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Tuesday, July 02, 2002

How Much Do You Really Want to Know About Securities Law?

And do you want to get in an argument with a bunch of lawyers about it? Paul Krugman mentioned a 1995 law "that, by blocking investor lawsuits, may have opened the door for a wave of corporate crime". And at his blog, Nathan Lane argues that the 1995 law was passed over Clinton's veto and helped open the floodgates to corporate fraud.

Groan. Let's see what else is out there. Here is an interesting perspective:

...the Private Securities Litigation Reform Act of 1995 has now become law and I am a bit tired of talking about the subject.... [already?!]

I know you've heard various pundits complaining that the legislation just passed goes too far, or doesn't go far enough, or will allow people to defraud investors without remedy, or doesn't provide adequate protection against frivolous suits.....
For me, a relative newcomer to Washington, the legislative process that brought us litigation reform was like a sprint through the no-man's-land between warring camps -- a baptism by fire into the frenetic, no-holds-barred way that laws are made, and unmade, in our nation's capital....
Perhaps I'm wrong, but anyone who has been attacked this way by both sides must be in about the right place.

As some of you will remember, early in my tenure I appeared at this Institute and set out the reasons why a degree of reform was desirable. My experience in business taught me something about the dangers and expenses involved in meritless litigation. It doesn't help investors or the markets if we're too accommodating of those who think they should be able at the drop of a hat -- or the drop of a stock -- to file a lawsuit immediately, hoping to wring out a profitable settlement, whether or not the company or its officers did anything wrong....

Traditionally, as you know, the SEC has aligned itself with plaintiffs' interests, not defendants', and with good reason. The threat of litigation serves a valuable purpose in our system, encouraging corporations to observe their disclosure obligations carefully. That's good for investors and good for our markets....
So it was unusual for an SEC Chairman to acknowledge that the litigation system required reform. But the pendulum had swung too far toward plaintiffs, and it needed to be brought into better balance....

The bill that eventually became law is not perfect -- but that may be said about almost every other statute that runs the legislative gauntlet....I believe that if you can cut through the rhetoric and emotionalism that has surrounded this issue, and read the message issued by the President when he vetoed the bill, you will agree that his veto was a reasoned, moderate attempt to improve the bill. He did not reject reform. He tried to strengthen the bill in a way most of
us can agree with. The President asked for three specific revisions: that the legislation specifically reflect the Second Circuit's standards for pleading scienter -- which was the avowed intention of the bill's drafters; that the Statement of Managers accompanying the bill be modified to avoid eroding further the "bespeaks caution" standard embodied in the bill itself; and that the Rule 11 sanctions provisions be clarified. With those changes, he said (and I quote) "I will sign such a bill as soon as it reaches my desk.".....

I mention the President's veto message simply to demonstrate that the concepts contained in the legislation had widespread acceptance. The points raised by the President were an attempt to make the bill a bit better. The Congress decided to go ahead with the legislation as it was. So be it."

So be it indeed. And thank you to Arther Levitt, former SEC Chairman, for a fine speech delivered on January 24, 1996.

And we have some bonus links. The National Investor Relations Institute has a long history of this legislation. Apparently it was class-action lawyers versus Silicon Valley in a Godzilla-King Kong epic, with Ralph Nader on the side of the trial lawyers. The NIRI inform us that the Washington Post urged an override of Clinton's veto, and why would they lie? And a fine chap who will always be "that other Sullivan" to everyone but his mom has extensive analysis on this very subject. Let's see if this link works.

So apparently this reform had been brewing for years, got kick-started as part of the Contract with America, and achieved veto-proof margins in both houses, with the support of the SEC chairman and what seems to be the qualified support of President Clinton. Aren't you glad you knew that? And isn't it odd that Krugman doesn't?

UPDATE: Nathan Franks are famous at Coney Island. Nathan Lane is an actor and comedian. Nathan Newman has a nice leftish blog going. And I am just about back from vacation and ready to take another break. So if your name is Frank Nathan, Monday might be a better time to drop me a note.

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