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SECURITIES LITIGATION REFORM ACT
(House of Representatives - March 08, 1995)

Text of this article available as: TXT PDF [Pages H2818-H2864] SECURITIES LITIGATION REFORM ACT The SPEAKER pro tempore. Pursuant to House Resolution 105 and rule XXIII, the Chair declares the House in the Committee of the Whole House on the State of the Union for the further consideration of the bill, H.R. 1058. {time} 1135 in the committee of the whole Accordingly the House resolved itself into the Committee of the Whole House on the State of the Union for the further consideration of the bill (H.R. 1058) to reform Federal securities litigation, and for other purposes, with Mr. Combest in the chair. The Clerk read the title of the bill. The CHAIRMAN. When the Committee of the Whole rose on Tuesday, March 7, 1995, the amendment offered by the gentleman from Texas [Mr. Fields] had been disposed of and the bill was open for amendment at any point. Six hours and thirty-five minutes remain for consideration of amendments under the 5-minute rule. Are there further amendments to the bill? amendment offered by ms. eshoo Ms. ESHOO. Mr. Chairman, I offer an amendment. The Clerk read as follows: Amendment offered by Ms. Eshoo: Page 18, beginning on line 2, strike ``For example, a defendant who genuinely forgot to disclose, or to whom disclosure did not come to mind, is not reckless.''. Ms. ESHOO. Mr. Chairman, I offer this amendment to improve the standard by which H.R. 1058 determines if a person has acted recklessly in misleading buyers or sellers of securities. Protecting against reckless conduct is critical in securities law because in the world of finance there is ample opportunity to mislead investors with recklessly fraudulent statements. My amendment is an effort to improve H.R. 1058 in this critical area. H.R. 1058 has many solid and much needed legal reforms. And as several of my colleagues mentioned yesterday, we should have had legislation on this issue before this House long before today. It is needed, and it is overdue. However, Mr. Chairman, the bill before us is seriously deficient when it comes to recklessness--not so much by what is missing, but by what has been added. My amendment protects the recklessness standard by striking the sentence which allows the defendant to escape liability by saying, ``Your honor, I forgot to disclose that important fact to the customer.'' In other words, I forgot to tell the truth. Outside of this sentence, Mr. Chairman, the bill's definition of recklessness is perfectly adequate. It follows the so-called Sundstrand decision which has been supported by 75 percent of the Federal courts. Yet, H.R. 1058 has taken Sundstrand and modified it to include a provision which exempts from liability defendants who forgot to act responsibly. Mr. Chairman, I believe there is a reason that no U.S. appellate courts have adopted the definition for recklessness as it is stated in H.R. 1058. Our Nation's judges, most of them conservative appointees, understand the difficulty plaintiffs, with legitimate cases, have in proving ``knowing'' fraud. Our courts have resoundingly said recklessness is not the same as knowing fraud, and ``I forgot'' is not an excuse. For two centuries this country has prided itself on the fact that we are governed by the rule of law rather than by the whim of individuals. Now the majority proposes to overturn this principle with one sentence providing every guilty defendant the opportunity to escape retribution. Mr. Chairman, I am not a lawyer. But I have a lay person's respect for our Nation's statutes. They should be written with care and with the goal of providing justice for every citizen. Now with that in mind, Mr. Chairman, when we write the statute which prohibits reckless and fraudulent conduct in securities law, do we want to include the following sentence: ``For example, a defendant who genuinely forgot to disclose, or to whom disclosure did not come to mind, is not reckless.'' Mr. Chairman, do we want our laws to say such a thing? Do we want to give the defense of faulty memory to a reckless person? I don't think so. The high technology companies in my district need relief from meritless lawsuits now. We need to pass legislation that will end these suits yet protect investors' rights. My amendment would be one step in the long process of writing a bill which Congress passes and that the President can sign. I urge my colleagues on both sides of the aisle to support this reasonable amendment and improve this legislation. Mr. BLILEY. Mr. Chairman, I rise in opposition to the amendment. Mr. Chairman, the second sentence of the recklessness definition comes directly from the Sundstrand decision. It is part of the holding of the case. Take it out and we change the law. In footnote 20 of the Sundstrand decision, the court wrote, ``[t]hus, if a trial judge found, for example, that a defendant genuinely forgot to disclose information or that it never came to his mind, etc., this prong of the * * * test would defeat a finding of recklessness * * * '' 553 F.2d 1033, 1045F n. 20 (7th Cir. 1976). Thus, the second sentence comes directly from the original decision at the point where the judges were explaining the standard. Opponents of the legislation seem to want to choose selectively from Sundstrand or to pretend that the explanatory second sentence does not exist. But it does. Opponents of the language argue that the second sentence is merely a footnote. If we ignore footnotes, we should ignore the recklessness issue--because the Supreme Court created the issue in the now-famous footnote 12 in the Hochfelder decision. Other famous footnotes in judicial history include footnote 4 in the Carolene Products case, which has generated dozens of law review articles and thousands of pages of commentary. The Sundstrand court was using the footnote to explain that the standard for recklessness is something more than inexcusable negligence. In the Hochfelder decision, the Supreme Court expressly recognized that negligence is not enough for liability under IOb-5. Thus, a mistake, even a bad mistake, is not enough to establish liability. The wrongdoing must be conscious for liability to attach. In applying the Supreme Court's standard, the Sundstrand court explained that for a party to be liable for recklessness, the omission must derive from something more egregious than even ``white heart/empty head, good faith.'' The footnote explains that ``this is a subjective test with the requirement of something more than ``inexcusable negligence'' imposed because of Hochfelder.'' Thus, by including the second sentence in the legislation, Congress is clarifying its intent not to lower the standard under IOb-5 cases to mere negligence or gross negligence. As the Court explained, forgetting facts is not actionable. Not a single Federal district or appellate court relying on the Sundstrand standard has raised any objections to footnote 20, or have found it inconsistent with the recklessness standard articulated in the case. Federal district courts have referred to footnote 20 when articulating the Sundstrand test. The courts appear to accept footnote 20 as part of the holding in the case. For example; Seifer v. Topsy's International, Inc. 487 F. Supp. 653, 665 (D. Kan. Mar. 19, 1980): [T]he core requirement of Hochfelder and Ultramereal is that the plaintiff establish that the defendant lacked a genuine belief that the information disclosed was accurate and complete in all material respect.--Accord, Sundstrand, 553 F.2d at 1045 n. 20. None of the circuit courts that have adopted the Sundstrand standard have rejected footnote 20 or its substance. Opponents claim that the second sentence would reverse the rule of ``ignorance of the law is no excuse.'' This argument is nonsense. The Sundstrand standard speaks of ignorance of the facts, not ignorance of the law. Ignorance of the law is, indeed, no excuse. But, as the footnote says, ignorance of the facts is negligence, or even inexcusable negligence, and actors are not liable for negligence under IOb-5 actions. The law is not intended to penalize individuals who forget particular facts. The second sentence says nothing about ignorance of the law and does [[Page H2819]] not provide an affirmative defense for one who forgot to obey the law--as the minority argues. It speaks only to ignorance of facts. I urge a ``no'' vote on the amendment. Mr. DeFAZIO. Mr. Chairman, I move to strike the last word. Mr. Chairman, as I heard the former Member speaking, I could hear a distant sound and I think it was champagne corks popping on Wall Street. This is extraordinary. I am not an attorney, so I will not cite chapter and verse of precedents. I will go straight to the heart of the matter. {time} 1145 If a person who has worked hard their whole life to put together a little bit of savings for retirement, or maybe they want to annuitize their pension, they have to depend upon someone for advice. And they go and they depend upon the advice of a stockbroker or a prospectus written by some $500-an-hour lawyer on Wall Street. And there is a little omission in that prospectus. It forgets to tell you that you are not investing in Treasury bills, you are investing in derivatives. You lose your money, your life savings, your annuitized pension. It is gone. You are broke. Do my colleagues know what? You now have a little problem. Two things. One is if you want to sue, this has loser pay in it. So if you are the individual who lost your life savings, you have to find the wherewithal to come with the money to pay for the costs. Second, it has a new and novel defense from a lay person's perspective. I do not know of any other law in America where you can say, ``I forgot. I forgot.'' What this means is the next time that someone tries to go to court to recover against the next Charles Keating--there will not be another Charles Keating--that would be great if there were no more frauds that cost the American people millions of dollars like the savings and loan scandals. No, that is not what it means. What it means is you will not have recourse to sue them because they forgot or they just overlooked the disclosure that the bank was on the brink of insolvency when you put your money in there, or when you invested it in that bank. At a time of turmoil in international markets, just after the bank's scandal, not very long after the Orange County scandal, how is it that we can come credibly before the American people and say Wall Street needs protection from those little stockholders, Wall Street needs protection from people who are putting their life savings in their hands. Why? Well, because Wall Street might forget to tell them something crucial. This is absolutely outrageous beyond the pale. It is a step through a looking glass into some bizarre new world. Mr. BLILEY. Mr. Chairman, will the gentleman yield? Mr. DeFAZIO. I yield to the gentleman from Virginia. Mr. BLILEY. Mr. Chairman, the gentleman makes a strong argument, but he is wrong on one of the facts, and that is if the firm knew of some information that was derogatory and withheld it, they would not be excused under this language. They could not use the ``I forgot'' defense, because they knew the language to begin with. Mr. DeFAZIO. If I can reclaim my time, I think what this leads to is full employment for psychologists, because we are going to have an awful lot of amnesia on Wall Street. It was not that they knew or recklessly disregarded or consciously omitted, but it is just they forgot at the moment that they were drafting it, or when the print of the prospectus came back from the printer, the proof, and it left out the section on risky derivatives, well, they forgot. They forgot that that should have been there. Mr. BLILEY. Mr. Chairman, will the gentleman yield again? Mr. DeFAZIO. I yield again to the gentleman from Virginia. Mr. BLILEY. The word in there is genuinely forgot, and as a proof in fraud, you have to prove all fraud in court. But they would not be able to stand a chance of maintaining a defense under this language if they knew in advance and deliberately just withheld it, because they could not use that defense because they did not genuinely forget. Mr. DeFAZIO. If I can reclaim my time, I understand this is not the reckless disregard section, so we already have reckless disregard, and this is a further definition of reckless disregard. That is, a defense for reckless disregard is ``I forgot.'' Is that not correct? It is a definition of reckless disregard. Mr. BLILEY. It is a definition of reckless, yes. The gentleman is correct. Mr. DeFAZIO. Reclaiming my time, if someone recklessly disregards and they lose your pension or your annuity, I think at that point they should be liable. I do not think they should have the defense of they forgot. I do not think the average American is going to think depending on experts, that is an incredible position to be taken by the U.S. Congress. Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, as we are having this debate I think it is important for all of us as Members not to forget certain points. Point No. 1 mentioned by Chairman Bliley just a moment ago is if you take this sentence out of the statute as the statute is currently drafted, you change the law. This sentence that is the subject matter of the debate comes directly from Sundstrand. Some people say that this is not important because this sentence comes from a footnote. But it is important to point out, as the chairman did just a moment ago, that in footnote 12 of Hockfelder that footnote created the issue of recklessness and whether recklessness might meet the standard of intent that was required. This sentence in Sundstrand was used to describe what was meant by the court in interpreting recklessness. This sentence has been litigated and relitigated. This sentence has stood the test of judicial review. In fact, this sentence as part of Sundstrand has been adopted by 9 of the 12 Federal circuit courts. I think it is really important for this debate to put this in perspective. Where does this particular amendment affect the legislation, and it is important for Members to know that this occurs in subsection 4 in defining recklessness. But it occurs in section 10(a) where we are talking about the requirements for securities fraud actions, and particularly under section (a) of Scienter, and we say under this section, it says to establish Scienter and we list elements, the defendant indirectly made a fraudulent statement, the fact that the defendant possessed the intention to deceive, manipulate or defraud and the defendant made such fraudulent statement knowingly or recklessly, and that is why the definition of reckless is so important in its definition and how it is put down in this particular statute. So it is important to go to the definition of recklessness in the statute as it is drafted to understand the purpose of that particular sentence. I will read in section 4, recklessness. ``For the purposes of paragraph 1,'' the paragraph I will refer to in just a moment, ``a defendant makes a fraudulent statement recklessly if the defendant in making such statement is guilty of highly unreasonable conduct that involves not simply merely simple or even gross negligence, but an extreme departure from standards of ordinary care; and (b) presents a danger of misleading buyers or sellers that was either known to the defendant or so obvious that the defendant must have been consciously aware of it.'' Then the sentence that is the subject of this follows. It says: ``For example, a defendant who genuinely forgot to disclose or to whom disclosure did not come to mind is not reckless.'' The court was indicating what was meant in the definition of reckless in that Sundstrand decision, so it is important that this sentence remain, and it is important that people recognize that this has already been adopted, it has been litigated time and again, but adopted by 9 of the 12 Federal circuit courts. Mr. MANTON. Mr. Chairman, I move to strike the requisite number of words and I rise in favor of the Eshoo amendment. At the outset, I want to commend my colleague, Ms. Eshoo, for offering this important amendment which would dramatically improve the bill's recklessness standard. As a representative who hails from New York City, the financial capital of [[Page H2820]] the world and the headquarters of most of our Nation's securities accounting firms, I share my colleagues interest in passing securities litigation reform and easing capital formation for our local, regional, and national economies. However, as the representative of New York's Seventh Congressional District, I am also committed to protecting the people of Queens and the Bronx, who help keep New York City running by supplying the city's businesses with skilled labor. My district is also home to a large number of retired middle class workers. I want to state that I support a level playing field in securities litigation. I think clear rules will serve to define prohibited activities and eventually lead to better protection of all parties. We must resist the temptation to try to address the uncertainties of the securities market by presuming bad faith by either party in securities litigation cases. In that regard, I rise in support of Ms. Eshoo's amendment which would correct the bill's untenable standard for defining recklessness which would protect fraudulent conduct. When first introduced, this securities litigation reform legislation contained no provisions designed to hold businesses accountable for reckless conduct, instead, defrauded investors would have had to prove that defendants actually intended to defraud them. After much criticism from members of the Commerce Committee, liability for recklessness was restored, but was defined as willful blindness, a definition which has been adopted by no circuit courts of appeal. It is difficult to understand why willfulness that is, intent, should be required as a prerequisite to a finding of recklessness. In fact, the only thing that seemed to recommend that obscure definition was that it was so narrow that it was unlikely anyone could be found reckless under its definition, and in fact, no one had never been found reckless through its use. For the benefit of my colleagues who are not on the Commerce Committee I would like to point out that, contrary to what they may hear today, there is little disagreement about what recklessness means in Federal courts. The majority of circuits, including the second circuit in New York, which most people acknowledge has special expertise in securities matters, has adopted the seventh circuit's determination in Sundstrand versus Sun Chemical, that: Reckless conduct may be defined as a highly unreasonably omission involving not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. While H.R. 1058 now contains language similar to Sundstrand, I ask my colleagues to consider why the ``For Example'' sentence, which the Eshoo amendment would strike, was added to this accepted standard. I do not think that I am being unreasonably suspicious by suggesting that these changes were designed to undermine the Sundstrand standard. If my colleagues are not trying to weaken the accepted standard, why don't they simply accept this amendment? The issue before us is not a complex legal question. If the Congress passes something which represents the accepted definition of recklessness plus ``something,'' then we are not codifying the current court standard. Courts will determine that we must mean something besides the accepted definition of recklessness, and set about to determine what else the addition of the footnote will require before a showing of recklessness can be made. As Anthony Lewis pointed out in the New York Times on Monday, this extra sentence will likely open new loopholes for securities fraud. I can think of no reason to allow businesses to escape liability for their own fraud if they conveniently forget that they perpetrated fraud on investors. I cannot fathom the common sense in this definition of recklessness. My colleague, Ms. Eshoo, and I have worked together through the committee process to improve the securities litigation portion of the Contract With America. In an unfortunately all too partisan setting, Ms. Eshoo has attempted to forge reasonable legislation which balances the rights of businesses and investors. She has drafted a commonsense amendment. I urge my colleagues to support it. amendment offered by mr. cox of california as a substitute for the amendment offered by ms. eshoo Mr. COX of California. Mr. Chairman, I offer an amendment as a substitute for the amendment. The Clerk read as follows: Amendment offered by Mr. Cox as a substitute for the amendment offered by Ms. Eshoo: Page 18, beginning on line 2, strike ``For example'' and all that follows through line 5 and insert the following: ``Deliberately refraining from taking steps to discover whether one's statements are false or misleading constitutes recklessness, but if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' {time} 1200 Mr. COX of California. Mr. Chairman, I would like to address myself to the comments that have been made thus far by my colleagues concerning one sentence in our definition in the statute of the court- created cause of action for reckless violation of the securities laws. The 1934 act and the 1933 act do not contain any private cause of action. This has been created by the courts. Likewise, they do not contain any cause of action for recklessness. That, too, has been created by the courts in very recent years. Our legislation takes the rather dramatic step of codifying this judge-made law of recklessness in the lower courts, judge-made law that the Supreme Court has never agreed to; only in a footnote in a Supreme Court decision did they say they were not prepared to decide whether recklessness could be a cause of action at all. So for the first time our legislation would be codifying recklessness, and to do this, we borrowed, at the suggestion of Democrats on the Committee on Commerce, language from the seventh circuit Sundstrand case. The Sundstrand decision itself crafted a recklessness standard borrowed from another court in the western district of Oklahoma, and that court had its opinion quote verbatim in the Sundstrand case. Then the judge in the Sundstrand case came up with his own interpretation of what that meant, which he put in a footnote. We have both the western district of Oklahoma case that was recited in Sundstrand and the judge's own words in this proposed legislation. It is the judge's own words in Sundstrand that contain the definition of the distinction between recklessness and negligence, so that someone who honestly makes a mistake is definitionally negligent but not reckless. Therein lies the distinction. And it is that language that is giving rise to all of this debate. So my colleague from California has proposed merely to strike that sentence which would leave us with something of a vacuum in our legislative definition of recklessness, but her reason for wanting to strike it is, I think, a fair one, and that is that examples are not normally contained in statutes. Now, one of the reasons that I think we need to put as much as possible into the statute is that judges increasingly are not looking to legislative history to determine what Congress meant. I actually support that mode of judicial interpretation of statute. I think there is a way to solve the problem. I am going to agree with my colleague from California that we can strike this last sentence and still achieve the objective, and I have proposed that we substitute instead language from a court case in the southern district of New York that simply harmonizes the Hochfelder standard that we have already written into subparagraph (b) of this statute with the idea of recklessness. The sentence we would substitute says simply this: Deliberately refraining from taking steps to discover whether one's statements are false or misleading constitutes recklessness, but if the failure to investigate was not deliberate, such conduct shall not be considered to be recklessness. I think we can all agree this is exactly what this statute means. This is what the judge-made case law already on the books means. Even if we do not enact this statute, it clarifies precisely [[Page H2821]] what is our congressional intent. It offers guidance to the courts, and most importantly of all, guidance to the American people who would like to know in advance the standard to which they should conform their conduct. So I congratulate my colleagues for focusing our attention on this issue. I think that this is a fair resolution. Mr. BRYANT of Texas. Mr. Chairman, will the gentleman yield? Mr. COX of California. I yield to the gentleman from Texas. Mr. BRYANT of Texas. I appreciate the gentleman's congratulations. We tried very hard to focus you on this issue in committee. Let us just go over, briefly, what happened here. In the subcommittee you told us the Sundstrand decision said one thing. We argued vigorously with that. In full committee you told us it said another thing which is what is in the bill today. Now you are presenting us with a handwritten amendment in which you say that you have tried to find some way to further codify what you were after. I think it raises a serious question about exactly what you guys are doing. I mean, have you thought this thing through or not? Why is this just a handwritten amendment? Was this just patched together in the last hour? We are writing laws that affect pension plans, affect people's stock investments, affect the stability of the market. This is a serious matter. You come up here at the very last minute with a handwritten amendment which, by the way, I find to be very difficult, much of which is almost impossible to distinguish from what is in the bill already. When did you write this amendment, I ask the gentleman from California [Mr. Cox]? Mr. COX of California. Reclaiming my time, the gentlewoman from California, at the close of business last night, was recognized as the opening amendment today, and it is, therefore, timely that we are discussing her amendment to this bill today, and it is because of the initiative to change the legislation that we are now engaged in describing how to do that. It is, of course, important for all of us to participate in this debate. Mr. BRYANT of Texas. If the gentleman will yield further, the Republican leadership told us yesterday there would be no additional amendments. We just saw this in the last 5 minutes. Mr. TAUZIN. