Ed Markey

Mr. MARKEY

Mr. MARKEY. I thank the gentleman for yielding to me. Mr. Chairman, is it not true that the U.S. Conference of Mayors and the Government Finance Officers Association of the United States both favor this?

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

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

Mr. MARKEY. I thank the gentleman for yielding. The answer is that it is an over-the-counter interest rate swap which again the CEO's of these companies are contending were not accurately described to them. There are many derivatives that are infinitely more complex, in fact exotic in their nature.

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

Mr. MARKEY. If the gentleman would yield further, I think it is a pretty big step for Fortune to take to say that CEO's of the companies do not even understand them, and we are talking about the companies that are selling them as well as buying them. I think that we should give the protection to the ordinary investor on a financial product that is that complex.

Mr. MARKEY. We have here Fortune magazine. This is not some populist perspective on this issue. Here is the headline in their magazine, ``The Risk That Won't Go Away.'' ``Like alligators in a swamp, derivatives lurk in the global economy. Even the CEO's of the companies that use them don't understand them.'' We have to give the public protection. We have to ensure that they are going to be able to bring class-action suits if there is a systematic pattern of trying to defraud investors in this area. Derivatives are just not as well understood as they should be even by the people who are selling them, even by the people who are making profits from them. We have to have the protection of the Markey amendment for all investors in this country.

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

Mr. MARKEY. Mr. Chairman, this is Time magazine: ``Ego and greed, the insider story of the 28-year-old trader who blew $1 billion, broke a bank, and stunned the world.'' This is Fortune magazine from 2 weeks ago: ``The risk that won't go away; financial derivatives are tightening their grip on the world economy, and nobody knows how to control them.'' Mr. Chairman, we are talking here about ensuring that these very sophisticated geniuses not be able to inoculate themselves against suit while they are dealing in these very risky financial products that are so complex that, in more instances, the CEO's of the companies themselves do not understand them. Proctor & Gamble, Gibson, companies across this country are alleging that they were misled into these products. The objective of the Markey amendment out here is to ensure that investors are protected when they are misled into products of this nature, which by their very personality cannot possibly be understood by ordinary, unsophisticated investors. By that, I mean the town treasurers, the country treasurers, the ordinary individual that thinks that they are sophisticated, but they are not so sophisticated that they can understand an algorithm that stretches out for half a mile and was constructed only inside of the mind of this 26- or 28-year-old summa cum laude in mathematics from Cal Tech or from MIT who constructed it. No one else in the firm understands it. The lesson that we are learning is that the heads of these firms turn a blind eye, because the profits are so great from these products that, in fact, the CEO's of the companies do not even want to know how it happens until the crash, which brings down the oldest bank in England, which brings down a company, a county, a municipality, an individual. Mr. Chairman, this amendment is intended to ensure that protections are given to individuals against these kinds of products being sold to them. Mr. Chairman, I urge every Member that is very concerned about Fortune magazine's identification of this as one of the most serious problems in our economy to vote ``yes'' on the Markey amendment, to give real protection to the ordinary investor in this country.

