Breeden Says Bondholders Claiming Fraud Can Be Hampered by Lampf Case Ruling
WASHINGTON -- Bondholders who settled fraud claims against the Washington Public Power Supply System might not have collected a penny if a Supreme Court decision limiting the time investors have to file antifraud suits had been in effect at the time, a top federal official said yesterday.
"The massive private WPPSS securities litigation, in which defrauded investors recovered over $750 million, might well have been barred" under the ruling in Lampf v. Gilbertson, Richard C. Breeden, chairman of the Securities and Exchange Commission, told the Senate Banking Committee's Subcommittee on Securities.
The decision holds that any litigation brought by a private investor under the antifraud provisions of the federal securities laws must be initiated within one year of the discovery of the violation and no more than three years after the violation occurred.
Mr. Breeden's comment on the decision illustrates what lawyers and advocacy groups representing bondholders have been saying since the court decision was handed down in June -- that it will severely limit the ability of municipal bond investors to bring future suits and hamper existing litigation.
During his testimony, Mr. Breeden also reiterated the commission's support for pending legislation that would overturn the ruling by giving investors two years to file suit after discovering fraud and set an outer limit of five years after the violation occurred to bring a suit.
"The commission believes that the three-year period established by Lampf is unrealistically short," Mr. Breeden said in his prepared statement.
Under questioning by subcommittee members, he added that in financial fraud cases, "investors don't realize until many years down the road" that they have been the victim of a fraudulent deal. "It has often taken the SEC more than three years" to detect fraud, build a case, and pursue the principals in the case, he added.
The SEC is exempt from the limits in the court decision and the legislation. But if it had been forced to conform to those limits, "approximately one half of the case against Drexel Burnham, a large part of the Equity Funding case, and all of the case against E.F. Hutton for check-kiting would have been barred from the courthouse," Mr. Breeden said.
The legislation to overturn the decision, introduced by Sen. Richard Bryan, D-Nev., and Rep. Edward Markey, D-Mass., would strike a balance between competing interests, Mr. Breeden said. Congress needs to "discourage the litigation of stale claims," but also needs to ensure "that defrauded investors have a meaningful opportunity to enforce their rights against intentional securities law violators."
Mr. Breeden's testimony came on the heels of news reports that Vice President Dan Quayle had asked to review the SEC chairman's statement after hearing from business groups that oppose the legislation. The reports said the vice president did not ask Mr. Breeden to water down his strong endorsement of the bill.
Sen. Bryan, who chaired the hearing in the absence of subcommittee Chairman Sen. Christopher Dodd, D-Conn., said Sen. Dodd plans to send a letter to the White House asking the Bush administration to clarify its position on the legislation. Mr. Breeden told reporters after his appearance that the administration has not taken a position.
He also said he did not see anything unusual in the vice president's desire to review the testimony and added that his statements often are reviewed by various administration officials. When asked whether he felt any undue pressure from Mr. Quayle to change his testimony, Mr. Breeden said, "None whatsoever."
Another witness, Securities Industry Association President Edward I. O'Brien, said his group is concerned that Congress is moving too quickly on the issue, reacting to a single court decision, rather than taking time to examine all sides of the issue.
"The committee should not consider the statute of limitations question in isolation," Mr. O'Brien said. "The committee should examine the entire [fraud section] and refocus it so that injured parties obtain the greatest relief possible and that innocent parties are spared as much as possible from the burdens of litigation that are meant for those who actually violate our securities laws."