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) intro-
duced the following bill; which was read twice and referred to the Com-
mittee 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 Con-
necticut, 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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION. 1. SHORT TITLE.
This Act may be cited as the ‘‘Securities Private En-
forcement Reform Act’’.
SEC. 2. FINDINGS.
The Congress finds that—
(1) excessive securities litigation is a serious
burden on the national economy, diverting limited
capital resources to less productive areas;
(2) meritless lawsuits filed under Federal secu-
rities laws are making it harder for American com-
panies to raise capital and attract experienced mem-
bers to serve on their boards;
(3) in the past 3 years, issuers of 1 out of every
12 stocks traded on the New York Stock Exchange
have been sued for securities fraud;
(4) in the securities fraud area, the civil justice
system is being transformed into a nonmerit-based,
unjust system, in which professional plaintiffs ex-
tract settlements from entrepreneurs, regardless of
the merits of the cases filed;
(5) such securities lawsuits impose additional
costs on publicly traded companies, often force them
into bankruptcy, and create job losses within the
economy;
(6) such securities fraud lawsuits stifle the de-
velopment of future products by compelling invest-
ment bankers and accounting firms, whose assist-
ance is essential for accessing capital markets, to re-
sist working with new venture firms because of the
higher risk of litigation associated with them; and
(7) reform in the securities fraud laws are need-
ed to ensure that the courts can properly hear and
adjudicate securities fraud cases.
SEC. 3. PRIVATE CIVIL ACTION PROCEDURES.
The Securities Exchange Act of 1934 is amended by
inserting after section 20A (15 U.S.C. 78u–1) the follow-
ing new section:
‘‘PRIVATE CIVIL ACTION PROCEDURES
‘‘SEC. 20B. (a) REQUIREMENT OF PROPORTIONATE
LIABILITY.—
‘‘(1) LIMITATION ON JOINT AND SEVERAL LI-
ABILITY.—A defendant who is found liable for dam-
ages in an implied private action arising under a
provision of this Act may be liable jointly and sever-
ally only if the trier of fact specifically determines
that the defendant engaged in knowing securities
fraud, as defined in paragraph (3).
‘‘(2) DETERMINATION
OF
LIABILITY.—If the
trier of fact does not find, pursuant to paragraph
(1), that the defendant engaged in knowing securi-
ties fraud, the defendant’s liability shall be deter-
mined as follows:
‘‘(A) The trier of fact shall determine the
percentage of responsibility of the plaintiff, of
each of the defendants and of each of the other
persons or entities alleged by the parties to
have caused or contributed to the harm alleged
by the plaintiff. In determining the percentages
of responsibility, the trier of fact shall consider
both the nature of the conduct of each person
and the nature and extent of the causal rela-
tionship between that conduct and the damage
claimed by the plaintiff.
‘‘(B) For each defendant, the trier of fact
shall then multiply the defendant’s percentage
of responsibility by the total amount of damage
suffered by the plaintiff that was caused in
whole or in part by that defendant and shall
enter a verdict or judgment against the defend-
ant in that amount. No defendant whose liabil-
ity is determined under this subsection shall be
jointly liable on any judgment entered against
any other party to the action.
‘‘(C) Except where contractual relationship
permits, no defendant whose liability is deter-
mined under this subsection shall have a right
to recover from another defendant any portion
of the judgment entered against him.
‘‘(3) DEFINITION.—A defendant engages in
‘knowing securities fraud’ only if he (A) makes a
material representation with actual knowledge that
the representation is false or omits to make a state-
ment with actual knowledge that, as a result of the
omission, one of his material representations is false;
and (B) knows that other persons are likely to rely
on that misrepresentation or omission. Reckless con-
duct by the defendant shall not constitute ‘knowing
securities fraud’. The liability in damages, in any, of
a defendant who acts in a reckless manner shall be
determined in accordance with paragraph (3).
‘‘(4) COVERAGE
OF
PROVISION.—This sub-
section relates only to the allocation of damages
among defendants. Nothing herein shall affect the
standards for liability under any implied private ac-
tion arising under a provision of this Act.
‘‘(b) AWARDS OF ATTORNEY FEES.—
‘‘(1) AUTHORITY
TO
AWARD
FEES.—If the
court in any implied private action arising under this
Act enters a final judgment against a party litigant
on the basis of a motion to dismiss, motion for sum-
mary judgment, or a trial on the merits, the court
shall, upon motion by the prevailing party, award
the prevailing party reasonable fees and other ex-
penses incurred by that party unless the court deter-
mines that the position of the losing party was sub-
stantially justified. If the court determines that the
position of the losing party was substantially justi-
fied, it shall not award fees and other expenses to
the prevailing party. The determination whether the
position of the losing party was substantially justi-
fied shall be made on the basis of the record which
is made in the civil action for which fees and other
expenses are sought.
