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31–531 PDF 2007

INVESTOR PROTECTION: A REVIEW OF

PLAINTIFFS’ ATTORNEY ABUSES IN SECURITIES

LITIGATION AND LEGISLATIVE REMEDIES

HEARING

BEFORE THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE, AND 

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 28, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–102

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SUE W. KELLY, New York 

ROBERT W. NEY, Ohio 

VITO FOSSELLA, New York, 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

MARK R. KENNEDY, Minnesota 

PATRICK J. TIBERI, Ohio 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

JIM GERLACH, Pennsylvania 

KATHERINE HARRIS, Florida 

JEB HENSARLING, Texas 

RICK RENZI, Arizona 

GEOFF DAVIS, Kentucky 

MICHAEL G. FITZPATRICK, Pennsylvania 

JOHN CAMPBELL, California 

MICHAEL G. OXLEY, Ohio 

PAUL E. KANJORSKI, Pennsylvania 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

ARTUR DAVIS, Alabama 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

June 28, 2006 .................................................................................................... 1

Appendix: 

June 28, 2006 .................................................................................................... 59

WITNESSES 

WEDNESDAY, JUNE 28, 2006

Cox, James D., Brainard Currie Professor of Law, Duke University .................. 26

Frank, Theodore H., Resident Fellow, American Enterprise Institute, and 

Director, AEI Liability Project ............................................................................ 24

Galvin, Hon. William F., Secretary of the Commonwealth, Commonwealth 

of Massachusetts .................................................................................................. 21

Walker, Hon. Vaughn R., Chief Judge, U.S. District Court, Northern District 

of California .......................................................................................................... 19

APPENDIX 

Prepared statements: 

Clay, Hon. Wm. Lacy ....................................................................................... 60

Cox, James D. ................................................................................................... 62

Frank, Theodore H. .......................................................................................... 75

Galvin, Hon. William F. ................................................................................... 87

Walker, Hon. Vaughn R. .................................................................................. 90

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Baker, Hon. Richard H.: 

Letter from Zuckerman Spaeder LLP ............................................................. 109

Frank, Hon. Barney: 

Letter to Hon. Richard H. Baker ..................................................................... 112

Response letter from Hon. Richard H. Baker ................................................ 113

Follow-up letter to Hon. Richard H. Baker .................................................... 114

Statement of Damon A. Silvers ....................................................................... 115

Letter from the Consumer Federation of America ........................................ 116

(1)

INVESTOR PROTECTION: A REVIEW 

OF PLAINTIFFS’ ATTORNEY ABUSES IN 

SECURITIES LITIGATION AND 

LEGISLATIVE REMEDIES 

Wednesday, June 28, 2006

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, 

AND GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:07 a.m., in room 

2128, Rayburn House Office Building, Hon. Richard H. Baker 

[chairman of the subcommittee] presiding. 

Present: Representatives Baker, Ryun, Shays, Gillmor, Castle, 

Lucas, Manzullo, Kelly, Ney, Biggert, Miller of California, Kennedy, Tiberi, Barrett, Brown-Waite, Feeney, Gerlach, Hensarling, 

Renzi, Davis of Kentucky, Fitzpatrick, Campbell, Pearce, McHenry, 

Ackerman, Sherman, Meeks, Moore of Kansas, Capuano, Ford, 

Crowley, Israel, Clay, McCarthy, Baca, Matheson, Miller of North 

Carolina, Scott, Velazquez, Davis of Alabama, Wasserman-Schultz, 

and Maloney. 

Ex officio present: Representative Frank. 

Chairman BAKER. I’d like to call this meeting of the Subcommittee on Capital Markets to order this morning. 

Let me first acknowledge that Mr. Kanjorski, the ranking member of the subcommittee, is unable to participate in today’s hearing. 

Unfortunately, due to unexpected flooding in Pennsylvania, he 

has returned home to an almost certain mandatory evacuation 

order, so our thoughts are with him this morning, as I know he did 

intend to participate. 

Mr. Frank, of course, as the ranking member of the Full Committee, will participate in today’s hearing for that and other reasons, as well. 

Today the subcommittee meets to discuss actions and securities 

class action litigation, particularly the elements of H.R. 5491, the 

Securities Litigation Attorney Accountability and Transparency 

Act. 

While I believe the securities litigation area is in need of a more 

comprehensive reform, this bill represents a modest first step in 

that direction. 

A recent indictment of the country’s leading securities firm, 

Milberg Weiss, and revelations accompanying this indictment raise 

2

significant questions. Are plaintiffs’ interests in class action suits 

really being treated in the most appropriate manner? 

The actions alleged in the indictment are egregious. Over a 20-

year period, Weiss and two of the named partners allegedly kicked 

back millions of dollars to individuals in exchange for serving as 

the named plaintiffs in more than 150 class action and shareholder 

derivative suits. 

The scheme allegedly manufactured suits for the firm and solidified its dominance in the arena of securities cases. 

If these allegations are proven to be true, the firm and the attorneys engaged have breached their fiduciary duty to the investors 

whom they are charged to represent. 

The dominance of the Weiss firm is unparalleled. There is a 

Anjan V. Thakor study of 755 securities class action settlements 

over a 10-year period. The firm handled 43 percent of the settlements, netting $1.7 billion in fees and expenses. 

The second nearest competitor came in at a meager 7.8 percent, 

just under $200 million. 

Although dominant 10 years ago, Milberg Weiss allegedly continued to abuse its dominance by engaging in this scheme of kickbacks up until, reportedly, 2005, until after the U.S. Attorney 

began its investigation. 

With these allegations before us, and H.R. 5491, it is appropriate 

the committee review the industry practice and behavior to determine if investor protection requires us to act in a more direct manner. 

These actions, I feel, are justified, warranted, and to ensure reasonable investor protection, there may be a need, in fact, to do 

more, but the provisions of the bill, I think, at a minimum, are essential. 

Finally, there are those who question even the propriety of the 

hearing. Mr. Weiss, in his response to me, at our voluntary invitation for him to appear, questioned the committee’s legitimacy and 

right to conduct this examination. 

This overlooks the fact that executives of Arthur Andersen, 

WorldCom, Enron, Global Crossing, mutual fund operators, Fannie 

Mae, and Freddie Mac, all of whom were facing some level of legal 

jeopardy, be it civil or criminal, did not dissuade this committee 

from engaging in inquiry and having representatives of those entities appear before this committee. 

It is essential, I believe, to determine whether this conduct was 

an aberrant act or merely an instance of a single individual, or 

more disturbingly, a pattern and practice within an entire industry. 

This is really what’s known as oversight. It’s never fun, but it’s 

a job that this committee has to conduct in the interests of all engaged in our financial securities markets. 

Although allegations of political motivations have been made 

with regard to this hearing, I would take the committee back to the 

appearance of Frank Raines in October of 2004, and in that case, 

subsequent events, I believe, have proven the importance of this 

committee’s work and of staying the course. 

3

And I wish to be very clear. Mr. Weiss is not under indictment. 

He actually continues his practice as of this moment, representing 

numerous plaintiffs in class action suits. 

He was voluntarily invited today to discuss the actions that the 

firm was taking to ensure that the alleged abuses would no longer 

continue. Instead, he has chosen simply to question the motivations 

of the committee as well as my personal motivation. 

His letter, of course, will be made public. I do consider the response an unprofessional one to this committee’s inquiry. 

However, despite the absence of Mr. Weiss, whom I believe refuses to appear because further discussion and disclosure about the 

conduct would perhaps further degrade the firm’s reputation, we do 

have a very distinguished panel, a panel that I know will not shy 

away from legitimate discussion on how to best provide investor 

protection. 

Whether the panelists agree with my perspective or not, I know 

they will state their opinions in an articulate manner. 

I believe investor protection is best served by seizing ill-gotten 

gains and returning them to the people from whom they were 

taken. 

Others believe, perhaps rightfully so, that upon successful pursuit of wrongdoers, seizing assets for the satisfaction of the plaintiff’ attorney or the State government in which the suit is filed is 

balanced justice. I find that interesting. 

I do know this. If you are robbed and your money is taken, you 

really just want your money back. The victim does not care if the 

loss came as a result of fraudulent market operatives, a clever trial 

lawyer, or a deft regulator. If any of them took your money, you 

still feel robbed. 

I choose to defend the investors from all of them—to get the 

money and simply give it back. 

Mr. Frank? 

Mr. FRANK OF MASSACHUSETTS. Mr. Chairman, I am very disappointed in the calling of this hearing. 

No one questions the usefulness of a hearing on protecting investors. Indeed, I am disappointed that this committee has had so few 

of them and that the focus in this case is so narrow. 

But to have a hearing which you originally titled, ‘‘A review of 

a pending indictment,’’ is a terrible abuse of the important principle of the separation of powers. 

You said, Mr. Chairman, that previously people have been indicted who faced some degree of legal jeopardy, civil or criminal. 

To equate the possibility of a civil lawsuit, including one not yet 

filed, with a pending indictment, is as fundamental a misunderstanding of the requirements of the American legal system as I 

have heard propounded officially. 

I thought Mr. Weiss’s letter to you was quite justified. I would 

ask to put into the record now the letters between yourself and myself and Mr. Kanjorski— 

Chairman BAKER. Without objection. 

Mr. FRANK OF MASSACHUSETTS.—in which we made the point 

that a hearing called, ‘‘to review the pending indictment,’’ your 

original title, is a terrible mistake, and then, in response to our 

complaint, you said, ‘‘Well, I’ll change the title.’’ But you haven’t 

4

changed the focus. You have people who are going to talk about the 

indictment. 

You say, ‘‘Well, Mr. Weiss wasn’t indicted.’’ True. The firm of 

which he is a named partner has been indicted. It is to discuss the 

indictment of the firm, and that is simply entirely inappropriate. 

You say, Mr. Chairman, you want to look at the pattern and 

practice here. Fine. You don’t need to look at the indictment in this 

particular case to do that. 

And yes, I do question, frankly, the motives of this hearing. 

I want to protect investors. You know, we have recently read a 

lot about the backdating of stock options. Where’s the hearing on 

that? Where’s the hearing that the SEC is now looking into? 

You say, Mr. Chairman, ‘‘Well, this is called oversight.’’ I can understand why you would have to explain to people the meaning of 

the phrase ‘‘oversight,’’ since we as a committee, indeed as a Congress, have in recent years done so little of it. But oversight includes looking at whether or not there is or isn’t enforcement. 

I would like for us to have a broad hearing on investor protection. The issues that you mention are legitimately part of that. But 

a review of a pending indictment? Have we become some kind of 

a court, some kind of a judicial body? 

Is this a longing for the days of the Schiavo bill when we decided 

that we would intervene and reverse the courts in Florida? Because 

that’s what we are talking about, a review of a pending indictment. 

That is as far from a legitimate legislative purpose as I can see. 

Mr. Weiss’s letter was entirely appropriate. 

Now, as to the substance here, yes, I want to look into this, but 

I want to look into a lot of other issues, as well. 

Let me say at this point, and I spoke to Mr. Kanjorski, who is 

busy now with a potential flood in his district, we recently had a 

decision by the circuit court striking down the SEC’s effort to require registration of hedge funds, a very serious issue. 

I think the hedge fund issue and the role of hedge funds in this 

economy and the impact that they can have is a very serious one. 

This committee has ignored the issue. 

Mr. Capuano and I had written and asked for a hearing on that 

issue. We can’t have that. Instead, we have to have a hearing on 

a pending indictment, because we apparently don’t have time to 

have a hearing on the subject of hedge funds. 

Mr. Kanjorski and I are preparing legislation now that will at 

the very least restore to the SEC the power that it thought it had 

before that circuit court decision regarding hedge funds, and I 

would hope that we would find time for a hearing about the issue 

of hedge funds. 

We have the Securities and Exchange Commission deprived of 

authority that it wanted to exercise with regard at least to registration. That’s a very serious issue and has a significant impact 

not just on investors but on the whole systemic issues before us. 

So there are a number of areas that we want to look at. 

I think what’s happened is, and we see this with legislation filed 

to repeal parts of Sarbanes-Oxley, with this notion that the only 

thing apparently going into this hearing, the only problem that investors face is that some lawsuits brought in the name of investors 

are too zealously brought and not properly structured. 

5

Are there no other problems that investors face? Are there no 

other abuses? As I say, the backdating of stock options, the refusal 

of boards of directors to pay attention to advisory votes, the problem of executive compensation, the problem of boards of directors 

receiving substantial negative votes and the members of the shells 

having no ability to deal with that? 

I think what we—maybe, you know we get into titles, and you 

changed the name of this. You were originally calling it ‘‘a review 

of a pending indictment.’’ I think you should have called it, ‘‘The 

empire strikes back,’’ because that’s what we have here. 

We have obviously on the part of many of my colleagues the feeling that this business of interfering with the people who run corporate America has gone too far. This is just beyond where we 

should be. And so we’re going to repeal part of Sarbanes-Oxley—

not you, Mr. Chairman, but others have advocated that. We’re 

going to push back here. 

Now, looking at every individual advice, I do believe that there 

is room—not room, but need for a revision of how Sarbanes-Oxley 

affects smaller corporations. The chairman and I both said that to 

Mr. Cox when he was here last. Let’s have an ongoing, balanced 

look at how best to protect investors. 

But a hearing that ignores the backdating of stock options, a 

committee that has not looked into hedge funds and always refused 

to do that, where you have sentiment on your side in particular, 

some on ours for repealing part of Sarbanes-Oxley, to make that 

the thrust of our approach, to act as if the real problem here is that 

the poor corporate leadership is being unduly picked on and harassed, and who ignore all these other issues, and then to top it off, 

frankly, by I think grandstanding entirely inappropriately in violation of the appropriate role of Congress in a system of separation 

of powers, by having a ‘‘review of a pending indictment’’ for which 

I can certainly find no precedent, which is a good thing about the 

judgment of our predecessors, is to make a mockery of the role of 

this committee, and I am very disappointed. 

Chairman BAKER. I thank the gentleman for his statement. 

Mr. Ryun? 

[No response] 

Chairman BAKER. Mrs. Biggert? 

[No response] 

Chairman BAKER. Mr. Castle, statement? 

[No response] 

Chairman BAKER. Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

And one, I want to thank you for holding this hearing. I listened 

very closely to the ranking member, whom I have the utmost respect for, but as I read some of the written testimony, we appear 

maybe to be at different hearings here. 

I think there are some very serious issues to be discussed here 

today about the attorney-driven securities class action suit, its impact upon our economy, and its impact upon investors. 

Much of what he said may have been accurate, it may have been 

inaccurate, but much of it, I believe, is frankly irrelevant. 

6

As I look at our panel, I don’t see anybody from Milberg Weiss 

represented here today. We’re not here to prosecute. We’re here to 

legislate. 

Beyond a reasonable doubt may be a burden to convict, but it 

certainly is not a burden to legislate and frankly, I think this committee has an obligation, when we see serious headlines, to look 

into the underlying matters. 

It’s not just simply the case of Milberg Weiss. I think it was just 

this last week that the Chicago Tribune broke a story of some serious accusations of general counsels pinching funds that had been 

lead plaintiffs’ in class action lawsuits—receiving massive legal 

fees for apparently no work. 

Again, I don’t know all the facts underlying these, but these are 

serious accusations that I believe this committee has an obligation 

to look into. 

I think this is a perfect follow-up to our earlier hearing that 

dealt with the impact of our place in the global securities market. 

And we know that we’re losing ground and we know that is a 

worrisome trend for our jobs, for our economy, and we know from 

our testimony that frankly, being an overly litigious society is at 

least one of the primary factors that are causing many companies 

to decide to list on other exchanges besides our own. 

And so I think, frankly, there’s a number of practices we have 

to look at here today, and I look forward to hearing the testimony. 

I think much good could be done. 

And I’m particularly interested in this unique aspect of using the 

power of free enterprise and competition in selecting lead counsel 

for these cases and exploring its impact on investors, and I believe, 

frankly, a little transparency, a little accountability, a little free enterprise may go a very long way to protecting our investors, our 

jobs, and our economy. 

And I want to thank the chairman for calling this hearing, and 

I yield back. 

Chairman BAKER. I thank the gentleman. 

Mr. Ackerman. 

Mr. ACKERMAN. I thank the Chair. 

Unlike Mr. Frank, whose remarks are always very measured, I 

would like to say that I am absolutely furious that we’re having 

this hearing today. 

At the outset, let me say that I know Mr. Weiss. I’m a friend of 

Mr. Weiss, and in the interests of full disclosure, I don’t believe 

he’s ever contributed to my campaign. 

Nine years ago, approximately five members of his 500-member 

organization did contribute to my campaign, none of them over 

$500. I want to say that at the outset. 

Mr. Chairman, there’s a war going on in this country between investors and consumers on the one hand, and corporate America, 

that seeks protection from any kind of meaningful lawsuit, and 

that war is getting rather vicious. 

The Administration and their corporate friends are using any 

means possible to try to degrade the plaintiffs’ bar and to discredit 

and defame any of the players therein, and will use any means at 

their disposal, and I am sorry to see that today, this committee becomes a tool in that war. 

7

You started out by saying, Mr. Chairman, that the, ‘‘allegations 

before us.’’ 

This is not a court. There should be no allegations before us. 

We’re not here to judge allegations in an ongoing judicial proceeding. How dare we involve ourselves in that? 

It was just said by my colleague across the aisle that we’re here 

to legislate. We are here to legislate. That is our job. We are not 

the judiciary. We’re not the Justice Department. We’re not the Administration. 

Mention was just made that what we should do for people who 

lost money in investments is to give their money back. If anybody 

even cared to read the indictment, to read the charges, there is no 

charge that any investor lost more than one penny, not even one 

penny. 

This is a fight over who gets to represent classes, not the loss of 

money to investors. That is not charged in this allegation. 

Let me also say that I am appalled, absolutely appalled at the 

fact that the committee has invited a sitting Federal judge, who 

has no business before this committee, to talk about a matter that’s 

before the courts. 

