S. HRG. 111–369 

EVALUATING S. 1551: THE LIABILITY FOR AIDING 

AND ABETTING SECURITIES VIOLATIONS ACT 

OF 2009 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CRIME AND DRUGS 

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 17, 2009 

Serial No. J–111–46 

Printed for the use of the Committee on the Judiciary 

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EVALUATING S. 1551: THE LIABILITY FOR AIDING AND ABETTING 

SECURITIES VIOLATIONS ACT OF 2009 

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55–898 PDF 2010

S. HRG. 111–369 

EVALUATING S. 1551: THE LIABILITY FOR AIDING 

AND ABETTING SECURITIES VIOLATIONS ACT 

OF 2009 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CRIME AND DRUGS 

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 17, 2009 

Serial No. J–111–46 

Printed for the use of the Committee on the Judiciary 

( 

(II) 

PATRICK J. LEAHY, Vermont, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

SHELDON WHITEHOUSE, Rhode Island 

AMY KLOBUCHAR, Minnesota 

EDWARD E. KAUFMAN, Delaware 

ARLEN SPECTER, Pennsylvania 

AL FRANKEN, Minnesota 

JEFF SESSIONS, Alabama 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

LINDSEY GRAHAM, South Carolina 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

MATT MINER, Republican Chief Counsel 

SUBCOMMITTEE ON CRIME AND DRUGS

ARLEN SPECTER, Pennsylvania, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

AMY KLOBUCHAR, Minnesota 

EDWARD E. KAUFMAN, Delaware 

LINDSEY GRAHAM, South Carolina 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JEFF SESSIONS, Alabama 

TOM COBURN, Oklahoma 

HANIBAL KEMERER, Democratic Chief Counsel 

WALT KUHN, Republican Chief Counsel 

(III) 

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page 

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, prepared 

statement .............................................................................................................. 164 

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 1 

WITNESSES 

Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia University 

School of Law, New York, New York .................................................................. 2 

Giuffra, Robert J., Jr., Partner, Sullivan & Cromwell LLP, New York, New 

York ....................................................................................................................... 4 

Pritchard, Adam C., Frances and George Skestos Professor of Law, Director, 

Empirical Legal Studies Center, University of Michigan Law School, Ann 

Arbor, Michigan .................................................................................................... 6 

Solov, Tanya, Director, Illinois Securities Department, Office of the Illinois 

Secretary of State, on behalf of the North American Securities Administrators Association, Washington, D.C. .................................................................... 8 

Szymanski, Patrick J., General Counsel, Change to Win, Washington, D.C. .... 9 

QUESTIONS AND ANSWERS 

Questions submitted by Senator Specter to John C. Coffee, Jr., (Note: Responses to questions were not received as of the time of printing, April 

22, 2010) ................................................................................................................ 18 

Responses of Robert J. Giuffra to questions submitted by Senator Specter ....... 22 

Responses of Adam C. Pritchard to questions submitted by Senator Specter .... 25 

SUBMISSIONS FOR THE RECORD 

AFL–CIO, Richard L. Trumka, Secretary-Treasurer, Washington, D.C., letter 26 

Business Roundtable, brief ..................................................................................... 28 

Chamber of Commerce, R. Bruce Josten, Executive Vice President, Government Affairs, Washington, D.C., letter and brief .............................................. 61 

Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia University 

School of Law, New York, New York, statement ............................................... 102 

Dodd, Hon. Christopher J., a U.S. Senator from the State of Connecticut: 

Letter to Solicitor General Paul Clement ....................................................... 114 

Letter to Christopher Cox ................................................................................ 116 

Letter to President George W. Bush ............................................................... 118 

Giuffra, Robert J., Jr., Partner, Sullivan & Cromwell LLP, New York, New 

York, statement .................................................................................................... 120 

Government Affairs Subcommittee, Enron’s Collapse .......................................... 136 

Lacorte, Dagan A., Village Trustee, Village of Suffern, Suffern, New York, 

letter ...................................................................................................................... 163 

Levitt-Amicus Brief Stoneridge 2007, .................................................................... 165 

Logan, Brendel, on behalf of Hudson Valley Environmental Action Fund, 

Albany, New York, letter ..................................................................................... 182 

Miller, Arthur R., National Law Journal, September 24, 2007 case ................... 184 

NYSE Euronext, John K. Halvey, Group Executive Vice President & General 

Counsel, New York, New York, letter and brief ................................................ 186 

New York Times, July 28, 2009, article ................................................................. 215 

Page

IV 

Pritchard, Adam C., Frances and George Skestos Professor of Law, Director, 

Empirical Legal Studies Center, University of Michigan Law School, Ann 

Arbor, Michigan, statement and article ............................................................. 216 

SEC v. Bank of America, U.S. District Court Southern District of New York, 

Memorandum order ............................................................................................. 262 

Securities Industry and Financial Markets Association (SIFMA), Scott DeFife, 

Senior Managing Director, Government Affairs, Washington, D.C., letter 

and brief ................................................................................................................ 274 

Solov, Tanya, Director, Illinois Securities Department, Office of the Illinois 

Secretary of State, on behalf of the North American Securities Administrators Association, Washington, D.C., statement ................................................. 320 

Soskin, Philp, Chair, Multi-Services Committees, Budget & Finance Committee, Government Operations Committee, Treasurer, Rockland County 

Solid Waste Management Authority, letter ....................................................... 324 

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania, letter ...... 326 

Szymanski, Patrick J., General Counsel, Change to Win, Washington, D.C., 

statement .............................................................................................................. 328 

Wall Street Journal, New York, New York: 

July 17, 2009, article ........................................................................................ 351 

August 10, 2009, article ................................................................................... 352 

Westlaw, Thomson Reuters: 

Central Bank amicus brief ............................................................................... 353 

In re Refco ......................................................................................................... 375 

(1) 

EVALUATING S. 1551: THE LIABILITY FOR AIDING AND ABETTING SECURITIES VIOLATIONS ACT OF 2009 

THURSDAY, SEPTEMBER 17, 2009 

U.S. SENATE, 

SUBCOMMITTEE ON CRIME AND DRUGS, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 5 p.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Arlen Specter, 

Chairman of the Subcommittee, presiding. 

Present: Senator Specter. 

OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. 

SENATOR FROM THE STATE OF PENNSYLVANIA 

Chairman SPECTER. Good afternoon, ladies and gentlemen. The 

hearing will proceed. 

