[Pages S1783-S1792]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

By Mr. GRAHAM (for himself, Mr. Hatch, Mr. Jeffords, Mr. Kerry,
and Mr. Torricelli):
S. 2006. A bill to amend the Internal Revenue Code of 1986 to clarify
the eligibility of certain expenses for the low-income housing credit;
to the Committee on Finance.
Mr. GRAHAM. Madam President, today I am introducing legislation that
will improve the effectiveness of one of the most effective programs we
have to help Americans get affordable housing, the Low Income Housing
Tax Credit. I am proud to be joined in this effort by my esteemed
colleagues Senator Hatch, Senator Jeffords, Senator Kerry and Senator
Torricelli.
The Low Income Housing Tax Credit was created in 1986 to attract
private sector capital to the affordable housing market. It has been
the major engine for financing the production of low income multi-
family housing. The program offers developers and investors in
affordable housing credit against their Federal income tax in return
for their investment. Since its inception, the Low Income Housing Tax
Credit has assisted in the development and availability of roughly
850,000 new and rehabilitated units of affordable housing.
Last fall, the Internal Revenue Service issued its first guidance in
the program's 16 year history. That guidance was issued in the form of
several technical advice memoranda, or TAMs, and specified which
development costs will be eligible and ineligible for the credit, known
as eligible basis.
TAMs are not official guidance, reviewed by the Treasury Department,
but instead, IRS legal opinion providing direction to IRS agents
conducting audits. They are not citable in court proceedings because
they are not official guidance. In the absence of official guidance,
TAMs could be taken as the official government position. In fact, that
is exactly what is happening. The IRS's position is contrary to common
industry practice, and eliminates many reasonable, legitimate and
necessary costs from the tax credit. This has caused uncertainty among
investors as to whether the credits for which they have been paid, will
be realized. Moreover, these guidelines could adversely affect the
ability of States to target affordable housing to those who need it the
most.
It is important to understand, this legislation will not increase the
number of low-income housing tax credits available. The maximum amount
of credits that states may allocate to developers of affordable housing
properties is set by the Internal Revenue Code. Thanks to legislation
that we enacted in 2000, the amount available to each state has
increased from $1.50 to $1.75 times the State's population.

[[Page S1784]]

That 40 percent increase is expected to produce about 30,000 more units
a year. Since the unmet demand for affordable housing is many times
greater than what can be built with the help of the credit, our
legislation should not affect revenues. In fact, the only way for this
legislation to have a revenue impact is if the legislation makes it
easier for the States to use the credits we intend for them to have
under present law.
What this legislation does do, however, is very important. To
understand its importance, it may be useful to have a little background
on how the low-income housing tax credit works.
In economic terms, the credit is equity financing which replaces a
portion of debt that would otherwise be necessary to finance a
property. By replacing debt, credits work to reduce interest costs.
This allows a property owner to offer lower rents than otherwise would
be the case.
The most unique feature of the program is that State Housing Finance
Agencies award Federal tax credits to developers of rental housing.
Since these agencies have considerable flexibility in how they
distribute the credits, developers compete for the limited number of
tax credits by submitting project proposals. The Housing Finance
Agencies rate the proposals, and allocate credits to individual
properties based on criteria provided in the Internal Revenue Code, and
on the State's particular housing needs and priorities.
The amount of credits a State may allocate to a particular property
is also limited by the Internal Revenue Code. The limit is determined
as percentage of the basis of a property. The basis is, generally
speaking, the costs of constructing a building that is part of an
affordable housing project. Non-federally subsidized new construction
may receive a 9-percent credit. Existing buildings and new buildings
receiving other Federal subsidies may get a 4-percent credit.
The problem at hand is this. The IRS takes the position that certain
construction costs should not be included in basis. This position makes
a large number of affordable housing properties financially infeasible,
and weakens the economics of those that still pass minimum underwriting
requirements. The loss of equity would surely affect the properties
that serve the lowest income tenants, provide higher levels of service,
or operate in high cost areas. The reason that this is problematic is
simple. Reducing the amount of credits does not reduce the development
costs. It merely removes a source of financing, forcing either higher
rents or lower quality construction.
Apparently, the Treasury Department and Internal Revenue Service
agree that this is an issue worthy of review, as both agencies have
included it in their business plan. As recently as this month, the IRS
issued new guidance on one of the items addressed by the TAMs, but
there does not appear to be a full review of the effect of the
positions set forth in the TAMs anytime soon.
This legislation would amend Section 42(d) of the Internal Revenue
Code to specify that various associated development costs are to be
included in eligible basis. In many cases, the largest item excluded
from eligible basis under the TAMs is ``impact fees.'' Impact fees are
fees required by the Government ``as a condition to the development''
and considered ineligible because they are one-time costs, unlike
building permits which need to be renewed each time a building is
built. These fees cover a wide range of infrastructure improvements
including sewer lines, schools, and roads. Certainly, whether or not
they are includible in basis for the purpose of calculating the amount
of tax credit, these costs will be incurred and will impact the
economics of the property. As I mentioned previously, the IRS has
recently addressed the inclusion of impact fees in eligible basis, but
not other costs directly related to building construction.
Other items that would be severely restricted or excluded from
eligible basis under the interpretations expressed in the TAMs are site
preparation costs, development fees, professional fees related to
developing the property, and construction financing costs. The
legislation we are introducing today will clarify that any cost
incurred in preparing a site which is reasonably related to the
development of a qualified low income housing property, any reasonable
fee paid to the developer, any professional fee relating to an item
includible in basis, and any cost of financing attributable to
construction of the building is includible in basis for the purpose of
calculating the maximum amount of credit a state may allocate to a low-
income housing property.
The intent of these clarifications is simply to codify common
industry practice before the issuance of the TAMs. Not only will the
legislation allow the low-income tax credit program to provide better
quality housing at lower rental rates than would be possible if the
positions taken in the TAMs are followed, but clarification will help
simplify administration of the credit by giving both taxpayers and the
Internal Revenue Service a clearer statement of the standards that
apply in calculating credit amounts.
Our economy is not doing as well as we would like, and there is a
significant likelihood that we are going to need even more affordable
housing in the not too distant future. We should be proud that we
increased the amount of low-income housing tax credits that will be
available to help finance this housing. What we need to do now is to
make sure that these credits are used as efficiently as possible to
provide housing for those who need it the most. The legislation we are
introducing today will help achieve that goal.
I ask unanimous consent that the text of this bill be printed in the
Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:

S. 2006

Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,

SECTION 1. ELIGIBILITY OF CERTAIN EXPENSES FOR LOW-INCOME
HOUSING CREDIT.

(a) In General.--Subsection (d) of section 42 of the
Internal Revenue Code of 1986 (relating to low-income housing
credit) is amended by adding at the end the following new
paragraph:
``(8) Associated development costs included in basis.--
``(A) In general.--Solely for purposes of this section,
associated development costs shall be taken into account in
determining the basis of any building which is part of a low-
income housing project to the extent not otherwise so taken
into account.
``(B) Associated development costs.--For purposes of
subparagraph (A), the term `associated development costs'
means, with respect to any building, such building's
allocable share of--
``(i) any cost incurred in preparing the site which is
reasonably related to the development of the qualified low-
income housing project of which the building is a part,
``(ii) any fee imposed by a State or local government as a
condition to development of such project,
``(iii) any reasonable fee paid to any developer of such
project,
``(iv) any professional fee relating to any item includible
in the basis of the building pursuant to this paragraph, and
``(v) any cost of financing attributable to construction of
the building (without regard to the source of such financing)
which is required to be capitalized.''
(b) Effective Date.--The amendments made by this section
shall apply to--
(1) housing credit dollar amounts allocated after December
31, 2001, and
(2) buildings placed in service after such date to the
extent paragraph (1) of section 42(h) of the Internal Revenue
Code of 1986 does not apply to any building by reason of
paragraph (4) thereof, but only with respect to bonds issued
after such date.

