Paul Sarbanes

Mr. SARBANES

Mr. SARBANES. Not even knowingly. I have been listening to the Senator very carefully, and he is talking about recklessness.

Mr. SARBANES. Does your bill allow for any private right of action against an aider and abettor?

Mr. SARBANES. Will the Senator yield for a question?

Mr. SARBANES. I move to lay that motion on the table. The motion to lay on the table was agreed to.

Mr. SARBANES. The other day, we rejected the amendment that would have restored joint and several. So the bill now has proportionate liability in it. The only thing the amendment offered earlier addresses is a provision in the bill that would still keep joint and several for small investors. So if you had a small investor with a net worth of under $200,000-- and that figure is retained--we would drop out of it the requirement that that small investor had to lose at least 10 percent of his net worth, namely $20,000. So if he lost $15,000 or $5,000, he could be held whole instead of the participant in the fraud escaping the burden.

Mr. SARBANES. Will the Senator yield on that point?

Mr. SARBANES. What that says is if you do a fraud, you are a fast operator, you perpetrate a fraud, and you manage to conceal it for 3 years, that under this statute, you are then scot-free. What the distinguished Senator from Nevada is saying is that period at least ought to be 5 years. Some say why should it not even be longer and some States, in fact, have a longer period. The argument for having a statute of limitations generally speaking in the law is that at some point you want to have finality, you want to bring things to an end, you do not want to have always open the prospects of a lawsuit. So you try to have a reasonable statute of limitations. The one we have always used in this area now for more than four decades has been 5 years in terms of the period that could run in which you could then find out about the fraud. Now it is proposed to cut that back to 3 years. So if the fast operator can conceal and deceive his fraud for a 3-year period, then he escapes, he comes out scot-free. I say to my colleagues, I suggest to you this is a very meritorious amendment, and I very much hope the Members will support it. Mr. President, I yield the floor.

Mr. SARBANES. Will the Senator yield me 1 more minute?

Mr. SARBANES. Mr. President, I want to again commend the Senator from Nevada for offering this amendment. It is a very important amendment. This is an issue he has dealt with over the years with a great deal of attention and understanding and thought. The distinguished Senator from Nevada is, of course, a former Governor of that State, and prior to that the attorney general of the State of Nevada, and before that a member of the Nevada Legislature on the judiciary committee. So he has had experience in dealing with these issues, and I am sure out of his tenure as attorney general can appreciate what small investors come up against when they are confronted with these fraud situations. This provision to extend the statute of limitations does not reach the kind of horror examples that people on the proponents of this legislation are asserting. This statute of limitations issue affects meritorious suits as well as frivolous suits. There are other ways in the bill that we are trying to do away with the frivolous suits, to which the Senator from New York was just making reference. And, in fact, many of us trying to amend this bill have indicated that we support many of the provisions aimed at dealing with the frivolous suits. But we have to draw the line when the provisions are carried to excess, when you have overreaching and, in effect, you are negatively going to impact upon the small investor who has been bilked, who has been taken gross advantage of. This statute of limitations we previously dealt with here with relatively little controversy. As a matter of fact, most people, when we previously considered it, were supportive of the 2- to 5-year period, which is what the standard has been for 40 years under the securities laws, for 40 years. The 1- to 3-year standard that is now in this bill is shorter than what applies in over 60 percent of the States. If you know about the fraud, you ought to be able to bring a suit within a year. The SEC takes over 2 years to bring a suit once it knows about it. So I think it is unfair to expect the private party to meet a higher standard than you expect the Securities and Exchange Commission to meet with all the expertise and with all the resources that it has. The 3 years, in effect, says if you perpetrate a fraud and no one finds out about it and 3 years go by, you are scot-free.

Mr. SARBANES. If the Senator will just yield me 3 minutes.

Mr. SARBANES. In just yesterday's New York Times an article appeared written by Mark Griffin, the director of the Utah Securities Division. He is a board member of the North American Securities Administrators Association, which comprises the 50 States' securities regulators. In fact, he is the chairman of the Securities Litigation Reform Task Force and testified in front of our committee, and I think, in fairness, all members of the committee would agree that he was a very rational, thoughtful witness. Now, he in this article, in which he takes a very strong position, says, ``The securities litigation bill is reform in name only.'' But on this very point that the Senator is now arguing, having addressed other provisions of the bill that he thought were deficient, he said, and I quote him: Perhaps the clearest sign, however, that the bill's proponents have sold middle class investors down the river is their refusal to lengthen the time in which consumers can bring cases to court. The current rule derives from a 1991 Supreme Court decision that created a statute of limitations for Federal securities law cases of 1 year from discovery of a misdeed or 3 years from the commission of the act in question. This represented a serious reduction in the time available for such lawsuits since Federal courts previously had relied on State standards for statute of limitations. Currently 31 States permit longer than the 1 and 3 standard for the filing of State securities cases. And then he closes this discussion on this very point with this question: What possible case can the backers of this bill make for keeping the time limit as short as possible so that future swindlers who cover their tracks carefully will get off the hook for good? Mr. President, this is not a party to the issue. This is not someone who has a vested economic interest on one side or another of this. This is a State director of the State securities division. I thank the Senator for yielding.

