnston
Kennedy
Kerrey
Kerry
Kohl
Lautenberg
Leahy
Levin
Lieberman
McCain
Mikulski
Murkowski
Nunn
Reid
Rockefeller
Roth
Sarbanes
Shelby
Specter
Wellstone

ANSWERED ``PRESENT''--1

Bond

NOT VOTING--6

Gramm
Moseley-Braun
Moynihan
Pell
Santorum
Simon
So the motion to table the amendment (No. 1469) was agreed to.

Amendment No. 1472

The PRESIDING OFFICER. The question now occurs on the Amendment 1472
offered by the Senator from Maryland, Mr. Sarbanes. Is there a request
for the yeas and nays?
Mr. D'AMATO. I ask for the yeas and nays.
The PRESIDING OFFICER. Is there a sufficient second?
There is a sufficient second.
The yeas and nays were ordered.
Mrs. BOXER. Mr. President, parliamentary inquiry? It was my
understanding that the author of the amendment had the option to take a
minute of time before the vote was taken. I understand that it was part
of the unanimous consent agreement. I want to make sure that I am
correct on that, because I would like that opportunity with my
amendment. I was not certain whether the Senator from Maryland waived
that right or what the parliamentary situation was.
The PRESIDING OFFICER. The Senator is correct. That time is available
if Senators wish to take it. It certainly would be available to the
Senator from California when her amendment is considered.
The question is on agreeing to the amendment of the Senator from
Maryland. On this question, the yeas and nays have been ordered.
Mr. BYRD. Mr. President, the explanation of the amendment was
included in the order. I ask that the explanation be given.
The PRESIDING OFFICER. The agreement called for an explanation, and
the explanation is requested. The Senator from Maryland is recognized.
Mr. SARBANES. Mr. President, I will be very quick.
This amendment takes a provision that is in the bill that departs
from proportionate liability. The bill says that in a situation in
which you have a small investor, with a net worth of less than
$200,000, and if that small investor loses over 10 percent of his net
worth--in other words, $20,000--then you will in effect hold them
harmless, all the defendants will continue to be jointly and severally
liable. I leave the $200,000 net worth provision but eliminate the 10
percent requirement as to the amount of loss, so if someone has a net
worth of $200,000 and loses $5,000, they still would be protected. The
notion of this is to try to protect small investors, and I am very
frank to tell you I think they ought to be protected.
Under the other provision in the bill, they provide--
Mr. CONRAD. May we have order, Mr. President, so we can hear.
Mr. SARBANES. That in an instance of proportionate liability----
The PRESIDING OFFICER. The Senator's time has expired.
The Senator from New York is recognized.
Mr. D'AMATO. Mr. President, this amendment is really another attempt
to knock out one of the most meaningful provisions of S. 240 and double
the amount that defendants would have to pay if there was an insolvent
codefendant. The basis upon which we attempt to give some relief is to
say, yes, for some small investors, if they have under $200,000 and a
10 percent cap. What we are doing here is just knocking it aside. We
have to stop people going after people just because they have deep
pockets, just because they have lots of money. And so I urge my
colleagues to vote no.
The PRESIDING OFFICER. The question now occurs on agreeing to
amendment No. 1472 offered by the Senator from Maryland, Mr. Sarbanes.
The yeas and nays have been ordered. The clerk will call the roll.
The legislative clerk called the roll.
Mr. BOND (when his name was called). Present.
Mr. LOTT. I announce that the Senator from Texas [Mr. Gramm] is
necessarily absent.
Mr. FORD. I announce that the Senator from Illinois [Ms. Moseley-
Braun], the Senator from New York [Mr. Moynihan], the Senator from
Illinois [Mr. Simon] are necessarily absent.
I further announce that the Senator from Rhode Island [Mr. Pell] are
absent on official business.
I further announce that, if present and voting, the Senator from
Illinois [Ms. Mosely-Braun] and the Senator from Rhode Island [Mr.
Pell] would each vote nay.
The PRESIDING OFFICER. Are there any other Senators in the Chamber
who desire to vote?
The result was announced--yeas 29, nays 65, as follows:

[Rollcall Vote No. 284 Leg.]

YEAS--29

Akaka
Biden
Boxer
Bradley
Breaux
Bryan
Cohen
Conrad
Daschle
Dorgan
Feingold
Graham
Harkin
Heflin
Hollings
Inouye
Jeffords
Kennedy
Kerrey
Lautenberg
Leahy
Levin
McCain
Rockefeller
Sarbanes
Shelby
Snowe
Thompson
Wellstone

NAYS--65

Abraham
Ashcroft
Baucus
Bennett
Bingaman
Brown
Bumpers
Burns
Byrd
Campbell
Chafee
Coats
Cochran
Coverdell
Craig
D'Amato
DeWine
Dodd
Dole
Domenici
Exon
Faircloth
Feinstein
Ford
Frist
Glenn
Gorton
Grams
Grassley
Gregg
Hatch
Hatfield
Helms
Hutchison
Inhofe
Johnston
Kassebaum
Kempthorne
Kerry
Kohl
Kyl
Lieberman
Lott
Lugar
Mack
McConnell
Mikulski
Murkowski
Murray
Nickles
Nunn
Packwood
Pressler
Pryor
Reid
Robb
Roth
Santorum
Simpson
Smith
Specter
Stevens
Thomas
Thurmond
Warner

ANSWERED ``PRESENT''--1

Bond

NOT VOTING--5

Gramm
Moseley-Braun
Moynihan
Pell
Simon
So the amendment (No. 1472) was rejected.
Mr. D'AMATO. Mr. President, I move to reconsider the vote by which
the amendment was rejected.
Mr. DOLE. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mr. SARBANES addressed the Chair.
The PRESIDING OFFICER. The Senator from Maryland is recognized.
Mr. SARBANES. Mr. President, as I understand it, under the unanimous
consent request, the Senator from California now has the opportunity to
address the substance of her amendment for 1 minute and the Senator
from New York has 1 minute to reply; is that correct?
The PRESIDING OFFICER. The Senator is correct.
Mr. SARBANES. Mr. President, I make the point of order that the
Senate is not in order, and I request the Chair to obtain order in the
Senate before we go to the explanation of the amendment and the
response thereto, out of courtesy to our colleagues.
The PRESIDING OFFICER. The Senator's point is well taken. The Senate
will be in order. Members will cease conversation.
The Senator from California is recognized.

Amendment No. 1473

Mrs. BOXER. I will be less than 1 minute. Mr. President, I say to my
friends, S. 240 changes many aspects of our securities laws, and many
senior citizen groups have voiced concern.

[[Page S9074]]

My amendment simply says if S. 240 becomes law, the Securities and
Exchange Commission shall report to the Congress in 180 days as to its
impact on senior citizens who are the main targets of securities fraud.
So we are calling on the SEC to come and report to us as to the
impact of this legislation on senior citizens.
I yield the floor.
The PRESIDING OFFICER. The Senator from New York is recognized.
Mr. D'AMATO. Mr. President, we have agreed to ask the Securities and
Exchange Commission to make this statement. We understand the
vulnerability of seniors. We are prepared to accept the amendment
without a rollcall vote.
Mrs. BOXER. Mr. President, I ask for a rollcall vote in accordance
with the previous order.
The PRESIDING OFFICER. The yeas and nays have been ordered.
Mr. DOLE addressed the Chair.
The PRESIDING OFFICER. The distinguished majority leader is
recognized.

Order of Procedure

Mr. DOLE. This is in reference to the remainder of the evening, so it
will be important to every Member. I understand we are not able to
convince anybody to continue on this evening, except there will be
amendments offered and there will be debate this evening, but there
will be no more votes after this rollcall vote.
There will be votes starting at 10:30 a.m. tomorrow: Two votes, under
the same provision. There will be 2 minutes to explain before each
vote, and then following those two votes, I understand there will be
another amendment laid down. Senator Sarbanes will be recognized to lay
down his amendment at about 11:15, I assume. We still very much would
like to finish this bill in the early afternoon. There are five
amendments, I understand, outstanding.
Mr. D'AMATO. It appears there are five amendments.
Mr. DOLE. Again, there has not been any delay on either side. There
has been a lot of good debate all day today. But we would like to
complete action on this bill to move to something else, hopefully
regulatory reform. There will be no more rollcall votes tonight, but
two votes starting at 10:30 a.m.
Mr. ROCKEFELLER. Will the majority leader yield? The Senator was just
interested in when the Medicare Select conference report will take
place?
Mr. DOLE. I hope that will happen this evening. As I understand, the
Senator from West Virginia wanted 20 minutes for debate. We will
dispose of that this evening.
Mr. ROCKEFELLER. I thank the majority leader.

Vote on Amendment No. 1473

The PRESIDING OFFICER. Under the previous order, the question is on
agreeing to amendment No. 1473 offered by the Senator from California,
Mrs. Boxer. The yeas and nays have been ordered. The clerk will call
the roll.
The assistant legislative clerk called the roll.
Mr. BOND (when his name was called). Present.
Mr. LOTT. I announce that the Senator from Texas [Mr. Gramm] is
necessarily absent.
Mr. FORD. I announce that the Senator from Illinois [Ms. Moseley-
Braun], the Senator from New York [Mr. Moynihan], and the Senator from
Illinois [Mr. Simon] are necessarily absent.
I further announce that the Senator from Rhode Island [Mr. Pell] is
absent on official business.
I further announce that, if present and voting, the Senator from
Rhode Island [Mr. Pell] and the Senator from Illinois [Ms. Moseley-
Braun] would each vote ``aye.''
The PRESIDING OFFICER. Are there any other Senators in the Chamber
desiring to vote?
The result was announced--yeas 93, nays 1, as follows:

[Rollcall Vote No. 285 Leg.]

YEAS--93

Abraham
Akaka
Ashcroft
Baucus
Bennett
Biden
Bingaman
Boxer
Bradley
Breaux
Brown
Bryan
Bumpers
Burns
Byrd
Campbell
Chafee
Coats
Cochran
Cohen
Conrad
Coverdell
Craig
D'Amato
Daschle
DeWine
Dodd
Dole
Domenici
Dorgan
Exon
Feingold
Feinstein
Ford
Frist
Glenn
Gorton
Graham
Grams
Grassley
Gregg
Harkin
Hatch
Hatfield
Heflin
Helms
Hollings
Hutchison
Inhofe
Inouye
Jeffords
Johnston
Kassebaum
Kempthorne
Kennedy
Kerrey
Kerry
Kohl
Kyl
Lautenberg
Leahy
Levin
Lieberman
Lott
Lugar
Mack
McCain
McConnell
Mikulski
Murkowski
Murray
Nickles
Nunn
Packwood
Pressler
Pryor
Reid
Robb
Rockefeller
Roth
Santorum
Sarbanes
Shelby
Simpson
Smith
Snowe
Specter
Stevens
Thomas
Thompson
Thurmond
Warner
Wellstone

NAYS--1

Faircloth

ANSWERED ``PRESENT''--1

Bond

NOT VOTING--5

Gramm
Moseley-Braun
Moynihan
Pell
Simon
So the amendment (No. 1473) was agreed to.
Mrs. BOXER. I move to reconsider the vote.
Mr. SARBANES. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mr. HATCH. Mr. President, I am very pleased to offer my enthusiastic
support to the Private Securities Litigation Reform Act of 1995.
I was an original cosponsor of S. 240, and have been deeply
interested in remedying the current abuses in the securities litigation
system--particularly those abuses that have arisen from the misuse of
class action lawsuits to prosecute securities fraud. Companies in Utah
as well as across the country are being adversely affected by unfair
lawsuits brought under the current system.
This is only one area of the law in which litigation abuse has become
rampant, and I commend the many cosponsors of this bill--who number
over 50--for their recognition that it is time to address some of the
significant litigation abuses in this country.
In particular, I would like to commend and thank Senators Dodd and
Domenici for their longstanding leadership on this issue. They have
once again worked long and hard to come up with an excellent bill,
which so many of us have been able to support wholeheartedly. I also
want to thank Senator D'Amato for his support of securities litigation
reform and for his key role in developing the fine version of the bill
reported out of the Banking Committee that we are considering here on
the floor today.
This bill seeks to make securities litigation more fair by curbing
the abusive litigation practices that have been employed by a small
number of plaintiffs' lawyers in securities litigation class action
lawsuits. The hallmark of this small group has been the so-called
strike suit. In such suits, attorneys typically file a securities fraud
lawsuit against a company as soon as possible after the company's stock
drops in price--often regardless of whether there has been any fraud on
the part of the company.
In the complaint, those attorneys accuse the company of securities
fraud, either in issuing the stock or in other company statements, and
seek to obtain damages to make up for the stock price drop--a drop that
is in fact typically caused by nothing more than natural market forces.
Here is one example. In a case--or I should say cases--filed in New
York this past year, Philip Morris had announced that it was reducing
the price of Marlboro cigarettes by 40 cents per pack. [In re Philip
Morris Securities Litigation, 1995 U.S. Dist. LEXIS 92 (S.D.N.Y. Jan.
6, 1995).] Shortly thereafter, the company's price per share lost
nearly 24 percent of its value. That is not so surprising in a reactive
market that could easily have interpreted such action as leading to a
loss in profits, at least in the short term.
What was surprising was the reaction of lawyers. Within just 2
business days, 10 securities litigation lawsuits involve 34 law firms
were filed against Philip Morris. That kind of litigiousness on such
short notice is absolutely astounding. Unfortunately, that kind of
action has become commonplace and is plaguing our finest companies, be
they large corporations or smaller businesses.
It is so widespread that a 1992 National Law Journal article reported
that of 46 stock fraud cases studied, 12 were filed within 1 day and
another 30

