C. Cox

Mr. COX of California

Mr. COX of California. Yes, I yield to the gentleman from Louisiana.

Mr. COX of California. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I will just pick up where this discussion has left off because I think the gentleman from Wisconsin is right on point when he talks about the litigiousness of our society, the crowded dockets, et cetera, in our Federal and State courts and the sense that every American is left with, that the civil justice system is not for them. They know when they go to the Federal courthouse near me in the Southern District of California, downtown Los Angeles, that they are looking at the second most crowded docket in America. They wonder why it takes them 5, 7 years to get to trial. Maybe all they have got is a case to collect a debt, but they have to wait in line behind these mammoth class action litigation suits that are taking years to resolve. The fact of the matter is one out of every eight companies traded on the New York Stock Exchange has been hit with a strike suit. That is according to Vincent O'Brien and Richard Hodges in their study of class action securities fraud cases from 1988 to 1993 published in Law and Economics Consulting.

Mr. COX of California. Mr. Chairman, I was just, during the debate, refreshing my recollection about Dodd-Domenici. It is now S. 240 introduced January 18, 1995, for Mr. Domenici, Mr. Dodd, who I need not remind people is now the chairman of the Democratic National Committee, Mr. Hatch, Ms. Mikulski, Mr. Bennett, Ms. Moseley-Braun, Mr. Lott, Mrs. Murray, Mr. Mack, Mr. Johnston, Mr. Faircloth, Mr. Conrad, Mr. Burns, Mr. Chafee, on and on. It is a completely bipartisan group. The provisions of Dodd-Domenici on specific pleading are a heck of a lot tougher than what we have in our bill because over in the other body they have recognized the problems that are created when someone launches a lawsuit which can take years and years and consume a whole lot of money on both sides with just vague conclusory allegations. We have heard some horror stories, or not really horror stories because they never happened, but we have heard horror future fiction about what would have happened in old cases that were successful if the new rule had been put in place. We are told, for example, in one case they had to amend their pleading six times. Well, right now the current rules are sufficiently lax that nobody bothers a great deal when they file the complaint. In the very abusive cases we know they just roll them right off the word processor. The worst that can happen to them after all, since one can amend one's complaint nearly an infinite number of times, is that some judge will make them go back and amend it. It is very difficult these days to get knocked out on the pleadings because one can simple amend. It is only when, even after amendment, people cannot state a cause of action. They end up losing on the pleadings, but it is not a logical form of argument to say that a case that was filed under the old rules where one could freely amend their complaint would have not make it if they could not have amended it so often. They simply would have taken more care in investigating the facts and bringing those cases to begin with, and what we heard about those cases is that the facts were on their side, that eventually they got it right even in their complaint. The other thing we need to point out here is we are not asking anyone do anything other than allege. We are asking people to make an allegation. That is they can charge something. They do not have to prove it until later. But they have to know what it is they are charging. The definition of a fishing expedition lawsuit is one in which somebody does not know what they are after at first. They want to start the lawsuit to get the civil discovery tools to figure out their cause of action as they go along. They sort of make it up as they go along. That is exactly the abusive kind of litigation we are trying to stop. This is the centerpiece of the bill that will permit us to stop it. The language that is in Dodd-Domenici is: The complaint shall allege specific facts demonstrating the state of mind of each defendant. Now we had a lot of complaint about that language on our side because people said, ``Well, you would have to be a mind reader in order to demonstrate the state of mind of each defendant.'' So now our bill no longer says that. It says that the complaint shall specify each statement or omission alleged to have been misleading. Those are objective facts and the reasons that the statement or omission was misleading. That is factual as well, and of course one only has to allege it. The complaint shall also make specific allegations which, if true, would be sufficient to establish scienter. So one only has to allege things which, if true, if they were proved later, would add up to a case that meets all the requirements of the existing law. Then we go on to say it shall not be sufficient for this purpose to plead the mere presence of facts inconsistent with a statement or omission. If an allegation is made on information and belief, the complaint shall set forth with specificity all information on which that belief is formed. These are all things that are within the capacity of anyone initiating a lawsuit to comply with. So, we are left with the fact that the Bryant amendment is probably directed at the language that people have complained about in Dodd- Domenici, which I point out again is sponsored by some of our most liberal Democrats in the U.S. Senate. This is a bipartisan agreement that fishing expedition lawsuits are a bad thing and we should stop them. I also should point out that we have heard that the bill that we are amending here would overrule 9(b), but in fact Federal Rules of Civil Procedure 9(b), rule 9(b), requires that one pleads fraud with particularity. Since these are fraud cases, Mr. Chairman, that is exactly what we are requiring here, and we do flesh out in greater detail precisely what we mean so we can avoid litigation on this subject. Ironically the amendment is completely inconsistent with Federal Rules of Civil Procedure 9(b) because, while it requires that one pleads fraud or particularity, the Bryant amendment would let a costly lawsuit go ahead if the complaint only, quote, suggests that fraud may have occurred. This is a hunting license for aggressive lawyers and frivolous lawsuits. Finally the Bryant amendment is inconsistent with court decision after court decision which have said that, when the plaintiffs cannot state what statements are false, they cannot proceed. So, Mr. Chairman, we are on solid ground here, and I hope that we will reject the Bryant amendment.