Mr. SARBANES. Will the Chair repeat the parliamentary situation now?

Mr. SARBANES. Will the Chair indicate the parliamentary situation for us now?

Mr. SARBANES. Mr. President, will the Senator yield for just a moment?

Mr. SARBANES. As I understand it, the Senator from Nevada said it takes the SEC 2.2 years from the time they start working on it to bring the case. So if it takes the SEC 2.2 years, I do not think it is unreasonable that a private party ought to have 2 years. The SEC cannot recover. The disgorgement which the Senator made reference to is only for illegal gains that a party realizes. Then you can force them to disgorge it. They may not have illegal gains, or the disgorgement may not be enough to pay the private parties. The private party suit goes against the wrongdoer with respect to all of their assets. The disgorgement only gets at some bonanza which they have hit upon which you force them to give back and then you can allocate that out. That does not begin to cover the problem of the plaintiff recovering. But, in any event, on the particular point, the SEC takes 2.2 years. I do not think it is unreasonable to give private parties 2 years to bring their suit.

Mr. SARBANES. Will the Senator yield on that point?

Mr. SARBANES. Will the Senator yield?

Mr. SARBANES. Mr. President, I very strongly support the amendment offered by the Senator from Nevada. I think it is important to restore some balance to this bill. The statute of limitations governs a period of time that an investor has to bring a securities fraud lawsuit. If it is not brought within that period of time, it cannot be brought at all, no matter how valid the claim is. So, it is very important to understand the impact the statute of limitations will have upon all suits. It is being portrayed here as impacting only frivolous suits. It will, in fact, impact all suits, including meritorious suits. For over 40 years, the courts held that the statute of limitations for security fraud actions is the State statute of limitations determined by analogous State law. While these statutes varied, they afforded securities fraud victims sufficient time, generally speaking, to discover fraud and to file suits. More than 60 percent of the States had statutes of limitations longer than what has now been provided in the Lampf case and that is in this bill. That was a 5-to-4 decision, that the lawsuit must be brought within a year after learning of the fraud, and in no event, more than 3 years after it takes place, even if you do not know about it --even if you do not know about it. There are two standards. One, you know; how soon must you bring your suit? The other is, you do not know about it; how many years must transpire before you are closed out? If you find out about it 7 years later, even under the old statute of limitations, well, it is too long. Now that is being cut from 5 to 3 years. The time period in this bill is shorter than the statute of limitations for private security actions under the law of 31 of the 50 States. Security law experts say the statute of limitations imposed by the Supreme Court is too short. It does not provide investors with enough time to discover a fraud and then to file a lawsuit. I quoted earlier a quote from Chairman Breeden, in which he said that it could ``well mean that by the time investors discover they have a case, they are already barred from the courthouse.'' As my distinguished colleague from Nevada has pointed out, not only the SEC but State securities administrators and the FDIC have all agreed that the shorter period as reflected in this legislation does not allow individual investors adequate time to discover and pursue violations of securities law. In fact, the State securities regulators said about the shorter statute of limitations, that it: . . . effectively forecloses any means of recovery for defrauded investors whose only mistake may be to not discover a concealed fraud. We are talking about people who are the victims of fraud. Their only mistake is they have not discovered this concealed fraud. I want to commend Senator Bryan for offering this amendment. It is a matter he has pursued before. In fact, it was without opposition, adopted as an amendment to a banking bill in 1991. Many here thought it was important. In fact, this bill, as initially introduced by Senator Domenici and Senator Dodd, contained this provision. In fact, it was put right in the title: To amend the Securities and Exchange Act of 1934 to establish a filing deadline. Obviously, it was regarded as an important matter, since it was put front and center. As I indicated, the objective, independent parties have all testified that the 2 and 5 years is the standard that we ought to have. The Government Finance Officers Association wrote: Wrongdoers would be let off the hook by a shorter statute of limitations. Mr. President, I very strongly support this. Let me close with this observation: Extending the statute of limitations has nothing to do with frivolous cases. It will allow individual investors more time to bring legitimate cases, time they need, because fraud artists often conceal their fraud. The experts in this area, the securities regulators, know more than anyone about bringing securities fraud cases. They have been supportive of the proposition being offered by my distinguished colleague from Nevada. I very much hope my colleagues will support this amendment. I yield the floor. Exhibit 1 American Bar Association, Governmental Affairs Office, Washington, DC, June 26, 1995. Hon. Christopher J. Dodd, Committee on Banking, Housing and Urban Affairs, U.S. Senate, Washington, DC. Dear Senator Dodd: I write on behalf of the American Bar Association concerning legislation entitled Reform of Private Securities Litigation--S. 240--presently before the United States Senate. In its present form the ABA opposes S. 240 since many of the provisions of the legislation would dramatically reduce the protection now afforded shareholders who are defrauded. The ABA agrees that some adjustments to existing procedure in securities class actions are warranted. Legislative amendments which require full disclosure of settlement terms, promote finality in settlements and encourage voluntary and non-binding ADR foster those goals without sacrificing the integrity of our markets and the interests of public investors. Accordingly, we support provisions of S. 240 which contain such reforms. The ABA's concerns are directed to those provisions in proposed legislation which would, in effect, eviscerate the remedy which makes the capital market in the United States the envy of the world. In particular, we oppose the ``Loser Pays'' provisions, the change in the long-standing principle of joint and several liability, and the expanded ``safe- harbor'' which will not protect even fraudulent forward looking statements. In addition, we oppose the mandating of heightened requirements for pleading scienter, and mandatory stay of discovery when a motion to dismiss is filed, the limitations on discovery even after a complaint has been sustained, and the limitation to a single amendment to a