Securities Private Enforcement Reform Act

Summary: Securities Private Enforcement Reform Act - Amends the Securities Exchange Act of 1934 to declare that a defendant may be liable jointly and severally for damages in an implied private action only if the trier of fact specifically determines that the defendant knowingly engaged in securities fraud.  Sets forth a liability allocation scheme to determine the percentage of responsibility among the defendants if the trier of fact finds that the defendant did not engage in knowing securities fraud. 
Prescribes guidelines for the award of reasonable fees and expenses incurred by the prevailing party in any implied private action. 
Declares that in any implied right of action that is certified as a plaintiff class action:  (1) the share that is awarded to the representative plaintiff shall be calculated in the same manner as the share awarded to all other members of the plaintiff class; (2) a party may not be represented by any attorney who owns or has a beneficial interest in the securities that are the subject of the litigation, or who is obligated to pay remuneration to a third party for assistance in obtaining the representation of any party to the action; and (3) funds disgorged as a result of Securities and Exchange Commission action shall not be distributed as payment for attorneys' fees or expenses incurred by private parties seeking distribution of the disgorged funds. 
Sets a statute of limitations on private rights of action under this Act.

SECTION. 1. SHORT TITLE.

    This Act may be cited as the ``Securities Private Enforcement 
Reform Act''.

SEC. 2. FINDINGS.

    The Congress finds that--
            (1) excessive securities litigation is a serious burden on 
        the national economy, diverting limited capital resources to 
        less productive areas;
            (2) meritless lawsuits filed under Federal securities laws 
        are making it harder for American companies to raise capital 
        and attract experienced members to serve on their boards;
            (3) in the past 3 years, issuers of 1 out of every 12 
        stocks traded on the New York Stock Exchange have been sued for 
        securities fraud;
            (4) in the securities fraud area, the civil justice system 
        is being transformed into a nonmerit-based, unjust system, in 
        which professional plaintiffs extract settlements from 
        entrepreneurs, regardless of the merits of the cases filed;
            (5) such securities lawsuits impose additional costs on 
        publicly traded companies, often force them into bankruptcy, 
        and create job losses within the economy;
            (6) such securities fraud lawsuits stifle the development 
        of future products by compelling investment bankers and 
        accounting firms, whose assistance is essential for accessing 
        capital markets, to resist working with new venture firms 
        because of the higher risk of litigation associated with them; 
        and
            (7) reform in the securities fraud laws are needed to 
        ensure that the courts can properly hear and adjudicate 
        securities fraud cases.

SEC. 3. PRIVATE CIVIL ACTION PROCEDURES.

    The Securities Exchange Act of 1934 is amended by inserting after 
section 20A (15 U.S.C. 78u-1) the following new section:

