WASHINGTON -- The Securities and Exchange Commission sees a rough legislative debate ahead on securities litigation reform, and issues such as who pays attorneys' fees and apportionment of liability "could be explosive," according to a commission paper prepared for a conference next month.
Securities litigation reform is a top priority of House Republicans, who have circulated draft legislation to change the federal civil justice system as part of their 100-day agenda. The draft bill would make it harder for investors to file securities lawsuits.
The new focus on litigation reform comes after years of vociferous debate and congressional inaction, said George Kramer, special counsel in the SEC's office of the general counsel, in a paper to be presented Jan. 26 at the 22d annual securities regulation institute in Coronado, Calif.
"Even if there is widespread support for reform there could be many fights, even among the proponents of reform, as to the content of that legislation," he said in the paper.
While the commission is not predicting the outcome, it is hopeful that the tone and substance of the debate may change in the next Congress, Kramer said.
"Strident and cathartic assertions have already been ventilated, and all sides have had reason to reflect on some of their assertions and beliefs," especially in light of SEC chairman Arthur Levitt's call last July at a House hearing for all parties to "stop shouting at one another," Kramer said.
The draft House legislation, whose provisions on private securities litigation are based on proposals by Rep. Christopher Cox, R-Calif., does not address civil aiding and abetting liability or the time period in which investors can file lawsuits under antifraud provisions of securities law. However, recent Supreme Court decisions probably will prompt some legislative debate in these areas, Kramer said.
In a ruling last April in Central Bank of Denver v. First Interstate Bank of Denver, the high court held that aiders and abettors of securities fraud have no private civil liability under securities law.
The decision did not directly address whether the SEC can continue to bring action against aiders and abettors, but the commission has said it would rather have Congress make that determination than rely on future court precedents.
Any legislative attempt to restore aiding and abetting liability probably will have to resolve the issue of how much knowledge about the fraud would make an alleged offender liable, Kramer said.
Another Supreme Court ruling, issued in 1991 in Lampf v. Gilbertson, effectively shortened the statute of limitations in securities fraud cases to three years, and the court applied the decision retroactively. Congress enacted a law removing the retroactive application, and it may renew debate next year on whether to lengthen the statute of limitations.
Levitt last July testified in support of overturning both the Central Bank of Denver and Lampf decisions, but he said securities fraud litigation involves other complex issues that must be addressed through a mix of legislation, court initiatives, and regulation.
One of the most controversial issues is who pays attorneys' fees and whether fee-shifting could deter frivolous lawsuits. The draft House bill would overturn the "American Rule," which calls for each party in a case to bear its own legal fees, in favor of the "English Rule," in which the losing party pays the fees of both sides. Under the English Rule, courts do not need to consider whether the loser had a good-faith position in the suit, Kramer said.
"This is a far-reaching proposal on an issue that has proven to be extremely divisive," Kramer said. Critics argue that this approach could effectively end all private litigation and significantly hurt investor confidence, he said.
Levitt has said he supports the concept of changing the way fees are awarded by courts, but he has not endorsed a specific proposal.
"Perhaps the most heated issue in the debate" on litigation reform is the allocation of liability among codefendants in private securities cases, Kramer said.
A bill sponsored in the previous Congress by Rep. Billy Tauzin, D-La., would have replaced joint and several liability with proportionate liability. Under joint and several liability, any co-defendant is liable for the total damage award. Under proportionate liability, no defendant would be liable for more than its fair share of damages.
Levitt has testified that this approach could deny defrauded investors of recovery of all their losses.
Parties in the debate have suggested that proportionate liability, which is not addressed by the draft House bill, could be linked with restoration of aiding and abetting liability, Kramer said.