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise in support of the substitute amendment. We are talking literally about the last sentence of the definition contained in the Sundstrand decision of recklessness. I want to point out for the members of the committee that the last sentence that is being debated here by the Eshoo amendment is contained in the Sundstrand decision. It is contained in the Sundstrand decision in further elaboration of what recklessness is not; Sundstrand adopts the language from the Oklahoma case which was the first case that was decided after the Supreme Court case of Hochfelder. It adopted that language and defined what recklessness is. That is in the bill exactly, indeed, as the court described it in the Sundstrand decision. But Sundstrand and the court in Sundstrand went a step further. It said not only is this what recklessness is, this is what it is not. And why was that important? It was important because in the original Supreme Court decision the Court made it very clear to its circuit courts who are going to be interpreting the law even more precisely than the Supreme Court did, it made it very clear, and here is a quote from Hochfelder, that ``When a statute,'' like 10(b)(5) ``when a statute speaks so specifically in terms of manipulation and deception and of implementing devices and contrivances, the commonly understood terminology of intentional wrongdoing, and when its history reflects no more expansive intent, we are quite unwilling to extend the scope of this statute to negligent conduct.'' In effect, what Hochfelder was saying was that this statute, 10(b)(5), that we are codifying and amending today, was clearly in its origination and in its history an intentional-fraud statute, not a negligence statute. Now, I know that there are many who would like to turn it into a negligence statute. That is not what it is. It is an intentional-fraud statute. The courts have interpreted that statute to say that when somebody's conduct is not quite clearly intentional but so reckless as to get real close to intentional misconduct, that that, too, can be used as a cause of action under the statute. Hochfelder was saying you still need to find some elements that lead you to that conclusion that recklessness is so severe that it is the equivalent of intentional wrongdoing, and so Sundstrand came along, the Oklahoma case came along interpreting that Supreme Court decision even further and defined recklessness in those terms. Let me quote from what is in the bill and what is in Sundstrand: ``Reckless conduct may be defined as a highly unreasonable omission involving not merely simple or even inexcusable negligence.'' Hear this again, ``Not even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that is either known by the defendant or is so obvious that the actor must have been aware of it.'' Sunstrand is, in effect, saying that you have got to get awfully close to intentional negligence. What the gentleman is now offering in place of further clarifying language of what is not negligence that is contained in Sundstrand, verbatim, is a statement that is taken from other court decisions, again interpreting the Supreme Court decision saying ``deliberately refraining from taking steps to discover whether your statement is true or false is, indeed, recklessness.'' In effect, referring again, as the Supreme Court said you must refer to, some kind of deliberateness, some kind of intentional misconduct, something so close to the intent to defraud that it meets both the history, the intent, and the original language of section 10(b)(5). Let me say it again: There are many people who would like this section of the law to be a negligence section. It is not. This is a fraud section of law, and you can try to turn it into a negligence standard if you like by amendment. That is not what this law is all about. That is not what this section of litigation is all about. There are many lawyers who try to turn it into a negligence standard. The court in Sundstrand and the Supreme Court said that is not the law. This is a recklessness, almost right up there close to intent to defraud, and if you want to make sure that that is true, the gentleman's substitute amendment is not only right but eliminates, indeed, an example that is in Sundstrand, because I frankly think that is not good text in the law and substitutes instead a finding of the court. The CHAIRMAN. The time of the gentleman from Louisiana [Mr. Tauzin] has expired. (By unanimous consent, Mr. Tauzin was allowed to proceed for 1 additional minute.) Mr. BRYANT of Texas. Mr. chairman, will the gentleman yield? Mr. TAUZIN. I yield to the gentleman from Texas. Mr. BRYANT of Texas. A few moments ago you all were quoting to us from a 1976 decision in Sundstrand saying this is the common law; we are just going to codify it. Last night we were told there would be no more amendments to the bill. In the last 5 or 10 minutes, we have been handed a very illegible handwritten amendment which you are now lauding as a great new standard for this industry. I would like to ask the gentleman, if I can---- Mr. TAUZIN. Reclaiming my time, I will be happy to respond; whatever time I have, I have got your question. The question is should the example that is quoted in Sundstrand of what is not negligence be contained in this bill. You have objected to that. The gentlewoman has asked we take it out. We are saying OK, if you really want to do that, let me answer the question---- Mr. BRYANT of Texas. Do you take it out? Mr. TAUZIN. Let me answer your question. Mr. BRYANT of Texas. I did not ask a question. I have got a question for you. Mr. TAUZIN. If the gentleman has suggested it should come out as he and the gentlewoman have, we are saying OK, if you are going to take that out, [[Page H2822]] you need to clarify as the Supreme Court asked us to do that you are still talking about a deliberate refraining from taking steps to discover the truth or falsity of the statement. The CHAIRMAN. The time of the gentleman from Louisiana [Mr. Tauzin] has again expired. (At the request of Mr. Bryant of Texas and by unanimous consent, Mr. Tauzin was allowed to proceed for 1 additional minute.) Mr. BRYANT of Texas. If the gentleman will yield further, when did you first see this handwritten amendment that we have been handed here in the last few minutes? Mr. TAUZIN. We have been discussing that and other language taken from the Supreme Court decisions for some days now in an effort to try to make this bill more palatable to my friend from California who was going to offer this amendment. Mr. BRYANT of Texas. We know as of last night there was no plan to offer any additional amendment. Now we see a handwritten amendment in the last few minutes. Mr. TAUZIN. Reclaiming my time, this is not an additional amendment. This is a substitute for your own amendment. The idea is before I and other Members who support this bill are willing to accept your amendment which deletes language from the Sundstrand decision, we think you ought to have language that clarifies what the Supreme Court said. That is what this amendment does. Mr. FIELDS of Texas. Mr. Chairman, will the gentleman yield? Mr. TAUZIN. I yield to the gentleman from Texas. Mr. FIELDS of Texas. Mr. Chairman, I would just point out last night this amendment did not exist, that this has been a dynamic process. We have taken the concerns expressed by people on the other side of the aisle. We have attempted to address those concerns to make the legislative language a little tighter, and we worked as late as this morning trying to come up with the particular language. Mr. DINGELL. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise to oppose the substitute. I rise first to commend the gentlewoman from California for her amendment. It should be adopted. Second of all, this curious piece of paper that has been passed around should be rejected. The gentleman from California has presented us with an amendment that was never before seen. This is not inconsistent with the practices that we have observed. But I want to take my colleagues through what is going on here. What is at stake here is the rights of investors, not a bunch of slippery lawyers, but investors, investors who were hurt in things like Orange County, things like the Milken, Boesky defalcations and a large number of other items of rascality, also in questions like we saw in connection with the savings and loan debacles where lawyers and accountants gave bad opinions, where they audited improperly, where they failed to keep track of property, where they did not find that property which was carried on the books did not exist, or where they failed to find that it was overvalued. Those matters have been found to be reckless, reckless by the courts, and actionable. Now we find that there is an attempt to get away from the problem of these people by defining recklessness to essentially be deliberate misbehavior. At question is not the issue of negligence or even of fraud. It is simply of reckless misbehavior. The amendment which is offered by the gentleman from California would say that if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless. We are talking here about lawyers giving opinions as to suitability. We are talking here about accountants who are failing to ascertain that the property which is carried on the books and which is filed in the reports which are submitted to the shareholders and the SEC, in fact, does not exist or does not have the value which is assigned to it. Is that fraud? Quite probably. Is it reckless? Absolutely. These people have a fiduciary duty, a fiduciary duty, a duty of the highest responsibility to the shareholders, and they have a responsibility which they must carry out to the Federal Government and to the State regulators to file their reports truthfully and to use due care and proper care to find out that the value is there, that the property exists, that it is not overvalued in some kind of a fraudulent evaluation. {time} 1215 That is what is at stake. This is an attempt to reduce the amendment offered by the gentlewoman from California [Ms. Eshoo] as an attempt to reduce the responsibility and to define recklessness now as some kind of deliberate misbehavior. That is not it. What is at stake here is the question of whether or not the individual has carried out his proper fiduciary relationship, whether he has been reckless, and recklessness comes to the brink of, but does not include, deliberate wrongdoing. This is an attempt to get a little more protection for wrongdoers and to strip a little more of the protection from the ordinary citizen who has invested his or her life savings in a stock or a security which can be converted to worthlessness by the kind of wrongdoing that this amendment offered by the gentleman from California [Mr. Cox] would sanctify. That is what is at stake here. Now, the original amendment offered by the gentlewoman simply struck out dicta, struck out a footnote. The committee was largely agreed that what we should do was to address this within the framework of the Sundstrand decision. The gentleman from California now finds that inadequate. He essentially would seek now to repudiate the language which he pushed in the committee. That is perhaps right, and I think that he should be commended for retreating from it, but not for retreating to something which raises the burden on the litigants to a still higher level, to address the problem of wrongdoing by people who are failing to carry out their fiduciary responsibility to investors and investing public of this country. Mr. WHITE. Mr. Chairman, I move to strike the requisite number of words. I would say simply I yield to the gentleman from California for his comments on this issue. Mr. COX of California. I thank the gentleman for yielding. Mr. Chairman, I listened carefully to the comments of the gentleman from Michigan [Mr. Dingell], and I must say it proves the law of the inverse correlation between desperate level and factual content on many occasions. What the gentleman from Michigan may have forgotten is that the bill we are discussing today simply embodies the policy choices that, for decades and decades, have been made by Democrat Congresses and confirmed by our Supreme Court. The pattern of the Federal securities laws is clear. When Congress wanted to impose absolute liability or impose liability for mere negligence, it did so explicitly. What the gentleman may have forgotten is that the securities laws already impose strict and absolute liability on the directors of a company for fraudulent misstatements and omissions. It is not just recklessness, not just negligence, but strict liability and absolute liability for the directors of company under section 11. It is the same thing for the officers of the company. By and large, what the Congress has chosen to do in securities laws is deal differently with formal documents filed with the SEC and deal differently with the enforcement powers of the SEC, on the one hand, and, on the other hand, informal documents and conversations ranging from press releases to telephone conversations and so on, where we want to make sure we facilitate the free movement of informal communications between issuers of securities and participants in the security markets. So we find that the legislative judgment made by the New Deal Congresses of the 1930's was that it was appropriate to apply a very high standard of liability and not to require liability and not to require fraudulent intent where prepared offering documents, formal prepared offering documents and SEC filings are involved. On the other hand, as is the case with private litigation that we are dealing with in this bill, Congress did not want to chill candid, free, and informal communications. [[Page H2823]] The language which the gentleman is discussing would affect private securities actions way outside the bounds of the formal offering documents that are provided prospectuses and so on, where we have strict liability. The ``I forget'' defense does not work for any people who are the issuers of securities. I think we need to focus on the fact that what we are doing here is not writing language for the first time in this bill, we are taking language from court decisions and putting it into statutes, and we are doing it, I think, in a very foresighted way. So that for the very first time, what the gentleman would like to see, I think, a codification of recklessness, would exist in our securities laws, and that codification will reflect the best reconciliation of our Supreme Court decisions in Hochfelder, which said every violation of section 10-B has to be intentional and which our lower courts have said sometimes that would include recklessness. Mr. TAUZIN. Mr. Chairman, will the gentleman yield? Mr. WHITE. I yield to gentleman from Louisiana. Mr. TAUZIN. I thank the gentleman for yielding to me. Mr. Chairman, the gentleman from Michigan has asserted that the addition of the word ``deliberately,'' which is contained in the gentleman's substitute, is something new to the law. Let me beg to differ, and let me quote from the Supreme Court. The court said on page 212 of the decision, ``We note that such a reading cannot be harmonized,'' a reading of nonintentional fraud, ``with the history of this ruling. A history making clear that when the Commission adopted the rule, it was intended to apply only to activities that involved Scienter.'' Scienter is defined by the court on page 194. It means ``a mental state embracing intent,'' that is deliberateness, ``intent to deceive, manipulate, or defraud.'' I will quote from Sundstrand as well. This is the Sundstrand language, the definition of recklessness is ``the kind of recklessness that is equivalent to willful fraud.'' Willful, deliberate fraud. Further, ``Indeed the franking definition,'' which is what they used, ``of recklessness should be viewed as the functional equivalent of intent.'' Deliberateness is what the Supreme Court in Sundstrand talked about, is absolutely part of our law, and it should be part of it. And I thank the gentleman for yielding. Mr. ALLARD. Mr. Chairman, will the gentleman yield? Mr. WHITE. I yield to the gentleman from Colorado. (Mr. ALLARD asked and was given permission to revise and extend his remarks.) Mr. ALLARD. I thank the gentleman for yielding. Mr. Chairman, I rise in support of H.R. 1058 and the Cox amendment. Mr. Chairman, abuses of securities litigation are particularly excessive. This act restricts the filing of frivolous suits by imposing stricter conditions. The act requires class action suits to have plaintiff steering committees to ensure that the interests of the lawyers to do dominate those of the plaintiffs. It equalizes individual plaintiff awards in a class action suit and restricts named plaintiffs from filing more than five suits in a 3-year period. The act also allows the court to order the ``lower pays'' rule in unjustified cases. The plaintiff has a greater burden of proof under this act, which allows the defendant to avoid liability if there is no intentional deceit. Also, the plaintiff must prove that loss was incurred because of reliance on a fraudulent statement. Finally, the act protects publishers of market predictions if the forecasts are well-reasoned but do not hold true. Without these reforms, plaintiff lawyers can file securities cases with few restraints. They routinely pounce on companies following a chance drop in stock. They have good reason to take, and in fact promote these suits. The plaintiff's counsels generally spend little time determining the facts of the case, yet receive a considerable amount of money for their involvement. Such practices are fostered by so-called professional plaintiffs who are sometimes recruited by lawyers with the promise of easy money. H.R. 1058 removes the incentives to file unfounded claims. Mr. Speaker, it is time we restore the notion that a capitalist economy, there are risks. The process is simple. Stocks rise, you win, stocks drop, you lose. Each person making an investment knows that it is a risk, still certain investors have been encouraged by counsel to fault companies for their inability to predict earnings. We can no longer afford to operate this way. Risk is an important element in the market. In Colorado alone it is estimated that frivolous securities litigation unjustly costs tens of millions of dollars every year. The assailed companies feel like they are dealing with a terrorist. Following a simple shift in stock price or a particular corporate decision, they find that their company is suddenly held hostage and they are compelled to negotiate a ransom payment. The cost of these suits is even more outrageous when you consider that the filing parties never see the bulk of the payment, it is the plaintiff attorneys who reap most of the benefits. When the law provides such incentives for greed, the law should be revised. H.R. 1058, the Securities Litigation Reform Act, will effectively limit unreasonable law suits. I strongly support this legislation. Mr. BRYANT of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, the question for Members of the House is what should the standard, what would the standard be, if the Eshoo amendment were adopted? It is that simple. Leaving aside all else you have heard today; if the Eshoo amendment was adopted, what would be the standard? Here is the standard. It is in the bill as brought out by the majority. The standard would be: ``Reckless conduct may be defined as highly unreasonable (conduct) involving not merely simple,'' not merely simple, ``or even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the action must have been aware of it.'' That is the standard. That is an extremely high standard. Simple negligence is not enough, gross negligence is not enough; it has got be even worse than that before you can hold one of these security dealers liable in a civil action. What we are arguing about is, should anything more come at the end of this paragraph? What the gentleman from California [Mr. Cox] wanted to put at the end of this paragraph is a sentence that would have said, ``Even if they do as bad as all of that, if they just plain forgot, it is all right, and they are not in trouble.'' Now, having been, I assume, embarrassed by the absurdity of that proposal, he comes now with a last-minute rewrite, a handwritten amendment which we have just seen in the last few minutes, which says, ``Add at the end of this extremely high standard a sentence that, ``Deliberately refraining from taking steps to discover whether one's flagrant or false or misleading conduct would constitute recklessness. But if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' Mr. Chairman, this language does not need an add-on. But, second, it sure does not need an add-on. But, second, it sure does not need an add-on that says, I forgot. In effect, Mr. Cox's last-minute rewrite, which we did not see until 10 or 15 minutes ago, is just another way of saying, I forgot. What does it say: ``If the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' What does that mean if failure to investigate is not deliberate? The point is the law should hold somebody who is in the business of issuing securities to at least this standard so that those who invest will know that they are not being the victim of false statements or grossly reckless statements that could cause them to lose their money. If they lost their money, under the Cox language, they could say, ``Well, our failure to investigate the facts which we put into the issuing documents was not deliberate.'' How can a failure to investigate be not deliberate? Who has the burden to decide whether or not an investigation ought to be done? Surely the burden ought to be upon those who are in a position, with an office full of experts and unlimited resources to do the investigation of whether or not the facts set forth in the offering document are true or not. The burden should not be left upon the pensioner, or upon the widow, upon the hopeful investor who has no [[Page H2824]] way whatsoever to know what facts should or should not be investigated. Members of the House, we have never ever allowed ignorance to be an excuse in a civil action or in a criminal action. If an American citizen forgets to buy their license plate after the old one has expired, they do not get to plead, ``I forgot.'' They do not get to say, ``Well, my failure to investigate whether or not my license plate has expired was not deliberate.'' You do not get off with that. If your lawyer fails to record your deed, he does not get off by saying, ``I forgot,'' or, ``My failure to investigate my file to see whether or not I had a deadline to record the deed,'' somehow or other was accidental. That does not let him off the hook. Who should be held responsible? Surely it is not the average person, relying upon the representations of experts, who invests his money. This level of responsibility is higher than we place on probably any other potential defendant in a civil action. You cannot hold him responsible for simple negligence or even gross negligence. In fact, you cannot hold him responsible unless they exhibit an extreme departure from the standards of ordinary care or present a danger of misleading buyers and sellers known to the defendant are so obvious that he should have known it. Ms. ESHOO wants to leave a period at the end of that sentence. These guys want to say, ``However, if in spite of all that, the guy says, `I forgot,' he gets off the hook.'' Now, embarrassed by the words ``I forgot,'' they come up with a last- minute rewrite which means, in effect, the same thing as I forgot. I strongly urge you to vote down the Cox amendment, to say ``no'' to this reckless kind of legislative procedure where amendments are thrown together at the last minute on critical legislation like this, to say ``no'' to the Cox amendment, say ``yes'' to the Eshoo amendment, and let us leave some kind of protection in this law for the average American investor so that those who take advantage of them by misleading them in offering documents will not be able to profit from their recklessness. Mr. WATT of North Carolina. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I would like to thank you for recognizing me because I really had intended to stay out of this discussion, but I got more and more outraged as I heard the debate taking place on the floor about what was going on. I want to respond to my colleague from Louisiana, Mr. Tauzin, who said we were trying to go back to a negligence standard. I want to admit to my colleagues that if it were me, I would be happy with a negligence standard. I did not come to the floor to play games with you. Lawyers are subject to negligence standard, doctors are subject to a negligence standard, ordinary people who drive automobiles and run into folks are subject to a negligence standard. If they make a mistake and they injure somebody, they are held liable. But I will not recognize to you that under the law as it is written Congress has already imposed a higher level of standard for folks in the stock brokerage business and those who engage in securities business. They have said, ``You can be held liable only if you do something fraudulently, knowingly, recklessly.'' That is a higher standard or actually, from the common, ordinary people's vernacular, it is a lower standard. Mr. COX of California. Mr. Chairman, will the gentleman yield? Mr. WATT of North Carolina. No, I will not yield. I want to make sure that you can confuse the issue if you want, but right now is my time to try to relate this to some semblance of sanity rather than missed--come and go that you all are engaged in. {time} 1230 What my colleagues want to do is take the already high standard, the one that is a step up, that applies to every other member of society, and create what I would call an impossibility standard, because if we adopted this language, you would never ever be able to win any cases in the securities area because any time recklessness is alleged or somebody is engaged in fraudulent conduct, the securities person would come back and say, ``Oh, well, that might be true, but I forgot to tell you,'' and all of a sudden they would be off the hook. Well, my colleagues, I thought the purpose of this bill was to get rid of frivolous lawsuits and to cut down on the amount of securities litigation which we have built in a wonderful procedure for trying to stop those kinds of lawsuits, but, Mr. Chairman, when we start to raise the standard to an even higher level of care, an impossibility standard, then I start to wonder is the purpose really to get rid of frivolous lawsuits or is it to protect the buddies up on Wall Street from what goes on in the real world, from the standard that everybody else in our society, these people, all of whom are seated in the gallery, are subject to, this common, everyday standard, and all of a sudden securities people, whom we have already given a higher level of protection to, now they want to give an impossible level of protection to. So, Mr. Chairman, I want to make sure that everybody understands in common, everyday language what is being proposed here: If I do something, if I am reckless, if I do it knowingly, and I come into court and say, Oh, no, I forgot, all of a sudden I am shielded from liability under this amendment. Mr. COX of California. Mr. Chairman, will the gentleman yield? Mr. WATT of North Carolina. I yield to the gentleman from California. Mr. COX of California. I would just point out, to correct the record, that underwriters, brokers and dealers who act as underwriters are absolutely and strictly liable, and I say to the gentleman, ``You don't need to prove negligence and recklessness; they are strictly---- The CHAIRMAN. The time of the gentleman from North Carolina [Mr. Watt] has expired. announcement by the chairman The CHAIRMAN. The Chair would remind Members not to make reference to individuals in the gallery. Mr. MARKEY. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise in opposition to the amendment offered by the gentleman from California [Mr. Cox] to the amendment offered by the gentlewoman from California [Ms. Eshoo]. Mr. Chairman, let us make it quite clear that today there is a standard which is used by the Federal courts, and that standard is largely an agreed upon standard, and it is the standard which is in the well of the House which has been sitting there as a printed statement of what has been accepted by 80 percent of the Federal courts of the United States. Now remember the standard is one which Federal judges across the country, most of them Reagan and Bush Federal district court judges, have used as their standard, and it has served our country quite well. Now, if over the course of the last 10 to 15 years 75 to 80 percent of the Federal district court judges, almost all of them Reagan and Bush appointees, have drafted a standard, have adopted a standard, which they use, why would we on the floor of the United States Congress adopt a standard which is a handwritten standard just presented to us that will override 15 years of precedents of the Reagan and Bush era judges that have reached the consensus as to what the standard should be? Should we not give some deference to these Federal district court judges? Should we not allow them in their courts, knowing all of the facts and law, the history of this country, to come to some consensus? Now I have the greatest respect for the legal knowledge of the gentleman from California, but it is not so substantial a level of respect that I think that a handwritten amendment on the floor, with no notice to any Members and in contradiction to the promise that there would be no additional majority party amendments to the legislation here today, should serve as a substitute for 15 years of settled law. The intent of this amendment, I think at the end of the day, is nothing more, nor less, then to dress up, dress up the I-forgot defense. It puts it in fancier words. It uses a legalese that, I think, is probably more professional than actually putting the words ``I forget'' into the law, but the effect of it is the same, to ensure that the standard for ordinary Americans to be able to bring [[Page H2825]] actions against executives of companies who have misled those individuals in the investment of their money have a more difficult time in court. That is what this is all about, by the way, or else we would not be out here on the floor of the House of Representatives. We would not be here if they were really happy with what the Sundstrand decision says, which is again, and this is what we believe the public should have as their protection, that there be reckless conduct which may be defined as highly unreasonable conduct involving not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that are either known to the defendant or so obvious that the actor must have been aware of it. This standard is one which the Federal district court judges have, George Bush and Ronald Reagan judges, codified for all intents and purposes as the national standard. We cannot use, we should not be allowed to use, a handwritten amendment on the floor of the House of Representatives to be attached to this profoundly important piece of American jurisprudence, and I just hope that anyone who is listening to this debate understands quite clearly that any additions to this are meant to reduce the ability of ordinary Americans to recover in the courts of the United States when executives of S's, when executives of a private company, have deliberately misled-- The CHAIRMAN. The time of the gentleman from Massachusetts [Mr. Markey] has expired. Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, first of all I want to compliment the gentleman from California [Mr. Cox]. In Sundstrand the court defined ``recklessness'' building on the court decision in Hochfelder, and that is what we have currently in the statute. We have language that has already been litigated, and relitigated, and been adopted by 9 of the 12 Federal circuit courts. Now I am complimenting the gentleman because, if I understand what the gentleman from California is doing with his handwritten amendment, which at one time that is the only type of amendments we had on the floor, handwritten amendments, but what the gentleman is doing is, first, I understand, he is trying to be cooperative. There were some concerns expressed on the other side of the aisle, and the gentleman is stepping up to the plate to meet some of those concerns, and we take the amendment offered by the gentlewoman from California [Ms. Eshoo] as being a sincere attempt to make the l

