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104th Congress                                             Rept. 104-50
                        HOUSE OF REPRESENTATIVES

 1st Session                                                     Part 1
_______________________________________________________________________


 
                 COMMON SENSE LEGAL REFORMS ACT OF 1995

_______________________________________________________________________


               February 24, 1995.--Ordered to be printed

                                _______


  Mr. Bliley, from the Committee on Commerce, submitted the following

                              R E P O R T

                             together with

                MINORITY AND ADDITIONAL DISSENTING VIEWS

                         [To accompany H.R. 10]

      [Including cost estimate of the Congressional Budget Office]
  The Committee on Commerce, to whom was referred title II of 
the bill (H.R. 10) to reform the Federal civil justice system; 
to reform product liability law, having considered the same, 
report favorably thereon with an amendment and recommend that 
the bill as amended do pass.
                                CONTENTS

                                                                   Page
The Amendment....................................................     2
Purpose and Summary..............................................    14
Background and Need for the Legislation..........................    14
Subcommittee Hearings............................................    20
Committee Consideration..........................................    21
Roll Call Votes..................................................    22
Committee Oversight Findings.....................................    34
Committee on Government Oversight and Reform.....................    34
Committee Cost Estimate..........................................    34
Congressional Budget Office Estimate.............................    34
Inflationary Impact Statement....................................    36
Section-by-Section Analysis......................................    36
Agency Views.....................................................    42
Changes In Existing Laws Made By the Bill........................    46
Minority Views...................................................    57
Additional Dissenting Views......................................    68

    The amendment is as follows:
    Page 18, beginning on line 5, strike all of title II and 
insert the following:
           TITLE II--REFORM OF PRIVATE SECURITIES LITIGATION

SEC. 201. SHORT TITLE; TABLE OF CONTENTS.

  (a) Short Title.--This title may be cited as the ``Securities 
Litigation Reform Act''.
  (b) Table of Contents.--The table of contents for this title 
is as follows:
            TITLE II--REFORM OF PRIVATE SECURITIES LITIGATION

Sec. 201.  Short title; table of contents.
Sec. 202. Prevention of lawyer-driven litigation.
  (a) Plaintiff steering committees to ensure client control of lawsuits
    ``Sec. 36. Class action steering committees.
      ``(a) Class action steering committee.
      ``(b) Membership of plaintiff steering committee.
      ``(c) Functions of plaintiff steering committee.
      ``(d) Immunity from civil liability; removal.
      ``(e) Effect on other law.''
  (b) Prohibition on attorneys' fees paid from Commission disgorgement 
          funds.
Sec. 203. Prevention of abusive practices that foment litigation.
  (a) Additional provisions applicable to private actions.
    ``Sec. 20B. Procedures applicable to private actions.
      ``(a) Elimination of bonus payments to named plaintiffs in class 
              actions.
      ``(b) Restrictions on professional plaintiffs.
      ``(c) Awards of fees and expenses.
      ``(d) Prevention of abusive conflicts of interest.
      ``(e) Disclosure of settlement terms to class members.
      ``(f) Encouragement of finality in settlement discharges.
      ``(g) Contribution from non-parties in interests of fairness.
      ``(h) Defendant's right to written interrogatories establishing 
              scienter.''
  (b) Prohibition of referral fees that foment litigation.
Sec. 204. Prevention of ``fishing expedition'' lawsuits.
    ``Sec. 10A. Requirements for securities fraud actions.
      ``(a) Scienter.
      ``(b) Requirement for explicit pleading of scienter.
      ``(c) Dismissal for failure to meet pleading requirements; stay of 
              discovery; summary judgment.
      ``(d) Reliance and causation.
      ``(e) Allocation of liability.
      ``(f) Damages.''
Sec. 205. Establishment of ``safe harbor'' for predictive Statements.
    ``Sec. 37. Application of safe harbor for forward-looking 
              Statements.
      ``(a) Safe harbor defined.
      ``(b) Automatic protective order staying discovery; expedited 
              procedure.
      ``(c) Regulatory authority.''
Sec. 206. Rule of construction.
Sec. 207. Effective date.

SEC. 202. PREVENTION OF LAWYER-DRIVEN LITIGATION.

  (a) Plaintiff Steering Committees To Ensure Client Control of 
Lawsuits.--The Securities Exchange Act of 1934 (15 U.S.C. 78a 
et seq.) is amended by adding at the end the following new 
section:

``SEC. 36. CLASS ACTION STEERING COMMITTEES.

  ``(a) Class Action Steering Committee.--In any private action 
arising under this title seeking to recover damages on behalf 
of a class, the court shall, at the earliest practicable time, 
appoint a committee of class members to direct counsel for the 
class (hereafter in this section referred to as the `plaintiff 
steering committee') and to perform such other functions as the 
court may specify. Court appointment of a plaintiff steering 
committee shall not be subject to interlocutory review.
  ``(b) Membership of Plaintiff Steering Committee.--
          ``(1) Qualifications.--
                  ``(A) Number.--A plaintiff steering committee 
                shall consist of not fewer than 5 class 
                members, willing to serve, who the court 
                believes will fairly represent the class.
                  ``(B) Ownership interests.--Members of the 
                plaintiff steering committee shall have 
                cumulatively held during the class period not 
                less than--
                          ``(i) the lesser of 5 percent of the 
                        securities which are the subject matter 
                        of the litigation or $10,000,000 in 
                        market value of the securities which 
                        are the subject matter of the 
                        litigation; or
                          ``(ii) such smaller percentage or 
                        dollar amount as the court finds 
                        appropriate under the circumstances.
          ``(2) Named plaintiffs.--Class plaintiffs serving as 
        the representative parties in the litigation may serve 
        on the plaintiff steering committee, but shall not 
        comprise a majority of the committee.
          ``(3) Noncompensation of members.--Members of the 
        plaintiff steering committee shall serve without 
        compensation, except that any member may apply to the 
        court for reimbursement of reasonable out-of-pocket 
        expenses from any common fund established for the 
        class.
          ``(4) Meetings.--The plaintiff steering committee 
        shall conduct its business at one or more previously 
        scheduled meetings of the committee, of which prior 
        notice shall have been given and at which a majority of 
        its members are present in person or by electronic 
        communication. The plaintiff steering committee shall 
        decide all matters within its authority by a majority 
        vote of all members, except that the committee may 
        determine that decisions other than to accept or reject 
        a settlement offer or to employ or dismiss counsel for 
        the class may be delegated to one or more members of 
        the committee, or may be voted upon by committee 
        members seriatim, without a meeting.
          ``(5) Right of nonmembers to be heard.--A class 
        member who is not a member of the plaintiff steering 
        committee may appear and be heard by the court on any 
        issue relating to the organization or actions of the 
        plaintiff steering committee.
  ``(c) Functions of Plaintiff Steering Committee.--The 
authority of the plaintiff steering committee to direct counsel 
for the class shall include all powers normally permitted to an 
attorney's client in litigation, including the authority to 
retain or dismiss counsel and to reject offers of settlement, 
and the authority to accept an offer of settlement subject to 
final approval by the court. Dismissal of counsel other than 
for cause shall not limit the ability of counsel to enforce any 
contractual fee agreement or to apply to the court for a fee 
award from any common fund established for the class.
  ``(d) Immunity From Civil Liability; Removal.--Any person 
serving as a member of a plaintiff steering committee shall be 
immune from any civil liability for any negligence in 
performing such service, but shall be not be immune from 
liability for intentional misconduct or from the assessment of 
costs pursuant to section 20B(c). The court may remove a member 
of a plaintiff steering committee for good cause shown.
  ``(e) Effect on Other Law.--This section does not affect any 
other provision of law concerning class actions or the 
authority of the court to give final approval to any offer of 
settlement.''.
  (b) Prohibition on Attorneys' Fees Paid From Commission 
Disgorgement Funds.--Section 21(d) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78u(d)) is amended by adding at the end 
the following new paragraph:
  ``(4) Prohibition on Attorneys' Fees Paid From Commission 
Disgorgement Funds.--Except as otherwise ordered by the court, 
funds disgorged as the result of an action brought by the 
Commission, or of any Commission proceeding, shall not be 
distributed as payment for attorneys' fees or expenses incurred 
by private parties seeking distribution of the disgorged 
funds.''.
SEC. 203. PREVENTION OF ABUSIVE PRACTICES THAT FOMENT LITIGATION.

  (a) Additional Provisions Applicable to Private Actions.--The 
Securities Exchange Act of 1934 is amended by inserting after 
section 20A (15 U.S.C. 78t-1) the following new section:


               ``procedures applicable to private actions


  ``Sec. 20B. (a) Elimination of Bonus Payments to Named 
Plaintiffs in Class Actions.--In any private action under this 
title that is certified as a class action pursuant to the 
Federal Rules of Civil Procedure, the portion of any final 
judgment or of any settlement that is awarded to class 
plaintiffs serving as the representative parties shall be 
equal, on a per share basis, to the portion of the final 
judgment or settlement awarded to all other members of the 
class. Nothing in this subsection shall be construed to limit 
the award to any representative parties of actual expenses 
(including lost wages) relating to the representation of the 
class.
  ``(b) Restrictions on Professional Plaintiffs.--Except as the 
court may otherwise permit for good cause, a person may be a 
named plaintiff, or an officer, director, or fiduciary of a 
named plaintiff, in no more than 5 class actions filed during 
any 3-year period.
  ``(c) Awards of Fees and Expenses.--
          ``(1) Authority to award fees and expenses.--If the 
        court in any private action arising under this title 
        enters a final judgment against a party litigant on the 
        basis of a motion to dismiss, motion for summary 
        judgment, or a trial on the merits, the court shall, 
        upon motion by the prevailing party, determine whether 
        (A) the position of the losing party was not 
        substantially justified, (B) imposing fees and expenses 
        on the losing party or the losing party's attorney 
        would be just, and (C) the cost of such fees and 
        expenses to the prevailing party is substantially 
        burdensome or unjust. If the court makes the 
        determinations described in clauses (A), (B), and (C), 
        the court shall award the prevailing party reasonable 
        fees and other expenses incurred by that party. The 
        determination of whether the position of the losing 
        party was substantially justified shall be made on the 
        basis of the record in the action for which fees and 
        other expenses are sought, but the burden of persuasion 
        shall be on the prevailing party.
          ``(2) Security for payment of costs in class 
        actions.--In any private action arising under this 
        title that is certified as a class action pursuant to 
        the Federal Rules of Civil Procedure, the court shall 
        require an undertaking from the attorneys for the 
        plaintiff class, the plaintiff class, or both, in such 
        proportions and at such times as the court determines 
        are just and equitable, for the payment of the fees and 
        expenses that may be awarded under paragraph (1).
          ``(3) Application for fees.--A party seeking an award 
        of fees and other expenses shall, within 30 days of a 
        final, nonappealable judgment in the action, submit to 
        the court an application for fees and other expenses 
        that verifies that the party is entitled to such an 
        award under paragraph (1) and the amount sought, 
        including an itemized statement from any attorney or 
        expert witness representing or appearing on behalf of 
        the party stating the actual time expended and the rate 
        at which fees and other expenses are computed.
          ``(4) Allocation and size of award.--The court, in 
        its discretion, may--
                  ``(A) determine whether the amount to be 
                awarded pursuant to this section shall be 
                awarded against the losing party, its attorney, 
                or both; and
                  ``(B) reduce the amount to be awarded 
                pursuant to this section, or deny an award, to 
                the extent that the prevailing party during the 
                course of the proceedings engaged in conduct 
                that unduly and unreasonably protracted the 
                final resolution of the action.
          ``(5) Awards in discovery proceedings.--In 
        adjudicating any motion for an order compelling 
        discovery or any motion for a protective order made in 
        any private action arising under this title, the court 
        shall award the prevailing party reasonable fees and 
        other expenses incurred by the party in bringing or 
        defending against the motion, including reasonable 
        attorneys' fees, unless the court finds that special 
        circumstances make an award unjust.
          ``(6) Rule of construction.--Nothing in this 
        subsection shall be construed to limit or impair the 
        discretion of the court to award costs pursuant to 
        other provisions of law.
          ``(7) Protection against abuse of process.--In any 
        action to which this subsection applies, a court shall 
        not permit a plaintiff to withdraw from or voluntarily 
        dismiss such action if the court determines that such 
        withdrawal or dismissal is taken for purposes of 
        evasion of the requirements of this subsection.
          ``(8) Definitions.--For purposes of this subsection--
                  ``(A) The term `fees and other expenses' 
                includes the reasonable expenses of expert 
                witnesses, the reasonable cost of any study, 
                analysis, report, test, or project which is 
                found by the court to be necessary for the 
                preparation of the party's case, and reasonable 
                attorneys' fees and expenses. The amount of 
                fees awarded under this section shall be based 
                upon prevailing market rates for the kind and 
                quality of services furnished.
                  ``(B) The term `substantially justified' 
                shall have the same meaning as in section 
                2412(d)(1) of title 28, United States Code.
  ``(d) Prevention of Abusive Conflicts of Interest.--In any 
private action under this title pursuant to a complaint seeking 
damages on behalf of a class, if the class is represented by an 
attorney who directly owns or otherwise has a beneficial 
interest in the securities that are the subject of the 
litigation, the court shall, on motion by any party, make a 
determination of whether such interest constitutes a conflict 
of interest sufficient to disqualify the attorney from 
representing the class.
  ``(e) Disclosure of Settlement Terms to Class Members.--In 
any private action under this title that is certified as a 
class action pursuant to the Federal Rules of Civil Procedure, 
any settlement agreement that is published or otherwise 
disseminated to the class shall include the following 
statements:
          ``(1) Statement of potential outcome of case.--
                  ``(A) Agreement on amount of damages and 
                likelihood of prevailing.--If the settling 
                parties agree on the amount of damages per 
                share that would be recoverable if the 
                plaintiff prevailed on each claim alleged under 
                this title and the likelihood that the 
                plaintiff would prevail--
                          ``(i) a statement concerning the 
                        amount of such potential damages; and
                          ``(ii) a statement concerning the 
                        likelihood that the plaintiff would 
                        prevail on the claims alleged under 
                        this title and a brief explanation of 
                        the reasons for that conclusion.
                  ``(B) Disagreement on amount of damages or 
                likelihood of prevailing.--If the parties do 
                not agree on the amount of damages per share 
                that would be recoverable if the plaintiff 
                prevailed on each claim alleged under this 
                title or on the likelihood that the plaintiff 
                would prevail on those claims, or both, a 
                statement from each settling party concerning 
                the issue or issues on which the parties 
                disagree.
                  ``(C) Inadmissibility for certain purposes.--
                Statements made in accordance with 
                subparagraphs (A) and (B) concerning the amount 
                of damages and the likelihood of prevailing 
                shall not be admissible for purposes of any 
                Federal or State judicial action or 
                administrative proceeding.
          ``(2) Statement of attorneys' fees or costs sought.--
        If any of the settling parties or their counsel intend 
        to apply to the court for an award of attorneys' fees 
        or costs from any fund established as part of the 
        settlement, a statement indicating which parties or 
        counsel intend to make such an application, the amount 
        of fees and costs that will be sought (including the 
        amount of such fees and costs determined on a per-share 
        basis, together with the amount of the settlement 
        proposed to be distributed to the parties to suit, 
        determined on a per-share basis), and a brief 
        explanation of the basis for the application. Such 
        information shall be clearly summarized on the cover 
        page of any notice to a party of any settlement 
        agreement.
          ``(3) Identification of lawyers' representatives.--
        The name and address of one or more representatives of 
        counsel for the class who will be reasonably available 
        to answer written questions from class members 
        concerning any matter contained in any notice of 
        settlement published or otherwise disseminated to the 
        class.
          ``(4) Other information.--Such other information as 
        may be required by the court, or by any plaintiff 
        steering committee appointed by the court pursuant to 
        section 36.
  ``(f) Encouragement of Finality in Settlement Discharges.--
          ``(1) Discharge.--A defendant who settles any private 
        action arising under this title at any time before 
        verdict or judgment shall be discharged from all claims 
        for contribution brought by other persons with respect 
        to the matters that are the subject of such action. 
        Upon entry of the settlement by the court, the court 
        shall enter a bar order constituting the final 
        discharge of all obligations to the plaintiff of the 
        settling defendant arising out of the action. The order 
        shall bar all future claims for contribution or 
        indemnity arising out of the action--
                  ``(A) by nonsettling persons against the 
                settling defendant; and
                  ``(B) by the settling defendant against any 
                nonsettling defendants.
          ``(2) Reduction.--If a person enters into a 
        settlement with the plaintiff prior to verdict or 
        judgment, the verdict or judgment shall be reduced by 
        the greater of--
                  ``(A) an amount that corresponds to the 
                percentage of responsibility of that person; or
                  ``(B) the amount paid to the plaintiff by 
                that person.
  ``(g) Contribution From Non-Parties in Interests of 
Fairness.--
          ``(1) Right of contribution.--A person who becomes 
        liable for damages in any private action under this 
        title (other than an action under section 9(e) or 
        18(a)) may recover contribution from any other person 
        who, if joined in the original suit, would have been 
        liable for the same damages.
          ``(2) Statute of limitations for contribution.--Once 
        judgment has been entered in any such private action 
        determining liability, an action for contribution must 
        be brought not later than 6 months after the entry of a 
        final, nonappealable judgment in the action.
  ``(h) Defendant's Right to Written Interrogatories 
Establishing Scienter.--In any private action under this title 
in which the plaintiff may recover money damages, the court 
shall, when requested by a defendant, submit to the jury a 
written interrogatory on the issue of each such defendant's 
state of mind at the time the alleged violation occurred.''.
  (b) Prohibition of Referral Fees That Foment Litigation.--
Section 15(c) of the Securities Exchange Act of 1934 (15 U.S.C. 
78o(c)) is amended by adding at the end the following new 
paragraph:
  ``(8) Receipt of Referral Fees.--No broker or dealer, or 
person associated with a broker or dealer, may solicit or 
accept remuneration for assisting an attorney in obtaining the 
representation of any customer in any private action under this 
title.''.

SEC. 204. PREVENTION OF ``FISHING EXPEDITION'' LAWSUITS.

  The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) 
is amended by inserting after section 10 the following new 
section:

``SEC. 10A. REQUIREMENTS FOR SECURITIES FRAUD ACTIONS.

