S. Rept. 105-182 - 105th Congress (1997-1998)
May 04, 1998, As Reported by the Banking, Housing, and Urban Affairs Committee

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Senate Report 105-182 - THE SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1998




[Senate Report 105-182]
[From the U.S. Government Printing Office]



105th Congress                                         Report
2d Session                       SENATE                105-182

_______________________________________________________________________

                                     

                                                       Calendar No. 355

 
        THE SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1998

                               __________

                              R E P O R T

                                 OF THE

                     COMMITTEE ON BANKING, HOUSING,

                           AND URBAN AFFAIRS

                          UNITED STATES SENATE

                              to accompany

                                S. 1260

                             together with

                            ADDITIONAL VIEWS

                                     
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>


                  May 4, 1998.--Ordered to be printed







            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                 ALFONSE M. D'AMATO, New York, Chairman

PHIL GRAMM, Texas                    PAUL S. SARBANES, Maryland
RICHARD C. SHELBY, Alabama           CHRISTOPHER J. DODD, Connecticut
CONNIE MACK, Florida                 JOHN F. KERRY, Massachusetts
LAUCH FAIRCLOTH, North Carolina      RICHARD H. BRYAN, Nevada
ROBERT F. BENNETT, Utah              BARBARA BOXER, California
ROD GRAMS, Minnesota                 CAROL MOSELEY-BRAUN, Illinois
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska

                    Howard A. Menell, Staff Director

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                       Douglas R. Nappi, Counsel

                   Mitchell Feuer, Democratic Counsel

                                 ______

                       Subcommittee on Securities

                      PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama           CHRISTOPHER J. DODD, Connecticut
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
ROBERT F. BENNETT, Utah              JOHN F. KERRY, Massachusetts
LAUCH FAIRCLOTH, North Carolina      RICHARD H. BRYAN, Nevada

                   Wayne A. Abernathy, Staff Director

         Andrew Lowenthal, Democratic Professional Staff Member

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page
Introduction.....................................................     1
History of the Legislation.......................................     1
Purpose and Scope................................................     3
Section-by-Section Analysis of S. 1260: ``The Securities 
  Litigation Uniform Standards Act of 1998''.....................     8
    Section 1. Short title.......................................     8
    Section 2. Findings and purposes.............................     8
    Section 3. Limitation on remedies............................     9
    Section 4. Applicability.....................................     9
Regulatory Impact Statement......................................     9
Cost of Legislation..............................................     9
Changes in Existing Law..........................................    10
Additional Views.................................................    11

                                 (iii)



                                                       Calendar No. 355

105th Congress                                                   Report
                                 SENATE
 2d Session                                                     105-182
_______________________________________________________________________



        THE SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1998

                                _______
                                

                  May 4, 1998.--Ordered to be printed

_______________________________________________________________________


Mr. D'Amato, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 1260]

                              Introduction

    The Committee on Banking, Housing and Urban Affairs, to 
which was referred the bill (S. 1260), to amend the Securities 
Act of 1933 and the Securities Exchange Act of 1934 to limit 
the conduct of securities class actions under State law, having 
considered the same, reports favorably thereon with an 
amendment in the nature of a substitute, and recommends that 
the bill as amended do pass.

                       History of the legislation

    On July 24, 1997, the Subcommittee on Securities held an 
oversight hearing on the operation of the Private Securities 
Litigation Reform Act (hereinafter referred to as either the 
``PSLRA'' or the ``1995 Act'') which was passed over 
presidential veto during the 104th Congress (PL-104-67). At 
this hearing testimony was received from: Arthur Levitt, 
Chairman of the Securities and Exchange Commission; Keith Paul 
Bishop, Commissioner, California Department of Corporations; 
Dr. Joseph A. Grundfest, Professor, Stanford Law School and 
former Commissioner, Securities and Exchange Commission; Mr. 
Michael A. Perino Lecturer, Stanford Law School; Mr. Joseph 
Polizotto, Managing Director, Office of the General Counsel, 
Lehman Brothers (on behalf of the Securities Industry 
Association); Mr. Kenneth Janke, Sr., President and Chief 
Executive Officer, National Association of Investors 
Corporation; Mr. Richard Miller, General Counsel, American 
Institute of Certified Public Accountants; Mr. Leonard Simon, 
Milberg Weiss Bershad Hynes and Lerach (on behalf of the 
National Association of Securities and Commercial Law 
Attorneys); Mr. Brian Dovey, President, National Venture 
Capital Association and; Mr. Robert C. Hinckley, Vice 
President, Strategic Plans and Programs, Xilinx (on behalf of 
the American Electronics Association).
    As a result of the testimony received at the July 1997 
hearing, Senators Gramm, Dodd, Boxer, Faircloth, Hagel and 
Moseley-Braun, together with seven other Senators who are not 
members of the Committee introduced on October 7, 1997, S. 
1260, the ``Securities Litigation Uniform Standards Act of 
1997'' (hereinafter referred to as either ``Uniform Standards'' 
or ``S. 1260'') Subsequently, a total of forty Senators 
cosponsored the legislation, including twelve from the 
Committee (Senators Gramm. Dodd, Boxer, Faircloth, Hagel, 
Moseley-Braun, Bennett, Grams, Kerry, Mack, Allard and Enzi).
    On October 29, 1997 and on February 23, 1998, the 
Subcommittee on Securities held legislative hearings on S. 
1260. Witnesses testifying on October 29, 1997 included: U.S. 
Representative Rick White; U.S. Representative Anna Eshoo; 
Arthur Levitt, Chairman, the Securities and Exchange Commission 
(SEC); Isaac C. Hunt, Jr., Commissioner, Securities and 
Exchange Commission; Robert C. Hinckley, Vice President, 
Strategic Plans and Programs, Xilinx, who testified on behalf 
of the American Electronics Association; Harry Smith, Mayor of 
Greenwood, Mississippi, who testified on behalf of the National 
League of Cities; Herbert Milstein of Cohen, Milstein, Hausfeld 
& Toll, who testified on behalf of the National Association of 
Securities and Commercial Law Attorneys; Professor Michael 
Perino, Stanford Law School; Thomas E. O'Hara, Chairman, Board 
of Trustees, the National Association of Investors Corporations 
and Daniel Cooperman, Senior Vice President, General Counsel, 
and Corporate Secretary, Oracle Corporation, who testified on 
behalf of the Software Publishers Association.
    Witnesses testifying on February 23, 1998 included: Boris 
Feldman, Wilson, Sonsini, Goodrich & Rosati; Professor Richard 
W. Painter, Cornell Law School; Michael H. Morris, Vice 
President and General Counsel, Sun Microsystems; Mary Rouleau, 
Legislative Director, Consumer Federation of America; J. Harry 
Weatherly, Director of Finance, Mecklenburg County, North 
Carolina, on behalf of the Government Finance Officers 
Association; and John F. Olson, Gibson, Dunn & Crutcher.
    On April 29, 1998, the Committee met in Executive Session 
to consider and adopt an amendment in the nature of a 
substitute that was offered by Chairman D'Amato and Senators 
Gramm and Dodd. The Committee also adopted an amendment, by 
voice vote, providing two findings to the bill. The amendment 
was offered by Chairman D'Amato and Senators Gramm and Dodd. 
The amendment makes clear the Committee's intention to enact 
this legislation in order to prevent state laws from being used 
to frustrate the operation and goals of the 1995 Reform Act. 
The legislation was ordered reported from Committee by a vote 
of 14-4. Senators Shelby, Sarbanes, Bryan and Johnson voted 
against this legislation.

                    Purpose and Scope of Legislation

    The need for this legislation became apparent during a 
Securities Subcommittee hearing on July 24, 1997. This hearing 
was held to review the status of the implementation and impact 
of the ``Private Securities Litigation Reform Act of 1995.'' 
1 During the course of that hearing one disturbing 
trend became apparent; namely, that there was a noticeable 
shift in class action litigation from federal to state courts. 
At this hearing, one witness pointed out the dangers of 
maintaining differing federal and state standards of liability 
for nationally-traded securities:
---------------------------------------------------------------------------
    \1\ Pub Law No. 104-67 (Dec. 22, 1995).

          Disparate, and shifting, state litigation procedures 
        may expose issuers to the potential for significant 
        liability that cannot easily be evaluated in advance, 
        or assessed when a statement is made. At a time when we 
        are increasingly experiencing and encouraging national 
        and international securities offerings and listings, 
        and expending great effort to rationalize and 
        streamline our securities markets, this fragmentation 
        of investor remedies potentially imposes costs that 
        outweigh the benefits. Rather than permit or foster 
        fragmentation of our national system of securities 
        litigation, we should give due consideration to the 
        benefits flowing to investors from a uniform national 
        approach.2
---------------------------------------------------------------------------
    \2\ Testimony of Stephen M.H. Wallman, Commissioner, Securities and 
Exchange Commission; submitted to the Subcommittee on Securities' 
``Oversight Hearing on the Private Securities Litigation reform Act of 
1995'' (the ``Reform Act Hearing''), July 24, 1997, p. 1.

    Former SEC Commissioner Joseph Grundfest summarized this 
post 1995 Act increase in state securities class actions in 
testimony co-authored with his fellow Stanford Law School 
---------------------------------------------------------------------------
faculty member Michael Perino:

          The relative stability of the aggregate litigation 
        rate masks a significant shift of activity from federal 
        to state court * * *. There is widespread agreement 
        that these figures represent a substantial increase in 
        state court litigation. Two phenomena seem to explain 
        the bulk of this shift. First, there appears to be a 
        ``substitution effect'' whereby plaintiff's counsel 
        file state court complaints when the underlying facts 
        appear not to satisfy new, more stringent federal 
        pleading requirements, or otherwise seek to avoid the 
        substantive or procedural provisions of the Act. Second 
        plaintiffs appear to be resorting to increased parallel 
        state and federal litigation in an effort to avoid 
        federal discovery stays or to establish alternative 
        state court venues for settlement of federal 
        claims.3
---------------------------------------------------------------------------
    \3\ Joint prepared statement of Joseph A. Grundfest and Michael A. 
Perino, ``Reform Act Hearing,'' July 24, 1997, p. 6.

