[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
INVESTOR PROTECTION: A REVIEW OF
PLAINTIFFS' ATTORNEY ABUSES IN SECURITIES
LITIGATION AND LEGISLATIVE REMEDIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JUNE 28, 2006
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-102
U.S. GOVERNMENT PRINTING OFFICE
31-531 PDF WASHINGTON : 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York
VITO FOSSELLA, New York WM. LACY CLAY, Missouri
GARY G. MILLER, California STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota JOE BACA, California
TOM FEENEY, Florida JIM MATHESON, Utah
JEB HENSARLING, Texas STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida AL GREEN, Texas
RICK RENZI, Arizona EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin,
TOM PRICE, Georgia
MICHAEL G. FITZPATRICK, BERNARD SANDERS, Vermont
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
JOHN CAMPBELL, California
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
RICHARD H. BAKER, Louisiana, Chairman
JIM RYUN, Kansas, Vice Chair PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York DENNIS MOORE, Kansas
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois HAROLD E. FORD, Jr., Tennessee
EDWARD R. ROYCE, California RUBEN HINOJOSA, Texas
SUE W. KELLY, New York JOSEPH CROWLEY, New York
ROBERT W. NEY, Ohio STEVE ISRAEL, New York
VITO FOSSELLA, New York, WM. LACY CLAY, Missouri
JUDY BIGGERT, Illinois CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MARK R. KENNEDY, Minnesota JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
J. GRESHAM BARRETT, South Carolina BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
TOM FEENEY, Florida NYDIA M. VELAZQUEZ, New York
JIM GERLACH, Pennsylvania MELVIN L. WATT, North Carolina
KATHERINE HARRIS, Florida ARTUR DAVIS, Alabama
JEB HENSARLING, Texas MELISSA L. BEAN, Illinois
RICK RENZI, Arizona DEBBIE WASSERMAN SCHULTZ, Florida
GEOFF DAVIS, Kentucky BARNEY FRANK, Massachusetts
MICHAEL G. FITZPATRICK,
Pennsylvania
JOHN CAMPBELL, California
MICHAEL G. OXLEY, Ohio
C O N T E N T S
----------
Page
Hearing held on:
June 28, 2006................................................ 1
Appendix:
June 28, 2006................................................ 59
WITNESSES
Wednesday, June 28, 2006
Cox, James D., Brainard Currie Professor of Law, Duke University. 26
Frank, Theodore H., Resident Fellow, American Enterprise
Institute, and Director, AEI Liability Project................. 24
Galvin, Hon. William F., Secretary of the Commonwealth,
Commonwealth of Massachusetts.................................. 21
Walker, Hon. Vaughn R., Chief Judge, U.S. District Court,
Northern District of California................................ 19
APPENDIX
Prepared statements:
Clay, Hon. Wm. Lacy.......................................... 60
Cox, James D................................................. 62
Frank, Theodore H............................................ 75
Galvin, Hon. William F....................................... 87
Walker, Hon. Vaughn R........................................ 90
Additional Material Submitted for the Record
Baker, Hon. Richard H.:
Letter from Zuckerman Spaeder LLP............................ 109
Frank, Hon. Barney:
Letter to Hon. Richard H. Baker.............................. 112
Response letter from Hon. Richard H. Baker................... 113
Follow-up letter to Hon. Richard H. Baker.................... 114
Statement of Damon A. Silvers................................ 115
Letter from the Consumer Federation of America............... 116
INVESTOR PROTECTION: A REVIEW
OF PLAINTIFFS' ATTORNEY ABUSES IN
SECURITIES LITIGATION AND
LEGISLATIVE REMEDIES
----------
Wednesday, June 28, 2006
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:07 a.m., in
room 2128, Rayburn House Office Building, Hon. Richard H. Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Ryun, Shays, Gillmor,
Castle, Lucas, Manzullo, Kelly, Ney, Biggert, Miller of
California, Kennedy, Tiberi, Barrett, Brown-Waite, Feeney,
Gerlach, Hensarling, Renzi, Davis of Kentucky, Fitzpatrick,
Campbell, Pearce, McHenry, Ackerman, Sherman, Meeks, Moore of
Kansas, Capuano, Ford, Crowley, Israel, Clay, McCarthy, Baca,
Matheson, Miller of North Carolina, Scott, Velazquez, Davis of
Alabama, Wasserman-Schultz, and Maloney.
Ex officio present: Representative Frank.
Chairman Baker. I'd like to call this meeting of the
Subcommittee on Capital Markets to order this morning.
Let me first acknowledge that Mr. Kanjorski, the ranking
member of the subcommittee, is unable to participate in today's
hearing.
Unfortunately, due to unexpected flooding in Pennsylvania,
he has returned home to an almost certain mandatory evacuation
order, so our thoughts are with him this morning, as I know he
did intend to participate.
Mr. Frank, of course, as the ranking member of the Full
Committee, will participate in today's hearing for that and
other reasons, as well.
Today the subcommittee meets to discuss actions and
securities class action litigation, particularly the elements
of H.R. 5491, the Securities Litigation Attorney Accountability
and Transparency Act.
While I believe the securities litigation area is in need
of a more comprehensive reform, this bill represents a modest
first step in that direction.
A recent indictment of the country's leading securities
firm, Milberg Weiss, and revelations accompanying this
indictment raise significant questions. Are plaintiffs'
interests in class action suits really being treated in the
most appropriate manner?
The actions alleged in the indictment are egregious. Over a
20-year period, Weiss and two of the named partners allegedly
kicked back millions of dollars to individuals in exchange for
serving as the named plaintiffs in more than 150 class action
and shareholder derivative suits.
The scheme allegedly manufactured suits for the firm and
solidified its dominance in the arena of securities cases.
If these allegations are proven to be true, the firm and
the attorneys engaged have breached their fiduciary duty to the
investors whom they are charged to represent.
The dominance of the Weiss firm is unparalleled. There is a
Anjan V. Thakor study of 755 securities class action
settlements over a 10-year period. The firm handled 43 percent
of the settlements, netting $1.7 billion in fees and expenses.
The second nearest competitor came in at a meager 7.8
percent, just under $200 million.
Although dominant 10 years ago, Milberg Weiss allegedly
continued to abuse its dominance by engaging in this scheme of
kickbacks up until, reportedly, 2005, until after the U.S.
Attorney began its investigation.
With these allegations before us, and H.R. 5491, it is
appropriate the committee review the industry practice and
behavior to determine if investor protection requires us to act
in a more direct manner.
These actions, I feel, are justified, warranted, and to
ensure reasonable investor protection, there may be a need, in
fact, to do more, but the provisions of the bill, I think, at a
minimum, are essential.
Finally, there are those who question even the propriety of
the hearing. Mr. Weiss, in his response to me, at our voluntary
invitation for him to appear, questioned the committee's
legitimacy and right to conduct this examination.
This overlooks the fact that executives of Arthur Andersen,
WorldCom, Enron, Global Crossing, mutual fund operators, Fannie
Mae, and Freddie Mac, all of whom were facing some level of
legal jeopardy, be it civil or criminal, did not dissuade this
committee from engaging in inquiry and having representatives
of those entities appear before this committee.
It is essential, I believe, to determine whether this
conduct was an aberrant act or merely an instance of a single
individual, or more disturbingly, a pattern and practice within
an entire industry.
This is really what's known as oversight. It's never fun,
but it's a job that this committee has to conduct in the
interests of all engaged in our financial securities markets.
Although allegations of political motivations have been
made with regard to this hearing, I would take the committee
back to the appearance of Frank Raines in October of 2004, and
in that case, subsequent events, I believe, have proven the
importance of this committee's work and of staying the course.
And I wish to be very clear. Mr. Weiss is not under
indictment. He actually continues his practice as of this
moment, representing numerous plaintiffs in class action suits.
He was voluntarily invited today to discuss the actions
that the firm was taking to ensure that the alleged abuses
would no longer continue. Instead, he has chosen simply to
question the motivations of the committee as well as my
personal motivation.
His letter, of course, will be made public. I do consider
the response an unprofessional one to this committee's inquiry.
However, despite the absence of Mr. Weiss, whom I believe
refuses to appear because further discussion and disclosure
about the conduct would perhaps further degrade the firm's
reputation, we do have a very distinguished panel, a panel that
I know will not shy away from legitimate discussion on how to
best provide investor protection.
Whether the panelists agree with my perspective or not, I
know they will state their opinions in an articulate manner.
I believe investor protection is best served by seizing
ill-gotten gains and returning them to the people from whom
they were taken.
Others believe, perhaps rightfully so, that upon successful
pursuit of wrongdoers, seizing assets for the satisfaction of
the plaintiff' attorney or the State government in which the
suit is filed is balanced justice. I find that interesting.
I do know this. If you are robbed and your money is taken,
you really just want your money back. The victim does not care
if the loss came as a result of fraudulent market operatives, a
clever trial lawyer, or a deft regulator. If any of them took
your money, you still feel robbed.
I choose to defend the investors from all of them--to get
the money and simply give it back.
Mr. Frank?
Mr. Frank of Massachusetts. Mr. Chairman, I am very
disappointed in the calling of this hearing.
No one questions the usefulness of a hearing on protecting
investors. Indeed, I am disappointed that this committee has
had so few of them and that the focus in this case is so
narrow.
But to have a hearing which you originally titled, ``A
review of a pending indictment,'' is a terrible abuse of the
important principle of the separation of powers.
You said, Mr. Chairman, that previously people have been
indicted who faced some degree of legal jeopardy, civil or
criminal.
To equate the possibility of a civil lawsuit, including one
not yet filed, with a pending indictment, is as fundamental a
misunderstanding of the requirements of the American legal
system as I have heard propounded officially.
I thought Mr. Weiss's letter to you was quite justified. I
would ask to put into the record now the letters between
yourself and myself and Mr. Kanjorski--
Chairman Baker. Without objection.
Mr. Frank of Massachusetts.--in which we made the point
that a hearing called, ``to review the pending indictment,''
your original title, is a terrible mistake, and then, in
response to our complaint, you said, ``Well, I'll change the
title.'' But you haven't changed the focus. You have people who
are going to talk about the indictment.
You say, ``Well, Mr. Weiss wasn't indicted.'' True. The
firm of which he is a named partner has been indicted. It is to
discuss the indictment of the firm, and that is simply entirely
inappropriate.
You say, Mr. Chairman, you want to look at the pattern and
practice here. Fine. You don't need to look at the indictment
in this particular case to do that.
And yes, I do question, frankly, the motives of this
hearing.
I want to protect investors. You know, we have recently
read a lot about the backdating of stock options. Where's the
hearing on that? Where's the hearing that the SEC is now
looking into?
You say, Mr. Chairman, ``Well, this is called oversight.''
I can understand why you would have to explain to people the
meaning of the phrase ``oversight,'' since we as a committee,
indeed as a Congress, have in recent years done so little of
it. But oversight includes looking at whether or not there is
or isn't enforcement.
I would like for us to have a broad hearing on investor
protection. The issues that you mention are legitimately part
of that. But a review of a pending indictment? Have we become
some kind of a court, some kind of a judicial body?
Is this a longing for the days of the Schiavo bill when we
decided that we would intervene and reverse the courts in
Florida? Because that's what we are talking about, a review of
a pending indictment. That is as far from a legitimate
legislative purpose as I can see. Mr. Weiss's letter was
entirely appropriate.
Now, as to the substance here, yes, I want to look into
this, but I want to look into a lot of other issues, as well.
Let me say at this point, and I spoke to Mr. Kanjorski, who
is busy now with a potential flood in his district, we recently
had a decision by the circuit court striking down the SEC's
effort to require registration of hedge funds, a very serious
issue.
I think the hedge fund issue and the role of hedge funds in
this economy and the impact that they can have is a very
serious one. This committee has ignored the issue.
Mr. Capuano and I had written and asked for a hearing on
that issue. We can't have that. Instead, we have to have a
hearing on a pending indictment, because we apparently don't
have time to have a hearing on the subject of hedge funds.
Mr. Kanjorski and I are preparing legislation now that will
at the very least restore to the SEC the power that it thought
it had before that circuit court decision regarding hedge
funds, and I would hope that we would find time for a hearing
about the issue of hedge funds.
We have the Securities and Exchange Commission deprived of
authority that it wanted to exercise with regard at least to
registration. That's a very serious issue and has a significant
impact not just on investors but on the whole systemic issues
before us.
So there are a number of areas that we want to look at.
I think what's happened is, and we see this with
legislation filed to repeal parts of Sarbanes-Oxley, with this
notion that the only thing apparently going into this hearing,
the only problem that investors face is that some lawsuits
brought in the name of investors are too zealously brought and
not properly structured.
Are there no other problems that investors face? Are there
no other abuses? As I say, the backdating of stock options, the
refusal of boards of directors to pay attention to advisory
votes, the problem of executive compensation, the problem of
boards of directors receiving substantial negative votes and
the members of the shells having no ability to deal with that?
I think what we--maybe, you know we get into titles, and
you changed the name of this. You were originally calling it
``a review of a pending indictment.'' I think you should have
called it, ``The empire strikes back,'' because that's what we
have here.
We have obviously on the part of many of my colleagues the
feeling that this business of interfering with the people who
run corporate America has gone too far. This is just beyond
where we should be. And so we're going to repeal part of
Sarbanes-Oxley--not you, Mr. Chairman, but others have
advocated that. We're going to push back here.
Now, looking at every individual advice, I do believe that
there is room--not room, but need for a revision of how
Sarbanes-Oxley affects smaller corporations. The chairman and I
both said that to Mr. Cox when he was here last. Let's have an
ongoing, balanced look at how best to protect investors.
But a hearing that ignores the backdating of stock options,
a committee that has not looked into hedge funds and always
refused to do that, where you have sentiment on your side in
particular, some on ours for repealing part of Sarbanes-Oxley,
to make that the thrust of our approach, to act as if the real
problem here is that the poor corporate leadership is being
unduly picked on and harassed, and who ignore all these other
issues, and then to top it off, frankly, by I think
grandstanding entirely inappropriately in violation of the
appropriate role of Congress in a system of separation of
powers, by having a ``review of a pending indictment'' for
which I can certainly find no precedent, which is a good thing
about the judgment of our predecessors, is to make a mockery of
the role of this committee, and I am very disappointed.
Chairman Baker. I thank the gentleman for his statement.
Mr. Ryun?
[No response]
Chairman Baker. Mrs. Biggert?
