John Dingell

Mr. DINGELL

Mr. DINGELL. Mr. Chairman, I commend the gentleman for his amendment. The hard fact is that this legislation, as now drawn, makes it impossible to win without having both an attorney, a psychiatrist, and probably a psychic, because you must plead to prove the state of mind of the defendant in this litigation. And the way the language on this section is drafted, it also requires, for example, that you submit a witness list because you must literally, in your pleadings, include the names of confidential informants, employees, competitors, Government employees, members of the media, and others who have provided information leading to the filing of the case. And even where they have requested anonymity, ofttimes out of fear of retaliation you must submit those names. This is not something which has been approved by the bar or by scholars. Bar groups, academics, and regulators have all opposed heightened pleading requirements. Arthur Miller, the Bruce Bromley Professor of Law at Harvard Law School, testified in 1994: The proposal seems to suggest that at the outset of the case, plaintiffs have the burden of proof of each individual defendant's state of mind. But this is totally unrealistic. It is not only in the rarest of cases that this type of evidence exists, under the best of circumstances requiring plaintiffs to plead defendant's state of mind generally calls for the drawing of subtle inferences from facts available prior to the institution, a task that is highly treacherous. It would be impossible in the vast majority of cases in which these facts are simply unavailable prior to the lawsuit. Mark Griffin, director of the securities division of the State of Utah Department of Commerce, had this to say: This new pleading requirement would go well beyond what are currently acceptable standards of pleading in fraud with specificity. For example, plaintiffs may not know at the pleading stage information about a defendant's state of mind, which is usually not within a plaintiff's knowledge until after discovery. Therefore, such information could not be included in a complaint. It should be pointed out that this provision would appear to directly overrule, to directly overrule, rule 9B of the Federal Rules of Civil Procedures. Beyond this, it must be observed there is something else here which has to be addressed, and that is a matter of very legitimate concern to those of us in this body. It is a fact that under this proposal, only one amendment of the pleadings would be permitted. Now, how do we compare that with existing law? Let us take the Lincoln Savings & Loan, the Keating fraud. Plaintiffs were required to amend their complaint not once, but six times, before it met all requirements for defendants. The case ultimately led to recovery of $240 million for thousands of elderly victims who had been victimized. With that requirement, Mr. Chairman, there would have been no recovery in the Keating Lincoln Savings & Loan case. In the WPPSS scandal, where thousands of victims of fraud ultimately recovered over $750 million, Mr. Chairman, plaintiffs were required to amend their complaint several times before it met the requirements of all the defendants. reasonable requirement for scienter, but it requires a reasonable number of occasions in which the pleadings may be reformed and may be amended. It is clearly fair. It is clearly proper. It protects the concerns of legitimate complaints, and it does not trammel or unfairly amend the provisions for existing Federal rules of civil procedure. I urge the adoption of the amendment. The gentleman is wise in having offered it, and he deserves accommodation of the House. The amendment should be adopted.

Mr. DINGELL. Mr. Chairman, I move to strike the requisite number of words and I rise in opposition to the amendment. Mr. Chairman, I am going to try and make this simple enough so that all of my colleagues can understand, and so that a Philadelphia lawyer is not needed to interpret what is about here. This does not deal, the amendment, with the authorities of the SEC. It deals, however, with the authorities of the ordinary citizen to go to court, to sue over matters in which he has been deceived, hoodwinked, or in which he has been taken advantage of my someone who has made a forward-looking projection or statement, provided that meets certain tests. Those tests are really very simple. They say that the disclosures are forward-looking statements and, second, it refers to the risk that the projections made may not be realized. Once those two tests are met, no rascality, no deceit, no duplicity, no outrage, no falsehood, no misleading statement is of a character which would ban a citizen to go to court to seek redress for the fact that he has been deceived and that he has lost money because of that condition. That is all it says. This is an immunity bath for wrongdoing so long as the disclosures say that they are forward-looking statements; and, second, that it refers to the risk that the projections may not be realized. If those conditions are met, this is an immunity bath, and any kind of rascality, any kind of deceit is fully justified. This is an amendment which would have been loved by Mr. Ponzi, who was the builder of enormous fiscal undertakings which were bottomed on fraud, holding companies, and other kinds of misbehavior. This is the kind of proposal that would have been loved by Mr. Insull, who built himself an enormous empire of electrical utilities through devices which would have been sanctified under this by simply the use of the two devices which are set forth in the language of the amendment. into law that Members of Congress are going to have people saying, ``Why is it that you permitted this kind of behavior to go forward?'' And we are going to have to address our constituents as to why it is we have taken from the American investing public the protections which they now have with regard to truth, fairness, honesty, and integrity in the marketplace and in reporting and disclosures. It has all been done on the thesis there are a bunch of slippery lawyers out there forming a large number of citizen suits which I happen to think is occasionally a very good idea, but it is important that they keep in mind one thing: the end result of this is going to be that citizens are going to be less able to protect themselves from wrongdoing, and the protection that we have built up over prospectuses and other things is going to be shrunk significantly by the unfortunate language of this amendment.

