[Pages S9109-S9126]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

PRIVATE SECURITIES LITIGATION REFORM ACT

The Senate continued with the consideration of the bill.

Amendment No. 1474

Mr. BRYAN. Mr. President, if I might inquire of the Chair, it is my
understanding that on the Bryan amendment, there is a time agreement in
which the distinguished chairman of the Banking Committee has 15
minutes allotted to him and the proponents of the Bryan amendment have
15 minutes; is that correct?
The PRESIDENT pro tempore. The Senator is correct.
Mr. BRYAN. Mr. President, I yield myself 8 minutes out of my
allocated time.
Mr. President, for the benefit of my colleagues, for six decades, the
foundation upon which public confidence in the American securities
market has been built rests upon two fundamental premises: First,
effective regulation by the Securities and Exchange Commission; second,
the right of individual investors who have been defrauded to pursue a
private cause of action against those wrongdoers.
Mr. President, I greatly fear that S. 240, as it is being processed
through this Chamber, will, for all intents and purposes, emasculate
that private cause of action, which has been so important in keeping
the American securities market safe and sound and investor confidence
high. Those are not just statements made by the Senator from Nevada.
The former Chairman of the SEC, Mr. Breeden, the last Republican
Chairman, made similar statements in

[[Page S 9110]]
testimony before the Banking Committee during his tenure. The current
Chairman, Mr. Levitt, has also made that proposition.
The amendment before us seeks to correct a decision by the Supreme
Court decided last year by a narrow 5-to-4 margin that wipes out
liability for aiders and abettors.
Now, there has been much debate on the floor of the Senate about
proportionate liability, joint and several liability, intentional
misconduct, knowing misconduct, and reckless misconduct. None of those
distinctions makes a whit of difference if this amendment is not
granted, because under the current State of the law, no aider and
abettor is liable under that theory, irrespective of his or her
misconduct. Everyone is home free.
I cannot conceive of a public policy that would support that
conclusion. And, indeed, the prime sponsors of this legislation have
previously written--I refer to the distinguished Senator from
Connecticut and the senior Senator from New Mexico--expressing their
support for restoration of aider and abettor liability.
Interspersed throughout all of this debate has been a great antipathy
to plaintiff's lawyers. I understand that antipathy and I do not, for a
moment, doubt that there has been some misconduct, and some provisions
in S. 240 deal with that misconduct. But let me point out that aiders
and abettors are also lawyers, and if misconduct on the part of the
plaintiff's bar ought to be addressed--as it ought to--under what
theory of social or economic justice, can we assert that those who are
part of the conspiracy itself--lawyers and accountants, primarily, and
to some extent bankers--in effect, be given a blank check? If they did
not sign their names to any of the statements, in effect, they have no
liability.
Now, is this theoretical? Is it esoteric? No. If the state of law at
the time of the Keating actions--one of the most notorious securities
frauds of this century--were in the form that it is today, here is what
would occur. My colleagues will recall that Mr. Keating, the primary
wrongdoer, was bankrupt. No recovery from him. Some $262 million were
recovered as a result of the Keating fraud by private investors. Jeri
Mellon, a retired woman who lives in Henderson, NV, a suburb of Las
Vegas, who came back, most of her savings were lost as a result of the
fraud. She joined with others similarly situated in a class action to
recover money. They recovered $262 million.
If that action were brought today, because aiding and abetting is no
longer a part of the law as a result of the Central Bank of Denver
case--I might add, the Court, in deciding that case, said, look, we do
not believe that the statute can be construed to apply to aider and
abettor liability, but we sure as the devil believe that there ought to
be liability. So this was not a value judgment made by the Court that
aiders and abettors ought not to be available. Here are some of the
aiders and abettors: Parker Milliken, Kay Sholer, Sidley & Austin,
Michael Milken; $121 million of the overall value of $262 million would
be wiped out if that action was filed today. So we are down now to $141
million.
Previously, I offered for the consideration of the Senate a
recommendation shared by the SEC, by the State Securities Association,
by every regulator, by consumer groups, by those charged with public
finance responsibilities at the State and local government level, to
extend the statute of limitations, which is currently limited to 1 to
3, to make it a 2-year to 5-year statute of limitations.
Had the action against Charles Keating been brought today, 20 percent
of the class claims would have been barred because of this restricted
statute of limitations. Another $28 million in recovery, wiped out.
These are people like the Jeri Mellons. I suspect that virtually
every Member of this Senate has had individuals who lost money as a
result of the Keating fraud.
The recovery is down $262 million, to $113 million. Joint and several
liability: Under the provisions of S. 240, in order to be jointly and
severally liable, you have to either have knowing misconduct or
intentional misconduct. Reckless misconduct no longer does it.
Although I recognize a distinction can be made between the two of
those, the amendment that Senator Sarbanes and I sought to offer in one
form or another, sought to make sure that if the primary violator is
insolvent, that those who are guilty of reckless misconduct--it is not
ordinary negligence, not simple negligence--if a Member of this Chamber
goes out this evening, gets in his or her automobile, is involved in an
accident and is negligent, that Member is responsible to the party to
whom he or she has inflicted the injury. Not so with securities law.
Only if they are guilty of reckless misconduct.
In effect, as a result of the changes we make in the joint and
several liability, those who are proportionally liable pay only their
share. It is estimated that another $67 million would be wiped out in
terms of investor recovery if the Keating case were brought today. S.
240 also wipes out the Rico treble damages provision, and another $30
million.
So if the Keating case were brought today, with the state of the law
as it exists on this morning as this debate continues, rather than $262
million recovered by innocent investors, many of whom lost their life
savings--and a disproportionately large number, small, elderly, retired
investors who had little likelihood of ever regaining their loss--$262
million of recovery would be reduced to $16 million.
Mr. President, I ask my colleagues, under what theory of social or
economic justice do we want to do this? Sure, we want to get at the
plaintiff's lawyers that file frivolous actions, and the enhanced
provisions of rule 11 under the Federal Rules of Civil Procedure
address that issue.
The amendment before the Senate would simply restore aiding and
abetting liability. Zippo, no recovery at all. Intentional misconduct,
knowing misconduct, reckless misconduct--not 1 cent could be recovered
under a theory of aider and abettor liability under the state of the
law today, unless the Bryan amendment is enacted.
May I inquire, I have used my time; how is the time being charged at
this point?
The PRESIDING OFFICER (Mr. Coverdell). The Senator has approximately
3 minutes remaining on his side.
Mr. D'AMATO. Mr. President, this is, admittedly, a very complex
subject. We must distinguish between knowingly and intentionally having
committed a fraudulent act and recklessly committing an act.
What is the difference between reckless conduct and intentional and
knowing fraud? What standard of proof is there between gross
negligence, negligence, and recklessness? These are not clear
distinctions and it is because of these blurred distinctions that there
has been a large body of case law, over the years, trying to make the
definitions clear. This is particularly true in the area of reckless
conduct; over the years a number of courts have given the
interpretation that someone who was not the primary wrongdoer, but
participated in the fraud and knowingly and substantially assisted in
the fraud could be held liable. This does not seem to me to be reckless
conduct but knowing fraud.
Courts have found, over the years, that a firm could be held fully
liable for conduct which the average person would consider imprudent,
negligent, or careless. Some circuit courts have recognized this so-
called aiding and abetting liability as part of the recklessness
standard.
Aiding and abetting liability holds the business community to an
incredibly high standard, particularly when they can be held liable for
damages that are far greater that any damage that they have caused.
There is a real culprit to hold liable. The primary wrongdoer is
somebody that has really committed fraud, who has practiced avarice and
greed, who has wantonly and knowingly broken the law.
The Supreme Court decided that aiding and abetting liability applies
to someone who is not the primary wrongdoer but participated in a fraud
and knowingly and substantially assisted in the fraud. In the Central
Bank of Denver case, the Court decided there was no aiding and abetting
liability for private lawsuits involving fraud.
The Supreme Court did not believe that section 10(b) intended to
cover aiding and abetting liability. Providing for aiding and abetting
liability under

[[Page S 9111]]
section 10(b) would be contrary to the goals of this legislation.
This bill is aimed at reducing frivolous litigation. Even the Supreme
Court recognized that expanding 10(b) to include aiding and abetting
liability would lead many defendants to settle to avoid the expense and
risk of going to trial.
The Supreme Court said, ``Litigation under rule 10b-a presents a
danger vexatiousness, different in degree and in kind, and would
require secondary actors to expend large sums even for pretrial defense
and the negotiation of settlement.''
As I have said, aiding and abetting liability would require secondary
actors--not the primary wrongdoer, the person who has committed the
fraud--to expend large sums, even for pretrial defense, and the
negotiation of settlement.
Indeed, I do not believe that just because people have made
settlements that they were guilty of fraud or that it was right and
proper that they were sued.
When 93 percent of the cases--and I know not all the defendants were
brought in to these suits for aiding and abetting, I grant that--but 93
percent of the defendants settled. These aiders and abettors are people
tangentially involved in the fraud; they are brought into the suits
only because they were involved with a scoundrel--a Keating--who was
deliberately breaking the law. Often these aiders and abettors are
accountants who did not notice the fraud, but possibly should have, yet
we would hold them liable as if they committed the fraud. The Supreme
Court said last year that aiding and abetting liability did not belong
in private lawsuits involving fraud.
Of course, if someone has knowingly, intentionally, misled investors
or been involved in committing fraud, they are no longer just aiders
and abettors, and can be held liable for their actions.
Under S. 240, people who commit fraud will be treated as primary
wrongdoers, as the culpable party, and can be held jointly and
severally.
Further, S. 240 grants the Securities and Exchange Commission express
authority to prosecute cases against wrongdoers who knowingly aid and
abet primary wrongdoers.
This issue is both very interesting and very complex. It is not easy.
First, the circuit courts recognized aiding and abetting liability,
then the Supreme Court decided there is no place in these lawsuits for
this liability. Using the aiding and abetting liability to proceed
under rule 10(b) with a lawsuit, which is what this amendment would do,
would take us to a standard that the Supreme Court decided should not
be applied. Again, I quote that this liability standard ``presents a
danger of vexatiousness, different in degree in kind and would require
secondary actors to expend large sums, even for pretrial defense and
negotiations of settlements.''
This amendment would actually destroy a good part of what this
legislation attempts to do in terms of keeping lawyers honest and
protecting those people who did not commit fraud, but were associated
with those who did. It is my belief that these firms, the so-called
aiders and abettors, are only brought in to these suits because of
their deep pockets.
They are professionals; securities analysts, accountants, and bankers
who are involved in some way with the fraudulent party. They get
brought in to the lawsuits and have to spend millions of dollars
defending themselves. And their lawyers tell them that there is a
chance that ``you may be held liable for the full amount.'' Why?
Because when the name of a primary wrongdoer like Keating comes up, you
are ``guilty by association.''

Any prudent lawyer would have to say that there is a chance you will
be held liable if you were involved with a rogue--and there will be
more rogues, make no mistake about it. I do not care what kind of
legislation we pass here, there will be others who break the laws, who
will do terrible things. It is not right that an accountant, law firm
or securities broker is dragged in and linked to the fraud because they
were asked to counsel and they gave some advice. They did not tell the
wrongdoers to lie, they did not participate in fraud, but if they
rendered some professional service, by virtue of their being linked
with by that fraud they may be held liable by a jury. Do you think that
a defendant is going to be able to establish clearly what is reckless
conduct and what is not? The jury can find against them and then hold
them for hundreds of millions of dollars in damages. That risk is why
you have the incredible percentage of settlements.
You heard Senator Dodd last evening explain how it was that a
prominent firm, one of the big six accounting firms, did $15,000 worth
of work, a contract to review something, and was then brought in to the
suit. This accounting firm did defend itself and won the case, but in
winning the case expended over $6 million. We cannot subject people to
that kind of choice. I tell you when that accounting firm is hauled in
the next time, it will settle. This amendment would allow a firm that
was associated with the fraudulent firm to be fully liable for the
damages. This would move us in the wrong direction, so I have to oppose
this amendment.
I yield the floor.
The PRESIDING OFFICER. Who seeks recognition?
Mr. BRYAN. Mr. President, may I inquire what the state of time is?
The PRESIDING OFFICER. The Senator from Nevada has 2\1/2\ minutes.
The Senator from New York has 2 minutes.
Mr. BRYAN. Mr. President, let me, in 2\1/2\ minutes, tell my
colleagues this amendment has nothing to do with frivolous lawsuits,
absolutely nothing. This amendment simply indicates whether or not the
Senate of the United States believes that those who counsel, who aid,
who provide assistance to those who perpetrate investor fraud, ought to
be held responsible. Under the current law, aiders and abettors are not
liable. Among that group are the lawyers who have been the focus of
much criticism during the course of the debate.
Sidley & Austin, Jones Day. These are law firms. A vote against the
Bryan amendment places the individual Senator and this Congress on
record as saying this kind of conduct--misconduct in my view--ought to
be tolerated, approved, and tacitly accepted. I cannot conceive of such
a result.
A decade ago the Congress of the United States enacted a piece of
legislation, Garn-St Germain, that led, within a decade, to a savings
and loan industry which cost the American taxpayers tens and tens of
billions of dollars.
It is my view that S. 240, in its present form, without the kinds of
amendments the distinguished Senator from Maryland and I have tried to
add, will cause investor losses of those magnitudes over the ensuing
years, and essentially private causes of action will be destroyed.
Mr. SARBANES. Will the Senator yield for a question?
Mr. BRYAN. I will be pleased to yield to the Senator.
Mr. SARBANES. Am I correct, under the legislation before us, there
could be no liability whatever imposed in a private action for aiding
and abetting?
Mr. BRYAN. The Senator is correct, no liability.
Mr. SARBANES. In the Keating case, a large part of the recovery of
the victims came from aiders and abettors, did it not?
Mr. BRYAN. If I might respond to the Senator, out of $262 million
recovered in a private cause of action--because Mr. Keating himself was
bankrupt--$121 million of the $262 million was recovered from aiders
and abettors. Under the state of law currently, that $121 million is
wiped out.
Mr. SARBANES. What public policy reason could there possibly be for
letting aiders and abettors go completely free? I understand there
could be an argument about what standards to impose. But on what basis
in public policy is it that aiders and abettors go free?
The PRESIDING OFFICER. The time of the Senator from Nevada has
expired.
Mr. BRYAN. Might I inquire if the acting floor manager will yield me
1 minute to respond to the question of the Senator from Maryland?
Mr. SARBANES. Mr. President, I ask unanimous consent the Senator be
allotted 1 additional minute.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. BRYAN. Mr. President, in responding to the question of the
Senator from Maryland, I am at a total loss. It

[[Page S 9112]]
is beyond my comprehension, whether one positions himself or herself in
the political spectrum to the left of Fidel Castro or to the right of
the Sheriff of Nottingham, under what theory you could say this kind of
conduct ought to be encouraged and to simply say to these folks, by and
large: Hey, as long as you are looking the other way and not signing
any documents, you can, with total impunity under the private cause of
action, counsel, aid, and provide tangible help to perpetrators of
investor fraud. It is simply incomprehensible, I respond to my good
friend.
Mr. SARBANES. I thank the Senator.
The PRESIDING OFFICER. Does the Senator from Colorado seek
recognition? You have 2 minutes left. The Chair recognizes the Senator
from Colorado.
Mr. BROWN. Mr. President, the distinguished Senator from Nevada, I
think, is a very thoughtful Member and brings persuasive arguments to
the floor on this and other issues that he takes on. The concern I
find, as I listen to this, is the potential of holding someone liable
for another's actions when they had no idea that fraud, that action,
was taking place. That is what this amendment does. This would hold
someone, an accountant, someone else involved in this process who has
no idea that a fraud is taking place, this would hold them liable even
though they did not commit the fraud and they did not even know about
the fraud.
Making someone liable, taking millions of dollars away from them,
putting them through this when they did not even know about the action
seems to me to be outrageous.
We yield the remainder of our time on this side.

