House Subcommittee Hears Litigation Reform Debate
In hearings on private securities litigation reform, corporate, investor, consumer and academic representatives testified before the House Energy and Commerce Telecommunications and Finance Subcommittee. The subcommittee, chaired by Congressman Edward Markey (D-Mass.), heard testimony on litigation abuse under section 10(b) of the Securities Exchange Act of 1934 and on the Securities Private Enforcement Reform Act (HR 417). The bill, subject of a House hearing for the first time, is sponsored by Congressman Billy Tauzin (D-La.).
HR 417 calls for a proportionate liability standard to replace the joint and several liability standard under Securities and Exchange Commission rule 10b-5. Tauzin called rule 10b-5, which was written to ensure that investors are compensated for losses due to securities fraud, a tool used by speculators to recoup losses from risky investments. The Louisiana representative said speculators' attorneys file frivolous class-action suits against companies whose only crime is a drop or gain in the price of their stock.
Speaking for the six largest accounting firms, J. Michael Cook, the chairman and chief executive officer of Deloitte & Touche, Wilton, Connecticut, argued that joint and several liability promotes "market incentives" for plaintiffs' lawyers to pursue cases "without regard to the merits of the underlying claims." Cook said proportionate liability can reverse the liability burden by changing incentives so as to force plaintiffs' attorneys to focus on cases with merit.
Opposing HR 417, Arthur Miller, Bruce Bromley Professor of Law at Harvard University, Boston, emphasized that there is no real explosion of securities fraud cases. Joel Seligman, professor of law at the University of Michigan, said studies show that securities class actions are "not primarily a vehicle for enriching lawyers." However, Seligman agreed that "bounty payments" to professional plaintiffs should be outlawed, as proposed in the Tauzin bill. And consumer advocate Ralph Nader, representing the Center for Study of Responsive Law, accused the accounting profession of seeking more limitations on liability, more privilege and more immunity.
But Cook countered the opposition, saying more than 90% of U. …