Paul Sarbanes

Mr. SARBANES

Mr. SARBANES. These figures, as I understand it, are from the Administrative Office of the U.S. Courts. What figures is the Senator using? What are they, and where do they come from?

Mr. SARBANES. The chart that the Senator from Nevada put up back there indicates that there was no major number of lawsuits filed subsequent to the Lampf decision. I do not know where, in fact, the highest figure preceded the Lampf decision. As I understand it, that was 315, and since then, it is now 290. On what basis does the Senator make the assertion that following the Lampf decision there was an upsurge in the number of cases filed?

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

Mr. SARBANES. I would like to ask the Senator, as I understand it, not only the SEC but the FDIC and State securities regulators all joined the SEC in seeking to, in effect, overturn the Lampf decision and go to the 2-and-5-year standard for the statute of limitations; is that correct?

Mr. SARBANES. Will the Senator yield?

Mr. SARBANES. I just point out to the Senator that the notion that it was unfair was encompassed by the Senator when he put his bill in. This was in the bill, put in by the Senator. So the Senator himself departed from the absolutely rigorous application of moving to proportionate liability because he recognized it was not fair. I am just making the point, the way it has been defined makes it so restrictive that these small, unsophisticated investors--which my colleague is asserting he is providing some protection for --are not going to get protection. I am urging my colleagues to change it in this respect in order to provide protection for these small people. The fact of the matter is, the shift the Senator is doing is he is shifting the burden of uncollected damages off of the codefendant, who has abused the system, over to the insolvent defendant, the victim. The Senator used an example between a misdemeanor and a felony, and he says you have to have a line. The line you have is you are still punishing the wrongdoer. The shift from a misdemeanor to a felony does not enable you to put the burden off on the victim of the crime. Here we are throwing it off on the victims, and you are doing it in such a way that they have no adequate protection. I think these small investors ought to be protected. I think the proportionate liability ought to be doubled. As the Senator from New York indicated the other day himself in making a statement, that is what this is directed to do. I say to my colleague, the way it is written now my colleague is going to have someone with a small net worth, they lose a small amount of money--he says, ``Too bad.'' They say, ``But this fellow was a participant in the fraud. They were in this scheme that cheated me.'' ``Tough. Very sorry.'' And Mr. and Mrs. Small investor, all across the country, are going to feel the brunt. They are going to feel the brunt of this. I should have tried to amend the net worth as well. I think the figure is much too low. But for the sake of drawing the distinctions we left the net worth. We just said all right, you got $200,000 net worth, you lose $15,000 in this fraudulent scheme. The person who directly perpetrated the scheme has fled. But his lawyer is around, his accountant is around, his investment counselor is around. And all of them were so reckless that they became participants in the scheme. They did not blow the whistle on this person and therefore you are entitled to collect from them. And I think you ought to be able to collect if you are the small person. If you have lost less than 10 percent, you have a smaller loss--why should they not? That may be the only investment funds these people have. We are not talking about wealthy people here. And you are putting the burden--it is very important to understand, the law to date has been that all of the defendants can be held. If one of them goes bankrupt, then the others can be brought in and made to pay. And the victim is held harmless. Now we are making the perpetrators of the fraud harmless as opposed to the victims. Mr. President, what is the time situation?

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

Mr. SARBANES. I am not sure I have seen the list, but I hope the Senator will include it in the Record so your colleagues will have the benefit of seeing the list. We have a clash amongst interest groups, no question about it. We have a group of lawyers who very much are involved in the securities litigation which my colleagues on the other side say are abusing the existing system. They are trying to address that. We also have a lot of corporate people who want to shield themselves from liability on the other hand. So we have vested economic interests coming from both directions, most of the judgment coming from groups that have no vested interest in it, questioning the provisions of this bill as being excessive and as going too far. As the article in the New York Times on Sunday by Mark Griffin, the director of the Utah Securities Division, states: What's in the name? In the case of Private Securities Litigation Reform Act of 1995, consumers will find a world- class misnomer now before the Senate. The bill is more accurately described as securities litigation repeal. In effect, what we have is a situation in which this is excessive; it goes too far. Even the proponents recognize that it went too far. They put this provision in that I am now trying to change, in a rather modest way, in order to make it have some meaning, rather than being almost meaningless. It has a double requirement. You have to be below $200,000 net worth, and you have to lose 10 percent of your net worth. If you are some small, unsophisticated person with very limited means, below $200,000 net worth--that is, your house, your jewelry, your real estate, any stocks or bonds that you own, all of that added up gets you below $200,000--you would think at least we will protect that person fully, fully protect them. Oh, no, no. In addition to having to be below the $200,000 net worth, you have to lose in this stock swindle more than 10 percent of your net worth. If your net worth is $195,000, all these things added up, you have to lose more than $19,500. Suppose you are a small investor with a net worth of $195,000, all of these things I enumerated. Someone talks you into making an investment. A lot of elderly people get fast-talked on the telephone or in person and make an investment of $5,000. They lose it; they lose it. The stock swindler goes bust, flees. There is no recovery there. The people advise the stock swindler, who were participants in the fraud on a reckless standard--on a reckless standard, the stock swindlers, lawyers, accountants, investment advisor, people drawn into this thing--they are protected ahead of this innocent investor who has lost $5,000. I cannot understand it. I said before that this is a ``have-you-no-shame amendment,'' I say to my colleagues on the other side with respect to what you are doing to these small investors. Senators recognize the problem of the small investor, the unsophisticated person, and fail to adequately give them any protection, is what it amounts to. That is a very important aspect. I would like to get the response from the other side focused on the provisions of the amendment. All we do, we put the amendments forward, and then we hear a statement about the bill as a whole. We said earlier, at the very beginning of the debate, that we accept certain aspects of this bill. The real question now is on the amendments which go to particular provisions in the legislation. I yield the floor. Perhaps we can get a focus on this particular amendment and its provisions.