Mr. JEFFORDS. Mr. President, today I join with my colleagues on the
Finance Committee, Senators Graham and Hatch, to introduce legislation
to clarify the rules governing the low-income housing tax credit. This
tax credit has played a critical role in the construction and
renovation of housing for low-income Americans.
The Internal Revenue Service has issued five technical advice
memoranda, TAMs, affecting the definition of eligible basis as defined
in section 42(d) of the Internal Revenue Code. These TAMs had the
effect of reducing the amount of tax credits available with respect to
projects financed with low-income housing tax credits. The bill we
introduce today recognizes that certain expenses are legitimate
development costs that are properly includible in the basis eligible
for the tax credits. Among these development costs are: state and local
impact fees, site preparation costs, reasonable development fees,
professional fees, and construction financing costs, excluding land
acquisition costs.

[[Page S1785]]

The TAMs drew unworkable distinctions among various costs developers
incur when they build low-income housing. For example, under the law as
interpreted by the IRS, a low-income housing developer would have to
distinguish between those trees and shrubs planted near a housing unit
and those planted elsewhere on the property. The costs of trees and
shrub near the housing unit could be included in basis; the costs of
other landscaping could not. Rules like this are not only illogical;
they also impose unnecessary burdens both on developers of affordable
housing projects, but also on the IRS itself, whose employees must draw
these highly technical distinctions when they audit the project. Our
bill includes fair and rational rules, introducing the concept of
``development cost basis'' in lieu of ``adjusted basis'' to determine
which costs may qualify for tax credits. It assures that reasonable and
legitimate expenses which incurred only for the purpose of building
low-income housing will be eligible for tax credit.
______

By Mr. INHOFE:
S. 2007. A bill to provide economic relief to general aviation
entities that have suffered substantial economic injury as a result of
the terrorist attacks perpetuated against the United States on
September 11, 2001; to the Committee on Banking, Housing, and Urban
Affairs.
Mr. INHOFE. Madam President, I rise today to introduce the Senate
companion to HR 3347, the General Aviation Industry Reparations Act of
2002. This bill directs to the President to provide compensation to
General Aviation for losses incurred as a result of the terrorist
attacks on September 11, 2001.
Many have the misperception that the entire aviation industry was
eligible for compensation under the Air Transportation Safety and
Systems Stabilization Act, PL 107-42. However, that act dealt only with
scheduled airline service. As a consequence General Aviation, a very
important segment of the aviation industry, has yet to be made whole
for actions taken by the federal government following the terrorist
attacks of September 11th.
The national airspace system re-opened to commercial aviation on
September 13, 2001. General Aviation was allowed limited Instrument
Flight Rules, IFR, flights, operating under guidance and direction from
air traffic controllers, with restrictions on September 14th. The more
common, Visual Flight Rules, VFR, flights (which cannot be done in
inclement weather since pilots are not under the guidance of air
traffic controllers) were grounded until September 19 and then only
limited flights could operate outside of ``enhanced'' Class B airspace,
the airspace surrounding the nation's 30 busiest airports. In fact,
enhanced Class B airspace did not return to the pre-September 11th
design until December 19th.
Contrary to what some think, General Aviation is much more than
weekend recreational pilots. It is made of a hundreds of small business
people who make their living either servicing general aviation
aircraft, instructing student pilots, using general aviation aircraft
to transport people, products and materials or perform various services
such as report on traffic conditions in congested metropolitan areas,
check the condition of energy pipelines, crop dusting, banner towing
and many other uses. The fact is that general aviation performs a very
important function in our economy beyond recreational flying.
Working closely with General Aviation groups such as the Aircraft
Owners and Pilots Association, AOPA, which has worked hard to explain
the scope of general aviation to members of Congress and how critical
it is to the nation, I think we have a very balanced package.
The General Aviation Industry Reparations Act of 2002 would
compensate General Aviation and their employees for economic injuries
caused by September 11. As defined by the bill ``general aviation''
includes ancillary businesses as well. Thus, parking garages, car
rental companies or other aviation related business that were not
covered by PL 107-42 would be eligible for compensation under this
bill. In addition, the bill extends compensation to employees who were
laid off due to the slow down of business following September 11 in the
form of reimbursement for health care costs and it requires businesses
who accept compensation to provide health care coverage for existing
employees.
The bill provides three forms of compensation. Loan Guarantees of $3
billion from the amount made available for the commercial airlines.
Grants totaling $2.5 billion and like the commercial aviation industry
the opportunity to purchase War Risk Insurance with the assistance of
the Department of Transportation.
Finally, spending in the bill would be designated as emergency
spending for scoring purposes. Normally I would oppose such a
designation but I believe in this instance we have successfully met the
criteria for an emergency. These benefits are not open ended,
compensation is only available for losses incurred between September 11
and December 31, 2001. Not all losses are eligible under the bill, only
those that can be shown to be a direct result of the government actions
following September 11. Businesses who choose to take advantage of the
loan guarantees must demonstrate an ability to pay back the loans and
the government has the right to benefit from profits made as a result
of a government backed loan.
In short, I believe this is a responsible bill and I hope that we
will be able to fully debate the merits of the package on the floor and
eventually have a vote on the bill.
______

By Mr. GREGG:
S. 2008. A bill to prohibit certain abortion-related discrimination
in governmental activities; to the Committee on Health, Education,
Labor, and Pensions.
Mr. GREGG. Madam President, I ask unanimous consent that the text of
the bill be printed in the Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:

S. 2008

Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,

SECTION 1. ABORTION NON-DISCRIMINATION.

Section 245 of the Public Health Service Act (42 U.S.C.
238n) is amended--
(1) in the section heading, by striking ``regarding
training and licensing of physicians'' and inserting
``regarding training, licensing, and practice of physicians
and other health care entities'';
(2) in subsection (a)(1), by striking ``to perform such
abortions'' and inserting ``to perform, provide coverage of,
or pay for induced abortions'';
(3) in subsection (c)(2)--
(A) by inserting ``or other health professional,'' after
``an individual physician'';
(B) by striking ``and a participant'' and inserting ``a
participant''; and
(C) by inserting before the period the following: ``, a
hospital, a provider sponsored organization, a health
maintenance organization, a health insurance plan, or any
other kind of health care facility, organization or plan'';
and
(4) in subsection (b)(1), by striking ``standards'' and
inserting ``standard''.
______

By Mr. LEAHY (for himself, Mr. Daschle, Mr. Durbin, and Mr.
Harkin):
S. 2010. a bill to provide for criminal prosecution of persons who
alter or destroy evidence in certain Federal Investigations or defraud
investors of publicly traded securities, to disallow debts incurred in
violation of securities fraud laws from being discharged in bankruptcy,
to protect whistleblowers against retaliation by their employers, and
for other purposes; to the Committee on the Judiciary.
Mr. LEAHY. Mr. President, I am pleased to introduce the ``Corporate
and Criminal Fraud Accountability Act of 2002.'' I want to thank the
majority leader, and Senators Durbin and Harkin for joining me as
original cosponsors in this effort to prevent corporate and criminal
fraud, protect shareholders and employees, and hold wrongdoers
accountable for their actions.
This bill is a crucial part of ensuring that the corporate fraud and
greed that have been on display in the Enron debacle can be better
detected, prevented and prosecuted. We cannot legislate against greed,
but we can do our best to make sure that greed does not succeed.
The fraud at Enron was not the work of novices. It was the work of
highly educated professionals, spinning an intricate spider's web of
deceit. They created sham partnerships with names like Jedi, Chewco,
Rawhide, Ponderosa

