Senate Committee Approves Securities Litigation Reform Bill

(April 30, 1998)  The Senate Banking Committee approved the Securities Litigation Uniform Standards Act of 1997 on Wednesday morning.  The bill would preempt state laws by establishing uniform national standards for class action lawsuits involving nationally traded securities.  It is designed to decrease the number of harassment suits brought in state courts that threaten the ability of companies -- particularly high-tech Silicon Valley companies -- to raise capital and disseminate information.

The bill, S 1260, was approved by a vote of 14 to 4.  Several amendments were rejected by a 12 to 6 margin.  One minor technical amendment was approved.   Prospects for enactment into law look good.

The House version of the bill, HR 1689, is sponsored by Rep. Rick White (R-WA), Rep. Anna Eshoo (D-CA), and 204 other members.  It has not yet been reported out of committee.  The Senate bill is sponsored by Sen. Phil Gramm (R-TX), Sen. Christopher Dodd (D-CT), and 37 other Senators.  The Clinton administration just announced its support for the legislation, in a letter from Bruce Lindsey, White House Deputy Counsel, and Gene Spalding, National Economic Counsel Director.

"Winning the presidential seal of approval is a major step forward in the drive to establish uniform standards for securities litigation suits," said Rep. Eshoo, in a statement released on Tuesday.  "The Administration's endorsement gives the legislation significant momentum going into Senate consideration of S 1260, momentum that should help carry it through the House, too.  Consumers and businesses are well on their way to seeing the promise of earlier securities litigation reforms fulfilled."

S 1260 would amend the Securities Act of 1933 and the Securities Exchange Act of 1934.   It remedies what many see as an oversight or deficiency of the recently enacted Private Securities Litigation Reform Act of 1995.   The PSLRA sought to reduce the number of frivolous class action 10(b) suits in federal courts.  One of its key provisions was to create a "safe harbor" for forward looking statements made by public companies, in order to promote dissemination of financial information to analysts and investors, and improve market efficiency.  It also limited plaintiffs' lawyers' ability to use pre-trial discovery for harassment purposes.

Since passage of the PSLRA, many companies, and several studies, have asserted that plaintiffs' securities lawyers have responded by shifting their securities fraud suits into state courts -- particularly in California, and particularly in suits against high-tech companies.  These suits avoid the "safe harbor clause" of the PSLRA.   Some suits are brought in both state and federal courts, with the state action used to evade the discovery restraints in the PSLRA.

Michael Morris, VP and General Counsel of Sun Microsystems, testified to the February 23 Senate Banking Committee hearing that:

"The disproportionate target of these state court suits continues to be high-technology and biotechnology companies - the very businesses that are driving our nation's economic revival and creating more new jobs than at any time in our history.   The economic conditions that characterize high-growth companies, such as volatile stock prices and unpredictable sales results, are the very conditions that plaintiffs' lawyers seize upon to file abusive claims."

S 1260 and HR 1689 are a response to the practice of shifting securities fraud suits to state courts.  "The bill will close a loophole in the law that has permitted harassment litigation to be continued in state courts," said Sen. Alfonse D'Amato, Chairman of the Senate Banking Committee.  "First, let me clarify some misunderstandings about this bill. This legislation is narrowly focused. It will apply only to "national" securities that are traded on National exchanges and on NASDAQ's National Market System. Second, it will not block injured individual plaintiffs from seeking their day in court. Under the bill, State enforcement actions or shareholder derivative suits will remain available as remedies for fraud and misconduct. It will not block actions against rogue brokers or microcap scam artists."