Amendment No. 1475

The PRESIDING OFFICER. Under the previous order, there will now be 30
minutes debate on the Boxer amendment No. 1475, to be equally divided
in the usual form.
The Senator from Colorado.
Mr. BROWN. Mr. President, if the Senator from California is willing,
I would like to address an inquiry to her concerning her amendment.
Mrs. BOXER. Certainly.
Mr. BROWN. On the first page of the amendment, on page 98, following
through line 100, you put in a subsection and insert the following
subsection that reads:

Not later than 90 days after the date on which a notice is
published under subparagraph (A) or (B) of paragraph (1), the
court shall determine whether all named plaintiffs acting on
behalf of the purported plaintiff's class who have moved the
court to be appointed to serve as lead plaintiff under
paragraph (1)(A)(ii) have unanimously selected a named
plaintiff or plaintiffs to serve as lead plaintiff or
plaintiffs of the purported plaintiff class . . . .
I did not read all of that. My question relates to it, and I frankly
find it a bit confusing. When we say ``all named plaintiffs acting on
behalf of the purported plaintiff class,'' who is it we are describing?
Mrs. BOXER. Everyone in the class. We took it right from your bill. I
guess the bill the Senator is supporting; that you have to advertise
that class actions are about to take place and every named plaintiff
has a chance to vote on who the lead plaintiff shall be. We think this
is very democratic. Unlike your bill, the richest investor will be the
lead plaintiff.
Mr. BROWN. If the Senator would, my question is I think very
specific. When it says all named plaintiffs, who are those? Are those
solely the ones who brought the suit?
Mrs. BOXER. Every plaintiff of the class who responded to become part
of the suit. There is a 90-day period where they go out and advertise.
Mr. BROWN. It would be the people who brought the suit as well as
people who decided to add their names?
Mrs. BOXER. Everyone; all plaintiffs who are interested in being part
of the suit gets to vote on who the lead plaintiff shall be.
Mr. BROWN. If that is the case, why do we have language ``acting on
behalf of the purported plaintiff class who have moved the court to be
appointed to serve as lead plaintiff?'' What if one of the outside
plaintiffs has not moved the court to serve to be plaintiff?
Mrs. BOXER. I think the Senator is confusing a very simple
straightforward point. We take the language straight out of S. 240. In
90 days, there are newspaper advertisements of general circulation, and
everyone who is part of the class is invited to join in the class. At
that point in time, all the plaintiffs who are in the suit--and
everyone is invited to be in--get to vote on who they want the lead
plaintiff to be. If there is not a unanimous selection then the judge
appoints.
Mr. BROWN. My question was very specific. The question I have is
this: If the intention is to have it include all plaintiffs, why do we
modify this by saying ``who have moved the court to be appointed to
serve as lead plaintiff''? What if one of the outside plaintiffs that
joined the suit does not petition the court to serve as lead plaintiff?
Does that mean that they have no voice under subparagraph (a) and they
are not required to consent to the naming of lead plaintiff?
Mrs. BOXER. My understanding of this amendment is clear. Everyone who
has joined in the suit has an equal say. And if they cannot agree, then
the court shall appoint. In S. 240 it is the richest investor. So the
answer is all the plaintiffs get to choose.
Mr. BROWN. Let me just say, at least for this Member, I was intrigued
by the arguments of the Senator from California last night. As I read
the bill, it appears to me that the language here seems to imply that
someone who is not in the original filing, or more specifically had not
moved the court to be appointed to serve as lead plaintiff, would not
have a voice in that unanimous consent required under selection for
subparagraph (a).
Mrs. BOXER. No. I would address my friend to page 3 on the selection
of lead counsel. The lead plaintiff or plaintiffs appointed under
paragraph 2 shall be subject to the approval of the court selecting the
named counsel. So everyone has a chance. All the plaintiffs have a
chance to vote.
Mr. BROWN. My suggestion would be if the Senator does not want to
limit that plaintiff class, having the words ``who have moved the court
to be appointed to serve as lead plaintiff,'' I think gives the
impression that you have to have been in that group. But the Senator
mentioned ``rich'' under the bill. I have looked in the bill. I do not
find that term. Could she show me where in the bill this indicates that
the richest one determines?
Mrs. BOXER. Certainly I will. Unfortunately, at this point I would
need a quorum call to find the exact place because I am working off my
amendment. My friend did not tell me he was going to question me about
the exact wording of the bill itself. So could we put a quorum call in
place? I could find the section.
Mr. BROWN. Mr. President, I suggest the absence of a quorum.
Mr. SARBANES. If the Senator will withhold, the bill says ``in the
determination of the court has the largest financial interest in the
relief sought by the class'' on page 99 of the bill.
The PRESIDING OFFICER. Who yields time?
Mr. SARBANES. Will the Senator yield so I may respond to his
question?
Mr. BROWN. Surely.
Mr. SARBANES. On page 99 of the bill, the language is ``in the
determination of the court has the largest financial interest in the
relief sought by the class.'' That is the language.
Mr. BROWN. That was not the question. That is an unresponsive answer.
The question was where in the bill is ``rich''? The Senator had made
the point.
Mr. SARBANES. ``The largest financial interest in the relief sought
by the class.''
Mr. BROWN. The Senator from Maryland is telling me ``rich'' is not in
the bill, that they use terms with regard to the ``largest financial.''
Mr. SARBANES. The richest person in the sense of having the ``largest
financial interest in the relief sought by the class'' is the one you
are putting forward.
Mr. BROWN. Mr. President, let me simply note this.
Mr. SARBANES. ``The largest financial interest.''
Mr. BROWN. I believe it is my time.
Mr. President, who has the time?
The PRESIDING OFFICER. The Senator from Colorado has the floor.
Mr. BROWN. Mr. President, we all make mistakes in debate on the
floor. I certainly am included. The point I wanted to make was that the
terms used by the Senator from Maryland

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and the Senator from California are in fact not in the bill. The
recitation and description of what was in the bill is not in the bill.
What was said was inaccurate. Mr. President, I think there is an
important point here.
Let us assume you have two lawyers from New York who bring a class
action against Wells Fargo. Each one of them is worth $10 million each.
The public employees pension fund is also a shareholder of Wells Fargo.
The manager of that public employees association has total assets about
one-tenth of what the lawyers from New York have. Who is rich? Who is
the richest? Are the people worth $10 million, the lawyers in New York,
who are professional plaintiffs, the poor ones in this? The answer is
obvious. The professional plaintiffs who are worth $10 million each are
a lot richer than the person who happens to work for a living and
manage the assets of the California employees' pension fund. But the
California employees' pension fund has a great deal larger financial
interest.
Mr. President, I simply want to assure the Senator from California,
for whom I have great respect, that if she is concerned about improving
on who we select to be the lead plaintiff, I will join her. But setting
up a provision where professional litigants get to name the lead
plaintiff and close other people out I think is a problem. The way I
read this measure is it says that the people who bring the suit agree,
and they may only have one share each. They may be in this only for the
purposes of getting a lawsuit and naming the plaintiff and getting to
name the lawyer. But if the people who are professional litigants agree
and bring the suit, they can name the lead plaintiff. They can control
the lawsuit. They can name the lawyer and they can benefit indirectly
from the attorney's fees. That is what this is all about.
The Senator has indicated that it is not her intention to exclude
those who did not specifically move the court to be appointed as lead
plaintiff. It is not her intention to exclude plaintiffs. It may not
have done that. But that is the wording of the amendment. If that is
not the intention, the language ought to be corrected.
Mr. President, more important than anything else, if her purpose is
to get the best lead plaintiff possible, I would suggest that we ought
to focus on that question, and that we should not carve out an
exception for those who are professional litigants who may have brought
the suit.
I reserve the remainder of my time.
Mrs. BOXER addressed the Chair.
The PRESIDING OFFICER. The Chair recognizes the Senator from
California.
Mrs. BOXER. I have heard a lot of distortions on this floor, but this
one takes the cake. I say to my friends on the other side, if you ask
the public who they stand and represent, most people would say it is
those in the upper income brackets. And this argument proves the point
better than I ever could.
That is correct, I said the ``richest'' investor, and my friend takes
great umbrage with that. Let us just say largest investor. That is what
you say in the bill. Let us stick with that. Because let me tell you,
if S. 240 had been the law of the land during the Keating case, you
know who the largest investor was? A company that turned out to be
guilty in that case, a codefendant in that case. So just because
somebody has the largest investment should not make them automatically
the lead plaintiff.
Now, my friend can ignore it all he wants, all he wants, but that is
exactly what S. 240 does. And I think it is elitist, I think it is
antidemocratic, and I say to my friend that just because you may be
wealthier, richer, if you will--and I am not going to change my
language--have a bigger investment than everyone else does not make you
better than anyone else. And if America stands for anything, it stands
for that premise.
Now, I want my friend to know--and he cares a lot about process--that
this provision he defends here today--and I ask my friend, was my
friend involved in the writing of this bill? I ask my friend from
Colorado, did he participate in the markup on this bill?
Mr. BROWN. I am not a member of the committee.
Mrs. BOXER. I think that is a point. He stands up here, and he argues
about something he never marked up. The fact is we held a lot of
hearings on this, and no one ever brought this issue forward about
selecting the lead plaintiff. It was brought 4 days before the markup,
with not one hearing. The SEC has concerns about it. The SEC is very
concerned about it. They do not know how it would work. They think it
is going to lead to more litigation, because what if what the Senator
from California says is accurate, that in many cases you are going to
have the lead plaintiff be someone who is eventually named as a
coconspirator, a codefendant? Imagine the kind of lawsuits that would
bring about.
Look, I do not care who is appointed attorney. I could care less.
There is going to be an attorney for the class. The question is, should
it be automatically the prerogative of the largest investor to
determine the course of the case?
Now, in the Boxer amendment, we say, if the plaintiffs cannot agree
unanimously--and any plaintiff can be part of that discussion--then the
judge gets to select the lead plaintiff based on a number of criteria.
I am very proud that Senator Bingaman and many others are supporting
me in this amendment. We can twist and turn and chastise people for
using plain English on this floor, and maybe my friend just wants to
talk about the exact language in the bill. I never thought we did that
around here. I thought we tried to get it down to where people can
understand. My friend wants me to say the ``largest'' investor? I say
the ``richest'' investor, and he takes me on as if I have committed
some kind of a sin. I stand by it. I think we need the Boxer amendment.
I think we need to send a message from this Chamber that just because
you are the largest investor does not give you the right to take over
from everybody else, because let me tell you sometimes the largest
investor does not really stand that much to lose because maybe he has a
very large dollar investment but in accordance with his net worth it is
not much, and someone who has invested $5,000 or $10,000 or $20,000 has
much more to lose.
I brought to my colleagues' attention yesterday a woman from
California who was bilked of $20,000 by Charles Keating. That may not
sound like a lot to my Republican friend on the other side, who
chastised me for using the word ``rich,'' but I can tell you that
$20,000 was the difference for this woman in being able to sleep at
night and pay her bills and have a sense of security.
Mr. President, at this time I reserve the remainder of my time and
ask, if there is a quorum call, it be divided from each side equally.
The PRESIDING OFFICER. Who yields time?
Mr. BROWN addressed the Chair.
The PRESIDING OFFICER (Mr. Campbell). The Senator from Colorado.
Mr. BROWN. Mr. President, I feel bad that the Senator from California
has responded the way she has. At least my experience in this Chamber
and the legislative process is that when you read the language and
there is a problem with the language and you offer to work on that,
Senators are grateful. All of us have an interest in good legislation.
As I read this amendment--and I have quoted the exact language--it
says, ``acting on behalf of the purported plaintiff class who have
moved the court to be appointed as lead plaintiff.''
As I read that--and I certainly could be wrong; I do not mean to hold
myself out as the authority--I think it suggests in very plain English
you have to move the court to be appointed as lead plaintiff to come
under that category. That means some people could be plaintiffs that
would be excluded. That is a drafting problem. It may not be a drafting
problem, but it certainly ought to be clarified, and it ought to be
clarified for the benefit of the Senator from California.
Now, the Senator from California has talked about democracy in this
process. Mr. President, what we are involved with here today, if this
amendment passes, is stuffing the ballot box. And let me be specific.
You can have one share of stock and bring the class action, and the
California public employees trust fund that may have a

[[Page S 9114]]
million shares of stock and represent 100,000 people may be excluded
from the process of selecting the lead plaintiff.
Now, that is not right, and that is not democracy. Should the
California public employees trust fund, a retirement fund, that owns a
million times as many shares as a professional plaintiff, have more
voice? I think they should. If they own a million times as many shares,
they surely should have a larger voice in the selection of this.
This amendment stuffs the ballot box. It says the people who brought
the suit and who have moved the court to be appointed to serve as lead
plaintiff end up, under the first option, being able to dictate who the
lead plaintiff is and end up being able to dictate who the lawyer is
who gets the fees and ends up being able to help guide the case.
Now, that is wrong. To have a person with one share or five shares
control an action where the California public employees trust fund may
have a million shares is wrong.
Let me reiterate. If there is interest in adding fairness to this
process, we ought to do it. One thing I might mention, because I think
what was mentioned on this floor was that the person who has the
largest financial interest may well have a conflict of interest, the
bill deals with that on page 100.

