105th Congress: Democratic Perspectives House Committee on Energy and Commerce Democrats Welcome Page
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We abhor strike suits and frivolous litigation of any stripe. We would enthusiastically support responsible and balanced legislation narrowly targeted at ameliorating those abuses. H.R. 1689 does not meet that standard. We dissent from this bill.
As introduced, H.R. 1689 was an industry wish list devoid of proper safeguards to protect the essential rights of injured investors to pursue meritorious claims. The sponsors and proponents of H.R. 1689 adopted several amendments during Subcommittee and Full Committee markup to temper some of the bill's harshest elements. We commend our colleagues. The bill, nonetheless, is still flawed.
H.R. 1689 creates a national standard governing securities fraud class actions involving "covered securities" which are nationally traded securities and some that are not. The bill requires these class actions to be brought in federal court pursuant to federal law, where they would be subject to the more stringent terms of the Private Securities Litigation Reform Act of 1995. These terms include the double whammy of heightened pleading standards along with a stay of discovery pending a motion to dismiss, blocking the ability of defrauded investors to gain the special facts needed to meet the heightened pleading standards.
First, the bill is premature. The Securities and Exchange Commission (SEC) concluded in its April 1997 report to the President and Congress that: "it is too early to assess with confidence many important effects of the Reform Act and therefore, on this basis, it is premature to propose legislative changes. The one-year time frame has not allowed for sufficient practical experience with the Reform Act's key provisions, or for many court decisions (particularly appellate court decisions) interpreting those provisions." The Chairman of the SEC testified before our finance subcommittee on October 21, 1997, that his agency had "not had enough practical experience with the Act to produce the data necessary for us to measure its success." That is still the case.
Second, there is no national problem in need of a national solution. Data compiled by unbiased sources shows that the number of state securities class actions has declined during the last year to pre-Reform Act levels. In 1997, there were a total of 44 state class action securities case, out of a total of 15 million civil filings. By comparison, 67 state class actions were filed in 1994, the year before the Reform Act became law, and 66 cases were filed in 1996, the year after the Reform Act was enacted. We note in passing that we have been shown no convincing proof that any of these lawsuits was without merit and was allowed to proceed notwithstanding its lack of merit. Moreover, as the attached map shows, the overwhelming majority of those cases were filed in California, with most states having zero filings. That being the case, shouldn't this "problem" be solved in the California legislature? We believe that state legislatures should be given time to consider laws of their own to address the issues raised in this debate.
We find it curious indeed that the Republican-led Congress that campaigns on returning power to the states and protecting individual choice, would champion a federal mandate abolishing important state prerogatives along with protections and rights. Forty-nine states, as well as the District of Columbia, allow for some form of aiding-and-abetting liability. There is no aiding-and-abetting liability in private actions for most federal securities fraud claims. In addition, private actions under the federal securities laws are subject to a short statute of limitations. Specifically, private actions under Section 10(b) of the Exchange Act must be brought within one year after discovery of the alleged violation, and no more than three years after the violation occurred. In contrast, 33 states allow for longer limitations periods. These investor protection laws available at the state level, as the attached list shows, will no longer be available to class action plaintiffs upon passage of H.R. 1689. The public should clearly understand the investor protections being wiped out by the elected representatives who vote yes on this bill.
Moreover, under H.R. 1689's unusual "grouping" provision, any time more than 50 individuals file state court complaints "in the same court and involving common questions of law or fact," they will be deemed to be part of a "class action" subject to this bill, if "the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose." Individuals who bring suits in state court in their own name may find, if others have brought similar suits, that their claims are preempted. For instance, if an investment adviser churns the accounts of or recommends unsuitable securities to clients in a single state and more than 50 of them seek to recover in the same court, each filing their own individual action, they may be forced to constitute a class action and have to pursue their claims if possible in federal court. These investors may be left without a remedy. This is broader preemption than we believe is necessary or appropriate. There has been no showing that these kinds of suits, either individually or in the aggregate, present the kinds of potential abuses that have been attributed to traditional class actions and strike suits.
