Good morning and thank you for the opportunity to testify today. My name is Kenneth S. Janke, Sr. I am president and chief executive officer of the National Association of Investors Corporation (NAIC). NAIC is a not-for-profit, largely volunteer organization of more than 570,000 individual investors and 32,000 investment clubs around the country. Founded in 1951, NAIC is dedicated to helping members build financial security and achieve important lifetime goals for themselves and their families through investing. Our organization is really an educational association with the premise that individual investors can make solid decisions based on research when properly informed.
Our members do not, for the most part, come to us with extensive investing experience. They are not Wall Street analysts, trading dozens of stocks every day. Rather, they tend to be novice investors who have banded together with a group of neighbors, friends or business associates to make long term investments. They analyze and monitor their investments carefully - in fact, we encourage our member investment clubs to meet regularly to review their investments and evaluate new information. A typical new member of NAIC has little, or no investment experience. However, our surveys indicate that after five years, an investment club member not only invests through the club, but begins to build a personal portfolio of common stocks. Our members are aggressive and successful, but rarely make rash or hasty decisions. They want to know as much as possible about a company before they make the decision to invest and they want access to forward-looking information to evaluate their holdings.
This is particularly true today. As we all know, the Dow Jones Industrial Average has moved into ever higher ground with the 8,000 barrier just the latest to fall. With the stock market surge has come an increase in the number of people investing. Our membership, for instance, has grown by 100% in the past three years. It is not unusual to see the popular averages go up, or down by more than 100 points in a single day. With an ever-growing pool of relatively inexperienced investors comes the need for more and better information and to concentrate on the long term, rather than short term fluctuations.
In 1995, NAIC played an active role in supporting the passage of the Securities Litigation Reform Act, and we were very pleased when the Senate voted to override President Clinton s veto of this important legislation. Investors around the country, cheered the passage of these reforms, which, among other things, required that plaintiffs provide clear evidence of wrongdoing when they file suit; halted costly fishing expeditions that forced companies to spend precious resources on groundless suits; and put an end to a variety of other abuses of the system, such as bounty payments for so-called professional plaintiffs. But perhaps the most important provision, from the individual investor s perspective, was the creation of a safe harbor in federal law to encourage the disclosure of voluntary forward-looking information, so that investors can learn as much as possible about the companies in which they invest.
One of the four basic principles that make up NAIC s investment philosophy is to buy stock in growing companies - stock in companies whose sales are increasing at a rate faster than industry in general. Very often, this means high-technology stocks, and that is the primary reason I am here.
High-technology companies have enormous growth potential. While it is a volatile industry, those companies have built value all over the country. And high-technology stocks can contribute significantly to building the wealth of individual investors - IF those investors can get the forward-looking information they need to make informed decisions. Those investors, in turn, provide crucial capital to these companies, increasing the likelihood that they will succeed and expand, creating more jobs and benefiting the American economy.
The safe harbor provision in the Private Securities Litigation Reform Act was intended to ensure that companies could, in good faith, provide investors like us with the voluntary information we need without fear of frivolous shareholder strike suits. Unfortunately, it has not turned out this way. Discouraged by the Act from filing their most speculative suits in federal courts, securities lawyers have begun turning to state courts, where no such safe harbor protection exist.
Last year, one in every four securities class action suits was filed in state court, where there had been virtually no such cases filed in previous years. But the increase in the number of suits, while obviously problematic, is beside the point. Even one frivolous suit filed at the state level is enough to deter companies from being forthcoming. Unfortunately, the reforms designed to help investors are not having the intended effect. Companies are reluctant to make voluntary information, particularly good-faith forecasts, available to investors because of fear that information could be turned against them in a state-filed class action. Just the threat of a state-filed class action has had a negative effect on the willingness of companies to make forward-looking information available - and that hurts investors, both professional and individual, companies and, in the long run the American economy.
Studies have repeatedly shown the value of such disclosure. Firms that voluntarily offer information logically increase their pool of potential investors, thus making it easier for the firm to attract the necessary capital for expansion. Responsible disclosure tends to give a fairer valuation for the price of a corporation s stock. Lack of disclosure, on the other hand, sends potential investors looking elsewhere, because no news is often considered the same as bad news in the stock market. A company that won t provide forward-looking information, conventional wisdom goes, is a company hiding something.
The continuing specter of frivolous strike suits poses still another threat to investors: the inordinate costs these suits impose on corporations - and ultimately on their shareholders. The pleading standard in a state court is so low that companies can be forced to invest significant resources defending themselves in even the most meritless lawsuits. Too often, suits are filed with little evidence, allowing the plaintiff s lawyers to go an a fishing expedition that requires the company to produce rooms full of documents in the hope that some usable shred of evidence will turn up in the vast collection of files. This ploy is designed to force a company into settling a meritless suit rather than spend countless hours and millions of dollars defending itself.
Whether it settles or stays in the fight, the company loses either way. The average settlement in these types of cases is more than $8 million - not a pretty option. But the average strike suit costs 1,055 hours of management time, $700,000 in legal fees, and countless millions in lost productivity. In this era of requiring corporate managers to be more responsive to the board of directors and the board to be more responsive to the shareholders, the companies are forced to divert their attentions from the task they were hired to perform. It s no choice at all - either option leaves investors out in the cold.
We investors are enormously troubled by this. We are saddened and we are fearful. Our investments have helped build America s industries; we have helped build America. And our faith in this country and its enterprises has been repaid over and over - helping us secure our own personal futures, and, for many of us, those of our children and our grandchildren.
We need help to turn this around. The NAIC strongly supports legislation that was introduced in the House by Representatives Rick White and Anna Eshoo, which would create uniform national standards requiring that all class actions involving nationally- traded securities be filed in federal court. We hope that similar legislation will be introduced in the Senate shortly.
I cannot overemphasize the importance of uniform federal standards to the average American investor. The current situation is discouraging companies from providing as much information about themselves as investors need, while also draining away precious resources from the companies themselves. Particularly in the volatile and extremely competitive high-technology area, this is a recipe for disaster; disaster for investors, disaster for companies and disaster for the economy. The only winners are a small group of lawyers who continue to get away with filing meritless suits and collecting enormous fees.
We need to close this loophole now. America s investors call on the Banking
Committee to help secure our individual and collective futures - and ensure that the
intent of the 1995 reforms are not thwarted - by crafting and passing uniform standards
legislation. Thank you very much.
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