    While there was some disagreement as to the exact size of 
the increase in state class-action filings, the overall 
evidence received by the Committee is compelling.4 
As one witness testified ``(t)he single fact is that state-
court class actions involving nationally traded securities were 
virtually unknown prior to the [1995 Act]; they are brought 
with some frequency now.'' 5
---------------------------------------------------------------------------
    \4\ ``* * * the apparent shift to state court may be the most 
significant development in securities litigation post-Reform Act.'' 
Securities and Exchange Commission, Report to the President and the 
Congress on the First Year of Practice Under the Private Securities 
Litigation Reform Act of 1995, p. 69 (1997); see also Statement of 
Senator Phil Gramm, Senate Subcommittee on Securities Hearing, February 
23, 1998, entering into the record materials submitted by Price, 
Waterhouse, LLP documenting both the rise in state securities class 
action cases and the changing nature of those cases; see also Michael 
A. Perino, Fraud and Federalism: Preempting Private State Securities 
Fraud Causes of Action, Stanford Law Review (forthcoming 1998), 
manuscript at 31, n. 127; see also Joseph A. Grundfest and Michael A. 
Perino; Securities Litigation Reform: The First Year's Experience 
(Release 97.1), Summary of Major Findings, p. ii-iii; Stanford Law 
School; February 27, 1997.
    \5\ Written testimony of John F. Olson of Gibson, Dunn & Crutcher, 
``Hearing on S. 1260,'' February 23, 1998, p. 5.
---------------------------------------------------------------------------
    Further, the Committee has found that this state class-
action trend has had an impact beyond the number of, and dollar 
amounts involved in, the class actions filed. This trend has 
created a ripple-effect that has inhibited small, high-growth 
companies in their efforts to raise capital, and has damaged 
the overall efficiency of our capital markets.6 
Specifically, the increased risk of state court class actions 
has had a chilling effect on the use of the ``safe-harbor'' and 
other important provisions of the 1995 Act.7 The 
safe harbor was intended to help get valuable financial 
forecasts and forward-looking information to investors, so that 
these investors could make decisions with as much information 
as possible; as Thomas O'Hara of the National Association of 
Investors Corporation (``NAIC''), testified:
---------------------------------------------------------------------------
    \6\ Joint prepared statement of Joseph A. Grundfest and Michael A. 
Perino, ``Reform Act Hearing,'' July 24, 1997, p. 6.
    \7\ See, e.g., Prepared statement of Michael Morris, Vice President 
and General Counsel, Sun Microsystems, ``Hearing on S. 1260,'' February 
23, 1998.

          The key to becoming successful with high-tech 
        investments is a willingness to recognize--and 
        tolerate--the inherent volatility of the business and 
        access to crucial forward-looking information so an 
        investor can make a wise decision.8
---------------------------------------------------------------------------
    \8\ Written statement of Thomas E. O'Hara, Chairman, NAIC, 
``Hearing on S. 1260,'' October 29, 1997.

    A number of witnesses at the July 1997 hearing advocated 
legislation to establish uniform standards for private 
securities class action litigation.9 This 
legislation is an outgrowth of the July 1997 hearings and 
subsequent investigation and oversight by the Committee.
---------------------------------------------------------------------------
    \9\ See, e.g.,  Grundfest and Perino, supra, note 2; Written 
statement of Robert C. Hinckely, Vice President Strategic Plans and 
Programs, XILINX, on behalf of The American Electronics Association, 
the Reform Act Hearing, July 27, 1997, p. 17.
---------------------------------------------------------------------------
    Some critics of establishing a uniform standard of 
liability have attacked such legislation as being an affront on 
Federalism and contrary to the recent trend towards reinforcing 
state rights.10 Proponents of the legislation have 
argued that we live in an information age in which we have 
truly national, if not international, securities markets and 
that uniform standards are entirely consistent with Congress's 
preeminent power over the regulation of interstate and foreign 
commerce. The Committee, while sensitive to both these 
considerations, found the interest in promoting efficient 
national markets to be the more convincing and compelling 
consideration in this context.
---------------------------------------------------------------------------
    \10\ Written statement of Hon. Harry Smith, Mayor, Greenwood, 
Mississippi, on behalf of the National League of Cities, ``Hearing on 
S. 1260,'' October 29, 1997, p. 8.
---------------------------------------------------------------------------
    We do have national markets for certain securities, and 
fraudulent and abusive securities class action litigation 
distorts the efficient operation of those markets and the 
optimal allocation of available capital. Commissioner Keith P. 
Bishop, then-California's primary state securities regulator, 
testified before the Subcommittee on Securities in July, 1997, 
that the preponderance of class action litigation in several 
states is irrelevant to the true national nature of the 
problem:

          It is important to note that companies can not 
        control where their securities are traded after an 
        initial public offering * * *. As a result, companies 
        with publicly-traded securities can not choose to avoid 
        jurisdictions which present unreasonable litigation 
        costs. Thus, a single state can impose the risks and 
        costs of its peculiar litigation system on all national 
        issuers.11
---------------------------------------------------------------------------
    \11\ Written statement of Hon. Keith Paul Bishop, Commissioner, 
California Department of Corporations, ``Reform Act Hearing,'' July 27, 
1998, p. 3.

    The Committee emphasizes the important role that the local 
``cop on the beat,'' i.e., the state securities regulators, 
plays in a complementary state-federal securities regulatory 
system. In recognition of this dual system, this legislation 
uses the approach that the National Securities Markets 
Improvement Act of 1996 (``NSMIA'') employed. The purpose of 
NSMIA was described by SEC Chairman Levitt in testimony 
---------------------------------------------------------------------------
regarding that legislation:

          The current system of dual federal-state regulation 
        is not the system that Congress or the Commission would 
        create today if we were designing a new system * * *. 
        An appropriate balance can be attained in the federal-
        state arena that better allocates responsibilities, 
        reduces compliance costs and facilitates capital 
        formation, while continuing to provide for the 
        protection of investors. The bill's approach to the 
        division of responsibilities in the investment adviser 
        and investment company areas exemplifies such a 
        balance.

    As introduced, the legislation incorporated the conceptual 
framework of NSMIA (with respect to interplay of federal and 
state regulation), while complementing, and hopefully giving 
full force to the 1995 Act. The Committee strongly notes that 
this legislation only covers precisely those securities defined 
in the NSMIA, principally those securities that are traded on 
national exchanges. During the course of the two hearings held 
by the Subcommittee on Securities on this legislation, the 
Subcommittee received a great deal of constructive advice about 
how best to give effect to the 1995 Act.

Scienter

    The Committee heard testimony from the Securities and 
Exchange Commission and others regarding the scienter 
requirement under a possible national standard of litigation 
for nationally traded securities. The Committee understands 
that this concern arises out of certain Federal district 
courts' interpretation of the Private Securities Litigation 
Reform Act of 1995 [PL 104-67]. In that regard, the Committee 
emphasizes that the clear intent in 1995 and our continuing 
intent in this legislation is that neither the PSLRA nor S. 
1260 in any way alters the scienter standard in federal 
securities fraud suits. It was the intent of Congress, as was 
expressly stated during the legislative debate on the PSLRA, 
and particularly during the debate on overriding the 
President's veto, that the PSLRA establish a uniform federal 
standard on pleading requirements by adopting the pleading 
standard applied by the Second Circuit Court of Appeals. Indeed 
the express language of the PSLRA itself carefully provides 
that plaintiffs must ``state with particularity facts giving 
rise to a strong inference that the defendant acted with the 
required state of mind'' (emphasis added). The Committee 
emphasizes that neither the PSLRA nor S. 1260 makes any attempt 
to define that state of mind.

Certain exceptions

    The SEC, as well as other commentators,12 also 
noted the need to exempt from the legislation shareholder-
initiated litigation based on breach of fiduciary duty of 
disclosure, in connection with certain corporate actions, that 
is found in the law of some states, most notably Delaware.
---------------------------------------------------------------------------
    \12\ See, e.g., Prepared statement of John F. Olson, ``Hearings on 
S. 1260,'' Senate committee on Banking, Housing & Urban Affairs, 
Subcommittee on Securities, February 23, 1998, pp. 8-13.
---------------------------------------------------------------------------
    The Committee is keenly aware of the importance of state 
corporate law, specifically those states that have laws that 
establish a fiduciary duty of disclosure. It is not the intent 
of the Committee in adopting this legislation to interfere with 
state law regarding the duties and performance of an issuer's 
directors or officers in connection with a purchase or sale of 
securities by the issuer or an affiliate from current 
shareholders or communicating with existing shareholders with 
respect to voting their shares, acting in response to a tender 
or exchange offer, or exercising dissenters' or appraisal 
rights.
    In applying the uniform standards in this manner, the 
Committee expressly does not intend for suits excepted under 
this provision to be brought in venues other than in the 
issuer's state of incorporation, in the case of a corporation, 
or state of organization, in the case of an other entity.