[[Page S1786]]

and Sundance to cook the books and trick both the public and federal
regulators. The actions of Enron's executives, accountants, and lawyers
exhibits a ``Wild West'' attitude which valued profit over honesty.
Nor is this web of corporate deceit the end of the Enron story. When
they thought that investigators might be coming, what did these
``professional'' men and women apparently do? First, they warmed up the
shredders and began destroying evidence. Then, after they successfully
shredded thousands of documents, they began the finger pointing. Now,
the Enron executives are blaming their accountants at Arthur Andersen;
the accountants are blaming the executives right back; and they are
both blaming their lawyers.
The truth is that just as there was enough greed to go around, there
is now enough blame to go around. But the blame does not end with the
people involved in this case. It extends to our courts, our regulators,
and to Congress, whose actions in the past decade helped create the
permissive atmosphere which allowed Enron to happen. No one in Congress
intended for such outrageous conduct to happen, but now it is our job
to stop it.
We must restore accountability. Accountability is important because
Enron is not alone. At a Judiciary Committee hearing which I recently
chaired, experts gave the public markets grave warnings, it is likely
that there are more ``Enrons'' lurking out there waiting to be
discovered. Waiting to be discovered not only by investigators or the
media but by the more than one in two Americans who depend on the
transparency and integrity of our markets.
The majority of Americans depend on our capital markets to invest in
the future needs of themselves and their families, from their
children's college fund to their retirement nest eggs. American
investors are watching what we do here and want action. We must act now
to restore confidence in the integrity of our markets and deter fraud
artists who think that their crimes will go unpunished. Restoring such
accountability is what this bill is all about.
This bill has three major components that will enhance
accountability. First, this bill provides prosecutors with new and
better tools to effectively prosecute and punish those who defraud our
Nation's investors, which means ensuring our criminal laws are flexible
enough to keep pace with the most sophisticated and clever con artists.
It also means providing criminal penalties which are tough enough to
make them think twice about defrauding the public.
Second, this bill provides tools that will improve the ability of
investigators and regulators to collect and preserve evidence which
proves fraud. That means ensuring that corporate whistleblowers are
protected and that those who destroy evidence of fraud are punished.
Third, the bill protects victims' rights to recover from those who have
cheated them. In short, this bill is going to both save documents from
the shredder and send wrongdoers to jail once they are caught.
This bill is only one part of the response needed to solve the
problems exposed by Enron's fall. Securities law experts, consumer
protection groups, and others Members of Congress, both in the Senate
and the House of Representatives, have made other proposals and
introduced legislation that deserves careful consideration. Working
with the majority leader, we have developed a comprehensive plan to
attack this problem. Certainly, in light of recent events, we must
carefully reexamine both the decisions of the Supreme Court and our
current laws. Despite the best of intentions, our laws may have helped
create an environment in which greed was inflated and integrity
devalued. This bill is an important starting point in that process. Let
me explain its provisions.
Section 2 of the bill would create two new 5 year felonies to clarify
and plug holes in the existing criminal laws relating to the
destruction or fabrication of evidence, including the shredding of
financial and audit records. Currently, those provisions are a
patchwork which have been interpreted, often very narrowly, by Federal
courts. For instance, certain of the current provisions in Title 18,
such as Section 1512(b), make it a crime to persuade another person to
destroy documents, but not a crime for a person to personally destroy
the same documents. Other provisions, such as Section 1503, have been
narrowly interpreted by courts, including the Supreme Court in United
States v. Aguillar, 115 S. Ct. 593 (1995), and the First Circuit in
United States v. Frankhauser, 80 F.3d 641 (1st Cir. 1996), to apply
only to situations where the obstruction of justice may be closely tied
to a judicial proceeding that is already pending. Still other
provisions, such as sections 152(8), 1517 and 1518 apply to obstruction
in certain limited types of cases, such as bankruptcy fraud,
examinations of financial institutions, and healthcare fraud. In short,
the current laws regarding destruction of evidence are full of
ambiguities and limitations that should be corrected.
Section 2 would create a new felony, 18 U.S.C. section 1519, for use
in a wide array of cases in which a person destroys evidence with the
specific intent to obstruct a Federal agency or a criminal
investigation. There would be no technical requirement that a judicial
proceeding was already underway or that the documents were formally
under subpoena. The law would also be used to prosecute a person who
actually destroys the records themself in addition to one who
persuades another to do so. The law would apply to the intentional
shredding of evidence in any matter within Federal regulatory or civil
jurisdiction, such as an SEC or civil fraud matter, as well as criminal
jurisdiction, eliminating another series of technical distinctions
imposed by some courts under current law.

Second, Section 2 creates a 5-year felony, 18 U.S.C. section 1520, to
punish the willful failure to preserve financial audit papers of
companies that issue securities as defined in the Securities Exchange
Act. The new statute, in subsection (a), would require that accountants
preserve audit records for 5 years from the conclusion of the audit.
Subsection (b) would make it a felony to knowingly and willfully
violate the 5-year audit retention period. This section both penalizes
the willful failure to maintain specified audit records and sets a
bright line rule that would require accountants to put strong
safeguards in place to ensure that such records are, in fact, retained.
Had such clear requirements been in place at the time that Arthur
Andersen was considering what to do with its audit documents, countless
documents might have been saved from the shredder.
Section 3 of this bill proposes an amendment to the civil Racketeer
Influenced and Corrupt Organizations, RICO, statute, enhance the
abilities of Federal and State regulators to enforce existing law. It
would give State Attorneys General and the Securities and Exchange
Commission, ``SEC'', explicit authority to bring a suit under the civil
RICO provisions. Currently, only the U.S. Attorney General has such
authority under RICO. At a Judiciary Committee hearing on Enron's fall,
Washington State Attorney General Christine Gregoire strongly supported
this change, testifying that State and local law enforcers are on the
front lines in protecting consumer's rights. Providing such authority
to State Attorneys General and to the SEC would provide them a potent
weapon in that battle and would allow us to take advantage of their
significant expertise in protecting consumers.
Others have suggested that we also consider repealing the one-of-a-
kind securities fraud exception to civil RICO, created in 1995 over the
veto of President Clinton. Congressman Conyers, the distinguished
ranking minority member of the House Judiciary Committee, has already
introduced a bill to repeal this unique exemption. As someone who voted
against the 1995 Private Securities Litigation Reform Act and voted to
sustain President Clinton's veto, I did not support this one-of-a-kind
exemption when it became law. Now, given what has happened in our
markets, I think that we all need to consider whether or not the
exemption for securities fraud makes sense. No one who voted for the
1995 Private Securities Litigation Reform Act or voted to override
President Clinton's veto meant for Enron to occur, but now that it has
occurred, none of us can ignore it.
In addition to giving the SEC the authority to sue under civil RICO,
we have to ensure that the SEC has all the powers and resources that it
needs to protect our Nation's shareholders. The

[[Page S1787]]

SEC needs to have sufficient attorneys, training, and investigative
resources, and enough power to pursue the most complex of cases against
the best funded defendants in our legal system. In particular, one idea
that is worth serious consideration is amending the statutes related to
the Federal Rules of Criminal Procedure to allow SEC attorneys in fraud
investigations to seek search warrants from a Federal judge, the same
way that Department of Justice attorneys currently may, when they can
demonstrate probable cause to believe that a crime has been committed.
Taking such a step might allow the SEC to act more quickly and to
prevent the destruction of documents and evidence in the future, as
they were not able to do in the Enron case. The SEC has to have the
tools it needs to protect what has truly become a nation of
shareholders.
Section 4 of this bill would amend the Bankruptcy Code to make
judgments and settlements based upon securities law violations non-
dischargeable, protecting victims' ability to recover their losses.
Current bankruptcy law may permit such wrongdoers to discharge their
obligations under court judgments or settlements based on securities
fraud and other securities violations. This loophole in the law should
be closed to help defrauded investors recoup their losses and to hold
accountable those who perpetrate securities fraud after a government
unit or private suit results in a judgment or settlement against the
wrongdoer.
State securities regulators have indicated their strong support for
this change in the bankruptcy law, and I have received letters
supporting the passage of this bill from the North American Securities
Administrators Association, whose membership includes the securities
administrators in all 50 States and Vermont's chief banking and
securities regulator. Under current laws, State regulators are often
forced to ``reprove'' their fraud cases in bankruptcy court to prevent
discharge because remedial statutes often have different technical
elements than the analogous common law causes of action. Moreover,
settlements may not have the same collateral estoppel effect as
judgments obtained through fully litigated legal proceedings. In short,
with their resources already stretched to the breaking point, these
State regulators have to plow the same ground twice in securities fraud
cases. By ensuring securities fraud judgments and settlements in State
cases are non-dischargeable, precious state enforcement resources will
be preserved and directed at preventing fraud in the first place.
Section 5 would protect victims by extending the statute of
limitations in private securities fraud cases. This section would set
the statute of limitations in private securities fraud cases to the
earlier of 5 years after the date of the fraud or 3 years after the
fraud was discovered. The current statute of limitations for such fraud
cases is 3 years from the date of the fraud. This can unfairly limit
recovery for defrauded investors in some cases. As Attorney General
Gregoire testified at our recent hearing, in the Enron State pension
fund litigation the current short statute of limitations has forced
some States to forgo claims against Enron based on securities fraud in
1997 and 1998. In Washington State alone, the short statute of
limitations may cost hard working State employees, firefighters and
police officers nearly $50 million, lost Enron investments which they
can never recover under current law.
Especially in complex securities fraud cases, the current short
statute of limitations may insulate the worst offenders from
accountability. As Justices O'Connor and Kennedy said in their dissent
in Lampf, Pleva, Lipkind, Prupis, & Petigrow v. Gilbertson, 111 S. Ct.
2773 (1991), the 5-4 decision upholding this short statute of
limitations in most securities fraud cases, the current ``one and
three'' limitations period makes securities fraud actions ``all but a
dead letter for injured investors who by no conceivable standard of
fairness or practicality can be expected to file suit within 3 years
after the violation occurred.'' The Consumers Union also strongly
supports the bill, and views this section in particular as a needed
measure to protect investors.