‘‘(2) APPLICATION FOR FEES.—A party seeking
an award of fees and other expenses shall, within 30
days of a final, nonappealable judgment in the ac-
tion, submit to the court an application for fees and
other expenses that verifies that the party is entitled
to such an award under paragraph (1) and the
amount sought, including an itemized statement
from any attorney or expert witness representing or
appearing on behalf of the party stating the actual
time expended and the rate at which fees and other
expenses are computed.
‘‘(3) ALLOCATION AND SIZE OF AWARD.—The
court, in its discretion, may—
‘‘(A) determine whether the amount to be
awarded pursuant to this section shall be
awarded against the unsuccessful party, its at-
torney, or both; and
‘‘(B) reduce the amount to be awarded
pursuant to this section, or deny an award, to
the extent that the prevailing party during the
course of the proceedings engaged in conduct
that unduly and unreasonably protracted the
final resolution of the matter in controversy.
‘‘(4) AWARDS IN DISCOVERY PROCEEDINGS.—
In adjudicating any motion for an order compelling
discovery or any motion for a protective order made
in any implied private action arising under this Act,
the court shall award the prevailing party reasonable
fees and other expenses incurred by the party in
bringing or defending against the motion, including
reasonable attorney fees, unless the court finds that
special circumstances make an award unjust.
‘‘(5) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) The term ‘fees and other expenses’
includes the reasonable expenses of expert wit-
nesses, the reasonable cost of any study, analy-
sis, report, test, or project which is found by
the court to be necessary for the preparation of
the party’s case, and reasonable attorney fees
and expenses. The amount of fees awarded
under this section shall be based upon prevail-
ing market rates for the kind and quality of
services furnished.
‘‘(B) The term ‘substantially justified’
shall have the same meaning as in section
2412(d)(1) of title 28, United States Code.
‘‘(c) ABUSIVE PRACTICES..—
‘‘(1) SHARES OF AWARDS TO REPRESENTATIVE
PLAINTIFFS.—In any implied private action arising
under this Act that is certified as a plaintiff class
action pursuant to the Federal rules of civil proce-
dures, the share of any final judgment or of any set-
tlement that is awarded to any party serving as a
representative plaintiff shall be calculated in the
same manner as the shares of the final judgment or
settlement awarded to all other members of the
plaintiff class.
‘‘(2) REPRESENTATION OF CLASS ACTIONS.—
(A) In any implied private action arising under this
Act that is certified as a plaintiff class action pursu-
ant to the Federal rules of civil procedure, the plain-
tiff class may not be represented by (i) any attorney
who directly or indirectly owned or otherwise had a
beneficial interest in the securities that are the sub-
ject of the litigation, or (ii) any attorney affiliated
with such an attorney. An attorney who knowingly
violates this prohibition shall be barred from rep-
resenting any party in any action arising under this
Act or under the Securities Act of 1933.
‘‘(B) In any implied private action arising
under this Act that is certified as a plaintiff class
action, an attorney may not represent the plaintiff
class if the attorney has paid or is obligated to pay
a fee to a third party who assisted him in obtaining
the representation of any party to the action. An at-
torney who knowingly violates this prohibition shall
be barred from representing any party in any action
arising under this Act or under the Securities Act of
1933.
‘‘(3) DISGORGED FUNDS.—(A) Funds disgorged
as a result of any action brought by the Commission
in Federal court or of any Commission administra-
tive action shall not be distributed as payment for
attorney fees or expenses incurred by private parties
seeking distribution of the disgorged funds.
‘‘(B) Any judgment awarded against any person
in any implied private action arising under this Act
a provision of this Act and that the defendant, acting with
deliberate intent to deceive, manipulate, or defraud for the
defendant’s own direct pecuniary benefit, provided sub-
stantial assistance to the other party’s violation. Direct
pecuniary benefit shall not include ordinary compensation
for services provided.’’.
SEC. 4. TIME LIMITATION ON PRIVATE RIGHTS OF ACTION.
The Securities Exchange Act of 1934 (15 U.S.C. 78a
et seq.) is amended by adding at the end the following
new section:
‘‘SEC. 36. LIMITATION ON PRIVATE RIGHTS OF ACTION.
‘‘Except as otherwise provided in this Act, any pri-
vate right of action arising from a violation of this Act
shall be brought not later than the earlier of—
‘‘(1) 5 years after the date on which such viola-
tion occurred; or
‘‘(2) one year after the date on which the viola-
tion was discovered or should have been discovered
through the exercise of reasonable diligence.’’.
SEC. 5. EFFECTIVE DATE.
The provisions of this Act shall apply to all actions
commenced on or after the date of the enactment of this
Act.
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