I

103D CONGRESS

1ST SESSION H. R. 417

To amend the Securities Exchange Act of 1934 in order to reform private

enforcement of the Federal securities laws, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 5, 1993

Mr. TAUZIN (for himself, Mr. PARKER, Mr. HALL of Texas Mr. ROWLAND,

Mr. MONTGOMERY, Mr. SHAW, Mr. MACHTLEY, and Mr. MORAN) introduced the following bill; which was read twice and referred to the Committee on Energy and Commerce

AUGUST 23, 1993

Additional sponsors: Mr. PETERSON of Minnesota, Mr. KYL, Mr. MCMILLAN,

Mr. SUNDQUIST, Mr. HENRY, Mr. BURTON of Indiana, Mr. PORTER, Mr.

LINDER, Mr. PAXON, Mr. RUSH, Mr. SCHAEFER, Mr. HASTERT, Mr.

UPTON, Mr. PALLONE, Mr. TOWNS, Mr. MCNULTY, Mr. NEAL of North

Carolina, Mr. MOORHEAD, Mr. GILLMOR, Mr. GENE GREEN of Texas,

Mr. MICHEL, Mr. ZELIFF, Mr. EWING, Mrs. JOHNSON of Connecticut,

Mr. HYDE, Ms. LONG, Mr. DURBIN, Mr. BAESLER, Mr. FRANKS of Connecticut, Mr. GUTIERREZ, Mr. CRANE, Mr. QUILLEN, Mr. BARCIA of

Michigan, and Mr. BAKER of Louisiana

A BILL

To amend the Securities Exchange Act of 1934 in order

to reform private enforcement of the Federal securities

laws, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,
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1 SECTION. 1. SHORT TITLE.

2 This Act may be cited as the ‘‘Securities Private En3 forcement Reform Act’’.

4 SEC. 2. FINDINGS.

5 The Congress finds that—

6 (1) excessive securities litigation is a serious

7 burden on the national economy, diverting limited

8 capital resources to less productive areas;

9 (2) meritless lawsuits filed under Federal secu10 rities laws are making it harder for American com11 panies to raise capital and attract experienced mem12 bers to serve on their boards;

13 (3) in the past 3 years, issuers of 1 out of every

14 12 stocks traded on the New York Stock Exchange

15 have been sued for securities fraud;

16 (4) in the securities fraud area, the civil justice

17 system is being transformed into a nonmerit-based,

18 unjust system, in which professional plaintiffs ex19 tract settlements from entrepreneurs, regardless of

20 the merits of the cases filed;

21 (5) such securities lawsuits impose additional

22 costs on publicly traded companies, often force them

23 into bankruptcy, and create job losses within the

24 economy;

25 (6) such securities fraud lawsuits stifle the de26 velopment of future products by compelling invest-
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1 ment bankers and accounting firms, whose assist2 ance is essential for accessing capital markets, to re3 sist working with new venture firms because of the

4 higher risk of litigation associated with them; and

5 (7) reform in the securities fraud laws are need6 ed to ensure that the courts can properly hear and

7 adjudicate securities fraud cases.

8 SEC. 3. PRIVATE CIVIL ACTION PROCEDURES.

9 The Securities Exchange Act of 1934 is amended by

10 inserting after section 20A (15 U.S.C. 78u–1) the follow11 ing new section:

12 ‘‘PRIVATE CIVIL ACTION PROCEDURES

13 ‘‘SEC. 20B. (a) REQUIREMENT OF PROPORTIONATE

14 LIABILITY.—

15 ‘‘(1) LIMITATION ON JOINT AND SEVERAL LI16 ABILITY.—A defendant who is found liable for dam17 ages in an implied private action arising under a

18 provision of this Act may be liable jointly and sever19 ally only if the trier of fact specifically determines

20 that the defendant engaged in knowing securities

21 fraud, as defined in paragraph (3).

22 ‘‘(2) DETERMINATION OF LIABILITY.—If the

23 trier of fact does not find, pursuant to paragraph

24 (1), that the defendant engaged in knowing securi25 ties fraud, the defendant’s liability shall be deter26 mined as follows:
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1 ‘‘(A) The trier of fact shall determine the

2 percentage of responsibility of the plaintiff, of

3 each of the defendants and of each of the other

4 persons or entities alleged by the parties to

5 have caused or contributed to the harm alleged

6 by the plaintiff. In determining the percentages

7 of responsibility, the trier of fact shall consider

8 both the nature of the conduct of each person

9 and the nature and extent of the causal rela10 tionship between that conduct and the damage

11 claimed by the plaintiff.