I took time last night to call some Federal judges. They were absolutely aghast that a sitting Federal judge, under the canons of 

judicial ethics, would testify on a matter of changing the law on 

issues that affect people in his courtroom. 

I read his testimony. It makes reference to Milberg Weiss. And 

maybe if we get to that point, I’ll ask him if it’s not true that even 

Milberg Weiss has a current case before his bench. This is an absolute conflict. 

I think that the judge should recuse himself of all such cases if 

he’s going to take an activist role and today become the poster boy 

for judicial activism to change the law under which he rules. 

Mr. Chairman, this is a hit. This is an axe job against a particular firm that has not been found or proven guilty, that has not 

even begun the case of defending itself. This committee participates 

in an ongoing smear before the trial even begins. 

I say shame on us. We should not be involved in that. We have 

legitimate issues to address. We have legitimate concerns. There is 

legislation purportedly before us that we’re discussing today, but 

that’s a ruse for what’s really going on here. 

Mr. Chairman, you said in your invitation a moment ago, you invited Mr. Weiss and that he declined, probably because his appearance here would tend to degrade his firm. 

I think that’s an important statement that you have made, knowing full well that the person to whom we refer is also a live target 

of this criminal investigation. 

And to say, ‘‘Oh, too bad, the guy doesn’t want to come here and 

defend himself’’—this isn’t a courtroom. But in making that statement, Mr. Chairman, which I absolutely agree with, that it would 

tend to degrade his firm—I would like to make a motion. 

May I, Mr. Chairman? 

Chairman BAKER. The gentleman was recognized for an opening 

statement. At the appropriate time, the gentleman certainly will be 

recognized for a motion. 

8

Mr. ACKERMAN. In that case, I will wait for that appropriate 

time. 

Chairman BAKER. I thank the gentleman. His time has expired. 

Mr. Feeney. 

Mr. FEENEY. Mr. Chairman, unlike some others in this committee, I haven’t made up my mind one way on whether there are 

serious abuses, and I just look forward to hearing the testimony. 

I will tell you, I’m both an attorney and a shareholder, and I’m 

interested in appropriate suits on my behalf as an investor, but 

what I’m not interested in as an investor are suits that are diminishing the value of my shares because of unnecessary defense or 

overzealous prosecution. 

So I think there’s a balance in basically the private way we protect investors against deliberate or negligent fraud by management. I hope we strike that balance right. 

But I don’t think enormous windfall profits to trial attorneys are 

the type of economic growth that I’m most interested in encouraging. 

So I’m here, anxious to hear the testimony. 

Chairman BAKER. I thank the gentleman. 

Mr. Moore. 

Mr. MOORE OF KANSAS. No statement, Mr. Chairman, except I 

am interested in hearing the testimony of the witnesses here today. 

Thank you. I yield back. 

Chairman BAKER. I thank the gentleman. 

Mr. Pearce. 

Mr. PEARCE. Thank you, Mr. Chairman. 

I find it amazing that we’re told that we’re not here to judge the 

allegations. 

As I review much of the hearings through the last month, I’ve 

listened as people have alleged that the financial services field is 

wrongly discriminating, charging too much interest to minorities, 

and those are allegations which are still in the process. We’ve listened to them. I think we will probably take action on those that 

are suitable, as we should. 

So I appreciate having the hearing today, because maybe we 

have a war between investors and corporate America, but we also 

have a love affair between investors and corporate America, because more Americans own stock now than ever before. 

And Mr. Feeney addressed the need of our investors to maximize 

the wealth, maximize their value without it having to be deteriorated by class action suits or judgments which are simply going 

into the pockets of our trial lawyers. 

So I personally am happy that you’re having the hearing and I 

look forward to the testimony. 

Thank you, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. 

Mr. Crowley. 

Mr. CROWLEY. I thank the chairman for yielding. 

The question I have is, why are we here? 

I went to bed last night and before I went to sleep, I don’t think 

we changed the Constitution prior to my going to sleep last night. 

And this morning, I am here. We’re going to be judges this morning, we’re going to—as the case is before our Federal courts, that 

9

will judge the performance or the actions of one particular company 

or law firm in this case, Milberg Weiss, wouldn’t prudence be that 

we wait until our courts have acted before we look at this particular case and its effect on our markets? 

I would imagine that many shareholders would prefer that, and 

pointing up one of my colleagues’ mentioning of shareholders and 

his owning some shares here, I’d prefer to wait and see what the 

courts have to say about this before we here make a judgment 

about any one particular case. 

I would also like to associate myself with my colleague from New 

York, Mr. Ackerman, in regards to a member of the judiciary here 

before the committee who may very well have to hear testimony on 

this particular case or similar cases like it. I have concerns about 

that, as well, and would associate myself with the remarks of the 

gentleman from New York. 

With that, I’ll yield back the balance of my time. 

Chairman BAKER. I thank the gentleman. 

Mr. McHenry. 

Mr. MCHENRY. Thank you, Mr. Chairman. Thank you for holding 

this hearing. 

I must disagree with my colleagues on the other side of the aisle. 

I think this is a very helpful hearing. 

They keep bringing up the firm Milberg Weiss, and I look at the 

committee hearing, and the title of it, Mr. Chairman, if I’ve the correct committee hearing notice, is, ‘‘Investor protection: a review of 

plaintiffs’ attorneys’ abuses in security litigation and legislative 

remedies.’’ 

I certainly think this hearing is mostly likely about legislative 

remedies, but if they’re bringing up Milberg Weiss, I assume that 

really pertains to a review of plaintiffs’ attorneys’ abuses in security litigation. 

Well, it’s kind of perplexing they would bring up Milberg Weiss 

if that weren’t the case, that perhaps that was a firm that was abusive and securities litigation. 

So Mr. Chairman, you know, I think it’s perplexing that the 

other side keeps talking about this. 

A colleague said that this side of the aisle is a tool for our corporate friends. Well, Mr. Chairman, I would simply retort that perhaps it’s the other side that’s the tool for the trial bar. 

I yield back the balance of my time. 

Chairman BAKER. I thank the gentleman. 

Mrs. McCarthy. 

Mr. FRANK OF MASSACHUSETTS. Will the gentlelady yield to me 

for 30 seconds? 

Mrs. MCCARTHY. I will yield to the gentleman from Massachusetts. 

Mr. FRANK OF MASSACHUSETTS. I would just point out to the previous speaker that the original title of the hearing was, ‘‘A review 

of the indictment.’’ 

So the notion that we are the ones who brought it up is, of 

course, about as far removed from reality as we get even in this 

hearing room from time to time. 

The original purpose—the original title of the hearing was, ‘‘A review of the indictment.’’ The chairman, when Mr. Kanjorski and I 

10

objected, wrote back and said, ‘‘Okay, I’ll change the title, but I 

won’t change the focus.’’ 

In fact, the memorandum sent out by the committee in its first 

substantive sentence says, ‘‘The law firm of Milberg Weiss and two 

of its partners were indicted.’’ 

So the focus on the indictment is the chairman’s focus, not ours. 

I thank the gentlelady. 

Mrs. MCCARTHY. Taking my time back, again, I’m looking forward to the hearing, but I have to say that, you know, we have 

seen this Congress, certainly in the last 10 years that I’ve been in 

Congress, try to do everything they can to take away the ability of 

our trial lawyers to help people that rightfully should be able to 

sue. 

If we look at a number of corporations in the last several years 

that have abused their powers—and Enron certainly is right there 

on the top of them—that it is our job to protect certainly our constituents and certainly those that need to be protected. 

You know, I consider myself a pro-business person, but when I 

look at these CEO’s, they’re putting the stockholder over their employees 9 times out of 10, don’t particularly care what their employees do, and that’s why we’re dealing with pensions, possibly 

losing health care, and we’re wondering why the middle-income 

families in this country are feeling the pain. 

So I will listen to the testimony, and I am surprised that we 

have a sitting judge, and I don’t know the law that much, but I am 

surprised that we have a sitting judge who possibly will be talking 

about a case that’s not even put to trial yet. 

With that, I yield back the balance of my time. 

Chairman BAKER. I thank the gentlelady. 

Mr. Campbell? 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

I have not been a Member of this Congress or this committee for 

very long, but if I’m not mistaken, this committee and this Congress, after the Enron, WorldCom, and so forth debacles, acted to 

have hearings and in fact took action on those items with Sarbanes-Oxley law and others long before many, if not all of the convictions in those cases occurred. 

In fact, it was only earlier this year that the primary convictions 

on Enron actually occurred, and I don’t think that anyone on this 

committee believes that this committee or this Congress should not 

have acted with Sarbanes-Oxley or whatever remedy we felt was 

appropriate until now, some 3 years after the shareholders in the 

Enron and WorldCom cases had lost their money. 

What we are dealing with here is similar to those cases, is an 

allegation of wrongdoing upon which shareholders have been 

harmed, and I don’t really see any distinction between hearings 

dealing with the allegations on Enron and WorldCom or the allegations here. 

So I thank you for the hearing, and I look forward to the testimony. 

Chairman BAKER. I thank the gentleman for his statement. 

Mr. Clay. 

Mr. CLAY. Thank you, Mr. Chairman. 

11

Mr. FRANK OF MASSACHUSETTS. Will the gentleman yield to me 

for 10 seconds? 

Mr. CLAY. I yield to the gentleman. 

Mr. FRANK OF MASSACHUSETTS. The difference is this. No one 

who was under indictment was summoned. Those were hearings 

not about indictments. 

And you are talking now about a hearing where it said originally, 

‘‘a review of the indictment,’’ and it was only changed for cosmetic 

purposes, and the invited witness was the named partner in the 

firm that is under indictment. 

And if the gentleman does not think there is a difference between someone who is under indictment in our system and someone who isn’t, that’s the core of our question. 

We are saying that at the point that an indictment comes and 

you are focused on a particular individual or a particular company, 

firm, whatever, with criminal liability, that ought to make a difference. 

I thank the gentleman. 

Mr. CLAY. I thank the gentleman. 

It is alarming to see the discovery of additional alleged ways to 

defraud investors in their retirements—their children’s college 

funds, trusts for their families, and other current or future plans 

for their investments. 

There is currently a case in court, no decision has been rendered, 

in which a law firm is accused of giving $11.3 million in kickbacks 

to paid plaintiffs. The indictment alleges that the firm received 

well over $200 million in attorney fees from class action lawsuits 

over the past 20 years. There is a 20-count indictment in this case. 

My concern centers on the alleged amounts of money involved 

and the fear of this not being an isolated case. 

These alleged schemes potentially are costing billions of dollars 

to investors. It is the investors who ultimately pay the judgments. 

We must stop this bleeding of our investment resources. 

However, in our haste to do something about this problem, we 

must not put in remedies that further complicate the problem. 

H.R. 5491, the Securities Litigation Accountability and Transparency Act, has been introduced as a remedy for this issue. 

I, as well as many others, have concerns that the loser pays provision of the bill could add a threat to plaintiff attorneys that 

would result in discouraging meritorious lawsuits as well as the intended frivolous lawsuits. 

Many are concerned that if a judge determined that their case 

was not substantially justified, the plaintiffs could be forced to pay 

the defendants’ legal fees. This could eliminate those law firms that 

work on a contingency basis and only the large firms would be able 

to take the risk of these cases. 

I also have concerns about Section 4 of H.R. 5491. This provision 

removes the right of plaintiffs to choose their lead attorneys. 

The Consumer Federation of America writes that, ‘‘Allowing 

judges to impose a competitive bidding process suggests that costs 

are the only relevant factor to consider when selecting counsel and 

that judges are better able than investors to determine what is in 

their best interest. Under the worst-case scenario, investors could 

be forced to accept representation by a lower-cost firm that lacks 

12

the expertise and experience of other available counsel and could 

lose their case as a result.’’ 

I look forward to hearing the witnesses’ testimony and the discussion of these and other salient issues on this subject. 

I also commend Chairman Baker for bringing forth legislation 

and I hope that we can work on compatible legislation to address 

this need. 

I yield back the balance of my time. 

Chairman BAKER. I thank the gentleman for his statement. 

Mr. Gillmor. 

Mr. GILLMOR. Thank you, Mr. Chairman. 

I’ll only say I think it’s very timely, what you’re doing, and I 

think it’s very important that we examine some of the abuses in 

this area. 

And I yield back. 

Chairman BAKER. I thank the gentleman for his delightfully constructive statement. 

Mr. Miller. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. I 

will make an opening statement, even though I did not intend to 

when I arrived, and I wonder, after all of the opening statements, 

what is really left for the witnesses to say this morning. 

The law recognizes that there are people we should be able to 

trust; we should be able to count on them to act on our behalf, and 

to deal with us fairly, honestly, and openly. Those are fiduciary relationships. 

A lawyer has that relationship with their client. A client should 

be able to count on their lawyer to act on their behalf, and to deal 

with them fairly, openly, and honestly. 

The law also recognizes that corporate officers are supposed to 

have that relationship with shareholders, and that shareholders 

can count on corporate officers to act on their behalf, to act fairly, 

openly, and honestly. 

If lawyers are betraying the trust of their clients, I’m outraged. 

I join in the outrage of those on that other side. 

But I also hope that they will join in the outrage that I feel if 

corporate officers are betraying the trust of shareholders to abuse 

their position, to take advantage, and to betray the trust of the 

people who should be able to trust them. 

Chairman BAKER. I thank the gentleman. 

Pursuant to the notice of the vote on the Floor, it would be my 

intention, with everyone’s concurrence, to recognize Ms. Velazquez, 

if she chooses to make any opening statement. 

I don’t believe there’s an additional member on our side that 

wishes to make an opening statement. 

I would ask the gentlelady to make her statement and then we 

would recess for the votes, much to the delight of our panel, I’m 

sure. 

Mr. FRANK OF MASSACHUSETTS. There is only one vote, apparently. There is a motion to adjourn. 

Chairman BAKER. A long day. 

Mr. FRANK OF MASSACHUSETTS. So buckle your seatbelts, it’s 

going to be a bumpy ride today. 

Chairman BAKER. Yes. I’m looking forward to that excitement. 

13

There being no objection, Ms. Velazquez? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

I ask unanimous consent to submit my statement into the record. 

Chairman BAKER. Absolutely, without objection. 

In that light, since we have a 15-minute vote, we will just come 

right back. We have one, and rather than rush any person to conclude their statement, we will stand in recess pending the single 

vote. 

Thank you. 

[Recess] 

Chairman BAKER. I’d like to reconvene the meeting of the Subcommittee on Capital Markets. 

At the time of the committee’s recess, I do not believe there was 

an additional member requesting recognition for opening statements. 

That being the case, I would now begin to move to our panel of 

witnesses. 

Mr. ACKERMAN. Mr. Chairman? 

Chairman BAKER. Mr. Ackerman? 

Mr. ACKERMAN. Would this be the appropriate time? 

Chairman BAKER. The gentleman is being recognized for what 

purpose? 

Mr. ACKERMAN. To make a motion. 

Chairman BAKER. The gentleman is recognized. 

Mr. ACKERMAN. Let me just get myself organized here for a second. 

Mr. Chairman, pursuant to the rules of the committee, the Rules 

of the House, and section 2(K)5 of Rule 11, I move that the committee go into executive session, and I ask to be heard on the motion. 

Chairman BAKER. The motion is in order. The gentleman’s motion, however, is not debatable, and the committee would proceed— 

Mr. ACKERMAN. Mr. Chairman, I’m reading the rules, and it does 

not say that the motion is not debatable, and in the absence of an 

assertion, every motion is debatable. 

Chairman BAKER. I’m advised by the committee parliamentarian 

that a discussion as to why the committee would go into a non-public consideration of a legislative matter is not a debatable measure, 

by precedent of the House. 

Mr. FRANK OF MASSACHUSETTS. Parliamentary inquiry, Mr. 

Chairman? 

Chairman BAKER. The gentleman is recognized. 

Mr. ACKERMAN. Reserving the right to appeal the decision. 

Chairman BAKER. Understood. 

Mr. FRANK OF MASSACHUSETTS. Mr. Chairman, you’re ruling that 

the motion is not debatable when it comes to the parliamentarian, 

who is entirely legitimate in his ruling, so I will not contest that, 

but I did want to get clarification, because does that apply to the 

provision that says whenever it is asserted by a member of the 

committee that the evidence or testimony may tend to degrade, defame, or incriminate any person, that ruling says that even if you 

say the purpose is that the testimony would tend to defame or degrade or incriminate, that is still nondebatable? 

Chairman BAKER. I am advised that is correct. 

14

Does the gentleman insist on his motion? 

Mr. ACKERMAN. Mr. Chairman, reserving the right to insist, Mr. 

Chairman, am I correct in saying that it was your statement that, 

‘‘Mr. Weiss chooses not to appear before the committee because 

that would apparently degrade’’—your words again—‘‘his firm’’? 

Does not that fit into Paragraph 5, ‘‘Whenever it is asserted by 

a member’’—that would be me, in this case—‘‘whenever it is asserted by a member of the committee’’—and that would be you in 

this, case, too—‘‘that the evidence or testimony at the hearing may 

tend to degrade, defame, or incriminate any person,’’ etc.? 

You’ve said it, I’ve said it, and I’ve read the hit man-like testimony of some of our witnesses, and they say it, and do it. 

And does this not say ‘‘may’’ and then we go into executive session? 

Because if it’s important for us as legislators to hear the testimony of the witnesses, I don’t think it is necessary to degrade this 

committee itself by dragging us into the act of degrading people 

who are accused, and who have not had the opportunity to defend 

themselves in court. 

Chairman BAKER. If I understand the gentleman’s inquiry properly, it is as to whether or not we should go into executive session. 

The gentleman’s privilege motion is in order. 

The matter, however, to which I object, is the debate of the motion to go into executive session, pursuant to the parliamentarian’s 

advising me that a debate of the motion to go into executive session 

thereby makes public the very issues which the gentleman would 

seek to make non-public by entering into executive session. 

Therefore, the matter before the committee, as I understand it at 

the moment, is your motion to go into executive session, which I 

then ruled is in order, however, it is not debatable. 