1. Will not fairly and adequately protect the interests of
the class.

Now, that is one of the grounds in which you can exclude someone,
even though they may have the largest financial interest.

2. Is subject to unique defenses that render such plaintiff
incapable of adequately representing the class.

Both of those, Mr. President, would apply as we have talked.
The PRESIDING OFFICER. The Senator's time has expired.
The Senator from California has 7 minutes 52 seconds remaining.
Mr. SARBANES. Will the Senator yield me just 1 minute?
Mrs. BOXER. Certainly.
The PRESIDING OFFICER. The Senator from Maryland is recognized for 1
minute.
Mr. SARBANES. Mr. President, I wish to say to the Senator from
Colorado that my perception of the dispute that arose as between him
and the Senator from California was his taking issue with her reference
to the ``richest'' plaintiff being named as the lead plaintiff under
the bill.
The Senator says, well, the word ``richest'' is not in the bill. That
is correct. But what is in the bill is that the lead plaintiff shall be
the one who has the largest financial interest, and in that sense I
think it is fair to say that is the richest of the plaintiffs, the
largest financial interest.
Now, second, the Senator says, well, we have covered the problem of a
conflict of interest in the bill. That is a rebuttable presumption and,
as someone said last night, it is really written to be almost
irrebuttable.
The SEC, which examined this provision of the legislation, having
looked at it and having looked at the very provision the Senator is
making reference to, said that:

It may create additional litigation concerning the
qualifications of the lead plaintiff, particularly when the
class member with the greatest financial interest in the
litigation has ties to management or interests that may be
different from other class members.

So clearly there is a problem here. And the way the bill is written
it may place the lead plaintiff position in the hands of people about
whom the SEC has raised large and significant questions.
I thank the Senator for yielding.
Mrs. BOXER. I thank my friend.
Mr. BROWN. May I respond?
Mrs. BOXER. Mr. President, how much time do I have?
The PRESIDING OFFICER. Five minutes fifty seconds.
Mrs. BOXER. How much time does the Senator from Colorado have
remaining?
The PRESIDING OFFICER. The Senator from Colorado has none.
Mrs. BOXER. I will be glad to yield if I have time at the end, but we
are getting down to the last 5 minutes of this discussion.
Mr. SARBANES. Mr. President, I ask unanimous consent that the Senator
from Colorado have 1 minute--I had 1 minute--to make a point in
response, so the Senator from California can preserve her time in order
to make her closing statement.
The PRESIDING OFFICER. Without objection, it is so ordered. The
Senator from Colorado has an additional 1 minute.
Mr. BROWN. Mr. President, I want to thank the Senator from Maryland
for his kindness. I simply want to join the Senator from Maryland to
indicate that I think he has a valid point. If someone has a conflict
of interest, obviously that ought to be addressed.
I believe the plain language of the bill on page 100 covers that:
``will not fairly and adequately protect the interest of the class.'' I
think that covers it. But if there is better language or more language,
I want to assure him I will support it, and I will be glad to join him
in that effort.
But, Mr. President, the point remains, we are not dealing with
disqualifications on that basis. What we are dealing with is a whole
new way to stack the deck, where someone with very few shares who
brings the suit can control the action and pick the attorney, and
someone who has a lot more shares and yet not be as rich, as has been
used on this floor, will be closed out of the process. Stacking the
deck is the problem with this amendment. If we eliminate that portion
of it, I think we would have something that all parties could work
together on.
I yield back any remaining time.
The PRESIDING OFFICER. The Senator's time has expired. Who yields
time?
Mrs. BOXER. Mr. President, I want to ask my friend from Colorado a
question. My friend from Colorado made two attacks on this Senator's
amendment, certainly not on the Senator, so I do not take it personally
at all. The two attacks were, one, that the Senator from California
said the richest investor and he took umbrage and said, ``Well, wait a
minute, the word 'richest' is not in the bill.'' OK, that is right, the
largest investor--I say the richest investor. I stand by that, with all
due respect.
Second, the Senator says that only a certain number of the plaintiffs
can, in fact, vote on who the plaintiff should be. The fact is if the
Boxer amendment becomes law, every single potential plaintiff in the
country, member of the class action, has an opportunity to be part of
the selection. This is not some secret thing of stuffing the ballot
box. Any plaintiff who joins the class, petitions the court, votes.
Now, if the Senator believes that the largest investor would not get
involved in that, I do not know what the Senator thinks. But the fact
is I do not care who the attorney is who gets to represent either side.
It does not make a whit's worth of difference to me. What I care is
that the lead plaintiff be selected in a way that is fair.
The fact of the matter is that the Banking Committee never held a
hearing on this and it shows up in the bill 4 days before the markup.
It is wrong to legislate this way. I believe it is elitist.
I pointed out to this Chamber last night that if S. 240 had been law
during the Keating case and the richest investor, or as my friend would
prefer, the largest investor had been named lead plaintiff, it would
have been someone who was guilty along with Keating, someone who
actually wound up paying to make those----
Mr. DODD. Will my colleague yield?
Mrs. BOXER. I will not yield at this time. I have very little time. I
ask my friend from New Mexico if he wishes to have a couple of minutes
in this debate. I will reserve that for him.
Mr. BINGAMAN. Mr. President, I will respond that I would like a
couple minutes to support the amendment by the Senator from California.
Mrs. BOXER. I say to my friend, how much time do I have?
The PRESIDING OFFICER. The Senator has 3 minutes.
Mrs. BOXER. I yield 2 minutes to my friend, and then I will conclude.
The PRESIDING OFFICER. The Senator from New Mexico.
Mr. BINGAMAN. Let me briefly say I support the effort of the Senator
from California to amend the bill in this regard. This provision, this
most adequate plaintiff idea, as I understand, was proposed as part of
a substitute in committee. There was no hearing held on it. I believe
that is the case.
Mr. SARBANES. If I could say, the Senator is correct, there have been
no

[[Page S 9115]]
hearings on this issue. It was not considered at any point until it
appeared in the draft.
Mr. BINGAMAN. Mr. President, I think one of the hallmarks of our
legal system has always been that a person's right to go to court or a
person's right to have his or her case presented in court should not be
strictly tied to the person's financial condition. We should not means
test justice, as the saying goes.
I think where you get a provision like this where there is a
presumption that the plaintiff who has the most invested is the most
adequate plaintiff and, therefore, should control the litigation, that
comes very close to means testing justice. It causes me great concern
that we would have this kind of a provision.
Clearly, there have been groundless lawsuits brought, and that is the
purpose. The purpose of this legislation is to deal with that. I
understand that. I support this legislation. I am a cosponsor of this
legislation, but when I cosponsored it, there was no provision in it
for most adequate plaintiff.
Now there is a presumption that those who have the most invested
should control the litigation. I do not know that that is always true.
I do not know that that should always be the case. Therefore, I do have
problems with the bill as it now stands.
The PRESIDING OFFICER. The Senator's 2 minutes have expired.
Mrs. BOXER. I yield the Senator another 25 seconds.
Mr. BINGAMAN. I will just say, the Senator from California has made a
very good-faith effort to correct this. I support her efforts. I hope
the Senate will adopt her amendment.
The PRESIDING OFFICER. The Senator has 43 seconds remaining.
Mrs. BOXER. Mr. President, I gave an example of if S. 240 was the law
and who would be the lead plaintiff in the Keating case. Let me give
another example.
The Wall Street Journal reported last night that a Wall Street
investment bank filed a class action suit against Avon Products for
securities fraud. That Wall Street bank was supposed to represent the
interest of small investors, but the Journal reported that that Wall
Street bank tried to get Avon to settle the case by giving them $50
million to invest. That is the way they thought they would act in the
best interest of the class.
Now I say to my friends, this is absurd. There is no way that small
investors would have benefited from that type of a settlement, and this
bill would prevent those small investors from discovering the secret
deal because they would have to know about it before they could use
subpoenas.
I hope my colleagues will support the Boxer-Bingaman amendment.
Mr. BENNETT. Section 102 of the legislation would require courts to
consider a motion by a purported class member to become a lead
plaintiff and would require courts to appoint as lead plaintiff the
class member ``most capable of adequately representing the interests of
the class member.'' The bill sets up a rebuttable presumption that the
most adequate plaintiff is the person who has made such a motion, who
has the largest financial interest in the relief sought by the class,
and who satisfies the requirements of rule 23 of the Federal Rules of
Civil Procedure. This presumption may be rebutted if a member of the
class proves that the presumptively most adequate plaintiff will not
fairly and adequately protect the interests of the class or is subject
to unique defenses.
What is the purpose of this provision?
Mr. DODD. This provision has two essential purposes. First, it will
improve class member choice, by giving class members an opportunity to
request service as lead plaintiff. Second, it will enhance a court's
ability to appoint as lead plaintiff any class member who has requested
service and who otherwise meets the conditions of the provision.
Mr. BENNETT. Would this provision require courts to name any
institutional investor as lead plaintiff?
Mr. DODD. No. Under the bill, a court may only appoint a plaintiff
who has asked, in a motion to the court, to serve as lead plaintiff.
Moreover, the institutional investor who asks to serve must satisfy the
conditions of rule 23, which authorizes the court to determine whether
such a party should serve as representative plaintiff in order to
facilitate management of the case. The court also has to determine that
the party who asks to serve has the largest financial interest in the
relief sought. Finally, the presumption as to most adequate lead
plaintiff could be rebutted under the bill.
Mr. BENNETT. Would the bill require any institutional investor to
request that its be appointed as lead plaintiff?
Mr. DODD. No. The bill merely gives each class member the opportunity
to request service. In no way does it obligate any member to do so.
Institutional and other investors would continue to have the right
simply to remain class members and not serve as lead plaintiff, and
they may select that approach independent of any responsibility to the
other class members or to anyone else.
Mr. BENNETT. Does this bill impose any new fiduciary duty on an
institutional investor to its shareholders or beneficiaries, or to
other class members, to request service as lead plaintiffs?
Mr. DODD. No. The bill imposes no fiduciary or other obligation on
institutions or other plaintiffs to serve or not to serve as lead
plaintiffs. Moreover, the court would have no authority to impose such
an obligation. For example, rule 23 authorizes the court to make
certain determinations about who should serve as representative
plaintiff. These determinations concern management of the case, and
they do not authorize the court to require a plaintiff to serve as
representative due to any perceived responsibility to the other class
members or to anyone else.
The PRESIDING OFFICER. All time has expired.

Amendment No. 1474

The PRESIDING OFFICER. Under the previous order, the question now is
on agreeing to amendment No. 1474, offered by the Senator from Nevada
[Mr. Bryan]. The yeas and nays have been ordered.
Mr. SARBANES addressed the Chair.
The PRESIDING OFFICER. The yeas and nays have not been ordered. The
Senator from Maryland.
Mr. SARBANES. Mr. President, I believe under the procedure we are
following, the Senator has 1 minute to set out his amendment; is that
correct?
The PRESIDING OFFICER. That is 2 minutes for debate prior to the
second vote.
Mr. D'AMATO. I ask unanimous consent that there be 1 minute equally
divided for Senator Bryan.
The PRESIDING OFFICER. Is there objection? Without objection, it is
so ordered.
Mr. D'AMATO. I do not believe the yeas and nays have been ordered.
The PRESIDING OFFICER. The Senator is correct.
Mr. D'AMATO. I request the yeas and nays.
The PRESIDING OFFICER. Is there a sufficient second?
There is a sufficient second.
The yeas and nays were ordered.
Mr. D'AMATO. As relates to the Boxer amendment, have the yeas and
nays have been ordered?
The PRESIDING OFFICER. The yeas and nays have not been ordered.
Mr. D'AMATO. I request the yeas and nays.
The PRESIDING OFFICER. Is there a sufficient second?
There is a sufficient second.
The yeas and nays were ordered.
The PRESIDING OFFICER. The Senator from Nevada is recognized.
Mr. BRYAN. Mr. President, I want to make this very clear. I have said
it ad nauseam. The Bryan amendment has nothing to do with frivolous
lawsuits. The question is whether or not the Senate wants to go on
record as tolerating, allowing, and permitting the conduct of aiders
and abettors, whether intentional, knowingly, or reckless, to go
unpunished. That is the state of the law.
This amendment would say that lawyers, accountants, bankers, and
others that aid and abet securities fraud will be held liable. That was
the law until the Central Bank case was decided, and the Supreme Court
in deciding that case made it clear that they were not saying that
aiders and abettors ought not to be liable. They just very narrowly
interpreted the statute. We have hit the plaintiffs' lawyers for their
frivolous actions, but how can we ignore the conduct of lawyers who
counsel

[[Page S 9116]]
those perpetrating securities fraud? If we fail to adopt the Bryan
amendment, we are simply saying to that group of lawyers that you can
continue and be free to continue your activities, and that may cost
literally hundreds of millions of dollars to innocent investors.
Mr. D'AMATO. Mr. President, I yield 1 minute to Senator Dodd.
Mr. DODD. Mr. President, very briefly, what the Senator from Nevada
is doing here is raising a whole new standard that was never
universally the case prior to the Central Bank of Denver. Here, in the
amendment, the standard is knowing and reckless--knowing or reckless.
And to include recklessness here, a standard that is so vague the
courts have had great difficulty defining it, would be to open up a
whole new area of law and allow proportionate liability to be gutted as
a result of this amendment. What we have done with this bill is, of
course, allowed the SEC to bring a Government action in the aiding and
abetting.
Where you do have fraudulent intent, joint and several applies.
Proportionate liability does not. In that case, where you have even the
casual conduct of an aider and abettor, they would be trapped. We try
to avoid when you do not have that standard being met, just a small
mistake, which can be the case of a lawyer or accountant, In the
process, should not be held fully accountable for the entire cost. So
the adoption of this amendment would destroy that very effort which is
central to this bill. So, for those reasons, because recklessness is
used here--were this to be an actual knowledge--words of art in
describing that--I might have some different views on this amendment.
But the fact of it is, using the recklessness standard, I think, takes
this far beyond where we even were before--before the Supreme Court
ruled in the Central Bank of Denver case, where certain courts in this
land held it to a much higher standard than recklessness.
So for that reason, I reluctantly urge my colleagues to reject this
amendment.
Mr. D'AMATO. May I inquire? I did not know if the Senator from
California wanted to use her 1 minute now.
Mrs. BOXER. In between the votes, I believe, is what the unanimous-
consent says. I would prefer it before the next vote, before the vote
on the Boxer amendment, which is what it said in the unanimous-consent
request.
Mr. D'AMATO. Fine.
The PRESIDING OFFICER. The question is on agreeing to amendment No.
1474 offered by Mr. Bryan.
The clerk will call the roll.
The legislative clerk called the roll.
Mr. BOND (when his name was called). Present.
The PRESIDING OFFICER. Are there any other Senators in the Chamber
desiring to vote?
The result was announced--yeas 39, nays 60, as follows:
[Rollcall Vote No. 286 Leg.]