12 ‘‘(B) For each defendant, the trier of fact

13 shall then multiply the defendant’s percentage

14 of responsibility by the total amount of damage

15 suffered by the plaintiff that was caused in

16 whole or in part by that defendant and shall

17 enter a verdict or judgment against the defend18 ant in that amount. No defendant whose liabil19 ity is determined under this subsection shall be

20 jointly liable on any judgment entered against

21 any other party to the action.

22 ‘‘(C) Except where contractual relationship

23 permits, no defendant whose liability is deter24 mined under this subsection shall have a right
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1 to recover from another defendant any portion

2 of the judgment entered against him.

3 ‘‘(3) DEFINITION.—A defendant engages in

4 ‘knowing securities fraud’ only if he (A) makes a

5 material representation with actual knowledge that

6 the representation is false or omits to make a state7 ment with actual knowledge that, as a result of the

8 omission, one of his material representations is false;

9 and (B) knows that other persons are likely to rely

10 on that misrepresentation or omission. Reckless con11 duct by the defendant shall not constitute ‘knowing

12 securities fraud’. The liability in damages, in any, of

13 a defendant who acts in a reckless manner shall be

14 determined in accordance with paragraph (3).

15 ‘‘(4) COVERAGE OF PROVISION.—This sub16 section relates only to the allocation of damages

17 among defendants. Nothing herein shall affect the

18 standards for liability under any implied private ac19 tion arising under a provision of this Act.

20 ‘‘(b) AWARDS OF ATTORNEY FEES.—

21 ‘‘(1) AUTHORITY TO AWARD FEES.—If the

22 court in any implied private action arising under this

23 Act enters a final judgment against a party litigant

24 on the basis of a motion to dismiss, motion for sum25 mary judgment, or a trial on the merits, the court
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1 shall, upon motion by the prevailing party, award

2 the prevailing party reasonable fees and other ex3 penses incurred by that party unless the court deter4 mines that the position of the losing party was sub5 stantially justified. If the court determines that the

6 position of the losing party was substantially justi7 fied, it shall not award fees and other expenses to

8 the prevailing party. The determination whether the

9 position of the losing party was substantially justi10 fied shall be made on the basis of the record which

11 is made in the civil action for which fees and other

12 expenses are sought.

13 ‘‘(2) APPLICATION FOR FEES.—A party seeking

14 an award of fees and other expenses shall, within 30

15 days of a final, nonappealable judgment in the ac16 tion, submit to the court an application for fees and

17 other expenses that verifies that the party is entitled

18 to such an award under paragraph (1) and the

19 amount sought, including an itemized statement

20 from any attorney or expert witness representing or

21 appearing on behalf of the party stating the actual

22 time expended and the rate at which fees and other

23 expenses are computed.

24 ‘‘(3) ALLOCATION AND SIZE OF AWARD.—The

25 court, in its discretion, may—
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1 ‘‘(A) determine whether the amount to be

2 awarded pursuant to this section shall be

3 awarded against the unsuccessful party, its at4 torney, or both; and

5 ‘‘(B) reduce the amount to be awarded

6 pursuant to this section, or deny an award, to

7 the extent that the prevailing party during the

8 course of the proceedings engaged in conduct

9 that unduly and unreasonably protracted the

10 final resolution of the matter in controversy.

11 ‘‘(4) AWARDS IN DISCOVERY PROCEEDINGS.—

12 In adjudicating any motion for an order compelling

13 discovery or any motion for a protective order made

14 in any implied private action arising under this Act,

15 the court shall award the prevailing party reasonable

16 fees and other expenses incurred by the party in

17 bringing or defending against the motion, including

18 reasonable attorney fees, unless the court finds that

19 special circumstances make an award unjust.

20 ‘‘(5) DEFINITIONS.—For purposes of this sub21 section—

22 ‘‘(A) The term ‘fees and other expenses’

23 includes the reasonable expenses of expert wit24 nesses, the reasonable cost of any study, analy25 sis, report, test, or project which is found by
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1 the court to be necessary for the preparation of

2 the party’s case, and reasonable attorney fees

3 and expenses. The amount of fees awarded

4 under this section shall be based upon prevail5 ing market rates for the kind and quality of

6 services furnished.

