WASHINGTON -- Investors would have up to three years after learning they may be victims of bond fraud to file lawsuits in federal court under legislation introduced in the House designed to overturn a controversial Supreme Court decision.
That is two years more than under the Supreme Court decision in Lampf v. Gilbertson that was handed down on June 20, which lawyers and advocacy groups representing municipal bond investors say will severely limit bondholders' ability to bring future suits and hamper existing litigation.
The House bill, introduced just as Congress left town last Friday by Rep. Edward Markey, D-Mass., also would give investors one year longer to file suit after discovering fraud than permitted under legislation approved last week by the Senate Banking Committee. The Senate bill was introduced by Sen. Richard Bryan, D-Nev., a member of the banking panel.
But under both the House and Senate bills, investors would have an outer limit of five years after the violation occurred to bring suit. The Supreme Court, however, ruled that the suit had to be brought within three years of the date of the violation.
Observers say the Senate bill could be delayed indefinitely, since it was incorporated in a sweeping bank reform package that faces an uphill battle on Capitol Hill. The measure was approved by the Senate Banking Committee on a voice vote last Friday over the objections of representatives of securities dealers and the accountants.
In a statement accompanying the House bill, Rep. Markey said victims of securities fraud have been allowed for over 50 years to file civil lawsuits under the antifraud provisions of the Securities and Exchange Act of 1934 under time frames generally set by state law. Some of those laws allow suits to be filed up to six years after the date of the crime, he said.
But with "one quick pound of the gavel" in June, the Supreme Court in a 5-to-4 decision reversed this long-standing practice, he said. Not only does the decision shorten the statute of limitations for future cases, but it "denies thousands of victims whose cases are currently pending their rightful day in court," he said.
Both bills would protect from dismissal cases pending at the time of the Supreme Court's ruling.
The Markey and Bryan bills are drawing strong opposition from the Securities Industry Association, which warns that the measures' time frames could leave firms under a cloud of litigation for so long that they will be unable to effectively conduct business.
In addition, the American Institute of Certified Public Accountants wrote members of Congress recently warning that the bills are "draconian" and will expose the accounting profession to unjustified increased legal liability. The group unsuccessfully urged the Senate Banking Committee to defer action on the bill, S-1533, until a public hearing can be held. It has written a similar letter to Rep. John Dingell, D-Mich., chairman of House Energy and Commerce Committee and co-sponsor of the Markey bill.
Meanwhile, an aide to Rep. Markey, who chairs the House Energy and Commerce Committee's subcommittee on telecommunications and finance, said this week the panel sent letters to states asking if they view the bill as preempting their authority. "They see it as helpful," the aide said. "They support the idea of legislation and this type of time frame."
The Supremem Court ruling has had an immediate impact on pending fraud cases brought by municipal bond investors. On July 11, for instance, lawyers for investors suing nursing home operator First Humanics Corp. filed a position paper with a fedeal court in Ohio urging it not to apply the decision retroactively to their case.
But the impact of the ruling on litigation related to Executive Life Insurance Co., whose guaranteed investment contracts backed a 16 municipal issues totaling $1.93 billion, is likely to be small, according to several lawyers involved in these suits. It will have relevance for bondholders' claims now pending in federal district court in New Orleans, but it is not part of litigation currently before Judge Karl Lewin of the Superior Court of Los Angeles, which is overseeing the life insurer's conservatorship.
A lawyer representing bondholders in Louisiana said revelation of the alleged fraud is being dated to the Jan. 1990 downgrade by Standard & Poor's Corp., when the issues first lost their triple-A status due to Executive Life's hemorrhaging junk bond portfolio. As such, the claims made it to court in time to meet the Supreme Court's time frame, the lawyer said. He asked not to be identified due to the ongoing litigation.