Richard Bryan

Mr. BRYAN

Mr. BRYAN. This is my understanding.

Mr. BRYAN. Mr. President, I will yield back the remainder of my time. I want to thank my colleague, Senator Sarbanes, for making the point that I think needs to be made here, that if the recovery is premised and predicated upon aider and abettor recovery; whether the conduct is intentional, whether it is knowing, or reckless, no recovery. The only way in which you can attach liability is under an aiding and abetting theory. That is the point he has made. The Senator from Connecticut quite correctly points out that with respect to others that are primary, then the level of misconduct, whether intentional or knowing, creates the joint and several liability situation, and the reckless conduct which the Senator from Maryland and I agree ought to be included as well. That is when you get the proportionate liability. There is no question about proportion or joint and several. There is no recovery if the cause of action is based upon aiding and abetting. That is the point he has made so clear.

Mr. BRYAN. Mr. President, I yield myself such time as I may require. Mr. President, our colleagues will recall, under the unanimous consent agreement propounded by our distinguished chairman, that this is an amendment that deals with restoring aiding and abetting liability. The amendment which I offer is to restore the state of the law as everyone in America believed it to be prior to last year's Supreme Court decision in a case involving Central Bank of Denver versus First Interstate Bank of Denver. With one stroke of the judicial pen, so to speak, this 5-to-4 decision wiped out private liability for crooked professionals who aid and abet, but who are not defined as primary participants in securities fraud under the provision of the law. What we are talking about are those people who counsel and assist in furtherance of the perpetration of fraud. Some of them are disreputable lawyers--who ought to be disbarred. Others are accountants. Others are professionals who, by virtue of their own affirmative action, have aided and contributed to the securities fraud involved. Aiding and abetting liability was the primary method through which professional assistors of fraud--these lawyers, accountants and investment banks--have historically been held liable to defrauded investors. In my view, if this decision is allowed to stand without action having been taken by the Congress, it will seriously weaken and erode the effectiveness of our Federal securities laws because it overturns three decades of established precedent in which Federal courts have permitted private investors to sue aiders and abettors of securities fraud. Every circuit court of appeals to address the issue--11 circuits--has upheld aiding and abetting liability. Investors have long had the right to sue accountants, brokers, bankers and lawyers who, by their actions, have assisted the primary perpetrators of such securities schemes. This right of action has played a critical role in compensating those investors who have been swindled in major financial frauds of recent times. I will comment a bit more on that in just a moment. The damage caused by the Central Bank decision is immeasurable. Dozens, if not hundreds, of participants in securities frauds have had cases against them dismissed on the basis of the Central Bank decision. An unknown number of other cases against clear wrongdoers have been precluded, based on the Central Bank decision. And the deterrence of securities fraud, which ought to be one of the prime reasons for the law in the first place, has suffered a major blow. The problem is that in immunizing wrongdoers who substantially assist fraud, we clearly give fraudulent behavior a green light. I cannot think of any argument that could be advanced, as a matter of social or economic justice, in which we ought to reward fraudulent behavior on the part of those who aid and abet a primary perpetrator in a securities fraud to the detriment and loss of literally tens of thousands of innocent investors. Under the Central Bank case, it is simply OK to help others commit securities fraud so long as you are careful not to make any direct statements or direct the wrongdoing. I know a good bit of animosity is directed to America's lawyers, and I must say that I am not happier than anybody else who has seen in America, speaking generically, a proliferation of a lot of litigation that ought not to be filed. If I might cite an outrageous case in my own State that has nothing to do with the issue currently, but it is the kind of case that just engenders real hostility on the part of the public--and count me on the part of those being hostile. It is a person who, under the workers compensation law in our State, had been denied recovery. Subsequent to that, he drove his automobile into the worker compensation office in the Las Vegas area, nearly killed several people who were working, and then a year or two later had the temerity to file a lawsuit against the SIS, which is the worker compensation system in Nevada, blaming the system for causing his action in doing extensive damage to the building and literally terrifying those employees. So I am not unmindful of the hostility that has been generated. But this is a case that rewards lawyers. If you are clever enough not to make a direct statement or participate directly in the wrongdoing, then you are home free. You do not go to jail, you go home free. I cannot imagine that is the sort of thing that we want to encourage. To put this into some historical context, if this decision had been on the books earlier, the substantial recoveries by the victims in the Keating case--which is the Lincoln Savings and Loan case--would have been impossible. As you will recall, in the Lincoln Savings and Loan case, the primary wrongdoer was the nefarious Charles Keating. By the time the class action is filed, Mr. Keating is bankrupt. There was a judgment entered of about $240 to $262 