WASHINGTON -- Congress on Wednesday voted to overturn a key provision of the Supreme Court's controversial ruling last June that limits the amount of time investors have to file fraud cases in federal court.
The action came as the House and Senate adopted an agreement hammered out by bank bill conferees early Wednesday that keeps alive any federal fraud cases that had been filed before the court handed down its Lampf v. Gilbertson ruling. President Bush was widely expected to sign the measure.
The amendment to the bank bailout measure, however, does not apply to fraud cases that were filed after the high court's June ruling.
Under the Lampf decision, the high court said any case brought by private investors under the antifraud provisions of the federal securities laws must be filed within one year of the discovery of the violation and no more than three years after the violation occurred. The decision applied rectroactively to any such case that was pending when the court handed down its decision.
Opponents of the decision have charged that securities fraud cases involving billions of dollars that were pending at the time of the ruling have been or shortly may be dismissed nationwide, including the First Humanics nursing home case and litigation involving special districts bonds in Colorado.
The dismissal of severl cases and that threat that more cases would be tossed out of court triggered the introduction recently of bills in both the House and Senate to exempt pending cases from the decision and to broaden the time limits for past-June cases.
But Sen. Richard Bryan, sponsor of the Senate bill, and Sen. Pete Domenici, who is pushing legislation to curb frivolous antifraud lawsuits in the securities arena, finally agreed on the compromise exempting cases that were pending at the time of the decision.
However, Congress is expected to hold hearings next year on the dual questions of whether the Lampf decision should be applied to cases filed after the court ruled and how to curb frivolous fraud litigation.
"The adopted compromise rights at least the most egregious wrong of last summer's Supreme Court decision," said Rep. Edward Markey, D-Mass, who sponsored the House version of Sen. Bryan's bill.
"As of today, over $650 million of securities fraud claims have been dismissed in suits brought all over the country long before the Supreme Court's decision. More shockingly, over $4 billion of fraud claims, including those against Michael Milken [and] Charles Keating are threatened with pending dismissal motions solely as a result of" the Lampf decision.
"I think this is the quickest that I've ever seen a Supreme Court decision overturned by Congress," said David Guin, at attorney with Ritchie & Rediker in Birmingham, Ala., which is handling the First Humanics case. "To that extent it's a tremendous success. We have yet begun to fight about prospective application of a new rule," said Mr. Guin, whose firm is seeking reinstatement of the 20 of 21 fraud claims thrown out by an Ohio district court last month because of Lampf.
Mr. Guin said another case his firm is handling that also was a near casualty of the Lampf decision was a $21 million fraud suit against the issuers of revenue bonds for the proposed Patriot's Point Hotel and Marina in Charleston, S.C., which investors contend were fraudulently issued.
Last week, a House panel heard testimony from Bank of Mississippi General Counsel Frank Riley, who said the bank bought $2.2 million in taxable municipal bonds backed by Executive Life Insurance Co. and warned Congress that it may not be able to recover its losses in court because of the Supreme Court decision. Also thrown out by a Colorado federal judge because of Lampf was a $4.5 million class action lawsuit by the Bank of Denver over troubled Will-O-Wisp special district bonds.
Richard Lehmann, head of the Bond Investors Association, warned that if the three-year statute of limitations had been in effect when investors brought their lawsuits against Jackson, Miss., underwriter Robert Buchanan Jr., none of the retirement home bond cases would have been litigated. "For all we know he'd be out there issuing bonds today," Mr. Lehmann said. "It was the burden of lawsuits that brought Buchanan down."
A federal jury in Greenville, S.C., found Mr. Buchanan guilty in June of securities and mail fraud as well as conspiracy in connection with a $16 million bond issue he underwrote for a South Carolina retirement project.
Sen. Domenici warned last week that the impact of frivolous cases, including a growing number of cases filed in response to changes in a stock's price, is very serious for small, start-up companies because they frequently have large unanticipated swings in earnings that plaintiffs can seize upon. Sen. Domenici is eyeing an amendment that would require law firms bringing "meritless" unsuccessful lawsuit to pay court costs.