YEAS--39

Akaka
Baucus
Biden
Boxer
Bradley
Breaux
Bryan
Bumpers
Byrd
Cohen
Conrad
Daschle
Dorgan
Feingold
Feinstein
Ford
Glenn
Graham
Harkin
Heflin
Hollings
Inouye
Jeffords
Kennedy
Kerrey
Kerry
Kohl
Lautenberg
Leahy
Levin
McCain
Moynihan
Pryor
Robb
Rockefeller
Sarbanes
Shelby
Simon
Wellstone

NAYS--60

Abraham
Ashcroft
Bennett
Bingaman
Brown
Burns
Campbell
Chafee
Coats
Cochran
Coverdell
Craig
D'Amato
DeWine
Dodd
Dole
Domenici
Exon
Faircloth
Frist
Gorton
Gramm
Grams
Grassley
Gregg
Hatch
Hatfield
Helms
Hutchison
Inhofe
Johnston
Kassebaum
Kempthorne
Kyl
Lieberman
Lott
Lugar
Mack
McConnell
Mikulski
Moseley-Braun
Murkowski
Murray
Nickles
Nunn
Packwood
Pell
Pressler
Reid
Roth
Santorum
Simpson
Smith
Snowe
Specter
Stevens
Thomas
Thompson
Thurmond
Warner

ANSWERED ``PRESENT''--1

Bond

So the amendment (No. 1474) was rejected.
Mr. D'AMATO. Mr. President, I move to reconsider the vote.
Mr. DOMENICI. I move to lay that motion on the table.
The motion to lay on the table was agreed to.

Amendment No. 1475

The PRESIDING OFFICER. Under the previous order there will now be 2
minutes equally divided for debate prior to the second vote, which will
be on the Boxer amendment No. 1475. The Senator will withhold until we
have order. The Senate will be in order.
The Senator from California [Mrs. Boxer] has 1 minute.
Mr. FORD. Mr. President, the Senate is still not in order. She
deserves to be heard.
The PRESIDING OFFICER. The Senate will be in order. The Senator from
California.
Mrs. BOXER. Mr. President, very briefly, if S. 240 as currently
written had been the law then, the lead plaintiff in the Keating case
would have been one of the guilty parties in the Keating case. That is
because S. 240 says the judge must choose the largest investor as the
lead plaintiff and the largest investor in the Keating case turned out
to be a party to the fraud.
Let us not allow this outrage. This ``largest investor'' language was
added, without public hearings, 4 days before markup. The SEC has
problems with it.
The Boxer-Bingaman amendment says the following, that after
advertising for 90 days, all the plaintiffs----
The PRESIDING OFFICER. The Senator will withhold until we have order.
The Senate will be in order.
The Senator from California.
Mrs. BOXER. The Boxer-Bingaman amendment says that after advertising
for 90 days, all the plaintiffs get to select the lead plaintiff. If
they cannot agree unanimously, then the judge will choose the lead
plaintiff, taking into consideration all factors, including conflicts
of interest, who the largest investor is, et cetera. Just because
someone is rich should not automatically make them the lead plaintiffs.
Support Boxer-Bingaman.
The PRESIDING OFFICER. The Senator from New York [Mr. D'Amato] is
recognized for 1 minute.
Mr. D'AMATO. Mr. President, our bill stops the kind of outrageous
conduct where the same handful of plaintiffs bring multiple complaints.
Mr. Cooperman has been a plaintiff 14 times and has always chosen the
same law firm.
Mr. Shore, 10 times, a professional plaintiff.
Mr. Shields, seven times.
Mr. Steinberg, seven times.
William Steiner, six times. They become the lead plaintiffs, they
pick the attorneys. Our legislation would prohibit that.
This legislation would give due deference to lead the case to someone
who has a real financial stake, not a phony professional plaintiff.
This amendment would keep alive that race to the courthouse. That is
why I urge a ``no'' vote.
The PRESIDING OFFICER. Does the Senator yield the remainder of his
time?
Mr. D'AMATO. Yes.
The PRESIDING OFFICER. The question occurs on the amendment of the
Senator from California. The yeas and nays have been ordered.
The clerk will call the roll.
The bill clerk called the roll.
Mr. BOND (when his name was called). Present.
The PRESIDING OFFICER (Mr. Thomas). Are there any other Senators in
the Chamber who desire to vote?
The result was announced--yeas 41, nays 58, as follows:
[Rollcall Vote No. 287 Leg.]

YEAS--41

Akaka
Baucus
Biden
Bingaman
Boxer
Bradley
Breaux
Bryan
Bumpers
Byrd
Conrad
Daschle
Dorgan
Feingold
Ford
Glenn
Graham
Harkin
Heflin
Hollings
Inouye
Jeffords
Kennedy
Kerrey
Kerry
Kohl
Lautenberg
Leahy
Levin
McCain
Moynihan
Pell
Pryor
Robb
Rockefeller
Roth
Sarbanes
Shelby
Simon
Specter
Wellstone

NAYS--58

Abraham
Ashcroft
Bennett
Brown
Burns
Campbell
Chafee
Coats
Cochran
Cohen
Coverdell
Craig
D'Amato
DeWine
Dodd
Dole
Domenici
Exon
Faircloth
Feinstein
Frist
Gorton
Gramm
Grams
Grassley
Gregg
Hatch
Hatfield
Helms
Hutchison

[[Page S 9117]]

Inhofe
Johnston
Kassebaum
Kempthorne
Kyl
Lieberman
Lott
Lugar
Mack
McConnell
Mikulski
Moseley-Braun
Murkowski
Murray
Nickles
Nunn
Packwood
Pressler
Reid
Santorum
Simpson
Smith
Snowe
Stevens
Thomas
Thompson
Thurmond
Warner

ANSWERED ``PRESENT''--1

Bond

So the amendment (No. 1475) was rejected.
Mr. D'AMATO. Mr. President, I move to reconsider the vote.
Mr. SARBANES. I move to lay that motion on the table.
The motion to lay on the table was agreed to.

Amendment No. 1476

Mr. D'AMATO. Mr. President, I believe under the consent order my
friend and colleague from Maryland, Senator Sarbanes, is to be
recognized for the purpose of offering an amendment. I have asked him
to give me the opportunity--and if it looks like I am looking around, I
am, because staff was supposed to prepare an amendment dealing with the
issue of safe harbor. And in that provision we call for knowingly,
intent, and expectation.
If I could have a copy of the bill itself, at page 121 of the bill it
says, ``knowingly made.'' These are statements that are knowingly made
with the expectation, purpose and actual intent of misleading
investors.
There is a very real question as to what do we mean by
``expectation,'' and do we go too far? I do not believe it is a word
that is necessary. I think it is gilding the lily, and for that purpose
I would submit an amendment, the purpose of which is to delete the word
``expectation,'' so that it would then read: ``knowingly made with the
purpose and actual intent of misleading investors.''
I ask unanimous consent that I might be able to submit this amendment
and have it considered at this time.
The PRESIDING OFFICER. Is there objection? Without objection, it is
so ordered.
The clerk will report the amendment.
The bill clerk read as follows:

The Senator from New York [Mr. D'Amato] proposes an
amendment numbered 1476:
On page 121, line 1, delete the word ``expectation,''.

Mr. D'AMATO. Mr. President, I have no illusions. I recognize that
this amendment does not answer all those questions or go as far as some
might like. But I certainly think it clears up something that would
raise a question and is a move in the right direction, and I urge its
adoption.
Mr. SARBANES. Mr. President, I welcome the amendment from the Senator
from New York. We spoke earlier about introducing it at this point
ahead of the general debate on safe harbor. I am quite amenable to that
because I want to get a substantive result. This provision was going to
be a part of the debate had this not happened, I think as the Senator
from New York well recognizes, but we are willing to forego the debate
points in order to try to clean something out of the bill. There is
still plenty wrong with it, and I am going to address that when we have
the general debate on safe harbor. But I support this modification that
is being made in the bill, and I hope the Senate will accept the
amendment.
The PRESIDING OFFICER. The question is on agreeing to the amendment.
Mr. D'AMATO. I am advised--and I mention this to my colleague and
friend--that there is another area of the bill that we will have to
modify because it is referred to a second time. But rather than do that
at this point in time, I suggest that we go forward, and then later on
I will make that modification.
Mr. SARBANES. Why not go ahead?
Mr. D'AMATO. On page 114, line 7, we delete the word ``expectation''
as well. This was not done in the first. I ask that the amendment be
modified.
The PRESIDING OFFICER. The amendment is so modified.
The amendment, as modified, is as follows:

On page 121, line 1, delete the word ``expectation,''.
On page 114, line 7, delete the word ``expectation,''.

The PRESIDING OFFICER. The question is on agreeing to the amendment.
So the amendment (No. 1476), as modified, was agreed to.
Mr. D'AMATO. Mr. President, I move to reconsider the vote.
Mr. SARBANES. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mr. SARBANES. Mr. President, I think under the order I am to be
recognized at this point?
The PRESIDING OFFICER. The Senator is correct.

Amendment No. 1477

(Purpose: To amend the safe harbor provisions of the bill)

Mr. SARBANES. Mr. President, I send an amendment to the desk and ask
for its immediate consideration.
The PRESIDING OFFICER. The clerk will report.
The bill clerk read as follows:

The Senator from Maryland [Mr. Sarbanes], for himself and
Mr. Lautenberg, proposes an amendment numbered 1477.

Mr. SARBANES. Mr. President, I ask unanimous consent that reading of
the amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:

Beginning on page 112, strike line 1 and all that follows
through page 126, line 14, and insert the following:

SEC. 105. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.

(a) Consideration of Regulatory or Legislative Changes.--In
consultation with investors and issuers of securities, the
Securities and Exchange Commission shall consider adopting or
amending rules and regulations of the Commission, or making
legislative recommendations, concerning--
(1) criteria that the Commission finds appropriate for the
protection of investors by which forward-looking statements
concerning the future economic performance of an issuer of
securities registered under section 12 of the Securities
Exchange Act of 1934 will be deemed not be in violation of
section 10(b) of that Act; and
(2) procedures by which courts shall timely dismiss claims
against such issuers of securities based on such forward-
looking statements if such statements are in accordance with
any criteria under paragraph (1).
(b) Commission Considerations.--In developing rules or
legislative recommendations in accordance with subsection
(a), the Commission shall consider--
(1) appropriate limits to liability for forward-looking
statements;
(2) procedures for making a summary determination of the
applicability of any Commission rule for forward-looking
statements early in a judicial proceeding to limit protracted
litigation and expansive discovery;
(3) incorporating and reflecting the scienter requirements
applicable to implied private actions under section 10(b);
and
(4) providing clear guidance to issuers of securities and
the judiciary.
(c) Securities Exchange Act of 1934.--Title I of the
Securities Exchange Act of 1934 (15 U.S.C. 73a et seq.) is
amended by inserting after section 13 the following new
section:

``SEC. 37. APPLICATION OF SAFE HARBOR FOR FORWARD-LOOKING
STATEMENTS.

``(a) In General.--In any implied private action arising
under this title that alleges that a forward-looking
statement concerning the future economic performance of an
issuer registered under section 12 was materially false or
misleading, if a party making a motion in accordance with
subsection (b) requests a stay of discovery concerning the
claims or defenses of that party, the court shall grant such
a stay until the court has ruled on the motion.
``(b) Summary Judgment Motions.--Subsection (a) shall apply
to any motion for summary judgment made by a defendant
asserting that a forward-looking statement was within the
coverage of any rule which the Commission may have adopted
concerning such predictive statements, if such motion is made
not less than 60 days after the plaintiff commences discovery
in the action.
``(c) Dilatory Conduct; Duplicative Discovery.--
Notwithstanding subsection (a) or (b), the time permitted for
a plaintiff to conduct discovery under subsection (b) may be
extended, or a stay of the proceedings may be denied, if the
court finds that--
``(1) the defendant making a motion described in subsection
(b) engaged in dilatory or obstructive conduct in taking or
opposing any discovery; or
``(2) a stay of discovery pending a ruling on a motion
under subsection (b) would be substantially unfair to the
plaintiff or to any other party to the action.''.

Mr. SARBANES. Mr. President and Members of the Senate, this is the
issue of safe harbor. I know many Members have heard about this issue.
In my judgment, it is an extremely important issue which we now seek to
develop. We have actually addressed five major issues in this bill:
Joint and several liability, statute of limitations, aiding and
abetting, and safe harbor, and the lead plaintiff amendment that was
offered by my distinguished colleague from California.