Therefore, the committee should immediately proceed— 

Mr. ACKERMAN. I would appeal the decision of the Chair. 

Chairman BAKER. And the gentleman now moves to appeal the 

ruling of the Chair, which is also in order, which would—Mr. 

Ryun? 

Mr. RYUN. Mr. Chairman, I move to lay the appeal on the table. 

Chairman BAKER. Which is also in order. Mr. Ryun is within his 

right to move to table your motion to appeal the ruling of the 

Chair. 

There being no further motion— 

Mr. ACKERMAN. I would request a roll call vote. 

Chairman BAKER. There being no further motion in order at this 

time, the question is the matter before the committee, to which the 

gentleman from New York requests a roll call vote. 

The clerk will call the roll on the motion to table the motion to 

appeal the ruling of the Chair. 

The clerk is coming around to call the roll here. Just one moment. 

Mr. ACKERMAN. Mr. Chairman? 

Chairman BAKER. Mr. Ackerman. 

Mr. ACKERMAN. I would ask unanimous consent, using my sense 

of math over my sense of justice, to withdraw the motion to appeal 

from the decision of the Chair and proceed directly to the vote. 

15

Chairman BAKER. I appreciate the gentleman’s offer, and I would 

first have to turn to Mr. Ryun and ask him to withdraw his motion 

to table the motion. 

Mr. RYUN. Mr. Chairman, I withdraw the motion. 

Chairman BAKER. Mr. Ryun withdraws his motion. 

Mr. Ackerman is recognized. He withdraws his motion. 

We are now back to proceeding to our first witness? 

Oh, I understand. Now you want to vote on the motion to go into 

executive session. 

That motion is not debatable. That motion is before the committee, and we will now vote on the motion to go into executive session. 

The clerk will call the roll, please. 

The CLERK. Mr. Ryun. 

Mr. RYUN. No. 

The CLERK. Mr. Ryun votes no. 

Mr. Shays. 

[No response] 

The CLERK. Mr. Gillmor. 

Mr. GILLMOR. No. 

The CLERK. Mr. Gillmor votes no. 

Mr. Bachus. 

[No response] 

The CLERK. Mr. Castle. 

[No response] 

The CLERK. Mr. Lucas. 

Mr. LUCAS. No. 

The CLERK. Mr. Lucas votes no. 

Mr. Manzullo. 

Mr. MANZULLO. No. 

The CLERK. Mr. Manzullo votes no. 

Mr. Royce. 

[No response] 

The CLERK. Mrs. Kelly. 

Mrs. KELLY. No. 

The CLERK. Mrs. Kelly votes no. 

Mr. Ney. 

Mr. NEY. No. 

The CLERK. Mr. Ney votes no. 

Mr. Fossella. 

[No response] 

The CLERK. Mrs. Biggert. 

Ms. BIGGERT. No. 

The CLERK. Mrs. Biggert votes no. 

Mr. Miller of California. 

[No response] 

The CLERK. Mr. Kennedy. 

Mr. KENNEDY. No. 

The CLERK. Mr. Kennedy votes no. 

Mr. Tiberi. 

Mr. TIBERI. No. 

The CLERK. Mr. Tiberi votes no. 

Mr. Barrett. 

Mr. BARRETT. No. 

16

The CLERK. Mr. Barrett votes no. 

Ms. Brown-Waite. 

[No response] 

The CLERK. Mr. Feeney. 

[No response] 

The CLERK. Mr. Gerlach. 

Mr. GERLACH. No. 

The CLERK. Mr. Gerlach votes no. 

Ms. Harris. 

[No response] 

The CLERK. Mr. Hensarling. 

Mr. HENSARLING. No. 

The CLERK. Mr. Hensarling votes no. 

Mr. Renzi. 

[No response] 

The CLERK. Mr. Davis of Kentucky. 

Mr. DAVIS OF KENTUCKY. No. 

The CLERK. Mr. Davis votes no. 

Mr. Fitzpatrick. 

[No response] 

The CLERK. Mr. Campbell. 

Mr. CAMPBELL. No. 

The CLERK. Mr. Campbell votes no. 

Mr. Kanjorski. 

[No response] 

The CLERK. Mr. Ackerman. 

Mr. ACKERMAN. Aye. 

The CLERK. Mr. Ackerman votes aye. 

Ms. Hooley. 

[No response] 

The CLERK. Mr. Sherman. 

[No response] 

The CLERK. Mr. Meeks. 

Mr. MEEKS. Aye. 

The CLERK. Mr. Meeks votes aye. 

Mr. Moore of Kansas. 

Mr. MOORE OF KANSAS. Aye. 

The CLERK. Mr. Moore votes aye. 

Mr. Capuano. 

Mr. CAPUANO. Aye. 

The CLERK. Mr. Capuano votes aye. 

Mr. Ford. 

[No response] 

The CLERK. Mr. Hinojosa. 

[No response] 

Mr. Crowley. 

Mr. CROWLEY. Aye. 

The CLERK. Mr. Crowley votes aye. 

Mr. Israel. 

[No response] 

The CLERK. Mr. Clay. 

Mr. CLAY. Aye. 

The CLERK. Mr. Clay votes aye. 

Mrs. McCarthy. 

17

Mrs. MCCARTHY. Aye. 

The CLERK. Mrs. McCarthy votes aye. 

Mr. Baca. 

Mr. BACA. Aye. 

The CLERK. Mr. Baca votes aye. 

Mr. Matheson. 

Mr. MATHESON. Aye. 

The CLERK. Mr. Matheson votes aye. 

Mr. Lynch. 

[No response] 

The CLERK. Mr. Miller of North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Aye. 

The CLERK. Mr. Miller votes aye. 

Mr. Scott. 

Mr. SCOTT. Aye. 

The CLERK. Mr. Scott votes aye. 

Ms. Velazquez. 

Ms. VELAZQUEZ. Aye. 

The CLERK. Ms. Velazquez votes aye. 

Mr. Watt. 

[No response] 

The CLERK. Mr. Davis of Alabama. 

Mr. DAVIS OF ALABAMA. Aye. 

The CLERK. Mr. Davis votes aye. 

Ms. Bean. 

[No response] 

The CLERK. Ms. Wasserman-Schultz. 

Ms. WASSERMAN-SCHULTZ. Aye. 

The CLERK. Ms. Wasserman-Schultz votes aye. 

Chairman BAKER. Mr. Sherman, how is he recorded? 

The CLERK. Mr. Sherman is not recorded. 

Mr. SHERMAN. Please record me as an aye. 

The CLERK. Mr. Sherman votes aye. 

Mr. Baker, I hadn’t actually finished the roll yet. 

Chairman BAKER. I’m sorry. Will members withhold, please? 

Mr. Frank. 

Mr. FRANK OF MASSACHUSETTS. Mr. Chairman, I have to explain 

that since I am on the committee ex officio, along with the chairman, in the absence of the chairman, I will not vote. 

I think it’s only appropriate if the chairman is here for me to 

vote, since we are both here ex officio. 

I would have voted aye if I had voted. 

Chairman BAKER. I respect and appreciate the ranking member’s 

sense of fairness. 

The CLERK. Mr. Baker. 

Chairman BAKER. I vote no. 

The CLERK. Mr. Baker votes no. 

Chairman BAKER. Mr. Miller? 

Mr. MILLER OF CALIFORNIA. No. 

The CLERK. Mr. Miller votes no. 

Chairman BAKER. Mr. Israel? 

Mr. ISRAEL. Aye. 

The CLERK. Mr. Israel votes aye. 

Chairman BAKER. Mr. Shays? 

18

Mr. SHAYS. No. 

The CLERK. Mr. Shays votes no. 

Chairman BAKER. Mr. Castle? 

Mr. CASTLE. No. 

The CLERK. Mr. Castle votes no. 

Chairman BAKER. Mr. Renzi? 

Mr. RENZI. No. 

The CLERK. Mr. Renzi votes no. 

Chairman BAKER. Mr. Fitzpatrick? 

Mr. FITZPATRICK. No. 

The CLERK. Mr. Fitzpatrick votes no. 

Chairman BAKER. The clerk will report. 

The CLERK. Mr. Chairman, the ayes are 16 and the nays are 20. 

Chairman BAKER. The gentleman’s motion has failed. 

We will now proceed to hearing the testimony of our panel of witnesses. 

Mr. FRANK OF MASSACHUSETTS. I think it’s safe to say goodbye 

to most of the members who just dropped in to vote. 

[Laughter] 

Chairman BAKER. I think the gentleman is correct. This is the 

first time, in a long time, that the Capital Markets Subcommittee 

has been full. 

Mr. BARRETT. Yes, but Mr. Chairman, some of us did vote, while 

the other abstained from voting. 

Mr. FRANK OF MASSACHUSETTS. Which means I get all the more 

credit for showing up. 

Chairman BAKER. But some are doing a great service by showing 

up, voting, and then leaving. 

Let us now proceed to our first witness. 

Mr. ACKERMAN. Mr. Chairman? 

Chairman BAKER. The gentleman from New York. 

Mr. ACKERMAN. I request that the witnesses be sworn. 

Chairman BAKER. The gentleman has asked that the witnesses 

be sworn. 

I have no objection to the witnesses being sworn, and if there is 

no further objection from anyone on the panel, or discussion, at 

this time, I would ask all witnesses please to rise. 

If you would please respond appropriately, do you swear to tell 

the whole truth and nothing but the truth, so help you, God? 

[Witnesses sworn] 

Chairman BAKER. For the record, all witnesses answered affirmatively to the inquiry. 

I thank the gentleman. 

We will now proceed to hear our first witness on the panel, the 

Honorable Vaughn R., Walker, Chief Judge, U.S. District Court, 

Northern District of California. 

Let me, for all witnesses, make the normal advisory. We request 

the witnesses to constrain your remarks to 5 minutes. Your full 

written testimony will be made part of the official record, and we 

do appreciate your patience and participation here today. 

Judge, please proceed at your own leisure. 

19

STATEMENT OF THE HONORABLE VAUGHN R. WALKER, CHIEF 

JUDGE, U.S. DISTRICT COURT, NORTHERN DISTRICT OF 

CALIFORNIA 

Judge WALKER. Thank you, Mr. Chairman, and members of the 

committee. 

It’s a pleasure to be here to speak today to House Resolution 

5491, and that is what I’m going to be talking about. 

In light of the comments that have been made, let me just say, 

in particular with reference to some of the comments made by Congressman Ackerman, that I think it’s always appropriate for the 

Congress to examine and to investigate how the laws that it enacts 

work in actual practice. That’s always appropriate for the Congress 

to do. 

Congress enacted much securities regulation legislation over the 

years, much of it having to do with how cases involving those laws 

are litigated, and I think it’s quite appropriate for the House and 

for the Congress to examine that and from time to time, when appropriate, to hear from judges who are called upon to apply those 

laws to determine whether or not they are working in the way that 

Congress intended them to work. 

Let me say that I come to this particular subject matter, the subject matter of securities litigation, from a little different perspective 

than others. 

Most lawyers in these cases appear on one side or the other, always for the plaintiff or always for the defendant. 

Well, I’ve practiced on both sides, and now as a judge, I’ve practiced on all three sides of these cases, and it is from that perspective that I offer the comments on H.R. 5491. 

Class actions are, at bottom, a privatization of a public function, 

public law enforcement. 

It is as if a public law enforcement function has been delegated 

to private parties to bring these actions, to maintain these actions, 

to pursue them on behalf of parties who are injured, and it operates in the same way that public law enforcement does. 

The general public does not ask for law enforcement officials to 

initiate the machinery of justice, and in the same way, absent class 

members do not ask for these class actions to be initiated. 

The only direct attorney-client relationships that exist are those 

that exist between the named plaintiffs, or the lead plaintiffs, and 

counsel in the cases. 

There are, with respect to these cases, relatively few of the kinds 

of controls that are analogous in other contexts of public contracting, controls that ensure transparency, competition, and the 

other measures that we all believe are appropriate when a public 

function is delegated to private parties. 

Congress, in 1995, perceived that there were abuses in this area, 

and as you well know, enacted the Private Securities Litigation Reform Act of that year, imposing essentially two requirements: one, 

a lead plaintiff requirement; and two, a heightened pleading requirement. 

I would suggest to the committee that things have not quite 

worked out the way that I think Congress intended. 

20

Relatively few lead plaintiffs have come forward in the form of 

institutional investors, as was envisioned by Congress when it enacted the lead counsel provisions of the 1995 Act. 

Studies have shown that only about a fifth, perhaps a third of 

institutional investors have come forward to serve as lead plaintiffs, to monitor the litigation, to control and watch counsel, and to 

make important decisions about when to settle and how to settle 

and how to litigate the case. 

It is still true that most of these cases are lawyer driven, lawyer 

brought, and lawyer controlled. 

And secondly, the heightened pleading standards of the legislation, I think, have also not quite turned out the way that Congress 

intended in 1995. 

What those heightened pleading standards have essentially done 

is to front-end load much of the work of these cases to require a 

great deal of litigation at the very beginning and to increase, actually, the cost of the litigation, and to increase the cost to securities 

issuers by putting—by essentially incentivizing them to put a lot 

of cautionary language into their offering documents, cautionary 

language and other measures that essentially have very little informational value to investors. 

H.R. 5491 makes several steps that I think are very helpful. 

The disclosure provisions to require that counsel and lead plaintiff disclose the relationships that they have among one another is 

a very helpful measure—a requirement to disclose some of the 

interrelationships that have been troubling in this area. 

Secondly, the provision that provides for competition as a means 

by which a judge can impose some controls over the costs to investors of these cases to try to bring down attorney fees to a more reasonable level. 

In cases where there have been active large institutional investors as lead plaintiffs and in cases in which there has been competitive bidding in the selection of lead counsel, the costs to investors of the fees and expenses in those cases have been substantially 

less than in the traditional form of organization of those cases, and 

the recoveries in those cases have been just as significant in the 

cases that have proven to be meritorious. 

Two other points which I would make very briefly. 

That is, first, I think the committee should look at an additional 

provision that would put some limitation on the ability of counsel 

to aggregate a group of unrelated plaintiffs and thereby qualify for 

the most adequate plaintiff or lead plaintiff provisions of the act. 

That has permitted counsel to put together groups that are large, 

that are unwieldy, and that do not exercise any effective control 

over the litigation. 

So I would suggest that the committee may wish to look at that 

possibility. 

And finally, at the fee shifting provision of H.R. 5491, let me just 

say that would be a far more effective and measured way of getting 

at the problem which Congress attempted to get at with the heightened pleading requirement. It would essentially impose upon those 

persons who bring actions that are not substantially justified the 

costs of the action and, therefore, provide an incentive not to bring 

cases that cannot substantially be justified. 

21

So I would think that perhaps with, I’m sure, the changes that 

will be wrought through the legislative process, the fundamental 

ideas that are put forth in H.R. 5491 are worthy of very serious 

consideration, and Mr. Chairman, I am pleased and honored to 

have the opportunity to come and address the committee on this 

subject. 

[The prepared statement of Judge Walker can be found on page 

90 of the appendix.] 

Chairman BAKER. I thank the gentleman for his participation 

and his statement. 

Our next witness is certainly not new to the committee, the Honorable William F. Galvin, secretary of the commonwealth, Commonwealth of Massachusetts. 

Welcome, sir. 

STATEMENT OF THE HONORABLE WILLIAM F. GALVIN, SECRETARY OF THE COMMONWEALTH, COMMONWEALTH OF 

MASSACHUSETTS 

Mr. GALVIN. Thank you, Mr. Chairman. 

Mr. Chairman, Ranking Member Frank, thank you again for 

your invitation. 

As secretary of the Commonwealth of Massachusetts, I am the 

chief securities regulator in Massachusetts, and among other provisions, my office administers and enforces the Massachusetts Uniform Securities Act. 

The work of my Securities Division includes the review of securities offerings, the listing of securities professionals, and significant 

enforcement work. 

Enforcement cases brought by my office have addressed some of 

the most substantial and timely problems in the financial marketplace: false and misleading analyst reports from national 

brokerages; market timing of mutual funds; abusive practices in 

the sales of annuity products; and fraudulent conduct by investment advisors. 

I must stress that the great majority of financial firms conduct 

an honest business and most issuers of stock are not defrauding investors. 

However, my office has repeatedly seen that small investors are 

at a serious disadvantage when they deal with the dishonest sellers 

of securities and dishonest companies. 

It is imperative that investors at all levels have effective remedies in cases when they are defrauded. Class action litigation has 

been an effective remedy, especially for small investors. 

My office also incorporates Massachusetts corporations and charters business entities in Massachusetts. 

I’m very sympathetic to the needs of legitimate businesspeople 

and their companies, but business corporations ultimately belong to 

their shareholders. Corporate executives and directors owe fiduciary obligations of care and loyalty to the corporation and its 

shareholders. 

I speak today for the interest of investors. 

If investors are to defend themselves from misconduct and fraud 

by officers and directors, we must preserve their remedies under 

the securities laws. Ultimately, giving investors strong and effecVerDate 0ct 09 2002 13:31 Jan 26, 2007 Jkt 031531 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 F:\DOCS\31531.TXT HFIN PsN: TERRIE
22

tive remedies will help prevent misconduct by company management. 

The way I see it, the right to civil litigation is an essential part 

of the free market. It’s a free market force that guarantees that 

there will be financial consequences for fraud and wrongdoing, and 

it operates as a deterrent in the marketplace to continuing misconduct. 

My office has committed significant resources to enforcement. We 

are a strong cop on the beat, although the resources of any regulatory agency will always be limited. 

Regulators cannot police the financial marketplaces alone. Since 

the 1930’s, investors’ private right to sue has also operated to police and deter investment fraud. Both of these tools are essential 

to maintain the integrity of our financial markets. 

We are concerned that the provisions of the Securities Litigation, 

Attorney Accountability, and Transparency Act will stifle the ability of plaintiffs to obtain recourse when the securities laws are violated. 