I regret the delay in beginning this hearing, but I know you are 

fully aware of the circumstances which delayed it, circumstances 

which made the delay unavoidable. The Senate has its own tempo, 

and we have just finished a series of votes. And this is a very important hearing, and I would like to see legislation result from the 

hearing and think it important to establish a record which can be 

reviewed by other Committee members who are not here and by 

other Senators to establish a basis for legislative action. 

When I noted the decision in Stoneridge, I was more than surprised; I was shocked. From my own experience as a district attorney, knowing aiders and abetters are co-conspirators and are liable, 

hard to understand. And in the context where the circuits until 

1994 were unanimous, with the arguable exception of the Seventh 

Circuit, imposing such liability, two Supreme Court decisions, really makes me wonder what the court is up to. And there have been 

commentaries about this Court being partial to big business. Hard 

to understand how aiders and abetters are not liable. And in light 

of some of the recent developments, consideration perhaps should 

be given to some modification of our standards on the confirmation 

process. 

The tradition has been that nominees are never asked how they 

are going to decide cases. And when Chief Justice Roberts testified 

that it was a matter for Congress to decide the factual basis for decisions under the Supreme Court standard of proportionate—proportionate and what? Very hard to remember proportionate and 

congruent because it makes little sense. Then the voting rights 

2 

came up, and he appeared to disregard a very extensive congressional record. And now we are looking at a decision on corporate 

contributions which, if reversed, is going to set the electoral process 

on its head in this country if corporations can make contributions 

in political campaigns. 

We would not countenance someone who would overturn Brown 

v. Board of Education, and maybe we have to look beyond. This 

issue raises in a sense that question. 

Well, there is a lot that I have on my mind in this and related 

subjects, but that has been about as brief as I can be. I intend to 

make an extended floor statement on the subject next week, if I 

can get to it. But we are going to proceed now with the bare bones, 

with no introductions, which is something I would like to take time 

to elaborate upon, but in view of the hour, I am just going to turn 

to our first witness, Professor John C. Coffee, Adolf A. Berle Professor of Law at Columbia, the author of a textbook way back when 

I went to law school. 

Professor Coffee, the floor is yours. 

STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE PROFESSOR OF LAW, COLUMBIA UNIVERSITY SCHOOL OF LAW, 

NEW YORK, NEW YORK 

Mr. COFFEE. Thank you very much, and I am honored to be here, 

and I will try to be quite concise. 

You focused on an anomaly, Chairman Specter, and it is an 

anomaly. For over a century, there has been criminal liability for 

anyone who aids and abets a Federal violation of law. For about 

a half-century, the Restatement of Torts, written by the American 

Law Institute, has stated the rule that private liability exists and 

a victim can sue not only the primary violator but a secondary violator who provides substantial assistance. 

Many Federal statutes, including the Commodities Exchange Act, 

which is something that closely parallels the Securities Exchange 

Act, does provide for private actions against aiders and abetters. 

But we have the Federal securities laws which, since 1994, do not 

permit the victim to sue the aider and abetter even if there is conscious, knowing assistance given to the primary violation. 

Now, it is time to reevaluate that. There are many—and I fully 

acknowledge that in 1995, Congress, in passing the Private Securities Litigation Reform Act, accepted the Supreme Court’s decision 

in Central Bank, but we have seen a lot of water go over the dam 

since then. We have seen serious developments and maybe some 

deterioration in the discipline and our capital markets. Just thinking back over the last decade, we have had the IPO bubble in 2000, 

Enron and WorldCom in 2001 and 2002; we have had the securities 

analyst scandals; we have had the market timing abuses. And now 

we have this huge credit crisis that dwarfs everything else. 

All of this suggests that the critical gatekeepers in our financial 

markets, the financial intermediaries, on whom investors rely to do 

things that they cannot do for themselves, such as the accountants, 

such as the credit rating agencies, may be under-deterred, and if 

they are under-deterred, we cannot expect to get back to equilibrium without some discipline on actors whose role is absolutely 

essential in the financial markets. 

3 

Now, from a policy perspective, I would suggest this entire debate comes down to one critical issue: Do we think that public enforcement standing alone can do the job of deterring, disciplining, 

and obtaining compensation for victims from these secondary participants? I am going to suggest to you that there are at least three 

reasons why public enforcement, although very important, is not 

sufficient to do that job by itself. 

Public enforcement in the context of securities violations means 

enforcement by the Securities and Exchange Commission. I am an 

admirer of that body, for all of its recent problems, but it has got 

at least three fundamental problems that I think we have to recognize. 

The SEC is authorized to sue aiders and abetters for knowing 

violations, but it can only seek relatively modest civil penalties plus 

disgorgement of ill-gotten gains. It cannot sue for restitution on behalf of all the victims, and that is the huge difference between 

disgorgement and restitution. 

Next, the SEC always has been, is now, and always will be cost 

constrained and logistically underfunded, and they will be the first 

to say that. The SEC is also not administratively capable of handling the equivalent of a large class action in terms of settling 

claims, dealing with all the class members, and disbursing the proceeds. It would be an administrative nightmare for them if they 

were to try to deal with the issue of handling restitution. 

Finally, the last point I would say about the Securities and Exchange Commission is a sensitive one, and I do not want to overstate it. Recent scandals—Mr. Madoff, the current Bank of America 

issue—suggest that the SEC does not proceed quite as zealously 

and vigorously against prominent figures and established firms as 

they do against the outcasts and the out-and-out crooks. But if we 

are going to have discipline in the capital markets, there has to be 

someone who will take serious disciplinary action, seek serious penalties against the major gatekeepers. And I think private enforcement can do that better than can public enforcement. 

We have already seen that private enforcement. Look at the 

Enron class action or the WorldCom class action. They both settled 

for $7.5 billion and $6.5 billion, respectively. Those are numbers 

that dwarf anything the SEC has ever received in the way of penalties or in the way of class action recoveries. The point here is 

really that the private enforcement bar can chase the money, can 

get significant claims, and it is not interested in simply getting 

headlines. For better or worse, they do go where the money is, and 

that is what is needed if we are going to get compensation for victims. 