[No response]
Chairman Baker. Mr. Castle, statement?
[No response]
Chairman Baker. Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman.
And one, I want to thank you for holding this hearing. I
listened very closely to the ranking member, whom I have the
utmost respect for, but as I read some of the written
testimony, we appear maybe to be at different hearings here.
I think there are some very serious issues to be discussed
here today about the attorney-driven securities class action
suit, its impact upon our economy, and its impact upon
investors.
Much of what he said may have been accurate, it may have
been inaccurate, but much of it, I believe, is frankly
irrelevant.
As I look at our panel, I don't see anybody from Milberg
Weiss represented here today. We're not here to prosecute.
We're here to legislate.
Beyond a reasonable doubt may be a burden to convict, but
it certainly is not a burden to legislate and frankly, I think
this committee has an obligation, when we see serious
headlines, to look into the underlying matters.
It's not just simply the case of Milberg Weiss. I think it
was just this last week that the Chicago Tribune broke a story
of some serious accusations of general counsels pinching funds
that had been lead plaintiffs' in class action lawsuits--
receiving massive legal fees for apparently no work.
Again, I don't know all the facts underlying these, but
these are serious accusations that I believe this committee has
an obligation to look into.
I think this is a perfect follow-up to our earlier hearing
that dealt with the impact of our place in the global
securities market.
And we know that we're losing ground and we know that is a
worrisome trend for our jobs, for our economy, and we know from
our testimony that frankly, being an overly litigious society
is at least one of the primary factors that are causing many
companies to decide to list on other exchanges besides our own.
And so I think, frankly, there's a number of practices we
have to look at here today, and I look forward to hearing the
testimony. I think much good could be done.
And I'm particularly interested in this unique aspect of
using the power of free enterprise and competition in selecting
lead counsel for these cases and exploring its impact on
investors, and I believe, frankly, a little transparency, a
little accountability, a little free enterprise may go a very
long way to protecting our investors, our jobs, and our
economy.
And I want to thank the chairman for calling this hearing,
and I yield back.
Chairman Baker. I thank the gentleman.
Mr. Ackerman.
Mr. Ackerman. I thank the Chair.
Unlike Mr. Frank, whose remarks are always very measured, I
would like to say that I am absolutely furious that we're
having this hearing today.
At the outset, let me say that I know Mr. Weiss. I'm a
friend of Mr. Weiss, and in the interests of full disclosure, I
don't believe he's ever contributed to my campaign.
Nine years ago, approximately five members of his 500-
member organization did contribute to my campaign, none of them
over $500. I want to say that at the outset.
Mr. Chairman, there's a war going on in this country
between investors and consumers on the one hand, and corporate
America, that seeks protection from any kind of meaningful
lawsuit, and that war is getting rather vicious.
The Administration and their corporate friends are using
any means possible to try to degrade the plaintiffs' bar and to
discredit and defame any of the players therein, and will use
any means at their disposal, and I am sorry to see that today,
this committee becomes a tool in that war.
You started out by saying, Mr. Chairman, that the,
``allegations before us.''
This is not a court. There should be no allegations before
us. We're not here to judge allegations in an ongoing judicial
proceeding. How dare we involve ourselves in that?
It was just said by my colleague across the aisle that
we're here to legislate. We are here to legislate. That is our
job. We are not the judiciary. We're not the Justice
Department. We're not the Administration.
Mention was just made that what we should do for people who
lost money in investments is to give their money back. If
anybody even cared to read the indictment, to read the charges,
there is no charge that any investor lost more than one penny,
not even one penny.
This is a fight over who gets to represent classes, not the
loss of money to investors. That is not charged in this
allegation.
Let me also say that I am appalled, absolutely appalled at
the fact that the committee has invited a sitting Federal
judge, who has no business before this committee, to talk about
a matter that's before the courts.
I took time last night to call some Federal judges. They
were absolutely aghast that a sitting Federal judge, under the
canons of judicial ethics, would testify on a matter of
changing the law on issues that affect people in his courtroom.
I read his testimony. It makes reference to Milberg Weiss.
And maybe if we get to that point, I'll ask him if it's not
true that even Milberg Weiss has a current case before his
bench. This is an absolute conflict.
I think that the judge should recuse himself of all such
cases if he's going to take an activist role and today become
the poster boy for judicial activism to change the law under
which he rules.
Mr. Chairman, this is a hit. This is an axe job against a
particular firm that has not been found or proven guilty, that
has not even begun the case of defending itself. This committee
participates in an ongoing smear before the trial even begins.
I say shame on us. We should not be involved in that. We
have legitimate issues to address. We have legitimate concerns.
There is legislation purportedly before us that we're
discussing today, but that's a ruse for what's really going on
here.
Mr. Chairman, you said in your invitation a moment ago, you
invited Mr. Weiss and that he declined, probably because his
appearance here would tend to degrade his firm.
I think that's an important statement that you have made,
knowing full well that the person to whom we refer is also a
live target of this criminal investigation.
And to say, ``Oh, too bad, the guy doesn't want to come
here and defend himself''--this isn't a courtroom. But in
making that statement, Mr. Chairman, which I absolutely agree
with, that it would tend to degrade his firm--I would like to
make a motion.
May I, Mr. Chairman?
Chairman Baker. The gentleman was recognized for an opening
statement. At the appropriate time, the gentleman certainly
will be recognized for a motion.
Mr. Ackerman. In that case, I will wait for that
appropriate time.
Chairman Baker. I thank the gentleman. His time has
expired.
Mr. Feeney.
Mr. Feeney. Mr. Chairman, unlike some others in this
committee, I haven't made up my mind one way on whether there
are serious abuses, and I just look forward to hearing the
testimony.
I will tell you, I'm both an attorney and a shareholder,
and I'm interested in appropriate suits on my behalf as an
investor, but what I'm not interested in as an investor are
suits that are diminishing the value of my shares because of
unnecessary defense or overzealous prosecution.
So I think there's a balance in basically the private way
we protect investors against deliberate or negligent fraud by
management. I hope we strike that balance right.
But I don't think enormous windfall profits to trial
attorneys are the type of economic growth that I'm most
interested in encouraging.
So I'm here, anxious to hear the testimony.
Chairman Baker. I thank the gentleman.
Mr. Moore.
Mr. Moore of Kansas. No statement, Mr. Chairman, except I
am interested in hearing the testimony of the witnesses here
today.
Thank you. I yield back.
Chairman Baker. I thank the gentleman.
Mr. Pearce.
Mr. Pearce. Thank you, Mr. Chairman.
I find it amazing that we're told that we're not here to
judge the allegations.
As I review much of the hearings through the last month,
I've listened as people have alleged that the financial
services field is wrongly discriminating, charging too much
interest to minorities, and those are allegations which are
still in the process. We've listened to them. I think we will
probably take action on those that are suitable, as we should.
So I appreciate having the hearing today, because maybe we
have a war between investors and corporate America, but we also
have a love affair between investors and corporate America,
because more Americans own stock now than ever before.
And Mr. Feeney addressed the need of our investors to
maximize the wealth, maximize their value without it having to
be deteriorated by class action suits or judgments which are
simply going into the pockets of our trial lawyers.
So I personally am happy that you're having the hearing and
I look forward to the testimony.
Thank you, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Mr. Crowley.
Mr. Crowley. I thank the chairman for yielding.
The question I have is, why are we here?
I went to bed last night and before I went to sleep, I
don't think we changed the Constitution prior to my going to
sleep last night.
And this morning, I am here. We're going to be judges this
morning, we're going to--as the case is before our Federal
courts, that will judge the performance or the actions of one
particular company or law firm in this case, Milberg Weiss,
wouldn't prudence be that we wait until our courts have acted
before we look at this particular case and its effect on our
markets?
I would imagine that many shareholders would prefer that,
and pointing up one of my colleagues' mentioning of
shareholders and his owning some shares here, I'd prefer to
wait and see what the courts have to say about this before we
here make a judgment about any one particular case.
I would also like to associate myself with my colleague
from New York, Mr. Ackerman, in regards to a member of the
judiciary here before the committee who may very well have to
hear testimony on this particular case or similar cases like
it. I have concerns about that, as well, and would associate
myself with the remarks of the gentleman from New York.
With that, I'll yield back the balance of my time.
Chairman Baker. I thank the gentleman.
Mr. McHenry.
Mr. McHenry. Thank you, Mr. Chairman. Thank you for holding
this hearing.
I must disagree with my colleagues on the other side of the
aisle. I think this is a very helpful hearing.
They keep bringing up the firm Milberg Weiss, and I look at
the committee hearing, and the title of it, Mr. Chairman, if
I've the correct committee hearing notice, is, ``Investor
protection: a review of plaintiffs' attorneys' abuses in
security litigation and legislative remedies.''
I certainly think this hearing is mostly likely about
legislative remedies, but if they're bringing up Milberg Weiss,
I assume that really pertains to a review of plaintiffs'
attorneys' abuses in security litigation.
Well, it's kind of perplexing they would bring up Milberg
Weiss if that weren't the case, that perhaps that was a firm
that was abusive and securities litigation.
So Mr. Chairman, you know, I think it's perplexing that the
other side keeps talking about this.
A colleague said that this side of the aisle is a tool for
our corporate friends. Well, Mr. Chairman, I would simply
retort that perhaps it's the other side that's the tool for the
trial bar.
I yield back the balance of my time.
Chairman Baker. I thank the gentleman.
Mrs. McCarthy.
Mr. Frank of Massachusetts. Will the gentlelady yield to me
for 30 seconds?
Mrs. McCarthy. I will yield to the gentleman from
Massachusetts.
Mr. Frank of Massachusetts. I would just point out to the
previous speaker that the original title of the hearing was,
``A review of the indictment.''
So the notion that we are the ones who brought it up is, of
course, about as far removed from reality as we get even in
this hearing room from time to time.
The original purpose--the original title of the hearing
was, ``A review of the indictment.'' The chairman, when Mr.
Kanjorski and I objected, wrote back and said, ``Okay, I'll
change the title, but I won't change the focus.''
In fact, the memorandum sent out by the committee in its
first substantive sentence says, ``The law firm of Milberg
Weiss and two of its partners were indicted.''
So the focus on the indictment is the chairman's focus, not
ours.
I thank the gentlelady.
Mrs. McCarthy. Taking my time back, again, I'm looking
forward to the hearing, but I have to say that, you know, we
have seen this Congress, certainly in the last 10 years that
I've been in Congress, try to do everything they can to take
away the ability of our trial lawyers to help people that
rightfully should be able to sue.
If we look at a number of corporations in the last several
years that have abused their powers--and Enron certainly is
right there on the top of them--that it is our job to protect
certainly our constituents and certainly those that need to be
protected.
You know, I consider myself a pro-business person, but when
I look at these CEO's, they're putting the stockholder over
their employees 9 times out of 10, don't particularly care what
their employees do, and that's why we're dealing with pensions,
possibly losing health care, and we're wondering why the
middle-income families in this country are feeling the pain.
So I will listen to the testimony, and I am surprised that
we have a sitting judge, and I don't know the law that much,
but I am surprised that we have a sitting judge who possibly
will be talking about a case that's not even put to trial yet.
With that, I yield back the balance of my time.
Chairman Baker. I thank the gentlelady.
Mr. Campbell?
Mr. Campbell. Thank you, Mr. Chairman.
I have not been a Member of this Congress or this committee
for very long, but if I'm not mistaken, this committee and this
Congress, after the Enron, WorldCom, and so forth debacles,
acted to have hearings and in fact took action on those items
with Sarbanes-Oxley law and others long before many, if not all
of the convictions in those cases occurred.
In fact, it was only earlier this year that the primary
convictions on Enron actually occurred, and I don't think that
anyone on this committee believes that this committee or this
Congress should not have acted with Sarbanes-Oxley or whatever
remedy we felt was appropriate until now, some 3 years after
the shareholders in the Enron and WorldCom cases had lost their
money.
What we are dealing with here is similar to those cases, is
an allegation of wrongdoing upon which shareholders have been
harmed, and I don't really see any distinction between hearings
dealing with the allegations on Enron and WorldCom or the
allegations here.
So I thank you for the hearing, and I look forward to the
testimony.
Chairman Baker. I thank the gentleman for his statement.
Mr. Clay.
Mr. Clay. Thank you, Mr. Chairman.
Mr. Frank of Massachusetts. Will the gentleman yield to me
for 10 seconds?
Mr. Clay. I yield to the gentleman.
Mr. Frank of Massachusetts. The difference is this. No one
who was under indictment was summoned. Those were hearings not
about indictments.
And you are talking now about a hearing where it said
originally, ``a review of the indictment,'' and it was only
changed for cosmetic purposes, and the invited witness was the
named partner in the firm that is under indictment.
And if the gentleman does not think there is a difference
between someone who is under indictment in our system and
someone who isn't, that's the core of our question.
We are saying that at the point that an indictment comes
and you are focused on a particular individual or a particular
company, firm, whatever, with criminal liability, that ought to
make a difference.
I thank the gentleman.
Mr. Clay. I thank the gentleman.
It is alarming to see the discovery of additional alleged
ways to defraud investors in their retirements--their
children's college funds, trusts for their families, and other
current or future plans for their investments.
There is currently a case in court, no decision has been
rendered, in which a law firm is accused of giving $11.3
million in kickbacks to paid plaintiffs. The indictment alleges
that the firm received well over $200 million in attorney fees
from class action lawsuits over the past 20 years. There is a
20-count indictment in this case.
My concern centers on the alleged amounts of money involved
and the fear of this not being an isolated case.
These alleged schemes potentially are costing billions of
dollars to investors. It is the investors who ultimately pay
the judgments. We must stop this bleeding of our investment
resources.
However, in our haste to do something about this problem,
we must not put in remedies that further complicate the
problem.
H.R. 5491, the Securities Litigation Accountability and
Transparency Act, has been introduced as a remedy for this
issue.
I, as well as many others, have concerns that the loser
pays provision of the bill could add a threat to plaintiff
attorneys that would result in discouraging meritorious
lawsuits as well as the intended frivolous lawsuits.
Many are concerned that if a judge determined that their
case was not substantially justified, the plaintiffs could be
forced to pay the defendants' legal fees. This could eliminate
those law firms that work on a contingency basis and only the
large firms would be able to take the risk of these cases.
I also have concerns about Section 4 of H.R. 5491. This
provision removes the right of plaintiffs to choose their lead
attorneys.