Mr. DINGELL. Mr. Chairman, I demand a recorded vote.

Mr. DINGELL. Mr. Chairman, will the gentleman yield?

Mr. DINGELL. Mr. Chairman, it would require in addition to that also that State or local units of government, cities or counties, before they could litigate, could be required to post a bond; is that not so?

Mr. DINGELL. Mr. Chairman, will the gentleman yield?

Mr. DINGELL. Mr. Chairman, the new rights that would be afforded cities, States, and local units of government would be the following: No. 1, loser pays. Before a city, State, or local unit of government can go into court in connection with derivatives fraud or other fraud upon their consumers involving securities, they would have to absorb the risk of paying the entire cost, lawyers and everything else, if they lost. In addition to this, there would be, as I mentioned, the heightened pleading requirements. There would be no more joint and several liability. So slippery people would escape. There would be no fraud-on- the-market protections for inactively traded securities. Now, here is what the United States Conference of Mayors says with regard to protections that the bill would afford them. Reduced to its simplest form, it is ``thanks but no thanks.'' I include this with my remarks. While we recognize the goal of H.R. 1058 to curtail frivolous private securities actions under Federal securities laws, we believe that the intended reforms may severely limit justified litigation, lessen deterrence to security frauds, and weaken existing legal standards insofar as the communities are concerned. Mr. Chairman, I thank my friend for yielding.

Mr. DINGELL. Mr. Chairman, I will express the highest regard to my good friend, the gentleman from Texas [Mr. Fields]. First of all, a litigant must prove and plead what is going on in the mind of the other side before he can properly get into court. He has literally got to define the thought process and the intentions of the other party. Cities, States, counties, local units of government, would not be compelled to bear that burden. That is hardly something that I think they ought to be compelled to do because they are litigating on behalf of their taxpayers. There are a large number of other burdens that they must pay before they can get into court and a large number of other burdens they must carry, and I do not see why it is that they should have to carry these burdens to litigate on behalf of their people. There is no allegation, none, that there has ever been any wrongdoing, that there is any ambulance chasing or any shyster lawyer practices engaged in in connection with these matters, and I would just urge my colleagues to support this, and I appreciate the concerns of my friend from Texas, but I would just say that the burdens that he is imposing on the cities, and States and local units of government by this amendment do not need to be accepted because there is no abuse on their part.

Mr. DINGELL. Mr. Chairman, will the gentleman yield?

Mr. DINGELL. Mr. Chairman, there is absolutely no evidence of wrongdoing on the part of any municipal, State or local government official in connection with litigation of this kind, absolutely none. There are absolutely no protections given to cities, States, and local units of government by the bill, but what is given, and it is a prodigious benefit, is to a group of slippery rascals from the derivatives business. They will receive an inoculation against litigation against them for wrongdoing in connection with derivatives and in connection with investments which the cities have made and the counties and the local units of government have made to increase their earnings on the monies which they have as tax receipts during the time that they are waiting to expend those monies.

Mr. DINGELL. Mr. Chairman, will the gentleman yield?