[[Page S9075]]

within 1 week of the publication of unfavorable news about the
defendant company. [Source: Milt Policzer, ``They've Cornered the
Market,'' National Law Journal, April 27, 1992.]
In 1990, when L.A. Gear, the sportswear and sneaker manufacturer,
announced lower than expected earnings, one law firm filed 15 lawsuits
just three days after the announcement. [Source: William Lash,
``Securities Law Reform: Too Little, Too Late'' (Center for the Study
of American Business, Washington University, May 1995).]
Particularly hard hit by strike suits have been high technology
computer companies. A Stanford University law professor who conducted a
study of shareholder class actions filed in the early 1980's, most
involving high tech firms, found that every single company that
experienced a market loss in stock price of at least $20 million was
sued. Every single company. [See Janet Cooper Alexander, ``Do the
Merits Matter? A Study of Settlements in Securities Class Actions,'' 43
Stan. L. Rev. 497 (1991).] That is mindboggling. These are some of the
most successful American companies in recent decades, and they are
being besieged with lawsuits. Why could this be?

The answer is found in the securities litigation system. In her
study, the Stanford professor--Professor Janet Cooper Alexander--
concluded that, due to the pressures of the litigation system,
companies were being sued for reasons that had little or nothing to do
with the presence of any real underlying securities fraud and that
companies were being forced into settlements that had nothing to do
with the merits of the case. That is not how the legal system is
supposed to work, and that is now how the securities laws were meant to
be used.
Although the securities laws were designed to punish and prevent
fraud and abuse in the securities market, they are currently being
abused by certain attorneys who seek to make a profit from simple stock
losses. But the securities laws were not designed to insure against
stock loss. Far from it. The securities laws were designed to protect
American investors from fraud.
When most of our major high-technology firms have been the target of
a securities fraud class action lawsuit, and when hundreds of millions
of dollars are spent each year on the litigation costs relating to such
suits, a number of which show no evidence of wrongdoing whatsoever on
the part of the defendant, I think we have to take a long hard look at
this and ask ourselves--is corporate fraud really so widespread that it
exists in every single firm in America? Or is this system encouraging
litigation when there is no evidence of any wrongdoing whatsoever on
the part of the defendant?
I think the answer is clear. I think the reason these suits yield so
many costly settlements has to do with the high costs to companies of
defending against these suits. Due to the threat of exorbitant legal
fees that would be required to defend against such strike suits,
companies will settle securities lawsuits even when those suits are
entirely meritless. The plaintiffs' attorneys then collect a hefty
portion of that settlement through their contingent fees.
While accurate statistics are not available on the breakdown of
attorneys fees, because this information is often not public, the
Banking Committee has heard testimony that plaintiffs in these types of
lawsuits typically receive only 14 cents for every dollar of damages
while the attorneys collect 39 percent of the settlement. Other studies
have suggested even lower recoveries by the shareholders.
This area of legal abuse is truly the work of a few attorneys. It has
been widely reported--both in congressional testimony and in cases and
articles--that only a small number of law firms are involved in these
abusive strike suits. Often, the firms use the same professional
plaintiffs in multiple suits. Some will pay referral fees to get
plaintiffs. Typically, these firms will rush to the courthouse to try
to be the firm that files suit first.
One problem is that, under current law, that firm will often be
designated the lead class counsel and will be able to receive a larger
share of the settlement. Clearly, with so many suits being filed on
such short notice, the law firms involved cannot possible have
thoroughly considered the possible existence of fraud. Instead, these
firms are simply reacting to the skewed incentives in the current
system that reward them for filing a lawsuit first.
These few, rapacious law firms have made this kind of abusive
litigation their specialty. They are the ones who have taken advantage
of the system and harmed our businesses and our economy. Let us all be
perfectly clear in our understanding that the only group this bill
harms is that small group of specialized lawyers.

Their actions come at a very high cost. Companies pay needless
litigation, settlement, and insurance costs with money that could be
going to create jobs or to further research and development. Testimony
before the Banking Committee demonstrated again and again how much
excessive securities litigation costs companies, who must then pass
those costs on.
Let me just mention one example. Testimony was received about a
Silicon Valley corporation named Adept Technology. Adept Technology is
the only U.S. robotics corporation and it employs over 275 people. They
were contemplating an initial public offering of shares, or what is
commonly referred to as going public. They were advised, however, that
due to the threat of litigation if they went public, they would have to
carry a liability insurance policy of $5 million in coverage which
would cost upwards of $450,000 per year. They were advised that they
had to bear that cost, because, as a high-technology company going
public, they would undoubtedly be sued for securities fraud within a
year or two of going public. The upshot of securities litigation
lawsuit abuse is that Adept must pay a litigation tax in order to be a
publicly traded company. The money spent this way could easily pay for
five or six engineers who might be creating new products and helping
keep American business competitive.
By limiting the access of some firms to the capital market--for
example, those that decide they cannot afford to go public--the current
system damages our economy and stunts its ability to grow. The irony is
that, while securities litigation laws were designed to safeguard
investors, in reality the current system ends up hurting investors. It
harms those investors who could have invested successfully in those
companies, had they gone public, and it hurts those investors who could
have earned more profits on their shares, had those companies been more
profitable. In this system, whose intent was to protect investors, the
sad fact is that investors end up getting hurt while certain lawyers
rake in exorbitant fees.
Another cost this abusive system imposes is in the perverse
incentives created when companies decide to disclose less information
about their companies simply for fear that they will inevitably be sued
on the basis of the information. That goes completely against the grain
of the securities laws--all of which were designed to encourage
openness and full information in our securities markets.
These costs must be addressed. We need to eliminate abuses in the
system, so that we can efficiently preserve the core values of the
American stock market--honesty, integrity, openness, and the free
exchange of information. Those values are what gives the American stock
market its respect, both here and abroad.
This act is an attempt to do just that. It represents the culmination
of a bipartisan effort that has evolved over several Congresses. I
believe this bill balances several competing interests. There can be no
question that it ensures that the class action device will remain
available for those shareholders who have been the victims of
securities fraud. It also improves on that class action device so that
injured investors--not a small group of greedy lawyers--can control the
litigation and have a greater share of any settlement.
The bill does this in a number of ways.
First, the bill contains a number of reforms of securities litigation
class actions that are designed to increase participation of the real
shareholder plaintiffs and decrease the control of attorneys. For
example, the court will select the most adequate plaintiff who will
then direct litigation decisions. Securities lawsuits have often been
brought and controlled by a relatively

[[Page S9076]]

small group of lawyers whose incentives are frequently at odds with
those of the plaintiffs and with the goals of the securities laws. This
provision would ensure that litigation decisions are truly in the best
interests of the shareholders and are not merely in the best interest
of the law firm that won the race to the counthouse door.

Where the parties enter into a class action settlement agreement, the
bill requires the disclosure of settlement terms to class members so
that plaintiffs know what they are getting and the attorneys fees
involved.
The bill increases pleading requirements so that a potential
violation must be clearly laid out in a complaint. In securities
actions involving misleading statements or omissions, plaintiffs will
have to specify each allegedly misleading statement or omission and why
it is misleading. Where a defendant's state of mind must be proven,
plaintiffs must plead specific facts supporting that state of mind.
Those provisions make sense. They do not require a plaintiff to prove
the entire case at the pleading stage. Instead, they merely require
that that case be set out and that all the allegations be supported by
sufficient allegations of fact.
The bill also provides for a stay of discovery during the pendency of
any motion to dismiss, unless the court finds that particularized
discovery is necessary to preserve evidence or prevent undue prejudice.
This reduces one of the highest litigation costs that have been used to
badger defendants into settling. This way, some of the merits of the
case can be considered by the court before the defendant can be forced
to settle through the threat of mounting unpayable legal bills.
Another problem the bill addresses is the problem of predictive of
so-called forward-looking statements. Some companies have faced
damaging lawsuits merely on the basis of vague but optimistic
projections that they would do well even though it was clear that the
preduction was somewhat speculative and future-orented. The bill does
so by establishing what has been referred to as a safe harbor to
protect issuers and others from liability under the securities laws for
forward-looking statements.
This provision has been mischaracterized by opponents of this
legislation. It should be clearly understood, however, that
intentionally misleading statements would never be covered by the safe
harbor provision. In addition, a number of other exceptions apply to
insure that investors can be protected adequately from fraud. In this
way, the bill does not permit companies to misrepresent their future
performance or intentions knowingly. It simply permits them to suggest
what they predict their future will entail without being subject to
harassing lawsuits when, for one reason or another, reality differs
from their suggestions.
The bill also reforms joints and several liability in private
securities lawsuits. Often, accounting firms and others involved in
issuing securities have been held liable and ultimately responsible for
fraud that was at best the primary responsibility of the issuing
company. This provision is carefully structured to be fair, and to
ensure that injured investors are protected to the greatest extent
possible. As a general rule, liability would be several only, in
proportion to a defendant's responsibility for wrongdoing.
Significantly, in cases involving knowing fraud, defendants would
remain jointly and severally liable. That is something that opponents
of this bill seem to have missed entirely. Where any defendant engages
in knowing fraud, that defendant can be liable for the investors'
entire loss. This bill does not give any leeway to knowing wrongdoers.
In addition, the bill also employs certain modifications to the joint
and several rule where one defendant's share may be uncollectible.
Those are designed to fairly balance the responsibilities and needs of
plaintiffs and defendants. Thus, it helps improve a shareholder's
ability to gain full recovery, for instance, where the defendant
company has gone bankrupt. In those cases, the other defendants'
contributions will be stepped up.

While this bill will grant some relief to accountants and others who
have been unfairly held jointly and severally liable, at the same time
the bill seeks to ensure that accountants take responsibility for
detecting fraud. The bill requires accountants to put in place
procedures to detect securities fraud. Then, if the accountant
discovers or suspects fraud, the accountant must inform management. If
management fails to act accordingly, the accountant must then notify
the SEC concerning the suspected fraud.
In another provision designed to balance the need to ensure that true
fraud does not go unpunished, the SEC is given authority to prosecute
those who aid and abet securities fraud. By giving this authority to
the SEC, it will not be misused by some of the securities lawyers who
have misused so many other provisions of the securities laws.
As one final point, I emphasize that the pervasive litigation abuses
in securities class action lawsuits are not the only litigation misuses
plaguing our civil justice system. In other areas of the law, reform is
needed just as desperately.
I was very proud to see the Senate pass product liability reform in
May, and I look forward to the passage of securities litigation reform.
I only note that these two areas of legal reform are only the tip of
the iceberg. Americans have been subject to all sorts of litigation
abuses that are imposing unjustifiable costs on our economy, our
businesses, and our workers.
Those costs are passed on throughout the Nation and they cause harm
whenever a company, a school, or a volunteer organization must defend
against outrageous legal claims. That occurs whether the lawsuits are
securities litigation lawsuits, product liability actions, or garden
variety fraud, breach of contract, or other types of civil lawsuits.
I hope to have the Senate consider the problem of the multiple
imposition of punitive damages for the same act or course of conduct.
While it is not my intent to offer to this legislation amendments that
pertain to other, broader civil justice reforms, I see this bill as one
step in a progression of more extensive reforms to improve our
litigation system. I am pleased to see the support for this bill, and I
look to my colleagues for continuing efforts against litigation abuse.
Again, I thank Senators Domenici, Dodd, and D'Amato for their
leadership and commend them for their efforts.
Mrs. MURRAY. Mr. President, I rise today in support of S. 240--the
Private Securities Litigation Reform Act.
Mr. President, Americans need to be assured that their investment are
secure--that our money has been invested in good faith.
And, if an American investor has been the victim of fraud--no matter
how big or little--how rich or poor--they should get equal treatment
under the law.
Guilty parties must be held accountable.
Mr. President, I am not rich. I know that investments are risky.
There is no guarantee that you will make money in the stock market, or
the bond market, or on any investment.
I learned a long time ago--from my parents--that you should not
invest money you cannot afford to lose. So, now as a parent myself, I
am very conservative in my investments.
I believe in personal responsibility.
But, Mr. President, there is an appropriate Federal role in this
process, as well. We cannot abdicate our responsibility to protect the
American people.
And, Mr. president, we in Congress have a unique role in promoting
investor confidence.
We have a duty to encourage critical investments--it is needed for
capital formation--it is needed for economic growth and job creation.
This is especially true in my home State of Washington--where many
consumers invest in small high-technology companies.
For Washington State and for the entire country--we must be vigilant
to ensure proper protection for investors.
That is why I am a big supporter of the work of the Securities and
Exchange Commission: Chairman Arthur Levitt and his staff do a great
job in exposing fraud and protecting even the smallest of investors.
Section 105 of this bill gives the SEC new authority to sue for
damages from securities fraud--so that victims of fraud will recover
more of their losses.

