I

104TH CONGRESS

1ST SESSION H. R. 681

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 25, 1995

Mr. TAUZIN (for himself, Mr. HALL of Texas, Mr. TOWNS, Mr. RUSH, and

Mr. BROWN of Ohio) introduced the following bill; which was referred to

the Committee on Commerce and, in addition, to the Committee on the

Judiciary, for a period to be subsequently determined by the Speaker, in

each case for consideration of such provisions as fall within the jurisdiction of the committee concerned

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,

3 SECTION. 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Securities Private En5 forcement Reform Act’’.

6 SEC. 2. FINDINGS.

7 The Congress finds that—
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1 (1) excessive securities litigation is a serious

2 burden on the national economy, diverting limited

3 capital resources to less productive areas;

4 (2) meritless lawsuits filed under Federal secu5 rities laws are making it harder for American com6 panies to raise capital and attract experienced mem7 bers to serve on their boards;

8 (3) in the securities fraud area, the civil justice

9 system is being transformed into a nonmerit-based,

10 unjust system, in which professional plaintiffs ex11 tract settlements from entrepreneurs, regardless of

12 the merits of the cases filed;

13 (4) such securities lawsuits impose additional

14 costs on publicly traded companies, often force them

15 into bankruptcy, and create job losses within the

16 economy;

17 (5) such securities fraud lawsuits stifle the de18 velopment of future products by compelling invest19 ment bankers and accounting firms, whose assist20 ance is essential for accessing capital markets, to re21 sist working with new venture firms because of the

22 higher risk of litigation associated with them; and

23 (6) reform in the securities fraud laws are need24 ed to ensure that the courts can properly hear and

25 adjudicate securities fraud cases.
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1 SEC. 3. PRIVATE CIVIL ACTION PROCEDURES.

2 The Securities Exchange Act of 1934 is amended by

3 inserting after section 20A (15 U.S.C. 78u–1) the follow4 ing new section:

5 ‘‘PRIVATE CIVIL ACTION PROCEDURES

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

7 LIABILITY.—

8 ‘‘(1) LIMITATION ON JOINT AND SEVERAL LI9 ABILITY.—A defendant who is found liable for dam10 ages in an implied private action arising under a

11 provision of this Act may be liable jointly and sever12 ally only if the trier of fact specifically determines

13 that the defendant engaged in knowing securities

14 fraud, as defined in paragraph (3).

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

16 trier of fact does not find, pursuant to paragraph

17 (1), that the defendant engaged in knowing securi18 ties fraud, the defendant’s liability shall be deter19 mined as follows:

20 ‘‘(A) The trier of fact shall determine the

21 percentage of responsibility of the plaintiff, of

22 each of the defendants and of each of the other

23 persons or entities alleged by the parties to

24 have caused or contributed to the harm alleged

25 by the plaintiff. In determining the percentages

26 of responsibility, the trier of fact shall consider
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1 both the nature of the conduct of each person

2 and the nature and extent of the causal rela3 tionship between that conduct and the damage

4 claimed by the plaintiff.

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

6 shall then multiply the defendant’s percentage

7 of responsibility by the total amount of damage

8 suffered by the plaintiff that was caused in

9 whole or in part by that defendant and shall

10 enter a verdict or judgment against the defend11 ant in that amount. No defendant whose liabil12 ity is determined under this subsection shall be

13 jointly liable on any judgment entered against

14 any other party to the action.

15 ‘‘(C) Except where contractual relationship

16 permits, no defendant whose liability is deter17 mined under this subsection shall have a right

18 to recover from another defendant any portion

19 of the judgment entered against him.

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

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

22 material representation with actual knowledge that

23 the representation is false or omits to make a state24 ment with actual knowledge that, as a result of the

25 omission, one of his material representations is false;
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1 and (B) knows that other persons are likely to rely

2 on that misrepresentation or omission. Reckless con3 duct by the defendant shall not constitute ‘knowing

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

5 a defendant who acts in a reckless manner shall be

6 determined in accordance with paragraph (3).

7 ‘‘(4) COVERAGE OF PROVISION.—This sub8 section relates only to the allocation of damages

9 among defendants. Nothing herein shall affect the

10 standards for liability under any implied private ac11 tion arising under a provision of this Act.

12 ‘‘(b) AWARDS OF ATTORNEY FEES.—

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

14 court in any implied private action arising under this

15 Act enters a final judgment against a party litigant

16 on the basis of a motion to dismiss, motion for sum17 mary judgment, or a trial on the merits, the court

18 shall, upon motion by the prevailing party, award

19 the prevailing party reasonable fees and other ex20 penses incurred by that party unless the court deter21 mines that the position of the losing party was sub22 stantially justified. If the court determines that the

23 position of the losing party was substantially justi24 fied, it shall not award fees and other expenses to

25 the prevailing party. The determination whether the
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1 position of the losing party was substantially justi2 fied shall be made on the basis of the record which

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

4 expenses are sought.