Mr. SARBANES. I yield for a question.

Mr. SARBANES. I yield myself 5 minutes. I say to my colleague that I listened carefully to his statement and it really does not address this amendment. The statement really addresses the overall bill and the provisions of the overall bill. There were some of the points he made with which I agree and some with which I disagree, but it did not really get to the question of the amendment before us. We had the debate on Friday on the joint and several issue, on Thursday night and Friday on the broad principle. We are now addressing the provision that is in the bill. I want the Senator to explain to me the fairness or equity-- obviously, the proponents of this legislation have recognized a necessity to protect the small unsophisticated investor. What they have provided is that if a plaintiff has a net worth of less than $200,000, he will be regarded as such a person--$200,000. This, by their own statement, includes all of the plaintiff's financial assets, including stocks, bonds, real estate, and jewelry. So if you own a home, that is going to get an awful lot of people close to the $200,000 right there. But in addition, it would be bad enough if they said if your net worth is $200,000 or less--you have to have a net worth of $200,000 or less in order to be fully protected. If you are slightly above that figure, you do not get full protection. In addition, there is also a requirement that to be fully protected on recoverable damages, you have to have lost more than 10 percent of your net worth by this fraudulent scheme. So, in other words, if you are at the $200,000 figure, you have to have lost more than $20,000 in order to be fully protected. Why should someone who has a net worth of only $200,000 not be fully protected if they get caught in a fraudulent scheme and they lose $12,000? Or $15,000? Or $18,000? Where is the equity or the fairness in that? If you are going to limit the small people--I think the limit is too great at $200,000, but this amendment does not address that part of the provision that is in the bill. This amendment addresses the provision that in addition to being limited to a $200,000 net worth, you have to have lost more than 10 percent of your net financial worth if you are going to be fully protected in recovering your damages. The small people are really going to be hit hard. The small people are really going to be hit hard because someone who has a $200,000 net worth, but only $5,000 of risk, loses it all. We say, ``Well, that is too bad. You will not get full protection.'' I cannot, for the moment, begin to understand the equity of that provision, and therefore the amendment that I have sent to the desk seeks to change that in order to provide additional protection for the small, unsophisticated investors who have been recognized in this bill as requiring some form of special protection.

Mr. SARBANES. But do not require, before they are held harmless they lose 10 percent of their net worth. You have someone with a $200,000 net worth, they loose $5,000 and you say, ``Tough.'' That is a small investor. It is an unsophisticated person who is taking a real pounding. I am saying, why do you not let them at least collect what they lost? You have limited it to a class of less than $200,000 net worth. At least whatever they lose, let them recover.

