In the Senate of the United States,

June 28 (legislative day, June 19), 1995.

Resolved, That the bill from the House of Representatives (H.R. 1058) entitled ‘‘An Act to reform Federal securities litigation, and for other purposes’’, do pass with the following

AMENDMENTS:

Strike out all after the enacting clause and insert:

1 SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

2 (a) SHORT TITLE.—This Act may be cited as the ‘‘Pri3 vate Securities Litigation Reform Act of 1995’’.

4 (b) TABLE OF CONTENTS.—The table of contents for

5 this Act is as follows:

Sec. 1. Short title; table of contents.

TITLE I—REDUCTION OF ABUSIVE LITIGATION

Sec. 101. Elimination of certain abusive practices.

Sec. 102. Securities class action reform.

Sec. 103. Sanctions for abusive litigation.

Sec. 104. Requirements for securities fraud actions.

Sec. 105. Safe harbor for forward-looking statements.

Sec. 106. Written interrogatories.

Sec. 107. Amendment to Racketeer Influenced and Corrupt Organizations Act.

Sec. 108. Authority of Commission to prosecute aiding and abetting.

Sec. 109. Loss causation.
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Sec. 110. Study and report on protections for senior citizens and qualified retirement plans.

Sec. 111. Amendment to Racketeer Influenced and Corrupt Organizations Act.

Sec. 112. Applicability.

TITLE II—REDUCTION OF COERCIVE SETTLEMENTS

Sec. 201. Limitation on damages.

Sec. 202. Proportionate liability.

Sec. 203. Applicability.

TITLE III—AUDITOR DISCLOSURE OF CORPORATE FRAUD

Sec. 301. Fraud detection and disclosure.

1 TITLE I—REDUCTION OF

2 ABUSIVE LITIGATION

3 SEC. 101. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.

4 (a) PROHIBITION OF REFERRAL FEES.—Section 15(c)

5 of the Securities Exchange Act of 1934 (15 U.S.C. 78o(c))

6 is amended by adding at the end the following new para7 graph:

8 ‘‘(8) PROHIBITION OF REFERRAL FEES.—No

9 broker or dealer, or person associated with a broker

10 or dealer, may solicit or accept, directly or indirectly,

11 remuneration for assisting an attorney in obtaining

12 the representation of any person in any private ac13 tion arising under this title or under the Securities

14 Act of 1933.’’.

15 (b) ATTORNEY CONFLICT OF INTEREST.—

16 (1) SECURITIES ACT OF 1933.—Section 20 of the

17 Securities Act of 1933 (15 U.S.C. 77t) is amended by

18 adding at the end the following new subsection:
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1 ‘‘(f) ATTORNEY CONFLICT OF INTEREST.—In any pri2 vate action arising under this title, if a plaintiff is rep3 resented by an attorney who directly owns or otherwise has

4 a beneficial interest in the securities that are the subject

5 of the litigation, the court shall make a determination of

6 whether such ownership or other interest constitutes a con7 flict of interest sufficient to disqualify the attorney from

8 representing the party.’’.

9 (2) SECURITIES EXCHANGE ACT OF 1934.—Sec10 tion 21 of the Securities Exchange Act of 1934 (15

11 U.S.C. 78u) is amended by adding at the end the fol12 lowing new subsection:

13 ‘‘(i) ATTORNEY CONFLICT OF INTEREST.—In any pri14 vate action arising under this title, in which a plaintiff

15 is represented by an attorney who directly owns or other16 wise has a beneficial interest in the securities that are the

17 subject of the litigation, the court shall make a determina18 tion of whether such ownership or other interest constitutes

19 a conflict of interest sufficient to disqualify the attorney

20 from representing the party.’’.

21 (c) PROHIBITION OF ATTORNEYS’ FEES PAID FROM

22 COMMISSION DISGORGEMENT FUNDS.—

23 (1) SECURITIES ACT OF 1933.—Section 20 of the

24 Securities Act of 1933 (15 U.S.C. 77t) is amended by

25 adding at the end the following new subsection:
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1 ‘‘(g) PROHIBITION OF ATTORNEYS’ FEES PAID FROM

2 COMMISSION DISGORGEMENT FUNDS.—Except as otherwise

3 ordered by the court upon motion by the Commission, or,

4 in the case of an administrative action, as otherwise ordered

5 by the Commission, funds disgorged as the result of an ac6 tion brought by the Commission in Federal court, or as a

7 result of any Commission administrative action, shall not

8 be distributed as payment for attorneys’ fees or expenses

9 incurred by private parties seeking distribution of the dis10 gorged funds.’’.

11 (2) SECURITIES EXCHANGE ACT OF 1934.—Sec12 tion 21(d) of the Securities Exchange Act of 1934 (15

13 U.S.C. 78u(d)) is amended by adding at the end the

14 following new paragraph:

15 ‘‘(4) PROHIBITION OF ATTORNEYS’ FEES PAID

16 FROM COMMISSION DISGORGEMENT FUNDS.—Except

17 as otherwise ordered by the court upon motion by the

18 Commission, or, in the case of an administrative ac19 tion, as otherwise ordered by the Commission, funds

20 disgorged as the result of an action brought by the

21 Commission in Federal court, or as a result of any

22 Commission administrative action, shall not be dis23 tributed as payment for attorneys’ fees or expenses in24 curred by private parties seeking distribution of the

25 disgorged funds.’’.
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1 SEC. 102. SECURITIES CLASS ACTION REFORM.

2 (a) RECOVERY RULES.—

3 (1) SECURITIES ACT OF 1933.—Section 20 of the

4 Securities Act of 1933 (15 U.S.C. 77t) is amended by

5 adding at the end the following new subsection:

6 ‘‘(h) RECOVERY RULES FOR PRIVATE CLASS AC7 TIONS.—

8 ‘‘(1) IN GENERAL.—The rules contained in this

9 subsection shall apply in each private action arising

10 under this title that is brought as a plaintiff class ac11 tion pursuant to the Federal Rules of Civil Procedure.

12 ‘‘(2) CERTIFICATION FILED WITH COMPLAINTS.—

13 ‘‘(A) IN GENERAL.—Each plaintiff seeking

14 to serve as a representative party on behalf of a

15 class shall provide a sworn certification, which

16 shall be personally signed by such plaintiff and

17 filed with the complaint, that—

18 ‘‘(i) states that the plaintiff has re19 viewed the complaint and authorized its fil20 ing;

21 ‘‘(ii) states that the plaintiff did not

22 purchase the security that is the subject of

23 the complaint at the direction of plaintiff’s

24 counsel or in order to participate in any

25 private action arising under this title;
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1 ‘‘(iii) states that the plaintiff is willing

2 to serve as a representative party on behalf

3 of a class, including providing testimony at

4 deposition and trial, if necessary;

5 ‘‘(iv) sets forth all of the transactions

6 of the plaintiff in the security that is the

7 subject of the complaint during the class pe8 riod specified in the complaint;

9 ‘‘(v) identifies any action under this

10 title, filed during the 3-year period preced11 ing the date on which the certification is

12 signed by the plaintiff, in which the plain13 tiff has sought to serve as a representative

14 party on behalf of a class; and

15 ‘‘(vi) states that the plaintiff will not

16 accept any payment for serving as a rep17 resentative party on behalf of a class beyond

18 the plaintiff’s pro rata share of any recov19 ery, except as ordered or approved by the

20 court in accordance with paragraph (3).

21 ‘‘(B) NONWAIVER OF ATTORNEY-CLIENT

22 PRIVILEGE.—The certification filed pursuant to

23 subparagraph (A) shall not be construed to be a

24 waiver of the attorney-client privilege.
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1 ‘‘(3) RECOVERY BY PLAINTIFFS.—The share of

2 any final judgment or of any settlement that is

3 awarded to a representative party serving on behalf

4 of a class shall be calculated in the same manner as

5 the shares of the final judgment or settlement awarded

6 to all other members of the class. Nothing in this

7 paragraph shall be construed to limit the award of

8 reasonable costs and expenses (including lost wages)

9 directly relating to the representation of the class to

10 any representative party serving on behalf of the

11 class.

12 ‘‘(4) RESTRICTIONS ON SETTLEMENTS UNDER

13 SEAL.—The terms and provisions of any settlement

14 agreement of a class action shall not be filed under

15 seal, except that on motion of any party to the settle16 ment, the court may order filing under seal for those

17 portions of a settlement agreement as to which good

18 cause is shown for such filing under seal. For pur19 poses of this paragraph, good cause shall exist only if

20 publication of a term or provision of a settlement

21 agreement would cause direct and substantial harm to

22 any party.

23 ‘‘(5) RESTRICTIONS ON PAYMENT OF ATTORNEYS’

24 FEES AND EXPENSES.—Total attorneys’ fees and ex25 penses awarded by the court to counsel for the plain-
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1 tiff class shall not exceed a reasonable percentage of

2 the amount of damages and prejudgment interest

3 awarded to the class.

4 ‘‘(6) DISCLOSURE OF SETTLEMENT TERMS TO

5 CLASS MEMBERS.—Any proposed or final settlement

6 agreement that is published or otherwise disseminated

7 to the class shall include each of the following state8 ments, along with a cover page summarizing the in9 formation contained in such statements:

10 ‘‘(A) STATEMENT OF PLAINTIFF RECOV11 ERY.—The amount of the settlement proposed to

12 be distributed to the parties to the action, deter13 mined in the aggregate and on an average per

14 share basis.