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SECURITIES LITIGATION REFORM ACT
(House of Representatives - March 08, 1995)

Text of this article available as: TXT PDF [Pages H2818-H2864] SECURITIES LITIGATION REFORM ACT The SPEAKER pro tempore. Pursuant to House Resolution 105 and rule XXIII, the Chair declares the House in the Committee of the Whole House on the State of the Union for the further consideration of the bill, H.R. 1058. {time} 1135 in the committee of the whole Accordingly the House resolved itself into the Committee of the Whole House on the State of the Union for the further consideration of the bill (H.R. 1058) to reform Federal securities litigation, and for other purposes, with Mr. Combest in the chair. The Clerk read the title of the bill. The CHAIRMAN. When the Committee of the Whole rose on Tuesday, March 7, 1995, the amendment offered by the gentleman from Texas [Mr. Fields] had been disposed of and the bill was open for amendment at any point. Six hours and thirty-five minutes remain for consideration of amendments under the 5-minute rule. Are there further amendments to the bill? amendment offered by ms. eshoo Ms. ESHOO. Mr. Chairman, I offer an amendment. The Clerk read as follows: Amendment offered by Ms. Eshoo: Page 18, beginning on line 2, strike ``For example, a defendant who genuinely forgot to disclose, or to whom disclosure did not come to mind, is not reckless.''. Ms. ESHOO. Mr. Chairman, I offer this amendment to improve the standard by which H.R. 1058 determines if a person has acted recklessly in misleading buyers or sellers of securities. Protecting against reckless conduct is critical in securities law because in the world of finance there is ample opportunity to mislead investors with recklessly fraudulent statements. My amendment is an effort to improve H.R. 1058 in this critical area. H.R. 1058 has many solid and much needed legal reforms. And as several of my colleagues mentioned yesterday, we should have had legislation on this issue before this House long before today. It is needed, and it is overdue. However, Mr. Chairman, the bill before us is seriously deficient when it comes to recklessness--not so much by what is missing, but by what has been added. My amendment protects the recklessness standard by striking the sentence which allows the defendant to escape liability by saying, ``Your honor, I forgot to disclose that important fact to the customer.'' In other words, I forgot to tell the truth. Outside of this sentence, Mr. Chairman, the bill's definition of recklessness is perfectly adequate. It follows the so-called Sundstrand decision which has been supported by 75 percent of the Federal courts. Yet, H.R. 1058 has taken Sundstrand and modified it to include a provision which exempts from liability defendants who forgot to act responsibly. Mr. Chairman, I believe there is a reason that no U.S. appellate courts have adopted the definition for recklessness as it is stated in H.R. 1058. Our Nation's judges, most of them conservative appointees, understand the difficulty plaintiffs, with legitimate cases, have in proving ``knowing'' fraud. Our courts have resoundingly said recklessness is not the same as knowing fraud, and ``I forgot'' is not an excuse. For two centuries this country has prided itself on the fact that we are governed by the rule of law rather than by the whim of individuals. Now the majority proposes to overturn this principle with one sentence providing every guilty defendant the opportunity to escape retribution. Mr. Chairman, I am not a lawyer. But I have a lay person's respect for our Nation's statutes. They should be written with care and with the goal of providing justice for every citizen. Now with that in mind, Mr. Chairman, when we write the statute which prohibits reckless and fraudulent conduct in securities law, do we want to include the following sentence: ``For example, a defendant who genuinely forgot to disclose, or to whom disclosure did not come to mind, is not reckless.'' Mr. Chairman, do we want our laws to say such a thing? Do we want to give the defense of faulty memory to a reckless person? I don't think so. The high technology companies in my district need relief from meritless lawsuits now. We need to pass legislation that will end these suits yet protect investors' rights. My amendment would be one step in the long process of writing a bill which Congress passes and that the President can sign. I urge my colleagues on both sides of the aisle to support this reasonable amendment and improve this legislation. Mr. BLILEY. Mr. Chairman, I rise in opposition to the amendment. Mr. Chairman, the second sentence of the recklessness definition comes directly from the Sundstrand decision. It is part of the holding of the case. Take it out and we change the law. In footnote 20 of the Sundstrand decision, the court wrote, ``[t]hus, if a trial judge found, for example, that a defendant genuinely forgot to disclose information or that it never came to his mind, etc., this prong of the * * * test would defeat a finding of recklessness * * * '' 553 F.2d 1033, 1045F n. 20 (7th Cir. 1976). Thus, the second sentence comes directly from the original decision at the point where the judges were explaining the standard. Opponents of the legislation seem to want to choose selectively from Sundstrand or to pretend that the explanatory second sentence does not exist. But it does. Opponents of the language argue that the second sentence is merely a footnote. If we ignore footnotes, we should ignore the recklessness issue--because the Supreme Court created the issue in the now-famous footnote 12 in the Hochfelder decision. Other famous footnotes in judicial history include footnote 4 in the Carolene Products case, which has generated dozens of law review articles and thousands of pages of commentary. The Sundstrand court was using the footnote to explain that the standard for recklessness is something more than inexcusable negligence. In the Hochfelder decision, the Supreme Court expressly recognized that negligence is not enough for liability under IOb-5. Thus, a mistake, even a bad mistake, is not enough to establish liability. The wrongdoing must be conscious for liability to attach. In applying the Supreme Court's standard, the Sundstrand court explained that for a party to be liable for recklessness, the omission must derive from something more egregious than even ``white heart/empty head, good faith.'' The footnote explains that ``this is a subjective test with the requirement of something more than ``inexcusable negligence'' imposed because of Hochfelder.'' Thus, by including the second sentence in the legislation, Congress is clarifying its intent not to lower the standard under IOb-5 cases to mere negligence or gross negligence. As the Court explained, forgetting facts is not actionable. Not a single Federal district or appellate court relying on the Sundstrand standard has raised any objections to footnote 20, or have found it inconsistent with the recklessness standard articulated in the case. Federal district courts have referred to footnote 20 when articulating the Sundstrand test. The courts appear to accept footnote 20 as part of the holding in the case. For example; Seifer v. Topsy's International, Inc. 487 F. Supp. 653, 665 (D. Kan. Mar. 19, 1980): [T]he core requirement of Hochfelder and Ultramereal is that the plaintiff establish that the defendant lacked a genuine belief that the information disclosed was accurate and complete in all material respect.--Accord, Sundstrand, 553 F.2d at 1045 n. 20. None of the circuit courts that have adopted the Sundstrand standard have rejected footnote 20 or its substance. Opponents claim that the second sentence would reverse the rule of ``ignorance of the law is no excuse.'' This argument is nonsense. The Sundstrand standard speaks of ignorance of the facts, not ignorance of the law. Ignorance of the law is, indeed, no excuse. But, as the footnote says, ignorance of the facts is negligence, or even inexcusable negligence, and actors are not liable for negligence under IOb-5 actions. The law is not intended to penalize individuals who forget particular facts. The second sentence says nothing about ignorance of the law and does [[Page H2819]] not provide an affirmative defense for one who forgot to obey the law--as the minority argues. It speaks only to ignorance of facts. I urge a ``no'' vote on the amendment. Mr. DeFAZIO. Mr. Chairman, I move to strike the last word. Mr. Chairman, as I heard the former Member speaking, I could hear a distant sound and I think it was champagne corks popping on Wall Street. This is extraordinary. I am not an attorney, so I will not cite chapter and verse of precedents. I will go straight to the heart of the matter. {time} 1145 If a person who has worked hard their whole life to put together a little bit of savings for retirement, or maybe they want to annuitize their pension, they have to depend upon someone for advice. And they go and they depend upon the advice of a stockbroker or a prospectus written by some $500-an-hour lawyer on Wall Street. And there is a little omission in that prospectus. It forgets to tell you that you are not investing in Treasury bills, you are investing in derivatives. You lose your money, your life savings, your annuitized pension. It is gone. You are broke. Do my colleagues know what? You now have a little problem. Two things. One is if you want to sue, this has loser pay in it. So if you are the individual who lost your life savings, you have to find the wherewithal to come with the money to pay for the costs. Second, it has a new and novel defense from a lay person's perspective. I do not know of any other law in America where you can say, ``I forgot. I forgot.'' What this means is the next time that someone tries to go to court to recover against the next Charles Keating--there will not be another Charles Keating--that would be great if there were no more frauds that cost the American people millions of dollars like the savings and loan scandals. No, that is not what it means. What it means is you will not have recourse to sue them because they forgot or they just overlooked the disclosure that the bank was on the brink of insolvency when you put your money in there, or when you invested it in that bank. At a time of turmoil in international markets, just after the bank's scandal, not very long after the Orange County scandal, how is it that we can come credibly before the American people and say Wall Street needs protection from those little stockholders, Wall Street needs protection from people who are putting their life savings in their hands. Why? Well, because Wall Street might forget to tell them something crucial. This is absolutely outrageous beyond the pale. It is a step through a looking glass into some bizarre new world. Mr. BLILEY. Mr. Chairman, will the gentleman yield? Mr. DeFAZIO. I yield to the gentleman from Virginia. Mr. BLILEY. Mr. Chairman, the gentleman makes a strong argument, but he is wrong on one of the facts, and that is if the firm knew of some information that was derogatory and withheld it, they would not be excused under this language. They could not use the ``I forgot'' defense, because they knew the language to begin with. Mr. DeFAZIO. If I can reclaim my time, I think what this leads to is full employment for psychologists, because we are going to have an awful lot of amnesia on Wall Street. It was not that they knew or recklessly disregarded or consciously omitted, but it is just they forgot at the moment that they were drafting it, or when the print of the prospectus came back from the printer, the proof, and it left out the section on risky derivatives, well, they forgot. They forgot that that should have been there. Mr. BLILEY. Mr. Chairman, will the gentleman yield again? Mr. DeFAZIO. I yield again to the gentleman from Virginia. Mr. BLILEY. The word in there is genuinely forgot, and as a proof in fraud, you have to prove all fraud in court. But they would not be able to stand a chance of maintaining a defense under this language if they knew in advance and deliberately just withheld it, because they could not use that defense because they did not genuinely forget. Mr. DeFAZIO. If I can reclaim my time, I understand this is not the reckless disregard section, so we already have reckless disregard, and this is a further definition of reckless disregard. That is, a defense for reckless disregard is ``I forgot.'' Is that not correct? It is a definition of reckless disregard. Mr. BLILEY. It is a definition of reckless, yes. The gentleman is correct. Mr. DeFAZIO. Reclaiming my time, if someone recklessly disregards and they lose your pension or your annuity, I think at that point they should be liable. I do not think they should have the defense of they forgot. I do not think the average American is going to think depending on experts, that is an incredible position to be taken by the U.S. Congress. Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, as we are having this debate I think it is important for all of us as Members not to forget certain points. Point No. 1 mentioned by Chairman Bliley just a moment ago is if you take this sentence out of the statute as the statute is currently drafted, you change the law. This sentence that is the subject matter of the debate comes directly from Sundstrand. Some people say that this is not important because this sentence comes from a footnote. But it is important to point out, as the chairman did just a moment ago, that in footnote 12 of Hockfelder that footnote created the issue of recklessness and whether recklessness might meet the standard of intent that was required. This sentence in Sundstrand was used to describe what was meant by the court in interpreting recklessness. This sentence has been litigated and relitigated. This sentence has stood the test of judicial review. In fact, this sentence as part of Sundstrand has been adopted by 9 of the 12 Federal circuit courts. I think it is really important for this debate to put this in perspective. Where does this particular amendment affect the legislation, and it is important for Members to know that this occurs in subsection 4 in defining recklessness. But it occurs in section 10(a) where we are talking about the requirements for securities fraud actions, and particularly under section (a) of Scienter, and we say under this section, it says to establish Scienter and we list elements, the defendant indirectly made a fraudulent statement, the fact that the defendant possessed the intention to deceive, manipulate or defraud and the defendant made such fraudulent statement knowingly or recklessly, and that is why the definition of reckless is so important in its definition and how it is put down in this particular statute. So it is important to go to the definition of recklessness in the statute as it is drafted to understand the purpose of that particular sentence. I will read in section 4, recklessness. ``For the purposes of paragraph 1,'' the paragraph I will refer to in just a moment, ``a defendant makes a fraudulent statement recklessly if the defendant in making such statement is guilty of highly unreasonable conduct that involves not simply merely simple or even gross negligence, but an extreme departure from standards of ordinary care; and (b) presents a danger of misleading buyers or sellers that was either known to the defendant or so obvious that the defendant must have been consciously aware of it.'' Then the sentence that is the subject of this follows. It says: ``For example, a defendant who genuinely forgot to disclose or to whom disclosure did not come to mind is not reckless.'' The court was indicating what was meant in the definition of reckless in that Sundstrand decision, so it is important that this sentence remain, and it is important that people recognize that this has already been adopted, it has been litigated time and again, but adopted by 9 of the 12 Federal circuit courts. Mr. MANTON. Mr. Chairman, I move to strike the requisite number of words and I rise in favor of the Eshoo amendment. At the outset, I want to commend my colleague, Ms. Eshoo, for offering this important amendment which would dramatically improve the bill's recklessness standard. As a representative who hails from New York City, the financial capital of [[Page H2820]] the world and the headquarters of most of our Nation's securities accounting firms, I share my colleagues interest in passing securities litigation reform and easing capital formation for our local, regional, and national economies. However, as the representative of New York's Seventh Congressional District, I am also committed to protecting the people of Queens and the Bronx, who help keep New York City running by supplying the city's businesses with skilled labor. My district is also home to a large number of retired middle class workers. I want to state that I support a level playing field in securities litigation. I think clear rules will serve to define prohibited activities and eventually lead to better protection of all parties. We must resist the temptation to try to address the uncertainties of the securities market by presuming bad faith by either party in securities litigation cases. In that regard, I rise in support of Ms. Eshoo's amendment which would correct the bill's untenable standard for defining recklessness which would protect fraudulent conduct. When first introduced, this securities litigation reform legislation contained no provisions designed to hold businesses accountable for reckless conduct, instead, defrauded investors would have had to prove that defendants actually intended to defraud them. After much criticism from members of the Commerce Committee, liability for recklessness was restored, but was defined as willful blindness, a definition which has been adopted by no circuit courts of appeal. It is difficult to understand why willfulness that is, intent, should be required as a prerequisite to a finding of recklessness. In fact, the only thing that seemed to recommend that obscure definition was that it was so narrow that it was unlikely anyone could be found reckless under its definition, and in fact, no one had never been found reckless through its use. For the benefit of my colleagues who are not on the Commerce Committee I would like to point out that, contrary to what they may hear today, there is little disagreement about what recklessness means in Federal courts. The majority of circuits, including the second circuit in New York, which most people acknowledge has special expertise in securities matters, has adopted the seventh circuit's determination in Sundstrand versus Sun Chemical, that: Reckless conduct may be defined as a highly unreasonably omission involving not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. While H.R. 1058 now contains language similar to Sundstrand, I ask my colleagues to consider why the ``For Example'' sentence, which the Eshoo amendment would strike, was added to this accepted standard. I do not think that I am being unreasonably suspicious by suggesting that these changes were designed to undermine the Sundstrand standard. If my colleagues are not trying to weaken the accepted standard, why don't they simply accept this amendment? The issue before us is not a complex legal question. If the Congress passes something which represents the accepted definition of recklessness plus ``something,'' then we are not codifying the current court standard. Courts will determine that we must mean something besides the accepted definition of recklessness, and set about to determine what else the addition of the footnote will require before a showing of recklessness can be made. As Anthony Lewis pointed out in the New York Times on Monday, this extra sentence will likely open new loopholes for securities fraud. I can think of no reason to allow businesses to escape liability for their own fraud if they conveniently forget that they perpetrated fraud on investors. I cannot fathom the common sense in this definition of recklessness. My colleague, Ms. Eshoo, and I have worked together through the committee process to improve the securities litigation portion of the Contract With America. In an unfortunately all too partisan setting, Ms. Eshoo has attempted to forge reasonable legislation which balances the rights of businesses and investors. She has drafted a commonsense amendment. I urge my colleagues to support it. amendment offered by mr. cox of california as a substitute for the amendment offered by ms. eshoo Mr. COX of California. Mr. Chairman, I offer an amendment as a substitute for the amendment. The Clerk read as follows: Amendment offered by Mr. Cox as a substitute for the amendment offered by Ms. Eshoo: Page 18, beginning on line 2, strike ``For example'' and all that follows through line 5 and insert the following: ``Deliberately refraining from taking steps to discover whether one's statements are false or misleading constitutes recklessness, but if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' {time} 1200 Mr. COX of California. Mr. Chairman, I would like to address myself to the comments that have been made thus far by my colleagues concerning one sentence in our definition in the statute of the court- created cause of action for reckless violation of the securities laws. The 1934 act and the 1933 act do not contain any private cause of action. This has been created by the courts. Likewise, they do not contain any cause of action for recklessness. That, too, has been created by the courts in very recent years. Our legislation takes the rather dramatic step of codifying this judge-made law of recklessness in the lower courts, judge-made law that the Supreme Court has never agreed to; only in a footnote in a Supreme Court decision did they say they were not prepared to decide whether recklessness could be a cause of action at all. So for the first time our legislation would be codifying recklessness, and to do this, we borrowed, at the suggestion of Democrats on the Committee on Commerce, language from the seventh circuit Sundstrand case. The Sundstrand decision itself crafted a recklessness standard borrowed from another court in the western district of Oklahoma, and that court had its opinion quote verbatim in the Sundstrand case. Then the judge in the Sundstrand case came up with his own interpretation of what that meant, which he put in a footnote. We have both the western district of Oklahoma case that was recited in Sundstrand and the judge's own words in this proposed legislation. It is the judge's own words in Sundstrand that contain the definition of the distinction between recklessness and negligence, so that someone who honestly makes a mistake is definitionally negligent but not reckless. Therein lies the distinction. And it is that language that is giving rise to all of this debate. So my colleague from California has proposed merely to strike that sentence which would leave us with something of a vacuum in our legislative definition of recklessness, but her reason for wanting to strike it is, I think, a fair one, and that is that examples are not normally contained in statutes. Now, one of the reasons that I think we need to put as much as possible into the statute is that judges increasingly are not looking to legislative history to determine what Congress meant. I actually support that mode of judicial interpretation of statute. I think there is a way to solve the problem. I am going to agree with my colleague from California that we can strike this last sentence and still achieve the objective, and I have proposed that we substitute instead language from a court case in the southern district of New York that simply harmonizes the Hochfelder standard that we have already written into subparagraph (b) of this statute with the idea of recklessness. The sentence we would substitute says simply this: Deliberately refraining from taking steps to discover whether one's statements are false or misleading constitutes recklessness, but if the failure to investigate was not deliberate, such conduct shall not be considered to be recklessness. I think we can all agree this is exactly what this statute means. This is what the judge-made case law already on the books means. Even if we do not enact this statute, it clarifies precisely [[Page H2821]] what is our congressional intent. It offers guidance to the courts, and most importantly of all, guidance to the American people who would like to know in advance the standard to which they should conform their conduct. So I congratulate my colleagues for focusing our attention on this issue. I think that this is a fair resolution. Mr. BRYANT of Texas. Mr. Chairman, will the gentleman yield? Mr. COX of California. I yield to the gentleman from Texas. Mr. BRYANT of Texas. I appreciate the gentleman's congratulations. We tried very hard to focus you on this issue in committee. Let us just go over, briefly, what happened here. In the subcommittee you told us the Sundstrand decision said one thing. We argued vigorously with that. In full committee you told us it said another thing which is what is in the bill today. Now you are presenting us with a handwritten amendment in which you say that you have tried to find some way to further codify what you were after. I think it raises a serious question about exactly what you guys are doing. I mean, have you thought this thing through or not? Why is this just a handwritten amendment? Was this just patched together in the last hour? We are writing laws that affect pension plans, affect people's stock investments, affect the stability of the market. This is a serious matter. You come up here at the very last minute with a handwritten amendment which, by the way, I find to be very difficult, much of which is almost impossible to distinguish from what is in the bill already. When did you write this amendment, I ask the gentleman from California [Mr. Cox]? Mr. COX of California. Reclaiming my time, the gentlewoman from California, at the close of business last night, was recognized as the opening amendment today, and it is, therefore, timely that we are discussing her amendment to this bill today, and it is because of the initiative to change the legislation that we are now engaged in describing how to do that. It is, of course, important for all of us to participate in this debate. Mr. BRYANT of Texas. If the gentleman will yield further, the Republican leadership told us yesterday there would be no additional amendments. We just saw this in the last 5 minutes. Mr. TAUZIN. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise in support of the substitute amendment. We are talking literally about the last sentence of the definition contained in the Sundstrand decision of recklessness. I want to point out for the members of the committee that the last sentence that is being debated here by the Eshoo amendment is contained in the Sundstrand decision. It is contained in the Sundstrand decision in further elaboration of what recklessness is not; Sundstrand adopts the language from the Oklahoma case which was the first case that was decided after the Supreme Court case of Hochfelder. It adopted that language and defined what recklessness is. That is in the bill exactly, indeed, as the court described it in the Sundstrand decision. But Sundstrand and the court in Sundstrand went a step further. It said not only is this what recklessness is, this is what it is not. And why was that important? It was important because in the original Supreme Court decision the Court made it very clear to its circuit courts who are going to be interpreting the law even more precisely than the Supreme Court did, it made it very clear, and here is a quote from Hochfelder, that ``When a statute,'' like 10(b)(5) ``when a statute speaks so specifically in terms of manipulation and deception and of implementing devices and contrivances, the commonly understood terminology of intentional wrongdoing, and when its history reflects no more expansive intent, we are quite unwilling to extend the scope of this statute to negligent conduct.'' In effect, what Hochfelder was saying was that this statute, 10(b)(5), that we are codifying and amending today, was clearly in its origination and in its history an intentional-fraud statute, not a negligence statute. Now, I know that there are many who would like to turn it into a negligence statute. That is not what it is. It is an intentional-fraud statute. The courts have interpreted that statute to say that when somebody's conduct is not quite clearly intentional but so reckless as to get real close to intentional misconduct, that that, too, can be used as a cause of action under the statute. Hochfelder was saying you still need to find some elements that lead you to that conclusion that recklessness is so severe that it is the equivalent of intentional wrongdoing, and so Sundstrand came along, the Oklahoma case came along interpreting that Supreme Court decision even further and defined recklessness in those terms. Let me quote from what is in the bill and what is in Sundstrand: ``Reckless conduct may be defined as a highly unreasonable omission involving not merely simple or even inexcusable negligence.'' Hear this again, ``Not even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that is either known by the defendant or is so obvious that the actor must have been aware of it.'' Sunstrand is, in effect, saying that you have got to get awfully close to intentional negligence. What the gentleman is now offering in place of further clarifying language of what is not negligence that is contained in Sundstrand, verbatim, is a statement that is taken from other court decisions, again interpreting the Supreme Court decision saying ``deliberately refraining from taking steps to discover whether your statement is true or false is, indeed, recklessness.'' In effect, referring again, as the Supreme Court said you must refer to, some kind of deliberateness, some kind of intentional misconduct, something so close to the intent to defraud that it meets both the history, the intent, and the original language of section 10(b)(5). Let me say it again: There are many people who would like this section of the law to be a negligence section. It is not. This is a fraud section of law, and you can try to turn it into a negligence standard if you like by amendment. That is not what this law is all about. That is not what this section of litigation is all about. There are many lawyers who try to turn it into a negligence standard. The court in Sundstrand and the Supreme Court said that is not the law. This is a recklessness, almost right up there close to intent to defraud, and if you want to make sure that that is true, the gentleman's substitute amendment is not only right but eliminates, indeed, an example that is in Sundstrand, because I frankly think that is not good text in the law and substitutes instead a finding of the court. The CHAIRMAN. The time of the gentleman from Louisiana [Mr. Tauzin] has expired. (By unanimous consent, Mr. Tauzin was allowed to proceed for 1 additional minute.) Mr. BRYANT of Texas. Mr. chairman, will the gentleman yield? Mr. TAUZIN. I yield to the gentleman from Texas. Mr. BRYANT of Texas. A few moments ago you all were quoting to us from a 1976 decision in Sundstrand saying this is the common law; we are just going to codify it. Last night we were told there would be no more amendments to the bill. In the last 5 or 10 minutes, we have been handed a very illegible handwritten amendment which you are now lauding as a great new standard for this industry. I would like to ask the gentleman, if I can---- Mr. TAUZIN. Reclaiming my time, I will be happy to respond; whatever time I have, I have got your question. The question is should the example that is quoted in Sundstrand of what is not negligence be contained in this bill. You have objected to that. The gentlewoman has asked we take it out. We are saying OK, if you really want to do that, let me answer the question---- Mr. BRYANT of Texas. Do you take it out? Mr. TAUZIN. Let me answer your question. Mr. BRYANT of Texas. I did not ask a question. I have got a question for you. Mr. TAUZIN. If the gentleman has suggested it should come out as he and the gentlewoman have, we are saying OK, if you are going to take that out, [[Page H2822]] you need to clarify as the Supreme Court asked us to do that you are still talking about a deliberate refraining from taking steps to discover the truth or falsity of the statement. The CHAIRMAN. The time of the gentleman from Louisiana [Mr. Tauzin] has again expired. (At the request of Mr. Bryant of Texas and by unanimous consent, Mr. Tauzin was allowed to proceed for 1 additional minute.) Mr. BRYANT of Texas. If the gentleman will yield further, when did you first see this handwritten amendment that we have been handed here in the last few minutes? Mr. TAUZIN. We have been discussing that and other language taken from the Supreme Court decisions for some days now in an effort to try to make this bill more palatable to my friend from California who was going to offer this amendment. Mr. BRYANT of Texas. We know as of last night there was no plan to offer any additional amendment. Now we see a handwritten amendment in the last few minutes. Mr. TAUZIN. Reclaiming my time, this is not an additional amendment. This is a substitute for your own amendment. The idea is before I and other Members who support this bill are willing to accept your amendment which deletes language from the Sundstrand decision, we think you ought to have language that clarifies what the Supreme Court said. That is what this amendment does. Mr. FIELDS of Texas. Mr. Chairman, will the gentleman yield? Mr. TAUZIN. I yield to the gentleman from Texas. Mr. FIELDS of Texas. Mr. Chairman, I would just point out last night this amendment did not exist, that this has been a dynamic process. We have taken the concerns expressed by people on the other side of the aisle. We have attempted to address those concerns to make the legislative language a little tighter, and we worked as late as this morning trying to come up with the particular language. Mr. DINGELL. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise to oppose the substitute. I rise first to commend the gentlewoman from California for her amendment. It should be adopted. Second of all, this curious piece of paper that has been passed around should be rejected. The gentleman from California has presented us with an amendment that was never before seen. This is not inconsistent with the practices that we have observed. But I want to take my colleagues through what is going on here. What is at stake here is the rights of investors, not a bunch of slippery lawyers, but investors, investors who were hurt in things like Orange County, things like the Milken, Boesky defalcations and a large number of other items of rascality, also in questions like we saw in connection with the savings and loan debacles where lawyers and accountants gave bad opinions, where they audited improperly, where they failed to keep track of property, where they did not find that property which was carried on the books did not exist, or where they failed to find that it was overvalued. Those matters have been found to be reckless, reckless by the courts, and actionable. Now we find that there is an attempt to get away from the problem of these people by defining recklessness to essentially be deliberate misbehavior. At question is not the issue of negligence or even of fraud. It is simply of reckless misbehavior. The amendment which is offered by the gentleman from California would say that if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless. We are talking here about lawyers giving opinions as to suitability. We are talking here about accountants who are failing to ascertain that the property which is carried on the books and which is filed in the reports which are submitted to the shareholders and the SEC, in fact, does not exist or does not have the value which is assigned to it. Is that fraud? Quite probably. Is it reckless? Absolutely. These people have a fiduciary duty, a fiduciary duty, a duty of the highest responsibility to the shareholders, and they have a responsibility which they must carry out to the Federal Government and to the State regulators to file their reports truthfully and to use due care and proper care to find out that the value is there, that the property exists, that it is not overvalued in some kind of a fraudulent evaluation. {time} 1215 That is what is at stake. This is an attempt to reduce the amendment offered by the gentlewoman from California [Ms. Eshoo] as an attempt to reduce the responsibility and to define recklessness now as some kind of deliberate misbehavior. That is not it. What is at stake here is the question of whether or not the individual has carried out his proper fiduciary relationship, whether he has been reckless, and recklessness comes to the brink of, but does not include, deliberate wrongdoing. This is an attempt to get a little more protection for wrongdoers and to strip a little more of the protection from the ordinary citizen who has invested his or her life savings in a stock or a security which can be converted to worthlessness by the kind of wrongdoing that this amendment offered by the gentleman from California [Mr. Cox] would sanctify. That is what is at stake here. Now, the original amendment offered by the gentlewoman simply struck out dicta, struck out a footnote. The committee was largely agreed that what we should do was to address this within the framework of the Sundstrand decision. The gentleman from California now finds that inadequate. He essentially would seek now to repudiate the language which he pushed in the committee. That is perhaps right, and I think that he should be commended for retreating from it, but not for retreating to something which raises the burden on the litigants to a still higher level, to address the problem of wrongdoing by people who are failing to carry out their fiduciary responsibility to investors and investing public of this country. Mr. WHITE. Mr. Chairman, I move to strike the requisite number of words. I would say simply I yield to the gentleman from California for his comments on this issue. Mr. COX of California. I thank the gentleman for yielding. Mr. Chairman, I listened carefully to the comments of the gentleman from Michigan [Mr. Dingell], and I must say it proves the law of the inverse correlation between desperate level and factual content on many occasions. What the gentleman from Michigan may have forgotten is that the bill we are discussing today simply embodies the policy choices that, for decades and decades, have been made by Democrat Congresses and confirmed by our Supreme Court. The pattern of the Federal securities laws is clear. When Congress wanted to impose absolute liability or impose liability for mere negligence, it did so explicitly. What the gentleman may have forgotten is that the securities laws already impose strict and absolute liability on the directors of a company for fraudulent misstatements and omissions. It is not just recklessness, not just negligence, but strict liability and absolute liability for the directors of company under section 11. It is the same thing for the officers of the company. By and large, what the Congress has chosen to do in securities laws is deal differently with formal documents filed with the SEC and deal differently with the enforcement powers of the SEC, on the one hand, and, on the other hand, informal documents and conversations ranging from press releases to telephone conversations and so on, where we want to make sure we facilitate the free movement of informal communications between issuers of securities and participants in the security markets. So we find that the legislative judgment made by the New Deal Congresses of the 1930's was that it was appropriate to apply a very high standard of liability and not to require liability and not to require fraudulent intent where prepared offering documents, formal prepared offering documents and SEC filings are involved. On the other hand, as is the case with private litigation that we are dealing with in this bill, Congress did not want to chill candid, free, and informal communications. [[Page H2823]] The language which the gentleman is discussing would affect private securities actions way outside the bounds of the formal offering documents that are provided prospectuses and so on, where we have strict liability. The ``I forget'' defense does not work for any people who are the issuers of securities. I think we need to focus on the fact that what we are doing here is not writing language for the first time in this bill, we are taking language from court decisions and putting it into statutes, and we are doing it, I think, in a very foresighted way. So that for the very first time, what the gentleman would like to see, I think, a codification of recklessness, would exist in our securities laws, and that codification will reflect the best reconciliation of our Supreme Court decisions in Hochfelder, which said every violation of section 10-B has to be intentional and which our lower courts have said sometimes that would include recklessness. Mr. TAUZIN. Mr. Chairman, will the gentleman yield? Mr. WHITE. I yield to gentleman from Louisiana. Mr. TAUZIN. I thank the gentleman for yielding to me. Mr. Chairman, the gentleman from Michigan has asserted that the addition of the word ``deliberately,'' which is contained in the gentleman's substitute, is something new to the law. Let me beg to differ, and let me quote from the Supreme Court. The court said on page 212 of the decision, ``We note that such a reading cannot be harmonized,'' a reading of nonintentional fraud, ``with the history of this ruling. A history making clear that when the Commission adopted the rule, it was intended to apply only to activities that involved Scienter.'' Scienter is defined by the court on page 194. It means ``a mental state embracing intent,'' that is deliberateness, ``intent to deceive, manipulate, or defraud.'' I will quote from Sundstrand as well. This is the Sundstrand language, the definition of recklessness is ``the kind of recklessness that is equivalent to willful fraud.'' Willful, deliberate fraud. Further, ``Indeed the franking definition,'' which is what they used, ``of recklessness should be viewed as the functional equivalent of intent.'' Deliberateness is what the Supreme Court in Sundstrand talked about, is absolutely part of our law, and it should be part of it. And I thank the gentleman for yielding. Mr. ALLARD. Mr. Chairman, will the gentleman yield? Mr. WHITE. I yield to the gentleman from Colorado. (Mr. ALLARD asked and was given permission to revise and extend his remarks.) Mr. ALLARD. I thank the gentleman for yielding. Mr. Chairman, I rise in support of H.R. 1058 and the Cox amendment. Mr. Chairman, abuses of securities litigation are particularly excessive. This act restricts the filing of frivolous suits by imposing stricter conditions. The act requires class action suits to have plaintiff steering committees to ensure that the interests of the lawyers to do dominate those of the plaintiffs. It equalizes individual plaintiff awards in a class action suit and restricts named plaintiffs from filing more than five suits in a 3-year period. The act also allows the court to order the ``lower pays'' rule in unjustified cases. The plaintiff has a greater burden of proof under this act, which allows the defendant to avoid liability if there is no intentional deceit. Also, the plaintiff must prove that loss was incurred because of reliance on a fraudulent statement. Finally, the act protects publishers of market predictions if the forecasts are well-reasoned but do not hold true. Without these reforms, plaintiff lawyers can file securities cases with few restraints. They routinely pounce on companies following a chance drop in stock. They have good reason to take, and in fact promote these suits. The plaintiff's counsels generally spend little time determining the facts of the case, yet receive a considerable amount of money for their involvement. Such practices are fostered by so-called professional plaintiffs who are sometimes recruited by lawyers with the promise of easy money. H.R. 1058 removes the incentives to file unfounded claims. Mr. Speaker, it is time we restore the notion that a capitalist economy, there are risks. The process is simple. Stocks rise, you win, stocks drop, you lose. Each person making an investment knows that it is a risk, still certain investors have been encouraged by counsel to fault companies for their inability to predict earnings. We can no longer afford to operate this way. Risk is an important element in the market. In Colorado alone it is estimated that frivolous securities litigation unjustly costs tens of millions of dollars every year. The assailed companies feel like they are dealing with a terrorist. Following a simple shift in stock price or a particular corporate decision, they find that their company is suddenly held hostage and they are compelled to negotiate a ransom payment. The cost of these suits is even more outrageous when you consider that the filing parties never see the bulk of the payment, it is the plaintiff attorneys who reap most of the benefits. When the law provides such incentives for greed, the law should be revised. H.R. 1058, the Securities Litigation Reform Act, will effectively limit unreasonable law suits. I strongly support this legislation. Mr. BRYANT of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, the question for Members of the House is what should the standard, what would the standard be, if the Eshoo amendment were adopted? It is that simple. Leaving aside all else you have heard today; if the Eshoo amendment was adopted, what would be the standard? Here is the standard. It is in the bill as brought out by the majority. The standard would be: ``Reckless conduct may be defined as highly unreasonable (conduct) involving not merely simple,'' not merely simple, ``or even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the action must have been aware of it.'' That is the standard. That is an extremely high standard. Simple negligence is not enough, gross negligence is not enough; it has got be even worse than that before you can hold one of these security dealers liable in a civil action. What we are arguing about is, should anything more come at the end of this paragraph? What the gentleman from California [Mr. Cox] wanted to put at the end of this paragraph is a sentence that would have said, ``Even if they do as bad as all of that, if they just plain forgot, it is all right, and they are not in trouble.'' Now, having been, I assume, embarrassed by the absurdity of that proposal, he comes now with a last-minute rewrite, a handwritten amendment which we have just seen in the last few minutes, which says, ``Add at the end of this extremely high standard a sentence that, ``Deliberately refraining from taking steps to discover whether one's flagrant or false or misleading conduct would constitute recklessness. But if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' Mr. Chairman, this language does not need an add-on. But, second, it sure does not need an add-on. But, second, it sure does not need an add-on that says, I forgot. In effect, Mr. Cox's last-minute rewrite, which we did not see until 10 or 15 minutes ago, is just another way of saying, I forgot. What does it say: ``If the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' What does that mean if failure to investigate is not deliberate? The point is the law should hold somebody who is in the business of issuing securities to at least this standard so that those who invest will know that they are not being the victim of false statements or grossly reckless statements that could cause them to lose their money. If they lost their money, under the Cox language, they could say, ``Well, our failure to investigate the facts which we put into the issuing documents was not deliberate.'' How can a failure to investigate be not deliberate? Who has the burden to decide whether or not an investigation ought to be done? Surely the burden ought to be upon those who are in a position, with an office full of experts and unlimited resources to do the investigation of whether or not the facts set forth in the offering document are true or not. The burden should not be left upon the pensioner, or upon the widow, upon the hopeful investor who has no [[Page H2824]] way whatsoever to know what facts should or should not be investigated. Members of the House, we have never ever allowed ignorance to be an excuse in a civil action or in a criminal action. If an American citizen forgets to buy their license plate after the old one has expired, they do not get to plead, ``I forgot.'' They do not get to say, ``Well, my failure to investigate whether or not my license plate has expired was not deliberate.'' You do not get off with that. If your lawyer fails to record your deed, he does not get off by saying, ``I forgot,'' or, ``My failure to investigate my file to see whether or not I had a deadline to record the deed,'' somehow or other was accidental. That does not let him off the hook. Who should be held responsible? Surely it is not the average person, relying upon the representations of experts, who invests his money. This level of responsibility is higher than we place on probably any other potential defendant in a civil action. You cannot hold him responsible for simple negligence or even gross negligence. In fact, you cannot hold him responsible unless they exhibit an extreme departure from the standards of ordinary care or present a danger of misleading buyers and sellers known to the defendant are so obvious that he should have known it. Ms. ESHOO wants to leave a period at the end of that sentence. These guys want to say, ``However, if in spite of all that, the guy says, `I forgot,' he gets off the hook.'' Now, embarrassed by the words ``I forgot,'' they come up with a last- minute rewrite which means, in effect, the same thing as I forgot. I strongly urge you to vote down the Cox amendment, to say ``no'' to this reckless kind of legislative procedure where amendments are thrown together at the last minute on critical legislation like this, to say ``no'' to the Cox amendment, say ``yes'' to the Eshoo amendment, and let us leave some kind of protection in this law for the average American investor so that those who take advantage of them by misleading them in offering documents will not be able to profit from their recklessness. Mr. WATT of North Carolina. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I would like to thank you for recognizing me because I really had intended to stay out of this discussion, but I got more and more outraged as I heard the debate taking place on the floor about what was going on. I want to respond to my colleague from Louisiana, Mr. Tauzin, who said we were trying to go back to a negligence standard. I want to admit to my colleagues that if it were me, I would be happy with a negligence standard. I did not come to the floor to play games with you. Lawyers are subject to negligence standard, doctors are subject to a negligence standard, ordinary people who drive automobiles and run into folks are subject to a negligence standard. If they make a mistake and they injure somebody, they are held liable. But I will not recognize to you that under the law as it is written Congress has already imposed a higher level of standard for folks in the stock brokerage business and those who engage in securities business. They have said, ``You can be held liable only if you do something fraudulently, knowingly, recklessly.'' That is a higher standard or actually, from the common, ordinary people's vernacular, it is a lower standard. Mr. COX of California. Mr. Chairman, will the gentleman yield? Mr. WATT of North Carolina. No, I will not yield. I want to make sure that you can confuse the issue if you want, but right now is my time to try to relate this to some semblance of sanity rather than missed--come and go that you all are engaged in. {time} 1230 What my colleagues want to do is take the already high standard, the one that is a step up, that applies to every other member of society, and create what I would call an impossibility standard, because if we adopted this language, you would never ever be able to win any cases in the securities area because any time recklessness is alleged or somebody is engaged in fraudulent conduct, the securities person would come back and say, ``Oh, well, that might be true, but I forgot to tell you,'' and all of a sudden they would be off the hook. Well, my colleagues, I thought the purpose of this bill was to get rid of frivolous lawsuits and to cut down on the amount of securities litigation which we have built in a wonderful procedure for trying to stop those kinds of lawsuits, but, Mr. Chairman, when we start to raise the standard to an even higher level of care, an impossibility standard, then I start to wonder is the purpose really to get rid of frivolous lawsuits or is it to protect the buddies up on Wall Street from what goes on in the real world, from the standard that everybody else in our society, these people, all of whom are seated in the gallery, are subject to, this common, everyday standard, and all of a sudden securities people, whom we have already given a higher level of protection to, now they want to give an impossible level of protection to. So, Mr. Chairman, I want to make sure that everybody understands in common, everyday language what is being proposed here: If I do something, if I am reckless, if I do it knowingly, and I come into court and say, Oh, no, I forgot, all of a sudden I am shielded from liability under this amendment. Mr. COX of California. Mr. Chairman, will the gentleman yield? Mr. WATT of North Carolina. I yield to the gentleman from California. Mr. COX of California. I would just point out, to correct the record, that underwriters, brokers and dealers who act as underwriters are absolutely and strictly liable, and I say to the gentleman, ``You don't need to prove negligence and recklessness; they are strictly---- The CHAIRMAN. The time of the gentleman from North Carolina [Mr. Watt] has expired. announcement by the chairman The CHAIRMAN. The Chair would remind Members not to make reference to individuals in the gallery. Mr. MARKEY. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise in opposition to the amendment offered by the gentleman from California [Mr. Cox] to the amendment offered by the gentlewoman from California [Ms. Eshoo]. Mr. Chairman, let us make it quite clear that today there is a standard which is used by the Federal courts, and that standard is largely an agreed upon standard, and it is the standard which is in the well of the House which has been sitting there as a printed statement of what has been accepted by 80 percent of the Federal courts of the United States. Now remember the standard is one which Federal judges across the country, most of them Reagan and Bush Federal district court judges, have used as their standard, and it has served our country quite well. Now, if over the course of the last 10 to 15 years 75 to 80 percent of the Federal district court judges, almost all of them Reagan and Bush appointees, have drafted a standard, have adopted a standard, which they use, why would we on the floor of the United States Congress adopt a standard which is a handwritten standard just presented to us that will override 15 years of precedents of the Reagan and Bush era judges that have reached the consensus as to what the standard should be? Should we not give some deference to these Federal district court judges? Should we not allow them in their courts, knowing all of the facts and law, the history of this country, to come to some consensus? Now I have the greatest respect for the legal knowledge of the gentleman from California, but it is not so substantial a level of respect that I think that a handwritten amendment on the floor, with no notice to any Members and in contradiction to the promise that there would be no additional majority party amendments to the legislation here today, should serve as a substitute for 15 years of settled law. The intent of this amendment, I think at the end of the day, is nothing more, nor less, then to dress up, dress up the I-forgot defense. It puts it in fancier words. It uses a legalese that, I think, is probably more professional than actually putting the words ``I forget'' into the law, but the effect of it is the same, to ensure that the standard for ordinary Americans to be able to bring [[Page H2825]] actions against executives of companies who have misled those individuals in the investment of their money have a more difficult time in court. That is what this is all about, by the way, or else we would not be out here on the floor of the House of Representatives. We would not be here if they were really happy with what the Sundstrand decision says, which is again, and this is what we believe the public should have as their protection, that there be reckless conduct which may be defined as highly unreasonable conduct involving not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that are either known to the defendant or so obvious that the actor must have been aware of it. This standard is one which the Federal district court judges have, George Bush and Ronald Reagan judges, codified for all intents and purposes as the national standard. We cannot use, we should not be allowed to use, a handwritten amendment on the floor of the House of Representatives to be attached to this profoundly important piece of American jurisprudence, and I just hope that anyone who is listening to this debate understands quite clearly that any additions to this are meant to reduce the ability of ordinary Americans to recover in the courts of the United States when executives of S's, when executives of a private company, have deliberately misled-- The CHAIRMAN. The time of the gentleman from Massachusetts [Mr. Markey] has expired. Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, first of all I want to compliment the gentleman from California [Mr. Cox]. In Sundstrand the court defined ``recklessness'' building on the court decision in Hochfelder, and that is what we have currently in the statute. We have language that has already been litigated, and relitigated, and been adopted by 9 of the 12 Federal circuit courts. Now I am complimenting the gentleman because, if I understand what the gentleman from California is doing with his handwritten amendment, which at one time that is the only type of amendments we had on the floor, handwritten amendments, but what the gentleman is doing is, first, I understand, he is trying to be cooperative. There were some concerns expressed on the other side of the aisle, and the gentleman is stepping up to the plate to meet some of those concerns, and we take the amendment offered by the gentlewoman from California [Ms. Eshoo] as being a sincere attempt to