Let me make two last points in just a second or two. One is that 

you are going to hear an awful lot about how authorizing liability 

against aiders and abetters will open the floodgates for frivolous 

and extortionate litigation. That might have been true, arguably, 

once. But since the Private Securities Litigation Reform Act of 

1995, secondary participants are not only protected, they are virtually insulated because of the pleading rules under that act, because you cannot get discovery unless you can plead with particularity facts giving rise to a strong inference of fraud. 

4 

There is no realistic prospect of frivolous, extortionate litigation 

brought against secondary participants. They can have that action 

dismissed without discovery unless at the outset you can show a 

very strong case that gives rise to a strong inference of fraud. 

And last, in just a sentence, in my proposal I suggest to you that 

you couple restoring private liability with a ceiling on damages. 

That is because the real goal here should be to create a penalty 

that deters but does not destroy. We do not want to see the loss 

of one more accounting firm like Arthur Andersen or one credit rating agency, because they are both in very concentrated markets. So 

I would suggest to you that the Solomonic compromise here—and 

I try to give you a possible model—is to restore aiding and abetting 

liability with a realistic ceiling on damages for secondary participants in securities violations. 

Thank you very much. 

[The prepared statement of Mr. Coffee appears as a submission 

for the record.] 

Chairman SPECTER. Thank you, Professor Coffee. 

We turn now to Robert Giuffra—how do you pronounce that? 

Mr. GIUFFRA. Giuffra. We met before, Senator. Giuffra. 

Chairman SPECTER. Thank you. Partner of the prestigious law 

firm Sullivan & Cromwell. 

STATEMENT OF ROBERT J. GIUFFRA, JR., PARTNER, SULLIVAN 

& CROMWELL LLP, NEW YORK, NEW YORK 

Mr. GIUFFRA. Mr. Chairman, in 1995, the PSLRA was passed 

with broad bipartisan support, including of Senators Dodd, Kennedy, and Reed, and then-Representative Schumer. As chief counsel to the Senate Banking Committee when Senator D’Amato 

chaired it, I worked closely with Republicans, Democrats, and thenSEC Chairman Arthur Levitt to develop a balanced law. 

Congress should not revisit the bipartisan judgment made in 

1995 in the PSLRA. That judgment was that the SEC and the Justice Department are best suited to prosecute aiders and abetters of 

securities fraud. 

S. 1551 would greatly expand the existing securities class action 

system, but this system benefits lawyers, often does not help investors, and often is not fair. 

Now, in the real world, where I practice law, motions to dismiss 

and summary judgment do not weed out baseless claims. In fact, 

less than 40 percent of all securities class action cases are ever dismissed on a motion. Less than 40 percent. More than 60 percent 

are settled, and, you know, one or two a year are ever tried. Less 

than 30 percent are ever dismissed on a motion to dismiss. In other 

words, by bringing a securities class action lawsuit, a lawyer has 

a better than 60 percent chance of getting fees through a settlement. Great odds. 

Now, juries can be unpredictable. There is on deep-pocket third 

party that wants to risk losing a multi-billion-dollar jury verdict. 

And even where a case has no merit, companies have to spend tens 

of millions of dollars defending those cases, reviewing millions of 

e-mails. 

Now, to eliminate settlements because a judge did not dismiss a 

baseless securities case, what Congress should do, as Senator SchuVerDate Nov 24 2008 10:41 Apr 26, 2010 Jkt 055898 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\55898.TXT SJUD1 PsN: CMORC
5 

mer has suggested, is permit parties as a right to appeal lowercourt decisions denying motions to dismiss. If S. 1551 is enacted, 

the plaintiffs’ bar will routinely name defendants all deep pockets 

who did business with a company. Plaintiffs’ lawyers do not need 

documentary evidence to survive a motion to dismiss. They just 

need to cut a deal with one criminal insider who will point the finger at a banker or a lawyer. And today, when bankers, accountants, and lawyers receive hundreds of e-mails a day, it is very easy 

for a lawyer to blow one e-mail out of proportion. 

Now, S. 1551 would hurt the competitiveness of U.S. capital markets. In Europe and Asia, there are no securities class actions. 

Non-U.S. companies do not think that our system is fair, and they 

are leaving our markets. 

I live and work in New York City. Enactment of this proposal 

would be good for the city of London, but it would not be good for 

New York, Philadelphia, or other U.S. financial centers. 

Now, since 1995, the SEC, the Justice Department, and State Attorney Generals have investigated the banks, the accountants, and 

the lawyers who provided services to Enron, WorldCom, Tyco, 

Refco, and the other companies that suffered major frauds and, 

when appropriate, they have taken action. Federal prosecutors convicted the law firm partner involved in the Refco matter and several Enron bankers, and the SEC obtained $50 million from the 

cable box providers involved in the Stoneridge case. 

Now, SEC lawyers and DOJ lawyers serve the public interest. 

They have no incentive to bring strike suits. The SEC and the DOJ 

are far better than private lawyers to exercise the discretion and 

judgment that is needed to decide when a banker’s conduct crossed 

the line. 

By contrast, plaintiffs’ lawyers have every incentive to sue deeppocket third parties. The SEC can recover and the DOJ can recover 

damages from wrongdoers. Since 2002, the SEC has recovered 

more than a billion dollars and the DOJ billions more. And the 

SEC and the DOJ do not have to pay as much as a third of any 

recovery to lawyers, and there is no risk that SEC or DOJ lawyers 

will pay kickbacks to plaintiffs or make political contributions to 

pension fund administrators to get control of cases. And the threat 

of 20 years in prison is a far greater deterrent to securities fraud 

than civil litigation. 

Finally, ‘‘fraud’’ is a very loose term. When a murder occurs, we 

can all agree that a crime has been committed. Not so with securities fraud. Prior to Central Bank, courts required plaintiffs to prove 

that secondary actors actually knew that the fraud they allegedly 

were assisting as going on. In this proposal, Senator, by adopting 

an open-ended definition of ‘‘recklessness,’’ this would force many 

companies to settle baseless cases. The proposal of just pure recklessness without any definition would be far more lenient than the 

existing standard that judges across the United States have adopted. 

So, to sum up, Congress should continue to rely on the SEC and 

the Department of Justice to prosecute aiders and abetters. The 

benefits of private enforcement are few, and the costs to our economy was potentially very great. 

Thank you. 

6 

[The prepared statement of Mr. Giuffra appears as a submission 

for the record.] 

Chairman SPECTER. Thank you very much. 

I have to take a 2-minute break. 

[Recess 5:19 p.m. to 5:22 p.m.] 