The experts agree with that view. In fact, the last two SEC Chairmen
supported extending the statute of limitations in securities fraud
cases. Then Chairman Arthur Levitt testified before a Senate
Subcommittee in 1995 that ``extending the statute of limitations is
warranted because many securities frauds are inherently complex, and
the law should not reward the perpetrator of a fraud, who successfully
conceals its existence for more than 3 years.'' Before Chairman Levitt,
in the last Bush administration, then SEC Chairman Richard Breeden also
testified before Congress in favor of extending the statute of
limitations in securities fraud cases. Reacting to the Lampf opinion,
Breeden stated in 1991 that ``[e]vents only come to light years after
the original distribution of securities, and the Lampf cases could well
mean that by the time investors discover they have a case, they are
already barred from the courthouse.'' Both the FDIC and the State
securities regulators joined the SEC in calling for a legislative
reversal of the Lampf decisions at that time.
In fraud cases the short limitations period under current law is an
invitation to take sophisticated steps to conceal the deceit. The
experts have long agreed on that point, but unfortunately they have
been proven right again. As we know from recent experience, it only
takes a few seconds to warm up the shredder, but unfortunately it will
take years for victims to put this complex case back together again. It
is time that the law be changed to give victims the time they need to
prove their fraud cases.
Section 6 of this bill ensures that those who destroy evidence or
perpetrate fraud are appropriately punished. It would require the
United States Sentencing Commission, ``Commission'', to consider
enhancing criminal penalties in cases involving the actual destruction
or fabrication of evidence or in serious fraud cases where a large
number of victims are injured or when the victims face financial ruin.
Currently, the United States Sentencing Guidelines recognize that a
wide variety of conduct falls under the offense of ``obstruction of
justice.'' For obstruction cases involving the murder of a witness or
another crime, the guidelines allow, by cross reference, significant
enhancements based on the underlying crimes, such as murder or
attempted murder. For cases where obstruction is the only offense,
however, they provide little guidance on differentiating between
different types of obstruction. This provision requests that the
Sentencing Commission consider a specific enhancement in cases where
evidence and records are actually destroyed or fabricated in order to
thwart investigators, a serious form of obstruction.
This provision, in subsections 3 and 4, also requires the Commission
to consider enhancing the penalties in fraud cases which are
particularly extensive or serious. The current fraud guidelines require
the sentencing judge to take the number of victims into account, but
only to a very limited degree in small and medium-sized cases.
Specifically, once there are more than 50 victims, the guidelines do
not require any further enhancement of the sentence, so that a case
with 51 victims may be treated the same as a case with 5,000 victims.
As the Enron matter demonstrates, serious frauds, especially in cases
where publicly traded securities are involved, can effect thousands of
victims. The Commission may well have not foreseen such extensive
cases, and subsection 3 requires it to reconsider whether they merit an
additional enhancement.
In addition, current guidelines allow only very limited consideration
of the extent of devastation that a fraud offense causes its victims.
Judges may only consider whether a fraud endangers the ``solvency or
financial security'' of a victim to impose an upward departure from the
recommended sentencing range. It is not a factor in establishing the
range itself unless a bank is the victim. Subsection 4 requires the
Commission to consider requiring judges to consider the extent of the
fraud in setting the actual recommended sentencing range in cases such
as the Enron matter, where many private victims have lost their life
savings.
Section 7 of the bill would provide whistleblower protection to
employees of publicly traded companies who report acts of fraud to
Federal officials

[[Page S1788]]

with the authority to remedy the wrongdoing or to supervisors or
appropriate individuals within their company. Although current law
protects many government employees who act in the public interest by
reporting wrongdoing, there is no similar protection for employees of
publicly traded companies who blow the whistle on fraud and protect
investors. With an unprecedented portion of the American public
investing in these companies and depending upon their honesty, this
distinction does not serve the public good.
In addition, corporate employees who report fraud are subject to the
patchwork and vagaries of current State laws, even though most publicly
traded companies do business nationwide. Thus, a whistleblowing
employee in one State may be far more vulnerable to retaliation than a
fellow employee in another State who takes the same actions.
Unfortunately, one thing that often transcends State lines, as we all
know from the State tobacco litigation, are certain companies with a
corporate culture that punishes whistleblowers for being ``disloyal''
and ``litigation risks.''
Most corporate employers, with help from their lawyers, know exactly
what they can do to a whistleblowing employee under the law.
Unfortunately, Enron has supplied us with another grievous example of
corporate conduct as shown by a recently released email from one of
Enron's lawyers. The email responds to a request for legal advice after
an Enron employee tried to report accounting irregularities at the
highest levels of the company in late August, 2001:

You asked that I include in this communication a summary of
the possible risks associated with discharging (or
constructively discharging) employees who report allegations
of improper accounting practices: 1. Texas law does not
currently protect corporate whistleblowers. The supreme court
has twice declined to create a cause of action for
whistleblowers who are discharged . . .

This legal advice lays bare the fact that employees who do the
``right thing'' are vulnerable to retaliation. After this high level
employee at Enron reported improper accounting practices, Enron is not
thinking about firing Arthur Andersen, they are considering discharging
the whistle blower. No wonder that so many employees are scared to come
forward. Our laws need to encourage and protect those who report
fraudulent activity that damages investors in publicly traded
companies. That is why this bill is supported by groups such as the
National Whistleblower Center, the Government Accountability Project,
and Taxpayers Against Fraud, who have written a letter calling this
bill ``the single most effective measure possible to prevent
recurrences of the Enron debacle and similar threats to the nation's
financial markets.''

