Securities Litigation Reform Proposals Affect State and Local Governments
Spain, Catherine L., Government Finance Review
The issue of securities litigation reform has gained considerable attention in the new Congress. Interest was spurred by the introduction of the Common Sense Legal Reforms Act (H.R. 10), a component of the Republican Contract with America, and the Private Securities Litigation Reform Act of 1995 (H.R. 555) by Representative Edward Markey (D-MA). The issue's relevance to state and local governments was highlighted during recent hearings in the House and Senate on the Orange County, California, bankruptcy. Democrats pointed out that investors who suffered losses in the Orange County Investment Fund would find it more difficult to sue succeswfully if the provisions of H.R. 10 were in effect. Coincidentally, H.R. 10 was introduced by Representative Christopher Cox - a member of the House from Orange County, California.
At its January 1995 meeting, the GFOA Committee on Governmental Debt and Fiscal Policy (the Debt Committee) reviewed litigation reform proposals and adopted the policy statement in the accompanying sidebar that addresses several concerns of state and local governments. The GFOA Executive Board subsequently approved the policy because of the impact of litigation proposals on state and local governments as investors in and issuers of securities.
Impetus for Reform
Litigation reform has been discussed for several years, but the issue's visibility was enhanced with the introduction of legislation in 1993 and 1994 and subsequent congressional hearings. An aggressive lobbying campaign by the accounting profession and high-technology industry representatives has been a significant impetus for reform. Specifically, these business representatives believe that the current system promotes frivolous litigation. Class action lawsuits are a particular source of concern because it is alleged that class counsel may have incentives that differ from those of underlying class members. Finally, the financial burdens imposed on accountants and other advisers who may become the "deep pockets" in litigation settlements have been a strong motivation for reform.
Several recent U.S. Supreme Court decisions also have focused attention on securities litigation reforms. Many believe that the Court is attempting to curb an excess of frivolous litigation by developing new doctrines that could adversely affect meritorious cases. Two cases in particular have been cited. In the 1994 decision Central Bank of Denver v. First Interstate Bank of Denver, the Court reversed 25 years of litigation practice by determining there is no private right of action under the federal securities laws against persons who aid and abet a securities fraud. This position rested on the fact that there is no explicit statutory language imposing aiding and abetting liability. As a result of this decision, investors would not be able to sue accountants and other professionals who substantially assist a securities fraud, even if those persons act knowingly or with a high degree of recklessness. In effect, the Court issued an invitation to the Congress to set the policy on aiding and abetting.
The 1991 Lampf, et al. v. Gilbertson decision held that private actions in the securities area had to be commenced within a year after discovery of the alleged violation and within three years after the violation occurred. Prior to the ruling, there was no uniform limitations period for private actions; courts relied on time limitations established in the most analogous state law. The Lampf limit is a substantially shorter period of time, and once again the Court has tossed the resolution of this issue to Congress because of the unworkability of a shorter period.
The various litigation reform bills that have been drafted contain significantly different provisions. Among the major issues addressed in the bills are:
* adoption of the "English Rule" of fee shifting where fees and costs are paid by the losing party rather than each side paying its own fees and costs,
* limits on joint and several liability so that only those professionals participating in a transaction who knowingly commit securities fraud are liable,
* creation of a new disciplinary board to oversee private accountants,
* extension of the statute of limitations applying to the filing of suits,
* litigation management and settlement reforms to weed out frivolous cases and impose sanctions on persons bringing frivolous suits, and
* restoration of the private right of action against persons who substantially aid and abet a securities fraud. …