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SECURITIES LITIGATION REFORM ACT
(House of Representatives - March 08, 1995)

Text of this article available as: TXT PDF [Pages H2818-H2864] SECURITIES LITIGATION REFORM ACT The SPEAKER pro tempore. Pursuant to House Resolution 105 and rule XXIII, the Chair declares the House in the Committee of the Whole House on the State of the Union for the further consideration of the bill, H.R. 1058. {time} 1135 in the committee of the whole Accordingly the House resolved itself into the Committee of the Whole House on the State of the Union for the further consideration of the bill (H.R. 1058) to reform Federal securities litigation, and for other purposes, with Mr. Combest in the chair. The Clerk read the title of the bill. The CHAIRMAN. When the Committee of the Whole rose on Tuesday, March 7, 1995, the amendment offered by the gentleman from Texas [Mr. Fields] had been disposed of and the bill was open for amendment at any point. Six hours and thirty-five minutes remain for consideration of amendments under the 5-minute rule. Are there further amendments to the bill? amendment offered by ms. eshoo Ms. ESHOO. Mr. Chairman, I offer an amendment. The Clerk read as follows: Amendment offered by Ms. Eshoo: Page 18, beginning on line 2, strike ``For example, a defendant who genuinely forgot to disclose, or to whom disclosure did not come to mind, is not reckless.''. Ms. ESHOO. Mr. Chairman, I offer this amendment to improve the standard by which H.R. 1058 determines if a person has acted recklessly in misleading buyers or sellers of securities. Protecting against reckless conduct is critical in securities law because in the world of finance there is ample opportunity to mislead investors with recklessly fraudulent statements. My amendment is an effort to improve H.R. 1058 in this critical area. H.R. 1058 has many solid and much needed legal reforms. And as several of my colleagues mentioned yesterday, we should have had legislation on this issue before this House long before today. It is needed, and it is overdue. However, Mr. Chairman, the bill before us is seriously deficient when it comes to recklessness--not so much by what is missing, but by what has been added. My amendment protects the recklessness standard by striking the sentence which allows the defendant to escape liability by saying, ``Your honor, I forgot to disclose that important fact to the customer.'' In other words, I forgot to tell the truth. Outside of this sentence, Mr. Chairman, the bill's definition of recklessness is perfectly adequate. It follows the so-called Sundstrand decision which has been supported by 75 percent of the Federal courts. Yet, H.R. 1058 has taken Sundstrand and modified it to include a provision which exempts from liability defendants who forgot to act responsibly. Mr. Chairman, I believe there is a reason that no U.S. appellate courts have adopted the definition for recklessness as it is stated in H.R. 1058. Our Nation's judges, most of them conservative appointees, understand the difficulty plaintiffs, with legitimate cases, have in proving ``knowing'' fraud. Our courts have resoundingly said recklessness is not the same as knowing fraud, and ``I forgot'' is not an excuse. For two centuries this country has prided itself on the fact that we are governed by the rule of law rather than by the whim of individuals. Now the majority proposes to overturn this principle with one sentence providing every guilty defendant the opportunity to escape retribution. Mr. Chairman, I am not a lawyer. But I have a lay person's respect for our Nation's statutes. They should be written with care and with the goal of providing justice for every citizen. Now with that in mind, Mr. Chairman, when we write the statute which prohibits reckless and fraudulent conduct in securities law, do we want to include the following sentence: ``For example, a defendant who genuinely forgot to disclose, or to whom disclosure did not come to mind, is not reckless.'' Mr. Chairman, do we want our laws to say such a thing? Do we want to give the defense of faulty memory to a reckless person? I don't think so. The high technology companies in my district need relief from meritless lawsuits now. We need to pass legislation that will end these suits yet protect investors' rights. My amendment would be one step in the long process of writing a bill which Congress passes and that the President can sign. I urge my colleagues on both sides of the aisle to support this reasonable amendment and improve this legislation. Mr. BLILEY. Mr. Chairman, I rise in opposition to the amendment. Mr. Chairman, the second sentence of the recklessness definition comes directly from the Sundstrand decision. It is part of the holding of the case. Take it out and we change the law. In footnote 20 of the Sundstrand decision, the court wrote, ``[t]hus, if a trial judge found, for example, that a defendant genuinely forgot to disclose information or that it never came to his mind, etc., this prong of the * * * test would defeat a finding of recklessness * * * '' 553 F.2d 1033, 1045F n. 20 (7th Cir. 1976). Thus, the second sentence comes directly from the original decision at the point where the judges were explaining the standard. Opponents of the legislation seem to want to choose selectively from Sundstrand or to pretend that the explanatory second sentence does not exist. But it does. Opponents of the language argue that the second sentence is merely a footnote. If we ignore footnotes, we should ignore the recklessness issue--because the Supreme Court created the issue in the now-famous footnote 12 in the Hochfelder decision. Other famous footnotes in judicial history include footnote 4 in the Carolene Products case, which has generated dozens of law review articles and thousands of pages of commentary. The Sundstrand court was using the footnote to explain that the standard for recklessness is something more than inexcusable negligence. In the Hochfelder decision, the Supreme Court expressly recognized that negligence is not enough for liability under IOb-5. Thus, a mistake, even a bad mistake, is not enough to establish liability. The wrongdoing must be conscious for liability to attach. In applying the Supreme Court's standard, the Sundstrand court explained that for a party to be liable for recklessness, the omission must derive from something more egregious than even ``white heart/empty head, good faith.'' The footnote explains that ``this is a subjective test with the requirement of something more than ``inexcusable negligence'' imposed because of Hochfelder.'' Thus, by including the second sentence in the legislation, Congress is clarifying its intent not to lower the standard under IOb-5 cases to mere negligence or gross negligence. As the Court explained, forgetting facts is not actionable. Not a single Federal district or appellate court relying on the Sundstrand standard has raised any objections to footnote 20, or have found it inconsistent with the recklessness standard articulated in the case. Federal district courts have referred to footnote 20 when articulating the Sundstrand test. The courts appear to accept footnote 20 as part of the holding in the case. For example; Seifer v. Topsy's International, Inc. 487 F. Supp. 653, 665 (D. Kan. Mar. 19, 1980): [T]he core requirement of Hochfelder and Ultramereal is that the plaintiff establish that the defendant lacked a genuine belief that the information disclosed was accurate and complete in all material respect.--Accord, Sundstrand, 553 F.2d at 1045 n. 20. None of the circuit courts that have adopted the Sundstrand standard have rejected footnote 20 or its substance. Opponents claim that the second sentence would reverse the rule of ``ignorance of the law is no excuse.'' This argument is nonsense. The Sundstrand standard speaks of ignorance of the facts, not ignorance of the law. Ignorance of the law is, indeed, no excuse. But, as the footnote says, ignorance of the facts is negligence, or even inexcusable negligence, and actors are not liable for negligence under IOb-5 actions. The law is not intended to penalize individuals who forget particular facts. The second sentence says nothing about ignorance of the law and does [[Page H2819]] not provide an affirmative defense for one who forgot to obey the law--as the minority argues. It speaks only to ignorance of facts. I urge a ``no'' vote on the amendment. Mr. DeFAZIO. Mr. Chairman, I move to strike the last word. Mr. Chairman, as I heard the former Member speaking, I could hear a distant sound and I think it was champagne corks popping on Wall Street. This is extraordinary. I am not an attorney, so I will not cite chapter and verse of precedents. I will go straight to the heart of the matter. {time} 1145 If a person who has worked hard their whole life to put together a little bit of savings for retirement, or maybe they want to annuitize their pension, they have to depend upon someone for advice. And they go and they depend upon the advice of a stockbroker or a prospectus written by some $500-an-hour lawyer on Wall Street. And there is a little omission in that prospectus. It forgets to tell you that you are not investing in Treasury bills, you are investing in derivatives. You lose your money, your life savings, your annuitized pension. It is gone. You are broke. Do my colleagues know what? You now have a little problem. Two things. One is if you want to sue, this has loser pay in it. So if you are the individual who lost your life savings, you have to find the wherewithal to come with the money to pay for the costs. Second, it has a new and novel defense from a lay person's perspective. I do not know of any other law in America where you can say, ``I forgot. I forgot.'' What this means is the next time that someone tries to go to court to recover against the next Charles Keating--there will not be another Charles Keating--that would be great if there were no more frauds that cost the American people millions of dollars like the savings and loan scandals. No, that is not what it means. What it means is you will not have recourse to sue them because they forgot or they just overlooked the disclosure that the bank was on the brink of insolvency when you put your money in there, or when you invested it in that bank. At a time of turmoil in international markets, just after the bank's scandal, not very long after the Orange County scandal, how is it that we can come credibly before the American people and say Wall Street needs protection from those little stockholders, Wall Street needs protection from people who are putting their life savings in their hands. Why? Well, because Wall Street might forget to tell them something crucial. This is absolutely outrageous beyond the pale. It is a step through a looking glass into some bizarre new world. Mr. BLILEY. Mr. Chairman, will the gentleman yield? Mr. DeFAZIO. I yield to the gentleman from Virginia. Mr. BLILEY. Mr. Chairman, the gentleman makes a strong argument, but he is wrong on one of the facts, and that is if the firm knew of some information that was derogatory and withheld it, they would not be excused under this language. They could not use the ``I forgot'' defense, because they knew the language to begin with. Mr. DeFAZIO. If I can reclaim my time, I think what this leads to is full employment for psychologists, because we are going to have an awful lot of amnesia on Wall Street. It was not that they knew or recklessly disregarded or consciously omitted, but it is just they forgot at the moment that they were drafting it, or when the print of the prospectus came back from the printer, the proof, and it left out the section on risky derivatives, well, they forgot. They forgot that that should have been there. Mr. BLILEY. Mr. Chairman, will the gentleman yield again? Mr. DeFAZIO. I yield again to the gentleman from Virginia. Mr. BLILEY. The word in there is genuinely forgot, and as a proof in fraud, you have to prove all fraud in court. But they would not be able to stand a chance of maintaining a defense under this language if they knew in advance and deliberately just withheld it, because they could not use that defense because they did not genuinely forget. Mr. DeFAZIO. If I can reclaim my time, I understand this is not the reckless disregard section, so we already have reckless disregard, and this is a further definition of reckless disregard. That is, a defense for reckless disregard is ``I forgot.'' Is that not correct? It is a definition of reckless disregard. Mr. BLILEY. It is a definition of reckless, yes. The gentleman is correct. Mr. DeFAZIO. Reclaiming my time, if someone recklessly disregards and they lose your pension or your annuity, I think at that point they should be liable. I do not think they should have the defense of they forgot. I do not think the average American is going to think depending on experts, that is an incredible position to be taken by the U.S. Congress. Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, as we are having this debate I think it is important for all of us as Members not to forget certain points. Point No. 1 mentioned by Chairman Bliley just a moment ago is if you take this sentence out of the statute as the statute is currently drafted, you change the law. This sentence that is the subject matter of the debate comes directly from Sundstrand. Some people say that this is not important because this sentence comes from a footnote. But it is important to point out, as the chairman did just a moment ago, that in footnote 12 of Hockfelder that footnote created the issue of recklessness and whether recklessness might meet the standard of intent that was required. This sentence in Sundstrand was used to describe what was meant by the court in interpreting recklessness. This sentence has been litigated and relitigated. This sentence has stood the test of judicial review. In fact, this sentence as part of Sundstrand has been adopted by 9 of the 12 Federal circuit courts. I think it is really important for this debate to put this in perspective. Where does this particular amendment affect the legislation, and it is important for Members to know that this occurs in subsection 4 in defining recklessness. But it occurs in section 10(a) where we are talking about the requirements for securities fraud actions, and particularly under section (a) of Scienter, and we say under this section, it says to establish Scienter and we list elements, the defendant indirectly made a fraudulent statement, the fact that the defendant possessed the intention to deceive, manipulate or defraud and the defendant made such fraudulent statement knowingly or recklessly, and that is why the definition of reckless is so important in its definition and how it is put down in this particular statute. So it is important to go to the definition of recklessness in the statute as it is drafted to understand the purpose of that particular sentence. I will read in section 4, recklessness. ``For the purposes of paragraph 1,'' the paragraph I will refer to in just a moment, ``a defendant makes a fraudulent statement recklessly if the defendant in making such statement is guilty of highly unreasonable conduct that involves not simply merely simple or even gross negligence, but an extreme departure from standards of ordinary care; and (b) presents a danger of misleading buyers or sellers that was either known to the defendant or so obvious that the defendant must have been consciously aware of it.'' Then the sentence that is the subject of this follows. It says: ``For example, a defendant who genuinely forgot to disclose or to whom disclosure did not come to mind is not reckless.'' The court was indicating what was meant in the definition of reckless in that Sundstrand decision, so it is important that this sentence remain, and it is important that people recognize that this has already been adopted, it has been litigated time and again, but adopted by 9 of the 12 Federal circuit courts. Mr. MANTON. Mr. Chairman, I move to strike the requisite number of words and I rise in favor of the Eshoo amendment. At the outset, I want to commend my colleague, Ms. Eshoo, for offering this important amendment which would dramatically improve the bill's recklessness standard. As a representative who hails from New York City, the financial capital of [[Page H2820]] the world and the headquarters of most of our Nation's securities accounting firms, I share my colleagues interest in passing securities litigation reform and easing capital formation for our local, regional, and national economies. However, as the representative of New York's Seventh Congressional District, I am also committed to protecting the people of Queens and the Bronx, who help keep New York City running by supplying the city's businesses with skilled labor. My district is also home to a large number of retired middle class workers. I want to state that I support a level playing field in securities litigation. I think clear rules will serve to define prohibited activities and eventually lead to better protection of all parties. We must resist the temptation to try to address the uncertainties of the securities market by presuming bad faith by either party in securities litigation cases. In that regard, I rise in support of Ms. Eshoo's amendment which would correct the bill's untenable standard for defining recklessness which would protect fraudulent conduct. When first introduced, this securities litigation reform legislation contained no provisions designed to hold businesses accountable for reckless conduct, instead, defrauded investors would have had to prove that defendants actually intended to defraud them. After much criticism from members of the Commerce Committee, liability for recklessness was restored, but was defined as willful blindness, a definition which has been adopted by no circuit courts of appeal. It is difficult to understand why willfulness that is, intent, should be required as a prerequisite to a finding of recklessness. In fact, the only thing that seemed to recommend that obscure definition was that it was so narrow that it was unlikely anyone could be found reckless under its definition, and in fact, no one had never been found reckless through its use. For the benefit of my colleagues who are not on the Commerce Committee I would like to point out that, contrary to what they may hear today, there is little disagreement about what recklessness means in Federal courts. The majority of circuits, including the second circuit in New York, which most people acknowledge has special expertise in securities matters, has adopted the seventh circuit's determination in Sundstrand versus Sun Chemical, that: Reckless conduct may be defined as a highly unreasonably omission involving not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. While H.R. 1058 now contains language similar to Sundstrand, I ask my colleagues to consider why the ``For Example'' sentence, which the Eshoo amendment would strike, was added to this accepted standard. I do not think that I am being unreasonably suspicious by suggesting that these changes were designed to undermine the Sundstrand standard. If my colleagues are not trying to weaken the accepted standard, why don't they simply accept this amendment? The issue before us is not a complex legal question. If the Congress passes something which represents the accepted definition of recklessness plus ``something,'' then we are not codifying the current court standard. Courts will determine that we must mean something besides the accepted definition of recklessness, and set about to determine what else the addition of the footnote will require before a showing of recklessness can be made. As Anthony Lewis pointed out in the New York Times on Monday, this extra sentence will likely open new loopholes for securities fraud. I can think of no reason to allow businesses to escape liability for their own fraud if they conveniently forget that they perpetrated fraud on investors. I cannot fathom the common sense in this definition of recklessness. My colleague, Ms. Eshoo, and I have worked together through the committee process to improve the securities litigation portion of the Contract With America. In an unfortunately all too partisan setting, Ms. Eshoo has attempted to forge reasonable legislation which balances the rights of businesses and investors. She has drafted a commonsense amendment. I urge my colleagues to support it. amendment offered by mr. cox of california as a substitute for the amendment offered by ms. eshoo Mr. COX of California. Mr. Chairman, I offer an amendment as a substitute for the amendment. The Clerk read as follows: Amendment offered by Mr. Cox as a substitute for the amendment offered by Ms. Eshoo: Page 18, beginning on line 2, strike ``For example'' and all that follows through line 5 and insert the following: ``Deliberately refraining from taking steps to discover whether one's statements are false or misleading constitutes recklessness, but if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' {time} 1200 Mr. COX of California. Mr. Chairman, I would like to address myself to the comments that have been made thus far by my colleagues concerning one sentence in our definition in the statute of the court- created cause of action for reckless violation of the securities laws. The 1934 act and the 1933 act do not contain any private cause of action. This has been created by the courts. Likewise, they do not contain any cause of action for recklessness. That, too, has been created by the courts in very recent years. Our legislation takes the rather dramatic step of codifying this judge-made law of recklessness in the lower courts, judge-made law that the Supreme Court has never agreed to; only in a footnote in a Supreme Court decision did they say they were not prepared to decide whether recklessness could be a cause of action at all. So for the first time our legislation would be codifying recklessness, and to do this, we borrowed, at the suggestion of Democrats on the Committee on Commerce, language from the seventh circuit Sundstrand case. The Sundstrand decision itself crafted a recklessness standard borrowed from another court in the western district of Oklahoma, and that court had its opinion quote verbatim in the Sundstrand case. Then the judge in the Sundstrand case came up with his own interpretation of what that meant, which he put in a footnote. We have both the western district of Oklahoma case that was recited in Sundstrand and the judge's own words in this proposed legislation. It is the judge's own words in Sundstrand that contain the definition of the distinction between recklessness and negligence, so that someone who honestly makes a mistake is definitionally negligent but not reckless. Therein lies the distinction. And it is that language that is giving rise to all of this debate. So my colleague from California has proposed merely to strike that sentence which would leave us with something of a vacuum in our legislative definition of recklessness, but her reason for wanting to strike it is, I think, a fair one, and that is that examples are not normally contained in statutes. Now, one of the reasons that I think we need to put as much as possible into the statute is that judges increasingly are not looking to legislative history to determine what Congress meant. I actually support that mode of judicial interpretation of statute. I think there is a way to solve the problem. I am going to agree with my colleague from California that we can strike this last sentence and still achieve the objective, and I have proposed that we substitute instead language from a court case in the southern district of New York that simply harmonizes the Hochfelder standard that we have already written into subparagraph (b) of this statute with the idea of recklessness. The sentence we would substitute says simply this: Deliberately refraining from taking steps to discover whether one's statements are false or misleading constitutes recklessness, but if the failure to investigate was not deliberate, such conduct shall not be considered to be recklessness. I think we can all agree this is exactly what this statute means. This is what the judge-made case law already on the books means. Even if we do not enact this statute, it clarifies precisely [[Page H2821]] what is our congressional intent. It offers guidance to the courts, and most importantly of all, guidance to the American people who would like to know in advance the standard to which they should conform their conduct. So I congratulate my colleagues for focusing our attention on this issue. I think that this is a fair resolution. Mr. BRYANT of Texas. Mr. Chairman, will the gentleman yield? Mr. COX of California. I yield to the gentleman from Texas. Mr. BRYANT of Texas. I appreciate the gentleman's congratulations. We tried very hard to focus you on this issue in committee. Let us just go over, briefly, what happened here. In the subcommittee you told us the Sundstrand decision said one thing. We argued vigorously with that. In full committee you told us it said another thing which is what is in the bill today. Now you are presenting us with a handwritten amendment in which you say that you have tried to find some way to further codify what you were after. I think it raises a serious question about exactly what you guys are doing. I mean, have you thought this thing through or not? Why is this just a handwritten amendment? Was this just patched together in the last hour? We are writing laws that affect pension plans, affect people's stock investments, affect the stability of the market. This is a serious matter. You come up here at the very last minute with a handwritten amendment which, by the way, I find to be very difficult, much of which is almost impossible to distinguish from what is in the bill already. When did you write this amendment, I ask the gentleman from California [Mr. Cox]? Mr. COX of California. Reclaiming my time, the gentlewoman from California, at the close of business last night, was recognized as the opening amendment today, and it is, therefore, timely that we are discussing her amendment to this bill today, and it is because of the initiative to change the legislation that we are now engaged in describing how to do that. It is, of course, important for all of us to participate in this debate. Mr. BRYANT of Texas. If the gentleman will yield further, the Republican leadership told us yesterday there would be no additional amendments. We just saw this in the last 5 minutes. Mr. TAUZIN. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise in support of the substitute amendment. We are talking literally about the last sentence of the definition contained in the Sundstrand decision of recklessness. I want to point out for the members of the committee that the last sentence that is being debated here by the Eshoo amendment is contained in the Sundstrand decision. It is contained in the Sundstrand decision in further elaboration of what recklessness is not; Sundstrand adopts the language from the Oklahoma case which was the first case that was decided after the Supreme Court case of Hochfelder. It adopted that language and defined what recklessness is. That is in the bill exactly, indeed, as the court described it in the Sundstrand decision. But Sundstrand and the court in Sundstrand went a step further. It said not only is this what recklessness is, this is what it is not. And why was that important? It was important because in the original Supreme Court decision the Court made it very clear to its circuit courts who are going to be interpreting the law even more precisely than the Supreme Court did, it made it very clear, and here is a quote from Hochfelder, that ``When a statute,'' like 10(b)(5) ``when a statute speaks so specifically in terms of manipulation and deception and of implementing devices and contrivances, the commonly understood terminology of intentional wrongdoing, and when its history reflects no more expansive intent, we are quite unwilling to extend the scope of this statute to negligent conduct.'' In effect, what Hochfelder was saying was that this statute, 10(b)(5), that we are codifying and amending today, was clearly in its origination and in its history an intentional-fraud statute, not a negligence statute. Now, I know that there are many who would like to turn it into a negligence statute. That is not what it is. It is an intentional-fraud statute. The courts have interpreted that statute to say that when somebody's conduct is not quite clearly intentional but so reckless as to get real close to intentional misconduct, that that, too, can be used as a cause of action under the statute. Hochfelder was saying you still need to find some elements that lead you to that conclusion that recklessness is so severe that it is the equivalent of intentional wrongdoing, and so Sundstrand came along, the Oklahoma case came along interpreting that Supreme Court decision even further and defined recklessness in those terms. Let me quote from what is in the bill and what is in Sundstrand: ``Reckless conduct may be defined as a highly unreasonable omission involving not merely simple or even inexcusable negligence.'' Hear this again, ``Not even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that is either known by the defendant or is so obvious that the actor must have been aware of it.'' Sunstrand is, in effect, saying that you have got to get awfully close to intentional negligence. What the gentleman is now offering in place of further clarifying language of what is not negligence that is contained in Sundstrand, verbatim, is a statement that is taken from other court decisions, again interpreting the Supreme Court decision saying ``deliberately refraining from taking steps to discover whether your statement is true or false is, indeed, recklessness.'' In effect, referring again, as the Supreme Court said you must refer to, some kind of deliberateness, some kind of intentional misconduct, something so close to the intent to defraud that it meets both the history, the intent, and the original language of section 10(b)(5). Let me say it again: There are many people who would like this section of the law to be a negligence section. It is not. This is a fraud section of law, and you can try to turn it into a negligence standard if you like by amendment. That is not what this law is all about. That is not what this section of litigation is all about. There are many lawyers who try to turn it into a negligence standard. The court in Sundstrand and the Supreme Court said that is not the law. This is a recklessness, almost right up there close to intent to defraud, and if you want to make sure that that is true, the gentleman's substitute amendment is not only right but eliminates, indeed, an example that is in Sundstrand, because I frankly think that is not good text in the law and substitutes instead a finding of the court. The CHAIRMAN. The time of the gentleman from Louisiana [Mr. Tauzin] has expired. (By unanimous consent, Mr. Tauzin was allowed to proceed for 1 additional minute.) Mr. BRYANT of Texas. Mr. chairman, will the gentleman yield? Mr. TAUZIN. I yield to the gentleman from Texas. Mr. BRYANT of Texas. A few moments ago you all were quoting to us from a 1976 decision in Sundstrand saying this is the common law; we are just going to codify it. Last night we were told there would be no more amendments to the bill. In the last 5 or 10 minutes, we have been handed a very illegible handwritten amendment which you are now lauding as a great new standard for this industry. I would like to ask the gentleman, if I can---- Mr. TAUZIN. Reclaiming my time, I will be happy to respond; whatever time I have, I have got your question. The question is should the example that is quoted in Sundstrand of what is not negligence be contained in this bill. You have objected to that. The gentlewoman has asked we take it out. We are saying OK, if you really want to do that, let me answer the question---- Mr. BRYANT of Texas. Do you take it out? Mr. TAUZIN. Let me answer your question. Mr. BRYANT of Texas. I did not ask a question. I have got a question for you. Mr. TAUZIN. If the gentleman has suggested it should come out as he and the gentlewoman have, we are saying OK, if you are going to take that out, [[Page H2822]] you need to clarify as the Supreme Court asked us to do that you are still talking about a deliberate refraining from taking steps to discover the truth or falsity of the statement. The CHAIRMAN. The time of the gentleman from Louisiana [Mr. Tauzin] has again expired. (At the request of Mr. Bryant of Texas and by unanimous consent, Mr. Tauzin was allowed to proceed for 1 additional minute.) Mr. BRYANT of Texas. If the gentleman will yield further, when did you first see this handwritten amendment that we have been handed here in the last few minutes? Mr. TAUZIN. We have been discussing that and other language taken from the Supreme Court decisions for some days now in an effort to try to make this bill more palatable to my friend from California who was going to offer this amendment. Mr. BRYANT of Texas. We know as of last night there was no plan to offer any additional amendment. Now we see a handwritten amendment in the last few minutes. Mr. TAUZIN. Reclaiming my time, this is not an additional amendment. This is a substitute for your own amendment. The idea is before I and other Members who support this bill are willing to accept your amendment which deletes language from the Sundstrand decision, we think you ought to have language that clarifies what the Supreme Court said. That is what this amendment does. Mr. FIELDS of Texas. Mr. Chairman, will the gentleman yield? Mr. TAUZIN. I yield to the gentleman from Texas. Mr. FIELDS of Texas. Mr. Chairman, I would just point out last night this amendment did not exist, that this has been a dynamic process. We have taken the concerns expressed by people on the other side of the aisle. We have attempted to address those concerns to make the legislative language a little tighter, and we worked as late as this morning trying to come up with the particular language. Mr. DINGELL. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise to oppose the substitute. I rise first to commend the gentlewoman from California for her amendment. It should be adopted. Second of all, this curious piece of paper that has been passed around should be rejected. The gentleman from California has presented us with an amendment that was never before seen. This is not inconsistent with the practices that we have observed. But I want to take my colleagues through what is going on here. What is at stake here is the rights of investors, not a bunch of slippery lawyers, but investors, investors who were hurt in things like Orange County, things like the Milken, Boesky defalcations and a large number of other items of rascality, also in questions like we saw in connection with the savings and loan debacles where lawyers and accountants gave bad opinions, where they audited improperly, where they failed to keep track of property, where they did not find that property which was carried on the books did not exist, or where they failed to find that it was overvalued. Those matters have been found to be reckless, reckless by the courts, and actionable. Now we find that there is an attempt to get away from the problem of these people by defining recklessness to essentially be deliberate misbehavior. At question is not the issue of negligence or even of fraud. It is simply of reckless misbehavior. The amendment which is offered by the gentleman from California would say that if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless. We are talking here about lawyers giving opinions as to suitability. We are talking here about accountants who are failing to ascertain that the property which is carried on the books and which is filed in the reports which are submitted to the shareholders and the SEC, in fact, does not exist or does not have the value which is assigned to it. Is that fraud? Quite probably. Is it reckless? Absolutely. These people have a fiduciary duty, a fiduciary duty, a duty of the highest responsibility to the shareholders, and they have a responsibility which they must carry out to the Federal Government and to the State regulators to file their reports truthfully and to use due care and proper care to find out that the value is there, that the property exists, that it is not overvalued in some kind of a fraudulent evaluation. {time} 1215 That is what is at stake. This is an attempt to reduce the amendment offered by the gentlewoman from California [Ms. Eshoo] as an attempt to reduce the responsibility and to define recklessness now as some kind of deliberate misbehavior. That is not it. What is at stake here is the question of whether or not the individual has carried out his proper fiduciary relationship, whether he has been reckless, and recklessness comes to the brink of, but does not include, deliberate wrongdoing. This is an attempt to get a little more protection for wrongdoers and to strip a little more of the protection from the ordinary citizen who has invested his or her life savings in a stock or a security which can be converted to worthlessness by the kind of wrongdoing that this amendment offered by the gentleman from California [Mr. Cox] would sanctify. That is what is at stake here. Now, the original amendment offered by the gentlewoman simply struck out dicta, struck out a footnote. The committee was largely agreed that what we should do was to address this within the framework of the Sundstrand decision. The gentleman from California now finds that inadequate. He essentially would seek now to repudiate the language which he pushed in the committee. That is perhaps right, and I think that he should be commended for retreating from it, but not for retreating to something which raises the burden on the litigants to a still higher level, to address the problem of wrongdoing by people who are failing to carry out their fiduciary responsibility to investors and investing public of this country. Mr. WHITE. Mr. Chairman, I move to strike the requisite number of words. I would say simply I yield to the gentleman from California for his comments on this issue. Mr. COX of California. I thank the gentleman for yielding. Mr. Chairman, I listened carefully to the comments of the gentleman from Michigan [Mr. Dingell], and I must say it proves the law of the inverse correlation between desperate level and factual content on many occasions. What the gentleman from Michigan may have forgotten is that the bill we are discussing today simply embodies the policy choices that, for decades and decades, have been made by Democrat Congresses and confirmed by our Supreme Court. The pattern of the Federal securities laws is clear. When Congress wanted to impose absolute liability or impose liability for mere negligence, it did so explicitly. What the gentleman may have forgotten is that the securities laws already impose strict and absolute liability on the directors of a company for fraudulent misstatements and omissions. It is not just recklessness, not just negligence, but strict liability and absolute liability for the directors of company under section 11. It is the same thing for the officers of the company. By and large, what the Congress has chosen to do in securities laws is deal differently with formal documents filed with the SEC and deal differently with the enforcement powers of the SEC, on the one hand, and, on the other hand, informal documents and conversations ranging from press releases to telephone conversations and so on, where we want to make sure we facilitate the free movement of informal communications between issuers of securities and participants in the security markets. So we find that the legislative judgment made by the New Deal Congresses of the 1930's was that it was appropriate to apply a very high standard of liability and not to require liability and not to require fraudulent intent where prepared offering documents, formal prepared offering documents and SEC filings are involved. On the other hand, as is the case with private litigation that we are dealing with in this bill, Congress did not want to chill candid, free, and informal communications. [[Page H2823]] The language which the gentleman is discussing would affect private securities actions way outside the bounds of the formal offering documents that are provided prospectuses and so on, where we have strict liability. The ``I forget'' defense does not work for any people who are the issuers of securities. I think we need to focus on the fact that what we are doing here is not writing language for the first time in this bill, we are taking language from court decisions and putting it into statutes, and we are doing it, I think, in a very foresighted way. So that for the very first time, what the gentleman would like to see, I think, a codification of recklessness, would exist in our securities laws, and that codification will reflect the best reconciliation of our Supreme Court decisions in Hochfelder, which said every violation of section 10-B has to be intentional and which our lower courts have said sometimes that would include recklessness. Mr. TAUZIN. Mr. Chairman, will the gentleman yield? Mr. WHITE. I yield to gentleman from Louisiana. Mr. TAUZIN. I thank the gentleman for yielding to me. Mr. Chairman, the gentleman from Michigan has asserted that the addition of the word ``deliberately,'' which is contained in the gentleman's substitute, is something new to the law. Let me beg to differ, and let me quote from the Supreme Court. The court said on page 212 of the decision, ``We note that such a reading cannot be harmonized,'' a reading of nonintentional fraud, ``with the history of this ruling. A history making clear that when the Commission adopted the rule, it was intended to apply only to activities that involved Scienter.'' Scienter is defined by the court on page 194. It means ``a mental state embracing intent,'' that is deliberateness, ``intent to deceive, manipulate, or defraud.'' I will quote from Sundstrand as well. This is the Sundstrand language, the definition of recklessness is ``the kind of recklessness that is equivalent to willful fraud.'' Willful, deliberate fraud. Further, ``Indeed the franking definition,'' which is what they used, ``of recklessness should be viewed as the functional equivalent of intent.'' Deliberateness is what the Supreme Court in Sundstrand talked about, is absolutely part of our law, and it should be part of it. And I thank the gentleman for yielding. Mr. ALLARD. Mr. Chairman, will the gentleman yield? Mr. WHITE. I yield to the gentleman from Colorado. (Mr. ALLARD asked and was given permission to revise and extend his remarks.) Mr. ALLARD. I thank the gentleman for yielding. Mr. Chairman, I rise in support of H.R. 1058 and the Cox amendment. Mr. Chairman, abuses of securities litigation are particularly excessive. This act restricts the filing of frivolous suits by imposing stricter conditions. The act requires class action suits to have plaintiff steering committees to ensure that the interests of the lawyers to do dominate those of the plaintiffs. It equalizes individual plaintiff awards in a class action suit and restricts named plaintiffs from filing more than five suits in a 3-year period. The act also allows the court to order the ``lower pays'' rule in unjustified cases. The plaintiff has a greater burden of proof under this act, which allows the defendant to avoid liability if there is no intentional deceit. Also, the plaintiff must prove that loss was incurred because of reliance on a fraudulent statement. Finally, the act protects publishers of market predictions if the forecasts are well-reasoned but do not hold true. Without these reforms, plaintiff lawyers can file securities cases with few restraints. They routinely pounce on companies following a chance drop in stock. They have good reason to take, and in fact promote these suits. The plaintiff's counsels generally spend little time determining the facts of the case, yet receive a considerable amount of money for their involvement. Such practices are fostered by so-called professional plaintiffs who are sometimes recruited by lawyers with the promise of easy money. H.R. 1058 removes the incentives to file unfounded claims. Mr. Speaker, it is time we restore the notion that a capitalist economy, there are risks. The process is simple. Stocks rise, you win, stocks drop, you lose. Each person making an investment knows that it is a risk, still certain investors have been encouraged by counsel to fault companies for their inability to predict earnings. We can no longer afford to operate this way. Risk is an important element in the market. In Colorado alone it is estimated that frivolous securities litigation unjustly costs tens of millions of dollars every year. The assailed companies feel like they are dealing with a terrorist. Following a simple shift in stock price or a particular corporate decision, they find that their company is suddenly held hostage and they are compelled to negotiate a ransom payment. The cost of these suits is even more outrageous when you consider that the filing parties never see the bulk of the payment, it is the plaintiff attorneys who reap most of the benefits. When the law provides such incentives for greed, the law should be revised. H.R. 1058, the Securities Litigation Reform Act, will effectively limit unreasonable law suits. I strongly support this legislation. Mr. BRYANT of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, the question for Members of the House is what should the standard, what would the standard be, if the Eshoo amendment were adopted? It is that simple. Leaving aside all else you have heard today; if the Eshoo amendment was adopted, what would be the standard? Here is the standard. It is in the bill as brought out by the majority. The standard would be: ``Reckless conduct may be defined as highly unreasonable (conduct) involving not merely simple,'' not merely simple, ``or even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the action must have been aware of it.'' That is the standard. That is an extremely high standard. Simple negligence is not enough, gross negligence is not enough; it has got be even worse than that before you can hold one of these security dealers liable in a civil action. What we are arguing about is, should anything more come at the end of this paragraph? What the gentleman from California [Mr. Cox] wanted to put at the end of this paragraph is a sentence that would have said, ``Even if they do as bad as all of that, if they just plain forgot, it is all right, and they are not in trouble.'' Now, having been, I assume, embarrassed by the absurdity of that proposal, he comes now with a last-minute rewrite, a handwritten amendment which we have just seen in the last few minutes, which says, ``Add at the end of this extremely high standard a sentence that, ``Deliberately refraining from taking steps to discover whether one's flagrant or false or misleading conduct would constitute recklessness. But if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' Mr. Chairman, this language does not need an add-on. But, second, it sure does not need an add-on. But, second, it sure does not need an add-on that says, I forgot. In effect, Mr. Cox's last-minute rewrite, which we did not see until 10 or 15 minutes ago, is just another way of saying, I forgot. What does it say: ``If the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' What does that mean if failure to investigate is not deliberate? The point is the law should hold somebody who is in the business of issuing securities to at least this standard so that those who invest will know that they are not being the victim of false statements or grossly reckless statements that could cause them to lose their money. If they lost their money, under the Cox language, they could say, ``Well, our failure to investigate the facts which we put into the issuing documents was not deliberate.'' How can a failure to investigate be not deliberate? Who has the burden to decide whether or not an investigation ought to be done? Surely the burden ought to be upon those who are in a position, with an office full of experts and unlimited resources to do the investigation of whether or not the facts set forth in the offering document are true or not. The burden should not be left upon the pensioner, or upon the widow, upon the hopeful investor who has no [[Page H2824]] way whatsoever to know what facts should or should not be investigated. Members of the House, we have never ever allowed ignorance to be an excuse in a civil action or in a criminal action. If an American citizen forgets to buy their license plate after the old one has expired, they do not get to plead, ``I forgot.'' They do not get to say, ``Well, my failure to investigate whether or not my license plate has expired was not deliberate.'' You do not get off with that. If your lawyer fails to record your deed, he does not get off by saying, ``I forgot,'' or, ``My failure to investigate my file to see whether or not I had a deadline to record the deed,'' somehow or other was accidental. That does not let him off the hook. Who should be held responsible? Surely it is not the average person, relying upon the representations of experts, who invests his money. This level of responsibility is higher than we place on probably any other potential defendant in a civil action. You cannot hold him responsible for simple negligence or even gross negligence. In fact, you cannot hold him responsible unless they exhibit an extreme departure from the standards of ordinary care or present a danger of misleading buyers and sellers known to the defendant are so obvious that he should have known it. Ms. ESHOO wants to leave a period at the end of that sentence. These guys want to say, ``However, if in spite of all that, the guy says, `I forgot,' he gets off the hook.'' Now, embarrassed by the words ``I forgot,'' they come up with a last- minute rewrite which means, in effect, the same thing as I forgot. I strongly urge you to vote down the Cox amendment, to say ``no'' to this reckless kind of legislative procedure where amendments are thrown together at the last minute on critical legislation like this, to say ``no'' to the Cox amendment, say ``yes'' to the Eshoo amendment, and let us leave some kind of protection in this law for the average American investor so that those who take advantage of them by misleading them in offering documents will not be able to profit from their recklessness. Mr. WATT of North Carolina. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I would like to thank you for recognizing me because I really had intended to stay out of this discussion, but I got more and more outraged as I heard the debate taking place on the floor about what was going on. I want to respond to my colleague from Louisiana, Mr. Tauzin, who said we were trying to go back to a negligence standard. I want to admit to my colleagues that if it were me, I would be happy with a negligence standard. I did not come to the floor to play games with you. Lawyers are subject to negligence standard, doctors are subject to a negligence standard, ordinary people who drive automobiles and run into folks are subject to a negligence standard. If they make a mistake and they injure somebody, they are held liable. But I will not recognize to you that under the law as it is written Congress has already imposed a higher level of standard for folks in the stock brokerage business and those who engage in securities business. They have said, ``You can be held liable only if you do something fraudulently, knowingly, recklessly.'' That is a higher standard or actually, from the common, ordinary people's vernacular, it is a lower standard. Mr. COX of California. Mr. Chairman, will the gentleman yield? Mr. WATT of North Carolina. No, I will not yield. I want to make sure that you can confuse the issue if you want, but right now is my time to try to relate this to some semblance of sanity rather than missed--come and go that you all are engaged in. {time} 1230 What my colleagues want to do is take the already high standard, the one that is a step up, that applies to every other member of society, and create what I would call an impossibility standard, because if we adopted this language, you would never ever be able to win any cases in the securities area because any time recklessness is alleged or somebody is engaged in fraudulent conduct, the securities person would come back and say, ``Oh, well, that might be true, but I forgot to tell you,'' and all of a sudden they would be off the hook. Well, my colleagues, I thought the purpose of this bill was to get rid of frivolous lawsuits and to cut down on the amount of securities litigation which we have built in a wonderful procedure for trying to stop those kinds of lawsuits, but, Mr. Chairman, when we start to raise the standard to an even higher level of care, an impossibility standard, then I start to wonder is the purpose really to get rid of frivolous lawsuits or is it to protect the buddies up on Wall Street from what goes on in the real world, from the standard that everybody else in our society, these people, all of whom are seated in the gallery, are subject to, this common, everyday standard, and all of a sudden securities people, whom we have already given a higher level of protection to, now they want to give an impossible level of protection to. So, Mr. Chairman, I want to make sure that everybody understands in common, everyday language what is being proposed here: If I do something, if I am reckless, if I do it knowingly, and I come into court and say, Oh, no, I forgot, all of a sudden I am shielded from liability under this amendment. Mr. COX of California. Mr. Chairman, will the gentleman yield? Mr. WATT of North Carolina. I yield to the gentleman from California. Mr. COX of California. I would just point out, to correct the record, that underwriters, brokers and dealers who act as underwriters are absolutely and strictly liable, and I say to the gentleman, ``You don't need to prove negligence and recklessness; they are strictly---- The CHAIRMAN. The time of the gentleman from North Carolina [Mr. Watt] has expired. announcement by the chairman The CHAIRMAN. The Chair would remind Members not to make reference to individuals in the gallery. Mr. MARKEY. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise in opposition to the amendment offered by the gentleman from California [Mr. Cox] to the amendment offered by the gentlewoman from California [Ms. Eshoo]. Mr. Chairman, let us make it quite clear that today there is a standard which is used by the Federal courts, and that standard is largely an agreed upon standard, and it is the standard which is in the well of the House which has been sitting there as a printed statement of what has been accepted by 80 percent of the Federal courts of the United States. Now remember the standard is one which Federal judges across the country, most of them Reagan and Bush Federal district court judges, have used as their standard, and it has served our country quite well. Now, if over the course of the last 10 to 15 years 75 to 80 percent of the Federal district court judges, almost all of them Reagan and Bush appointees, have drafted a standard, have adopted a standard, which they use, why would we on the floor of the United States Congress adopt a standard which is a handwritten standard just presented to us that will override 15 years of precedents of the Reagan and Bush era judges that have reached the consensus as to what the standard should be? Should we not give some deference to these Federal district court judges? Should we not allow them in their courts, knowing all of the facts and law, the history of this country, to come to some consensus? Now I have the greatest respect for the legal knowledge of the gentleman from California, but it is not so substantial a level of respect that I think that a handwritten amendment on the floor, with no notice to any Members and in contradiction to the promise that there would be no additional majority party amendments to the legislation here today, should serve as a substitute for 15 years of settled law. The intent of this amendment, I think at the end of the day, is nothing more, nor less, then to dress up, dress up the I-forgot defense. It puts it in fancier words. It uses a legalese that, I think, is probably more professional than actually putting the words ``I forget'' into the law, but the effect of it is the same, to ensure that the standard for ordinary Americans to be able to bring [[Page H2825]] actions against executives of companies who have misled those individuals in the investment of their money have a more difficult time in court. That is what this is all about, by the way, or else we would not be out here on the floor of the House of Representatives. We would not be here if they were really happy with what the Sundstrand decision says, which is again, and this is what we believe the public should have as their protection, that there be reckless conduct which may be defined as highly unreasonable conduct involving not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that are either known to the defendant or so obvious that the actor must have been aware of it. This standard is one which the Federal district court judges have, George Bush and Ronald Reagan judges, codified for all intents and purposes as the national standard. We cannot use, we should not be allowed to use, a handwritten amendment on the floor of the House of Representatives to be attached to this profoundly important piece of American jurisprudence, and I just hope that anyone who is listening to this debate understands quite clearly that any additions to this are meant to reduce the ability of ordinary Americans to recover in the courts of the United States when executives of S's, when executives of a private company, have deliberately misled-- The CHAIRMAN. The time of the gentleman from Massachusetts [Mr. Markey] has expired. Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, first of all I want to compliment the gentleman from California [Mr. Cox]. In Sundstrand the court defined ``recklessness'' building on the court decision in Hochfelder, and that is what we have currently in the statute. We have language that has already been litigated, and relitigated, and been adopted by 9 of the 12 Federal circuit courts. Now I am complimenting the gentleman because, if I understand what the gentleman from California is doing with his handwritten amendment, which at one time that is the only type of amendments we had on the floor, handwritten amendments, but what the gentleman is doing is, first, I understand, he is trying to be cooperative. There were some concerns expressed on the other side of the aisle, and the gentleman is stepping up to the plate to meet some of those concerns, and we take the amendment offered by the gentlewoman from California [Ms. Eshoo] as being a sincere attempt to make the l