The Consumer Federation of America writes that, ``Allowing
judges to impose a competitive bidding process suggests that
costs are the only relevant factor to consider when selecting
counsel and that judges are better able than investors to
determine what is in their best interest. Under the worst-case
scenario, investors could be forced to accept representation by
a lower-cost firm that lacks the expertise and experience of
other available counsel and could lose their case as a
result.''
I look forward to hearing the witnesses' testimony and the
discussion of these and other salient issues on this subject.
I also commend Chairman Baker for bringing forth
legislation and I hope that we can work on compatible
legislation to address this need.
I yield back the balance of my time.
Chairman Baker. I thank the gentleman for his statement.
Mr. Gillmor.
Mr. Gillmor. Thank you, Mr. Chairman.
I'll only say I think it's very timely, what you're doing,
and I think it's very important that we examine some of the
abuses in this area.
And I yield back.
Chairman Baker. I thank the gentleman for his delightfully
constructive statement.
Mr. Miller.
Mr. Miller of North Carolina. Thank you, Mr. Chairman. I
will make an opening statement, even though I did not intend to
when I arrived, and I wonder, after all of the opening
statements, what is really left for the witnesses to say this
morning.
The law recognizes that there are people we should be able
to trust; we should be able to count on them to act on our
behalf, and to deal with us fairly, honestly, and openly. Those
are fiduciary relationships.
A lawyer has that relationship with their client. A client
should be able to count on their lawyer to act on their behalf,
and to deal with them fairly, openly, and honestly.
The law also recognizes that corporate officers are
supposed to have that relationship with shareholders, and that
shareholders can count on corporate officers to act on their
behalf, to act fairly, openly, and honestly.
If lawyers are betraying the trust of their clients, I'm
outraged. I join in the outrage of those on that other side.
But I also hope that they will join in the outrage that I
feel if corporate officers are betraying the trust of
shareholders to abuse their position, to take advantage, and to
betray the trust of the people who should be able to trust
them.
Chairman Baker. I thank the gentleman.
Pursuant to the notice of the vote on the Floor, it would
be my intention, with everyone's concurrence, to recognize Ms.
Velazquez, if she chooses to make any opening statement.
I don't believe there's an additional member on our side
that wishes to make an opening statement.
I would ask the gentlelady to make her statement and then
we would recess for the votes, much to the delight of our
panel, I'm sure.
Mr. Frank of Massachusetts. There is only one vote,
apparently. There is a motion to adjourn.
Chairman Baker. A long day.
Mr. Frank of Massachusetts. So buckle your seatbelts, it's
going to be a bumpy ride today.
Chairman Baker. Yes. I'm looking forward to that
excitement.
There being no objection, Ms. Velazquez?
Ms. Velazquez. Thank you, Mr. Chairman.
I ask unanimous consent to submit my statement into the
record.
Chairman Baker. Absolutely, without objection.
In that light, since we have a 15-minute vote, we will just
come right back. We have one, and rather than rush any person
to conclude their statement, we will stand in recess pending
the single vote.
Thank you.
[Recess]
Chairman Baker. I'd like to reconvene the meeting of the
Subcommittee on Capital Markets.
At the time of the committee's recess, I do not believe
there was an additional member requesting recognition for
opening statements.
That being the case, I would now begin to move to our panel
of witnesses.
Mr. Ackerman. Mr. Chairman?
Chairman Baker. Mr. Ackerman?
Mr. Ackerman. Would this be the appropriate time?
Chairman Baker. The gentleman is being recognized for what
purpose?
Mr. Ackerman. To make a motion.
Chairman Baker. The gentleman is recognized.
Mr. Ackerman. Let me just get myself organized here for a
second.
Mr. Chairman, pursuant to the rules of the committee, the
Rules of the House, and section 2(K)5 of Rule 11, I move that
the committee go into executive session, and I ask to be heard
on the motion.
Chairman Baker. The motion is in order. The gentleman's
motion, however, is not debatable, and the committee would
proceed--
Mr. Ackerman. Mr. Chairman, I'm reading the rules, and it
does not say that the motion is not debatable, and in the
absence of an assertion, every motion is debatable.
Chairman Baker. I'm advised by the committee
parliamentarian that a discussion as to why the committee would
go into a non-public consideration of a legislative matter is
not a debatable measure, by precedent of the House.
Mr. Frank of Massachusetts. Parliamentary inquiry, Mr.
Chairman?
Chairman Baker. The gentleman is recognized.
Mr. Ackerman. Reserving the right to appeal the decision.
Chairman Baker. Understood.
Mr. Frank of Massachusetts. Mr. Chairman, you're ruling
that the motion is not debatable when it comes to the
parliamentarian, who is entirely legitimate in his ruling, so I
will not contest that, but I did want to get clarification,
because does that apply to the provision that says whenever it
is asserted by a member of the committee that the evidence or
testimony may tend to degrade, defame, or incriminate any
person, that ruling says that even if you say the purpose is
that the testimony would tend to defame or degrade or
incriminate, that is still nondebatable?
Chairman Baker. I am advised that is correct.
Does the gentleman insist on his motion?
Mr. Ackerman. Mr. Chairman, reserving the right to insist,
Mr. Chairman, am I correct in saying that it was your statement
that, ``Mr. Weiss chooses not to appear before the committee
because that would apparently degrade''--your words again--
``his firm''?
Does not that fit into Paragraph 5, ``Whenever it is
asserted by a member''--that would be me, in this case--
``whenever it is asserted by a member of the committee''--and
that would be you in this, case, too--``that the evidence or
testimony at the hearing may tend to degrade, defame, or
incriminate any person,'' etc.?
You've said it, I've said it, and I've read the hit man-
like testimony of some of our witnesses, and they say it, and
do it.
And does this not say ``may'' and then we go into executive
session?
Because if it's important for us as legislators to hear the
testimony of the witnesses, I don't think it is necessary to
degrade this committee itself by dragging us into the act of
degrading people who are accused, and who have not had the
opportunity to defend themselves in court.
Chairman Baker. If I understand the gentleman's inquiry
properly, it is as to whether or not we should go into
executive session. The gentleman's privilege motion is in
order.
The matter, however, to which I object, is the debate of
the motion to go into executive session, pursuant to the
parliamentarian's advising me that a debate of the motion to go
into executive session thereby makes public the very issues
which the gentleman would seek to make non-public by entering
into executive session.
Therefore, the matter before the committee, as I understand
it at the moment, is your motion to go into executive session,
which I then ruled is in order, however, it is not debatable.
Therefore, the committee should immediately proceed--
Mr. Ackerman. I would appeal the decision of the Chair.
Chairman Baker. And the gentleman now moves to appeal the
ruling of the Chair, which is also in order, which would--Mr.
Ryun?
Mr. Ryun. Mr. Chairman, I move to lay the appeal on the
table.
Chairman Baker. Which is also in order. Mr. Ryun is within
his right to move to table your motion to appeal the ruling of
the Chair.
There being no further motion--
Mr. Ackerman. I would request a roll call vote.
Chairman Baker. There being no further motion in order at
this time, the question is the matter before the committee, to
which the gentleman from New York requests a roll call vote.
The clerk will call the roll on the motion to table the
motion to appeal the ruling of the Chair.
The clerk is coming around to call the roll here. Just one
moment.
Mr. Ackerman. Mr. Chairman?
Chairman Baker. Mr. Ackerman.
Mr. Ackerman. I would ask unanimous consent, using my sense
of math over my sense of justice, to withdraw the motion to
appeal from the decision of the Chair and proceed directly to
the vote.
Chairman Baker. I appreciate the gentleman's offer, and I
would first have to turn to Mr. Ryun and ask him to withdraw
his motion to table the motion.
Mr. Ryun. Mr. Chairman, I withdraw the motion.
Chairman Baker. Mr. Ryun withdraws his motion.
Mr. Ackerman is recognized. He withdraws his motion.
We are now back to proceeding to our first witness?
Oh, I understand. Now you want to vote on the motion to go
into executive session.
That motion is not debatable. That motion is before the
committee, and we will now vote on the motion to go into
executive session.
The clerk will call the roll, please.
The Clerk. Mr. Ryun.
Mr. Ryun. No.
The Clerk. Mr. Ryun votes no.
Mr. Shays.
[No response]
The Clerk. Mr. Gillmor.
Mr. Gillmor. No.
The Clerk. Mr. Gillmor votes no.
Mr. Bachus.
[No response]
The Clerk. Mr. Castle.
[No response]
The Clerk. Mr. Lucas.
Mr. Lucas. No.
The Clerk. Mr. Lucas votes no.
Mr. Manzullo.
Mr. Manzullo. No.
The Clerk. Mr. Manzullo votes no.
Mr. Royce.
[No response]
The Clerk. Mrs. Kelly.
Mrs. Kelly. No.
The Clerk. Mrs. Kelly votes no.
Mr. Ney.
Mr. Ney. No.
The Clerk. Mr. Ney votes no.
Mr. Fossella.
[No response]
The Clerk. Mrs. Biggert.
Ms. Biggert. No.
The Clerk. Mrs. Biggert votes no.
Mr. Miller of California.
[No response]
The Clerk. Mr. Kennedy.
Mr. Kennedy. No.
The Clerk. Mr. Kennedy votes no.
Mr. Tiberi.
Mr. Tiberi. No.
The Clerk. Mr. Tiberi votes no.
Mr. Barrett.
Mr. Barrett. No.
The Clerk. Mr. Barrett votes no.
Ms. Brown-Waite.
[No response]
The Clerk. Mr. Feeney.
[No response]
The Clerk. Mr. Gerlach.
Mr. Gerlach. No.
The Clerk. Mr. Gerlach votes no.
Ms. Harris.
[No response]
The Clerk. Mr. Hensarling.
Mr. Hensarling. No.
The Clerk. Mr. Hensarling votes no.
Mr. Renzi.
[No response]
The Clerk. Mr. Davis of Kentucky.
Mr. Davis of Kentucky. No.
The Clerk. Mr. Davis votes no.
Mr. Fitzpatrick.
[No response]
The Clerk. Mr. Campbell.
Mr. Campbell. No.
The Clerk. Mr. Campbell votes no.
Mr. Kanjorski.
[No response]
The Clerk. Mr. Ackerman.
Mr. Ackerman. Aye.
The Clerk. Mr. Ackerman votes aye.
Ms. Hooley.
[No response]
The Clerk. Mr. Sherman.
[No response]
The Clerk. Mr. Meeks.
Mr. Meeks. Aye.
The Clerk. Mr. Meeks votes aye.
Mr. Moore of Kansas.
Mr. Moore of Kansas. Aye.
The Clerk. Mr. Moore votes aye.
Mr. Capuano.
Mr. Capuano. Aye.
The Clerk. Mr. Capuano votes aye.
Mr. Ford.
[No response]
The Clerk. Mr. Hinojosa.
[No response]
Mr. Crowley.
Mr. Crowley. Aye.
The Clerk. Mr. Crowley votes aye.
Mr. Israel.
[No response]
The Clerk. Mr. Clay.
Mr. Clay. Aye.
The Clerk. Mr. Clay votes aye.
Mrs. McCarthy.
Mrs. McCarthy. Aye.
The Clerk. Mrs. McCarthy votes aye.
Mr. Baca.
Mr. Baca. Aye.
The Clerk. Mr. Baca votes aye.
Mr. Matheson.
Mr. Matheson. Aye.
The Clerk. Mr. Matheson votes aye.
Mr. Lynch.
[No response]
The Clerk. Mr. Miller of North Carolina.
Mr. Miller of North Carolina. Aye.
The Clerk. Mr. Miller votes aye.
Mr. Scott.
Mr. Scott. Aye.
The Clerk. Mr. Scott votes aye.
Ms. Velazquez.
Ms. Velazquez. Aye.
The Clerk. Ms. Velazquez votes aye.
Mr. Watt.
[No response]
The Clerk. Mr. Davis of Alabama.
Mr. Davis of Alabama. Aye.
The Clerk. Mr. Davis votes aye.
Ms. Bean.
[No response]
The Clerk. Ms. Wasserman-Schultz.
Ms. Wasserman-Schultz. Aye.
The Clerk. Ms. Wasserman-Schultz votes aye.
Chairman Baker. Mr. Sherman, how is he recorded?
The Clerk. Mr. Sherman is not recorded.
Mr. Sherman. Please record me as an aye.
The Clerk. Mr. Sherman votes aye.
Mr. Baker, I hadn't actually finished the roll yet.
Chairman Baker. I'm sorry. Will members withhold, please?
Mr. Frank.
Mr. Frank of Massachusetts. Mr. Chairman, I have to explain
that since I am on the committee ex officio, along with the
chairman, in the absence of the chairman, I will not vote.
I think it's only appropriate if the chairman is here for
me to vote, since we are both here ex officio.
I would have voted aye if I had voted.
Chairman Baker. I respect and appreciate the ranking
member's sense of fairness.
The Clerk. Mr. Baker.
Chairman Baker. I vote no.
The Clerk. Mr. Baker votes no.
Chairman Baker. Mr. Miller?
Mr. Miller of California. No.
The Clerk. Mr. Miller votes no.
Chairman Baker. Mr. Israel?
Mr. Israel. Aye.
The Clerk. Mr. Israel votes aye.
Chairman Baker. Mr. Shays?
Mr. Shays. No.
The Clerk. Mr. Shays votes no.
Chairman Baker. Mr. Castle?
Mr. Castle. No.
The Clerk. Mr. Castle votes no.
Chairman Baker. Mr. Renzi?
Mr. Renzi. No.
The Clerk. Mr. Renzi votes no.
Chairman Baker. Mr. Fitzpatrick?
Mr. Fitzpatrick. No.
The Clerk. Mr. Fitzpatrick votes no.
Chairman Baker. The clerk will report.
The Clerk. Mr. Chairman, the ayes are 16 and the nays are
20.
Chairman Baker. The gentleman's motion has failed.
We will now proceed to hearing the testimony of our panel
of witnesses.
Mr. Frank of Massachusetts. I think it's safe to say
goodbye to most of the members who just dropped in to vote.
[Laughter]
Chairman Baker. I think the gentleman is correct. This is
the first time, in a long time, that the Capital Markets
Subcommittee has been full.
Mr. Barrett. Yes, but Mr. Chairman, some of us did vote,
while the other abstained from voting.
Mr. Frank of Massachusetts. Which means I get all the more
credit for showing up.
Chairman Baker. But some are doing a great service by
showing up, voting, and then leaving.
Let us now proceed to our first witness.