million in the class action. But about half, a little more than $100 million of recovery for the 23,000 bondholders, would have been denied to these 23,000 bondholders. These are people who are totally innocent, have no culpability at all other than the fact that they relied upon some representations made at the savings and loan which they kind of thought was a local, home-based outfit. Everybody knew each other. Mr. and Mrs. Smith would be greeted every morning. ``Have you walked your dog? Your cat?'' ``How are the grandkids doing?'' That sort of thing. But the aiders and abettors responded with more than $100 million of recovery that otherwise would have been denied to these 23,000 bondholders. Had this case, Central Bank, been the law, that $100 million recovery would not have been possible. These are aiders and abettors, people who have assisted in the fraud. Again, if the scales of justice mean anything, should those who have aided and abetted, in terms of their own conduct, not be held responsible, to respond to damages incurred by their conduct to those who are totally innocent? That is what this whole issue is all about. Federal District Judge Stanley Sporkin, a former SEC enforcement chief, in his opinion in the Keating case asked critical questions that sum up the theory behind aiding and abetting: Where were the professionals when these clearly improper transactions were being consummated? Why didn't any of them speak up or disassociate themselves from the transactions? Where also were the outside accountants and attorneys when these transactions were effectuated? In a subsequent speech, Judge Sporkin elaborated, For this kind of massive, very sophisticated fraud to have occurred, it required the complicity of certain professionals that we all know of--CPAs, lawyers and appraisers. I am suggesting that perhaps these professionals did not discharge their responsibilities to the broader public interest. The responsibility of corrupt accountants and lawyers for the savings and loan debacle of the 1980's can hardly be overstated. On August 12, 1992, then SEC Chairman Richard Breeden wrote Senator Domenici: Securities fraud actions against accounting firms that participate in or assist in fraudulent activity by not properly preforming their auditing functions are important to the maintenance of high standards of quality and integrity among public accounting firms. Parenthetically, I should say I think the public has a right to expect that level of integrity. Then Chairman Breeden went on to say: Investors rely heavily on the accuracy of all of audited financial statements of public companies as do creditors, investment analysts and others. When others fail to adhere to generally accepted accounting principles or generally accepted auditing standards, many innocent parties may suffer. Indeed, inaccuracies in audited financial statements of banks and savings and loans have contributed billions of dollars in investor losses during the past 10 years. Public policy should seek to maintain high expectations of integrity and accuracy in the performance by others and accountants of their tasks. Mr. President, that is what the Republican Chairman of the SEC had to say about the importance of holding aiders and abettors responsible for their actions. A number of notable statistics from cases brought by the Federal Government highlight the importance of holding professional assistors liable: In 1990, the RTC banned six of the largest accounting firms-- Ernst & Young, Deloitte & Touche, Coopers & Lybrand, Peat Marwick, Arthur Andersen, and Grant Thornton--from receiving thrift reorganization work because they were being sued by the Government for failure to perform their audits of S&L's in a professional manner. According to the General Accounting Office, when all categories of professionals are considered, Resolution Trust Corp. attorneys suspected wrongdoing on the part of one or more professionals affiliated with over 80 percent of failed thrift institutions. More than 80 percent. There is some indication that professionals were responsible, and attorneys in particular were suspected of wrongdoing. In one astounding example of the pervasive role of accountants in S&L wrongdoing, a Federal judge stated in 1992 that: [The Office of Thrift Supervision] advised the court that approximately one-third of the 690 financial institutions that have failed were audited by Ernst & Young or its predecessor.--Director of the Office of Thrift Supervision v. Ernst & Young, 786 F. Supp. 46, 52 (D.D.C. 1992). In a speech before the American Bar Association, Timothy Ryan, former Director of the Office Thrift Supervision, stated: The federal agencies have uncovered actionable abuse in a third of the failed thrifts investigated to date. It is clear that many of the unlawful scheme hatched at those failed institutions could not have proceeded without the active assistance of professional service providers, especially lawyers. They have abandoned their ethics for expediency, and sold their good name to satisfy their greed. Mr. President, the point I seek to make is that unless the law is changed, that kind of conduct, so articulately denounced, will remain unpunished and innocent investors will be unable to recover from lawyers, accountants, and other professionals. So, Mr. President, the loss of aiding and abetting liability undermines fundamental protections for investors and the securities markets. Many defrauded investors will not recover their losses because, typically, the perpetrator of the fraud is insolvent, in jail, or has fled by the time the case is completed. In addition to wiping out private actions against aiders and abettors, the Central Bank case calls into question the SEC's own enforcement actions against aiders and abettors. S. 240 fails to restore aiding and abetting liability for private actions. Although it authorizes the SEC to take action against aiders and abettors who knowingly violate the securities laws, it