Clinton Signs Securities Litigation Reform Bill
(November 5, 1998) Bill Clinton signed the Securities Litigation Uniform Standards Act of 1998 (SLUSA) on Tuesday, November 3. Clinton vetoed the underlying Public Securities Litigation Reform Act two years ago, and was overridden. Facing veto proof support for the SLUSA, Clinton had aide Bruce Lindsey write a letter in April announcing his support for the bill.
|Summary of S 1260 and HR 1689.
S 1260, Conference Report.
Bruce Lindsey Letter, 4/28/98.
Bill Clinton Statement, 11/3/98.
This bill (S 1260, Conference Report) preempts state laws by establishing uniform national standards for class action suits involving nationally traded securities. Its purpose is to decrease the number of harassment suits brought in state courts that threaten the ability of companies -- particularly high-tech Silicon Valley companies -- to raise capital and disseminate information.
It amends the Securities Act of 1933 and the Securities Exchange Act of 1934. It remedies what many see as an oversight or deficiency of the recently enacted Private Securities Litigation Reform Act of 1995. The PSLRA sought to reduce the number of frivolous class action 10(b) suits in federal courts. One of its key provisions was to create a "safe harbor" for forward looking statements made by public companies, in order to promote dissemination of financial information to analysts and investors, and improve market efficiency.
It also limited plaintiffs' lawyers' ability to use pre-trial discovery for harassment purposes. Since passage of the PSLRA, many companies, and several studies, have asserted that plaintiffs' securities lawyers have responded by shifting their securities fraud suits into state courts -- particularly in California, and particularly in suits against high-tech companies. These suits avoid the "safe harbor clause" of the PSLRA. Some suits are brought in both state and federal courts, with the state action used to evade the discovery restraints in the PSLRA.
Clinton issued a statement on November 3 explaining his signature of the bill.
This legislation will help stabilize the enforcement scheme of the Private Securities Litigation Reform Act of 1995 (the Reform Act) by ensuring that parties obtain the benefits of the protections that Federal law provides. The Uniform Standards Act reinforces our national capital markets by promoting uniform national standards for information generated for and used in national capital markets. If firms know that they can rely on the Reform Act's "safe harbor" for forward-looking information, they will provide the public with valuable information about their prospects, thus benefiting investors by enabling them to make wiser decisions. (See, full text of Clinton statement at bottom of this page.)
|Senate Committee Approves S 1260, 4/30/98.
Securities Litigation Reform Bill on Track for Passage, 5/20/98.
House Subcommittee Approves Securities Litigation Bill, 6/11/98.
House Commerce Committee Approves Securities Bill, 6/25/98.
House Passes Securities Litigation Reform Bill, 7/23/98.
House and Senate Pass SLUSA Conference Report, 10/14/98.
|Legislative History of SLUSA|
The Senate approved its original bill (S 1260 ES) on May 13 by a vote of 79 to 21. The House passed its version of the bill (HR 1689 EH) on July 22 by a vote of 340 to 83. The conference report was approved by the House by a vote of 319 to 82 on October 13; the Senate passed it without a roll call vote. In addition, Arthur Leavitt, Chairman of the Securities and Exchange Commission supported the bill. (See, testimony and extended statement to House Commerce Committee, May 19, 1998.)
The only source of opposition came from plaintiffs' trial lawyers, and the mostly Democratic legislators who press their cause. The Senate passed the conference report by voice vote. In the House vote on October 13, only one Republican voted against the bill. Eighty Democrats voted against the bill. In the Senate vote on May 13 only one Republican voted against the bill.
The House version of the bill was sponsored by Rep. Anna Eshoo (D-CA), Rep. Rick White (R-WA), Rep. Chris Cox (R-CA), and over 200 others. Its passage by the House was furthered facilitated by support from Rep. Thomas Manton (R-NY), the ranking minority members of the Finance Subcommittee of the House Commerce Committee, which had jurisdiction over the bill.
The Senate version of the bill, S 1620, was sponsored by Sen. Phil Gramm (R-TX), Sen. Chris Dodd (D-CT), and 42 others. Although, swift passage in the Senate was made possible by the strong support of Senate Banking Committee Chairman Al D'Amato. The members of the conference committee were Senators D'Amato, Gramm, Shelby, Sarbanes, and Dodd. The House members were Representatives Bliley, Oxley, Tauzin, Cox, White, Dingell, Stupak, and Eshoo.
However, the chances for passage of any further amendments to the PSLRA, or any other securities litigation reform bills, were decreased by the results of last Tuesday's elections. Several key supporters of the bill will not be returning to the Congress next year. Rep. White was defeated in his re-election bid on November 3. Rep. Manton is retiring. Sen. D'Amato lost his seat to Rep. Charles Schumer (D-NY), who voted against the bill. Also, another supporter of the bill on the Sen. Banking Committee, Sen. Lauch Faircloth (R-NC), lost his seat to John Edwards. Edwards not only had strong backing from the plaintiffs' trial lawyers: he is a trial lawyer himself.
|Recent Case Filings|
When Congress passed the PSLRA two years ago, a rush of suits was filed, to beat the effective date of the statute. Since then, there has been a migration of class action securities suits to state court, particularly California, to avoid the PSLRA. This trend was a main reason for passing the SLUSA this year. However, class action securities lawyers are divided as to whether there has recently been any increase in state court filings in anticipation of the SLUSA becoming law.