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

Mr. SARBANES. I yield 1 more minute. And then, in addition, to require that they lose at least 10 percent of their net worth, more than $20,000--you take a person, they have $200,000 of net worth. They have a home worth $150,000, which is modest in today's markets in most places in the country--worth $150,000. They have $50,000 worth of items for net worth which the bill has defined as including the jewelry and heirlooms and everything else. They are drawn into a fraudulent scheme. They lose $19,500, not 10 percent of the $200,000, and you are not going to hold them harmless. You are going to put the fraudulent perpetrators, the perpetrators of the fraud, ahead of the innocent investor. Mr. President, it is an outrage. At a minimum we need to change this; otherwise, there is no shame left whatever. Now, Mr. President, I understand that the Senator from the other side of the aisle has returned, and I will reserve the remainder of my time. Exhibit 1 [From the New York Times, June 23, 1995] Protection for Corporate Fraud Two bills before Congress reveal how reckless the Republicans have become in their zeal to reduce regulation. The bills--which would ``reform'' laws governing securities firms and banks--go far beyond their stated purpose of ending frivolous litigation. What they would actually do is insulate corporate officials who commit fraud from legal challenge by their victims. The Senate securities bill sets out to protect corporate officials from being sued when they issue overly optimistic predictions of corporate profitability that are simply innocent misjudgments. Sponsors cite cases where opportunistic shareholders waited for a company's share price to nosedive, then sued on the grounds that their investment was based on fraudulent representations of the company's health. But to solve this infrequent problem, the bill would erect a nearly insurmountable barrier to suing officials who peddle recklessly false information. It would block suits against accountants, lawyers and other professionals who look the other way when the companies they serve mislead investors. The bill requires that suits be filed within a short statute of limitations and threatens plaintiffs who technically violate the court's procedures with heavy fines, including payment of the defendant's legal fees. These provisions would ward off frivolous suits. But they just as surely ward off valid suits. Securities markets work well when investors are confident that the data on which they base decisions is honest. The bill threatens that confidence. Banking legislation working its way through the House would also cause damage, both socially and economically. It would remove the Justice Department's authority to sue bankers and realtors who systematically block blacks and other minorities from renting apartments or getting mortgages. Apparently Justice has been too vigilant fighting discrimination for the G.O.P.'s taste. Astonishingly--in the wake of the fraud that brought down savings and loan institutions during the 1980's--the bill would weaken regulatory oversight over bank directors, requirements to provide independent audits and prohibitions against preferential loans to bank officials. The bill leaves few customer protections in place. It would eliminate some requirements that banks report interest rates on customer accounts in uniform, easy-to-compare terms. It would also gut the Community Reinvestment Act, which requires banks to lend money in the neighborhoods where they take deposits or else possibly relinquish the right to merge or open and close branch offices. The act requires reform because enforcement is needlessly expensive. But the answer is to clarify and tighten standards, the solution the Administration has already taken. The bill will make banks more profitable. But it will also invite some of the sordid practices that contributed to the $500 billion that the savings and loans failures cost taxpayers. The Administration has expressed opposition to many of the banking provisions. But it has remained silent on the securities bill. Apparently, powerful Democrats, like Christopher Dodd of the insurance state of Connecticut, have pressured the White House to remain mum. President Clinton seems eager to run as a candidate who could work with the Republican Congress but protect Americans from G.O.P. excesses. He could demonstrate his worth by vowing to veto the securities and banking bills--and any others that would put the interests of deceptive executives above those of ordinary voters. Exhibit 2 [From the Baltimore Sun, June 26, 1995] Safe Harbors for Financial Fraud In the wake of the nation's savings and loan debacle, the financial derivatives shock to U.S. pension systems, the junk bond manipulations of Mike Milken, one could expect Congress to bolster the rights of investors in securities fraud cases. Instead, Capitol Hill legislators are rallying to protect the interests of corporate executives, securities dealers, lawyers and accountants against the claims of victims of financial crimes. Legislation approved by the House and awaiting a Senate floor vote today would grant virtual immunity to these participants in securities fraud lawsuits. Executives who hype their companies' financial projections to jack up the stock price would be sheltered from legal action. Bondholders defrauded by Charles Keating and his S&L scam, the largest in U.S. history, would find it almost impossible to sue the co-defendants for relief under the pending bill. They recovered $240 million from Keating's accountants, lawyers and securities dealers, although still losing nearly 40 percent of their money. Originally drafted to reduce the number of frivolous investor lawsuits against corporations, the bill was pushed by Silicon Valley companies whose fortunes are highly volatile. But the sweeping protections included have fired the opposition of investor groups, advocates for the elderly and even the federal Securities and Exchange Commission. The number of federal securities fraud cases has nearly doubled over the past decade. But the SEC, which polices securities fraud, says that investor lawsuits are important in accomplishing its