Mr. COX of California. Once that market price then reflects the assessment that CALPERS or some other institutional investor has made of forward-looking information, an individual who does not read the prospectus is put in the position of benefiting from that expertise. That is how the fraud-on-the-market doctrine works. That is why we were asked to put it into the legislation. So it really does not do to say that the individual investor is left only with the prospectus, because as the gentleman knows, most individual investors, would that it were otherwise, do not read those prospectuses. It would be a much better market if everybody did, but just as shoppers go into grocery stores, and so many hasty shoppers like I used to be before I had kids, I would hurry myself down the down the supermarket aisle and just grab things, and go down the checkout and I would depend on all of the other shoppers actually looking at the prices in the supermarket and that is what kept the supermarket honest. It was not Chris Cox when I was moving down the aisle that quickly. But it is the same way with individual investors who would buy so many shares of stocks. They are not for such a trivial investment going to read the prospectus and read everything available to the investors, but somebody is, and it is in fact the case that the market is capable of discounting forward-looking information. What is most important about this amendment is that the quality of forward-looking information that we have not got under the current rules is defective and it is injuring investors. Bad information is being traded on because it is the only information in many cases. When companies know things that could be of use to investors they are sitting on it because it may affect the future and they are afraid to say yes or no, here is what is going to happen. And we have material event disclosure already. We have to talk about things as they occur, but what about having a best estimate of the future? That is what investors want to know and that is what this amendment will get out to the marketplace.

Mr. COX of California. Mr. Chairman, would the gentleman yield?

Mr. COX of California. Mr. Chairman, I thank the gentleman for yielding. I want to concur with the gentleman's earlier assessment that the safe harbor protects investors of all sizes. There is certainly no reason to think that the same investor who in one of the litigations that is covered in other parts of this legislation, who would be relying upon the fraud-on-the-market doctrine, would not rely for the same effect on what CALPERS or other large investors are doing when they assess information. The market price, according to the fraud-on-the-market doctrine reflects knowable information enacted in a liquid market, and if we have big institutional investors that are pouring over all these prospectuses, reading all of the press releases and so on, if they are the big market makers and traders, of course, that gets translated to the price under what we call efficient markets theory as quickly as can be.

Mr. COX of California. Mr. Chairman, will the gentleman yield?