Mr. Ackerman. Mr. Chairman?
Chairman Baker. The gentleman from New York.
Mr. Ackerman. I request that the witnesses be sworn.
Chairman Baker. The gentleman has asked that the witnesses
be sworn.
I have no objection to the witnesses being sworn, and if
there is no further objection from anyone on the panel, or
discussion, at this time, I would ask all witnesses please to
rise.
If you would please respond appropriately, do you swear to
tell the whole truth and nothing but the truth, so help you,
God?
[Witnesses sworn]
Chairman Baker. For the record, all witnesses answered
affirmatively to the inquiry.
I thank the gentleman.
We will now proceed to hear our first witness on the panel,
the Honorable Vaughn R., Walker, Chief Judge, U.S. District
Court, Northern District of California.
Let me, for all witnesses, make the normal advisory. We
request the witnesses to constrain your remarks to 5 minutes.
Your full written testimony will be made part of the official
record, and we do appreciate your patience and participation
here today.
Judge, please proceed at your own leisure.
STATEMENT OF THE HONORABLE VAUGHN R. WALKER, CHIEF JUDGE, U.S.
DISTRICT COURT, NORTHERN DISTRICT OF CALIFORNIA
Judge Walker. Thank you, Mr. Chairman, and members of the
committee.
It's a pleasure to be here to speak today to House
Resolution 5491, and that is what I'm going to be talking
about.
In light of the comments that have been made, let me just
say, in particular with reference to some of the comments made
by Congressman Ackerman, that I think it's always appropriate
for the Congress to examine and to investigate how the laws
that it enacts work in actual practice. That's always
appropriate for the Congress to do.
Congress enacted much securities regulation legislation
over the years, much of it having to do with how cases
involving those laws are litigated, and I think it's quite
appropriate for the House and for the Congress to examine that
and from time to time, when appropriate, to hear from judges
who are called upon to apply those laws to determine whether or
not they are working in the way that Congress intended them to
work.
Let me say that I come to this particular subject matter,
the subject matter of securities litigation, from a little
different perspective than others.
Most lawyers in these cases appear on one side or the
other, always for the plaintiff or always for the defendant.
Well, I've practiced on both sides, and now as a judge,
I've practiced on all three sides of these cases, and it is
from that perspective that I offer the comments on H.R. 5491.
Class actions are, at bottom, a privatization of a public
function, public law enforcement.
It is as if a public law enforcement function has been
delegated to private parties to bring these actions, to
maintain these actions, to pursue them on behalf of parties who
are injured, and it operates in the same way that public law
enforcement does.
The general public does not ask for law enforcement
officials to initiate the machinery of justice, and in the same
way, absent class members do not ask for these class actions to
be initiated.
The only direct attorney-client relationships that exist
are those that exist between the named plaintiffs, or the lead
plaintiffs, and counsel in the cases.
There are, with respect to these cases, relatively few of
the kinds of controls that are analogous in other contexts of
public contracting, controls that ensure transparency,
competition, and the other measures that we all believe are
appropriate when a public function is delegated to private
parties.
Congress, in 1995, perceived that there were abuses in this
area, and as you well know, enacted the Private Securities
Litigation Reform Act of that year, imposing essentially two
requirements: one, a lead plaintiff requirement; and two, a
heightened pleading requirement.
I would suggest to the committee that things have not quite
worked out the way that I think Congress intended.
Relatively few lead plaintiffs have come forward in the
form of institutional investors, as was envisioned by Congress
when it enacted the lead counsel provisions of the 1995 Act.
Studies have shown that only about a fifth, perhaps a third
of institutional investors have come forward to serve as lead
plaintiffs, to monitor the litigation, to control and watch
counsel, and to make important decisions about when to settle
and how to settle and how to litigate the case.
It is still true that most of these cases are lawyer
driven, lawyer brought, and lawyer controlled.
And secondly, the heightened pleading standards of the
legislation, I think, have also not quite turned out the way
that Congress intended in 1995.
What those heightened pleading standards have essentially
done is to front-end load much of the work of these cases to
require a great deal of litigation at the very beginning and to
increase, actually, the cost of the litigation, and to increase
the cost to securities issuers by putting--by essentially
incentivizing them to put a lot of cautionary language into
their offering documents, cautionary language and other
measures that essentially have very little informational value
to investors.
H.R. 5491 makes several steps that I think are very
helpful.
The disclosure provisions to require that counsel and lead
plaintiff disclose the relationships that they have among one
another is a very helpful measure--a requirement to disclose
some of the interrelationships that have been troubling in this
area.
Secondly, the provision that provides for competition as a
means by which a judge can impose some controls over the costs
to investors of these cases to try to bring down attorney fees
to a more reasonable level.
In cases where there have been active large institutional
investors as lead plaintiffs and in cases in which there has
been competitive bidding in the selection of lead counsel, the
costs to investors of the fees and expenses in those cases have
been substantially less than in the traditional form of
organization of those cases, and the recoveries in those cases
have been just as significant in the cases that have proven to
be meritorious.
Two other points which I would make very briefly.
That is, first, I think the committee should look at an
additional provision that would put some limitation on the
ability of counsel to aggregate a group of unrelated plaintiffs
and thereby qualify for the most adequate plaintiff or lead
plaintiff provisions of the act.
That has permitted counsel to put together groups that are
large, that are unwieldy, and that do not exercise any
effective control over the litigation.
So I would suggest that the committee may wish to look at
that possibility.
And finally, at the fee shifting provision of H.R. 5491,
let me just say that would be a far more effective and measured
way of getting at the problem which Congress attempted to get
at with the heightened pleading requirement. It would
essentially impose upon those persons who bring actions that
are not substantially justified the costs of the action and,
therefore, provide an incentive not to bring cases that cannot
substantially be justified.
So I would think that perhaps with, I'm sure, the changes
that will be wrought through the legislative process, the
fundamental ideas that are put forth in H.R. 5491 are worthy of
very serious consideration, and Mr. Chairman, I am pleased and
honored to have the opportunity to come and address the
committee on this subject.
[The prepared statement of Judge Walker can be found on
page 90 of the appendix.]
Chairman Baker. I thank the gentleman for his participation
and his statement.
Our next witness is certainly not new to the committee, the
Honorable William F. Galvin, secretary of the commonwealth,
Commonwealth of Massachusetts.
Welcome, sir.
STATEMENT OF THE HONORABLE WILLIAM F. GALVIN, SECRETARY OF THE
COMMONWEALTH, COMMONWEALTH OF MASSACHUSETTS
Mr. Galvin. Thank you, Mr. Chairman.
Mr. Chairman, Ranking Member Frank, thank you again for
your invitation.
As secretary of the Commonwealth of Massachusetts, I am the
chief securities regulator in Massachusetts, and among other
provisions, my office administers and enforces the
Massachusetts Uniform Securities Act.
The work of my Securities Division includes the review of
securities offerings, the listing of securities professionals,
and significant enforcement work.
Enforcement cases brought by my office have addressed some
of the most substantial and timely problems in the financial
marketplace: false and misleading analyst reports from national
brokerages; market timing of mutual funds; abusive practices in
the sales of annuity products; and fraudulent conduct by
investment advisors.
I must stress that the great majority of financial firms
conduct an honest business and most issuers of stock are not
defrauding investors.
However, my office has repeatedly seen that small investors
are at a serious disadvantage when they deal with the dishonest
sellers of securities and dishonest companies.
It is imperative that investors at all levels have
effective remedies in cases when they are defrauded. Class
action litigation has been an effective remedy, especially for
small investors.
My office also incorporates Massachusetts corporations and
charters business entities in Massachusetts.
I'm very sympathetic to the needs of legitimate
businesspeople and their companies, but business corporations
ultimately belong to their shareholders. Corporate executives
and directors owe fiduciary obligations of care and loyalty to
the corporation and its shareholders.
I speak today for the interest of investors.
If investors are to defend themselves from misconduct and
fraud by officers and directors, we must preserve their
remedies under the securities laws. Ultimately, giving
investors strong and effective remedies will help prevent
misconduct by company management.
The way I see it, the right to civil litigation is an
essential part of the free market. It's a free market force
that guarantees that there will be financial consequences for
fraud and wrongdoing, and it operates as a deterrent in the
marketplace to continuing misconduct.
My office has committed significant resources to
enforcement. We are a strong cop on the beat, although the
resources of any regulatory agency will always be limited.
Regulators cannot police the financial marketplaces alone.
Since the 1930's, investors' private right to sue has also
operated to police and deter investment fraud. Both of these
tools are essential to maintain the integrity of our financial
markets.
We are concerned that the provisions of the Securities
Litigation, Attorney Accountability, and Transparency Act will
stifle the ability of plaintiffs to obtain recourse when the
securities laws are violated.
While my office has returned more than $20 million directly
to investors, I'm still concerned that many times so-called
Fair Funds or pool compensation funds do not effectively reach
defrauded investors. Civil actions offer a more precise remedy.
Let me speak about some of the specific provisions that I'm
concerned about.
The loser pays provision. This provision may be seriously
detrimental to the interests of retail investors because their
attorneys will be required to take on greater financial risk in
a class action.
This provision would reverse the long-standing ``American
rule'' that each party in an action should be responsible for
its costs unless the action involves abuse of the legal
process, potentially imposing on a defendant costs--on a
plaintiff--that will chill investors and their attorneys from
pressing legitimate claims.
Litigation always involves many uncertainties. If there is
a risk that the costs of defense counsel may fall on
plaintiffs' counsel, lawyers and parties who cannot afford that
risk are that exposure will back away from even meritorious
investor suits.
I note that Federal Rule 11 already requires that court
filings not be made for any improper purpose, and that legal
arguments be warranted, and that a party violating these
requirements will be subject to court sanctions, including
paying defendants' costs and legal fees.
The loser pays provision of this legislation will add very
little value to the current court rules.
With regard to conflict of interest disclosure, I have no
comment on this section, except to ask whether legislation that
targets the practice of a particular law firm is the proper way
to approach these issues.
I note the law firm in question is currently the subject of
a Federal indictment for the practices that this section would
address, and it seems to me that the courts should be the ones
to make those decisions as to the guilt of that firm before we
pursue general remedial action.
The court's role in selecting counsel for plaintiffs' class
is a particularly troubling part of the bill. It's not clear
why this section is necessary, and appears not to be advisable.
The Private Securities Litigation Reform Act of 1995
created a presumption that the investor with the largest
financial stake in a case should serve as lead plaintiff and it
should choose and negotiate with class counsel.
This law has led to more institutional investors acting as
lead plaintiffs in class actions, so these cases are often led
by sophisticated plaintiffs with meaningful resources.
If the proper party is acting as lead plaintiff, the
selection of counsel should rest with them.
Section 4 of this bill goes beyond requiring that the court
should simply approve or disapprove counsel for the plaintiffs,
and instead embroils the court in the selection of plaintiffs'
counsel.
The legislation will allow the court to employ alternative
means in the selection and retention of counsel for the
plaintiff, including a competitive bidding process.
Clearly, a bidding process is not the best way to select
counsel when significant issues are at stake in complex and
technical litigation.
This provision also raises disturbing constitutional
issues, including the right to be represented by counsel,
freedom of association, and freedom of contract. In the end, it
is simply common sense that if the proper lead plaintiff is in
place, that plaintiff is in the best position to select its
counsel.
I urge that this legislation not be adopted.
Even after the passage of the Sarbanes-Oxley Act, we
continue to see disturbing examples of fraud in the financial
markets, from the failure and bankruptcy of the Refco commodity
firm just a few months after its IPO went to market, to the
unfolding stories relating to the backdating of executive stock
options, there are still fresh examples of fraud and misconduct
in the financial marketplace.
But there is often a common thread running through these
scandals, and that is the application of two sets of rules, one
set for connected insiders, which will allow them to exact
unjust profits from the marketplace, and the other set of rules
for the average American investor that has them pay the price
for the fraud of the connected insiders.
Private suits play an important part in keeping companies
honest.
As successive Congresses have encouraged and often required
American families to assume the risks of the marketplace for
their pensions and other aspects of their financial future, I
urge you to protect and not diminish this important tool to
fight abuse and fraud against investors.
Thank you.
[The prepared statement of Mr. Galvin can be found on page
87 of the appendix.]
Chairman Baker. I thank the gentleman.
In light of the pending motion to rise on the Floor, and
not to put the next witness under any constraint with
testimony, I suggest the committee now recess, record votes,
and return as quickly as possible.
[Recess]
Chairman Baker. If I may, I'd like to reconvene our
hearing.
At the time of the committee's recess, we had just
concluded, or Mr. Galvin had concluded his remarks, and we were
to move to our next witness.
I welcome to the committee today Mr. Theodore H. Frank,
resident fellow and director, AEI Liability Project of the
American Enterprise Institute.
Welcome, sir.
STATEMENT OF THEODORE H. FRANK, RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE AND DIRECTOR, AEI LIABILITY PROJECT
Mr. Frank. Thank you, Mr. Chairman, and members of this
subcommittee, for your kind invitation to testify today.
I serve as a resident fellow at the American Enterprise
Institute, but I'm not testifying here on their behalf, and the
views that I'm sharing here today are my own.
There are areas of securities class action reform that are
unavoidably divisive, but this bill should not be one of them.
The small steps taken by this bill are non-controversial means
to reduce corruption in the securities litigation process,
benefitting shareholders and plaintiffs' law firms that play by
the rules.
Securities class actions affect almost every element of
American business. Between 1997 and 2005, there were 225
securities class actions brought against members of the Fortune
500.
From 1996 to 2005, securities class action settlement
totalled $37 billion. Not all of that settlement money reflects
wrongdoing.
As Justice Stevens noted about securities class actions in
a unanimous Supreme Court decision in March, even weak cases
brought under the securities laws may have substantial
settlement value, because the very pendency of the lawsuit may
frustrate or delay normal business activity.
There is a war, with investors on one side and lawyers on
the other. It's worth noting that the majority of institutional
investors, who suffer the greatest losses from stock fraud,
don't want anything to do with the vast majority of securities
litigation, because they recognize that they are made worse off
by it.
Settlements in such lawsuits provide money to the
plaintiffs' left-hand pocket by taking it from their right-hand
pocket with a substantial commission to the plaintiffs'
attorneys involved for facilitating the transaction.
In the WorldCom litigation, Forbes Magazine calculated that
the lead plaintiff, Public Pension Fund, lost at least $2
million net from its settlements, because it also held stock in
the defendant banks, while the plaintiffs' attorneys, who
donated generously to the elected official who approved the fee
agreement, collected more than $300 million.