This bill would create a new provision protecting employees when they
take lawful acts to disclose information or otherwise assist criminal
investigators, Federal regulators, Congress, their supervisors, or
other proper people within a corporation, or parties in a judicial
proceeding in detecting and stopping actions which they reasonably
believe to be fraudulent. Since the only acts protected are ``lawful''
ones, the bill would not protect illegal actions, such as the improper
public disclosure of trade secret information. In addition, a
reasonableness test is also provided under the subsection (a)(1), which
is intended to impose the normal reasonable person standard used and
interpreted in a wide variety of legal contexts. See generally Passaic
Valley Sewerage Commissioners v. Department of Labor, 992 F. 2d 474,
478. Certainly, although not exclusively, any type of corporate or
agency action taken based on the information or the information
constituting admissible evidence would be strong indicia that it could
support of such a reasonable belief. Under this bill's new protections,
if the employer does take illegal action in retaliation for such lawful
and protected conduct, subsection b allows the employee to elect to
file an administrative complaint at the Department of Labor, as is the
case for employees who provide assistance in airplane safety, or to
bring a case in Federal court, with a jury trial available for an
action at law. See United States Constitution, Amendment VII; Title 42
United States Code, Section 1983.
Subsection (c) of this section would require both reinstatement of
the whistleblower, double backpay, and compensatory damages to make a
victim whole. In severe cases, where the finder of fact determines that
underlying fraud posed a substantial risk to the shareholders' or the
general public's health, safety or welfare, punitive damages would be
allowed in the discretion of the finder of fact based on a number of
enumerated factors. The bill does not supplant or replace State law,
but sets a national floor for employee protections in the context of
publicly traded companies.
Section 8 of the bill would create a new ten year felony under Title
18 for defrauding shareholders of publicly traded companies. Currently,
unlike bank fraud or health care fraud, there is no generally
accessible statute dealing with the specific problem of securities
fraud. In these cases, Federal investigators and prosecutors are forced
either to resort to a patchwork of technical Title 15 offenses, which
may criminalize particular violations of securities law, or to treat
the cases as generic mail or wire fraud cases and to meet the technical
elements of those statutes, with their 5 year maximum penalties.
This bill, then, would create a new ten year felony for securities
fraud, a more general and less technical provision comparable to the
bank fraud and health care fraud statutes in Title 18. Specifically, it
would add a provision to Chapter 63 of Title 18 which would criminalize
the execution or attempted execution of a scheme or artifice to defraud
persons in connection with securities of publicly traded companies or
obtain their money or property. The provision would provide needed
enforcement flexibility in the context of publicly traded companies to
protect shareholders and prospective shareholders against all the types
of schemes and frauds which inventive criminals may devise in the
future.
This bill can only be part of the needed response to the problems
exposed by the Enron debacle. It is clear that changes are needed to
restore accountability in our markets. As a lawyer and a former
prosecutor I am appalled at the role that lawyers and accountants
played in the Enron case. Instead of acting as gatekeepers who detect
and deter fraud, it appears that Enron's accountants and lawyers
brought all their skills and knowledge to bear in assisting the fraud
to succeed and then in covering it up. We need to reconsider the
incentive system that has been set up that encourages accountants and
lawyers who come across fraud in their work to remain silent.
Others have suggested that we restore aider and abettor liability to
the law as it existed for almost five decades before the Supreme Court,
in another 5-4 decision, took away the ability of private parties to
sue aiders and abettors for securities fraud. I hope that Senators on
the Banking Committee will seriously consider this change, which
restores the ability to hold liable accountants and lawyers who
knowingly or recklessly provide substantial assistance in perpetrating
a fraud. Others have also proposed to restore joint and several
liability in securities fraud cases so that fraud victims are not left
empty handed watching the accountants, lawyers, and executives point
fingers at each other, until they can blame everything on the one
company that files for bankruptcy protection, like Enron, another
change worth careful consideration. In short, we have to ask ourselves
whether, as a nation, we have unintentionally stacked the deck against
fraud victims. I think that we have, and we need to have the courage to
admit it and reshuffle the cards to restore basic fairness.
For all of these reasons, I am pleased to introduce the ``Corporate
and Criminal Fraud Accountability Act of 2002.'' I look forward to
working with members on both sides of the aisle to enact its provisions
into law.
I ask unanimous consent for this bill to be printed in the Record
along with the sectional analysis and a copy of the entire e-mail
document to which I referred as well as the letters of support which I
have referenced.
There being no objection, the materials were ordered to be printed in
the Record, as follows:

[[Page S1789]]

S. 2010

Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ``Corporate and Criminal Fraud
Accountability Act of 2002''.

SEC. 2. CRIMINAL PENALTIES FOR ALTERING DOCUMENTS.

(a) In General.--Chapter 73 of title 18, United States
Code, is amended by adding at the end the following:

``Sec. 1519. Destruction, alteration, or falsification of
records in Federal investigations and bankruptcy

``Whoever knowingly alters, destroys, mutilates, conceals,
covers up, falsifies, or makes a false entry in any record,
document, or tangible object with the intent to impede,
obstruct, or influence the investigation or proper
administration of any matter within the jurisdiction of any
department or agency of the United States or any case filed
under title 11, or in relation to or contemplation of any
such matter or case, shall be fined under this title,
imprisoned not more than 5 years, or both.

``Sec. 1520. Destruction of corporate audit records

``(a) Any accountant who conducts an audit of an issuer of
securities to which section 10A(a) of the Securities Exchange
Act of 1934 (15 U.S.C. 78j-1(a)) applies, shall maintain all
documents (including electronic documents) sent, received, or
created in connection with any audit, review, or other
engagement for such issuer for a period of 5 years from the
end of the fiscal period in which the audit, review, or other
engagement was concluded.
``(b) Whoever knowingly and willfully violates subsection
(a) shall be fined under this title, imprisoned not more than
5 years, or both.
``(c) Nothing in this section shall be deemed to diminish
or relieve any person of any other duty or obligation,
imposed by Federal or State law or regulation, to maintain,
or refrain from destroying, any document.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 73 of title 18, United States Code, is
amended by adding at the end the following new items:

``1519. Destruction, alteration, or falsification of records in Federal
investigations and bankruptcy.
``1520. Destruction of corporate audit records.''.

SEC. 3. ENHANCED ENFORCEMENT OF LAWS AFFECTING RACKETEER-
INFLUENCED AND CORRUPT ORGANIZATIONS.

Section 1964 of title 18, United States Code, is amended--
(1) in subsection (b), by inserting after ``The Attorney
General'' the following: ``, the Attorney General of any
State, or the Securities and Exchange Commission''; and
(2) in subsection (d), by inserting before the period the
following: ``or any State''.

SEC. 4. DEBTS NONDISCHARGEABLE IF INCURRED IN VIOLATION OF
SECURITIES FRAUD LAWS.

Section 523(a) of title 11, United States Code, is
amended--
(1) in paragraph (17), by striking ``or'' after the
semicolon;
(2) in paragraph (18), by striking the period at the end
and inserting ``; or''; and
(3) by adding at the end, the following:
``(19) that--
``(A) arises under a claim relating to--
``(i) the violation of any of the Federal securities laws
(as that term is defined in section 3(a)(47) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), any
State securities laws, or any regulations or orders issued
under such Federal or State securities laws; or
``(ii) common law fraud, deceit, or manipulation in
connection with the purchase or sale of any security; and
``(B) results, in relation to any claim described in
subparagraph (A), from--
``(i) any judgment, order, consent order, or decree entered
in any Federal or State judicial or administrative
proceeding;
``(ii) any settlement agreement entered into by the debtor;
or
``(iii) any court or administrative order for any damages,
fine, penalty, citation, restitutionary payment, disgorgement
payment, attorney fee, cost, or other payment owed by the
debtor.''.

SEC. 5. STATUTE OF LIMITATIONS FOR SECURITIES FRAUD.

(a) In General.--Section 1658 of title 28, United States
Code, is amended--
(1) by inserting ``(a)'' before ``Except''; and
(2) by adding at the end the following:
``(b) Notwithstanding subsection (a), a private right of
action that involves a claim of fraud, deceit, manipulation,
or deliberate or reckless disregard of a regulatory
requirement concerning the securities laws, as defined in
section 3(a)(47) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(47)), may be brought not later than the earlier
of--
``(1) 5 years after the date on which the alleged violation
occurred; or
``(2) 3 years after the date on which the alleged violation
was discovered.''.
(b) Effective Date.--The limitations period provided by
section 1658(b) of title 28, United States Code, as added by
this section, shall apply to all proceedings addressed by
this section that are commenced on or after the date of
enactment of this Act.

SEC. 6. REVIEW OF FEDERAL SENTENCING GUIDELINES FOR
OBSTRUCTION OF JUSTICE AND EXTENSIVE CRIMINAL
FRAUD.