Definition of ``Class Action''

    The Subcommittee on Securities heard testimony from the 
Securities and Exchange Commission and others that the 
definition of class action originally drafted as part of S. 
1260 would inadvertently include cases that were beyond the 
intent of the legislation--such as certain types of individual 
state private securities actions.
    In response to these concerns, the Committee made several 
significant changes to the definition of class action. Because 
of the unique nature of the suits that the Committee has made 
subject to the legislation's provisions, this definition cannot 
simply track the exact language of Rule 23 of the Federal Rules 
of Civil Procedure.
    In order to ensure that individual state actions would not 
be included as part of the bill's definitions, it was necessary 
for the Committee to create a standard of demarcation between 
individual actions appropriately brought in state court and 
those actions that should be subject to the bill's provisions. 
To address this goal, and to establish objective criteria in 
the application of the definition, the Committee specifically 
included a threshold number of fifty or more persons or 
prospective class members as part of the definition of a class 
action under this legislation.
    Section 2(f)(1)(A)(i)(II) of the legislation provides a 
definition that closely tracks the relevant provisions of Rule 
23 of the Federal Rules of Civil Procedure in which a suit is 
brought by representative plaintiffs on behalf of themselves 
and other unnamed parties. Section 2(f)(1)(A)(i)(I), however, 
provides that any single lawsuit is treated as a class action 
if it seeks damages on behalf of more than fifty persons and 
questions of law or fact common to the prospective class 
predominate, without regard to questions of individualized 
reliance. The predominance requirement, modeled on Rule 23, is 
included to assure that claims that are not closely related, 
but that are included in a single proceeding only for the 
purposes of convenience are not treated as a class action. The 
Committee is conscious, however, of the danger that the 
predominance requirement could be used as a loophole to bring a 
single suit that names many plaintiffs. If such a suit is 
brought under a state law that requires proof of each 
individual plaintiff's reliance on a defendant's alleged 
misstatement or omission, the necessity of proving reliance on 
an individual basis might mean that common questions would not 
predominate and the suit accordingly would not be treated as a 
class action.
    Indeed the Supreme Court stated in Basic, Inc. v. Levinson 
[485 U.S. 224, 242, (1988)] that ``requiring proof of 
individualized reliance from each member of the proposed 
plaintiff class effectively would * * * prevent plaintiffs from 
proceeding with a class action, since individual issues would * 
* * overwhelm the common ones.'' To avoid this problem, the 
definition provides that the predominance inquiry must be 
undertaken without reference to issues of individualized 
reliance, so that the necessity of proving reliance on an 
individual basis would not defeat treatment of the suit as a 
class action.
    Section 2(f)(1)(A)(ii) is a definition of class action that 
is intended to prevent evasion of the bill through the use of 
so-called ``mass actions.'' These kinds of actions are now 
brought in product liability, environmental tort and similar 
cases. In practice, such suits may function very much like 
traditional class actions and, because they involve many 
plaintiffs, they may have a very high settlement value. They 
accordingly may be abused by lawyers who seek to evade the 
provisions of this Act in order bring coercive strike suits.
    Subpart (A)(ii) addresses the Committee's concern by 
including in the definition of class action any group of 
lawsuits that are filed or pending in the same court, that in 
the aggregate seek damages on behalf of more than fifty 
persons, that involve common questions of law or fact, and 
which are joined, consolidated, or otherwise proceed as a 
single action for any purpose. The Committee does not intend 
for the bill to prevent plaintiffs from bringing bona fide 
individual actions simply because more than fifty persons 
commence the actions in the same state court against a single 
defendant.
    However, the provisions of the bill would apply where the 
court orders that the suits be joined, consolidated, or 
otherwise proceed as a single action at the state level. The 
Committee also notes that when such suits proceed as a single 
action in state court, it is frequently at the request of the 
plaintiffs.
    The class action definition has been changed from the 
original text of S. 1260 to ensure that the legislation does 
not cover instances in which a person or entity is duly 
authorized by law, other than a provision of state or federal 
law governing class action procedures, to seek damages on 
behalf of another person or entity. Thus, a trustee in 
bankruptcy, a guardian, a receiver, and other persons or 
entities duly authorized by law (other than by a provision of 
state or federal law governing class action procedures) to seek 
damages on behalf of another person or entity would not be 
covered by this provision.
    Finally, while the Committee believes that it has 
effectively reached those actions that could be used to 
circumvent the reforms enacted by Congress in 1995 as part of 
the Private Securities Litigation Reform Act, it remains the 
Committee's intent that the bill be interpreted broadly to 
reach mass actions and all other procedural devices that might 
be used to circumvent the class action definition.

                      section-by-section analysis

Section 1. Short title

    The short title of the bill is the Securities Litigation 
Uniform Standards Act of 1998.

Section 2. Findings

    Congress finds that in order to avoid the thwarting of the 
purpose of the Private Securities Litigation Reform Act of 
1995, national standards for nationally traded securities must 
be enacted, while preserving the appropriate enforcement powers 
of state regulators, and the right of individuals to bring 
suit.

Section 3. Limitation on remedies

    Subsection 3(a) amends Section 16 of the Securities Act of 
1933 as follows:
    Subsection 16(a) is a savings clause.
    Subsection 16(b) provides that no class action based on 
State law alleging fraud in connection with the purchase or 
sale of covered securities may be maintained in State or 
Federal court.
    Subsection 16(c) provides that any class action described 
in Subsection (b) that is brought in a State court shall be 
removable to a Federal district court, and may be dismissed 
pursuant to the provisions of subsection (b).
    Subsection 16(d) of the new section 16 provides for the 
preservation of certain law suits brought under State law 
affecting conduct of corporate officers with respect to certain 
corporate actions, including tender offers, exchange offers or 
the exercise of dissenter's or appraisal rights.
    Subsection 16(e) of the new section 16 reemphasizes that 
State securities commissions retain their jurisdiction to 
investigate and bring enforcement actions.
    Subsection 16(f) of the new section 16 provides for 
definitions under the section, including definitions of ``class 
action,'' ``covered security,'' and ``affiliate of the 
issuer.'' ``Class action'' is defined so as to capture mass 
actions, but to exclude shareholder derivative actions and 
actions by a group of less than 50 individuals or entities. 
``Covered securities'' includes securities satisfy the 
definition of that term given in subsection 18(b)(1) and 
18(b)(2) of the Securities Act of 1933.
    Subsection 3(b) amends Section 28 of the Securities 
Exchange Act of 1934 so as to effect the changes to that 
section substantially similar to, and consistent with, the 
amendments that subsection 3(a) makes to the Securities Act of 
1933.

Section 4. Applicability

    The changes in law made by the bill do not affect any court 
action commenced before and pending on the date of enactment of 
the legislation.

                      regulatory impact statement

    This legislation is designed to address and unforeseen 
``loophole'' in the 1995 Private Securities Litigation Act, 
that has blocked that law from accomplishing its stated goal of 
reforming private securities litigation. Because S.1260 seeks 
to achieve further reforms in the private securities litigation 
system, the Committee believes that this legislation will have 
little or no regulatory impact.

                          cost of legislation

                                     U.S. Congress,
                               Congressional Budget Office,
                                       Washington, DC, May 1, 1998.
Hon. Alfonse M. D'Amato,
Chairman, Committee on Banking, Housing and Urban Affairs,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 1260, the Securities 
Litigation Uniform Standards Act of 1998.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Kathleen 
Gramp (for federal costs), and Pepper Santalucia (for the state 
and local impact).
            Sincerely,
                                         June E. O'Neill, Director.
    Enclosure.

               congressional budget office cost estimate

S. 1260--Securities Litigation Uniform Standards Act of 1998

    S. 1260 would amend existing law related to class actions 
involving certain types of securities fraud. Under this bill, 
certain class actions could not be based on state law and could 
only be maintained in federal courts.
    CBO estimates that implementing S. 1260 would have no 
significant impact on the federal budget. Recent data on the 
number of securities-related class actions brought under state 
law suggest that fewer than 100 cases per year might shift to 
federal courts as a result of this bill. Although class actions 
often involve complex and time-consuming issues, CBO estimates 
that the federal court system would not incur significant costs 
to process that number of new cases. Because S. 1260 would not 
affect direct spending or receipts, pay-as-you-go procedures 
would not apply.
    S. 1260 contains an intergovernmental mandate as defined in 
the Unfunded Mandates Reform Act of 1995 (UMRA) because it 
would preempt state securities laws. However, CBO estimates 
that the impact on state budgets would not be significant. The 
bill contains no private-sector mandates as defined in UMRA.
    The CBO staff contacts for this estimate are Kathleen Gramp 
(for federal costs), who can be reached at 226-2860, and Pepper 
Santalucia (for the state and local impact), who can be reached 
at 225-3220. This estimate was approved by Robert A. Sunshine, 
Deputy Assistant Director for Budget Analysis.

                        changes in existing law

    In the opinion of the Committee, it is necessary to 
dispense with the requirements of paragraph or subsection 12 of 
rule XXVI of the Standing Rules of the Senate in order to 
expedite the business of the Senate.

        ADDITIONAL VIEWS OF SENATORS SARBANES, BRYAN AND JOHNSON

                            i. introduction

    In reporting the Securities Litigation Uniform Standards 
Act (``Uniform Standards Bill'), the Senate Banking Committee 
once again sends to the Senate floor a solution in search of a 
problem. The Committee majority seeks to stem a supposed 
epidemic of frivolous securities fraud suits being filed in 
State court. The majority operates on the assumption that 
securities fraud class actions filed in State court are being 
used to evade the provisions of the Private Securities 
Litigation Reform Act of 1995 (``Litigation Reform Act''). This 
assumption is supported neither by empirical studies of State 
court litigation nor by the record pace of securities 
offerings. Undeterred by the evidence, the majority would 
preempt securities fraud causes of action under State law. The 
Uniform Standards Bill would establish the provisions of the 
Litigation Reform Act as a uniform standard for litigation 
involving securities traded on the national stock exchanges.
    In so doing, the majority turns a blind eye both to the 
shortcomings of the Litigation Reform Act and to the flaws of 
the Uniform Standards Bill. We opposed the Litigation Reform 
Act because we were concerned that it was not sufficiently 
protective of investors. Developments since its enactment 
heighten rather than lessen that concern. We oppose the Uniform 
Standards Bill both because of its overly broad reach and 
because its sponsors fail to take this opportunity to correct 
the flaws of the Litigation Reform Act. Should the Uniform 
Standards Bill be enacted, investors will find their State 
court remedies eliminated. We fear that in too many cases, 
investors will be left without any effective remedies at all. 
Such a result can only harm innocent investors, undermine 
public confidence in the securities markets, and ultimately 
raise the cost of capital for deserving American businesses. 
For these reasons, a broad coalition of groups representing 
investors, public officials, workers and pension funds, 
including AARP, AFSCME, Consumer Federation of America, the 
Government Finance Officers Association, the National 
Association of State Retirement Administrators, the National 
League of Cities, the New York State Bar Association, the U.S. 
Conference of Mayors, and the United Mine Workers, opposes this 
Bill. Over two dozen law professors have expressed their 
opposition as well.\1\
---------------------------------------------------------------------------
    \1\ See January 23, 1998 Letter to Senators and Members of Congress 
from Professors Ian Ayres, Stephen M. Bainbridge, Douglas M. Branson, 
William W. Bratton, John C. Coffee, Jr., James D. Cox, Charles M. 
Elson, Merritt B. Fox, Tamar Frankel, Theresa A. Gabaldon, Nicholas L. 
Georgakopoulos, James J. Hanks, Jr., Kimberly D. Krawiec, Fred S. 
McChesney, Lawrence E. Mitchell, Donna M. Nagy, Jennifer O'Hare, 
Richard W. Painter, William H. Painter, Margaret V. Sachs, Joel 
Seligman, D. Gordon Smith, Marc I. Steinberg, Celia R. Taylor, Robert 
B. Thompson, Manning G. Warren III, and Cynthia A. Williams.
---------------------------------------------------------------------------