complaint in a securities class action. The legislation detailed above, if enacted, would not simply, as proponents assert, prevent frivolous litigation. It would dramatically undermine the ability of public shareholders who have been injured through violations of the federal securities laws to achieve redress. In our view, the federal class action for securities fraud remains a vital and necessary component of the federal regulatory scheme. Moreover, the present trend in the case law to eliminate frivolous claims and to ensure adherence to relatively stringent pleading and proof requirements, calls into question the need for many of the provisions of S. 240. At a minimum, any proposed changes to Federal rules of Civil Procedure should follow the Rules Enabling Act in which Congress specified such changes will go to the Judicial Conference of the United States which receives input from the public, the bench and the bar. The need for this review by the Judicial Conference is particularly compelling given the provisions of the legislation which seek to have different pleading, proof and discovery rules for federal securities fraud cases, a dramatic departure from the uniform approach to all claims taken by the Federal Rules of Civil Procedure ever since their enactment in 1937. The reasons for our objections to particular provisions of S. 240 are detailed below: modified ``loser pays'' under rule 11 The requirements of Section 103 (a) and (b) requires the court (i) to make specific findings on compliance by all parties and all attorneys with regard to each requirement of Rule 11(b) and (ii) mandating sanctions for any violations. The court is also directed to presume that the appropriate sanction is reasonable attorneys' fees and expenses of the opposing party. Although this presumption may be rebutted by evidence that such sanctions would impose an undue burden on the violator, we agree with Chairman Levitt of the SEC that this section ``may have the unintended effect of imposing a `Loser Pays' scheme''. The in terrorem effect of such a change in the law will largely close the Federal courts to securities class actions including the most meritorious of cases because the vast majority of litigants are unable to run the risk of being forced to pay for the other side's fees. The merits of litigation are rarely, if ever, clear at the outset and what is one side's clearly meritorious case is often the other side's frivolous litigation. Thus, in the absence of assurances from counsel, which counsel will be unable to provide, all but the very wealthy likely will be prevented from bringing a securities action in Federal court and no one likely will ever bring a class action. If any ``Loser Pays'' provision is enacted, securities class actions in the federal courts will largely become a thing of the past, and private securities litigation in general may all but disappear, except for disputes between wealthy adversaries. The resulting loss in accountability, investor confidence, and the proper functioning of our capital markets would be wholly against the public interest. A major deterrent to corporate wrongdoing would be lost. This cannot be the desire of Congress and we urge you to reject these proposals. excessive safe harbor for forward looking statements S. 240, in Section 105, adopts a sweeping exemption from fraud liability for forward looking statements by including a scienter standard which, in the words of Chairman Levitt of the SEC, ``may be so high as to preclude all but the most obvious frauds.'' S. 240 should be amended to assure that there is no safe harbor for a forward looking statement that is materially false or misleading. ending of joint and several liability The ABA strongly supports the existing joint and several liability principles of today's laws. As SEC Chairman Levitt stated, ``[t]he Commission has consistently opposed proportionate liability, because [u]nder the existing system of joint and several liability, the solvent defendants [in cases where one of the wrongdoers in insolvent] must bear the share of the bankrupt defendants. Under a system of strict proportionate liability, the defrauded investors would be required to absorb the loss.'' As he elaborated: ``although the traditional doctrine of joint and several liability may cause defendants to bear more than their proportional share of liability in particular cases, this is because the current system is based on equitable principles that operate to protect innocent investors. Joint and several liability is based on the equitable principle that, as between defrauded investors and defendants who are found to have knowingly or recklessly participated in a fraud, the risk of loss should fall on the latter. The goal of ensuring that defrauded investors are fully compensated for their losses, in other words, overrides any distinction based on the relative culpability of the defendants. . . . S. 240 should therefore be amended to restore the joint and several liability princples. pleading and discovery, and limitations on amended pleadings and discovery S. 240 mandates a number of procedural requirements none of which have serious merit and all of which represent a violation of the procedures established by the Rules Enabling Act. Simply put, the cumbersome nature of these proposals and their unintended consequences demonstrate anew why the far more thoughtful process established by Congress in the Rules Enabling Act ought to be followed here. Rule 23 contains ample safeguards today to assure that named plaintiffs adequately represent the class and their lawyers pursue the cases vigorously. The new pleading and discovery proposals of S. 240 are troublesome in that for the first time under the Federal Rules special requirements are established for a particular class of cases. Moreover, the proposals contradict the present Rule 9(b) of the Federal Rules of Civil Procedure. Given the evidence that courts are already enforcing heightened pleading requirements today, the proposal is not only mischievous but unnecessary. The last thing Congress should be endorsing is the dismissal of meritorious cases at the pleading state. The pleading standards in S. 240 require a plaintiff to plead the ``state of mind'' of each defendant, which is impossible to do prior to any discovery. Finally, the limitations on the ability of plaintiffs to amend their pleadings and to pursue discovery while undoubtedly having the effect of preventing frivolous claims from going forward, also has the pernicious effect of barring claims with substantial merit. It is only through significant discovery and repleading that these important claims get adjudicated, an unlikely result if these proposals are adopted. In sum, the American Bar Association urges you to amend many of the proposals in S. 240. Instead of accomplishing the laudable purposes that their proponents assert, the legislation in its present form will have a fundamental negative effect upon private enforcement of the securities law, which is an essential and effective ingredient to maintaining the integrity of our markets. Sincerely, Robert D. Evans.