  ``(a) Scienter.--
          ``(1) In general.--In any private action arising 
        under this title based on a fraudulent statement, 
        liability may be established only on proof that--
                  ``(A) the defendant directly or indirectly 
                made a fraudulent statement;
                  ``(B) the defendant possessed the intention 
                to deceive, manipulate, or defraud; and
                  ``(C) the defendant made such fraudulent 
                statement knowingly or recklessly.
          ``(2) Fraudulent statement.--For purposes of this 
        section, a fraudulent statement is a statement that 
        contains an untrue statement of a material fact, or 
        omits a material fact necessary in order to make the 
        statements made, in the light of the circumstances in 
        which they were made, not misleading.
          ``(3) Knowingly.--For purposes of paragraph (1), a 
        defendant makes a fraudulent statement knowingly if the 
        defendant knew that the statement of a material fact 
        was untrue at the time it was made, or knew that an 
        omitted fact was necessary in order to make the 
        statements made, in the light of the circumstances in 
        which they were made, not misleading.
          ``(4) Recklessness.--For purposes of paragraph (1), a 
        defendant makes a fraudulent statement recklessly if 
        the defendant, in making such statement, is guilty of 
        highly unreasonable conduct that (A) involves not 
        merely simple or even gross negligence, but an extreme 
        departure from standards of ordinary care, and (B) 
        presents a danger of misleading buyers or sellers that 
        was either known to the defendant or so obvious that 
        the defendant must have been consciously aware of it. 
        For example, a defendant who genuinely forgot to 
        disclose, or to whom disclosure did not come to mind, 
        is not reckless.
  ``(b) Requirement for Explicit Pleading of Scienter.--In any 
private action to which subsection (a) applies, the complaint 
shall specify each statement or omission alleged to have been 
misleading, and the reasons the statement or omission was 
misleading. The complaint shall also make specific allegations 
which, if true, would be sufficient to establish scienter as to 
each defendant at the time the alleged violation occurred. It 
shall not be sufficient for this purpose to plead the mere 
presence of facts inconsistent with a statement or omission 
alleged to have been misleading. If an allegation is made on 
information and belief, the complaint shall set forth with 
specificity all information on which that belief is formed.
  ``(c) Dismissal for Failure To Meet Pleading Requirements; 
Stay of Discovery; Summary Judgment.--In any private action to 
which subsection (a) applies, the court shall, on the motion of 
any defendant, dismiss the complaint if the requirements of 
subsection (b) are not met, except that the court may, in its 
discretion, permit a single amended complaint to be filed. 
During the pendency of any such motion to dismiss, all 
discovery and other proceedings shall be stayed unless the 
court finds upon the motion of any party that particularized 
discovery is necessary to preserve evidence or to prevent undue 
prejudice to that party. If a complaint satisfies the 
requirements of subsection (b), the plaintiff shall be entitled 
to conduct discovery limited to the facts concerning the 
allegedly misleading statement or omission. Upon completion of 
such discovery, the parties may move for summary judgment.
  ``(d) Reliance and Causation.--
          ``(1) In general.--In any private action to which 
        subsection (a) applies, the plaintiff shall prove 
        that--
                  ``(A) he or she had knowledge of, and relied 
                (in connection with the purchase or sale of a 
                security) on, the statement that contained the 
                misstatement or omission described in 
                subsection (a)(1); and
                  ``(B) that the statement containing such 
                misstatement or omission proximately caused 
                (through both transaction causation and loss 
                causation) any loss incurred by the plaintiff.
          ``(2) Fraud on the market.--For purposes of paragraph 
        (1), reliance may be proven by establishing that the 
        market as a whole considered the fraudulent statement, 
        that the price at which the security was purchased or 
        sold reflected the market's estimation of the 
        fraudulent statement, and that the plaintiff relied on 
        that market price. Proof that the market as a whole 
        considered the fraudulent statement may consist of 
        evidence that the statement--
                  ``(A) was published in publicly available 
                research reports by analysts of such security;
                  ``(B) was the subject of news articles;
                  ``(C) was delivered orally at public meetings 
                by officers of the issuer, or its agents;
                  ``(D) was specifically considered by rating 
                agencies in their published reports; or
                  ``(E) was otherwise made publicly available 
                to the market in a manner that was likely to 
                bring it to the attention of, and to be 
                considered as credible by, other active 
                participants in the market for such security.
        Nonpublic information may not be used as proof that the 
        market as a whole considered the fraudulent statement.
          ``(3) Presumption of reliance.--Upon proof that the 
        market as a whole considered the fraudulent statement 
        pursuant to paragraph (2), the plaintiff is entitled to 
        a rebuttable presumption that the price at which the 
        security was purchased or sold reflected the market's 
        estimation of the fraudulent statement and that the 
        plaintiff relied on such market price. This presumption 
        may be rebutted by evidence that--
                  ``(A) the market as a whole considered other 
                information that corrected the allegedly 
                fraudulent statement; or
                  ``(B) the plaintiff possessed such corrective 
                information prior to the purchase or sale of 
                the security.
          ``(4) Reasonable expectation of integrity of market 
        price.--A plaintiff who buys or sells a security for 
        which it is unreasonable to rely on market price to 
        reflect all current information may not establish 
        reliance pursuant to paragraph (2). For purposes of 
        paragraph (2), the following factors shall be 
        considered in determining whether it was reasonable for 
        a party to expect the market price of the security to 
        reflect substantially all publicly available 
        information regarding the issuer of the security:
                  ``(A) The weekly trading volume of any class 
                of securities of the issuer of the security.
                  ``(B) The existence of public reports by 
                securities analysts concerning any class of 
                securities of the issuer of the security.
                  ``(C) The eligibility of the issuer of the 
                security, under the rules and regulations of 
                the Commission, to incorporate by reference its 
                reports made pursuant to section 13 of this 
                title in a registration statement filed under 
                the Securities Act of 1933 in connection with 
                the sale of equity securities.
                  ``(D) A history of immediate movement of the 
                price of any class of securities of the issuer 
                of the security caused by the public 
                dissemination of information regarding 
                unexpected corporate events or financial 
                releases.
        In no event shall it be considered reasonable for a 
        party to expect the market price of the security to 
        reflect substantially all publicly available 
        information regarding the issuer of the security unless 
        the issuer of the security has a class of securities 
        listed and registered on a national securities exchange 
        or quoted on the automated quotation system of a 
        national securities association.
  ``(e) Allocation of Liability.--
          ``(1) Joint and several liability for knowing 
        fraud.--A defendant who is found liable for damages in 
        a private action to which subsection (a) applies may be 
        liable jointly and severally only if the trier of fact 
        specifically determines that the defendant acted 
        knowingly (as defined in subsection (a)(3)).
          ``(2) Proportionate liability for recklessness.--If 
        the trier of fact does not make the findings required 
        by paragraph (1) for joint and several liability, a 
        defendant's liability in a private action to which 
        subsection (a) applies shall be determined under 
        paragraph (3) of this subsection only if the trier of 
        fact specifically determines that the defendant acted 
        recklessly (as defined in subsection (a)(4)).
          ``(3) Determination of proportionate liability.--If 
        the trier of fact makes the findings required by 
        paragraph (2), the defendant's liability shall be 
        determined as follows:
                  ``(A) The trier of fact shall determine the 
                percentage of responsibility of the plaintiff, 
                of each of the defendants, and of each of the 
                other persons or entities alleged by the 
                parties to have caused or contributed to the 
                harm alleged by the plaintiff. In determining 
                the percentages of responsibility, the trier of 
                fact shall consider both the nature of the 
                conduct of each person and the nature and 
                extent of the causal relationship between that 
                conduct and the damage claimed by the 
                plaintiff.
                  ``(B) For each defendant, the trier of fact 
                shall then multiply the defendant's percentage 
                of responsibility by the total amount of damage 
                suffered by the plaintiff that was caused in 
                whole or in part by that defendant and the 
                court shall enter a verdict or judgment against 
                the defendant in that amount. No defendant 
                whose liability is determined under this 
                subsection shall be jointly liable on any 
                judgment entered against any other party to the 
                action.
                  ``(C) Except where contractual relationship 
                permits, no defendant whose liability is 
                determined under this paragraph shall have a 
                right to recover any portion of the judgment 
                entered against such defendant from another 
                defendant.
          ``(4) Effect of Provision.--This subsection relates 
        only to the allocation of damages among defendants. 
        Nothing in this subsection shall affect the standards 
        for liability under any private action arising under 
        this title.
  ``(f) Damages.--In any private action to which subsection (a) 
applies, and in which the plaintiff claims to have bought or 
sold the security based on a reasonable belief that the market 
value of the security reflected all publicly available 
information, the plaintiff's damages shall not exceed the 
lesser of--
          ``(1) the difference between the price paid by the 
        plaintiff for the security and the market value of the 
        security immediately after dissemination to the market 
        of information which corrects the fraudulent statement; 
        and
          ``(2) the difference between the price paid by the 
        plaintiff for the security and the price at which the 
        plaintiff sold the security after dissemination of 
        information correcting the fraudulent statement.''.
SEC. 205. ESTABLISHMENT OF ``SAFE HARBOR'' FOR PREDICTIVE STATEMENTS.

  The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) 
is amended by adding at the end the following new section:

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

  ``(a) Safe Harbor Defined.--In any action arising under this 
title based on a fraudulent statement (within the meaning of 
section 10A), a person shall not be liable for the publication 
of any projection if--
          ``(1) the basis for such projection is briefly 
        described therein, with citations (which may be 
        general) to representative sources or authority, and a 
        disclaimer is made to alert persons for whom such 
        information is intended that the projections should not 
        be given any more weight than the described basis 
        therefor would reasonably justify; and
          ``(2) the basis for such projection is not inaccurate 
        as of the date of publication, determined without 
        benefit of subsequently available information or 
        information not known to such person at such date.
  ``(b) Automatic Protective Order Staying Discovery; Expedited 
Procedure.--In any action arising under this title based on a 
fraudulent statement (within the meaning of section 10A) by any 
person, such person may, at any time beginning after the filing 
of the complaint and ending 10 days after the filing of such 
person's answer to the complaint, move to obtain an automatic 
protective order under the safe harbor procedures of this 
section. Upon such motion, the protective order shall issue 
forthwith to stay all discovery as to the moving party, except 
that which is directed to the specific issue of the 
applicability of the safe harbor. A hearing on the 
applicability of the safe harbor shall be conducted within 45 
days of the issuance of such protective order. At the 
conclusion of the hearing, the court shall either (1) dismiss 
the portion of the action based upon the use of a projection to 
which the safe harbor applies, or (2) determine that the safe 
harbor is unavailable in the circumstances.
  ``(c) Regulatory Authority.--In consultation with investors 
and issuers of securities, the Commission shall adopt rules and 
regulations to facilitate the safe harbor provisions of this 
section. Such rules and regulations shall--
          ``(1) include clear and objective guidance that the 
        Commission finds sufficient for the protection of 
        investors,
          ``(2) prescribe such guidance with sufficient 
        particularity that compliance shall be readily 
        ascertainable by issuers prior to issuance of 
        securities, and
          ``(3) provide that projections that are in compliance 
        with such guidance and that concern the future economic 
        performance of an issuer of securities registered under 
        section 12 of this title will be deemed not to be in 
        violation of section 10(b) of this title.''.

SEC. 206. RULE OF CONSTRUCTION.

  Nothing in the amendments made by this title shall be deemed 
to create or ratify any implied private right of action, or to 
prevent the Commission by rule from restricting or otherwise 
regulating private actions under the Securities Exchange Act of 
1934.

SEC. 207. EFFECTIVE DATE.

  This title and the amendments made by this title are 
effective on the date of enactment of this Act and shall apply 
to cases commenced after such date of enactment.
                          Purpose and Summary

    The purpose of Title II of H.R. 10, the Common Sense Legal 
Reforms Act of 1995, is to reform the Federal civil justice 
system with regard to private securities litigation. It 
eliminates certain abusive practices, provides for greater 
plaintiff control over litigation, and defines or modifies the 
legal standards establishing liability in actions based on 
securities fraud.

                Background and Need for the Legislation

    America has become an excessively litigious society. We sue 
each other too often and too easily, and the consequences 
affect all of us. The dramatic growth in litigation carries 
high costs for the American economy--manufacturers withdraw 
products from the market, discontinue product research, reduce 
their workforces, and raise their prices.
    The federal securities laws specifically endow the 
Securities and Exchange Commission (SEC) with broad regulatory 
and enforcement powers. In contrast, however, Congress wrote 
quite narrowly in authorizing private parties to file lawsuits. 
Notably, those remedies did not include an express private 
right of action under Section 10(b) of the Securities Exchange 
Act of 1934. The ``10b-5 cause of action'' was created entirely 
by judges. Congress enacted the Federal securities laws in 1933 
and 1934 to protect investors and promote the efficient 
functioning of our capital markets. Today, private lawsuits 
under those statutes create precisely the opposite effect.
    The securities litigation system was designed to achieve 
several goals. These include the prevention of fraudulent 
statements by corporate insiders; encouragement of companies to 
make full disclosure to investors; compensation of investors 
when they lose money due to fraud; encouragement of 
participation in American capital markets; and strengthening of 
the American economy. Arthur Levitt, the Chairman of the SEC, 
has stated publicly that in order for investors to have 
confidence in the securities markets, they must have confidence 
in their right to seek fair recovery from those that may 
defraud them. Private actions serve a crucial role as a 
deterrent and are a vital supplement to the SEC's enforcement 
resources. However, Chairman Levitt noted the system should not 
only assure that fraud victims recover their loss, but that the 
system works well enough to serve the interests of all 
investors: ``private actions are intended to compensate 
defrauded investors and deter securities violations. If the 
current system fails to distinguish between strong cases and 
weak cases, it serves neither purpose effectively.'' 1
    \1\ Speech by Arthur Levitt, ``Private Litigation Under the Federal 
Securities Laws'', The University of California, San Diego, Securities 
Regulation Institute, (Jan. 26. 1994).
---------------------------------------------------------------------------
    Many executives of companies in the accounting, securities, 
and manufacturing industries believe that the civil liability 
system has been twisted and is operating unfairly against them. 
They maintain it no longer channels benefits to investors who 
are actually damaged; and it does not focus the burdens of 
litigation and liability for damages upon those who engage in 
fraud.
    Today, our litigation system allows, indeed encourages, 
abusive ``strike suits''--class actions typically brought under 
the antifraud provisions of Section 10(b) of the Securities 
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. 
Strike lawsuits are lawsuits filed by class action attorneys on 
behalf of shareholders whose once attractive stock purchases 
have failed to live up to their expectations. Volatile stock 
prices, rapid product development, and technological changes 
make growing companies a target. As a result, high technology, 
biotechnology, and other growth companies are hardest hit.
    Whether a shareholder lawsuit is meritorious or not, the 
corporation sued must spend a great deal of money to defend 
itself. It is common for a corporation simply to agree to a 
substantial settlement out of court. Despite the absence of 
wrongdoing by managers, corporations are essentially forced to 
pay large sums of money to avoid even larger expenses 
associated with legal defense. This has been described by some 
as legal extortion. Advocates of litigation reform cite 
empirical studies that show virtually all claims in 10b-5 class 
actions, meritorious or not, are settled. The settlement bears 
no relationship to the underlying damages, but instead is 
related principally to the amount claimed or the defendants' 
insurance coverage.
                      A SUMMARY OF A TYPICAL CASE

    A typical case involves a stock, usually of a high-growth, 
high-tech company, that has performed well for many quarters, 
but ultimately misses analysts' expectations:

          Whenever there is any sudden change in stock price, 
        there is, by definition some surprise (e.g., a 
        disappointing earnings announcement or an adverse 
        product development). Securities class action lawyers 
        can then file a complaint (frequently many are filed 
        immediately after any sudden price drop) claiming that 
        some group of defendants ``knew or should have known'' 
        about the negative information and disclosed it 
        earlier.2
    \2\ Testimony of Professor Daniel R. Fischel before the House 
Subcommittee on Telecommunications and Finance, Hearings on H.R. 10, 
January 19, 1995, p.3.

    Officers, directors, accountants, and consultants are also 
named as defendants. Damages sought by plaintiffs--on behalf of 
anyone who bought the company's stock prior to the earnings 
announcement--amount to hundreds of millions of dollars. The 
plaintiffs who bring the suit typically hold only a handful of 
shares in the company. They almost certainly have filed such 
cases before, usually working with the same law firm. Known as 
``professional plaintiffs,'' they sue companies many times 
throughout the year, and receive bonuses above what they 
recover in the settlement. The driving force behind many of 
these suits are not angry investors, but entrepreneurial trial 
lawyers who use the ``professional plaintiff.'' 3
    \3\ Andrew Leigh, ``Being a Plaintiff Sometimes Amounts to a 
Profession'', Investors Business Daily, Nov. 1, 1991. Professor John C. 
Coffee, Jr. of Columbia University Law School noted in the article that 
Harry Lewis, a retired lawyer, had been the named plaintiff in over 300 
cases.
---------------------------------------------------------------------------
    Using professional plaintiffs, law firms often file 
complaints within days of a substantial movement in stock 
price. The leading plaintiffs' law firm reported that 69 
percent of the cases it filed over a three year period were 
filed within 10 days of the event or disclosure that gave rise 
to the allegations of fraud.4 Firms are able to do this by 
keeping a stable of professional plaintiffs who hold a few 
shares in a broad range of companies. As William Lerach, whose 
firm filed 229 different suits over forty-four months--one 
every 4.2 business days--told Forbes magazine: ``I have the 
greatest practice of law in the world. I have no clients.'' 
5
    \4\ Private Litigation Under the Federal Securities Law: Hearings 
before the Subcommittee on Securities of the Senate Committee on 
Banking, Housing, and Urban Affairs, 103rd Cong., 1st Session (June 17, 
and July 21, 1993). (Hereinafter cited ``Senate Securities Hearings.'')
    \5\ William P. Barrett, ``I Have No Clients,'' Forbes, Oct. 11, 
1993.
    As noted, in many instances, the suits are filed just hours 
after the news of a stock price decline, with no evidence of 
wrongdoing. High technology companies are easy prey for 
plaintiffs' lawyers who want to file speculative suits. If a 
company's stock moves significantly, up or down, it will likely 
be hit with a strike suit. Typically, plaintiffs' attorneys 
file suit within hours or days alleging fraud, while citing a 
laundry list of cookie-cutter complaints.
    One recent case is illustrative of the current state of 
affairs. On April 2, 1993, Philip Morris announced that it 
would reduce the average price of its cigarettes, and 
therefore, that it expected earnings in the future to decline. 
Less than five hours later, the first of several lawsuits were 
filed on behalf of a plaintiff who had bought 60 shares during 
the alleged class period. Four more lawsuits were filed the 
same day. And on the next day, five additional lawsuits were 
filed. Two of the complaints contained identical allegations 
``that the defendants * * * engaged in conduct to create and 
prolong the illusion of Philip Morris' success in the toy 
industry'' (emphasis supplied). 6 Apparently, these 
complaints are lodged in some computer bank of fraud 
complaints, available for quick access but without much regard 
to accuracy.
    \6\ Theodore J. Boutrous, Jr., ``Out of Control Securities Suits'', 
Washington Times, February 9, 1995, p. 1. Also, Junda Woo, ``Judges 
Show Growing Skepticism in Class-Action Securities Cases'', Wall Street 
Journal, January 11, 1995, p. C1.
---------------------------------------------------------------------------
    In the typical case, after some legal skirmishing, the 
court refuses to dismiss the complaints and discovery begins. 
With relatively little specific evidence other than a drop in 
stock price, the plaintiffs have succeeded in filing a lawsuit, 
triggering the costly discovery process, and imposing massive 
costs on the defendant who possesses the bulk of the relevant 
information. As Dennis W. Bakke, President and Chief Executive 
Officer of the AES Corporation testified:

          After the motion to dismiss was decided, the 
        financial blood letting began in earnest with the onset 
        of the discovery process as the rest of the suit 
        proceeded. Discovery is an extremely broad and a 
        formidable weapon in the hands of skilled plaintiffs 
        attorneys. Our business is enormously paper intensive. 
        Therefore, we were immediately served with document 
        production requests that resulted in us reviewing 
        enormous numbers of boxes of paper. Depositions for a 
        significant amount of our staff at our plant, plus a 
        number of executive officers, were served. Worse yet, 
        we were not the only people served with intrusive 
        discovery requests. Plaintiffs served notice of 
        depositions, and incredibly broad requests for document 
        production, on at least four of our potential 
        customers, various suppliers, certain of our lenders, 
        and our largest construction contractor. I cannot begin 
        to describe the disruption to important business 
        relationships that this caused.7
    \7\ Testimony of Dennis W. Bakke, President and Chief Executive 
Officer of the AES Corporation before the House Subcommittee on 
Telecommunications and Finance. Hearing on H.R. 10, January 19, 1995, 
p. 8.