                    ii. myth of state court loophole

    The rationale for this legislation rests on a misconception 
of the facts. The sponsors of the Bill assert that securities 
fraud class actions have migrated from Federal court to State 
court in order to evade the provisions of the Litigation Reform 
Act. In particular, the Bill's supporters maintain that class 
actions are being brought in State court to avoid the Act's 
stay of discovery and safe harbor for forward looking 
statements. In fact, every empirical study of securities fraud 
class action filings reaches the same conclusion: while State 
court securities filings may have increased in 1996, they 
decreased in 1997.
    For example, a study done by the National Economic Research 
Associates (NERA), a consulting firm, found that the number of 
securities class action suits filed in State courts during the 
first 10 months of 1996 increased to 79 from 48 filed during 
the same period in 1995.\2\ In an update released in the summer 
of 1997, however, NERA found that the number of securities 
class actions filed in State courts during the first four 
months of 1997 declined to 19, down from 40 filed in the same 
period in 1996.\3\ In July 1997, Professor Joseph Grundfest and 
Michael Perino of Stanford Law School testified that the number 
of issuers sued only in State class actions declined from 33 in 
1996 to an annualized rate of 18 in 1997.\4\ A ``Price 
Waterhouse Securities Litigation Study'' posted by that 
accounting firm on its Internet site corroborated NERA's 
findings. Using data compiled by Securities Class Action Alert 
based on the number of defendants sued, Price Waterhouse 
reported that the number of State court securities class 
actions increased from 52 in 1995 to 66 in 1996, but then 
declined to 44 in 1997. That was lower than the number of such 
actions in 1991 or 1993. The Study found ``the total number of 
cases filed in 1997 shows little to no change from the average 
number of lawsuits filed in the period 1991 through 1995.'' 
Data provided to the Committee by Price Waterhouse on February 
20, 1998 also demonstrate that State court filings declined in 
1997. Measured by the number of cases filed, the number of 
State securities class actions declined from 71 in 1996 to 39 
in 1997. As the SEC testified in October 1997, ``recent data * 
* * tends to show that the migration of securities class 
actions from federal to state court may have been a transient 
phenomenon.''
---------------------------------------------------------------------------
    \2\ See CRS Report for Congress, ``Securities Litigation Reform: 
Unfinished Business?,'' April 4, 1998, at 2.
    \3\ Id. at 6.
    \4\ Joint Written Testimony of Joseph A. Grundfest and Michael A. 
Perino before the Subcommittee on Securities, July 24, 1997, at Figure 
1.
---------------------------------------------------------------------------
    Not only do the Bill's supporters fail to address the 
decline in State court securities actions in 1997, they fail to 
recognize the geographic concentration of such actions. Many 
securities class actions are brought under the ``fraud on the 
market'' theory. Under this theory, each investor need not 
prove his or her individual reliance on the fraudulent 
statement.\5\ Appellate courts in just four States have 
recognized the ``fraud on the market'' theory in securities 
actions.\6\ The General Counsel of the SEC has suggested 
``eliminating the requirement of reliance makes possible a 
class action for securities suits.'' \7\ Securities fraud class 
actions therefore may not be possible in the great majority of 
States. California is one of the few States that recognizes the 
``fraud on the market'' theory.\8\ Not surprisingly, the great 
majority of securities fraud class actions filed in State court 
are filed in California. According to the SEC, roughly 60% of 
State securities class actions brought since enactment of the 
1995 Act were brought in California.\9\ While we do not believe 
that any one State should set a ``pro-plaintiff'' national 
standard for securities fraud, we also do not believe that 
Congress need second-guess the judgments of California at 
balancing the interests of its local businesses versus those of 
its local investors. If California law makes it too easy to sue 
California businesses, then the California legislature should 
change the law.
---------------------------------------------------------------------------
    \5\ See Basic, Inc. v. Levinson, 485 U.S. 224 (1988), adopting the 
``fraud on the market'' theory for Federal securities fraud actions.
    \6\ Richard H. Walker, ``The New Securities Class Action: Federal 
Obstacles, State Detours,'' 39 Ariz. L. Rev. 641, 678 & n.272 (Summer 
1997).
    \7\ Id. at 678.
    \8\ Mirkin v. Wasserman, 858 P.2d 568, 580 (Cal. 1993).
    \9\ Testimony of U.S. Securities and Exchange Commission before the 
Subcommittee on Securities, October 29, 1997, at 12.
---------------------------------------------------------------------------
    The record volume of securities offerings is further 
evidence that investors feel they are receiving adequate 
information on which to base investment decisions. The $39 
billion raised by initial public offerings in 1997 is a record 
second only to the nearly $50 billion raised in 
1996.10 Total underwriting of corporate equities and 
bonds in 1997 hit a record $1.3 trillion.11 Market 
capitalization and trading volume on the national securities 
exchanges are also at record highs. By every measure, the 
nation's securities markets remain preeminent in the world. 
Whatever the cost of securities litigation, at either the 
Federal or State level, it does not interfere with the 
functioning of America's securities markets.
---------------------------------------------------------------------------
    \10\ ``IPO Market Shows its Muscle for a Second-Straight Year,'' 
Wall Street Journal, January 2, 1998.
    \11\ ``An Overview of the Capital Markets and Securities Industry 
in 1997,'' Securities Industry Association, January 23, 1998, at 4.
---------------------------------------------------------------------------
    Unable to demonstrate a need for this legislation, 
supporters of preemption next argue that the mere threat of 
State litigation is a problem. In particular, they argue that 
the threat of State litigation is deterring companies from 
making the kind of ``forward-looking statements'' that would be 
protected from Federal litigation under the ``safe harbor'' 
contained in the 1995 Act. We were concerned that the safe 
harbor went too far and might very well protect fraudulent 
statements from liability. Regardless of one's views of the 
safe harbor, the evidence is that companies are in fact using 
it. A study of 547 high-tech firms by Professors at the 
University of Michigan and Stanford Business Schools found ``a 
significant increase in both the frequency of firms issuing 
forecasts and the number of forecasts issued following 
enactment of the Reform Act.'' 12
---------------------------------------------------------------------------
    \12\ Marilyn Johnson, Ron Kasznik and Karen K. Nelson, ``The Impact 
of Securities Litigation Reform on the Disclosure of Forward-Looking 
Information by High Technology Firms, January 5, 1998.
---------------------------------------------------------------------------
    Proponents of preemption also cite the possibility that 
State actions may be used to circumvent the stay on discovery 
pending a motion to dismiss that was enacted by the Litigation 
Reform Act. We agree that State court filings should not be 
used by plaintiffs to ``game the system,'' to enjoy the best of 
both the State and Federal securities laws. Discovery is an 
extensive, expensive proposition and should not be used to 
drive up the settlement value of weak cases. In fact, some 
State courts have voluntarily imposed stays on discovery in 
circumstances where the Federal courts would do 
so.13 There is certainly no need to preempt State 
law causes of action generally in order to effectuate the 
discovery stay provisions of the Act.
---------------------------------------------------------------------------
    \13\ See, e.g., Milano v. Auhll, No. SB 213 476 (Cal. Super. Court, 
Santa Barbara County, Oct. 2, 1996; Sperber v. Bixby, No. 699812 (Cal. 
Super. Court, San Diego County, Oct. 25, 1996)
---------------------------------------------------------------------------
    A range of experts has concluded that the need for this 
legislation has not been demonstrated. SEC Commissioner Norman 
Johnson wrote on March 24, 1998:

          Consistent with the opinion the Commission and its 
        staff have repeatedly taken, I believe there has been 
        inadequate time to determine the overall effects of the 
        Private Securities Litigation Reform Act of 1995, and 
        that the proponents of further litigation reform have 
        not demonstrated the need for preemption of state 
        remedies or causes of action at this time.

Perhaps the most telling debunking of the myth of an explosion 
in State court actions was provided by Boris Feldman, a partner 
in the Silicon Valley defendants' firm Wilson, Sonsini, 
Goodrich & Rosati. In a report on ``Securities Litigation--
Recent Developments'' posted on his firm's Internet site, Mr. 
Feldman stated:

        In my opinion, plaintiffs' state court gambit has been 
        a failure and is over. Others may disagree. I base that 
        conclusion on three factors. First, plaintiffs' 
        attempts to broaden dramatically state laws that have 
        been on the books for years have not worked. Courts 
        have consistently rejected plaintiffs' attempts to 
        apply to shareholder disputes statutes that impose 
        lower burdens, or greater penalties, than do the 
        securities laws.
          Second, I believe that plaintiffs have come to 
        realize that they will not be permitted to use courts 
        in a particular state (i.e., California) to litigate 
        the claims of shareholders around the country * * *
          Finally, plaintiffs have not had much success milking 
        the state cases for discovery that they can then use to 
        file a federal complaint.

             III. SHORTCOMINGS OF THE LITIGATION REFORM ACT

    The Uniform Standards Bill would preempt State law 
securities actions in favor of the provisions of the Litigation 
Reform Act. As we considered the provisions of the Litigation 
Reform Act insufficiently protective of investors to be an 
appropriate Federal securities antifraud standard, we cannot 
support establishing that Act as the sole, ``uniform'' standard 
for nationally traded securities. At this juncture, it is 
necessary briefly to review the shortcomings of the Litigation 
Reform Act.