mission. A study released last month by the Congressional Research Service finds the number of securities suits against companies ``exceptionally small.'' The loudest complaints have come from the elderly, whose retirement assets are most vulnerable to fraud. Senior citizens account for over 30 percent of securities fraud victims, according to a study by the Gray Panthers. The House bill includes the chilling proviso that the losers of a fraud lawsuit must pay lawyer bills of those they sued. The Senate measure would limit defendant responsibility in lawsuits only to their degree of proven guilt, instead of making all parties liable for fraud settlements. The arsenal of weapons against investors in the legislation shows that it is more about protecting the shadowy dealings of corporate leaders and their professional confederates than in limiting frivolous class action lawsuits. If the integrity of the marketplace is to be truly protected, the Senate will vote down this invitation to expanded investor fraud. Exhibit 3 [From the New York Times, June 25, 1995] Securities Litigation Bill Is Reform in Name Only (By Mark Griffin) What's in a name? In the case of the ``Private Securities Litigation Reform Act of 1995,'' consumers will find a world- class misnomer. Now before the Senate, the bill is more accurately described as securities litigation repeal. For millions of middle-class American investors, the fate of this bill--and the even more radical version passed by the House of Representatives in March--could spell the difference between recovering or losing billions of dollars from securities fraud. Securities litigation reform began with the intent of putting some weights around the ankles of a few fleet-footed lawyers; but the measure now dangerously close to Senate passage would wind up being a noose around the neck of defrauded investors. While everyone agrees on the need for reasonable reform, numerous public-minded groups are strongly opposed to radical steps in the Senate bill, S. 240, that would snuff out key investor rights. If securities litigation reform was the real goal here, the widespread support that exists for reasonable steps to curb lawsuit abuses would have insured easy passage. But the bill now before the Senate would rein in frivolous lawsuits only by making it virtually impossible for consumers to pursue rightful claims. Here we see the financial world's equivalent of the notorious Vietnam ``hamlet strategy'': we must destroy this village in order to save it. The reality is that the main intent of this legislation, despite what its proponents say, is to provide a shield for all but the most extreme cases of fraud. Have the members of the Senate already forgotten the financial scandals of the 1980's that cost investors and taxpayers billions of dollars? Is it really good public policy to erect protective barriers around future wrongdoers who will be emboldened to emulate Lincoln Savings and Loan and Prudential Securities? At the heart of consumer concerns over this legislation are two key problems. Under current rules, public companies are prevented from deceiving investors by reasonable restrictions on statements concerning future corporate performance, known as ``forward- looking statements.'' The original S. 240 created a limited ``safe harbor'' for such statements, but the harbor was changed to an ocean. So now the Senate is considering a measure that protects any reckless or irresponsible statement by a company about its future as long as the statement is represented as forward-looking and notes that actual results may differ. The Senate bill narrowly defines as fraudulent only those statements ``knowingly made with the expectation, purpose and actual intent of misleading investors.'' As if this was not a loose enough standard the bill require that each of the three conditions be proven separately in court. Consequently, S. 240 is a dagger aimed at the heart of what makes possible strong public confidence in the markets: full, fair disclosure mandated under Federal securities law. Arthur Levitt, Jr., the Securities and Exchange Commission chairman, has noted: ``I cannot embrace proposals which allow willful fraud to receive the benefit of safe harbor protection.'' 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 one year from discovery of a misdeed or three 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 statutes of limitation. Currently, 31 states permit longer than the ``1 and 3'' standard for the filing of state securities cases. 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? Fortunately, efforts are under way to pull the measure back toward the interests of small investors. Among the amendments expected to be deliberated on the Senate floor this week are measures that would: replace the expansive safe harbor for forward-looking statements with a directive to the S.E.C. to continue its rulemaking efforts in this area; lengthen the statute of limitations for private securities fraud actions; fully restore aiding and abetting liability under the securities laws, an established concept that before it was recently removed by a Supreme Court decision, made it possible to sue even indirect participants in a fraud, and lift the severe limitations the bill imposes on joint and several liability, allowing investors to continue recovering from all participants in the fraud. The difference between reform and repeal of securities litigation is an enormous one for middle-class investors in America. Based on current payments to securities class-action claimants, it should be expected that shutting the doors of America's courthouses over the next five years to securities fraud victims will result in 1.79 million investors losing the right to recover approximately $2.87 billion. Even these numbers may underestimate matters. By loosening the Federal laws that now empower citizens to go to court to restrain misconduct in our financial marketplace, Congress has the potential to unleash a new, painful era of financial fraud. Exhibit 4 Government Finance Officers Association, Washington, DC, June 8, 1995. Hon. Paul S. Sarbanes, U.S. Senate, Washington, DC. Dear Senator Sarbanes: I am writing on behalf of the more than 13,000 