Mr. MARKEY. Mr. Chairman, the amendment which is now pending before the House is one that deals with one of the most complex areas of the financial world. The issue is derivatives. The issue here today is whether or not these new financial products, derivatives, which are causing more and more trouble out in our financial marketplace, are going to be given the proper respect, which they should in this legislation, with respect to protection of investors. Derivatives are financial products whose value is dependent upon or derived from the value of some underlying financial asset, such as a stock or a bond, a foreign currency, a commodity or an index representing the values of that asset. as exchange traded futures and options used by investors and dealers seeking to hedge positions taken in the stock and bond markets, or to speculate on future market movements. Within the last few years, however, exchange traded futures and options have been supplemented by a vast and dizzying array of over- the-counter derivatives. These include structured securities, forwards, swaps, options, swaptions, caps, floors, and callers that may be linked to the performance of the Japanese stock market, the dollar, deutsche mark, the S&P 500, or virtually any other asset out in our marketplace. Today the outstanding value of the principal underlying the over-the- counter derivatives is estimated to be $12 trillion. Remember, we are going to have a big debate here this year on how to spend $1.5 trillion, which will divide this Congress quite bitterly. We are talking here now about instruments that are valued at $12 trillion in their principal form. Now, the dynamic growth of the over-the-counter derivatives market is the direct result of developments in telecommunications and computer technologies and breakthroughs in new concepts and modern portfolio management strategies. Using these new tools of technology and portfolio management strategies, a new generation of Wall Street geniuses have begun to market these products out across out country. By breaking down the price movement into individual deltas and gammas, betas, and vegas dancing across the computer screen, the quants, that is the mathematical geniuses who call themselves quants because they deal in quantitative mathematics, they deal as physicists, who have moved over from the nuclear physicist world into the world of creating these new products, have created the new world of cyberfinance, which is reshaping both the United States and the global financial marketplace. These geniuses, these young men and women that work with computers and highly sophisticated mathematical and other principles, have developed these captions and flortions, the accreting and amortizing swaps, the digital options, the butterfly spreads, the condors, the straddles, the cylinders, the roller coaster swaps. All of these products have now been sent out into the American marketplace, in many instances with the promise that they are quite safe for a municipality to purchase. There might be a home town that has been told they can purchase some of these products. There may be people inside of the district who have been told they are quite safe to purchase. The problem is, Mr. Chairman, is that in the hands of ``The Boy Who Lost $1 Billion; Nicholas Leeson, the 28-Year-Old Trader Who Bankrupted England's Oldest Financial Firm,'' that is Newsweek's cover this week; Fortune magazine, ``Cracking the Derivatives Case: the Untold Story of Lies, Arrogance, and Ignorance That Cost Major Players Billions.'' This is Fortune magazine we are talking about.

Mr. MARKEY. Mr. Chairman, I offer an amendment.

Mr. MARKEY. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise in opposition to the amendment offered by the gentleman from California [Mr. Cox] to the amendment offered by the gentlewoman from California [Ms. Eshoo]. Mr. Chairman, let us make it quite clear that today there is a standard which is used by the Federal courts, and that standard is largely an agreed upon standard, and it is the standard which is in the well of the House which has been sitting there as a printed statement of what has been accepted by 80 percent of the Federal courts of the United States. Now remember the standard is one which Federal judges across the country, most of them Reagan and Bush Federal district court judges, have used as their standard, and it has served our country quite well. Now, if over the course of the last 10 to 15 years 75 to 80 percent of the Federal district court judges, almost all of them Reagan and Bush appointees, have drafted a standard, have adopted a standard, which they use, why would we on the floor of the United States Congress adopt a standard which is a handwritten standard just presented to us that will override 15 years of precedents of the Reagan and Bush era judges that have reached the consensus as to what the standard should be? Should we not give some deference to these Federal district court judges? Should we not allow them in their courts, knowing all of the facts and law, the history of this country, to come to some consensus? Now I have the greatest respect for the legal knowledge of the gentleman from California, but it is not so substantial a level of respect that I think that a handwritten amendment on the floor, with no notice to any Members and in contradiction to the promise that there would be no additional majority party amendments to the legislation here today, should serve as a substitute for 15 years of settled law. The intent of this amendment, I think at the end of the day, is nothing more, nor less, then to dress up, dress up the I-forgot defense. It puts it in fancier words. It uses a legalese that, I think, is probably more professional than actually putting the words ``I forget'' into the law, but the effect of it is the same, to ensure that the standard for ordinary Americans to be able to bring those individuals in the investment of their money have a more difficult time in court. That is what this is all about, by the way, or else we would not be out here on the floor of the House of Representatives. We would not be here if they were really happy with what the Sundstrand decision says, which is again, and this is what we believe the public should have as their protection, that there be reckless conduct which may be defined as highly unreasonable conduct 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 are either known to the defendant or so obvious that the actor must have been aware of it. This standard is one which the Federal district court judges have, George Bush and Ronald Reagan judges, codified for all intents and purposes as the national standard. We cannot use, we should not be allowed to use, a handwritten amendment on the floor of the House of Representatives to be attached to this profoundly important piece of American jurisprudence, and I just hope that anyone who is listening to this debate understands quite clearly that any additions to this are meant to reduce the ability of ordinary Americans to recover in the courts of the United States when executives of S&L's, when executives of a private company, have deliberately misled--

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

Mr. MARKEY. If I may ask the gentleman a question, Have there been any allegations that any municipality in the United States has filed a frivolous lawsuit? Is there any allegation that has ever been made that they should be prevented under this legislation from being exempted and using the older standard?