[[Page S 9118]]

Now, Mr. President, this is an extremely important amendment. It is a
very complex issue and some very able people have worked very hard to
understand it and try to address it. I hope to develop it here over a
reasonably short period.
This amendment that I have sent to the desk, this particular
amendment, does not try to define in the statute the standard for safe
harbor. That may come later. What this amendment seeks to do is simply
to put into this bill the provision on the issue of safe harbor that
was in the bill introduced by Senator Dodd and Senator Domenici.
I want to say to my colleagues who sponsored that bill that this
amendment is the provision you cosponsored. The provision that is in
the bill before us dealing with safe harbor is not the provision that
was in the bill which you cosponsored.
Some may say, ``Well, that's all right, I want the provision that's
in this bill.'' But others may not say that. Every Member should
understand that the provision that was in the bill which they
cosponsored--a significant number of Members cosponsored--is the
provision that is in the amendment at the desk. That is the safe harbor
provision that people signed on to.
And what Senator Dodd and Senator Domenici had done is, in effect,
create a regulatory safe harbor. They had placed the burden, as it
were, on the Securities and Exchange Commission to come up with a
definition of safe harbor, and it set out certain standards by which
the Commission would be governed.
This is an extremely important matter. It is one about which the
Chairman of the Commission is very much concerned. And I submit to my
colleagues, at some point in this legislative process, Members ought to
stop, look and listen and ask themselves whether they want to continue
to be at variance or at odds with very strongly held opinions of the
regulators, of the Chairman of the SEC, of the States securities
regulators, particularly in a matter as difficult and as complex as the
safe harbor issue.
The regulators disagree with a majority of this body on the statute
of limitations issue, but the statute of limitations issue is a
relatively easily understood issue. The question was, are you going to
have 1 and 3 years, or 2 and 5 years? That is not the safe harbor
issue.
On May 19, the Chairman of the Securities and Exchange Commission
wrote to the Banking Committee a four-page letter entirely devoted to
the safe harbor issue. Only the safe harbor issue was discussed in that
four-page letter.
The letter itself is complex, let alone the issue. The letter
reflects the complexity of the issue.
In that letter, the Chairman states his interest in trying to have
changes in the securities litigation issue. He concedes that he would
like to see improvements in existing safe harbor provisions. He talks
about the need to get accurate forward projections, but he also talks
about the need to protect investors.
Mr. President, I ask unanimous consent that the full letter be
printed in the Record at the end of my remarks.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit 1.)
Mr. SARBANES. Mr. President, I am quoting:

A carefully crafted safe harbor protection for meritless
private lawsuits should encourage public companies to make
additional forward looking disclosure that would benefit
investors. At the same time, it should not compromise the
integrity of such information which is vital to both investor
protection and the efficiency of the capital markets, the two
goals of the Federal securities law.

Later he says, and I quote him:

A safe harbor must be balanced. It should encourage more
sound disclosure without encouraging either omission of
material information or irresponsible and dishonest
information.

Let me repeat that:

A safe harbor must be balanced. It should encourage more
sound disclosure without encouraging either omission of
material information or irresponsible and dishonest
information.
A safe harbor must be thoughtful so that it protects
considered projections but never fraudulent ones. A safe
harbor must also be practical. It should be flexible enough
to accommodate legitimate investor protection concerns that
may arise on both sides of the issue.
This is a complex issue in a complex industry and it raises
almost as many questions as it answers. Should the safe
harbor apply to information required by Commission rule,
including predictive information contained in the financial
statements, for example, pension liabilities and over-the-
counter derivatives? Should it extend to oral statements?
Should there be a requirement that forward looking
information that has become incorrect be updated if the
company or its insiders are buying or selling securities?
Should the safe harbor extend to disclosures made in
connection with a capital raising transaction on the same
basis as more routine disclosures as well? Are there
categories of transactions, such as partnership offerings or
going private transactions, that should be subject to
additional conditions?
There are many more questions that have arisen in the
course of the Commission's exploration of how to design a
safe harbor. We have issued a concept release, received a
large volume of comment letters in response and held 3 days
of hearing, both in California and Washington. In addition, I
have met personally with most groups that might conceivably
have an interest in the subject--corporate leaders,
investment groups, plaintiffs lawyers, defense lawyers, State
and Federal regulators, law professors and even Federal
judges.
The one thing I can state unequivocally is that this
subject eludes easy answers.

Let me repeat that last statement. This is Chairman Levitt:

The one thing I can state unequivocally is that this
subject eludes easy answers.

Then he goes on to say:

Given these complexities and in light of the enormous
amount of care, thought and work that the Commission has
already invested in the subject, my recommendation would be
that you provide broad rulemaking authority to the Commission
to improve the safe harbor.

He then goes on to address considerations if the committee tries to
put in a legislative standard, instead of having a regulatory safe
harbor. I think Chairman Levitt was absolutely right. That is obviously
what Senators Dodd and Domenici thought when they put in their bill. I
do not know how many other people who cosponsored that bill agreed
that, in effect, giving this assignment to the Securities and Exchange
Commission was the way to do it. As Chairman Levitt said:

That is not what was done. The provision that was in the original
bill, which is the amendment that is at the desk, was dropped from the
bill and instead a legislative standard was substituted.
The provision that was in the bill that is on Members' desks, the
original bill, is at page 19 through 22, and those pages, as Members
can all see, have been stricken. That is what Members originally signed
on to, and that provision has been, as you can see, lined out in this
bill, and instead an effort has been made for this body to define the
standard in an extremely complex matter. As Chairman Levitt said:

The one thing I can state unequivocally is that this
subject eludes easy answers.

We have just seen an example of that. My distinguished colleague from
New York, just before I offered this amendment, got up to offer an
amendment to amend the standard that is in the bill. In other words,
here we are, they are conceding that the standard in the bill goes too
far and needs to be corrected, so we just amended it. I indicated I
welcome that amendment because I think this standard that is in the
bill, even with the amendment, is an improper standard. But the fact
that the amendment was offered is a demonstration of the point I am
trying to make about the complexity of this issue and the wisdom of the
original approach to, in effect, charge the Commission with the
responsibility of defining the safe harbor provision,
a matter which the chairman has indicated he was, in fact, working on.
Now, as people who were here just a few minutes ago noted, not only was
it amended, but then my distinguished colleague from New York neglected
to amend another section of the bill which also needed to be amended.
So you get some sense of how we are dealing with a very difficult
issue. Here we are trying to jury-rig it at the last minute. Now,
later, if I have to, I will try to deal with the legislative standard,
but I think that fools are rushing in where angels fear to tread,

[[Page S 9119]]
with all due respect to my colleagues. This is a matter that ought to
be put to the Securities and Exchange Commission, just as Senators Dodd
and Domenici proposed in their initial legislation.

On May 19, Chairman Levitt wrote the Banking Committee a four-page
letter on safe harbor only. This safe harbor is a catastrophe waiting
to happen. And Members must keep in mind the danger that the safe
harbor is going to become a haven for pirates. As I have said earlier,
it will turn into a pirate's cove. That is where they will shield
themselves in order to really perpetrate some egregious frauds on the
investing public.
Subsequent to the letter of May 19 from the Chairman of the
Securities and Exchange Commission, the majority within the Banking
Committee, including the sponsors of the earlier bill, departed from
their approach in terms of charging the Commission with the
responsibility of developing a safe harbor. I mean, the Commission are
the experts, they can hold the hearings, and I will discuss in a minute
the hearings they held in trying to resolve this matter. But a majority
decided that, well, no, they were going to do a legislative standard.
Efforts began to develop an appropriate legislative standard in
discussions with the SEC and others and with members of the committee
on both sides, including those of us that are now opposing this
legislation. But the end result of that discussion, unfortunately, was
an inability to come to an agreement. The definition, the standard in
the bill I think is just fraught with danger. In fact, it was just
amended by the proponents of this legislation here on the floor only a
moment or two ago. They took out one element of it right here,
obviously recognizing themselves the deficiencies in it. That
illustrates the problem with this body trying to formulate a
legislative standard.
I welcome that substantive change, but I do think it illustrates, in
a rather demonstrative way, the problem with this body trying to write
the legislative standard rather than letting the SEC do it. Now, if we
have to write it, I will try to do it, but I think it is a mistake.
This is an opportunity for Members, in effect, to go back to the
provision that was in the bill.
Let me read what Chairman Levitt said about the provision that was in
the markup document. In other words, after this week of working, the
committee moved with a document that had this definition, and this is
what the Chairman said:

As Chairman of the Securities and Exchange Commission--

This letter came on the morning of the markup.

I cannot embrace proposals which allow willful fraud to
receive the benefit of safe harbor protection.

And then he discussed the problems that he saw with the provision
that is in this legislation. The Chairman of the Securities and
Exchange Commission said, ``I cannot embrace proposals which allow
willful fraud to receive the benefit of safe harbor protection.''
Mr. DOMENICI. Will the Senator yield for a question?
Mr. SARBANES. Certainly.
Mr. DOMENICI. Does not the safe harbor provision do just that--make
sure that willful fraud is still covered, expressly stating that the
safe harbor does not apply to knowing fraud?
Mr. SARBANES. I say to the Senator that I do not believe it does so.
Mr. DOMENICI. I do not know what else we can put in.
Mr. SARBANES. That is why Chairman Levitt wrote the letter. He read
the provision in the bill.
Mr. DOMENICI. He wrote the letter about a lot of other issues besides
that. We addressed his concerns about willful fraud. We have knowledge
and intent, which exempt people from the safe harbor.
Mr. SARBANES. This letter was written the morning of the markup and
was directed to the very provision in the bill, as brought out of the
committee. Senator Levitt wrote an earlier letter, which I quoted from
earlier. I do not know if the Senator was on the floor.
Mr. DOMENICI. He is not a Senator yet, is he? Arthur Levitt is not a
Senator.
Mr. SARBANES. Chairman Levitt.
Mr. DOMENICI. I wanted to correct the Record.
Mr. SARBANES. I am not sure who to apologize to about that.
Mr. DOMENICI. Just to clear up the Record.
Mr. SARBANES. I will not try to reach a conclusion, but I do lay out
a general apology for anyone who may have been offended by it. There
may be differing views of the matter.
But Chairman Levitt wrote an earlier letter, which I quoted from at
some length. At one point, it looked like maybe, if we were going to do
a statutory definition, we might be able to arrive at an appropriate
one. That did not work. The comment I just quoted is what he had to say
about the provision that is in the bill. This came to us on the morning
of the markup.
Now, the Dodd-Domenici bill--and I must say to my two colleagues that
had we stuck with your bill, the number of issues in dispute here on
the floor would have been fewer. There still would have been some.
Your bill also had in it the statute of limitations issue, and it had
an approach on safe harbor which I think was acceptable, which left us,
of course, with the joint and several, on which there is, I think, a
sharp difference in perception and philosophy. I recognize that. And
there is the aiding and abetting issue.
But the bill was introduced in the last Congress on March 24, 1994. I
believe I am correct. If I am in error about that, I hope the two
cosponsors will correct me, both of whom are here on the floor.
Now, that bill contained in it this charge to the SEC, which is in
the amendment that is at the desk, I say to my distinguished
colleagues. This amendment is your language, verbatim, from the bill as
you introduced it and the bill which a lot of Members cosponsored.
The SEC put out their concept release on safe harbor on October 13,
1994. Let me just read the summary of their concept release and notice
of hearing:

The Securities and Exchange Commission is soliciting
comment on current practices relating to disclosure of
forward-looking information. In particular, the Commission
seeks comment on whether the safe harbor provisions for
forward-looking statements set forth in rule 175 under the
Securities Act of 1933, rule 3b-6 under the Securities
Exchange Act of 1934, rule 103(a) under the Public Utility
Holding Company Act of 1935, and rule 0-11 under the Trust
Indenture Act of 1939 are effective in encouraging disclosure
of voluntary forward-looking information and protecting
investments, or, if not, should be revised, and if revised,
how?
The Commission also seeks comment on various changes to the
existing safe harbor provisions that have been suggested by
certain commentators. Finally, the Commission is announcing
that public hearings will be held beginning February 13,
1995, to consider these issues.

They went on to say:

Comments should be received on or before January 11, 1995.
Public hearings will begin at 10 a.m. on February 13, 1995.
Those who wish to testify at the hearings must notify the
Commission in writing of their intention to appear on or
before December 31, 1994.