Mr. SARBANES. I thank the Senator. Mr. President, first of all, I want to have printed in the Record a letter from the American Bar Association expressing its opposition to S. 240, and stating: In its present form the ABA opposes S. 240 since many of the provisions of the legislation would dramatically reduce the protection now afforded shareholders who are defrauded. The ABA agrees that some adjustments to existing procedures and securities class actions are warranted. They are making a very important point. I say to my distinguished colleagues, I hear the assertions, the people proposing the amendments want no changes made. That is not the case. From the very first in this debate, we agreed to the proposition that some changes needed to be made. The question now is, what changes, how far? We are trying to cut back on the excesses. Here is a letter--and many others I have quoted take exactly the same position--which concludes by saying, urging us: . . . to amend many of the proposals in S. 240. Instead of accomplishing the laudable purposes that the proponents assert, the legislation in its present form will have a fundamental negative effect upon private enforcement of the securities law which is an essential and effective ingredient to maintaining the integrity of our markets. Mr. President, I ask unanimous consent that the full text of the letter be printed in the Record at the end of my statement.

Mr. SARBANES. Will the Senator yield 4 minutes?

Mr. SARBANES. What is the time situation?

Mr. SARBANES. Is this colloquy on the time of the Senator from Minnesota?

Mr. SARBANES. Mr. President, what is the time situation?

Mr. SARBANES. The people who file the frivolous suits, by the Senator's own statement, would file them within the 1-year period. He was just complaining about that, and he said subsequent to Lampf, the numbers jumped because they were doing exactly that. Our numbers do not show that. In fact, the SEC used these numbers when they testified before the committee in 1993. But the frivolous suits, the persons that are doing these things with a cookie-cutter, they can file them within the 1-year period. The people that are going to be blocked out by the 1 and 3 requirement are people who really have reasonable claims and do not find out about them. By definition, there is a lot of deception that goes on here, and a lot of people with meritorious claims are going to be blocked out by the failure to adopt this 2 and 5-year amendment, which I think is a very constructive proposal.

Mr. SARBANES. How would they be rectified in the courts if the statute of limitations had run? That is the whole problem. See, the people who file a----