Mr. DINGELL. There is no evidence of abuse by the mayors and Government Finance Officers of the cities, States and counties. It is also a fact their behavior has been exemplary. It is also a fact that they are engaged in litigation to protect their taxpayers against wrongdoing done not only to the cities, States, and counties, but also to the taxpayers thereof. U.S. Conference of Mayors, Washington, DC, March 6, 1995. Hon. Newt Gingrich, Speaker, House of Representatives, Washington, DC Dear Mr. Speaker: On behalf of the United States Conference of Mayors, I would like to raise some serious concerns regarding H.R. 1058--formally title II of H.R. 10, the Common Sense Legal Reforms Act. Local governments participate in the securities markets both as investors of pension funds and temporary cash balances as well as issuers of municipal debt. Therefore, we have an interest both in preserving well-established and vital investor rights and protecting ourselves from unwarranted and expensive litigation. While we recognize the goal of H.R. 1058 to curtail ``frivolous'' private securities actions under the federal securities law, we believe that the intended reforms may severely limit justified litigation, lesson deterrence to securities fraud, and waken existing legal standards. In addition, as has been pointed out by the Government Finance Officers Association (GFOA), this legislation fails to address key issues such as an extension of the statute of limitations to provide a fair and reasonable period for filing a securities fraud case and the creation of investor rights to purse private actions against person who violate appropriately clear standards in aiding and abetting securities fraud. We ask that these concerns be addressed as this legislation is considered on the House floor. Thank you for your continued attention to our nation's cities. Sincerely yours, Victor Ashe, Mayor of Knoxville, President.

Mr. DINGELL. I yield to the gentleman.

Mr. DINGELL. I yield to the gentleman from Massachusetts.

Mr. DINGELL. That is correct, but, remember, the language of this bill is not something which is applicable to the kind of lawsuit about which we are language of this bill relates to bounty hunting, to a large number of other practices which are engaged in by people who participate in class action suits, according to the charges which have been made here, and not governmental institutions which are going out and suing to recover moneys improperly taken from their taxpayers.

Mr. DINGELL. Mr. Chairman, will the gentleman yield?

Mr. DINGELL. What the gentleman [Mr. Tauzin] is referring to are class action matters. Those are matters which really do not relate to the business that we are discussing. Here we are talking about communities, cities, States, local units of government, governmental agencies which need to go in and sue. These are not class actions in the sense that we have been talking about in the basic legislation which we address, the actions to which we are addressing ourselves with this amendment are not class actions. No professional plaintiffs, no bodies, no illegal behavior of the kind that would be condemned by this legislation. It would be illegal for a county treasurer to accept a bounty, and indeed if he were to do so, he would first of all be committing a crime, but second of all if he were to do so, he would be responsible for paying those moneys over to the county or to the governmental agency of which he was a part because that money would belong to the county as opposed to belonging to him.

Mr. DINGELL. Let me advise my good friend that the protections of this bill have never been extended to investors. The protections of this bill are extended to a bunch of high-priced lobbyists, to a group of people in the accounting profession, large numbers of whom are now in the gallery up above watching this proceeding, and to a group of slippery people in the investment industry who have been taking advantage of investors by marketing questionable derivatives, by engaging in an assortment of difficult, improper series of behaviors.

Mr. DINGELL. If the gentleman would permit, cities, States, counties, local units of government are covered under existing law in all matters; all matters, all fashion, all purposes for a period of 3 years. They are given no additional right over those which they have now, and none are taken away from them. They may proceed to litigate in the fashion they may now do for a period of 3 years.

Mr. DINGELL. I yield to the gentleman from Louisiana.

Mr. DINGELL. Well, these are the only ones of which I am aware at this particular minute, but I would observe that every day, if you read the Wall Street Journal, you will find that there are new and additional derivatives problems which are afflicting everybody, including highly sophisticated people like General Electric, Barings Bank or, indeed, Orange County, which ran a several-billion-dollar investment trust.

Mr. DINGELL. I yield to the gentleman from Texas.