                   ``private civil action procedures

    ``Sec. 20B. (a) Requirement of Proportionate Liability.--
            ``(1) Limitation on joint and several liability.--A 
        defendant who is found liable for damages in an implied private 
        action arising under a provision of this Act may be liable 
        jointly and severally only if the trier of fact specifically 
        determines that the defendant engaged in knowing securities 
        fraud, as defined in paragraph (3).
            ``(2) Determination of liability.--If the trier of fact 
        does not find, pursuant to paragraph (1), that the defendant 
        engaged in knowing securities fraud, the defendant's liability 
        shall be determined as follows:
                    ``(A) The trier of fact shall determine the 
                percentage of responsibility of the plaintiff, of each 
                of the defendants and of each of the other persons or 
                entities alleged by the parties to have caused or 
                contributed to the harm alleged by the plaintiff. In 
                determining the percentages of responsibility, the 
                trier of fact shall consider both the nature of the 
                conduct of each person and the nature and extent of the 
                causal relationship between that conduct and the damage 
                claimed by the plaintiff.
                    ``(B) For each defendant, the trier of fact shall 
                then multiply the defendant's percentage of 
                responsibility by the total amount of damage suffered 
                by the plaintiff that was caused in whole or in part by 
                that defendant and shall enter a verdict or judgment 
                against the defendant in that amount. No defendant 
                whose liability is determined under this subsection 
                shall be jointly liable on any judgment entered against 
                any other party to the action.
                    ``(C) Except where contractual relationship 
                permits, no defendant whose liability is determined 
                under this subsection shall have a right to recover 
                from another defendant any portion of the judgment 
                entered against him.
            ``(3) Definition.--A defendant engages in `knowing 
        securities fraud' only if he (A) makes a material 
        representation with actual knowledge that the representation is 
        false or omits to make a statement with actual knowledge that, 
        as a result of the omission, one of his material 
        representations is false; and (B) knows that other persons are 
        likely to rely on that misrepresentation or omission. Reckless 
        conduct by the defendant shall not constitute `knowing 
        securities fraud'. The liability in damages, in any, of a 
        defendant who acts in a reckless manner shall be determined in 
        accordance with paragraph (3).
            ``(4) Coverage of provision.--This subsection relates only 
        to the allocation of damages among defendants. Nothing herein 
        shall affect the standards for liability under any implied 
        private action arising under a provision of this Act.
    ``(b) Awards of Attorney Fees.--
            ``(1) Authority to award fees.--If the court in any implied 
        private action arising under this Act enters a final judgment 
        against a party litigant on the basis of a motion to dismiss, 
        motion for summary judgment, or a trial on the merits, the 
        court shall, upon motion by the prevailing party, award the 
        prevailing party reasonable fees and other expenses incurred by 
        that party unless the court determines that the position of the 
        losing party was substantially justified. If the court 
        determines that the position of the losing party was 
        substantially justified, it shall not award fees and other 
        expenses to the prevailing party. The determination whether the 
        position of the losing party was substantially justified shall 
        be made on the basis of the record which is made in the civil 
        action for which fees and other expenses are sought.
            ``(2) Application for fees.--A party seeking an award of 
        fees and other expenses shall, within 30 days of a final, 
        nonappealable judgment in the action, submit to the court an 
        application for fees and other expenses that verifies that the 
        party is entitled to such an award under paragraph (1) and the 
        amount sought, including an itemized statement from any 
        attorney or expert witness representing or appearing on behalf 
        of the party stating the actual time expended and the rate at 
        which fees and other expenses are computed.
            ``(3) Allocation and size of award.--The court, in its 
        discretion, may--
                    ``(A) determine whether the amount to be awarded 
                pursuant to this section shall be awarded against the 
                unsuccessful party, its attorney, or both; and
                    ``(B) reduce the amount to be awarded pursuant to 
                this section, or deny an award, to the extent that the 
                prevailing party during the course of the proceedings 
                engaged in conduct that unduly and unreasonably 
                protracted the final resolution of the matter in 
                controversy.
            ``(4) Awards in discovery proceedings.--In adjudicating any 
        motion for an order compelling discovery or any motion for a 
        protective order made in any implied private action arising 
        under this Act, the court shall award the prevailing party 
        reasonable fees and other expenses incurred by the party in 
        bringing or defending against the motion, including reasonable 
        attorney fees, unless the court finds that special 
        circumstances make an award unjust.
            ``(5) Definitions.--For purposes of this subsection--
                    ``(A) The term `fees and other expenses' includes 
                the reasonable expenses of expert witnesses, the 
                reasonable cost of any study, analysis, report, test, 
                or project which is found by the court to be necessary 
                for the preparation of the party's case, and reasonable 
                attorney fees and expenses. The amount of fees awarded 
                under this section shall be based upon prevailing 
                market rates for the kind and quality of services 
                furnished.
                    ``(B) The term `substantially justified' shall have 
                the same meaning as in section 2412(d)(1) of title 28, 
                United States Code.
    ``(c) Abusive Practices..--
            ``(1) Shares of awards to representative plaintiffs.--In 
        any implied private action arising under this Act that is 
        certified as a plaintiff class action pursuant to the Federal 
        rules of civil procedures, the share of any final judgment or 
        of any settlement that is awarded to any party serving as a 
        representative plaintiff shall be calculated in the same manner 
        as the shares of the final judgment or settlement awarded to 
        all other members of the plaintiff class.
            ``(2) Representation of class actions.--(A) In any implied 
        private action arising under this Act that is certified as a 
        plaintiff class action pursuant to the Federal rules of civil 
        procedure, the plaintiff class may not be represented by (i) 
        any attorney who directly or indirectly owned or otherwise had 
        a beneficial interest in the securities that are the subject of 
        the litigation, or (ii) any attorney affiliated with such an 
        attorney. An attorney who knowingly violates this prohibition 
        shall be barred from representing any party in any action 
        arising under this Act or under the Securities Act of 1933.
            ``(B) In any implied private action arising under this Act 
        that is certified as a plaintiff class action, an attorney may 
        not represent the plaintiff class if the attorney has paid or 
        is obligated to pay a fee to a third party who assisted him in 
        obtaining the representation of any party to the action. An 
        attorney who knowingly violates this prohibition shall be 
        barred from representing any party in any action arising under 
        this Act or under the Securities Act of 1933.
            ``(3) Disgorged funds.--(A) Funds disgorged as a result of 
        any action brought by the Commission in Federal court or of any 
        Commission administrative action shall not be distributed as 
        payment for attorney fees or expenses incurred by private 
        parties seeking distribution of the disgorged funds.
            ``(B) Any judgment awarded against any person in any 
        implied private action arising under this Act shall be 
        diminished by the amounts, if any, that such person has been or 
        may be required to disgorge, pursuant to a court order obtained 
        at the instance of the Commission in a proceeding brought under 
        section 21(d) of this Act, or in connection with any Commission 
        administrative action, relating to the same alleged misconduct.
    ``(d) Burden of Proof.--In any implied cause of action arising 
under this Act in which the plaintiff may recover money damages only if 
it proves that the defendant acted with scienter, the plaintiff must 
establish that element of his claim by clear and convincing evidence in 
order to establish a right to recover money damages.
    ``(e) Pleading Requirement.--In any implied cause of action arising 
under this Act in which the plaintiff may recover money damages only if 
it proves that the defendant acted with scienter, the plaintiff must 
allege in its complaint facts suggesting that the defendant acted with 
that state of mind.
    ``(f) Aiding and Abetting Liability.--In any implied cause of 
action arising under this Act in which the plaintiff may recover 
damages only if it proves that the defendant acted with scienter, a 
defendant may be held liable as an aider and abettor only if the 
plaintiff proves that the defendant knew that another party had 
violated a provision of this Act and that the defendant, acting with 
deliberate intent to deceive, manipulate, or defraud for the 
defendant's own direct pecuniary benefit, provided substantial 
assistance to the other party's violation. Direct pecuniary benefit 
shall not include ordinary compensation for services provided.''.

SEC. 4. TIME LIMITATION ON PRIVATE RIGHTS OF ACTION.

    The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is 
amended by adding at the end the following new section:

``SEC. 36. LIMITATION ON PRIVATE RIGHTS OF ACTION.

    ``Except as otherwise provided in this Act, any private right of 
action arising from a violation of this Act shall be brought not later 
than the earlier of--
            ``(1) 5 years after the date on which such violation 
        occurred; or
            ``(2) one year after the date on which the violation was 
        discovered or should have been discovered through the exercise 
        of reasonable diligence.''.

SEC. 5. EFFECTIVE DATE.

    The provisions of this Act shall apply to all actions commenced on 
or after the date of the enactment of this Act.