    Indeed, the U.S. Supreme Court has taken note of this 
situation. In Blue Chip Stamps v. Manor Drug Stores, the Court 
opined that the potential for abuse of the liberal discovery 
rules might be greater in this type of case than in other 
litigation: ``[A] plaintiff with a largely groundless claim 
[may] simply take up the time of a number of other people, with 
the right to do so representing an in terrorem increment of the 
settlement value * * *'' 8
    \8\ 421 U.S. 723 at 741.
---------------------------------------------------------------------------
    As the costs of discovery rise, the pressure to settle 
becomes enormous. Many cases settle before the completion of 
discovery. Others will go as far as a summary judgment motion 
and if that is unsuccessful, settle immediately with defendants 
paying a substantial sum. The plaintiffs' lawyers take one 
third of the settlement, and the rest is distributed to the 
members of the class, resulting in pennies of return for each 
individual plaintiff. There is no adjudication of the merits of 
the case. James Kimsey, Chairman of America Online Inc., 
testified: ``Even when a company committed no fraud, indeed no 
negligence, there is still the remote possibility of huge jury 
verdicts, not to mention the costs of litigation. In the face 
of such exposure, defendant companies inevitably settle these 
suits rather than go to trial.'' 9
    \9\ Testimony of James Kimsey, Chairman, America Online, Inc. 
before the House Subcommittee on Telecommunications and Finance, 
hearing on H.R. 10, January 19, 1995, p. 7.
---------------------------------------------------------------------------
    Throughout the process, it is clear that the plaintiff 
class has difficulty in exercising any meaningful direction 
over the case brought on its behalf. Class counsel may also 
have incentives that differ from those of the underlying class 
members. Because class counsels' fees and expenses sometimes 
amount to one-third or more of recovery, class counsel 
frequently has a significantly greater interest in the 
litigation than any individual member of the class. 10
    \10\ Letter from State of Wisconsin Investment Board to Senator 
Pete Domenici (Sept. 27, 1993). Similar statements were elicited during 
hearings before the Senate Banking Committee on S. 1976 during the 
103rd Congress from the Director of the Division of Enforcement of the 
SEC, William McLucas, and the State Securities Commissioner of Utah, 
Mark Griffin. See Senate Securities Hearings, supra.
    Furthermore, class counsel usually advances the costs of 
the litigation, which means that counsel may have a greater 
incentive than the members of the class to accept a settlement 
that provides a significant fee and eliminates any risk of 
failure to recoup funds already invested in the case. Even if a 
substantially higher recovery might be obtained through 
litigation, the return on counsel's investment might be lower 
than that provided by the settlement, especially if lost 
opportunity costs are taken into account.
    As a practical matter, members of the class who object must 
opt out of the class, obtain separate counsel, and oppose a 
settlement that is supported both by class counsel and the 
corporate defendant. The expense and difficulty of this process 
makes it unusable for most plaintiffs, although in light of 
plaintiff attorney conflicts of interest, this effort may be 
worthwhile. The Corporations Commissioner of the State of 
California submitted a statement to the Subcommittee outlining 
his experience in connection with a class action brought by the 
leading plaintiffs' law firm:

          In the VMS Realty Partnership case, limited 
        partnerships interests were sold to thousands of 
        unsuitable investors, often on the basis of materially 
        misleading statements. A class action suit based upon 
        these abuses was brought by Milberg, Weiss, Bershad, 
        Hynes & Lerach, the nation's largest class action law 
        firm. Despite the strong evidence of securities law 
        violations, this case was settled for less than 8 cents 
        on the dollar. While this may have represented a 
        significant recovery for the lawyers, it woefully 
        undervalued the investors claims. Investors who opted 
        out of the class action settlement and are now 
        participating in the independent arbitration process 
        are frequently receiving 100% of their losses. In 
        addition, these investors haven't had to share their 
        recovery with a lawyer ``representing their interest. 
        11
    \11\ Testimony of Gary S. Mendoza, Commissioner of Corporations, 
State of California, submitted to the House Subcommittee on 
Telecommunications and Finance, Hearings on H.R. 10, February 10, 1995, 
p. 2.

    Finally, although class actions require judicial approval, 
courts have a natural incentive to clear complicated cases from 
their dockets and have been known to adopt the premise that a 
bad settlement is almost always better than a good trial.

                  ABUSE AND HARM IN THE CURRENT SYSTEM

    Perhaps the most offensive fact about strike suits is that 
studies show that a very large percentage of securities fraud 
class action suits settle and that the average investor 
recovers pennies on the dollar. A study by the National 
Economic Research Associates concluded the average investor 
recovers only seven cents for every dollar lost in the market, 
prior to the award of attorney's fees.12 Dr. Vincent 
O'Brien, of the Law and Economics Consulting Group, Inc. found 
that the average settlement provided investors with only six 
cents for every dollar lost in the market prior to an award of 
attorneys fees.13 And an analysis by Professor Janet 
Cooper Alexander of Stanford Law School established an average 
gross settlement of 26 cents for every dollar of potential 
damages, with another 27 percent subtracted for attorney's 
fees, or a net recovery for plaintiffs of 19 cents on the 
dollar.14 On the other end of the scale, a plaintiffs' 
attorney, appearing before the Subcommittee on behalf of the 
trade association of plaintiffs' attorneys, disputed these 
figures and alleged that 83 cents of every dollar is 
distributed to shareholders.15
    \12\ Frederick C. Dunbar and Vinita M. Juneja, ``Recent Trends II: 
What Explains Settlements in Shareholder Class Actions,'' National 
Economic Research Associates, Inc. (1993).
    \13\ Vincent O'Brien & Richard Hodges, ``A Study of Class Action 
Securities Fraud Cases'' (1993).
    \14\ Janet Cooper Alexander, Do the Merits Matter? A Study of 
Settlements in Securities Class Actions, 43 ``Stanford Law Review'' 497 
(1991).
    \15\ Testimony of William S. Lerach before the House Subcommittee 
on Telecommunications and Finance, hearings on H.R. 10, January 19, 
1995, pp. 17-18.
    Only slightly less offensive is the fact that abuse of the 
10b-5 system deprives investors of information they need 
because it deters the voluntary disclosure of information that 
the Federal securities laws were designed to promote. Given the 
threat of a lawsuit based on voluntarily disclosed information, 
the wisest thing for management to do is to volunteer nothing. 
That appears to be precisely what companies are doing. An 
American Stock Exchange survey found that 75 percent of 
corporate chief executive officers have limited the information 
disclosed to investors out of fear that greater disclosure 
would lead to a meritless lawsuit.16 A survey by Venture 
One of two hundred and twelve entrepreneurial companies found 
that seventy one percent were reluctant to discuss company 
performance with analysts or otherwise disclose information for 
fear that an unjustified lawsuit would result.17 In a 
study of information disclosure patterns of 550 companies, two 
University of California, Berkeley professors found that fewer 
than 50 percent of companies with earnings results 
significantly above or below analysts' expectations released 
information voluntarily. The professors concluded that fear of 
litigation was the reason for the low disclosure rate.18
    \16\ American Stock Exchange, ``CEOs Would Release More Financial 
Information if Litigation Albatross Were Removed'' (May 17, 1994).
    \17\ Venture One for the National Venture Capital Association and 
American Entrepreneurs for Economic Growth, ``The Impact of Securities 
Fraud Suits on Entrepreneurial Companies'' (January 1994).
    \18\ Ron Kasznik & Baruch Lev, ``To Warn or Not To Warn: A 
Manager's Dilemma When Facing an Earnings Surprise'' (University of 
California, Berkeley, November 1993).
---------------------------------------------------------------------------
    Finally, American society as a whole is a victim of strike 
suit abuse. As noted by Professor Fischel:

          Similarly situated companies who become aware of this 
        debacle will not stand still. To avoid a similar 
        problem they have several options, none of which are 
        socially desirable. Some companies may decide not to go 
        public. In this way, they can avoid possible liability 
        but only by incurring the costs associated with more 
        expensive private financing. Other companies may decide 
        not to experiment with risky drugs. By avoiding risky 
        projects, firms can avoid adverse outcomes that result 
        in dramatic stock price declines. This solution, too, 
        is undesirable, because society does not get the 
        benefit of products that are never developed. The drug 
        in the above example, after all, should be introduced 
        because it is beneficial even though its benefits were 
        less than was [sic] initially anticipated. A third 
        solution is to remain silent about the drug because the 
        company cannot later be accused of ``fraud'' if it 
        chose not to speak in the first place. These 
        ``solutions'' are perverse because investors--the 
        supposed beneficiaries of the existing law--are denied 
        the opportunity to invest in and learn about attractive 
        but risky ventures. Even though suits like this are 
        socially undesirable, plaintiffs' attorneys have 
        powerful incentives to bring them since they can expect 
        a court to award them a substantial fraction of the 
        settlement as compensation for their time and 
        expenses.19

    \19\ Testimony of Professor Daniel R. Fischel, before the House 
Subcommittee on Telecommunications and Finance, Hearings on H.R. 10, 
January 19, 1995, pp. 5-6.
    As a result, the goals of the securities laws have been 
skewed. Fraud is not deterred, because these suits are filed 
regardless of fraud. Fear of unjustified litigation has forced 
companies to curtail disclosure of information. Injured 
investors obtain little compensation but their lawyers recover 
exorbitant fees. Fear of litigation keeps companies out of the 
capital markets. Finally, businesses suffer as auditors and 
directors decline engagements and board positions.
    The consequences of the current system are serious and 
diverse. Strike suits are money makers for the lawyers, but 
such claims destroy jobs and hurt the economy. Instead of 
spending money on research and development or hiring more 
employees or reducing the cost of their products, companies 
spend that money on strike suit insurance and legal fees. And, 
the problem is rapidly getting worse.

                         Subcommittee Hearings

    The Subcommittee on Telecommunications and Finance held two 
hearings in the 103rd Congress on the subject of securities 
litigation reform on July 22, 1994, and August 10, 1994. The 
Subcommittee held two hearings on Title II of H.R. 10, The 
Common Sense Legal Reforms Act of 1995, on January 19, 1995, 
and February 10, 1995.
    The witnesses at the hearing on July 22, 1994 included the 
Honorable Howard Metzenbaum, U.S. Senator, State of Ohio; and 
the Honorable Arthur Levitt, Chairman, SEC.
    Witnesses at the August 10, 1994 hearing included two 
panels. The first panel consisted of Joel Seligman, Professor 
of Law, Hutchins Hall, University of Michigan; Donald C. 
Langevoort, Lee S. & Charles A. Speir, Professor of Law, 
Vanderbilt University; Abraham J. Briloff, Emanuel Saxe 
Distinguished Professor of Accounting, Emeritus, Baruch 
College; Arthur Miller, Bruce Bromley, Professor of Law, 
Harvard University; Adolf A. Berle, Professor of Law, Columbia 
University; and Janet Cooper Alexander, Professor of Law, 
Stanford University. The second panel included J. Michael Cook, 
Chairman and CEO, Deloitte & Touche; Mark J. Griffin, Director, 
Securities Division, Utah Department of Commerce; Ralph Nader, 
Consumer Advocate, Center for the Study of Responsive Law; Alan 
C. Hevesi, Comptroller, City of New York; Leonard B. Simon, 
Partner, Milberg Weiss Bershad Hynes & Lerach; and Stephen 
Smith, General Counsel, Exabyte Corporation.
    The January 19, 1995 hearing consisted of one panel 
including Daniel R. Fischel, the Lee and Brena Freeman 
Professor of Law, The University of Chicago Law School; William 
Lerach, Partner, Milberg Weiss Bershad Hynes & Lerach; James 
Kimsey, Chairman, America Online, Inc.; and Dennis Bakke, 
President, the AES Corporation.
    The February 10, 1995 hearing included The Honorable Arthur 
Levitt, Chairman, SEC. There was a panel of eight witnesses 
including: Richard Breeden, Coopers & Lybrand; Saul S. Cohen, 
Rosenman & Colin; Gregory P. Joseph, Fried, Frank, Harris, 
Shriver & Jacobson; John F. Olsen, Gibson, Dunn & Crutcher; 
Daniel L. Goelzer, Baker & McKenzie; Sheldon Elsen, Orans, 
Elsen & Lupert, representing the Association of the Bar of the 
City of New York; Mark Griffin, Director of the Utah Department 
of Commerce's Division of Securities, representing the North 
American Securities Administrators Association; and Joseph 
Seligman, Professor, The University of Michigan Law School.

                        Committee Consideration

    On February 14, 1995, the Subcommittee on 
Telecommunications and Finance met in open markup session and 
ordered the bill, H.R. 10, as amended, reported to the Full 
Committee by a voice vote, a quorum being present. Mr. Cox 
offered an amendment in the nature of a substitute, which was 
approved by a roll call vote of 16-10.
    The following amendments to the amendment in the nature of 
a substitute were offered but none were approved by the 
Subcommittee. Mr. Dingell offered an amendment to strike the 
definition of recklessness and insert a new definition. The 
Dingell amendment was defeated by a roll call vote of 15-11. 
Mr. Manton offered an amendment that would have deleted the 
fee-shifting provisions. It was defeated by a roll call vote of 
16-10. Mr. Gordon of Tennessee offered an amendment that would 
have changed the burden of persuasion from the losing party, as 
provided in the substitute, to the prevailing party as to 
whether a court should award reasonable fees and other expenses 
to the prevailing party. It was defeated by a roll call vote of 
15-11. Mr. Markey offered an amendment that would have provided 
for a private right of action for aiding and abetting in the 
Securities Act and the Exchange Act, thereby overturning 
Central Bank of Denver v. First Interstate Bank of Denver, in 
which the Supreme Court held that there is no private implied 
right of action for aiding and abetting under section 10(b) of 
the Exchange Act. It was defeated by voice vote.
    On February 16, 1995, the Committee met in open markup 
session and ordered the bill, H.R. 10 as amended, reported by a 
recorded vote of 32 to 10, with 3 voting present, a quorum 
being present. The bill, as amended, will be described in 
greater detail in the Section-by-Section Analysis.

                             Rollcall Votes

    Pursuant to clause 2(l)(2)(B) of rule XI of the Rules of 
the House of Representatives, following are listed the recorded 
votes on the motion to report H.R. 10 and on amendments offered 
to the measure, including the names of those Members voting for 
and against.






















                      Committee Oversight Findings

    Pursuant to clause 2(l)(3)(A) of rule XI of the Rules of 
the House of Representatives, the Subcommittee held oversight 
hearings and made findings that are reflected in the 
legislative report.

              Committee on Government Oversight and Reform

    Pursuant to clause 2(l)(3)(D) of rule XI of the Rules of 
the House of Representatives, no oversight findings have been 
submitted to the Committee by the Committee on Government 
Reform and Oversight.
                        Committee Cost Estimate

    Pursuant to clause 7(a) of rule XIII of the rules of the 
House of Representatives, the Committee is required to estimate 
the costs that would be incurred in carrying out Title II of 
H.R. 10. The Committee has serious concerns with the cost 
estimate prepared by the Director of the Congressional Budget 
Office (CBO), pursuant to section 403 of the Congressional 
Budget Act of 1974.
    The Committee disagrees strongly with the CBO estimate that 
enacting the provisions of Title II would cost the federal 
government between $125 million and $250 million over the next 
five years, assuming the appropriation of the necessary 
amounts. The main purpose of H.R. 10 is to deter abusive 
``strike suits,'' class action lawsuits that are brought under 
the anti-fraud provisions of the Exchange Act, but that are 
generally without merit. The Committee has found that these 
lawsuits are brought by entrepreneurial lawyers against a 
corporation simply because of a drop in its stock price. 
Despite the absence of wrongdoing by corporate managers, the 
corporation is forced to settle to avoid the expense of 
defending against a frivolous lawsuit. Enactment of Title II of 
H.R. 10 would ensure that lawyers bring meritorious lawsuits 
only after careful deliberation and for good cause.
    Since the overwhelming majority of those shareholder 
lawsuits that will be deterred by H.R. 10 are abusive and 
without merit, there should be no noticeable increase in the 
number of enforcement actions brought by the Securities 
Exchange Commission as asserted by the Director of CBO. 
Certainly, the Committee strongly disagrees with CBO that the 
SEC's enforcement efforts would double or triple. While the 
Committee agrees that the SEC may incur some negligible costs 
for promulgating rules, the estimate of between $125 million 
and $250 million for additional enforcement actions is 
incorrect.

                  Congressional Budget Office Estimate

    Pursuant to clause 2(l)(3)(C) of Rule XI of the rules of 
the House of Representatives, following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
403 of the Congressional Budget Act of 1974:

                                       U.S. Senate,
                               Congressional Budget Office,
                                 Washington, DC, February 24, 1995.
Hon. Thomas J. Bliley, Jr.,
Chairman, Committee on Commerce,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
reviewed Title II of H.R. 10, the Securities Litigation Reform 
Act, as ordered reported by the House Committee on the Commerce 
on February 16, 1995. CBO estimates that enacting the 
provisions of Title II would cost the federal government 
between $125 million and $250 million over the next five years, 
assuming appropriation of the necessary amounts.
    Title II of H.R. 10 would require a court, when hearing 
class action litigation brought under the Securities Exchange 
Act of 1934, to appoint a steering committee of class members 
to direct counsel for the class. The title would require the 
full disclosure of the terms of settlement for any such class 
action lawsuit and would prohibit the payment of attorneys' 
fees from certain funds. In addition, the title would establish 
various procedures and restrictions to discourage litigation, 
restrict the liability of those persons who make forward-
looking statements regarding securities or markets, and require 
the Securities and Exchange Commission (SEC) to promulgate 
rules establishing such limited liability. CBO estimates that 
promulgating these rules would result in increased costs to the 
federal government of approximately $150,000 in 1996, primarily 
for personnel costs, assuming appropriation of the necessary 
amounts.
    By discouraging private litigation under the Securities 
Exchange Act of 1934, enacting Title II of H.R. 10 would result 
in an increase in the number of enforcement actions brought by 
the SEC. In 1994, there were about 50 enforcement actions due 
to financial fraud, resulting in administrative costs to the 
federal government of approximately $24 million. Although the 
impact on the SEC's workload from enacting Title II is highly 
uncertain, CBO expects that the number of financial fraud 
enforcement actions would at least double, and possibly triple. 
Therefore, CBO estimates that enactment of Title II would 
increase costs to the SEC for enforcement actions by $25 
million to $50 million annually, or $125 million to $250 
million over the next five years, assuming appropriation of the 
necessary amounts.
    Enacting Title II of H.R. 10 would not affect direct 
spending or receipts; therefore, pay-as-you-go procedures would 
not apply to the bill. Enacting Title II of H.R. 10 would not 
affect the budgets of state or local governments.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is John Webb.
            Sincerely,
                                          Paul Van de Water
                              (For Robert D. Reischauer, Director).
                     Inflationary Impact Statement

    Pursuant to clause 2(l)(4) of rule XI of the Rules of the 
House of Representatives, the Committee finds that the bill 
would have no inflationary impact.

