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             U.S. Securities and Exchange Commission
                  Office of the General Counsel
                            April 1997

             REPORT TO THE PRESIDENT AND THE CONGRESS
             ON THE FIRST YEAR OF PRACTICE UNDER THE 
         PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995


I.   EXECUTIVE SUMMARY.


     Following passage of the Private Securities Litigation
Reform Act of 1995, President Clinton wrote to Commission
Chairman Arthur Levitt requesting that the Commission advise him
and the Congress about the impact of the Reform Act on the
effectiveness of the securities laws and on investor protection,
and on the extent and nature of any litigation under the Act. 
The Commission's Office of the General Counsel prepared this
report in response to the President's request.

     In preparing this report, the staff discussed the effects of
the Reform Act with a variety of interested parties, reviewed the
complaints from federal securities class action lawsuits filed in

1996, and analyzed the court decisions under the Reform Act.  In
addition, the staff has reviewed a sample of complaints from
securities class actions brought in state courts during 1996.  

     The number of court decisions under the Reform Act and the
availability of other objective data that could be used to
evaluate the effectiveness of the Act are still very limited.  In
particular, the federal appellate courts have had virtually no
opportunity to interpret the provisions of the Reform Act. 
Although it is too soon to draw definitive conclusions about the
impact of the Reform Act on the effectiveness of the securities
laws and on investor protection, some preliminary observations
can be made.


     The number of companies sued in securities class actions in
federal court is down for the twelve months following passage of
the Reform Act.  This may be a temporary aberration, however, as
the first three months of the year following passage of the Act
are unrepresentative -- only 15% of the cases were filed in this
quarter.  More time is necessary to determine whether the number
of cases has been affected by the Reform Act.  It also appears
that the "race to the courthouse" has slowed somewhat.  Although
a few cases were filed within days of the release of negative
news by the issuer, most were filed after at least several weeks
had passed.
==========================================START OF PAGE======
     The discovery stay imposed by the Act during the pendency of
a motion to dismiss, coupled with the heightened pleading
standards, has made it more difficult for plaintiffs to bring and
prosecute securities class action lawsuits.  No cases to date
have been dismissed without leave to amend because of the new
pleading standards.  Plaintiffs who are unable to uncover
evidence of wrongdoing sufficient to meet those new standards
prior to filing their complaints, however, may find it difficult
to amend their complaints without access to discovery.

     Although the Reform Act sought to increase the participation

of institutional investors in securities class actions,
institutional investors have not become active in many cases. 
Securities class actions generally continue to be controlled by
plaintiffs' law firms.

     Secondary defendants, such as accountants and lawyers, are
being named much less frequently in securities class actions. 
This may, however, largely be the result of a 1994 Supreme Court
decision eliminating aiding and abetting in private actions.

     The number of securities class actions filed in state court
has reportedly increased.  Moreover, many of the state cases are

filed parallel to a federal court case in an apparent attempt to
avoid some of the procedures imposed by the Reform Act,
particularly the stay of discovery pending a motion to dismiss. 
This may be the most significant development in securities
litigation post-Reform Act.  While the allegations contained in
state court complaints are generally similar to those of the
federal complaints, state complaints having no parallel federal
action are more likely to be based solely on forecasts which have
not materialized and less likely to include insider trading
allegations.

     To date, the reported federal judicial decisions have mainly
focussed on issues that arise at the beginning of the litigation

process.  These decisions have concerned (i) the Act's
requirements for pleading fraud; (ii) the stay of discovery
during the pendency of a motion to dismiss; and (iii) the
procedure for appointing a lead plaintiff.  In addition, the
Court of Appeals for the Ninth Circuit considered the retroactive
application of the Reform Act provision allowing the Commission
to bring actions based on aiding and abetting.

     There have as yet been no decisions on several other
important provisions of the Act.  These include the adequacy of
cautionary language under the safe harbor for forward-looking
statements, sanctions for violations of Rule 11(b) (other than
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one case that simply found no violation), proportionate
liability, and the limitation on damages.

     Finally, based on discussions with the issuer community and
review of filings with the Commission, the staff believes that
the quality and quantity of forward-looking disclosure has not
significantly improved following enactment of the safe harbor for
forward-looking statements.  So far, it appears that companies
have been reluctant to provide significantly more forward-looking
disclosure than they provided prior to enactment of the safe
harbor. 


     There are still many uncertainties about the effects of the
Reform Act and the staff expects to continue carefully monitoring
the cases.  The staff believes that it is too soon to draw any
firm conclusions about the effect of the Reform Act on frivolous
securities litigation, or, for that matter, on meritorious
litigation.  Accordingly, the staff does not recommend any
legislative changes at this time.


II.  INTRODUCTION TO THE REPORT.


     After the Private Securities Litigation Reform Act of 1995
(the "Reform Act" or the "Act")-[1]- was passed, President
Clinton wrote to Commission Chairman Arthur Levitt requesting
that the Commission "advise me and the Congress within a year
about the impact of the act on the effectiveness of the
securities laws and on investor protection, and on the extent and
nature of any litigation under the act."  The Commission's Office
of the General Counsel has prepared this report in response to
the President's request.

     In preparing this report, the staff has discussed the
effects of the Reform Act with a variety of interested parties,
including plaintiffs' and defense attorneys, public and private

institutional investors, and issuers.  The staff has also
reviewed the complaints from federal securities class action
lawsuits filed in 1996 and the court decisions to date under the
Reform Act.  In addition, the staff has reviewed a sample of
complaints from securities class actions brought in state courts
during 1996.

     The number of court decisions under the Reform Act and other
objective data that could be used to evaluate the effectiveness


---------FOOTNOTES----------
     -[1]-Pub. L. No. 104-67, 109 Stat. 737 (1995).
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of the Act are still very limited.  In particular, the federal
appellate courts have had virtually no opportunity to interpret
the provisions of the Act.  As cases reach the courts of appeals,
a more complete picture of how the Act will be interpreted should
emerge.  Accordingly, the conclusions reached in this report are
necessarily tentative and subject to change as more decisions are
handed down by the courts. 

     A.   Summary of Conclusions.

     Although it is too soon to draw any definitive conclusions

about the impact of the Reform Act on the effectiveness of the
securities laws and on investor protection, some preliminary
observations can be made:

    The number of companies sued in securities class actions in
     federal court is down for the twelve months following
     passage of the Reform Act.  This may be a temporary
     aberration, however, as the first three months following
     passage of the Act are unrepresentative -- only 15% of the
     cases were filed in this quarter.  Plaintiffs' lawyers may
     have been hesitant to test unchartered waters.  More time is
     necessary to determine whether the number of cases has been

     affected by the Reform Act.

    Most securities class action complaints filed in federal
     court post-Reform Act appear to contain detailed allegations
     specific to the action.  Few appear to be cookie-cutter
     complaints and a substantial majority include allegations
     beyond a mere failed forecast.-[2]-

    The race to the courthouse has slowed somewhat.  Although a
     few cases were filed within days of the release of negative
     news by the issuer, most were filed after at least several
     weeks had passed.


    Secondary defendants, such as accountants and lawyers, are
     being named much less frequently in securities class
     actions.  It is unclear whether this decline can be
     attributed to the Reform Act.  It may be the result of the
     Supreme Court's 1994 decision in the Central Bank case which
     eliminated private liability for  aiding and abetting.




---------FOOTNOTES----------
     -[2]-The staff, however, did no comparative review of pre-
Reform Act complaints.
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    The discovery stay imposed by the Act during the pendency of
     a motion to dismiss, coupled with the heightened pleading
     standards required by the Act, has made it more difficult
     for plaintiffs to bring and prosecute securities class
     action lawsuits.  No case to date has been dismissed without
     leave to amend because of the new pleading standards. 
     Plaintiffs who are unable to uncover evidence of wrongdoing
     sufficient to meet those new standards prior to filing their
     complaints, however, may find it difficult to amend their
     complaints without access to discovery.


    Institutional investors have not yet actively sought to
     become involved in securities class actions, which continue
     to be controlled by plaintiffs' law firms.

    The number of state filings reportedly has increased. 
     Moreover, many of the state cases are filed parallel to a
     federal court case in an apparent attempt to avoid
     provisions of the Reform Act.

    While the allegations contained in state court complaints
     are generally similar to those of the federal complaints,
     state complaints having no parallel federal action are more

     likely to be based solely on forecasts which have not
     materialized and less likely to include insider trading
     allegations. 

    Companies have been reluctant to provide significantly more
     forward-looking disclosure beyond what they provided prior
     to enactment of the safe harbor.  Companies are primarily
     concerned about the lack of judicial guidance as to the
     sufficiency of the required "meaningful" cautionary language
     and about potential liability under state law, where the
     statements may not be protected by the federal safe harbor. 



     B.   Background.

     The Reform Act became effective on December 22, 1995,
revising both substantive and procedural law governing private
actions under the federal securities laws.  For the most part,
the Reform Act applies only to private actions.  Except with
respect to its authority to bring aiding and abetting actions,
the Act does not directly affect the law enforcement program of
the Securities and Exchange Commission.

     The  Reform Act was intended to address concerns that had
been raised about abuses believed to be associated with
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securities class action lawsuits.-[3]-  While the Statement
of Managers that accompanied the Conference Committee Report
acknowledges the importance of private securities litigation to
"promote public and global confidence in our capital markets and
help to deter wrongdoing," it also notes that this important
system can be undermined by "abusive and meritless
suits."-[4]-  In an effort to protect "investors, issuers,
and all who are associated with our capital markets from abusive
securities litigation," and to "discourage frivolous
litigation,"-[5]- the Reform Act made many changes to the
system of private litigation, and particularly class action

litigation, under the federal securities laws.

     Proponents of the Reform Act, including accountants,
securities firms, and the high-technology industry, believed that
they were victims of meritless lawsuits which alleged "fraud by
hindsight."  In such suits, a sudden drop in a company's stock
price was claimed to be evidence that the issuer and its agents
had been misrepresenting the company's operations or performance
in order to inflate its stock price.  Critics of securities class
actions alleged that plaintiffs' lawyers were filing such suits
against "deep pocket" defendants -- whether or not these
defendants actually committed fraud -- solely for their

settlement value.-[6]-  According to the Report of the House
Committee on Commerce, plaintiffs' lawyers were filing suits
"citing a laundry list of cookie-cutter complaints" against
companies "within hours or days" of a substantial drop in the
company's stock price.-[7]-  Once the complaint was filed,
plaintiffs' lawyers were free to impose "massive costs" on
defendants in the form of discovery requests.-[8]-  As noted
in the Report of the Senate Committee on Banking, Housing, and
Urban Affairs, the availability of wide-ranging discovery gave


---------FOOTNOTES----------
     -[3]-Statement of Managers -- The "Private Securities
Litigation Reform Act of 1995," H.R. Rep. 104-369, 104th Cong.
1st Sess. at 31); 141 Cong. Rec. H13699 (daily ed. Nov. 28, 1995)
("Statement of Managers").

     -[4]-Id.

     -[5]-Id.

     -[6]-Id. at 32.

     -[7]-H.R. Rep. 104-50, 104th Cong., 1st Sess. 16 (1995) ("H.
Rep.").

     -[8]-H. Rep. at 16.
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plaintiffs' lawyers incentives to "file [frivolous] lawsuits in
order to conduct discovery in the hopes of finding a sustainable
claim not alleged in the complaint."-[9]-  Faced with the
cost of discovery, defendants contended that "the pressure to
settle becomes enormous,"-[10]- thus forcing even "innocent
parties to settle frivolous securities class
actions."-[11]-  Even if a company were willing to bear the
expense of litigation, critics charged that companies inevitably
settled rather than face a potentially ruinous jury
verdict.-[12]- 


     Opponents of the Reform Act, while generally recognizing the
need for some reforms, countered that the empirical evidence did
not support these charges, and that in fact, the securities class
action served an essential role in protecting investors from
fraud.-[13]-  Putting obstacles in the way of private
enforcement of the securities laws would cause investors to lose
confidence in the markets.-[14]- 


---------FOOTNOTES----------
     -[9]- S. Rep. 104-98, 104th Cong., 1st Sess. 14 (1995) ("S.
Rep.").

     -[10]-H. Rep. at 17.

     -[11]-Statement of Managers at 37.

     -[12]-H. Rep. at 17.

     -[13]-Prepared Statement of William S. Lerach, Before the
Subcommittee on Telecommunications and Finance, House Committee
on Commerce on Legislation on Securities Fraud Litigation,
January 19, 1995 at 45 (testifying on behalf of the National
Association of Securities and Commercial Law Attorneys
("NASCAT")) ("we believe the empirical case for the major changes
in the [House bill] has not been made and those proposals would
leave those defrauded in the securities markets essentially
without a remedy"); Prepared Statement of Sheldon H. Elsen,
Hearing on Securities Litigation Reform Proposals: Subcommittee
on Securities, Senate Committee on Banking, Housing, and Urban
Affairs, March 22, 1995, at 195 (representing the New York Bar
Association) (predicting that obstacles to securities class
actions would lead to "many more violations of the law").

     -[14]-Prepared Statement of David J. Guin, Hearing on
Securities Litigation Reform Proposals: Subcommittee on
Securities, Senate Committee on Banking, Housing, and Urban
Affairs, March 22, 1995, at 193 (representing NASCAT) (arguing
that strengthened securities laws are necessary to maintain
investor confidence).
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     The second theme driving the debate over securities
litigation reform was the question of how successful securities
class actions were in protecting investors.  In particular,
concerns were aired that plaintiffs' lawyers, rather than
faithfully representing investors, were serving primarily their
own interests.  Critics charged that the plaintiff class action
law firms dominated the actions brought by the "100 share
plaintiff," setting their own fees, making all strategic
decisions, and often reaching settlements that favored the law
firm at the expense of investors.  The Senate Report states:


          Under the current system, the initiative for
          filing 10b-5 suits comes almost entirely from the
          lawyers, not from genuine investors.  Lawyers
          typically rely on repeat, or "professional,"
          plaintiffs who, because they own a token number of
          shares in many companies, regularly lend their
          names to lawsuits.  Even worse, investors in the
          class usually have great difficulty exercising any
          meaningful direction over the case brought on
          their behalf.  The lawyers decide when to sue and
          when to settle, based largely on their own
          financial interests, not the interests of the

          purported clients.-[15]-

The Senate Report further charged that plaintiffs' lawyers
recruited these "professional plaintiffs" through "the payment of
a `bonus' far in excess of their share of any
recovery."-[16]-  With plaintiff in pocket, the Senate
Report observed, plaintiffs' lawyers often rushed to the
courthouse after spending a "minimal time preparing [the]
complaint[]" because "[c]ourts traditionally appoint the lead
plaintiff and lead counsel in class action lawsuits on a `first
come, first serve' basis."-[17]-  Congress also found
abuses in the settlement process.  Plaintiffs' lawyers typically
received a third of the settlement, with the plaintiffs often

receiving pennies on the dollar.-[18]-  Members of the




---------FOOTNOTES----------
     -[15]-S. Rep. at 6.

     -[16]-S. Rep. at 10.

     -[17]-Id.

     -[18]-H. Rep. at 17.
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plaintiff class often received inadequate notice of the terms of
the settlement.-[19]-

     In response to these perceived abuses, Congress enacted a
series of provisions intended to "empower investors so that they
-- not their lawyers -- exercise primary control over private
securities litigation."-[20]-  As we discuss in detail
below, the Reform Act restricts who can serve as the class
representative, adopting a presumption that the investor with the
largest damage claim is the best representative of the class and
should serve as the "lead plaintiff."  The Act also seeks to

insure that members of the plaintiff class will receive adequate
notice of both the class action and any settlement of the suit. 
In addition, the Act attempts to make it more difficult for
plaintiffs to sue a company and force a settlement simply because
its stock price dropped.  It does this by adopting stringent new
pleading standards and a safe harbor for so-called "forward-
looking statements."  The Act also protects "secondary"
defendants, such as accountants and corporate counsel, by
adopting a system of proportionate, rather than joint and
several, liability.  The Act further protects defendants by
imposing a discovery stay when a motion to dismiss the complaint
has been filed, thus sparing defendants the costs of discovery

until the court has determined that the allegations of the
complaint have merit.

     Critics of these provisions raised concerns that they may
tend to frustrate meritorious lawsuits, thus diluting the
deterrent effect of private litigation.  In his veto message, the
President supported the goals of the legislation "to end
frivolous lawsuits and to ensure that investors receive the best
possible information by reducing the litigation risk to companies
that make forward-looking statements."-[21]-  But he stated
that he was unwilling to sign legislation that would have the
effect of "closing the courthouse door on investors who have
legitimate claims . . . .  Those who are victims of fraud should







---------FOOTNOTES----------
     -[19]-Statement of Managers at 36.

     -[20]-S. Rep. at 4.

     -[21]-141 Cong. Rec. H15214 (daily ed. Dec. 20, 1995) ("Veto
Message").
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have recourse to the courts.  Unfortunately, changes made in this
bill during conference could well prevent that."-[22]-

     In the sections that follow, this Report assesses the impact
of these changes on securities class action litigation and
investor protection.  The Report begins by summarizing the
provisions of the Reform Act.  The Report then evaluates the
effect of the Act on the quantity and quality of securities class
actions that have been brought following its enactment.  The
Report also considers the effect of the safe harbor for forward-
looking statements.  Next, the Report analyzes the decisions to

date under the Act and discusses some practical issues that have
been raised by the implementation of the Act.  Finally, the
Report discusses the reported increase in state court securities
class actions since passage of the Act.


III. SUMMARY OF PRINCIPAL PROVISIONS OF THE REFORM ACT.

     The most significant measures instituted by the Reform Act
are:  (i) a statutory "safe harbor" for forward-looking
statements; (ii) heightened pleading standards; (iii) a stay of
discovery during the pendency of a motion to dismiss; (iv) a

system of proportionate, as opposed to joint and several,
liability for defendants in private actions who are not found to
have "knowingly" committed a violation of the securities laws;
(v) mandatory sanctions for violations of Rule 11(b) of the




---------FOOTNOTES----------
     -[22]-Id.  The President's veto message expanded on this
point:

     While it is true that innocent companies are hurt by
     frivolous lawsuits and that valuable information may be
     withheld from investors when companies fear the risks
     of such suits, it is also true that there are innocent
     investors who are defrauded and who are able to recover
     their losses only because they can go to court.  It is
     appropriate to change the law to ensure that companies
     can make reasonable statements and future projections
     without getting sued every time earnings turn out to be
     lower than expected or stock prices drop.  But it is
     not appropriate to erect procedural barriers that will
     keep wrongly injured persons from having their day in
     court.

Id. at H15215.
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Federal Rules of Civil Procedure;-[23]- and (vi) a
requirement that courts choose a lead plaintiff in securities
class actions to represent the class, with the presumption that
the most capable representative is the person or group with the
largest financial interest in the case.  The Act also expressly
provides authority to the Commission to bring actions based on
aiding and abetting.

     In addition, the Reform Act places limitations on damages in
certain cases, eliminates securities fraud as a predicate offense
in a civil RICO action, and requires auditors to report promptly

illegal acts discovered during an audit.  Finally, the Act
eliminates the payment of bonuses to named plaintiffs, restricts
settlements under seal, provides for enhanced disclosure of
settlement terms, modifies the manner of awarding attorneys'
fees, prohibits brokers and dealers from receiving referral fees,
and makes a number of other changes.

     The following is a summary of those provisions of the Reform
Act that either have raised issues during the course of the first
year following the adoption of the Act or are expected to have a
significant impact on private litigation under the Act. 


     A.   Safe Harbor for Forward-Looking Statements.

     One of the key provisions of the Reform Act is the statutory
safe harbor for forward-looking statements.-[24]-  This
provides shelter from private liability under the federal
securities laws for projections and other forward-looking
statements that were not known to be false when made or that were
accompanied by "meaningful" cautionary statements.  Meaningful
cautionary statements must identify important factors that could





---------FOOTNOTES----------
     -[23]-Rule 11(b) provides, in relevant part, that by
presenting to the court a pleading, written motion or other
paper, the attorney is certifying that the claims, defenses and
other legal contentions therein are warranted by existing law or
by a nonfrivolous argument for the extension, modification or
reversal of that law or the establishment of new law; and that
the allegations and other factual contentions have, or after
discovery are likely to have, evidentiary support.