[[Page S9077]]

Right now, Americans--who have been defrauded--have been getting only
pennies on the dollar for their losses. Victims of fraud deserve
better; they deserve more. This bill will help change that.
Mr. President, that is why this bill is so critical. It returns some
common sense to our legal system.
I have been pleased to work with my good friend from Connecticut,
Senator Dodd, on this legislation. He has provided real leadership on
this issue together with the distinguished chairman of the Budget
Committee, Senator Domenici.
This bill is the best of bipartisan cooperation--it passed the
Banking Committee by a vote of 11 to 4, with the majority of Democrats,
voting in favor of this much needed reform.
I have heard from so many people in my home State of Washington on
this issue. Many have told me the present system operates at the
expense of the investors it was intended to protect--everyday,
hardworking Americans.
We have all heard the stores of court cases which diminish
investments. They inhibit job creation. They slow economic growth.
How many times do small business people settle suits out of court
just to make them go away?
And, as I said, how many times do small investors--who have actually
been the victims of fraud--only receive pennies on the dollar of their
investment?
This bill returns power and benefits to the little guy. Sections 101
and 102 of the D'Amato substitute are critical in this regard.
This reform will provide a mechanism for real plaintiffs--instead of
a few lawyers--to take charge of the cases.
That way, the interest of plaintiffs are taken into account.
And, investors are the ones who lose money when fraud occurs--they
have a right to have more of a say in steering the course of
litigation.
Right now, small investors lose out--we all lose out--because company
resources are wasted on settling suits, instead of inventing new
products.
Biotech companies waste their resources on settling nuisance lawsuits
instead of finding the cure for AIDS and breast cancer.
High-technology companies waste their time and resources on legal
fees--instead of giving us a cutting technological edge that will bring
us into the 21st century.
I have heard from many of these companies in my home State. Companies
such as these--new, growing, forward-looking--are a point of civic
pride in the Pacific Northwest. They reflect the high-technology, high-
wage economy of the future.
I have real letters from real people expressing the importance of
this bill. I ask unanimous consent that these letters be printed in the
Record.
There being no objection, the letters were ordered to be printed in
the Record, as follows:

The Northern Group,

Seattle, WA, June 1, 1995.
Senator Patty Murray,
U.S. Senate, Washington, DC.
Dear Senator Murray: I would like to voice my strong
support for Senate Bill 240. This long overdue legislation is
critical to the continued success of our nation's
entrepreneurial underpinnings.
It is unfortunate that our judicial system has allowed a
small group of unscrupulous attorneys to create such havoc
among the community of public companies, particularly given
the evidence that shows the lawyers as primary beneficiaries.
Enough! S. 240 deserves your full support.
Sincerely,
Glenn Kalnasy,
President.
____

IMRE Corp.,

Seattle, WA, June 7, 1995.
Re Senate Bill 240.

Hon. Patty Murray,
U.S. Senator, Washington, DC.
Dear Senator Murray: We urge you to continue to support SB
240, a bill which would reduce the ability of parties to
bring groundless stockholder suits. IMRE Corporation is a
small, publicly held, biomedical company which is seeking to
develop therapeutic products to treat patients with certain
immunologically mediated conditions such as rheumatoid
arthritis and difficulties with kidney transplants. Given the
investor environment for biotechnology companies, wide
fluctuations in a company's stock price can occur because of
rumors, perceptions, and other factors outside the control of
the company.
While there are circumstances in which shareholder suits
should be brought to protect investors, many stockholder
suits which are filed are based solely on a sudden drop in
stock price which may have nothing to do with information
that was or was not disseminated to the public by the
company. Groundless shareholder suits consume vital corporate
resources that should be used for more productive purposes
such as research and development.
If we can be of any assistance in answering questions that
you or your staff may have about this subject matter, please
call me at (206) 298-9400.
Sincerely yours,
Edward M. Yoshida, Esq.,
Director, Legal Affairs.
____

Washington Natural Gas,

Seattle, WA, May 25, 1995.
Hon. Patty Murray,
Senate Russell Building, Washington, DC.
Dear Senator Murray: I am writing to urge your support of
S. 240, the Private Securities Litigation Reform Act of 1995.
This legislation, designed to curb abusive securities suits,
is very important to Washington Energy Company (WECO). We
believe that it is time to restore balance and fairness to
the securities litigation system.
The number of shareholder suits have escalated dramatically
in recent years. Many are unsubstantiated, however, companies
are forced to address them in protracted and extremely costly
processes. In addition, these suits may produce indirect
expenses, such as insurance costs and stock price
fluctuations. As you may know, Washington Energy Company
currently is involved with a shareholder suit. While the
court dismissed the claim as one without merit, we've been
forced to commit considerable resources. These costs will
continue to climb as the decision has been appealed.
S. 240 seeks to establish disincentives against filing
frivolous suits. It encourages voluntary disclosures,
transfers control of suits from lawyers to investors, and
enhances ways to address bona fide shareholder claims.
The Senate Budget Committee soon will be considering the
``Chairman's Mark'' which reflects a good compromise. Your
support would be greatly appreciated.
Sincerely,
William J. Wortley,
Vice President Public Affairs.
____

Key Technology, Inc.,

Walla Walla, WA, June 5, 1995.
Re S. 240, The Securities Litigation Reform Act.

Hon. Patty Murray,
U.S. Senate, Hart Senate Office Building, Washington, DC.
Dear Senator Murray: I am writing to express my support for
the provisions in the Private Securities Litigation Reform
Act (S. 240). This reform will benefit the growth of
companies, like Key Technology, that provide jobs and
economic expansion in our local communities. In addition, the
proposed reform will provide protection for those who have
invested these companies.
It is important that we work to provide a more fair basis
on which to establish the degree of liability for defendants,
to provide a safe harbor for statements by a company
regarding future economic performance, and to put an end to
litigation suits filed without any substantial evidence.
I am pleased to see that you are a co-sponsor of S. 240 and
encourage your continued support of this needed reform. Thank
you for taking a leadership position on this important issue.
Sincerely,
Tom Madsen,
President.
____

Whirlpool Corp.,

Benton Harbor, MI, May 24, 1995.
Hon. Patty Murray,
U.S. Senate, Washington, DC.
Dear Senator Murray: As a company with a constituent
facility in Redmond, I am writing to request your support of
the Securities Litigation Reform Act. Senate Banking
Committee Chairman D'Amato's substitute for S. 240 is
scheduled to be marked up in the Senate Banking Committee on
Thursday, May 25, 1995.
We especially request your support for a ``safe harbor''
which would correct the ``chilling effect'' on voluntary
disclosure of information to investors by providing companies
with protection from investor lawsuits based upon forward-
looking information. Disclosures that would be protected by a
safe harbor provision are predictive statements on business
trends, possible price movements and other market factors
which investors want and expect companies, such as Whirlpool,
to provide.
Unfortunately, the threat of private securities litigation,
should these predictions not be realized, is causing many
companies to hesitate before sharing such information. A
strong safe harbor provision will help correct the chilling
effect on disclosure and will force American businesses to
redirect their focus away from baseless lawsuits. In turn,
this will allow us to redirect scarce resources toward
competing more effectively in the global market place.

[[Page S9078]]

Thank you for your consideration of this important issue.
Please support the Securities Litigation Reform Act with a
safe harbor provision as it is considered in future Committee
and Floor action.
Very truly yours,
Robert Kenagy,
Associate General Counsel.
____

Darwin Molecular Corp.

Bothell, WA, June 6, 1995.
Hon. Patty Murray,
U.S. Senate, Washington, DC.
Dear Senator Murray: I am writing on behalf of Darwin
Molecular, a start-up biotechnology company based in Bothell.
It has come to our attention that the U.S. Senate is
contemplating SB 240, a bill that would dramatically reduce
the ability of lawyers to file meritless stockholder
lawsuits. I am writing to encourage your continued support
for this bill.
As you well know, high technology business and especially
biotechnology companies face many uncertainties on the road
to produce development. This is an industry whose potential
may continue to be in jeopardy because of the inherent
difficulty of balancing out the financial opportunities and
obligations against truly innovative scientific and medical
productivity. It is difficult enough to raise sufficient
funding to do useful and beneficial research without the
additional burdens imposed by other types of ``risks'' often
from individuals who may be looking to enhance their own
situations. New companies in particular are vulnerable to
these risks.
Reform legislation in this area would be extremely
beneficial not only to assist companies but most importantly
to provide a more productive marketplace for the ultimate
beneficiary, the consumer.
We thank you for your support of this bill.

Diane Isonaka,

Director, Scientific and
Business Development.
____

Conductive Rubber

Technology, Inc.,

Bothell, WA, June 6, 1995.
Hon. Patty Murray,
U.S. Senator, Washington, DC.
Dear Senator Murray: As the President of a small, high-tech
company in Bothell, Washington, I am concerned about the S.
240 legislation drafted to curb the extravagant number of
meritless lawsuits filed against high tech companies. As it
now stands, the bill has been altered from its original
intent and purpose and no longer provides the ``safe harbor''
provision for forward-looking and predictive statements by
companies.
S. 240 is a modest, reasonable and balanced piece of
legislation which assured the right of private action as a
deterrent to fraud. The high-tech community has acted very
responsibly in their desire to provide access for truly
defrauded investors to sue for recovery. The U.S. House of
Representatives has already passed Securities Litigation
Reform Legislation by a veto-proof majority of 325 to 99.
I am asking you to support the original intent and purpose
of S. 240 by cosponsoring the bill and further to add your
vote to strengthening amendments for safe harbor, without
which reform will be meaningless for the high-tech community.
Please give your unqualified support to this important
bill. I look forward to the successful passage of S. 240 as
soon as possible.
Best regards,
R.B. Lawrence,
President.
____

Lease Crutcher Lewis,

Contractors,

Seattle, WA, June 8, 1995.
Hon. Patty Murray,
U.S. Senate, Washington, DC.
Dear Senator Murray: I understand that the U.S. Senate is
considering a bill (SB 240) which would reduce frivolous
stockholder lawsuits. As both a small investor and an
employee of a company that provides services to high
technology companies, I strongly encourage your support of
such legislation.
High-tech companies, particularly high risk biomedical
companies, are susceptible to what amounts to extortion by
attorneys bringing meritless lawsuits. By nature, their stock
values fluctuate widely, and almost any sharp drop can
trigger a stockholder suit.
Officers of high-tech companies have become so fearful of
stockholder suits that disclosure of information of any type
can be a risky proposition. Such an intimidating business
atmosphere stifles the entrepreneurial spirit found in most
young high-tech enterprises.
Unscrupulous attorneys have stunted the growth of high-tech
companies, have cost the small investor money, and have made
themselves rich in the process. Again, I strongly encourage
your support of SB 240, as such legislation is a positive
step in limiting stockholder suits to only those cases which
have merit.
Respectfully,
Mark Johnson,
Division Manager, Biomedical Projects.
____

Eagle Hardware & Garden,

June 2, 1995.
Hon. Patty Murray,
Russell Senate Office Building,
Washington, DC.
Dear Senator Murray: I want to express our thanks and
appreciation for your vote for Senate Bill 240. It is very
important for businesses and employees in the state of
Washington.
Eagle Hardware & Garden, Inc. had a basically unfounded
class action suit filed against the company by Steve Berman.
It was a frivolous suit and the insurance company will settle
the case, but we know these suits can damage a fledging
company and affect the price of the stock for all
shareholders.
Again, your vote for Senate Bill 240 is greatly
appreciated.
Very truly yours,
David J. Heerensperger.
____

Hi-Rel Laboratories,

Spokane, WA, June 2, 1995.
To: Senator Slade Gorton, Senator Patty Murray.
Dear Senators: I would like to take a moment and thank each
of you for being cosponsors for S. 240.
As you know, we need strong laws to protect the rights of
the people, However, business needs support on many laws
which cause great harm.
We urge you to continue to support this bill and hope that
you will work hard to convince others that this bill as
written, needs to be passed and not a watered down version,
Hi-Rel Laboratories, Inc, and the American Electronics
Association will always stand behind a person who in fact has
a legitimate suit against a company, but to have the suits
for no reason other than to be able to settle a suit on an
un-earned basis just to make sure the defense lawyers have
income, borders on fraud.
Thank you again for the support.
Respectfully,
John Level,
VP Gen. Manager.

