WASHINGTON _ Legal reform to curb class action lawsuitsagainst companies when their stock prices drop is one of the 10 billsin the GOP Contract With America wending its way to the Housefloor. The bill could offer relief to volatile commercials sectors likethe biotechnology industry that are awash in shareholder suits.
The House Commerce Committee's Subcommittee onTelecommunications and Finance is hammering out changes to theCommon Sense Legal Reform Act and final mark-up sessions arescheduled for Tuesday and Thursday.
Many of the changes, which have yet to be nailed down in fine print,were made in response to criticism leveled at the original GOP billby Securities and Exchange Commission Chairman Arthur Levitt Jr.and by House Democrats. Although Levitt has called for reform tostem abuses in private securities litigation, he opposes "precipitouschanges" in the current system that could make it too difficult forshareholders to file suits against companies.
"The changes we make must be profound, not drastic," Levitt toldlegislators at a subcommittee hearing on Friday. "What we need is abalance between caveat emptor and caveat venditor "between `buyerbeware' and `seller beware.'" Although he was not invited byRepublicans to testify at two earlier hearings on the Contract WithAmerica's legal reform bill, Levitt made his views known on Jan. 23in a speech to the Securities Regulation Institute in San Diego.
Specifically, Levitt objected to a "loser-pays-all" provision thatwould impose the legal costs of a suit on the losing party (as is donein England, hence the alternative name for this concept, the "EnglishRule"). Supporters have argued that such a provision wouldeffectively screen out frivolous lawsuits from the courts. Levittwarned it also could eliminate meritorious cases and allow fraud togo unchecked.
Levitt also attacked a GOP provision that would require plaintiffs toprove that they had personally read and relied upon a misleadingstatement by the defendant (in many cases a corporate officermaking predictions about the future) in order to bring action. "This isantithetical to our entire system of disclosure, which is premised onthe notion that, when information is disclosed generally, it isincorporated into market prices," said Levitt.
Finally, a proposal in the Common Sense Legal Reform Act thatwould require plaintiffs to prove that the defendant had actualknowledge that the relevant statements were false was nixed byLevitt. "The circuit courts have been unanimous in holding thatliability can be predicated on reckless conduct," said Levitt in SanDiego. "An actual knowledge standard could create a legal incentive[for corporate officers] to ignore indications of fraud. The phrase`ignorance is bliss' could take on new meaning."
GOP Bill Modified For Broader Support
Late Thursday, key players in the securities litigation reform effortannounced substantive changes to the GOP bill. CommerceCommittee chairman Thomas Bliley (R-Va.), Telecommunicationsand Finance Subcommittee chairman Jack Fields (R-Tex.) andsubcommittee member Rep. W.J. "Billy" Tauzin (a conservativeLouisiana Democrat who has threatened to switch parties) said amodified version of the bill could garner broad support.
* Modification of the "loser-pays" provision to state that thelosing party need not pay legal costs in cases where the lawsuit wasdeemed "substantially justified" or in cases where imposition of thecosts would be "unjust."
* Preservation of a shareholder's right to sue in cases where acompany's stock price was inflated by inaccurate or misleadingstatements, even if the shareholder did not personally read thestatement.
* Elimination of a requirement that shareholders own either$10,000 worth (or 1 percent) of a company's stock in order to filesuit.
* Clarification that would make a defendant who "willfullyshielded himself or herself from an ongoing fraud" still liable insecurities class action suits.
* Stipulation that the terms of the bill would apply only toprivate lawsuits and would not affect SEC enforcement actions.
In addition to the Contract With America bill, several other versionsof litigation reform legislation have been introduced in the House,including bills crafted by Rep. Christopher Cox (R-Calif.), Rep.Edward Markey (D-Mass.) and Rep. Norman Mineta (D-Calif.). Onthe other side of Capitol Hill, Sens. Pete Domenici (R-N.M.) andChristopher Dodd (D-Conn.) reintroduced a version of their 1994bill to curtail frivolous securities lawsuits on Jan. 18. The previousbill died.
Mineta's bill is the House companion bill to the Dodd-Domenicilegislation, which differs from the Contract With America bill. Forexample, the Dodd-Domenici bill offers an "alternative disputeresolution" mechanism that allows a judge to order a plaintiff to payattorneys' fee if the suit is ruled frivolous by the judge (in lieu of"loser-pays").
It also contains a proportional liability provision wherein parties withincidental involvement in instances of corporate fraud would beliable for damages and fees in proportion to the share of damagestheir actions caused. This proposal is backed by the SEC's Levitt,who agrees with the arguments of accounting firms that the scope ofliability should be limited because current law forces parties who areonly partially responsible to pay more than their fair share ofdamages.
The Dodd-Domenici bill also offers a "safe harbor" provision forcorporate officers who make good-faith predictions "on a reasonablebasis." Last October, the SEC issued a concept paper on "safe harborfor forward looking statements" and plans to hold public hearings onthe topic in Washington and San Francisco this month.
"The question is how to provide protection to issuers acting in goodfaith, without also insulating companies that intentionally hype theirstock by making unreasonable projections," said Levitt. The SECmay issue a new proposed disclosure rule on the matter, pending theoutcome of the hearings. n
-- Lisa Piercey Washington Editor
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