Mr. COX of California. Mr. Chairman, I move to strike the requisite number of words, and I rise in support of the amendment. I too want to join in congratulating my colleague, the gentleman from California [Mr. Mineta], for offering a very constructive proposal on safe harbor. It is in fact part of the legislation that we had intended to change in the committee but because of our deadline to bring the bill to the floor, we determined that it would be best accomplished on the floor of the House. But I do not want anyone to think that because this amendment is being made on the floor that it has not been carefully discussed and thoughtfully considered. It has had the complete benefit of analysis by every member on our Committee on Commerce, and I think the gentleman from California, who is not on the committee, is to be congratulated for broadening that discussion and that debate and the support for this amendment to be on the committee. This amendment does a number of things that is really long overdue in the area of forward-looking information. It codifies the ``bespeaks caution'' doctrine in effect, something that we have found very workable in the common law, and now we are making it very clear as a matter of congressional policy, very clear as a matter of statute, that we intend to do that in the securities laws themselves, in the positive law. A very important part of this amendment is that it will permit people who project honestly and diligently the future as best they can with the limited tools that all of us have to prognosticate, permit them to avoid a lawsuit on the basis of those statements. CALPERS testimony was just referred to by my colleague the gentleman from Louisiana. I want to read just briefly from that testimony. This is of course a huge investor of pension funds. Their view is from the investor standpoint. They say, ``By definition projections are inherently uncertain.'' ``The more such statements are based on assumptions susceptible to change, the less useful they are in assessing prospective performance. Investors recognize this and appropriately discount the importance of such information when making investment decisions. We see no reason why investors should then be allowed to rely upon such statements in an action for fraud after the speculative nature has been fully disclosed.'' That is precisely the basis for this amendment. What my colleague the into law a clear, understandable and readily accessible procedure to automatically stay discovery and to avoid all the rest of the lawsuit while the court takes a look at whether the safe harbor applies and we do not get ourselves mixed up in long months and years of discovery on the general lawsuit itself until first we dispose of this question of the safe harbor. It makes it truly a safe harbor. This is very much the approach that I think we ought to take. For some time, we have asked the SEC to help us with rules in this area. But as we worked on this legislation, we discovered that the SEC itself did not want the responsibility of writing the court procedures for early dismissal of an action, the court procedures to stay discovery, because that would put an independent agency of the Federal Government in the business of writing rules to govern the article 3 courts. It is appropriately the role of Congress to do that in the statute. I think what we have got here, in sum, is a safe harbor provision that will work, it is clear and easy to understand for all of the people, not just the issuers of securities but people who talk about securities, for their business, the analysts, the people on the telephone and so on, people will not be afraid to talk about the future anymore for fear of a lawsuit; and we have satisfied the concerns of investors who desperately want this information. Right now, we have something of a black market in forward-looking information. Nobody wants officially to state for the record, least of all CEO's speaking to the press, what might happen in the future of their company because they know they might be sued if they are wrong, if they guess wrong about the future. But investors all want this information. They are interested mildly in the track record of a company, what has happened in the past, but what they really want to know is what is going to happen if I buy this security, if I buy this stock or this bond today, tomorrow and the next day, what will happen in the future, is this a good investment or not? It is that future information that matters the most, that is what the market demands, and the market gets it after a fashion right now, they get it in whispered conversations, under the table, it is a black market, it is not the best information, it is not the highest quality information, and we would like it to be. That will be the effect of this amendment. It has been adequately demonstrated, I think, to everyone's satisfaction that this will help investors in that fashion, it will help issuers, it will stop frivolous and abusive lawsuits, which is precisely the centerpiece of this bill. I heartily endorse it. I congratulate my colleague the gentleman from California for bringing it, and I am happy to support it.

Mr. COX of California. Reclaiming my time, the gentleman is aware that the statutes of limitation that apply to what went on in Orange County are sufficiently long so that people can file lawsuits after this legislation. It is my sincere and fond hope that this legislation will apply to as much of the litigation that might arise out of Orange County as is possible, for precisely the reasons that John Moorlach, the soon-to-be Treasurer of Orange County, just pointed out.

Mr. COX of California. Mr. Chairman, I thank the gentleman for yielding further. Finally, the section says an allegation may be made on information and belief. So there are several parts of this pleading section that the gentleman from Michigan has conveniently left out of his description. First of all, we are talking today about allegations, so we do not need to know that they are true. You simply allege it and you get on with your lawsuit, you go through discovery, you take depositions, you subpoena records, and so on, and see if you can back up those allegations. But you make the allegations in your complaint; you do not put the proof in your complaint. Second, you can do it on information and belief, so you just state in your pleading that the plaintiff is informed and believes and thereupon alleges that--and that is very, very easy to do. The complaint shall make allegations which, if true, would be sufficient to establish Scienter. So for purposes of judging the pleading, all the court does is assume all of the allegations are true even before you have actually proved them, and if added together, assuming their truthfulness, they would state a cause of action and you get by judgment on the pleadings, and away you go and you are off with your lawsuit. That is the way it ought to work. Many, many years ago a young lawyer wrote a Law Review article in which he said that the noticed pleadings which, up until that point, had been the rule of Federal pleadings, should be departed from and we should have this rule where you specifically plead, because it would help end abuses in this area. The young lawyer who wrote this, it turns out, is a lawyer named William Shannon Lerach, who is now one of the big securities class action lawyers in America--he lives out in San Diego, out my way in California--and he came as a witness and I asked him about this Law Review article and he said, ``I still agree with that today.'' So I think the gentleman from Michigan should get in league with Mr. Lerach and get on board with our pleading requirements. They are good ones, and we need them.