While my office has returned more than $20 million directly to 

investors, I’m still concerned that many times so-called Fair Funds 

or pool compensation funds do not effectively reach defrauded investors. Civil actions offer a more precise remedy. 

Let me speak about some of the specific provisions that I’m concerned about. 

The loser pays provision. This provision may be seriously detrimental to the interests of retail investors because their attorneys 

will be required to take on greater financial risk in a class action. 

This provision would reverse the long-standing ‘‘American rule’’ 

that each party in an action should be responsible for its costs unless the action involves abuse of the legal process, potentially imposing on a defendant costs—on a plaintiff—that will chill investors and their attorneys from pressing legitimate claims. 

Litigation always involves many uncertainties. If there is a risk 

that the costs of defense counsel may fall on plaintiffs’ counsel, 

lawyers and parties who cannot afford that risk are that exposure 

will back away from even meritorious investor suits. 

I note that Federal Rule 11 already requires that court filings 

not be made for any improper purpose, and that legal arguments 

be warranted, and that a party violating these requirements will 

be subject to court sanctions, including paying defendants’ costs 

and legal fees. 

The loser pays provision of this legislation will add very little 

value to the current court rules. 

With regard to conflict of interest disclosure, I have no comment 

on this section, except to ask whether legislation that targets the 

practice of a particular law firm is the proper way to approach 

these issues. 

I note the law firm in question is currently the subject of a Federal indictment for the practices that this section would address, 

and it seems to me that the courts should be the ones to make 

those decisions as to the guilt of that firm before we pursue general 

remedial action. 

23

The court’s role in selecting counsel for plaintiffs’ class is a particularly troubling part of the bill. It’s not clear why this section 

is necessary, and appears not to be advisable. 

The Private Securities Litigation Reform Act of 1995 created a 

presumption that the investor with the largest financial stake in a 

case should serve as lead plaintiff and it should choose and negotiate with class counsel. 

This law has led to more institutional investors acting as lead 

plaintiffs in class actions, so these cases are often led by sophisticated plaintiffs with meaningful resources. 

If the proper party is acting as lead plaintiff, the selection of 

counsel should rest with them. 

Section 4 of this bill goes beyond requiring that the court should 

simply approve or disapprove counsel for the plaintiffs, and instead 

embroils the court in the selection of plaintiffs’ counsel. 

The legislation will allow the court to employ alternative means 

in the selection and retention of counsel for the plaintiff, including 

a competitive bidding process. 

Clearly, a bidding process is not the best way to select counsel 

when significant issues are at stake in complex and technical litigation. 

This provision also raises disturbing constitutional issues, including the right to be represented by counsel, freedom of association, 

and freedom of contract. In the end, it is simply common sense that 

if the proper lead plaintiff is in place, that plaintiff is in the best 

position to select its counsel. 

I urge that this legislation not be adopted. 

Even after the passage of the Sarbanes-Oxley Act, we continue 

to see disturbing examples of fraud in the financial markets, from 

the failure and bankruptcy of the Refco commodity firm just a few 

months after its IPO went to market, to the unfolding stories relating to the backdating of executive stock options, there are still 

fresh examples of fraud and misconduct in the financial marketplace. 

But there is often a common thread running through these scandals, and that is the application of two sets of rules, one set for connected insiders, which will allow them to exact unjust profits from 

the marketplace, and the other set of rules for the average American investor that has them pay the price for the fraud of the connected insiders. 

Private suits play an important part in keeping companies honest. 

As successive Congresses have encouraged and often required 

American families to assume the risks of the marketplace for their 

pensions and other aspects of their financial future, I urge you to 

protect and not diminish this important tool to fight abuse and 

fraud against investors. 

Thank you. 

[The prepared statement of Mr. Galvin can be found on page 87 

of the appendix.] 

Chairman BAKER. I thank the gentleman. 

In light of the pending motion to rise on the Floor, and not to 

put the next witness under any constraint with testimony, I sugVerDate 0ct 09 2002 13:31 Jan 26, 2007 Jkt 031531 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 F:\DOCS\31531.TXT HFIN PsN: TERRIE
24

gest the committee now recess, record votes, and return as quickly 

as possible. 

[Recess] 

Chairman BAKER. If I may, I’d like to reconvene our hearing. 

At the time of the committee’s recess, we had just concluded, or 

Mr. Galvin had concluded his remarks, and we were to move to our 

next witness. 

I welcome to the committee today Mr. Theodore H. Frank, resident fellow and director, AEI Liability Project of the American Enterprise Institute. 

Welcome, sir. 

STATEMENT OF THEODORE H. FRANK, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE AND DIRECTOR, AEI LIABILITY PROJECT 

Mr. FRANK. Thank you, Mr. Chairman, and members of this subcommittee, for your kind invitation to testify today. 

I serve as a resident fellow at the American Enterprise Institute, 

but I’m not testifying here on their behalf, and the views that I’m 

sharing here today are my own. 

There are areas of securities class action reform that are unavoidably divisive, but this bill should not be one of them. The 

small steps taken by this bill are non-controversial means to reduce 

corruption in the securities litigation process, benefitting shareholders and plaintiffs’ law firms that play by the rules. 

Securities class actions affect almost every element of American 

business. Between 1997 and 2005, there were 225 securities class 

actions brought against members of the Fortune 500. 

From 1996 to 2005, securities class action settlement totalled $37 

billion. Not all of that settlement money reflects wrongdoing. 

As Justice Stevens noted about securities class actions in a unanimous Supreme Court decision in March, even weak cases brought 

under the securities laws may have substantial settlement value, 

because the very pendency of the lawsuit may frustrate or delay 

normal business activity. 

There is a war, with investors on one side and lawyers on the 

other. It’s worth noting that the majority of institutional investors, 

who suffer the greatest losses from stock fraud, don’t want anything to do with the vast majority of securities litigation, because 

they recognize that they are made worse off by it. 

Settlements in such lawsuits provide money to the plaintiffs’ lefthand pocket by taking it from their right-hand pocket with a substantial commission to the plaintiffs’ attorneys involved for facilitating the transaction. 

In the WorldCom litigation, Forbes Magazine calculated that the lead plaintiff, Public Pension Fund, lost at least $2 million net from 

its settlements, because it also held stock in the defendant banks, 

while the plaintiffs’ attorneys, who donated generously to the elected official who approved the fee agreement, collected more than 

$300 million. 

This is ironic, given that the lawsuits against the bystander 

banks accused the defendants of having conflicts of interest. 

The recent indictment shines a small light on a small portion of 

a great problem of corruption in the plaintiffs’ bar. The very fact 

25

of someone pleading guilty to accepting kickbacks exhibits that the 

PSLRA’s attempt to impose market discipline on securities litigation has failed. 

If securities class action attorneys were facing market competition, there would be no windfall worth fighting for with millions of 

dollars in alleged under-the-table payments, much less the risk of 

prosecution. 

I would argue that sweeping reform is needed. This bill is not 

that sweeping reform, but it represents some incremental reforms 

that improve the system for honest players on both sides of the 

table, and therefore, should be uncontroversial. 

Most notably, courts differ over whether the PSLRA, the Private 

Securities Litigation Reform Act, permits competitive bidding. As a 

result, courts are reluctant to implement auctions, and the benefits 

auctions provide to investors and to honest plaintiff law firms are 

rarely realized. 

This bill fixes the statutory ambiguity by making competitive 

bidding to chose lead counsel explicitly permissible. 

Auctions should lead to lower-priced representation. When a 

court appoints a law firm within setting the fees, the attorneys’ incentive is to maximize their take, but if a law firm is selected by 

auction, attorneys compete to provide the lowest reasonable bid. 

Empirical research supports these theoretical contentions. Both 

Judge Milton Shadur, a Carter appointee who has experimented 

with competitive bidding in his court, and Professor Michael Parin, 

in a 2006 working paper, find that auctions substantially reduced 

attorneys’ fees and increased returns to the class. 

Parin’s study predicted that fees could be cut by more than half. 

This money, which amounts to hundreds of millions of dollars a 

year, could be going directly into investors’ pockets instead of those 

of attorneys. 

It further suggests that class action attorneys are gouging at a 

price twice what a fair market competition would produce, the 

equivalent of one’s local service station charging $6 a gallon for 

gasoline on a normal spring day in 2006 without extenuating circumstances. 

In the case of an overcharging service station, one can choose to 

buy gas elsewhere. Unnamed class members have little recourse to 

limit fees obtained by plaintiffs’ firms who did not agree to a market-based price at the front end. 

The language of the bill is permissive, not mandatory. Thus, 

courts will have the freedom to attempt alternative approaches, for 

example structuring auctions for when there isn’t a trustworthy institutional investor as a lead plaintiff. This judicial discretion will 

provide helpful data on how best to help investors when Congress 

next revisits the securities laws. 

I’d love to talk about any of these issues in the more detailed testimony, written testimony, with any of the members who would 

like. 

[The prepared statement of Mr. Frank can be found on page 75 

of the appendix.] 

Chairman BAKER. I thank the gentleman for his testimony. 

Our next witness is Professor James D. Cox, Duke University 

School of Law, Duke University. 

26

Welcome, sir. 

STATEMENT OF JAMES D. COX, BRAINARD CURRIE 

PROFESSOR OF LAW, DUKE UNIVERSITY 

Mr. COX. I also thank the committee for inviting me to share my 

views, both in writing and orally here. 

Congressman Feeney mentioned earlier the necessity of achieving some balance, and I want to share and amplify some data 

points that are in my sworn statement that filings of securities 

class actions peaked in 2003–2004; there was a 17 percent decline 

in 2005 from that of 2004. 

Following the PSLRA, we found a significant increase in the 

granting of motions to dismiss and motions for summary judgment. 

Before the PSLRA, the rate was about 19 percent on filed cases; 

after that, it’s in excess of 40 percent, a 107 percent change in that 

short period of time. 

My paper captures some of the explanations for this, some of 

which is the PSLRA, some is doctrinal shifts that have occurred, 

and a number of things. All these have had a chastening effect on 

the number of filings of class actions. 

As to the question of auctions, I want to just mention one thing. 

Arranged marriages should always cast—we should always cast 

a skeptical eye toward any sort of arranged marriages, and I think 

we should do that particularly when we find in the last 3 years a 

growing trend, and it is a significant increase in the trend of financial institutions stepping forward to apply and then be selected as 

a lead plaintiff. 

Our own surveys and canvassing of funds has revealed to us that 

the relationship that they have with the law firm, and they do look 

around for a variety and are not just generally married to one law 

firm, is important to their decision to become a lead plaintiff. 

I commend to the committee a review of the very thoughtful 

Third Circuit Task Force Report on Selecting Lead Counsel, where 

they conclude generally that auctions are a bad idea, but save them 

for rare situations, such as Judge Walker widely saw was happening in the Oracle case, the very first case to introduce auctions, 

and that would still be a possibility today. 

Courts do not prohibit auctions. They are permitted in situations 

where the court thinks that there’s not an appropriate counsel 

here, and that’s certainly true under the guidance of the Third Circuit Task Force Report. 

So I believe that auctions remain alive and well, a fallback position when the court believes that there’s reason to question whether there’s suitable and appropriate counsel there. 

As to the fee shifting arrangement, which is the Rule 11 modifications that we find in H.R. 5491, let me just point out four problems with that. 

One, there’s a certain internal inconsistency. What happens with 

this draft language that you have is you’re adding a new section 

to the rule. 

Earlier what happened with the PSLRA is a mandated finding 

by the presiding court about whether Rule 11 has been satisfied. 

That has not been changed in H.R. 5491. 

27

So the life of the provisions that you’re proposing would be in a 

situation where the judge has already made a finding that there’s 

no reason for Rule 11 sanctions and so, therefore, you’re likely to 

find counsel for the defendants seeing that this just continues the 

litigation burdens, the expense, and the bother of litigation, by so 

moving, so you need to look at internal inconsistency. 

The other thing you may want to ask is, why was it in the 

PSLRA that they changed Rule 11 for securities litigation? And the 

reason was they found that defense counsel was reluctant to move 

for Rule 11 sanctions in these cases. 

So now you’re introducing where you were prior to pretty much 

PSLRA, and that was found to be deficient at that point. I’m not 

quite sure how things have changed. 

The other thing I want to just share with you, the third point 

I’ll say, as a reader of advance sheets—that’s what I’m going to be 

doing when I’m waiting for my 3:30 plane this afternoon—I can 

just share with you that I find, in reading those cases, you know, 

a lot of close questions when the defendant’s motion to dismiss is 

granted on the pleading issues, that I don’t think this is a slam 

dunk for thinking that there’s a lot of Rule 11 cases that are going 

to be arising by tinkering around with the standards here, because 

I think that these are vetted within the law firms’ offices and these 

are close cases, so I don’t think you’re going to find that. 

I will say the following, that courts have imposed, in a handful 

of instances, I must say, Rule 11 sanctions pursuant to the PSLRA. 

Whereas before the PSLRA, there were extremely isolated instances over 25 years of imposing Rule 11 sanctions, in the 10 

years since the PSLRA, you now find a handful of cases where 

that’s happening. 

And the final question I would have is, anytime that we start 

talking about loser pay principles, anything that introduces friction 

into access to the courts, I just want to point out a wonderful 

phrase that’s part of our democracy, and distinguishes our country 

from countries around the world, and it’s the expression, ‘‘Access 

to justice.’’ 

That’s a wonderful expression. Let’s be very careful before we 

start tinkering with anything that’s going to cause that to be qualified in any substantial way without producing equally substantial 

benefits. 

The final thing I’d say is that the third provision in H.R. 5491 

calls for greater disclosure of information about how counsel was 

selected, conflicts of interest. 

I would fully support that. I believe it should not be isolated to 

securities class action. 

My sworn statement suggests that perhaps this is something 

that should be universal across class actions. 

Many judges do inquire very closely with respect to conflicts of 

interest, how the plaintiff is selected, counsel, in a class action, 

whether it be a securities class action or a non-securities class action. 

This is something that should be uniform across judges, and to 

the extent that all judges don’t do that, then I think there are 

grounds, as there is proposed in this legislation, for making it uniform across all class actions. 

28

Thank you for your time, and I’ll be glad to work with the committee and the staff in supplying other information that’s come out 

of our studies of securities class action settlements. 

Thank you very much. 

[The prepared statement of Mr. Cox can be found on page 62 of 

the appendix.] 

Chairman BAKER. I thank the gentleman for his statement. 

I will start with questions. 

First, Secretary Galvin, I noted in your written testimony a concern about so-called Fair Fund distributions, but in the resolution 

of the Putnam settlement, which was $110 million in the aggregate, of which the State of Massachusetts received half, the SEC 

received half, there was, as I understand it, a distribution of $5 

million back to Putnam Fund’s shareholders. 

How was the determination made as to who was entitled, and to 

the amount each recipient ultimately received? 

Mr. GALVIN. As a matter of fact, that process is still ongoing. 

We’re trying to determine—most of the losers in that case were 

investors who operate through pension funds or 401k’s. 

We’re attempting now to work through a schedule with Putnam 

to get those monies back. 

My policy has been that I want to make sure that the victims 

are made whole first. The only monies that the State generally gets 

are monies that compensate us for our investigation or in some 

way are actually a punitive penalty for conduct. We do not preference our taking over the individuals. 

In the Putnam case, we’re still in the process of negotiating the 

details of getting back people’s money. 

Obviously, when you’re talking market timing, calculating the 

exact damage is extremely difficult. When you’re talking an aggregated fund, such as many of the victims here were, it’s even more 

complicated, but we’re still committed to that goal. 

My frustration, as referred to in my remarks, is that so often, for 

instance, in the research analysis cases, I think you’ll find that 

most of that money is still sitting over at the SEC or under court 

jurisdiction where they’re trying to figure out how to get it back to 

those who were harmed. 

I think class actions provide a better remedy for figuring out exactly who is most adversely affected. I think that that’s an important tool to have when you’re trying to make people whole, especially in complex financial cases. 

Increasingly, the victims of these types of financial crimes are indirect in the sense that they are members of pension funds, they 

are affected by involvement in mutual funds. Calibrating their precise loss is extremely difficult and time consuming, but I still think 

it’s a goal. 

I share with you the idea that the important thing is to put people back, get people back their money, and if it’s been stolen from 

them, to get it back for them. 

Chairman BAKER. Well, why not, then, if you’re going through 

the difficult task of making judgments about whom is entitled to 

the funds in the first place, deducting out your cost of administration? Certainly that can’t be $50 million out of the $55 million settlement. 

29

Why would you not, after having established the fact and precedent that you wish to give money back. 

I believe in your statement you also indicated in the aggregate, 

through efforts of your office, you have returned about $20 million 

to investors. 

What is the legitimate reason for keeping $50 million at the 

State level as opposed to giving it back, or some significant percentage, to those identified recipients? 

Mr. GALVIN. Well, I don’t think we have. 

First of all, the Putnam case was a joint case between Massachusetts and the SEC, and obviously, as you know, from some of my 

previous appearances before this committee, I do subscribe to the 

theory that the SEC has superior jurisdiction, and obviously, in 

that regard, we give them some leeway in determining how these 

cases are decided. 

We’ve always preferenced Massachusetts investors, especially, 

and others. 

In the case of Putnam, you also had a number of investors from 

outside of Massachusetts who were adversely affected by the conduct. In that case, the SEC was the better party to speak for them, 

more than I was. 

Chairman BAKER. Well, that’s correct. The settlement was $110 

million. SEC received $55 million of it. All of the $55 million, pursuant to SEC explanations, will go to Fair Funds distribution, and 

that merely— 

Mr. GALVIN. That hasn’t been distributed. I mean, that’s my criticism. 

Chairman BAKER. Well, of $7 billion targeted by the SEC subject 

to Fair Funds identification as being ill-gotten gains, $5 billion has 

been collected in assets and over $3.1 billion, I believe, to date, has 

actually been distributed. 

So the progress is more significant than most would believe. I’m 

just getting to the principle, rather than actual operative facts, and 

that is, should we not give the money back to the individuals as 

opposed to retention for State government purposes? 

