Securities Litigation Reform Bill Passes Congress

(October 14, 1998)  Both the House and Senate passed the Conference Report on S 1260, the "Securities Litigation Uniform Standards Act" yesterday.  Clinton supports the bill.

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 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.

The Joint Explanatory Report of the Committee on Conference (No. 105-803, 10/9/98) explained the bill as follows:

"[T]he Securities Litigation Uniform Standards Act of 1998, makes Federal court the exclusive venue for most securities class action lawsuits. The purpose of this title is to prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State, rather than in Federal, court. The legislation is designed to protect the interests of shareholders and employees of public companies that are the target of meritless ``strike'' suits. The purpose of these strike suits is to extract a sizeable settlement from companies that are forced to settle, regardless of the lack of merits of the suit, simply to avoid the potentially bankrupting expense of litigating."

Rep. Cox, one of the sponsors, spoke in favor of the bill during floor debate:

"Trial lawyers have sought to get around our 1995 reforms by bringing their suits in state courts, where those reforms do not apply. Yet as our capital markets are national, and thus investors may live in any of the 50 states, bringing a suit in one state unfairly imposes a financial burden on residents of another state. To address this inequity and assert that national markets require nationally applied rules, this legislation will make federal courts the exclusive venue for large-scale securities fraud lawsuits involving securities subject to federal regulation under the 1996 National Markets Act."

Representative Anna Eshoo (Democrat, Silicon Valley)

The House version of the bill, HR 1689, was sponsored by Rep. Anna Eshoo (D-CA), Rep. Rick White (R-WA), Rep. Chris Cox (R-CA), and over 200 others.  The Senate version of the bill, S 1620, was sponsored by Sen. Phil Gramm (R-TX), Sen. Chris Dodd (D-CT), and 42 others.  The members of the conference committee were Senators D'Amato, Gramm, Shelby, Sarbanes, and Dodd.  The House members were Representatives Bliley, Oxley, Tauzin, Cox, White, Dingell, Stupak, and Eshoo.

The Senate approved its original bill (S 1260 ES) on May 13 by a vote of 79 to 21.  The House passed its version of the bill (HR 1689 EH) on July 22 by a vote of 340 to 83.  The bill has had overwhelming and bipartisan support in both the House and Senate.  The only source of opposition has come from plaintiff's trial lawyers, and the legislators who press their cause. Clinton vetoed the underlying PSLRA two years ago, and was overridden.  He supports this bill.   Clinton aide Bruce Lindsey wrote a letter in April announcing administration support for this bill.

In addition, Arthur Leavitt, Chairman of the Securities and Exchange Commission supports the bill.  (See, testimony and extended statement to House Commerce Committee, May 19, 1998.) 

The Senate passed the conference report by voice vote.  The House held a roll call.  All but one of the Republicans who voted, voted for the bill.  Eighty Democrats voted against the bill.

The House debated the issue on Tuesday afternoon, October 13, but put off the vote until the evening.  The vote was on whether to suspend the rules and agree to the Conference Report on S 1260.  This procedure required a 2/3 majority for passage.