Mr. COX of California. I will just underscore what the gentleman from Texas has just said. The assertion is made that government entities generally do not bring frivolous lawsuits. So what? That is really not what we are talking about here. What we are talking about is abusive practices in the context of litigation, and in many of the cases and in many of the parts of this legislation those abusive practices are maintained by lawyers acting otherwise than in the interests of their clients, so this bill protects the client, and who is the client for purposes of this amendment? The government entity and the taxpayer. Why would we want to strip the taxpayer of the protection against abusive practices that this legislation affords? On the question of pleading, the gentleman from Michigan, although I am sure with every good intention, misstates rather dramatically what the legislation says. What the legislation says is that the complaint shall specify each statement or omission alleged to have been misleading. That is not an onerous requirement for anyone inasmuch as rule X(b)5, section 10(b), in the 1934 act predicates liability on some misstatement or omission, and we already have a requirement in here that either you prove reliance or fraud on the market. So there has to be a fraudulent statement out there somewhere, and asking somebody to identify what those fraudulent statements are before they bring litigation is, I think, entirely reasonable. Second, the complaint shall also make----

Mr. COX of California. She stated that the bill was retroactive, and I stated that it was not, and I then went back and checked, and indeed that provision of the bill, the effective date, which is a biolerplate provision that comes at the end that this Member had never been involved in drafting, was improperly constructed, and it would have required that inside a lawsuit two different rules apply. That makes no sense whatever.

Mr. COX of California. Mr. Chairman, will the gentleman continue to yield?

Mr. COX of California. The original lawsuits were filed under State laws and in State courts. The gentleman brings a new matter to my attention, but I assure him that lawsuit was surely filed after January 4, after the date of introduction of this bill, which gets directly to the gentleman's point. The gentleman just speaks of motive, and I gave the gentleman my answer to his question, which is that I wanted to be sure, when we introduced that bill on January 4, that it was not retroactive. Indeed, Mr. Chairman, I was in a radio debate with a Member of the other body from California in which she alleged that this was retroactive----

Mr. COX of California. Mr. Chairman, will the gentleman yield?

Mr. COX of California. Mr. Chairman, I oppose retroactive legislation. It does not work. We had the same question come up on title I of this bill. I opposed it there. I say to my colleagues, The fact is, if you have two different rules operating inside of the same lawsuit, it doesn't work.

Mr. COX of California. Mr. Chairman, will the gentleman yield?

Mr. COX of California. I thank the gentleman from California for yielding to me. I will be brief. Mr. Chairman, I have already made my complete presentation on why I think this amendment would gut the bill. It would strip all the protections concerning conflict of interest, protection of litigants from abuses by the attorneys not in the interests of the clients and so on, just on the thin tissue that there happens to be a government entity involved. But I did want to address the comments of the gentleman just preceding concerning the applicability of this legislation to litigation arising out of the Orange County problems. Any litigation arising out of the Orange County problems that anyone chooses to file under Federal securities laws will be covered by this bill as soon as it is passed by the Congress. Thus far the actions have been filed, not under the Federal laws, but under State laws, so it really would not matter what is the effective date for this purpose, and I have taken it to be an affront to this Member to suggest that, when we introduced the bill on January 4 and made sure that the bill was drafted with a provision that makes it clear that there will be only one rule applying in the middle of any lawsuit, that that was somehow directed to Orange County. In my view this is good legislation which I want applicable to my constituents. I would like to have all of my constituents have the protections against conflict of interest, against abusive practices by lawyers that foment litigation against strike suits apply to them. This will help the taxpayers of Orange County, and I would not be surprised, mark my words, that somebody does not bring a lawsuit against the county of Orange, against the taxpayers of Orange County, and it is they who will be the ultimate deep pockets unless we have these strike suit protections. The new incoming treasurer of Orange County, the guy who has come in at the request of all the people, picking up the pieces, is the guy who knows what is going on here, has written a letter, wrote to our committee, and he said he strongly supports this legislation without the carve out that the gentleman's amendment would provide because it will protect the taxpayers of Orange County from precisely the kind of abuses that we are legislating against here today.