Safe harbor protects fraudulent statements

    The Litigation Reform Act created a ``safe harbor'' for 
forward looking statements, immunizing them from antifraud 
liability. Forward looking statements are broadly defined under 
the Act to include projections of financial items such as 
revenues, income and dividends as well as statements of future 
economic performance. Forward looking statements are thus 
precisely the sort of information of most interest to investors 
deciding whether to purchase or sell securities. Given this 
broad definition, it is crucial that such statements not be 
immunized when made with fraudulent intent. To do so is to 
provide fraud artists with an incentive to tailor their frauds 
to fit the statutory safe harbor and thereby defraud investors 
with impunity.
    Prominent legal scholars have warned that the Litigation 
Reform Act's safe harbor did precisely that. A body of expert 
opinion suggests that the language of the safe harbor indeed 
protects deliberate falsehoods. Professor John Coffee of 
Columbia Law School wrote, ``even if a knowingly false 
statement is made, the defendant escapes liability if 
meaningful cautionary statements are added to the forward-
looking statement.'' 14 (emphasis added) The 
Association of the Bar of the City of New York stated the safe 
harbor ``could immunize artfully packaged and intentional 
misstatements and omissions of known facts.'' 15 
(emphasis added)
---------------------------------------------------------------------------
    \14\ December 6, 1995 Letter to President Clinton.
    \15\ November 15, 1995 Letter to President Clinton.
---------------------------------------------------------------------------
    To date, no Federal circuit court has had an opportunity to 
address the Litigation Reform Act's safe harbor. The danger 
that the statutory language immunizes deliberate fraud remains 
strong.

Proportionate liability penalizes innocent investors

    The Litigation Reform Act eliminated the rule of ``joint 
and several'' liability that has been applied in fraud cases 
for hundreds of years and that had been applied in Federal 
securities fraud cases. The Act substituted a system of 
``proportionate liability,'' which transferred responsibility 
for bearing the results of a fraud from participants in the 
fraud to innocent victims of the fraud. This change was opposed 
and continues to be opposed by a host of consumer groups, labor 
unions, and government officials.16
---------------------------------------------------------------------------
    \16\ May 23, 1995 Letter to Senate Banking Committee Members from 
American Council on Education, California Labor Federation--AFL-CIO, 
Congress of California Seniors--LA County, Consumer Federation of 
America, Consumers for Civil Justice, International Brotherhood of 
Teamsters, Government Finance Officers Association, Gray Panthers, 
National League of Cities, New York State Council of Senior Citizens, 
North American Securities Administrators Association, and U.S. PIRG; 
May 24, 1995 Letter to Members from Citizen Action, Consumer Federation 
of America, Consumers Union, Public Citizen, U.S. PIRG, and Violence 
Policy Center.
---------------------------------------------------------------------------
    Under joint and several liability, each person who 
participates in a fraud is liable for the entire amount of the 
victim's damages. Mark Griffin, Securities Commissioner for the 
State of Utah, testified before the Securities Subcommittee on 
March 22, 1995 on behalf of the 50 State securities 
commissioners. He explained why the law held all parties who 
participate in a securities fraud jointly and severally liable:

          ``Under current law, each defendant who conspires to 
        commit a violation of the securities law is jointly and 
        severally liable for all the damages resulting from the 
        violation. The underlying rationale of this concept is 
        that a fraud will fail if one of the participants 
        reveals its existence and, as a result, all wrongdoers 
        are held equally culpable if the fraud achieves its 
        aims.'' (emphasis in original)

    In practice, defendants bear the burden of proving their 
relative fault. Through a contribution action, a defendant in a 
securities fraud action can seek reimbursement from another 
party that he believes to be more at fault.
    The Litigation Reform Act transferred this burden to 
investors. The Act limited joint and several liability under 
the Federal securities laws to persons who commit ``knowing 
securities fraud.'' All other violators generally are liable 
only for their proportionate share of the fraud victim's 
losses. ``Knowing securities fraud'' is defined in the Act 
specifically to exclude reckless conduct. The Litigation Reform 
Act thus reduced the liability for reckless violators from 
joint and several liability to proportionate liability.
    When investors' damages can be paid by a violator who is 
jointly and severally liable, this change will not affect the 
recovery available to investors. In many cases, though, the 
architect of the fraud is bankrupt, has fled, or otherwise 
cannot pay the investors' damages. In those cases, this change 
will harm investors: innocent victims of fraud will be denied 
full recovery of their damages. In a February 23, 1995 letter 
to House Commerce Committee Chairman Thomas J. Bliley, Jr., 
Chairman Levitt wrote, ``[t]he Commission has consistently 
opposed proportionate liability.'' Testifying before the 
Securities Subcommittee on April 6, 1995, Chairman Levitt said

          ``Proportionate liability would inevitably have the 
        greatest effect on investors in the most serious cases 
        (e.g., where an issuer becomes bankrupt after a fraud 
        is exposed).''

    The Litigation Reform Act thus transferred responsibility 
for bearing the results of a fraud from participants in the 
fraud to innocent victims of the fraud. It provided that those 
who commit fraud are no longer responsible for the results of 
their conduct. Instead, innocent investors must bear the losses 
if a portion of their damages are uncollectible. In so doing, 
the Litigation Reform Act seriously undermined the 
effectiveness of the Federal securities laws as a remedy for 
defrauded investors.

No extension of statute of limitations

    We were concerned about the provisions of the Litigation 
Reform Act described above, which harm investors bringing 
meritorious fraud suits. We were also disappointed that the Act 
did not contain provisions necessary to aid investors bringing 
meritorious suits. The first omission was the Act's failure to 
extend the statute of limitations for private rights of action 
under Section 10(b) of the Securities Exchange Act of 1934, the 
principal antifraud provision of the Federal securities laws.
    In Lampf v. Gilbertson, 501 U.S. 350 (1991), the Supreme 
Court significantly shortened the period of time in which 
investors may bring such securities fraud actions. By a five to 
four vote, the Court held that the applicable statute of 
limitations is one year after the plaintiff knew of the 
violation and in no event more than three years after the 
violation occurred. This is shorter than the statute of 
limitations for private securities actions under the law of 33 
of the 50 States.17
---------------------------------------------------------------------------
    \17\ Testimony of the U.S. Securities and Exchange Commission 
before the Subcommittee on Securities, October 29, 1997, at 20.
---------------------------------------------------------------------------
    Testifying before the Banking Committee in 1991, SEC 
Chairman Richard Breeden stated ``the timeframes set forth in 
the [Supreme] Court's decision is unrealistically short and 
will do undue damage to the ability of private litigants to 
sue.'' Chairman Breeden pointed out that in many cases,

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

The FDIC and the State securities regulators joined the SEC in 
1991 in favor of overturning the Lampf decision. Chairman 
Levitt testified before the Securities Subcommittee in April 
1995, ``[e]xtending the statute of limitations is warranted 
because many securities frauds are inherently complex, and the 
law should not reward the perpetrator of a fraud who 
successfully conceals its existence for more than three 
years.'' Chairman Levitt reaffirmed his support for a longer 
statute of limitations before the Committee as recently as 
March 25, 1998.\18\
---------------------------------------------------------------------------
    \18\ Senate Banking Committee Hearing, March 25, 1998, Transcript 
at 30.
---------------------------------------------------------------------------
    This shorter period does not allow individual investors 
adequate time to discover and pursue violations of securities 
laws. Ignoring these recommendations, the Litigation Reform Act 
left intact the shorter statute of limitations adopted by 
Lampf.

No restoration of aiding and abetting

     A final major shortcoming of the Litigation Reform Act was 
its failure to restore liability in private actions under the 
Federal securities laws for aiders and abettors of securities 
fraud. Prior to 1994, courts in every circuit in the country 
had recognized the ability of investors to sue aiders and 
abettors of securities frauds. The courts derived aiding and 
abetting liability from traditional principles of common law 
and criminal law. To be held liable, most courts required that 
an investor show that a securities fraud was committed, that 
the aider and abettor gave substantial assistance to the fraud, 
and that the aider and abettor had the intent to deceive or 
behaved recklessly.\19\
---------------------------------------------------------------------------
    \19\ See, e.g., IIT v. Cornfeld, 619 f.2d 909, 992 (2nd Cir. 1980).
---------------------------------------------------------------------------
    In Central Bank of Denver v. First Interstate Bank of 
Denver, 511 U.S. 164 (1994), again by a five to four vote, the 
Supreme Court eliminated the right of investors to sue aiders 
and abettors of securities fraud. Testifying at a May 12, 1994 
Securities Subcommittee hearing, Chairman Levitt stressed the 
importance of restoring aiding and abetting liability for 
private investors:

          ``persons who knowingly or recklessly assist the 
        perpetration of a fraud may be insulated from liability 
        to private parties if they act behind the scenes and do 
        not themselves make statements, directly or indirectly, 
        that are relied upon by investors. Because this is 
        conduct that should be deterred, Congress should enact 
        legislation to restore aiding and abetting liability in 
        private actions.''

The North American Securities Administrators Association and 
the Association of the Bar of the City of New York also 
endorsed restoration of aiding and abetting liability in 
private actions. Chairman Levitt recently testified that he 
continues to support restoration of aiding and abetting 
liability.\20\
---------------------------------------------------------------------------
    \20\ Senate Banking Committee Hearing, March 25, 1998, Transcript 
at 30.
---------------------------------------------------------------------------
    The Litigation Reform Act ignored the recommendation of the 
SEC, the State securities regulators and the bar association 
that aiding and abetting liability be restored for private 
litigants. The deterrent effect of the Federal securities laws 
thus remains weakened.