Chairman SPECTER. Our next witness is Professor Adam Pritchard, Frances and George Skestos Professor of Law at the University of Michigan. 

Professor Pritchard. 

STATEMENT OF ADAM C. PRITCHARD, FRANCES AND GEORGE 

SKESTOS PROFESSOR OF LAW, DIRECTOR, EMPIRICAL 

LEGAL STUDIES CENTER, UNIVERSITY OF MICHIGAN LAW 

SCHOOL, ANN ARBOR, MICHIGAN 

Mr. PRITCHARD. I want to thank you, Chairman Specter, for inviting me to testify today. 

There are two possible justifications for imposing liability for securities fraud: compensation and deterrence. Neither one of those 

rationales supports the extension of liability to accountants, bankers, and lawyers that is proposed in this bill. 

To put it bluntly, the compensation rationale for securities class 

actions is nonsense. Class actions provide about 3 to 10 cents on 

the dollar of the losses that investors have sustained, and that is 

a good thing. If we were to actually provide compensation for the 

full losses that investors suffered in securities class actions, it 

would be an economic disaster. Shareholders are paying the compensation that is paid out in securities class actions because the 

settlement dollars come from the corporation itself or the directors 

and officers’ insurance that is paid for by the corporation. 

So we have an insurance scheme—an insurance scheme that protects against fraud, but it is an insurance scheme in which we have 

to pay 50 cents on every premium dollar for administrative costs. 

Plaintiffs’ lawyers get paid, the defense lawyers get paid, and the 

shareholders get their own money back, with a big haircut for the 

lawyers. 

If you tried to sell this sort of insurance policy to a shareholder, 

you would not be able to find anyone who would buy it. If you tried 

to get an insurance commissioner to approve it, you would not find 

any insurance commissioner in the United States who would let 

you sell it. 

Aiding and abetting liability would not change that calculus. 

Shareholders are effectively paying the fees that go to accountants, 

lawyers, and investment banks, and any liability costs that we impose on those professionals are going to be passed back to the 

shareholders in the form of higher fees. There is no free lunch in 

adding new deep pockets. We just will be able to employ more lawyers. As an educator of future lawyers, I want to say that is a good 

thing, but it is not enough to justify the bill. The only effective protection against secondary market fraud is diversification. 

The second rationale for imposing securities fraud liability is deterrence. Given what we know about securities fraud class actions 

based on the studies that have been done over the last 10 years 

since the Private Securities Litigation Reform Act was adopted, it 

is implausible that securities class actions have any important deVerDate Nov 24 2008 10:41 Apr 26, 2010 Jkt 055898 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\55898.TXT SJUD1 PsN: CMORC
7 

terrent impact at the margin above and beyond reputational effects 

in the market and Government enforcement efforts. 

If you want to know what the predictors are of securities fraud 

class actions—how can you predict who is going to be sued—the 

relevant criteria are market capitalization, share turnover, stock 

price drop, Government investigations, and restatements of accounting statements. The class action bar does not uncover fraud. 

It follows these very public indicators. The stock price drop occurs. 

The class action bar responds. 

Secondary defendants are sued when the corporation is bankrupt. The corporation is the easy settlement target. Ordinarily, the 

plaintiffs’ lawyers are happy to go after them. That would not 

change if aiding and abetting liability were to be introduced. If we 

protect shareholders against the effects of bankruptcy by giving 

them a deep pocket to sue in the case when the corporation has 

gone bankrupt, it is going to further undermine the deterrent effect 

of securities class actions. 

The problem with securities class actions is that the individuals 

who commit fraud—the officers who lie—do not pay in these class 

actions. If we take away the incentive to go after those officers in 

bankruptcy, which is the only time that the officers and directors 

pay, the plaintiffs’ lawyers will pursue the investment bankers and 

the accountants because they can pay a lot more than the individual officers can. 

If we want to reform securities fraud class actions, we need to 

begin with the fundamental economic problem. We need to fix the 

damages measure. There are two ways to do this. Congress could 

reform the damages measure directly, or we could allow shareholders to adopt the appropriate damages measure through the 

company’s articles of incorporation. 

The appropriate measure is disgorgement. If you have committed 

fraud, give back the benefits of the fraud, perhaps with a multiplier 

to reflect the probability that not all fraud would be detected. 

Maybe we would need to have attorney fee shifting. If the corporation has not benefited from the fraud, which is the overwhelming 

case, then there would be no damages. If the officer has benefited 

in the form of bonuses or stock options, the officer would have to 

pay. Apply the same rule to the secondary defendants. 

In conclusion, the capital markets and the U.S. Treasury would 

be the victims if liability bankrupts an accounting firm or a TARP 

recipient. Without reforming the damages measure, it would be 

reckless to adopt aiding and abetting liability. 

[The prepared statement of Mr. Pritchard appears as a submission for the record.] 

Chairman SPECTER. Thank you very much, Professor Pritchard. 

Our next witness is Ms. Tanya Solov, Director of the Securities 

Department of the Office of the Illinois Secretary of State. Welcome 

and we look forward to your testimony. 

8 

STATEMENT OF TANYA SOLOV, DIRECTOR, ILLINOIS SECURITIES DEPARTMENT, OFFICE OF THE ILLINOIS SECRETARY 

OF STATE, ON BEHALF OF THE NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, WASHINGTON, D.C. 

Ms. SOLOV. Thank you, Chairman Specter. I am honored to convey the support of the North American Securities Administrators 

Association for S. 1551, the Liability for Aiding and Abetting Securities Violations Act. 

NASAA is the member association of State and provincial securities regulators and maintains a corporate office in Washington, 

D.C. State securities regulators, license broker-dealers, and investment advisers, register local securities offerings and conduct compliance examinations. Especially important is their enforcement 

role: protecting the Nation’s investors by bringing thousands of actions every year against the firms and individuals who have committed securities fraud. In certain cases, regulators seek restitution 

or rescission on behalf of investors. However, given the large number of investors in the market today, private civil cases are a necessary and important complement to State and Federal actions. S. 

1551 would restore the ability of defrauded investors to seek damages from all of the entities that substantially participated in the 

fraud. 