15 ‘‘(B) STATEMENT OF POTENTIAL OUTCOME

16 OF CASE.—

17 ‘‘(i) AGREEMENT ON AMOUNT OF DAM18 AGES.—If the settling parties agree on the

19 average amount of damages per share that

20 would be recoverable if the plaintiff pre21 vailed on each claim alleged under this title,

22 a statement concerning the average amount

23 of such potential damages per share.

24 ‘‘(ii) DISAGREEMENT ON AMOUNT OF

25 DAMAGES.—If the parties do not agree on
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1 the average amount of damages per share

2 that would be recoverable if the plaintiff

3 prevailed on each claim alleged under this

4 title, a statement from each settling party

5 concerning the issue or issues on which the

6 parties disagree.

7 ‘‘(iii) INADMISSIBILITY FOR CERTAIN

8 PURPOSES.—A statement made in accord9 ance with clause (i) or (ii) concerning the

10 amount of damages shall not be admissible

11 in any Federal or State judicial action or

12 administrative proceeding, other than an

13 action or proceeding arising out of such

14 statement.

15 ‘‘(C) STATEMENT OF ATTORNEYS’ FEES OR

16 COSTS SOUGHT.—If any of the settling parties or

17 their counsel intend to apply to the court for an

18 award of attorneys’ fees or costs from any fund

19 established as part of the settlement, a statement

20 indicating which parties or counsel intend to

21 make such an application, the amount of fees

22 and costs that will be sought (including the

23 amount of such fees and costs determined on an

24 average per share basis), and a brief explanation

25 supporting the fees and costs sought.
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1 ‘‘(D) IDENTIFICATION OF LAWYERS’ REP2 RESENTATIVES.—The name, telephone number,

3 and address of one or more representatives of

4 counsel for the plaintiff class who will be reason5 ably available to answer questions from class

6 members concerning any matter contained in

7 any notice of settlement published or otherwise

8 disseminated to the class.

9 ‘‘(E) REASONS FOR SETTLEMENT.—A brief

10 statement explaining the reasons why the parties

11 are proposing the settlement.

12 ‘‘(F) OTHER INFORMATION.—Such other in13 formation as may be required by the court.’’.

14 (2) SECURITIES EXCHANGE ACT OF 1934.—Sec15 tion 21 of the Securities Exchange Act of 1934 (15

16 U.S.C. 78u) is amended by adding at the end the fol17 lowing new subsection:

18 ‘‘(j) RECOVERY RULES FOR PRIVATE CLASS AC19 TIONS.—

20 ‘‘(1) IN GENERAL.—The rules contained in this

21 subsection shall apply in each private action arising

22 under this title that is brought as a plaintiff class ac23 tion pursuant to the Federal Rules of Civil Procedure.

24 ‘‘(2) CERTIFICATION FILED WITH COMPLAINTS.—
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1 ‘‘(A) IN GENERAL.—Each plaintiff seeking

2 to serve as a representative party on behalf of a

3 class shall provide a sworn certification, which

4 shall be personally signed by such plaintiff and

5 filed with the complaint, that—

6 ‘‘(i) states that the plaintiff has re7 viewed the complaint and authorized its fil8 ing;

9 ‘‘(ii) states that the plaintiff did not

10 purchase the security that is the subject of

11 the complaint at the direction of plaintiff’s

12 counsel or in order to participate in any

13 private action arising under this title;

14 ‘‘(iii) states that the plaintiff is willing

15 to serve as a representative party on behalf

16 of a class, including providing testimony at

17 deposition and trial, if necessary;

18 ‘‘(iv) sets forth all of the transactions

19 of the plaintiff in the security that is the

20 subject of the complaint during the class pe21 riod specified in the complaint;

22 ‘‘(v) identifies any action under this

23 title, filed during the 3-year period preced24 ing the date on which the certification is

25 signed by the plaintiff, in which the plain-
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1 tiff has sought to serve as a representative

2 party on behalf of a class; and

3 ‘‘(vi) states that the plaintiff will not

4 accept any payment for serving as a rep5 resentative party on behalf of a class beyond

6 the plaintiff’s pro rata share of any recov7 ery, except as ordered or approved by the

8 court in accordance with paragraph (3).

9 ‘‘(B) NONWAIVER OF ATTORNEY-CLIENT

10 PRIVILEGE.—The certification filed pursuant to

11 subparagraph (A) shall not be construed to be a

12 waiver of the attorney-client privilege.

13 ‘‘(3) RECOVERY BY PLAINTIFFS.—The share of

14 any final judgment or of any settlement that is

15 awarded to a representative party serving on behalf

16 of a class shall be calculated in the same manner as

17 the shares of the final judgment or settlement awarded

18 to all other members of the class. Nothing in this

19 paragraph shall be construed to limit the award to

20 any representative party serving on behalf of a class

21 of reasonable costs and expenses (including lost

22 wages) directly relating to the representation of the

23 class.

24 ‘‘(4) RESTRICTIONS ON SETTLEMENTS UNDER

25 SEAL.—The terms and provisions of any settlement
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1 agreement of a class action shall not be filed under

2 seal, except that on motion of any party to the settle3 ment, the court may order filing under seal for those

4 portions of a settlement agreement as to which good

5 cause is shown for such filing under seal. For pur6 poses of this paragraph, good cause shall exist only if

7 publication of a term or provision of a settlement

8 agreement would cause direct and substantial harm to

9 any party.

10 ‘‘(5) RESTRICTIONS ON PAYMENT OF ATTORNEYS’

11 FEES AND EXPENSES.—Total attorneys’ fees and ex12 penses awarded by the court to counsel for the plain13 tiff class shall not exceed a reasonable percentage of

14 the amount of damages and prejudgment interest

15 awarded to the class.

16 ‘‘(6) DISCLOSURE OF SETTLEMENT TERMS TO

17 CLASS MEMBERS.—Any proposed or final settlement

18 agreement that is published or otherwise disseminated

19 to the class shall include each of the following state20 ments, along with a cover page summarizing the in21 formation contained in such statements:

22 ‘‘(A) STATEMENT OF PLAINTIFF RECOV23 ERY.—The amount of the settlement proposed to

24 be distributed to the parties to the action, deter-
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1 mined in the aggregate and on an average per

2 share basis.

3 ‘‘(B) STATEMENT OF POTENTIAL OUTCOME

4 OF CASE.—

5 ‘‘(i) AGREEMENT ON AMOUNT OF DAM6 AGES.—If the settling parties agree on the

7 average amount of damages per share that

8 would be recoverable if the plaintiff pre9 vailed on each claim alleged under this title,

10 a statement concerning the average amount

11 of such potential damages per share.

12 ‘‘(ii) DISAGREEMENT ON AMOUNT OF

13 DAMAGES.—If the parties do not agree on

14 the average amount of damages per share

15 that would be recoverable if the plaintiff

16 prevailed on each claim alleged under this

17 title, a statement from each settling party

18 concerning the issue or issues on which the

19 parties disagree.

20 ‘‘(iii) INADMISSIBILITY FOR CERTAIN

21 PURPOSES.—A statement made in accord22 ance with clause (i) or (ii) concerning the

23 amount of damages shall not be admissible

24 in any Federal or State judicial action or

25 administrative proceeding, other than an
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1 action or proceeding arising out of such

2 statement.

3 ‘‘(C) STATEMENT OF ATTORNEYS’ FEES OR

4 COSTS SOUGHT.—If any of the settling parties or

5 their counsel intend to apply to the court for an

6 award of attorneys’ fees or costs from any fund

7 established as part of the settlement, a statement

8 indicating which parties or counsel intend to

9 make such an application, the amount of fees

10 and costs that will be sought (including the

11 amount of such fees and costs determined on an

12 average per share basis), and a brief explanation

13 supporting the fees and costs sought.

14 ‘‘(D) IDENTIFICATION OF LAWYERS’ REP15 RESENTATIVES.—The name, telephone number,

16 and address of one or more representatives of

17 counsel for the plaintiff class who will be reason18 ably available to answer questions from class

19 members concerning any matter contained in

20 any notice of settlement published or otherwise

21 disseminated to the class.

22 ‘‘(E) REASONS FOR SETTLEMENT.—A brief

23 statement explaining the reasons why the parties

24 are proposing the settlement.
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1 ‘‘(F) OTHER INFORMATION.—Such other in2 formation as may be required by the court.’’.

3 (b) APPOINTMENT OF LEAD PLAINTIFF.—

4 (1) SECURITIES ACT OF 1933.—Section 20 of the

5 Securities Act of 1933 (15 U.S.C. 77t) is amended by

6 adding at the end the following new subsection:

7 ‘‘(i) PROCEDURES GOVERNING APPOINTMENT OF LEAD

8 PLAINTIFF IN CLASS ACTIONS.—

9 ‘‘(1) EARLY NOTICE TO CLASS MEMBERS.—

10 ‘‘(A) IN GENERAL.—In any private action

11 arising under this title that is brought on behalf

12 of a class, not later than 20 days after the date

13 on which the complaint is filed, the plaintiff or

14 plaintiffs shall cause to be published, in a widely

15 circulated national business-oriented publication

16 or wire service, a notice advising members of the

17 purported plaintiff class—

18 ‘‘(i) of the pendency of the action, the

19 claims asserted therein, and the purported

20 class period; and

21 ‘‘(ii) that, not later than 60 days after

22 the date on which the notice is published,

23 any member of the purported class may

24 move the court to serve as lead plaintiff of

25 the purported class.
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1 ‘‘(B) ADDITIONAL NOTICES MAY BE RE2 QUIRED UNDER FEDERAL RULES.—Notice re3 quired under subparagraph (A) shall be in addi4 tion to any notice required pursuant to the Fed5 eral Rules of Civil Procedure.