Mr. MARKEY. Mr. Speaker, this recommittal motion contains two of the worst elements of the legislation which is pending before the House right now and seeks to correct those two portions of the legislation. the issue of the English rule versus the American rule. That is the question of whether or not a plaintiff, when they file a case and lose, should be subject to having to pay the legal bills of the prevailing side. The English rule is completely outside the traditions of American jurisprudence. What we seek to do in the recommittal motion is to insure that there is a correction made that does not in fact impose upon plaintiffs who happen to lose cases which they have brought against large financial or industrial institutions in this country the responsibility of shouldering the legal bills of those financial or industrial firms. The Manton amendment, which we just considered, dealt with this issue extensively in debate. We are sure all the Members understand this issue. We debated a similar form of this ``loser pays'' proposal all day yesterday on the floor of this House. The second part of the recommittal motion deals with the Dingell amendment, which was made unsuccessfully earlier this evening. The Dingell amendment seeks to deal with the reality that no municipality, no mayor, no city council in this country has ever been charged with bringing a frivolous action in a case where they believe that the municipality has been defrauded. As a result, the Dingell amendment sought to insure that there is a 3-year period in which the onerous burdens of this legislation are not imposed upon a municipality, that those municipalities can still bring actions up to 3 years based upon financial irregularities. So the heart of the Dingell amendment was that any State government, any municipality, any county in the United States can sue under existing law without the much higher burden which is imposed by the bill which is now pending before the House. This measure insures that those mayors, those Governors, those city councilmen, those county commissioners who have never had a single charge levied against them that they ever brought a frivolous case, can continue to bring actions under the existing law. So, if the case exists where the derivatives, where fraudulent financial instruments have in fact been sold to municipalities, to State governments, to county governments, that they in fact are able to continue to bring lawsuits under the existing standard which had served our country well for the last 60 years in this country in securities fraud cases. So this is a very simple case. The National Association of Mayors support the Dingell amendment and want the language in the existing bill to be deleted. The National Association of Government Securities Officials want this language to be deleted from the language. The recommittal language sends back to committee the portions which deal with ``loser pays.'' This bill is a much harsher version of the English rule than the ``loser pays'' rule that was voted on yesterday. Under this bill, if the 3-part test of not substantially justified, imposing fees and expenses on the losing party or its attorney would be just and the cost of the fees to the prevailing party is burdensome or unjust, then the loser must pay all of the attorney fees for the entire case. In contrast, yesterday's bill just required the loser to pay that part of the attorneys' fees occurring after an offer of settlement was made and rejected or if the verdict was lower than the offer. The Manton language, in contrast, would require the losing party to pay the winner's fees if the case was frivolous or brought in bad faith. This responds to exactly the concern that the Republicans are complaining about. If you are serious about wanting to penalize the attorneys when they have brought frivolous cases, then vote for this motion. If you want the investors who have just lost their life savings to bet the house and put up a bond at the beginning of the case, then that would be incredibly intimidating. It would have a chilling effect on the willingness of investors to sue. The recommittal motion seeks to insure that we do not establish insurmountable barriers to investors to be able to sue large industrial and financial powers in this country and insures the State, county, and municipal elements have the same laws they have always been able to use in order to protect their rights in court. I hope there is an affirmative vote by this House to send this recommittal motion successfully back to committee so we can have an inclusion of these matters.

Mr. MARKEY. I am opposed to the bill in its present form, Mr. Speaker.

Mr. MARKEY. Mr. Speaker, I offer a motion to recommit.

Mr. MARKEY

Mr. MARKEY. Mr. Chairman, I yield 5 minutes to the gentleman from Louisiana [Mr. Tauzin]. (Mr. TAUZIN asked and was given permission to revise and extend his remarks.)