Mrs. MURRAY. I want to read just a portion of another letter I
received. It is from Michael Darling, who wrote:

Digital Systems International settled two securities cases
in 1993 for payments of cash and stock valued at $7.5
million, not including litigation expenses. The costs of the
litigation forced the company to lay off 30 workers--and to
ask those remaining to accept pay cuts.

Mr. President, I have also heard from the opponents of the
legislation. I have listened carefully to every argument against the
bill. I have worked to make this legislation good for all the parties
involved.
In fact, I have studied this issue for more than 2 years with members
of both sides of the aisle--in a strong bipartisan fashion--to make
this bill work for the American people.
As we debate this bill, there are ads running in the papers and
inflammatory attack ads being broadcast by both sides in this debate.
Given the lengthy debate we have had on this bill, I find these
campaigns very disturbing.
Let me say to these groups, Mr. President, they are not serving
anyone's purpose but their own.
They are not helping craft legislation that works for America--they
are slugging it out trying to seek advantage.
I stand here on the floor today and say clearly to both sides of this
issue--
Keep things in perspective. Use some common sense. Stop attacking and
start cooperating.
Mr. President, I have seen some unfortunate--and inaccurate--
statements made about this bill. Many have referred to an editorial
from a Seattle newspaper which overlooked some of the bill's most
important provisions.
First, their editorial states that high-profile, meritorious cases of
securities fraud could not be brought once S. 240 becomes law.
That is simply not true. The SEC can always fight fraud, and they do
so with vigor and clear purpose.
This point is made quite clearly in the committee report:

None of the provisions in S. 240 affects the SEC's ability
to bring enforcement actions.

Second, the editorial stated the bill contains a loser-pays
provision.
Again, this is untrue. S. 240 does not contain any fee-shifting
provisions.
It merely modifies rule 11 of the Federal Rule of Civilian Procedure.
And, rule 11 does not sanction anyone just for losing their case.
This provision actually favors the small investor. S. 240 states that
the sanction does not apply if it will cause undue financial hardship
on the sanctioned party.
Mr. President, this editorial has been challenged aggressively by
public officials, business people, and many constituents in my State. I
now ask unanimous consent to have printed in the Record a series of
letters-to-the-editor to Washington newspapers on this issue.
There being no objection, the material was ordered to be printed in
the Record, as follows:

[[Page S9079]]

[From Seattle Post-Intelligencer, June 19, 1995]

Editorial on Fraud Law Shows Homework Wasn't Done

(By John Level)

Your June 2 editorial regarding Sens. Patty Murray and
Slade Gorton was certainly not good reporting. Both senators
became co-sponsors of S. 240 because the bill is long
overdue. If you had done your homework, you would have found
the following information.
High-growth companies have become targets of abusive
securities litigation. There are about 300 lawsuits filed in
each of the past few years. Ninety-three percent are settled
before they go to court with settlements that amount to $8.6
million or a $2.4 billion a year industry.
The only reason that these cases are settled out of court
is that it is cheaper in the long run. The trail lawyers are
the only big winners in these suits. In many cases, over 60
percent of the settlement goes to the legal system.
Nearly seven out of 10 investors surveyed by Public Opinion
Strategies for the National Investor Relations Institute say
they want the bill passed. The only people who do not want
the bill passed are the lawyers, people who make a living
from lawsuits and some people who have not read the bill or
even seen it. I suspect that is the case with you.
Your editorial was written without a full understanding of
the bill, and your remarks about Murray are fully uncalled
for. A retraction should be made to her. While I don't agree
with Murray all of the time, she certainly made a good
decision in supporting this bill and it appears that she
``read'' it.
____

[From Seattle Times, June 7, 1995]

Investors Retain Right To Sue

(By Scott G. Hallquist)

The misleading information printed by The Times concerning
securities litigation reform has been a disservice to Times
readers. In both an editorial published May 29 and a news
article published May 31, Times writers incorrectly suggested
that the proposed legislation will strip investors of their
right to sue companies for fraud. This is simply not true.
The legislation to be considered by the Senate represents a
negotiated compromise that preserves an investor's right to
sue, while implementing reforms intended to curb lawsuits
that are filed without reasonable basis.
By providing a safe harbor for forward-looking company
forecasts made in good faith, the legislation is expected to
improve the quality of information companies can make
available to investors.
Most troubling to me was a personal attack upon the
integrity of Sen. Patty Murray by a local attorney who
specializes in securities litigation. Unlike her accuser, I
do not believe that Sen. Murray can be ``bought off'' and
applaud her courage for voting in favor of this legislation.
In our securities markets, the ability of individual
investors to sue for damages for fraud by securities issuers
does provide an important incentive for companies to provide
accurate and timely information to investors. In approving
the legislation now being considered by Congress, Sen. Murray
and other members of Congress balanced the need to preserve
redress for investors in fraud cases, against the need for
public companies to be able to discuss future performance
without the fear that unanticipated developments will
invariably result in costly and protracted litigation.
Growing public companies are primary engines of job
creation and economic growth in our state. Appropriately
balanced legislation such as the securities litigation reform
bill supported by Sen. Murray is a reasonable step that need
not be feared by individual or public investors.
____

[From Seattle Times, June 19, 1995]

Reform Measure Doesn't Limit Liability of Accounting Firms

(By John A. Moga)

Your May 29 editorial and your May 31 news report on
congressional efforts to repair a securities litigation
system that is drowning investors and businesses in a sea of
unmerited lawsuits included a number of disturbing factual
errors.
Your report that legislation (S. 240) introduced in the
Senate by Republican Sen. Pete Domenici would relieve
accounting firms of liability is simply not true. Rather, the
bill establishes a system of proportionate liability that
would base liability on a defendant's degree of
responsibility for any plaintiff damages. In cases of
``knowing fraud'' where the defendant was guilty of
deliberate misconduct, the defendant would remain liable for
the total amount of damages assessed by the court. By the
way, this provision applies to all defendants--not just
accounting firms as you suggest.
The report also erroneously says that the bill eliminates
the ``fraud on the market'' provision of current law. This,
too, is untrue. S. 240 retains fraud on the market--which
enables shareholders to recover even when they are unaware of
the erroneous statement--an important provision for
investors.
Finally, I was distressed by the flat assertion in your
editorial that the proposed reform measures strip investors
and government of their right to sue. Neither the Senate bill
nor a measure passed by the House earlier this year does any
such thing. I believe you should re-visit this issue and make
sure you have all the facts right. Your readers deserve it.
____

Lawyers the Only Ones to Reap Benefits

(By Austin L. Wolff)

Your editorial in defense of the current class-action
securities law is very wrong. You have not looked at the real
issue. Stockholder class-action suits enrich the lawyers at
the expense of the stockholders and the consumer.
Most suits against small public companies are never proved
but instead settle out of court because, regardless of right
or wrong, it is cheaper to pay than to defend. A word that
would describe this type of settlement is ``blackmail.''
Carol Bartz, president of Autodesk, a CADD software company,
explained it this way at President Clinton's business
conference. A lawyer, using the name of a couple of
shareholders, instigated a class-action suit. Autodesk's
lawyers reviewed the claim and concluded that the company was
not in the wrong but advised the company to pay $10 million
because it would cost $100 million to defend. That is called
a ``negotiated'' settlement.
In a recent stockholder case against Egghead, the Issaquah-
based software retailer, I personally heard the judge approve
a similarly arrived-at settlement that paid the suing lawyer
about $700,000, which computes out at the rate of $700 per
``billable'' hour. That is almost 200 times minimum wage.
The two stockholders in whose name the suit was brought had
lost a total of less than $1,200. The managers who were
running the company at that time paid nothing because they
were covered by a company guaranty. The total cost to the
company, and thus to the rest of the stockholders, was in the
order of $3 million, plus the loss of much management and
employee time. Among those stockholders, and thus among those
who in essence paid, was my nephew, a minor, whose savings
account for college was invested in the company. . . .
The judge implied that settlements like this would
encourage more such suits. Woe to small businesses, woe to
the investing public.
There are adequate criminal laws regarding fraud that are
handled by state and federal agencies; let those agencies
prosecute. . . .
____

[From Seattle Post-Intelligencer, June 16, 1995]

Editorial Fails To Acknowledge the Need to Reform Existing Law

(By Dan Grimm)

As state treasurer and a member of the State Investment
Board, I read with interest your June 2 editorial on
securities litigation reform. The SIB has been involved in
costly and protracted litigation involving allegations of
securities fraud. (Your editorial noted the SIB's recent
recovery of $1 million in the settlement of a securities
fraud case. And like some corporations, the SIB has had to
deal with hastily drafted lawsuits filed by attorneys who
were out to make a quick buck.
I was disappointed that you failed to acknowledge the need
to reform the securities litigation law. The fact is, many
organizations representing investors and government entities
support legislation designed to deter costly and frivolous
litigation while preserving vital investor rights and
remedies.
Your editorial correctly pointed our that legislation under
consideration by Congress could unduly burden investors and
limit their access to the courts. That's why I sent a letter
to our Senate delegation urging them to oppose legislation
that does not strike an appropriate balance between the
concerns of investors and corporations.
I have been in contact with Sen. Patty Murray to share
those concerns, and contrary to the assertions of your
editorial, she shares the view that securities-reform
legislation must protect the rights of investors as well as
address the problems of frivolous lawsuits. In fact, Murray
was instrumental in making sure that legislation under
consideration by Congress will reasonably protect the rights
of small and large investors. With her assistance, the
draconian ``loser pays'' provision was tempered in the
Banking Committee. I am optimistic that Murray will be
successful in her efforts to see that other anti-investor
language is moderated or even removed from the bill as it
moves through the Senate.

Mrs. MURRAY. Mr. President, this system needs reform. S. 240 will
retain the rights of investors to bring suit if they have been the
victims of securities fraud.
At the same time, it will clamp down on the abusive suits that prey
on investors and small business owners.
It is an honest effort to reduce the excessive costs to investors and
our economy. It enjoys bipartisan support.
It is a good compromise.
For those of us concerned about the rights of investors--let me be
very clear.
It is absolutely critical to me that businesses and entrepreneurs
remain bound to their obligations to maximize the return-on-
investment--to seniors

[[Page S9080]]

and average American families who invest in stocks and bonds.
I will not support a bill which goes further than this in changing
the current system.
I will not support a loser pays provision.
I will fight efforts to remove the protections for small investors in
the bill.
I will reject any legislation that takes away the SEC's powers to
fight fraud.
These are lines I will not cross, and in fact, no Senator should
cross.
They set my standards publicly for Senators offering amendments
today--and Senators who go into conference with the House.
As it stands now, S. 240 brings rationality and perspective and
common sense to the system.
And, I urge its swift adoption.
Mr. LEAHY. Mr. President, I have many questions about S. 240, the so-
called Private Securities Litigation Reform Act. This bill is intended
to curb frivolous lawsuits by private investors claiming securities
fraud. But I fear that this bill would also stifle honest lawsuits. I
cannot support a bill that will infringe on the rights of innocent
securities fraud victims.
Our Federal securities laws provide enforceable legal rights to the
Securities and Exchange Commission (SEC) and private investors. The
ability of private investors to enforce their rights is indispensable
to enforcing our Federal securities laws. As one former Commissioner of
the SEC said:

Because the Commission does not have adequate resources to
detect and prosecute all violations of the federal securities
laws, private actions preform a critical role in preserving
the integrity of our securities market.
A perfect example of this critical role is the securities fraud case
involving Charles Keating, known for his role in the largest savings
and loan debacle in U.S. history. After Keating, as president of the
Lincoln Savings & Loan of California, sold uninsured bonds in the
lobbies of Lincoln branches by making misrepresentations, private
investors sued under our Federal securities laws. A class of 23,000
investors recovered $240 million of their $288 million in losses
through private securities fraud actions.
I am sure that the vast majority of professionals working in the
securities industry strive to provide accurate information and there
are some abuses of the private securities litigation system. This
legislation would, undoubtedly, curb many of these abuses. For
instance, I support the bill's provisions to prohibit lawyers from
paying bounties to professional plaintiffs, those who buy a few shares
of different stocks so they may bring shareholder suits for a living.
But this bill also overreaches beyond these abuses and penalizes
innocent investors. Under S. 240, for example, aiders and abettors
cannot be sued in private securities actions, even if they knowingly
assist securities fraud. The defendants in the Charles Keating case
whose liability depending on aiding and abetting, which included
Keating's lawyers, accountants and consultants, paid over $100 million
to fraud victims.
In addition, the nonpartisan Congressional Budget Office estimated
that enactment of S. 240 would increase costs to the SEC for
enforcement actions by $125 million to $250 million over the next 5
years. In these tight budget times, I am very doubtful that Congress
will increase the SEC's budget by such a large amount. As a result,
enforcement of our securities laws will suffer.
I have heard from many Vermonters, including the commissioner of the
Vermont Department of Banking, Insurance and Securities--the State's
chief securities regulator--who feel S. 240, as reported by the Senate
Banking Committee, would severely limit private actions under
securities laws. Vermont institutional investors, such as the Towns of
Colchester, Brandon and Stowe, Teamster Union Local 597, the Vermont
NEA, AFSCME Council 93, the Vermont State Labor Council and others have
also alerted me to their opposition to this bill. Vermont consumer and
senior groups including Vermont Public Interest Research Group, Council
of Vermont Elders, Older Women's League, Southwestern Vermont Council
on Aging and the Central Vermont Council on Aging opposed S. 240.
Moreover, the Commissioner of the SEC--the national's chief securities
regulator--also has significant concerns about S. 240 as reported.
I believe we are moving too fast on this bill, ignoring the SEC and
others concerns. That is why I supported a motion on the Senate floor
to refer this bill to the Senate Judiciary Committee, of which I am a
member. This legislation would make significant changes to Federal
litigation rules and should be carefully reviewed by the Senate
Judiciary Committee before the full Senate votes on it. Unfortunately,
that motion was defeated.
Thousands of Vermonters and millions of Americans depend on our
Federal securities laws to protect their investments, savings and
retirements. These laws are just too important to add questionable
curbs that may protect companies and individuals who commit fraud at
the expense of innocent investors. Unless this bill is significantly
amended, I will vote against it.

Unanimous-Consent Agreements

Mr. D'AMATO. Mr. President, I would like to propound a number of
unanimous consent agreements which we have worked out in order to
accommodate Members and in order to move the legislative flow.
I ask unanimous consent that Senator Bryan be recognized to offer an
amendment relative to aiding and abetting on which there will be 1 hour
for debate to be equally divided in the usual form, and any second-
degree amendments may be limited to half that debate time, and must be
relevant in the first degree they propose to amend.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. D'AMATO. Mr. President, I further ask that following the debate
on the Bryan amendment, the amendment be laid aside, and Senator Boxer
be recognized to offer an amendment relative to lead plaintiffs, on
which there will be 90 minutes for debate equally divided in the usual
form, and any second-degree amendment be limited to half the debate
time and must be relevant to the first-degree amendment they propose to
amend.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. D'AMATO. Mr. President, I further ask that at 9:15 on Tuesday,
the Senate resume consideration of S. 240, and that there be time for
30 minutes of debate on the Bryan amendment to be equally divided in
the usual form, and following that debate there will be 30 minutes for
debate on the Boxer amendment, to be equally divided in the usual form.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. D'AMATO. Mr. President, I ask unanimous consent that at the hour
of 10:15 on Tuesday, the Senate proceed to vote on or in relation to
the Bryan amendment, to be followed immediately by a vote on or in
relation to the Boxer amendment, with 2 minutes prior to the second
vote for Senator Boxer in the usual form, to set forth an explanation,
1 minute on each side.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. D'AMATO. Mr. President, I further ask, following the two stacked
votes at 10:15, Senator Sarbanes be recognized to offer an amendment
relative to safe harbor.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. D'AMATO. Mr. President, I ask unanimous consent that Senator
Abraham be recognized, and that the time he utilizes be charged against
the time that we would be allocated in considering the Bryan amendment.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. ABRAHAM. Mr. President, I rise today to express my support for S.
240. This legislation makes a number of important reforms that are
designed to prevent abuse in litigation connected with the issuance of
securities.
This in turn will improve the investment climate in this country,
which will make it easier to start businesses and create jobs.
These changes will be made without, in my judgment, in any way
undermining protection for investors against genuine fraud or other
misconduct by issuers.
There is one particular set of reforms the bill would make on which I
would like to focus. The bill will require courts to sanction attorneys
who file

[[Page S9081]]

frivolous pleadings. This reform will apply when the lawyers file
frivolous proceedings on behalf of plaintiffs and on lawyers filing on
behalf of defendants. I think it is an extremely sound proposal which
should command strong support from Members on both sides of the aisle.
Indeed, as the Presiding Officer will recall, he himself offered a
similar provision with regard to the product liability issue some weeks
ago, a provision which I supported and which a majority of Senators
supported at that time.
Mr. President, under present law, Federal Rules of Civil Procedure
No. 11 requires all attorneys to have some factual and legal basis for
filing any claim or defense. If attorneys violate this requirement,
courts may award sanctions against the violator. Right now, however,
the courts are not required to take any action against the violator.
The changes proposed by S. 240 would do three things. First, they
would require courts to find, at the end of all securities cases,
whether any attorney violated rule 11. Second, the court would then
have to impose a sanction if they found a violation. Third, that
sanction would presumptively require the attorney in violation to pay
the other side's attorney fees, although the court could select another
sanction if the attorney shows that the presumptive sanction would
impose an undue burden on the sanctioned party.
Two important features of this reform should particularly be known.
First, the court would only be obligated to impose a sanction on an
attorney who filed a frivolous pleading; that is, a pleading wholly
lacking in a legal or factual basis. This reform will in no way kill
legitimate litigation.
Second, the sanction is paid by the person signing the frivolous
pleading; that is to say the attorney responsible, not by the party the
attorney is representing.
The Supreme Court itself has noted the securities litigation has been
especially prone to be misused as a tool to extort settlements. It is
Congress' responsibility to do something to put an end to this abuse.
The rule 11 provisions are one mechanism this legislation puts in place
to do just that.
This leaves me, however, with one problem about what we are doing
here this week. It is certainly good we are taking serious steps to
enact litigation reforms that will address abusive practices in the
securities area. Similarly, it was good we took similar steps to enact
reforms that address abusive practices in the field of product
liability, which we did just a few weeks ago.
I ask, Mr. President, why are we stopping here? Brokerage firms,
accountants, and manufacturers, and the people who buy their products
or use their services, are far from the only victims of our out-of-
control civil justice system.
Our homeowners, farmers, volunteer groups, charitable organizations,
small businesses, State and local governments, architects, engineers,
doctors and patients, employers and employees, are likewise injured by
our civil justice system on a daily basis.
Every day, lawsuits suffering from the same defects as those the
sponsors of this litigation have brought up are filed against all of
these people.
Indeed, when their plight was brought to the attention of the Senate
during the product liability debate, along with several other
colleagues, I led an effort to broaden the reforms that bill would have
made.
We wanted reforms that would benefit all Americans. A majority of
Senators supported many of our broadening proposals, yet the will of
that majority was frustrated by opponents of broader reform, who made
clear they would filibuster a bill that made civil justice reforms that
would benefit all Americans. I considered mounting a similar effort in
conjunction with this bill, but sponsors of this legislation were
assured that it would suffer a similar fate. Therefore, and with some
regret, I yielded to their request not to offer broadening amendments
at this time. However, I do not believe the Senate can forever avoid
confronting the fact that, while it is making important reforms in
specific areas of civil justice, it is refusing to make broad-based
reforms that will help small businesses, charities, and other
institutions that form the backbone of this country. I, for one, will
continue to bring these reforms up, again and again. I will not rest
until broad-based reforms to our civil justice system are adopted.
Mr. President, I think it is important that we take the actions we
take today to protect the people in the securities industry and people
who are shareholders in corporations that are affected by these
frivolous lawsuits, just as I think it was appropriate that we take
those actions in conjunction with product liability actions. But across
America, every day the small business people, the farmers, and the
charitable organizations in our communities suffer from frivolous
lawsuits brought against them. They suffer when the joint and several
liability provisions cause deep pockets to end up paying for damages
they had virtually no connection with creating. I think it is time for
across-the-board reforms that protect, not just certain areas of civil
justice, but all areas.
For those reasons, I intend to come back to this Chamber at a future
time to offer some of those types of reforms, and I look forward to
working with other Members of the Senate who agree we need them and we
need them soon.
I yield the floor.
The PRESIDING OFFICER. The Senator from New York is recognized.
Mr. D'AMATO. Mr. President, I commend my colleague from Michigan
because he does have, and has had, a number of proposals that I believe
would have strengthened the bill. He has agreed, in order to get
legislation that would pass and begin to address some of the
shortcomings in the present system, to withhold them--I deeply
appreciate that--so we can make some progress. I fully anticipate in
the future he will go forward with those legislative initiatives.
Mr. President, I yield the floor.
The PRESIDING OFFICER. The Senator from Nevada is recognized.

Amendment No. 1474

(Purpose: To amend provisions relating to liability for aiding or
abetting violations)

Mr. BRYAN. Mr. President, I send an amendment to the desk and ask for
its immediate consideration.
The PRESIDING OFFICER. The clerk will report.
The bill clerk read as follows:

The Senator from Nevada [Mr. Bryan], proposes an amendment
numbered 1474.

Mr. BRYAN. Mr. President, I ask unanimous consent that reading of the
amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:
On page 127, strike line 20 and all that follows through
page 128, line 15, and insert the following:

SEC. 108. AUTHORITY OF COMMISSION TO PROSECUTE AIDING AND
ABETTING.

(a) Securities Act of 1933.--Section 20 of the Securities
Act of 1933 (15 U.S.C. 77t) is amended by adding at the end
the following new subsection:
``(n) Prosecution of Persons Who Aid or Abet Violations.--
For purposes of subsections (b) and (d), any person who
knowingly or recklessly provides substantial assistance to
another person in the violation of a provision of this title,
or of any rule or regulation promulgated under this title,
shall be deemed to violate such provision to the same extent
as the person to whom such assistance is provided. No person
shall be liable under this subsection based on an omission or
failure to act unless such omission or failure constituted a
breach of a duty owed by such person.''.
(b) Securities Exchange Act of 1934.--Section 20 of the
Securities Exchange Act of 1934 (15 U.S.C. 78t) is amended--
(1) by adding at the end the following new subsection:
``(e) Prosecution of Persons Who Aid or Abet Violations.--
For purposes of paragraphs (1) and (3) of section 21(d), or
an action by a self-regulatory organization, or an express or
implied private right of action arising under this title, any
person who knowingly or recklessly provides substantial
assistance to another person in the violation of a provision
of this title, or of any rule or regulation promulgated under
this title, shall be deemed to violate such provision and
shall be liable to the same extent as the person to whom such
assistance is provided. No person shall be liable under this
subsection based on an omission or failure to act unless such
omission or failure constituted a breach of a duty owed by
such person.''; and
(2) by striking the section heading and inserting the
following:

``SEC. 20. LIABILITY OF CONTROLLING PERSONS AND PERSONS WHO
AID OR ABET VIOLATIONS.''.

(c) Investment Company Act of 1940.--Section 42 of the
Investment Company Act of 1940 (15 U.S.C. 80a-41) is amended
by adding at the end the following new subsection:

[[Page S9082]]

``(f) Prosecution of Persons Who Aid or Abet Violations.--
For purposes of subsections (d) and (e), any person who
knowingly or recklessly provides substantial assistance to
another person in the violation of a provision of this title,
or of any rule, regulation, or order promulgated under this
title, shall be deemed to violate such provision to the same
extent as the person to whom such assistance is provided. No
person shall be liable under this subsection based on an
omission or failure to act unless such omission or failure
constituted a breach of a duty owed by such person.''.
(d) Investment Advisers Act of 1940.--Section 209(d) of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-9) is
amended--
(1) in subsection (d)--
(A) by striking ``or that any person has aided, abetted,
counseled, commanded, induced, or procured, is aiding,
abetting, counseling, commanding, inducing, or procuring, or
is about to aid, abet, counsel, command, induce, or procure
such a violation,''; and
(B) by striking ``or in aiding, abetting, counseling,
commanding, inducing, or procuring any such act or
practice''; and
(2) by adding at the end the following new subsection:
``(f) Prosecution of Persons Who Aid or Abet Violations.--
For purposes of subsections (d) and (e), any person who
knowingly or recklessly provides substantial assistance to
another person in the violation of a provision of this title,
or of any rule, regulation, or order promulgated under this
title, shall be deemed to violate such provision to the same
extent as the pension to whom such assistance is provided. No
person shall be liable under this subsection based on an
omission or failure to act unless such omission or failure
constituted a breach of duty owed by such person.''.