Pleading standard may have eliminated liability for reckless conduct

     In addition to the concerns we identified at the time the 
Litigation Reform Act was passed, another concern has developed 
since its enactment: a number of Federal District Courts have 
interpreted the pleading standards enacted by the Act as 
eliminating liability for reckless conduct under the Federal 
securities antifraud provision. No Circuit Court has yet ruled 
on the issue and the majority of District Courts have ruled 
that the Act did not eliminate recklessness as a state of mind 
sufficient to satisfy the requirements for fraud. If, however, 
the view of the minority of District Courts should prevail, the 
effectiveness of the Federal securities laws as a deterrent to 
and remedy for fraud will be compromised.
    The Litigation Reform Act enacted a strict pleading 
standards for Federal securities fraud suits. Following a 
standard applied by the U.S. Court of Appeals for the Second 
Circuit, the Act requires a complaint to ``state with 
particularity facts giving rise to a strong inference that the 
defendant acted with the required state of mind.'' Federal 
District Courts have disagreed on how to interpret this 
provision, based primarily on different readings of the Act's 
legislative history. According to the SEC, 14 District Courts 
have interpreted this provision to allow plaintiffs to plead 
facts giving rise to a strong inference that the defendants 
acted either knowingly or recklessly, or that the defendants 
had a motive and opportunity to commit the fraud.\21\ However, 
a minority of District Courts have held that the Act eliminated 
recklessness as conduct sufficient to constitute fraud.\22\
---------------------------------------------------------------------------
    \21\ See Testimony of the U.S. Securities and Exchange Commission 
before the Senate Securities Subcommittee, October 29, 1997, at 13.
    \22\ See, e.g., ``In re Silicon Graphics, Inc. Securities 
Litigation,'' C 96-0393, 1997 WL 337580 (N.D. Cal. June 5, 1997).
---------------------------------------------------------------------------
    This issue is currently pending in the Courts of Appeal for 
the Sixth and Ninth Circuits.\23\ The Securities and Exchange 
Commission has filed an amicus brief in the Ninth Circuit case, 
urging the view that the Litigation Reform Act did not 
eliminate recklessness as the standard for antifraud liability. 
The Commission warned the Securities Subcommittee that 
elimination of liability for reckless conduct ``would 
jeopardize the integrity of the securities markets, and would 
deal a crippling blow to defrauded investors with meritorious 
claims.'' \24\ The Litigation Reform Act has thus 
unintentionally placed the effectiveness of the Federal 
securities laws at risk.
---------------------------------------------------------------------------
    \23\ Hoffman v. Comshare, Inc., No. 97-2098 (6th Cir.); Zeid v. 
Kimberly, No. 97-16070 (9th Cir.).
    \24\ Testimony of the U.S. Securities and Exchange Commission 
before the Senate Securities Subcommittee, October 29, 1997, at 13.
---------------------------------------------------------------------------

                IV. FLAWS OF THE UNIFORM STANDARDS BILL

    We oppose the Uniform Standards Bill firstly because of the 
shortcomings of the Litigation Reform Act described above. The 
Uniform Standards Bill would preempt securities fraud class 
actions brought under State law. Investors seeking to file 
class action lawsuits would be forced to file under the Federal 
securities laws. They would have to endure the objectionable 
provisions we have cited: the safe harbor and proportionate 
liability provisions enacted by the Litigation Reform Act and 
the shorter statute of limitations and the elimination of 
aiding and abetting liability left intact by the Litigation 
Reform Act. Because these provisions prevent investors from 
bringing meritorious securities fraud class actions, we cannot 
support the preemption of all State law provisions without 
which investors might have no remedies at all.
    But the Uniform Standards Bill contains shortcomings of its 
own, apart from those already present in the Federal securities 
laws. These include a definition of ``class action'' that is 
overly broad; an unfair application of the statute of 
limitations; and a failure to codify liability for reckless 
conduct.

Definition of class action is too broad

    Although narrowed by the Substitute Amendment adopted by 
the Committee, the Bill's definition of ``class action'' is 
still too broad. It may include State court actions brought by 
separate individual investors, or by groups of public investors 
such as school districts or local governments. They risk being 
dragged into Federal court against their will, potentially 
depriving them of more favorable State statutes of limitations, 
pleading standards, joint and several liability, and so on.
    The term ``class action'' is commonly understood to refer 
to cases brought by one plaintiff on behalf of all other 
unnamed plaintiffs similarly situated. Under Rule 23 of the 
Federal Rules of Civil Procedure, common questions of law and 
fact must predominate before a judge can certify a case as a 
class action. This is the type of case about which the 
proponents of the legislation complain: a case brought by an 
attorney with just one actual investor as lead plaintiff, in 
order to force a company to pay a large settlement.
    The Bill, however, contains a definition of ``class 
action'' broad enough to pick up individual investors against 
their will. The Bill would amend Section 16 of the Securities 
Act of 1933 and 28 of the Securities Exchange Act of 1934 to 
define class action. New Sections 16(f)(1)(A)(ii) and 
28(f)(5)(A)(ii) include as a class action any group of lawsuits 
in which damages are sought on behalf of more than 50 persons, 
if those lawsuits are pending in the same court, involve common 
questions of law or fact, and have been consolidated as a 
single action for any purpose. Even if the lawsuits are brought 
by separate lawyers, without coordination, and common questions 
do not predominate, they may qualify as a class action and thus 
be preempted. So, if an individual investor chooses to bring 
his own lawsuit in State court, to bear the expenses of 
litigation himself in order to avoid the provisions of the 
Litigation Reform Act, he can be forced into Federal court and 
made to abide by the Federal rules if 50 other investors each 
make the same decision. Indeed, the Bill provides an incentive 
for defendants to collude with parties to ensure that the 
preemption threshold is reached. Such a result does not merely 
end abuses associated with class action lawsuits, it deprives 
individual investors of their remedies.
    The definition of ``class action'' in the Bill would 
preempt other types of lawsuits as well. New Sections 
16(f)(1)(A)(i)(I) and 28(f)(5)(A)(i)(I) include as a class 
action any lawsuit in which damages are sought on behalf of 
more than 50 persons and common questions of law or fact 
predominate. The Bill specifies that the predomination inquiry 
be made ``without reference to issues of individualized 
reliance on an alleged misstatement or omission * * *'' This 
ensures that investors receive the worst of both worlds. While 
the investors could not bring a class action under State law 
because each investor must prove his or her reliance, they 
nonetheless constitute a ``class action'' under the Bill and 
their suit is preempted.
     Suits brought by local government investors, such as 
cities or school districts, are likely to be preempted under 
this provision. For example, Mayor Harry Smith of Greenwood, 
Mississippi testified last October, ``[i]n August, we learned 
that at least 22 cities and 12 counties might have been misled 
with regard to a series of investments.'' \25\ Should 16 more 
cities and counties be found to have been victimized, these 
Mississippi local governments could not bring a suit under 
Mississippi law. There is no reason for such a suit to be shut 
out of State court. Such suits are not the vague, open-ended 
class actions about which the supporters of the Bill complain. 
Whatever the merits of preempting those cases, individual 
investors who forego filing such class actions should retain 
the right to bring a case in either Federal or State court.
---------------------------------------------------------------------------
    \25\ Testimony of Harry Smith, Mayor, City of Greenwood, 
Mississippi, on behalf of the National League of Cities before the 
Senate Securities Subcommittee, October 29, 1997, at 3.
---------------------------------------------------------------------------

Application of statute of limitations is unfair

    The overly broad definition of ``class action'' leads 
directly to another of the bill's flaws. The Federal statute of 
limitations, which the SEC considers unduly short, will now 
apply in an unfair manner to State cases as well. Cases that 
were timely filed under State statutes of limitations may now 
be removed to Federal court and dismissed under the shorter 
Federal statute of limitations.
    As described above, actions brought by individual investors 
in State court could constitute a ``group'' and be removable to 
Federal court. Similarly, an action brought by more than 50 
identified investors, such as school districts or 
municipalities, could fall within the definition. The bill 
provides that in such instances the suits may be removed to 
Federal court. Once there, no action based upon State statutory 
or common law may be maintained. The investors must be able to 
maintain a suit under Federal law, including the Federal 
statute of limitations. Since most States have a statute of 
limitations longer than the Federal time period, it is likely 
that most investors will have to satisfy a shorter statute of 
limitations. In other words, investors who filed timely 
lawsuits under State law may find their lawsuits dismissed for 
failure to meet a shorter time requirement that they could not 
have known would be applied to them. Such a result goes far 
beyond discouraging frivolous suits. It can deprive defrauded 
investors of any opportunity to seek a remedy.

Failure to codify liability for recklessness

    A final shortcoming of this Bill is its failure to codify 
liability under the Federal antifraud provisions for reckless 
conduct. Liability for reckless conduct is crucial to ensure 
that professionals such as accountants and underwriters perform 
the responsibilities assigned to them by the Federal securities 
laws. The SEC has stated, ``a uniform standard for securities 
fraud class actions that did not permit investors to recover 
losses attributable to reckless misconduct would jeapordize the 
integrity of the securities markets.'' \26\ (emphasis added)
---------------------------------------------------------------------------
    \26\ Letter from Chairman Levitt and Commissioners Hunt and Unger 
to Senators D'Amato, Gramm and Dodd, March 24, 1998.
---------------------------------------------------------------------------
    As described above, a minority of Federal district courts 
have interpreted the Litigation Reform Act and its legislative 
history as eliminating such liability. We recognize and support 
the statements made in the Committee Report that Congress did 
not and does not intend to eliminate such liability. We hope 
these statements are sufficient to preserve recklessness as the 
substantive standard for liability under the Federal antifraud 
provisions.
    While such legislative history is helpful, however, is not 
a substitute for legislative language. Federal courts do not 
uniformly consider legislative history when deciding questions 
of statutory interpretation. Even those courts that do may not 
consider legislative history prepared in a succeeding Congress 
when interpreting a statute enacted in a preceding Congress. 
Chairman Levitt testified that he would prefer legislative 
language that explicitlycodified liability for reckless 
conduct.\27\ Nonetheless, the Uniform Standards Bill fails to include 
such language. The Bill therefore would preempt State class actions in 
favor of a uniform Federal standard potentially containing a disastrous 
flaw, namely no imposition of liability for reckless conduct.
---------------------------------------------------------------------------
    \27\ Senate Banking Committee Hearing, March 25, 1998, Transcript 
at 34.
---------------------------------------------------------------------------

                             V. CONCLUSION

    Requiring true class actions regarding securities traded on 
national exchanges to conform to an appropriate uniform 
standard is not without some intellectual appeal. But this bill 
fails on both counts. First, it would reach beyond true class 
actions to rob investors of their opportunity to bring 
individual actions in State court. Second, it would impose the 
current Federal standard as the uniform standard without 
rectifying its shortcomings.
    The SEC testified before the Securities Subcommittee on 
October 29, 1997 that ``the bill would deprive investors of 
important protections, such as aiding-and-abetting liability 
and longer statutes of limitations, that are only available 
under state law.'' This concern remains valid. Thirty-three of 
50 States provide longer statutes of limitations for securities 
fraud actions than do the Federal securities.\28\ Forty-nine of 
50 States provide liability for aiders and abetters of such 
fraud.\29\ In too many instances, these provisions would no 
longer be available under the Uniform Standards Bill, leaving 
investors without remedies.
---------------------------------------------------------------------------
    \28\ Testimony of U.S. Securities and Exchange Commission before 
the Senate Securities Subcommittee, October 29, 1997, at 20.
    \29\ Id. at 19.
---------------------------------------------------------------------------
    For these reasons, State and local government officials, 
unions, senior citizens, academics, consumer groups and others 
oppose the Uniform Standards Bill. The New York State Bar 
Association concluded in January 1998, ``the proposed solution 
far exceeds any appropriate level of remedy for the perceived 
problem.'' We urge the Senate carefully to consider the Bill's 
impact on individual investors before approving it in its 
current form.