6 ‘‘(2) APPOINTMENT OF LEAD PLAINTIFF.—

7 ‘‘(A) IN GENERAL.—Not later than 90 days

8 after the date on which a notice is published

9 under paragraph (1)(A), the court shall consider

10 any motion made by a purported class member

11 in response to the notice, and shall appoint as

12 lead plaintiff the member or members of the pur13 ported plaintiff class that the court determines to

14 be most capable of adequately representing the

15 interests of class members (hereafter in this sub16 section referred to as the ‘most adequate plain17 tiff’) in accordance with this paragraph.

18 ‘‘(B) CONSOLIDATED ACTIONS.—If more

19 than one action on behalf of a class asserting

20 substantially the same claim or claims arising

21 under this title has been filed, and any party has

22 sought to consolidate those actions for pretrial

23 purposes or for trial, the court shall not make the

24 determination required by subparagraph (A)

25 until after the decision on the motion to consoli-
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1 date is rendered. As soon as practicable after

2 such decision is rendered, the court shall appoint

3 the most adequate plaintiff as lead plaintiff for

4 the consolidated actions in accordance with this

5 paragraph.

6 ‘‘(C) REBUTTABLE PRESUMPTION.—

7 ‘‘(i) IN GENERAL.—Subject to clause

8 (ii), for purposes of subparagraph (A), the

9 court shall adopt a presumption that the

10 most adequate plaintiff in any private ac11 tion arising under this title is the person or

12 group of persons that—

13 ‘‘(I) has either filed the complaint

14 or made a motion in response to a no15 tice under paragraph (1)(A);

16 ‘‘(II) in the determination of the

17 court, has the largest financial interest

18 in the relief sought by the class; and

19 ‘‘(III) otherwise satisfies the re20 quirements of Rule 23 of the Federal

21 Rules of Civil Procedure.

22 ‘‘(ii) REBUTTAL EVIDENCE.—The pre23 sumption described in clause (i) may be re24 butted only upon proof by a member of the
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1 purported plaintiff class that the presump2 tively most adequate plaintiff—

3 ‘‘(I) will not fairly and ade4 quately protect the interests of the

5 class; or

6 ‘‘(II) is subject to unique defenses

7 that render such plaintiff incapable of

8 adequately representing the class.

9 ‘‘(iii) DISCOVERY.—For purposes of

10 clause (ii), discovery relating to whether a

11 member or members of the purported plain12 tiff class is the most adequate plaintiff—

13 ‘‘(I) may not be conducted by any

14 defendant; and

15 ‘‘(II) may be conducted by a

16 plaintiff only if the plaintiff first dem17 onstrates a reasonable basis for a find18 ing that the presumptively most ade19 quate plaintiff is incapable of ade20 quately representing the class.

21 ‘‘(D) SELECTION OF LEAD COUNSEL.—The

22 most adequate plaintiff shall, subject to the ap23 proval of the court, select and retain counsel to

24 represent the class.’’.
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1 (2) SECURITIES EXCHANGE ACT OF 1934.—Sec2 tion 21 of the Securities Exchange Act of 1934 (15

3 U.S.C. 78a et seq.) is amended by adding at the end

4 the following new subsection:

5 ‘‘(k) PROCEDURES GOVERNING APPOINTMENT OF

6 LEAD PLAINTIFF IN CLASS ACTIONS.—

7 ‘‘(1) EARLY NOTICE TO CLASS MEMBERS.—

8 ‘‘(A) IN GENERAL.—In any private action

9 arising under this title that is brought on behalf

10 of a class, not later than 20 days after the date

11 on which the complaint is filed, the plaintiff or

12 plaintiffs shall cause to be published, in a widely

13 circulated national business-oriented publication

14 or wire service, a notice advising members of the

15 purported plaintiff class—

16 ‘‘(i) of the pendency of the action, the

17 claims asserted therein, and the purported

18 class period; and

19 ‘‘(ii) that, not later than 60 days after

20 the date on which the notice is published,

21 any member of the purported class may

22 move the court to serve as lead plaintiff of

23 the purported class.

24 ‘‘(B) ADDITIONAL NOTICES MAY BE RE25 QUIRED UNDER FEDERAL RULES.—Notice re-
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1 quired under subparagraph (A) shall be in addi2 tion to any notice required pursuant to the Fed3 eral Rules of Civil Procedure.

4 ‘‘(2) APPOINTMENT OF LEAD PLAINTIFF.—

5 ‘‘(A) IN GENERAL.—Not later than 90 days

6 after the date on which a notice is published

7 under paragraph (1)(A), the court shall consider

8 any motion made by a purported class member

9 in response to the notice, and shall appoint as

10 lead plaintiff the member or members of the pur11 ported plaintiff class that the court determines to

12 be most capable of adequately representing the

13 interests of class members (hereafter in this sub14 section referred to as the ‘most adequate plain15 tiff’) in accordance with this paragraph.

16 ‘‘(B) CONSOLIDATED ACTIONS.—If more

17 than one action on behalf of a class asserting

18 substantially the same claim or claims arising

19 under this title has been filed, and any party has

20 sought to consolidate those actions for pretrial

21 purposes or for trial, the court shall not make the

22 determination required by subparagraph (A)

23 until after the decision on the motion to consoli24 date is rendered. As soon as practicable after

25 such decision is rendered, the court shall appoint
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1 the most adequate plaintiff as lead plaintiff for

2 the consolidated actions in accordance with this

3 paragraph.

4 ‘‘(C) REBUTTABLE PRESUMPTION.—

5 ‘‘(i) IN GENERAL.—Subject to clause

6 (ii), for purposes of subparagraph (A), the

7 court shall adopt a presumption that the

8 most adequate plaintiff in any private ac9 tion arising under this title is the person or

10 group of persons that—

11 ‘‘(I) has either filed the complaint

12 or made a motion in response to a no13 tice under paragraph (1)(A);

14 ‘‘(II) in the determination of the

15 court, has the largest financial interest

16 in the relief sought by the class; and

17 ‘‘(III) otherwise satisfies the re18 quirements of Rule 23 of the Federal

19 Rules of Civil Procedure.

20 ‘‘(ii) REBUTTAL EVIDENCE.—The pre21 sumption described in clause (i) may be re22 butted only upon proof by a member of the

23 purported plaintiff class that the presump24 tively most adequate plaintiff—
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1 ‘‘(I) will not fairly and ade2 quately protect the interests of the

3 class; or

4 ‘‘(II) is subject to unique defenses

5 that render such plaintiff incapable of

6 adequately representing the class.

7 ‘‘(iii) DISCOVERY.—For purposes of

8 clause (ii), discovery relating to whether a

9 member or members of the purported plain10 tiff class is the most adequate plaintiff—

11 ‘‘(I) may not be conducted by any

12 defendant; and

13 ‘‘(II) may be conducted by a

14 plaintiff only if the plaintiff first dem15 onstrates a reasonable basis for a find16 ing that the presumptively most ade17 quate plaintiff is incapable of ade18 quately representing the class.

19 ‘‘(D) SELECTION OF LEAD COUNSEL.—The

20 most adequate plaintiff shall, subject to the ap21 proval of the court, select and retain counsel to

22 represent the class.’’.
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1 SEC. 103. SANCTIONS FOR ABUSIVE LITIGATION.

2 (a) SECURITIES ACT OF 1933.—Section 20 of the Se3 curities Act of 1933 (15 U.S.C. 77t) is amended by adding

4 at the end the following new subsection:

5 ‘‘(j) SANCTIONS FOR ABUSIVE LITIGATION.—

6 ‘‘(1) MANDATORY REVIEW BY COURT.—In any

7 private action arising under this title, upon final ad8 judication of the action, the court shall include in the

9 record specific findings regarding compliance by each

10 party and each attorney representing any party with

11 each requirement of Rule 11(b) of the Federal Rules

12 of Civil Procedure.

13 ‘‘(2) MANDATORY SANCTIONS.—If the court

14 makes a finding under paragraph (1) that a party or

15 attorney violated any requirement of Rule 11(b) of the

16 Federal Rules of Civil Procedure, the court shall im17 pose sanctions on such party or attorney in accord18 ance with Rule 11 of the Federal Rules of Civil Proce19 dure.

20 ‘‘(3) PRESUMPTION IN FAVOR OF ATTORNEYS’

21 FEES AND COSTS.—

22 ‘‘(A) IN GENERAL.—Subject to subpara23 graphs (B) and (C), for purposes of paragraph

24 (2), the court shall adopt a presumption that the

25 appropriate sanction for failure of the complaint

26 or the responsive pleading or motion to comply
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1 with any requirement of Rule 11(b) of the Fed2 eral Rules of Civil Procedure is an award to the

3 opposing party of all of the reasonable attorneys’

4 fees and other expenses incurred as a direct re5 sult of the violation.

