Securities Litigation Reform Bill Is Now Law

Article excerpt

The House voted 319-100 and the Senate voted 68-30 to override President Bill Clinton's veto of a bill that will reduce the number of frivolous class action securities lawsuits. The Private Securities Litigation Reform Act of 1995 was drafted to reshape securities laws that professional investors and some class-action lawyers have used against corporations, accountants and securities underwriters to win billions of dollars in damages.

The president unexpectedly vetoed the bill after signaling earlier that he might sign it. Only days before the veto the president was seeking reassurance that the Securities and Exchange Commission would take administrative measures to protect the interests of small investors, according to White House aides. SEC chairman Arthur Levitt endorsed a safe harbor provision to shield companies from the legal liability for incorrect predictions.

American Institute of CPAs key persons, state CPA societies and national CPA firms urged members of Congress to support the reforms in the bill. "The passage of the securities legislation is a tremendous victory for both business and the CPA profession," said Barry C. Melancon, AICPA president. "The AICPA key persons program and the Accountants Coalition, a coalition of national CPA firms, deserve tremendous credit for the effort and support given to achieve this goal."

Perhaps the bill's strongest supporter in Congress, Senator Christopher J. Dodd (D-Conn.), urged both House and Senate Democrats to override Clinton's veto, even if it amounted to a defeat of the intent of his own party's president. In his veto message, Clinton said his main concern was that the bill's pleading requirements, which require the plaintiff to show that a defendant had the intent to defraud someone, imposed an "unacceptable procedural hurdle" to many worthy lawsuits.

Who benefits?

"This law will have major implications for accounting and underwriting firms and public companies, which typically are the first to be sued," said William Ezzell, chairman of the Accountants Coalition and partner of Deloitte Touche in Washington, D.C. "The law encourages the dissemination of forward-looking information to the marketplace in an appropriate, cautionary fashion. This cautionary language removes some of the burden of frivolous lawsuits from companies and, in turn, from ancillary players such as accountants and investment bankers."

Here are some of the law's provisions that will have a direct impact on the accounting profession.

Proportionate liability

The new law implements a system of proportionate liability in which peripheral defendants pay only their "fair share" of a judgment. Less culpable defendants will pay a proportionate share of the damages, but parties that knowingly engage in fraud still are subject to the full force of joint and several liability. Proponents of the bill had argued that joint and several liability in the previous law rewarded plaintiffs' lawyers who targeted "deep pocket" defendants.

"The most significant part of this bill for the accounting profession is its system of proportionate liability," said John E. Hunnicutt, AICPA senior vice president--public affairs. "It is what the profession has fought for from start to finish."

"The proportionate liability provision in this law is a very positive step," said Ezzell. He said under the new law, a defendant who is found, only to have acted recklessly, but who did not knowingly commit fraud, would be responsible for only a proportionate amount of the damages.

All defendants remain jointly and severally liable to investors with a net worth under $200,000 who lose more than 10% of their net worth. Defendants liable for their proportionate share are also liable for up to an additional 50% of their share to help pay for insolvent co-defendants.

Safe harbor for prediction

The law encourages voluntary disclosure of forward-looking information to investors by establishing a carefully designed safe harbor. …