WASHINGTON -- Rep. Edward Markey, D-Mass., said Friday that he will introduce legislation soon to overturn the Supreme Court's recent decision that prevents investors from suing those who aid and abet securities fraud.
But congressional action is unlikely this year because the issue is linked to other controversial litigation reform proposals that are stalled.
The Securities and Exchange Commission is helping to draft the bill, which would restore the right of investors to bring private actions against alleged alders and abettors of securities fraud under Section 10(b) of the Securities Exchange Act of 1934.
The Supreme Court on April 19 ruled that the Central Bank of Denver, in its role as municipal bond trustee for tax-exempt bonds that went into default and triggered a fraud suit, was not liable for aiding and abetting under the act.
Markey, who held a hearing before his subcommittee on telecommunications and finance, said he enlisted the commission's help in writing the bill because the ruling "raised serious doubts" about whether the SEC can continue to bring actions against aiders and abettors.
SEC chairman Arthur Levitt Jr. reiterated his support for legislation to reverse the court's decision and said any bill that restores the private right of action should expressly provide that the SEC may bring action.
Levitt also renewed the commission's call for overturning a 1991 Supreme Court ruling, Lampfv. Gilbertson, which shortened to three years the period in which investors can file fraud claims. The SEC supports a five-year period.
But securities fraud litigation involves other complex issues that need to be addressed through "a combination of legislation, increased judicial activism in the case management process, and the commission's use of its own rulemaking and interpretative authority," Levitt said at the hearing.
Subcommittee Republicans also support a comprehensive approach to litigation reform, including any legislation addressing aiding and abetting. This stance, along with Levitt's call for a combination of actions, dims any chance for a quick-fix bill on aiding and abetting, a Republican aide said.
Sen. Howard Metzenbaum, D-Ohio, urged the subcommittee to reverse the Supreme Court ruling "separately and by itself. I do not share the view that the securities litigation system is a problem that requires a broad fix."
Metzenbaum appeared to testify against comprehensive litigation reform legislation sponsored by Rep. Billy Tauzin, D-La., which is designed to eliminate frivolous class action lawsuits against start-up and other vulnerable companies and their officers, accountants, lawyers, and other professionals.
But Metzenbaum said he wanted to emphasize the "urgent need" to act on the high court ruling. "If allowed to stand, the Central Bank of Denver case will weaken the federal securities laws more than any other case in the 60-year history of the federal securities laws," he said.
The ruling "illustrates why it is important to seek improvements in the system through legislation, rather than rely solely on the courts," Levitt said. "Judicial decisions of this type are blunt instruments that affect broad categories of cases without regard to their merits. They are not a substitute for legislation that is carefully tailored to ensure that it does not affect meritorious cases."
The extent to which the ruling will affect private rights of action "is difficult to predict," Levitt said. Investors are changing their claims against alleged aiders and abettors so that they are charging the same defendants with primary liability for fraud, he said. But the line between primary and secondary liability is unclear because there was little need to make a distinction in cases before the Central Bank of Denver ruling, he said.
Levitt said his recommendations on aiding and abetting liability implicate other litigation reform issues, but he said the debate over such reform has become so confrontational that parties have become stuck in their positions. He called for interests to "stop shouting" and try to reconcile their views.
Among the proposed reforms are removing incentives for plaintiff lawyers to file meritless cases by changing the way fees are awarded and counsel is selected -- concepts that Levitt said he supports. The Tauzin bill also would replace "joint and several" liability with "proportionate" liability. Under joint and several liability, any defendant in a case is liable for the total damage award, even if there are multiple defendants.
Levitt took no official position on the Tauzin bill, but he said he is "uncomfortable" with proportionate liability. Under this doctrine, no defendant would be liable for more than its fair share of damages. Levitt said he is concerned that this approach could deny defrauded investors of recovery of all their losses. Instead, he advocated apportioning liability on the basis of "relative fault."
Under relative fault, a defendant who pays out the entire award can seek from other defendants only a share reflecting the degree of fault. When securities laws first were enacted, the first defendant could seek equal shares from other defendants regardless of the degree to which they were at fault.
Statistics play a prominent part in the litigation reform debate. Markey and Levitt said there has been no explosion of lawsuits, in contrast to assertions by many litigation reform proponents. Levitt said he would work with the subcommittee to confirm numbers of lawsuits, firms that are sued, and other statistics and their relation to trends in the securities markets.