     -[24]-A safe harbor is provided for private actions brought
under both the Securities Act of 1933 and the Securities Exchange
Act of 1934.  1933 Act  27A; 1934 Act  21E.
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cause actual results to differ from the projected
ones.-[25]-

     The purpose of the safe harbor is to encourage companies to
provide projections and other forward-looking information to
investors by giving them some protection from lawsuits if the
projections do not prove accurate.  The Statement of Managers
quotes testimony from former SEC Chairman Richard Breeden that:
"Shareholders are also damaged due to the chilling effect of the
current system on the robustness and candor of disclosure . . . .

Understanding a company's own assessment of its future potential

would be among the most valuable information shareholders and
potential investors could have about a firm."-[26]-  The
Conference Committee stated that it had adopted a statutory safe
harbor "to enhance market efficiency by encouraging companies to
disclose forward-looking information."-[27]-

     Specifically, the safe harbor provides protection from
liability in any private action under the federal securities laws
as a result of any forward-looking statement,-[28]- whether
written or oral, if --

          (a) the statement (i) is identified as a forward-

          looking statement, and (ii) is accompanied by
          meaningful cautionary statements identifying
---------FOOTNOTES----------
     -[25]-The safe harbor provides for a specific stay of
discovery (other than discovery directed to the applicability of
the safe harbor) during the pendency of any motion for summary
judgment based on the safe harbor.

     -[26]-Statement of Managers at 42-43.

     -[27]-Id. at 43.

     -[28]-For purposes of the safe harbor, "forward-looking
statement" is defined as: 

     (A) a statement containing a projection of revenues,
     income or other financial items; (B) a statement of
     management's plans and objectives for future operations
     (including products or services); (C) a statement of
     future economic performance; (D) a statement of the
     assumptions underlying any of such statements; (E) any
     report issued by an outside reviewer retained by the
     issuer that assesses a forward-looking statement made
     by the issuer; or (F) a statement containing
     projections or estimates of such other items as the
     Commission may specify.
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          important factors that could cause actual results
          to differ materially from those in the forward-
          looking statement; or

          (b) the plaintiff fails to prove that the
          statement was made with actual knowledge that it
          was false or misleading.-[29]-

The safe harbor is limited with respect to the type of person
making the statement, applying primarily to statements by or
about reporting companies.-[30]-  There are also a number

of important exclusions from the protection of the safe
harbor.-[31]-

---------FOOTNOTES----------
     -[29]-The safe harbor also provides that a forward-looking
statement is protected if it is immaterial.

     -[30]-The safe harbor is limited to forward-looking
statements made by (1) an issuer that is a reporting company; (2)
an officer, director or employee of such an issuer; (3) an
outside reviewer retained by such an issuer making a statement on
behalf of such issuer; or (4) an underwriter with respect to
information provided by such an issuer.  In the case of an oral
statement, the requirement for cautionary language is deemed
satisfied if the speaker identifies a readily available written
document that contains the required cautionary language.  The
speaker must also make a cautionary statement that the particular
oral statement is forward-looking and that actual results could
differ materially.

     -[31]-Excluded from the safe harbor are:

     (1) statements (A) made within 3 years after the maker
     of the statement has been found responsible for certain
     securities law or related violations; (B) made by
     "blank-check" companies; (C) made by "penny stock"
     issuers; (D) made in connection with rollup
     transactions; and (E) made in connection with going
     private transactions; as well as

     (2) statements that are (A) included in GAAP financial
     statements; (B) made by investment companies; (C) made
     in connection with a tender offer; (D) made in
     connection with an initial public offering: (E) made by
     partnerships and other direct participation investment
     programs; (F) made in 1934 Act  13(d) reports of
     beneficial ownership.

The Commission may, by rule or regulation, expand the scope of
the statutory safe harbor.
==========================================START OF PAGE======
     The two prongs of the safe harbor operate independently
(i.e., the defendant prevails if the forward-looking statement is
accompanied by appropriate cautionary disclosure or if the
plaintiff fails to establish actual knowledge of falsity). 
Unless the plaintiff can refer to subsequent events or other
sources of information to allege facts demonstrating that the
forward-looking statements were false or that the cautionary
statements themselves were misleading, the safe harbor
contemplates that courts will dismiss the case without any
inquiry into the defendants' state of mind.-[32]-


     B.   Heightened Pleading Standards.

     Under the Reform Act, plaintiffs must meet strict new
pleading standards.  The Statement of Managers found that the
pleading requirements set forth in Rule 9(b) of the Federal Rules
of Civil Procedure had not "prevented abuse of the securities
laws by private litigants."-[33]-  Furthermore, the courts
of appeals had interpreted the rule in conflicting ways,
"creating distinctly different standards among the
circuits."-[34]-  The Conference Committee adopted this
strict pleading standard for private securities lawsuits "based
in part on the pleading standard of the Second Circuit, * * *



---------FOOTNOTES----------
     -[32]-The Statement of Managers explains, at 44:

     The use of the words "meaningful" and "important
     factors" are intended to provide a standard for the
     types of cautionary statements upon which a court may,
     where appropriate, decide a motion to dismiss, without
     examining the state of mind of the defendant.  The
     first prong of the safe harbor requires courts to
     examine only the cautionary statement accompanying the
     forward-looking statement.  Courts should not examine
     the state of mind of the person making the statement.

     It should be noted that one of the issues upon which the
President based his veto of the bill was his concern that the
discussion of the safe harbor in the Statement of Managers,
which, he noted, would be used by the courts as a guide to the
intent of Congress, "attempts to weaken the cautionary language
that the bill itself requires."  As a result, he said, "investors
[may] find their legitimate claims unfairly dismissed."  Veto
Message at H15215.

     -[33]-Statement of Managers at 41.

     -[34]-Id.
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regarded as the most stringent pleading standard."-[35]- 
Specifically, the Reform Act provides that where the plaintiff
files a complaint in a private action under the Exchange Act
seeking money damages that are available only on a showing that
the defendant acted with a particular state of mind, the
complaint must "state with particularity facts giving rise to a
strong inference that the defendant acted with the required state
of mind."-[36]-

     The Reform Act also requires a plaintiff in a private action
under the Exchange Act to specify each statement alleged to have

been misleading and the reasons why the statement is misleading. 
If an allegation is made on information and belief, the plaintiff
must state with particularity all facts on which the belief is
formed.-[37]-  The court is required to dismiss a complaint
that does not meet these statutory pleading
requirements.-[38]-

     C.   Stay of Discovery During the Pendency of a Motion to
          Dismiss.

     In order to avoid the high costs of discovery when the
plaintiff cannot meet the new pleading standards, the Reform Act

provides for a stay of discovery during the pendency of any
motion to dismiss unless the court finds that particularized
discovery is necessary to preserve evidence or prevent undue
prejudice.-[39]-  The Statement of Managers noted that the
House and the Senate had heard testimony that discovery in




---------FOOTNOTES----------
     -[35]-Id.

     -[36]-1934 Act  21D(b)(2).  In private actions under both
the Exchange Act and the Securities Act, when requested by a
defendant, the court is required to submit written
interrogatories to the jury on the question of the defendant's
state of mind.  The application of this provision is limited to
actions in which money damages may be recovered, and, in the case
of actions under the Securities Act, actions in which such
damages may be recovered only on proof of the defendant's state
of mind.  1933 Act  27(d); 1934 Act  21D(d).

     -[37]-1934 Act  21D(b)(1).

     -[38]-1934 Act  21D(b)(3)(A).

     -[39]-1933 Act  27(b)(1); 1934 Act  21D(b)(3)(B).
==========================================START OF PAGE======
securities class actions "often resembles a fishing
expedition."-[40]-  The cost of this discovery "often
forces innocent parties to settle frivolous securities class
actions."-[41]-

     D.   Lead Plaintiff Provision; Notice to Class.

     Under the Reform Act, the court must appoint a lead
plaintiff from among class members who seek to act as such, with
a procedure for national publication of a notice advising class
members of the filing of the action.  There is a rebuttable

presumption that the most adequate plaintiff is the class member
or group of members that has the largest financial interest in
the relief sought in the case.-[42]-  That presumption may
be rebutted by proof that the presumptive plaintiff will not
fairly and adequately protect the interests of the class or is
subject to unique defenses foreclosing adequate
representation.-[43]-  The lead plaintiff selects counsel
for the class, subject to court approval.

     This provision was intended in part to discourage the "race
to the courthouse" by plaintiffs' counsel to be the first to file
a securities class action complaint.  Noting that courts often

appoint as lead plaintiff and class counsel those who are the
first to file a complaint, the Statement of Managers states that
the Conference Committee believed that "the selection of the lead
plaintiff and lead counsel should rest on considerations other
than how quickly a plaintiff has filed its complaint."  Hence,
the Act allows any class member to move to be appointed lead
plaintiff.  Further, believing that greater involvement by
institutional investors "will ultimately benefit shareholders and
assist courts by improving the quality of representation in
securities class actions," the Conference Committee sought "to
increase the likelihood that institutional investors will serve
as lead plaintiffs by requiring courts to presume that the member





---------FOOTNOTES----------
     -[40]-Statement of Managers at 37.

     -[41]-Id.

     -[42]-1933 Act  27(a)(3); 1934 Act  21D(a)(3).

     -[43]-A plaintiff is entitled under appropriate
circumstances to conduct discovery as to the adequacy of the
presumptively most adequate plaintiff.
==========================================START OF PAGE======
of the purported class with the largest financial stake in the
relief sought is the `most adequate plaintiff.'"-[44]-

     E.   Sanctions; Security for Payment of Costs.

     The Reform Act requires mandatory sanctions for violations
of Rule 11(b) of the Federal Rules of Civil
Procedure.-[45]-  Finding that Rule 11 "has not deterred
abusive securities litigation,"-[46]- the Conference
Committee determined to "give teeth" to the rule by "requiring
the court to include in the record specific findings, at the

conclusion of the action, as to whether all parties and all
attorneys have complied with each requirement of Rule
11(b)."-[47]-  Thus, upon final adjudication, the court is
required to make a finding of compliance with Rule 11(b) with
respect to any complaint, responsive pleading, or dispositive
motion.  Failure to comply results in mandatory sanctions against
a party or an attorney.

     Payment of the other party's reasonable attorneys' fees and
expenses directly relating to the violation is presumed to be the
appropriate sanction,-[48]- except that upon the
substantial failure of a complaint to comply with Rule 11(b), the

amount of the sanction is presumed to be the defendant's
reasonable attorneys' fees and expenses incurred in the





---------FOOTNOTES----------
     -[44]-Statement of Managers at 34.  The Act further provides
that a person is prohibited from being a lead plaintiff, or an
officer, director or fiduciary of a lead plaintiff, in more than
five class actions in any three-year period, except as permitted
by the court consistent with the purposes of the section.  1933
Act  27(a)(3)(B)(vi); 1934 Act  21D(a)(3)(B)(vi).

     -[45]-1933 Act  27(c); 1934 Act  21D(c).  

     -[46]-Statement of Managers at 39.

     -[47]-Id.

     -[48]-Reasonable attorneys' fees are presumed to be the
appropriate sanction for a violation unless the party or attorney
shows that (i) the award would impose an unreasonable burden and
would be unjust, and the failure to make such an award would not
impose a greater burden on the party in whose favor sanctions are
to be imposed; or (ii) the violation was de minimis.
==========================================START OF PAGE======
action.-[49]-  In order to ensure that the sanctions will
be paid, the court may require an undertaking for the payment of
fees and expenses from the plaintiff class or from the defendant
or from the attorneys for either.-[50]-

     F.   Proportionate Liability; Contribution; Settlement
          Discharge.

     The Reform Act institutes a system of proportionate, as
opposed to joint and several, liability for "covered defendants"
in private actions who are not found to have "knowingly committed

a violation" of the securities laws.-[51]-  In proposing
this measure, the Conference Committee found that: "One of the
most manifestly unfair aspects of the current system of
securities litigation is its imposition of liability on one party
for injury actually caused by another."-[52]-  The system
of joint and several liability "creates coercive pressure for
entirely innocent parties to settle meritless claims rather than
risk exposing themselves to liability for a grossly
disproportionate share of the damages in the case," the Committee
stated.-[53]-

     Under the Act, "covered defendants"-[54]- are jointly


---------FOOTNOTES----------
     -[49]-This difference in treatment between a complaint and
other papers was one of the reasons given for the President's
veto of the bill.  The President objected that the provision
treated plaintiffs "more harshly than defendants in a manner that
comes too close to the `loser pays' standard" that he opposed. 
Veto Message at H15215.

     -[50]-1934 Act  21D(a)(8).  The provision erroneously
refers to fees and expenses that may be awarded under "this
subsection."  However, the subsection does not expressly provide
for any award of fees or expenses.

     -[51]-1934 Act  21D(g).

     -[52]-Statement of Managers at 37.

     -[53]-Id. at 37-38.

     -[54]-Covered defendants are defined as all defendants in
actions brought under the Exchange Act and outside directors in
actions under the Securities Act.  The liability of an outside
director under subsection (e) of Section 11 of the Securities Act
must be determined in accordance with the new provisions of the
Exchange Act regarding proportionate liability.  1933 Act
                                                   (continued...)
==========================================START OF PAGE======
and severally liable only if they "knowingly" commit a violation
of the securities laws.-[55]-  For violations that are not
made "knowingly," such defendants are proportionately liable
based on the defendant's percentage of responsibility.  If a
defendant's share cannot be collected from that defendant or from
a jointly and severally liable defendant, each proportionately
liable defendant is then liable for a proportionate share of the
uncollectible amount, up to an amount equal to an additional 50%
of such defendant's initial share.-[56]-

     The Act provides an express right of contribution in private

actions under the Exchange Act, with a six-month statute of
limitations for contribution claims.  The Act also expressly
provides for the discharge of liability of a settling defendant
in private actions under the Exchange Act.  Upon a settlement,
the judgment that may be obtained against the other non-settling
defendants is reduced by the greater of the settling party's
percentage of responsibility or the amount actually paid.

     There have been no judicial decisions to date regarding the
proportionate liability provision.

     G.   Limitation on Damages.




---------FOOTNOTES----------
     -[54]-(...continued)
 11(f).  The cross-reference in this provision to the
proportionate liability provisions of the Exchange Act is
erroneous.

     -[55]-The Act provides that a defendant "knowingly" commits
a violation of the securities laws if the defendant (i) makes an
untrue statement of a material fact, with actual knowledge that
the representation is false, or omits to state a fact necessary
in order to make the statement made not misleading, with actual
knowledge that, as a result of the omission, one of the material
representations of the defendant is false, and persons are likely
to reasonably rely on that misrepresentation or omission; or (ii)
in cases not involving false representations, the defendant
engages in conduct with actual knowledge of the facts and
circumstances that make such conduct a violation of the
securities laws.  1934 Act  21D(g)(10)(A).

     -[56]-Also, where the plaintiff is an individual whose net
worth is less than $200,000, and the plaintiff's damages were
more than 10% of his or her net worth (as defined), the
proportionately liable defendants are jointly and severally
liable for any uncollectible amount.
==========================================START OF PAGE======
     In cases in which a plaintiff seeks to establish damages by
reference to the market price of a security, the Reform Act
limits the plaintiff's damages to the difference between the
price paid by the plaintiff and the mean value of the security
during the 90-day period following correction of the misstatement
or omission.-[57]-    This provision was intended to
rectify the uncertainty in calculating damages by providing a
"look back" period which, the Committee contended, would limit
damages "to those losses caused by the fraud and not by other
market conditions."-[58]-


     The Reform Act also provides a limitation on damages in
certain cases brought under Section 12(2) of the Securities Act. 
Under the Reform Act, a defendant may avoid rescission under
Section 12(2) and reduce the damages upon proof that part of the
plaintiff's loss was the result of factors unrelated to the
fraud.-[59]-

     H.   Auditor Detection and Disclosure of Fraud.

     The Reform Act imposes a requirement on auditors who detect
or otherwise become aware of illegal acts by issuers to report
such acts to the issuer's board and, if the board does not take

appropriate action, report such acts to the
Commission.-[60]-  On March 12, 1997, the Commission
adopted revisions to its rules to implement the reporting
requirements.-[61]-  In sum, the rules (i) provide that
these reports will be non-public and exempt from disclosure under
the Freedom of Information Act to the same extent as the
Commission's investigative records, (ii) designate the
Commission's Office of Chief Accountant as the appropriate office
to receive the reports, and (iii) set forth the required contents
of the issuer's notice to the Commission.

     I.   RICO Liability.


     Under the Reform Act, no person may rely upon conduct that
would have been actionable as fraud in the purchase or sale of

---------FOOTNOTES----------
     -[57]-1934 Act  21D(e).

     -[58]-Id.

     -[59]-1933 Act  12(b).

     -[60]-1934 Act  10A.

     -[61]-Securities Exchange Act Release No. 34-38387.
==========================================START OF PAGE======
securities to establish a predicate offense in a civil RICO
action.  The prohibition does not apply if the defendant has been
criminally convicted in connection with the fraudulent securities
activities.-[62]-

     There have been several judicial decisions regarding the
retroactive application of this provision.  Most courts have
determined that the provision does not apply to actions brought
prior to enactment of the Reform Act.-[63]-

     J.   Aiding and Abetting in Commission Actions.


     The Reform Act authorizes the Commission to bring an
enforcement action against any person who knowingly provides
substantial assistance to another in violation of a provision of
the Exchange Act.-[64]-  Such a person is deemed to be in
violation of the provision to the same extent as the person
assisted.

     This provision was intended to confirm the Commission's
authority to pursue aiders and abettors after the Supreme Court's
decision in Central Bank of Denver, N.A. v. First Interstate Bank
of Denver, N.A.,-[65]- which held that there was no aiding

and abetting liability in a private right of action.  By limiting
this provision to persons who act knowingly, however, the
Commission's authority may be more limited than it was assumed to
be prior to Central Bank.


IV.  EFFECT OF THE REFORM ACT ON THE NUMBER AND NATURE OF FEDERAL
     CASES FILED.

     A.   The Numbers.

     We have identified 105 companies sued in federal securities
class actions during the first year following passage of the


---------FOOTNOTES----------
     -[62]-18 U.S.C.  1964(c).

     -[63]-See, e.g., In re Prudential Sec. Inc. Ltd. Partner.
Lit., 930 F. Supp. 68, 80-81 (S.D.N.Y. 1996); District 65 v.
Prudential Sec., 925 F. Supp. 1551, 1570 (N.D. Ga. 1996).

     -[64]-1934 Act  20(f).  The provision applies only to
Commission actions under Section 21(d)(1) or (3) of the Exchange
Act.

     -[65]-511 U.S. 164 (1994).
==========================================START OF PAGE======
Reform Act.-[66]-  By contrast, Securities Class Action
Alert ("SCAA") has reported that approximately 153 companies were
sued in federal securities class actions during 1993, 221 during
1994, and 158 during 1995.-[67]-  Accordingly, there is a
34% drop-off from the number of companies sued in federal court
class actions in 1995, a 52% drop-off from the number of suits in
1994, and a 31% drop-off from the number of suits in 1993.  At
the same time, there has been an increase in the number of
reported state securities class actions.-[68]-

     A recent study by the National Economic Research Associates

("NERA") finds that following an initial decline in companies
sued in securities class actions, the number of new suits in
recent months is now on pace with the number of suits last
year.-[69]-  According to the NERA Study, no significant
decline in federal class action filings has occurred since the
passage of the Reform Act.  NERA arrives at this conclusion by
excluding the number of class actions filed during January to
March of 1996, the first three months of the Act, and focusing
solely on the number of class actions filed between April and
October 1996.  According to NERA, 81 suits were filed during this
time compared to 81 suits filed during the same period in 1995. 
As NERA itself notes, however, going back to 1994, 135 cases were

filed during the period from April to October (60% more than the
81 filed during the same period in 1996); 97 were filed in 1993
(a 20% increase); and 125 were filed in 1992 (a 54% increase).

     The first three months following passage of the Reform Act
are unrepresentative.  It has been reported that many class
actions were rushed in under the wire in December 1995 to avoid
the strictures of the Reform Act.  Other lawsuits were likely
delayed by attorneys hesitant to test unchartered waters as the


---------FOOTNOTES----------
     -[66]-The leading jurisdictions for securities class action
suits are California (24), New York (18), Florida (10),
Massachusetts (8), and Texas (8).