     Section-by-Section Analysis of Title II of H.R. 10 Securities 
                         Litigation Reform Act

              Section 201. Short Title; Table of Contents

    Section 201 provides that Title II of H.R. 10 may be cited 
as the ``Securities Litigation Reform Act'' (the ``Act''), and 
sets out a table of contents for the title.

          Section 202. Prevention of Lawyer-Driven Litigation

    Section 202(a) amends the Securities Exchange Act of 1934 
(the ``Exchange Act'') by adding a new Section 36, which 
includes five new subsections. Subsection (a) requires the 
court to appoint a plaintiff steering committee in securities 
class actions to direct counsel for the class and to perform 
other functions specified by the court. Court appointment of a 
plaintiff steering committee is not subject to interlocutory 
review.
    Subsection (b)(1) provides that the plaintiff steering 
committee shall consist of not fewer than 5 willing class 
members who the court believes will fairly represent the class. 
Committee members must have cumulatively held during the class 
period the lesser of 5 per cent of the securities which are the 
subject of the litigation, or securities which are the subject 
of the litigation with a market value of $10,000,000. This 
subsection also permits the court to appoint a committee which 
meets a smaller percentage test of dollar amount if the court 
finds it appropriate under the circumstances.
    Under subsection (b)(2), class members who are named 
plaintiffs in the litigation may serve on the plaintiff 
steering committee, but shall not comprise a majority of the 
committee. Subsection (b)(3) provides that members of the 
plaintiff steering committee shall serve without compensation, 
but may apply to the court for reasonable out-of-pocket 
expenses from any common fund established for the class. 
Subsection (b)(4) provides that the committee shall conduct 
previously scheduled meetings with at least a majority of 
committee members present in person or by electronic 
communication. All matters must be decided by majority vote, 
except that decisions on matters other than whether to accept 
or reject a settlement offer or to hire or dismiss counsel may 
be delegated to one or more members of the committees, or may 
be voted upon by committee members seriatim, without a meeting. 
Subsection (b)(5) allows any class member who is not a member 
of the committee to appear and be heard by the court on any 
issue in the case.
    Subsection (c) provides that the authority of the plaintiff 
steering committee to direct counsel for the class shall 
include all powers normally permitted to a client in 
litigation. The steering committee has the authority to retain 
or dismiss class counsel and to reject offers of settlement or 
preliminarily accept offers of settlement. Counsel dismissed 
other than for cause may enforce any contractual fee agreement 
or apply to the court for a fee award from any common fund 
established for the class.
    Subsection (d) provides that any person who is appointed as 
a member of a plaintiff steering committee shall be immune from 
any civil liability for any negligence in performing such 
service, but shall not be immune from liability for intentional 
misconduct or from the assessment of attorneys' fees and costs 
as provided in proposed new Section 20B(c) of the Exchange Act, 
set out in Section 203 of the Act.
    Subsection (e) states that this section does not affect any 
other provision of law concerning class actions or the 
authority of the court to give final approval to any offer of 
settlement.
    Section 202(b) amends Section 21(d) of the Exchange Act to 
prevent distribution of funds disgorged pursuant to an action 
by the Securities and Exchange Commission (the ``Commission'') 
as attorneys' fees or expenses unless otherwise ordered by the 
court.

  Section 203. Prevention of Abusive Practices That Foment Litigation

    Section 203(a) amends the Exchange Act by adding a new 
Section 20B, which includes eight new subsections. Subsection 
(a) requires that, in any private action under the Exchange Act 
that is certified as a class action, the portion of any final 
judgment or settlement that is awarded to class plaintiffs 
serving as the representative parties shall be equal, on a per 
share basis, to the portion of the final judgment or settlement 
awarded to all other members of the class, except that the 
representative parties may be awarded lost wages and other 
actual expenses related to their representation of the class.
    Subsection (b) requires that, unless the court otherwise 
permits, a person may not be a named plaintiff, or an officer, 
director, fiduciary, or beneficiary of a named plaintiff, in 
more than 5 class actions filed during any 3-year period.
    Subsection (c) provides for an award of reasonable 
attorneys' fees to the prevailing party in private actions 
under the Exchange Act. If a final judgment is entered on the 
basis of a motion to dismiss, a motion for summary judgment, or 
a trial on the merits, the prevailing party may move for its 
reasonable attorneys' fees and costs. If the court determines 
that (i) the position taken by the losing party was not 
substantially justified, (ii) an award against the losing party 
would be just, and (iii) the cost of such fees to the 
prevailing party is substantially burdensome or unjust, the 
court shall award such fees and costs. The burden of persuasion 
is on the prevailing party.
    The subsection also requires that, in any private action 
under the Exchange Act that is certified as a class action, the 
court shall require an undertaking from the plaintiff for the 
payment of fees and expenses. This undertaking may be required 
from the plaintiff class, its attorneys, or both, as the court 
finds just and equitable. The subsection also sets out certain 
procedural requirements for seeking attorneys' fees and costs, 
permits a reduction or denial of the fee award to the extent 
that the prevailing party engaged in conduct that unduly 
protracted the proceedings, and provides for awarding 
attorneys' fees and costs in connection with any adjudicated 
discovery issue.
    Subsection (d) requires the court to determine whether an 
attorney has a conflict of interest sufficient to disqualify 
the attorney from representing a party in a securities class 
action if the attorney owns (or has a beneficial interest in) 
the securities that are the subject of the litigation.
    Subsection (e) requires additional disclosures of 
settlement terms to class members in a securities class action. 
Any proposed settlement agreement that is sent to the class 
members must include information about (1) the amount of 
damages per share the class would recover if it continued to 
pursue the litigation and was successful, (2) the likelihood of 
success if the class continued to pursue the litigation, (3) 
the amount of attorneys' fees and costs proposed to be deducted 
from the settlement amount, and (4) the name and address of a 
representative of the class counsel who would be available to 
answer any written questions concerning the proposed 
settlement.
    Subsection (f) relieves a settling defendant from claims 
for contribution from other defendants. Any verdict or judgment 
against the other defendants would be reduced by the greater of 
(1) an amount that corresponds to the settling defendant's 
degree of responsibility or (2) the amount paid in the 
settlement (determined pursuant to the factors set forth in new 
Section 10A(e)).
    Subsection (g) expressly provides for a right of 
contribution in private actions under the Exchange Act, subject 
to a six-month statute of limitations.
    Subsection (h) requires the court to submit to the jury a 
written interrogatory to the jury requiring it to specifically 
make a finding on the issue of the defendant's state of mind at 
the time of the violation. This provision applies only in 
actions in which the plaintiff may recover money damages.
    Section 203(b) amends Section 15(c) of the Exchange Act by 
adding a new paragraph prohibiting brokers, dealers, or their 
affiliated persons from soliciting or accepting fees for 
assisting attorneys in obtaining representation of their 
customers.

       Section 204. Prevention of ``Fishing Expedition'' Lawsuits

    Section 204 amends the Exchange Act by adding a new Section 
10A, which includes six new subsections. Subsection (a) 
provides that in any private action under the Exchange Act 
based on a misstatement or omission of a material fact, 
liability could only be established on proof that: (i) the 
defendant directly or indirectly made a fraudulent statement; 
(ii) the defendant possessed the intention to deceive, 
manipulate, or defraud; and (iii) the defendant made such 
fraudulent statement knowingly or recklessly. The phrase 
``directly or indirectly'' mirrors the existing language of 
Section 10(b) and SEC Rule 10b-5 and is not intended to expand 
the class of persons currently subject to liability under those 
provisions. The term ``fraudulent statement'' means a statement 
that contains an untrue statement of a material fact or omits a 
material fact necessary in order to make the statements made 
not misleading. The term ``recklessly'' is defined to include 
conduct that is highly unreasonable, and that involved an 
extreme departure from standards of ordinary care, and that 
presents a danger of misleading buyers or sellers that was 
either known to the defendant or so obvious that the defendant 
must have been consciously aware of it. The provision 
specifically cites the instance where a defendant genuinely 
forgot to disclose as an illustration of a situation where a 
defendant would not be reckless.
    Subsection (b) provides that, in any private action to 
which subsection (a) applies, the plaintiff must specify each 
statement or omission alleged to have been misleading and must 
make specific allegations which, if true, would be sufficient 
to establish that the defendant acted knowingly or recklessly. 
It is not sufficient for this purpose to plead the mere 
presence of facts inconsistent with a statement or omission 
alleged to have been misleading.
    The Committee did not intend to overrule Supreme Court 
precedent on scienter. Rather, given the conflicting lower 
court decisions in this area, the Committee's purpose was to 
clearly codify the definition of scienter in Ernst & Ernst v. 
Hochfelder, 425 U.S. 185 (1976). In that leading case, the 
Court made clear that ``the language of section 10(b) * * * 
clearly connotes intentional misconduct,'' and ``its history 
reflects no more expansive intent.''
    In footnote 12 of the Hochfelder opinion, the Court 
reserved for later decision whether ``recklessness'' might, in 
some cases, reach the level of intentional wrongdoing in 
section 10(b). Exploiting the opening provided by that 
footnote, lower federal courts have found, under varying 
standards, that certain aggravated forms of recklessness amount 
to intentional misconduct. Across the federal Circuits, 
however, the courts have been unable either to formulate a 
clear standard or to apply it consistently. As a result, 
current case law is a hodgepodge of conflicting decisions, 
interpreted inconsistently not only from one Circuit to the 
next but even within Circuits.
    The Committee's task was to resolve these inconsistencies 
and produce a standard that is clear, consistent with the 
Hochfelder standard of intentionality, and capable of being 
applied in a uniform and consistent manner. As the Second 
Circuit has explained, ``the adjudication process is not well 
suited to the formulation of a universal resolution of [these] 
tensions * * *'' In re Time Warner Inc., 9 F.3d 259, 263 (2d 
Cir. 1993). The legislative process is the better way to 
establish clear rules.
    The Committee determined that a standard that includes 
language quoted from Sundstrand Corp. v. Sun Chem. Corp., 553 
F.2d 1033 (7th Cir.), cert. denied, 434 U.S. 875 (1977), 
together with restatement of the type of ``intentionality or 
willfulness'' that Hochfelder had found is required for 
liability under section 10(b), would best reconcile the 
tensions in this area. See In re Fischbach Corporation 
Securities Litigation, No. 89 CIV. 5826 (KMW) (S.D.N.Y. January 
15, 1992). The Committee believes that this standard, 
particularly as it has been applied in the case law of the 
Second and Seventh Circuits, will provide the degree of 
consistency and certainty that has been lacking heretofore. In 
adopting a standard that includes language from the Sundstrand 
case, however, the Committee notes that it in no way intends to 
codify all of the prior case law--indeed, any particular case--
purporting to apply that decision. For example, many of the 
cases purporting to apply Sundstrand have applied negligence 
concepts that fall far short of ``an extreme departure from the 
standard of ordinary care * * * which presents a danger of 
misleading buyers or sellers that is either known to the 
defendant or is so obvious that the actor must have been aware 
of it.'' Sundstrand, supra, 553 F.2d at 1045 (emphasis added). 
The Committee expressly disapproves these lax applications of 
the high standard laid out in that case, and has included 
language expressly confirming the scienter requirements 
mandated by Hochfelder.
    Subsection (c) provides that, in any private action to 
which subsection (a) applies, if the complaint is dismissed for 
failure to meet the requirements of subsection (b), the court 
may permit one amended complaint to be filed. During the 
pendency of a motion to dismiss pursuant to subsection (b), all 
discovery and other proceedings are stayed unless the court 
finds that particularized discovery is necessary to preserve 
evidence or prevent undue prejudice. This provision also limits 
a plaintiff's ability to conduct discovery to the facts 
concerning the allegedly misleading statement or omission.
    Subsection (d) provides that, in any private action to 
which subsection (a) applies, a plaintiff must prove that he or 
she had knowledge of, and relied on, the misleading statement 
or omission and that the statement caused the transaction which 
injured the plaintiff and the loss itself. The subsection 
provides that in ``fraud-on-the-market'' cases, reliance may be 
proven by establishing that the market as a whole considered 
the fraudulent statement, that the price at which the security 
was purchased or sold reflected the market's estimation of the 
fraudulent information, and that the plaintiff reasonably 
relied on the market price. Where it is shown that the market 
as a whole considered the fraudulent statement, reliance may be 
presumed with respect to securities that are listed on a 
national securities exchange or quoted on the automated 
quotation system of a national securities association unless 
such reliance would be unreasonable. In determining 
reasonableness, the following factors are to be considered:
          (A) the weekly trading volume of any class of 
        securities of the issuer of the security;
          (B) the existence of public reports by securities 
        analysts concerning any class of securities of the 
        issuer of the security;
          (C) the eligibility of the issuer of the security, 
        under the rules and regulations of the Commission, to 
        incorporate by reference its reports made pursuant to 
        section 13 of this title in a registration statement 
        filed under the Securities Act of 1933 in connection 
        with the sale of equity securities; and
          (D) a history of immediate movement of the price of 
        any class of securities of the issuer of the security 
        caused by the public dissemination of information 
        regarding unexpected corporate events or financial 
        releases.
    Subsection (e) provides that a defendant who is found 
liable for damages in any private action to which subsection 
(a) applies, and who is specifically found to have acted 
knowingly, is jointly and severally liable. If the defendant is 
not found to have acted knowingly, but merely recklessly, 
liability is limited to the defendant's percentage of 
responsibility. In making the determination of responsibility, 
the fact finder must consider the nature of the conduct of each 
person, including persons not parties to the action, and the 
nature and extent of the causal relationship between that 
conduct and the damage claimed by the plaintiff. This 
subsection permits contractual indemnification agreements 
between defendants who are proportionally liable.
    Subsection (f) provides that, in a private action under the 
Exchange Act based on a material misstatement or omission, and 
in which the plaintiff alleges a fraud-on-the-market theory, a 
plaintiff's damages are limited to the lesser of: (1) the 
difference between the price paid by the plaintiff and the 
market value of the security immediately after dissemination to 
the market of information correcting the misstatement or 
omission, or (2) the difference between the price paid by the 
plaintiff and the price at which the plaintiff sold the 
security after dissemination to the market of information 
correcting the misstatement or omission.

Section 205. Establishment of ``Safe Harbor'' for Predictive Statements

    Section 205 amends the Exchange Act by adding a new Section 
37, which includes three new subsections. Subsection (a) 
creates a statutory safe harbor for forward-looking 
information. Under this provision, in any action (whether it is 
a Commission action or a private action) arising under the 
Exchange Act and based on a misstatement or omission of a 
material fact, a person is not liable for the publication of 
any forward-looking information if (i) the portion of the 
information identified as the basis for any projection is ``not 
inaccurate'' as of the date of publication, and (ii) the basis 
for any projections is briefly described therein, and a 
disclaimer is made concerning the reliability of the 
projection.
    Subsection (b) allows a defendant, in an action based on a 
misleading forward-looking statement, to move for summary 
judgment on the basis that the forward-looking statement was 
within the coverage of this statutory safe harbor, and to 
obtain a stay of discovery on all issues in the litigation 
except discovery directed to the specific issue of the 
applicability of the safe harbor. A hearing on the 
applicability of the safe harbor must be conducted within 45 
days of the issuance of the protective order.
    Subsection (c) directs the Commission to adopt rules to 
facilitate the safe harbor provisions.

                   Section 206. Rule of Construction

    Section 206 provides that nothing in the amendments made by 
the Act shall be deemed to create or ratify any implied private 
right of action or prevent the Commission by rule from 
restricting or otherwise regulating private actions.

                      Section 207. Effective Date

    Section 207 provides that the date of enactment shall be 
the effective date of the amendments made by the Act. The Act 
shall apply to cases commenced after such date of enactment.

                        Securities and Exchange Commission,
                                 Washington, DC, February 23, 1995.
Hon. Thomas Bliley,
Chairman, Committee on Commerce, Rayburn House Office Building, 
        Washington, DC.
    Dear Mr. Chairman: On behalf of the Securities and Exchange 
Commission, I have attached a document that presents our views 
regarding Title II of H.R. 10, ``The Common Sense Legal Reforms 
Act of 1995.''
    I respectfully request that the SEC's views be included in 
the Committee report accompanying Title II of H.R. 10.
    Thank you for your consideration.
            Sincerely,
                                                     Arthur Levitt.
    Attachment.