Mr. BRYAN. Mr. President, I yield myself such time as I may require.
Mr. President, our colleagues will recall, under the unanimous
consent agreement propounded by our distinguished chairman, that this
is an amendment that deals with restoring aiding and abetting
liability. The amendment which I offer is to restore the state of the
law as everyone in America believed it to be prior to last year's
Supreme Court decision in a case involving Central Bank of Denver
versus First Interstate Bank of Denver.
With one stroke of the judicial pen, so to speak, this 5-to-4
decision wiped out private liability for crooked professionals who aid
and abet, but who are not defined as primary participants in securities
fraud under the provision of the law. What we are talking about are
those people who counsel and assist in furtherance of the perpetration
of fraud. Some of them are disreputable lawyers--who ought to be
disbarred. Others are accountants. Others are professionals who, by
virtue of their own affirmative action, have aided and contributed to
the securities fraud involved.
Aiding and abetting liability was the primary method through which
professional assistors of fraud--these lawyers, accountants and
investment banks--have historically been held liable to defrauded
investors. In my view, if this decision is allowed to stand without
action having been taken by the Congress, it will seriously weaken and
erode the effectiveness of our Federal securities laws because it
overturns three decades of established precedent in which Federal
courts have permitted private investors to sue aiders and abettors of
securities fraud.
Every circuit court of appeals to address the issue--11 circuits--has
upheld aiding and abetting liability. Investors have long had the right
to sue accountants, brokers, bankers and lawyers who, by their actions,
have assisted the primary perpetrators of such securities schemes. This
right of action has played a critical role in compensating those
investors who have been swindled in major financial frauds of recent
times. I will comment a bit more on that in just a moment.
The damage caused by the Central Bank decision is immeasurable.
Dozens, if not hundreds, of participants in securities frauds have had
cases against them dismissed on the basis of the Central Bank decision.
An unknown number of other cases against clear wrongdoers have been
precluded, based on the Central Bank decision. And the deterrence of
securities fraud, which ought to be one of the prime reasons for the
law in the first place, has suffered a major blow. The problem is that
in immunizing wrongdoers who substantially assist fraud, we clearly
give fraudulent behavior a green light.
I cannot think of any argument that could be advanced, as a matter of
social or economic justice, in which we ought to reward fraudulent
behavior on the part of those who aid and abet a primary perpetrator in
a securities fraud to the detriment and loss of literally tens of
thousands of innocent investors. Under the Central Bank case, it is
simply OK to help others commit securities fraud so long as you are
careful not to make any direct statements or direct the wrongdoing.
I know a good bit of animosity is directed to America's lawyers, and
I must say that I am not happier than anybody else who has seen in
America, speaking generically, a proliferation of a lot of litigation
that ought not to be filed. If I might cite an outrageous case in my
own State that has nothing to do with the issue currently, but it is
the kind of case that just engenders real hostility on the part of the
public--and count me on the part of those being hostile. It is a person
who, under the workers compensation law in our State, had been denied
recovery. Subsequent to that, he drove his automobile into the worker
compensation office in the Las Vegas area, nearly killed several people
who were working, and then a year or two later had the temerity to file
a lawsuit against the SIS, which is the worker compensation system in
Nevada, blaming the system for causing his action in doing extensive
damage to the building and literally terrifying those employees.
So I am not unmindful of the hostility that has been generated. But
this is a case that rewards lawyers. If you are clever enough not to
make a direct statement or participate directly in the wrongdoing, then
you are home free. You do not go to jail, you go home free. I cannot
imagine that is the sort of thing that we want to encourage.
To put this into some historical context, if this decision had been
on the books earlier, the substantial recoveries by the victims in the
Keating case--which is the Lincoln Savings and Loan case--would have
been impossible. As you will recall, in the Lincoln Savings and Loan
case, the primary wrongdoer was the nefarious Charles Keating. By the
time the class action is filed, Mr. Keating is bankrupt.
There was a judgment entered of about $240 to $262 million in the
class action. But about half, a little more than $100 million of
recovery for the 23,000 bondholders, would have been denied to these
23,000 bondholders. These are people who are totally innocent, have no
culpability at all other than the fact that they relied upon some
representations made at the savings and loan which they kind of thought
was a local, home-based outfit. Everybody knew each other. Mr. and Mrs.
Smith would be greeted every morning. ``Have you walked your dog? Your
cat?'' ``How are the grandkids doing?'' That sort of thing. But the
aiders and abettors responded with more than $100 million of recovery
that otherwise would have been denied to these 23,000 bondholders. Had
this case, Central Bank, been the law, that $100 million recovery would
not have been possible.
These are aiders and abettors, people who have assisted in the fraud.
Again, if the scales of justice mean anything, should those who have
aided and abetted, in terms of their own conduct, not be held
responsible, to respond to damages incurred by their conduct to those
who are totally innocent?
That is what this whole issue is all about. Federal District Judge
Stanley Sporkin, a former SEC enforcement chief, in his opinion in the
Keating case asked critical questions that sum up the theory behind
aiding and abetting:

Where were the professionals when these clearly improper
transactions were being consummated? Why didn't any of them
speak up or disassociate themselves from the transactions?
Where also were the outside accountants and attorneys when
these transactions were effectuated?

In a subsequent speech, Judge Sporkin elaborated,

For this kind of massive, very sophisticated fraud to have
occurred, it required the complicity of certain professionals
that we all know of--CPAs, lawyers and appraisers. I am
suggesting that perhaps these professionals did not discharge
their responsibilities to the broader public interest.

The responsibility of corrupt accountants and lawyers for the savings
and loan debacle of the 1980's can hardly be overstated. On August 12,
1992, then SEC Chairman Richard Breeden wrote Senator Domenici:

Securities fraud actions against accounting firms that
participate in or assist in fraudulent activity by not
properly

[[Page S9083]]

preforming their auditing functions are important to the
maintenance of high standards of quality and integrity among
public accounting firms.

Parenthetically, I should say I think the public has a right to
expect that level of integrity.
Then Chairman Breeden went on to say:

Investors rely heavily on the accuracy of all of audited
financial statements of public companies as do creditors,
investment analysts and others. When others fail to adhere to
generally accepted accounting principles or generally
accepted auditing standards, many innocent parties may
suffer. Indeed, inaccuracies in audited financial statements
of banks and savings and loans have contributed billions of
dollars in investor losses during the past 10 years. Public
policy should seek to maintain high expectations of integrity
and accuracy in the performance by others and accountants of
their tasks.

Mr. President, that is what the Republican Chairman of the SEC had to
say about the importance of holding aiders and abettors responsible for
their actions.
A number of notable statistics from cases brought by the Federal
Government highlight the importance of holding professional assistors
liable: In 1990, the RTC banned six of the largest accounting firms--
Ernst & Young, Deloitte & Touche, Coopers & Lybrand, Peat Marwick,
Arthur Andersen, and Grant Thornton--from receiving thrift
reorganization work because they were being sued by the Government for
failure to perform their audits of S&L's in a professional manner.
According to the General Accounting Office, when all categories of
professionals are considered, Resolution Trust Corp. attorneys
suspected wrongdoing on the part of one or more professionals
affiliated with over 80 percent of failed thrift institutions. More
than 80 percent. There is some indication that professionals were
responsible, and attorneys in particular were suspected of wrongdoing.
In one astounding example of the pervasive role of accountants in S&L
wrongdoing, a Federal judge stated in 1992 that:

[The Office of Thrift Supervision] advised the court that
approximately one-third of the 690 financial institutions
that have failed were audited by Ernst & Young or its
predecessor.--Director of the Office of Thrift Supervision v.
Ernst & Young, 786 F. Supp. 46, 52 (D.D.C. 1992).

In a speech before the American Bar Association, Timothy Ryan, former
Director of the Office Thrift Supervision, stated:

The federal agencies have uncovered actionable abuse in a
third of the failed thrifts investigated to date. It is clear
that many of the unlawful scheme hatched at those failed
institutions could not have proceeded without the active
assistance of professional service providers, especially
lawyers. They have abandoned their ethics for expediency, and
sold their good name to satisfy their greed.

Mr. President, the point I seek to make is that unless the law is
changed, that kind of conduct, so articulately denounced, will remain
unpunished and innocent investors will be unable to recover from
lawyers, accountants, and other professionals.
So, Mr. President, the loss of aiding and abetting liability
undermines fundamental protections for investors and the securities
markets. Many defrauded investors will not recover their losses
because, typically, the perpetrator of the fraud is insolvent, in jail,
or has fled by the time the case is completed. In addition to wiping
out private actions against aiders and abettors, the Central Bank case
calls into question the SEC's own enforcement actions against aiders
and abettors.
S. 240 fails to restore aiding and abetting liability for private
actions. Although it authorizes the SEC to take action against aiders
and abettors who knowingly violate the securities laws, it effectively
eliminates the ability of the Commission to proceed against reckless
professional assistors, which is now permitted by most courts.
This amendment, which was drafted with the technical assistance of
the SEC, reverses the Central Bank decision, and restores the status
quo ante. It restores the law to the way it was prior to the Central
Bank case last year by restoring aiding and abetting authority in
individual securities fraud actions and clarifying the SEC's authority
to pursue aiders and abettors for reckless and knowing fraud.
The original sponsor of securities litigation reform, Senator Dodd,
has recognized the importance of aiding and abetting liability and has
urged a response to Central Bank. At a May 12, 1994, hearing before
this committee, he said:

In my view, aiding and abetting liability has been
critically important in deterring individuals from assisting
possible fraudulent acts by others. Until the Supreme Court
changed the landscape a few weeks ago, aiding and abetting
liability was an important tool in ensuring honesty and high
professional standards by individual professionals who
facilitate access to the securities markets. In my view, we
need to respond to the Supreme Court's decision promptly and
I emphasize promptly.

In a February 27, 1995, ``Dear Colleague,'' Senator Dodd and Senator
Domenici reiterated that a reversal of Central Bank should occur ``as a
part of a comprehensive package to fix our broken securities class
action system.'' In his additional views to the committee report on S.
240, Senator Dodd again expressed his concern about the restoration of
aiding and abetting liability for private actions.
Even the Supreme Court majority opinion in Central Bank which was
based solely on the lack of the actual words ``aiding and abetting'' in
the statute, recognized the need for restoring aiding and abetting
liability. In the words of Justice Kennedy:

To be sure, aiding and abetting a wrongdoer ought to be
actionable in certain instances. The issue, however, is not
whether imposing private liability on aiders and abettors is
good policy, but whether aiding and abetting liability is
covered by the statute.

The SEC argued strongly in the Supreme Court that ``aiding and
abetting'' liability was critical to enforcement of the Federal
securities laws. Since the Court decision, the SEC has repeatedly urged
Congress to restore aiding and abetting liability. Most recently, on
April 6, 1995, SEC Chairman Arthur Levitt testified before the
Subcommittee on Securities that:

Unless another theory of liability can be applied in a
particular case, 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. Such
legislation should also clarify the Commission's ability to
use the aiding and abetting theory of liability where it is
not expressly provided by statute.

Levitt previously testified that, of 400 pending SEC cases, 80 to 85
rely on aiding and abetting theories of liability.
I must say, Mr. President, as I read the current version of S. 240,
even the ability of the SEC to recover for aiding-and-abetting
liability seems to be more narrowly confined than those circumstances
where there is knowledge or scienter involved.
On May 25, 1995, the day S. 240 was voted out of the Banking
Committee, Chairman Levitt again raised the aiding-and-abetting issue,
noting that, while some of the SEC's authority had been restored, ``a
more complete solution is preferable.''
The bar association of the city of New York--undoubtedly the leading
organization of plaintiff and defense attorney's in the securities
field--has taken an extremely strong position on this issue. As Mr.
Sheldon Elsen testified in the House,

Let me turn, finally, to lawsuits against lawyers,
accountants, underwriters and other professionals. Experience
in these cases has shown that securities frauds do not
succeed very often without the aid of such professionals, but
that it is almost impossible to prove the professionals'
involvement . . . The Association feels particularly strongly
about this matter, which involves lawyer misconduct. In our
view, the primary problem of abuse by lawyers lies in the
conduct of securities lawyers involved in fraudulent
transactions.

