Chairman Gramm, Senator Dodd, members of the Subcommittee. Good morning. My name is Daniel Cooperman and I serve as Senior Vice President, General Counsel and Secretary for Oracle Corporation. I would like to thank you for the opportunity to present testimony today on the subject of uniform national standards for private securities litigation.
Located in Redwood Shores, California, Oracle Corporation is the world's second largest independent software company and the world's largest vendor of database software and information management services. Our software runs on almost every computer, from the smallest laptop to the largest massively parallel computer, and it is used to manage everything from personal information to giant corporations. Oracle exports to more than 110 countries; employs more than 30,000 people; and has annual revenue in excess of $6 billion.
I am privileged to testify today on behalf of the members of the Software Publishers Association (SPA). Since its founding in 1984, SPA has grown to become the principal software industry trade association, serving more than 1,200 members internationally. The Association represents the leading publishers as well as start-up firms on the Internet and in the business, consumer and education markets. SPA supports companies that develop and publish software applications, components, tools and digital content for use on the desktop, client-server networks and on-line. Taken together, SPA members account for 85 percent of the revenue in the U.S. packaged and on-line software industry .
My testimony today will focus on the need for uniform national standards in the area of securities litigation and will voice my support for the passage of S. 1260, the Securities Litigation Uniform Standards Act. I offer my testimony as one who is a practitioner on the “front lines” who grapples with many of the implications of the current system which provides no uniform standard for securities litigation.
Let me state up front that the software industry has a great interest in the integrity of the capital markets. Similarly, we have a keen interest in a strong system of securities law enforcement. Companies which attract investment by engaging in fraudulent behavior are taking capital directly out of our pocket, and the pockets of our shareholders and our employees.
Let me also note that we are focused today, as is the language of S. 1260, on private securities litigation for nationally traded companies, not enforcement cases brought by either the U.S. Securities and Exchange Commission or any state securities agency.
The U.S. software industry operates in an environment which is fairly unique. The volatility of stock prices of software companies is greater than that of most other industries primarily due to the rapid pace of innovation, intense competition and the unpredictability of customer demand. It is not unheard of to see software securities trading at 70 or 80 times earnings, although with the events of the last several trading sessions such P/E multiples may become only a fond memory. Nor has it been uncommon to see a software company achieve a billion dollar market capitalization with sales of just a few hundred million dollars.
Second, the barriers to entry in the software industry are extremely low. Software companies have very little capital investment in plant, property or equipment. The only assets needed to develop a product are: an idea, a personal computer, and some software development tools. More so than most any other industry, our primary assets are our employees, our human capital . In this respect, software companies are vastly different from, say, automobile manufacturers. It is now possible for a programmer anywhere on the globe with an innovative idea to leapfrog existing technology and market barriers by marketing and distributing a product globally over the Internet.
Third, we operate in an intensely competitive environment. The pace and scale of innovation is mind boggling. Our product cycles are measured in months, not years. And then, technology can take sudden turns even the brightest visionaries can't foresee. In these competitive markets, large multinational corporations can face stiff competition from start-ups. It reminds me of the story of the two guys camping out in the jungle who suddenly see a tiger approaching them. One fellow quickly puts on his running shoes. The other guy asks, "Do you really think those shoes will make you run faster than that tiger?" "I don't have to outrun the tiger," the first one replies. "I just have to outrun you."
Fourth, in many respects our industry is selling the future. Oracle was founded in 1977 with the then-novel notion of simplifying and automating enterprise-wide business tasks with the advent of relational databases. While this seems obvious today, it had not been done prior to 1977. It is said in the software industry that the key to success is to be the first one to make your own product obsolete by rolling the dice on that next great innovation, product, or idea.
Risk taking, volatility, competitiveness, and a heavy reliance on continual innovation are all factors which make software companies easy targets for meritless securities class action litigation. When you add a tendency - brought on by frivolous litigation and conflicting legal standards - to be much more cautious about public disclosure of forward-looking information, you wind up with an inefficient allocation of capital. That is why we were so supportive of the Private Securities Litigation Reform Act of 1995 passed with the leadership of this committee.
Allow me to offer five reasons why we should adopt uniform national standards for private class action securities lawsuits brought against nationally-traded companies.
