WASHINGTON -- Legislation was introduced in the Senate this week that would give investors five years to file a securities fraud case rather than the three-year limit imposed by the Supreme Court last month.

The Securities Investor Protection Act would give an investor two years after he or she knew or should have known about a securities violation to file a fraud suit, but no later than five years from the date of violation.

The legislation was introduced Tuesday by Sen. Richard Bryan, D-Nev., a member of the Senate Banking Committee, and co-sponsored by the panel's chairman, Donald Riegle, D-Mich., and five other committee members.

The bill would blunt the high court's ruling June 20 in Lampi v. Gilbertson, in which it said that any litigation brought by a private investor under the antifraud provisions of the Securities and Exchange Act of 1934 must be initiated within one year of the discovery of the violation and no more than three years after the violation has occurred.

Lawyers and advocacy groups representing municipal bond investors objected that their constituents would be among the heaviest hit by the decision. They said that many tax-exempt deals are structured so that investors may not detect problems with their bonds until three years after their purchase.

But representatives of securities dealers yesterday denounced the Bryan bill.

"You are dealing with a very volatile stock market," warned William Fitzpatrick, senior vice president and general counsel of the Securities Industry Association. "To allow somebody who knew they had been defrauded to sit and play the markets for two years waiting for a more advantageous or appropriate time is just not realistic." He called the two-year post-discovery provision "uncnscionable."

Asked about the impact of the ruling on the municipal market, Mr. Fitzpatrick conceded that there are "differences in markets." But he said the "principle" is still the same. "You can't have people at risk forever. You need certainty to conduct a business," he said.

Sen. Riegle, however, warned in a statement Tuesday that the "key to the strength and liquidity of the securities markets is the individual investor. In order to attract participation by individual investors, we must ensure that the securities markets are accessible and fair.

"Regrettably," the senator continued, "on occasion there will be violations of the securities laws. This bill will protect individual investors by providing them with sufficient time to put a case together to fight any violations of the securities laws.

Sen. Bryan said in a statement Tuesday that the bill strikes a proper balance between the needs of investors and the securities industry. He added that "without question" some of the greatest victims of the Lampf decision will be municipal bond investors.

"Often perpetrators of securities fraud can go undetected for years," the senator said, "and will not be exposed until their fraudulent investment schemes ultimately collapse. Even then, putting the pieces of these complicated scams together to form the basis for a lawsuit can take an enormous amount of time."

A key provision of the Bryan bill would protect pending cases from dismissal as a result of the Supreme Court's shortening of the statute of limitations.

In addition, lawyers for the investors that brought the Lampf case filed a motion July 15 asking the Supreme Court not to apply the decision retroactively. They argued that in the past when the high court has applied a decision retroactively, it has provided a written analysis of its decision. But in the Lampf case it did not, they said.

Franklin Gordon Allen 2d, one of the investors' lawyers, conceded that chances are slim that the high court will hear the retroactivity issue. "But the stakes are so high, if there is a small chance" that the Supreme Court will rehear the issue, them investors should pursue it, said Mr. Allen, a partner with Allen, Kilmer, Schrader, Yazbeck & Chenoweth in Portland.

The Supreme Court decision has had an immediate impact on pending fraud cases brought by municipal bond investors. For instance, lawyers for bondholders who bought Washington Public Power Supply System units 4 and 5 bonds before June 15, 1983, expressed concern earlier this week that the ruling could harm bondholders' claims if out of court settlements now being challenged in appeals courts are overturned.

And on July 11 lawyers for investors suing nursing home operator First Humanics Corp. filed a position paper with the U.S. District Court for the Southern District of Ohio Western Division urging the court not to apply the decision retroactively to their case.

The impact of the Supreme Court decision on the municipal bond market is "enormous," said John Cuneo, general counsel for the National Association of Securities and Commercial Law Attorneys, who are pushing the Bryan legislation. "We've made a number of members of Congress aware of the unfairness of the decision. It is particularly significant for bondholders because municipal bonds are exempt from the requirements of the Securities Act of 1933," which requires extensive disclosure about securities issues.

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