6 ‘‘(B) REBUTTAL EVIDENCE.—The presump7 tion described in subparagraph (A) may be re8 butted only upon proof by the party or attorney

9 against whom sanctions are to be imposed

10 that—

11 ‘‘(i) the award of attorneys’ fees and

12 other expenses will impose an undue burden

13 on that party or attorney; or

14 ‘‘(ii) the violation of Rule 11(b) of the

15 Federal Rules of Civil Procedure was de

16 minimis.

17 ‘‘(C) SANCTIONS.—If the party or attorney

18 against whom sanctions are to be imposed meets

19 its burden under subparagraph (B), the court

20 shall award the sanctions that the court deems

21 appropriate pursuant to Rule 11 of the Federal

22 Rules of Civil Procedure.’’.

23 (b) SECURITIES EXCHANGE ACT OF 1934.—Section 21

24 of the Securities Exchange Act of 1934 (15 U.S.C. 78u) is

25 amended by adding at the end the following new subsection:
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1 ‘‘(l) SANCTIONS FOR ABUSIVE LITIGATION.—

2 ‘‘(1) MANDATORY REVIEW BY COURT.—In any

3 private action arising under this title, upon final ad4 judication of the action, the court shall include in the

5 record specific findings regarding compliance by each

6 party and each attorney representing any party with

7 each requirement of Rule 11(b) of the Federal Rules

8 of Civil Procedure.

9 ‘‘(2) MANDATORY SANCTIONS.—If the court

10 makes a finding under paragraph (1) that a party or

11 attorney violated any requirement of Rule 11(b) of the

12 Federal Rules of Civil Procedure, the court shall im13 pose sanctions in accordance with Rule 11 of the Fed14 eral Rules of Civil Procedure on such party or attor15 ney.

16 ‘‘(3) PRESUMPTION IN FAVOR OF ATTORNEYS’

17 FEES AND COSTS.—

18 ‘‘(A) IN GENERAL.—Subject to subpara19 graphs (B) and (C), for purposes of paragraph

20 (2), the court shall adopt a presumption that the

21 appropriate sanction for failure of the complaint

22 or the responsive pleading or motion to comply

23 with any requirement of Rule 11(b) of the Fed24 eral Rules of Civil Procedure is an award to the

25 opposing party of all of the reasonable attorneys’
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1 fees and other expenses incurred as a direct re2 sult of the violation.

3 ‘‘(B) REBUTTAL EVIDENCE.—The presump4 tion described in subparagraph (A) may be re5 butted only upon proof by the party or attorney

6 against whom sanctions are to be imposed

7 that—

8 ‘‘(i) the award of attorneys’ fees and

9 other expenses will impose an undue burden

10 on that party or attorney; or

11 ‘‘(ii) the violation of Rule 11(b) of the

12 Federal Rules of Civil Procedure was de

13 minimis.

14 ‘‘(C) SANCTIONS.—If the party or attorney

15 against whom sanctions are to be imposed meets

16 its burden under subparagraph (B), the court

17 shall award the sanctions that the court deems

18 appropriate pursuant to Rule 11 of the Federal

19 Rules of Civil Procedure.’’.

20 SEC. 104. REQUIREMENTS FOR SECURITIES FRAUD AC21 TIONS.

22 (a) SECURITIES ACT OF 1933.—

23 (1) STAY OF DISCOVERY.—Section 20 of the Se24 curities Act of 1933 (15 U.S.C. 77t) is amended by

25 adding at the end the following new subsection:
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1 ‘‘(k) STAY OF DISCOVERY.—In any private action

2 arising under this title, during the pendency of any motion

3 to dismiss, all discovery and other proceedings shall be

4 stayed unless the court finds, upon the motion of any party,

5 that particularized discovery is necessary to preserve evi6 dence or to prevent undue prejudice to that party.’’.

7 (2) PRESERVATION OF EVIDENCE.—Section 20 of

8 the Securities Act of 1933 (15 U.S.C. 77t) is amended

9 by adding at the end the following new subsection:

10 ‘‘(l) PRESERVATION OF EVIDENCE.—It shall be unlaw11 ful for any person, upon receiving actual notice that a com12 plaint has been filed in a private action arising under this

13 title naming that person as a defendant and that describes

14 the allegations contained in the complaint, to willfully de15 stroy or otherwise alter any document, data compilation

16 (including any electronically recorded or stored data), or

17 tangible object that is in the custody or control of that per18 son and that is relevant to the allegations.’’.

19 (b) SECURITIES EXCHANGE ACT OF 1934.—Title I of

20 the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)

21 is amended by adding at the end the following new section:
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1 ‘‘SEC. 36. REQUIREMENTS FOR SECURITIES FRAUD AC2 TIONS.

3 ‘‘(a) MISLEADING STATEMENTS AND OMISSIONS.—In

4 any private action arising under this title in which the

5 plaintiff alleges that the defendant—

6 ‘‘(1) made an untrue statement of a material

7 fact; or

8 ‘‘(2) omitted to state a material fact necessary in

9 order to make the statements made, in the light of the

10 circumstances in which they were made, not mislead11 ing;

12 the complaint shall specify each statement alleged to have

13 been misleading, the reason or reasons why the statement

14 is misleading, and, if an allegation regarding the statement

15 or omission is made on information and belief, the plaintiff

16 shall set forth all information on which that belief is formed.

17 ‘‘(b) REQUIRED STATE OF MIND.—

18 ‘‘(1) IN GENERAL.—In any private action aris19 ing under this title in which the plaintiff may recover

20 money damages only on proof that the defendant

21 acted with a particular state of mind, the complaint

22 shall, with respect to each act or omission alleged to

23 violate this title, specifically allege facts giving rise to

24 a strong inference that the defendant acted with the

25 required state of mind.
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1 ‘‘(2) STRONG INFERENCE OF FRAUDULENT IN2 TENT.—For purposes of paragraph (1), a strong in3 ference that the defendant acted with the required

4 state of mind may be established either—

5 ‘‘(A) by alleging facts to show that the de6 fendant had both motive and opportunity to

7 commit fraud; or

8 ‘‘(B) by alleging facts that constitute strong

9 circumstantial evidence of conscious misbehavior

10 or recklessness by the defendant.

11 ‘‘(c) MOTION TO DISMISS; STAY OF DISCOVERY.—

12 ‘‘(1) DISMISSAL FOR FAILURE TO MEET PLEAD13 ING REQUIREMENTS.—In any private action arising

14 under this title, the court shall, on the motion of any

15 defendant, dismiss the complaint if the requirements

16 of subsections (a) and (b) are not met.

17 ‘‘(2) STAY OF DISCOVERY.—In any private ac18 tion arising under this title, all discovery and other

19 proceedings shall be stayed during the pendency of

20 any motion to dismiss, unless the court finds upon

21 the motion of any party that particularized discovery

22 is necessary to preserve evidence or to prevent undue

23 prejudice to that party.

24 ‘‘(3) PRESERVATION OF EVIDENCE.—It shall be

25 unlawful for any person, upon receiving actual notice
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1 that a complaint has been filed in a private action

2 arising under this title naming that person as a de3 fendant and that describes the allegations contained

4 in the complaint, to willfully destroy or otherwise

5 alter any document, data compilation (including any

6 electronically recorded or stored data), or tangible ob7 ject that is in the custody or control of that person

8 and that is relevant to the allegations.

9 ‘‘(d) LOSS CAUSATION.—In any private action arising

10 under this title, the plaintiff shall have the burden of prov11 ing that the act or omission alleged to violate this title

12 caused any loss incurred by the plaintiff. Damages arising

13 from such loss may be mitigated upon a showing by the

14 defendant that factors unrelated to such act or omission

15 contributed to the loss.’’.

16 SEC. 105. SAFE HARBOR FOR FORWARD-LOOKING STATE17 MENTS.

18 (a) SECURITIES ACT OF 1933.—Title I of the Securi19 ties Act of 1933 (15 U.S.C. 77a et seq.) is amended by in20 serting after section 13 the following new section:

21 ‘‘SEC. 13A. APPLICATION OF SAFE HARBOR FOR FORWARD22 LOOKING STATEMENTS.

23 ‘‘(a) SAFE HARBOR.—

24 ‘‘(1) IN GENERAL.—In any private action aris25 ing under this title that is based on a fraudulent
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1 statement, an issuer that is subject to the reporting

2 requirements of section 13(a) or section 15(d) of the

3 Securities Exchange Act of 1934, a person acting on

4 behalf of such issuer, or an outside reviewer retained

5 by such issuer, shall not be liable with respect to any

6 forward-looking statement, whether written or oral, if

7 and to the extent that the statement—

8 ‘‘(A) projects, estimates, or describes future

9 events; and

10 ‘‘(B) refers clearly (and, except as otherwise

11 provided by rule or regulation, proximately)

12 to—

13 ‘‘(i) such projections, estimates, or de14 scriptions as forward-looking statements;

15 and

16 ‘‘(ii) the risk that actual results may

17 differ materially from such projections, esti18 mates, or descriptions.