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

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

7 days of a final, nonappealable judgment in the ac8 tion, submit to the court an application for fees and

9 other expenses that verifies that the party is entitled

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

11 amount sought, including an itemized statement

12 from any attorney or expert witness representing or

13 appearing on behalf of the party stating the actual

14 time expended and the rate at which fees and other

15 expenses are computed.

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

17 court, in its discretion, may—

18 ‘‘(A) determine whether the amount to be

19 awarded pursuant to this section shall be

20 awarded against the unsuccessful party, its at21 torney, or both; and

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

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

24 the extent that the prevailing party during the

25 course of the proceedings engaged in conduct
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1 that unduly and unreasonably protracted the

2 final resolution of the matter in controversy.

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

4 In adjudicating any motion for an order compelling

5 discovery or any motion for a protective order made

6 in any implied private action arising under this Act,

7 the court shall award the prevailing party reasonable

8 fees and other expenses incurred by the party in

9 bringing or defending against the motion, including

10 reasonable attorney fees, unless the court finds that

11 special circumstances make an award unjust.

12 ‘‘(5) DEFINITIONS.—For purposes of this sub13 section—

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

15 includes the reasonable expenses of expert wit16 nesses, the reasonable cost of any study, analy17 sis, report, test, or project which is found by

18 the court to be necessary for the preparation of

19 the party’s case, and reasonable attorney fees

20 and expenses. The amount of fees awarded

21 under this section shall be based upon prevail22 ing market rates for the kind and quality of

23 services furnished.
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1 ‘‘(B) The term ‘substantially justified’

2 shall have the same meaning as in section

3 2412(d)(1) of title 28, United States Code.

4 ‘‘(c) ABUSIVE PRACTICES..—

5 ‘‘(1) SHARES OF AWARDS TO REPRESENTATIVE

6 PLAINTIFFS.—In any implied private action arising

7 under this Act that is certified as a plaintiff class

8 action pursuant to the Federal rules of civil proce9 dures, the share of any final judgment or of any set10 tlement that is awarded to any party serving as a

11 representative plaintiff shall be calculated in the

12 same manner as the shares of the final judgment or

13 settlement awarded to all other members of the

14 plaintiff class.

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

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

17 Act that is certified as a plaintiff class action pursu18 ant to the Federal rules of civil procedure, the plain19 tiff class may not be represented by (i) any attorney

20 who directly or indirectly owned or otherwise had a

21 beneficial interest in the securities that are the sub22 ject of the litigation, or (ii) any attorney affiliated

23 with such an attorney. An attorney who knowingly

24 violates this prohibition shall be barred from rep-
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1 resenting any party in any action arising under this

2 Act or under the Securities Act of 1933.

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

4 under this Act that is certified as a plaintiff class

5 action, an attorney may not represent the plaintiff

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

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

8 the representation of any party to the action. An at9 torney who knowingly violates this prohibition shall

10 be barred from representing any party in any action

11 arising under this Act or under the Securities Act of

12 1933.

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

14 as a result of any action brought by the Commission

15 in Federal court or of any Commission administra16 tive action shall not be distributed as payment for

17 attorney fees or expenses incurred by private parties

18 seeking distribution of the disgorged funds.

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

20 in any implied private action arising under this Act

21 shall be diminished by the amounts, if any, that

22 such person has been or may be required to dis23 gorge, pursuant to a court order obtained at the in24 stance of the Commission in a proceeding brought

25 under section 21(d) of this Act, or in connection
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1 with any Commission administrative action, relating

2 to the same alleged misconduct.

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

4 action arising under this Act in which the plaintiff may

5 recover money damages only if it proves that the defend6 ant acted with scienter, the plaintiff must establish that

7 element of his claim by clear and convincing evidence in

8 order to establish a right to recover money damages.

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

10 cause of action arising under this Act in which the plain11 tiff may recover money damages only if it proves that the

12 defendant acted with scienter, the plaintiff must allege in

13 its complaint facts suggesting that the defendant acted

14 with that state of mind.

15 ‘‘(f) AIDING AND ABETTING LIABILITY.—In any im16 plied cause of action arising under this Act in which the

17 plaintiff may recover damages only if it proves that the

18 defendant acted with scienter, a defendant may be held

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

20 that the defendant knew that another party had violated

21 a provision of this Act and that the defendant, acting with

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

23 defendant’s own direct pecuniary benefit, provided sub24 stantial assistance to the other party’s violation. Direct
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1 pecuniary benefit shall not include ordinary compensation

2 for services provided.’’.

3 SEC. 4. EFFECTIVE DATE.

4 The provisions of this Act shall apply to all actions

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

6 Act.

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