My colleagues and I have witnessed firsthand the devastation of 

financial fraud on victims and their families. Investor education 

materials teach investors to conduct research on companies prior to 

investing, but no amount of research will allow investors to make 

appropriate decisions if the financial and other public information 

provided by companies is false or misleading. The integrity of the 

U.S. markets depends on accurate information, and our laws must 

send the message to corporate management, as well as their lawyers, accountants, investment bankers, and other so-called secondary actors, that they will be held accountable for aiding and 

abetting in deception and fraud. 

In passing the Securities Exchange Act, Congress implicitly authorized a private right of action, and for decades thereafter courts 

allowed private suits. As Professor Coffee stated, the right to bring 

a private suit for aiding and abetting has been severely restricted 

by the Supreme Court and other courts. The decisions in these 

cases favor big business over innocent investors. Corporations and 

secondary actors often seek short-term profits, big bonuses, and 

large fees, and many times these goals can be achieved by cooking 

the books or engaging in sham transactions. Sham transactions are 

fraudulent, and even the majority in Stoneridge acknowledged that 

they are not baseless. If secondary actors are permitted to avoid liability, there will be no deterrent to prevent them from engaging 

in fraudulent schemes. 

State and Federal regulators filed numerous cases against corporations and secondary actors in the past decade. However, many 

more cases of fraud were not pursued by regulators due to resource 

limitations. The majority in Stoneridge contends that aiding and 

abetting actions can be brought by the SEC on behalf of shareholders. While it is true that Federal regulators can pursue such 

cases, Chairman Mary Schapiro stated that the agency’s enforcement and examination resources have been severely constrained in 

9 

recent years. The SEC’s immediate agenda includes proxy access, 

compensation disclosure, hedge funds, and others that need regulatory attention. Significant SEC resources will be expended working on these priorities as well as large Ponzi scheme cases and 

fraudulent activity having national impact. Cases involving a limited number of shareholders are less likely to be addressed. 

Critics of private securities actions claim that such cases provide 

little benefit to victims, they punish innocent shareholders, and unjustly reward plaintiffs’ lawyers. In reality, over the years private 

actions resulted in greater recoveries for shareholders than the 

compensation from regulatory actions. The fact that victims were 

not able to recover full damages is the result of a number of factors 

including the shareholders’ desire to settle for less rather than to 

spend more time in litigation. The contention that paying defrauded investors harms innocent, current shareholders is not really applicable in cases involving secondary actors such as accountants. The vast majority of shareholders want accountability and 

the right to seek redress for wrongdoing. If management is concerned about current shareholders, it might strip away the bonuses, high salaries, and stock options awarded to those who participated in the fraud and place those assets in the victim restitution fund. With regard to plaintiffs’ lawyers’ fees, it is important 

to remember that class action settlements, including attorneys’ 

fees, are reviewed and approved by judges. The recent Bank of 

America case is an example of a case where the judge refused to 

approve a negotiated settlement. 

Allowing investors to file aiding and abetting cases will not open 

the floodgates of litigation and stifle business development. Private 

suits were allowed prior to the Central Bank and Stoneridge decisions, and businesses grew and flourished during those years. Congress enacted Section 10(b) of the Securities Exchange Act with the 

understanding that Federal courts respected the principle that 

every wrong would have a remedy. S. 1551 recognizes the right of 

defrauded shareholders to bring private actions against aiders and 

abetters and to seek remedies from wrongdoers. 

In the interest of investor protection and market integrity, 

NASAA supports S. 1551. Thank you. 

[The prepared statement of Ms. Solov appears as a submission 

for the record.] 

Chairman SPECTER. Thank you very much, Ms. Solov. 

Our final witness is the general counsel of Change to Win, Patrick—Szymanski? 

Mr. SZYMANSKI. Szymanski, Your Honor—Senator Specter. I 

think I am back in the court of appeals someplace. 

Chairman SPECTER. Mr. Szymanski, I am not a ‘‘Your Honor.’’ 

[Laughter.] 

Chairman SPECTER. Thank you for joining us. 

STATEMENT OF PATRICK J. SZYMANSKI, GENERAL COUNSEL, 

CHANGE TO WIN, WASHINGTON, D.C. 

Mr. SZYMANSKI. Thank you, Senator. And, again, thanks to you 

for the invitation to testify. Let me confess at the outset that, unlike the other people sitting up here, I have not spent my career 

involved in securities litigation. I am a union lawyer, and I spent 

10 

a lot of time talking to workers, and I have got to disagree with 

Mr. Giuffra when he basically says we ought to leave things the 

way they are. I do not think what we have seen since the mid– 

1990’s indicates in anybody’s mind that things ought to stay where 

they were back then. 

Professor Coffee catalogued very briefly and succinctly many of 

the things that have happened since then that indicate that it is 

time for a reexamination. And whether it is the result of my talking to workers or just my own natural bias, I have always thought 

that the law ought to make sense. I have always thought that you 

ought to be able to explain things so that a reasonably intelligent 

person can understand them. And as far as I am concerned, any 

rule of law that does not make sense has got a problem. And 

Stoneridge does not make any sense. 

In Stoneridge, two providers of cable TV converters—Scientific 

Atlanta and Motorola—entered into sham contracts with a cable 

TV service provider, Charter Communications, to artificially inflate 

Charter’s assets. There was no economic reason for the contracts. 

They had a perfectly fine relationship before these changes happened. The contracts were back-dated to fool Charter’s outside 

audit firm, and Scientific Atlanta and Motorola knew that the additional fictional income would be used to artificially inflate Charter’s 

assets. In short, the fraud on shareholders could not have been accomplished in that case without the willing participation and knowing participation of Scientific Atlanta and Motorola. But the Supreme Court in Stoneridge held that because Scientific Atlanta and 

Motorola had no duty to the shareholders and made no public 

statements, they are not responsible for any of the losses that were 

suffered by the Charter Communications shareholders. 

Now, my written testimony describes similar cases involving 

Enron, Refco, Homestore.com, Pugh v. Tribune. Interestingly, the 

judge in Refco is Judge Lynch. And in some of these cases, the 

wrongdoing participants were convicted or pled guilty to criminal 

charges, and they still completely escaped any civil liability or responsibility for the losses suffered by the innocent shareholders. 

Now, you just try explaining that to a worker, someone who goes 

out every day and makes money, as John Houseman used to say, 

‘‘the old-fashioned way.’’ He and she ‘‘earn it.’’ 