effectively eliminates the ability of the Commission to proceed against reckless professional assistors, which is now permitted by most courts. This amendment, which was drafted with the technical assistance of the SEC, reverses the Central Bank decision, and restores the status quo ante. It restores the law to the way it was prior to the Central Bank case last year by restoring aiding and abetting authority in individual securities fraud actions and clarifying the SEC's authority to pursue aiders and abettors for reckless and knowing fraud. The original sponsor of securities litigation reform, Senator Dodd, has recognized the importance of aiding and abetting liability and has urged a response to Central Bank. At a May 12, 1994, hearing before this committee, he said: In my view, aiding and abetting liability has been critically important in deterring individuals from assisting possible fraudulent acts by others. Until the Supreme Court changed the landscape a few weeks ago, aiding and abetting liability was an important tool in ensuring honesty and high professional standards by individual professionals who facilitate access to the securities markets. In my view, we need to respond to the Supreme Court's decision promptly and I emphasize promptly. In a February 27, 1995, ``Dear Colleague,'' Senator Dodd and Senator Domenici reiterated that a reversal of Central Bank should occur ``as a part of a comprehensive package to fix our broken securities class action system.'' In his additional views to the committee report on S. 240, Senator Dodd again expressed his concern about the restoration of aiding and abetting liability for private actions. Even the Supreme Court majority opinion in Central Bank which was based solely on the lack of the actual words ``aiding and abetting'' in the statute, recognized the need for restoring aiding and abetting liability. In the words of Justice Kennedy: To be sure, aiding and abetting a wrongdoer ought to be actionable in certain instances. The issue, however, is not whether imposing private liability on aiders and abettors is good policy, but whether aiding and abetting liability is covered by the statute. The SEC argued strongly in the Supreme Court that ``aiding and abetting'' liability was critical to enforcement of the Federal securities laws. Since the Court decision, the SEC has repeatedly urged Congress to restore aiding and abetting liability. Most recently, on April 6, 1995, SEC Chairman Arthur Levitt testified before the Subcommittee on Securities that: Unless another theory of liability can be applied in a particular case, persons who knowingly or recklessly assist the perpetration of a fraud may be insulated from liability to private parties if they act behind the scenes and do not themselves make statements, directly or indirectly, that are relied upon by investors. Because this is conduct that should be deterred, Congress should enact legislation to restore aiding and abetting liability in private actions. Such legislation should also clarify the Commission's ability to use the aiding and abetting theory of liability where it is not expressly provided by statute. Levitt previously testified that, of 400 pending SEC cases, 80 to 85 rely on aiding and abetting theories of liability. I must say, Mr. President, as I read the current version of S. 240, even the ability of the SEC to recover for aiding-and-abetting liability seems to be more narrowly confined than those circumstances where there is knowledge or scienter involved. On May 25, 1995, the day S. 240 was voted out of the Banking Committee, Chairman Levitt again raised the aiding-and-abetting issue, noting that, while some of the SEC's authority had been restored, ``a more complete solution is preferable.'' The bar association of the city of New York--undoubtedly the leading organization of plaintiff and defense attorney's in the securities field--has taken an extremely strong position on this issue. As Mr. Sheldon Elsen testified in the House, Let me turn, finally, to lawsuits against lawyers, accountants, underwriters and other professionals. Experience in these cases has shown that securities frauds do not succeed very often without the aid of such professionals, but that it is almost impossible to prove the professionals' involvement . . . The Association feels particularly strongly about this matter, which involves lawyer misconduct. In our view, the primary problem of abuse by lawyers lies in the conduct of securities lawyers involved in fraudulent transactions. That is a scorching indictment by the most distinguished and knowledgeable and the most sophisticated bar in America dealing with this subject. And it deals with lawyer misconduct. Thus our purpose here simply is to deter lawyer misconduct on the part of the plaintiffs bar, and that we certainly ought to do. If the changes which our able chairman has crafted to rule 11 do, indeed, deal with misconduct in the form of frivolous actions by the plaintiffs bar, why would we not also want to impose liability on lawyers, accountants and others who are helping to assist in the perpetration of this fraud? The policy disconnect, Mr. President, I find difficult to comprehend. Mr. President, as I have indicated previously, the securities regulators in their respective States also support this proposition. And it seems to me that in light of the indications that we have seen that the amount of securities fraud is estimated to be about $40 billion annually--the SEC has commented recently in an article which I shared with our colleagues on Friday that securities fraud is not something out of the 19th century; it is very much alive, very sophisticated--the sophisticated aiders and abettors, the clever lawyers, the smooth accountants who assist in this fraud behind the scenes, they ought to be brought to the bar of justice, and economic recovery for innocent victims is the way of achieving that economic justice. I yield the floor and reserve the remainder of my time.