19 ‘‘(2) EFFECT ON OTHER SAFE HARBORS.—The

20 exemption from liability provided for in paragraph

21 (1) shall be in addition to any exemption that the

22 Commission may establish by rule or regulation

23 under subsection (e).
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1 ‘‘(b) DEFINITION OF FORWARD-LOOKING STATE2 MENT.—For purposes of this section, the term ‘forward-look3 ing statement’ means—

4 ‘‘(1) a statement containing a projection of reve5 nues, income (including income loss), earnings (in6 cluding earnings loss) per share, capital expenditures,

7 dividends, capital structure, or other financial items;

8 ‘‘(2) a statement of the plans and objectives of

9 management for future operations;

10 ‘‘(3) a statement of future economic performance

11 contained in a discussion and analysis of financial

12 condition by the management or in the results of op13 erations included pursuant to the rules and regula14 tions of the Commission;

15 ‘‘(4) any disclosed statement of the assumptions

16 underlying or relating to any statement described in

17 paragraph (1), (2), or (3); or

18 ‘‘(5) a statement containing a projection or esti19 mate of such other items as may be specified by rule

20 or regulation of the Commission.

21 ‘‘(c) EXCLUSIONS.—The exemption from liability pro22 vided for in subsection (a) does not apply to a forward23 looking statement that is—

24 ‘‘(1) knowingly made with the purpose and ac25 tual intent of misleading investors;
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1 ‘‘(2) except to the extent otherwise specifically

2 provided by rule, regulation, or order of the Commis3 sion, made with respect to the business or operations

4 of the issuer, if the issuer—

5 ‘‘(A) during the 3-year period preceding the

6 date on which the statement was first made—

7 ‘‘(i) was convicted of any felony or

8 misdemeanor described in clauses (i)

9 through (iv) of section 15(b)(4)(B); or

10 ‘‘(ii) has been made the subject of a ju11 dicial or administrative decree or order

12 arising out of a governmental action that—

13 ‘‘(I) prohibits future violations of

14 the anti-fraud provisions of the securi15 ties laws, as that term is defined in

16 section 3 of the Securities Exchange

17 Act of 1934;

18 ‘‘(II) requires that the issuer cease

19 and desist from violating the anti20 fraud provisions of the securities laws;

21 or

22 ‘‘(III) determines that the issuer

23 violated the anti-fraud provisions of

24 the securities laws;
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1 ‘‘(B) makes the forward-looking statement

2 in connection with an offering of securities by a

3 blank check company, as that term is defined

4 under the rules or regulations of the Commission;

5 ‘‘(C) issues penny stock, as that term is de6 fined in section 3(a)(51) of the Securities Ex7 change Act of 1934, and the rules, regulations, or

8 orders issued pursuant to that section;

9 ‘‘(D) makes the forward-looking statement

10 in connection with a rollup transaction, as that

11 term is defined under the rules or regulations of

12 the Commission; or

13 ‘‘(E) makes the forward-looking statement

14 in connection with a going private transaction,

15 as that term is defined under the rules or regula16 tions of the Commission issued pursuant to sec17 tion 13(e) of the Securities Exchange Act of

18 1934; or

19 ‘‘(3) except to the extent otherwise specifically

20 provided by rule or regulation of the Commission—

21 ‘‘(A) included in a financial statement pre22 pared in accordance with generally accepted ac23 counting principles;

24 ‘‘(B) contained in a registration statement

25 of, or otherwise issued by, an investment com-
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1 pany, as that term is defined in section 3(a) of

2 the Investment Company Act of 1940;

3 ‘‘(C) made in connection with a tender

4 offer;

5 ‘‘(D) made in connection with an initial

6 public offering;

7 ‘‘(E) made by or in connection with an of8 fering by a partnership, limited liability cor9 poration, or a direct participation investment

10 program, as those terms are defined by rule or

11 regulation of the Commission; or

12 ‘‘(F) made in a disclosure of beneficial own13 ership in a report required to be filed with the

14 Commission pursuant to section 13(d) of the Se15 curities Exchange Act of 1934.

16 ‘‘(d) STAY PENDING DECISION ON MOTION.—In any

17 private action arising under this title, the court shall stay

18 discovery during the pendency of any motion by a defend19 ant (other than discovery that is specifically directed to the

20 applicability of the exemption provided for in this section)

21 for summary judgment that is based on the grounds that—

22 ‘‘(1) the statement or omission upon which the

23 complaint is based is a forward-looking statement

24 within the meaning of this section; and
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1 ‘‘(2) the exemption provided for in this section

2 precludes a claim for relief.

3 ‘‘(e) AUTHORITY.—In addition to the exemption pro4 vided for in this section, the Commission may, by rule or

5 regulation, provide exemptions from liability under any

6 provision of this title, or of any rule or regulation issued

7 under this title, that is based on a statement that includes

8 or that is based on projections or other forward-looking in9 formation, if and to the extent that any such exemption

10 is, as determined by the Commission, consistent with the

11 public interest and the protection of investors.

12 ‘‘(f) COMMISSION DISGORGEMENT ACTIONS.—

13 ‘‘(1) IN GENERAL.—If the Commission, in any

14 proceeding, orders or obtains (by settlement, court

15 order, or otherwise) a payment of funds from a per16 son who has violated this title through means that in17 cluded the utilization of a forward-looking statement,

18 and if any portion of such funds is set aside or other19 wise held for or available to persons who suffered

20 losses in connection with such violation, no person

21 shall be precluded from participating in the distribu22 tion of, or otherwise receiving, a portion of such funds

23 by reason of the application of this section.

24 ‘‘(2) JUDGMENT FOR LOSSES SUFFERED.—In

25 any action by the Commission alleging a violation of
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1 this title in which the defendant or respondent is al2 leged to have utilized a forward-looking statement in

3 furtherance of such violation, the Commission may,

4 upon a sufficient showing, in addition to all other

5 remedies available to the Commission, obtain a judg6 ment for the payment of an amount equal to all losses

7 suffered by reason of the utilization of the forward8 looking statement that are not compensated through

9 final adjudication or settlement of a private action

10 brought under this title arising from the same viola11 tion.

12 ‘‘(g) EFFECT ON OTHER AUTHORITY OF COMMIS13 SION.—Nothing in this section limits, either expressly or

14 by implication, the authority of the Commission to exercise

15 similar authority or to adopt similar rules and regulations

16 with respect to forward-looking statements under any other

17 statute under which the Commission exercises rulemaking

18 authority.’’.

19 (b) SECURITIES EXCHANGE ACT OF 1934.—Title I of

20 the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)

21 is amended by adding at the end the following new section:

22 ‘‘SEC. 37. APPLICATION OF SAFE HARBOR FOR FORWARD23 LOOKING STATEMENTS.

24 ‘‘(a) SAFE HARBOR.—
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1 ‘‘(1) IN GENERAL.—In any private action aris2 ing under this title that is based on a fraudulent

3 statement, an issuer that is subject to the reporting

4 requirements of section 13(a) or section 15(d) of the

5 Securities Exchange Act of 1934, a person acting on

6 behalf of such issuer, or an outside reviewer retained

7 by such issuer, shall not be liable with respect to any

8 forward-looking statement, whether written or oral, if

9 and to the extent that the statement—

10 ‘‘(A) projects, estimates, or describes future

11 events; and

12 ‘‘(B) refers clearly (and, except as otherwise

13 provided by rule or regulation, proximately)

14 to—

15 ‘‘(i) such projections, estimates, or de16 scriptions as forward-looking statements;

17 and

18 ‘‘(ii) the risk that actual results may

19 differ materially from such projections, esti20 mates, or descriptions.

21 ‘‘(2) EFFECT ON OTHER SAFE HARBORS.—The

22 exemption from liability provided for in paragraph

23 (1) shall be in addition to any exemption that the

24 Commission may establish by rule or regulation

25 under subsection (e).
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1 ‘‘(b) DEFINITION OF FORWARD-LOOKING STATE2 MENT.—For purposes of this section, the term ‘forward-look3 ing statement’ means—

4 ‘‘(1) a statement containing a projection of reve5 nues, income (including income loss), earnings (in6 cluding earnings loss) per share, capital expenditures,

7 dividends, capital structure, or other financial items;

8 ‘‘(2) a statement of the plans and objectives of

9 management for future operations;

10 ‘‘(3) a statement of future economic performance

11 contained in a discussion and analysis of financial

12 condition by the management or in the results of op13 erations included pursuant to the rules and regula14 tions of the Commission;

15 ‘‘(4) any disclosed statement of the assumptions

16 underlying or relating to any statement described in

17 paragraph (1), (2), or (3); or

18 ‘‘(5) a statement containing a projection or esti19 mate of such other items as may be specified by rule

20 or regulation of the Commission.