                                   Paul S. Sarbanes.
                                   Richard H. Bryan.
                                   Tim Johnson.

                 ADDITIONAL VIEWS OF SENATOR JACK REED

          S. 1260 Securities Litigation Uniform Standards Act

                              introduction

    As a supporter of the Private Securities Litigation Reform 
Act of 1995 (hereafter ``PSLRA'' or ``1995 Act'') , I am 
pleased to support S.1260, the Securities Litigation Uniform 
Standards Act of 1998 (hereafter ``1998 Act''). This 
legislation will create a uniform standard for securities class 
action lawsuits against corporations listed on the three 
largest national exchanges. While class action suits are 
frequently the only financially feasible means for small 
investors to recover damages, such lawsuits have also been 
subject to abuse, draining resources from corporations while 
inadequately representing the interests of investor plaintiffs.
    In 1995, I voted for the PSLRA in order to curtail this 
abusive litigation. At that time it was obvious that some class 
action suits were being filed after a precipitous drop in the 
value of a corporation's stock, without citing specific 
evidence of fraud. Such lawsuits frequently inflict substantial 
legal costs upon corporations, harming both the business and 
its shareholders. Unfortunately, since passage of federal 
litigation procedures protecting corporations from such suits 
there has been some attempt by class action plaintiffs to 
circumvent these safeguards by filing similar lawsuits in state 
courts.
    The 1998 Act will preempt this circumvention, creating a 
national standard for class action suits involving nationally 
traded securities. I favor this legislation because it 
recognizes the national nature of our securities markets, 
provides for more efficient capital formation, and protects 
investors.

                    new responsibilities of congress

    Preemption marks a significant change concerning the 
obligations of Congress. When federal legislation was enacted 
to combat securities fraud (the Securities Act of 1933 and the 
Securities Exchange Act (SEA) of 1934, which included section 
10(b), the antifraud provision upon which private actions are 
now based 1), the federal law augmented existing 
state statutes. States were still free to provide greater 
protections to their citizens from fraud. Indeed, in 1995, the 
Chairman of the Securities and Exchange Commission provided 
testimony concerning the multifaceted system by which 
securities were regulated: through both public and private 
lawsuits in both state and federal courts.2 Many of 
my colleagues voted for the 1995 legislation knowing that if 
federal standards failed to provide adequate investor 
protections, state suits would provide a necessary 
backup.3
---------------------------------------------------------------------------
    \1\ 15 U.S.C. Sec. 77(l).
    \2\ See Testimony of Securities and Exchange Commission, Hearings 
on Securities Litigation Uniform Standards Act. Subcommittee on 
Securities, United States Senate Committee on Banking, Housing and 
Urban Affairs, October 29, 1997. (``* * * the benefits of our dual 
system of federal and state law, which has served investors well for 
over 60 years.)
    \3\ See Testimony of Professor Richard W. Painter, Hearings on 
Securities Litigation Uniform Standards Act. Subcommittee on 
Securities, United States Senate Committee on Banking, Housing and 
Urban Affairs, February 23, 1998, citing colloquy of Representative 
Christopher Cox with Professor Daniel Fischel, Hearings Concerning the 
Common Sense Legal Reform Act. Subcommittee on Telecommunications and 
Finance, House Committee on Commerce, January 19, 1995, at 110 (Mr. 
Cox. ``So if you were a plaintiff, who like any plaintiff has a choice 
of forum, and if you were one of the investors who were defrauded in 
Orange County, for example, you might file your suit in State court or 
in Federal Court, depending on how you saw your advantage * * * '' Mr. 
Fischel. ``Yes, you would still have the same choice of forums.').
---------------------------------------------------------------------------
    With passage of this legislation, my colleagues and I have 
now accepted full and sole responsibility for securities traded 
on the three national exchanges to ensure that standards 
concerning fraud allow victimized, small investors to recoup 
lost funds through class action suits. A meaningful right of 
action against those that defraud guarantees the average 
investor confidence in our national markets. A uniform national 
standard concerning fraud provides no benefit to markets if 
issuers having listed securities can, with impunity, fail to 
ensure that consumers receive truthful, complete information on 
which to base investment decisions.
    My support for this legislation rests on the presumption 
that the scienter standard was not altered by either the 1995 
Act or this legislation. I strongly endorse the Report which 
accompanies this legislation, which states clearly that nothing 
in the 1995 legislation changed the scienter standard 
4 or the previous case law, established by the 
Second Circuit, concerning the means to successfully plead that 
state of mind.5 The reason such standards were not 
changed in 1995 is that they are essential to providing 
adequate investor protection from fraud.
---------------------------------------------------------------------------
    \4\ See Time Warner, Inc. v. Ross, 9 F3d 259, 268-69 (2d Cir. 
1993).
    \5\ A plaintiff can plead scienter, without direct knowledge of the 
plaintiff's state of mind, in two ways: ``The first approach is to 
allege facts establishing a motive to commit fraud and an opportunity 
to do so. The second approach is to allege facts constituting 
circumstantial evidence of either reckless or conscious behavior.'' Id.
---------------------------------------------------------------------------
    I have been deeply troubled by the ruling of several 
federal district courts 6 which, ignoring the clear 
legislative history of the 1995 Act, have invalidated the 
proper pleading standard for a 10b-5 action. With regard to 
10(b) class action lawsuits, the PSLRA mandated stiffer 
pleading requirements concerning the defenddant(s)'s state of 
mind. See 15 U.S.C. Sec. Sec. 77z-1, 78u-4. The PSLRA requires 
plaintiffs to plead specific facts ``giving rise to a strong 
inference'' hat the defendants acted with the required state of 
mind. See 15 U.S.C. Sec. 78u-4(b)(2). In contrast, some 
circuits allowed scienter to be averred generally prior to 
adoption of the PSLRA. (See In re Glenfed, Inc., 42 F.3d 1541, 
1545-47 (9th Cir. 1994). However, the PSLRA's heightened 
standard was specifically linked to the most stringent pleading 
standard at the time, that of the Second Circuit. See The 
Conference Committee Report (Report), 141 Cong. Rec. H13702 
(daily ed. Nov. 28, 1995).
---------------------------------------------------------------------------
    \6\ See attached list of recent judicial adjudications of this 
standard, prepared at my request, by the staff of the Securities and 
Exchange Commission. The analysis indicates that of the thirty-two (32) 
federal district courts which have ruled on the issue, eighteen (18) 
have correctly upheld the previous Second Circuit Standard, whereas 
fourteen (14) have not.
---------------------------------------------------------------------------

                           pre-1995 standards

    In Ernst & Ernst v. Hochfelder, the Court held that to 
establish liability under Section 10(b) and Rule 10b-5, a 
plaintiff must ``establish scienter on the part of a 
defendant.'' 425 U.S. 185, 193 & n. 12 (1976). While in 
Hochfelder the Court failed to address whether recklessness 
satisfied the scienter requirement, subsequent decisions by 
virtually all the courts of appeals held that recklessness did 
meet the scienter requirement. Time Warner, supra. Sundstrand 
v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir. 1977) 
(defining reckless conduct as ``a highly unreasonable omission, 
involving not merely simple, or even inexcusable negligence, 
but an extreme departure from the standards of ordinary care, 
and which presents a danger of misleading buyers or sellers 
that is either known to the defendant or is so obvious that the 
actor must have been aware of it.'') (No Circuit Court has held 
otherwise.)
    With regard to the standards necessary to establish 
scienter in a pleading, the Second Circuit developed the most 
stringent requirement. That court required plaintiffs to allege 
in the complaint ``facts that give rise to a strong inference 
of fraudulent intent.'' Shields v. Citytrust Bancorp. Inc., 25 
F.3d 1124, 1128 (2d Cir. 1994). Such a ``strong inference'' 
could be established in two ways: by ``alleging facts to show 
that defendants had both the motive and opportunity to commit 
fraud, or by alleging facts that constitute strong 
circumstantial evidence of conscious misbehavior or 
recklessness.'' Id. See also Beck v. Manufacturers Hanover 
Trust Company, 820 F.2d 46 at (2d Cir. 1987), and Ross v. A.H. 
Robins Co., 607 F.2d 545 (2nd Cir. 1979).