state and local government financial officials who comprise the membership of the Government Finance Officers Association (GFOA) to bring to your attention serious concerns we have with the Securities Litigation Reform Act, S. 240, recently approved by the Senate Banking Committee. As you know, the GFOA is a professional association of state and local officials who are involved in and manage all the disciplines of public finance. The state and local governmental entities our members represent bring a unique perspective to this proposed legislation because they are both investors of billions of dollars of public pension funds and temporary cash balances, and issuers of debt securities as well. We support efforts to deter frivolous securities lawsuits, but we believe that any legislation to accomplish this must also maintain an appropriate balance that ensures the rights of investors to seek recovery against those who engage in fraud in the securities markets. We believe that S. 240 does not achieve this balance, but rather erodes the ability of investors to seek recovery in cases of fraud. The strength and stability of our nation's securities markets depend on investor confidence in the integrity, fairness and efficiency of these markets. To maintain this confidence, investors must have effective remedies against those persons who violate the antifraud provisions of the federal securities laws. In recent years, we have seen how investment losses caused by securities laws violations can adversely affect state and local governments and their taxpayers. It is essential, therefore, that we fully maintain our rights to seek redress in the courts. S. 240 would drastically alter the way America's financial system has worked for over 60 years--a system second to none. Following are the major concerns state and local governments have with this ``reform'' legislation: Fraud victims would face the risk of having to pay the defendant's legal fees if they lost. S. 240 imposes a modified ``loser pays'' rule that carries the presumption that if the loser is the plaintiff, all legal fees should be shifted to the plaintiff. The same presumption, however, would not apply to losing defendants. The end result of this modified ``loser pays'' rule is that it would strongly discourage the filing of securities fraud claims by victims, regardless of the merits of the cases. This is particularly true for state and local governments that have lost taxpayer funds through investments, involving financial fraud in derivatives, for example, but who simply cannot afford to risk further taxpayer funds by taking the risk that they might lose their case and have to pay the legal fees of large corporations. The argument is made that a modified loser pays rule is necessary to deter frivolous lawsuits, but we understand there are only 120 companies sued annually--out of over 14,000 public corporations, and that the number of suits has not increased from 1974. Fraud victims would find it exceedingly difficult to fully recover their losses. Our legal standard of ``joint and several'' liability has enabled defrauded investors to recover full damages from accountants, brokers, bankers and lawyers who help engineer securities frauds, even when the primary wrongdoer is bankrupt, has fled or is in jail. S. 240 sharply limits the traditional rule of joint and several liability for reckless violators. This means that fraud victims would be precluded from fully recovering their losses. Wrongdoers who ``aid and abet'' fraud would be immune from cases brought by fraud victims. As you know, aiders had been held liable in cases brought by fraud victims for 25 years until a 5-4 Supreme Court ruling last year eliminated such liability because there was not specific statutory language in federal securities law. If aiders and abettors are immune from liability, as issuers of debt securities, state and local governments would become the ``deep pockets,'' and as investors they would be limited in their ability to recover losses. The Securities and Exchange Commission and the state securities regulators have recommended full restoration of liability of aiders and abettors and GFOA supports that recommendation. Wrongdoers would be let off the hook by a short statute of limitations. We had supported the modest extension of the statute--from one year from discovery of the fraud but no more than three years after the fraud to two years after the violation was, or should have been, discovered but not more than five years after the fraud was committed--that was contained in an earlier version of S. 240. We are disappointed that this extension was removed in the Committee's markup of the legislation and hope it will be restored when the full Senate considers the bill. Under S. 240, corporations could deceive investors about future events and be immunized from liability in cases brought by defrauded investors. Corporate predictions are inherently prone to fraud as they are an easy way to make exaggerated claims of favorable developments to attract investors. The ``safe harbor'' in S. 240 is a very broad exemption and immunizes a vast amount of corporate information so long as it is called a ``forward-looking statement'' and states that it is uncertain and there is risk it may not occur. Such statements are immunized even if they are made recklessly. We believe this opens a major loophole through which wrongdoers could escape liability while fraud victims would be denied recovery. Access to fair and full compensation through the civil justice system is an important safeguard for state and local government investors, and is a strong deterrent to securities fraud. We believe. S. 240 as written does not provide such access to state and local governments or to other investors. Just as state and local government investors are urged to use extreme caution in investing public funds, the Senate should use extreme caution in reforming the securities regulation system. We hope you will work to bring about needed changes in the legislation when it is considered by the full Senate. If there is any way we can help in this effort, please do not hesitate to call on us. Sincerely, Catherine L. Spain, Director, Federal Liaison Center.