     -[67]-The Commission's Office of Economic Analysis ("OEA")
identified 148 class actions filed in 1995, 200 in 1994, and 142
in 1993.  Unlike SCAA, OEA limited its count to "fraud-on-the-
market" class actions.

     -[68]-See Section VII below.

     -[69]-Denise N. Martin, Vinita M. Juneja, Todd S. Foster &
Frederick C. Dunbar, Recent Trends IV: What Explains Filings and
Settlements in Shareholder Class Actions?, National Economic
Research Associates (1996), at i ("NERA Study"). 
==========================================START OF PAGE======
first to file under the new Act.  Thus, the drop may be a
temporary aberration caused by a sharp drop in the number of
cases filed during the first few months of the year -- only 15%
of the cases were filed during the first quarter.  More time is
necessary to determine whether the Act will reduce the number of
federal cases.

     We caution against evaluating the effectiveness of the
Reform Act on a purely statistical basis.  Data on the number of
new filings does not point to any clear conclusions as to whether
the Reform Act has eliminated the practices that it targeted.  In

any event, 1996 witnessed a bull market.  This is not an
environment lending itself to the inception, or unraveling, of
fraudulent schemes designed to cook the books and artificially
inflate income.

     B.   The Nature of the Allegations.

     We have reviewed the allegations in each of the 105 federal
securities class actions.  Members of both the plaintiffs' and
defense bar have told us that greater research and investigation
is going into the typical class action complaint and that few are
premised solely on a drop in the stock price. 


     Our review of the complaints filed post-Reform Act suggests
that most complaints do not have the type of glaring errors which
would suggest that they were the product of a hurried word
processing "cut-and-paste."  Few of the complaints (12%) are
based solely on forecasts that have not proved true, while many
are premised on allegations of either insider trading (48%) or
accounting irregularities (43%).-[70]-  A smaller
percentage contain allegations of restatement of previously
reported financial results (18%), government investigations
(15%), or outright Ponzi schemes (2%).  Fourteen percent contain
allegations not fitting into any of the above categories.  The
graph below presents these numbers.







---------FOOTNOTES----------
     -[70]-A recent study found that prior to the Reform Act,
20.7% of securities class actions contained allegations of
insider trading and 33.9% contained allegations of
misrepresentations in financial statements.  Laura E. Simmons,
Cornerstone Research, The Importance of Merit-Based Factors in
10b-5 Litigation, Table 2 (Nov. 14, 1996).
==========================================START OF PAGE======














     C.   The Race to the Courthouse.

     The "race to the courthouse" has slowed somewhat.  We were
able to identify the date for both the end of the class period
and the filing of the first complaint for 96 of the 105
securities class actions filed during 1996.  The average lag time
was 79 days, and the median lag time was 38 days.  By comparison,
NERA has observed that from January 1991 through December 5,
1995, the average lag time was 49 days.  We also observed that
11% of the 96 complaints were filed within one week of the end of

the class period, 21% within two weeks, and 33% within three
weeks.  At the opposite spectrum, 27% of the 96 complaints were
filed three months or more after the end of the class period, and
14% were filed after six months.  The heightened pleading
standards and the lead plaintiff provision are likely responsible
for this slowdown.

     D.   Effect of the Act on Secondary Defendants.

     Congress acted to reduce the liability exposure of secondary
defendants in the Reform Act by replacing the traditional regime
of joint and several liability with a system of proportionate
liability.  To date there have been no cases interpreting this

provision.

     Our review of complaints in the 105 class actions filed
under the Act reveals that accounting firms have been named in
six cases, corporate counsel in no cases, and underwriters in 19
cases.-[71]-  By contrast, a report of the Big Six


---------FOOTNOTES----------
     -[71]-These numbers could increase as plaintiffs begin to
conduct discovery and file amended complaints.  Moreover, even
though these actors are not being named in securities class
                                                   (continued...)
==========================================START OF PAGE======
accounting firms concluded that the number of audit-related suits
filed against these firms for the years 1990 to 1992, was 192,
172, and 141 respectively,-[72]- although these numbers are
not limited to securities class actions.  Moreover, this report
concludes that during these same years the number of cases either
settled or dismissed against the Big Six firms which involved
claims under Section 10(b) of the Securities Exchange Act of 1934
("Exchange Act") was 18, 35, and 58 respectively.-[73]- 
The NERA Study reports that during the period 1991 through June
1996, accountants were defendants in 52 reported settlements (as
opposed to complaints), underwriters were defendants in 80, and

law firms were defendants in 7.-[74]-  Thus, there seems to
be a real decline in the number of lawsuits against secondary
defendants.

     In our discussions with members of the plaintiffs' bar, they
attributed part of this decline to their inability to get
discovery which might reveal misconduct by secondary defendants. 
Secondary defendants are not being named in initial complaints,
and because complaints are customarily met with a motion to
dismiss, discovery can be stayed for a year or more after the
complaint is filed.  The Supreme Court's decision in Lampf,
Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,-[75]-

however, requires that class actions under Section 10(b) of the
Exchange Act be brought within one year from the date that the
plaintiff discovered the alleged fraud.  As a consequence,

---------FOOTNOTES----------
     -[71]-(...continued)
actions they may still face liability exposure.  See, e.g., Karen
Donovan, Bean Counters in a Bind: Trade-Off Expands Duties, NAT'L
L.J., April 29, 1996, at B1 (discussing derivative suit filed
against Ernst & Young L.L.P. for negligent audit).  We note that
underwriters are typically charged with Securities Act Section 11
claims, which impose strict liability (subject to a due diligence
defense) upon underwriters for material misstatements or
omissions in the prospectus.  15 U.S.C.A.  77k(a) (West 1981).

     -[72]-Letter from Mark H. Gitenstein & Andrew J. Pincus,
Mayer Brown & Platt, to Walter P. Schuetze, Chief Accountant,
Securities and Exchange Commission, at 14, Table VIII, (June 11,
1993).

     -[73]-Id. at 16, Table IX.

     -[74]-These numbers, relying on the number of settlements,
rather than the number of times named in a complaint, understate
the litigation burden faced by these defendants.

     -[75]-501 U.S. 350, 364 (1991).
==========================================START OF PAGE======
plaintiffs may find it difficult to name secondary defendants in
either the original or amended complaints.-[76]-  

     The decrease in cases against accountants and lawyers is not
wholly attributable to the Reform Act.  Rather, this decrease may
largely result from the Supreme Court's decision in Central
Bank,-[77]- in which the Court held that a private aiding
and abetting action will not lie under Section 10(b) of the
Exchange Act.  Aiding and abetting was the theory most often
charged against these defendants.  Private plaintiffs now must
allege that these defendants are primarily liable for the fraud,

a standard that is considerably more difficult to both plead and
prove.


V.   UTILIZATION OF THE SAFE HARBOR AND QUALITY OF SAFE HARBOR
     CAUTIONARY STATEMENTS.

     By enacting a safe harbor for forward-looking statements,
Congress intended to encourage companies to provide more and
better disclosure of financial projections and other forward-
looking information to investors.  As noted above, under one
prong of the safe harbor such statements must be identified as

forward-looking and accompanied by "meaningful cautionary"
statements identifying important factors that could cause actual
results to differ materially from those in the forward-looking
statement.-[78]- 


---------FOOTNOTES----------
     -[76]-These difficulties may prove unfounded as the statute
of limitations arguably will not begin to run until plaintiffs
are in a position to obtain knowledge of wrongdoing by the
peripheral actor.  Fidel v. Nat'l Union Fire Ins. Co., 1996 U.S.
App. LEXIS 33388 (9th Cir. Aug. 7, 1996) ("Inquiry notice that
triggers the running of the statute of limitations exists `when a
plaintiff has notice or information of circumstances to put a
reasonable person on inquiry, or has the opportunity to obtain
knowledge from sources open to his [or her] investigation (such
as public records or corporation books).'" (citation omitted)).

     -[77]-511 U.S. 164 (1994).

     -[78]-To date, there have been no judicial decisions
construing the safe harbor provision.  But see Weiner v. Quaker
Oats Co., 928 F. Supp. 1372, 1387 (D.N.J. 1996) (a non-Reform Act
case stating that had the safe harbor been applicable, it would
have provided a basis for dismissing the complaint).  Most of the
complaints filed during the first year following enactment of the
                                                   (continued...)
==========================================START OF PAGE======
     The staff spoke with corporate officers and outside counsel
for issuers.  In addition, the Commission's Division of
Corporation Finance has reviewed forward-looking statements, as
well as their accompanying cautionary language, in the normal
course of its review of issuer filings.  Based on these sources,
the staff believes that, in general, companies have been
reluctant to provide significantly more forward-looking
disclosure than they had prior to enactment of the safe harbor. 
Several reasons have been advanced to account for this
reluctance.  The two most frequently cited reasons are:  (i) the
safe harbor provision is still new and companies are waiting to

see how courts will interpret it and how other companies are
using it; and (ii) fear of state court liability, where forward-
looking statements may not be protected by the federal safe
harbor.  Another often cited reason is a concern that including a
complete list of cautionary statements would be "cumbersome" and
might "water down" the company's disclosures.-[79]-

     We also note that on April 10, 1997, the American
Electronics Association-[80]- sent a letter to Congressman
Thomas J. Bliley, Jr. stating the following:

     [T]he `safe harbor' protections do not apply in state

     courts.  As leaders of our industry, we want to give
     the investing public as much voluntary information as
     possible, so that they may make informed decisions
     about their investments.  Without the protections of

---------FOOTNOTES----------
     -[78]-(...continued)
statute involve forward-looking statements made prior to
enactment.  These statements were not, therefore, made with the
intention of seeking safe harbor protection and the courts have
not been faced with the issue of the sufficiency of cautionary
language that was tailored to conform to the requirements of the
statute.  Furthermore, plaintiffs have argued that the safe
harbor does not apply to statements made prior to the
effectiveness of the Reform Act; this issue, however, remains
undecided.

     -[79]-Other reasons that were offered include the following:

fear of liability in a Commission enforcement action where the
safe harbor is inapplicable; fear of damaged credibility should
projections prove wrong; and difficulty of making projections
where a company has multiple sources of revenues from diverse
businesses. 

     -[80]-The Association represents the electronics, software
and information technology industries.
==========================================START OF PAGE======
     the `safe harbor' provisions of the [Reform Act], we
     cannot do so.  Without a change in the law, the net
     effect is that investors may get less information than
     they need.

The letter was signed by 181 corporate officers.

     Although Companies do not appear to be disclosing much
additional forward-looking information, they do appear to be
seeking safe harbor protection for essentially the same type of
forward-looking information that they disclosed prior to the

Reform Act.  The quality of the cautionary language that they are
using to invoke the safe harbor, however, has been criticized. 
Chairman Levitt expressed dissatisfaction concerning this
cautionary language:  "[R]ather than taking advantage of the new
safe harbor to communicate forecasts more clearly companies are
using even more boilerplate, in the form of cautionary language. 
It appears that the legal requirements of the safe harbor are
being `over-lawyered.'"-[81]-

     The staff will continue to study the safe harbor and
consider what steps might be desirable to encourage companies to
provide more forward-looking information and to improve the

quality of the accompanying cautionary language.


VI.  JUDICIAL DECISIONS AND PRACTICAL PROBLEMS.

     Judicial implementation of the Reform Act is still in its
early stages, with   most judicial decisions at the district
court level.  We have reviewed these decisions and the most
important cases are summarized below.  In addition, we have
identified certain practical problems of litigating under the Act
that have come to light based on the experiences of the first
year following its enactment.


     To date, the reported judicial decisions have mainly
focussed on issues that arise at the beginning of the litigation
process.  These decisions, discussed below, have concerned (i)
the Act's requirements for pleading fraud; (ii) the stay of
discovery during the pendency of a motion to dismiss; and (iii)
the procedure for appointing a lead plaintiff.  In addition, the
Court of Appeals for the Ninth Circuit considered the retroactive


---------FOOTNOTES----------
     -[81]-SEC Chairman Arthur Levitt, Remarks at the 24th Annual
Securities Regulation Institute, San Diego, California (January
23, 1997).
==========================================START OF PAGE======
application of the provision of the Reform Act allowing the
Commission to bring actions based on aiding and abetting.

     There have as yet been no decisions on several other
important provisions of the Act.  These include the adequacy of
cautionary language under the safe harbor for forward-looking
statements, sanctions for violations of Rule 11(b) (other than
one case that simply found no violation), proportionate
liability, and the limitation on damages.

     A.   Cases Involving Pleading Standards.


          1.   Background.

     The Statement of Managers notes that Congressional hearings
had "included testimony on the need to establish uniform and more
stringent pleading requirements."-[82]-  Prior to the
Reform Act, the circuits were split on the issue of securities
fraud pleading requirements.  The Ninth Circuit had the most
liberal pleading standard, allowing scienter to be averred
generally, i.e. simply by saying it exists.-[83]-  By
contrast, the Second Circuit had the strictest pleading standard,
requiring that plaintiffs state facts with particularity and that

these facts give rise to a "strong inference" of fraudulent
intent.

     In response to these concerns, the Conference Committee
adopted language based in part on the pleading standard of the
Second Circuit, then "[r]egarded as the most stringent pleading
standard."-[84]-  The Second Circuit standard was first




---------FOOTNOTES----------
     -[82]-Statement of Managers at 41.

     -[83]-See In re Glenfed Inc. Sec. Litig., 42 F.3d 1541, 1547
(9th Cir. 1994) ("We conclude that plaintiffs may aver scienter
generally . . . that is, simply by saying that scienter
existed."); Robbins v. Hometown Buffet, Inc., 1995 U.S. Dist.
LEXIS 17870 (S.D. Cal. March 16, 1995) (stating that the Glenfed
standard is an "easily met pleading requirement"); Securities
Investor Protection Corp. v. Vigman, 764 F.2d 1309, 1313 (9th
Cir. 1985) ("When considering a Section 10(b) and Rule 10b-5
claim for relief, the court should liberally construe that claim
in order to effectuate the policies underlying the federal
securities laws.").

     -[84]-Statement of Managers at 41.
==========================================START OF PAGE======
announced in Ross v. A.H. Robins Co.-[85]-  There the court
of appeals said:

          It is reasonable to require that the plaintiffs
          specifically plead those events which they assert
          give rise to a strong inference that the
          defendants had knowledge of the [facts] or
          recklessly disregarded their existence.

The language of Section 21D(b)(2) clearly reflects this standard,
although, as noted in the Statement of Managers which accompanied

the Conference Committee Report, the provision was also
"specifically written to conform the language to Rule 9(b)'s
notion of pleading with `particularity.'"-[86]-

     The Reform Act, therefore, brings federal pleading standards
nationwide in line with the highest pleading standard existing
before passage of the Act.  However, the Act leaves the question
of what constitutes a "strong inference" to be decided by the
courts.-[87]-  Under Second Circuit case law, a plaintiff
can adequately plead scienter pursuant to a two prong test by
alleging either:  (1) a "motive" and an "opportunity" on the part
of the defendant to commit fraud; or (2) facts that constitute

strong circumstantial evidence of conscious behavior or
recklessness.-[88]-  Although an amendment that would have

---------FOOTNOTES----------
     -[85]-607 F.2d 545, 558 (2d Cir. 1979), cert. denied, 446
U.S. 946 (1980).

     -[86]-Statement of Managers at 41.

     -[87]-See Melvin R. Goldman, The Reform Act -- One Year
Later:  The Next Generation, Prepared for the 24th Annual
Securities Regulation Institute, January 22 - 24, 1997, San
Diego, CA, at 11 ("While Congress borrowed the `strong inference'
standard from Second Circuit case law, Congress did not say how
this standard could be satisfied and it is not at all clear from
this language alone that Congress intended to import the Second
Circuit's two-part test as the means for satisfying this new
standard.").

     -[88]-Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46,
50 (2d Cir. 1987); Shields v. Citytrust Bancorp., Inc., 25 F.3d
1124, 1128 (2d Cir. 1994).  Motive is defined to include
"concrete benefits that could be realized by one or more of the
false statements and wrongful nondisclosures alleged."  Shields,
25 F.3d at 1130.  Opportunity is defined as "the means and likely
prospect of achieving concrete benefits by the means alleged." 
Id.
==========================================START OF PAGE======
tracked this test had been included in the Senate version of the
bill, the language was dropped from the final version of the
bill.  The Conference Committee explained the deletion of this
language as follows:

          Because the Conference Committee intends to
          strengthen existing pleading requirements, it does
          not intend to codify the Second Circuit's case law
          interpreting this pleading standard.-[89]-

     The Reform Act's heightened pleading standard as construed

in the Statement of Managers was one of the reasons offered by
President Clinton for his veto of the Act.  In his veto message,
President Clinton stated:

          I believe that the pleading requirements of the
          Conference Report with regard to a defendant's
          state of mind impose an unacceptable procedural
          hurdle to meritorious claims being heard in
          Federal courts.  I am prepared to support the high
          pleading standards of the U.S. Court of Appeals
          for the Second Circuit -- the highest pleading
          standard of any Federal circuit court.  But the

          conferees make crystal clear in the Statement of
          Managers their intent to raise the standard even
          beyond that level.  I am not prepared to accept
          that.-[90]-

     Despite the President's concerns, however, a majority of the
cases thus far have adopted the Second Circuit test.  To date, we
are aware of ten written opinions (four in California) in which
district courts have construed the Act's heightened pleading
standards.  Six have adopted the Second Circuit test.  Of these
six, four denied motions to dismiss with respect to pleading
standards, one denied in part and granted in part such a motion,
and one granted the motion.  In the two cases in which the motion

to dismiss was granted, the plaintiffs were given leave to amend
with respect to most allegations.

     Three courts have adopted a standard more stringent than the
Second Circuit test.  They have required plaintiffs to allege
conscious misbehavior -- allegations of 



---------FOOTNOTES----------
     -[89]-Statement of Managers at 41.

     -[90]-Veto Message at H15215.
==========================================START OF PAGE======
motive, opportunity, and recklessness would not suffice. 
Applying this strict test, two of the courts found that the
plaintiffs had adequately pled conscious misbehavior and refused
to grant the motions to dismiss.  The third court dismissed the
complaint but gave leave to amend with respect to most of the
allegations.

     In the ninth case, the court construed the language of the
statutory pleading standard as written without reference to prior
case law, dismissing the complaint with leave to amend.  Although
no reported case as yet has been dismissed without leave to

amend, which would shut the courthouse door to the plaintiffs,
these decisions make clear that the threshold established by the
new pleading standard is at least as high as the Second Circuit
test.

          2.   Cases Adopting the Second Circuit Test for
               Pleading Facts Giving Rise to a Strong Inference.

     Six of the cases that have addressed the new pleading
standards have adopted, in large part, the Second Circuit test
for determining when a complaint has adequately stated with
particularity facts giving rise to a strong inference that the

defendant acted with the required state of mind.  These courts
have looked to (i) motive and opportunity, or (ii) circumstantial
evidence of conscious misbehavior or recklessness, in assessing
the sufficiency of a complaint.

               a.   Marksman Partners, L.P. v. Chantal
                    Pharmaceuticals Corp.-[91]-

     The complaint in this case alleged that Chantal
Pharmaceuticals and its Chairman and CEO, Chantal Burnison,
engaged in a scheme to boost the company's share price. 
Specifically, the complaint alleged that Chantal violated
generally accepted accounting principles ("GAAP") by immediately

recognizing millions of dollars in sales revenue on items that
were sold on consignment.-[92]-  As Chantal's stock price
began to rise, the complaint alleges, the company made a private
placement of common and preferred stock totaling $7,350,000, and





---------FOOTNOTES----------
     -[91]-927 F. Supp. 1297 (C.D. Cal. 1996).