So the Commission is moving to try to develop a safe harbor. I think
it moved relatively promptly after it saw this signal of, in effect,
charging them with this mandate.
The Commission received 150 responses on the safe harbor issue. That
is more witnesses, by far, more witnesses by far, than the Banking
Committee has heard from on all securities litigation issues. The
Banking Committee hearings with respect to the safe harbor were
eclipsed by the SEC.
The SEC held public hearings, 2 days in Washington, February 13 and
February 14. Then a day in California on February 16.
At those public hearings they had 62 witnesses in all. Venture
capitalists, law professors, corporate executives, plaintiff's lawyers,
defense lawyers, institutional investors.
Mr. President, these are the hearing records of the SEC with respect
to the matter of safe harbor for forward-looking statements.
Now, I submit to my colleagues that it is--I do not want to say sheer
folly, because at some point we may have to try to work out a
legislative standard--but it is certainly imprudent conduct, at the
least, to be trying to develop a standard here instead of allowing the
Securities and Exchange Commission to develop the standard, which was
recognized by the original sponsors of this legislation.
I assume they will argue, ``Well, the Commission had not done it, and
therefore we are going to go ahead and do

[[Page S 9120]]
it.'' The fact is, the Commission is working to do it and trying to
struggle through some very difficult and complex issues as the Chairman
of the Commission has stated.
He set out a number of questions which I read earlier, and I defy any
Member of this body to take those questions and go through them and
give me an easy answer to them. Not only do I defy the Members, I defy
their staffs to go through it, to go through those questions and work
through them--the ones that the Chairman outlined in his letter; of
course, there are many others, as he indicated--and give me an easy
response.
As the Chairman pointed out, ``A safe harbor must be balanced. It
should encourage more sound disclosure without encouraging either
omission of material information, or irresponsible and dishonest
information.''
Actually, Chairman Levitt and others recognize the need to have more
disclosure of information. That is a desirable objective. The question
is, what safeguards do we have to ensure that this disclosure of
information is not going to set people up to be exploited in fraudulent
schemes?
Chairman Levitt went on to say, ``A safe harbor must be thoughtful so
that it protects considered projections but never fraudulent ones. A
safe harbor must also be practical. It should be flexible enough to
accommodate legitimate investor protection concerns that may arise on
both sides of the issue. This is a complex issue and a complex
industry. It raises almost as many questions as one answers.''
He then details some of those questions, and then goes on to say,
``There are many more questions that have arisen in the course of the
Commission's exploration of how to design a safe harbor. We have issued
a concept release, received a large volume of comment letters and
response, and held 3 days of hearings, both in California and
Washington. In addition, I have met personally with most groups that
might conceivably have an interest in the subject. Corporate leaders,
investor groups, plaintiff's lawyers, defense lawyers, State and
Federal regulators, law professors, and even Federal judges. The one
thing I can state unequivocally, is that this subject eludes easy
answers.''
He then goes on to state his basic conclusion, which is, ``Given
these complexities and in light of the enormous amount of care,
thought, and work that the Commission has already invested in the
subject, my recommendation would be that you provide broad rulemaking
authority to the Commission to improve the safe harbor.''
Mr. President, that is what the amendment at the desk does. I urge
its adoption. I yield the floor.
Exhibit 1

U.S. Securities and

Exchange Commission,

Washington, DC, May 19, 1995.
Hon. Alfonse M. D'Amato,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: As Chairman of the Securities and
Exchange Commission I have no higher priority than to protect
American investors and ensure an efficient capital formation
process. I know personally just how deeply you share these
goals. In keeping with our common purpose, both the SEC and
the Congress are working to find an appropriate ``safe
harbor'' from the liability provisions of the federal
securities laws for projections and other forward-looking
statements made by public companies. Several pieces of
proposed legislation address the issue of the safe harbor and
the House-passed version, H.R. 1058, specifically defines
such a safe harbor.
Your committee is now considering securities litigation
reform legislation that will include a safe harbor provision.
Rather than simply repeat the Commission's request that
Congress await the outcome of our rulemaking deliberations
and thereby run the risk of missing an opportunity to provide
input for your own deliberations, I thought I would take this
opportunity to express my personal views about a legislative
approach to a safe harbor.
There is a need for a stronger safe harbor than currently
exists. The current rules have largely been a failure and I
share the disappointment of issuers that the rules have been
ineffective in affording protection for forward-looking
statements. Our capital markets are built on the foundation
of full and fair disclosure. Analysts are paid and investors
are rewarded for correctly assessing a company's prospects.
The more investors know and understand management's future
plans and views, the sounder the valuation is of the
company's securities and the more efficient the capital
allocation process. Yet, corporate America is hesitant to
disclose projections and other forward-looking information,
because of excessive vulnerability to lawsuits if predictions
ultimately are not realized.
As a businessman for most of my life, I know all too well
the punishing costs of meritless lawsuits--costs that are
ultimately paid by investors. Particularly galling are the
frivolous lawsuits that ignore the fact that a projection is
inherently uncertain even when made reasonably and in good
faith.
This is not to suggest that private litigation under the
federal securities laws is generally counterproductive. In
fact, private lawsuits are a necessary supplement to the
enforcement program of the Commission. We have neither the
resources nor the desire to replace private plaintiffs in
policing fraud; it makes more sense to let private forces
continue to play a key role in deterrence, than to vastly
expand the Commission's role. The relief obtained from
Commission disgorgement actions is no substitute for private
damage actions. Indeed, as government is downsized and
budgets are trimmed, the investor's ability to seek redress
directly is likely to increase in importance.
To achieve our common goal of encouraging enhanced sound
disclosure by reducing the threat of meritless litigation, we
must strike a reasonable balance. A carefully crafted safe
harbor protection from meritless private lawsuits should
encourage public companies to make additional forward-looking
disclosure that would benefit investors. At the same time, it
should not compromise the integrity of such information which
is vital to both investor protection and the efficiency of
the capital markets--the two goals of the federal securities
laws.
The safe harbor contained in H.R. 1058 is so broad and
inflexible that it may compromise investor protection and
market efficiency. It would, for example, protect companies
and individuals from private lawsuits even where the
information was purposefully fraudulent. This result would
have consequences not only for investors, but for the market
as well. There would likely be more disclosure, but would it
be better disclosure? Moreover, the vast majority of
companies whose public statements are published in good faith
and with due care could find the investing public skeptical
of their information.
I am concerned that H.R. 1058 appears to cover other
persons such as brokers. In the Prudential Securities case,
Prudential brokers intentionally made baseless statements
concerning expected yields solely to lure customers into
making what were otherwise extremely risky and unsuitable
investments. Pursuant to the Commission's settlement with
Prudential, the firm has paid compensation to its defrauded
customers of over $700 million. Do we really want to protect
such conduct from accountability to these defrauded
investors? In the past two years or so, the Commission has
brought eighteen enforcement cases involving the sale of more
than $200 million of interests in wireless cable partnerships
and limited liability companies. Most of these cases involved
fraudulent projections as to the returns investors could
expect from their investments. Promoters of these types of
ventures would be immune from private suits under H.R. 1058
as would those who promote blank check offerings, penny
stocks, and roll-ups. It should also address conflict of
interest problems that may arise in management buyouts and
changes in control of a company.
A safe harbor must be balanced--it should encourage more
sound disclosure without encouraging either omission of
material information or irresponsible and dishonest
information. A safe harbor must be thoughtful--so that it
protects considered
projections, but never fraudulent ones. A safe harbor must
also be practical--it should be flexible enough to
accommodate legitimate investor protection concerns that
may arise on both sides of the issue. This is a complex
issue in a complex industry, and it raises almost as many
questions as one answers: Should the safe harbor apply to
information required by Commission rule, including
predictive information contained in the financial
statements (e.g. pension liabilities and over-the-counter
derivatives)? Should it extend to oral statements? Should
there be a requirement that forward-looking information
that has become incorrect be updated if the company or its
insiders are buying or selling securities? Should the safe
harbor extend to disclosures made in connection with a
capital raising transaction on the same basis as more
routine disclosures as well? Are there categories of
transactions, such as partnership offerings or going
private transactions that should be subject to additional
conditions?
There are many more questions that have arisen in the
course of the Commission's exploration of how to design a
safe harbor. We have issued a concept release, received a
large volume of comment letters in response, and held three
days of hearings, both in California and Washington. In
addition, I have met personally with most groups that might
conceivably have an interest in the subject: corporate
leaders, investor groups, plaintiff's lawyers, defense
lawyers, state and Federal regulators, law professors, and
even Federal

[[Page S 9121]]
judges. The one thing I can state unequivocally is that this subject
eludes easy answers.
Given these complexities--and in light of the enormous
amount of care, thought, and work that the Commission has
already invested in the subject--my recommendation would be
that you provide broad rulemaking authority to the Commission
to improve the safe harbor. If you wish to provide more
specificity by legislation, I believe the provision must
address the investor protection concerns mentioned above. I
would support legislation that sets forth a basic safe harbor
containing four components: (1) protection from private
lawsuits for reasonable projections by public companies; (2)
a scienter standard other than recklessness should be used
for a safe harbor and appropriate procedural standards should
be enacted to discourage and easily terminate meritless
litigation; (3) ``projections'' would include voluntary
forward-looking statements with respect to a group of
subjects such as sales, revenues, net income (loss), earnings
per share, as well as the mandatory information required in
the Management's Discussion and Analysis; and (4) the
Commission would have the flexibility and authority to
include or exclude classes of disclosures, transactions, or
persons as experience teaches us lessons and as circumstances
warrant.
As we work to reform the current safe harbor rules of the
Commission, the greatest problem is anticipating the
unintended consequences of the changes that will be made in
the standards of liability. The answer appears to be an
approach that maintains flexibility in responding to problems
that may develop. As a regulatory agency that administers the
Federal securities laws, we are well situated to respond
promptly to any problems that may develop, if we are given
the statutory authority to do so. Indeed, one possibility we
are considering is a pilot safe harbor that would be reviewed
formally at the end of a two year period. What we have today
is unsatisfactory, but we think that, with your support, we
can expeditiously build a better model for tomorrow.
I am well aware of your tenacious commitment to the
individual Americans who are the backbone of our markets and
I have no doubt that you share our belief that the interests
of those investors must be held paramount. I look forward to
continuing to work with you on safe harbor and other issues
related to securities litigation reform.
Thank you for your consideration.
Sincerely,
Arthur Levitt.

Mr. BENNETT. Mr. President, I ask the Senator from Maryland to pay
attention closely to this since it concerns him directly.
I ask unanimous consent that the vote occur on or in relation to the
Sarbanes amendment No. 1477 at 2:15 today and that the time between the
beginning of the debate and 2:15 be equally divided in the usual form.
Mr. SARBANES. Reserving the right to object, first of all, could I
inquire of the Chair, what is the time situation?
The PRESIDING OFFICER. We began consideration of this amendment at
11:09.
Mr. SARBANES. So the Senator has used 30 minutes.
The PRESIDING OFFICER. Thirty-five.
Mr. SARBANES. Mr. President, I am agreeable to dividing the time
between now and 12:30 equally, and then having half an hour after
lunch, equally divided, and then going to a vote on the amendment.
Mr. BENNETT. Mr. President, I would like to confer with the chairman
of the Banking Committee before agreeing to that. I have no personal
objection to it. I would think we ought to bring Senator D'Amato into
the discussion.
Mr. SARBANES. Fine. I was not aware of this request until I just
heard it. I do think we should have some time after the caucus on the
debate--after the conference luncheon.
Mr. BENNETT. Mr. President, I propound a unanimous-consent request
that the time between now and 12:30 be equally divided on this issue,
and leave the unanimous-consent request as to the exact time of the
vote for a later request.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. BENNETT. Mr. President, I have heard the Senator from Maryland
talk at great length about all of the hearings and the comments and the
legal aspects of this.
Once again, I would like to talk about it from the standpoint of the
chief executive officer, struggling to maintain the investor confidence
in his company, and bring an appropriate return to investors, and talk
about how this safe harbor circumstance would actually work.
A chief executive officer, having been one, sees dozens, maybe
hundreds, of memorandum, every week. He engages in any number of
conversations with individuals in the company in any given week about
any particular subject. That is the fact against which I want to paint
the picture of how this thing works.
We have been having this discussion about weakening a standard, safe
harbor; where should the threshold be? I think the issue comes down, do
we want a safe harbor or not? If we want one, it has to be safe, or we
should not go through the exercise.
Now, the opponents have suggested that the safe harbor in the bill
is, in fact, a pirate's cove.
Let me list, Mr. President, the pirates who are not welcome in this
cove. That is, the pirates who would be denied the right to sail into
this particular harbor, by the bill.
A blank check company, a blind investment pool that does not tell
anybody how they invest, a penny stock company, a rollup transaction, a
going private transaction. Not to imply these people are pirates, but
they could not get into the cove. A mutual fund. It is very significant
that that is on the list because that is where most of the seniors
invest their money. They do not go out and individually pick stocks
unless they have some experience at that. They buy a mutual fund. A
mutual fund cannot come into this particular harbor. A limited
partnership. A tender officer. Anyone filing certain ownership reports
with the SEC. Or information in the financial statements is excluded.
And of course any company that has recently committed a violation of
the antifraud provisions of the securities laws cannot sail into the
harbor.
Those kinds of restrictions are already out there. So the safe harbor
is not for the pirates. It is for the people who do not fall into those
categories.
Now, for those in the harbor, they have some requirements written
into the bill. They must clearly state that any projection they are
making is, in fact, a statement about the future, and they must clearly
state, here in the words of the bill, ``The risk that actual results
may differ materially from such projections, states, or descriptions.''
In other words, there is not a risk that we might be off a day or
two. There is not a risk that we might be off a penny or two. There is
a risk that the actual results may differ materially from the
projections or estimates. Then, of course, we have the language that
the bill does not permit companies to take advantage of the safe harbor
if they act with ``the purpose and actual intent of misleading
investors.'' This is the language of the bill that we have before us.
Those are the requirements in this particular harbor; those that
prevent people from coming in in the first place and those who govern
the people who are there.
Let me explain why it is important that we not further lower the
threshold that we have established with the words ``purpose'' and
``actual intent of misleading investors.'' Here is how things work in
an actual company, as I say speaking from experience as a chief
executive officer. You gather all of your people around you. You look
at the memos and the other reports that come out, and you inevitably
find that there is a difference of opinion about just about everything
going on in your company. Let us talk about a new product.
Some of your people say to you, ``Oh. Our product, product X, will be
available right on schedule in August. You can depend on it. You can
take it to the bank.'' Others will say, ``No. We are a little worried.
We may not make it in August. We have this problem. We have that
problem. Our supplier may not come through. We may miss the target
date.'' You are the chief executive officer. You have to decide. You
have a meeting coming up with a group of security analysts, and they
are going to ask you point blank, ``When will product X be on the
market?'' You want to give them the very best information you can.
So you sift through all of this and ultimately you have to make a
decision. And you decide based on the track record of the people who
are advising you that you think product X is a pretty good bet to be on
line in August just as you anticipated it would. You go before the
analyst meeting. And they say