Mr. COX of California. I thank the gentleman for yielding to me. Mr. Chairman, I would just like to correct the record. The bill, as originally introduced, had the same effective date that the bill on the floor has. This has never been changed.

Mr. COX of California. Mr. Chairman, will the gentleman yield?

Mr. COX of California. Mr. Chairman, I move to strike the requisite number of words, and I rise in strong opposition to this amendment. Mr. Chairman, this amendment proceeds on the mistaken premise that what is good for trial lawyers is always good for everybody else. It proceeds on the mistaken assumption that the trial lawyers' interests are always the same as their clients. But what we heard in hearings on this very bill is that that, unfortunately, is not always the case. The Dodd-Domenici bill which preceded this in the Senate last year, drafted in principal part by the current chairman of the Democratic National Committee contained no such carve-out as is being offered today. The Tauzin bill that was offered in the Congress last year contained no such carveout. This legislation contains no such carveout, for a very good reason. Every client deserves the protections of this legislation. The mere fact that there happens to be a government that is the client does not mean that that client should not still have protections against abusive practices by lawyers. Let us take, for example, the provisions in this legislation that prevent abusive conflicts of interest. The judge is given the opportunity to disqualify a lawyer from representing the client if it turns out that the lawyer owns the securities that are the subject of the action. That is a conflict of interest, and judges should, except for exceptional cases which this bill provides for, have the opportunity to disqualify the lawyer for conflict of interest. Why in the world would we want to say, just because taxpayers are involved, they should not have protections against conflict of interest that are provided on page 11 of this bill? There is a full recovery rule in this bill that is a substantial protection to plaintiffs with winning cases. Right now we have a winner/loser system under which, when you get all finished, the winner has to pay the costs anyway even though they proved somebody else is responsible and committed the injury. We have heard that in some cases that might deter people without much money from bringing cases, and we have already provided for that by letting the contingent fee arrangement take care of that. But obviously, if the government is bringing the case, that is not a question. Instead the problem is going to be at the other end of the case when the government prosecutes a very good cause of action and the taxpayers then end up holding the bag for the damages committed by someone else and that the court has already proven and accepted were established by someone else. The gentleman from Michigan said that governments cannot be involved in class actions. Nonsense. Of course they can. This is a new rule that he has just invented on the floor of this Congress. But there is nothing in the Federal Rules of Civil Procedures that would prevent a subdivision of a local government from being a member of a class. And why should they not be entitled to the same protection for class members as this bill provides? Right now we litigation is that the lawyer settle the cases on terms favorable to themselves, giving only cents on the dollar to investors. But this bill provides protections for members of that class so that they find out up front how much is going to the lawyers per share and how much is going to plaintiffs in the action. All of these protections are designed for investors' benefit. As a practical matter, what the gentleman would do with his amendment is strip all of these investor protections simply on the ground it happened to be a government or a subdivision of a government, not prosecuting under the Federal securities law, not SEC acting as a plaintiff on its own behalf. This makes absolutely no sense whatever. There is no precedent for it in 60 years of Federal securities law, and we should not start at the 11th hour having not taken it up in any committee or subcommittee or any time heretofore, and do it right now. I strongly oppose the amendment.

Mr. COX of California. Mr. Chairman, will the gentleman yield?

Mr. COX of California. The gentleman is exactly correct in noting first that this amendment as drafted excludes most of the big derivatives problems that we have all been made publicly aware of. It also includes many things that are not derivatives at all. The definition as drafted includes, and I quote, a contract that derives its value from the value of any security. That includes a lot of things that most people would not consider to be derivatives at all. For example, many people in firms across America, many in California, have their compensation package comprised of something called phantom stock. Phantom stock is not real shares of stock but it is just a contract that tracks the value of the underlying stock. The way this is written, because those are not exchange-traded securities, any lawsuit arising out of that employee compensation would be exempt from the coverage of what we are passing right now, the Securities Litigation Reform Act. Surely the gentleman does not mean to include those types of things as derivatives.

Mr. COX of California. Mr. Chairman, will the gentleman yield?

Mr. COX of California. I yield to the gentleman from Texas.