     -[92]-Id. at 1302.
==========================================START OF PAGE======
Burnison sold 300,000 shares of her own personally held stock,
netting in excess of $6,300,000.-[93]-

     The defendants moved to dismiss, arguing that Marksman
failed to satisfy the Reform Act's heightened pleading standard. 
Recognizing that the Act "leaves little doubt, however, that the
lenient GlenFed standard [formerly applied in the Ninth Circuit]
can no longer be said to constitute the sum of scienter pleading
requirements,"-[94]- the court turned to the two prong
Second Circuit test for guidance.  The defendants argued that the
Act had rejected the Second Circuit's "motive and opportunity"

test, citing the language from the Statement of Managers that the
Conference Committee "was strengthening existing pleading
requirements, and therefore did not intend to codify the Second
Circuit's case law interpreting this pleading
standard."-[95]-  The Chantal court was not persuaded,
however, concluding that the "`motive and opportunity' test has
not been discarded."-[96]-  In reaching this conclusion,
the court relied on several factors, including the fact that the
"strong inference" language of the Reform Act's pleading standard
mirrors the Second Circuit standard, and that Congress failed to
specifically disapprove of the test in the text of the
statute.-[97]- 


---------FOOTNOTES----------
     -[93]-Id. at 1303.

     -[94]-Id. at 1309.

     -[95]-Id. at 1310.

     -[96]-Id.

     -[97]-The court explained:

     The Court is unimpressed with the defendants'
     enthusiastic reliance on an oblique reference to
     "motive, opportunity and recklessness" in a footnote to
     the Conference Committee Report for their argument that
     the "motive and opportunity" test has been jettisoned. 
     The footnote, embedded as it is in the legislative
     history and not the body of the statute, implies that
     Congress chose not to codify motive and opportunity as
     pleading requirements but does not indicate that
     Congress chose to specifically disapprove the motive
     and opportunity test.  The Court has little doubt that
     when Congress wishes to supplant a judicially-created
     rule it knows how to do so explicitly, and in the body
     of the statute.
                                                   (continued...)
==========================================START OF PAGE======
     In finding that motive was adequately pled, the court held
that "[a]llegations that a corporate insider either presented
materially false information, or delayed disclosing materially
adverse information, in order to sell personally-held stock at a
huge profit can supply the requisite `motive' for a scienter
allegation."-[98]-  The court qualified this holding,
however, by adding that "a plaintiff . . . must demonstrate that
the insider trading activity was `unusual'"-[99]-  Adopting
pre-Reform Act case law, the court defined "unusual" as "`amounts
dramatically out of line with prior trading practices, at times
calculated to maximize personal benefit from undisclosed inside

information.'"-[100]-  The court was swayed by the fact
that Burnison had not sold any of her Chantal stock during the
three prior years and that she sold 20% of her
holdings.-[101]-  Because Burnison controlled issuance of
all accounting and financial statements, the court found the
"opportunity" requirement was also satisfied.-[102]- 

     The court next turned to the circumstantial evidence prong
of the Second Circuit test.  Here the court found that plaintiffs
had successfully pled scienter by making circumstantial
allegations supporting the strong inference that the defendants
acted with an intent to defraud the market.  The court stated

that a violation of GAAP "may be used to show that a company
overstated its income, which may be used to show the scienter for
a violation of Section 10(b) and Rule 10b-5."-[103]-  The
court further explained that: "Although it is true that a
violation of GAAP in itself will generally not be sufficient to
establish fraud, . . . when combined with other circumstances
suggesting fraudulent intent, however, allegations of improper



---------FOOTNOTES----------
     -[97]-(...continued)

Id. at 1311 (footnote omitted).

     -[98]-Id. at 1312.

     -[99]-Id.

     -[100]-Id. (quoting Alfus v. Pyramid Technology Corp., 764
F.Supp. 598, 605 & n.1 (N.D. Cal. 1991)).

     -[101]-Id. at 1313.

     -[102]-Id. at 1312.

     -[103]-Id. at 1313.
==========================================START OF PAGE======
accounting may support a strong inference of
scienter."-[104]-  The court found that the test had been
satisfied because the complaint coupled the alleged violation of
GAAP with proof of substantial insider sales, the private
placements, and revenue overstatements of a large
magnitude.-[105]-  Accordingly, defendants' motion to
dismiss was denied.-[106]-

               b.   Zeid v. Kimberley-[107]-

     In Zeid, plaintiffs filed suit against Firefox

Communications, Inc., a software company, and three of its
officers and directors, alleging that the defendants engaged in a
fraudulent scheme to inflate the price of the company's stock
prior to a planned merger.  The defendants moved to dismiss the
complaint for failure to meet the pleading requirements.  The
complaint contained general allegations that Firefox's "sales and
marketing expansion plan was failing" and that "demand for
Firefox products was weak."-[108]-  The court found that
these allegations lacked the necessary specificity:  "Plaintiffs
have not sufficiently alleged the reason or reasons why the
statements [made to the public] are misleading. * * * 





---------FOOTNOTES----------
     -[104]-Id.

     -[105]-Id. at 1314-15.

     -[106]-In a footnote, the court dismissed the defendants'
argument that the Reform Act had abolished securities fraud
liability for reckless conduct:

     First, defendants' suggestion that strengthening the
     pleading standard for scienter must necessarily result
     in a change to the nature of the scienter required
     makes little sense.  Second, while it is true that the
     PSLRA elevates the mental state requirement to "actual
     knowledge" for certain specified situations, the Court
     finds no basis to conclude that Congress altered the
     mental state requirement for the type of Section 10(b)
     and Rule 10b-5 violation at issue in this case.

Id. at 1309, n.9.  

     -[107]-930 F. Supp. 431 (N.D. Cal. 1996).

     -[108]-Id. at 436.
==========================================START OF PAGE======
[C]onclusory allegations are insufficient to support a claim of
fraud."-[109]- 

     In analyzing whether the heightened pleading standards for
scienter were satisfied, the Zeid court, like the Chantal court,
applied the Second Circuit test.  Unlike the Chantal court,
however, the court here found that the complaint fell short under
either prong of the analysis.-[110]-  The "motive and
opportunity" prong was found not to be satisfied because,
although the plaintiffs alleged a motive of obtaining a high
acquisition price for Firefox, the company had actually released

its disappointing earnings results prior to the merger, thus
causing its stock price (and the merger price) to plummet. 
Moreover, plaintiffs failed to allege any facts supporting their
contention that the defendants intended to complete the merger
prior to announcing the results.-[111]-  Plaintiffs also
did not satisfy the "circumstantial evidence" prong because they
did "not sufficiently specify any reasons why [d]efendants'
statements were misleading when they were made,"-[112]-
and they did "not set forth any contemporaneous facts to support
their assertions of knowledge and recklessness."-[113]- 
Accordingly, the complaint was dismissed with leave to
amend.-[114]-


     In granting leave to amend, the court rejected the
defendants  argument that since the complaint did not satisfy the
Act's pleading standards, the language and legislative history of
the Reform Act compelled that it be dismissed without leave to
amend.  "Contrary to Defendants' assertions, there is nothing in
[the language of the Act] to indicate that district courts are
required to dismiss securities fraud claims without leave to
amend.  Further, without a clear directive from Congress, this
Court refuses to read into the Reform Act any limitation on the



---------FOOTNOTES----------
     -[109]-Id.

     -[110]-Id.

     -[111]-Id.

     -[112]-Id.

     -[113]-Id.

     -[114]-Claims that various boilerplate warnings were
themselves false and misleading because they were not specific
enough were dismissed without leave to amend.
==========================================START OF PAGE======
ability of trial courts to permit an opportunity to
amend."-[115]-

               c.   STI Classic Fund v. Bollinger Industries,
                    Inc.-[116]-

     On November 12, 1996, the district court adopted a
magistrate's report and recommendation which refused to dismiss,
in large part, an amended class action complaint filed against
Bollinger Industries.  The complaint alleged that Bollinger
engaged in a financial fraud.  Relying on the Chantal decision,

the magistrate concluded that the Second Circuit's "motive and
opportunity" test was the "persuasive interpretation" of the
Reform Act's heightened pleading requirements.-[117]-  The
magistrate further concluded that the individual defendants,
owning substantial shares in Bollinger, had ample motive to
engage in the alleged financial fraud.  Specifically, the
magistrate stated: "Materially inflated reports concerning
Bollinger's financial health . . . benefited the value of
Bollinger's shares and likewise increased the value of the
Brothers Bollinger's interest in the Company."-[118]-  

     Although the defendants argued that "these facts would

`indict' any small, family dominated business," the magistrate
responded that: "The flaw in Defendants' argument is that it
seeks to isolate an element of the circumstances alleged in
Plaintiffs' amended complaint rather than to consider them in
their totality."-[119]-  The magistrate did not specify
what other facts were part of this "totality" of circumstances.

               d.   Fischler v. AmSouth
                    Bancorporation-[120]-




---------FOOTNOTES----------
     -[115]-930 F. Supp. at 438.

     -[116]-No. 3:96-CV-823-R (N.D. Tex. Nov. 12, 1996).

     -[117]-Report and Recommendation of United States Magistrate
Judge at 2; 2 SEC. REF. ACT LITIG. REP. 99 (Oct. 1996).

     -[118]-Id. at 2-3.

     -[119]-Id. at 3.

     -[120]-No. 96-1567-CIV-T-17A, 1996 U.S. Dist. LEXIS 17670
(M.D. Fla. Nov. 14, 1996).
==========================================START OF PAGE======
     In Fischler, the court also adopted the Second Circuit test
as the pleading standard required by the Reform Act.  The
plaintiffs alleged that the company violated the antifraud
provisions of the federal securities laws by selling annuities
without disclosing certain hidden surrender
charges.-[121]-  Defendants moved to dismiss on several
grounds, including failure to adequately plead fraud.  

     The Fischler court noted that because both the Reform Act
and the traditional Second Circuit test require that a "strong
inference" of scienter be pled, the court could look to the

Second Circuit for interpretive guidance.-[122]-  The
court noted that the motive and opportunity test is a "common
method" for establishing this strong inference.-[123]- 
The court held, "In the present case, Plaintiff alleges facts
showing motive and opportunity.  Plaintiff's Complaint meets the
requirements of 21D(b)(3)(A)."-[124]-  No indication is
given as to what the court found to be an adequate motive.  A
review of the complaint shows that the pleading standard may more
readily be satisfied by reference to the other prong of the
Second Circuit test, which permits the pleading of facts giving
rise to circumstantial evidence of at least reckless behavior. 
Here, the complaint alleged that the defendants were the subject

of two NASD investigations during the class period, as well as
investigations by  Alabama and Florida state securities
regulators.  Moreover, a report by an outside consultant
concluded that systematic wrongdoing was occurring.  This
information should have put the defendants on notice of the
fraud.

               e.   Rehm v. Eagle Finance
                    Corporation-[125]-

     In Rehm, the Northern District of Illinois became the fifth
court post-Reform Act to adopt the Second Circuit pleading test. 
The court found that the Act "adopts the Second Circuit standard

but declines to bind courts to the Second Circuit's

---------FOOTNOTES----------
     -[121]-Id. at *3.

     -[122]-Id. at *7-*8.

     -[123]-Id. at *8.

     -[124]-Id.

     -[125]-No. 96 C 2455, 1997 U.S. Dist. LEXIS 767 (N.D. Ill.
Jan. 27, 1997).
==========================================START OF PAGE======
interpretation of its standard."-[126]-  Like the Chantal
court, this court was swayed by the fact that the language of the
Reform Act mirrored the language traditionally employed by the
Second Circuit that a "strong inference" of fraudulent intent be
pled.-[127]-  The court also looked to the legislative
history:

          The Committee does not adopt a new and untested
          pleading standard that would generate additional
          litigation.  Instead, the Committee chose a
          uniform standard modelled upon the pleading

          standard of the Second Circuit.  . . . The
          Committee does not intend to codify the Second
          Circuit's case law interpreting this pleading
          standard, although courts may find this body of
          law instructive.-[128]-

     Although it was not bound to follow the Second Circuit test
in applying the pleading standard, the Rehm court concluded that
test was "consistent with the language and purpose of the PSLRA
and therefore an appropriate standard to apply in this
case."-[129]-  The court found that the Second Circuit
test struck an appropriate balance between curtailing abusive

securities lawsuits and leaving the courthouse door open for
valid lawsuits.  The court proceeded to analyze the two prongs of
the test.  

     The lawsuit alleged that Eagle, a financial services
company, materially misrepresented its known credit losses and
net income.-[130]-  The court found that it was
insufficient to establish motive simply by alleging that the
company was facing an impending risk that it would lose access to
the capital markets if the truth about its credit losses was
known.  The court observed that "allegations of motives that are
generally held by similarly positioned executives and companies
are insufficient."-[131]-  The court found it significant


---------FOOTNOTES----------
     -[126]-Id. at *16.

     -[127]-Id.

     -[128]-Id. at *17 (quoting S. Rep. at 15).

     -[129]-Id. at *18.

     -[130]-Id. at *3.

     -[131]-Id. at *20-*21.
==========================================START OF PAGE======
that plaintiffs did not allege that Eagle actually attempted to
raise capital during the class period.-[132]-  Next, the
court found insufficient allegations that the individual
defendants owned substantial Eagle stock.-[133]-  Allowing
motive to be inferred from stock ownership would mean that
"virtually every company in the United States that experiences a
downturn in stock price would be forced to defend securities
fraud actions" based on the statements of its officers and
directors.-[134]-  Lastly, the court deemed insufficient
allegations that one of the individual defendants engaged in
insider trading during the class period.  The court noted that

this person's trading -- 6% of his Eagle holdings -- was not
"dramatically out of line with [his] prior trading
practices."-[135]- 

     The Rehm court nonetheless did not dismiss the complaint
because it held that the second prong of the Second Circuit test
had been satisfied.  The court found that plaintiffs had
adequately pled facts demonstrating at least reckless behavior. 
Again following Chantal, the court held that, "in addition to
bare allegations of GAAP violations, the complaint must show that
defendants recklessly disregarded the deviance [from GAAP] or
acted with gross indifference towards the purported material

misrepresentations contained in the financial
statements."-[136]-  The court also focussed on the
"magnitude of [the] reporting errors" and the "optimistic and
reassuring `spin'" the individual defendants put on the matter in
public remarks.-[137]-  The court held that the magnitude



---------FOOTNOTES----------
     -[132]-Id.  Conversely, the conduct of a public offering of
securities or a significant private placement during the class
period may well satisfy the motive prong.

     -[133]-Id. at *22.

     -[134]-Id. at *23 (citation omitted).

     -[135]-Id. at *24 (emphasis added).  Compare Chantal, supra
(sales by Chantal Burnison of 20% of her holdings during the
class period deemed "unusual").  The court also found it relevant
that the other two individual defendants did not sell stock
during the class period, Rehm at *23, although this fact seems
irrelevant as to the scienter of the insider who actually traded.

     -[136]-Id. at *28.

     -[137]-Id. at *29-*30.
==========================================START OF PAGE======
of the reporting errors combined with these remarks satisfied the
heightened pleading standard.

               f.   Fugman v. Aprogenex, Inc.-[138]-

     The pleading standard codified in the Reform Act is
applicable to any private action under the Exchange Act -- it is
not limited to class actions.  Although not a class action, the
adequacy of the pleadings in this securities case was considered
in accordance with the Act.  Following the earlier decision in
Rehm, the court determined that the required "strong inference"

that the company made the allegedly false statements "either
knowing their falsity or with recklessness regarding their
falsity"-[139]- could be established by the two prong
Second Circuit test.  "[W]e believe that the plaintiffs'
Complaint alleges facts which `constitute strong circumstantial
evidence of conscious misbehavior or recklessness' by
Aprogenex."-[140]-  In an accompanying footnote, the court
added: "Because we conclude that the plaintiffs satisfy part (b)
of the Second Circuit's test, we need not consider whether they
have satisfied the more intricate `motive and opportunity'
requirement of part (a)."-[141]-









---------FOOTNOTES----------
     -[138]-No. 96 C 5817, 1997 WL 136323 (N.D. Ill. Mar. 19,
1997).

     -[139]-Id. at *3.

     -[140]-Id. at *4.

     -[141]-Id. at *8 n.5.  The court dismissed certain
allegations with respect to forward-looking statements on account
of the safe harbor provided by the Commission's Exchange Act Rule
3b-6.  The court noted at *5 that "[a]s in the case of scienter,
Rule 9(b)'s particularity requirement is heightened ever further
with respect to forward-looking statements, which are protected
by a `safe harbor' provision unless they are made in bad faith or
without a reasonable basis."  The court found that the
allegations did not support the view that the company lacked a
reasonable basis in making the forward-looking statements.  The
opinion does not refer to the statutory safe harbor contained in
the Reform Act.
==========================================START OF PAGE======
          3.   Cases Rejecting the Second Circuit Test --
               Requiring the Pleading of Conscious Misbehavior.

               a.   In re Silicon Graphics, Inc. Securities
                    Litigation-[142]-

     On September 25, 1996, a judge in the Northern District of
California refused to look to Second Circuit case law to
interpret the heightened pleading standard.  The Silicon Graphics
class action alleged that the company and nine of its officers
and directors violated the antifraud laws in connection with both

historical and forward-looking statements about the company's
growth targets.-[143]-  The plaintiffs alleged that the
company and the individual defendants issued false and misleading
information after a disappointing first quarter in an effort to
inflate the stock price so that the individuals could sell their
own stock at a substantial profit.-[144]-  The defendants
moved to dismiss.

     Primarily based on the language in the Statement of
Managers, the court found that "Congress did not simply codify
the Second Circuit standard," but "intended to strengthen
it."-[145]-  Reviewing the legislative history of the

Reform Act, the court found it particularly significant that the
Conference Committee had eliminated the amendment to the pleading
provision of the Senate version of the bill that would have
tracked the two prong Second Circuit test.  The Conference
Committee explained the deletion of this language as follows,
"Because the Conference Committee intends to strengthen existing
pleading requirements, it does not intend to codify the Second
Circuit's case law interpreting this pleading
standard."-[146]-  Footnote 23 in the Statement of
Managers further explained that, "[f]or this reason, the
Conference Report chose not to include in the pleading standard





---------FOOTNOTES----------
     -[142]-Fed. Sec. L. Rep. (CCH)   99,325 (N.D. Cal. 1996);
1996 U.S. Dist. LEXIS 16989.

     -[143]-Id. at 95,959-60.

     -[144]-Id.

     -[145]-Id. at 95,961-62.  

     -[146]-Statement of Managers at 41.
==========================================START OF PAGE======
certain language relating to motive, opportunity, or
recklessness."-[147]-

     Since footnote 23 specifically referred to motive,
opportunity, and recklessness, but not to conscious behavior, the
court appears to have determined that Congress must have intended
that only evidence of conscious behavior would suffice to meet
the strong inference test.  This conclusion was reached despite
the fact that in deleting the clarifying amendment, the
Conference Committee deleted not only the language regarding
motive, opportunity, and recklessness, but also the language

regarding conscious misbehavior.

     As stated by the court: "Because Congress chose not to
include that language from the Second Circuit standard relating
to motive, opportunity, and recklessness, Congress must have
adopted the Conference Committee view and intended that a
narrower first prong apply."-[148]-  The "narrower first
prong" to which the court referred was the language contained in
the clarifying amendment that was not specifically mentioned in
footnote 23, i.e., conscious behavior.  Accordingly, the court
held that a "plaintiff must allege specific facts that constitute
circumstantial evidence of conscious behavior by

defendants."-[149]-  The court held that the plaintiffs
must allege facts that would " create a strong inference of
knowing misrepresentation on the part of the
defendants."-[150]-  The court noted that its opinion
conflicted with the holdings in Chantal and Zeid, but
"respectfully disagreed" with those decisions.-[151]- 
Determining that the plaintiff's allegations were not specific
enough to raise a strong inference of fraud, the court dismissed
the complaint with leave to amend.-[152]-



---------FOOTNOTES----------
     -[147]-Id. at 48 n. 23.

     -[148]-Fed. Sec. L. Rep. (CCH)   99,325 at 95,962.

     -[149]-Id.

     -[150]-Id. at 95,963.

     -[151]-Id. at n.4.