This is ironic, given that the lawsuits against the
bystander banks accused the defendants of having conflicts of
interest.
The recent indictment shines a small light on a small
portion of a great problem of corruption in the plaintiffs'
bar. The very fact of someone pleading guilty to accepting
kickbacks exhibits that the PSLRA's attempt to impose market
discipline on securities litigation has failed.
If securities class action attorneys were facing market
competition, there would be no windfall worth fighting for with
millions of dollars in alleged under-the-table payments, much
less the risk of prosecution.
I would argue that sweeping reform is needed. This bill is
not that sweeping reform, but it represents some incremental
reforms that improve the system for honest players on both
sides of the table, and therefore, should be uncontroversial.
Most notably, courts differ over whether the PSLRA, the
Private Securities Litigation Reform Act, permits competitive
bidding. As a result, courts are reluctant to implement
auctions, and the benefits auctions provide to investors and to
honest plaintiff law firms are rarely realized.
This bill fixes the statutory ambiguity by making
competitive bidding to chose lead counsel explicitly
permissible.
Auctions should lead to lower-priced representation. When a
court appoints a law firm within setting the fees, the
attorneys' incentive is to maximize their take, but if a law
firm is selected by auction, attorneys compete to provide the
lowest reasonable bid.
Empirical research supports these theoretical contentions.
Both Judge Milton Shadur, a Carter appointee who has
experimented with competitive bidding in his court, and
Professor Michael Parin, in a 2006 working paper, find that
auctions substantially reduced attorneys' fees and increased
returns to the class.
Parin's study predicted that fees could be cut by more than
half. This money, which amounts to hundreds of millions of
dollars a year, could be going directly into investors' pockets
instead of those of attorneys.
It further suggests that class action attorneys are gouging
at a price twice what a fair market competition would produce,
the equivalent of one's local service station charging $6 a
gallon for gasoline on a normal spring day in 2006 without
extenuating circumstances.
In the case of an overcharging service station, one can
choose to buy gas elsewhere. Unnamed class members have little
recourse to limit fees obtained by plaintiffs' firms who did
not agree to a market-based price at the front end.
The language of the bill is permissive, not mandatory.
Thus, courts will have the freedom to attempt alternative
approaches, for example structuring auctions for when there
isn't a trustworthy institutional investor as a lead plaintiff.
This judicial discretion will provide helpful data on how best
to help investors when Congress next revisits the securities
laws.
I'd love to talk about any of these issues in the more
detailed testimony, written testimony, with any of the members
who would like.
[The prepared statement of Mr. Frank can be found on page
75 of the appendix.]
Chairman Baker. I thank the gentleman for his testimony.
Our next witness is Professor James D. Cox, Duke University
School of Law, Duke University.
Welcome, sir.
STATEMENT OF JAMES D. COX, BRAINARD CURRIE PROFESSOR OF LAW,
DUKE UNIVERSITY
Mr. Cox. I also thank the committee for inviting me to
share my views, both in writing and orally here.
Congressman Feeney mentioned earlier the necessity of
achieving some balance, and I want to share and amplify some
data points that are in my sworn statement that filings of
securities class actions peaked in 2003-2004; there was a 17
percent decline in 2005 from that of 2004.
Following the PSLRA, we found a significant increase in the
granting of motions to dismiss and motions for summary
judgment.
Before the PSLRA, the rate was about 19 percent on filed
cases; after that, it's in excess of 40 percent, a 107 percent
change in that short period of time.
My paper captures some of the explanations for this, some
of which is the PSLRA, some is doctrinal shifts that have
occurred, and a number of things. All these have had a
chastening effect on the number of filings of class actions.
As to the question of auctions, I want to just mention one
thing.
Arranged marriages should always cast--we should always
cast a skeptical eye toward any sort of arranged marriages, and
I think we should do that particularly when we find in the last
3 years a growing trend, and it is a significant increase in
the trend of financial institutions stepping forward to apply
and then be selected as a lead plaintiff.
Our own surveys and canvassing of funds has revealed to us
that the relationship that they have with the law firm, and
they do look around for a variety and are not just generally
married to one law firm, is important to their decision to
become a lead plaintiff.
I commend to the committee a review of the very thoughtful
Third Circuit Task Force Report on Selecting Lead Counsel,
where they conclude generally that auctions are a bad idea, but
save them for rare situations, such as Judge Walker widely saw
was happening in the Oracle case, the very first case to
introduce auctions, and that would still be a possibility
today.
Courts do not prohibit auctions. They are permitted in
situations where the court thinks that there's not an
appropriate counsel here, and that's certainly true under the
guidance of the Third Circuit Task Force Report.
So I believe that auctions remain alive and well, a
fallback position when the court believes that there's reason
to question whether there's suitable and appropriate counsel
there.
As to the fee shifting arrangement, which is the Rule 11
modifications that we find in H.R. 5491, let me just point out
four problems with that.
One, there's a certain internal inconsistency. What happens
with this draft language that you have is you're adding a new
section to the rule.
Earlier what happened with the PSLRA is a mandated finding
by the presiding court about whether Rule 11 has been
satisfied. That has not been changed in H.R. 5491.
So the life of the provisions that you're proposing would
be in a situation where the judge has already made a finding
that there's no reason for Rule 11 sanctions and so, therefore,
you're likely to find counsel for the defendants seeing that
this just continues the litigation burdens, the expense, and
the bother of litigation, by so moving, so you need to look at
internal inconsistency.
The other thing you may want to ask is, why was it in the
PSLRA that they changed Rule 11 for securities litigation? And
the reason was they found that defense counsel was reluctant to
move for Rule 11 sanctions in these cases.
So now you're introducing where you were prior to pretty
much PSLRA, and that was found to be deficient at that point.
I'm not quite sure how things have changed.
The other thing I want to just share with you, the third
point I'll say, as a reader of advance sheets--that's what I'm
going to be doing when I'm waiting for my 3:30 plane this
afternoon--I can just share with you that I find, in reading
those cases, you know, a lot of close questions when the
defendant's motion to dismiss is granted on the pleading
issues, that I don't think this is a slam dunk for thinking
that there's a lot of Rule 11 cases that are going to be
arising by tinkering around with the standards here, because I
think that these are vetted within the law firms' offices and
these are close cases, so I don't think you're going to find
that.
I will say the following, that courts have imposed, in a
handful of instances, I must say, Rule 11 sanctions pursuant to
the PSLRA.
Whereas before the PSLRA, there were extremely isolated
instances over 25 years of imposing Rule 11 sanctions, in the
10 years since the PSLRA, you now find a handful of cases where
that's happening.
And the final question I would have is, anytime that we
start talking about loser pay principles, anything that
introduces friction into access to the courts, I just want to
point out a wonderful phrase that's part of our democracy, and
distinguishes our country from countries around the world, and
it's the expression, ``Access to justice.''
That's a wonderful expression. Let's be very careful before
we start tinkering with anything that's going to cause that to
be qualified in any substantial way without producing equally
substantial benefits.
The final thing I'd say is that the third provision in H.R.
5491 calls for greater disclosure of information about how
counsel was selected, conflicts of interest.
I would fully support that. I believe it should not be
isolated to securities class action.
My sworn statement suggests that perhaps this is something
that should be universal across class actions.
Many judges do inquire very closely with respect to
conflicts of interest, how the plaintiff is selected, counsel,
in a class action, whether it be a securities class action or a
non-securities class action.
This is something that should be uniform across judges, and
to the extent that all judges don't do that, then I think there
are grounds, as there is proposed in this legislation, for
making it uniform across all class actions.
Thank you for your time, and I'll be glad to work with the
committee and the staff in supplying other information that's
come out of our studies of securities class action settlements.
Thank you very much.
[The prepared statement of Mr. Cox can be found on page 62
of the appendix.]
Chairman Baker. I thank the gentleman for his statement.
I will start with questions.
First, Secretary Galvin, I noted in your written testimony
a concern about so-called Fair Fund distributions, but in the
resolution of the Putnam settlement, which was $110 million in
the aggregate, of which the State of Massachusetts received
half, the SEC received half, there was, as I understand it, a
distribution of $5 million back to Putnam Fund's shareholders.
How was the determination made as to who was entitled, and
to the amount each recipient ultimately received?
Mr. Galvin. As a matter of fact, that process is still
ongoing.
We're trying to determine--most of the losers in that case
were investors who operate through pension funds or 401k's.
We're attempting now to work through a schedule with Putnam
to get those monies back.
My policy has been that I want to make sure that the
victims are made whole first. The only monies that the State
generally gets are monies that compensate us for our
investigation or in some way are actually a punitive penalty
for conduct. We do not preference our taking over the
individuals.
In the Putnam case, we're still in the process of
negotiating the details of getting back people's money.
Obviously, when you're talking market timing, calculating
the exact damage is extremely difficult. When you're talking an
aggregated fund, such as many of the victims here were, it's
even more complicated, but we're still committed to that goal.
My frustration, as referred to in my remarks, is that so
often, for instance, in the research analysis cases, I think
you'll find that most of that money is still sitting over at
the SEC or under court jurisdiction where they're trying to
figure out how to get it back to those who were harmed.
I think class actions provide a better remedy for figuring
out exactly who is most adversely affected. I think that that's
an important tool to have when you're trying to make people
whole, especially in complex financial cases.
Increasingly, the victims of these types of financial
crimes are indirect in the sense that they are members of
pension funds, they are affected by involvement in mutual
funds. Calibrating their precise loss is extremely difficult
and time consuming, but I still think it's a goal.
I share with you the idea that the important thing is to
put people back, get people back their money, and if it's been
stolen from them, to get it back for them.
Chairman Baker. Well, why not, then, if you're going
through the difficult task of making judgments about whom is
entitled to the funds in the first place, deducting out your
cost of administration? Certainly that can't be $50 million out
of the $55 million settlement.
Why would you not, after having established the fact and
precedent that you wish to give money back.
I believe in your statement you also indicated in the
aggregate, through efforts of your office, you have returned
about $20 million to investors.
What is the legitimate reason for keeping $50 million at
the State level as opposed to giving it back, or some
significant percentage, to those identified recipients?
Mr. Galvin. Well, I don't think we have.
First of all, the Putnam case was a joint case between
Massachusetts and the SEC, and obviously, as you know, from
some of my previous appearances before this committee, I do
subscribe to the theory that the SEC has superior jurisdiction,
and obviously, in that regard, we give them some leeway in
determining how these cases are decided.
We've always preferenced Massachusetts investors,
especially, and others.
In the case of Putnam, you also had a number of investors
from outside of Massachusetts who were adversely affected by
the conduct. In that case, the SEC was the better party to
speak for them, more than I was.
Chairman Baker. Well, that's correct. The settlement was
$110 million. SEC received $55 million of it. All of the $55
million, pursuant to SEC explanations, will go to Fair Funds
distribution, and that merely--
Mr. Galvin. That hasn't been distributed. I mean, that's my
criticism.
Chairman Baker. Well, of $7 billion targeted by the SEC
subject to Fair Funds identification as being ill-gotten gains,
$5 billion has been collected in assets and over $3.1 billion,
I believe, to date, has actually been distributed.
So the progress is more significant than most would
believe. I'm just getting to the principle, rather than actual
operative facts, and that is, should we not give the money back
to the individuals as opposed to retention for State government
purposes?
Mr. Galvin. My sympathy is to give it back to the
individuals, and I think it's been proven by the actions we've
taken.
I do think this whole issue is an evolving one and I think
it speaks to the larger issue of this legislation and what
we're here about.
You know, it's interesting that we're talking about 1995,
the last time the Congress acted in this area, and I would urge
you to look at all the changes that have occurred in the
financial marketplace since 1995, and what we've uncovered.
You know, it's not just because of State regulators and
Federal action, but--and perhaps also the action of this
committee.
I think we're a lot more aware today of the risks that
people have, of some of the misconduct that's going on, and the
amounts of money that are affected.
Just the mutual fund scandal alone, the Putnam--
Chairman Baker. If I can sort of cap, because I'm getting
ready--my time is going to expire in just a second, you do not
have objection to the principle of a Fair Fund, but rather
concerns about the operative distribution of funds assigned to
a Fair Fund, is that--
Mr. Galvin. If a Fair Fund is truly fair, I'm for it.
Chairman Baker. That's what I needed to hear, and I have
more on the subject, and I wanted to get to Judge Walker with a
series, but I'm out of time, so I'll go to Mr. Frank at this
time. I'm sorry, Mr. Ackerman.
Mr. Ackerman. Will we have more than one round, Mr.
Chairman?
Chairman Baker. I suspect so, yes.
Mr. Ackerman. Thank you, very much.
Chairman Baker. Mr. Ackerman was asking as to process, will
we have more than one round of questions, and I just wanted to
disclose to everybody that that's our intention.
Mr. Ackerman. Thank you.
I just want to make it clear for those people who might be
listening, or just reading the initial transcripts, of really
what's going on here.
What we've heard from the witnesses sounds very reasonable.
What they've addressed verbally is really the issue, and the
issue is legitimate, regardless of whether you have an opinion
or not, or agree with one side or the other; the issue is real.
But this is a ruse. This is a beard. The real purpose here,
after listening to the reasonable witnesses that the majority
presented, is not the statements that they said in which there
was not one mention, I think, listening, trying to listen
carefully, of a specific law firm, but the real intent was at
the beginning to put into the record the voluminous pages of
their testimony, which does almost entirely address itself to
ripping apart and damaging the reputation of one particular law
firm that hasn't yet been tried, certainly hasn't been found
guilty.
I'm still puzzled by the appearance of Judge Walker. I
don't know how he justifies, and I heard his written testimony,
but I read--I heard his oral testimony, I read his written
testimony. He's here lobbying on a bill.
I don't know if he's registered as a lobbyist. I don't know
that he's recused himself, or is going to, in cases that come
before him and deal with this matter--that deal with how
attorneys who appear before him are going to get compensated.
I know he has very strong opinions. He's expressed them,
and appropriately so, at peer review and other forums. But the
particular case that he cites, and he only cites one case by
name, is the case that was cited initially in this hearing.
The judge states that he's been on all three sides of the
issue--the corporate side, the plaintiff side, and now the
bench.
I would contend that he's on two sides of the separation of
powers issue--sitting on the bench, and now coming here trying
to help us write the law, and perhaps if we don't like the law,
we'll be on all three sides of that, and maybe we can veto it.