                              Agency Views

    The Commission believes that the current version of H.R. 10 
represents an improvement over the bill as originally 
introduced. The Commission greatly appreciates the Committee's 
responsiveness to our concerns, as reflected by the amendments 
which have moderated the effect of the fee shifting provisions, 
preserved liability based on reckless conduct, and preserved 
the fraud on the market theory of liability.
    Although there are provisions in H.R. 10 that the 
Commission supports, the benefits of these provisions are, in 
part, offset by the effects of other provisions within H.R. 10. 
We support the measures that would eliminate some of the most 
prevalent abuses associated with class action lawsuits, 
eliminate civil RICO liability predicated on securities law 
violations (as provided by Title I of H.R. 10), and enact a 
proportionate scheme of contribution among defendants.
    The following discussion addresses provisions of the bill 
with which the Commission continues to have concerns. With 
respect to most of these provisions, the Commission is 
confident that there are solutions that would address the 
Commission's concerns without sacrificing the objectives of the 
Committee.
    Fee Shifting: Section 203 of H.R. 10 would amend the 
Securities Exchange Act of 1934 (Exchange Act) by adding new 
Section 20B. Subsection (c) of new Section 20B would provide 
that, in any private action under the Exchange Act that is 
resolved on any basis other than settlement, the court shall 
award fees to the prevailing party if the prevailing party 
meets its burden in showing that:
          a. The position taken by the losing party was not 
        ``substantially justified;''
          b. An award against the losing party would be 
        ``just;'' and
          c. The cost of such fees to the prevailing party is 
        ``substantially burdensome or unjust.''
    The bill also contains a special provision for class 
actions instructing the court to require an undertaking for the 
payment of fees and expenses, from either the plaintiff class 
or class counsel, once a case is certified as a class action. 
Finally, the bill provides the court with discretion to 
determine whether fees should be awarded against the losing 
party, its attorneys, or both.
    The current fee shifting provisions are less onerous than 
those included in the original bill, and the Commission 
appreciates the Committee's sensitivity to the concerns raised 
by automatic fee shifting. We also recognize that plaintiffs, 
as well as defendants, may recover fees and expenses. We have 
concerns, however, about whether the undertaking provision 
would deter the filing of meritorious suits. Moreover, as 
pointed out in the Commission's testimony, the ``substantially 
justified'' standard is drawn from a statute that applies fee 
shifting only against the government in cases brought against 
individuals and small businesses. The use of such a standard in 
investor lawsuits may also deter the filing of meritorious 
suits, especially when combined with a requirement to provide 
security for costs.
    The Commission believes that it is important to deter 
frivolous lawsuits, but to do so in a manner that does not have 
a chilling effect on investors with legitimate claims. In our 
view, the key is to provide that judges exercise their 
discretion to award fees and costs in appropriate cases. The 
Commission therefore recommends that Congress amend the 
Exchange Act by adding a provision analogous to Section 11(e) 
of the Securities Act, coupled with a requirement that courts 
make findings as to why fees should or should not be awarded 
whenever cases are decided by means of a dispositive motion. 
This would help to ensure that judges give effect to the 
Congressional intent to free the system of meritless 
litigation. Congress should also make it clear, in such a 
provision, that a fee award may be awarded against counsel.
    Scienter: Section 204 of H.R. 10 would amend the Exchange 
Act by adding a new Section 10A. Subsection (a) of a new 
Section 10A would establish scienter standards for ``any 
private action arising under this title based on a misstatement 
or omission of a material fact.'' This would have the effect of 
requiring a showing of scienter in proxy cases brought under 
Section 14 of the Exchange Act and disclosure cases brought 
under Section 18, neither of which currently has a scienter 
requirement, in addition to cases under Section 10(b). It may 
also redefine the elements of a violation under the proxy 
provisions. The Commission recommends that an appropriate 
amendment be made to limit the scienter standards to those 
sections that require a showing of scienter under current law. 
The Commission also recommends that the second part of the 
three part test in Subsection 10A(a) be deleted as redundant, 
as a defendant's intent to deceive, manipulate or defraud is 
established by evidence that the defendant knowingly or 
recklessly made a fraudulent statement.
    Subsection 10A(a) would provide that liability in a private 
action may be based on conduct that satisfies a definition of 
recklessness based generally on the standard enunciated by the 
Seventh Circuit Court of Appeals in Sunstrand Corporation v. 
Sun Chemical Corporation.\1\
    \1\ 553 F.2d 1033 (7th Cir.) cert. denied sub nom., Meers v. 
Sunstrand Corp., 434 U.S. 875 (1977).
    The Sunstrand definition has been altered by adding the 
word ``consciously'' near the end of the first sentence, and by 
adding the second sentence, which paraphrases a footnote in the 
Sunstrand opinion. The extent to which these amendments would 
change the result in any particular case is unclear, but the 
Commission believes that it would be preferable simply to 
codify the Sunstrand definition as currently applied by a 
majority of the federal circuit courts.
    Pleading: For purposes of pleading scienter, subsection (b) 
of new Section 10A would require a plaintiff to make specific 
allegations which, if true, would be sufficient to 
``establish'' that the defendant acted knowingly or recklessly. 
It then adds that ``it shall not be for this purpose to plead 
the mere presence of facts inconsistent with a statement or 
omission alleged to have been misleading.''
    As the Commission noted in its testimony, it would be 
beneficial to resolve the existing split between the circuit 
courts regarding pleading requirements under Rule 9(b) of the 
Federal Rules of Civil Procedure. In the Commission's view, 
however, the standard in H.R. 10 would place unrealistic 
demands on plaintiffs. The Second Circuit Court of Appeals 
currently requires that plaintiffs plead with some 
particularity facts giving rise to a ``strong inference'' of 
fraudulent intent on the part of the defendant. This test is 
regarded as being the most stringent used today, and the 
Commission recommends that Congress not enact any pleading 
requirements that go beyond those used by the Second Circuit.
    Reliance and Fraud on the Market: The original version of 
H.R. 10 would have required actual reliance on a fraudulent 
misstatement or omission, a requirement which would have 
effectively eliminated cases brought under a fraud on the 
market theory of liability. The current bill preserves fraud on 
the market liability in cases involving securities that are 
listed on a national securities exchange or quoted on an 
automatic quotation system (e.g. NASDAQ). The Commissions's 
appreciates the Committee's recognition of the need to preserve 
this important concept.
    The Commission nevertheless has concerns regarding the 
effect that the reliance requirement in new Section 10A(d) 
would have in cases involving securities, such as municipal 
securities, that are not traded on a national securities 
exchange or quoted on an automatic quotation system. By 
requiring the plaintiff to establish actual knowledge of, and 
reliance on, a fraudulent statement, H.R. 10 would eliminate 
the possibility of recovery for investors in such securities 
who indirectly rely on the misstatement. Many investors who are 
injured by fraudulent statements would not be able to meet this 
test. An investor who did not read a fraudulent statement, for 
example, may have purchased a stock because he relied on a 
recommendation from a broker based on the fraudulent statement. 
The Commission recommends that the language be amended to 
clarify that both direct and indirect reliance would suffice.
    The actual reliance requirement would also overturn 
existing law in cases based on an omission, as opposed to an 
affirmative misrepresentation. As the Supreme Court held in 
Affiliate Ute Citizens v. United States, 406 U.S. 128 (1972), a 
positive proof of reliance is not a prerequisite to recovery in 
a case involving primarily a failure to disclose. It would be 
preferable simply to codify existing law in this area.
    Proportionate Liability: H.R. 10 as introduced did not 
alter joint and several liability in cases brought under the 
antifraud provisions. The current bill provides that where the 
liability of a defendant is based on reckless conduct, as 
opposed to actual knowledge, the liability of that defendant 
shall be proportionate rather than joint and several. Unlike 
other provisions in the bill, this switch to proportionate 
liability would affect cases that are clearly meritorious 
(i.e., those in which the plaintiff establishes that the 
defendants recklessly participated in a fraud).
    Joint and several liability is based on the equitable 
principle that, as between innocent investors and defendants 
who are found to have knowingly or recklessly participated in a 
fraud, the risk that one of the defendants will be unable to 
satisfy its portion of a judgment should fall on the other 
defendants. The goal of ensuring that defrauded investors are 
compensated for their losses, in other words, overrides any 
distinction based on the relative culpability of the 
defendants.
    The Commission has consistently opposed proportionate 
liability. As stated in the Commission's testimony, if Congress 
determines to change the liability standards, the Commission 
recommends that any such change limit the application of 
proportionate liability to fraud on the market cases involving 
reckless conduct. Even in such cases, the Commission recommends 
that Congress ensure that defrauded investors are fairly 
compensated by adopting an appropriately modified form of such 
liability. Finally, an issuer of securities should always be 
held jointly and severally liable.
    It should also be noted that new Section 10A(e) would 
require the trier of fact to determine the percentage of 
responsibility of the plaintiff in addition to each of the 
defendants. This appears to incorporate a contributory 
negligence concept into the calculation, which would be 
inappropriate in cases based on a defendant's knowing or 
reckless conduct. This provision should be deleted.
    Calculation of Damages: As the Commission noted in its 
testimony, the proposed limitation on recoverable damages in 
fraud on the market cases, as set forth in new Section 10A(f), 
might not reach the appropriate result in certain types of 
cases. These principally would be cases in which losses 
attributable to fraudulent statements are offset by other price 
rises that are unrelated to the fraudulent activity.
    Safe Harbor Provisions: The safe harbor provisions have 
been substantially rewritten since H.R. 10 was originally 
introduced. The current provisions in Section 205 of H.R. 10 
appear to be intended to codify the ``bespeaks caution'' 
doctrine and to negate any duty to update statements. The 
provisions would apply only to cases brought under the Exchange 
Act.
    Because the Commission is in the midst of a rulemaking 
proceeding, it would be inappropriate to take a position on the 
substantive safe-harbor provisions. The most appropriate 
solution to the issue, from the Commission's perspective, would 
be a provision directing the Commission's perspective, would be 
a provision directing the Commission to complete its rulemaking 
proceeding and report back to Congress. This would leave 
Congress with the option of revisiting the issue if it 
determined that the Commission had failed appropriately to 
address the issues.
    The provisions mandating the Commission to promulgate rules 
are also problematic because they can be read to limit the 
Commission's flexibility. Section (a) of new Exchange Act 
Section 37, for example, would define a safe harbor that 
applies to any action under the Exchange Act, including 
Commission actions. In addition, subsection (c) would instruct 
the Commission to adopt rules and regulations that 
``facilitate'' the provision in H.R. 10. This would seem to 
imply that the Commission could not adopt a broader or narrower 
safe harbor than the one set forth in the statute. Finally, 
subsection (c) would instruct the Commission to provide a safe 
harbor only from actions brought under Section 10(b) of the 
Exchange Act.
    The Commission appreciates the Committee's recognition of 
the important need for reform in the area of private securities 
litigation, as well as the cooperation you and your staff have 
extended to us in the course of working to resolve problems 
raised by the bill as originally introduced. We look forward to 
working with the Congress as this important legislation 
progresses.
         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3 of rule XIII of the Rules of the 
House of Representatives, changes in existing law made by title 
II of the bill, as reported, are shown as follows (new matter 
is printed in italic and existing law in which no change is 
proposed is shown in roman):

                    SECURITIES EXCHANGE ACT OF 1934

          * * * * * * *

              TITLE I--REGULATION OF SECURITIES EXCHANGES

          * * * * * * *
SEC. 10A. REQUIREMENTS FOR SECURITIES FRAUD ACTIONS.

  (a) Scienter.--
          (1) In general.--In any private action arising under 
        this title based on a fraudulent statement, liability 
        may be established only on proof that--
                  (A) the defendant directly or indirectly made 
                a fraudulent statement;
                  (B) the defendant possessed the intention to 
                deceive, manipulate, or defraud; and
                  (C) the defendant made such fraudulent 
                statement knowingly or recklessly.
          (2) Fraudulent statement.--For purposes of this 
        section, a fraudulent statement is a statement that 
        contains an untrue statement of a material fact, or 
        omits a material fact necessary in order to make the 
        statements made, in the light of the circumstances in 
        which they were made, not misleading.
          (3) Knowingly.--For purposes of paragraph (1), a 
        defendant makes a fraudulent statement knowingly if the 
        defendant knew that the statement of a material fact 
        was untrue at the time it was made, or knew that an 
        omitted fact was necessary in order to make the 
        statements made, in the light of the circumstances in 
        which they were made, not misleading.
          (4) Recklessness.--For purposes of paragraph (1), a 
        defendant makes a fraudulent statement recklessly if 
        the defendant, in making such statement, is guilty of 
        highly unreasonable conduct that (A) involves not 
        merely simple or even gross negligence, but an extreme 
        departure from standards of ordinary care, and (B) 
        presents a danger of misleading buyers or sellers that 
        was either known to the defendant or so obvious that 
        the defendant must have been consciously aware of it. 
        For example, a defendant who genuinely forgot to 
        disclose, or to whom disclosure did not come to mind, 
        is not reckless.
  (b) Requirement for Explicit Pleading of Scienter.--In any 
private action to which subsection (a) applies, the complaint 
shall specify each statement or omission alleged to have been 
misleading, and the reasons the statement or omission was 
misleading. The complaint shall also make specific allegations 
which, if true, would be sufficient to establish scienter as to 
each defendant at the time the alleged violation occurred. It 
shall not be sufficient for this purpose to plead the mere 
presence of facts inconsistent with a statement or omission 
alleged to have been misleading. If an allegation is made on 
information and belief, the complaint shall set forth with 
specificity all information on which that belief is formed.
  (c) Dismissal for Failure To Meet Pleading Requirements; Stay 
of Discovery; Summary Judgment.--In any private action to which 
subsection (a) applies, the court shall, on the motion of any 
defendant, dismiss the complaint if the requirements of 
subsection (b) are not met, except that the court may, in its 
discretion, permit a single amended complaint to be filed. 
During the pendency of any such motion to dismiss, all 
discovery and other proceedings shall be stayed unless the 
court finds upon the motion of any party that particularized 
discovery is necessary to preserve evidence or to prevent undue 
prejudice to that party. If a complaint satisfies the 
requirements of subsection (b), the plaintiff shall be entitled 
to conduct discovery limited to the facts concerning the 
allegedly misleading statement or omission. Upon completion of 
such discovery, the parties may move for summary judgment.
  (d) Reliance and Causation.--
          (1) In general.--In any private action to which 
        subsection (a) applies, the plaintiff shall prove 
        that--
                  (A) he or she had knowledge of, and relied 
                (in connection with the purchase or sale of a 
                security) on, the statement that contained the 
                misstatement or omission described in 
                subsection (a)(1); and
                  (B) that the statement containing such 
                misstatement or omission proximately caused 
                (through both transaction causation and loss 
                causation) any loss incurred by the plaintiff.
          (2) Fraud on the market.--For purposes of paragraph 
        (1), reliance may be proven by establishing that the 
        market as a whole considered the fraudulent statement, 
        that the price at which the security was purchased or 
        sold reflected the market's estimation of the 
        fraudulent statement, and that the plaintiff relied on 
        that market price. Proof that the market as a whole 
        considered the fraudulent statement may consist of 
        evidence that the statement--
                  (A) was published in publicly available 
                research reports by analysts of such security;
                  (B) was the subject of news articles;
                  (C) was delivered orally at public meetings 
                by officers of the issuer, or its agents;
                  (D) was specifically considered by rating 
                agencies in their published reports; or
                  (E) was otherwise made publicly available to 
                the market in a manner that was likely to bring 
                it to the attention of, and to be considered as 
                credible by, other active participants in the 
                market for such security.
        Nonpublic information may not be used as proof that the 
        market as a whole considered the fraudulent statement.
          (3) Presumption of reliance.--Upon proof that the 
        market as a whole considered the fraudulent statement 
        pursuant to paragraph (2), the plaintiff is entitled to 
        a rebuttable presumption that the price at which the 
        security was purchased or sold reflected the market's 
        estimation of the fraudulent statement and that the 
        plaintiff relied on such market price. This presumption 
        may be rebutted by evidence that--
                  (A) the market as a whole considered other 
                information that corrected the allegedly 
                fraudulent statement; or
                  (B) the plaintiff possessed such corrective 
                information prior to the purchase or sale of 
                the security.
          (4) Reasonable expectation of integrity of market 
        price.--A plaintiff who buys or sells a security for 
        which it is unreasonable to rely on market price to 
        reflect all current information may not establish 
        reliance pursuant to paragraph (2). For purposes of 
        paragraph (2), the following factors shall be 
        considered in determining whether it was reasonable for 
        a party to expect the market price of the security to 
        reflect substantially all publicly available 
        information regarding the issuer of the security:
                  (A) The weekly trading volume of any class of 
                securities of the issuer of the security.
                  (B) The existence of public reports by 
                securities analysts concerning any class of 
                securities of the issuer of the security.
                  (C) The eligibility of the issuer of the 
                security, under the rules and regulations of 
                the Commission, to incorporate by reference its 
                reports made pursuant to section 13 of this 
                title in a registration statement filed under 
                the Securities Act of 1933 in connection with 
                the sale of equity securities.
                  (D) A history of immediate movement of the 
                price of any class of securities of the issuer 
                of the security caused by the public 
                dissemination of information regarding 
                unexpected corporate events or financial 
                releases.
        In no event shall it be considered reasonable for a 
        party to expect the market price of the security to 
        reflect substantially all publicly available 
        information regarding the issuer of the security unless 
        the issuer of the security has a class of securities 
        listed and registered on a national securities exchange 
        or quoted on the automated quotation system of a 
        national securities association.
  (e) Allocation of Liability.--
          (1) Joint and several liability for knowing fraud.--A 
        defendant who is found liable for damages in a private 
        action to which subsection (a) applies may be liable 
        jointly and severally only if the trier of fact 
        specifically determines that the defendant acted 
        knowingly (as defined in subsection (a)(3)).
          (2) Proportionate liability for recklessness.--If the 
        trier of fact does not make the findings required by 
        paragraph (1) for joint and several liability, a 
        defendant's liability in a private action to which 
        subsection (a) applies shall be determined under 
        paragraph (3) of this subsection only if the trier of 
        fact specifically determines that the defendant acted 
        recklessly (as defined in subsection (a)(4)).
          (3) Determination of proportionate liability.--If the 
        trier of fact makes the findings required by paragraph 
        (2), the defendant's liability shall be determined as 
        follows:
                  (A) The trier of fact shall determine the 
                percentage of responsibility of the plaintiff, 
                of each of the defendants, and of each of the 
                other persons or entities alleged by the 
                parties to have caused or contributed to the 
                harm alleged by the plaintiff. In determining 
                the percentages of responsibility, the trier of 
                fact shall consider both the nature of the 
                conduct of each person and the nature and 
                extent of the causal relationship between that 
                conduct and the damage claimed by the 
                plaintiff.
                  (B) For each defendant, the trier of fact 
                shall then multiply the defendant's percentage 
                of responsibility by the total amount of damage 
                suffered by the plaintiff that was caused in 
                whole or in part by that defendant and the 
                court shall enter a verdict or judgment against 
                the defendant in that amount. No defendant 
                whose liability is determined under this 
                subsection shall be jointly liable on any 
                judgment entered against any other party to the 
                action.
                  (C) Except where contractual relationship 
                permits, no defendant whose liability is 
                determined under this paragraph shall have a 
                right to recover any portion of the judgment 
                entered against such defendant from another 
                defendant.
          (4) Effect of Provision.--This subsection relates 
        only to the allocation of damages among defendants. 
        Nothing in this subsection shall affect the standards 
        for liability under any private action arising under 
        this title.
  (f) Damages.--In any private action to which subsection (a) 
applies, and in which the plaintiff claims to have bought or 
sold the security based on a reasonable belief that the market 
value of the security reflected all publicly available 
information, the plaintiff's damages shall not exceed the 
lesser of--
          (1) the difference between the price paid by the 
        plaintiff for the security and the market value of the 
        security immediately after dissemination to the market 
        of information which corrects the fraudulent statement; 
        and
          (2) the difference between the price paid by the 
        plaintiff for the security and the price at which the 
        plaintiff sold the security after dissemination of 
        information correcting the fraudulent statement.
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           registration and regulation of brokers and dealers

  Sec. 15. (a)(1) * * *
          * * * * * * *
  (c)(1)(A) No broker or dealer shall make use of the mails or 
any means or instrumentality of interstate commerce to effect 
any transaction in, or to induce or attempt to induce the 
purchase or sale of, any security (other than commercial paper, 
bankers' acceptances, or commercial bills) otherwise than on a 
national securities exchange of which it is a member by means 
of any manipulative, deceptive, or other fraudulent device or 
contrivance.
          * * * * * * *
  (8) Receipt of Referral Fees.--No broker or dealer, or person 
associated with a broker or dealer, may solicit or accept 
remuneration for assisting an attorney in obtaining the 
representation of any customer in any private action under this 
title.
          * * * * * * *
                procedures applicable to private actions