     -[152]-Following the court's order granting the Motion to
Dismiss, the plaintiffs filed a First Amended Complaint on
October 17, 1996.  The defendants moved to dismiss the Amended
Complaint on December 13, 1996.  This motion is pending.
==========================================START OF PAGE======
     The plaintiffs amended their complaint and the defendants
again moved to dismiss.  In connection with this motion, on
February 3, 1997, the Commission filed an amicus curiae brief
urging the district court to reconsider its earlier
decision.-[153]-  By requiring the plaintiffs to allege
conscious behavior, the court effectively eliminated recklessness
as a sufficient state of mind for liability under Section 10(b)
of the Exchange Act.  The Commission argues that the Act did not
alter the state of mind required to be shown in a private action,
except in the case of certain forward-looking statements entitled
to the protection of the "safe harbor."-[154]-  The

Commission's brief further argues that a retreat from the
recklessness standard would greatly erode the deterrent effect of
Section 10(b) actions.-[155]-

     The Commission's brief reviews the Reform Act's legislative
history and concludes that the Act does not eliminate
recklessness as a scienter standard.  The Commission points out
that:

          Nowhere did the Conference Committee suggest that
          it was eliminating recklessness as satisfying the
          scienter requirement, or, indeed, that it was

          eliminating evidence of motive and opportunity or
          circumstantial evidence of fraudulent intent (be
          it conscious or reckless) as factors that the
          courts might consider in determining whether the
          strong inference had been established.  Instead,
          Congress simply elected not to attempt to codify
          the guidance provided in Second Circuit case law,
          preferring to leave to the courts the discretion
          to create their own standards for determining
          whether a plaintiff has established the required
          strong inference.-[156]-


---------FOOTNOTES----------
     -[153]-Brief of the Securities and Exchange Commission,
amicus curiae, In re Silicon Graphics Sec. Litig., Fed. Sec. L.
Rep.   99, 325 (N.D. Cal. 1996).

     -[154]-Id. at 7-8.

     -[155]-Id. at 3.

     -[156]-Id. at 12-13.  See also Michael A. Perino, A Strong
Inference of Fraud?  An Early Interpretation of the 1995 Private
Securities Litigation Reform Act, 1 SEC. REF. ACT LITIG. REP.
397, 403 (June & July 1996) ("Like the statements in the earlier
                                                   (continued...)
==========================================START OF PAGE======
The Commission concluded that: "If plaintiffs can state with
particularity facts giving rise to a strong inference that
defendants acted recklessly, their complaint is sufficient under
[the Reform Act]."-[157]-  A hearing on the motion to
dismiss the amended complaint is set for April 1997.

               b.   Friedberg v. Discreet Logic
                    Inc.-[158]-

     This case involved an alleged violation of Section 10(b) of
the Exchange Act in connection with a public offering by Discreet

Logic.  The plaintiffs alleged that the prospectus and other
statements made in connection with the offering were false and
misleading.  On a motion to dismiss, the court considered the
question of "what must a plaintiff plead in order to create [a]
`strong inference' of scienter."-[159]-

     Citing language from the Statement of Managers, the court
determined that the Reform Act pleading standard was intended to
be "even stronger than the existing Second Circuit pleading
standard."-[160]-  The court also noted that the
Conference Committee "purposely chose not to include in its
pleading standard language derived from Second Circuit case law

relating to motive, opportunity or recklessness,"-[161]-
and that the Conference Committee had not adopted language from
the Senate bill that would have expressly set forth the Second
Circuit test.



---------FOOTNOTES----------
     -[156]-(...continued)
Senate Report, the language in the Statement of Managers is
ambiguous.  It does not clarify whether Congress intended to make
its standard more stringent than the Second Circuit's standard,
whether the Second Circuit standard was meant to be the norm, or
whether the Managers were only attempting to formulate a standard
that was higher than that used by Circuits other than the Second
Circuit.").

     -[157]-Id. at 13.

     -[158]-Civ. A. No. 96-11232-EFH, 1997 U.S. Dist. LEXIS 2893
(D. Mass. Mar. 7, 1997).

     -[159]-Id. at *20.

     -[160]-Id. at *22.

     -[161]-Id.
==========================================START OF PAGE======
     Adopting what it called a "conscious behavior" pleading
approach, the court 
rejected the Second Circuit "motive and opportunity" test, as
well as the recklessness prong.  Instead, the court adopted a
test requiring the plaintiff to "plead a `strong inference' of
scienter by alleging facts constituting circumstantial evidence
of conscious behavior."-[162]-  Applying this standard to
the allegations of the complaint, the court denied the motion to
dismiss.  Among other things, the court relied on sales of shares
by insiders to provide strong circumstantial evidence of
conscious misbehavior.


               c.   Powers v. Eichen-[163]-

     This class action filed against Proxima Corporation and
certain of its officers and directors alleged that the defendants
had artificially inflated the company's stock by falsely
representing that Proxima had successfully developed new products
that would lead to substantial revenue and earnings growth.  The
defendants moved to dismiss, arguing that the plaintiffs had
failed to plead scienter with the particularity required under
the Reform Act.  The court agreed with the reasoning of the court
in Silicon Graphics and adopted its strict standard, but held

that the plaintiffs had met the standard and denied the motion to
dismiss.  Like the court in Discreet Logic, the court here relied
in large part on sales of stock by insiders in finding a strong
inference of intent to defraud.    

          4.   A Decision Construing the Pleading Standard
               Without Adopting or Rejecting the Second Circuit
               Test -- Myles v. Midcom Communications,
               Inc.-[164]-

     The court in this case also considered the applicability of
the Second Circuit test to the Reform Act requirements for
pleading scienter.  The plaintiffs argued that the Second Circuit

test should apply, citing Chantal.  The defendants argued for a
tougher test, citing Silicon Graphics.  The court found this
dispute to be unwarranted: "The statute itself defines the



---------FOOTNOTES----------
     -[162]-Id. at *25.

     -[163]-Case No. Civil 96-1431-B (AJB) (S.D. Cal. Mar. 13,
1997).

     -[164]-No. C96-614D (W.D. Wash. Nov. 19, 1996).
==========================================START OF PAGE======
standard and the statute is clear."-[165]-  Since
recklessness was sufficient for scienter, the court held that "a
complaint must `state with particularity facts giving rise to a
strong inference that the defendant acted' either with an intent
to deceive, manipulate or defraud or with
recklessness."-[166]-

     A strong inference is created by circumstantial evidence,
the court found.  "[T]he two are essentially the same.  That is,
direct evidence of one fact (e.g., bad accounting practices) that
creates an inference as to a second fact (i.e., fraudulent

intent) is circumstantial evidence of the second
fact."-[167]-  Thus, the court concluded, "[w]hether this
is lower or higher than the Second Circuit test is
irrelevant."-[168]- 

     Applying this test, the court found that the allegations
were not sufficient to demonstrate scienter, but granted the
plaintiffs leave to amend. 

          5.   A Reform Act Case Dismissed on Other Grounds --
               Steckman v. Hart Brewing, Inc.-[169]-


     Hart Brewing did not involve the heightened pleading
requirements of the Act.  The complaint alleged only violations
of Sections 11 and 12(2) of the Securities Act and not violations
of the Exchange Act.  In connection with an initial public
offering by Hart Brewing, the plaintiff claimed that Hart failed
to disclose material information indicating an "adverse trend" of
declining sales.  Relying on pre-Reform Act case law, the court
held that the plaintiff must allege facts showing that the
defendants had a duty to disclose the adverse trend, but that
such a duty arises only upon a showing of an "extreme departure"
from prior earnings trends.  Finding no such extreme departure,
and finding further that Hart Brewing's prospectus contained many
warnings directly addressing the plaintiff's allegations of

omissions, the court dismissed the complaint on the grounds that
the plaintiff had failed to state a claim upon which relief could

---------FOOTNOTES----------
     -[165]-Id. at 9.

     -[166]-Id. at 9-10.

     -[167]-Id. at 10 (footnote omitted).

     -[168]-Id. (footnote omitted).

     -[169]-Civ. Case No. 96-1077-K (RBB) (S.D. Cal.).
==========================================START OF PAGE======
be granted.  The dismissal was made with prejudice since the
plaintiff conceded that he could not meet the pre-Reform Act
extreme departure standard.

     B.   Cases Involving the Stay of Discovery.

     The Reform Act requires that all discovery be stayed in a
private action under the Exchange Act during the pendency of any
motion to dismiss, unless the court finds that particularized
discovery is "necessary to preserve evidence or prevent undue
prejudice."  Members of the plaintiffs' bar have informed us that

at least one, and perhaps several, motions to dismiss are now
being made in virtually every case.  Because defendants no longer
incur the cost of discovery during this time period, they are
extremely reluctant to settle before a motion to dismiss has been
decided.

          1.   The Discovery Stay Is Being Strictly Applied.

     A court may grant relief from the discovery stay upon a
showing that particularized discovery is necessary either (1) to
preserve evidence, or (2) to prevent undue
prejudice.-[170]-  Three decisions to date have

interpreted these exceptions strictly, allowing no relief from
the stay.-[171]-  The decisions demonstrate that
unsubstantiated allegations of an existing risk of destruction of
evidence will not satisfy the first prong, and that under the
second prong the relevant standard will be a showing of harm
which is greater than mere prejudice but less than irreparable
harm. 

               a.   Novak v. Kasaks-[172]-

     In Novak v. Kasaks, after the defendants moved to dismiss,
the plaintiffs argued that discovery should proceed because there
was "`great risk' that highly relevant evidence will be lost or


---------FOOTNOTES----------
     -[170]-1934 Act  21D(b)(3)(B).

     -[171]-In March 1997, the discovery stay was made even more
stringent in the Northern District of California.  A new local
rule requires that a discovery stay be imposed in securities
class actions not just during the pendency of a motion to
dismiss, but also until a lead plaintiff is chosen by the court. 
N.D. Cal. Civil L.R. 26-6 (d).

     -[172]-96 Civ. 3073 (AGS), 1996 U.S. Dist. LEXIS 11778
(S.D.N.Y. Aug. 16, 1996).
==========================================START OF PAGE======
destroyed and that undue prejudice will result if discovery is
stayed."-[173]-  The court disagreed, granting the
requested stay.  "[P]laintiffs have provided no evidence to
bolster their wholly speculative assertions as to the risk of
lost evidence and undue prejudice."-[174]-

               b.   Medical Imaging Centers of America, Inc. v.
                    Lichtenstein-[175]-

     On January 10, 1996, Medical Imaging filed a complaint in
the Southern District of California seeking injunctive relief and

damages against several Medical Imaging shareholders.  The case
is unusual in that the corporation is suing certain of its
shareholders, rather than vice-versa.  Medical Imaging alleged
that the defendant shareholders filed an incomplete and
misleading Schedule 13D disclosure document in an ongoing proxy
contest for control of the corporation.-[176]-  Medical
Imaging asked that the defendants be ordered to correct their
disclosures on matters necessary for an informed vote to take
place.

     The defendant shareholders filed a motion to dismiss. 
Medical Imaging argued that it would suffer "undue prejudice" if

discovery was stayed because the shareholder vote to replace the


---------FOOTNOTES----------
     -[173]-Id. at *3.

     -[174]-Id.  The plaintiffs also argued that if the discovery
stay was imposed, non-parties would not feel obligated to
maintain relevant documents.  The court found this concern
"easily remedied," and imposed an order directing all non-parties
upon whom subpoenas had been served to preserve all potentially
relevant evidence.  The result of this order is that plaintiffs
continue to have an incentive to serve subpoenas on non-parties
to the extent permitted by local rules, even if a discovery stay
is on the horizon, or perhaps already in place, in order to
ensure that relevant evidence is not destroyed.  See also Order
Denying Plaintiffs' Motion to Compel Non-Party Cisco Systems,
Inc. to Produce Documents, Kane v. Made Networks N.V., Case No.
C96-20652 RMW PVT (N.D. Cal. Jan. 13, 1997) (staying third-party
discovery prior to motion to dismiss pursuant to Rule 26(c), Fed.
R. Civ. P., because "[s]uch discovery is unnecessary and
burdensome because it may require considerable production prior
to an assessment of the viability of the pleadings").

     -[175]-917 F. Supp. 717 (S.D. Cal. 1996).

     -[176]-Id. at 718.
==========================================START OF PAGE======
board of directors was imminent.-[177]-  The magistrate
reviewed the legislative history of the Act and noted that the
only example provided that would justify a discovery stay was
"the terminal illness of an important witness."-[178]- 
The magistrate went on to conclude that the harm required to
establish "undue prejudice" must be essentially
irreparable.-[179]-

     Medical Imaging appealed the magistrate's ruling to the
district court.  The Commission filed an amicus brief urging the
district court to reject the magistrate's ruling.  The Commission

contrasted this case, where an event (proxy contest) had not yet
occurred, with the type of case envisioned by the Act's
legislative history -- money damages sought for events occurring
in the past.-[180]-  The Commission argued that:

          [T]he "undue prejudice" standard for allowing
          limited discovery should not be restricted to
          situations where irreparable harm can be
          demonstrated.  Rather, in a case where, as here,
          the plaintiff seeks emergency equitable relief
          with respect to an on-going contest for control of
          a corporation, it is possible that the time

          pressure of upcoming events may result in
          substantial prejudice, although less than
          irreparable harm, accruing from a stay of
          discovery.  In such cases, a showing of harm,
          which is greater than mere prejudice but less than
          irreparable harm, should satisfy the "undue
          prejudice" criterion.-[181]-

     At the hearing, the district court judge stated that he
agreed with the statutory analysis articulated in the
Commission's brief.  After considering evidence from both sides,


---------FOOTNOTES----------
     -[177]-Id. at 719.

     -[178]-See Medical Imaging Centers v. Lichtenstein, Civ. No.
96-0039 (AJB), 1996 U.S. Dist. LEXIS 7641, at *5 (S.D. Cal. Jan.
22, 1996). 

     -[179]-Id. at *7.

     -[180]-Brief of the Securities and Exchange Commission at 6-
7, amicus curiae, Medical Imaging Centers of America, Inc. v.
Lichtenstein, 917 F. Supp. 717 (S.D. Cal. 1996).

     -[181]-Id. at 2 (emphasis supplied).
==========================================START OF PAGE======
however, the judge concluded that Medical Imaging had
demonstrated insufficient prejudice and left the discovery stay
in place pending resolution of the motion to
dismiss.-[182]-  The motion to dismiss was eventually
denied and Medical Imaging obtained an injunction.

               c.   Levy v. United HealthCare Corp.-[183]-

     The defendants in this case sought to use the discovery stay
as both a shield and a sword.  After making a motion to dismiss,
the defendants sought relief from the discovery stay so they

could depose the plaintiff in order to test the veracity of the
statements in the certification filed with his
complaint.-[184]-  Finding that neither of the exceptions
to the discovery stay had been met, the court denied defendants 
motion.-[185]-

          2.   The Discovery Stay Likely Will Encompass FRCP 26
               Disclosure.

     A question not specifically addressed by the Reform Act is
whether the discovery stay applies to the disclosure requirements
of Rule 26(a) of the Federal Rules of Civil Procedure.  Rule

26(a) requires the "disclosure" of certain information by
plaintiffs as well as defendants, including:  identification of
persons likely to possess discoverable information relevant to
disputed facts; identification of all parties expected to be
called as expert witnesses at trial; exchange of reports
concerning the opinions to be expressed by expert witnesses; and
exchange of witness lists.-[186]-  The Ninth Circuit has
held that the discovery stay does apply to Rule 26(a)
disclosures.








---------FOOTNOTES----------
     -[182]-Medical Imaging, 917 F. Supp. at 723.

     -[183]-Civ. No. 3-96-750 (D. Minn. Sept. 10, 1996).

     -[184]-Id. at 2.

     -[185]-Id. at 3.

     -[186]-FED. R. CIV. P. 26.
==========================================START OF PAGE======
               a.   Hockey v. Medhekar-[187]-

     In Hockey, a California federal district court held that the
stay does not encompass the disclosures mandated by Rule 26(a) of
the Federal Rules of Civil Procedure.-[188]-  The court
noted that recent amendments to Rule 26 inserted the term
"disclosure," and added that the court "assumes . . . that
Congress is fully cognizant of the difference between the terms
`discovery' and `disclosure.'"-[189]-

     The Ninth Circuit disagreed.-[190]-  The appellate

court noted that "[t]he federal discovery rules contain numerous
examples in which disclosures are treated as a subset of
discovery."-[191]-  The Ninth Circuit added that "the time
and expense involved in the identification and production of
documents and other items required by the disclosure rule is
exactly the type of burden sought to be eliminated by the
Act"-[192]- and "Congress clearly intended that complaints
in these securities actions should stand or fall based on the
actual knowledge of the plaintiffs rather than information
produced by the defendants after the action has been
filed."-[193]-  Accordingly, the appellate court vacated
the district court's decision.-[194]-





---------FOOTNOTES----------
     -[187]-932 F. Supp. 249 (N.D Cal. July 11, 1996), vacated,
Medhekar v. Unites States, 99 F.3d 325 (9th Cir. Oct. 31, 1996). 

     -[188]-Id.

     -[189]-Hockey, 932 F. Supp. at 251.

     -[190]-Medhekar v. United States, 99 F.3d 325 (9th Cir. Oct.
31, 1996).

     -[191]-99 F.3d at 328.

     -[192]-Id.

     -[193]-Id.

     -[194]-On a related issue, a new local rule adopted in the
Northern District of California addresses when disclosure is to
take place in securities class actions.  Disclosure information
must be exchanged no later than 10 days before a case management
conference, which is scheduled by the court after its designates
a lead plaintiff.  N.D. Cal. Civil L.R. 26-6(b).
==========================================START OF PAGE======
               b.   Levy v. United HealthCare Corp.-[195]-

     When faced with the same issue as to whether the Reform Act
discovery stay applies to "disclosure," the Minnesota district
court in Levy v. United HealthCare Corp., followed the district
court decision in Hockey.-[196]-  The court in Levy stated
two reasons for allowing "disclosure" to go forward.  First, the
court was influenced by the text of the Reform Act, noting, "we
are confident that had Congress intended to relieve the parties
from the disclosures intended by Rule 26(a), it was fully capable
of so stating."-[197]-  Next, the court stated that to

hold otherwise would run counter to the views of the FRCP's
Advisory Committee.  In the Notes to the 1993 Amendments to Rule
26(a), the Committee states, "[t]he obligation to participate in
the planning process [i.e. a FRCP Rule 26 disclosure conference]
is imposed on all parties that have appeared in the case,
including defendants who, because of a pending Rule 12 motion,
may not have filed an answer in the case."-[198]-  The
Eighth Circuit was not given an opportunity to resolve the
conflict between Levy and Hockey because the Levy plaintiffs
voluntarily dismissed their complaint.

     C.   Procedure for Appointing a Lead Plaintiff.


     The Reform Act directs the court to appoint a "lead
plaintiff" from among class members who seek to act as such, with
a procedure for national publication of a notice advising class
members of the filing of the action.-[199]-  Congress
believed that this new system would encourage more responsible
control of class actions.  The presumption that the most adequate
plaintiff is the one with the largest financial stake in the
lawsuit is intended to "encourage institutional investors to take
a more active role in securities class action
lawsuits."-[200]-



---------FOOTNOTES----------
     -[195]-Civ. No. 3-96-750 (D. Minn. Sept. 10, 1996).

     -[196]-Id.  This decision was handed down before the Ninth
Circuit's decision in Hockey. 

     -[197]-Id. at 3-4.

     -[198]-Id. at 4.

     -[199]-1933 Act  27(a)(3); 1934 Act  21D(a)(3).

     -[200]-Statement of Managers at 34.
==========================================START OF PAGE======
          1.   The Early Results.