On the testimony, Judge, that you present, you say,
``Mention has been made here today of the recent indictment of
Milberg Weiss law firm and two of its partners,'' etc.
This was given out a couple of days ago, so I guess you
knew that mention would be made here.
You then say, ``The factual recitals of the Milberg
indictment tell of millions of illegal kickbacks to lead
plaintiffs, misrepresentations to courts, breaches of fiduciary
duties to investor class members,'' quote and unquote.
That kind of drags their name through the mud just by the
very mention of it in the way--you go on to say, ``The
defendants in that case are entitled to a fair trial''--that's
pretty generous--``and the government may not be able to prove
the facts alleged in the indictment'', etc.
You don't even indicate that the facts might not be true.
Your concern is the government may not be able to prove the
facts, which in and of itself may be able to stand the smell
test.
But you go on to say, ``or persuade the courts that that
those facts, if proved, constitute the alleged crimes,''
``but,'' you continue to say, ``the indictment is significant
nonetheless.''
So even if there's no case, the indictment becomes
significant.
``These allegations need not''--your words--``need not be
proved true beyond a reasonable doubt for them to awaken
Congress to the need to review,'' etc., etc.
So while in your courtroom you may have a standard of
reasonable doubt, you're suggesting to people who make the law
that we base the law on a case that may have no merit and
legislate on some problem that may or may not exist, and I'm
not saying that it doesn't, but that's your suggestion to us,
and I don't think that's fair.
Interesting, you go on to cite another case that was in
the--reported in the Chicago Tribune a week ago about
allegations, and it's interesting, you don't mention the name
of this law firm, and you don't mention the name of its
partners, and you don't mention the injustices that they were
allegedly charged with.
It's interesting that you just stay on Milberg Weiss.
Chairman Baker. If the gentleman--
Mr. Ackerman. You're very much to the point. You're on
message.
Chairman Baker. If the gentleman can begin to--
Mr. Ackerman. And that's what concerns me.
Chairman Baker.--to wind up, I want to make sure every
member, and we will do multiple rounds to make sure the
gentleman gets all of his questions in.
Mr. Ackerman. Can I have another half a minute, just to
finish the thought?
I thank the Chair for his indulgence.
And in one other place, you say, ``Significantly, in at
least two of the class actions listed in the indictment against
Milberg Weiss,'' etc., etc., Milberg Weiss was able to inject
itself into''--that's a pretty loaded word, ``inject itself
into the legislation with a client, and that they would not
have met the criteria for most adequate plaintiff.''
That's pretty much an opinion that we're not writing here.
And you go on to talk about the Oxford--and I'm finished
with this, Mr. Chairman.
``It's worth noting that in one of these cases, Oxford
Health involved the largest kickback''--not even alleged--
``single kickback payment''--then you have ``alleged in the
Milberg indictment.''
I don't know if you read the whole indictment. Is it not
true that Mr. Vogel, whom I believe is the person who is--who
received the kickback, isn't it true that he was never
appointed the lead plaintiff, never even represented the class?
I don't know how you make this analogy without that even
being the case.
You're trying the case here, Your Honor, with only part,
with only the prosecution side, and without full knowledge of
the facts.
Chairman Baker. The gentleman's time has expired.
Was it his intention to afford the judge an opportunity--
Mr. Ackerman. Oh, absolutely, if the Chair would--
Chairman Baker. If the gentleman chooses to respond.
Judge Walker. Thank you very much, Mr. Chairman, and Mr.
Ackerman.
First of all, we're not talking about a case which we're
trying here in this committee room, Mr. Ackerman. The
defendants in that case are going to have their day in court.
There have been guilty pleas already in connection with
that case, and of course that puts--
Mr. Ackerman. Your Honor, just to be fair, the guilty pleas
were by witnesses who were found guilty in other cases and are
looking for deals, not any of the people accused in this firm,
is that correct?
Judge Walker. I'm thoroughly familiar with how this works,
of course.
Mr. Ackerman. I just want to make sure everybody else
understood that.
Judge Walker. And I believe that it is not incumbent upon
this committee to wait until the resolution of a lawsuit to
decide that a lawsuit or a criminal prosecution may raise
questions which the committee would want to look at.
What I think the committee should be interested in, and I
hope is interested in, is how these cases work in actual
practice.
After all, the people who are charged with the
responsibility of representing wronged investors carry very
serious fiduciary obligations to those investors, and as
attorneys, they have to do more than simply be free of a
criminal conviction. They should avoid impropriety, and indeed,
avoid the appearance of impropriety.
What I said in that portion of the written statement, and
what I think is significant for the committee, is that when
there are charges of this kind, whether proven in a courtroom
to a standard of criminal liability, nevertheless would be
grounds for this committee to look at the process and examine
it and determine whether it is working in the best interests of
investors and the best interests of the economy.
And the provisions of the proposed legislation, I believe,
are substantial and should be seriously considered by the
committee as a reform of this litigation process.
And with all due respect, sir, judges do know something
about litigation, and I think can offer some insights to the
Congress when it comes to how litigation works in actual
practice, and I would hope that the committee and Congress
would hear from judges from time to time on that subject.
Chairman Baker. The gentleman's time has expired.
Mr. Ackerman. If I could just follow up?
Chairman Baker. Okay, 30 seconds, please.
Mr. Ackerman. It's always good to hear from judges.
Was your viewpoint on this overturned by the Ninth Circuit?
Judge Walker. There was a case that went up on a petition
for writ of mandate in connection with a selection of class
counsel that I made in a case. That was reversed on the grounds
that the process of bidding in that case did not comply with
the lead counsel provisions of the 1995 Act. That is correct.
Mr. Ackerman. Thank you.
Chairman Baker. The gentleman's time has expired.
Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman.
Although I have a number of questions for the panel, I must
admit, after listening to a lot of opening comments after my
own, I feel compelled to say a few things, because I'm somewhat
taken aback by the reaction to this hearing.
Some have protested the mere existence of this hearing
because they didn't like its previous title.
I happen to know, for example, that the most famous song of
the Beatles, ``Yesterday,'' was once termed ``Scrambled Eggs''
before they chose to call it ``Yesterday.'' I'm not sure that
the popularity of the song was ever burdened by its previous
title.
Some have protested this hearing because they see it as
some type of interference in ongoing litigation.
I think I've read everybody's biography, but let me ask the
first question.
Are any of you four gentleman directly involved in the
Milberg Weiss litigation?
[Chorus of noes.]
Mr. Hensarling. Listening to the testimony, I don't frankly
know how any reasonable person could come to that conclusion.
Following the logic of some of our friends on the other
side of the aisle, and I think this point was made earlier when
we followed what appears to be the logic of some, Sarbanes-
Oxley would not have been passed 4 years ago, it would have
been passed perhaps several weeks ago once Jeff Skilling and
Ken Lay were finally convicted.
Some have said that this is a hearing to attack, I guess,
the reputation or integrity of a firm, and I think I've just
witnessed an attack on one particular witness.
I think I know why he's here, or at least I know one of the
reasons that I'm very happy he's here.
That is, there is a legitimate issue on the usefulness of a
competitive bidding process in class action securities
litigation, and whether you agree with it or don't agree with
it, I think it would be very difficult to conclude that the
justice who initiated this and has 15 years of experience in
it, you would have to conclude that he's an expert at the
issue.
So with that, I would like to ask my first question to
Judge Walker.
I've seen at least three studies that make a fairly
compelling case that in the competitive bidding process, fees
have been significantly reduced as much as a factor of 50
percent.
In your own court, can you explain what you've observed,
how the auction process reduces attorneys' fees?
Judge Walker. Let me just tell you, Congressman, how it
began.
It began in 1990 when lawyers were contending for the
leadership position in a securities class action, and the
contention was all on very subjective grounds, personality
conflicts. It was East Coast versus West Coast, that sort of
thing, none of which seemed to me mattered as far as the
interests of the investors were concerned.
And I simply suggested to the lawyers that they submit
proposals for the representation of the class based upon the
price of their services and the quality of those services, and
that was met, I must say, with silence in the courtroom.
Subsequently, what I received was a joint proposal. The
battle having been resolved, the parties gave up their
respective positions and submitted a joint proposal.
Well, needless to say, I didn't think that that was in the
interests of the investors.
And in fact, they had prepared a transcript of the meeting
at which this joint proposal was worked out and it sounded very
much like some of the things that you read about in price
fixing cases. It sounded very much like that. I used to do that
kind of work when I was practicing law.
But in any event, that's how it began.
And the results were very satisfactory from the point of
view of the class. Recovery was had, a very substantial
recovery. It came in early in the case. And the fees were
substantially lower than the standard 25 percent, one-third fee
that typically had been awarded.
The same was true in other cases in which competitive
bidding had been used in the selection of class counsel.
Now, I must tell you that I do not advocate competitive
bidding in all cases and I don't have--I'm not without some
reservations about it.
If you have a lead plaintiff which is a responsible
institutional investor or other investor in whom the court can
have confidence that the investor is monitoring the lawyers,
interested in the litigation, is following it, and is making
decisions of the kind that a client would make, there's no need
for any kind of competitive selection process because that lead
plaintiff will have done that itself, or himself or herself.
In addition, it's not altogether clear what means of
compensation is the most advantageous to the class.
Is it a decreasing percentage to take advantage of
economies of scale in litigation or is it an increasing
percentage in order to incentivize the lawyer, or is it the
kind of system that Judge Lewis Kaplan developed in the
Southeby's case, in which he set a certain amount of money
below which the attorneys would get nothing and above which
they would get a percentage of the recovery?
So I completely agree with Professor Cox that competitive
bidding is a useful tool in the arsenal of a judge who is
interested in protecting the interests of the class and
ensuring that the class gets fair, good, and reasonable
economic representation--
Chairman Baker. The gentleman's time has expired.
Judge Walker.--and we should not abandon that tool.
Chairman Baker. I thank the gentleman.
Mr. Frank.
Mr. Frank of Massachusetts. Mr. Chairman, first of all, I
want to deal with rather bizarre misrepresentations of our
arguments.
No one has suggested that it's inappropriate to inquire
into the subject matter. No one has suggested waiting for
legislation until trials are completed. These are total
fantasies.
What we are saying is that it should be possible to go into
the subject matter without focusing on a pending indictment,
and that title was relevant because the title indicated what
the intent was, to focus on the indictment.
And we did think that it was inappropriate for a
Congressional committee to do a review of an indictment, and
frankly, I think there was some indication of this being the
purpose because, Judge Walker, I have to agree with one of the
particular points Mr. Ackerman made.
I'll be honest with you. I think it's disingenuous in your
testimony where you say on Page 4 in your prepared testimony
submitted earlier, ``Mention has been made here today of the
recent indictment of the Milberg Weiss law firm,'' as if
somebody else had brought it up and you felt compelled to
comment on it.
You obviously came here as part of a plan to discuss it and
to be critical of the firm. I'm a great believer in the First
Amendment. In some places that would be an appropriate thing.
For a sitting Federal judge to come to a Congressional
committee and pretend that it somehow just came up when it was
part of an intent to focus on it is part of what we're upset
about.
Now, I do have a couple of questions.
For Mr. Frank, in your first statement, you say, ``When
Congress passed the 1933 and 1934 Acts, there was no private
right of action. Such a right was created by judicial fiat and
accepted as a fait accompli by the Supreme Court.''
Now, judicial fiat and fait accompli are not usually words
of approbation.
Do you take the view that we would have been better off if
such a right had never been created? Do you oppose the very
existence of a private right of action?
Mr. Frank. No, I didn't say that.
Mr. Frank of Massachusetts. No, no, I know you didn't say--
you said it was judicial fiat and a fait accompli.
I never heard anybody talk about fiat and fait accompli
about things they liked, so you sound here critical of the very
existence of a private right of action.
Do you think it was a mistake to have created a private
right of action?
Mr. Frank. I think it's a mistake for the judiciary--
Frank of Massachusetts. No, no. No, that's not the
question.
Do you think it was a mistake to have created a private
right of action, simple straightforward question.
Mr. Frank. It depends on the scope of the private right of
action.
Mr. Frank of Massachusetts. The one that was created. I'm
not talking about one up on Mars.
Do you think that it was wrong in 1946 that it was created
by a district court opinion and accepted in 1971 by the Supreme
Court? Do you wish that hadn't happened?
Mr. Frank. Do you mean as a matter of a judicial
decisionmaking or do you mean as a matter of public policy?
Mr. Frank of Massachusetts. Public policy.
Mr. Frank. As a matter of public policy, the right that was
created was overbroad.
Mr. Frank of Massachusetts. So would you want any private
right of action in these cases?
Mr. Frank. I would like some right of private action.
Mr. Frank of Massachusetts. You had described that in
writing, but you basically objected to the very existence of
the right as it existed from 1971?
Mr. Frank. No, I objected to the judicial--
Mr. Frank of Massachusetts. As it existed?
Mr. Frank. No, I objected--
Mr. Frank of Massachusetts. You said it was overbroad. That
means as it existed then.
Mr. Frank. Well, to some extent I object to it, and to
some--
Mr. Frank of Massachusetts. Yes, all right, I want to get--
now, as to auctions, you said that auctions save money.
Should the Federal Government use auctions and other
governments use auctions when they're hiring outside counsel?
The Federal Government may not do it as much. It does
sometimes. State and local governments also do it.
Do you advocate the use of auctions when State and local
governments hire outside counsel, as a possibility?
Mr. Frank. It depends on the situation.
Mr. Frank of Massachusetts. Well, yes. Then you would say
that in some cases say there should be auctions by them?
Mr. Frank. There should be a competitive bidding process.
That's, I think, a different concept than an auction. An
auction implies that the only element is price.
Mr. Frank of Massachusetts. So would you differentiate
between the kind of selection process you would use in class
action cases from what a, say, a local government maybe ought
to do when hiring outside counsel?
Mr. Frank. Well, it depends on whether there are named
class members; it depends on a variety of--
Mr. Frank of Massachusetts. All right. To be honest, I--
well, let me ask the other--how about the ``loser pays''
principle. Let me ask this.
Judge Walker, the loser pays, principle, are you in favor
in this case?
Judge Walker. I do favor it--
Mr. Frank of Massachusetts. Good. What about in patent
cases, do you favor the loser pays principle?
Judge Walker. Yes, and we have a modified form of a ``loser
pay'' in patent cases--
Mr. Frank of Massachusetts. So you're not just for the
loser pay principle in class action cases--
Judge Walker. Oh--
Mr. Frank of Massachusetts.--you're for generally applying
it?