Mr. GALVIN. My sympathy is to give it back to the individuals, 

and I think it’s been proven by the actions we’ve taken. 

I do think this whole issue is an evolving one and I think it 

speaks to the larger issue of this legislation and what we’re here 

about. 

You know, it’s interesting that we’re talking about 1995, the last 

time the Congress acted in this area, and I would urge you to look 

at all the changes that have occurred in the financial marketplace 

since 1995, and what we’ve uncovered. 

You know, it’s not just because of State regulators and Federal 

action, but—and perhaps also the action of this committee. 

I think we’re a lot more aware today of the risks that people 

have, of some of the misconduct that’s going on, and the amounts 

of money that are affected. 

Just the mutual fund scandal alone, the Putnam— 

Chairman BAKER. If I can sort of cap, because I’m getting 

ready—my time is going to expire in just a second, you do not have 

objection to the principle of a Fair Fund, but rather concerns about 

30

the operative distribution of funds assigned to a Fair Fund, is 

that— 

Mr. GALVIN. If a Fair Fund is truly fair, I’m for it. 

Chairman BAKER. That’s what I needed to hear, and I have more 

on the subject, and I wanted to get to Judge Walker with a series, 

but I’m out of time, so I’ll go to Mr. Frank at this time. I’m sorry, 

Mr. Ackerman. 

Mr. ACKERMAN. Will we have more than one round, Mr. Chairman? 

Chairman BAKER. I suspect so, yes. 

Mr. ACKERMAN. Thank you, very much. 

Chairman BAKER. Mr. Ackerman was asking as to process, will 

we have more than one round of questions, and I just wanted to 

disclose to everybody that that’s our intention. 

Mr. ACKERMAN. Thank you. 

I just want to make it clear for those people who might be listening, or just reading the initial transcripts, of really what’s going on 

here. 

What we’ve heard from the witnesses sounds very reasonable. 

What they’ve addressed verbally is really the issue, and the issue 

is legitimate, regardless of whether you have an opinion or not, or 

agree with one side or the other; the issue is real. 

But this is a ruse. This is a beard. The real purpose here, after 

listening to the reasonable witnesses that the majority presented, 

is not the statements that they said in which there was not one 

mention, I think, listening, trying to listen carefully, of a specific 

law firm, but the real intent was at the beginning to put into the 

record the voluminous pages of their testimony, which does almost 

entirely address itself to ripping apart and damaging the reputation of one particular law firm that hasn’t yet been tried, certainly 

hasn’t been found guilty. 

I’m still puzzled by the appearance of Judge Walker. I don’t 

know how he justifies, and I heard his written testimony, but I 

read—I heard his oral testimony, I read his written testimony. He’s 

here lobbying on a bill. 

I don’t know if he’s registered as a lobbyist. I don’t know that 

he’s recused himself, or is going to, in cases that come before him 

and deal with this matter—that deal with how attorneys who appear before him are going to get compensated. 

I know he has very strong opinions. He’s expressed them, and 

appropriately so, at peer review and other forums. But the particular case that he cites, and he only cites one case by name, is 

the case that was cited initially in this hearing. 

The judge states that he’s been on all three sides of the issue—

the corporate side, the plaintiff side, and now the bench. 

I would contend that he’s on two sides of the separation of powers issue—sitting on the bench, and now coming here trying to help 

us write the law, and perhaps if we don’t like the law, we’ll be on 

all three sides of that, and maybe we can veto it. 

On the testimony, Judge, that you present, you say, ‘‘Mention 

has been made here today of the recent indictment of Milberg 

Weiss law firm and two of its partners,’’ etc. 

This was given out a couple of days ago, so I guess you knew 

that mention would be made here. 

31

You then say, ‘‘The factual recitals of the Milberg indictment tell 

of millions of illegal kickbacks to lead plaintiffs, misrepresentations 

to courts, breaches of fiduciary duties to investor class members,’’ 

quote and unquote. 

That kind of drags their name through the mud just by the very 

mention of it in the way—you go on to say, ‘‘The defendants in that 

case are entitled to a fair trial’’—that’s pretty generous—‘‘and the 

government may not be able to prove the facts alleged in the indictment’’, etc. 

You don’t even indicate that the facts might not be true. Your 

concern is the government may not be able to prove the facts, 

which in and of itself may be able to stand the smell test. 

But you go on to say, ‘‘or persuade the courts that that those 

facts, if proved, constitute the alleged crimes,’’ ‘‘but,’’ you continue 

to say, ‘‘the indictment is significant nonetheless.’’ 

So even if there’s no case, the indictment becomes significant. 

‘‘These allegations need not’’—your words—‘‘need not be proved 

true beyond a reasonable doubt for them to awaken Congress to 

the need to review,’’ etc., etc. 

So while in your courtroom you may have a standard of reasonable doubt, you’re suggesting to people who make the law that we 

base the law on a case that may have no merit and legislate on 

some problem that may or may not exist, and I’m not saying that 

it doesn’t, but that’s your suggestion to us, and I don’t think that’s 

fair. 

Interesting, you go on to cite another case that was in the—reported in the Chicago Tribune a week ago about allegations, and 

it’s interesting, you don’t mention the name of this law firm, and 

you don’t mention the name of its partners, and you don’t mention 

the injustices that they were allegedly charged with. 

It’s interesting that you just stay on Milberg Weiss. 

Chairman BAKER. If the gentleman— 

Mr. ACKERMAN. You’re very much to the point. You’re on message. 

Chairman BAKER. If the gentleman can begin to— 

Mr. ACKERMAN. And that’s what concerns me. 

Chairman BAKER.—to wind up, I want to make sure every member, and we will do multiple rounds to make sure the gentleman 

gets all of his questions in. 

Mr. ACKERMAN. Can I have another half a minute, just to finish 

the thought? 

I thank the Chair for his indulgence. 

And in one other place, you say, ‘‘Significantly, in at least two 

of the class actions listed in the indictment against Milberg Weiss,’’ 

etc., etc., Milberg Weiss was able to inject itself into’’—that’s a 

pretty loaded word, ‘‘inject itself into the legislation with a client, 

and that they would not have met the criteria for most adequate 

plaintiff.’’ 

That’s pretty much an opinion that we’re not writing here. 

And you go on to talk about the Oxford—and I’m finished with 

this, Mr. Chairman. 

‘‘It’s worth noting that in one of these cases, Oxford Health involved the largest kickback’’—not even alleged—‘‘single kickback 

payment’’—then you have ‘‘alleged in the Milberg indictment.’’ 

32

I don’t know if you read the whole indictment. Is it not true that 

Mr. Vogel, whom I believe is the person who is—who received the 

kickback, isn’t it true that he was never appointed the lead plaintiff, never even represented the class? 

I don’t know how you make this analogy without that even being 

the case. 

You’re trying the case here, Your Honor, with only part, with 

only the prosecution side, and without full knowledge of the facts. 

Chairman BAKER. The gentleman’s time has expired. 

Was it his intention to afford the judge an opportunity— 

Mr. ACKERMAN. Oh, absolutely, if the Chair would— 

Chairman BAKER. If the gentleman chooses to respond. 

Judge WALKER. Thank you very much, Mr. Chairman, and Mr. 

Ackerman. 

First of all, we’re not talking about a case which we’re trying 

here in this committee room, Mr. Ackerman. The defendants in 

that case are going to have their day in court. 

There have been guilty pleas already in connection with that 

case, and of course that puts— 

Mr. ACKERMAN. Your Honor, just to be fair, the guilty pleas were 

by witnesses who were found guilty in other cases and are looking 

for deals, not any of the people accused in this firm, is that correct? 

Judge WALKER. I’m thoroughly familiar with how this works, of 

course. 

Mr. ACKERMAN. I just want to make sure everybody else understood that. 

Judge WALKER. And I believe that it is not incumbent upon this 

committee to wait until the resolution of a lawsuit to decide that 

a lawsuit or a criminal prosecution may raise questions which the 

committee would want to look at. 

What I think the committee should be interested in, and I hope 

is interested in, is how these cases work in actual practice. 

After all, the people who are charged with the responsibility of 

representing wronged investors carry very serious fiduciary obligations to those investors, and as attorneys, they have to do more 

than simply be free of a criminal conviction. They should avoid impropriety, and indeed, avoid the appearance of impropriety. 

What I said in that portion of the written statement, and what 

I think is significant for the committee, is that when there are 

charges of this kind, whether proven in a courtroom to a standard 

of criminal liability, nevertheless would be grounds for this committee to look at the process and examine it and determine whether it is working in the best interests of investors and the best interests of the economy. 

And the provisions of the proposed legislation, I believe, are substantial and should be seriously considered by the committee as a 

reform of this litigation process. 

And with all due respect, sir, judges do know something about 

litigation, and I think can offer some insights to the Congress when 

it comes to how litigation works in actual practice, and I would 

hope that the committee and Congress would hear from judges 

from time to time on that subject. 

Chairman BAKER. The gentleman’s time has expired. 

Mr. ACKERMAN. If I could just follow up? 

33

Chairman BAKER. Okay, 30 seconds, please. 

Mr. ACKERMAN. It’s always good to hear from judges. 

Was your viewpoint on this overturned by the Ninth Circuit? 

Judge WALKER. There was a case that went up on a petition for 

writ of mandate in connection with a selection of class counsel that 

I made in a case. That was reversed on the grounds that the process of bidding in that case did not comply with the lead counsel 

provisions of the 1995 Act. That is correct. 

Mr. ACKERMAN. Thank you. 

Chairman BAKER. The gentleman’s time has expired. 

Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Although I have a number of questions for the panel, I must 

admit, after listening to a lot of opening comments after my own, 

I feel compelled to say a few things, because I’m somewhat taken 

aback by the reaction to this hearing. 

Some have protested the mere existence of this hearing because 

they didn’t like its previous title. 

I happen to know, for example, that the most famous song of the 

Beatles, ‘‘Yesterday,’’ was once termed ‘‘Scrambled Eggs’’ before 

they chose to call it ‘‘Yesterday.’’ I’m not sure that the popularity 

of the song was ever burdened by its previous title. 

Some have protested this hearing because they see it as some 

type of interference in ongoing litigation. 

I think I’ve read everybody’s biography, but let me ask the first 

question. 

Are any of you four gentleman directly involved in the Milberg 

Weiss litigation? 

[Chorus of noes.] 

Mr. HENSARLING. Listening to the testimony, I don’t frankly 

know how any reasonable person could come to that conclusion. 

Following the logic of some of our friends on the other side of the 

aisle, and I think this point was made earlier when we followed 

what appears to be the logic of some, Sarbanes-Oxley would not 

have been passed 4 years ago, it would have been passed perhaps 

several weeks ago once Jeff Skilling and Ken Lay were finally convicted. 

Some have said that this is a hearing to attack, I guess, the reputation or integrity of a firm, and I think I’ve just witnessed an attack on one particular witness. 

I think I know why he’s here, or at least I know one of the reasons that I’m very happy he’s here. 

That is, there is a legitimate issue on the usefulness of a competitive bidding process in class action securities litigation, and 

whether you agree with it or don’t agree with it, I think it would 

be very difficult to conclude that the justice who initiated this and 

has 15 years of experience in it, you would have to conclude that 

he’s an expert at the issue. 

So with that, I would like to ask my first question to Judge 

Walker. 

I’ve seen at least three studies that make a fairly compelling case 

that in the competitive bidding process, fees have been significantly 

reduced as much as a factor of 50 percent. 

34

In your own court, can you explain what you’ve observed, how 

the auction process reduces attorneys’ fees? 

Judge WALKER. Let me just tell you, Congressman, how it began. 

It began in 1990 when lawyers were contending for the leadership position in a securities class action, and the contention was all 

on very subjective grounds, personality conflicts. It was East Coast 

versus West Coast, that sort of thing, none of which seemed to me 

mattered as far as the interests of the investors were concerned. 

And I simply suggested to the lawyers that they submit proposals for the representation of the class based upon the price of 

their services and the quality of those services, and that was met, 

I must say, with silence in the courtroom. 

Subsequently, what I received was a joint proposal. The battle 

having been resolved, the parties gave up their respective positions 

and submitted a joint proposal. 

Well, needless to say, I didn’t think that that was in the interests 

of the investors. 

And in fact, they had prepared a transcript of the meeting at 

which this joint proposal was worked out and it sounded very much 

like some of the things that you read about in price fixing cases. 

It sounded very much like that. I used to do that kind of work 

when I was practicing law. 

But in any event, that’s how it began. 

And the results were very satisfactory from the point of view of 

the class. Recovery was had, a very substantial recovery. It came 

in early in the case. And the fees were substantially lower than the 

standard 25 percent, one-third fee that typically had been awarded. 

The same was true in other cases in which competitive bidding 

had been used in the selection of class counsel. 

Now, I must tell you that I do not advocate competitive bidding 

in all cases and I don’t have—I’m not without some reservations 

about it. 

If you have a lead plaintiff which is a responsible institutional 

investor or other investor in whom the court can have confidence 

that the investor is monitoring the lawyers, interested in the litigation, is following it, and is making decisions of the kind that a client would make, there’s no need for any kind of competitive selection process because that lead plaintiff will have done that itself, 

or himself or herself. 

In addition, it’s not altogether clear what means of compensation 

is the most advantageous to the class. 

Is it a decreasing percentage to take advantage of economies of 

scale in litigation or is it an increasing percentage in order to 

incentivize the lawyer, or is it the kind of system that Judge Lewis 

Kaplan developed in the Southeby’s case, in which he set a certain 

amount of money below which the attorneys would get nothing and 

above which they would get a percentage of the recovery? 

So I completely agree with Professor Cox that competitive bidding is a useful tool in the arsenal of a judge who is interested in 

protecting the interests of the class and ensuring that the class 

gets fair, good, and reasonable economic representation— 

Chairman BAKER. The gentleman’s time has expired. 

Judge WALKER.—and we should not abandon that tool. 

Chairman BAKER. I thank the gentleman. 

35

Mr. Frank. 

Mr. FRANK OF MASSACHUSETTS. Mr. Chairman, first of all, I want 

to deal with rather bizarre misrepresentations of our arguments. 

No one has suggested that it’s inappropriate to inquire into the 

subject matter. No one has suggested waiting for legislation until 

trials are completed. These are total fantasies. 

What we are saying is that it should be possible to go into the 

subject matter without focusing on a pending indictment, and that 

title was relevant because the title indicated what the intent was, 

to focus on the indictment. 

And we did think that it was inappropriate for a Congressional 

committee to do a review of an indictment, and frankly, I think 

there was some indication of this being the purpose because, Judge 

Walker, I have to agree with one of the particular points Mr. Ackerman made. 

I’ll be honest with you. I think it’s disingenuous in your testimony where you say on Page 4 in your prepared testimony submitted earlier, ‘‘Mention has been made here today of the recent indictment of the Milberg Weiss law firm,’’ as if somebody else had 

brought it up and you felt compelled to comment on it. 

You obviously came here as part of a plan to discuss it and to 

be critical of the firm. I’m a great believer in the First Amendment. 

In some places that would be an appropriate thing. 

For a sitting Federal judge to come to a Congressional committee 

and pretend that it somehow just came up when it was part of an 

intent to focus on it is part of what we’re upset about. 

Now, I do have a couple of questions. 

For Mr. Frank, in your first statement, you say, ‘‘When Congress 

passed the 1933 and 1934 Acts, there was no private right of action. Such a right was created by judicial fiat and accepted as a fait 

accompli by the Supreme Court.’’ 

Now, judicial fiat and fait accompli are not usually words of approbation. 

Do you take the view that we would have been better off if such 

a right had never been created? Do you oppose the very existence 

of a private right of action? 

Mr. FRANK. No, I didn’t say that. 

Mr. FRANK OF MASSACHUSETTS. No, no, I know you didn’t say—

you said it was judicial fiat and a fait accompli. 

I never heard anybody talk about fiat and fait accompli about 

things they liked, so you sound here critical of the very existence 

of a private right of action. 

Do you think it was a mistake to have created a private right of 

action? 

Mr. FRANK. I think it’s a mistake for the judiciary— 

FRANK OF MASSACHUSETTS. No, no. No, that’s not the question. 

Do you think it was a mistake to have created a private right of 

action, simple straightforward question. 

Mr. FRANK. It depends on the scope of the private right of action. 

Mr. FRANK OF MASSACHUSETTS. The one that was created. I’m 

not talking about one up on Mars. 

Do you think that it was wrong in 1946 that it was created by 

a district court opinion and accepted in 1971 by the Supreme 

Court? Do you wish that hadn’t happened? 

36

Mr. FRANK. Do you mean as a matter of a judicial decisionmaking or do you mean as a matter of public policy? 

Mr. FRANK OF MASSACHUSETTS. Public policy. 

Mr. FRANK. As a matter of public policy, the right that was created was overbroad. 

Mr. FRANK OF MASSACHUSETTS. So would you want any private 

right of action in these cases? 

Mr. FRANK. I would like some right of private action. 

Mr. FRANK OF MASSACHUSETTS. You had described that in writing, but you basically objected to the very existence of the right as 

it existed from 1971? 

Mr. FRANK. No, I objected to the judicial— 

Mr. FRANK OF MASSACHUSETTS. As it existed? 

Mr. FRANK. No, I objected— 

Mr. FRANK OF MASSACHUSETTS. You said it was overbroad. That 

means as it existed then. 

Mr. FRANK. Well, to some extent I object to it, and to some— 

Mr. FRANK OF MASSACHUSETTS. Yes, all right, I want to get—

now, as to auctions, you said that auctions save money. 

Should the Federal Government use auctions and other governments use auctions when they’re hiring outside counsel? The Federal Government may not do it as much. It does sometimes. State 

and local governments also do it. 

Do you advocate the use of auctions when State and local governments hire outside counsel, as a possibility? 

Mr. FRANK. It depends on the situation. 

Mr. FRANK OF MASSACHUSETTS. Well, yes. Then you would say 

that in some cases say there should be auctions by them? 

Mr. FRANK. There should be a competitive bidding process. 

That’s, I think, a different concept than an auction. An auction implies that the only element is price. 