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to you, ``When will product X be available?'' You say, ``Well, it is my
best judgment that it will be available in August. I have to qualify
that by saying that is my estimate. I tell you there are some people in
the company who do not think it will be available in August. But the
best I can tell, my guess, my prediction, is that we will deliver
product X in August.'' He can maybe put some other caveats in. You
know, this is very sophisticated. The analysts do not hear any of that.
They are like pollsters. ``Who is ahead? Who is going to win the
election?'' ``No. We want to know what your numbers say right now.''
And they do not listen to the caveats. The CEO can put in all the
caveats he wants. But they are going to walk away saying, ``He
predicted that is going to come out in August.''
Now we get to August. What happens? Any one of a number of things
happens. Frankly, they do not have to be the kinds of things projected
in the memo that the division manager who said it might not happen in
August included. There could be a hurricane in Florida where one of
your suppliers is and the supplier cannot provide the parts that you
were depending on. There was no way you could predict that. There are
any number of things that could have happened. But you get to August,
and the company puts out a press release saying product X has been
delayed and will not be introduced until sometime later in the fall.
Bang--the analysts pound the stock. There is wild speculation. I have
seen those. We have all seen those. They go through the marketplace--
all kinds of rumors, the company has serious problems, their management
is in difficulty, so and so is going to get fired, the stock drops 10
percent, and within a week strike suits are filed naming the company,
its chief executive officer, and a bunch of other officers for
conspiring to put out false information about product X and misleading
the marketplace.
Product X comes out in September. It is a great hit. The stock price
recovers. Presumably nobody is hurt. But, frankly, all of that is
irrelevant because the legal machinery is now in motion and they do not
care what is happening to the product or the company. Whether they want
to or not, the top management of that company must now focus on an
issue that is irrelevant to the management of the business; and, if I
may, Mr. President, to the detriment of the investors in that company
because the investors in that company want top management focusing on
sales. They want top management focusing on efficiency. They want top
management focusing on cutting costs and opening new markets. But
instead they have a situation where in the name of the investors the
legal machinery is forcing the top management of that company to focus
on something totally unproductive--coming up with a defense against the
charges that they mislead the public.
Discovery: That great word in the legal lexicon; discovery starts,
and it goes to every piece of paper that has to do with product X, and
every memorandum that may have crossed the CEO's desk. And they find
the memo from the fellow who says, ``I don't think we are going to be
ready in August.'' And, bingo, we have a smoking gun. No reference is
made to the other opinions now. In court the reference is all going to
hammer in on this one fateful memo, and, ``Mr. CEO, did you read this
memo?'' If, he says yes, he not only has knowledge that product X was
not going to come in, he has actual knowledge, not just imputed
knowledge, actual knowledge. He admits he read the memo. Nail him to
the wall.
That is what happens if he does not have the safe harbor that we have
written into this act. Let us assume that this company is not one of
those that is kept out of the harbor, the list I read in the beginning.
It is one of those that is allowed into the harbor and without the
harbor that is what happens.
Now suppose we have the reckless standard that people have argued
for. This would be a very easy standard for a plaintiff's lawyer to
meet in the circumstance I have described. Arguably any projection
about the future is reckless. ``You do not know, Mr. CEO, that the
future is going to produce this product in August. It was reckless of
you to say that you would have it in August. You may have believed it
but it was a reckless statement.'' There is no protection for the CEO
in this circumstance with the term ``reckless.'' No. He needs the safe
harbor of the bill.
And the question is how safe should that harbor be? Well, if we had
the simple knowledge standard that the SEC suggests, the question is,
``Well, did you know that this product would not meet its date in
August? Well, here is a memo in the company. It came over your desk.
You read it. If you did not know, you should have known.'' Simple
knowledge can be twisted in the hands of a careful lawyer, and the CEO
has a very difficult time explaining this circumstance.
So a knowledge standard, even an actual knowledge standard, is not
going to be a safe harbor. It is not going to protect the CEO. And
again the point, Mr. President, it is not going to be for the benefit
of the investors because the CEO is not going to be able to be doing
what he is hired by the investors to do--run the company. He is going
to be worrying about this particular problem.
This is the kind of thing that drives companies to settle out of
court and to say, ``Well, we really did not do anything wrong but in
order to get back to the business of making products and out of the
business of prosecuting lawsuits, we will settle even though we are
pretty sure we did not do anything wrong.''
No. What we need to have is what we have in this bill, a safe harbor
that says not only did the CEO have knowledge but he acted with the
purpose and actual intent of misleading investors. Now that no one can
tolerate. That clearly must not be allowed. But it must be the purpose
and actual intent of misleading investors before the CEO is driven out
of the harbor.
Why actual intent? Because without it intent can be implied in a
number of circumstances. ``You saw this memo, the very fact that you
decided to ignore it in your presentation to the security analyst, Mr.
CEO, implies that you intended to deceive them.'' No. The standard must
be higher than that. You must prove that he had the actual intent, that
he had the purpose of deceiving investors before you drag him into that
area.
Is this a high threshold? I think it is an appropriate threshold
because it fits the reality of the circumstances, and it prevents
plaintiffs from accusing companies and officers of committing fraud
simply because documents of differing opinions exist somewhere in the
file. You have to go beyond that. You have to prove actual intent.
If I may stray into waters that I probably should not, since I have
not gone to law school, but I have had some experience in this area, it
is a little like the standards that we apply in the first amendment.
If a newspaper inadvertently prints something that is inaccurate,
they cannot be held for libel unless it is proven that they acted with
malice, with actual intent, if you will, to harm the reputation of the
individual. Thus free speech is allowed to go forward unimpeded,
however damaging it is to the individual involved. Having been the
individual involved in some circumstances, I know how hard sometimes
that is to accept.
But that is the standard we have created in that circumstance, and I
think the language in this bill holds that same kind of standard.
Now, Mr. President, I come to the final question, which is what I
think we should focus on here. Whom are we trying to protect? With all
of this legislation, whom do we seek to benefit? What is the purpose of
all of this? Are we trying to protect CEO's? Are we trying to protect
lawyers? Are we trying to protect security analysts and newspapers that
report things? Whom are we trying to protect at base by all of this
legislation? The answer, Mr. President, is the investor. The purpose of
this legislation is to protect the investor and his or her investment.
Look at every issue that we are talking about here through that
particular lens. Is it good for the investor or is it bad for the
investor? Is it good for the investor to have the CEO feel constrained
about talking about the prospects of his company? Is it good for the
investor to have the CEO being hedged about by lawyers who tell him
when he goes before the security analyst: You cannot talk about this;
you cannot talk about that; you cannot make any speculation of any kind
lest you run

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the risk of exposing yourself to these kinds of suits later on.
I submit that it is good for the investor to have the CEO be as open
and candid as he possibly can be and to say to the security analyst:
Yes, it is my judgment that product X will be on the market in August.
Because what if he is right and product X is on the market in August,
and he did not tell anybody that and they did not have the opportunity
to buy the stock in the expectation that that would be the case?
Is it good for the investors to have him say: I have differences of
opinion within the company; there are some people who do not think it
will be.
Yes, it is good for the investors to have him be as candid and open
as possible. And the only way you can get that kind of candid, open
discussion is if you have a safe harbor in which that honest CEO can
sail knowing that he will be protected from the waves and whims of the
shark suits that are out there.
Is it good for the investor or is it bad for the investor to have the
CEO's attention diverted into lawsuits that have nothing whatever to do
with the management of the company? I submit it is bad for the investor
to have the CEO concentrating on things other than the things for which
he was hired. And ultimately, is it good for the investor or is it bad
for the investor to have the company paying out millions of dollars in
legal fees on issues that are tangential to the company's performance?
I submit it is bad for the investor, and it becomes doubly bad for
the investor when, as we have seen over and over again in the debate on
this bill, the highest percentage of those fees and fines being paid
out by the investor--those are the investor's moneys; those are not the
CEO's moneys. When you say those are the company's moneys, there is
only one source of company money, and that is the investor. That is the
investor's money going out, with the vast bulk of it going out to the
plaintiff's attorneys and not the investor. They say: Oh, look, we are
protecting the investor. Look at the money that is going back to the
investor.
No, the money is going back to the lawyer, and in the meantime all of
the money and attention and activity on behalf of the management of the
company has been focusing on this suit.
That is why they settle, Mr. President. They settle because it is
good for the investors and for them to get this thing behind them. But
it would be better for the investors if honest executives who have no
intent and no purpose of deceiving have a safe harbor from which they
can explain to the public the things that are going on in the company
and make statements about the future fully hedged about with
protections that say these are speculations so that the investor then
has information from which to make his or her own intelligent
decisions.
So, Mr. President, I oppose the amendment by the distinguished
Senator from Maryland. I enjoy serving with him on the Banking
Committee. I enjoy the intellect and I enjoy the thoroughness with
which he approaches these decisions, and I hope he recognizes it is not
an act of disrespect on my part when I say I disagree with him on this
amendment and intend to vote against it and urge my colleagues to do
the same.
Now, Mr. President, I ask unanimous consent that at 2:15 p.m. today,
Senator Kassebaum be recognized in morning business for not to exceed 5
minutes, and that at the hour of 2:20 p.m. there be 40 minutes of
debate on the Sarbanes amendment No. 1477, equally divided in the usual
form, with the vote occurring on or in relation to the Sarbanes
amendment at 3 p.m. today, with no second-degree amendments in order to
the amendment; further, that following the disposition of the Sarbanes
amendment No. 1477, Senator Sarbanes be recognized to offer an
amendment regarding safe harbor.
Mr. SARBANES. Reserving the right to object, Mr. President, I have
indicated a desire to have an up-or-down vote on the amendment. Does
the Senator have any problem with that?
Mr. BENNETT. Mr. President, I have no problem with that, but I cannot
bind other Senators who may wish to make a motion to table.
Mr. President, I would have no objection to that.
Mr. SARBANES. So with that amendment to the unanimous consent
request, I have no objection.
Mr. BENNETT. Yes, on the Sarbanes amendment there would be no motion
to table.
Mr. SARBANES. Right.
The PRESIDING OFFICER (Mr. Ashcroft). Without objection, it is so
ordered.
Mr. DODD addressed the Chair.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Mr. President, I thank the Chair.
Let me just, if I can, make a couple of observations here about this
amendment and the history----
The PRESIDING OFFICER. Who yields time?
Mr. DODD. How much time remains?
The PRESIDING OFFICER. All of the time remaining is under the control
of the Senator from Maryland.
Mr. SARBANES. Mr. President, I do not think that is correct, in all
fairness to my colleague. I wish to be fair. I think the agreement was
we would divide equally the time between 11:10, as I understood it,
when we went----
Mr. BENNETT. Mr. President, I ask unanimous consent that the previous
unanimous-consent be amended to be as the Senator from Maryland
remembers it.
Mr. SARBANES. I thought that is what it was.
It would not be fair to divide the time from 11:45 equally since the
time before 11:45 was consumed, not quite but primarily, on one side.
That is not really fair to my colleagues, and I recognize that. I think
if we divided it--was it from 11:15 on?
Mr. BENNETT. It was 11:09.
Mr. SARBANES. If that time were divided equally, what would the time
situation now be?
The PRESIDING OFFICER. The Senator from Maryland would have 10
minutes, and the Senator from Utah would have 10 minutes.
Mr. BENNETT. I ask unanimous consent that that be the state of the
time from this time until we break for lunch.
The PRESIDING OFFICER. Without objection, it is so ordered.
The PRESIDING OFFICER. Who yields time?
Mr. SARBANES. And that would mean from the time we went on this
amendment, all time would have been equally divided; is that correct?
The PRESIDING OFFICER. That is correct.
Mr. SARBANES. Yes.
Mr. BENNETT. Mr. President, I yield such time as he may consume to
the Senator from Connecticut.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. I thank my colleague from Utah. I yield myself 5 minutes.
If the Chair would remind me at the end of 5 minutes so as not to take
too much time on this because a lot has been said already about it.
Mr. President, let me make a couple of observations to underscore the
point that my colleague from Utah has already addressed. Some of my
colleagues have said that the safe harbor provisions of S. 240 do not
go as far as some would suggest. First, our provisions of safe harbor
limit significantly the circumstances in which the safe harbor applies.
I think it is very important to lay out as clearly as I can here,
what is included and what is excluded.
The safe harbor provisions of S. 240 apply only--only--to statements
made by issuers or outside reviewers retained by issuers. Statements by
stockbrokers are not protected at all under S. 240's safe harbor.
Certain issuers are excluded. Not all issuers are included; some are
excluded from safe harbor, including anyone who has violated securities
laws within the prior 3 years. Penny stock companies, blank check
companies, investment companies, all companies, Mr. President, are
excluded from the safe harbor when they engage in certain types of
transactions such as IPO's, initial public offerings. The tender
offers, rollup transactions, all of those are excluded. So this is a
very narrow provision here. All information contained in historical
financial statements is excluded as well.
Second, Mr. President, the safe harbor applies only to projections or
estimates that are identified--they must be identified--as forward
looking statements and that refer ``clearly and

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proximately'' to ``the risk that actual results may differ
materially''--that is the language, ``the risk that actual results may
differ materially''--from the projection or estimate.
That goes right to the heart of what the Senator from Utah was
talking about. This is a very narrow area we are talking about, and the
point is to create a safe harbor. Why do you create a safe harbor?
Because we are trying to solicit from these issuers as much information
as possible so that a potential buyer can have as much awareness as
possible about where this stock or where this company is likely to go.
It is in the interest of the investor that we get as much of that
information as possible.
There is no requirement in law that an issuer even put out forward
looking statements. In fact, what has happened lately is a lot of them
have retreated from that very advantageous idea because of the very
situation we find ourselves in today. So it is in our interest to
solicit this kind of information, but in doing so, we say, ``Look, we
want you to share as much information about where you think this
company is going, where this stock is going so that investors will make
intelligent decisions.''
In doing so, if you do anything--and we say very clearly in the bill
if you do anything that knowingly with purpose or intent of misleading
investors, on page 121 of this bill, we now take out the word
``expectation''--knowingly made with the purpose or intent of
misleading investors, then you are excluded. Not only excluded, you are
subject to the penalties of the law.
So anyone who knowingly with intent to mislead in those forward
looking statements is subject to the provisions of the law that apply
in this piece of legislation before us. But the idea is to get that
information out, and it seems to me that is in everyone's interest.
You have to strike that balance. There are those who are opposed to
safe harbor. I disagree with them; I understand it. I do not think
anyone who has really looked at the larger issues would agree with it.
So we have attempted with this legislation to craft the safe harbor
provisions.
My colleague from Maryland has correctly pointed out that in the
earlier bill we introduced some 17 months ago, we asked the SEC to try
to develop a regulatory scheme to deal with safe harbor. I must say, I
have heard now for the last 2 days a lot of these kudos and praise over
the bill that we introduced last March. I would very much have liked to
have passed a bill in the previous Congress in this area, but I could
not get that kind of support.
I ask unanimous consent that I may be able to proceed for 5
additional minutes.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. DODD. Mr. President, I wish we had some of that support. The very
people today who find the previous bill so attractive, I must say
candidly, were not exactly racing to support the legislation when it
potentially could have been adopted in the last Congress.
Putting that aside, let me also point out to my colleagues, having
made the offer 17 months ago to have the SEC move, frankly, the SEC has
not moved, and I am convinced today they would not move on this.
There is ample evidence to indicate that that suspicion of mine is
correct. In a June 22 edition of the Bureau of National Affairs
publication, which follows legislation dealing with financial
institutions, under securities, the headline is, ``SEC safe harbor
initiative may be overtaken by litigation reform.'' Following are
several pertinent paragraphs I think support what I am saying:

Although one agency official stated in late March that SEC
action in its October concept release was imminent, that has
not materialized. Rather, the SEC remains at the concept-
release stage on the initiative. Its inaction during the 8
months since release was issued has been attributed by some
observers to some differences of opinion within the
Commission on various issues connected with the initiative.

