Paul Sarbanes

Mr. SARBANES

Mr. SARBANES. Mr. President, how much time remains?

Mr. SARBANES

Mr. SARBANES. Yes.

Mr. SARBANES. And that would mean from the time we went on this amendment, all time would have been equally divided; is that correct?

Mr. SARBANES. If that time were divided equally, what would the time situation now be?

Mr. SARBANES

Mr. SARBANES. All right, fourteen. He could be ruled out by the judge by considering that factor. It says, ``after considering all relevant factors including prior experience representing classes.'' That could be a negative factor as well as a positive factor. It is up to the judge. That is the very thing you would argue to the judge. You would say to the judge, ``This person should not be the lead plaintiff. He has fourteen instances of doing this. He is just playing a game with you.'' And the judge would say, ``Oh, yes, you are right. And under the Boxer amendment I am entitled to consider that factor, prior experience representing classes, and considering that factor I am not going to make this person the lead plaintiff.'' The Senator from California has in effect taken one of your contentions and put it in her amendment.

Mr. SARBANES. Will the Senator say this amendment with respect to considering financial interest in the relief sought--is that a plus or a minus?

Mr. SARBANES. If the Senator will yield, I mean the way the amendment is written it is absolutely neutral in terms of whether the judge shall consider the factor positively or negatively. It only says these are factors to be looked at, and the judge upon looking at the factor could weigh in a positive way or weigh it in a negative way. I mean I think the Senator has tried very hard to just lay out some items the judge should look at. The Senator tried in arguing against it to read it a certain way. But the amendment does not read a certain way. It is very clear on the face of the amendment.

Mr. SARBANES. If the Senator will yield, one of the provisions that the Senator from New York pointed to, that the Senator has listed, prior experience representing classes, could be used by the judge to disqualify plaintiff, not to qualify the plaintiff. The very plaintiffs you have cited who you said have represented--I do not know, seven times or whatever the number was--who were just buying professional plaintiffs.

Mr. SARBANES. As exactly happened in the Keating case, as I understand the Senator from New York, or as other interests that may be different from the broad range of the class members. So it is very important to understand that. I think the Senator from California, as I understand it, in effect, has said, let all the plaintiffs decide amongst themselves, or, alternatively, let the judge decide; and the judge, in deciding, should consider this list of factors. But it is up to the judge to make the decision. So you do not try to predetermine the outcome, as I think has been done in the legislation before us.

Mr. SARBANES. I want to say to the Senator that the assertion of making the argument is that the pension funds are going to come forward in order to be the lead plaintiff. The fact of it is that, as the bill is written, there is nothing that assures that the pension funds will come forward. In fact, pension funds have been notorious for hanging back in terms of being the lead plaintiff. So when this proposition is put forward in the legislation and it is then asserted or interpreted that this means the pension funds will come forward to be the lead plaintiff, there is no reason to suppose that will be the case. In fact, the lead plaintiff may well be an investor with a great financial interest in the litigation who has ties to management.

Mr. SARBANES. I want to agree with the Senator from California when she said that nothing the Senator from New York said really negates her amendment. I think she is absolutely right. What we just saw was another example of what is taking place in the course of considering this legislation. An amendment was offered, which is focused fairly narrowly in its scope, directed at correcting a flaw in the legislation that is before us. The counter argument that then is made to the amendment is the whole universe. We go right back to the basic argument that, well, something is amiss here and we need to correct it. We have conceded we want to correct some things. But how far should the correction go? If you overcorrect, you are creating another problem. Now, the problems the Senator from New York referred to when he cited the so-called professional plaintiffs--there are provisions in the bill to get at those. This amendment does not touch those provisions. There is a provision called no bonus to the named plaintiff, which has been going on, which we do not think ought to be happening. The lawyer cannot pay brokers for referring clients. That is in this bill. That is going to be prohibited. No one is seeking to take that provision out. Requiring the plaintiff to file a sworn certificate that he did not buy the stock in order to file the lawsuit, and requiring notice to class members that the lawsuit has been filed, they can ask the judge to take over the suit. Those are all provisions designed to get at the kind of problem which the Senator from New York cited. Now, the amendment of the Senator from California addresses a different issue. Those professional plaintiffs can be knocked out by all of those provisions that I am talking about. The question now comes down to whether, when you pick the lead plaintiff, you ought to establish this presumption. And as the Senator says, it is supposedly a rebuttable presumption; but if you read carefully, it amounts to an irrebuttable presumption that it ought to be the wealthiest plaintiff. I want to commend the Senator for offering this amendment. She does not preclude giving it to the party with the largest financial interest. In fact, it is permitted for the judge to consider that as one of the factors to be weighed. But it is not made the sort of dominant factor. I think it would bring a much greater balance and equity to the problem of selecting the lead plaintiff. All of the horror stories that were outlined by the Senator from New York are addressed by other provisions that are in the legislation. Those are provisions that we are not seeking to amend in the consideration of this legislation.