7 ‘‘(B) The term ‘substantially justified’

8 shall have the same meaning as in section

9 2412(d)(1) of title 28, United States Code.

10 ‘‘(c) ABUSIVE PRACTICES..—

11 ‘‘(1) SHARES OF AWARDS TO REPRESENTATIVE

12 PLAINTIFFS.—In any implied private action arising

13 under this Act that is certified as a plaintiff class

14 action pursuant to the Federal rules of civil proce15 dures, the share of any final judgment or of any set16 tlement that is awarded to any party serving as a

17 representative plaintiff shall be calculated in the

18 same manner as the shares of the final judgment or

19 settlement awarded to all other members of the

20 plaintiff class.

21 ‘‘(2) REPRESENTATION OF CLASS ACTIONS.—

22 (A) In any implied private action arising under this

23 Act that is certified as a plaintiff class action pursu24 ant to the Federal rules of civil procedure, the plain25 tiff class may not be represented by (i) any attorney
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1 who directly or indirectly owned or otherwise had a

2 beneficial interest in the securities that are the sub3 ject of the litigation, or (ii) any attorney affiliated

4 with such an attorney. An attorney who knowingly

5 violates this prohibition shall be barred from rep6 resenting any party in any action arising under this

7 Act or under the Securities Act of 1933.

8 ‘‘(B) In any implied private action arising

9 under this Act that is certified as a plaintiff class

10 action, an attorney may not represent the plaintiff

11 class if the attorney has paid or is obligated to pay

12 a fee to a third party who assisted him in obtaining

13 the representation of any party to the action. An at14 torney who knowingly violates this prohibition shall

15 be barred from representing any party in any action

16 arising under this Act or under the Securities Act of

17 1933.

18 ‘‘(3) DISGORGED FUNDS.—(A) Funds disgorged

19 as a result of any action brought by the Commission

20 in Federal court or of any Commission administra21 tive action shall not be distributed as payment for

22 attorney fees or expenses incurred by private parties

23 seeking distribution of the disgorged funds.

24 ‘‘(B) Any judgment awarded against any person

25 in any implied private action arising under this Act
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1 shall be diminished by the amounts, if any, that

2 such person has been or may be required to dis3 gorge, pursuant to a court order obtained at the in4 stance of the Commission in a proceeding brought

5 under section 21(d) of this Act, or in connection

6 with any Commission administrative action, relating

7 to the same alleged misconduct.

8 ‘‘(d) BURDEN OF PROOF.—In any implied cause of

9 action arising under this Act in which the plaintiff may

10 recover money damages only if it proves that the defend11 ant acted with scienter, the plaintiff must establish that

12 element of his claim by clear and convincing evidence in

13 order to establish a right to recover money damages.

14 ‘‘(e) PLEADING REQUIREMENT.—In any implied

15 cause of action arising under this Act in which the plain16 tiff may recover money damages only if it proves that the

17 defendant acted with scienter, the plaintiff must allege in

18 its complaint facts suggesting that the defendant acted

19 with that state of mind.

20 ‘‘(f) AIDING AND ABETTING LIABILITY.—In any im21 plied cause of action arising under this Act in which the

22 plaintiff may recover damages only if it proves that the

23 defendant acted with scienter, a defendant may be held

24 liable as an aider and abettor only if the plaintiff proves

25 that the defendant knew that another party had violated
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1 a provision of this Act and that the defendant, acting with

2 deliberate intent to deceive, manipulate, or defraud for the

3 defendant’s own direct pecuniary benefit, provided sub4 stantial assistance to the other party’s violation. Direct

5 pecuniary benefit shall not include ordinary compensation

6 for services provided.’’.

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

8 The Securities Exchange Act of 1934 (15 U.S.C. 78a

9 et seq.) is amended by adding at the end the following

10 new section:

11 ‘‘SEC. 36. LIMITATION ON PRIVATE RIGHTS OF ACTION.

12 ‘‘Except as otherwise provided in this Act, any pri13 vate right of action arising from a violation of this Act

14 shall be brought not later than the earlier of—

15 ‘‘(1) 5 years after the date on which such viola16 tion occurred; or

17 ‘‘(2) one year after the date on which the viola18 tion was discovered or should have been discovered

19 through the exercise of reasonable diligence.’’.

20 SEC. 5. EFFECTIVE DATE.

21 The provisions of this Act shall apply to all actions

22 commenced on or after the date of the enactment of this

23 Act.

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