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Securities Litigation Reform Act passes the House.

The House of Representatives passed legislation to reform the private securities litigation system with an overwhelmingly bipartisan vote of 325-99. The approval of the Securities Litigation Reform Act (HR 1058) followed a vigorous lobbying campaign by the accounting profession, high-tech industries, the-securities industry and business leaders who said the current legal system promoted incentives for lawyers to pursue meritless cases against "deep pocket" companies. The American Institute of CPAs considers the passage of HR 1058 a significant victory for the profession.

The large margin of victory for HR 1058 exceeds the votes necessary to override a presidential veto. The White House has echoed Securities and Exchange Commission concerns that certain provisions in the House bill were unfair but has stopped short of announcing official opposition.

A major provision of HR 1058 reduces the liability exposure for companies of all sizes by establishing a system of proportionate liability in which defendants are responsible for the share of damages caused by their own actions. The joint and several liability system currently in use has been the bane of accounting firms exposed to a substantial amount of liability as peripheral defendants.

C. Christopher Cox (R-Cal.), architect of the House bill, said the current system of private securities litigation had to be changed. "It cheats both the victims of fraud and innocent parties by lavishly encouraging meritless cases," said Cox. "It has destroyed thousands of jobs and has undercut economic growth and American competitiveness." Another provision of HR 1058 establishes a safe harbor for forward-looking statements to encourage the voluntary disclosure of information to investors. At hearings before the SEC last February, Philip B. Chenok, president of the AICPA, said current safe harbor provisions were not effective. Chenok urged the SEC to support "meaningful reform" in Congress (see JofA, Apr.95, page 11).

W. J. (Billy) Tauzin (D-La.), who has championed litigation reform legislation in the House for four years, said, "The threat of lawsuits over forward-looking information is so serious that many if not most chief executive officers refuse to talk about their company's performance, yet that is exactly the kind of information the market needs to operate." Tauzin worked with Cox to negotiate compromises in the original bill to make it acceptable to House Democrats. Edward J. Markey (D-Mass.), who voted against HR 1058, said the new safe harbor provision would protect corporate projections that lack a reasonable basis and thus could harm the ordinary investor.

Among other securities litigation reforms, the House bill

* Protects against abusive practices. Bounty payments to plaintiffs and plaintiff referral fees are eliminated. Professional plaintiffs are limited to five class actions every three years.

* Increases investors' control over class-action lawsuits. Court-appointed plaintiffs' steering committees will ensure plaintiffs, and not their lawyers, control class-action lawsuits under U.S. securities legislation.

* Provides a "loser-pays" rule. Losing parties can be required by the courts to pay attorneys' fees if their positions are not substantially justified.

* Requires lawyers to plead specific facts. Plaintiffs must allege specific facts in their complaint to demonstrate each defendant's state of mind and must specify each statement by the defendant alleged to have been misleading.

* Adopts "fraud-on-the-market" theory. Plaintiffs must prove the market as a whole was defrauded by a company's illegal statement and that the stock -price reflected the fraudulent information.

Senate hearings on securities litigation reform already are under way. Senators Pete V. Domenici (R-N.M.) and Christopher J. Dodd (D-Conn.) have introduced a more moderate reform measure (S 240) that includes proportionate liability provisions. Senate banking chairman Alfonse M. D'Amato (R-N.Y.), who has jurisdiction over securities issues, opposes the loser-pays provisions-in the House legislation. Outcome in the Senate is uncertain.
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Publication:Journal of Accountancy
Date:May 1, 1995
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