This makes no sense. It does not make sense to me, and it does 

not make sense to hard-working Americans who invest their own 

funds in 401(k)s and IRAs and in pension funds in which they participate. And let me make that point. We sometimes talk about institutional investors as though they are something different. They 

are not different than workers. They are simply holding the funds 

that those workers earned in trust for a purpose: to pay pensions 

that those workers are relying on when it comes time for them to 

retire. And when they are injured, the workers are injured, and 

that is worker money, not money that belongs to anybody else. And 

the Government, their Government, should be protecting them, not 

the wrongdoers who are responsible for defrauding them. People 

ought to be responsible for their actions, and the idea that these 

third-party people are immune from liability is ridiculous. 

So I am here to tell you that the organizations who represent 

workers, who brought America the weekend, holidays, the 40-hour 

11 

work week, employer-paid health care, pensions, and health and 

safety standards and more, and who are still fighting to keep those 

standards on behalf of working people in this country, support Senate bill 1551, which tries to bring some common sense back into 

this area of the law. 

I look forward to your questions, Senator. Thank you. 

[The prepared statement of Mr. Szymanski appears as a submission for the record.] 

Chairman SPECTER. Thank you very much, Mr. Szymanski. 

Professor Pritchard, in looking for deterrence, what would you 

think about an active role by the Department of Justice to utilize 

18 U.S.C. Section 2 to send people to jail because the Federal 

criminal law makes it a criminal violation to aid and abet somebody who commits a crime? Fraud is a crime. 

Mr. PRITCHARD. I think criminal enforcement is essential to deterring fraud, and I have no complaint about it being applied 

against third parties who have assisted, aided, facilitated the 

fraud. As long as their guilt is determined beyond a reasonable 

doubt to a jury and the standards for fraudulent intent are met, 

then I think that is an excellent deterrent to fraud. 

Chairman SPECTER. But proving that you think should be insufficient for damages for the shareholder? 

Mr. PRITCHARD. Insofar as the third party may have received 

benefits from participating in the fraud, I think they definitely 

should be made to pay those back. 

Chairman SPECTER. Well, you have testified about disgorgement, 

but you think even though their conduct is sufficient to send them 

to jail, it is not sufficient to compensate the party who has been 

injured by that conduct. 

Mr. PRITCHARD. I think the compensation is irrelevant. What is 

important is sending them to jail. Sending people to jail is a very 

strong message that you should not do that. 

Chairman SPECTER. There is some thinking on cases like Pinto 

that it is insufficient to have the tortfeasor pay damages. Pinto is 

a good illustration of the document showing that Ford executives 

knew that putting the gas tank at the rear to save money from putting it in a less exposed spot constituted malice, supports a conviction for murder in the second degree, and that that would be the 

way to really deal with corporate executives who knowingly put 

into the stream of commerce items which are reasonably expected 

to cause serious bodily injury or death. Do you think that would 

be a collaterally good approach? 

Mr. PRITCHARD. A what kind of approach? I am sorry? 

Chairman SPECTER. Well, a better approach than damages. 

Mr. PRITCHARD. Sending people to jail if they—— 

Chairman SPECTER. I am calling it a ‘‘collateral’’ approach. 

Mr. PRITCHARD [continuing].—Are knowingly trying to kill people? Yes. 

Chairman SPECTER. Well, they are not trying to kill people. They 

are recklessly indifferent to it. 

Ms. Solov, you talked about favoring big business, and in the 

Stoneridge case the Court lined up 5–3—Justice Breyer recused 

himself—which has all the contours of a traditional ideological battle. Do you think that in favoring big business this is a part of the 

12 

liberal-conservative split on the Supreme Court in the matter of 

ideology as opposed to justice, to pick an abstract term? 

Ms. SOLOV. Stoneridge is just one of several, of many cases. 

Tellabs was another case, and there are many lower-court cases 

where I think the courts are coming down in favor of big business. 

Chairman SPECTER. Never mind the lower courts. There are 

many cases where, as the commentators have said, the Supreme 

Court is favoring big business. But dealing with the Supreme 

Court, do you think it is ideological? 

Ms. SOLOV. Well, it is hard to say. I did find it interesting in 

Stoneridge that, unlike the testimony that we’ve heard about baseless cases, the Court did not say that these transactions were baseless. I think in this case they were saying that they are somehow 

constrained by the Private Securities Litigation Reform Act from 

awarding damages and looking to Congress. I think they are inviting Congress to make some changes to allow for aiding and abetting liability. And throughout the case, they write that Congress 

knew to include the SEC as a party that can bring aiding and abetting actions, but Congress did not include private rights of action. 

So it is difficult—— 

Chairman SPECTER. You think they were really inviting Congress 

to do something? To say that Congress could have done it differently, do you really think it is an invitation? 

Ms. SOLOV. Well, I think that they—— 

Chairman SPECTER. You think they would like to see Congress 

change their decision? 

I am coming back to my question on ideology, which you have not 

answered yet. Yes or no? 

Ms. SOLOV. I think that there seems to be a split with the Justices, yes. 

Chairman SPECTER. Mr. Giuffra, when you talk about the SEC 

being the better agency to deal with it, Senator Grassley and I, 

when he chaired the Finance Committee and I chaired the Judiciary Committee, went after the SEC on failure to deal with insider 

trading. And we had very much the same view that was stated by 

Judge Rakoff in the celebrated refusal to accept the settlement this 

week, castigating the SEC. I will not ask you if you thought Senator Grassley and I were wrong. Let me ask you if you think Judge 

Rakoff was wrong. 

Mr. GIUFFRA. Senator, I respect all of you and I know Judge 

Rakoff quite well. The SEC does a very good job. The SEC in these 

big cases—the WorldComs, the Enrons—in those cases they take a 

lot of testimony, and they would love to make a case against a 

wealthy lawyer, a wealthy banker, and, in fact, they do when the 

facts and circumstances warrant it. 

The problem is what I am concerned about is the innocent banker and the innocent lawyer and the innocent accountant in the case 

that is not the high-profile case, but where a plaintiff’s lawyer 

names everyone who touched a company that has a stock drop and 

essentially seeks hundreds of millions of dollars in damages. The 

legal fees can be in the tens of millions of dollars. And what happens is that third party has no choice but to settle the case. 

13 

As I mentioned in my testimony, 60-plus percent of these cases 

are settled; less than 40 percent are dismissed on either a motion 

to dismiss or on summary judgment. 

Chairman SPECTER. I recall your testimony. It was only a few 

minutes ago. 