     Congress' efforts to encourage more active participation by
institutional and other large investors has not yet taken hold. 
With few exceptions, traditional plaintiffs' firms continue to
run class actions, representing investors, or groups of
investors, with only relatively small holdings in the issuer.  In
the 105 cases filed in the first year after passage of the Reform
Act, we have found only eight cases in which institutions have
moved to become lead plaintiff.-[201]-  In seven of those
eight cases, the institution has been represented by a group of

law firms which includes at least one traditional plaintiffs' law
firm.-[202]-  Indeed, in two of these seven cases the lead
plaintiff is represented by thirty and thirty-three law firms
respectively, most of which are familiar names in securities
class actions.-[203]-  This phenomenon of multiple law
firms representing the class was a familiar pattern prior to the
Reform Act.  Although an institution's choice of a traditional
plaintiffs' firm to represent it does not preclude the


---------FOOTNOTES----------
     -[201]-Gluck v. Cellstar Corp., C.A. No. 3:96 Civ. 1353-R
(N.D. Tex., complaint filed May 14, 1996) (State of Wisconsin
Investment Board); Malin v. IVAX Corp., C. No. 96-1843-CIV-Moreno
(S.D. Fla., complaint filed July 15, 1996) (Pennsylvania School
Employees Retirement System Pension Fund); Mark v. Fleming Cos.,
Civ. Act. No. CIV-96-0506-M (W.D. Okla., complaint filed Apr. 4,
1996) (City of Philadelphia, acting through its Board of Pensions
and Retirement); In re Summit Technology Sec. Litig., Civ. Act.
No. 96-11589-JLT (D. Mass., complaint filed Aug. 2, 1996)
(Teachers' Retirement System of Louisiana); Teachers' Retirement
System of Louisiana v. Micro Warehouse, Inc., Ca. No. 396CV02166
(D. Conn., complaint filed Oct. 25, 1996) (Teachers' Retirement
System of Louisiana & Pennsylvania School Employees Retirement
System Pension Fund); In re Cephalon, Inc. Sec. Litig., Civ. Act.
No. 96 CV-0633 (E.D. Pa., complaint filed Jan. 29, 1996) (Sands
Point Partners, L.P.); Sweetwater Inv., Inc. v. Pepsi-Cola Puerto
Rico Bottling Co., No. 96-8671-CIV-ZLOCH (S.D. Fla., N.Div.,
complaint filed Oct. 15, 1995) (Sweetwater Investments, Inc.);
Chan v. OrthoLogic Corp., No. CIV 96-1514 PHX RCB (D.Ariz.,
complaint filed June 24, 1996) (City of Philadelphia).

     -[202]-The only exception is Cellstar, in which the State of
Wisconsin Investment Board is represented by Blank, Rome, Comisky
& McCauley.

     -[203]-The two cases are, respectively, IVAX, C. No. 96-
1843-CIV-Moreno (S.D. Fla., complaint filed July 15, 1996) (30);
and Summit, Civ. Act. NO. 96-11589-JLT (D. Mass., complaint filed
Aug. 2, 1996) (33).
==========================================START OF PAGE======
institution from exercising control over the litigation, even the
most active institutional investor may have difficulty
controlling thirty or more law firms.




          2.   Will Institutions Become More Active?

     Even though the legislative history makes clear that the
Reform Act "does not confer any new fiduciary duty on

institutional investors -- and courts should not impose such a
duty," it nonetheless reflects Congress' hope that institutions
would seek to be named lead plaintiff.-[204]-  Our
discussions with institutional investors, however, suggest that
there are substantial disincentives for institutional investors
considering intervention in securities class actions.  Those
disincentives fall into two categories:  cost and perceived
liability exposure.

     As the Reform Act allows potential lead plaintiffs to
conduct discovery of other potential lead plaintiffs,
institutions may find key personnel being subjected to costly and

time-consuming discovery by plaintiffs and then to a second round
of discovery by defendants.  Moreover, private institutional
investors, such as investment companies, may be forced to open
their books during discovery, thus revealing proprietary
information.-[205]-  In addition, many institutions may
not want to advance the costs of litigation for the class. 
Adding to the expense is the time needed to manage the
litigation.  

     Some institutions have also expressed concerns about added
liability exposure when acting as lead plaintiff.  The fear is
that other plaintiffs may sue them for actions such as selecting
incompetent counsel, settling for an inadequate amount, or

dismissing what the institution deemed to be a meritless suit. 
Further, institutions can still opt out of the class, proceed


---------FOOTNOTES----------
     -[204]-Statement of Managers at 34 ("[T]he Conference
Committee nevertheless intends that the lead plaintiff provision
will encourage institutional investors to take a more active role
in securities class action lawsuits.").

     -[205]-Public institutions generally do not share this
problem as they are subject to state public record laws which
make their books and records available for public inspection.
==========================================START OF PAGE======
separately, and not be faced with this added exposure.  Some
institutions have informed us that they always obtain a better
recovery when they opt out and proceed separately.  Moreover, one
representative of a major mutual fund group stated that the fund
is disinclined to get involved as lead plaintiff because
traditionally recoveries have been insignificant to overall fund
performance.  Whether or not institutions will look beyond these
disincentives remains to be seen. 

     Notwithstanding these disincentives, several of the
institutional representatives have stated that they do plan to

get involved and seek lead plaintiff status when the right case
surfaces.  Moreover, the staff is aware of at least two major
institutions not only willing to get involved, but also to have
their in-house general counsel serve as class counsel in an
effort to reduce fees.  In short, while institutional involvement
is still limited, institutions may become more active in
securities class action litigation in the future.

          3.   The Lead Plaintiff Provision Has Added Delay and
               Expense.

     Members of the plaintiff class may attempt to rebut the

presumption that the class member having the largest financial
stake in the litigation is the most adequate plaintiff by
demonstrating that this plaintiff "will not fairly and adequately
protect the interests of the class" or "is subject to unique
defenses that render such plaintiff incapable of adequately
representing the class."-[206]-  A class member
demonstrating a reasonable basis for a finding that the
presumptive most adequate plaintiff will not adequately represent
the class is entitled to conduct discovery of the presumptive
plaintiff.-[207]-  Thus, when an institution asserts that
it is the most adequate plaintiff, other would-be lead plaintiffs
may use the above provisions to challenge the institution in
court, resulting in added delay and expense.-[208]-


---------FOOTNOTES----------
     -[206]-1933 Act  27(a)(3)(B)(iii)(II); 1934 Act 
21D(a)(3)(B)(iii)(II).

     -[207]-1933 Act  27(a)(3)(B)(iv); 1934 Act 
21D(a)(3)(B)(iv).

     -[208]-The staff has been unable to locate any court orders
dealing with lead plaintiff challenges among individual
plaintiffs only.  To the extent these disputes have arisen, they
appear to have been resolved by agreement among the parties.  The
                                                   (continued...)
==========================================START OF PAGE======
               a.   Micro Warehouse-[209]-

     In a securities class action pending against Micro
Warehouse, Inc., at least eight plaintiffs filed separate, but
related complaints.-[210]-  Four competing motions for
lead plaintiff status were subsequently filed.  After
negotiation, a group was formed (the "Micro Warehouse Group") to
represent movants in three of the four motions.  This group
included two institutional investors, the Teachers' Retirement
System of Louisiana ("TRSL") and the Pennsylvania School
Employees Retirement System Pension Fund ("PSERS").


     The Micro Warehouse Group alleged that TRSL had purchased
141,504 shares of Micro Warehouse during the class period at a
market value in excess of $5.4 million, and had suffered a loss
of $2.1 million.  The papers also alleged that PSERS had
purchased 306,900 shares and had suffered a loss of $3.6 million
(the largest loss of any movant seeking lead plaintiff status).

     Two individual plaintiffs, John Turner and John Schultz, who
were represented by traditional plaintiffs' lawyers, opposed the
institutions.  These two individuals claimed to have lost over
$250,000 during the class period.-[211]-  They moved for

the appointment of Turner as lead plaintiff.  To rebut the Reform
Act's presumption that the Micro Warehouse Group was the most
adequate plaintiff, the two argued that TRSL would not fairly and
adequately represent the interests of the class.  Specifically,
they objected to the bid by William Reeves, General Counsel of


---------FOOTNOTES----------
     -[208]-(...continued)
challenges decided by courts during the first year all have
involved institutions seeking to be named lead plaintiff.

     -[209]-Ca. No. 396CV02166 (D.Conn., complaint filed Oct. 25,
1996).

     -[210]-These multiple filings are somewhat curious as the
Reform Act allows any plaintiff to simply move to be named lead
plaintiff after an initial complaint is filed, thereby making the
filing of additional (and costly) complaints unnecessary.  A
possible reason for these multiple complaints is discussed below
in Section VI(C)(5)(c).

     -[211]-See Memorandum of Law in Support of Motion of
Plaintiff John Turner For Appointment as Lead Plaintiff and to
Conduct Certain Discovery Pursuant to Section 21D(a)(3)(B) of the
Securities Exchange Act of 1934, at 5, Payne v. Micro Warehouse,
Inc., Civil Action No. 3:96CV01920 (DJS) (D.Conn. Dec. 2, 1996).
==========================================START OF PAGE======
TRSL, to serve as class counsel in an effort to reduce fees.  In
a certification filed with the court, TRSL declared:

          The General Counsel of [TRSL] is participating as
          one of the attorneys for the plaintiff in this
          litigation and, if the present action is
          successful and results in the creation of a fund
          for the compensation of Class Members, the
          plaintiff will apply to this Court for
          reimbursement of its expenses and said General
          Counsel will apply to the Court for an award of a

          reasonable attorney's fee said expenses [sic] with
          any award of such attorney's fee and expenses
          being subject to the approval of the
          Court.-[212]-

Turner and Schultz argued that, to the extent that Reeves turned
over to TRSL any fee he obtained from representing the class, his
actions would violate a Reform Act provision which limits the
lead plaintiff's claim to its pro rata share of the final
judgment or settlement.  The two individuals further argued that
"the different allegiances TRSL's General Counsel will possess as
an employee of the class representative and as counsel for the

Class will cause a conflict -- either in fact or in appearance --
between the interests of TRSL and the interests of the Class that
may result in the denial of TRSL as the class
representative."-[213]-  They added a motion to conduct
discovery of TRSL.

     TRSL subsequently withdrew its proposal that Reeves serve as
co-lead counsel to resolve the conflict, but that did not end the
dispute.  Rather, Turner and Schultz began opposing PSERS
participation as co-lead plaintiff.-[214]-  They made two


---------FOOTNOTES----------
     -[212]-Id. at 13.

     -[213]-Id. at 14.

     -[214]-See Plaintiffs John Turner and John Schultz'
Opposition or Statement Relating to the Motions of Catherine
Baker Knoll, State Treasurer of the Commonwealth of Pennsylvania
as Custodian for the Pennsylvania School Employees Retirement
System Pension Fund, the Motion of Teacher's Retirement System of
Louisiana and others, and the Motion of Bruce Payne, Roberto
Espinosa, Lawrence Bober, Bruce Banker, and Melvin Levine for
Appointment as Lead Plaintiffs, In re Micro Warehouse Sec.
Litig., Civil Action No. 3:96CV01920 (DJS) (D. Conn. Dec. 23,
1996).
==========================================START OF PAGE======
arguments.  First, the decision for PSERS to enter the class
action was made by Pennsylvania's then-Treasurer, Catherine Baker
Knoll.  In January 1997, a new Treasurer took office.  Turner and
Schultz complained that "[t]here has been no proffer by the
Commonwealth of their interest in continuing the
lawsuit."-[215]-  Second, they argued that Knoll had not
documented her authority from PSERS to commence this litigation,
even though as Treasurer, she was custodian for PSERS.  The two
concluded by asking the court to name Turner co-lead plaintiff
with TRSL, or alternatively, to allow discovery of Knoll.  The
court did not resolve the dispute, however, as an agreement was

reached by which a new lead plaintiffs' group was formed
including Turner and the two institutions.  

               b.   Cephalon-[216]-

     A second example of the disputes between competing
plaintiffs is the class action against Cephalon, Inc.  On March
27, 1996, one of the plaintiffs, Sands Point Partners, moved to
be named lead plaintiff.  Sands Point, a private fund managing
$12 million, claimed to have lost $677,876 trading in Cephalon
securities.


     A competing group of four individual plaintiffs moved the
court to take discovery of Sands Point to determine whether or
not Sands Point had properly characterized itself to the court as
an "institutional investor."-[217]-  The statutory basis
for this request is unclear, as the Reform Act's lead plaintiff
provision does not use the term "institutional investor;" rather,
it presumes that the lead plaintiff will be the person or group
of persons having "the largest financial interest in the relief
sought by the class."-[218]-  Nonetheless, the court
granted discovery:  "As Sands Point has asserted that it is a
uniquely situated institutional investor to which the Act affords
preference in appointing the lead plaintiff, and as the
[competing group of] plaintiffs have raised concerns challenging


---------FOOTNOTES----------
     -[215]-Id.

     -[216]-Civ. Act. No. 96 CV-0633 (E.D. Pa., complaint filed
Jan. 29, 1996).

     -[217]-See Memorandum of Law in Support of Motion for Leave
to Take Discovery, In re Cephalon Sec. Litig., Civil Action No.
96-CV-0633 (E.D. Pa. July 12, 1996).

     -[218]-1933 Act  27(a)(3)(B)(iii)(I)(bb); 1934 Act 
21D(a)(3)(B)(iii)(I)(bb).
==========================================START OF PAGE======
this position, this court finds that discovery on the issue of
determining the most adequate plaintiff is
appropriate."-[219]-

     The court's order sweeps broadly, providing that "[a]ny
plaintiff in this matter is granted leave to take discovery of
any other plaintiff in this matter on the appointment of lead
plaintiff and lead counsel."  In allowing broad-based discovery
by any plaintiff of any other plaintiff, the order conflicts with
the text of the Reform Act which allows narrow discovery by a
moving plaintiff "only if the plaintiff first demonstrates a

reasonable basis for a finding that the presumptively most
adequate plaintiff is incapable of adequately representing the
class."-[220]-  The issue was later resolved when the two
groups of plaintiffs proposed that they be appointed co-lead
plaintiffs, which the court accepted.

               c.   OrthoLogic-[221]-

     In other cases, recycled pre-Reform Act challenges have been
made that institutional investors, as sophisticated investors,
are subject to unique defenses and are incapable of adequately
representing the class.  This argument is being made despite the

Reform Act's clear bias toward institutional investors as lead
plaintiffs.  To the extent this argument is successful, the
potential effectiveness of the lead plaintiff provision will be
eroded if not eliminated.  In the two cases to date, the courts
have rejected this argument.-[222]-

     In the class action pending against OrthoLogic Corp., a lead
plaintiff motion was made by a group including the City of
Philadelphia.-[223]-  A group of individuals competing for


---------FOOTNOTES----------
     -[219]-Memorandum and Order, In re Cephalon Sec. Litig.,
Civil Action No. 960CV-0633 (E.D. Pa. July 18, 1996).

     -[220]-1933 Act  27(a)(3)(B)(iv); 1934 Act 
21D(a)(3)(B)(iv).

     -[221]-No. CIV 96-1514 PHX RCB (D. Ariz., complaint filed
June 24, 1996).

     -[222]-Aside from OrthoLogic, discussed below, another case
where these arguments have been raised is Cellstar, discussed
infra at n.227 and accompanying text.

     -[223]-See Order, Chan v. OrthoLogic Corp., No. CIV 96-1514
PHW RCB (D. Ariz. Dec. 19, 1996).
==========================================START OF PAGE======
the lead plaintiff position ("Group B") argued that under Rule 23
of the Federal Rules of Civil Procedure, the defendants would be
able to challenge Philadelphia as a class representative, because
as a sophisticated investor, "it operates according to methods
and investment criteria which are not typical of those employed
by the smaller individual investors."-[224]-  In making
their argument, Group B cited a number of pre-Reform Act cases
which held that sophisticated investors are atypical of the class
under Rule 23.  The court was not persuaded.  First, the court
found that the pre-Reform Act cases had essentially been
superseded.  "[I]n light of the [Reform Act], the landscape under

which [these prior decisions were made] has clearly shifted in
favor of institutional investors."-[225]-  The court also
concluded that the fraud-on-the-market theory, essential to the
bringing of a securities class action, applies equally to
institutional and individual investors.  Here, the court held,
"[d]ifferences in sophistication, etc., among purchasers have no
bearing in the impersonal market fraud context, because
dissemination of false information necessarily translates through
market mechanisms into price inflation which harms each purchaser
identically."-[226]-

          4.   Gluck v. Cellstar-[227]- -- The State of

               Wisconsin Investment Board Becomes the First
               Institutional Investor to Control a Class Action.

     The potential benefits of institutional investors becoming
lead plaintiff, as envisioned by Congress, can best be seen in
this class action filed against Cellstar Corp.  The State of
Wisconsin Investment Board ("SWIB"), represented by Blank, Rome,
Comisky & McCauley, moved to be named lead
plaintiff.-[228]-  SWIB, which manages $40 billion for the
Wisconsin Retirement System, purchased one million shares of
Cellstar during the class period.  SWIB alleged that it lost more


---------FOOTNOTES----------
     -[224]-Id. at 9.

     -[225]-Id. at 11.

     -[226]-Id. at 11.

     -[227]-Gluck v. Cellstar Corp., C.A. No. 3:96 Civ. 1353-R
(N.D. Tex., complaint filed May 14, 1996).

     -[228]-See Brief of the State of Wisconsin Investment Board
in Support of its Motion for Appointment as Lead Plaintiff,
Larson v. Cellstar Corp., No. 396CV1436 (N.D. Tex. July 22, 1996)
(hereinafter "SWIB Brief").
==========================================START OF PAGE======
than $14 million on its investment during the class period, the
most significant financial interest in the action, and therefore,
it should be named lead plaintiff.  

     Another group of plaintiffs, represented by a traditional
plaintiffs' law firm ("Group 2"), opposed SWIB's motion.  Group
2, echoing the arguments made in OrthoLogic, claimed that SWIB
would not satisfy the requirements of Rule 23 of the Federal
Rules of Civil Procedure because,  as a sophisticated investor,
it was subject to defenses atypical of the class.  Group 2 argued
that it should be named co-lead plaintiff and its lawyers should

be named co-lead counsel.  Following a hearing, the court issued
an order, without written opinion, naming SWIB the lead
plaintiff, and denying Group 2's motion.  The court has not yet
ruled on SWIB's selection of Blank, Rome as class counsel.

     SWIB's management of the class action may provide a
blueprint for future class actions involving institutions.  Keith
Johnson, Assistant General Counsel for SWIB, describes SWIB's
management of the case as follows:

          A committee with internal and external legal
          expertise and portfolio management representation

          was established to review SWIB's CellStar claim. 
          Several qualified law firms that had previously
          expressed an interest in providing securities
          class action legal advice to SWIB were invited to
          make presentations to the committee on their
          evaluation of SWIB's claim.  The selected law
          firms included representation from the traditional
          plaintiffs' bar.  Firms were asked to include in
          their presentations an evaluation of the case, a
          plan for pursuing the claim, a review of their
          expertise, and a proposed fee schedule.  At the
          conclusion of this process, SWIB selected Blank,
          Rome . . .


          Blank, Rome agreed to represent SWIB, and the
          class if approved as lead counsel by the court, on
          a contingent fee basis that SWIB believes could
          save the class as much as several million dollars
          in legal fees from customary fee levels.  The fee
          arrangement is based on a sliding percentage
          scale, which increases both as the size of the
          recovery increases and as the matter progresses
          through the litigation process.  It starts at 12.5
          percent of first dollar recoveries and tops out at
==========================================START OF PAGE======
          25 percent of amounts in excess of $15
          million,-[229]- and includes any post-trial
          appellate work.  SWIB also agreed to support a fee
          bonus of up to 1.5 percent if the case can be
          promptly prepared and scheduled for trial within
          set target dates.  The fee structure was designed
          to align the interests of the law firm with those
          of its clients.-[230]-

SWIB's efforts to negotiate attorneys' fees should work to the
benefit of investors.-[231]-  The process employed by SWIB

is similar to an attorney bidding process ordered by Judge Vaughn
Walker of the Northern District of California in pre-Reform Act
class actions against California Micro Devices, Wells Fargo, and
Oracle Systems.


---------FOOTNOTES----------
     -[229]-By contrast, a recent study found that the average
award of attorney fees in securities class actions, measured as a
percentage of settlement, is as follows:  30.38% for settlements
of less than $1.00 million; 31.88% for settlements ranging from
$1.00 - $1.99 million; 32.11% for settlements ranging from $2.00
-
 $9.99 million; 31.72% for settlements ranging from $10.00 -
$49.99 million; and 31.48% for settlements in excess of $50
million.  NERA Study, at Table 9.

     -[230]-Keith Johnson, Institutional Investors and Securities
Class Action Reform:  A Report From the Trenches, THE CORPORATE
GOVERNANCE ADVISOR, January/February 1997, at 3-4 (emphasis and
footnote supplied).