21 ‘‘(c) EXCLUSIONS.—The exemption from liability pro22 vided for in subsection (a) does not apply to a forward23 looking statement that is—

24 ‘‘(1) knowingly made with the purpose and ac25 tual intent of misleading investors;
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1 ‘‘(2) except to the extent otherwise specifically

2 provided by rule, regulation, or order of the Commis3 sion, made with respect to the business or operations

4 of the issuer, if the issuer—

5 ‘‘(A) during the 3-year period preceding the

6 date on which the statement was first made—

7 ‘‘(i) was convicted of any felony or

8 misdemeanor described in clauses (i)

9 through (iv) of section 15(b)(4)(B); or

10 ‘‘(ii) has been made the subject of a ju11 dicial or administrative decree or order

12 arising out of a governmental action that—

13 ‘‘(I) prohibits future violations of

14 the anti-fraud provisions of the securi15 ties laws;

16 ‘‘(II) requires that the issuer cease

17 and desist from violating the anti18 fraud provisions of the securities laws;

19 or

20 ‘‘(III) determines that the issuer

21 violated the anti-fraud provisions of

22 the securities laws;

23 ‘‘(B) makes the forward-looking statement

24 in connection with an offering of securities by a
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1 blank check company, as that term is defined

2 under the rules or regulations of the Commission;

3 ‘‘(C) issues penny stock;

4 ‘‘(D) makes the forward-looking statement

5 in connection with a rollup transaction, as that

6 term is defined under the rules or regulations of

7 the Commission; or

8 ‘‘(E) makes the forward-looking statement

9 in connection with a going private transaction,

10 as that term is defined under the rules or regula11 tions of the Commission issued pursuant to sec12 tion 13(e); or

13 ‘‘(3) except to the extent otherwise specifically

14 provided by rule or regulation of the Commission—

15 ‘‘(A) included in financial statements pre16 pared in accordance with generally accepted ac17 counting principles;

18 ‘‘(B) contained in a registration statement

19 of, or otherwise issued by, an investment com20 pany;

21 ‘‘(C) made in connection with a tender

22 offer;

23 ‘‘(D) made in connection with an initial

24 public offering;
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1 ‘‘(E) made by or in connection with an of2 fering by a partnership, limited liability cor3 poration, or a direct participation investment

4 program, as those terms are defined by rule or

5 regulation of the Commission; or

6 ‘‘(F) made in a disclosure of beneficial own7 ership in a report required to be filed with the

8 Commission pursuant to section 13(d).

9 ‘‘(d) STAY PENDING DECISION ON MOTION.—In any

10 private action arising under this title, the court shall stay

11 discovery during the pendency of any motion by a defend12 ant (other than discovery that is specifically directed to the

13 applicability of the exemption provided for in this section)

14 for summary judgment that is based on the grounds that—

15 ‘‘(1) the statement or omission upon which the

16 complaint is based is a forward-looking statement

17 within the meaning of this section; and

18 ‘‘(2) the exemption provided for in this section

19 precludes a claim for relief.

20 ‘‘(e) AUTHORITY.—In addition to the exemption pro21 vided for in this section, the Commission may, by rule or

22 regulation, provide exemptions from liability under any

23 provision of this title, or of any rule or regulation issued

24 under this title, that is based on a statement that includes

25 or that is based on projections or other forward-looking in-
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1 formation, if and to the extent that any such exemption

2 is, as determined by the Commission, consistent with the

3 public interest and the protection of investors.

4 ‘‘(f) COMMISSION DISGORGEMENT ACTIONS.—

5 ‘‘(1) IN GENERAL.—If the Commission, in any

6 proceeding, orders or obtains (by settlement, court

7 order, or otherwise) a payment of funds from a per8 son who has violated this title through means that in9 cluded the utilization of a forward-looking statement,

10 and if any portion of such funds is set aside or other11 wise held for or available to persons who suffered

12 losses in connection with such violation, no person

13 shall be precluded from participating in the distribu14 tion of, or otherwise receiving, a portion of such funds

15 by reason of the application of this section.

16 ‘‘(2) JUDGMENT FOR LOSSES SUFFERED.—In

17 any action by the Commission alleging a violation of

18 this title in which the defendant or respondent is al19 leged to have utilized a forward-looking statement in

20 furtherance of such violation, the Commission may,

21 upon a sufficient showing, in addition to all other

22 remedies available to the Commission, obtain a judg23 ment for the payment of an amount equal to all losses

24 suffered by reason of the utilization of the forward25 looking statement that are not compensated through
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1 final adjudication or settlement of a private action

2 brought under this title arising from the same viola3 tion.

4 ‘‘(g) EFFECT ON OTHER AUTHORITY OF COMMIS5 SION.—Nothing in this section limits, either expressly or

6 by implication, the authority of the Commission to exercise

7 similar authority or to adopt similar rules and regulations

8 with respect to forward-looking statements under any other

9 statute under which the Commission exercises rulemaking

10 authority.’’.

11 (c) INVESTMENT COMPANY ACT OF 1940.—Section 24

12 of the Investment Company Act of 1940 (15 U.S.C. 80a–

13 24) is amended by adding at the end the following new sub14 section:

15 ‘‘(g) REGULATORY AUTHORITY FOR FORWARD-LOOK16 ING STATEMENTS.—

17 ‘‘(1) IN GENERAL.—The Commission shall review

18 and, if necessary to carry out the purposes of this

19 title, promulgate such rules and regulations as may

20 be necessary to describe conduct with respect to the

21 making of forward-looking statements that the Com22 mission deems does not provide a basis for liability

23 in any private action arising under this title.

24 ‘‘(2) REQUIREMENTS.—A rule or regulation pro25 mulgated under paragraph (1) shall—
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1 ‘‘(A) include clear and objective guidance

2 that the Commission finds sufficient for the pro3 tection of investors;

4 ‘‘(B) prescribe such guidance with sufficient

5 particularity that compliance shall be readily

6 ascertainable by issuers prior to issuance of secu7 rities; and

8 ‘‘(C) provide that forward-looking state9 ments that are in compliance with such guidance

10 and that concern the future economic perform11 ance of an issuer of securities registered under

12 section 12 shall be deemed not to be in violation

13 of this title.

14 ‘‘(3) EFFECT ON OTHER AUTHORITY OF COMMIS15 SION.—Nothing in this subsection limits, either ex16 pressly or by implication, the authority of the Com17 mission to exercise similar authority or to adopt

18 similar rules and regulations with respect to forward19 looking statements under any other statute under

20 which the Commission exercises rulemaking author21 ity.’’.

22 SEC. 106. WRITTEN INTERROGATORIES.

23 (a) SECURITIES ACT OF 1933.—Section 20 of the Se24 curities Act of 1933 (15 U.S.C. 77t) is amended by adding

25 at the end the following new subsection:
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1 ‘‘(m) DEFENDANT’S RIGHT TO WRITTEN INTERROG2 ATORIES.—In any private action arising under this title

3 in which the plaintiff may recover money damages only on

4 proof that a defendant acted with a particular state of

5 mind, the court shall, when requested by a defendant, sub6 mit to the jury a written interrogatory on the issue of each

7 such defendant’s state of mind at the time the alleged viola8 tion occurred.’’.

9 (b) SECURITIES EXCHANGE ACT OF 1934.—Section 21

10 of the Securities Exchange Act of 1934 (15 U.S.C. 78u) is

11 amended by adding at the end the following new subsection:

12 ‘‘(m) DEFENDANT’S RIGHT TO WRITTEN INTERROG13 ATORIES.—In any private action arising under this title

14 in which the plaintiff may recover money damages, the

15 court shall, when requested by a defendant, submit to the

16 jury a written interrogatory on the issue of each such de17 fendant’s state of mind at the time the alleged violation oc18 curred.’’.

19 SEC. 107. AMENDMENT TO RACKETEER INFLUENCED AND

20 CORRUPT ORGANIZATIONS ACT.

21 Section 1964(c) of title 18, United States Code, is

22 amended by inserting before the period ‘‘, except that no

23 person may rely upon conduct that would have been action24 able as fraud in the purchase or sale of securities to estab25 lish a violation of section 1962’’.
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1 SEC. 108. AUTHORITY OF COMMISSION TO PROSECUTE AID2 ING AND ABETTING.

3 Section 20 of the Securities Exchange Act of 1934 (15

4 U.S.C. 78t) is amended—

5 (1) by striking the section heading and inserting

6 the following:

7 ‘‘LIABILITY OF CONTROLLING PERSONS AND PERSONS WHO

8 AID AND ABET VIOLATIONS’’; AND

9 (2) by adding at the end the following new sub10 section:

11 ‘‘(e) PROSECUTION OF PERSONS WHO AID AND ABET

12 VIOLATIONS.—For purposes of any action brought by the

13 Commission under paragraph (1) or (3) of section 21(d),

14 any person that knowingly provides substantial assistance

15 to another person in the violation of a provision of this

16 title, or of any rule or regulation issued under this title,

17 shall be—

18 ‘‘(1) deemed to be in violation of such provision;

19 and

20 ‘‘(2) liable to the same extent as the person to

21 whom such assistance is provided.’’.

22 SEC. 109. LOSS CAUSATION.

23 Section 12 of the Securities Act of 1933 (15 U.S.C.

24 77l) is amended—

25 (1) by inserting ‘‘(a) IN GENERAL.—’’ before

26 ‘‘Any person’’;
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1 (2) by inserting ‘‘, subject to subsection (b),’’

2 after ‘‘shall be liable’’; and

3 (3) by adding at the end the following:

4 ‘‘(b) LOSS CAUSATION.—In an action described in sub5 section (a)(2), if the person who offered or sold such security

6 proves that any portion or all of the amount recoverable

7 under subsection (a)(2) represents other than the deprecia8 tion in value of the subject security resulting from such part

9 of the prospectus or oral communication, with respect to

10 which the liability of that person is asserted, not being true

11 or omitting to state a material fact required to be stated

12 therein or necessary to make the statement not misleading,

13 then such portion or amount, as the case may be, shall not

14 be recoverable.’’.

