Mr. Chairman, I welcome these oversight hearings on the impacts of legislation passed last Congress that restricted private securities litigation. While I oppose frivolous litigation wherever it occurs, I strongly opposed that legislation because I believed it tipped the balance too far in favor of defendants, without providing the necessary protections to defrauded investors. To allow criminals who hide their securities fraud for 3 years to avoid punishment defies logic to me.
I think it is critical that we carefully review to review the effects of this legislation on investors and the securities markets before we undertake further legislative action. I hope in the future this Subcommittee attempts to present a more balanced picture. For example, the Subcommittee should have included the Government Finance Officers Association which has the unique perspective of viewing this issue from both sides - as a defendant and a plaintiff - but whose request to testify was turned down.
The North American Securities Administrators Association [NASAA] estimates that the total annual U.S. investment fraud stands at $40 billion. As an example, the recent "Bre-X" scandal which cost investors billions of dollars. In May of this year when independent tests disclosed that there didn't appear to be gold in any of the 268 holes drilled by Bre-X Minerals in Indonesia, billions of dollars of wealth disappeared from the stock market in a matter of hours. Many of the investors who got hoodwinked were sophisticated, experienced professionals.
I find it ironic that we are focusing on a small number of lawsuits - which in the worst case scenario, maybe a handful lack merit - while our markets experience serious cases of insider trading and fraud that cost Americans billions.
The Securities and Exchange Commission has testified repeatedly how state securities laws and the private bar are part of a dual enforcement system that has served the country well for decades. The SEC has called the private bar an "essential supplement" to their enforcement efforts. We must consider the ramifications of our actions before we take steps to undermine this complimentary system.
The fact is that we have passed two major securities bills in the past two years, the Private Securities Litigation Reform Act of 1995 [PSLRA] and the National Securities Markets Improvement Act of 1996. As a matter of common sense t we should wait some time to see how these new laws are interpreted by the courts and how they are affecting consumers and the market before we rush into more legislation. Quite simply, we need to have all the facts about the problems, if any, with these bills before taking away additional rights of investors and consumers.
Earlier this year, the Securities and Exchange Commission issued a report concluding that new legislation -- particularly legislation that would preempt private rights of action under state law -- would be premature. The Commission noted that, due to the lack of any appellate court decisions interpreting the law, it was impossible to gauge what its effect would ultimately be and that therefore the Commission could not support additional legislative changes at this time.
I concur in the SEC's judgment for one overriding reason. If we should legislate now and eliminate the rights of defrauded investors under state law and it subsequently turns out that the appellate courts interpret the new law in a manner that essentially makes suits under federal law impossible, we will have left defrauded investors with no remedy at all. That is simply too big a risk to take.
This is not a far-fetched scenario. A number of district court decisions that have already been handed down seem to me to be dangerous. Specifically, these decisions would eliminate recklessness as a ground of liability under the federal securities law, a result that would virtually end the ability of defrauded investors to bring suit to recover their losses. I would note that the SEC found this possibility to be of such consequence that -- in an especially unusual move -- it filed an amicus brief in district court in the Northern District of California in the Silicon Graphics case to challenge this result. Although the court subsequently modified its decision on the recklessness point slightly, it now still would require defrauded investors to prove "deliberate recklessness" in order to prevail in a case. I am troubled that swindled investors might have to prove "deliberate recklessness" in order to recoup their fraudulently lost savings.
I would urge my colleagues to remember that even many of those who supported the legislation did so with reservations. Their concerns were mitigated in part because they were convinced that there was a state law remedy available to consumers if it turned out that federal law did, in fact, go too far, as those of us on the other side claimed. I would also point out that many who supported the legislation also supported amendments that had been strongly advocated by the SEC that were not adopted that would have restored aiding and abetting liability and extended the statute of limitations in federal cases. To now pass legislation that would force all securities cases to be brought under federal law without fixing the glaring defects in that federal law would be doubly intolerable.
Finally, I would just make one additional point about how fragmentary our information is at this juncture and how premature it would be to enact legislation on the basis of what little we now know. Those who are already suggesting that legislation is needed to preempt private rights of action under state law have based their argument on a number of statistics, most prominently studies prepared by National Economic Research Associates. According to NERA's initial statistics and the proponents of new legislation, there was a dramatic increase in state court suits subsequent to enactment of PSLRA, which the proponents view as an attempt to circumvent the new law. Now it turns out that the latest NERA study indicates that in fact shareholder suits filed in state courts are down sharply this year, and that the 1996 figures, according to NERA, "are found to have been transient." According to the Wall Street Journal,, there have only been 19 shareholder class actions filed in state court through April of this year and it appears that there will be fewer of these suits filed by the end of the year than there were in either 1994 or 1995, the last two years prior to enactment of PSLRA.
To trample states rights by eliminating the ability of states to decide how to protect their own investors because of some 19 securities class action suits nationwide out of 15 million state civil cases filed annually seems to me to be overkill in the extreme. These new figures clearly support the SEC and my own view that we should continue to study this issue carefully but should not move ahead with any legislation until we have definitive answers as to how PSLRA is operating in the real world and how it has been finally interpreted by the courts of appeals and perhaps the Supreme Court.
I am troubled that some of my colleagues who profess to be for returning power to the states are so eager to do just the opposite. As a former Governor, you can be assured I will oppose efforts to gut state's rights in favor of the "heavy hand" of the federal government.
I look forward to hearing from today's witnesses.
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