Mr. SARBANES. Mr. President, I yield myself 1 minute. You have to lose over $20,000 in order to be held whole by these defendants who have participated in this fraudulent scheme. If you are going to recognize the concept of the small investor and the need to provide some additional protection, do not render it meaningless by having this 10 percent requirement on losses. It is bad enough that you have defined the small investor as $200,000 of net worth including, including the person's home--including the person's home. Now, that is an awful lot of people.

Mr. SARBANES. Mr. President, let me just give you this example. A retired person, a small investor, retired person has a $190,000 net worth. A fraudulent stock scheme is practiced upon this person, and he loses $17,000. The person who perpetrated the scheme, this scam artist, has gone bankrupt. They flee the country, or whatever. The lawyer who advised the scam artist knew about this or was reckless in terms of knowing about this fraud, the standard I quoted earlier. Under current law, that person would be jointly and severally liable and would have to pay all of the damages. Under this provision, since the damages are not 10 percent of the net worth, the investor does not get that protection. What is the meaning of this provision in the bill, if it has that kind of exclusion that simply swallows up any meaning? Here is a small investor, $190,000 net worth, loses $17,000 which is not 10 percent of the $190,000, and the small investor is not protected in that situation, and the participants in the fraud are able to avoid having to make that small investor whole. If you really mean trying to provide some protection for the small investor, this provision needs to be corrected. Clearly, as written, hardly anyone is going to be protected. And the amendment that I have offered, one part of it, provides greater protection to small investors, people of modest means. The bill says you are protected only if you lose 10 percent of your net worth in a fraud. In other words, you have to lose $20,000 of a $200,000 net worth or $15,000 of a $150,000 net worth. My amendment deletes this 10 percent requirement. It says you do not have to lose 10 percent of your net worth in the fraud. Regardless of how much you lose in the fraud, if your net worth is $200,000 or less, you are protected. So you have the very small investor who ought to be protected, not the reckless advisers to the corporate scam artists who participated in the fraud. So we strike the provision in the bill that requires that the damages be equal to 10 percent of the net worth. So you have someone with a $200,000 net worth. If they lose something to this scam artist, they are going to be protected, and all the defendants will continue to be held jointly and severally liable in that instance. If you really want to talk about protecting small investors, you obviously have to make that change. The second provision that is in this legislation, in the course of changing the joint and several liability scheme and shifting it to proportionate liability, even the authors recognize that was a very heavy weighting of the balance against the investors. So they said, ``Well, in all instances we are going to require the reckless participants in the fraud to pay investors an additional amount over their proportionate share.'' The additional amount, though, that is provided for is 50 percent. Let me give you an example. A con artist perpetrates a fraud. He is assisted by the reckless conduct of his lawyer or his accountant who knows about the fraud but does nothing to stop it. When the fraud is exposed, the con artist skips the country. The reckless adviser is found to be 10 percent responsible for the investor's losses. Under the bill, there is an overage, and the reckless adviser could be held liable for up to 15 percent of the investor's losses; in other words, a 50-percent overage. So you give some additional marginal recovery to the investor. The extra 50 percent payment required under the bill, in my judgment, does not go far enough toward making the investor whole. So the other part of this amendment increases the additional payment the reckless defendants pay, when the con artist is bankrupt or flees, from 50 percent of their proportionate share to 100 percent. Under the example I gave a moment ago, a reckless adviser, a lawyer, investment banker, an accountant to the corporate swindler who did nothing to stop it was later found responsible for 10 percent of the fraud. As the bill is written, he could be held to 15 percent of it. This amendment would raise that to 20 percent. It would allow investors to recover a little bit more of their losses in cases of fraud. I note that just on Friday when we were debating this bill my distinguished colleague from New York said in speaking about addressing this problem that we were outlining at the time: If the fraudulent defendant is bankrupt and cannot pay, we would double the liability of the other defendants. So if a defendant was found 5 percent negligent but the main defendant is not able to pay, the 5 percent negligent defendant would be held responsible for 10 percent of the damages. Well, that is what my amendment is trying to accomplish. The bill as written provides a 50 percent overage. So if you were 5 percent liable, under the bill you would go to 7\1/2\ percent. I actually think that this was, in effect, really the recognition of an appropriate increase, and this would double it. In that instance, you go from 5 to 10. If they were 10 percent liable, they would go to 20 percent liable. So those are the two amendments here. I disagree with abandoning the joint and several liability principle. That was voted on the other day. What we are now trying to do is to take the provision in the bill and to make it more reasonable with respect to the small investor. In some respects, I regard this as the ``have-you-no-shame'' amendment in terms of the provisions that are in the bill. We have provisions in this bill that if you are a very small investor with a net worth of under $200,000, you have to lose at least $20,000----

Mr. SARBANES. That letter states: As currently drafted, S. 240 will shield wrongdoers from liability in a number of ways. As a result, the bill needs to be improved to help strike a better balance between protecting investors and eliminating claims without merit. Last week, an amendment was offered by Senators Shelby, Bryan, Boxer, and I, to try to strike a better balance with respect to the broad issue of joint and several liability. That amendment was defeated. I very much regret that was the case. The amendment that has just been sent to the desk is, therefore, not dealing with the broader issue of joint and several liability, which I have just outlined, but with a more narrow aspect of it. I urge my colleagues to focus very carefully on the fact situation. Even the authors of the bill that is before us recognize that it is unfair to favor reckless lawyers, accountants, and investment bankers who participate in a fraud entirely over the individual investor victimized by the fraud. In fact, the bill has two provisions, one that would require reckless accountants and reckless lawyers to pay investors more than the proportionate share of the reckless advisers when a fraud artist is bankrupt or has fled the country, and another provision designed to make up for the entire losses of so-called small investors. Let me examine these two provisions, and the amendment goes to these two provisions. The first provision says that all the defendants shall be jointly and severally liable for the uncollec- tible share of the small investor, but only under these very limited circumstances--first of all, only if the net worth of the investor is under $200,000. The committee report says that net worth includes all of the plaintiffs' financial assets including stocks, bonds, real estate, and jewelry. How many investors are we talking about here? People who are able to buy stocks, are going to have a net worth under $200,000, particularly when the net worth includes the value of their home? How many elderly people who have saved for a lifetime have a net worth over $200,000? Their home is usually paid for or close to it. They have some other assets. For such a person, $200,000 is not a large net worth. I guess they would have to value the engagement ring, value the wedding ring, value the heirlooms. So it is a $200,000 net financial worth of the plaintiff. The other provision says that the plaintiff will be held whole only if the recoverable damages are equal to more than 10 percent of the net financial worth of the plaintiff. Listen to this. You are only going to protect--the bill supposedly makes an effort to protect the small investor. But the definition of the protection is that the investor's net worth has to be under $200,000, and then you protect recoverable damages only if they are equal to or more than 10 percent of the net financial worth. (Mr. THOMPSON assumed the Chair.)