Mr. BRYAN. I yield to the Senator from Connecticut.

Mr. BRYAN. I will be pleased to.

Mr. BRYAN. I yield as much time as the Senator from Maryland desires.

Mr. BRYAN. Mr. President, may I inquire how much time remains?

Mr. BRYAN. I think the Senator makes a very compelling point, and I think he speaks on behalf of the Nation's security regulators at the State level. And that view is shared by his counterpart at the Federal level. I would yield the floor and reserve the remainder of my time.

Mr. BRYAN. The Senator from Nevada will be happy to yield.

Mr. BRYAN. That I would think would be fair. If we do not need it all, we can yield it back.

Mr. BRYAN. Mr. President, it is my understanding that a motion will be made shortly to seek unanimous consent, to which I have no objection, to have the rollcall begin at 5:30. If in fact the Senator from Nevada is correctly informed of that, I inquire of the distinguished chairman of the Banking Committee whether he would be agreeable to providing a little additional time for us to engage in discussion?

Mr. BRYAN. May I inquire of the Chair, how much time remains?

Mr. BRYAN. I yield such time as the Senator needs.

Mr. BRYAN. The Senator from Nevada will be happy to yield 4 minutes.

Mr. BRYAN. I respect the response of the Senator. I yield the floor, reserving the remainder of my time.

Mr. BRYAN. If I might engage in a continuing dialog, we all agree-- and there is no disagreement--with respect to taking the appropriate action against the frivolous lawsuits, as I have commended the chairman of the Banking Committee. There are provisions in there that I agree with, as do the Senator from Minnesota and the Senator from Maryland, with respect to the sanction provisions under rule 11. But I must say-- and I ask the Senator this--when you have the SEC, the Securities and Exchange Commission, the State Securities Administrators, the North American Association of Securities Administrators, you have the State Government Finance Officers, the local government finance officers, all of whom advocate the 2- and 5-year statute, is it the Senator's view that they are advocating that on behalf of the Nation's trial lawyers as opposed to the public? Unless there is a conspiracy I am not aware of, I would be interested in the Senator's response.

Mr. BRYAN. Would the Senator yield for a question?

Mr. BRYAN. If I misspoke myself I apologize. What I was seeking to do was to get a combined 30, which was the time that, as I understood it, the vote was to occur, and the use of additional time. I am not trying to preclude my friend from New York from exercising the full amount of his time.

Mr. BRYAN. I will be pleased to yield.

Mr. BRYAN. Let me say, I appreciate the explanation the chairman has given. It is a matter of balance. Again, I respond with great respect that the role of the SEC is not to recover those losses, and that is something that greatly troubles me, that individuals who have lost money, who are totally innocent, although the SEC would not be precluded from bringing an action, that action is not to recover money for them but simply to impose the appropriate fine, penalty, sanction, that may exist for the violation. Second, I, too, was exposed to the arguments made by those who reach a different conclusion than I do that the shorter statute of limitations protects them from some lawsuits. On the other hand, I must say that in balancing, I found the arguments of the securities regulators--the SEC, the States securities, the State and local government finance officials--who all argued that the 2 to 5 was necessary. We all put into the scales of justice our individual component parts, and I would just respectfully say, engaging my good friend in colloquy, that ultimately that is what persuaded me on the longer statute.

Mr. BRYAN. I thank the distinguished chairman. I ask unanimous consent to yield 2 additional minutes to myself.

Mr. BRYAN. I thank the Senator.

Mr. BRYAN. Will the Senator be willing to take part of his time to engage in the colloquy?

Mr. BRYAN. And I appreciate that. The concern that I have is that we are engaging in this discussion and the time may run out.

Mr. BRYAN. May I interrupt my friend?