     -[231]-On a related note, on September 27, 1996, the
Commission filed an amicus curiae brief in the class action
pending against PaineWebber arguing that the fees sought by class
counsel were excessive.  Brief of the Securities and Exchange
Commission, amicus curiae, In re PaineWebber Inc. Ltd.
Partnerships Litig., 94 Civ. 8547 (SHS) (S.D.N.Y. Sept. 27,
1996).  Class counsel stated an intent to submit a petition for
attorneys' fees in the amount of 27.5% of the $125 million in
immediate cash consideration, plus 27.5% of the cash portion of
"Additional Benefits" to be paid under the settlement agreement. 
Id. at 1.  The value of the total requested fees, based on Lead
Class Counsel's valuation of Additional Benefits at over $75
million, was at least $34.4 million, and might have approached
$55 million.  Id.  The Commission's brief argued that the
attorneys' fees being sought were excessive because they
substantially exceeded those normally awarded in cases involving
large settlements and the case did not involve unusually large
risks.  Id. at 2-3.  A decision has not yet been rendered.
==========================================START OF PAGE======
          5.   The Notice Procedure.

     Not later than 20 days after the complaint is filed, the
plaintiff filing the complaint must publish "in a widely
circulated national business-oriented publication or wire
service, a notice advising members of the purported plaintiff
class . . . of the pendency of the action, the claims asserted
therein, and the purported class period," and "not later than 60
days after the date on which the notice is published, any member
of the purported class may move the court to serve as lead
plaintiff of the purported class."-[232]-


     This procedure, in conjunction with the presumptive lead
plaintiff provision, reduces the incentives for plaintiffs'
attorneys to race to the courthouse to file a complaint, although
there are still advantages to being the first to file because it
allows the attorney to control the content of the notice. 
Because "first in time" no longer assures lead plaintiff status,
the courthouse race has been replaced by strategies designed: (1)
to identify and collect the group of shareholders with the
largest stake in the action; and (2) as discussed above, to show
that rival groups will not adequately represent the class.


     The limited experience to date suggests that the notice
provision does create an obstacle to securing lead plaintiff
status by the first plaintiff to file, as courts are interpreting
the provision strictly.  The strict interpretation of the notice
provision increases the likelihood that other class members will
both receive the notice and inform themselves of the suit's
allegations, so that they can make an educated decision whether
to seek lead plaintiff status.  Moreover, the early returns
demonstrate that the notice provision may have created an added
obstacle in that defendants, too, may have standing to object to
the adequacy of the notice.

               a.   Means of Publication.


     The first written opinion ruling on a motion to become lead
plaintiff was issued in Greebel v. FTP Software,
Inc.,-[233]- addressing several issues relating to the
notice provision under the Act.  Greebel's complaint alleged that
FTP Software, Inc. ("FTP") made material misrepresentations and


---------FOOTNOTES----------
     -[232]-1933 Act  27(a)(3)(A)(i); 1934 Act 
21D(a)(3)(A)(i).

     -[233]-939 F. Supp. 57 (D. Mass. 1996).
==========================================START OF PAGE======
omissions concerning its business.  Four days after filing its
complaint, Greebel issued a press release to Business Wire for
transmission over its computer database to inform other potential
class members of their right to move to be appointed lead
plaintiff.  The entire text of the notice was picked up by
Bloomberg Business News Wire.  Subsequently, a group of three
persons -- Greebel, Robinson, and Crane -- moved to be appointed
lead plaintiff.

     The Reform Act requires a plaintiff to file with his or her
complaint a sworn certificate describing, among other things, the

plaintiff's transaction in the security and his or her prior
appearances as plaintiff in other securities class actions, and
stating that the plaintiff has read the complaint and authorized
its filing.-[234]-  This procedure is intended to slow the
race to the courthouse.  Here, only Greebel filed the required
certificate; Robinson and Crane (who were not named in the
caption of the complaint) did not.

     Defendant FTP raised three objections to the motion:  (1)
that it was premature to determine whether Greebel and the others
met the class-representation requirements of Rule 23 of the
Federal Rules of Civil Procedure; (2) that Greebel's notice over

Business Wire failed to satisfy the Act's publication
requirement; and (3) that Robinson and Crane failed to comply
with the certification requirement.  The movants responded that
FTP did not have standing to oppose a motion for appointment of a
lead plaintiff.

     The court first held that defendant FTP had standing to
object to the adequacy of the notice and certification because
these are procedural prerequisites to becoming lead plaintiff. 
According to the court, "[p]ermitting a defendant to object on
these grounds enhances effective judicial administration of the
case,"  i.e. if notice is defective, the court cannot rely on
other class members to proffer opposition.-[235]-  The

court further held, however, that FTP could not object to the
movants' adequacy to serve as lead plaintiffs at this point in
the proceedings.  On this issue the court stated, "The text of
the [Act] clearly indicates that this issue is one over which
only potential plaintiffs may be heard.  For example, Congress
provided that rebuttal of the lead plaintiff presumption shall be



---------FOOTNOTES----------
     -[234]-1933 Act  27(a)(2)(A); 1934 Act  21D(a)(2)(A).

     -[235]-Id. at 60.
==========================================START OF PAGE======
limited to `proof by a member of the purported plaintiff
class.'"-[236]-  The court ruled that FTP could be heard
on this issue later when a motion for class certification was
made.

     Next, FTP claimed that Greebel's notice over Business Wire
failed to satisfy the Act's publication requirement, arguing that
Business Wire did not qualify as a "wire service" and was not
"widely circulated."-[237]-  On the first point, the court
held that the "mere fact that Business Wire arrives at a print
publication via an electronic signal, rather that [sic] in the

manner of a traditional wire service, does not disqualify it as a
'wire service' within the meaning of the statute."-[238]- 
The court also held that Business Wire is "widely circulated" as
hundreds of print publications and other wire services subscribe
to it and individuals can access it directly through on-line
services and databases.

     The court implied that notice over Business Wire might be
more effective than notice via newspapers because spotting the
notice in a newspaper is "subject to the happenstance" of
purchasing the newspaper that day whereas notice transmitted via
computers remains accessible.  Finally, the court noted that

Business Wire is likely to reach institutional investors, the
Reform Act's favored class members.

     The court went on to hold that the certification need only
be filed by the plaintiff who files the complaint, and not by
class members who subsequently file motions to become lead
plaintiff.  The court relied on the language of Section
21D(a)(2)(A), which requires "each plaintiff seeking to serve as
a representative party on behalf of a class . . . [to] provide a
sworn certification, which shall be . . . filed with the


---------FOOTNOTES----------
     -[236]-Id. at 60.  But see Order Requiring Further
Information for Plaintiff's Motion to be Appointed Lead
Plaintiff, at 6 & 7, Howard Bunty Profit Sharing v. Quantum
Corp., Civil No. 96-20711 SW (N.D. Cal. Feb. 6, 1997) ("While
defendants may not offer evidence or conduct discovery relating
to who is the most adequate plaintiff, it is appropriate for
defendants to bring to the attention of the court a flaw in the
papers of a party moving for the appointment as lead plaintiff,"
and "defendants [may] make a limited, facial challenge to a
plaintiff's motion for appointment as lead plaintiff."). 

     -[237]-Id. at 62.

     -[238]-Id. at 62.
==========================================START OF PAGE======
complaint."  The court bolstered this conclusion with legislative
history which states that parties moving to be named lead
plaintiff need not file the certificate.-[239]-  As no
other party moved to become lead plaintiff, the court granted
Greebel, Robinson and Crane's lead plaintiff motion.   

               b.   Content of Notice.

     The Reform Act specifies that the notice must advise
potential class members of four items:  (1) the "pendency of the
action;" (2) the "claims asserted therein;" (3) the "purported

class period;" and (4) that class members may move to be named
lead plaintiff within 60 days of publication of the
notice.-[240]-  While the first, third, and fourth items
appear non-controversial, the second item has resulted in
litigation.

     In SyQuest Technology, Inc.,-[241]- Judge Vaughn
Walker of the Northern District of California addressed what
notice of "claims asserted" required.  In that case, a  group of
plaintiffs ("Group 1"), represented by three firms, moved to be
appointed lead plaintiff.-[242]-  Group 1 had published a
notice, which read as follows:


          TO:  All purchaser [sic] of SyQuest Technology,
          Inc. common stock during the period October 21,
          194 [sic] to February 1, 1996[:]

          On April 2, 1996, a class action, Ravens, et al.
          v. Iftikar, et al., C-96-1224-VRW, was filed in
          the U.S. District Court for the Northern District
          of California, which asserts claims for violations
          of  10(b) and 20(a) of the Securities Exchange
          Act of 1934.  Any member of the proposed class may
          move the Court to serve as lead plaintiff no later


---------FOOTNOTES----------
     -[239]-Id. at 62 (The Senate Committee Report explains that
it "does not intend for the members of the purported class who
seek to serve as lead plaintiff to file with this motion the
certification described above." (citation omitted)).

     -[240]-1933 Act  27(a)(3)(A)(i); 1934 Act 
21D(a)(3)(A)(i).

     -[241]-No. C-96-1224-VRW (N.D. Cal.).

     -[242]-Order, Ravens v. Iftikar, No. C-96-1224-VRW (N.D.
Cal. Jan. 7, 1997).
==========================================START OF PAGE======
          than 60 days from the date of this Notice.  For
          more information contact [name and phone number of
          plaintiffs' counsel].-[243]-

Sixty days expired, and no prospective class members moved to be
named lead plaintiff.  Later, a rival group of plaintiffs, also
represented by three traditional plaintiff class action firms,
opposed Group 1's motion, challenging the adequacy of Group 1's
notice.

     Judge Walker held that the notice was deficient, reasoning

that:

          The notice provisions are only effective . . . if
          qualified investors are notified of the nature and
          character, not just the existence, of the claims
          asserted.  An investor can only make an informed
          determination whether intervention [is]
          appropriate to protect his interests if he is
          provided information describing the legal and
          factual basis of the claims.  A mere recitation of
          the statute, or statutes, under which the claim is
          brought is simply inadequate to give an investor

          the information necessary to make the decision to
          intervene or not.-[244]-

In addressing the inadequacies of the notice, Judge Walker
observed that the following details would be required to give
notice of the "claims asserted": an explanation of the legal
theory underlying plaintiffs' suit; a discussion of who committed
the alleged violations; and a description of the alleged
wrongdoing that forms the basis of the complaint.-[245]- 
As these details were lacking from the notice at issue, he denied
Group 1's lead plaintiff motion.  Judge Walker also ordered that
a case management conference be set up to discuss how the
plaintiffs could correct the notice's deficiencies.



---------FOOTNOTES----------
     -[243]-Id. at 8.  A more detailed notice of the lawsuit was
issued over Business Wire.  See Class Action Suit Filed Against
SyQuest Technology and Its Officers and Directors Alleging
Misrepresentations, False Financial Statements and Insider
Trading, BUSINESS WIRE, April 10, 1996.  This notice was not
addressed by Judge Walker.

     -[244]-Id. at 5-6.

     -[245]-Id. at 8.
==========================================START OF PAGE======
     By contrast, Judge Fern Smith, also of the Northern District
of California, held a virtually identical notice to be adequate. 
In her order, Judge Smith held that the notice "advised the
potential class members of the claims and of the opportunity to
file a motion to be lead plaintiff."  It appears, however, that
the notice at issue, unlike in SyQuest, was not challenged by
other plaintiffs.  Thus, it remains to be seen whether the
content required by the notice may only be an impediment for
plaintiffs' attorneys when rival attorneys challenge the notice. 
When such a challenge is brought, however, minimalist notice may
not suffice.


               c.   Advertising Through the Notice Provision.

     While the lead plaintiff provision and its accompanying
publication requirement are intended to shift control from
plaintiffs' lawyers to the plaintiffs themselves, plaintiffs'
attorneys have garnered at least two benefits from the
publication of notice.  First, the publication of notice can help
uncover relevant facts.  The notice can help attract witnesses,
including disgruntled ex-employees and others who may possess
useful information.  This source of information may help develop
a case given the automatic discovery stay imposed by the Act upon

a motion to dismiss.

     Second, the notice may be used as a form of advertising by
lawyers representing one or more investors with only a small
financial stake in the class action.  The Reform Act allows the
court to select as lead plaintiff not just individuals but
alternatively a "group of persons," whose financial interests in
the suit may be aggregated in determining if they have the
"largest financial interest in the relief sought by the
class."-[246]-  Taking advantage of this provision,
lawyers have used the notice to recruit investors as additional
clients.  Notices are phrased in a way more likely to attract
clients, rather than competition from investors (and other law

firms) independently vying to be named lead plaintiff.  While not
required by the Act, notices routinely end with two boilerplate
paragraphs consisting of a firm biography and a form of sales
pitch to investors.  A standard example follows:

          [Plaintiffs' firm] has been actively engaged in
          commercial litigation emphasizing securities and
          antitrust class actions . . . .  The firm has


---------FOOTNOTES----------
     -[246]-1933 Act  27(a)(3)(B)(iii)(I)(bb); 1934 Act 
21D(a)(3)(B)(iii)(I)(bb).
==========================================START OF PAGE======
          offices in [nationwide] and is active in major
          litigations pending in federal and state courts
          throughout the United States.  The firm's
          reputation for excellence has been recognized on
          repeated occasions by courts which have appointed
          the firm to major positions in complex multi-
          district or consolidated litigations. 
          [Plaintiffs  firm] has taken a lead role in
          numerous important actions on behalf of defrauded
          investors, and has been responsible for a number
          of outstanding recoveries . . . .


          If you are a member of the Class described above,
          you may, no later than 60 days from today, move
          the Court to serve as lead plaintiff of the Class,
          if you so choose.  In order to serve as lead
          plaintiff, however, you must meet certain legal
          requirements.  If you wish to discuss this action
          or have any questions concerning this notice or
          your rights or interests, please contact [name of
          lawyer at firm] at [firm phone number].

               d.   Need for a Centralized Notice Repository?


     While the Reform Act requires a "widely circulated national
business-oriented publication or wire service," it does not
mandate a precise location for publication.  Representatives of
institutional investors have informed us that they are having
difficulty discovering and reviewing notices in a timely fashion.

Moreover, other representatives have informed us that once they
discover the notice, they have insufficient time to complete the
process required to get approval by the institution's board of
directors to enter the suit.  A possible solution would be to
require the notice of each class action to be posted on a
designated internet site.-[247]-


     D.   Sanctions for Violations of Rule 11(b).

     In order to discourage frivolous pleadings in securities
class actions, Congress mandated that courts make a finding of
compliance with Rule 11(b) of the Federal Rules of Civil

---------FOOTNOTES----------
     -[247]-As of March 1997, lawyers in securities class actions
filed in the Northern District of California are required to post
certain enumerated litigation documents to "Designated Internet
Sites (`DIS')."  N.D. Cal. Civil L.R. 23-3.  The Commission is
considering creating links from its web site to each DIS.
==========================================START OF PAGE======
Procedure with respect to any complaint, responsive pleading, or
dispositive motion.-[248]-  Only one court to date has
undertaken this mandatory inquiry.  On December 24, 1996, in the
class action against Hart Brewing, Inc. in the Southern District
of California, the court granted Hart's motion to dismiss for
failure to state a claim.-[249]-  The opinion ends with
the Court finding, "that no parties violated the pleading
requirements of FRCP 11(b) in this matter.  Sanctions are
therefore not appropriate in this case."-[250]-  As more
cases are decided, the effect of this provision will become
clearer.


     E.   Retroactive Effect of the Reform Act.

     In October 1996, the Ninth Circuit upheld a permanent
injunction against H. Thomas Fehn, a California securities law
attorney, for aiding and abetting violations of the federal
securities laws.  Fehn assisted in the creation and filing with
the Commission of quarterly reports on behalf of a company that
falsely described the role of the company's president and
promoter and that misleadingly failed to disclose contingent
liabilities stemming from earlier securities law violations. 
With knowledge that statements made about the company's president

were false, and with knowledge that the company faced substantial
undisclosed potential liabilities, Fehn asserted that the company
need not make the legally required disclosures because they were
protected by the president's Fifth Amendment privilege.

     The district court had enjoined Fehn shortly before the
Supreme Court's decision in Central Bank,-[251]- which
declared that the Exchange Act creates no private right of action
for aiding and abetting a primary violation of the securities
laws.  Fehn argued on appeal that Central Bank applied to
Commission actions as well as private actions.  The Commission
argued that Central Bank does not apply to Commission actions.


     Two months after oral argument in the appeal, Congress
enacted a provision as part of the Reform Act expressly

---------FOOTNOTES----------
     -[248]-1933 Act  27(c)(1); 1934 Act  21D(c)(1).

     -[249]-Order Granting Defendants' Motion to Dismiss,
Steckman v. Hart Brewing, Inc., Civ. Case No. 96-1077-K (RBB),
(S.D. Cal. Dec. 24, 1996).  

     -[250]-Id. at 9.

     -[251]-511 U.S. 164 (1994).
==========================================START OF PAGE======
authorizing the Commission to bring actions against persons who
knowingly aid and abet violations of the Exchange Act.  The Ninth
Circuit held that the Reform Act's aiding and abetting provision
applied retroactively.  After emphasizing Congress' rejection of
Central Bank to the extent it might be "extended" to Commission
actions, the court noted that the new legislation expressly
provides an effective date for private actions, the date of
enactment, but was silent with respect to any effective date for
Commission actions.  This congressional silence as to any
intended retroactive effect permitted the court of appeals to
apply the standard governing retroactive application of an

intervening civil statute to antecedent events.-[252]- 
Applying that analysis, the court concluded it was appropriate to
apply the aiding and abetting provision retroactively.


VII. SECURITIES CASES FILED IN STATE COURT.

     During the first year following enactment of the Reform Act,
state courts have seen a reported increase in both stand-alone
securities class actions and class actions that are parallel to
federal actions.-[253]-  The NERA Study found that 78
cases had been filed in the first ten months of 1996 (for an

annualized total of 94), as compared to 48 for the previous
year.-[254]-  Another source reported that 40% of the
securities class actions filed in the first ten months of 1996
were filed in state courts, compared to slightly more than 20%
during 1995.-[255]-  Indeed, one source reports that there
were 65 securities class actions filed in state court between


---------FOOTNOTES----------
     -[252]-Landgraf v. USI Film Products, 511 U.S. 244 (1994). 
Landgraf set forth a number of factors that should be considered,
including "fair notice, reasonable reliance, and settled
expectations."

     -[253]-In preparing this Report, the Commission staff found
it difficult to obtain data about the number of securities-
related cases filed in state court.  Although the staff has been
closely tracking all federal securities class actions (a less
difficult task since the Reform Act requires that a public notice
be given), the staff has relied on data compiled by others in
assessing the incidence of securities class actions in state
courts.

     -[254]-NERA Study, supra at n.69.

     -[255]-See Walter Hamilton, Lawyers' End Run Around Legal
Reforms, INVESTOR'S BUSINESS DAILY, Oct. 21, 1996, at A1.
==========================================START OF PAGE======
January 2, 1996 and December 26, 1996 -- 64% of the number filed
in federal court during this period.-[256]-  This apparent
shift to state court may be the most significant development in
securities litigation post-Reform Act.

     A.   Reasons for the Increase in State Court Filings.

     Following enactment of the Reform Act, some plaintiffs
appear to have been drawn to state court by the potential for
obtaining discovery during the pendency of a motion to dismiss, a
procedure that is not available under the Act.  These plaintiffs

may be able to use state discovery procedures to uncover facts
necessary to frame allegations sufficient to withstand a motion
to dismiss, either in the state court proceeding or in a
subsequently filed federal complaint.  To the extent that state
courts can be used to avoid the discovery stay in cases that
would otherwise have been brought under the federal securities
laws, one of the goals of the Reform Act may be frustrated.  

     It should be recognized, however, that state courts may
offer other advantages to plaintiffs, including non-unanimous
jury verdicts, punitive damages, and aiding and abetting
liability, depending on the jurisdiction.  On the other hand, few

states provide state law remedies for private plaintiffs that are
as broad as the federal remedies for securities fraud. 
Furthermore, jurisdiction over the defendants must be established
in the particular state, and state law must provide a private
right of action for the plaintiffs' alleged securities claims. 
For these reasons, state court has not traditionally been the
primary forum for securities class actions.  But if state law
provides advantages to plaintiffs in a particular case, it is
reasonable to expect that plaintiffs' counsel will file suit in
state courts.