Mr. SARBANES. Will the Senator yield?

Mr. SARBANES. Mr. President, this is an extraordinarily important point which the Senator from California is making. In fact, the SEC in commenting on this provision of the bill that is before us said, and I quote them: One provision of section 102 requires the court generally to appoint as lead plaintiff the class member that has the largest financial interest in the case. Exactly the provision the Senator is addressing. The SEC then says: While this approach has merit, it may create additional litigation concerning the qualification of the lead plaintiff, particularly when the class member with the greatest financial interest in the litigation has ties to management, or interest that may be different from other class members. As I understand it, you permit having the largest financial interest to be a factor to be considered by the judge if all the plaintiffs cannot get together on who the lead plaintiff should be. Then the judge has to pick a lead plaintiff, and the Senator concedes the one factor to be looked at would be financial interest. But the bill as written provides the presumption to the large financial interest plaintiff which carries with it the risk, as the SEC points out, where the lead plaintiff may have ties to management or interest that may be different from other class members. As the Senator points out, they later found that out in the Keating case. Well, you say they will find it out in the beginning. They cannot find it out in the beginning. In fact, the bill as written denies the discovery in the early stages unless you already have a reasonable basis for doubting the lead plaintiff. This whole thing is structured in such a way that a lead plaintiff who has ties to the defendant, a party that has ties to the defendant, can end up being the lead plaintiff.

Mr. SARBANES. Will the Senator yield?

Mr. SARBANES. It does not say positively or negatively. That is for the judge to weigh.

Mr. SARBANES

Mr. SARBANES. Mr. President, will the Senator yield? I understand that following the second of those votes, the Senator from Maryland would then be recognized to offer an amendment relating to the so- called safe harbor, which is one of two amendments I have on that aspect of the bill?

Mr. SARBANES. I thank the Senator.

Mr. SARBANES

Mr. SARBANES. If the Senator will yield for a second, I would like to bring this discussion towards close by saying there is a point where I agree very strongly with the Senator from Connecticut. At the outset of his statement he gave praise to the very strong statement which the Senator from Nevada had made on this issue. I want to fully associate myself with that judgment. I think he is absolutely right. I urge all my colleagues, and their staffs that are following this issue, to go very carefully through the opening statement which the Senator from Nevada made when he presented his amendment. It was a very powerful statement as to why aiders and abettors ought not to be completely free from liability.

Mr. SARBANES. I understand in many suits that an important part of the recovery, on the part of the innocent investor, is from the aiders and the abettors.

Mr. SARBANES. We try to attach liability that way. Under the different theories of liability, there is an argument over recklessness and knowingly and so forth. The bill never attaches liability to the aider and abettor; is that correct?

Mr. SARBANES. The Senator put it very clearly. The point we were trying to make, the aiders and abettors walk scot-free as far as private lawsuits are concerned under this legislation.

Mr. SARBANES. What I want to do is pass a good piece of legislation. I want to avoid the comment that was at the end of the article that I put in the Record the other day about the pendulum swing. And that in the course of swinging the pendulum too far, what you are going to require are some investors to actually be defrauded and not gain any recovery before you will straighten out the law. We ought to straighten it out now and not allow that situation to happen. We tried to address the issue of joint and several liability versus proportionate liability. We had this extension of the statute of limitations, and we are doing aiders an abettors today, and tomorrow we are going to do the ``pirate's cove.'' The Senator from California has, I think, some very worthwhile amendments to offer as well. This is not a balanced bill. That point needs to be made and needs to be made very clear. This is not a balanced bill. There are certain problems we want to get at, and we ought to do that. This bill overreaches. It is unbalanced. I think we will pay a high price for it.

Mr. SARBANES. I would refer the Senator to pages 131 and 132 of his bill, where they define a knowing securities fraud. ``Defendant engages in knowing securities fraud if that defendant, (1), makes a material misrepresentation with actual knowledge that the representation is false * * *. And it also requires other things. The central--

Mr. SARBANES. If the Senator will yield further, I am trying to point out what you have done with the bill. In other words, what you have done with the bill is let a knowing aider and abettor go free. Now, I cannot, for the life of me, understand how you can possibly justify that. A knowing aider and abettor cannot be reached and held liable when a securities fraud is perpetrated. How can you justify that?

Mr. SARBANES. You let the knowing aider and abettor go free. How can you justify that? I will argue the recklessness with you, and I understand that is a more complicated issue. But how can you let the knowing aider and abettor go free?