Paul Sarbanes

Mr. SARBANES

Mr. SARBANES. One minute to each side.

Mr. SARBANES. There will be 2 minutes to a side?

Mr. SARBANES. Mr. President, I just want to point out that the recklessness standard has long been a part of the common law for purposes of fraud. It is a very high standard. The chairman of the committee earlier said, Well, you know, someone could come in and be negligent, and they are going to be held jointly and severally liable. That has never been the law. It is not the law. It will not be the law under the amendment of the distinguished Senator from Alabama. The definition of reckless conduct--let me read the definition that is generally used by the courts: ``A highly unreasonable omission involving not merely simple or even gross negligence''--so it is higher than simple negligence, it is higher than gross negligence--``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 way the bill is written now, the phrase ``ignorance is bliss'' is going to take on a meaning that just staggers the imagination. The problem that is being talked about, about the strike suits, is dealt with up front in the bill. You try to make it harder to bring those suits. We support a lot of those provisions. This is, simply put, a question whether fraud participants are going to be put ahead of innocent victims and individual investors. I mean, why in the world, if a fraud has been committed, should the burden fall on the innocent victim of the fraud and not on the people who have been participants in the fraud? I defy anyone to explain to me the logic or the rationale for protecting the participant of the fraud ahead of the innocent victim of the fraud. I thank the Senator for yielding.

Mr. SARBANES. Could I just make an inquiry, reserving the right to object.

Mr. SARBANES. Will the Senator yield?

Mr. SARBANES. I think that is an extremely important point. This does not affect the basis on which you can bring the suit in any way. All the other provisions are unaffected. This only affects the time period within which the suit must be brought.

Mr. SARBANES. I say to my colleagues, this is a very rough bill on innocent investors who have been victimized, as it were swindled, and I certainly hope that at a minimum, the Senate would be willing to restore an appropriate statute of limitations back to the time periods that have prevailed, generally speaking, throughout most of our experience with the securities laws. It has been related to the State laws, and most of the State laws are 2 to 5 and some even longer than that, if I am not mistaken.

Mr. SARBANES. Mr. President, this is an extremely important amendment. The 1- and 3-year time periods are unrealistically short, and the danger that is associated with an unrealistically short time period for the application of the statute of limitations is that people with meritorious causes will be barred from the courthouse door. We have statute of limitations because we say, ``Well, we do not want this thing just hanging out there indefinitely, and people ought to assert their rights,'' and so forth and so on. But the time periods have to be reasonable. Under the amendment, there is a 5-year time period regardless, so that the victim may never know of it. If 5 years goes by, he is closed out. The bill would reduce that to 3 years. People have to make their judgment, but why should you come down on the side of concealment instead of on the other side in terms of protecting the investor? The 1 and the 2 years is very important because you may discover, or think you have discovered, the fraud, but then you have to work it up to determine whether you have a case or not, and 1 year is a very unrealistically short time period. In fact, I think the Senator yesterday quoted a time period that it took the SEC from when they began working on a case before they felt they could bring it. Was I correct in that?

Mr. SARBANES. As I understand it, following the Supreme Court decision in the Lampf case, the then-Chairman of the Securities and Exchange Commission, Richard Breeden, a Republican nominee--because I think it is very important to understand, as far as Chairman of the SEC is concerned, they are bipartisan in their view about this matter-- testified or stated, and I quote him: The timeframe set forth in the Court's decision is unrealistically short and will do undue damage to the ability of private litigants to sue. Chairman Breeden pointed out that in many cases: . . . events only come to light years after the original distribution of securities and the cases could well mean that by the time investors discover they have a case, they are already barred from the courthouse. As I understand it, the States securities regulators and the FDIC at the time joined the SEC in this position. As I understand it, the States securities regulators today feel very strongly that the amendment which the Senator is offering is an extremely important amendment.

Mr. SARBANES. Why should that investor, who was the victim of a fraud, have to swallow $850,000 of the loss when there are parties who were participants in the fraud who ought to be held accountable?

Mr. SARBANES. So the proposal, your amendment, in effect, is seeking to put into the law the very provision that we had previously reported.

Mr. SARBANES. Mr. President, I want to underscore the importance of this amendment. I ask the distinguished Senator from Nevada, did the Banking Committee not report an amendment lengthening the statute of limitations for securities fraud actions to 2 years after the plaintiff knew of the violation and to 5 years after the violation occurred, following that Supreme Court decision?

Mr. SARBANES. Will the Senator yield?

Mr. SARBANES. The plaintiff.

Mr. SARBANES. Who would bear the burden of the other $850,000 in that case?