Mr. FRANK OF MASSACHUSETTS. So would you differentiate between the kind of selection process you would use in class action 

cases from what a, say, a local government maybe ought to do 

when hiring outside counsel? 

Mr. FRANK. Well, it depends on whether there are named class 

members; it depends on a variety of— 

Mr. FRANK OF MASSACHUSETTS. All right. To be honest, I—well, 

let me ask the other—how about the ‘‘loser pays’’ principle. Let me 

ask this. 

Judge Walker, the loser pays, principle, are you in favor in this 

case? 

Judge WALKER. I do favor it— 

Mr. FRANK OF MASSACHUSETTS. Good. What about in patent 

cases, do you favor the loser pays principle? 

Judge WALKER. Yes, and we have a modified form of a ‘‘loser 

pay’’ in patent cases— 

Mr. FRANK OF MASSACHUSETTS. So you’re not just for the loser 

pay principle in class action cases— 

Judge WALKER. Oh— 

Mr. FRANK OF MASSACHUSETTS.—you’re for generally applying it? 

Judge WALKER.—absolutely not. No, I think it would be very constructive— 

Mr. FRANK OF MASSACHUSETTS. Mr. Frank— 

37

Judge WALKER.—I would just say— 

Mr. FRANK OF MASSACHUSETTS. No, no, you answered the question. 

Judge WALKER. Well— 

Mr. FRANK OF MASSACHUSETTS. Mr. Frank, do you think that the 

loser pay principle should be applied in, say, patent cases, in cases 

where two businesses are suing each other? 

Mr. FRANK. Yes. Yes, I do. 

Mr. FRANK OF MASSACHUSETTS. So you’re for the loser pay principle in general, not just— 

Mr. FRANK. Yes— 

Mr. FRANK OF MASSACHUSETTS.—in the class action cases. 

Let me say, Mr. Chairman, at this point, I would like to introduce into the record a statement from the Consumer Federation of 

America, which is on the bill where it expresses—‘‘express our opposition to H.R. 5491,’’ and also from the AFL–CIO associate general counsel Damon Silvers, ‘‘H.R. 5491 will protect perpetrators of 

corporate fraud and increase legal fees to plaintiff lawyers at the 

expense of working’’—to Mr. Galvin, just one last question— 

Chairman BAKER. Just, without objection, that’s admitted. 

Mr. FRANK OF MASSACHUSETTS. Thank you. 

Are there other issues that you think we should address, because 

I think nobody has an objection, everybody is in favor of addressing 

in these hearings and legislatively the whole question of how best 

to protect shareholders, and the argument here is that this legislation will lead to better protection of shareholders. 

Are there other factors that you think we should be considering 

if we were to deal with legislation? 

Mr. GALVIN. Absolutely. I think there’s a multitude of issues. 

For instance, in the idea of remediation, one of the things that 

I’ve been most concerned about is the arbitration process. 

We force investors into arbitrations that are oftentimes rigged 

against them, and that’s a condition of buying stock, and that’s 

something that I think the Congress ought to be looking at. 

That actually affects many people in this country who don’t go—

can’t go to litigation, that are trying to get recovery of losses. 

And there’s one example. 

I think the whole issue of the pricing and the timing of options 

that was mentioned in my testimony is another. 

The hedge fund issue, which I think cuts across our entire financial services system, indeed our entire economy, that’s another example of something that I think demands a lot more attention than 

it’s been getting. 

Mr. FRANK OF MASSACHUSETTS. I thank the secretary, who has 

been a great leader in consumer protection and shareholder protection, and I hope that we can pursue these— 

Chairman BAKER. The gentleman’s time has expired. 

Mr. Feeney. 

Mr. FEENEY. Thank you, Mr. Chairman. 

I think the testimony from all of our panel has been quite interesting. 

First of all, Your Honor, I want to tell you that I’m hardly offended by your being here. Matter of fact, I consider your testimony 

interesting, persuasive, and very much appropriate. 

38

Congress, collectively and individually, all the time gives advice 

to the president and to our sister branch in the judiciary. Sometimes we do it officially. It’s called a resolution. Sometimes we do 

it unofficially. It’s called criticism of judicial decisions. I engage in 

it on a frequent basis. 

And I can’t ever remember being offended by something that a 

judge said off of the bench. I’m regularly offended by decisions that 

come from the bench. 

But for example, you know, Justice Breyer’s recent book, Act of 

Liberty, I find terribly, terribly interesting, and I’m glad that he 

shared it with us. I wrote a full critique of his book because I 

thought it was wrong, but I’m delighted that he shared his view 

with us. 

And I think that your testimony, especially given your experience, is particularly helpful, from my perspective. 

Chairman BAKER. Would the gentleman yield for just one moment, for just a procedural matter? 

Mr. FEENEY. I’ll yield under any circumstances, but I hope it 

doesn’t come out of my time. 

Chairman BAKER. Absolutely not. The gentleman’s time will be 

honored. 

I understand Secretary Galvin needs to leave the hearing. Certainly we want to accommodate him. 

There were questions on the second round we’d like to forward. 

We will put those in writing and— 

Mr. GALVIN. I apologize for having to leave, but I have made 

other commitments that require my departure. 

Chairman BAKER. We certainly understand. I just wanted to 

make clear for the record that we would follow up with our questions by correspondence. 

Mr. GALVIN. I look forward to working with the committee. 

Chairman BAKER. I thank the secretary for his appearance. 

The gentleman is recognized on the remainder of his time. 

Mr. FEENEY. Thank you very much, Mr. Chairman. 

We appreciated having the gentleman from Massachusetts with 

us. 

Professor Cox, I understand that there are significant portions of 

H.R. 5491 that you don’t think are necessary, but you do agree that 

there are some problems, and you refer to them in your testimony. 

In a recent article, you actually analyzed some of the pay to play 

allegations and suggested that perhaps a total bar of appointments 

from a law firm that’s made political donations is appropriate. 

As a former lawyer, I’m terribly troubled by some of the allegations, and we don’t need to have a trial here of any particular 

names. We can talk about hypotheticals and legal ethics and appropriateness, and I think that all of us can hopefully agree. 

With respect to the pay to play practices, could you describe 

those as they may be happening in the real world out there, and 

tell us what, if anything, you think Congress may need to do, since 

you point out in your article, the American Bar Association has 

sort of a, you know, ambiguous inference or implication that this 

may be wrong, but none of the 50 States has apparently directly 

barred this. 

39

So maybe you can address what pay to play is, what the problem 

is, and how Congress may need to address it. 

Mr. COX. Pay to play exists on several fronts. The front we 

looked at in terms of trying to find out if there is some relationship 

between, for example, State treasurers, State controllers, etc., decisions of funds under their control could become lead plaintiffs or 

not. 

And there are, you know isolated stories that we were first able 

to collect in the press that suggested this was a problem. 

Second thing we looked at was to go from State to State to find 

out how many law firms, plaintiff law firms registered as lobbyists. 

We did find, I believe, nine States where there were at least one, 

sometimes seven plaintiffs’ law firms that had registered as lobbyists in those States. 

We teed up then the idea that many States had wisely, in light 

of the brouhaha that accompanied the Cendant settlement where 

there were allegations of pay to play, where Pennsylvania law 

firms mysteriously were making contributions to somebody running 

for statewide office in the State of New York, and then was selected 

as lead plaintiff in the Cendant litigation—strange connection 

there, I would think, but leave that as it is. 

Many States then introduced procedures to insulate the decisions 

about becoming the lead plaintiff totally from those who would be 

political officers, etc., head of advisory committees. 

And we think that’s a good practice, certainly a prophylactic requirement, and we think that, to just wrap this up, because I don’t 

want to eat into your time needlessly, thinking that this is fair 

game, I think, when you’re a presiding judge and you have an institution, I think it’s worth asking those questions about—that 

probe exactly how it came that you selected this law firm to represent— 

Mr. FEENEY. Well, professor, if I can interrupt, Judge Walker 

may do that. But should we require it of other judges who may not 

be as thorough as Judge Walker is? 

Mr. COX. Yes. I found nothing objectionable in that portion of 

H.R. 5491 on that point. 

Mr. FEENEY. Can I give you a hypothetical that is a little bit historical? I don’t think it’s in play today. 

Supposing that it turned out that a particular industry, like the 

tobacco industry, was sued by a group of 10 or 12 law firms who 

ended up in a settlement, having never needed to take the case to 

trial, that resulted in hundreds of millions of dollars per law firm, 

and supposing it turned out that those law firms had one significant thing in common, that they had made contributions to attorneys general in various States and their respective party treasuries; would that be an ethically troubling problem for you as a 

professor of law? 

Mr. COX. The answer to that is that it would certainly be a troubling problem, just sort of given my makeup, okay? 

Whether I’m going to entangle that with ethics or not is another 

question. 

Going forward, I would think we’d want to learn from that experience and try to squeeze that out. I mean, now if we start doing 

40

it with lawyers doing that, I mean, I think we go right down the 

list and there’s lots of other entanglements. 

I just speak as somebody who, you know, grew up in Kansas and 

lives in Durham, North Carolina. We see things a lot differently 

than maybe what goes on around here. 

But I find all those entanglements troubling. 

Chairman BAKER. The gentleman’s time has expired. 

Mr. Miller. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

I did not practice in this area. I did not bring class actions when 

I practiced law. 

But all the concerns that I have heard today, and about this subject generally, ring a bell with me, because when I went to law 

school, my understanding was that class actions were fundamentally different. The courts were adjudicating the rights of people 

who weren’t there, who weren’t sitting in the courtroom, who had 

never met their lawyers, and who had no control of the litigation. 

And for those reasons, the rules of court put a pretty strict burden on the judge to make sure that people were not abused, that 

people whose rights were being adjudicated were being treated fairly by the named plaintiffs who were different from the class members and from their lawyers. 

And looking at Rule 23, it seems to me that every concern that 

anyone has expressed today is already reflected in the rule. 

In appointing a counsel, first of all, the counsel for a class has 

to be approved by the court. At the end of the litigation, their attorneys’ fees and their reimbursement of cost has to be approved by 

the court, with everyone put on notice, all the members of the class 

put on notice, and allowed to come forward and have their say, and 

the opposing party put on notice. 

And then the court has to enter findings of fact and conclusions 

of law, and is required to act in the best interests of the class members. 

And the criteria for selecting counsel for a class seemed to me 

to hit all the right considerations. 

The court has to consider the work the counsel has done in identifying or investigating potential claims in that action, the experience in handling class actions, other complex litigation and claims 

specifically of the type asserted in that action, a knowledge of the 

law, the resources the counsel could bring to representing the class. 

The court may also consider more than one applicant to be counsel for a class, and required to consider all those considerations, 

and also to require any applicant to propose terms for attorney fees 

and nontaxable costs. That’s at the front end. 

And at the back end, they also have to approve the award of attorneys’ fees. 

Judge Walker, it appears, based on just reading Rule 23, that if 

litigants or class members are having their rights seriously abused 

by their lawyers, if their lawyers retain them, then the judge responsible for the litigation, the judge assigned the litigation has seriously failed the duties given to the judge under Rule 23. 

I’m sorry. Is there some consideration in Rule 23 that you think 

should not apply in selection of counsel? 

41

Judge WALKER. To the contrary, Mr. Miller. I think Rule 23 

should apply to selection of counsel in securities class actions. 

The problem is that we have the overlay of the lead counsel provisions of the 1995 Act, which make difficult the kind of comparative or competitive selection process that Rule 23 now envisions. 

I would say further that the comparative or competitive processes that Rule 23 now contains were not there in 1990 when the 

first bidding case came down. That basically is an outgrowth of the 

decisions made by judges, including myself, and the learning that 

the courts obtained through that process. 

But let me just comment further on a very troubling aspect of 

Rule 23 and all class actions, not just securities class actions, and 

that’s the situation that the judge faces at the end of the litigation. 

At the end of the litigation, typically, the parties have settled. 

There’s a fund of money. The defendants have agreed to pay in the 

money and they’ve agreed not to contest the plaintiffs’ and plaintiffs’ counsels’ application for fees. 

And there is nobody there who really represents the class, other 

than the lead plaintiff, and if the lead plaintiff is not a vigorous 

advocate for the class, the judge really doesn’t have an adversarial 

presentation, and that’s what we need in court. That’s the raw material with which we work, an adversary—an advocate on one side 

and an advocate on the other side, and through that clash, we try 

to reach a just result. 

And, in the absence of a vigorous lead plaintiff, you simply don’t 

have the raw material to make these determinations. 

Mr. MILLER OF NORTH CAROLINA. But Judge Walker, that seems 

to be contemplated in any Rule 23 case. 

In any class action, the court has to pause and consider that the 

plaintiffs before the court and their counsel are not like most plaintiffs and most counsel, most parties and their counsel, that there 

are people who are not there whose rights are being adjudicated. 

Any settlement, the court has to approve. The court has to look 

at it skeptically, and not just accept the arguments of those in the 

courtroom. The court needs to understand that a class action is different. 

This is understood by the rules for the entire time that Rule 23 

has been in effect, the entire time that we’ve recognized class actions. Courts have to understand, judges have to understand this 

case is not like other cases. 

Judge WALKER. And my point is— 

Mr. MILLER OF NORTH CAROLINA. And that seems to be reflected 

already by the rules. 

Judge WALKER.—is that that adversarial process is absent once 

the parties have resolved the case and gone away. 

Mr. MILLER OF NORTH CAROLINA. Right. 

Judge WALKER. And the judge only has one side of the case. 

Mr. MILLER OF NORTH CAROLINA. And the rule says to judges, 

‘‘You do not have the adversarial process you usually have. You 

cannot just listen to the people who are in the courtroom. You have 

to pause and consider the position of those who aren’t here before 

you approve the settlement.’’ 

Judge WALKER. That is true. 

42

Mr. MILLER OF NORTH CAROLINA.—before you approve the settlement,’; before you approve attorneys’ fees, before you approve lead 

counsel or counsel for a class.’’ 

Professor Cox— 

Judge WALKER. That is true, but let me just add one comment. 

A judge just can’t pull these facts out of thin air. A judge depends upon the parties to present the facts and to present them in 

an adversarial fashion, and when the adversarial process no longer 

exists, then the raw material for the kind of decision making you’re 

talking about is simply absent. 

Chairman BAKER. And can the gentleman begin to wrap up? 

You’re over your time. 

Mr. MILLER OF NORTH CAROLINA. I was going to ask Professor 

Cox if he thinks that Rule 23 does not reflect the considerations 

that apply in class actions, in how the court is supposed to supervise the conduct of lawyers for a class in a class action. 

Mr. COX. I would concur with Congressman Miller, to be brief. 

And I would just say another thing, that as we’ve discussed this 

in the hallways at my law school and other law schools, one question we’ve always had is why judges don’t more frequently resort 

to some other mechanisms to try and squeeze these fees down or 

evaluate a settlement. 

You know, you’ve seen some instances outside the securities 

arena of using special masters to come in and take a look at it, to 

introduce some sort of close scrutiny, and there are some mechanisms out there. 

But I agree, I think we overtax our courts. We need to expand 

the number of judgeships, etc. But at the same time, I think there’s 

more that the judges can be doing here, and I would encourage 

that, with all due respect. 

Chairman BAKER. The gentleman’s time has expired. 

Mr. Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

Judge Walker, in your oral testimony, I believe that—I’m going 

to paraphrase here, and ask you if it’s correct—in class action securities litigation where there is not a sophisticated institutional lead 

plaintiff, that the lead—the attorneys in that case are basically acting, when they’re representing hundreds of thousands of shareholders, in a public trust. Is that a fair clarification or fair— 

Judge WALKER. I think that’s a fair understanding yes. 

Mr. CAMPBELL. Of what you said. 

Do either of the other members of the panel disagree with that? 

[No response] 

Mr. CAMPBELL. No? Okay. 

And we have seen violations of that public trust in the past, or 

abuses of that public trust by plaintiffs’ law firms, have we not? 

Judge WALKER. That’s certainly what appears to have motivated 

the 1995 Private Securities Litigation Reform Act, that Congress 

determined that there were problems that needed to be addressed. 

Mr. CAMPBELL. Right. And I take it neither of you disagree with 

that? 

Mr. COX. I don’t know whether I agree with it or not. I mean, 

I generally supported some of the reforms, but not all the reforms 

of the PSLRA. 

43

Mr. CAMPBELL. My point was simply that abuses of this trust 

that we just defined have occurred. 

Mr. FRANK. Yes. 

Mr. COX. The answer to that has to be yes, but on what scale, 

of course. 

Mr. CAMPBELL. Right. Okay. 

Then the next question is, what do we do about it? 

And if these—which is what this hearing, I believe is about—if 

these attorneys are operating in a fashion of public trust, and 

therefore we have an obligation to ensure that that public trust is 

protected, does the existing laws, do the existing laws in this area 

adequately protect the public trust, or is there more that we should 

do? 

Now, I believe that Judge Walker implied that you believe 

there’s more that we should do in that regard? 

Judge WALKER. Well, that’s right, and I agree entirely with Professor Cox as well, that there’s more that judges can and should 

do. 

I think there’s more that— 

Mr. CAMPBELL. How do we sitting up here entice, or whatever, 

judges to do more that they should do, then? 

Judge WALKER. Well, I don’t know that you can entice them, 

Congressman, but certainly the provisions here in the Act, particularly the disclosure provisions, and I would suggest a provision governing aggregation and also a provision which allows a judge to either directly or indirectly engage in a competitive selection of class 

counsel when there is not an active lead plaintiff sophisticated and 

able to take charge of the litigation would be a very constructive 

step in the right direction. 

Mr. CAMPBELL. Mr. Frank, you, I believe, stated in your testimony that you think that H.R. 5491 is a step or something, but not 

where you believe the law should go in this area; is that correct? 

Mr. FRANK. That’s correct. 

Mr. CAMPBELL. Where do you believe it should go? 

Mr. FRANK. Well, I think the loser pays provision of H.R. 5491 

is going to end up being toothless. 

