Securities Litigation Reform Bill on Track for Passage

(May 20, 1998)  The Securities Litigation Uniform Standards Act passed the Senate on May 13 by a vote of 79-21, and was the subject of a House Commerce subcommittee hearing on May 19.  The bill would create uniform national standards for class action suits involving nationally traded securities.  It is of particular concern to high tech Silicon Valley companies.

Both the Senate and House versions of the bill would preempt state laws by establishing uniform national standards for class action lawsuits.  They are 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.  They would remedy what many see as an oversight or deficiency of the recently enacted Private Securities Litigation Reform Act of 1995 (PSLRA), which was intended to reduce the number of frivolous class action 10(b) suits in federal courts.

One of its key provisions of the PSLRA 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.  These bills would allow the defendants to remove these state actions to federal court.

Rep. Rick White (R-WA) explained his view of the problem.  "In the last Congress we had a good idea.  ...  The idea was to fix some of the abusive securities litigation suits that we had seen in the past. ... Unfortunately, as we have learned since that time is that good ideas are not always good enough to defeat clever lawyers, (who) discovered the flaw in this bill.  What we are doing today is to try to make sure that we address those flaws. ... What we have seen is that some of the suits that formerly were filed in federal courts have migrated into state courts ...as a way of getting around some of the obligations that we imposed upon federal suits. ...  What HR 1689 is all about is simply to realize the intent of the 1995 Reform Act.  It does that by making sure that class action suits for securities that are traded on the three major securities trading exchanges of our country have to be subject to the rules that we passed last time, have to go to federal court."

The Senate version of the bill, S 1620, is sponsored by Sen. Phil Gramm (R-TX), Sen. Christopher Dodd (D-CT), and 37 other Senators.  It was approved by the Senate Banking Committee in amended form on April 29, 1998 by a vote of 14 to 4.  It was approved by the full Senate on May 13 by a vote of 79-21.  (See, voting record, below.)

Bruce Lindsey, White House Deputy Counsel, and Gene Sperling, National Economic Counsel Director, wrote a letter to Sens. D'Amato, Gramm and Dodd on April 28 expressing administration support for a bill.

The House version of the bill, HR 1689, is sponsored by Rep. Rick White (R-WA), Rep. Anna Eshoo (D-CA), and 222 other members.

The Senate bill has three major differences from the House bill:

• The Senate bill avoids pre-empting certain corporate law claims which have traditionally been resolved by state courts.  (This is also known as the "Delaware problem.")
• The Senate bill has a definition of class action that focuses on cases where abuses are claimed to be more prevalent.
• The Senate bill preempts only those cases involving nationally traded securities.

HR 1689 cosponsor Rep. Anna Eshoo endorsed these changes.

However, when the Senate approved its versions of the bill, an amendment offered Sen. Paul Sarbannes (D-MD) was adopted without debate, and by a voice vote.  It exempts state and local pensions plans from the bill.  While most members of the subcommittee and witnesses who commented on the Senate bill praised the amendments made by the Senate Banking Committee, many went on to criticize the Sarbannes amendment.

Rep. Tom Campbell (R-CA) testified as a witness in favor of the bill.  He also spoke in favor of his own bill, HR 1653, which would go further than HR 1689 in weeding out frivolous securities lawsuits.

Arthur Levitt, Chairman of the Securities and Exchange Commission, testified in favor of HR 1689.  He stated:

"we have concluded that we can support a carefully crafted uniform liability standard for certain securities class action lawsuits.  We do so primarily because we believe that for those securities where a transparent and highly liquid national trading market exists, conflicting standards in class action lawsuits may impose an unnecessary cost on the capital formation process."

The bill enjoys broad bipartisan support both on the Commerce Committee, and in the full House. Rep. Bart Stupak (D-MI) lead a vehement opposition to the bill.  Rep. Edward Markey (D-MA) also criticized the bill.  Several members expressed some concerns, but most voiced strong support for some version of the bill.