Mr. GIUFFRA. Yes, I understand. 

Chairman SPECTER. My memory is good for about 40 minutes. 

Now, do you remember my question? 

Mr. GIUFFRA. Yes, I think the SEC—we have an excellent SEC 

enforcement person, Robert Khuzami. He is going to try to do 

things to even strengthen the SEC further. Obviously, Congress 

can give more money to the SEC. There are a lot of really competent lawyers at the SEC, and those lawyers do not have a conflict 

of interest. They are doing the public’s work. 

Class action lawyers are obviously motivated by getting attorneys’ fees, and so the problem becomes that they will bring cases 

that do not have merit. 

Chairman SPECTER. You have said that before several times, but 

I would like to come back to my question. My question was: Do you 

think Judge Rakoff was wrong? 

Mr. GIUFFRA. I think in that particular case, what Judge Rakoff 

was concerned about was the problem of the current shareholders 

of Bank of America paying money to settle this matter, and he 

thought that perhaps other people should pay the money. And that 

is one of the problems with class actions generally, because what 

happens with class actions is the shareholders pay the money. 

Chairman SPECTER. I will only ask it one more time. 

Mr. GIUFFRA. Okay. 

Chairman SPECTER. Was Judge Rakoff wrong? 

Mr. GIUFFRA. I think that he identified an issue, but I still think 

that the SEC does a very good job. And, in fact, the point that was 

made—— 

Chairman SPECTER. Let the record show you have not answered 

my question unless you want to dispute my conclusion. 

Mr. GIUFFRA. I think the concern that he has focused on, though, 

is the concern about these cases, which is the pocket-shifting problem, which is that the shareholders essentially pay the damages, 

as opposed to the people who did something wrong. And I fully support criminal—if someone engages in—if it is a banker or a lawyer 

or an accountant, if they engage in real securities fraud, put them 

in jail. The SEC and the Department of Justice can do that. The 

problem is the cases that are far from the line, where people are 

innocent and maybe they dealt with a company that was full of 

fraudsters and they were lied to, and then what happens is the 

plaintiffs’ lawyers will do a deal with the fraudsters and have the 

fraudsters blame the lawyers and blame the accountants. 

Chairman SPECTER. OK, that is fine. I understand your points 

made repetitively. But I would just have liked to have had an answer to the question. 

Mr. Szymanski, is the Court ideological? Is this another aspect 

of the ideology which permeates the Court with all these 5–4 decisions? 

Mr. SZYMANSKI. I cannot help but think that it is. I see decisions 

that are customarily with a bloc of voters on one side and a bloc 

14 

of voters on the other side, and it is the same bloc. And you can 

have your viewpoint about who you agree with and who you disagree with, but it seems to be the same bloc ruling the same way 

every time. 

Chairman SPECTER. What do you think about the conventional 

wisdom of deference to the President as the appointing authority? 

There are some Senators who will apply an ideological test. I think 

most do not. Do you think Senators should? 

Mr. SZYMANSKI. I think, unfortunately, we have had a series of 

judges nominated by Presidents, and I would say Republican Presidents, who are much more, I think, ideological than some of the 

judges appointed otherwise or nominated otherwise. I think, unfortunately, the initial obligation ought to be for the President of the 

United States to appoint good, fair judges to begin with. 

Chairman SPECTER. Does empathy suggest an ideology? 

Mr. SZYMANSKI. I am sorry? 

Chairman SPECTER. Does empathy suggest an ideology? 

Mr. SZYMANSKI. Empathy does not suggest ideology to me. The 

difficulty—when you talk about ideology, I think you are talking 

about ideology that overrules adherence to the law and the Constitution. 

We all know that there is interpretation to be done, and interpretation is always done with a point of view. And as good as people 

try to be honest to the law, there are going to be judgments that 

are going to be made, and those judgments are colored by somebody’s viewpoint about how things ought to operate. 

You know, the Supreme Court listens to the election returns, one 

famous wag used to say. And I think that is true, although I think 

that most of the judges honestly try to do their best in reaching 

their decisions. 

Chairman SPECTER. Do you think the judicial appointments, the 

appointments to the Supreme Court are appropriate for Presidential campaigning, as a Presidential campaign issue? 

Mr. SZYMANSKI. If the President would say that he is interested 

in appointing certain people to the Court for certain reasons? I honestly do not think that that ought to be something that is there, 

that they ought to be saying that they are going to appoint good 

judges who are fair judges to—— 

Chairman SPECTER. Nominees have been doing that at least 

since Nixon, haven’t they? 

Mr. SZYMANSKI. And I think that is unfortunate, Senator. I really 

think that that is where it begins. It would be much easier for the 

Senate and these nominations would be much easier for the Senate 

to address if they began from a point that was more neutral than 

they have been. 

Chairman SPECTER. If they all had the sterling academic and 

professional qualifications like Chief Justice Roberts? 

Mr. SZYMANSKI. I cannot say that when I saw Chief Justice Roberts’ nomination that I had a sense about how I thought he would 

rule in certain cases like these, if he had the opportunity, if the law 

allowed him the ability to go one way or another, how he would 

rule. 

Chairman SPECTER. What do you think of his definition of stare 

decisis that the Court should be modest, should not shock the sysVerDate Nov 24 2008 10:41 Apr 26, 2010 Jkt 055898 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\55898.TXT SJUD1 PsN: CMORC
15 

tem, should consider the length of the decision, how many times it 

had been reaffirmed, how much reliance there was, whether a contrary decision would reflect on the integrity of the Court? Do you 

think those are pretty good standards? 

Mr. SZYMANSKI. I think those are very good standards. 

Chairman SPECTER. How do you think those standards would 

apply if objectively applied to letting corporations engage in campaign—make campaign contributions? 

Mr. SZYMANSKI. I would think that the Supreme Court ought to 

leave the law the way it is instead of all of a sudden finding that 

the First Amendment permits corporations to do these—— 

Chairman SPECTER. Leave the law the way it is, but how would 

you think those standards for stare decisis would apply to that 

issue? 

Mr. SZYMANSKI. That is the way I think that those standards 

would apply. I mean, that is the way the law has been. 

I will tell you personally my gripe with the whole thing about 

corporations are decisions that were done in the mid-1800’s that 

found that corporations were people with the rights of people. I 

think, frankly, although there is a lot of stare decisis since the mid1800’s, finding that corporations are people and should be treated 

as though they have the rights of people, I do not think they 

should, frankly. Corporations are legal fictions, and I do not think 

they should have the rights of people. And that is where I think 

we went wrong. 