I think the substantially justified standard isn’t sufficiently different enough from the Rule 11 standard that judges exercising 

their discretion will do so to fee shift in a meaningful number of 

cases. 

I further think that there’s an underlying fundamental problem 

with the securities class action where the lawsuits that are being 

brought are not to the public good in general. 

Mr. CAMPBELL. How do we— 

Mr. FRANK. Well, I think we need to limit the securities laws to 

cases where there’s real insider trading, to where corporate executives are, for example, using misleading financial projections to get 

better bonuses for themselves and then view that as sort of a derivative action for the shareholder against the wrongdoing executive 

rather than these sort of lawsuits that make up the vast majority 

of securities lawsuits, where it’s sort of one pocket feeding the 

other pocket and the only real winners are the lawyers. 

44

Mr. CAMPBELL. So you’re suggesting that the abuses we’re talking about are better limited by actually changing the securities law 

so that those actions aren’t raised at all? 

Mr. FRANK. I think it’s a fundamental problem in the current 

system, certainly. 

Mr. CAMPBELL. Okay. Professor Cox? 

Mr. COX. Well, I think one thing we want to do is think about 

providing a whole set of the right incentives, and part of the incentives is to try and have individuals go and pursue the assets of 

those who are responsible for the wrong. 

So the statement about money going from one pocket to the other 

pocket is a little overblown, I think you would have to admit to 

that. 

But it is an issue of circularity, where, you know, money goes out 

of a corporation if the corporation makes a payment, and the lead 

plaintiff continues to own that corporation, and you say, ‘‘Well, 

that’s okay, some of that’s paid by the insurance company,’’ and of 

course the lead plaintiff owns the insurance company, too. 

So, you know, there’s this problem of circularity out there, and 

I think everybody identifies that, and if you’re going to deal with 

the circularity problem, then you have to really figure out where 

the money is, and the money is going to be with the people who 

are responsible—the CEO’s, the investment bankers, and others 

who have aided in the fraud. 

And to be able to do that, if you’re willing to do it, means you 

have to rethink the role of aiding and abetting responsibility or at 

least the definitions of what is a primary participant, so that those 

avenues can be pursued if you’re going to cap or limit the recoveries against the corporation to overcome the circularity problem. 

That’s where I would start with things—redirect the money. 

Mr. CAMPBELL. Isn’t the purpose of looking for—having a lead 

plaintiff that is sophisticated, institutional, etc., is that, you’re 

right, I don’t see how we can here sit here and create any legislation which can judge on this circularity in every single instance, 

but— 

Mr. COX. Oh, yes, you can. You can do a number of things. 

One, you could rethink about how you design the proportionate 

liability standards that were introduced by the PSLRA so that perhaps that shields certain individuals from liability, and then you 

could also reverse Central Bank of Denver, which prohibited aiding 

and abetting under the anti-fraud provision. 

Yes, Congressman, there are some things you could do. 

Mr. CAMPBELL. I would like either Mr. Frank or Judge Walker’s 

comment on that, and then I’ll yield back, Mr. Chairman. 

Judge WALKER. Well, I’d simply add this to our discussion of lead 

plaintiffs, Congressman. 

If you were the trustee of a substantial investor that had been 

wronged in one of these frauds, you would face a troubling decision 

that you’d have to make. 

Do you come in as a lead plaintiff and try to represent a class 

of people that you’ve never seen before and have no obligation to, 

or would you attempt to opt out of the class and pursue your own 

individual action? 

And more and more institutional investors are doing the latter. 

45

So we don’t have a sufficient incentive, it seems to me, in the 

present scheme of things to provide a reason for the kinds of institutional investors or investors that we want to see come in and 

monitor these cases, and Congress might very well give some consideration to how it would change things to give sufficient incentives to the kinds of monitors that we think are appropriate to 

watch over these cases. 

Chairman BAKER. The gentleman’s time has expired. 

Mr. McHenry. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

I certainly appreciate you holding this hearing. I think the panelists have been very good in their testimony. I enjoyed hearing you. 

I’m sorry that Secretary Galvin had to leave; I had a few questions 

for him. 

But if I could start with you, Mr. Frank, in your testimony, you 

provide evidence that 70 percent of securities settlements in 2004 

were, ‘‘actually nuisance settlements of under $10 million, an 

amount that to settle is cheaper than litigating,’’. 

And you term these settlements, ‘‘effectively legalized extortion.’’ 

Those are strong words. 

Can you elaborate on that? 

Mr. FRANK. Certainly. 

We have three stages of litigation. 

One, the cases that are dismissed right up front because they 

don’t even meet the PSLRA’s pleading standards. Two, the cases 

that are litigated and then thrown out on summary judgment. And 

three, the cases that are settled. 

And if you look at the distribution of settlement amounts, you 

find that a stunning number of these are just very small amounts. 

Surely not all of the settlements under $10 million are fraudulent, but for a lot of corporations, you’re facing a litigation that’s 

very expensive to try, very expensive to get to the summary judgment stage or past the summary judgment stage to try. It takes up 

executive time. It takes up corporate time. And it take attorneys’ 

fees. 

And in many cases, it’s just cheaper to settle, pay what is effectively an extortionate amount because the plaintiffs’ lawyers are 

saying, ‘‘You give us money or we’ll put your corporation through 

all of this and even if you win, because there’s no loser pays, you 

don’t get any of your money back,’’ and it’s a rational decision for 

the corporation to just pay off the plaintiffs’ attorney. 

Mr. MCHENRY. What is your remedy? 

Mr. FRANK. Well, one remedy for this would be a real definitive 

loser pays provision that takes it out of the hands of the judge and 

just says, you lose a case that you bring to trial, you’re compensating the defendant for what they’ve done,’’ and that’s the way it’s 

done in every western democracy except the United States. 

Mr. MCHENRY. Well, Secretary Galvin actually says that, in effect, that our enhancement of Rule 11 is not effective. 

Can you speak to that—what we offer in our legislation? 

Mr. FRANK. Certainly. 

There are various differing standards one could use for fee shifting. 

46

Right now, we have a Rule 11 standard that is used in perhaps 

maybe 1 percent of all the cases, if that many, and probably less 

than that. 

The current legislation wishes to change that from the Rule 11 

standard to a standard of substantially justified, which is the same 

standard in Federal Rule 37, the same standard in the Equal Access to Justice Act, though it’s actually a little bit stricter than that 

because it requires the winning party to prove that it wasn’t substantially justified, which is the opposite of the role it takes in the 

Equal Access to Justice Act. 

But at the end of the day, it ends up with judicial discretion, and 

if you talk to securities lawyers, they’ll tell you that judges don’t 

like fee shifting if its’ discretionary. They just want the case out 

of their courts, and if there’s no fee shifting, then they don’t have 

to have further proceedings on how much the fees are. 

Mr. MCHENRY. Professor Cox, you actually have a similar statement in your testimony that says, ‘‘not likely to be effective for several reasons.’’ And you mention some of these in your testimony. 

Could you elaborate? 

Mr. COX. Yes. 

First of all, I think Ted is right. I think that judges tend to be 

reluctant to impose that. 

But more likely, under the old rule, individuals tended to not 

move, or the defendants tend not to move to it, again for a variety 

of reasons. 

They had sometimes the burden of proof, wanting to put the litigation behind them, frequently repeat players with the parties on 

the other side. 

You know, so there’s a variety of issues there. 

As to judges’ unwillingness to impose Rule 11, I defer to the one 

judge in the room to talk about that. 

But I would just say that the standards that apply in Rule 11 

or that were introduced by the PSLRA, or that would be introduced 

by this litigation, are sufficiently tolerant to create a lot of ambiguity into the process, which is unlikely, therefore, to lead to the 

results that you and others would like to achieve. 

Mr. MCHENRY. Professor Cox, do you support a loser pay provision? 

Mr. COX. Not at all. 

Mr. MCHENRY. Not at all? 

Mr. COX. No. 

Mr. MCHENRY. And why would that be? 

Mr. COX. Well, I think I mentioned the phrase earlier. I think 

it really does fly in the face of an important part of American society, which is access to justice, and the loser pay rule really operates to the disadvantage of those who are outside the corridors of 

power or wealth. 

Mr. MCHENRY. I would sort of point to power and wealth with 

the $9.7 billion award and settlements just last year, and the 25 

to 30 percent the trial lawyers netted off of that, so you’re talking 

about a $3 billion industry, and you’re talking about them acting 

as if they’re not in power. 

I mean, I think they’re fully in power, and raking the shareholders over the coals. 

47

Mr. COX. You know, I thought the plaintiffs in these cases were 

the investors, and many of them are widows, widowers, and orphans, individuals— 

Mr. MCHENRY. Yes, but you’re talking about $3 billion that trial 

lawyers net off of this type of action, $3 billion, and if I may— 

Chairman BAKER. The gentleman needs to begin to wind up. 

Mr. MCHENRY. So I would point out that the idea that these people are out of power and indigent is almost laughable on its face 

when you have— 

Mr. COX. I don’t think it’s laughable at all. I think that you need 

to provide rewards for the high cost of conducting this litigation—

the search costs, the uncertainty of the process, and the 40 percent 

of the cases that get dismissed. 

If you ran a business like that, you’d want a pretty good profit 

margin on the products that you did sell, Congressman. 

Mr. MCHENRY. And I would just say that’s one heck of an award, 

$3 billion. 

If I may finish with you, Judge Walker, you know, if you could 

speak in terms of a lower plaintiffs’ attorney having to pay, and 

Rule 11, if you could just touch on that, based on your experience. 

Judge WALKER. It seems to me a more objective standard than 

Rule 11 would be useful for the subcommittee to consider, for a 

number of reasons. 

First of all, Rule 11 applies in all sorts of cases, not simply securities cases, and there might be certain standards in a securities 

case that you might want to impose that would not necessarily be 

applicable in cases generally. 

Secondly, Rule 11 is subject to judicial interpretation, which 

changes and evolves over time. 

As Professor Cox pointed out, Rule 11 issues generally arise at 

the tail end of litigation, and nobody wants to deal with that at the 

end of litigation, because by this time, the case is pretty much over. 

Rule 11 sanctions are difficult. They’re essentially impractical to 

impose. And that’s the reason that there are so few instances of 

them being imposed. 

Finally, they relate to the signing of pleadings, primarily, rather 

than the conduct of litigation, and I think it would be useful for 

the committee to consider a sanction or a fee shift that would bring 

into the equation not just what was written in the pleadings, but 

how the litigation was conducted. 

Chairman BAKER. The gentleman’s time has expired. 

Mr. Davis. 

Mr. DAVIS OF ALABAMA. Thank you, Mr. Chairman. 

Gentlemen, let me pick up where Mr. McHenry left off, on the 

loser pay issue. 

Judge, as a former lawyer and a former assistant U.S. attorney, 

I’m reluctant to question a Federal judge too strongly, but I’m not 

sure— 

Judge WALKER. It happens all the time. 

Mr. DAVIS OF ALABAMA.—I’m not sure that I followed your last 

argument. 

You mentioned some of the defects in relying on Rule 11 as a 

remedy for frivolous claims, and you mention the fact that, well, 

48

the litigation is over, it’s hard for the court to go back in and address these issues. 

Presumably, losers pay, obviously, happens after the litigation is 

over, too, so why wouldn’t those same arguments cut just as strongly against loser pay? 

Judge WALKER. Well, if it were required that there be an award 

at the end of a case in which a defendant had prevailed, judges 

would have no choice but to get into the issue. 

But under the Rule 11 standard that now exists, it’s not mandatory, it’s not required, and it’s an unpleasant piece of business. 

And judges are no different from anybody else. We don’t like to 

do what’s unpleasant. 

Mr. DAVIS OF ALABAMA. Judge, let me ask you one practical concern. 

You’ve been on the bench a while, and I was a law clerk for a 

district judge in Alabama, and we are both well aware that it takes 

all phases of litigation a very long time to move. 

One concern that I have is that losers pay would weave potentially another 9 to 10 months worth of litigation, because under—

and I think we all understand at this point in the hearing, we’re 

not talking about a hard scenario that every plaintiff who loses 

pays. 

You would have, the district judge would have the capacity to do 

an analysis of whether there was a substantial basis for the claim. 

There would be some extra layer of scrutiny. 

That layer of scrutiny would presumably require hearings, possibly evidentiary hearings, possibly just arguments on motions. 

They would have to be scheduled. 

There would no doubt be motions for additional hearings. There 

might be a motion for reconsideration of your first ruling. There 

might be an appeal of your ruling at the same time the appeal of 

the underlying case was going on. 

It seems to me that we would weave a lot of complexity into the 

end of cases. 

And I suppose it raises another question. 

Since the appeal of the underlying ruling would be going on at 

the same time, what happens in terms of attorneys’ fees issues and 

those kinds of questions if a judge were to somehow rule that, ‘‘I 

think a plaintiff should pay,’’ and somehow the judge was reversed 

on the underlying ruling on the merits; what would happen then? 

Anybody? Mr. Frank, have you thought about that kind of a 

standard? What would be the remedy for a plaintiff who ended up 

winning on appeal and after a judge found that claim was not entitled to paying? 

Mr. FRANK. Well, it’s the same remedy that a defendant has after 

losing, which is you move for a stay of the ruling pending appeal 

and the appeal either succeeds or it doesn’t succeed, and if the appeal succeeds, you’ve never paid a penny, and you get your bonds 

back, and if the appeal doesn’t succeed, then the defendant gets to 

execute— 

Mr. DAVIS OF ALABAMA. Well, that sounds good, but for the fact 

of attorneys’ fees. 

Judge? 

49

Judge WALKER. The award is not payable until the judgment is 

final, and the final— 

Mr. DAVIS OF ALABAMA. What about attorneys’ fees that accumulate in the interim— 

Judge WALKER.—appeal has been exhausted. 

But distinguish, Congressman, if you would, determining the 

amount of fees from whether fees should be awarded. It’s the latter 

that is complicated. 

Determining the amount of fees is generally pretty uncomplicated. 

Mr. DAVIS OF ALABAMA. Yes, I think you’re right. 

Judge WALKER. It’s generally just hours and a reasonable fee 

rate and— 

Mr. DAVIS OF ALABAMA. The point I was making, though, gentlemen, is obviously there’s a period of time in which a litigant—these 

cases don’t happen on contingency, typically. There’s a period of 

time in which a litigant is having to bear the legal cost of not just 

adjudicating the appeal or pursuing the appeal, but also the legal 

cost of challenging the finding of pay by the plaintiff. 

And my only concern—I don’t want to spend my whole 5 minutes 

on this—my only concern is that if you have multiple tracks that 

are being pursued, an appeal plus the question of who pays, that 

it simply builds a lot of complexity and a lot of burden for the 

plaintiff. 

Judge WALKER. Well, but would you use that logic then to say 

that a plaintiff who is successful should not recover fees? 

And we have lots of provisions, and quite properly— 

Mr. DAVIS OF ALABAMA. What I would say, Your Honor, is that 

if we contemplate— 

Judge WALKER.—that the plaintiff is entitled to fees, and so we 

have to go through that determination. 

Mr. DAVIS OF ALABAMA. But the question is, if we’re going to 

make a change in the rules as we know them, who has the burden 

of persuasion? 

And I would argue that if there are reasons of complexity, reasons of redundancy, that might argue against a change, perhaps we 

should err on the side of caution. 

Let me raise another line of questions. 

Let me go back to Professor Cox’s point. He and Mr. McHenry 

had an exchange over the question of is the little guy, is the little 

plaintiff, excluded from bringing these kinds of claims. 

I’m more on Professor Cox’s side of the argument than either the 

judge or Mr. Frank, but if I just wrap up, Your Honor, let me tell 

you why I think there’s a lot to Professor Cox’s argument. 

By definition, for a plaintiff investor to even bring this kind of 

case, that person has to wade through a lot of transactional costs, 

and has to wade through a lot of gaps of information. It is not an 

evenly situated playing field. 

It’s difficult under the best of circumstances, I think you’d agree, 

Professor Cox, that it’s hard under the best of circumstances to get 

plaintiffs to fully exercise and pursue their rights. 

Now, you add the disincentive of a penalty at the end, of having 

to pay the cost of the litigation, you add that possibility, and I can’t 

imagine that you don’t raise a significant impediment to these 

50

kinds of cases being brought, and I think that’s something we 

ought to be concerned about. 

Mr. Frank, you were trying to speak to that? 

Mr. FRANK. Yes, you raise an impediment to cases that aren’t 

substantially justified. I’m not sure why— 

Mr. DAVIS OF ALABAMA. This is the problem, though, Mr. Frank. 

Some of the cases will be and some won’t be. They all won’t be 

found to be in the not substantially justified category. 

The disincentive accrues for everybody who might be a plaintiff 

in one of these cases, doesn’t it, Professor Cox? 

Mr. COX. There’s going to be heavy discounting on the benefits 

of me bringing this suit if there is a loser pay rule, and that’s the 

point that Congressman McHenry was missing. 

You start squeezing out the fees and you introduce the uncertainty of the loser pay rule, and those widows, those orphans, retirees’ funds, etc., are going to not think twice, they’re going to think 

seven, eight, nine times about— 

Mr. DAVIS OF ALABAMA. Well, let me just end on this point. 

What I think you’re missing, frankly, Mr. Frank, sure, people 

who bring frivolous lawsuits shouldn’t be able to collect anything 

and probably ought to bear the costs of litigation. 

What I’m concerned about is the class of people who lose, but 

who still have a merit to their lawsuit, who lost because their judge 

wasn’t as wise as Vaughn Walker, or who lost because their lawyer 

didn’t file a discovery motion in time, or who lost because a witness 

went south in a deposition, you name it. 

Chairman BAKER. Or lost because his time has expired. 

[Laughter] 

Mr. DAVIS OF ALABAMA. People bring a lot of good cases that are 

not successful, and those of us who practice law understand that. 

Chairman BAKER. I thank the gentleman. 

Mr. Pearce. 

Mr. PEARCE. The University of Southern California would like 

the same option, to go back and play the last 4 minutes of that national championship game. Everyone would always like the ability 

to replay. 