1. The legislation before this Committee is not about evaluating the effectiveness of the Private Securities Litigation Reform Act.
First, in our view, the Uniform National Standards Act should be passed without regard to the effectiveness of the 1995 Reform Act. The 1995 statute was a deliberate compromise intended to bring an end to frivolous securities litigation -- to raise the bar, if you will. As time goes on, and as the courts test and interpret the 1995 Act, adjustments may be required in either direction. In our view, we have not lived with the new law long enough to pass judgment on the law’s effectiveness.
The question before us in evaluating the Uniform National Standards Act is whether the predictability and stability of our capital markets is being undermined by a patchwork of duplicative and, in some cases, inconsistent state laws. Those who oppose the Uniform National Standards Act argue that plaintiffs need the protection of state law to guard against the possibility that courts may interpret the 1995 Reform Act in a more restrictive manner than Congress intended. In our view it is bad law, bad policy, and bad economics to provide protection against possible future court interpretations by providing plaintiffs with alternatives to circumvent the federal initiative .
2. Permitting state standards to substitute for federal standards Fundamentally Blocks the benefits envisioned by the 1995 Reform Act.
Second, permitting state standards to substitute for federal standards fundamentally blocks the benefits envisioned by the 1995 Reform Act. As a practical matter, so long as the possibility of state action exists, the 1995 Reform Act is dragged down to whatever the most permissive legal environment may be – even if it is a patchwork of state statutory, regulatory or case law existing in many different jurisdictions . By bringing a case in state court, plaintiffs can take advantage of lower pleading standards, engage in extensive discovery prior to a motion to dismiss, enjoy the benefit of a different statute of limitations, and expand the pool of potential defendants beyond that permitted by the federal law. Moreover, plaintiffs can bring cases attacking the accuracy of forward-looking information without regard to the safe harbor provisions passed in the 1995 Reform Act.
3. Corporate disclosure is key to investor protection and reduced volatility.
Third, the free flow of information is a critical foundation of the efficient allocation of capital in the marketplace. A company’s stock price reflects expectations about future earnings potential, not about historical performance. Yet the conflicting state standards which govern private securities litigation fundamentally affects a corporation’s willingness to risk including forward-looking disclosures at all in its public securities filings.
A February, 1995 letter to the SEC from the California Public Employees Retirement System (CalPERS) stated:
Until issuers have the certainty which comes with the application of a single standard by which public disclosure is examined, we are pulled between the conflicting desire to provide timely and responsible information to the marketplace and the strong desire to minimize our litigation risk. The experience of issuers demonstrates that, in the end, the current system does not enable us to satisfy either desire particularly well.
4. Today's capital markets are global, not national, and definitely not local.
Fourth, today's capital markets are global, not national … definitely not local. While we take states' rights seriously, we also have to recognize the realities of today's marketplace. Software companies compete around the globe not only for market share, but also for capital. The list of uncertainties is endless and includes -- currency fluctuation, political risk, technological risk, cultural risk and financial risk. As nationally traded companies competing in a global marketplace, it simply makes no sense for there to be 50 different state laws applying to the buying and selling of our securities .
5. Initiatives like Proposition 211 threaten to undermine, not advance, the efficient allocation of capital.
Finally, this Committee is undoubtedly aware of Proposition 211, an initiative proposed on California's ballot in 1996. Proposition 211 would have:
Initiatives like Proposition 211 threaten to undermine, not advance, the efficient allocation of capital in the marketplace. Had Proposition 211 passed it would have become the new de facto national standard for securities litigation, thereby completely erasing the gains achieved by passage of the 1995 Reform Act. Proposition. 211 would have impacted not only citizens and companies in California, but also citizens and companies of Texas, Connecticut, Alabama, South Dakota, Colorado, Massachusetts, Utah, Nevada and North Carolina.
We believe it is time to enact S. 1260, the Securities Litigation Uniform National Standards Act of 1997. In doing so we will prevent the circumvention of the recently enacted federal law; eliminate the current conflicting maze of state laws governing private securities litigation; and promote the use of forward-looking information in corporate communications.
Thank you for your time and attention. I would be pleased to respond to any questions you may have.
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