Mr. MARKEY. Mr. Chairman, I yield myself 6 minutes. Mr. Chairman, what I would like to do to help all those who are trying to decide how they are going to vote here today is to perhaps assist them by applying a multiple choice test, so that people can choose themselves, as we go through the test, which they think would be the correct answer. Let me begin by asking which one of these four categories would be hurt by H.R. 1058: A, insider traders; B, fraudulent derivative brokers; C, wrongdoer accountants; or D, fraud victims. The correct answer there is D, fraud victims would in fact be harmed, because it is going to essentially cripple the ability of private fraud actions to be brought by individual investors who have in fact had their life savings ripped off by investors, by companies that have misled them in their investment strategy. Next question: out of the 235,000 suits filed in 1994, how many were securities fraud cases in this country: A, 31,800 out of the 235,000; B, 9,500; C, 18,670; D, 290, 290 out of the 235,000 cases. The correct answer is 290 cases in the securities fraud area. The next question, by what percentage have securities fraud class actions increased over the last 20 years in our country: A, a 150- percent increase; B, a 100-percent increase; C, a 50-percent increase; D, minus 4.3-percent. The correct answer is D, a 4.3-percent decrease in securities fraud actions brought over the last 20 years. Next question, just trying to be helpful: Out of the 14,000 public companies, how many were sued each year on average in securities fraud class actions over the last several years? A. 7,000 public companies sued each year. B. 3,500 public companies sued each year. C. 1,400 companies in America sued each year. D. 125 companies sued for fraud each year in the United States. The correct answer, D, only 125 companies are sued each year in the United States for securities fraud. Next question: Which is H.R. 1058's solution to the derivatives crisis facing dozens of municipalities and other counties in the United States? A. Improve the supervision and regulation of derivatives dealers. B. Strengthen fraud liability. C. Increase customer protections. D. Make it virtually impossible for victims to recover their losses from fraudulent brokers. The answer, D, make it impossible for all intents and purposes for there to be a recovery when individuals have been injured. Next question: Which one do the English not like? A. Tea. B. Soccer. C. Fish and chips. D. The English rule. The correct answer is the English rule. they do not like the English rule in England. Economist, the leading conservative periodical in that country, last month editorialized against the English rule arguing that the American rule is a better rule if ordinary individuals are to be compensated for harm which has befallen them because of fraudulent activity in the financial marketplace. Next question: Which is not a defense to securities fraud under H.R. 1058? A. The plaintiff did not plead specific facts of my state of mind. B. The plaintiff did not read on line 12 of page 68 of the prospectus where I made my fraudulent misrepresentation. C. Sorry, I forgot the truth. D. None of the above. The answer, D. H.R. 1058 requires plaintiff's complaints to make specific allegations which, if true, would be sufficient to establish scienter as to each defendant it is expressly made insufficient for this purpose to plead the mere presence of facts inconsistent with a statement or omission alleged to have been misleading. Next question: How much will H.R. 1058 reduce the Federal budget? A. By $100 million. B. By $50 million. C. By zero. D. It will increase it by up to $250 million over the next 5 years. The answer, D, it will increase the Federal deficit by $250 million according to the Congressional Budget Office because of the needed additional enforcement by the Securities and Exchange Commission out in the financial marketplace. Finally, under H.R. 1058, who will pay fraud victims the share of the damages caused by the primary wrongdoer who is in jail or bankrupt? A. The reckless wrongdoers who participated in the fraud. B. Aiders and abetters in the fraud who helped to make it possible. C. The accountants who claim they forgot to disclose the fraud. D. Nobody. The answer is, D, nobody else would have to pay if somebody lost their life's fortune after being misled into a terrible investment with information which was completely and totally erroneous. That is the problem we have with this bill. We hope that as we move into the specific amendments that those who are concerned about integrity and honesty in the financial marketplace will support some of the amendments we have to improve the bill.

Mr. MARKEY. Mr. Chairman, I thank the gentleman for yielding. Indeed this amendment does include several technical changes which have been agreed upon between the majority and the minority, and we would recommend them to the full committee.