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SECURITIES LITIGATION REFORM ACT
(House of Representatives - March 08, 1995)

Text of this article available as: TXT PDF [Pages H2818-H2864] SECURITIES LITIGATION REFORM ACT The SPEAKER pro tempore. Pursuant to House Resolution 105 and rule XXIII, the Chair declares the House in the Committee of the Whole House on the State of the Union for the further consideration of the bill, H.R. 1058. {time} 1135 in the committee of the whole Accordingly the House resolved itself into the Committee of the Whole House on the State of the Union for the further consideration of the bill (H.R. 1058) to reform Federal securities litigation, and for other purposes, with Mr. Combest in the chair. The Clerk read the title of the bill. The CHAIRMAN. When the Committee of the Whole rose on Tuesday, March 7, 1995, the amendment offered by the gentleman from Texas [Mr. Fields] had been disposed of and the bill was open for amendment at any point. Six hours and thirty-five minutes remain for consideration of amendments under the 5-minute rule. Are there further amendments to the bill? amendment offered by ms. eshoo Ms. ESHOO. Mr. Chairman, I offer an amendment. The Clerk read as follows: Amendment offered by Ms. Eshoo: Page 18, beginning on line 2, strike ``For example, a defendant who genuinely forgot to disclose, or to whom disclosure did not come to mind, is not reckless.''. Ms. ESHOO. Mr. Chairman, I offer this amendment to improve the standard by which H.R. 1058 determines if a person has acted recklessly in misleading buyers or sellers of securities. Protecting against reckless conduct is critical in securities law because in the world of finance there is ample opportunity to mislead investors with recklessly fraudulent statements. My amendment is an effort to improve H.R. 1058 in this critical area. H.R. 1058 has many solid and much needed legal reforms. And as several of my colleagues mentioned yesterday, we should have had legislation on this issue before this House long before today. It is needed, and it is overdue. However, Mr. Chairman, the bill before us is seriously deficient when it comes to recklessness--not so much by what is missing, but by what has been added. My amendment protects the recklessness standard by striking the sentence which allows the defendant to escape liability by saying, ``Your honor, I forgot to disclose that important fact to the customer.'' In other words, I forgot to tell the truth. Outside of this sentence, Mr. Chairman, the bill's definition of recklessness is perfectly adequate. It follows the so-called Sundstrand decision which has been supported by 75 percent of the Federal courts. Yet, H.R. 1058 has taken Sundstrand and modified it to include a provision which exempts from liability defendants who forgot to act responsibly. Mr. Chairman, I believe there is a reason that no U.S. appellate courts have adopted the definition for recklessness as it is stated in H.R. 1058. Our Nation's judges, most of them conservative appointees, understand the difficulty plaintiffs, with legitimate cases, have in proving ``knowing'' fraud. Our courts have resoundingly said recklessness is not the same as knowing fraud, and ``I forgot'' is not an excuse. For two centuries this country has prided itself on the fact that we are governed by the rule of law rather than by the whim of individuals. Now the majority proposes to overturn this principle with one sentence providing every guilty defendant the opportunity to escape retribution. Mr. Chairman, I am not a lawyer. But I have a lay person's respect for our Nation's statutes. They should be written with care and with the goal of providing justice for every citizen. Now with that in mind, Mr. Chairman, when we write the statute which prohibits reckless and fraudulent conduct in securities law, do we want to include the following sentence: ``For example, a defendant who genuinely forgot to disclose, or to whom disclosure did not come to mind, is not reckless.'' Mr. Chairman, do we want our laws to say such a thing? Do we want to give the defense of faulty memory to a reckless person? I don't think so. The high technology companies in my district need relief from meritless lawsuits now. We need to pass legislation that will end these suits yet protect investors' rights. My amendment would be one step in the long process of writing a bill which Congress passes and that the President can sign. I urge my colleagues on both sides of the aisle to support this reasonable amendment and improve this legislation. Mr. BLILEY. Mr. Chairman, I rise in opposition to the amendment. Mr. Chairman, the second sentence of the recklessness definition comes directly from the Sundstrand decision. It is part of the holding of the case. Take it out and we change the law. In footnote 20 of the Sundstrand decision, the court wrote, ``[t]hus, if a trial judge found, for example, that a defendant genuinely forgot to disclose information or that it never came to his mind, etc., this prong of the * * * test would defeat a finding of recklessness * * * '' 553 F.2d 1033, 1045F n. 20 (7th Cir. 1976). Thus, the second sentence comes directly from the original decision at the point where the judges were explaining the standard. Opponents of the legislation seem to want to choose selectively from Sundstrand or to pretend that the explanatory second sentence does not exist. But it does. Opponents of the language argue that the second sentence is merely a footnote. If we ignore footnotes, we should ignore the recklessness issue--because the Supreme Court created the issue in the now-famous footnote 12 in the Hochfelder decision. Other famous footnotes in judicial history include footnote 4 in the Carolene Products case, which has generated dozens of law review articles and thousands of pages of commentary. The Sundstrand court was using the footnote to explain that the standard for recklessness is something more than inexcusable negligence. In the Hochfelder decision, the Supreme Court expressly recognized that negligence is not enough for liability under IOb-5. Thus, a mistake, even a bad mistake, is not enough to establish liability. The wrongdoing must be conscious for liability to attach. In applying the Supreme Court's standard, the Sundstrand court explained that for a party to be liable for recklessness, the omission must derive from something more egregious than even ``white heart/empty head, good faith.'' The footnote explains that ``this is a subjective test with the requirement of something more than ``inexcusable negligence'' imposed because of Hochfelder.'' Thus, by including the second sentence in the legislation, Congress is clarifying its intent not to lower the standard under IOb-5 cases to mere negligence or gross negligence. As the Court explained, forgetting facts is not actionable. Not a single Federal district or appellate court relying on the Sundstrand standard has raised any objections to footnote 20, or have found it inconsistent with the recklessness standard articulated in the case. Federal district courts have referred to footnote 20 when articulating the Sundstrand test. The courts appear to accept footnote 20 as part of the holding in the case. For example; Seifer v. Topsy's International, Inc. 487 F. Supp. 653, 665 (D. Kan. Mar. 19, 1980): [T]he core requirement of Hochfelder and Ultramereal is that the plaintiff establish that the defendant lacked a genuine belief that the information disclosed was accurate and complete in all material respect.--Accord, Sundstrand, 553 F.2d at 1045 n. 20. None of the circuit courts that have adopted the Sundstrand standard have rejected footnote 20 or its substance. Opponents claim that the second sentence would reverse the rule of ``ignorance of the law is no excuse.'' This argument is nonsense. The Sundstrand standard speaks of ignorance of the facts, not ignorance of the law. Ignorance of the law is, indeed, no excuse. But, as the footnote says, ignorance of the facts is negligence, or even inexcusable negligence, and actors are not liable for negligence under IOb-5 actions. The law is not intended to penalize individuals who forget particular facts. The second sentence says nothing about ignorance of the law and does [[Page H2819]] not provide an affirmative defense for one who forgot to obey the law--as the minority argues. It speaks only to ignorance of facts. I urge a ``no'' vote on the amendment. Mr. DeFAZIO. Mr. Chairman, I move to strike the last word. Mr. Chairman, as I heard the former Member speaking, I could hear a distant sound and I think it was champagne corks popping on Wall Street. This is extraordinary. I am not an attorney, so I will not cite chapter and verse of precedents. I will go straight to the heart of the matter. {time} 1145 If a person who has worked hard their whole life to put together a little bit of savings for retirement, or maybe they want to annuitize their pension, they have to depend upon someone for advice. And they go and they depend upon the advice of a stockbroker or a prospectus written by some $500-an-hour lawyer on Wall Street. And there is a little omission in that prospectus. It forgets to tell you that you are not investing in Treasury bills, you are investing in derivatives. You lose your money, your life savings, your annuitized pension. It is gone. You are broke. Do my colleagues know what? You now have a little problem. Two things. One is if you want to sue, this has loser pay in it. So if you are the individual who lost your life savings, you have to find the wherewithal to come with the money to pay for the costs. Second, it has a new and novel defense from a lay person's perspective. I do not know of any other law in America where you can say, ``I forgot. I forgot.'' What this means is the next time that someone tries to go to court to recover against the next Charles Keating--there will not be another Charles Keating--that would be great if there were no more frauds that cost the American people millions of dollars like the savings and loan scandals. No, that is not what it means. What it means is you will not have recourse to sue them because they forgot or they just overlooked the disclosure that the bank was on the brink of insolvency when you put your money in there, or when you invested it in that bank. At a time of turmoil in international markets, just after the bank's scandal, not very long after the Orange County scandal, how is it that we can come credibly before the American people and say Wall Street needs protection from those little stockholders, Wall Street needs protection from people who are putting their life savings in their hands. Why? Well, because Wall Street might forget to tell them something crucial. This is absolutely outrageous beyond the pale. It is a step through a looking glass into some bizarre new world. Mr. BLILEY. Mr. Chairman, will the gentleman yield? Mr. DeFAZIO. I yield to the gentleman from Virginia. Mr. BLILEY. Mr. Chairman, the gentleman makes a strong argument, but he is wrong on one of the facts, and that is if the firm knew of some information that was derogatory and withheld it, they would not be excused under this language. They could not use the ``I forgot'' defense, because they knew the language to begin with. Mr. DeFAZIO. If I can reclaim my time, I think what this leads to is full employment for psychologists, because we are going to have an awful lot of amnesia on Wall Street. It was not that they knew or recklessly disregarded or consciously omitted, but it is just they forgot at the moment that they were drafting it, or when the print of the prospectus came back from the printer, the proof, and it left out the section on risky derivatives, well, they forgot. They forgot that that should have been there. Mr. BLILEY. Mr. Chairman, will the gentleman yield again? Mr. DeFAZIO. I yield again to the gentleman from Virginia. Mr. BLILEY. The word in there is genuinely forgot, and as a proof in fraud, you have to prove all fraud in court. But they would not be able to stand a chance of maintaining a defense under this language if they knew in advance and deliberately just withheld it, because they could not use that defense because they did not genuinely forget. Mr. DeFAZIO. If I can reclaim my time, I understand this is not the reckless disregard section, so we already have reckless disregard, and this is a further definition of reckless disregard. That is, a defense for reckless disregard is ``I forgot.'' Is that not correct? It is a definition of reckless disregard. Mr. BLILEY. It is a definition of reckless, yes. The gentleman is correct. Mr. DeFAZIO. Reclaiming my time, if someone recklessly disregards and they lose your pension or your annuity, I think at that point they should be liable. I do not think they should have the defense of they forgot. I do not think the average American is going to think depending on experts, that is an incredible position to be taken by the U.S. Congress. Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, as we are having this debate I think it is important for all of us as Members not to forget certain points. Point No. 1 mentioned by Chairman Bliley just a moment ago is if you take this sentence out of the statute as the statute is currently drafted, you change the law. This sentence that is the subject matter of the debate comes directly from Sundstrand. Some people say that this is not important because this sentence comes from a footnote. But it is important to point out, as the chairman did just a moment ago, that in footnote 12 of Hockfelder that footnote created the issue of recklessness and whether recklessness might meet the standard of intent that was required. This sentence in Sundstrand was used to describe what was meant by the court in interpreting recklessness. This sentence has been litigated and relitigated. This sentence has stood the test of judicial review. In fact, this sentence as part of Sundstrand has been adopted by 9 of the 12 Federal circuit courts. I think it is really important for this debate to put this in perspective. Where does this particular amendment affect the legislation, and it is important for Members to know that this occurs in subsection 4 in defining recklessness. But it occurs in section 10(a) where we are talking about the requirements for securities fraud actions, and particularly under section (a) of Scienter, and we say under this section, it says to establish Scienter and we list elements, the defendant indirectly made a fraudulent statement, the fact that the defendant possessed the intention to deceive, manipulate or defraud and the defendant made such fraudulent statement knowingly or recklessly, and that is why the definition of reckless is so important in its definition and how it is put down in this particular statute. So it is important to go to the definition of recklessness in the statute as it is drafted to understand the purpose of that particular sentence. I will read in section 4, recklessness. ``For the purposes of paragraph 1,'' the paragraph I will refer to in just a moment, ``a defendant makes a fraudulent statement recklessly if the defendant in making such statement is guilty of highly unreasonable conduct that involves not simply merely simple or even gross negligence, but an extreme departure from standards of ordinary care; and (b) presents a danger of misleading buyers or sellers that was either known to the defendant or so obvious that the defendant must have been consciously aware of it.'' Then the sentence that is the subject of this follows. It says: ``For example, a defendant who genuinely forgot to disclose or to whom disclosure did not come to mind is not reckless.'' The court was indicating what was meant in the definition of reckless in that Sundstrand decision, so it is important that this sentence remain, and it is important that people recognize that this has already been adopted, it has been litigated time and again, but adopted by 9 of the 12 Federal circuit courts. Mr. MANTON. Mr. Chairman, I move to strike the requisite number of words and I rise in favor of the Eshoo amendment. At the outset, I want to commend my colleague, Ms. Eshoo, for offering this important amendment which would dramatically improve the bill's recklessness standard. As a representative who hails from New York City, the financial capital of [[Page H2820]] the world and the headquarters of most of our Nation's securities accounting firms, I share my colleagues interest in passing securities litigation reform and easing capital formation for our local, regional, and national economies. However, as the representative of New York's Seventh Congressional District, I am also committed to protecting the people of Queens and the Bronx, who help keep New York City running by supplying the city's businesses with skilled labor. My district is also home to a large number of retired middle class workers. I want to state that I support a level playing field in securities litigation. I think clear rules will serve to define prohibited activities and eventually lead to better protection of all parties. We must resist the temptation to try to address the uncertainties of the securities market by presuming bad faith by either party in securities litigation cases. In that regard, I rise in support of Ms. Eshoo's amendment which would correct the bill's untenable standard for defining recklessness which would protect fraudulent conduct. When first introduced, this securities litigation reform legislation contained no provisions designed to hold businesses accountable for reckless conduct, instead, defrauded investors would have had to prove that defendants actually intended to defraud them. After much criticism from members of the Commerce Committee, liability for recklessness was restored, but was defined as willful blindness, a definition which has been adopted by no circuit courts of appeal. It is difficult to understand why willfulness that is, intent, should be required as a prerequisite to a finding of recklessness. In fact, the only thing that seemed to recommend that obscure definition was that it was so narrow that it was unlikely anyone could be found reckless under its definition, and in fact, no one had never been found reckless through its use. For the benefit of my colleagues who are not on the Commerce Committee I would like to point out that, contrary to what they may hear today, there is little disagreement about what recklessness means in Federal courts. The majority of circuits, including the second circuit in New York, which most people acknowledge has special expertise in securities matters, has adopted the seventh circuit's determination in Sundstrand versus Sun Chemical, that: Reckless conduct may be defined as a highly unreasonably omission involving not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. While H.R. 1058 now contains language similar to Sundstrand, I ask my colleagues to consider why the ``For Example'' sentence, which the Eshoo amendment would strike, was added to this accepted standard. I do not think that I am being unreasonably suspicious by suggesting that these changes were designed to undermine the Sundstrand standard. If my colleagues are not trying to weaken the accepted standard, why don't they simply accept this amendment? The issue before us is not a complex legal question. If the Congress passes something which represents the accepted definition of recklessness plus ``something,'' then we are not codifying the current court standard. Courts will determine that we must mean something besides the accepted definition of recklessness, and set about to determine what else the addition of the footnote will require before a showing of recklessness can be made. As Anthony Lewis pointed out in the New York Times on Monday, this extra sentence will likely open new loopholes for securities fraud. I can think of no reason to allow businesses to escape liability for their own fraud if they conveniently forget that they perpetrated fraud on investors. I cannot fathom the common sense in this definition of recklessness. My colleague, Ms. Eshoo, and I have worked together through the committee process to improve the securities litigation portion of the Contract With America. In an unfortunately all too partisan setting, Ms. Eshoo has attempted to forge reasonable legislation which balances the rights of businesses and investors. She has drafted a commonsense amendment. I urge my colleagues to support it. amendment offered by mr. cox of california as a substitute for the amendment offered by ms. eshoo Mr. COX of California. Mr. Chairman, I offer an amendment as a substitute for the amendment. The Clerk read as follows: Amendment offered by Mr. Cox as a substitute for the amendment offered by Ms. Eshoo: Page 18, beginning on line 2, strike ``For example'' and all that follows through line 5 and insert the following: ``Deliberately refraining from taking steps to discover whether one's statements are false or misleading constitutes recklessness, but if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' {time} 1200 Mr. COX of California. Mr. Chairman, I would like to address myself to the comments that have been made thus far by my colleagues concerning one sentence in our definition in the statute of the court- created cause of action for reckless violation of the securities laws. The 1934 act and the 1933 act do not contain any private cause of action. This has been created by the courts. Likewise, they do not contain any cause of action for recklessness. That, too, has been created by the courts in very recent years. Our legislation takes the rather dramatic step of codifying this judge-made law of recklessness in the lower courts, judge-made law that the Supreme Court has never agreed to; only in a footnote in a Supreme Court decision did they say they were not prepared to decide whether recklessness could be a cause of action at all. So for the first time our legislation would be codifying recklessness, and to do this, we borrowed, at the suggestion of Democrats on the Committee on Commerce, language from the seventh circuit Sundstrand case. The Sundstrand decision itself crafted a recklessness standard borrowed from another court in the western district of Oklahoma, and that court had its opinion quote verbatim in the Sundstrand case. Then the judge in the Sundstrand case came up with his own interpretation of what that meant, which he put in a footnote. We have both the western district of Oklahoma case that was recited in Sundstrand and the judge's own words in this proposed legislation. It is the judge's own words in Sundstrand that contain the definition of the distinction between recklessness and negligence, so that someone who honestly makes a mistake is definitionally negligent but not reckless. Therein lies the distinction. And it is that language that is giving rise to all of this debate. So my colleague from California has proposed merely to strike that sentence which would leave us with something of a vacuum in our legislative definition of recklessness, but her reason for wanting to strike it is, I think, a fair one, and that is that examples are not normally contained in statutes. Now, one of the reasons that I think we need to put as much as possible into the statute is that judges increasingly are not looking to legislative history to determine what Congress meant. I actually support that mode of judicial interpretation of statute. I think there is a way to solve the problem. I am going to agree with my colleague from California that we can strike this last sentence and still achieve the objective, and I have proposed that we substitute instead language from a court case in the southern district of New York that simply harmonizes the Hochfelder standard that we have already written into subparagraph (b) of this statute with the idea of recklessness. The sentence we would substitute says simply this: Deliberately refraining from taking steps to discover whether one's statements are false or misleading constitutes recklessness, but if the failure to investigate was not deliberate, such conduct shall not be considered to be recklessness. I think we can all agree this is exactly what this statute means. This is what the judge-made case law already on the books means. Even if we do not enact this statute, it clarifies precisely [[Page H2821]] what is our congressional intent. It offers guidance to the courts, and most importantly of all, guidance to the American people who would like to know in advance the standard to which they should conform their conduct. So I congratulate my colleagues for focusing our attention on this issue. I think that this is a fair resolution. Mr. BRYANT of Texas. Mr. Chairman, will the gentleman yield? Mr. COX of California. I yield to the gentleman from Texas. Mr. BRYANT of Texas. I appreciate the gentleman's congratulations. We tried very hard to focus you on this issue in committee. Let us just go over, briefly, what happened here. In the subcommittee you told us the Sundstrand decision said one thing. We argued vigorously with that. In full committee you told us it said another thing which is what is in the bill today. Now you are presenting us with a handwritten amendment in which you say that you have tried to find some way to further codify what you were after. I think it raises a serious question about exactly what you guys are doing. I mean, have you thought this thing through or not? Why is this just a handwritten amendment? Was this just patched together in the last hour? We are writing laws that affect pension plans, affect people's stock investments, affect the stability of the market. This is a serious matter. You come up here at the very last minute with a handwritten amendment which, by the way, I find to be very difficult, much of which is almost impossible to distinguish from what is in the bill already. When did you write this amendment, I ask the gentleman from California [Mr. Cox]? Mr. COX of California. Reclaiming my time, the gentlewoman from California, at the close of business last night, was recognized as the opening amendment today, and it is, therefore, timely that we are discussing her amendment to this bill today, and it is because of the initiative to change the legislation that we are now engaged in describing how to do that. It is, of course, important for all of us to participate in this debate. Mr. BRYANT of Texas. If the gentleman will yield further, the Republican leadership told us yesterday there would be no additional amendments. We just saw this in the last 5 minutes. Mr. TAUZIN. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise in support of the substitute amendment. We are talking literally about the last sentence of the definition contained in the Sundstrand decision of recklessness. I want to point out for the members of the committee that the last sentence that is being debated here by the Eshoo amendment is contained in the Sundstrand decision. It is contained in the Sundstrand decision in further elaboration of what recklessness is not; Sundstrand adopts the language from the Oklahoma case which was the first case that was decided after the Supreme Court case of Hochfelder. It adopted that language and defined what recklessness is. That is in the bill exactly, indeed, as the court described it in the Sundstrand decision. But Sundstrand and the court in Sundstrand went a step further. It said not only is this what recklessness is, this is what it is not. And why was that important? It was important because in the original Supreme Court decision the Court made it very clear to its circuit courts who are going to be interpreting the law even more precisely than the Supreme Court did, it made it very clear, and here is a quote from Hochfelder, that ``When a statute,'' like 10(b)(5) ``when a statute speaks so specifically in terms of manipulation and deception and of implementing devices and contrivances, the commonly understood terminology of intentional wrongdoing, and when its history reflects no more expansive intent, we are quite unwilling to extend the scope of this statute to negligent conduct.'' In effect, what Hochfelder was saying was that this statute, 10(b)(5), that we are codifying and amending today, was clearly in its origination and in its history an intentional-fraud statute, not a negligence statute. Now, I know that there are many who would like to turn it into a negligence statute. That is not what it is. It is an intentional-fraud statute. The courts have interpreted that statute to say that when somebody's conduct is not quite clearly intentional but so reckless as to get real close to intentional misconduct, that that, too, can be used as a cause of action under the statute. Hochfelder was saying you still need to find some elements that lead you to that conclusion that recklessness is so severe that it is the equivalent of intentional wrongdoing, and so Sundstrand came along, the Oklahoma case came along interpreting that Supreme Court decision even further and defined recklessness in those terms. Let me quote from what is in the bill and what is in Sundstrand: ``Reckless conduct may be defined as a highly unreasonable omission involving not merely simple or even inexcusable negligence.'' Hear this again, ``Not even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that is either known by the defendant or is so obvious that the actor must have been aware of it.'' Sunstrand is, in effect, saying that you have got to get awfully close to intentional negligence. What the gentleman is now offering in place of further clarifying language of what is not negligence that is contained in Sundstrand, verbatim, is a statement that is taken from other court decisions, again interpreting the Supreme Court decision saying ``deliberately refraining from taking steps to discover whether your statement is true or false is, indeed, recklessness.'' In effect, referring again, as the Supreme Court said you must refer to, some kind of deliberateness, some kind of intentional misconduct, something so close to the intent to defraud that it meets both the history, the intent, and the original language of section 10(b)(5). Let me say it again: There are many people who would like this section of the law to be a negligence section. It is not. This is a fraud section of law, and you can try to turn it into a negligence standard if you like by amendment. That is not what this law is all about. That is not what this section of litigation is all about. There are many lawyers who try to turn it into a negligence standard. The court in Sundstrand and the Supreme Court said that is not the law. This is a recklessness, almost right up there close to intent to defraud, and if you want to make sure that that is true, the gentleman's substitute amendment is not only right but eliminates, indeed, an example that is in Sundstrand, because I frankly think that is not good text in the law and substitutes instead a finding of the court. The CHAIRMAN. The time of the gentleman from Louisiana [Mr. Tauzin] has expired. (By unanimous consent, Mr. Tauzin was allowed to proceed for 1 additional minute.) Mr. BRYANT of Texas. Mr. chairman, will the gentleman yield? Mr. TAUZIN. I yield to the gentleman from Texas. Mr. BRYANT of Texas. A few moments ago you all were quoting to us from a 1976 decision in Sundstrand saying this is the common law; we are just going to codify it. Last night we were told there would be no more amendments to the bill. In the last 5 or 10 minutes, we have been handed a very illegible handwritten amendment which you are now lauding as a great new standard for this industry. I would like to ask the gentleman, if I can---- Mr. TAUZIN. Reclaiming my time, I will be happy to respond; whatever time I have, I have got your question. The question is should the example that is quoted in Sundstrand of what is not negligence be contained in this bill. You have objected to that. The gentlewoman has asked we take it out. We are saying OK, if you really want to do that, let me answer the question---- Mr. BRYANT of Texas. Do you take it out? Mr. TAUZIN. Let me answer your question. Mr. BRYANT of Texas. I did not ask a question. I have got a question for you. Mr. TAUZIN. If the gentleman has suggested it should come out as he and the gentlewoman have, we are saying OK, if you are going to take that out, [[Page H2822]] you need to clarify as the Supreme Court asked us to do that you are still talking about a deliberate refraining from taking steps to discover the truth or falsity of the statement. The CHAIRMAN. The time of the gentleman from Louisiana [Mr. Tauzin] has again expired. (At the request of Mr. Bryant of Texas and by unanimous consent, Mr. Tauzin was allowed to proceed for 1 additional minute.) Mr. BRYANT of Texas. If the gentleman will yield further, when did you first see this handwritten amendment that we have been handed here in the last few minutes? Mr. TAUZIN. We have been discussing that and other language taken from the Supreme Court decisions for some days now in an effort to try to make this bill more palatable to my friend from California who was going to offer this amendment. Mr. BRYANT of Texas. We know as of last night there was no plan to offer any additional amendment. Now we see a handwritten amendment in the last few minutes. Mr. TAUZIN. Reclaiming my time, this is not an additional amendment. This is a substitute for your own amendment. The idea is before I and other Members who support this bill are willing to accept your amendment which deletes language from the Sundstrand decision, we think you ought to have language that clarifies what the Supreme Court said. That is what this amendment does. Mr. FIELDS of Texas. Mr. Chairman, will the gentleman yield? Mr. TAUZIN. I yield to the gentleman from Texas. Mr. FIELDS of Texas. Mr. Chairman, I would just point out last night this amendment did not exist, that this has been a dynamic process. We have taken the concerns expressed by people on the other side of the aisle. We have attempted to address those concerns to make the legislative language a little tighter, and we worked as late as this morning trying to come up with the particular language. Mr. DINGELL. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise to oppose the substitute. I rise first to commend the gentlewoman from California for her amendment. It should be adopted. Second of all, this curious piece of paper that has been passed around should be rejected. The gentleman from California has presented us with an amendment that was never before seen. This is not inconsistent with the practices that we have observed. But I want to take my colleagues through what is going on here. What is at stake here is the rights of investors, not a bunch of slippery lawyers, but investors, investors who were hurt in things like Orange County, things like the Milken, Boesky defalcations and a large number of other items of rascality, also in questions like we saw in connection with the savings and loan debacles where lawyers and accountants gave bad opinions, where they audited improperly, where they failed to keep track of property, where they did not find that property which was carried on the books did not exist, or where they failed to find that it was overvalued. Those matters have been found to be reckless, reckless by the courts, and actionable. Now we find that there is an attempt to get away from the problem of these people by defining recklessness to essentially be deliberate misbehavior. At question is not the issue of negligence or even of fraud. It is simply of reckless misbehavior. The amendment which is offered by the gentleman from California would say that if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless. We are talking here about lawyers giving opinions as to suitability. We are talking here about accountants who are failing to ascertain that the property which is carried on the books and which is filed in the reports which are submitted to the shareholders and the SEC, in fact, does not exist or does not have the value which is assigned to it. Is that fraud? Quite probably. Is it reckless? Absolutely. These people have a fiduciary duty, a fiduciary duty, a duty of the highest responsibility to the shareholders, and they have a responsibility which they must carry out to the Federal Government and to the State regulators to file their reports truthfully and to use due care and proper care to find out that the value is there, that the property exists, that it is not overvalued in some kind of a fraudulent evaluation. {time} 1215 That is what is at stake. This is an attempt to reduce the amendment offered by the gentlewoman from California [Ms. Eshoo] as an attempt to reduce the responsibility and to define recklessness now as some kind of deliberate misbehavior. That is not it. What is at stake here is the question of whether or not the individual has carried out his proper fiduciary relationship, whether he has been reckless, and recklessness comes to the brink of, but does not include, deliberate wrongdoing. This is an attempt to get a little more protection for wrongdoers and to strip a little more of the protection from the ordinary citizen who has invested his or her life savings in a stock or a security which can be converted to worthlessness by the kind of wrongdoing that this amendment offered by the gentleman from California [Mr. Cox] would sanctify. That is what is at stake here. Now, the original amendment offered by the gentlewoman simply struck out dicta, struck out a footnote. The committee was largely agreed that what we should do was to address this within the framework of the Sundstrand decision. The gentleman from California now finds that inadequate. He essentially would seek now to repudiate the language which he pushed in the committee. That is perhaps right, and I think that he should be commended for retreating from it, but not for retreating to something which raises the burden on the litigants to a still higher level, to address the problem of wrongdoing by people who are failing to carry out their fiduciary responsibility to investors and investing public of this country. Mr. WHITE. Mr. Chairman, I move to strike the requisite number of words. I would say simply I yield to the gentleman from California for his comments on this issue. Mr. COX of California. I thank the gentleman for yielding. Mr. Chairman, I listened carefully to the comments of the gentleman from Michigan [Mr. Dingell], and I must say it proves the law of the inverse correlation between desperate level and factual content on many occasions. What the gentleman from Michigan may have forgotten is that the bill we are discussing today simply embodies the policy choices that, for decades and decades, have been made by Democrat Congresses and confirmed by our Supreme Court. The pattern of the Federal securities laws is clear. When Congress wanted to impose absolute liability or impose liability for mere negligence, it did so explicitly. What the gentleman may have forgotten is that the securities laws already impose strict and absolute liability on the directors of a company for fraudulent misstatements and omissions. It is not just recklessness, not just negligence, but strict liability and absolute liability for the directors of company under section 11. It is the same thing for the officers of the company. By and large, what the Congress has chosen to do in securities laws is deal differently with formal documents filed with the SEC and deal differently with the enforcement powers of the SEC, on the one hand, and, on the other hand, informal documents and conversations ranging from press releases to telephone conversations and so on, where we want to make sure we facilitate the free movement of informal communications between issuers of securities and participants in the security markets. So we find that the legislative judgment made by the New Deal Congresses of the 1930's was that it was appropriate to apply a very high standard of liability and not to require liability and not to require fraudulent intent where prepared offering documents, formal prepared offering documents and SEC filings are involved. On the other hand, as is the case with private litigation that we are dealing with in this bill, Congress did not want to chill candid, free, and informal communications. [[Page H2823]] The language which the gentleman is discussing would affect private securities actions way outside the bounds of the formal offering documents that are provided prospectuses and so on, where we have strict liability. The ``I forget'' defense does not work for any people who are the issuers of securities. I think we need to focus on the fact that what we are doing here is not writing language for the first time in this bill, we are taking language from court decisions and putting it into statutes, and we are doing it, I think, in a very foresighted way. So that for the very first time, what the gentleman would like to see, I think, a codification of recklessness, would exist in our securities laws, and that codification will reflect the best reconciliation of our Supreme Court decisions in Hochfelder, which said every violation of section 10-B has to be intentional and which our lower courts have said sometimes that would include recklessness. Mr. TAUZIN. Mr. Chairman, will the gentleman yield? Mr. WHITE. I yield to gentleman from Louisiana. Mr. TAUZIN. I thank the gentleman for yielding to me. Mr. Chairman, the gentleman from Michigan has asserted that the addition of the word ``deliberately,'' which is contained in the gentleman's substitute, is something new to the law. Let me beg to differ, and let me quote from the Supreme Court. The court said on page 212 of the decision, ``We note that such a reading cannot be harmonized,'' a reading of nonintentional fraud, ``with the history of this ruling. A history making clear that when the Commission adopted the rule, it was intended to apply only to activities that involved Scienter.'' Scienter is defined by the court on page 194. It means ``a mental state embracing intent,'' that is deliberateness, ``intent to deceive, manipulate, or defraud.'' I will quote from Sundstrand as well. This is the Sundstrand language, the definition of recklessness is ``the kind of recklessness that is equivalent to willful fraud.'' Willful, deliberate fraud. Further, ``Indeed the franking definition,'' which is what they used, ``of recklessness should be viewed as the functional equivalent of intent.'' Deliberateness is what the Supreme Court in Sundstrand talked about, is absolutely part of our law, and it should be part of it. And I thank the gentleman for yielding. Mr. ALLARD. Mr. Chairman, will the gentleman yield? Mr. WHITE. I yield to the gentleman from Colorado. (Mr. ALLARD asked and was given permission to revise and extend his remarks.) Mr. ALLARD. I thank the gentleman for yielding. Mr. Chairman, I rise in support of H.R. 1058 and the Cox amendment. Mr. Chairman, abuses of securities litigation are particularly excessive. This act restricts the filing of frivolous suits by imposing stricter conditions. The act requires class action suits to have plaintiff steering committees to ensure that the interests of the lawyers to do dominate those of the plaintiffs. It equalizes individual plaintiff awards in a class action suit and restricts named plaintiffs from filing more than five suits in a 3-year period. The act also allows the court to order the ``lower pays'' rule in unjustified cases. The plaintiff has a greater burden of proof under this act, which allows the defendant to avoid liability if there is no intentional deceit. Also, the plaintiff must prove that loss was incurred because of reliance on a fraudulent statement. Finally, the act protects publishers of market predictions if the forecasts are well-reasoned but do not hold true. Without these reforms, plaintiff lawyers can file securities cases with few restraints. They routinely pounce on companies following a chance drop in stock. They have good reason to take, and in fact promote these suits. The plaintiff's counsels generally spend little time determining the facts of the case, yet receive a considerable amount of money for their involvement. Such practices are fostered by so-called professional plaintiffs who are sometimes recruited by lawyers with the promise of easy money. H.R. 1058 removes the incentives to file unfounded claims. Mr. Speaker, it is time we restore the notion that a capitalist economy, there are risks. The process is simple. Stocks rise, you win, stocks drop, you lose. Each person making an investment knows that it is a risk, still certain investors have been encouraged by counsel to fault companies for their inability to predict earnings. We can no longer afford to operate this way. Risk is an important element in the market. In Colorado alone it is estimated that frivolous securities litigation unjustly costs tens of millions of dollars every year. The assailed companies feel like they are dealing with a terrorist. Following a simple shift in stock price or a particular corporate decision, they find that their company is suddenly held hostage and they are compelled to negotiate a ransom payment. The cost of these suits is even more outrageous when you consider that the filing parties never see the bulk of the payment, it is the plaintiff attorneys who reap most of the benefits. When the law provides such incentives for greed, the law should be revised. H.R. 1058, the Securities Litigation Reform Act, will effectively limit unreasonable law suits. I strongly support this legislation. Mr. BRYANT of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, the question for Members of the House is what should the standard, what would the standard be, if the Eshoo amendment were adopted? It is that simple. Leaving aside all else you have heard today; if the Eshoo amendment was adopted, what would be the standard? Here is the standard. It is in the bill as brought out by the majority. The standard would be: ``Reckless conduct may be defined as highly unreasonable (conduct) involving not merely simple,'' not merely simple, ``or even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the action must have been aware of it.'' That is the standard. That is an extremely high standard. Simple negligence is not enough, gross negligence is not enough; it has got be even worse than that before you can hold one of these security dealers liable in a civil action. What we are arguing about is, should anything more come at the end of this paragraph? What the gentleman from California [Mr. Cox] wanted to put at the end of this paragraph is a sentence that would have said, ``Even if they do as bad as all of that, if they just plain forgot, it is all right, and they are not in trouble.'' Now, having been, I assume, embarrassed by the absurdity of that proposal, he comes now with a last-minute rewrite, a handwritten amendment which we have just seen in the last few minutes, which says, ``Add at the end of this extremely high standard a sentence that, ``Deliberately refraining from taking steps to discover whether one's flagrant or false or misleading conduct would constitute recklessness. But if the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' Mr. Chairman, this language does not need an add-on. But, second, it sure does not need an add-on. But, second, it sure does not need an add-on that says, I forgot. In effect, Mr. Cox's last-minute rewrite, which we did not see until 10 or 15 minutes ago, is just another way of saying, I forgot. What does it say: ``If the failure to investigate was not deliberate, such conduct shall not be considered to be reckless.'' What does that mean if failure to investigate is not deliberate? The point is the law should hold somebody who is in the business of issuing securities to at least this standard so that those who invest will know that they are not being the victim of false statements or grossly reckless statements that could cause them to lose their money. If they lost their money, under the Cox language, they could say, ``Well, our failure to investigate the facts which we put into the issuing documents was not deliberate.'' How can a failure to investigate be not deliberate? Who has the burden to decide whether or not an investigation ought to be done? Surely the burden ought to be upon those who are in a position, with an office full of experts and unlimited resources to do the investigation of whether or not the facts set forth in the offering document are true or not. The burden should not be left upon the pensioner, or upon the widow, upon the hopeful investor who has no [[Page H2824]] way whatsoever to know what facts should or should not be investigated. Members of the House, we have never ever allowed ignorance to be an excuse in a civil action or in a criminal action. If an American citizen forgets to buy their license plate after the old one has expired, they do not get to plead, ``I forgot.'' They do not get to say, ``Well, my failure to investigate whether or not my license plate has expired was not deliberate.'' You do not get off with that. If your lawyer fails to record your deed, he does not get off by saying, ``I forgot,'' or, ``My failure to investigate my file to see whether or not I had a deadline to record the deed,'' somehow or other was accidental. That does not let him off the hook. Who should be held responsible? Surely it is not the average person, relying upon the representations of experts, who invests his money. This level of responsibility is higher than we place on probably any other potential defendant in a civil action. You cannot hold him responsible for simple negligence or even gross negligence. In fact, you cannot hold him responsible unless they exhibit an extreme departure from the standards of ordinary care or present a danger of misleading buyers and sellers known to the defendant are so obvious that he should have known it. Ms. ESHOO wants to leave a period at the end of that sentence. These guys want to say, ``However, if in spite of all that, the guy says, `I forgot,' he gets off the hook.'' Now, embarrassed by the words ``I forgot,'' they come up with a last- minute rewrite which means, in effect, the same thing as I forgot. I strongly urge you to vote down the Cox amendment, to say ``no'' to this reckless kind of legislative procedure where amendments are thrown together at the last minute on critical legislation like this, to say ``no'' to the Cox amendment, say ``yes'' to the Eshoo amendment, and let us leave some kind of protection in this law for the average American investor so that those who take advantage of them by misleading them in offering documents will not be able to profit from their recklessness. Mr. WATT of North Carolina. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I would like to thank you for recognizing me because I really had intended to stay out of this discussion, but I got more and more outraged as I heard the debate taking place on the floor about what was going on. I want to respond to my colleague from Louisiana, Mr. Tauzin, who said we were trying to go back to a negligence standard. I want to admit to my colleagues that if it were me, I would be happy with a negligence standard. I did not come to the floor to play games with you. Lawyers are subject to negligence standard, doctors are subject to a negligence standard, ordinary people who drive automobiles and run into folks are subject to a negligence standard. If they make a mistake and they injure somebody, they are held liable. But I will not recognize to you that under the law as it is written Congress has already imposed a higher level of standard for folks in the stock brokerage business and those who engage in securities business. They have said, ``You can be held liable only if you do something fraudulently, knowingly, recklessly.'' That is a higher standard or actually, from the common, ordinary people's vernacular, it is a lower standard. Mr. COX of California. Mr. Chairman, will the gentleman yield? Mr. WATT of North Carolina. No, I will not yield. I want to make sure that you can confuse the issue if you want, but right now is my time to try to relate this to some semblance of sanity rather than missed--come and go that you all are engaged in. {time} 1230 What my colleagues want to do is take the already high standard, the one that is a step up, that applies to every other member of society, and create what I would call an impossibility standard, because if we adopted this language, you would never ever be able to win any cases in the securities area because any time recklessness is alleged or somebody is engaged in fraudulent conduct, the securities person would come back and say, ``Oh, well, that might be true, but I forgot to tell you,'' and all of a sudden they would be off the hook. Well, my colleagues, I thought the purpose of this bill was to get rid of frivolous lawsuits and to cut down on the amount of securities litigation which we have built in a wonderful procedure for trying to stop those kinds of lawsuits, but, Mr. Chairman, when we start to raise the standard to an even higher level of care, an impossibility standard, then I start to wonder is the purpose really to get rid of frivolous lawsuits or is it to protect the buddies up on Wall Street from what goes on in the real world, from the standard that everybody else in our society, these people, all of whom are seated in the gallery, are subject to, this common, everyday standard, and all of a sudden securities people, whom we have already given a higher level of protection to, now they want to give an impossible level of protection to. So, Mr. Chairman, I want to make sure that everybody understands in common, everyday language what is being proposed here: If I do something, if I am reckless, if I do it knowingly, and I come into court and say, Oh, no, I forgot, all of a sudden I am shielded from liability under this amendment. Mr. COX of California. Mr. Chairman, will the gentleman yield? Mr. WATT of North Carolina. I yield to the gentleman from California. Mr. COX of California. I would just point out, to correct the record, that underwriters, brokers and dealers who act as underwriters are absolutely and strictly liable, and I say to the gentleman, ``You don't need to prove negligence and recklessness; they are strictly---- The CHAIRMAN. The time of the gentleman from North Carolina [Mr. Watt] has expired. announcement by the chairman The CHAIRMAN. The Chair would remind Members not to make reference to individuals in the gallery. Mr. MARKEY. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise in opposition to the amendment offered by the gentleman from California [Mr. Cox] to the amendment offered by the gentlewoman from California [Ms. Eshoo]. Mr. Chairman, let us make it quite clear that today there is a standard which is used by the Federal courts, and that standard is largely an agreed upon standard, and it is the standard which is in the well of the House which has been sitting there as a printed statement of what has been accepted by 80 percent of the Federal courts of the United States. Now remember the standard is one which Federal judges across the country, most of them Reagan and Bush Federal district court judges, have used as their standard, and it has served our country quite well. Now, if over the course of the last 10 to 15 years 75 to 80 percent of the Federal district court judges, almost all of them Reagan and Bush appointees, have drafted a standard, have adopted a standard, which they use, why would we on the floor of the United States Congress adopt a standard which is a handwritten standard just presented to us that will override 15 years of precedents of the Reagan and Bush era judges that have reached the consensus as to what the standard should be? Should we not give some deference to these Federal district court judges? Should we not allow them in their courts, knowing all of the facts and law, the history of this country, to come to some consensus? Now I have the greatest respect for the legal knowledge of the gentleman from California, but it is not so substantial a level of respect that I think that a handwritten amendment on the floor, with no notice to any Members and in contradiction to the promise that there would be no additional majority party amendments to the legislation here today, should serve as a substitute for 15 years of settled law. The intent of this amendment, I think at the end of the day, is nothing more, nor less, then to dress up, dress up the I-forgot defense. It puts it in fancier words. It uses a legalese that, I think, is probably more professional than actually putting the words ``I forget'' into the law, but the effect of it is the same, to ensure that the standard for ordinary Americans to be able to bring [[Page H2825]] actions against executives of companies who have misled those individuals in the investment of their money have a more difficult time in court. That is what this is all about, by the way, or else we would not be out here on the floor of the House of Representatives. We would not be here if they were really happy with what the Sundstrand decision says, which is again, and this is what we believe the public should have as their protection, that there be reckless conduct which may be defined as highly unreasonable conduct involving not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that are either known to the defendant or so obvious that the actor must have been aware of it. This standard is one which the Federal district court judges have, George Bush and Ronald Reagan judges, codified for all intents and purposes as the national standard. We cannot use, we should not be allowed to use, a handwritten amendment on the floor of the House of Representatives to be attached to this profoundly important piece of American jurisprudence, and I just hope that anyone who is listening to this debate understands quite clearly that any additions to this are meant to reduce the ability of ordinary Americans to recover in the courts of the United States when executives of S's, when executives of a private company, have deliberately misled-- The CHAIRMAN. The time of the gentleman from Massachusetts [Mr. Markey] has expired. Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, first of all I want to compliment the gentleman from California [Mr. Cox]. In Sundstrand the court defined ``recklessness'' building on the court decision in Hochfelder, and that is what we have currently in the statute. We have language that has already been litigated, and relitigated, and been adopted by 9 of the 12 Federal circuit courts. Now I am complimenting the gentleman because, if I understand what the gentleman from California is doing with his handwritten amendment, which at one time that is the only type of amendments we had on the floor, handwritten amendments, but what the gentleman is doing is, first, I understand, he is trying to be cooperative. There were some concerns expressed on the other side of the aisle, and the gentleman is stepping up to the plate to meet some of those concerns, and we take the amendment offered by the gentlewoman from California [Ms. Eshoo] as being a sincere attempt to