Judge Walker.--absolutely not. No, I think it would be very
constructive--
Mr. Frank of Massachusetts. Mr. Frank--
Judge Walker.--I would just say--
Mr. Frank of Massachusetts. No, no, you answered the
question.
Judge Walker. Well--
Mr. Frank of Massachusetts. Mr. Frank, do you think that
the loser pay principle should be applied in, say, patent
cases, in cases where two businesses are suing each other?
Mr. Frank. Yes. Yes, I do.
Mr. Frank of Massachusetts. So you're for the loser pay
principle in general, not just--
Mr. Frank. Yes--
Mr. Frank of Massachusetts.--in the class action cases.
Let me say, Mr. Chairman, at this point, I would like to
introduce into the record a statement from the Consumer
Federation of America, which is on the bill where it
expresses--``express our opposition to H.R. 5491,'' and also
from the AFL-CIO associate general counsel Damon Silvers,
``H.R. 5491 will protect perpetrators of corporate fraud and
increase legal fees to plaintiff lawyers at the expense of
working''--to Mr. Galvin, just one last question--
Chairman Baker. Just, without objection, that's admitted.
Mr. Frank of Massachusetts. Thank you.
Are there other issues that you think we should address,
because I think nobody has an objection, everybody is in favor
of addressing in these hearings and legislatively the whole
question of how best to protect shareholders, and the argument
here is that this legislation will lead to better protection of
shareholders.
Are there other factors that you think we should be
considering if we were to deal with legislation?
Mr. Galvin. Absolutely. I think there's a multitude of
issues.
For instance, in the idea of remediation, one of the things
that I've been most concerned about is the arbitration process.
We force investors into arbitrations that are oftentimes
rigged against them, and that's a condition of buying stock,
and that's something that I think the Congress ought to be
looking at.
That actually affects many people in this country who don't
go--can't go to litigation, that are trying to get recovery of
losses.
And there's one example.
I think the whole issue of the pricing and the timing of
options that was mentioned in my testimony is another.
The hedge fund issue, which I think cuts across our entire
financial services system, indeed our entire economy, that's
another example of something that I think demands a lot more
attention than it's been getting.
Mr. Frank of Massachusetts. I thank the secretary, who has
been a great leader in consumer protection and shareholder
protection, and I hope that we can pursue these--
Chairman Baker. The gentleman's time has expired.
Mr. Feeney.
Mr. Feeney. Thank you, Mr. Chairman.
I think the testimony from all of our panel has been quite
interesting.
First of all, Your Honor, I want to tell you that I'm
hardly offended by your being here. Matter of fact, I consider
your testimony interesting, persuasive, and very much
appropriate.
Congress, collectively and individually, all the time gives
advice to the president and to our sister branch in the
judiciary. Sometimes we do it officially. It's called a
resolution. Sometimes we do it unofficially. It's called
criticism of judicial decisions. I engage in it on a frequent
basis.
And I can't ever remember being offended by something that
a judge said off of the bench. I'm regularly offended by
decisions that come from the bench.
But for example, you know, Justice Breyer's recent book,
Act of Liberty, I find terribly, terribly interesting, and I'm
glad that he shared it with us. I wrote a full critique of his
book because I thought it was wrong, but I'm delighted that he
shared his view with us.
And I think that your testimony, especially given your
experience, is particularly helpful, from my perspective.
Chairman Baker. Would the gentleman yield for just one
moment, for just a procedural matter?
Mr. Feeney. I'll yield under any circumstances, but I hope
it doesn't come out of my time.
Chairman Baker. Absolutely not. The gentleman's time will
be honored.
I understand Secretary Galvin needs to leave the hearing.
Certainly we want to accommodate him.
There were questions on the second round we'd like to
forward. We will put those in writing and--
Mr. Galvin. I apologize for having to leave, but I have
made other commitments that require my departure.
Chairman Baker. We certainly understand. I just wanted to
make clear for the record that we would follow up with our
questions by correspondence.
Mr. Galvin. I look forward to working with the committee.
Chairman Baker. I thank the secretary for his appearance.
The gentleman is recognized on the remainder of his time.
Mr. Feeney. Thank you very much, Mr. Chairman.
We appreciated having the gentleman from Massachusetts with
us.
Professor Cox, I understand that there are significant
portions of H.R. 5491 that you don't think are necessary, but
you do agree that there are some problems, and you refer to
them in your testimony.
In a recent article, you actually analyzed some of the pay
to play allegations and suggested that perhaps a total bar of
appointments from a law firm that's made political donations is
appropriate.
As a former lawyer, I'm terribly troubled by some of the
allegations, and we don't need to have a trial here of any
particular names. We can talk about hypotheticals and legal
ethics and appropriateness, and I think that all of us can
hopefully agree.
With respect to the pay to play practices, could you
describe those as they may be happening in the real world out
there, and tell us what, if anything, you think Congress may
need to do, since you point out in your article, the American
Bar Association has sort of a, you know, ambiguous inference or
implication that this may be wrong, but none of the 50 States
has apparently directly barred this.
So maybe you can address what pay to play is, what the
problem is, and how Congress may need to address it.
Mr. Cox. Pay to play exists on several fronts. The front we
looked at in terms of trying to find out if there is some
relationship between, for example, State treasurers, State
controllers, etc., decisions of funds under their control could
become lead plaintiffs or not.
And there are, you know isolated stories that we were first
able to collect in the press that suggested this was a problem.
Second thing we looked at was to go from State to State to
find out how many law firms, plaintiff law firms registered as
lobbyists.
We did find, I believe, nine States where there were at
least one, sometimes seven plaintiffs' law firms that had
registered as lobbyists in those States.
We teed up then the idea that many States had wisely, in
light of the brouhaha that accompanied the Cendant settlement
where there were allegations of pay to play, where Pennsylvania
law firms mysteriously were making contributions to somebody
running for statewide office in the State of New York, and then
was selected as lead plaintiff in the Cendant litigation--
strange connection there, I would think, but leave that as it
is.
Many States then introduced procedures to insulate the
decisions about becoming the lead plaintiff totally from those
who would be political officers, etc., head of advisory
committees.
And we think that's a good practice, certainly a
prophylactic requirement, and we think that, to just wrap this
up, because I don't want to eat into your time needlessly,
thinking that this is fair game, I think, when you're a
presiding judge and you have an institution, I think it's worth
asking those questions about--that probe exactly how it came
that you selected this law firm to represent--
Mr. Feeney. Well, professor, if I can interrupt, Judge
Walker may do that. But should we require it of other judges
who may not be as thorough as Judge Walker is?
Mr. Cox. Yes. I found nothing objectionable in that portion
of H.R. 5491 on that point.
Mr. Feeney. Can I give you a hypothetical that is a little
bit historical? I don't think it's in play today.
Supposing that it turned out that a particular industry,
like the tobacco industry, was sued by a group of 10 or 12 law
firms who ended up in a settlement, having never needed to take
the case to trial, that resulted in hundreds of millions of
dollars per law firm, and supposing it turned out that those
law firms had one significant thing in common, that they had
made contributions to attorneys general in various States and
their respective party treasuries; would that be an ethically
troubling problem for you as a professor of law?
Mr. Cox. The answer to that is that it would certainly be a
troubling problem, just sort of given my makeup, okay?
Whether I'm going to entangle that with ethics or not is
another question.
Going forward, I would think we'd want to learn from that
experience and try to squeeze that out. I mean, now if we start
doing it with lawyers doing that, I mean, I think we go right
down the list and there's lots of other entanglements.
I just speak as somebody who, you know, grew up in Kansas
and lives in Durham, North Carolina. We see things a lot
differently than maybe what goes on around here.
But I find all those entanglements troubling.
Chairman Baker. The gentleman's time has expired.
Mr. Miller.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
I did not practice in this area. I did not bring class
actions when I practiced law.
But all the concerns that I have heard today, and about
this subject generally, ring a bell with me, because when I
went to law school, my understanding was that class actions
were fundamentally different. The courts were adjudicating the
rights of people who weren't there, who weren't sitting in the
courtroom, who had never met their lawyers, and who had no
control of the litigation.
And for those reasons, the rules of court put a pretty
strict burden on the judge to make sure that people were not
abused, that people whose rights were being adjudicated were
being treated fairly by the named plaintiffs who were different
from the class members and from their lawyers.
And looking at Rule 23, it seems to me that every concern
that anyone has expressed today is already reflected in the
rule.
In appointing a counsel, first of all, the counsel for a
class has to be approved by the court. At the end of the
litigation, their attorneys' fees and their reimbursement of
cost has to be approved by the court, with everyone put on
notice, all the members of the class put on notice, and allowed
to come forward and have their say, and the opposing party put
on notice.
And then the court has to enter findings of fact and
conclusions of law, and is required to act in the best
interests of the class members.
And the criteria for selecting counsel for a class seemed
to me to hit all the right considerations.
The court has to consider the work the counsel has done in
identifying or investigating potential claims in that action,
the experience in handling class actions, other complex
litigation and claims specifically of the type asserted in that
action, a knowledge of the law, the resources the counsel could
bring to representing the class.
The court may also consider more than one applicant to be
counsel for a class, and required to consider all those
considerations, and also to require any applicant to propose
terms for attorney fees and nontaxable costs. That's at the
front end.
And at the back end, they also have to approve the award of
attorneys' fees.
Judge Walker, it appears, based on just reading Rule 23,
that if litigants or class members are having their rights
seriously abused by their lawyers, if their lawyers retain
them, then the judge responsible for the litigation, the judge
assigned the litigation has seriously failed the duties given
to the judge under Rule 23.
I'm sorry. Is there some consideration in Rule 23 that you
think should not apply in selection of counsel?
Judge Walker. To the contrary, Mr. Miller. I think Rule 23
should apply to selection of counsel in securities class
actions.
The problem is that we have the overlay of the lead counsel
provisions of the 1995 Act, which make difficult the kind of
comparative or competitive selection process that Rule 23 now
envisions.
I would say further that the comparative or competitive
processes that Rule 23 now contains were not there in 1990 when
the first bidding case came down. That basically is an
outgrowth of the decisions made by judges, including myself,
and the learning that the courts obtained through that process.
But let me just comment further on a very troubling aspect
of Rule 23 and all class actions, not just securities class
actions, and that's the situation that the judge faces at the
end of the litigation.
At the end of the litigation, typically, the parties have
settled. There's a fund of money. The defendants have agreed to
pay in the money and they've agreed not to contest the
plaintiffs' and plaintiffs' counsels' application for fees.
And there is nobody there who really represents the class,
other than the lead plaintiff, and if the lead plaintiff is not
a vigorous advocate for the class, the judge really doesn't
have an adversarial presentation, and that's what we need in
court. That's the raw material with which we work, an
adversary--an advocate on one side and an advocate on the other
side, and through that clash, we try to reach a just result.
And, in the absence of a vigorous lead plaintiff, you
simply don't have the raw material to make these
determinations.
Mr. Miller of North Carolina. But Judge Walker, that seems
to be contemplated in any Rule 23 case.
In any class action, the court has to pause and consider
that the plaintiffs before the court and their counsel are not
like most plaintiffs and most counsel, most parties and their
counsel, that there are people who are not there whose rights
are being adjudicated.
Any settlement, the court has to approve. The court has to
look at it skeptically, and not just accept the arguments of
those in the courtroom. The court needs to understand that a
class action is different.
This is understood by the rules for the entire time that
Rule 23 has been in effect, the entire time that we've
recognized class actions. Courts have to understand, judges
have to understand this case is not like other cases.
Judge Walker. And my point is--
Mr. Miller of North Carolina. And that seems to be
reflected already by the rules.
Judge Walker.--is that that adversarial process is absent
once the parties have resolved the case and gone away.
Mr. Miller of North Carolina. Right.
Judge Walker. And the judge only has one side of the case.
Mr. Miller of North Carolina. And the rule says to judges,
``You do not have the adversarial process you usually have. You
cannot just listen to the people who are in the courtroom. You
have to pause and consider the position of those who aren't
here before you approve the settlement.''
Judge Walker. That is true.
Mr. Miller of North Carolina.--before you approve the
settlement,'; before you approve attorneys' fees, before you
approve lead counsel or counsel for a class.''
Professor Cox--
Judge Walker. That is true, but let me just add one
comment.
A judge just can't pull these facts out of thin air. A
judge depends upon the parties to present the facts and to
present them in an adversarial fashion, and when the
adversarial process no longer exists, then the raw material for
the kind of decision making you're talking about is simply
absent.
Chairman Baker. And can the gentleman begin to wrap up?
You're over your time.
Mr. Miller of North Carolina. I was going to ask Professor
Cox if he thinks that Rule 23 does not reflect the
considerations that apply in class actions, in how the court is
supposed to supervise the conduct of lawyers for a class in a
class action.
Mr. Cox. I would concur with Congressman Miller, to be
brief.
And I would just say another thing, that as we've discussed
this in the hallways at my law school and other law schools,
one question we've always had is why judges don't more
frequently resort to some other mechanisms to try and squeeze
these fees down or evaluate a settlement.
You know, you've seen some instances outside the securities
arena of using special masters to come in and take a look at
it, to introduce some sort of close scrutiny, and there are
some mechanisms out there.
But I agree, I think we overtax our courts. We need to
expand the number of judgeships, etc. But at the same time, I
think there's more that the judges can be doing here, and I
would encourage that, with all due respect.
Chairman Baker. The gentleman's time has expired.
Mr. Campbell.
Mr. Campbell. Thank you, Mr. Chairman.
Judge Walker, in your oral testimony, I believe that--I'm
going to paraphrase here, and ask you if it's correct--in class
action securities litigation where there is not a sophisticated
institutional lead plaintiff, that the lead--the attorneys in
that case are basically acting, when they're representing
hundreds of thousands of shareholders, in a public trust. Is
that a fair clarification or fair--
Judge Walker. I think that's a fair understanding yes.
Mr. Campbell. Of what you said.
Do either of the other members of the panel disagree with
that?
[No response]
Mr. Campbell. No? Okay.
And we have seen violations of that public trust in the
past, or abuses of that public trust by plaintiffs' law firms,
have we not?
Judge Walker. That's certainly what appears to have
motivated the 1995 Private Securities Litigation Reform Act,
that Congress determined that there were problems that needed
to be addressed.
Mr. Campbell. Right. And I take it neither of you disagree
with that?