             the need to preserve the recklessness standard

    The court's reason for allowing a plaintiff to establish 
scienter through a pleading of motive and opportunity or 
recklessness is clear: ``a plaintiff realistically cannot be 
expected to plead a defendant's actual state of mind.'' Cohen 
v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994) (quoting 
Connecticut Nat'l. Bank v. Fluor Corp., 808 F.2d 957, 962 (2d 
Cir. 1987) (quoting Goldman v. Belden, 754 F.2d 1059, 1070 (2d 
Cir. 1985)). Since the 1995 Act allows for a stay of discovery 
pending a defendant's motion to dismiss, requiring a plaintiff 
to establish actual knowledge of fraud or an intent to defraud 
in a complaint raises the bar far higher than most legitimately 
defrauded investors can meet. The SEC has been clear on this 
point 7 and it has been well recognized by the 
supporters of both the 1995 and 1998 Acts that neither changed 
the preexisting scienter standard. Indeed, proponents of the 
1995 Act were clear that the bill included recklessness. 
William H. Kuehnle, Comment, ``On Scienter, Knowledge, and 
Recklessness Under the Federal Securities'' Laws, 34 House. L. 
Rev. 121, n. 93, citing 141 Cong. Rec. S17934 (daily ed. Dec. 
5, 1995) (statement of Senator D'Amato) (``The legislation 
creates a uniform standard for complaints that allege 
securities fraud. This standard is already the law in New 
York.''). Even after passage of the Conference Report of the 
1995 Act and the President's veto and message were complete, 
proponents of the legislation described the bill as retaining 
recklessness. See, e.g., 141 Cong. Rec. S19150 (daily ed. Dec. 
22, 1995) (statement of Senator Domenici) (``[I]t is the Second 
Circuit's pleading standard.''); 141 Cong. Rec. S19067 (Dec. 
21, 1995) (statement of Sen. Dodd) (``[P]leading standard is 
faithful to the Second Circuit's test.''); and 141 Cong. Rec. 
H15219 (daily ed. Dec. 20, 1995) (statement of Rep. Lofgren) 
(``The President says he supports the Second Circuit standard 
for pleading * * *. That is * * * included in this bill.'')
---------------------------------------------------------------------------
    \7\ See Testimony of Securities and Exchange Commission, Hearings 
on Securities Litigation Uniform Standards Act. Subcommittee on 
Securities, United States Senate Committee on Banking, Housing and 
Urban Affairs, October 29, 1997. (``The Commission strongly believe 
that recklessness must be preserved as the standard for liability 
because it is essential to investor protection.)
---------------------------------------------------------------------------
    Thus, the legislative history well establishes that the 
1995 Act retained the standards, as established by the Second 
Circuit Court of Appeals, associated with pleading and 
establishing scienter in a 10(b) action. Not only are the 
standards clear, but it is clear that a weakening of such 
standards threatens the security ofinvestors and the stability 
of our markets.
    The views of the Majority, as outlined in this Report, make 
clear that interpretations which eviscerate a plaintiff's 
ability to plead motive and opportunity or recklessness, as 
defined by the Second Circuit prior to the 1995 Act, are both 
incorrect and a threat to the security of our markets. Such 
standards are under attack by both those who both misinterpret 
the standards of the 1995 Act and those who argue that 
recklessness fails to satisfy the scienter standard as 
established in the 1933 and 1934 Acts.8 This later 
interpretation is particulary dangerous in that it could 
eliminate liability for recklessness in both private actions as 
well as regulatory enforcement actions by the SEC.9
---------------------------------------------------------------------------
    \8\ See Amicus Curiae brief of American Institute of Certified 
Public Accountants in the matter of Zeid v. Kimberely, (9th Cir. 
1998)(No. 97-16070).
    \9\ Four years after Hochfelder, in Aaron v. SEC, the Court, held 
that the SEC must meet the same scienter standards as private 
litigants, since the 1933 and 1934 Acts contained no distinctions in 
the standards of proof that either private or public litigants must 
meet. 446 U.S. 680 at 701 (1980).
---------------------------------------------------------------------------

                               conclusion

    With assurances of the Chair and sponsors of S. 1260 that 
proper protections for investors will remain in place, I 
supported the 1998 Act, thus moving toward an efficient, 
national, uniform standard for securities class action 
lawsuits. I trust that higher courts will adhere to current 
principles of legislative history and case law to rule that the 
pleading and scienter standards continue to protect investors. 
Additionally, as expressed in votes during the mark-up of this 
legislation, I am concerned that the definition of class 
action, as currently included in the bill, is too broad. 
Specifically, by defining a class as those whose claims have 
been consolidated by a state court judge, the bill infringes 
upon the rights of individual investors to bring suit; a 
situation sponsors have sought to avoid. I hope that this issue 
can be resolved before the bill reaches the Senate floor. 
Finally, I have appreciated the expert analysis that the 
Chairman, Commissioners, and staff of the Securities and 
Exchange Commission have provided on this issue. I thank them 
for their assistance.

                                                         Jack Reed.
                     Office of the General Counsel,
                   U.S. Securities and Exchange Commission,
                                    Washington, DC, April 20, 1998.
Ted Long,
Legislative Counsel, Offices of Senator Jack Reed,
Hart Senate Office Building, Washington, DC.
    Dear Mr. Long: The attached responds to your request for 
staff technical assistance with respect to S. 1260, the 
``Securities Litigation Uniform Standards Act of 1997.'' This 
technical assistance is the work of the staff of the Securities 
and Exchange Commission; the Securities and Exchange Commission 
itself expresses no views on this assistance.
    I hope the attached is responsive to your request.
            Sincerely,
                                         Richard H. Walker,
                                                   General Counsel.
    Attachment.

                      Pleading Standard Scorecard

         i. cases applying the second circuit pleading standard

    1. City of Painesville v. First Montauk Financial Corp., 
1998 WL 59358 (N.D. Ohio Feb. 8, 1998).
    2. Epstein v. Itron, Inc., No. CS-97-214 (RHW), 1998 WL 
54944 (E.D. Wash. Jan. 22, 1998).
    3. In re Wellcare Mgmt. Group, Inc. Sec. Lit., 964 F. Supp. 
632 (N.D.N.Y. 1997).
    4. In re FAC Realty Sec. Lit., 1997 WL 810511 (E.D.N.C. 
Nov. 5, 1997).
    5. Page v. Derrickson, No. 96-842-CIV-T-17C, 1997 U.S. 
Dist. LEXIS 3673 (M.D. Fla. Mar. 25, 1997).
    6. Weikel v. Tower Semiconductor Ltd., No. 96-3711 (D.N.J. 
Oct. 2, 1997).
    7. Gilford Ptnrs. L.P. v. Sensormatic Elec. Corp., 1997 WL 
757495 (N.D. Ill. Nov. 24, 1997).
    8. Galaxy Inv. Fund, Ltd. v. Fenchurch Capital Management, 
Ltd., 1997 U.S. Dist. LEXIS 13207 (N.D. Ill. Aug. 29, 1997).
    9. Pilarczyk v. Morrison Knudsen Corp., 965 F. Supp. 311, 
320 (N.D.N.Y. 1997).
    10. OnBank & Trust Co. v. FDIC, 967 F. Supp. 81, 88 & n.4 
(W.D.N.Y. 1997).
    11. Fugman v. Aprogenex, Inc., 961 F. Supp. 1190, 1195 
(N.D. Ill. 1997).
    12. Shahzad v. H.J. Meyers & Co., Inc., No. 95 Civ. 6196 
(DAB), 1997 U.S. Dist. LEXIS 1128 (S.D.N.Y. Feb. 6, 1997).
    13. Rehm v. Eagle Fin. Corp., 954 F. Supp. 1246, 1252 (N.D. 
Ill. 1997).
    14. In re Health Management Inc., 970 F. Supp. 192, 201 
(E.D.N.Y. 1997).
    15. Marksman Partners, L.P. v. Chantal Pharmaceutical 
Corp., 927 F. Supp. 1297, 1309-10, 1309 n.9 (C.D. Cal. 1996).
    16. Fischler v. AmSouth Bancorporation, 1996 U.S. Dist. 
LEXIS 17670 (M.D. Fla. Nov. 14, 1996).
    17. STI Classic Fund v. Bollinger Industries, Inc., No. CA 
3:96-CV-0823-R, 1996 WL 866699 (N.D. Tex. Nov. 12, 1996).
    18. Zeid v. Kimberley, 930 F. Supp. 431 (N.D. Cal. 1996).

ii. cases applying a stricter pleading standard than the second circuit

A. Cases holding that motive and opportunity and recklessness do not 
        meet pleading standard

    1. Mark v. Fleming Cos., Inc., No. CIV-96-0506-M (W.D. 
Okla. Mar. 27, 1998).
    2. In re Silicon Graphics Sec. Lit., 970 F. Supp. 746 (N.D. 
Cal. 1997).
    3. In re Comshare, Inc. Sec. Litig., Case No. 96-73711-DT, 
1997 U.S. Dist. LEXIS 17262 (E.D. Mich. Sept. 18, 1997).
    4. Voit v. Wonderware Corp., No. 96-CV. 7883, 1997 U.S. 
Dist. LEXIS 13856 (E.D. Pa. Sept. 8, 1997).
    5. Powers v. Eichen, NO. 96-1431-B (AJB), 1997 U.S. Dist. 
LEXIS 11074 (S.D. Cal. Mar. 13, 1997).
    6. Norwood Venture Corp. v. Converse Inc., 959 F. Supp. 
205, 208 (S.D.N.Y. 1997).
    7. Friedberg v. Discreet Logic, Inc., 959 F. Supp. 42, 48-
49 (D. Mass. 1997).
    8. In re Glenayre Technologies, Inc., 1997 WL 691425 
(S.D.N.Y. Nov. 5, 1997).
    9. Havenick v. Network Express, Inc., 1997 WL 626539 (E.D. 
Mich. Sep. 30, 1997).
    10. Chan v. Orthologic Corp., et al., No. CIV-96-1514-PHX-
RCB (D. Ariz. Feb. 5, 1998) (dicta).

B. Cases holding only that motive and opportunity do not meet Reform 
        Act's pleading standard

    1. Novak v. Kasaks, No. 96 Civ. 3073 (AGS), 1998 WL 107033 
(S.D.N.Y. Mar. 10, 1998).
    2. Myles v. MidCom Communications, Inc., No. C96-614D (W.D. 
Wash. Nov. 19, 1996).
    3. In re Baesa Securities Litig., 969 F. Supp. 238 
(S.D.N.Y. 1997).
    4. Press v. Quick & Reilly Group, Inc., No. 96 Civ. 4278 
(RPP), 1997 U.S. Dist. LEXIS 11609, at *5 (S.D.N.Y. Aug. 8, 
1997).

  iii. examples of cases with language questioning recklessness as a 
         basis of liability (all cases previously listed above)

    1. In re Silicon Graphics Sec. Lit., 970 F. Supp. 746 (N.D. 
Cal. 1997).
    2. Friedberg v. Discreet Logic, Inc., 959 F. Supp. 42, 49 
n.2 (D. Mass. 1997).
    3. Norwood Venture Corp. v. Converse Inc., 959 F. Supp. 
205, 208 (S.D.N.Y. 1997).