15 SEC. 110. STUDY AND REPORT ON PROTECTIONS FOR SEN16 IOR CITIZENS AND QUALIFIED RETIREMENT

17 PLANS.

18 (a) FINDINGS.—The Congress finds that—

19 (1) senior citizens and qualified retirement plans

20 are too often the target of securities fraud of the kind

21 evidenced in the Charles Keating, Lincoln Savings &

22 Loan Association, and American Continental Cor23 poration situations;
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1 (2) this Act, in an effort to curb unfounded law2 suits, changes the standards and procedures for secu3 rities fraud actions; and

4 (3) the Securities and Exchange Commission has

5 indicated concern with some provisions of this Act.

6 (b) IN GENERAL.—Not later than 180 days after the

7 date of enactment of this Act, the Securities and Exchange

8 Commission shall—

9 (1) determine whether investors that are senior

10 citizens or qualified retirement plans require greater

11 protection against securities fraud than is provided

12 in this Act and the amendments made by this Act;

13 and

14 (2) if so, submit to the Congress a report con15 taining recommendations on protections that the

16 Commission determines to be appropriate to thor17 oughly protect such investors.

18 (c) DEFINITIONS.—For purposes of this section—

19 (1) The term ‘‘qualified retirement plan’’ has the

20 same meaning as in section 4974(c) of the Internal

21 Revenue Code of 1986; and

22 (2) the term ‘‘senior citizen’’ means an individ23 ual who is 62 years of age or older as of the date of

24 the securities transaction at issue.
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1 SEC. 111. AMENDMENT TO RACKETEER INFLUENCED AND

2 CORRUPT ORGANIZATIONS ACT.

3 Section 1964(c) of title 18, United States Code, is

4 amended by inserting before the period ‘‘, except that no

5 person may rely upon conduct that would have been action6 able as fraud in the purchase of sale of securities to establish

7 a violation of section 1962’’: Provided however, That this

8 exception shall not apply if any participant in the fraud

9 is criminally convicted in connection therewith, in which

10 case the statute of limitations shall start to run on the date

11 that the conviction becomes final.

12 SEC. 112. APPLICABILITY.

13 The amendments made by this title shall not affect or

14 apply to any private action arising under title I of the Se15 curities Exchange Act of 1934 or title I of the Securities

16 Act of 1933 commenced before the date of enactment of this

17 Act.

18 TITLE II—REDUCTION OF

19 COERCIVE SETTLEMENTS

20 SEC. 201. LIMITATION ON DAMAGES.

21 Section 36 of the Securities Exchange Act of 1934, as

22 added by section 104 of this Act, is amended by adding

23 at the end the following new subsection:

24 ‘‘(e) LIMITATION ON DAMAGES.—

25 ‘‘(1) IN GENERAL.—Except as provided in para26 graph (2), in any private action arising under this
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1 title, the plaintiff’s damages shall not exceed the dif2 ference between the purchase or sale price paid or re3 ceived, as appropriate, by the plaintiff for the subject

4 security and the value of that security, as measured

5 by the median trading price of that security, during

6 the 90-day period beginning on the date on which the

7 information correcting the misstatement or omission

8 is disseminated to the market.

9 ‘‘(2) EXCEPTION.—In any private action arising

10 under this title in which damages are sought, if the

11 plaintiff sells or repurchases the subject security prior

12 to the expiration of the 90-day period described in

13 paragraph (1), the plaintiff’s damages shall not ex14 ceed the difference between the purchase or sale price

15 paid or received, as appropriate, by the plaintiff for

16 the security and the median market value of the secu17 rity during the period beginning immediately after

18 dissemination of information correcting the

19 misstatement or omission and ending on the date on

20 which the plaintiff sells or repurchases the security.’’.

21 SEC. 202. PROPORTIONATE LIABILITY.

22 Title I of the Securities and Exchange Act of 1934 (15

23 U.S.C. 78a et seq.) is amended by adding at the end the

24 following new section:
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1 ‘‘SEC. 38. PROPORTIONATE LIABILITY.

2 ‘‘(a) APPLICABILITY.—This section shall apply only to

3 the allocation of damages among persons who are, or who

4 may become, liable for damages in any private action aris5 ing under this title. Nothing in this section shall affect the

6 standards for liability associated with any private action

7 arising under this title.

8 ‘‘(b) LIABILITY FOR DAMAGES.—

9 ‘‘(1) JOINT AND SEVERAL LIABILITY.—A person

10 against whom a judgment is entered in any private

11 action arising under this title shall be liable for dam12 ages jointly and severally only if the trier of fact spe13 cifically determines that such person committed know14 ing securities fraud.

15 ‘‘(2) PROPORTIONATE LIABILITY.—Except as

16 provided in paragraph (1), a person against whom a

17 judgment is entered in any private action arising

18 under this title shall be liable solely for the portion

19 of the judgment that corresponds to the percentage of

20 responsibility of that person, as determined under

21 subsection (c).

22 ‘‘(3) KNOWING SECURITIES FRAUD.—For pur23 poses of this section—

24 ‘‘(A) a defendant engages in ‘knowing secu25 rities fraud’ if that defendant—
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1 ‘‘(i) makes a material representation

2 with actual knowledge that the representa3 tion is false, or omits to make a statement

4 with actual knowledge that, as a result of

5 the omission, one of the material representa6 tions of the defendant is false; and

7 ‘‘(ii) actually knows that persons are

8 likely to rely on that misrepresentation or

9 omission; and

10 ‘‘(B) reckless conduct by the defendant shall

11 not be construed to constitute knowing securities

12 fraud.

13 ‘‘(c) DETERMINATION OF RESPONSIBILITY.—

14 ‘‘(1) IN GENERAL.—In any private action aris15 ing under this title in which more than 1 person is

16 alleged to have violated a provision of this title, the

17 court shall instruct the jury to answer special inter18 rogatories, or if there is no jury, shall make findings,

19 concerning—

20 ‘‘(A) the percentage of responsibility of each

21 of the defendants and of each of the other persons

22 alleged by any of the parties to have caused or

23 contributed to the violation, including persons

24 who have entered into settlements with the plain25 tiff or plaintiffs, measured as a percentage of the
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1 total fault of all persons who caused or contrib2 uted to the violation; and

3 ‘‘(B) whether such defendant committed

4 knowing securities fraud.

5 ‘‘(2) CONTENTS OF SPECIAL INTERROGATORIES

6 OR FINDINGS.—The responses to interrogatories, or

7 findings, as appropriate, under paragraph (1) shall

8 specify the total amount of damages that the plaintiff

9 is entitled to recover and the percentage of respon10 sibility of each person found to have caused or con11 tributed to the damages sustained by the plaintiff or

12 plaintiffs.

13 ‘‘(3) FACTORS FOR CONSIDERATION.—In deter14 mining the percentage of responsibility under this

15 subsection, the trier of fact shall consider—

16 ‘‘(A) the nature of the conduct of each per17 son; and

18 ‘‘(B) the nature and extent of the causal re19 lationship between that conduct and the damages

20 incurred by the plaintiff or plaintiffs.

21 ‘‘(d) UNCOLLECTIBLE SHARE.—

22 ‘‘(1) IN GENERAL.—Notwithstanding subsection

23 (b)(2), in any private action arising under this title,

24 if, upon motion made not later than 6 months after

25 a final judgment is entered, the court determines that
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1 all or part of a defendant’s share of the judgment is

2 not collectible against that defendant or against a de3 fendant described in subsection (b)(1), each defendant

4 described in subsection (b)(2) shall be liable for the

5 uncollectible share as follows:

6 ‘‘(A) PERCENTAGE OF NET WORTH.—Each

7 defendant shall be jointly and severally liable for

8 the uncollectible share if the plaintiff establishes

9 that—

10 ‘‘(i) the plaintiff is an individual

11 whose recoverable damages under the final

12 judgment are equal to more than 10 percent

13 of the net financial worth of the plaintiff;

14 and

15 ‘‘(ii) the net financial worth of the

16 plaintiff is equal to less than $200,000.

17 ‘‘(B) OTHER PLAINTIFFS.—With respect to

18 any plaintiff not described in subparagraph (A),

19 each defendant shall be liable for the uncollectible

20 share in proportion to the percentage of respon21 sibility of that defendant, except that the total li22 ability under this subparagraph may not exceed

23 50 percent of the proportionate share of that de24 fendant, as determined under subsection (c)(2).
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1 ‘‘(2) OVERALL LIMIT.—In no case shall the total

2 payments required pursuant to paragraph (1) exceed

3 the amount of the uncollectible share.

4 ‘‘(3) DEFENDANTS SUBJECT TO CONTRIBU5 TION.—A defendant against whom judgment is not

6 collectible shall be subject to contribution and to any

7 continuing liability to the plaintiff on the judgment.