Mr. SARBANES. They wrote: Fraud victims would find it exceedingly difficult to fully recover their losses. S. 240 sharply limits the traditional rule of joint and several liability for reckless violators. This means the fraud victims would be precluded from fully recovering their losses. The National League of Cities, the Consumer Federation of America, the U.S. Conference of Mayors have all opposed this version of proportionate liability that puts fraud participants ahead of fraud victims. On Friday, we received a letter from the American Association of Retired Persons, which I would like to have printed in the Record. I ask unanimous consent to do so.

Mr. SARBANES. I will come back to this article because I think it is a perspective analysis of the situation in which we find ourselves. Now, Mr. President, let me turn to the amendment which I sent to the desk, which deals with the issue of proportional liability and the departure from the concept of joint and several liability. Let me recap very quickly the broader issue that was dealt with last and then the more narrowly focused amendment which I have offered and which I will then discuss. The bill changes the current system of joint and several liability to a new system of proportionate liability. Joint and several liability is the legal principle that says that each participant in a fraud may be held liable for all of the fraud victim's losses. Under the Federal securities laws as they now are--not as they are being changed in this bill but as they are right now--each participant in a securities fraud--a corporate executive, an outside accountant, lawyer, investment banker--may be held liable for all of a victim's losses. In other words, if one of the fraud participants is bankrupt or if one of the fraud participants has fled the country, the other fraud participants make up the difference. So the burden, if one of the fraud participants is bankrupt or flees, does not fall on the innocent investor. It seems to me a rather simple concept. It is between those who have participated in the fraud--perhaps in varying degrees but nevertheless participated in it--they should be held accountable and have to sustain the burden before it is thrust upon the innocent investor. In fact, under the current system, the defrauded investors are able to recover their entire losses against any of the participants in the fraud. This bill will change that. The bill will change the system from joint and several liability to proportional liability for reckless defendants. Who are reckless defendants under the securities laws as they now exist? The Federal securities law currently punishes two types of people who participate in a fraud: People who plan the fraud who intended to deceive the investors, and people who acted recklessly, who knew nothing about the fraud and did nothing about it--who knew about the fraud and did nothing about it. The standard of recklessness used in the courts is not--last week, in fact, some of the people supporting this legislation talked about it as though it was negligent or just by chance that one got involved. The standard is--this is a quote out of the Sundstrand case: . . . a highly unreasonable omission involving not merely simple or even gross negligence but an extreme departure from the standards of ordinary care and which present a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. The recklessness liability, under Federal securities fraud, is usually asserted against the fraud artist's professional advisers, his lawyers, accountants, appraisers, investment bankers, and so forth. Unfortunately, sometimes these people know about a fraud and do nothing about it. In those instances, the law holds them jointly and severally liable in that fraud. The bill changes that. It changes that. And the reckless participant will be liable only for a proportionate share of the investor's losses. If one of the fraud participants is bankrupt or fled the country or cannot be found, the losses will no longer be made up by other participants in the fraud. Instead, the innocent investor-- the innocent investor will not recover his losses, even when other participants in the fraud are available to pay. Reckless participants in a fraud will be favored over innocent victims of a fraud, over individual investors, over State and local governments, over pension plans, over charitable organizations. Securities regulators, Government officials, consumer groups, and others oppose this provision. The Chairman of the SEC wrote the Congress saying: The Commission has consistently opposed proportionate liability. The North American Securities Administrators Association, which represents the 50 State securities regulators, wrote, urging the Senate ``to lift the severe limitations on joint and several liability so that defrauded investors may fully recover their losses.'' The Government Finance Officers Association, representing thousands of county treasurers, city managers, and so on, people who invest taxpayer funds and pension funds, are opposed to this provision. They wrote, on June 8, in a letter that was printed last week in the Record--and I ask unanimous consent their letter, along with the one from the North American Securities Administrators Association, again be printed at the conclusion of my remarks.