     Of the 105 federal actions filed in 1996, we have identified
26 that are tied to a parallel state action.-[257]-  In

these actions, defendants are forced to respond on two fronts,

---------FOOTNOTES----------
     -[256]-Securities Class Action Clearinghouse -- State
Complaints at 1-7 (last modified Jan. 8, 1997) (located at
http://securities.stanford.edu).

     -[257]-This number is subject to change as additional
federal or state cases are filed.  A separate study found 30
parallel state actions out of a total of 108 federal actions. 
See Joseph A. Grundfest & Michael A. Perino, Cornerstone
Research, Securities Litigation Reform: The First Year s
Experience (Feb. 27, 1997).
==========================================START OF PAGE======
thus incurring greater litigation expense than pre-Reform Act. 
The remaining state actions -- 39 as measured by the Stanford
Securities Class Action Clearinghouse-[258]- -- are stand-
alone state court actions.  Some of these cases may migrate to
federal court after discovery has taken place.  Some may be
forced into federal court if a national class cannot be certified
at the state level.  Others, however, may proceed to the merits
in state court.  Of the 39 stand-alone state court actions, 24
are in California.

     Three factors, two of which operate together only in

California, make state court an alternative for many cases.  The
first, which applies to all state court actions, is the Supreme
Court's recent ruling in Matsushita Elec. Indus. Co. v.
Epstein,-[259]- which held that a state court judgment
dismissing a state class action suit pursuant to a settlement
agreement could include a provision barring federal securities
fraud class actions arising out of the same transaction.  The
Court concluded that the state court judgment would be entitled
to res judicata effect, despite the exclusive federal court
jurisdiction over cases brought under the Exchange Act, including
Section 10(b) and Rule 10b-5 claims.  By allowing defendants to
obtain a global settlement in state court, Matsushita made state

court class actions more advantageous for plaintiffs.

     The second and third factors currently converge only in
California.  The second factor is the absence of a requirement
that an individual plaintiff prove that he relied on a
misstatement or an omission.  In Mirkin v. Wasserman, the
California Supreme Court stated that plaintiffs need not plead or
prove actual reliance in an action under the state's securities
law.-[260]-  Eliminating the reliance requirement makes


---------FOOTNOTES----------
     -[258]-Securities Class Action Clearinghouse Litigation --
State Complaints at 1-7 (last modified Jan. 8, 1997) (located at
http://securities.standford.edu). 

     -[259]-116 S. Ct. 873 (1996).

     -[260]-858 P.2d 568, 580 (Cal. 1993).  At least three other
states do not require reliance for common-law fraud actions, see
Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095, 1106
(Colo. 1996); State v. Superior Court of Maricopa Cty., 599 P.2d 
777 (Ariz. 1979); Weatherly v. Deloitte & Touche, 905 S.W.2d 642,
648-49 (Tex.Ct.App. 1995), while one state trial court has
adopted the fraud-on-the-market doctrine under that state's blue
sky law,  see Bierman v. Thompson, No. DV-96-124A (Mont. 11th
Jud. Ct., Flathead Cty., Oct. 15, 1996).
==========================================START OF PAGE======
possible a class action for securities suits.  The third factor
is the availability of jurisdiction over high-technology firms,
who are frequently named as defendants in securities
suits.-[261]-  The largest concentration of high-
technology firms in the United States is located in Silicon
Valley.  High-technology firms tend to have a volatile share
price, plus officers and directors who receive a large portion of
their compensation in company stock and stock options, which
means they will be more likely to be selling shares during a
period of volatility.  Volatility and insider sales are
frequently relied upon by plaintiffs in pleading their cases. 

Thus, California provides a convenient alternative to federal
court post-Reform Act.

     At this point, it appears that state court actions are not
being filed to circumvent the federal court reforms intended to
protect secondary defendants.  In federal court, plaintiffs face
both the Reform Act's proportionate liability provision and the
Supreme Court's Central Bank decision, which held that there is
no private right of action for aiding and abetting under Section
10(b) of the Exchange Act.  A review of 41 post-Reform Act state
securities class action complaints discloses only one naming
accountants, none naming corporate counsel, and nine naming

underwriters.

     B.   Analysis of State Court Complaints.

     For the most part, the allegations in state court complaints
are similar to those found in the federal complaints -- although
it should be noted that we have no view on the merits of any
complaints we have examined.  We reviewed a sample of state court
complaints -- 10 complaints for which there is a parallel federal
action and 16 complaints for stand-alone state
actions.-[262]-  The results are as follows:

    15% of the state court complaints we reviewed are based

     solely on failed forecasts (as compared to 12% at the
     federal level);

---------FOOTNOTES----------
     -[261]-NERA Study, supra note at Table 10c (finding that
suits naming high-technology firms as defendants comprised 22.85%
of all securities class actions between 1991 and October 1996,
and 26.92% of all filings between January and October 1996).

     -[262]-This sample was selected to mirror the overall
percentage (40%) of parallel (26 out of 65) versus stand-alone
(39 out of 65) state actions, as reported by the Securities Class
Action Clearinghouse.  
==========================================START OF PAGE======
    46% contain insider trading allegations (as compared to 48%
     at the federal level); 

    38% contain allegations of accounting irregularities (as
     compared to 43% at the federal level);

    15% contain allegations of a restatement of the financials
     (as compared to 18% at the federal level);

    8% contain allegations of a concurrent government
     investigation (as compared to 15% at the federal level); and


    15% contain none of the above allegations (as compared to
     14% at the federal level).

The following graph presents these results. 





  



















     Although these numbers suggest that the allegations in state
court complaints are substantially the same as federal
complaints, further analysis casts a slightly different light. 
While the parallel state court complaints should be nearly
identical in their factual allegations to their federal court
counterparts, the stand-alone complaints, which are not subject
to the heightened federal pleading standards, contain a somewhat
different mix of allegations.  In the 16 stand-alone state
complaints that we reviewed, the numbers are as follows: 
==========================================START OF PAGE======
    25% of these complaints are based solely on failed forecasts
     (as compared to 12% at the federal level);

    25% contain insider trading allegations (as compared to 48%
     at the federal level);

    31% contain allegations of accounting irregularities (as
     compared to 43% at the federal level);

    13% contain allegations of a restatement of the financials
     (as compared to 18% at the federal level);


    6% contain allegations of a concurrent government
     investigation (as compared to 15% at the federal level); and

    25% contain none of the above allegations (as compared to
     14% at the federal level). 

The following graph presents these results.
==========================================START OF PAGE======







While the small sample size does not allow for a definitive
assessment of the stand-alone state complaints, we note that the
percentage of failed forecast cases is double the federal
percentage, while the percentage of insider trading cases is

approximately half that of the federal complaints.
   
     C.   State Obstacles.

     Class action plaintiffs may also find obstacles in state
court.  First, a discovery stay may -- or may not -- be
available.  Of the four cases that have addressed the issue, two
have granted the stay and two have denied it.  Second,
institutions may seek to intervene, but there is no equivalent
notice and presumptive lead plaintiff provision as there is under
the Reform Act.  Third, state securities actions raise difficult
constitutional issues when plaintiffs seek to certify a national

class.  Thus, the long term viability of the state court
securities class action remains to be determined.

          1.   State Discovery Stay Cases.

               a.   Cases Imposing a Discovery Stay.

     In Milano v. Auhll,-[263]- plaintiff filed a
complaint in California state court alleging violations of both
state and federal securities laws.-[264]-  The defendants
demurred and moved for a discovery stay pursuant to the Reform
Act.  Milano responded that the Reform Act's discovery stay does


---------FOOTNOTES----------
     -[263]-No. SB 213 476 (Oct. 2, 1996); 1 SEC. REF. ACT LITIG.
REP. 870 (August & Sept. 1996).

     -[264]-Milano's state court claim for violations of federal
securities laws is authorized by Section 22 of the Securities Act
which provides state courts with concurrent jurisdiction to
enforce any liability or duty created by that Act.  15 U.S.C. 
77v(a).  Section 22 further provides that cases brought in state
court may not be removed to federal district courts.  Id. 
Compare Section 27 of the Exchange Act, 15 U.S.C.  78aa
(providing federal courts with exclusive jurisdiction to enforce
any liability or duty created by the Exchange Act).
==========================================START OF PAGE======
not apply to cases pending in state courts.  Milano's primary
argument rested on the Act's plain language.  First, under the
Reform Act, a "motion to dismiss" triggers the discovery stay,
and Milano contended that this term is unknown to California
civil procedure, which instead uses the term "demurrer."  Second,
the Act states, "[t]he provisions of this subsection shall apply
to each private action arising under this title that is brought
as a plaintiff class action pursuant to the Federal Rules of
Civil Procedure."  Milano argued that the reference to the
Federal Rules meant that the Act's provisions were not meant to
apply in state court actions.


     The court rejected these arguments and imposed the discovery
stay.  The court reasoned that Section 27(b), which contains the
discovery stay provision, applies by its terms to "any private
action arising under this title."  The court concluded that
"title" referred to the Securities Act.  The court accordingly
held that the discovery stay applies "if at least one cause of
action is within [the Reform Act amendments]."  Because Milano
had alleged a violation of Section 11 of the Securities Act, his
complaint was controlled by the Reform Act.

     In response to Milano, state class action complaints may

omit Securities Act Section 11 claims, and instead rely
exclusively on state law claims.-[265]-  This strategy,
however, may not allow plaintiffs to avoid the discovery stay. 
In a class action filed against Brooktree Corporation in
California,-[266]- a discovery stay was imposed, despite
the fact that plaintiffs had alleged no federal securities
claims.  Notwithstanding the exclusively state claims, the court
granted Brooktree's motion to stay all discovery, including
third-party discovery.  While no opinion accompanied the court's
order, the oral argument transcript discloses that the court was
"looking at the spirit of the new federal legislation ... in the
nature of guidance" and that imposing a stay was "a function of
judicial discretion."


---------FOOTNOTES----------
     -[265]-This is not to say that a Securities Act Section 11
claim may not be added in an amended complaint after discovery is
had.  See Alpern v. UtiliCorp United, Inc., 84 F.3d 1525 (8th
Cir. 1996) (holding that a Section 11 claim added to an amended
complaint relates back to the date the original complaint was
filed for purposes of the statute of limitations and calculation
of damages, if based on the same transactions, occurrences, and
conduct alleged in the original complaint).

     -[266]-Sperber v. Bixby, Case No. 699812 (Cal. Super. Ct.,
San Diego Cty., Oct. 18, 1996).
==========================================START OF PAGE======
               b.   Cases Denying a Discovery Stay.

     In two state class actions, Nutrition for Life and IMP, Inc.
(both parallel to federal actions), state courts have denied the
discovery stay.-[267]-  While the Nutrition for Life court
does not explain its ruling, the IMP court, in allowing discovery
and denying a motion to stay the proceedings in favor of the
federal action, held:

          The motion to stay the consolidated state actions
          is denied.  This action was filed after the

          related federal actions.  California law affords
          plaintiffs broader and more effective relief on
          their state law claims than on their federal
          claims, which involve different issues.  Under the
          circumstances, this court can best determine the
          rights of the parties.  There are no "unseemly
          conflicts" if this case proceeds.  And this action
          is not harassing, vexatious or
          oppressive.-[268]-

Thus, state courts are in conflict on the question of whether
plaintiffs who seek to elude the federal discovery stay in state

court will be granted discovery.

          2.   Institutional Intervention in State Court.

     Filing suit in state court does not necessarily preclude
institutional involvement.  A recent New York state court
decision, not involving the Reform Act, raises issues of control
similar to those being litigated under the lead plaintiff
provision of the Act.  On September 3, 1996, a New York State
Supreme Court trial judge granted a motion made by the California
Public Employees Retirement System ("CALPERS") to become co-lead
counsel during settlement talks in a shareholder action against
W.R. Grace & Co.-[269]-  The suit centered on the


---------FOOTNOTES----------
     -[267]-David S. Gilfand, Ltd. Profit Sharing Plan v.
Nutrition for Life Int'l, Inc., (Harris Cty., Tex. Dec. 11,
1996); Lee v. IMP, Inc., CV 760793 (Cal. Super. Ct. Santa Clara
Cty. Dec. 11, 1996). 

     -[268]-Lee v. IMP, Inc., CV 760793 (Cal. Super. Ct. Santa
Clara Cty. Dec. 11, 1996). 

     -[269]-Weiser v. Grace, Index No. 106285/95 (N.Y. Sup. Ct.,
N.Y. Cty. Sept. 3, 1996); 1 SEC. REF. ACT LITIG. REP. 940 (Aug. &
Sept. 1996).
==========================================START OF PAGE======
departure of Grace's CEO, J.P. Bolduc, who received severance pay
in excess of $20 million.  CALPERS, one of W.R. Grace & Co.'s
largest shareholders, was displeased with a previously proposed
settlement that would have required the company to change certain
policies, but not return any funds to shareholders.  If
institutions continue to intervene in this manner, the influence
of the Reform Act will be felt at the state level as well,
although the Act does nothing to encourage institutional
involvement in state court.

          3.   National Certification.


     For the state court actions for which there is no parallel
federal action, certification of a national class is critical. 
If a national class cannot be certified, potential recovery is
greatly diminished.  In order to apply its law to defendant
companies not incorporated or headquartered within the state, a
state must satisfy both the Due Process Clause of the Fourteenth
Amendment and the Full Faith and Credit Clause of Article IV.  As
those provisions have been construed by the United States Supreme
Court, the state "must have a `significant contact or significant
aggregation of contacts' to the claims asserted by each member of
the plaintiff class, contacts `creating state interest,' in order

to ensure that the choice of state law is not arbitrary or
unfair."-[270]-  State law will likely apply to the entire
class if the defendant is incorporated or maintains its principal
place of business in that state.-[271]-  A state also has
a "significant contact" if the plaintiff resides in that state or
the alleged fraudulent conduct occurred in that
state.-[272]-








---------FOOTNOTES----------
     -[270]-Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 821-
22 (1985) (citation omitted).

     -[271]-Havlicek v. Coast-to-Coast Analytical Serv., 39 Cal.
App. 4th 1844, 1855 (Cal. Ct. App. 1995) (principal place of
business is a "significant contact.").  But see, In re Victor
Tech Sec. Litig., 102 F.R.D. 53, 60 (1984) (certifying national
class where the misstatement "emanated" from the forum state),
aff'd, 792 F.2d 862 (9th Cir. 1986).

     -[272]-Phillips Petroleum, 472 U.S. at 819.
==========================================START OF PAGE======
     Many issues remain to be decided at the state court
level.-[273]-  These decisions will determine whether the
increase in state court filings will be sustained.

     D.   Proposition 211.

     Lawyers and consumer groups that had opposed enactment of
the Reform Act unsuccessfully sought to rewrite the California
securities laws through a ballot measure known as Proposition
211, officially known as the "Attorney-Client Fee Arrangements,
Securities Fraud, Initiative Statute."  The measure would have,

among other things, created an Exchange Act Section 10(b) type
action at the state level expressly allowing:  private rights of
action, aiding and abetting, punitive damages, the fraud-on-the-
market theory, no indemnification of officers and directors,
joint and several liability for all defendants, and no caps on
attorneys' fees.  Proponents of Proposition 211 argued that the
Reform Act left investors in need of better protection from
fraud.  After opposition by, among others, President Clinton and
Chairman Levitt, California voters defeated the measure in
November, 1996 by a vote of 3 to 1.  In voicing his opposition,
Chairman Levitt stated Proposition 211 "may skew [the] balance"
between investor protection and capital formation and that "the

Litigation Reform Act should be given a chance to work before
other measures are taken."  In response to the threat of greater
exposure at the state level, issuers and other traditional
defendants have begun a push for federal preemption of state
securities class actions.-[274]-

---------FOOTNOTES----------
     -[273]-For example, a Petition for Review has recently been
filed with the California Supreme Court to address whether the
California Corporate Securities Law applies to stock transactions
outside of California.  Pass v. Diamond Multimedia Sys., Inc.,
Case No. CV-758927 (Santa Clara Cty. Sup. Ct.) (petition filed
Jan. 27, 1997).

     -[274]-On November 9, 1996, at their annual industry
convention, top Wall Street officials, including NYSE Chairman
Richard Grasso, announced they would push for federal legislation
during this upcoming Congressional session to preempt state blue
sky laws.  See Jill Dutt, Brokers Pledge to Fight Anti-Securities
Initiatives, WASH. POST, Nov. 10, 1996, at A7.  Further, Silicon
Valley executives have formed the California Technology Alliance,
with passage of preemption legislation one of its top priorities.

See CORP. FIN. WEEK, Dec. 16, 1996 at 13.  As expected,
opposition to preemption is beginning to form.  See Rachel
Witmer, Industry Groups Seek New Legislation to Preserve
                                                   (continued...)
==========================================START OF PAGE======

VIII.     CONCLUSION.

     In his letter to Chairman Levitt, President Clinton
expressed his concern that the Reform Act "may reduce the ability
of investors to seek redress for damages resulting from arguably
fraudulent activities."  The President said it was important for
the agency to "monitor the implementation and impact of this
legislation carefully -- and increase enforcement and rulemaking
activities if necessary."  The staff of the Office of the General
Counsel has been following private securities class action cases

very closely since the Reform Act was enacted.

     While the number of cases filed in federal court has dropped
on an annual basis compared to prior years, it is not clear
whether this decrease is the result of a temporary drop in cases
immediately following the enactment of the Reform Act or whether
it means that the weaker cases are no longer being brought in
federal court.  It is also possible that the drop is a reflection
of the strength of the market.  A market downturn could result in
an increased number of lawsuits.  It appears that the number of
suits naming accountants and other third party defendants has
dropped sharply.  This may be the result of the Supreme Court

decision in the Central Bank case, as well as the Reform Act.

     We have found that the cases are moving slowly through the
courts.  The courts appear to be proceeding in a cautious and
deliberate manner, carefully considering the sufficiency of the
cases under the strict new pleading standards imposed by the Act.

Our review suggests that plaintiffs' lawyers are not filing
"cookie-cutter" complaints and that the race to the courthouse
has slowed somewhat.



---------FOOTNOTES----------
     -[274]-(...continued)
Securities Litigation Reform, Sec. Reg. & L. Rep. (BNA) Vol. 29,
No. 6, at 152-153 (Feb. 7, 1997) (listing Public Citizen,
Government Finance Officers Association, and Consumer Federation
of America as potential opponents).

     Legislators in California have taken action which may also
affect the future of the state securities class action.  See
Legislative Briefs, State News Briefs, Sec. Reg. & L. Rep. (BNA)
Vol. 28, No. 48, at 1523 (Dec. 13, 1996) (reporting that
California State Senators John Vasconcellos and Jim Brulte
introduced SB No. 35, which would incorporate the Reform Act into
California state law).
==========================================START OF PAGE======
     It appears that more securities class action cases are being
brought in the state courts.  In some cases, this may be an
attempt to overcome the discovery stay imposed by the Reform Act.

In other cases, it may reflect a migration of weaker cases to
state court.  We are continuing to monitor the situation.

     The quality and quantity of forward-looking disclosure has
not significantly improved following enactment of the safe harbor
for forward-looking statements.  Companies have been reluctant to
provide significantly more forward-looking disclosure beyond what
they provided prior to enactment of the safe harbor.  Companies

are primarily concerned about the lack of judicial guidance as to
the sufficiency of the required "meaningful" cautionary language
and about potential liability under state law, where the
statements may not be protected by the federal safe harbor. 
Concerns also have been raised about the quality of the
cautionary language provided by some issuers.  The staff intends
to continue to study the safe harbor and to consider what steps
might be necessary to encourage companies to provide forward-
looking information and to improve the quality of the
accompanying cautionary language.

     In addition to requesting this Report, the President also

expressed his hope that, if there were indications that the Act
was having a negative impact on the integrity of our markets, the
Commission would recommend amendments.  Based on our review of
the actions that have been filed and the judicial decisions that
have been rendered, as well as on discussions with various
interested parties, the staff believes that it is too soon to
draw any firm conclusions about the effect of the Reform Act on
frivolous securities litigation, or, for that matter, on
meritorious litigation.  Accordingly, the staff does not
recommend any legislative changes at this time.

     There are still many uncertainties about the effects of the
Reform Act.  The staff expects to continue carefully monitoring

the cases, offering our views to the courts through the filing of
friend of the court briefs, studying issuer use of the safe
harbor, and reporting back to the Commission if we find that
modifications are necessary.