  Sec. 20B. (a) Elimination of Bonus Payments to Named 
Plaintiffs in Class Actions.--In any private action under this 
title that is certified as a class action pursuant to the 
Federal Rules of Civil Procedure, the portion of any final 
judgment or of any settlement that is awarded to class 
plaintiffs serving as the representative parties shall be 
equal, on a per share basis, to the portion of the final 
judgment or settlement awarded to all other members of the 
class. Nothing in this subsection shall be construed to limit 
the award to any representative parties of actual expenses 
(including lost wages) relating to the representation of the 
class.
  (b) Restrictions on Professional Plaintiffs.--Except as the 
court may otherwise permit for good cause, a person may be a 
named plaintiff, or an officer, director, or fiduciary of a 
named plaintiff, in no more than 5 class actions filed during 
any 3-year period.
  (c) Awards of Fees and Expenses.--
          (1) Authority to award fees and expenses.--If the 
        court in any private action arising under this title 
        enters a final judgment against a party litigant on the 
        basis of a motion to dismiss, motion for summary 
        judgment, or a trial on the merits, the court shall, 
        upon motion by the prevailing party, determine whether 
        (A) the position of the losing party was not 
        substantially justified, (B) imposing fees and expenses 
        on the losing party or the losing party's attorney 
        would be just, and (C) the cost of such fees and 
        expenses to the prevailing party is substantially 
        burdensome or unjust. If the court makes the 
        determinations described in clauses (A), (B), and (C), 
        the court shall award the prevailing party reasonable 
        fees and other expenses incurred by that party. The 
        determination of whether the position of the losing 
        party was substantially justified shall be made on the 
        basis of the record in the action for which fees and 
        other expenses are sought, but the burden of persuasion 
        shall be on the prevailing party.
          (2) Security for payment of costs in class actions.--
        In any private action arising under this title that is 
        certified as a class action pursuant to the Federal 
        Rules of Civil Procedure, the court shall require an 
        undertaking from the attorneys for the plaintiff class, 
        the plaintiff class, or both, in such proportions and 
        at such times as the court determines are just and 
        equitable, for the payment of the fees and expenses 
        that may be awarded under paragraph (1).
          (3) Application for fees.--A party seeking an award 
        of fees and other expenses shall, within 30 days of a 
        final, nonappealable judgment in the action, submit to 
        the court an application for fees and other expenses 
        that verifies that the party is entitled to such an 
        award under paragraph (1) and the amount sought, 
        including an itemized statement from any attorney or 
        expert witness representing or appearing on behalf of 
        the party stating the actual time expended and the rate 
        at which fees and other expenses are computed.
          (4) Allocation and size of award.--The court, in its 
        discretion, may--
                  (A) determine whether the amount to be 
                awarded pursuant to this section shall be 
                awarded against the losing party, its attorney, 
                or both; and
                  (B) reduce the amount to be awarded pursuant 
                to this section, or deny an award, to the 
                extent that the prevailing party during the 
                course of the proceedings engaged in conduct 
                that unduly and unreasonably protracted the 
                final resolution of the action.
          (5) Awards in discovery proceedings.--In adjudicating 
        any motion for an order compelling discovery or any 
        motion for a protective order made in any private 
        action arising under this title, the court shall award 
        the prevailing party reasonable fees and other expenses 
        incurred by the party in bringing or defending against 
        the motion, including reasonable attorneys' fees, 
        unless the court finds that special circumstances make 
        an award unjust.
          (6) Rule of construction.--Nothing in this subsection 
        shall be construed to limit or impair the discretion of 
        the court to award costs pursuant to other provisions 
        of law.
          (7) Protection against abuse of process.--In any 
        action to which this subsection applies, a court shall 
        not permit a plaintiff to withdraw from or voluntarily 
        dismiss such action if the court determines that such 
        withdrawal or dismissal is taken for purposes of 
        evasion of the requirements of this subsection.
          (8) Definitions.--For purposes of this subsection--
                  (A) The term ``fees and other expenses'' 
                includes the reasonable expenses of expert 
                witnesses, the reasonable cost of any study, 
                analysis, report, test, or project which is 
                found by the court to be necessary for the 
                preparation of the party's case, and reasonable 
                attorneys' fees and expenses. The amount of 
                fees awarded under this section shall be based 
                upon prevailing market rates for the kind and 
                quality of services furnished.
                  (B) The term ``substantially justified'' 
                shall have the same meaning as in section 
                2412(d)(1) of title 28, United States Code.
  (d) Prevention of Abusive Conflicts of Interest.--In any 
private action under this title pursuant to a complaint seeking 
damages on behalf of a class, if the class is represented by an 
attorney who directly owns or otherwise has a beneficial 
interest in the securities that are the subject of the 
litigation, the court shall, on motion by any party, make a 
determination of whether such interest constitutes a conflict 
of interest sufficient to disqualify the attorney from 
representing the class.
  (e) Disclosure of Settlement Terms to Class Members.--In any 
private action under this title that is certified as a class 
action pursuant to the Federal Rules of Civil Procedure, any 
settlement agreement that is published or otherwise 
disseminated to the class shall include the following 
statements:
          (1) Statement of potential outcome of case.--
                  (A) Agreement on amount of damages and 
                likelihood of prevailing.--If the settling 
                parties agree on the amount of damages per 
                share that would be recoverable if the 
                plaintiff prevailed on each claim alleged under 
                this title and the likelihood that the 
                plaintiff would prevail--
                          (i) a statement concerning the amount 
                        of such potential damages; and
                          (ii) a statement concerning the 
                        likelihood that the plaintiff would 
                        prevail on the claims alleged under 
                        this title and a brief explanation of 
                        the reasons for that conclusion.
                  (B) Disagreement on amount of damages or 
                likelihood of prevailing.--If the parties do 
                not agree on the amount of damages per share 
                that would be recoverable if the plaintiff 
                prevailed on each claim alleged under this 
                title or on the likelihood that the plaintiff 
                would prevail on those claims, or both, a 
                statement from each settling party concerning 
                the issue or issues on which the parties 
                disagree.
                  (C) Inadmissibility for certain purposes.--
                Statements made in accordance with 
                subparagraphs (A) and (B) concerning the amount 
                of damages and the likelihood of prevailing 
                shall not be admissible for purposes of any 
                Federal or State judicial action or 
                administrative proceeding.
          (2) Statement of attorneys' fees or costs sought.--If 
        any of the settling parties or their counsel intend to 
        apply to the court for an award of attorneys' fees or 
        costs from any fund established as part of the 
        settlement, a statement indicating which parties or 
        counsel intend to make such an application, the amount 
        of fees and costs that will be sought (including the 
        amount of such fees and costs determined on a per-share 
        basis, together with the amount of the settlement 
        proposed to be distributed to the parties to suit, 
        determined on a per-share basis), and a brief 
        explanation of the basis for the application. Such 
        information shall be clearly summarized on the cover 
        page of any notice to a party of any settlement 
        agreement.
          (3) Identification of lawyers' representatives.--The 
        name and address of one or more representatives of 
        counsel for the class who will be reasonably available 
        to answer written questions from class members 
        concerning any matter contained in any notice of 
        settlement published or otherwise disseminated to the 
        class.
          (4) Other information.--Such other information as may 
        be required by the court, or by any plaintiff steering 
        committee appointed by the court pursuant to section 
        36.
  (f) Encouragement of Finality in Settlement Discharges.--
          (1) Discharge.--A defendant who settles any private 
        action arising under this title at any time before 
        verdict or judgment shall be discharged from all claims 
        for contribution brought by other persons with respect 
        to the matters that are the subject of such action. 
        Upon entry of the settlement by the court, the court 
        shall enter a bar order constituting the final 
        discharge of all obligations to the plaintiff of the 
        settling defendant arising out of the action. The order 
        shall bar all future claims for contribution or 
        indemnity arising out of the action--
                  (A) by nonsettling persons against the 
                settling defendant; and
                  (B) by the settling defendant against any 
                nonsettling defendants.
          (2) Reduction.--If a person enters into a settlement 
        with the plaintiff prior to verdict or judgment, the 
        verdict or judgment shall be reduced by the greater 
        of--
                  (A) an amount that corresponds to the 
                percentage of responsibility of that person; or
                  (B) the amount paid to the plaintiff by that 
                person.
  (g) Contribution From Non-Parties in Interests of Fairness.--
          (1) Right of contribution.--A person who becomes 
        liable for damages in any private action under this 
        title (other than an action under section 9(e) or 
        18(a)) may recover contribution from any other person 
        who, if joined in the original suit, would have been 
        liable for the same damages.
          (2) Statute of limitations for contribution.--Once 
        judgment has been entered in any such private action 
        determining liability, an action for contribution must 
        be brought not later than 6 months after the entry of a 
        final, nonappealable judgment in the action.
  (h) Defendant's Right to Written Interrogatories Establishing 
Scienter.--In any private action under this title in which the 
plaintiff may recover money damages, the court shall, when 
requested by a defendant, submit to the jury a written 
interrogatory on the issue of each such defendant's state of 
mind at the time the alleged violation occurred.
        investigations; injunctions and prosecution of offenses

  Sec. 21. (a) * * *
          * * * * * * *
  (d)(1) Whenever it shall appear to the Commission that any 
person is engaged or is about to engage in acts or practices 
constituting a violation of any provision of this title, the 
rules or regulations thereunder, the rules of a national 
securities exchange or registered securities association of 
which such person is a member or a person associated with a 
member, the rules of a registered clearing agency in which such 
person is a participant, or the rules of the Muncipal 
Securities Rulemaking Board, it may in its discretion bring an 
action in the proper district court of the United States, the 
United States District Court for the District of Columbia, or 
the United States courts of any territory or other place 
subject to the jurisdiction of the United States, to enjoin 
such acts or practices, and upon a proper showing a permanent 
or temporary injunction or restraining order shall be granted 
without bond. The Commission may transmit such evidence as may 
be available concerning such acts or practices as may 
constitute a violation of any provision of this title or the 
rules or regulations thereunder to the Attorney General, who 
may, in his discretion, institute the necessary criminal 
proceedings under this title.
          * * * * * * *
  (4) Prohibition on Attorneys' Fees Paid From Commission 
Disgorgement Funds.--Except as otherwise ordered by the court, 
funds disgorged as the result of an action brought by the 
Commission, or of any Commission proceeding, shall not be 
distributed as payment for attorneys' fees or expenses incurred 
by private parties seeking distribution of the disgorged funds.
          * * * * * * *
SEC. 36. CLASS ACTION STEERING COMMITTEES.

  (a) Class Action Steering Committee.--In any private action 
arising under this title seeking to recover damages on behalf 
of a class, the court shall, at the earliest practicable time, 
appoint a committee of class members to direct counsel for the 
class (hereafter in this section referred to as the ``plaintiff 
steering committee'') and to perform such other functions as 
the court may specify. Court appointment of a plaintiff 
steering committee shall not be subject to interlocutory 
review.
  (b) Membership of Plaintiff Steering Committee.--
          (1) Qualifications.--
                  (A) Number.--A plaintiff steering committee 
                shall consist of not fewer than 5 class 
                members, willing to serve, who the court 
                believes will fairly represent the class.
                  (B) Ownership interests.--Members of the 
                plaintiff steering committee shall have 
                cumulatively held during the class period not 
                less than--
                          (i) the lesser of 5 percent of the 
                        securities which are the subject matter 
                        of the litigation or $10,000,000 in 
                        market value of the securities which 
                        are the subject matter of the 
                        litigation; or
                          (ii) such smaller percentage or 
                        dollar amount as the court finds 
                        appropriate under the circumstances.
          (2) Named plaintiffs.--Class plaintiffs serving as 
        the representative parties in the litigation may serve 
        on the plaintiff steering committee, but shall not 
        comprise a majority of the committee.
          (3) Noncompensation of members.--Members of the 
        plaintiff steering committee shall serve without 
        compensation, except that any member may apply to the 
        court for reimbursement of reasonable out-of-pocket 
        expenses from any common fund established for the 
        class.
          (4) Meetings.--The plaintiff steering committee shall 
        conduct its business at one or more previously 
        scheduled meetings of the committee, of which prior 
        notice shall have been given and at which a majority of 
        its members are present in person or by electronic 
        communication. The plaintiff steering committee shall 
        decide all matters within its authority by a majority 
        vote of all members, except that the committee may 
        determine that decisions other than to accept or reject 
        a settlement offer or to employ or dismiss counsel for 
        the class may be delegated to one or more members of 
        the committee, or may be voted upon by committee 
        members seriatim, without a meeting.
          (5) Right of nonmembers to be heard.--A class member 
        who is not a member of the plaintiff steering committee 
        may appear and be heard by the court on any issue 
        relating to the organization or actions of the 
        plaintiff steering committee.
  (c) Functions of Plaintiff Steering Committee.--The authority 
of the plaintiff steering committee to direct counsel for the 
class shall include all powers normally permitted to an 
attorney's client in litigation, including the authority to 
retain or dismiss counsel and to reject offers of settlement, 
and the authority to accept an offer of settlement subject to 
final approval by the court. Dismissal of counsel other than 
for cause shall not limit the ability of counsel to enforce any 
contractual fee agreement or to apply to the court for a fee 
award from any common fund established for the class.
  (d) Immunity From Civil Liability; Removal.--Any person 
serving as a member of a plaintiff steering committee shall be 
immune from any civil liability for any negligence in 
performing such service, but shall not be immune from liability 
for intentional misconduct or from the assessment of costs 
pursuant to section 20B(c). The court may remove a member of a 
plaintiff steering committee for good cause shown.
  (e) Effect on Other Law.--This section does not affect any 
other provision of law concerning class actions or the 
authority of the court to give final approval to any offer of 
settlement.

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

  (a) Safe Harbor Defined.--In any action arising under this 
title based on a fraudulent statement (within the meaning of 
section 10A), a person shall not be liable for the publication 
of any projection if--
          (1) the basis for such projection is briefly 
        described therein, with citations (which may be 
        general) to representative sources or authority, and a 
        disclaimer is made to alert persons for whom such 
        information is intended that the projections should not 
        be given any more weight than the described basis 
        therefor would reasonably justify; and
          (2) the basis for such projection is not inaccurate 
        as of the date of publication, determined without 
        benefit of subsequently available information or 
        information not known to such person at such date.
  (b) Automatic Protective Order Staying Discovery; Expedited 
Procedure.--In any action arising under this title based on a 
fraudulent statement (within the meaning of section 10A) by any 
person, such person may, at any time beginning after the filing 
of the complaint and ending 10 days after the filing of such 
person's answer to the complaint, move to obtain an automatic 
protective order under the safe harbor procedures of this 
section. Upon such motion, the protective order shall issue 
forthwith to stay all discovery as to the moving party, except 
that which is directed to the specific issue of the 
applicability of the safe harbor. A hearing on the 
applicability of the safe harbor shall be conducted within 45 
days of the issuance of such protective order. At the 
conclusion of the hearing, the court shall either (1) dismiss 
the portion of the action based upon the use of a projection to 
which the safe harbor applies, or (2) determine that the safe 
harbor is unavailable in the circumstances.
  (c) Regulatory Authority.--In consultation with investors and 
issuers of securities, the Commission shall adopt rules and 
regulations to facilitate the safe harbor provisions of this 
section. Such rules and regulations shall--
          (1) include clear and objective guidance that the 
        Commission finds sufficient for the protection of 
        investors,
          (2) prescribe such guidance with sufficient 
        particularity that compliance shall be readily 
        ascertainable by issuers prior to issuance of 
        securities, and
          (3) provide that projections that are in compliance 
        with such guidance and that concern the future economic 
        performance of an issuer of securities registered under 
        section 12 of this title will be deemed not to be in 
        violation of section 10(b) of this title.
          * * * * * * *
                             MINORITY VIEWS

    We strongly support the goal of deterring meritless 
securities class action lawsuits. The record before this 
Committee establishes that such lawsuits can be costly to 
defend and may needlessly distract corporate officials who work 
honestly and diligently to help their companies prosper in an 
increasingly competitive economic climate.
    But the record before this Committee also establishes--
unequivocally--that our system of private litigation under the 
federal securities laws has functioned effectively as a 
``necessary'' \1\ and ``essential'' \2\ supplement to the 
enforcement program of the U.S. Securities and Exchange 
Commission (SEC). Private class actions are ``crucial to the 
integrity of our disclosure system '' \3\ because they provide 
a ``powerful deterrent'' \4\ to those who might consider 
ignoring or fraudulently evading their obligations to the 
investing public. Private class actions also provide an 
irreplaceable means of compensating millions of defrauded 
individual investors. According to a staff report on private 
securities litigation prepared by the Senate Subcommittee on 
Securities, ``a long list of notorious cases have recovered 
billions of dollars for defrauded investors.'' \5\
    \1\ See, e.g., Bateman Eichler, Hill Richards, Inc. v. Berner, 472 
U.S. 299, 310 (1985); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 
723, 730 (1975); J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964).
    \2\ See e.g., ``Hearing on Securities Fraud Litigation Reform 
Proposals Before the Subcommittee on Telecommunications & Finance of 
the House Committee on Commerce,'' (Feb. 10, 1995) (Oral testimony of 
Arthur Levitt, Chairman, SEC); ``Securities Investor Protection Act of 
1991: Hearing Before the Subcommittee on Securities of the Senate 
Committee on Banking, Housing & Urban Affairs,'' (Oct. 2, 1991) at 3-4 
(Testimony of Richard C. Breeden, Chairman, SEC) (``[p]rivate 
litigation is an essential element in enforcing the rights of the more 
than 50 million Americans who participate in the U.S. securities 
markets'').
    \3\ ``Hearing on Securities Fraud Litigation Reform Proposals 
Before the Subcommittee on Telecommunications & Finance of the House 
Committee on Commerce,'' (Feb. 10, 1995) (Testimony of Arthur Levitt, 
Chairman, SEC) at 1.
    \4\ Id. at 30.
    \5\ ``Private Securities Litigation, Staff Report Prepared At The 
Direction of Senator Christopher J. Dodd, Chairman, Subcommittee on 
Securities of the Committee on Banking, Housing and Urban Affairs,'' 
United States Senate, (May 17, 1994) at 10.
---------------------------------------------------------------------------
    The conclusion to be drawn from these facts is clear. 
Legislative reforms aimed at frivolous or meritless securities 
class action lawsuits are needed. But the reforms must be 
carefully crafted, because the antifraud provisions of the 
federal securities laws are one of the nation's most important 
weapons in the continuing response to ever larger and more 
complex financial scandals that recur too frequently on Wall 
Street. At the first hearing on the subject of securities 
litigation reform held by the Subcommittee on 
Telecommunications and Finance last year, Arthur Levitt, 
Chairman of the SEC implored Members to keep these facts in 
mind:

          I thought during my service as head of Shearson and 
        then head of the American Stock Exchange, that I had 
        seen just about every kind of public fraud that could 
        possible be perpetrated on individual investors. And 
        then I came to the Commission, and week by week hearing 
        cases, seeing what is going on in this country, how 
        many people are out there taking advantage of innocent 
        individual shareholders dwarfed anything I had ever 
        experienced before and convinced me in a way that no 
        amount of experience or reading or anecdotal 
        information could possibly have persuaded me of the 
        vital and compelling importance and mandate of the 
        Commission, above everything else that it has to do in 
        terms of governance issues and legislative issues, the 
        critical important of protecting individual investors. 
        So anything that is suggested which raises the hurdle 
        for those investors to right these wrongs is something 
        that I have to look at with great care and 
        circumspection. The abuses you speak of are there. * * 
        * But, again, in the balance between the interests of 
        investors and the interests of a better system, a 
        better system is important, but it can't be at the 
        expense of those investors.