Pursuant to section 994 of title 28, United States Code,
and in accordance with this section, the United States
Sentencing Commission shall review and amend, as appropriate,
the Federal Sentencing Guidelines and related policy
statements to ensure that--
(1) the guideline offense levels and enhancements for an
obstruction of justice offense are adequate in cases where
documents or other physical evidence are actually destroyed
or fabricated;
(2) the guideline offense levels and enhancements for
violations of section 1519 or 1520 of title 18, United States
Code, as added by this Act, are sufficient to deter and
punish that activity;
(3) the guideline offense levels and enhancements under
United States Sentencing Guideline 2B1.1 (as in effect on the
date of enactment of this Act) are sufficient for a fraud
offense when the number of victims adversely involved is
significantly greater than 50; and
(4) a specific offense characteristic enhancing sentencing
is provided under United States Sentencing Guideline 2B1.1
(as in effect on the date of enactment of this Act) for a
fraud offense that endangers the solvency or financial
security of 1 or more victims.

SEC. 7. PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES
WHO PROVIDE EVIDENCE OF FRAUD.

(a) In General.--Chapter 73 of title 18, United States
Code, is amended by inserting after section 1514 the
following:

``Sec. 1514A. Civil action to protect against retaliation in
fraud cases

``(a) Whistleblower Protection for Employees of Publicly
Traded Companies.--No company with securities registered
under section 6 of the Securities Act of 1933 (15 U.S.C. 77f)
or section 12 or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78l, 78o(d)), or any officer, employee,
contractor, subcontractor, or agent of such company, may
discharge, demote, suspend, threaten, harass, or in any other
manner discriminate against an employee in the terms and
conditions of employment because of any lawful act done by
the employee--
``(1) to provide information, cause information to be
provided, or otherwise assist in an investigation regarding
any conduct which the employee reasonably believes
constitutes a violation of section 1341, 1343, 1344, or 1348,
any rule or regulation of the Securities and Exchange
Commission, or any provision of Federal law relating to fraud
against shareholders, when the information or assistance is
provided to or the investigation is conducted by--
``(A) a Federal regulatory or law enforcement agency;
``(B) any Member of Congress or any committee of Congress;
or
``(C) a person with supervisory authority over the employee
(or such other person working for the employer who has the
authority to investigate, discover, or terminate misconduct);
or
``(2) to file, cause to be filed, testify, participate in,
or otherwise assist in a proceeding filed or about to be
filed (with any knowledge of the employer) relating to an
alleged violation of section 1341, 1343, 1344, or 1348, any
rule or regulation of the Securities and Exchange Commission,
or any provision of Federal law relating to fraud against
shareholders.
``(b) Election of Action.--
``(1) In general.--A person who alleges discharge or other
discrimination by any person in violation of subsection (a)
may seek relief under subsection (c), by--
``(A) filing a complaint with the Secretary of Labor; or
``(B) bringing an action at law or equity in the
appropriate district court of the United States.
``(2) Procedure.--
``(A) In general.--An action under paragraph (1)(A) shall
be governed under the rules and procedures set forth in
section 42121(b) of title 49, United States Code.
``(B) Exception.--Notification made under section
42121(b)(1) of title 49, United States Code, shall be made to
the person named in the complaint and to the employer.
``(C) Burdens of proof.--An action brought under paragraph
(1)(B) shall be governed by the legal burdens of proof set
forth in section 42121(b) of title 49, United States Code.
``(D) Statute of limitations.--An action under paragraph
(1) shall be commenced not later than 180 days after the date
on which the violation occurs.
``(c) Remedies.--
``(1) In general.--An employee prevailing in any action
under subsection (b)(1) (A) or (B) shall be entitled to all
relief necessary to make the employee whole.
``(2) Compensatory damages.--Relief for any action under
paragraph (1) shall include--
``(A) reinstatement with the same seniority status that the
employee would have had, but for the discrimination;
``(B) 2 times the amount of back pay, with interest; and
``(C) compensation for any special damages sustained as a
result of the discrimination, including litigation costs,
expert witness fees, and reasonable attorney fees.
``(3) Punitive damages.--
``(A) In general.--In a case in which the finder of fact
determines that the protected conduct of the employee under
subsection (a)

[[Page S1790]]

involved a substantial risk to the health, safety, or welfare
of shareholders of the employer or the public, the finder of
fact may award punitive damages to the employee.
``(B) Factors.--In determining the amount, if any, to be
awarded under this paragraph, the finder of fact shall take
into account--
``(i) the significance of the information or assistance
provided by the employee under subsection (a) and the role of
the employee in advancing any investigation, proceeding,
congressional inquiry or action, or internal remedial
process, or in protecting the health, safety, or welfare of
shareholders of the employer or of the public;
``(ii) the nature and extent of both the actual and
potential discrimination to which the employee was subjected
as a result of the protected conduct of the employee under
subsection (a); and
``(iii) the nature and extent of the risk to the health,
safety, or welfare of shareholders or the public under
subparagraph (A).
``(d) Rights Retained by Employee.--
``(1) Other remedies unaffected.--Nothing in this section
shall be deemed to diminish the rights, privilege, or
remedies of any employee under any Federal or State law, or
under any collective bargaining agreement.
``(2) Voluntary adjudication.--No employee may be compelled
to adjudicate his or her rights under this section pursuant
to an arbitration agreement.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 73 of title 18, United States Code, is
amended by inserting after the item relating to section 1514
the following new item:

``1514A. Civil action to protect against retaliation in fraud cases.''.

SEC. 8. CRIMINAL PENALTIES FOR DEFRAUDING SHAREHOLDERS OF
PUBLICLY TRADED COMPANIES.

(a) In General.--Chapter 63 of title 18, United States
Code, is amended by adding at the end the following:

``Sec. 1348. Securities fraud

``Whoever knowingly executes, or attempts to execute, a
scheme or artifice--
``(1) to defraud any person in connection with any security
registered under section 12 or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78l, 78o(d)) or section 6 of
the Securities Act of 1933 (15 U.S.C. 77f); or
``(2) to obtain, by means of false or fraudulent pretenses,
representations, or promises, any money or property in
connection with the purchase or sale of any security
registered under section 12 or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78l, 78o(d)) or section 6 of
the Securities Act of 1933 (15 U.S.C. 77f),

shall be fined under this title, or imprisoned not more than
10 years, or both.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 63 of title 18, United States Code, is
amended by adding at the end the following new item:

``1348. Securities fraud.''.
____

Sectional Analysis: Corporate and Criminal Fraud Accountability Act of
2002

Section 1. Title.
``Corporate and Criminal Fraud Accountability Act.''
Section 2. Criminal Penalties for Altering, Destroying, or
Failing to Maintain Documents
This section provides two new criminal statutes which would
clarify and plug holes in the current criminal laws relating
to the destruction or fabrication of evidence, including the
shredding of financial and audit records. Currently, those
provisions are a patchwork which have been interpreted in
often limited ways in federal court. For instance, certain of
the current provisions make it a crime to persuade another
person to destroy documents, but not a crime to actually
destroy the same documents yourself. Other provisions have
been narrowly interpreted by courts, including the Supreme
Court in United States v. Aguillar, 115 S. Ct. 593 (1995), to
apply only to situations where the obstruction of justice can
be closely tied to a pending judicial proceeding.
First, this section would create a new 5 year felony which
could be effectively used in a wide array of cases where a
person destroys or creates evidence with the specific intent
to obstruct a federal agency or a criminal investigation.
Second, the section creates another 5 year felony which
applies specifically to the willful failure to preserve audit
papers of companies that issue securities.
Section 3. Amendment to Improve Enforcement of Civil RICO
This section proposes an amendment to the civil RICO
provision found at 18 U.S.C. Section 1964 which would enhance
the abilities of federal and state regulators to enforce
existing law by giving State Attorneys General and the
Securities and Exchange Commission, SEC, explicit authority
to bring a suit under the civil RICO provisions. Currently,
only the Attorney General has such authority under RICO.
Section 4. Bankruptcy
This provision would amend the Federal bankruptcy code to
make judgments and settlements arising from state and federal
securities law violations brought by state or federal
regulators and private individuals non-dischargeable. Current
bankruptcy law may permit wrongdoers to discharge their
obligations under court judgments or settlements based on
securities fraud and securities law violations. This loophole
in the law should be closed to help defrauded investors
recoup their losses and to hold accountable those who
perpetrate securities fraud.
Section 5. Statute of Limitations
This section would set the statute of limitations in
private securities fraud cases to the earlier of 5 years
after the date of the fraud or three years after the fraud
was discovered. The current statute of limitations for
private securities fraud cases is the earlier of three
years from the date of the fraud or one year from the date
of discovery. In the Enron state pension fund litigation,
the current short statute of limitations has forced some
states to forgo claims against Enron based on securities
fraud in 1997 and 1998. Victims of securities fraud should
have a reasonable time to discover the facts underlying
the fraud.
The Supreme Court, in Lampf v. Gilbertson, 501 U.S. 350
(1991), endorsed the current short statute of limitations for
securities fraud in a 5-4 decision. Justices O'Connor and
Kennedy wrote in their dissent in the Lampf decison: ``By
adopting a 3-year period of repose, the Court makes a
Sec. 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 suit within three years after the
violation occurred. In so doing, the Court also turns its
back on the almost uniform rule rejecting short periods of
repose for fraud-based actions.''
Section 6. Review and Enhancement of Criminal Sentences in
Cases of Fraud and Evidence Destruction
This section would require the United States Sentencing
Commission, ``Commission'', to consider enhancing criminal
penalties in cases involving the actual destruction or
fabrication of evidence or in fraud cases in which a large
number of victims are injured or when the injury to the
victims is particularly grave, i.e. they face financial ruin.
This provision first requires the Commission to consider
sentencing enhancements in obstruction of justice cases where
physical evidence was actually destroyed. The provision, in
subsections 3 and 4, also requires the Commission to consider
sentencing enhancements for fraud cases which are
particularly extensive or serious. Specifically, once there
are more than 50 victims, the current guidelines do not
require any further enhancement of the sentence, so that a
case with 51 victims may be treated the same as a case with
5,000 victims. In addition, current guidelines allow only
very limited consideration of the extent of financial
devastation that a fraud offense causes to private victims.
This section corrects both these problems.
Section 7. Whistleblower Protection for Employees of Publicly
Traded Companies
This section would provide whistleblower protection to
employees of publicly traded companies, similar to those
currently available to many government employees. It
specifically protects them when they take lawful acts to
disclose information or otherwise assist criminal
investigators, federal regulators, Congress, supervisors (or
other proper people within a corporation), or parties in a
judicial proceeding in detecting and stopping fraud. Since
the bill's provisions only apply to ``lawful'' actions by an
employee, it does not protect employees from improper and
unlawful disclosure of trade secrets. In addition, a
reasonableness test is also set forth under the information
providing subsection of this section, which is intended to
impose the normal reasonable person standard used and
interpreted in a wide variety of legal contexts. See
generally Passaic Valley Sewerage Commissioners v. Department
of Labor, 992 F. 2d 474, 478. Certainly, although not
exclusively, any type of corporate or agency action taken
based on the information, or the information constituting or
leading to admissible evidence would be strong indicia that
it could support of such a reasonable belief. If the employer
does take illegal action in retaliation for lawful and
protected conduct, subsection (b) allows the employee to
elect to file an administrative complaint or to bring a case
in federal court, with a jury trial available in cases where
the case is an action at law. See United States Constitution,
Amendment VII; Title 42 United States Code, Section 1983.
Subsection (c) would require both reinstatement of the
whistleblower, double backpay, compensatory damages to make a
victim whole, and would allow punitive damages in extreme
cases where the public's health, safety or welfare was at
risk.
Section 8. Criminal Penalties for Securities Fraud
This provision would create a new 10 year felony for
defrauding shareholders of publicly traded companies. The
provision would supplement the patchwork of existing
technical securities law violations with a more general and
less technical provision, comparable to the bank fraud and
health care fraud statutes. The provision would be more
accessible to investigators and prosecutors and would provide
needed enforcement flexibility and, in the context of
publicly traded companies, protection against all the types
schemes and frauds which inventive criminals may devise in
the future.

[[Page S1791]]

____
Vermont Department of Banking, Insurance, Securities and
Health Care Administration,
Montpelier, VT, March 8, 2002.
Senator Patrick Leahy,
Russell Senate Office Building,
U.S. Senate, Washington, DC.
Dear Senator Leahy: Your staff recently forwarded a copy of
a bill you intend to introduce entitled, ``Corporate and
Criminal Fraud Accountability Act of 2002''. I read your
proposed legislation with special interest, as I am a trustee
of the Vermont State Teachers' Retirement Board. That system
recently experienced some losses due to its investment in
Enron, as did the other state retirement systems.
I believe that your bill will have a significant and
positive effect on how we investigate and punish those
involved in cases of corporate and criminal fraud. The
provision of your bill making judgments arising from state
and federal securities law violations non-dischargeable under
the federal bankruptcy code is particularly welcome. This
improvement in the law would materially improve the ability
of defrauded investors to recoup their losses. I also support
your proposed expansion of the statute of limitations in
private securities fraud cases. This longer statute of
limitations will result in investors, including state
retirement funds, enjoying a more level playing field when
they are defrauded by complex schemes that they could not
reasonably be expected to discover within the current three
year period.
I also support the provisions in the bill to clarify the
criminal laws concerning the destruction or fabrication of
evidence and the enhancement of criminal sentences in cases
of fraud and destruction of evidence. As the agency charged
with examining financial institutions, the integrity of
records is essential to our ability to do our jobs. Clear
federal laws and increased criminal penalties will provide
powerful deterrents to evidence destruction and securities
fraud. I also support the expansion of civil RICO to allow
state attorney generals and the SEC to bring civil RICO
suits.
Please let me know if I can be of any further assistance on
this legislation.
Sincerely,
Elizabeth Costle,
Commissioner.
____

National Whistleblower Center,

Washington, DC, March 11, 2002.
Senator Patrick Leahy,
Chairman, Senate Judiciary Committee, Dirksen Senate Office
Building, Washington, DC.
Dear Chairman Leahy: Since 1988 the National Whistleblower
Center has aided or defended hundreds of employees who have
disclosed fraud and criminal activities within the public and
private sectors. During this time we have become painfully
aware of the major loopholes which often leave courageous
employees without any legal protection. One of the most
notorious loopholes exists under the securities laws, in
which employees who report fraud upon stockholders have no
protection under federal law. It is truly tragic that
employees who are wrongfully discharged merely for reporting
violations of law, which may threaten the integrity of
pension funds or education-based savings accounts, have no
federal protection. This point was made perfectly clear by
the recently released internal memorandum from attorneys for
Enron. According to Enron's own counsel, employees who raised
concerns over that company's accounting practices had no
protection under federal law and could be fired.
With this background in mind, the National Whistleblower
Center strongly commends you for introducing the Corporate
and Criminal Fraud Accountability Act of 2002. This law would
protect employees who disclose Enron-related fraud to the
appropriate authorities. It is modeled on the airline safety
whistleblower law, which overwhelmingly passed Congress with
strong bi-partisan support. The next time a company like
Enron seeks advice from counsel as to whether they can fire
an employee, like Sharon Watkins, who merely discloses
potential fraud on shareholders, the answer must be a
resounding ``no.'' That can only happen if the Corporate and
Criminal Fraud Accountability Act is enacted into law.
Respectfully submitted,
Stephen M. Kohn,
Chairman of the Board of Directors.
Kris Kolesnik,
Executive Director.
____