John Olsen, with the law firm of Gibson, Dunn &
Crutcher, states that there has been an increase in state court filings recently.
Similarly, Steven Schatz, of Wilson Sonsoni Goodrich
& Rosati, states that "there may have been a slight uptick in the number of
state court filings, but not a dramatic uptick." In contrast, a plaintiffs'
class action securities litigator stated that there has been no increase of late.
The reason is that all class action securities suits are filed very quickly after the
event giving rise to the suit, because the plaintiffs' lawyers are competing to become the
lead attorney, and because of the Diamond decision.
|Statement by Clinton upon Signing of SLUSA.
Re: Securities Litigation Uniform Standards Act of 1998, S 1260, HR 1689.
Date: November 3, 1998.
Source: Office of the Press Secretary.
THE WHITE HOUSE
For Immediate Release
STATEMENT BY THE PRESIDENT
Today I am pleased to sign into law S. 1260, the "Securities Litigation Uniform Standards Act of 1998," (Uniform Standards Act).
This country is blessed with strong and vibrant markets, and they function best when corporations can raise capital by providing investors with their best, good-faith future projections. This legislation will help stabilize the enforcement scheme of the Private Securities Litigation Reform Act of 1995 (the Reform Act) by ensuring that parties obtain the benefits of the protections that Federal law provides. The Uniform Standards Act reinforces our national capital markets by promoting uniform national standards for information generated for and used in national capital markets. If firms know that they can rely on the Reform Act's "safe harbor" for forward-looking information, they will provide the public with valuable information about their prospects, thus benefiting investors by enabling them to make wiser decisions.
The Reform Act substantially revised both substantive and procedural law governing private actions under Federal securities laws. It was designed to end litigation abuses and ensure that investors receive the best possible information by reducing the litigation risk to companies that make forward-looking statements. In addition to the safe harbor for forward-looking statements, the Reform Act created, among other things, a stay of discovery pending a defendant's motion to dismiss; limited the exposure of certain defendants by establishing proportionate liability, rather than joint and several liability, for parties not found to have "knowingly" committed violations; and required courts to assess whether all parties complied with Rule 11 of the Federal Rules of Civil Procedure, prohibiting frivolous legal filings.
Although I supported the Reform Act's goals, I vetoed the Act because I was concerned that it would erect procedural barriers and keep wrongly injured persons from having their day in court. In particular, I objected to certain statements in the 1995 Conference Report's Statement of Managers that created ambiguity with respect to whether the bill was adopting the pleading standard in private securities fraud cases of the U.S. Court of Appeals for the Second Circuit -- the highest pleading standard of any Federal circuit court and a standard that I support. When the bill returned to the House and Senate floors after my veto, the bill's supporters made clear that they did in fact intend to codify the Second Circuit standard. After this important assurance, the bill passed over my veto.
Since passage of the Reform Act, there has been considerable concern that the goals of the Reform Act have not been realized. In particular, there was testimony that firms are not using the Federal safe harbor for forward-looking statements because they fear State court litigation over the same representations that are protected under Federal law. In addition, concerns have been raised that State actions are being used to achieve an "end run" around the Reform Act's stay of discovery.
In signing the Uniform Standards Act, I do so with the understanding, as reflected in the Statement of Managers for this legislation and numerous judicial decisions under the Reform Act adopting the pleading standard of the Second Circuit, that investors with legitimate complaints meeting the Second Circuit pleading standard will have access to our Nation's courts. This point was critical to my veto of the Reform Act in 1995; it was reaffirmed before ultimate passage of the 1995 Act over my veto; and its assurance was a prerequisite to my signing this legislation today, as indicated in the April 28, 1998, letter from my staff to Chairman D'Amato, Senator Gramm, and Senator Dodd. Since the uniform standards provided by this legislation state that class actions generally can be brought only in Federal court, where they will be governed by Federal law, clarity on the Federal law to be applied is particularly important. The Statement of Managers confirms that the Second Circuit pleading standard will be the uniform standard for pleading securities fraud. Thus, the uniform national standards contained in this bill will permit investors to continue to recover losses fairly attributable to reckless misconduct. I am aware of and agree with the expert views on this issue of the Securities and Exchange Commission (SEC), which, along with my staff, worked hard in shaping this legislation.
With these assurances in the Statement of Managers that reckless conduct will continue to be actionable and that complaints meeting the Second Circuit pleading standard will permit investors access to our Nation's courts, I believe that the uniform national standards created by this bill will generate meaningful information for investors and further reduce frivolous litigation without jeopardizing the critically important right of defrauded investors to obtain relief.
I do, however, object to one provision in this bill. Section 203 provides separate authority for job classification and pay of SEC economists. This provision was added to the bill at the last minute without any time for review or comment. There is no justification to treat SEC economists differently from other Federal employees. With that one exception, I am pleased to sign the Securities Litigation Uniform Standards Act of 1998 into law.
WILLIAM J. CLINTON
THE WHITE HOUSE,