    Rather than cutting off access to the courts, we must 
ensure that the private litigation system works more 
responsibly and effectively. Abusive practices must be deterred 
and, where appropriate, sternly sanctioned. But individual 
investors, who honestly believe they have been defrauded, must 
also be assured that the doorway to the American system of 
civil justice remains open, and that the law remains available 
to protect them and their families. Every Democrat on this 
Committee is prepared to support enthusiastically legislation 
that strikes this crucial balance. But legislation that 
succeeds in stopping frivolous cases only by making it equally 
impossible to pursue those who were responsible for calamities 
like the billion dollar frauds at Drexel Burnham Lambert, 
Lincoln Savings and Loan, Prudential Securities, the Washington 
Public Power Supply System, Salomon Brothers, CenTrust Savings, 
and perhaps even the Orange County bankruptcy, to name but a 
few, obviously fails to achieve this needed balance and will 
not have our support.
    In our judgment, Title II of H.R. 10, as reported by the 
Committee, utterly fails to pass this simple test of balance 
and fairness. Notwithstanding hastily drafted last-minute 
changes,\6\ this bill represents a drastic overreaction to the 
problem of meritless class action lawsuits.\7\ The misguided 
and counterproductive approach set forth in the bill will have 
profoundly harmful consequences for small individual investors 
and, ultimately, for their confidence in the fairness of our 
capital markets. Many of the bill's sweeping provisions bear no 
logical relation to the evidence and testimony presented to the 
Congress during the last two years.\8\ And, paradoxically, the 
bill's contradictory, confused, and ambiguous provisions, if 
enacted, would cause years of needless and enormously wasteful 
litigation in the federal courts.
    \6\ As enshrined in the Republicans' Contract With America, Title 
II of H.R. 10 was even more draconian. It removed from the securities 
laws prohibitions against reckless conduct by corporate officials and 
their financial advisers. In effect, it also ensured that no class 
action lawsuit for securities fraud would or could be brought in the 
federal courts. It accomplished this by eliminating the ability of 
investors to argue that the market itself had been defrauded, by 
imposing an absolute ``loser pays'' attorney fee shifting requirement 
in all securities fraud cases, and by requiring that investors plead at 
the outset of the case specific facts demonstrating a defendant's state 
of mind, a task most legal experts view as impossible at any time 
during a lawsuit.
    \7\ In a speech delivered in early 1994, SEC Chairman Levitt noted 
that ``the number of securities law cases has not increased during the 
past two decades. Class action filings have increased over the past 
three years, but they do not exceed the levels that prevailed during 
the 1970's. When measured against the number of public offerings and 
the volume of trading on NASDAQ and the exchanges, the amount of 
securities litigation has actually declined.'' Speech by Arthur Levitt, 
Chairman, SEC, January 26, 1994.
    \8\ For example, the onerous new rules established by this 
legislation are not limited to class actions brought under Section 
10(b) of the Securities Exchange Act of 1934 (``Exchange Act''), about 
which the Subcommittee on Telecommunications and Finance received ample 
testimony. Instead, for reasons that have never been explained and have 
no basis in the record, they will apply to all private actions brought 
under the Exchange Act. We have been unable to locate any testimony 
presented to the Subcommittee which analyzes or argues in support of 
these changes. Moreover, the most significant decisions in the federal 
courts draw important distinctions between, for example, the 
culpability standards under Sections 10(b) and 14(e) of the Exchange 
Act. Yet, with one entirely unexplained sweep of its hand, the 
Committee upsets decades of thoughtful and careful securities caselaw 
by superimposing it proposed new Section 10(b) requirements to actions 
brought under Section 14(a).
    In light of the failure of the Republicans to respond 
adequately to concerns about the egregious impact this bill 
will have on average investors and on the integrity of the 
market,\9\ the breadth of opposition to the bill that continues 
to emerge is not surprising. On the day before this Committee 
marked up Title II of H.R. 10, the SEC stated that:
    \9\ Among other things, the Republicans made changes that deleted 
the guardian ad litem and the alternative dispute resolution procedure 
provisions; deleted the discriminatory investment restrictions on 
potential named plaintiffs with small holdings; ameliorated the 
potentially unconstitutional aspects of the restrictions on 
professional plaintiffs; removed SEC enforcement actions from the 
bill's restrictions; restored controlling person liability, liability 
for recklessness, and the fraud on the market theory of reliance; and 
modified the loser pays, scienter, pleading, and safe harbor for 
predictive statement provisions. However, as discussed infra, some of 
these revisions have served to make the bill worse rather than better.

          Because of the potential impact on U.S. investors and 
        markets, the Commission cannot support the proposed 
        provisions. * * * While the SEC supports Congressional 
        efforts to curb abuses, we reiterate our first 
        priority: the rights of American investors and the 
        integrity of the American capital markets must be held 
---------------------------------------------------------------------------
        paramount.

    We agree:
    In addition to the SEC, the securities regulators from the 
fifty states, and municipal finance officers from across the 
nation oppose all of the key elements of Title II of H.R. 10. 
So do groups that represent retirees, many of whom have 
invested their life's savings, or insurance proceeds, or the 
equity from their homes in the securities market. These groups 
include the American Association of Retired Persons, the 
National Council of Senior Citizens, and the Gray Panthers. As 
of February 22, 1995, ninety-five of the nation's leading 
scholars in the field of corporate and securities law had 
signed a petition opposing the enactment of H.R. 10. Major 
consumer organizations, including the Consumer Federation of 
America, Consumer's Union (publisher of the widely respected 
Consumer Reports), Public Citizen, and the U.S. Public Interest 
Research Group, are unified in their opposition to Title II of 
H.R. 10. So too are many large pension funds, including those 
representing present and future retirees from the AFL-CIO, the 
Teamsters, the Machinists, and the Fraternal Order of Police. 
The American Bar Association, the well respected group that 
represents lawyers from every field of law, and the Association 
of the Bar of the City of New York, the nation's most respected 
group of securities law experts, also oppose the key elements 
of H.R. 10.
    Even Herbert Stein, a resident scholar at the conservative 
American Enterprise Institute and former Chairman of the 
Council of Economic Advisers under Presidents Nixon and Ford, 
believes that Title II of H.R. 10 is badly out of balance. In a 
recent article in The New York Times,\10\ he suggests that H.R. 
10's authors and principal supporters have lost touch with the 
real concerns of middle class Americans and the complex 
realities of our financial markets.
    \10\ ``Letting Wall Street Off Easy,'' New York Times, Wednesday, 
February 15, 1995, at A21.

          [F]rivolous lawsuits can be an unnecessary drain on 
        the system. But a much more serious problem is assuring 
        the middle-class investor that the people to whom he 
        entrusts his money will look after his interest 
        honestly and diligently. The possibility of recourse to 
        the judicial system is integral to that assurance, and 
        the proposals in the [Contract With America] would 
        weaken it.
the loser almost always pays provision: barricading the courthouse door 
                           to small investors

    Since the nation's founding over 200 years ago, our 
national policy has consistently favored fair and equal access 
to justice. Title II of H.R. 10 would significantly undermine 
this longstanding and treasured national policy by imposing a 
version of the so-called ``English Rule'' on American litigants 
and federal courts. Under the English Rule, the losing party 
must pay all of the attorneys' fees and other costs and 
expenses of the prevailing party.
    Contrary to claims advanced in support of H.R. 10's version 
of the English Rule, the award of fees to the prevailing party 
will be mandatory. A court would be able to prevent the 
shifting of fees to the losing party only if each of three 
demanding (and somewhat confusing) conditions are met. First, 
the court must conclude that the losing party's ``position'' 
was ``substantially justified.'' Second, the court must find 
that imposing the fees on the losing party is not unjust. And 
third, the court must find that the prevailing party would be 
substantially burdensome or unjust if imposed on the losing 
party. Again, unless all three requirements are satisfied, the 
court must shift all of the prevailing party's fees and 
expenses to the losing party.
    In addition to establishing a ``loser almost always pays'' 
rule of fee shifting, H.R. 10 imposes a costly and hopelessly 
burdensome requirement applicable only to the investors. Either 
the investors or their attorneys will be required to post 
security at the beginning of the case to provide for the 
payment of the defendant's attorneys' fees and other expenses 
in the event that fees are shifted. While no such requirement 
is imposed on defendants (even though, in almost all instances, 
it would be much easier for them to do so), the lack of 
equivalent treatment misses the point.
    During hearings before the Subcommittee on 
Telecommunications and Finance, numerous witnesses and Members 
warned that this fee shifting provision (and its even more 
onerous predecessor) would effectively end all private actions 
by small investors who are victims of fraud.\11\ Victims--
including even those with the strongest cases--will not be able 
to stand up and sue, either on their own, or as the champion of 
a class of similarly situated investors, if by doing so they 
are exposed to the risk of paying millions in legal fees to 
large public corporations, investment banking houses, 
accounting firms, and law firms.\12\
    \11\ See, e.g., ``Hearings on Federal Securities Fraud Litigation 
Before the Subcommittee on Telecommunications and Finance of the House 
Committee on Energy and Commerce.'' (Aug. 10, 1994) (testimony of 
Professor Arthur Miller) at 14 (``As a practical matter, fee shifting 
is almost invariably in intimidation device designed to inhibit people 
from seeking access to the courts. Fee shifting would eviscerate all--
or virtually all--plaintiffs' securities claims, the meritorious along 
with the meritless.''); (testimony of Professor John Coffee, Jr.) at 16 
(``Clearly, some proposed reforms--such as the English rule under which 
the loser pays the winner's legal expenses--would probably end 
securities class actions in all except rare cases of flagrant 
fraud.''); (oral testimony of Professor Joel Seligman) (``[T]he one 
proposal that is on the table that I find most objectionable and [am] 
most strongly troubled by is the English fee shifting rule. * * * This 
is the rule, if adopted, that would basically have the tendency to 
prevent meritorious lawsuits from going forward.''). It should be noted 
that this testimony was received in opposition to the fee shifting 
provision in H.R. 417 in the 103d Congress, a proposal that was less 
demanding on investors than the provision presently contained in H.R. 
10.
    \12\ See, e.g., ``Hearings on Private Litigation Under the Federal 
Securities Laws, Senate Subcommittee on Securities of the Senate 
Committee on Banking, Housing & Urban Affairs,'' (June 17 & July 21, 
1993) (testimony of Gordon Billip, defrauded investor) at 71 (``If the 
law had required [my wife] Betty and me and other bond-holders and our 
lawyers to pay the defendants' exorbitant legal fees if we were to lose 
the case, we never would have stuck our necks out to represent the 
2,000 investors, many of whom had invested the savings of a 
lifetime.''); (testimony of Russell E. Ramser, Jr., defrauded investor) 
at 74 (``Although I was comfortable in my belief that the bondholders 
had been wronged by the accounting firms, I would not have filed this 
suit if, in addition to devoting my time to the case, I would have been 
required to pay their millions of dollars of attorneys' fees in the 
event that the jury, or a judge, did not agree with me.'').
    SEC Chairman Arthur Levitt emphasized this point in his 
recent appearance before the Subcommittee. ``In class action 
lawsuits, in particular, individual plaintiffs frequently stand 
to recover only a small amount if they prevail. Their potential 
liability under an automatic fee shifting provision would be 
totally disproportionate to their potential recovery.''
    The arguments in opposition to the various forms of the 
English Rule that have been proposed were also recently 
buttressed by a surprising but powerful and authoritative 
source: the respected conservative weekly, The Economist. In 
its British edition of January 14, 1995, the magazine 
forcefully argued that Britain should abandon its ``loser 
pays'' rule. According to The Economist, this rule was 
dramatically eroding the legitimacy of the British civil 
justice system. ``Enormous numbers of mostly middle-class 
people'' simply cannot use the courts, The Economist said, 
because they must pay for the other side's lawyers if they 
lose. ``For most people, this means that they are risking 
financial ruin'' if they choose to go to court, no matter how 
justified or serious their underlying complaint may be. Today 
in Britain, The Economist noted, ``only the very wealthy can 
afford the costs and risks of most litigation. This offends one 
of the most basic principles of a free society: equality before 
the law.''
    Common sense suggests to us that the standards for shifting 
fees and the provision requiring investors to post security 
that are contained in the present version of H.R. 10 have been 
poorly thought out and will likely have highly undesirable 
consequences. For example, while the term ``substantially 
justified'' is apparently borrowed from the Equal Access to 
Justice Act (``EAJA''), none of the provisions of that statute 
that modify and limit its applicability have been included in 
H.R. 10.\13\
    \13\ See Pub. L. No. 96-481, 94 Stat. 2325 (1980) (codified at 5 
U.S.C. Sec. 504 and 28 U.S.C. Sec. 2412). Under the EAJA, the federal 
government can be required to pay a private party's attorneys' fees and 
other costs if a court determines that the government's position was 
not ``substantially justified.'' But fees cannot be shifted onto any 
party other than the government. And attorneys' fees and costs may only 
be pursued against the government under this unusual statute if the 
party seeking the sanction is either an individual with a net worth of 
under $200,000, a tax-exempt organization, or a business with a net 
worth of under $7 million and fewer than 500 employees. While we 
obviously are not familiar with all the details that led to the 
promulgation of the EAJA's ``substantially justified'' standard, it is 
evident that care was taken to limit its applicability so as not to 
preclude the government from pursuing legitimate cases. There are no 
such limitations in this bill.
---------------------------------------------------------------------------
    Notwithstanding our objections to the `loser almost always 
pays'' provision in H.R. 10, we would support a reasonable fee-
shifting proposal. In fact, Congressman Manton offered an 
amendment at the full Committee mark-up that would have 
established a fair and balanced mandatory fee-shifting scheme 
for cases (or defenses) that were frivolous or asserted in bad 
faith. But, because debate was cut off by the Republicans, 
there was no opportunity for Mr. Manton or his colleagues to 
present to the Committee the strong policy arguments that 
support his approach. In the absence of any debate on the 
issue, it came as no surprise that Mr. Manton's amendment was 
defeated in a straight party line vote.
    Because of the deep and lasting chilling effect it will 
have on investors who have a legitimate basis for pursuing a 
securities fraud claim in court, we strongly oppose H.R. 10's 
``lower almost always pays'' provision and its requirement that 
investors post security before being allowed to proceed with 
their case.
    reckless conduct as evidence of scienter: its restoration is an 
                                illusion

    As introduced, Title II of H.R. 10 proposed to radically 
increase the burden on investors seeking to prove a case of 
fraud under the federal securities laws, and to dramatically 
restrict the circumstances in which a corporation or one of its 
financial advisors could be charged with fraud.\14\ One of the 
bill's most troubling provisions was its extraordinary reversal 
of an unbroken string of court rulings over the last twenty 
years. In this long series of decisions, every federal 
appellate court that considered the issue concluded that a 
defendant who acted recklessly would be deemed to have acted 
with the ``scienter'' needed to prove securities fraud.\15\
    \14\ As originally drafted, these new liability standards were 
intended to cut back on the ability of the SEC to bring enforcement 
actions as well as to restrict individual investors who sought to bring 
private actions. In part because of strenuous objections from Members 
and other concerned observers, the language that had applied these 
provisions to the SEC was removed. We have now been assured by the 
Republicans that H.R. 10 will not affect (and is not intended to 
affect) any aspect of the SEC's enforcement of the antifraud provisions 
of the securities laws.
    \15\ See, e.g., Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 
46-47 (2d Cir.), cert. denied, 439 U.S. 1039 (1978); McLean v. 
Alexander, 599 F.2d 1190, 1197 (3d Cir. 1979); Broad v. Rockwell Int'l 
Corp., 642 F.2d 929, 961-962 (5th Cir.) (en banc), cert. denied, 454 
U.S. 965 (1981); Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 
1024 (6th Cir. 1979); Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 
1033, 1044 (7th Cir.), cert. denied, 434 U.S. 875 (1977); Van Dyke v. 
Coburn Enterprises, Inc., 873 F.2d 1094, 1100 (8th Cir. 1989); Nelson 
v. Serwold, 576 F.2d 1332, 1337 (9th Cir.), cert. denied, 439 U.S. 970 
(1978); Hackbart v. Holmes, 675 F.2d 1114, 1117 (10th Cir. 1982); SEC 
v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. 1982).
---------------------------------------------------------------------------
    The original version of H.R. 10 assigned no value to the 
fact that the recklessness standard had for twenty years been a 
crucial element of our public policy of maintaining fair and 
honest financial markets. As initially proposed in the Contract 
With America, even extreme types of recklessness would no 
longer have been prohibited by the antifraud provisions of the 
securities laws.
    But virtually all experts in the field of securities law 
believe that liability for recklessness is critical if the 
antifraud laws are to successfully deter fraudulent activity in 
the market. Indeed, providing that defendants who recklessly 
disregard the truth may be liable to investors, or subject to 
an enforcement action by the SEC, discourages ``head in the 
sand'' passivity on the part of senior corporate officials and 
their financial advisers, and creates an essential and powerful 
incentive to proper disclosure and good corporate governance.
    During a Subcommittee hearing on H.R. 10, several witnesses 
and Members advanced similar reservations about the 
consequences of abandoning the recklessness standard. Member 
were particularly concerned that abandoning all liability for 
reckless conduct would effectively inoculate auditors, 
underwriters, and corporate counsel from any risks associated 
with fraudulent misstatements, and thus greatly erode the 
ability of private actions to deter fraud and defrauded 
investors to obtain justice. Chairman Levitt made it clear that 
this proposal would make it virtually impossible for investors 
who had clearly been defrauded and suffered substantial losses 
from pursuing compensation from professionals whose work may 
have been instrumental to the fraud's success:

          [Abandoning the recklessness standard] would reduce 
        the degree to which such professional advisers 
        encourage full and complete disclosure. There are 
        relatively few cases in which it is established that 
        professional advisers acted with actual, subjective 
        knowledge that the representations made by an issuer 
        were false. Rather, the liability of such advisers 
        typically is predicated on a finding that they 
        participated in the dissemination of false statements 
        while recklessly ignoring indications of fraud.