Another Commissioner, Richard Roberts, told BNA June 21 that there
are bona fide reasons that the Commission did not act quickly on the
concept release, including questions about the agency's authority in
the area of forward looking information.
Again, we just were not getting the action in this area.
It is a complex area. The Senator from Maryland is absolutely
correct. Anyone who suggests otherwise has not spent any time looking
at this. But I will argue, despite the fact that our original bill
tried to get the SEC to come forward in this area--in fact they have
not--that there is a good case to be made that leaving these matters
just up to the regulatory bodies or, as we have seen in other cases
dealing with aiding and abetting, for instance, to the courts, is not a
wise way to go ultimately.
In many matters here, we ought to be trying to establish through the
legislative process what our intent is. So while I welcomed in the past
the SEC's efforts in this regard, that was not forthcoming. Now it is
being suggested by those who opposed the bill last year that I ought to
go back to my earlier position on this matter, even though the SEC did
not move in this area, given the 17 months they had an opportunity to
do so.
Letters are being bandied about. The letter of May 19 from the
Chairman of the SEC certainly recognizes that there is a need to
strengthen the safe harbor provisions. In fact, in paragraph 3 of
Chairman Levitt's letter on May 19, he says:

There is a need for a stronger safe harbor than currently
exists. The current rules have largely been a failure, and I
share the disappointment of issuers that the rules have been
ineffective in affording protection for forward-looking
statements. Our capital markets are built on the foundation
of full and fair disclosure. Analysts are paid and investors
are rewarded for correctly assessing a company's prospects.
The more investors know and understand management's future
plans and views, the sounder the valuation is of the
company's securities and the more efficient the capital
allocation process. Yet, corporate America is hesitant to
disclose projections and other forward-looking information
because of excessive vulnerability to lawsuits if predictions
ultimately are not realized.
It goes on to talk about how he was a businessman all his life, and
so forth, and lays out some specific areas and talks on page 2 of this
letter, in the last paragraph:

A safe harbor must be balanced, should encourage more sound
disclosure, without encouraging either omission or material
information or irresponsible and dishonest information. Safe
harbor must be thoughtful so that it protects considered
projections, but never fraudulent ones.

I invite my colleagues to look at the language on page 121 of our
bill, where we specifically lay out, No. 1, knowingly--talking about
projections--knowingly made with the purpose and actual intent of
misleading investors.
So we clearly there are saying if you make a knowingly fraudulent
statement, a misleading--not even fraudulent but misleading statement--
a knowingly misleading statement, that you are not protected by the
safe harbor provisions. Is this perfect? I cannot say that it is. But I
will say it conforms to what the Chairman of the SEC says, that the
present situation is not working very well. We know when we see what is
happening with the forward-looking statement; they are being contracted
and contracted and contracted. That is the practical effect of the
environment we live in today. That does not serve the investor
community well, Mr. President.
With those reasons, with all due respect and great admiration for my
colleague from Maryland, throwing this back into the court of the SEC I
do not think is going to advance our cause in dealing with clear reform
in the area of safe harbor that is needed.
I urge my colleagues to reject the amendment offered by the Senator
from Maryland.
Mr. SARBANES. Mr. President, I listened very carefully to both of my
colleagues and I would like to, very quickly, address some of the
points they made. I think the Senator from Connecticut is being
extremely unfair to the SEC in terms of saying that they did not pick
up on this. They have picked up on it. Whether they should have picked
up sooner is the question. But they did issue a period for comment, and
that was in October 1994, and they received comments--over 150. They
then held hearings in the first part of this year. The Chairman, I
think, of the SEC, as the Senator quoted him in the letter, has
indicated that he wants to do something about safe harbor. The Senator
quoted him correctly.

[[Page S 9125]]

Mr. President, I ask unanimous consent that a letter from Chairman
Levitt, dated May 25, 1995, be printed in the Record at the end of my
statement.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit 1.)
Mr. SARBANES. The real question here is not whether we should improve
safe harbor. The question is, who is going to try to do it? Where is
the best place to do that? This amendment says that the best place to
do that is at the SEC, and that this body is not equipped to try to
work through this complex issue; and if it tries to do it, the law of
unintended consequences is going to bring a lot of potentially
devastating developments.
The proposal to have it done at the SEC is, of course, the proposal
which the Senators from Connecticut and New Mexico had when they first
introduced the bill--the bill which Members cosponsored. Members who
cosponsored this legislation were cosponsoring a provision with respect
to safe harbor, which is exactly the amendment at the desk. That
provision was subsequently changed in the committee. That is not the
provision that was in the legislation which Members were signing onto
as cosponsors.
Chairman Levitt has warned us of the danger that the provision in the
bill will protect fraud. Safe harbor is a grant of immunity, an
exemption from any liability. Safe harbor, in effect, says that you are
immunized altogether. So it is very important to properly define the
safe harbor. I have been interested in Members--first of all, the
chairman amended the statutory provision in the bill on safe harbor
shortly a while ago here on the floor, recognizing that this effort to
write this statutory standard was deficient, I assume.
My colleague from Connecticut is citing provisions in the bill where
certain activities cannot get safe harbor. He specifically precludes
them from doing that and he went through some of them. All of those are
things that developed. We got concerned about penny stocks when they
were used as an abuse. Who knows what the next abuse is going to be
down the road? If the SEC does this, they are in the business of being
able to adjust to the abuses as they come. The SEC can, in effect,
modify the framework. These listings of exceptions to the safe harbor
standard in the rule are a demonstration, in my judgment, of the
inappropriateness of trying to write the standard here, as opposed to
letting it be done by the regulatory authorities.
The forward-looking statements in this bill are broadly defined. They
include both oral and written statements. Now, we want a lot of the
information, but it is the kind of information investors use in
deciding whether to purchase a particular stock.
Now, the Chairman of the SEC himself has said they want--in fact, the
Senator quoted one member of the SEC who said maybe they were not
moving as quickly because they had some doubts about their statutory
authority to do so. Of course, his original proposal would have
provided that statutory authority. So if that is an inhibition, the
amendment eliminates that and any doubts with respect to the SEC's
ability to move ahead. The Commission received 150 comment letters in
response to the release. It has worked closely with a vast
representation of the industry. In fact, when Chairman Levitt testified
in April of this year, he said:

From the Commission's perspective, an appropriate
legislative approach is contained in the Domenici-Dodd bill.
This provision would allow the Commission to complete its
rulemaking proceeding and take appropriate action after its
evaluation of the extensive comments and testimony already
received. Based on the Commission's experience with this
issue to date, we believe there is considerable value in
proceeding with rulemaking which can more efficiently be
administered, interpreted and, if needed, modified than can
legislation.

The North American Securities Administrators Association, the
Government Finance Officers Association, the National League of Cities,
and nine other groups, in a letter to the committee, on the 23d of May,
expressed the same view, saying:

We believe the more appropriate response is SEC rulemaking
in this area.

Unfortunately, the committee print substitute to S. 240, unlike the
bill as introduced, abandoned this approach in favor of trying to
formulate a statutory safe harbor.
This is contrary to all the advice we are receiving from the
regulators. Everybody gets up here and says this interest group wants
this and this interest group wants that. I recognize that. I have been
the first to state that you have these interest groups clashing over
this thing. But what are the public interest officials telling us--
those whose responsibility it is to serve the public interest, not one
or another of these economic interest groups--what are they telling us?
Of course, what they are telling us is that the approach in my
amendment is the approach to follow.
The standard that is in the legislation, I think, is going to allow
fraud to occur. In fact, Chairman Levitt, on the morning of the markup,
wrote about the language that is in the bill before us. He stressed
that this language failed to adhere to his belief that a safe harbor
should never protect fraudulent statements. Let me quote him:

I continue to have serious concerns about the safe harbor
fraud exclusion as it relates to the stringent standard of
proof that must be satisfied before a private plaintiff can
prevail. As Chairman of the Securities and Exchange
Commission, I cannot embrace proposals which allow willful
fraud to receive the benefit of safe harbor protection.

He had seen the language. That is a comment on the very language that
is in this bill. He said:

. . . I cannot embrace proposals which allow willful fraud
to receive the benefit of safe harbor protection.

Others have criticized this provision as well. The Government Finance
Officers Association, representing more than 13,000 State and local
government financial officials, county treasurers, city managers, and
so forth, wrote on the safe harbor provision in the bill:

We believe this opens a major loophole through which
wrongdoers could escape liability while fraud victims would
be denied recovery.

I say to my colleagues, no one is arguing here that we do not need to
do something to improve safe harbor. The issue framed by this amendment
is, who should do it? I submit, as I indicated earlier, in an issue of
this complexity, it is better that it be done by the Securities and
Exchange Commission.
The North American Securities Administrators Association represents
50 State securities regulators. They said:

We believe this opens a major loophole through which
wrongdoers could escape liability while fraud victims would
be denied recovery.

These are on the front line of defense against securities fraud. They
are really the regulators closest to the individual investors. They
call the provision in this bill an overly broad safe harbor, making it
extremely difficult to sue when misleading information causes investors
to suffer losses.
AARP has also written calling for replacement of the safe harbor
provision, with a directive to the SEC to issue a rule which structures
a safe harbor that protects both legitimate business and investors.
Given the broad definition in this legislation of forward-looking
statements, discussed above, it is crucial that the legislation not
shield such statements when they are false. Encouraging reasonable
disclosures is one thing. Allowing fraudulent projections is another.
Actually, that kind of safe harbor would hurt investors trying to make
intelligent investment decisions and penalize companies trying to
communicate honestly with their shareholders. It runs counter to the
whole premise of our Federal securities laws, which has helped to give
us strong markets. The fraud must be deterred, and the fraud must be
punished when it occurs.
Mr. President, I think it is important that safe harbor not protect
fraudulent statements and, in my judgment, the best way to address this
issue is to, in effect, use the approach that was initially in the
legislation charging the SEC with developing a safe harbor regulation--
a process now engaged in.
These are the transcripts of the hearings they held on the issue.
They received over 150 comment statements and letters, and they have
engaged in an extensive discussion with a whole range of people who
have acquaintance and knowledge in this area.
I very much hope the body will adopt the amendment.

[[Page S 9126]]

Exhibit 1

U.S. Securities and

Exchange Commission,

Washington, DC, May 25, 1995.
Hon. Alfonse M. D'Amato,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: I understand that this morning you and
the members of the Banking Committee will be considering S.
240 and that you will be offering an amendment in the nature
of a substitute. While I have not had the opportunity to
analyze fully the May 24th manager's amendment to the
Committee print, I appreciate your leadership and efforts to
address the concerns of the Commission in drafting your
alternative.
The safe harbor provision in the amendment, in my opinion,
is preferable to the blanket approach of H.R. 1058. It
addresses a number of the concerns pertaining to the size of
the safe harbor and the exclusions from the safe harbor. The
Committee staff appears to be genuinely interested in the
Commission's views of its draft legislation and has attempted
to be responsive. I was pleased to see the latest draft
deleted the requirement that a plaintiff must read and
actually rely upon the misrepresentation before a claim is
actionable. Your attempt to tailor the breadth of the safe
harbor of the Securities Exchange Act of 1934 to the more
narrow safe harbor of the Securities Act of 1933 was
encouraging. However, I continue to believe that the
definition should be further narrowed to parallel the items
contained in my letter of May 19th. Moreover, there remain a
number of troubling issues.
I continue to have serious concerns about the safe harbor
fraud exclusion as it relates to the stringent standard of
proof that must be satisfied before a private plaintiff can
prevail. As Chairman of the Securities and Exchange
Commission, I cannot embrace proposals which allow willful
fraud to receive the benefit of safe harbor protection. The
scienter standard in the amendment may be so high as to
preclude all but the most obvious frauds. I believe that
there should be a direct relationship between the level of
scienter required to prove fraud and the types of statements
protected by the safe harbor. My letter of May 19th indicated
the discreet list of subjects that are suitable for safe
harbor protection, assuming a simple ``knowing'' standard.
Accordingly, if the Committee is unwilling to lower the
proposed scienter level to a simple ``knowing'' standard, the
safe harbor should not protect forward-looking statements
contained in the management's discussion and analysis
section. This would be better left to Commission rulemaking.
In addition to my concerns about the safe harbor, there is
no complete resolution of two important issues for the
Commission. First, there is no extension of the statute of
limitations for private fraud actions from three to five
years. Second, the draft bill does not fully restore the
aiding and abetting liability eliminated in the Supreme
Court's Central Bank of Denver opinion. I am encouraged by
the Committee's willingness to restore partially the
Commission's ability to prosecute those who aid and abet
fraud; however, a more complete solution is preferable.
I also wish to call you attention to a potential problem
with the provision relating to Rule 11 of the Federal Rules
of Civil Procedure. I worry that the standard employed in
your draft may have the unintended effect of imposing a
``loser pays'' scheme. The greater the discretion afforded
the court, the less likely this unintended consequence may
appear.
I would like to express my particular gratitude for the
courtesy and openness displayed by the Committee and its
staff. I hope we will continue to work together to improve
the bill so as to reduce costly litigation without
compromising essential investor protections.
Thank you for your consideration.
Sincerely,
Arthur Levitt.

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