The Subcommittee's ranking member, Rep. Thomas Manton (D-OH) stated that "there are two key issues in this debate.   The first is how to insure that shareholders who suffer legitimate damage still have the ability to bring suits and recover damages.  The second is how to stymie the escalating costs associated with meritless strike suits."  He concluded, "I believe this legislation adequately addresses the second of these two concerns."  He supported the 1995 PSLRA, and said that "I support the intent of HR 1689, believe that legislation may ultimately be necessary to fulfill the objectives we sought to accomplish in 1995 ..."  However, he added that "I also continue to have some concerns as to how this will affect genuinely defrauded investors."

Rep. James Rogan (R-CA) was highly critical of "the predatory activities that have gone on by certain individuals, certain companies, that claim to be protecting stockholders when in fact they have had to hire stockholders to be able to gain standing in our courts."

He continued: "This is not just an issue of dollars and cents. ...  It is not just an issue of the private sector being cannibalized by individuals in the legal profession. ...  As somebody who represents an area of San Diego which has entrepreneurial companies specializing in health research, this is an issue of public health ... the companies that are being hit ... are coming through with the major health breakthroughs.  ...  Every time someone files a strike suit and gets the four or five million dollars of blood money away from these companies, that is four or five million dollars that belongs in medical research and health research ..."

Most committee Democrats present , including Reps. Anna Eshoo (D-CA), Edolphus Towns (D-NY), Thomas Sawyer (D-OH), and Elizabeth Furse (D-OR), expressed varying levels of support for the bill  For example, Rep. Towns called it "a perfect piece of legislation," while Furse voiced her support for the bill, but praised the "dedication and expertise" plaintiffs' lawyers.  "This is not, and should not, be an anti-lawyer bill, but rather should be a pro good law bill."

Meanwhile, Rep. Eshoo is a prime sponsor and promoter of the bill.  She testified to the subcommittee as a witness, and then was permitted to sit on the subcommittee panel to question other witnesses, even though she is not a member.

Two committee members expressed opposition to the bill: Rep. Bart Stupak (D-MI) and Rep. Edward Markey (D-MA).  Stupak not only opposes the bill -- he continues to oppose the 1995 PSLRA.  "The 1995 Securities Litigation Reform Act was a mistake."  He opposes amending it, because "we have not had time to assess its effects."  He also said that "there is little evidence that securities fraud suits are an impediment to capital formation," and cited the records levels of American stock exchanges.

Markey said that "the simple truth is that we still don't know enough about how the courts will interpret the 1995 Act to be able to reach any definitive conclusions about its success or its failures."  He also argued that this was not an issue for the U.S. Congress.  "I do believe, however, that there is any evidence that there is a national problem.  (A) Californian delegation should solve their problems in Sacramento, dealing with this problem as a California issue."

"Let us not pretend that there is a crisis in the economy.  There is venture capital galore chasing investments across this country," Markey concluded.

The Subcommittee heard testimony from, and questioned, eleven witnesses:

• Rep. Anna Eshoo (D-CA), sponsor of HR 1689, and Silicon Valley congressman.
• Rep. Tom Campbell (R-CA), another Silicon Valley congressman.
• Arthur Levitt, SEC Chairman.
• Jack Levin, NationsBanc Montgomery Securities.
• Robert Hinkley, Xilinx, Inc.
• David Anderson, attorney, Pillsbury, Madison & Sutro.
• Jack Coffee, professor, Columbia Law School.
• Richard Painter, professor, Cornell University Law School.
• Blake Campbell, California state securities regulator.
• John F. Olsen, attorney, Gibson, Dunn & Crutcher.
• Mary Rouleau, Consumer Federation of America.

Rep. Michael Oxley (R-OH), the Chairman of the Subcommittee on Finance and Hazardous Materials, presided at the hearing.  Reps. Rick White (R-WA), Anna Eshoo (D-CA), Thomas Manton (D-NY), Thomas Sawyer (D-OH), and Bart Stupak (D-MI) also participated in all or almost all of the three hour hearing.  Other members who participated included Tom Bliley (R-VA), Billy Tauzin (R-LA), James Rogan (R-CA), Edward Markey (D-MA), Edolphus Towns (D-NY), Elizabeth Furse (D-OR), Ted Strickland (D-OH), and Eliot Engel (D-NY).

Vote on S 1620, May 13, 1998