But if you are talking about overturning stare decisis, I am talking about overturning now 150 years of it rather than just 35 or 

40 years of it. 

And, by the way, Senator, let me say I think that Judge Rakoff 

was right, and I do not think he was worried about who was going 

to pay the money. I think what he was concerned about was that 

the amount of the settlement did not come anywhere near the size 

of the $3.5 billion of the violation that was involved. 

Chairman SPECTER. Let me thank you for answering the Rakoff 

question. 

Professor Coffee, do you think the securities laws are fairly well 

balanced at the present time, if we move ahead and enact S. 1551, 

would be pretty well balanced? 

Mr. COFFEE. I think 1551 does fill the void. I do think—and you 

have heard this debate between myself and Mr. Giuffra—that public enforcement cannot do it all by itself. We need private enforcement to supplement public enforcement, and 1551 is directing private enforcement at secondary participants and what I will call the 

‘‘gatekeepers of our capital markets.’’ 

Chairman SPECTER. What do you think of the recent—— 

Mr. COFFEE. What do I think what? 

Chairman SPECTER. What do you think of the recent Supreme 

Court decision, opinion by Justice Kennedy changing the pleading 

rules? 

Mr. COFFEE. Which rules—I am just not hearing fully. 

Chairman SPECTER. The recent Supreme Court decision, opinion 

by Justice Kennedy requiring a lot more specificity on pleading 

in—— 

16 

Mr. COFFEE. Well, that is going to weed out some meritorious 

cases. It is going to weed out some frivolous cases. I think on balance it is probably going to go in the direction of making it much 

harder to get access to the Court. 

Chairman SPECTER. What happened to notice pleading, Professor 

Charles E. Clark and Dioguardi v. Durning and all that sort of 

thing? 

Mr. COFFEE. I remember both Professor and Judge Clark from a 

long time ago, and he had a very liberalized pleading rule. I do 

think that there has been some evidence that we needed to cut 

back on frivolous litigation. I think there were some provisions in 

the PSLRA that were justified and were desirable. But precisely 

because we have those protections, I now think 1551 is particularly 

justified because you are not turning loose a huge litigation engine 

on innocent secondary participants. They have great protection— 

great protection under the PSLRA. 

And let me point out we are talking about a world in which there 

was obvious under-deterrence in some fields. To my knowledge, no 

credit rating agency has ever been held liable for damages for securities fraud. And I think they have made some very serious errors. 

I think your 1551 would greatly increase the possibility of holding accountable some of the critical gatekeepers who today are not 

deterred. 

Chairman SPECTER. Do you think the 1995 legislation established an appropriate balance in the necessity of pleading? 

Mr. COFFEE. I think it went a little too far. I think there were 

abuses that needed to be curbed. I think it went a little too far. 

If it was up to me and I ruled the world, I would correct the balance 10 or 15 degrees back in the direction of making it slightly 

more pro-plaintiff. But I would not try to simply reverse or throw 

out the PSLRA. I think it has a number of provisions that should 

be retained. 

Chairman SPECTER. My recollection is I offered an amendment 

which would have struck a little different balance, which passed 

the Senate 57–42. Do you remember—— 

Mr. GIUFFRA. I actually do remember that. I remember being on 

the floor, Senator, when you made—— 

Chairman SPECTER. I tried to talk Senator D’Amato into holding 

it in conference. He probably was listening more closely to you than 

to me. 

[Laughter.] 

Chairman SPECTER. What did you think of that amendment? 

Probably not much because it went down in conference and you 

were counsel. 

Mr. GIUFFRA. Respectfully, Senator, I think the problem is that 

what was going on in those cases was that the plaintiffs’ lawyers 

would see a company’s stock price drop; they would go into their 

support system, literally, change the names on the form complaints, and file them the next day. They did no investigation, no 

consideration of actually whether fraud had occurred. 

Chairman SPECTER. Why not put some teeth into Rule 11 on penalties for frivolous lawsuits, to deal with frivolous lawsuits? 

Mr. GIUFFRA. We tried to do that in the PSLRA, and there was 

a lot of discussion about it. And, in fact, the House bill had much 

17 

tougher provisions to sanction lawyers. The Senate bill reduced 

those provisions, and there is a provision in the PSLRA that says 

that at the end of every case the judge should consider whether 

Rule 11 sanctions should be imposed. 

Typically, since most of these cases settle or are dismissed, the 

defense lawyers do not want to really fight with the plaintiffs’ lawyers, and the cases where they are dismissed, everybody just wants 

it to go away. And I, in fact, was involved in a case recently where 

the judge basically said it was a baseless complaint. We said let us 

try to see if the judge will look and see whether Rule 11 sanctions 

should be filed. And in that particular case, the plaintiff’s lawyer 

and I had a conversation, and the plaintiff’s lawyer had filed a motion to dismiss, and I decided it was better for my client, rather 

than to litigate about sanctions, to just have the case be dropped. 

So sanctions are—you know, courts are not in the United States 

very pro-sanctions. It is much more of a U.K. concept. 

Chairman SPECTER. Yes, but you are a fellow who likes deterrence. Wouldn’t that have been a deterrent to some lawyers? 

Mr. GIUFFRA. Absolutely, but at least in the United States we do 

not have a loser-pay rule, and that is one of the issues. You 

can—— 

Chairman SPECTER. Well, it is not loser pay if you can prove 

sanctions under Rule 11. 

Mr. GIUFFRA. Absolutely. But there are so few cases where lawyers are actually ever sanctioned, notwithstanding the—— 

Chairman SPECTER. It seems to me like you have one, as you describe it, where it could have been done. 

Mr. GIUFFRA. And I decided it was better for my client not to 

pursue the sanctions because they would appeal, it would be more 

money being spent on the case, and so it was better just to have 

it end. 

Chairman SPECTER. We are now at the 1-hour mark, and thank 

you very much for staying. This is a very, very distinguished panel. 

You are even more erudite than you are patient, which is going 

some, on a 2 o’clock hearing which was rescheduled for 3, then for 

4, and started at 5. So thank you all very much for coming. 

[Whereupon, at 6:02 p.m., the Subcommittee was adjourned.] 

[Questions and answers and submission for the record follow.] 

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Æ 


55898.375