Mr. Walker, Judge Walker, you had mentioned in your testimony 

the need to awaken Congress to the need to review the operations. 

We’ve heard a lot of comments and I’m sorry I haven’t been able 

to be here for the questions, but does that seem like a valid reason 

to have a hearing, to awaken Congress to the need that lies out 

there in the circumstance? 

And I have a lot more questions, so please, a shorter answer 

rather than a longer one. 

Judge WALKER. Well, I don’t think a judge is here to tell Congress when it should have a hearing or not have a hearing. That 

seems to me to be entirely up to Congress to decide. 

Mr. PEARCE. I understand, but I’m asking if you think there’s a 

compelling need for Congress to sit and listen to this. 

You heard the early opening statements—that we are making a 

mistake that was foolish, that we’re impeding the process of the judiciary. 

51

Judge WALKER. I don’t feel that this hearing or the consideration 

of legislation to change the way securities class actions are handled 

impedes what judges do in the least. 

Mr. PEARCE. Thank you, sir— 

Judge WALKER. It seems to me to be a fair and appropriate matter for Congress to consider at any time that it perceives that 

there’s a problem. 

Mr. PEARCE. Okay. 

The question I have for all of you is that there are complaints 

that attorneys’ fees are just not widely known in these class action 

settlements and opinions have been given that greater publication 

of those fees would be productive. 

Again, short answers, because I have several questions in 5 minutes. 

So Mr. Walker, Mr. Frank, and Mr. Cox, if you all would— 

Judge WALKER. It would be very helpful to have that. It would 

be very helpful to judges who are called upon to set fees in cases. 

Mr. PEARCE. Mr. Frank. 

Mr. FRANK. I concur. 

Mr. PEARCE. Mr. Cox? 

Mr. COX. I fully concur, too. 

Mr. PEARCE. Okay. 

How would we go about that? What—would we post those on the 

Internet a Web site that puts all fees of all actions of this nature 

in one site? 

Judge WALKER. I don’t want to mention a university that’s a 

rival of the University of Southern California, but Stanford University Law School has a Web site that compiles a great deal of information concerning securities litigation, and that would be one appropriate vehicle. 

Mr. PEARCE. Okay. Mr. Frank, any comment? 

Mr. FRANK. I think that’s right. I think we just need to make 

the—if we require the disclosure of the information, then existing 

private sources can disseminate it. 

Mr. PEARCE. Mr. Cox? 

Mr. COX. Our work has shown, as repeated in the filed statement, that a significant problem in securities class actions is that 

individuals, particularly institutions, with provable claims do not 

submit those claims. 

One of the problems is that there is no centrally located mandatory place for notice of settlements to occur. There’s no uniformity 

in the form that has to be satisfied. 

A great contribution could be made in putting money into people’s pocket by not just going with the Stanford site, which is quite 

good, but making it a site that something has to happen 

mandatorily. 

That doesn’t require legislation, it requires probably a swift kick 

in the backside to the SEC to get this moving, because that’s where 

they could have the force to do that. 

Mr. PEARCE. Any suggestion, Mr. Cox, as to what that might be 

that would be that swift kick? 

Mr. COX. Perhaps somebody on the football team. 

Mr. PEARCE. Mr. Cox, you had talked about—Mr. Galvin actually 

had talked about it before I was called away—the risk of the 

52

chilling effect on people from having to bear the possible risk, and 

you had then I think an answer to Mr. Davis, had supported something similar to that. 

How can we avoid the chill on the other side, the chill that 

causes companies never to get into things where there might even 

be litigation? 

That chill probably affects the price of stock just as much as any 

wrongdoing. 

Mr. COX. I remain the eternal optimist here, and hope springs 

eternal and I do think that part of the dip we’re seeing in the filings of securities claims, as documented in my statement, is a result of the great strengthening that’s occurred since 2002 in the financial reporting process. 

I think that that, following good procedures, running a good ship, 

is the best way to avoid a cold chill down your spine if you’re a 

CFO or a CEO. 

Mr. PEARCE. Mr. Walker, do you have a comment on that? 

Judge WALKER. No, I would concur with Professor Cox. 

One needs to bear in mind, however, that all of these rules and 

regulations and disclosure requirements do come at a cost, and I 

think it’s fair in our system that those costs be borne by public 

issuers of securities, but we do have to recognize that there is a 

cost that these entail. 

Mr. PEARCE. Mr. Cox, would you have any—oops, I see my time 

has expired. Thank you, Mr. Chairman. 

Chairman BAKER. If you want to ask your final one and wrap up, 

that’s fine. 

Mr. PEARCE. The whole problem, Mr. Cox, of the improper relationships that appear to be highlighted in this case that’s before 

the courts right now, how can we root that out? 

I mean, you get somebody that does not do anything and gets the $750,000 fee, and I mean, this is, according to the paper, that’s always going to be an attraction. 

So how do you root that kind of behavior out? 

Mr. COX. Well, I always think that the first line of defense in 

protecting the class members, and I think that’s what we’re really 

talking about, and also the whole system, are the presiding judges, 

and I defer to Judge Walker to say what guidance we can have. 

But I think the publicity surrounding the Milberg Weiss indictment and also the recent revelations in the Chicago Tribune all are 

wakeup calls to judges that they need to inquire deeply into possible conflicting relationships. 

And as I said before, I do support that part of H.R. 5491. 

Mr. PEARCE. Mr. Walker do you, and Mr. Frank, I’ll give you one 

last chance, then my time is expired. 

Judge WALKER. I quite agree with Professor Cox’s last statement. 

I think it is a wakeup call, both to Congress and to the judges. 

Mr. PEARCE. Mr. Frank? 

Mr. FRANK. I agree. 

Mr. PEARCE. You guys are really compatible out there. 

All right, thanks. 

Thanks, Mr. Chairman. 

Chairman BAKER. You should have been here earlier. 

[Laughter] 

53

Chairman BAKER. I thank the gentleman for yielding back. 

By prior agreement, I had indicated that we would have a second 

round of questions, and so keeping my commitment to Mr. Ackerman, I’ll recognize him, but it’s my intention, and this is a bit unusual, if we have additional members arrive, I will not recognize 

them for questions. 

There is a 2 o’clock hearing in this committee room, and there 

is time needed to prepare for that, so Mr. Ackerman and Mr. Davis 

will be the last of the day. 

Please proceed, sir. 

Mr. ACKERMAN. Thank you, I appreciate that, Mr. Chairman. 

I just want to clarify a couple of points for the record. 

The first one is that in the Milberg Weiss indictment, which is 

referenced so extensively in the written testimony of witnesses, 

that there is no charge or allegation that even one dollar was lost 

to investors by the things that they were charged with, that it basically charged—it was mostly a fight between who gets to represent 

the class, etc. 

Secondly, there is no charge that the firm that is cited so extensively in the testimony is not a vigorous firm in the prosecution for 

their clients. 

Third, because people mentioned it as if it were a crime or a 

charge that the firm received or earned $1.6 billion in fees and reimbursements, that first, there is no fee that can be paid that’s not 

approved by the judge or the court, and second, I find it curious 

that nothing was made, no point was made that the firm, if that 

number is correct, received $1.6 billion, that they also recovered 

$45 billion for the people in the classes that they represented. 

Fourth, I don’t know of any CEO of any of the large, giant corporations that have been found guilty of corporate corruption in 

which the CEO of that company did not earn more money than the 

attorneys for the lead plaintiffs. 

That having been said, I want to turn to Mr. Frank’s testimony, 

if I may. 

I find it highly unusual, because Mr. Frank’s testimony reads 

like the opening statement in a prosecution, by the prosecutors. 

The very first statement, Mr. Chairman, says, ‘‘Hello.’’ 

The second sentence says who he is, and that he’s not necessarily 

representing the people who pay for his livelihood. 

And he waits all the way to the third sentence before bringing 

up Milberg Weiss, and from that third sentence on, there’s hardly 

a page that goes by that he doesn’t mention Milberg Weiss, ripping 

them apart in the most vicious ways, expressing opinions that he 

could not do in a court of law, the purpose of which is only speculative, but certainly that’s what his testimony is all about, and that 

was the purpose of his being here and the focus of so many who 

are involved in this, I’ll call it a movement. 

Pages aren’t numbered, but under number two, ‘‘Abuses by the 

plaintiffs’ bar in securities legislation, the problem of kickbacks,’’ 

he says, quote: 

‘‘To illustrate the problem of illegal kickbacks, I summarize the 

Milberg Weiss indictment from the government’s complaint.’’ 

54

And then he goes on and on, and on and on and on and on, about 

the Milberg Weiss case, testifying, in effect, as to what the charges 

are in the case and what his opinions are. 

I’ll cite just a couple of examples. 

‘‘According to the indictment, Milberg Weiss paid kickbacks to at 

least three groups of named plaintiffs,’’ etc., etc., etc. ‘‘Milberg Weiss obtained more than $216 million in attorneys’ 

fees.’’ 

‘‘The government alleges that the kickbacks were sometimes 

given in cash,’’ laundered through this and that, going into specifics 

that are unproven, and really have no business before this committee or Congress. 

Those are points to make in a court of law, not in a subcommittee holding a hearing on legislation, talking about who allegedly put what money in what drawer and who gave it to who. 

That’s no concern of ours, and the only purpose that I can think 

of is to smear this company that has been indicted and not yet 

tried. 

Then on the next page: 

‘‘Some have suggested,’’ you say, ‘‘Some have suggested that the 

monies were just what they were recorded as, referral fees, but this 

is implausible.’’ 

And you go and analyze for us why the firm is guilty and why 

the defense that apparently they’re going to put up, according to 

you, should be knocked down. 

That you’re trying that case before me, whose only experience at 

this, having not gone to law school, is that of a schoolteacher, who 

did teach about the separation of powers to small children, and 

being presumed innocent until proven guilty, is very offensive. 

The only purpose of doing this—you say, ‘‘Why would Milberg 

Weiss passively pay millions of dollars,’’ as if they did. I don’t 

know. Maybe you do. ‘‘Why would they do that,’’ you say, unless 

this or that? 

Chairman BAKER. Can the gentleman begin to wrap up, please? 

Mr. ACKERMAN. The only purpose is to defame, degrade, and incriminate. 

You mention the Chicago Tribune case. 

‘‘The Chicago Tribune revealed that Milberg Weiss’’—the former 

predecessor company, law firm—as if those are facts, because a 

newspaper charged it—they revealed. It wasn’t that they charged. 

They revealed. You reveal something that’s true. That’s a charge. 

There’s a difference, and you know that, and you make that look 

like a fact. 

And then in number three, and I’m wrapping up, Mr. Chairman, 

you say, ‘‘The Milberg Weiss indictment shines a small light on a 

small portion of a great problem of corruption in the plaintiffs’ bar. 

The very fact of kickbacks’’—da da da da da da da—the fact. You’ve 

now rendered a decision in your own case. 

You may not be representing the people who pay your livelihood, 

but it seems to me that you’ve weighed in here in a very, very unfair way the views to which you’re entitled, but testifying in this 

court, as if it were a court in absentia of a real court, instead of 

presenting the evidence that you apparently know, I don’t know 

how, because you said you have no involvement in that case—I do 

55

understand, I think, that as an attorney, you appeared in cases on 

the other side of Milberg Weiss— 

Chairman BAKER. If you can, sir, wrap up. 

Mr. ACKERMAN. And I’d like your response to that, Mr. Frank. 

Mr. FRANK. Well, I challenge your premises on many different 

levels. 

First of all, Mr. Vogel did, I believe it was Mr. Vogel who did 

plead guilty and did plead that the United States Government 

could prove that he took several million dollars in kickbacks from 

Milberg Weiss. 

With respect to the Chicago Tribune, Coughlin and Milberg 

Weiss acknowledged that they made these payments and argue 

that they were appropriate, and the Chicago Tribune simply quotes 

judges who say, ‘‘I didn’t know about these payments, and it would 

have made a difference in my opinion if somebody had told me 

about them. I don’t feel that they were disclosed to me.’’ 

Mr. ACKERMAN. Excuse me. Just on that statement, isn’t their 

assertion that they paid finders fees to another law firm? 

Mr. FRANK. No, sir, not in the Chicago Tribune. 

With respect to kickbacks and whether or not plaintiffs are hurt 

by this, I would note that this is not something that’s controversial. 

Other plaintiffs’ law firms criticize this. They say that this goes to 

the very center of what it is to be a class counsel. 

And the point of a lead plaintiff is to act as a watchdog, and it’s 

already a problem— 

Mr. ACKERMAN. I’m sorry, their competition complained about 

them? 

Mr. FRANK. I’m sorry? 

Mr. ACKERMAN. You’re saying— 

Mr. FRANK. Other law firms complained about them, yes. Other 

law firms— 

Mr. ACKERMAN. The other law firms being the law firms that 

they were able to best at becoming the lead law firm, other law 

firms— 

Mr. FRANK.—other law firms. 

Mr. ACKERMAN.—that didn’t get the fees? 

Chairman BAKER. If I may, sir, I really need to call on Mr. Davis. 

Mr. ACKERMAN. And I will yield to him. 

Mr. DAVIS OF ALABAMA. Thank you, Mr. Chairman. Thank you 

Mr. Chairman. 

Let me—I have a couple of questions to close with, but Mr. 

Frank, you did something that’s kind of remarkable a minute ago, 

and I can’t help but comment on it. 

You were asked about your prejudgment of various facts in the 

case by my friend from New York, and your response was that, 

well, someone has entered a guilty plea and made certain assertions. 

Mr. Frank, if you’ve practiced in anybody’s court for any period 

of time, to take one guilty plea in a case and to make a dispositive 

judgment about the case based on that is remarkable. 

But let me move on to my other two questions. 

General proposition. We hear these arguments a lot, that, ‘‘Well, 

we’re concerned about the costs of litigation on defendants, we 

don’t like frivolous claims,’’ and the arguments tend to spill over. 

56

We’ll hear them in the securities context. And then we’re told, 

‘‘Well, we’re just talking about securities cases.’’ 

And then we’ll hear them in the medical malpractice context. 

And then we’ll hear them in the civil rights context. And then we’ll 

hear them in the products liability context. 

Just so I’m clear, Mr. Frank, is your enthusiasm for losers pay 

limited to securities litigation or is it pretty much anytime a plaintiff walks in court? 

Mr. FRANK. I believe it’s appropriate in several other areas. 

Mr. DAVIS OF ALABAMA. When is it not appropriate? Give me a 

class of civil litigation where it’s not appropriate. 

Mr. FRANK. I think civil rights litigation is a very good place for 

where it’s not appropriate. I think there is a problem there, where 

you do have widows and orphans and indigent people who are 

bringing litigation. 

Mr. DAVIS OF ALABAMA. Products liability? 

Mr. FRANK. Products liability, I think that can be judged by the 

attorneys firms. These are very well-financed law firms that have 

received billions of dollars from tobacco litigation and other 

sources. 

And in England, where there is losers pay, there is not a problem 

of bringing products liability suits, because well, the law firms that 

bring them— 

Mr. DAVIS OF ALABAMA. This is the only concern, well, not the 

only, but it’s one major concern I have with your argument. 

The argument keeps turning into, whenever plaintiffs make a lot 

of money off these cases, we think the loser ought to pay. 

Now, that’s a nice subjective standard, but I can’t imagine it’s 

guidance for Congress. 

What happens if plaintiffs have a bad year? Then we switch over 

and we take them out of losers pay? 

I mean, it seems like that seems to be your constant refrain, that 

if the plaintiffs’ attorneys are making a lot of money, they somehow 

need to be bearing the burden of losers pay, whereas if, in civil 

rights cases, they’re not making that much money, that somehow 

exempts them from it. I think we need a harder principle than 

that. 

The final point that I will make today, we have—and I don’t 

have all the details and legal theories in front of me, but by my 

recollection, we’ve made it harder to bring securities claims in the 

last 10 years, we’ve made it harder to bring State claims in Federal 

court, we’ve made it harder to prove securities claims by requiring 

a higher degree of knowledge of wrongdoing. There are a number 

of substantive things that have been done with the law to make it 

harder to bring these cases. 

And I think, frankly, we ought to be content with that. If by narrowing the scope of claims and narrowing the class of people who 

can bring them, and making Rule 23 harder as a general proposition, if that hasn’t had a sufficient deterrent effect, if that hasn’t 

had the effect of casting out a lot of frivolous or unsubstantial 

claims, then maybe we need to heed that lesson. 

As a practical matter, it’s the last point I will make, Congress 

has done a lot, and the Supreme Court and the appellate courts 

57

have done a lot to narrow the scope of these kinds of legislation 

and claims. That itself is a disincentive, is it not, Professor Cox? 

Mr. COX. That’s correct. 

Mr. DAVIS OF ALABAMA. That itself is something which ought to 

put a crimp in these cases, and I don’t think that Congress needs 

to weigh in and have this heavy hand sitting out there. 

Because you’re right. It’s not just securities cases you want to do, 

Mr. Frank. You and a lot of people on your side want to do as 

many plaintiffs’ cases as you can, and I think it’s the wrong direction. 

I yield back the balance of my time. 

Chairman BAKER. I thank the gentleman for yielding back. 

Let me express appreciation to all of you for your time and contribution. It is my intent to move forward with H.R. 5491 subject 

to suggested modifications that you have brought to the committee’s attention. 

This hearing was a bit different from our customary practice in 

that witnesses were sworn before testimony. 

It is my intention to leave the hearing record open for an additional 45 days. A number of members who could not be here have 

interest in forwarding questions of interest for them. 

The responses to those inquiries would be subject to the same 

rules of sworn testimony. 

Just to state for the record purposes, I do have my own interrogatories that I would like to forward for a number of reasons. 

But having said that, I am appreciative for members’ attendance 

and for the very productive discussion I believe we engaged in 

today. 

Thank you, and our meeting stands adjourned. 

[Whereupon, at 1:33 p.m., the subcommittee was adjourned.] 

(59)

A P P E N D I X

June 28, 2006

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