That is a scorching indictment by the most distinguished and
knowledgeable and the most sophisticated bar in America dealing with
this subject. And it deals with lawyer misconduct. Thus our purpose
here simply is to deter lawyer misconduct on the part of the plaintiffs
bar, and that we certainly ought to do. If the changes which our able
chairman has crafted to rule 11 do, indeed, deal with misconduct in the
form of frivolous actions by the plaintiffs bar, why would we not also
want to impose liability on lawyers, accountants and others who are
helping

[[Page S9084]]

to assist in the perpetration of this fraud? The policy disconnect, Mr.
President, I find difficult to comprehend.
Mr. President, as I have indicated previously, the securities
regulators in their respective States also support this proposition.
And it seems to me that in light of the indications that we have seen
that the amount of securities fraud is estimated to be about $40
billion annually--the SEC has commented recently in an article which I
shared with our colleagues on Friday that securities fraud is not
something out of the 19th century; it is very much alive, very
sophisticated--the sophisticated aiders and abettors, the clever
lawyers, the smooth accountants who assist in this fraud behind the
scenes, they ought to be brought to the bar of justice, and economic
recovery for innocent victims is the way of achieving that economic
justice.
I yield the floor and reserve the remainder of my time.
The PRESIDING OFFICER. Who seeks recognition? The Senator from
Connecticut is recognized.
Mr. DODD. Mr. President, I thank the Chair. I will try not to take a
great deal of time on this. I have said privately, Mr. President, I am
going to hire the Senator from Nevada as my lawyer if I am ever in need
of a lawyer, after the Senator from New York apparently.
I have known the Senator from Nevada for a long time. No one is
better in crystallizing an argument and making a thoughtful
presentation on a point. Certainly we have seen his incredible ability
here over the last several days on a number of amendments that he has
offered to this bill.
On this particular issue of aiding and abetting, he has once again
displayed those skills which should probably earn him a distinguished
reputation as great debater of causes. But we disagree on this
amendment. I say that because we agree on aspects of this. The tendency
of these debates on amendments is to lose sight of where you agree.
One of the things this bill does do is, of course, extend to the SEC
the authority to bring aiding and abetting cases, which was not the
case prior to this legislation as a result of Supreme Court decisions
so we have strengthened it.
Second, when it comes to the issue of fraud, knowing intentional
fraud, we do not change anything in effect. The joint and several
provisions apply. People who are knowingly involved in those
activities, all can be subject to the maximum financial penalties.
What we are talking about here is a much lower standard and one that
would apply, as the amendment indicates, to knowing or reckless
behavior. It is a result of that standard and the amendment of the
Senator from Nevada that I would take exception, particularly the
recklessness standard. The knowing standard, if you could really
tighten that up to some degree and actual knowledge, and so forth, I
think you might have something that we would like to talk about. But
the recklessness standard here is a standard that is so difficult to
apply that it in effect would destroy the attempts of this legislation
to mitigate against this explosion of unwarranted litigation in the
area of securities.
Let me just, if I can, Mr. President, as a matter of background point
out that until the Central Bank of Denver case was decided last year,
many circuit courts recognized aiding-and-abetting liability.
I want to come back to that point in a minute because one of the
points I wish to make here is that it is being implied or suggested if
we adopt this amendment, all we are doing is going back and just
applying the law as it was prior to the Central Bank of Denver case. I
would argue very strenuously here in a moment that, in fact, we are
going by and applying a different standard than existed prior to the
decision on Central Bank of Denver and, in fact, going further back
than I think the courts at least in many cases would like to see us go.
At any rate, that was the situation. Prior to Central Bank of Denver
there was a controversy about aiding-and-abetting. In that case, the
Supreme Court decided that there was no aiding and abetting liability
for private lawsuits involving fraud and that in fact that idea evolved
as a result of section 10(b), rule 10b-5. And many can argue, in fact,
that probably was the case; that we had not legislatively determined
that, this has been more of an evolution of an idea over the years, and
so the issue comes back to us if we want to expand it.
The Supreme Court did not believe that section 10(b) intended to
cover aiding-and-abetting liability. You can argue about that, but that
is how the Court ruled. Providing for aiding and abetting liability
under section 10(b) would be contrary to the goal of this legislation.
I remind my colleagues to come back to the central goal of this
legislation, and that is to reduce the number of frivolous lawsuits
that are being brought under 10(b) and to try and avoid what my
colleague from New York, I think, has appropriately described as sort
of a hijacking scheme that goes on where you end up with these
settlements because if you do not settle, the small percentage of risk
that you may end being held accountable causes people to settle for
amounts vastly in excess of their involvement.
The case we talked about earlier today where Peat Marwick in a
$15,000 contract to go in and do an audit of some banks books were
brought to trial, and it went on for some time. The courts ultimately
decided that in that case Peat Marwick was not responsible, did not
meet the aiding-and-abetting standard, but the legal fees for Peat
Marwick for a $15,000 contract, which is a nothing contract, were in
excess of $7 million. That is what it cost that company over a $15,000
contract.
We want to stop that kind of stuff. That should not have to go on,
frankly. And that is where the crux of this whole legislation is
designed to try and minimize those sorts of problems.
At any rate, the Supreme Court said in the Central Bank of Denver
case--and it is highly appropriate that we have as the Presiding
Officer this evening the distinguished Senator from Denver--from
Colorado. I apologize--in that case litigation under rule 10b-5
presents a danger of vexatiousness--it is a mouthful, that word,
``vexatiousness''--different in degree and kind and would require
secondary actors to expend large sums even for pretrial defense and the
negotiation of settlement.
That is exactly what happened to Peat Marwick--a $15,000 contract, a
$7 million legal fee. Peat Marwick, it was painful to them. They
probably passed that cost on to a lot of other clients out there, so it
is not as if somehow the company just absorbed it, as bad it was for
them, but there is where you get the economic ripple effect as a result
of a lawsuit where again the allegation is that they were marginally
involved, aiding and abetting on a $15,000 contract. The Court said no,
they were not ultimately but not before that company spent $7 million
to defend against a $15,000 contract.
The Supreme Court did not consider whether the SEC was able to bring
cases for aiding and abetting, and the committee print, as I mentioned
a moment ago, restores aiding and abetting liability for the Securities
and Exchange Commission. Allowing the SEC to bring cases against aiders
and abetters strikes, we think, a balance. It allows the SEC to punish
bad actors without opening the door to a flood of unnecessary
litigation.
So, Mr. President, that is the reason that we reluctantly oppose the
amendment of our colleague, because it does change the standard.
Now, let me come back to the point I made earlier, because the
suggestion that all we are doing is making whole the situation prior to
the Supreme Court's decision on the Central Bank of Denver case is just
not borne out.
Let me point out that prior to the Central Bank of Denver the courts
across the country adopted different types of scienter, standards, for
the aiding-and-abetting context. Some courts concluded that, as with
the primary violators, recklessness was sufficient.
I would say to my colleague from Nevada he is correct in that. There
were courts that did hold the recklessness standard adds enough to net
someone under the aiding-and-abetting provisions. Other courts, I would
point out just as quickly, Mr. President, held that where the alleged
primary violators did not have an independent duty

[[Page S9085]]

to disclose information to the plaintiff, proof of actual knowledge of
the fraud was required. Still other courts adopted what the SEC
described to the Supreme Court as the sliding scale approach to aiding
and abetting under which the degree of scienter required for aiding-
and-abetting liability varied depending upon the nature of the
defendant's conduct and the presence or absence of a duty to disclose.
So here we had a lot of different standards being used. Recklessness
was one, in some courts. But in many others, it was actual knowledge or
sliding scales.
The Seventh Circuit had essentially eliminated aiding-and-abetting
claims by requiring proof of all elements of a primary violation of
10b-5 in order to impose liability.
Accordingly, expanding to private suits the provision included in the
committee print would not provide any real protection against abusive
claims. And that approach, if we adopted this amendment, would actually
represent, as I said a moment ago, an expansion of liability, not a
return to pre-Central Bank of Denver status quo, because it would
overrule those decisions that had set the higher standard. That is,
actual knowledge before you can get a minor player in terms of the
aiding-and-abetting clause.
Again, my point is--and again I say this with all due respect to the
author of the amendment--throughout the amendment it is knowing or
reckless, and on the reckless standard, let me, just for the purpose of
my colleagues, point out how difficult that standard is to apply.
Again, this is citing some work that has been done on the issue. I will
footnote them accordingly.
Let me begin with this. The prevailing reckless standard does not
limit, as I am sure the case can be made, liability to highly culpable
wrongdoers, and that is the suggestion here. Again, the highly culpable
wrongdoers are not covered. We get them under this bill, in fact. And
this is where the problem comes with recklessness. The vagueness of the
recklessness standard is one of the principal reasons that joint and
several liability should be modified, and that is what we do in this
bill.
In practice, the legal standard does not provide protection against
unjustified or abusive claims because juries can and do misapply the
standard. Juries today have considerable difficulty in distinguishing
innocent mistakes, negligence, and even gross negligence--none of
which, by the way, Mr. President, is actionable under rule 10b-5--from
recklessness.
So, while to the layman recklessness sounds like something else,
recklessness can actually be a minor mistake, a mathematical mistake.
In effect, you could get netted under the recklessness standard.
One commentator observed:

The courts have been less than precise in defining what
exactly constitutes a reckless misrepresentation. This
imprecision has resulted in ad hoc, if not arbitrary,
recklessness, if I may use the word, determinations. The
result is that the actual and potential parties to section
10(b) and rule 10b-5 actions cannot predict with any degree
of certainty how a trier of fact will characterize alleged
conduct and, thus, whether it may serve as the basis of
liability.

I am quoting from Johnson, ``Liability for Recklessness
Representations and Omissions'' under section 10(b) of the Securities
and Exchange Act of 1934 in the Cincinnati Law Review, 1991.
Let me quote further from Commissioners of the SEC. Commissioner
Beese argues:

Because the standard of recklessness is a vague one and its
interpretation by both the court and the jury is difficult to
predict accurately, defendants that may not have acted in a
reckless fashion cannot be assured of being vindicated at
trial.

Former SEC Chairman Breeden observed:

The problem is that almost anything can be said to be
reckless.

He goes on to say:

It is all too easy to apply 20/20 hindsight to a complex
problem and conclude that someone behaved less than
perfectly.

The standard of reckless behavior has tended to expand in recent
years as courts and even at times the SEC tried to reach out to
compensate investor losses. Even the SEC, with all its expertise, has
misjudged the standard. In a case arising out of a 1982 bankruptcy of
one of an accounting firm's clients, the SEC alleged a violation of
rule 10b-5 asserting that the firm had acted recklessly in failing to
comply with the professional standards in an audit. A Federal court
rejected every claim, including the claim that the firm had acted
recklessly. The court found that the SEC's claim ``involved complex
issues of accounting as to which reasonable accountants could reach
different conclusions. It follows that no finding of fraud or
recklessness can rationally be made in that case.''
That was SEC versus Price Waterhouse, decided in 1992.
Mr. SARBANES. Will the Senator yield for a question?
Mr. DODD. I will be glad to yield.
Mr. SARBANES. Does your bill allow for any private right of action
against an aider and abettor?
Mr. DODD. No, it does not.
Mr. SARBANES. Not even knowingly. I have been listening to the
Senator very carefully, and he is talking about recklessness.
Mr. DODD. Right.
Mr. SARBANES. My own view is, if you are reckless, you ought to be
able to be reached as an aider or abettor. I understand the Senator is
opposed to that. The Senator's bill, as I understand it, would not
allow a knowing aider and abettor to be reached by a private securities
suit; is that correct?
Mr. DODD. Let me say to my colleague, the problem with just the word
``knowing'' is that it is far too vague a word. I said at the outset of
my remarks that if you could apply where you had actual knowing,
knowledge of the fraud itself, then you might raise a different
standard. I said that at the outset of my remarks.
My problem is your amendment says ``knowing or recklessness.'' I
focused my remarks on the recklessness side of this because under the
amendment, you could be nabbed under the recklessness standard. Again,
as I pointed out, with a series of court decisions----
Mr. SARBANES. The bill does not have a knowing standard in it; is
that correct? The bill leaves out aider and abettor altogether in a
private action.
Mr. DODD. No. What we have said here is where you have the knowledge,
knowing fraud involved here, then obviously the whole question of
joint-and-several liability applies. In almost every case an aider and
abettor, where you have that kind of knowledge situation, would be
snagged. Yes, we do cover that in that situation.
What they are attempting to do with this amendment is to reach a
different level. So when you have that fact situation, clearly as we
made that case all the way through this debate dealing with
proportionate liability, we do not allow proportionate liability to
apply. Where you meet that standard of the actual knowledge and intent
to defraud, then you get everybody involved.
Mr. SARBANES. The aiding-and-abetting issue is separate from the
joint-and-several issue, is it not?
Mr. DODD. De facto they end up not being separate. If this amendment
were adopted, that is not the case, because you have a reckless
standard here which is a much, much lower threshold than the other ones
we require you to meet.
Mr. D'AMATO. Will the Senator yield for a question?
Mr. DODD. I will be glad to yield.
Mr. D'AMATO. If one is tangentially involved, let us say an
accountant, and knowingly and intentionally participates in a fraud, is
that person, regardless of their portion of liability, held jointly-
and-severally liable?
Mr. DODD. Absolutely. Absolutely.
Mr. D'AMATO. So that a person, would be considered as a minor
participant, an aider and abettor, as a result of this amendment. We
have made very clear, that if they knowingly and intentionally
participate in fraud, that defendant can really be held as a primary
culprit, so to speak; he or she would be libel for all the damages
under the present situation; is that not true?
Mr. DODD. My understanding is that is correct.
Mr. D'AMATO. Of course, as it is clearly stated in the S. 240 the
Securities and Exchange Commission, still has the ability to go after
those for their intentional wrongdoing.
Mr. DODD. That is there, also. We include that in the bill
specifically. As I pointed out a minute ago, everybody said let us go
back to Central Bank of Denver. Prior to that case, different standards
were being used on the aiding and abetting provisions. Some