Mr. DINGELL. If the gentleman would permit, the gentleman has come up with a very good point. The thrust of the legislation before this body at this minute relates to lawyers who assemble class-action suits for their personal profit. This relates, this amendment protects intact for a period of 3 years cities, States, counties, and local units of government, so that they may go in and sue. They have been no allegations whatsoever, none, that cities, States, or counties have engaged in any kind of frivolous litigation on matters of this kind.

Mr. DINGELL

Mr. DINGELL. Mr. Chairman, will the gentleman yield?

Mr. DINGELL. Mr. Chairman, there are ways of cleaning up the abuses that exist with regard to citizens' suits regarding securities. But this legislation is not the way that it should be done. My colleagues on the Republican side would have us believe that the securities industry and the marketplaces of this country are some kind of kindergarten or perhaps a cloistered nunnery where nothing that is good for us is brought out. No, sir, nothing could be further from the truth. The hard fact of the matter is this is the place where rascals and rogues go to plunder the American people, honest investors who invest their life savings and that is all. And this legislation, while it might correct abuses of which the other side complains, will also strip law-abiding citizens of their rights to litigate where wrongdoing has been done to them and where their assets have been stolen by wrongdoing. This is not a handout from the trial lawyers. This is a prestigious business publication. It says, ``Can you trust your broker?'' The answer is you may be able to, but you may not. It is inside the publication, and I would commend it to the reading of my colleagues. Look at some of the things that have had happened recently in the securities industry, and you will understand why collapse of Barings investment banking firm in England. The lawsuits against the perpetrators of that wrongdoing would have probably been sheltered by this legislation. Similarly, the $2 billion collapse of Orange County investments that led that county to declare bankruptcy probably would be sheltered by this legislation. Limited partnership fraud so far has cost Prudential Securities better than $1 billion. Twelve billion dollars in litigation in a fraud case against Drexel Burnham Lambert; the case was settled for $3 billion, no shakedown by trial lawyers, but action by the Federal Government. How about the securities fraud and insider trading scandals perpetrated by Ivan Boesky, Dennis Levine, Martin Siegel and others on Wall Street? What about some other splendid securities frauds which probably would have been sheltered under this legislation? Lincoln Savings and Loan, Charlie Keating and his cohorts; they sold worthless bonds to the elderly in bank lobbies; Washington Public Power Supply System, a massive default of $10 billion and more in bonds, led to a class-action lawsuit which resulted in more than an $800 million settlement, probably would have been proscribed under the legislation that we are addressing. In Salomon Brothers, a group of elite institutions worked together to raid government bonds auctions; probably lawsuits would have been banned under the legislation we are talking about. At Miniscribe, the company shipped bricks in boxes instead of hard disk drives, or at Phar-Mor, where executives maintained two sets of books so that as much as $1 billion could be diverted for personal interests. Those are some of the better. But you know that in some 35 other communities other than Orange County, some publicly supported institutions also reported massive losses in 9 months, these because of exotic derivatives, and it goes on and on, Kemper Financial Services, which was recently charged by the SEC with illegally diverting stock trades for the benefit of its own profit-sharing plan. Kemper settled a similar charge earlier with the SEC for $10 million. We do not know how much they are going to come up with on this one. The Wall Street Journal reported the SEC charged more than a dozen individuals and companies with wireless cable fraud bulking 3,000 investors out of $40 million. On February 27, the Journal and the Times reported Hanover, Sterling & Co., a brokerage company, was ordered to cease all operations. Why? Because thousands of investors in the 16 stocks to which the firm was a market-maker suffered massive losses ranging from 57 percent to 80 percent when the shutdown was reported. Business Week on February 20 said, ``Can you trust your broker?'' The answer, as I have said, was not reassuring. It says a rising wave of cynicism, both inside and outside the industry on widely accepted ways of doing business at the largest and most prestigious firms. What we are talking about here is legislation that has been offered by my Republican colleagues that shelters wrongdoing. It does not only protect innocent people against strike suits, but it requires, for example, that in pleading, a pleader has to prove what was going on inside the head and the mind of the wrongdoer, and the question then is, what is the representative of the hurt litigant? Is it a lawyer? Is it a psychic or is it a psychiatrist? This is outrageous legislation and should be rejected.