Mr. SARBANES. Mr. President, I made reference to an article that appeared in the New York Times on Sunday, authored by Mark Griffin, the director of the Utah securities division who is a board member of the North American Securities Administrators Association, comprising the securities regulators from the 50 States. Mr. Griffin is chairman of the Securities Litigation Reform Task Force of the North American Securities Administrators Association. In other words, all of the 50 State securities administrators. That article entitled ``Securities Litigation Bill Is Reform in Name Only.'' Just to quote briefly: What's in a name? In the case of the Private Securities Litigation Reform Act of 1995, consumers will find a world class misnomer. Now before the Senate, the bill is more accurately described as securities litigation repeal. For millions of middle-class American investors, the fate of this bill--and the even more radical version passed by the House of Representatives in March--could spell the difference between recovering or losing billions of dollars from securities fraud. Securities litigation reform began with the intent of putting some weights around the ankles of a few fleet-footed lawyers; but the measure now dangerously close to Senate passage would wind up being a noose around the neck of defrauded investors. While everyone agrees on the need for reasonable reform, numerous public-minded groups are strongly opposed to radical steps in the Senate bill, S. 240, that would snuff out key investor rights. If securities litigation reform was the real goal here, the widespread support that exists for reasonable steps to curb lawsuit abuses would have ensured easy passage. But the bill now before the Senate would rein in frivolous lawsuits only by making it virtually impossible for consumers to pursue rightful claims. He goes on later to say, The reality is that the main intent of this legislation, despite what its proponents say, is to provide a shield for all but the most extreme cases of fraud. Mr. President, I ask unanimous consent that this article be printed in the Record at the close of my remarks.

Mr. SARBANES. The Baltimore Sun has an editorial ``Safe Harbors for Financial Fraud.'' Let me quote very briefly from it: In the wake of the Nation's savings and loan debacle, the financial derivative shock to U.S. pension systems, the junk bond manipulations of Mike Milken, one could expect Congress to bolster the rights of investors in securities fraud cases. Instead, Capitol Hill legislators are rallying to protect the interests of corporate executives, securities dealers, lawyers and accountants against the claims of victims of financial crimes. Further on it says: Originally drafted to reduce the number of frivolous investor lawsuits against corporations. . . . And then it goes on to say: But the sweeping protections included have fired the opposition of investor groups, advocates for the elderly and even the Federal Securities and Exchange Commission. It closes by saying: The arsenal of weapons against investors in the legislation shows that it is more about protecting the shadowy dealings of corporate leaders and their professional confederates than in limiting frivolous class action lawsuits. This is the question. No one is protecting the frivolous class action lawsuit. The question is whether the provisions of the bill have gone beyond that and are excessive. We submit that they are. Those are some of the provisions we are now trying to change. Mr. President, I ask unanimous consent that the Baltimore Sun editorial be printed in the Record.

Mr. SARBANES. Mr. President, before I turn to the provisions of the amendment, I want to make a few comments with respect to what my distinguished colleague from Utah said in his opening remarks on the consideration of this legislation today. It is very important to understand that there are parts of this bill that Members are trying to amend and there are parts we are not trying to amend. There are parts which we think are desirable and worthwhile having. There are other parts that we think are excessive. They overreach. They go too far. Those are the ones we are trying to correct. If we could get it corrected, we would have a total package of which one could be supportive. Examples that are cited, many of them that are being cited, are, in fact, things we are prepared to try to correct with the provisions of this legislation, that we are not opposing. It is very important that that be understood. The New York Times on Friday has an editorial headed ``Protection for Corporate Fraud.'' It says, speaking of the Senate security bill: . . . goes far beyond their stated purpose of ending frivolous litigation. The Senate securities bill sets out to protect corporate officials from being sued when they issue overly optimistic predictions of corporate profitability that are simply innocent misjudgment. Sponsors cite cases for opportunist shareholders who waited for a company's share price to nosedive, then sued on the grounds that their investment was based on fraudulent representations of the company's health. But to solve this infrequent problem, the bill would erect a nearly insurmountable barrier to suing officials who peddle recklessly false information. It would block suits against the accountants, lawyers, and other professionals who look the other way when the companies they serve mislead investors. The bill requires that suits be filed within a short statute of limitations and threatens plaintiffs who technically violate the court's procedures with heavy fines, including payment of the defendant's legal fees. These provisions would ward off frivolous suits. But they just as surely ward off valid suits. Securities markets work well when investors are confident that the data on which they base decisions is honest. The bill threatens that confidence. Mr. President, I ask unanimous consent that that editorial be printed at the end of my remarks.

Mr. SARBANES. Mr. President, I ask the Chair to state the time situation.

Mr. SARBANES. Mr. President, I ask unanimous consent that reading of the amendment be dispensed with.

Mr. SARBANES. Mr. President, I send an amendment to the desk and ask for its immediate consideration.

Mr. SARBANES

Mr. SARBANES. It is right there in black and white.