The debate on this legislation has been polar. It has tarred all private securities fraud litigation as meritless strike suits, and all defendant companies, accountants, and broker-dealers as innocent victims of large-sum-settlement highjackings. Through this lens, unintended harm to legitimate lawsuits is viewed as a reasonable tradeoff. We disagree on both counts.
The record shows that securities fraud is up. Many of those cases involve accounting frauds. The SEC has always taken the view that private lawsuits are a crucial adjunct to the SEC's own enforcement program. They are the principle means by which investors have recovered losses caused by fraud. Proponents of H.R. 1689 argue that investors recover only "10 cents on the dollar" in these cases. We agree that we need to put investors first. But nothing in this bill addresses the recovery issue in any way.
For these reasons, we oppose this bill and urge the House to do the same.
JOHN D. DINGELL
EDWARD J. MARKEY
BART STUPAK
DIANA DEGETTE
H.R. 1689 is a solution in search of a problem.
In 1995, the Commerce Committee developed and Congress approved, over a presidential veto, the Private Securities Litigation Reform Act, which put strict limits on federal investor class action lawsuits. I opposed that legislation because I was concerned about preventing defrauded investors from being made whole again. But my side lost, and we all moved on.
One of the arguments when we debated the 1995 Act was that truly victimized investors could still seek redress in state court. So there was some comfort in that; retirees who lost their life savings to securities fraud could still pursue legal action.
Now, however, I fear that the Committee is moving to cut off the state avenue for class action securities suits. That could mean that investors would have no ability to seek relief from securities wrongdoers, and that is unacceptable to me.
There appears to be no explosion of state securities class actions, so I see no real need for this bill. Last year there were only 44 throughout the entire country, the lowest number in five years.
Furthermore, at a time when there are more investors than at any time in history, many of them unsophisticated investors, we should not be making it easier to get away with securities fraud. We owe that to our investor constituents and we owe that to the capital markets in this country, which remain the strongest in the world.
Additionally, though the bill contains a provision similar to the Sarbanes amendment in the Senate bill, which provides for an exemption from the bill for state and local entities, this provision goes beyond Sarbanes to require those entities to be named plaintiffs in and authorize participation in state securities class actions. This assumes a level of sophistication that may be lacking in these investors.
I will provide an example. Last year, the SEC alleged that Devon Capital Management had defrauded 100 municipal clients in Pennsylvania and elsewhere. Those clients included 75 school districts, mostly in Western and Central Pennsylvania. Devon and the SEC reached a settlement, and those school districts are expected to recover a little over half of the $71 million that Devon lost.
Now, how can we say that these same school districts and local governments that were unsophisticated enough to have invested with Devon in the first place and lost all this money, are, at the same time, sophisticated enough to recognize the steps they need to take to preserve their rights to bring a state securities class action under this bill?
I would prefer that, at the very least, the Sarbanes amendment exempting state and local governments and pension plans be maintained as it passed the Senate.
Finally, I am disturbed by the trend I am seeing in the Committee and Congress as a whole in our attitude toward investors, especially the mom and pop investors we all represent. As I said, I opposed the 1995 Securities Litigation Reform Act. That was followed closely by the Fields Securities Reform bill, which threatened to severely limit the ability of state securities regulators, the local cops on the beat in the securities world, to protect investors. In Committee and in conference, we were able to temper this legislation so that investors would not be left vulnerable.
We are at a point in time when Members of Congress and others are talking about privatizing Social Security. That will lead to even more unsophisticated investors and hundreds of billions of dollars going into the marketplace. And yet we continue to talk about reducing investor protections.
Another question I have is, are we now saying to the states that we in Washington, DC, know better than the states what cases should go through state courts and which should not. Are we next going to tell the states that they can't hear real estate cases? Are we going to tell them they can't hear tobacco cases? What comes next?
I never thought I would see the day when my Republican colleagues would want to dictate from on high in Washington, DC, what state law should be.
105th Congress: Democratic Perspectives
House Committee on Energy and Commerce Democrats Welcome Page