8 ‘‘(e) RIGHT OF CONTRIBUTION.—To the extent that a

9 defendant is required to make an additional payment pur10 suant to subsection (d), that defendant may recover con11 tribution—

12 ‘‘(1) from the defendant originally liable to make

13 the payment;

14 ‘‘(2) from any defendant liable jointly and sever15 ally pursuant to subsection (b)(1);

16 ‘‘(3) from any defendant held proportionately

17 liable pursuant to this subsection who is liable to

18 make the same payment and has paid less than his

19 or her proportionate share of that payment; or

20 ‘‘(4) from any other person responsible for the

21 conduct giving rise to the payment that would have

22 been liable to make the same payment.

23 ‘‘(f) NONDISCLOSURE TO JURY.—The standard for al24 location of damages under subsections (b) and (c) and the
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1 procedure for reallocation of uncollectible shares under sub2 section (d) shall not be disclosed to members of the jury.

3 ‘‘(g) SETTLEMENT DISCHARGE.—

4 ‘‘(1) IN GENERAL.—A defendant who settles any

5 private action arising under this title at any time be6 fore final verdict or judgment shall be discharged

7 from all claims for contribution brought by other per8 sons. Upon entry of the settlement by the court, the

9 court shall enter a bar order constituting the final

10 discharge of all obligations to the plaintiff of the set11 tling defendant arising out of the action. The order

12 shall bar all future claims for contribution arising

13 out of the action—

14 ‘‘(A) by any person against the settling de15 fendant; and

16 ‘‘(B) by the settling defendant against any

17 person, other than a person whose liability has

18 been extinguished by the settlement of the settling

19 defendant.

20 ‘‘(2) REDUCTION.—If a person enters into a set21 tlement with the plaintiff prior to final verdict or

22 judgment, the verdict or judgment shall be reduced by

23 the greater of—

24 ‘‘(A) an amount that corresponds to the per25 centage of responsibility of that person; or
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1 ‘‘(B) the amount paid to the plaintiff by

2 that person.

3 ‘‘(h) CONTRIBUTION.—A person who becomes liable for

4 damages in any private action arising under this title may

5 recover contribution from any other person who, if joined

6 in the original action, would have been liable for the same

7 damages. A claim for contribution shall be determined

8 based on the percentage of responsibility of the claimant

9 and of each person against whom a claim for contribution

10 is made.

11 ‘‘(i) STATUTE OF LIMITATIONS FOR CONTRIBUTION.—

12 Once judgment has been entered in any private action aris13 ing under this title determining liability, an action for con14 tribution shall be brought not later than 6 months after the

15 entry of a final, nonappealable judgment in the action, ex16 cept that an action for contribution brought by a defendant

17 who was required to make an additional payment pursuant

18 to subsection (d) may be brought not later than 6 months

19 after the date on which such payment was made.’’.

20 SEC. 203. APPLICABILITY.

21 The amendments made by this title shall not affect or

22 apply to any private action arising under title I of the Se23 curities Exchange Act of 1934 commenced before the date

24 of enactment of this Act.
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1 TITLE III—AUDITOR DISCLO2 SURE OF CORPORATE FRAUD

3 SEC. 301. FRAUD DETECTION AND DISCLOSURE.

4 (a) IN GENERAL.—The Securities Exchange Act of

5 1934 (15 U.S.C. 78a et seq.) is amended by inserting imme6 diately after section 10 the following new section:

7 ‘‘SEC. 10A. AUDIT REQUIREMENTS.

8 ‘‘(a) IN GENERAL.—Each audit required pursuant to

9 this title of the financial statements of an issuer by an inde10 pendent public accountant shall include, in accordance with

11 generally accepted auditing standards, as may be modified

12 or supplemented from time to time by the Commission—

13 ‘‘(1) procedures designed to provide reasonable

14 assurance of detecting illegal acts that would have a

15 direct and material effect on the determination of fi16 nancial statement amounts;

17 ‘‘(2) procedures designed to identify related

18 party transactions that are material to the financial

19 statements or otherwise require disclosure therein; and

20 ‘‘(3) an evaluation of whether there is substan21 tial doubt about the ability of the issuer to continue

22 as a going concern during the ensuing fiscal year.

23 ‘‘(b) REQUIRED RESPONSE TO AUDIT DISCOVERIES.—

24 ‘‘(1) INVESTIGATION AND REPORT TO MANAGE25 MENT.—If, in the course of conducting an audit pur-
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1 suant to this title to which subsection (a) applies, the

2 independent public accountant detects or otherwise be3 comes aware of information indicating that an illegal

4 act (whether or not perceived to have a material effect

5 on the financial statements of the issuer) has or may

6 have occurred, the accountant shall, in accordance

7 with generally accepted auditing standards, as may

8 be modified or supplemented from time to time by the

9 Commission—

10 ‘‘(A)(i) determine whether it is likely that

11 an illegal act has occurred; and

12 ‘‘(ii) if so, determine and consider the pos13 sible effect of the illegal act on the financial

14 statements of the issuer, including any contin15 gent monetary effects, such as fines, penalties,

16 and damages; and

17 ‘‘(B) as soon as practicable, inform the ap18 propriate level of the management of the issuer

19 and assure that the audit committee of the is20 suer, or the board of directors of the issuer in the

21 absence of such a committee, is adequately in22 formed with respect to illegal acts that have been

23 detected or have otherwise come to the attention

24 of such accountant in the course of the audit, un25 less the illegal act is clearly inconsequential.
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1 ‘‘(2) RESPONSE TO FAILURE TO TAKE REMEDIAL

2 ACTION.—If, after determining that the audit commit3 tee of the board of directors of the issuer, or the board

4 of directors of the issuer in the absence of an audit

5 committee, is adequately informed with respect to ille6 gal acts that have been detected or have otherwise

7 come to the attention of the accountant in the course

8 of the audit of such accountant, the independent pub9 lic accountant concludes that—

10 ‘‘(A) the illegal act has a material effect on

11 the financial statements of the issuer;

12 ‘‘(B) the senior management has not taken,

13 and the board of directors has not caused senior

14 management to take, timely and appropriate re15 medial actions with respect to the illegal act;

16 and

17 ‘‘(C) the failure to take remedial action is

18 reasonably expected to warrant departure from a

19 standard report of the auditor, when made, or

20 warrant resignation from the audit engagement;

21 the independent public accountant shall, as soon as

22 practicable, directly report its conclusions to the

23 board of directors.

24 ‘‘(3) NOTICE TO COMMISSION; RESPONSE TO

25 FAILURE TO NOTIFY.—An issuer whose board of direc-
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1 tors receives a report under paragraph (2) shall in2 form the Commission by notice not later than 1 busi3 ness day after the receipt of such report and shall fur4 nish the independent public accountant making such

5 report with a copy of the notice furnished to the Com6 mission. If the independent public accountant fails to

7 receive a copy of the notice before the expiration of the

8 required 1-business-day period, the independent pub9 lic accountant shall—

10 ‘‘(A) resign from the engagement; or

11 ‘‘(B) furnish to the Commission a copy of

12 its report (or the documentation of any oral re13 port given) not later than 1 business day follow14 ing such failure to receive notice.

15 ‘‘(4) REPORT AFTER RESIGNATION.—If an inde16 pendent public accountant resigns from an engage17 ment under paragraph (3)(A), the accountant shall,

18 not later than 1 business day following the failure by

19 the issuer to notify the Commission under paragraph

20 (3), furnish to the Commission a copy of the account21 ant’s report (or the documentation of any oral report

22 given).

23 ‘‘(c) AUDITOR LIABILITY LIMITATION.—No independ24 ent public accountant shall be liable in a private action

25 for any finding, conclusion, or statement expressed in a re-
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1 port made pursuant to paragraph (3) or (4) of subsection

2 (b), including any rule promulgated pursuant thereto.

3 ‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO4 CEEDINGS.—If the Commission finds, after notice and op5 portunity for hearing in a proceeding instituted pursuant

6 to section 21C, that an independent public accountant has

7 willfully violated paragraph (3) or (4) of subsection (b), the

8 Commission may, in addition to entering an order under

9 section 21C, impose a civil penalty against the independent

10 public accountant and any other person that the Commis11 sion finds was a cause of such violation. The determination

12 to impose a civil penalty and the amount of the penalty

13 shall be governed by the standards set forth in section 21B.

14 ‘‘(e) PRESERVATION OF EXISTING AUTHORITY.—Ex15 cept as provided in subsection (d), nothing in this section

16 shall be held to limit or otherwise affect the authority of

17 the Commission under this title.

18 ‘‘(f) DEFINITION.—As used in this section, the term ‘il19 legal act’ means an act or omission that violates any law,

20 or any rule or regulation having the force of law.’’.

21 (b) EFFECTIVE DATES.—The amendment made by

22 subsection (a) shall apply to each annual report—

23 (1) for any period beginning on or after Janu24 ary 1, 1996, with respect to any registrant that is re25 quired to file selected quarterly financial data pursu-
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1 ant to the rules or regulations of the Securities and

2 Exchange Commission; and

3 (2) for any period beginning on or after Janu4 ary 1, 1997, with respect to any other registrant.

Amend the title so as to read: ‘‘An Act to amend the

Federal securities laws to curb certain abusive practices

in private securities litigation, and for other purposes.’’.

Attest:

Secretary.
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104TH CONGRESS

1ST SESSION H. R. 1058

AMENDMENTS