Government Accountability Project and Taxpayers Against
Fraud,
Washington, DC, March 11, 2002.
Hon. Patrick Leahy,
Chair, Senate Judiciary Committee, Dirksen Senate Office
Building, Washington, DC.
Dear Senator Leahy: Thank you for your leadership in
introducing the Corporate Fraud and Criminal Accountability
Act of 2002. This is a landmark proposal, for which we offer
our complete support. The bill promises to make whistleblower
protection the rule rather than the exception for those
challenging betrayals of corporate fiduciry duty enforced by
the Securities and Exchange Commission. It would be the
single most effective measure possible to prevent recurrences
of the Enron debacle and similar threats to the nation's
financial markets, shareholders and pension holders. It also
would be a breakthrough in implementing recommendations
pending since 1985 by the Administrative Conference of the
United States for a consistent, coherent system of corporate
whistleblower protection.
The Government Accountability Project (GAP) is a nonprofit,
nonpartisan public interest law firm dedicated since 1976 to
helping whistleblowers, those employees who exercise freedom
of speech to bear witness against betrayals of public trust
that they discover on the job. GAP has led the campaign for
passage of nearly all federal whistleblower laws over the
last two decades, as well as a model law approved by the
Organization of American States to implement its Inter-
American Convention Against Corruption. Two decades of
lessons learned are summarized in GAP's book The
Whistleblower's Survival Guide: Courage Without Martyrdom.
Taxpayers Against Fraud, The False Claims Act Legal Center
(TAF) is a nonprofit, nonpartisan public interest
organization dedicated to combating fraud against the Federal
Government through the promotion and use of the federal False
Claims Act and its qui tam whistleblower provisions. TAF
supports effective anti-fraud legislation at the federal and
state level and, as part of its educational outreach,
publishes the False Claims Act and Qui Tam Quarterly Review.
This bill is outstanding good goverenment legislation. It
uses the best combination of provisions that have proven
effective in other contexts. It has the modern burdens of
proof in the Whistleblower Protection Act of 1989, and offers
choices of forum that virtually guarantee whistleblowers will
have a fair day in court. Most significant, it closes the
loopholes that have meant whistleblowers proceed at their own
risk when warning Congress, shareholders or even their own
management or Board Audit Committees of financial misconduct
threatening the health both of their own company and, in some
cases, the nation's economy. You have our unqualified pledge
of helping to finish the public service you started by
introducing this legislation.
Sincerely,
Jim Moorman,
Executive Director, TAF.
Tom Devine,
Legal Director, GAP.
____

North American Securities Administrators Association,
Inc.,
Washington, DC, March 5, 2002.
Hon. Patrick J. Leahy,
Chairman, Senate Judiciary Committee,
Washington, DC.
Dear Mr. Chairman: The North American Securities
Administrators Association, Inc., (NASAA), organized in 1919,
is the oldest international organization devoted to investor
protection. Its membership consists of the securities
administrators in the 50 states, the District of Columbia,
Canada, Mexico and Puerto Rico. NASAA is the voice of
securities agencies responsible for grass-roots investor
protection and efficient capital formation.
NASAA members collectively bring thousands of enforcement
actions against violators of securities laws in an effort to
protect investors from fraud and abuse in connection with the
offer and sale of securities.
We have reviewed a draft of the Corporate and Criminal
Fraud and Accountability Act of 2002, and we support it. Our
focus is on the section that would prevent the discharge of
certain debts in bankruptcy proceedings. At the present time,
the bankruptcy code enables defendants who are guilty of
fraud and other securities violations to thwart enforcement
of the judgments and other awards that are issued in these
cases.
We support Section 4, as drafted, because it strengthens
the ability of regulators and individual investors to prevent
the discharge of certain debts and hold defendants
financially responsible for violations of securities laws.
This issue is of great interest to state securities
regulators, and we commend you for addressing it in the
proposed legislation.
NASAA and its members are prepared to work with you as the
legislative process continues. We support your effort to
enhance the ability of state and federal regulators to help
defrauded investors recoup their losses and to hold
accountable those who perpetuate securities fraud.
Sincerely,

Joseph P. Borg,

NASAA President, Director of
Alabama Securities Commission.
____

From: Jordan, Carl.
Sent: Friday, August 24, 2001 7:02 PM.
To: Butcher, Sharon (Enron).
Subject: Confidential Employee Matter.

Attorney Client Privileged Communication

Sharon: Per your request, the following are some bullet
thoughts on how to manage the situation with the employee who
made the sensitive report.
1. I agree that it is a positive that she has requested
reassignment to another department. Assuming a suitable
position can be found, I recommend documenting in memo form
that the transfer is being effected per her request. This
would be worded to convey that the company has considered and
decided to accommodate her request for reassignment. See
comments below re additional items to be addressed in the
memo.
2. I suggest that the memo also name a designated company
officer for her to contact in the unlikely future event that
she believes she is being retaliated against for having made
the report. Case law suggests that she then will have the
burden of reporting

[[Page S1792]]

any perceived retaliation and allowing the company a
reasonable opportunity to correct it before quitting and
asserting a constructive discharge. (Note: If there is any
chance that the decision might be made in the future to
discharge the employee for making the report--e.g., if the
company concludes that the allegations were not made in good
faith--then this assurance probably should not be given, at
least until later when (if) the company is satisfied that the
employee was not acting in bad faith or otherwise
improperly.)
3. The memo should contain language that conveys that the
other terms of her employment--specifically, its at-will
status--remains unchanged. This is to avoid any future claim
that the understandings surrounding the transfer constitute a
contractual obligation of some sort.
4. The new position, as we discussed, should have
responsibilities and compensation comparable to her current
one, to avoid any claim of constructive discharge.
5. As we discussed, to the extent practicable, the fact
that she made the report should be treated as confidential.
6. The individual or individuals who are implicated by her
allegations should be advised to treat the matter
confidentially and to use discretion regarding any comments
to or about the complaining employee. They should be advised
that she is not to be treated adversely in any way for having
expressed her concerns.
7. You indicated that the officer in charge of the area to
which the employee may be reassigned would probably need to
be advised of the circumstances. I suggest he be advised at
the same time that it is important that she not be treated
adversely or differently because she made the report. And
that the circumstances of the transfer are confidential and
should not be shared with others.
You also asked that I include in this communication a
summary of the possible risks associated with discharging (or
constructively discharging) employees who report allegations
of improper accounting practices:
1. Texas law does not currently protect corporate
whistleblowers. The supreme court has twice declined to
create a cause of action for whistleblowers who are
discharged; however, there were special factors present in
both cases that weighed against the plaintiffs and the court
implied that it might reach a different conclusion under
other circumstances.
2. Regardless of the whistleblower issue, there is often a
risk of a Sabine Pilot claim (i.e., allegation of discharge
for refusing to participate in an illegal act). Whistleblower
cases in Texas commonly are pled or repled as Sabine Pilot
claims--it is often an easy leap for the plaintiff to make if
she had any involvement in or duties relating to the alleged
improper conduct. For example, some cases say that if an
employee's duties involve recording accounting data that she
knows to be misleading onto records that are eventually
relied on by others in preparing reports to be submitted to a
federal agency (e.g., SEC, IRS, etc.), then the employee can
be subject to criminal prosecution even tho she did not
originated the misleading data and does not prepare the
actual document submitted to the government. Under such
circumstances, if the employee alleges that she was
discharged for refusing to record (or continuing the practice
of recording) the allegedly misleading data, then she has
stated a claim under the Sabine Pilot doctrine.
3. As we discussed, there are a myriad of problems
associated with Sabine Pilot claims, regardless of their
merits, that involve allegations of illegal accounting or
related practices. One is that the company's accounting
practices and books and records are fair game during
discovery--the opposition typically will request production
of volumes of sensitive material. Another problem is that
because accounting practices often involve judgments in gray
areas, rather than non-judgmental applications of black-
letter rules, there are often genuine disputes over whether a
company's practice or a specific report was materially
misleading or complied with some statutory or regulatory
requirements. Third, these are typically jury cases--that
means they are decided by lay persons when the legal
compliance issues are often confusing even to the lawyers and
experts. Fourth, because of the above factors, they are very
expensive and time consuming to litigate.
4. In addition to the risk of a wrongful discharge claim,
there is the risk that the discharged employee will seek to
convince some government oversight agency (e.g., IRS, SEC,
etc.) that the corporation has engaged in materially
misleading reporting or is otherwise non-compliant. As with
wrongful discharge claims, this can create problems even tho
the allegations have no merit whatsoever.
These are, of course, very general comments. I will be
happy to discuss them in greater detail at your convenience.

____________________