Mr. MARKEY. Mr. Chairman, I yield 4 minutes to the gentleman from Michigan [Mr. Conyers], the ranking minority member of the Committee on the Judiciary.

Mr. MARKEY. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise in opposition to this amendment. This is Congress operating at its worst. The amendment that we have here on the floor was never considered before our committee. There were no hearings that were called on this issue. In fact, the statute that we are amending right now is a separate statute altogether, the RICO statute. It has nothing to do with the jurisdiction of this committee. In fact, Mr. Chairman, this subject was never referred to our committee for consideration. Moreover, the Committee on the Judiciary, which does have jurisdiction over this issue, did not consider it, and had no witnesses on this subject as part of the process of bringing this bill out onto the floor. Mr. Chairman, we can all have a debate about whether or not racketeering should be considered to cover this, that, or another category, or potential defendants in suits, but let us not kid ourselves. When our subcommittee held hearings on penny stock fraud in 1989 and 1990, we had to have our witnesses testify with bags over their heads because of the fear of retaliation by organized crime in the penny stock market of this country. Mr. Chairman, for any of the Members who think that as we talk about racketeering, that somehow or other it is exclusive of the securities marketplace, believe me, the penny stock market was rife with organized crime, so much so that there were life-threatening circumstances that many of our witnesses felt they were going to encounter. Mr. Chairman, that is even apart from the central question, though, that we have to answer tonight: Is it proper for this Congress to take up an issue of such a magnitude with no hearings, in fact, with markups before our committee, that is, a process by which we could make amendments to the legislation, that resulted in both subcommittee and full committee markups being truncated down to a point where there was no more than 2 or 3 hours on each occasion, even to consider amendments to the subject which was before us, much less this, which was not before us? To then come out here with a historic amendment to a separate piece of legislation with the Committee on Rules having a special hearing last night to put in order a nongermane amendment to a piece of legislation that has nothing to do with the business, and then asking our Members to rush out here at 6:30 and cast a vote on that, it is unfair. It is wrong. Congress unnecessary. The Committee on the Judiciary, chaired by the gentleman from Illinois, is fully capable of having a hearing on RICO that considers all aspects of it, that has witnesses coming in from the Justice Department, from the States, from the private bar, and from all others to give testimony. Congress tonight is being asked to cast a historic vote on a subject with no information before us except the opinions of a few Members who have been able to get a nongermane amendment put in order. It is Congress at its worst. I recommend to all Members to vote ``no'' on such an important subject, and send that signal that this subject should be sent back to the Committee on the Judiciary so that they have hearings on the issue, and send us out a bill that deals with that relevant subject in a way that dignifies this most important of all legislative bodies in the country.

Mr. MARKEY. I am glad to yield to the gentleman from Michigan.

Mr. MARKEY

Mr. MARKEY. I thank the gentleman very much, but at the same time we have to note that all the rollcall time does come out of that 8 hours, and the time for the additional amendment that the Committee on Rules has put in order to allow a nongermane amendment is also coming out of the time of our ability to consider this legislation. A English rule is built into this law which puts the burden on the loser in any lawsuit. It makes it almost onerously impossible for anyone to bring a lawsuit against a large financial institution in this country. It, second, imposes an I-forgot defense. That is, if any of the people who are engaging in any of this fraud say, ``Well, I forgot,'' then they are protected. Remember the old Saturday Night Live skit where Steve Martin would stand up at the end and say, ``Well, I've got a sure-fire, guaranteed defense.'' I say to my colleagues, ``Anytime you're stymied for an answer to any charge which is being made against you, just say, `I forgot,''' and that is our defense here today. Mr. Speaker, we are going to allow that as a defense in these important cases, and, third, we have the depleting requirements which require a specific pleading at the get-go of any of this legislation requiring any plaintiff to be Carnac in terms of their ability to know what was going on in the intent of the defendant's mind at that time, although they know with some certainty that some fraud has been perpetrated, and finally the fraud on the market----

Mr. MARKEY. The staff of the Committee on Rules has just informed me of that.