House Subcommittee Approves Securities Litigation Reform Bill

(June 11, 1998)  The House Finance Subcommittee approved by a vote of 20-4 HR 1689, the Securities Litigation Uniform Standards Act of 1997.  A similar version of the bill passed the Senate in May.

The bill would preempt state laws by establishing uniform national standards for class action lawsuits.  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.  It would remedy what what its promoters 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.

Rep. Mike Oxley (R-OH) stated that "our securities markets are national in scope.  It simply makes no sense to permit multiple layers of inconsistent state laws to impede the efficiency, liquidity and depth of our national marketplace."

However, opponents of the bill argued that there is no threat.  Rep Edward Markey (D-MA) stated that "the number of class actions filed in the states is lower this year than last, and fewer than before passage of the 1995 Private Securities Litigation Reform Act."

One of the 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.  HR 1689 would allow the defendants to remove these state actions to federal court.

The lead sponsors of the bill are Rep Rick White (R-WA) and Rep. Anna Eshoo (D-CA).   Rep. White, along with Rep. Oxley and Rep. Billy Tauzin (R-LA) led the debate yesterday.   Rep. Eshoo, who is a member of the House Commerce Committee, but not its Finance Subcommittee, sat in the audience of the hearing room directly in front of the Democrats on the panel.

Finance Subcommittee Chairman Oxley offered an amendment in the nature of a substitute.  Opponents of the bill, including Rep. Edward Markey (D-MA), Rep. John Dingell (D-MI), and Bart Stupak (D-MI), sought to amend the bill to make it easier to bring securities fraud suits.

Rep. Markey offered two amendments to the Oxley amendment.  The first would have lengthened the statute of limitations, or the deadline for bringing a suit, to three years from discovery of the alleged fraud, or five years from its occurrence.  It failed on a roll call vote of 20 to 6.

The second Markey amendment would have reintroduced a private cause of action for "aiding and abetting" securities fraud, a section which would have made it easier for plaintiffs' securities lawyers to include financial professionals in securities fraud suits. It failed on a voice vote.

The Oxley amendment was approved by a voice vote.  Then, final approval of HR 1689 by the subcommittee came on a roll call vote of 20 to 4.

Exception for State and Local Pension Funds

When the Senate passed its version of the bill, S 1620, it adopted by voice vote an amendment offered by Sen. Paul Sarbanes (D-MD) that would create an exception to the statute for state and local pensions funds.  The bill adopted by the House Finance Subcommittee contains similar, but more narrowly crafted, language.

Rep. Oxley explained his version:

"The amendment includes the exemption for class actions brought by state and local governments, and their pension funds, that was adopted by the Senate, which makes an important change to that provision.  The substitute that I am offering permits state and local governments and their pension funds to bring class actions in state court, but only if those plaintiffs are named and have authorized participation in that action.   This amendment is designed to protect state and local taxpayers and pensioners while ensuring that the exemption cannot be used by strike suit lawyers to evade the protections of the bill."

Dingell, reading from a prepared statement, said that Oxley's "substitute contains exceptions for several classes of claims and I commend the chairman for this. I am particularly pleased to see that you preserve the right of State and local governments and their pension plans to pursue class actions in State courts. However, your requirement that they be named plaintiffs and authorize such participation severely limits the use of this exclusion, especially for the smallest, most vulnerable public entities and plans."

Full Committee Markup

The next step for the bill is markup by the full House Commerce Committee.  The Finance Subcommittee's Ranking Minority Member, Thomas Manton (D-NY), spoke in favor of the bill, and voted for it, but stated that "there is still work to be done between this, and full committee mark up."   Manton, who favors amending the bill to allow securities regulators to issue and enforce subpoenas nationwide, added that "I have been informed that ... a package of technical amendments would be offered at the Full Committee markup," and "I reserve the right to offer an amendment on this matter at Full Committee."

Congressional Poetry

Markey recited an old poem in his argument against the bill:

As I was going up the stair
I met a man who wasn't there.
He wasn't there again today.
Oh how I wish he'd stay away.

"The proponents of this bill would have you believe that a man has appeared on the stair in the form of investors flocking from federal to state courts to pursue frivolous class actions. ... It isn't happening," said Markey.

Rep. White responded with a poem of his own, which made reference to a lawyer named Lerach who is notorious for his class action securities fraud suits against high-tech companies,

There may be no man on the stair,
but there was a man in a chair.
The man named Lerach,
made it clear as a clock,
that a problem worth fixing is there.