[[Page S9086]]

courts did recklessness. Obviously, if you are an attorney for the
plaintiff in that case, of course you are going to allege that. In
effect, you have wiped out our efforts in the bill to try and minimize
that. So you are back in the negotiation phase again. But up to the 93
or 98 percent of these cases people are settling out of court. That is
what every good attorney would advise his clients. They would say,
``You are exposed to the whole cost on this. With the reckless
standards being so low, my advice is you better settle, because if do
you not, that is a pretty low standard.'' In a sense, you get snagged
for the whole amount. We are trying to avoid that.
Mr. SARBANES. You let the knowing aider and abettor go free. How can
you justify that? I will argue the recklessness with you, and I
understand that is a more complicated issue. But how can you let the
knowing aider and abettor go free?
Mr. DODD. It is not a question of letting him go free. I think in the
most recent colloquy the Senator from New York and I had, we made it
clear that where you have that standard, I think we establish very
clearly what the intent of the legislation is.
I say to my colleague, having to face the law firm of Sarbanes and
Bryan or Bryan and Sarbanes is difficult under any set of
circumstances. But the word ``knowing'' alone is a rather loose term in
terms of what constitutes knowledge. So I say to my colleague from
Maryland that if, in fact, it is the desire of the Senator from Nevada
and the Senator from Maryland to offer an amendment that truly raises
the level of knowledge to a point where legal definitions would apply,
I, for one--not speaking for my colleague from New York or others--
would entertain such an amendment. That is what you have done. The word
``knowing''--you have to be much more definitive.
Mr. SARBANES. If the Senator will yield further, I am trying to point
out what you have done with the bill. In other words, what you have
done with the bill is let a knowing aider and abettor go free. Now, I
cannot, for the life of me, understand how you can possibly justify
that. A knowing aider and abettor cannot be reached and held liable
when a securities fraud is perpetrated. How can you justify that?
Mr. DODD. That is not what the case is here. You are applying two
different standards here. When you have actual knowledge and intent to
defraud, again, we do not allow an aider and abettor, in that case, to
get off the hook at all. It is a different standard you are applying
here.
Mr. SARBANES. I would refer the Senator to pages 131 and 132 of his
bill, where they define a knowing securities fraud. ``Defendant engages
in knowing securities fraud if that defendant, (1), makes a material
misrepresentation with actual knowledge that the representation is
false * * *. And it also requires other things.
The central--
Mr. DODD. To reclaim my time, that is under the section dealing with
proportionate liability. Again, my colleague is fully aware that,
obviously, it would only apply it to proportionate liability. When you
have the knowledge and intent to defraud, then the joint and several
applies.
Mr. SARBANES. Will the Senator repeat that again?
Mr. DODD. We do not apply proportionate liability when you have the
knowledge and intent to defraud. You cannot escape and get
proportionate liability. Joint and several applies.
Mr. SARBANES. By your own admission, under this bill, an aider and
abettor cannot be reached in a private action suit, is that correct?
Mr. DODD. An aider and abettor can be reached through Government
action, but not private action, correct. Under the standards you have
set here--
Mr. SARBANES. How can you justify that?
Mr. DODD. To go back to the point I am trying to make to my colleague
over and over again, under the proportionate liability standard--which
is the section we are talking about here--recklessness is such a low
standard.
Mr. SARBANES. You are not even reaching the aider and abettor; you
only go to recklessness.
Mr. DODD. My colleague from Maryland has a fundamental and inherent
objection to proportionate liability.
Mr. SARBANES. I am trying to get over that. I am trying to point out
that there are a lot of other problems with this bill.
The PRESIDING OFFICER. The time the Senator has been allocated has
expired.
Mr. BRYAN. Mr. President, I would be happy to yield more time. How
much time remains?
The PRESIDING OFFICER. There are 11 minutes 27 seconds remaining.
Mr. BRYAN. I yield five more minutes to the Senator.
Mr. SARBANES. What I am trying to point out to my colleague is that
there is a joint and several liability problem in this bill. We have
tried to deal with that--unsuccessfully. There was a statute of
limitations problem in this bill. I think these are large problems.
These are what the independent objective groups have been writing to us
about.
Now we are addressing the aider and abettor problem. The way you have
written the bill, aiders and abettors in a private action go scot-
free--whatever the test is. They go scot-free on recklessness and on
knowingly. The way you have written the bill --
Mr. DODD. I say to my colleague, if he will yield, the way you have
written your amendment, what you are asking us to support is that you
would apply that standard of reckless behavior, which is an unfair
standard to apply.
Mr. SARBANES. I do not think it is unfair. But I do want to make this
point. The question is, who is going to go scot-free? For years, we
caught aiders and abettors on recklessness and knowingly, on both of
those standards. That was the law.
Mr. DODD. Not in every court, no, no. There were courts that set a
much higher standard in this country than that. Actual knowledge was
required by many courts in the country prior to the decision by Central
Bank of Denver. You are going back and weakening a standard applied in
many courts.
Mr. SARBANES. If the Senator will yield, the general prevailing
standard on reaching aiders and abettors was, in effect, thrown out in
the Denver case.
Mr. DODD. I point out to my colleague--and you may not have been here
when I pointed out the cases where the SEC used sliding scales in
cases. Other courts used actual damages.
Mr. SARBANES. Fine. I am prepared to concede to the Senator that, in
certain jurisdictions, there were sliding scales and all the rest. But
you have eliminated all of that.
Mr. DODD. I did not, the Supreme Court eliminated that.
Mr. SARBANES. You do not have a sliding scale encompassing knowing
standard. You have knocked it out, and all the aiders and abettors are
dancing their way down the street.
Mr. DODD. I did not do it, the Supreme Court did it.
The PRESIDING OFFICER. The time of the Senator has expired.
Mr. BRYAN. I am enjoying this colloquy. If the Senator requires more
time, I yield three more minutes.
Mr. SARBANES. The final point is that, obviously, tomorrow we are
going to do the so-called safe harbor. I call it pirate's cove because
it is being carved out here for all the sharks and barracudas to find
sort of a comfort and solace----
Mr. DODD. Including the buccaneer barristers.
Mr. SARBANES. The Senator from Nevada and I have conceded that we
want to do some things about frivolous suits. We are trying to get at
the extraordinary lengths to which you have gone to immunize from
liability and, therefore, throw the burden upon innocent investors. I
think the Senator from Nevada put it very well the other day. He said
this is a ``Trojan horse.'' It is waving the pennant of frivolous
suits, but hidden within the Trojan horse are lots of other things as
well. That is exactly the case. That is what we have been trying to, in
effect, lay out in the course of this debate.
Mr. DODD. If my colleague will yield on that point, would you not
admit that the present situation, in the absence of passing this
legislation, is certainly as big a Trojan horse as anything he might
describe with this legislation being adopted?
Mr. SARBANES. What I want to do is pass a good piece of legislation.
I want to avoid the comment that was at the end of the article that I
put in the Record the other day about the pendulum swing. And that in
the course of

[[Page S9087]]

swinging the pendulum too far, what you are going to require are some
investors to actually be defrauded and not gain any recovery before you
will straighten out the law. We ought to straighten it out now and not
allow that situation to happen. We tried to address the issue of joint
and several liability versus proportionate liability. We had this
extension of the statute of limitations, and we are doing aiders an
abettors today, and tomorrow we are going to do the ``pirate's cove.''
The Senator from California has, I think, some very worthwhile
amendments to offer as well. This is not a balanced bill. That point
needs to be made and needs to be made very clear. This is not a
balanced bill. There are certain problems we want to get at, and we
ought to do that. This bill overreaches. It is unbalanced. I think we
will pay a high price for it.
The PRESIDING OFFICER. The Senator from New York has used all of his
time.
Mr. BRYAN. Mr. President, I will yield back the remainder of my time.
I want to thank my colleague, Senator Sarbanes, for making the point
that I think needs to be made here, that if the recovery is premised
and predicated upon aider and abettor recovery; whether the conduct is
intentional, whether it is knowing, or reckless, no recovery. The only
way in which you can attach liability is under an aiding and abetting
theory. That is the point he has made.
The Senator from Connecticut quite correctly points out that with
respect to others that are primary, then the level of misconduct,
whether intentional or knowing, creates the joint and several liability
situation, and the reckless conduct which the Senator from Maryland and
I agree ought to be included as well.
That is when you get the proportionate liability. There is no
question about proportion or joint and several. There is no recovery if
the cause of action is based upon aiding and abetting. That is the
point he has made so clear.
Mr. SARBANES. The Senator put it very clearly. The point we were
trying to make, the aiders and abettors walk scot-free as far as
private lawsuits are concerned under this legislation.
Mr. BRYAN. This is my understanding.
Mr. SARBANES. We try to attach liability that way.
Under the different theories of liability, there is an argument over
recklessness and knowingly and so forth.
The bill never attaches liability to the aider and abettor; is that
correct?
Mr. BRYAN. That is my understanding.
Mr. SARBANES. I understand in many suits that an important part of
the recovery, on the part of the innocent investor, is from the aiders
and the abettors.
Mr. BRYAN. That is my understanding.
Tomorrow, as we complete the debate, I will have additional data to
share with my colleagues. I have never been involved in this area as an
attorney representing a class action or defending this, but the issue
is quite substantial, and the impact, I think, will astonish some of
our colleagues. It is not just an academic discussion among Senators in
good faith trying to craft a piece of legislation.
The impact is profound. There must be reasons, when these actions are
brought, they are brought under a theory of aiding and abetting. It
must be the only way to get into court against some of this misconduct
with lawyers, accountants, bankers, and others. We simply wipe them
out. ``You folks can do whatever you want. You are home free.'' That is
a public policy that, in my view, is indefensible.
Mr. SARBANES. If the Senator will yield for a second, I would like to
bring this discussion towards close by saying there is a point where I
agree very strongly with the Senator from Connecticut.
At the outset of his statement he gave praise to the very strong
statement which the Senator from Nevada had made on this issue. I want
to fully associate myself with that judgment. I think he is absolutely
right. I urge all my colleagues, and their staffs that are following
this issue, to go very carefully through the opening statement which
the Senator from Nevada made when he presented his amendment. It was a
very powerful statement as to why aiders and abettors ought not to be
completely free from liability.
Mr. BRYAN. I notice a number of colleagues are about ready to join
the floor with other amendments.
I will simply share one additional statistic in closing and yielding
the remainder of my time. Chairman Levitt has stated, of 400 pending
SEC cases, 80 to 85 rely on aiding and abetting theories of liability.
We are talking about a substantial number.
I yield the floor and yield back the remainder of my time.
Mr. ROCKEFELLER. I ask unanimous consent that the Senator from West
Virginia be allowed to speak for 5 minutes as if in morning business.
The PRESIDING OFFICER. Without objection, it is so ordered.

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