    We have written at some length about H.R. 10's initial 
proposal to eliminate the recklessness standard, even though 
amendments at both the Subcommittee and Committee mark-ups were 
said to have restored the standard to the antifraud laws. 
However, the language that supposedly restored recklessness at 
the Subcommittee mark-up, was, we believe, a charade. It 
established extraordinary and utterly unattainable requirements 
of proof that no investor could ever satisfy.
    The recklessness standard that was proposed and enacted by 
the Committee is, at first glance, a considerable improvement 
over the language adopted by the Subcommittee. The first 
sentence in the definition, with one significant exception,\16\ 
codifies the recklessness standard that was adopted by the 
Seventh Circuit Court of Appeals in Sundstrand Corp. v. Sun 
Chemical Corp.,\17\ a version of which is applied by at least 
75% of the nation's federal courts. We believe that the 
original Sundstrand standard represents a perfectly adequate 
definition of recklessness, and we would all be pleased to 
support it.
    \16\ The only material change to the first sentence of the 
definition is the addition of the word ``consciously'' to modify the 
word ``aware.'' We believe this is a last-ditch effort to ratchet up 
the burdens placed on investors who have been defrauded because of 
reckless conduct, and is entirely unnecessary. We therefore continue to 
oppose this formulation of the Sundstrand standard.
    \17\ 553 F.2d 1033 (7th Cir.), cert. denied sub nom., Meers v. 
Sundstrand Corp., 434 U.S. 875 (1977).
---------------------------------------------------------------------------
    Unfortunately the amendment that was adopted by the 
Committee purporting to restore liability for recklessness to 
the antifraud laws contained two sentences rather than one. And 
the second sentence included in the amendment takes away 
virtually everything that was provided by the first.
    The second sentence establishes as a matter of federal law 
the following unprecedented affirmative defense to a claim of 
reckless securities fraud: ``For example, a defendant who 
genuinely forgot to disclose, or to whom disclosure did not 
come to mind, is not reckless.''
    This ``I forgot'' defense is not only unprecedented under 
federal securities law, it does not appear to be recognized in 
any other area of federal law, or in any other jurisdiction in 
this country. We are not aware of a single securities fraud 
case in which any defendant has ever successfully argued that 
he or she was excused from and not responsible for their 
otherwise reckless conduct because they ``forgot'' to obey the 
law, or because fulfilling their legal responsibilities to 
shareholders just ``did not come to mind.''
    For centuries this country has, with great justification, 
prided itself on the fact that we are governed by the rule of 
law rather than by the whim of individuals. With just one 
sentence, however, the majority proposes a complete reversal of 
this principle, and its corollary, which is that ignorance of 
the law is no excuse. From now on in federal securities fraud 
cases--where during the course of the last ten years hundreds 
of thousands of small investors have lost their life's savings 
and seen their faith in the American dream shaken--the 
Committee proposes to sanctify ignorance of the law by 
elevating it into the statute that has been our most important 
weapon against fraud.
    We strenuously object.
       h.r. 10 is unnecessarily and unjustifiably broad in scope

    As reported by the Committee, the scienter provisions in 
title II of H.R. 10 apply to ``any private action'' arising 
under the Securities Exchange Act of 1934 (Exchange Act). By 
extending the bill's application to ``any private action,'' the 
bill will have the effect of requiring proof of scienter in 
proxy cases brought under Section 14 and disclosure cases 
brought under Section 8, neither of which currently has a 
scienter requirement. This is absurd public policy. It is 
entirely unrelated to the objective of reducing meritless 
securities fraud lawsuits, and has no support in the otherwise 
voluminous record assembled by this Committee over the course 
of the last year.
    It also appears that H.R. 10 may redefine the elements of a 
violation under the proxy provisions. Current law allows a case 
to be brought under Section 14(a) against any person who 
solicits or permits the use of his name to solicit a proxy by 
means of a proxy statement that is false or misleading. H.R. 10 
would limit recovery to cases against persons who directly or 
indirectly ``make'' a fraudulent statement.
    Again, this has nothing to do with the stated goals of this 
legislation and would only serve to shield unlawful conduct 
from liability. Because there is no information in the record 
describing or discussing these matters, we do not know if these 
effects are intended. We do know that unintended consequences 
are the foreseeable result when politics rather than policy 
directs the process.
    This provision was poorly thought out, and we are convinced 
that H.R. 10's supporters are not aware of the many harmful 
effects it may have. We oppose the provision.

         h.r. 10's harsh pleading requirements are unattainable

    In its original form, Title II of H.R. 10 required 
investors to plead ``specific facts demonstrating the state of 
mind of each defendant at the time the alleged violation 
occurred.'' At one point during Committee consideration, we 
were informed that the bill would likely be amended to require 
that investors allege specific facts giving rise to a ``strong 
inference'' that the defendant acted knowingly or recklessly. 
This is the test used today by the Second Circuit Court of 
Appeals, and it is generally regarded as more stringent than 
the test used by the other circuits.
    H.R. 10 as reported does not codify the Second Circuit 
test. It provides that investors who bring securities fraud 
cases must make specific allegations which, if true, would be 
sufficient to ``establish'' that the defendant acted knowingly 
or recklessly. It than adds that ``it shall not be sufficient 
for this purpose to plead the mere presence of facts 
inconsistent with a statement of omission alleged to have been 
misleading.''
    There is a significant difference between having to allege 
facts that give rise to a ``strong inference'' that the 
defendant acted knowingly or recklessly, and having to plead 
facts that ``establish'' that the defendant had the requisite 
state of mind. We believe that it is inappropriate to establish 
any test more stringent than the Second Circuit test, which 
many experts already believe is already too severe.
    Because we believe that the bill as reported may result in 
meritorious fraud cases being dismissed, we are unable to 
support this provision.
    establishing reliance by means of the fraud on the market theory

    Title II of H.R. 10 as introduced would have eliminated the 
ability of defrauded investors to demonstrate that they relied 
on the market price of a security, which in turn relied on or 
was adversely affected by a fraudulent misstatement or 
omission. This method of establishing indirect reliance was 
accepted by the Supreme Court in the landmark case of Basic v. 
Levinson, and is popularly known as the fraud on the market 
theory. By repealing the Basic decision, H.R. 10 would have 
required that each of the thousands of investors who typically 
comprise a class present proof to the court that they actually 
relied on a specific fraudulent misstatement or omission made 
by a defendant. Because such a requirement destroys one of the 
foundational elements needed to proceed on a classwide basis, 
this requirement by itself would have precluded all future 
class actions for securities fraud.
    As reported by the Committee, however, H.R. 10 has, at 
least in part, reversed its approach to this issue. The bill 
now appears to preserve the ability of investors to plead fraud 
on the market in many cases, a welcome and laudable 
development, and the Republicans deserve thanks for recognizing 
the importance of this issue.
    Despite this important improvement, however, a serious 
problem remains. H.R. 10 as reported appears to attempt to 
limit the availability of the fraud on the market theory for 
fraud cases involving securities that are deemed to be 
``illiquid.'' While, in theory, such a limitation may be 
justified, attempting to formulate the complex contours of such 
a limitation virtually overnight, without doing more harm than 
good, strikes us as virtually impossible.
    An article in the February 23, 1995 Bond Buyer appears to 
prove the point. The article reports that this provision may 
preclude any class action from ever proceeding if the 
underlying security is a municipal bond.\18\ The article notes, 
rather ironically, that two of the largest securities fraud 
cases in history--the litigation surrounding the default by the 
Washington Public Power Supply System, and the developing 
litigation resulting from Orange County's bankruptcy--both 
involved municipal securities. The idea that investors in these 
securities will be precluded from pursuing their case as a 
class because of this provision strikes us as absurd, and 
cannot possibly be the result intended by the Republicans.
    \18\ ``House Panel's Bill Could Prohibit Class Action Suits in Muni 
Market,'' The Bond Buyer, February 23, 1995.
---------------------------------------------------------------------------
    We think a much simpler approach is to assign 
responsibility to the SEC to develop rules that determine when 
the fraud on the market theory should be available to protect 
investors, and when it might be unfair to permit them to use 
it. Unfortunately, the Republicans opposed a sensible amendment 
that would have permitted this issue to be analyzed in a more 
thoughtful and deliberate way.
    We continue to believe that this provision is seriously 
flawed.

                         calculation of damages

    The provision in section 204 addressing the calculation of 
damages has been amended to apply only to fraud on the market 
cases, which is an improvement. The provision continues to 
place somewhat arbitrary limits on recoverable damages, 
however, for reasons that are unclear. In a typical case, 
damages are based on the difference between the price paid for 
a security and the market value of that security after 
information correcting prior fraudulent statements is 
disclosed. H.R. 10 as reported would provide that, if the 
plaintiff subsequently sells the stock at a higher price, the 
plaintiff's recoverable damages must be offset by the amount by 
which the stock price increased after the corrective 
information was disclosed. Because this subsequent increase in 
the price will, by definition, be unrelated to the fraud, there 
is no apparent justification for offsetting it against the 
plaintiff's damages.
    We believe that this provision is unfair to defrauded 
investors.
                               conclusion

    As this legislation advances to the floor of the House, we 
will continue to support meaningful efforts to deter the filing 
of meritless securities fraud class action lawsuits, and to 
sanction those who proceed in bad faith and abuse the process. 
We cannot, however, countenance efforts that promise to 
eviscerate the ability of individual investors to protect 
themselves in the guise of remedying what we all agree have 
sometimes been excessive and abusive litigation practices.
    As we have repeated in the past and will repeat again in 
the future, the provisions of our securities laws that prohibit 
fraud are one of this country's most important and powerful 
weapons in the battle against financial wrongdoing. The record 
of enforcement of these laws, whether by the SEC, by state 
securities regulators, or by groups of small individual 
investors who in effect serve as private attorneys general, 
demonstrates overwhelmingly that effective laws against 
fraudulent and corrupt practices are essential to maintaining 
honest, fair and efficient financial markets.
    Legislation that would substantially alter the well-
established enforcement mechanisms that exist under the 
antifraud provisions of the nation's securities laws must be 
closely scrutinized to ensure that it is has been carefully 
drafted and is well-tailored to the problems it seeks to 
address. Title II of H.R. 10 as reported by the Committee fails 
this crucial test. We again express our hope that our 
Republican colleagues, who in the past have expressed great 
concern with undertaking grand social experiments through ill-
conceived but well-intended legislation, will abandon their 
newly found affection for their unprecedented effort to 
severely cut back the laws that protect investors against 
financial fraud. If they are willing to commit themselves to 
working cooperatively with us to develop a careful and 
responsible bill, we will commit ourselves to working with them 
to ensure that it is enacted into law.

                                   John D. Dingell.
                                   Edward J. Markey.
                                   Ron Klink.
                                   Gerry Studds.
                                   John Bryant.
                                   Elizabeth Furse.
                                   Henry A. Waxman.
                                   Bart Stupak.
                                   Rick Boucher.
                                   Ron Wyden.
                                   Edolphus Towns.
                                   Bart Gordon.
               ADDITIONAL DISSENTING VIEWS OF MR. MARKEY

    I find it curious that a securities litigation reform bill 
as broad in scope as Title II of H.R. 10 entirely ignores the 
devastating practical effects of one of the most important 
securities-related decisions to be handed down in years by the 
U.S. Supreme Court. I am referring to the Central Bank of 
Denver \1\ decision in which a divided Court held that there is 
no implied private right of action for aiding and abetting 
under Section 10(b) of the Securities Exchange Act of 1934 and 
Rule 10b-5 promulgated thereunder.
    \1\ Central Bank of Denver, N.A. v. First Interstate Bank of 
Denver, N.A. 114 S. Ct. 1439 (1994).
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    Aiding and abetting is rooted in the common-law doctrine 
that provides liability for those who do not directly violate 
the law but who provide assistance to the unlawful acts of 
others. Until the Supreme Court altered the landscape in May 
1994, aiding and abetting liability was an important tool in 
encouraging honesty and high professional standards by 
individual professionals--such as lawyers and accountants--who 
facilitate access to the capital markets. Aiding and abetting 
played a crucial role in helping taxpayers and investors 
recover some of their losses from the unprecedented financial 
frauds of the last decade. Perhaps even more important, the 
prospect of potential liability for aiding and abetting has 
served as a powerful deterrent to wrongdoing.
    Investors in publicly traded securities often rely on 
professionals when evaluating investments. Recent scandals on 
Wall Street, and in the savings and loan debacle, illustrate 
how important it is for these professional roles to be 
fulfilled responsibly. Judge Stanley Sporkin--a Reagan 
appointee who served as General Counsel of the Central 
Intelligence Agency under William Casey and former head of the 
Enforcement Division of the SEC--focused the issue with crystal 
clarity in the Charles Keating securities fraud case (in 
connection with the Lincoln Savings and Loan debacle) in a 
series of pointed questions:

          There are other unanswered questions presented by 
        this case. Keating testified that he was so bent on 
        doing the `right thing' that he surrounded himself with 
        literally scores of accountants and lawyers to make 
        sure all the transactions were legal. The questions 
        that must be asked are:
          Where were these professionals, a number of whom are 
        now asserting their rights under the Fifth Amendment, 
        when these clearly improper transactions were being 
        consummated?
          Why didn't any of them speak up or disassociate 
        themselves from the transaction?
          Where also were the outside accountants and attorneys 
        when these transactions were effectuated?
          What is difficult to understand is that with all the 
        professional talent involved (both accounting and 
        legal), why at least one professional would not have 
        blown the whistle to stop the overreaching that took 
        place in this case.

Absent aiding and abetting civil liability, many of the 
professionals who act as ``gatekeepers,'' and on whose 
credibility both buyers and sellers depend, may be essentially 
immune from liability.
    While the Central Bank decision clearly foreclosed the 
ability of private litigants to pursue aiders and abettors, it 
was less clear in its application to actions initiated by the 
SEC. However, the decision created enough uncertainty that the 
Securities and Exchange Commission (SEC) asked Congress to 
provide explicit authority for the SEC to pursue aiders and 
abettors directly. SEC Chairman Arthur Levitt testified before 
the Telecommunications and Finance Subcommittee that: 
``Legislation expressly providing that the Commission can seek 
injunctions and other relief against aiders and abettors is 
necessary to preserve fully the strength and flexibility that 
Congress intended to provide when it enacted the Securities 
Enforcement Remedies and Penny Stock Reform Act of 1990.''
    Echoing these sentiments were the state securities 
regulators and several prominent legal scholars. Toward that 
end, I offered an amendment at the full Committee markup to 
provide explicit authority for the SEC to pursue aiders and 
abettors. While many commentators urged that aiding and 
abetting also be restored for private actions, and I offered 
such an amendment at the Subcommittee markup, I chose to focus 
my amendment at full Committee on what should have been the 
non-controversial issue of restoring this legal remedy to the 
SEC's arsenal against wrongdoers. However, I was unable to 
present the strong public policy case for this amendment 
because the Republicans Majority inexplicably and unfairly cut 
off debate. It should come as no surprise, therefore, that my 
amendment was defeated on a party line vote. The rejection of 
this amendment vividly demonstrates that H.R. 10 is not about 
``reform'' or about protecting the rights of truly defrauded 
investors; it is about protecting a class of special interests 
who want immunity from all lawsuits, no matter how meritorious.

                                                  Edward J. Markey.
                ADDITIONAL DISSENTING VIEWS OF MR. WYDEN

    At the full Committee markup of H.R. 10, I offered an 
amendment that would have amended the Securities Exchange Act 
of 1934 (Exchange Act) to improve fraud detection and 
disclosure with respect to public companies in order to 
facilitate the detection of fraudulent financial reports and 
assist the Securities and Exchange Commission (SEC) in meeting 
its responsibility to enforce the antifraud provisions of the 
Exchange Act. It would accomplish this by codifying existing 
auditing standards that are pertinent to the detection of 
financial fraud, and by requiring earlier and more direct 
reporting to the SEC when independent accountants uncover 
financial fraud during their audits of Exchange Act 
registrants.
    The Republicans cut off debate and, since there was no 
opportunity for me or my colleagues to explain to the Committee 
the strong policy arguments supporting my amendment, it was 
defeated in a straight party line vote.
    The amendment was based on legislation (H.R. 725) that I 
introduced on January 30, 1995 along with Reps. Dingell and 
Markey. This legislation represents the response of this 
Committee \1\ to the public record, including extensive 
Congressional hearings,\2\ regarding the administration and 
enforcement of the antifraud and other provisions of the 
federal securities laws in the areas of auditing, accounting, 
and financial reporting. One of the major problems reflected in 
the record is the rather widespread perception that the 
accounting profession has filed in its responsibilities, as 
evidenced by a succession of business failures seemingly 
related to negligent audits. The Oversight and Investigations 
Subcommittee hearings, for example, closely examined auditing 
and accounting problems associated with the failures, among 
others, of E.S.M. Government Securities Inc., American Savings 
and Loan Association of Florida, Home State Savings and Loan of 
Ohio, Beverly Hills Savings and Loan Association, ZZZZ-Best 
Company, Mission Insurance Company, Transit Casualty Company, 
and First Executive Corporation. ``Investors, regulators, 
politicians, and accountants themselves are asking how so many 
insolvent and fraud-riddled industrial corporations, banks, 
savings-and-loan associations, and insurance companies could 
have received clean audits from major firms shortly before they 
collapsed.\3\ Such failures have resulted in substantial harm 
to the investing public and increased financial burdens on the 
taxpayer.
    \1\ Substantially similar legislation has been reported unanimously 
by this Committee and passed by the House previously. During House 
consideration of the Comprehensive Crime Control Act of 1990 (H.R. 
5269), the House adopted an amendment based on auditor responsibility 
legislation (H.R. 4886 and H.R. 5439) that I introduced in the 99th 
Congress. That provision was dropped in conference with the Senate. 
Similar legislation was included as section 487 of the Financial 
Institutions Safety and Consumer Choice Act of 1991 (H.R. 6), an early 
version of banking reform legislation that was defeated for reasons 
unrelated to the auditing provisions. Title II to the Securities 
Investor Protection Amendments of 1992 (H.R. 5726), passed by the House 
on September 22, 1992, included the Financial Fraud Detection and 
Disclosure Act (H.R. 4313, H. Rpt. 102-890) as amended. The 
legislation, however, failed to pass in the Senate. And in the 103rd 
Congress, this Committee ordered reported a substantially similar bill 
(H.R. 574) but no further action was taken due to a jurisdictional 
dispute involving the House Banking Committee.
    \2\ Since 1985, the Committee's Subcommittee on Oversight and 
Investigations has held 34 days of hearings on the accuracy and quality 
of audits and financial reporting by publicly owned companies and the 
independent public accountants which are hired to complete the audit. 
Testimony was received from approximately 200 witnesses.
    \3\ See William Sternberg, ``Washington: Cooked Books,'' The 
Atlantic, Volume 269, No. 1 (January 1992) at 20.
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    Last year, this legislation was supported by the accounting 
profession. The opposition of the Republican Majority to this 
common sense provision is inexplicable, and only enhances my 
serious concerns about whether H.R. 10 represents the best 
public policy that this Committee could report. I strongly 
believe that it is not. I hope by Republican colleagues will 
consider working with me cooperatively to secure passage of my 
amendment when the bill is taken up on the floor of the House. 
My amendment will help detect and correct frauds before they 
become private lawsuits and thus will further the goals of H.R. 
10.


                                                         Ron Wyden.