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

Mr. SARBANES

Mr. SARBANES. This 7-year blueprint which the Republican budget plan is laying out for the country, is it not correct that the cuts in the investments in the future--cuts in education, in college opportunities, in work training programs, all of the things that build a stronger economy--that those cuts intensify in each of the subsequent years as you move through the 7-year period? So that people need to understand. I think the Senator is making an extremely important point. This is not just the plan for next year. It is the plan for 7 years. Furthermore, the way this plan is structured, as I understand it, the impact will intensify as we move through the time period so what people will experience in the first year of the plan, which I submit will be very draconian, will worsen as the time passes through the 7-year period. Is that correct?

Mr. SARBANES. Will the Senator yield? Do the tax cuts for the wealthy that are provided in this plan--in other words, what the plan is doing is sharply curtailing opportunities for working people, taking the money that is realized from that, and then using it, as I understand it, to give a tax cut to the very wealthy. Do those tax cuts occur in the beginning or in the front of this 7-year period? Or do they occur at the end of the 7-year period? As I understand it, with the changes made in the budget conference the tax cuts now will be part of the reconciliation and therefore will become applicable at once, or in the near future, for the benefit of the very wealthy while the rest of the population will begin to bear these cuts and then bear them throughout the 7-year period, is that correct?

Mr. SARBANES. Just in the Senator's State alone.

Mr. SARBANES. Will the Senator yield?

Mr. SARBANES. May I ask the Senator a question. Does the budget resolution cut back the earned-income tax credit program which was established to help working families get above the poverty line? This helps families, I think, with incomes up to $27,000 or $28,000.

Mr. SARBANES. Absolutely not. People have to understand that under the existing program, which is now about to be changed, young people and their families take out loans in order to finance their college education. That is tough because it means they come out of school with a burden hanging over them which they then have to pay off as they go through their working lives. Not to compound that problem, under the current system, the interest on those loans is abated or forgiven while they are in school, so you are not in this situation where you took out a loan and then you have to pay interest on the loan while you are in school. I think that is reasonable. That is sensible. It is bad enough that you are taking on this heavy burden of paying off in the future. At least, do not compound the financial problem which these families confront at the very time they are trying to get a college education for their young men and women. This proposal, as I understand it, will drop that provision, so they will be confronted then with the task of an additional burden added onto their loan responsibility in order to get a college education. It is tough enough now. I have talked with these families. They come to see me. They are desperate to find a way for their young son or daughter to get through college. The young people themselves are desperate. Sometimes they go out there holding three or four jobs at the same time to try to get enough money. They are committed to getting through college. Many families have never sent children to college before. It represents a breakthrough. They are out on an uncharted path. Mark this: Other industrialized countries do not put their young people under this kind of stress and strain in terms of furthering their higher education. They make it possible for their young people with talent and ability to get a higher education. Why do they do that? Because they recognize that the benefit of further education is not only to the individual who gets it. That is an obvious benefit. But it is a benefit to society. They build a stronger society by making it possible for their young people to get an education. Here we are retreating from that challenge.

Mr. SARBANES. That is right. What is happening is there is a massive effort to shift the economic benefits to a small group at the top of the income scale, a trend that has already been going on over the last decade and a half. I ask the Senator from Massachusetts, does the provision from the conference committee drop the forgiveness of paying interest on your student loans while you are in school?

Mr. SARBANES. I think the Senator is absolutely right. People have to understand, because people say we want to eliminate the deficit, then they say we ought to cut spending, but with this plan, a good part of the cut in spending is not to eliminate the deficit but to provide a pool of money which can then be given as tax cuts for the people at the very top of the income scale. In effect, what this budget plan is doing is, it says to people on Medicare, our senior citizens: You are going to take a reduction in your Medicare services. It says to young people who want to go to college, it is going to become much more costly for you to go to college. And the reason this is happening, a good part of the reason this is happening, is to create a pot of money with which to give these tax cuts. I submit, anyone weighing the equities of this and the desirability of this in terms of investing in the future would conclude it would be better to keep open the opportunities for college, not to subject our senior citizens to higher risks with respect to medical treatment and medical care, not to impact on child nutrition and feeding programs, school lunches, and so forth --not to hit those programs so heavy and to give up on the notion of giving a large tax cut to very wealthy people. I do not understand the rationale for doing that, in terms of the priorities of the country, I say to my distinguished colleague.

Mr. SARBANES. The Senator is absolutely right. It is very important for the public to understand that a tax measure built into the law before, which would have allowed working families to get an earned income tax credit in order to improve their position to support their family--these are people making up to $27,000 a year--that is being cut back, that is being cut back at the same time that it is proposed to give tax breaks to people making hundreds of thousands of dollars a year. Where is the fairness or the equity in that? If you were not giving a tax break, then you would have an argument about where the cuts should come, and there I think this program is draconian, but at least it would be in that context. But what is happening is you are cutting a tax provision to benefit working families in order to give a tax break to people making six-figure incomes, and to compound the bizarre nature of this, they are unwilling to close the billionaire's expatriate tax loophole on which the Senate has gone on record, I think unanimously or almost unanimously----