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WASHINGTON-A bipartisan group of legislators wants to close what it considers a gaping loophole in securities litigation law.
"This initiative is needed to complete the work we began in the last Congress," said Rep. Anna Eshoo, D-Calif., as she and Rep. Rich White, R-Wash., unveiled the Securities Litigation Uniform Standards Act of 1997. The bill, which already has 20 co-sponsors, would require that class action lawsuits brought against nationally traded securities be heard in federal, rather than state courts.
The bill's sponsors said that the new law was necessary to stop securities plaintiffs' attorneys from "circumventing" the Private Securities Litigation Reform Act of 1995-designed to prevent the filing of frivolous lawsuits-by filing in state courts.
Among other things, the 1995 act: set tougher pleading standards; set requirements for courts to select a lead plaintiff in a suit, which usually should ensure that the plaintiff with the most at stake leads the suit rather than the one who filed first; and introduced a concept of a "safe harbor" to shield companies from liability for forward-looking statements not known to be false when they were made (BI, Nov. 25, 1996).
"Two years ago, we created a legal environment that would encourage companies to provide consumers with forward-looking statements that could be used to make informed stock purchases. But instead of curbing frivolous lawsuits based on such statements, a loophole in the law merely channeled them to state courts," said Rep. Eshoo.
President Clinton vetoed the 1995 act and was repaid with the only veto override of his administration to date. California voters later decisively rejected Proposition 211, an initiative that would have made it easier to pursue securities litigation in state courts (BI, Nov. 11, 1996). Nevertheless, Rep. White estimated that nationwide about 100 securities-related class-action suits that should have been filed in federal courts have ended up in state courts.
The White-Eshoo act defines covered class actions as those that seek damages on behalf of more than 25 people, in which named parties seek to recover damages on behalf of unnamed parties or in which one or more of the parties seeking to recover damages did not personally authorize the suit.
According to the sponsors, the legislation would apply only to those nationally traded securities on the New York Stock Exchange, NASDAQ or the American Stock Exchange.
"The plaintiffs' bar has found a clever detour around the federal statute, which is to do something that has never been done before, which is to create a new species of securities fraud lawsuits which are filed in state court," said Mark Gitenstein, partner with Mayer Brown & Platt in Washington and counsel to Uniform Standards Coalition, a Washington-based group of high-tech companies, securities firms and others that support the White-Eshoo measure.
None of the protections against "fishing expeditions," or "bogus bounty payments or steering fees to plaintiffs" apply in state courts, said Mr. Gitenstein.
"You just get one judge to take your case and you've got it," he said.
From an investor's point of view, the most important protection was the so-called safe harbor, which does not protect companies in state legal actions, he said. That provision encouraged companies to be more forthcoming with information, according to reform proponents.
But the perception that more legislation is justified is not universal.
Even before Reps. Eshoo and White unveiled their bill, H.R. 1689, the Washington-based Consumer Federation of America, the Government Finance Officers Assn. and other groups urged President Clinton to oppose it.
"At a minimum, we believe that you and Congress should insist on seeing real, conclusive evidence of how the litigation reform act has affected the ability of defrauded investors to recover their losses. Until such evidence has been generated, we urge you not to support legislative initiatives that would extend this untested experiment to lawsuits brought under state laws," wrote the CFA.