Mr. Cox. I don't know whether I agree with it or not. I
mean, I generally supported some of the reforms, but not all
the reforms of the PSLRA.
Mr. Campbell. My point was simply that abuses of this trust
that we just defined have occurred.
Mr. Frank. Yes.
Mr. Cox. The answer to that has to be yes, but on what
scale, of course.
Mr. Campbell. Right. Okay.
Then the next question is, what do we do about it?
And if these--which is what this hearing, I believe is
about--if these attorneys are operating in a fashion of public
trust, and therefore we have an obligation to ensure that that
public trust is protected, does the existing laws, do the
existing laws in this area adequately protect the public trust,
or is there more that we should do?
Now, I believe that Judge Walker implied that you believe
there's more that we should do in that regard?
Judge Walker. Well, that's right, and I agree entirely with
Professor Cox as well, that there's more that judges can and
should do.
I think there's more that--
Mr. Campbell. How do we sitting up here entice, or
whatever, judges to do more that they should do, then?
Judge Walker. Well, I don't know that you can entice them,
Congressman, but certainly the provisions here in the Act,
particularly the disclosure provisions, and I would suggest a
provision governing aggregation and also a provision which
allows a judge to either directly or indirectly engage in a
competitive selection of class counsel when there is not an
active lead plaintiff sophisticated and able to take charge of
the litigation would be a very constructive step in the right
direction.
Mr. Campbell. Mr. Frank, you, I believe, stated in your
testimony that you think that H.R. 5491 is a step or something,
but not where you believe the law should go in this area; is
that correct?
Mr. Frank. That's correct.
Mr. Campbell. Where do you believe it should go?
Mr. Frank. Well, I think the loser pays provision of H.R.
5491 is going to end up being toothless.
I think the substantially justified standard isn't
sufficiently different enough from the Rule 11 standard that
judges exercising their discretion will do so to fee shift in a
meaningful number of cases.
I further think that there's an underlying fundamental
problem with the securities class action where the lawsuits
that are being brought are not to the public good in general.
Mr. Campbell. How do we--
Mr. Frank. Well, I think we need to limit the securities
laws to cases where there's real insider trading, to where
corporate executives are, for example, using misleading
financial projections to get better bonuses for themselves and
then view that as sort of a derivative action for the
shareholder against the wrongdoing executive rather than these
sort of lawsuits that make up the vast majority of securities
lawsuits, where it's sort of one pocket feeding the other
pocket and the only real winners are the lawyers.
Mr. Campbell. So you're suggesting that the abuses we're
talking about are better limited by actually changing the
securities law so that those actions aren't raised at all?
Mr. Frank. I think it's a fundamental problem in the
current system, certainly.
Mr. Campbell. Okay. Professor Cox?
Mr. Cox. Well, I think one thing we want to do is think
about providing a whole set of the right incentives, and part
of the incentives is to try and have individuals go and pursue
the assets of those who are responsible for the wrong.
So the statement about money going from one pocket to the
other pocket is a little overblown, I think you would have to
admit to that.
But it is an issue of circularity, where, you know, money
goes out of a corporation if the corporation makes a payment,
and the lead plaintiff continues to own that corporation, and
you say, ``Well, that's okay, some of that's paid by the
insurance company,'' and of course the lead plaintiff owns the
insurance company, too.
So, you know, there's this problem of circularity out
there, and I think everybody identifies that, and if you're
going to deal with the circularity problem, then you have to
really figure out where the money is, and the money is going to
be with the people who are responsible--the CEO's, the
investment bankers, and others who have aided in the fraud.
And to be able to do that, if you're willing to do it,
means you have to rethink the role of aiding and abetting
responsibility or at least the definitions of what is a primary
participant, so that those avenues can be pursued if you're
going to cap or limit the recoveries against the corporation to
overcome the circularity problem.
That's where I would start with things--redirect the money.
Mr. Campbell. Isn't the purpose of looking for--having a
lead plaintiff that is sophisticated, institutional, etc., is
that, you're right, I don't see how we can here sit here and
create any legislation which can judge on this circularity in
every single instance, but--
Mr. Cox. Oh, yes, you can. You can do a number of things.
One, you could rethink about how you design the
proportionate liability standards that were introduced by the
PSLRA so that perhaps that shields certain individuals from
liability, and then you could also reverse Central Bank of
Denver, which prohibited aiding and abetting under the anti-
fraud provision.
Yes, Congressman, there are some things you could do.
Mr. Campbell. I would like either Mr. Frank or Judge
Walker's comment on that, and then I'll yield back, Mr.
Chairman.
Judge Walker. Well, I'd simply add this to our discussion
of lead plaintiffs, Congressman.
If you were the trustee of a substantial investor that had
been wronged in one of these frauds, you would face a troubling
decision that you'd have to make.
Do you come in as a lead plaintiff and try to represent a
class of people that you've never seen before and have no
obligation to, or would you attempt to opt out of the class and
pursue your own individual action?
And more and more institutional investors are doing the
latter.
So we don't have a sufficient incentive, it seems to me, in
the present scheme of things to provide a reason for the kinds
of institutional investors or investors that we want to see
come in and monitor these cases, and Congress might very well
give some consideration to how it would change things to give
sufficient incentives to the kinds of monitors that we think
are appropriate to watch over these cases.
Chairman Baker. The gentleman's time has expired.
Mr. McHenry.
Mr. McHenry. Thank you, Mr. Chairman.
I certainly appreciate you holding this hearing. I think
the panelists have been very good in their testimony. I enjoyed
hearing you. I'm sorry that Secretary Galvin had to leave; I
had a few questions for him.
But if I could start with you, Mr. Frank, in your
testimony, you provide evidence that 70 percent of securities
settlements in 2004 were, ``actually nuisance settlements of
under $10 million, an amount that to settle is cheaper than
litigating,''.
And you term these settlements, ``effectively legalized
extortion.'' Those are strong words.
Can you elaborate on that?
Mr. Frank. Certainly.
We have three stages of litigation.
One, the cases that are dismissed right up front because
they don't even meet the PSLRA's pleading standards. Two, the
cases that are litigated and then thrown out on summary
judgment. And three, the cases that are settled.
And if you look at the distribution of settlement amounts,
you find that a stunning number of these are just very small
amounts.
Surely not all of the settlements under $10 million are
fraudulent, but for a lot of corporations, you're facing a
litigation that's very expensive to try, very expensive to get
to the summary judgment stage or past the summary judgment
stage to try. It takes up executive time. It takes up corporate
time. And it take attorneys' fees.
And in many cases, it's just cheaper to settle, pay what is
effectively an extortionate amount because the plaintiffs'
lawyers are saying, ``You give us money or we'll put your
corporation through all of this and even if you win, because
there's no loser pays, you don't get any of your money back,''
and it's a rational decision for the corporation to just pay
off the plaintiffs' attorney.
Mr. McHenry. What is your remedy?
Mr. Frank. Well, one remedy for this would be a real
definitive loser pays provision that takes it out of the hands
of the judge and just says, you lose a case that you bring to
trial, you're compensating the defendant for what they've
done,'' and that's the way it's done in every western democracy
except the United States.
Mr. McHenry. Well, Secretary Galvin actually says that, in
effect, that our enhancement of Rule 11 is not effective.
Can you speak to that--what we offer in our legislation?
Mr. Frank. Certainly.
There are various differing standards one could use for fee
shifting.
Right now, we have a Rule 11 standard that is used in
perhaps maybe 1 percent of all the cases, if that many, and
probably less than that.
The current legislation wishes to change that from the Rule
11 standard to a standard of substantially justified, which is
the same standard in Federal Rule 37, the same standard in the
Equal Access to Justice Act, though it's actually a little bit
stricter than that because it requires the winning party to
prove that it wasn't substantially justified, which is the
opposite of the role it takes in the Equal Access to Justice
Act.
But at the end of the day, it ends up with judicial
discretion, and if you talk to securities lawyers, they'll tell
you that judges don't like fee shifting if its' discretionary.
They just want the case out of their courts, and if there's no
fee shifting, then they don't have to have further proceedings
on how much the fees are.
Mr. McHenry. Professor Cox, you actually have a similar
statement in your testimony that says, ``not likely to be
effective for several reasons.'' And you mention some of these
in your testimony.
Could you elaborate?
Mr. Cox. Yes.
First of all, I think Ted is right. I think that judges
tend to be reluctant to impose that.
But more likely, under the old rule, individuals tended to
not move, or the defendants tend not to move to it, again for a
variety of reasons.
They had sometimes the burden of proof, wanting to put the
litigation behind them, frequently repeat players with the
parties on the other side.
You know, so there's a variety of issues there.
As to judges' unwillingness to impose Rule 11, I defer to
the one judge in the room to talk about that.
But I would just say that the standards that apply in Rule
11 or that were introduced by the PSLRA, or that would be
introduced by this litigation, are sufficiently tolerant to
create a lot of ambiguity into the process, which is unlikely,
therefore, to lead to the results that you and others would
like to achieve.
Mr. McHenry. Professor Cox, do you support a loser pay
provision?
Mr. Cox. Not at all.
Mr. McHenry. Not at all?
Mr. Cox. No.
Mr. McHenry. And why would that be?
Mr. Cox. Well, I think I mentioned the phrase earlier. I
think it really does fly in the face of an important part of
American society, which is access to justice, and the loser pay
rule really operates to the disadvantage of those who are
outside the corridors of power or wealth.
Mr. McHenry. I would sort of point to power and wealth with
the $9.7 billion award and settlements just last year, and the
25 to 30 percent the trial lawyers netted off of that, so
you're talking about a $3 billion industry, and you're talking
about them acting as if they're not in power.
I mean, I think they're fully in power, and raking the
shareholders over the coals.
Mr. Cox. You know, I thought the plaintiffs in these cases
were the investors, and many of them are widows, widowers, and
orphans, individuals--
Mr. McHenry. Yes, but you're talking about $3 billion that
trial lawyers net off of this type of action, $3 billion, and
if I may--
Chairman Baker. The gentleman needs to begin to wind up.
Mr. McHenry. So I would point out that the idea that these
people are out of power and indigent is almost laughable on its
face when you have--
Mr. Cox. I don't think it's laughable at all. I think that
you need to provide rewards for the high cost of conducting
this litigation--the search costs, the uncertainty of the
process, and the 40 percent of the cases that get dismissed.
If you ran a business like that, you'd want a pretty good
profit margin on the products that you did sell, Congressman.
Mr. McHenry. And I would just say that's one heck of an
award, $3 billion.
If I may finish with you, Judge Walker, you know, if you
could speak in terms of a lower plaintiffs' attorney having to
pay, and Rule 11, if you could just touch on that, based on
your experience.
Judge Walker. It seems to me a more objective standard than
Rule 11 would be useful for the subcommittee to consider, for a
number of reasons.
First of all, Rule 11 applies in all sorts of cases, not
simply securities cases, and there might be certain standards
in a securities case that you might want to impose that would
not necessarily be applicable in cases generally.
Secondly, Rule 11 is subject to judicial interpretation,
which changes and evolves over time.
As Professor Cox pointed out, Rule 11 issues generally
arise at the tail end of litigation, and nobody wants to deal
with that at the end of litigation, because by this time, the
case is pretty much over.
Rule 11 sanctions are difficult. They're essentially
impractical to impose. And that's the reason that there are so
few instances of them being imposed.
Finally, they relate to the signing of pleadings,
primarily, rather than the conduct of litigation, and I think
it would be useful for the committee to consider a sanction or
a fee shift that would bring into the equation not just what
was written in the pleadings, but how the litigation was
conducted.
Chairman Baker. The gentleman's time has expired.
Mr. Davis.
Mr. Davis of Alabama. Thank you, Mr. Chairman.
Gentlemen, let me pick up where Mr. McHenry left off, on
the loser pay issue.
Judge, as a former lawyer and a former assistant U.S.
attorney, I'm reluctant to question a Federal judge too
strongly, but I'm not sure--
Judge Walker. It happens all the time.
Mr. Davis of Alabama.--I'm not sure that I followed your
last argument.
You mentioned some of the defects in relying on Rule 11 as
a remedy for frivolous claims, and you mention the fact that,
well, the litigation is over, it's hard for the court to go
back in and address these issues.
Presumably, losers pay, obviously, happens after the
litigation is over, too, so why wouldn't those same arguments
cut just as strongly against loser pay?
Judge Walker. Well, if it were required that there be an
award at the end of a case in which a defendant had prevailed,
judges would have no choice but to get into the issue.
But under the Rule 11 standard that now exists, it's not
mandatory, it's not required, and it's an unpleasant piece of
business.
And judges are no different from anybody else. We don't
like to do what's unpleasant.
Mr. Davis of Alabama. Judge, let me ask you one practical
concern.
You've been on the bench a while, and I was a law clerk for
a district judge in Alabama, and we are both well aware that it
takes all phases of litigation a very long time to move.
One concern that I have is that losers pay would weave
potentially another 9 to 10 months worth of litigation, because
under--and I think we all understand at this point in the
hearing, we're not talking about a hard scenario that every
plaintiff who loses pays.
You would have, the district judge would have the capacity
to do an analysis of whether there was a substantial basis for
the claim. There would be some extra layer of scrutiny.
That layer of scrutiny would presumably require hearings,
possibly evidentiary hearings, possibly just arguments on
motions. They would have to be scheduled.
There would no doubt be motions for additional hearings.
There might be a motion for reconsideration of your first
ruling. There might be an appeal of your ruling at the same
time the appeal of the underlying case was going on.
It seems to me that we would weave a lot of complexity into
the end of cases.
And I suppose it raises another question.
Since the appeal of the underlying ruling would be going on
at the same time, what happens in terms of attorneys' fees
issues and those kinds of questions if a judge were to somehow
rule that, ``I think a plaintiff should pay,'' and somehow the
judge was reversed on the underlying ruling on the merits; what
would happen then?
Anybody? Mr. Frank, have you thought about that kind of a
standard? What would be the remedy for a plaintiff who ended up
winning on appeal and after a judge found that claim was not
entitled to paying?
Mr. Frank. Well, it's the same remedy that a defendant has
after losing, which is you move for a stay of the ruling
pending appeal and the appeal either succeeds or it doesn't
succeed, and if the appeal succeeds, you've never paid a penny,
and you get your bonds back, and if the appeal doesn't succeed,
then the defendant gets to execute--
Mr. Davis of Alabama. Well, that sounds good, but for the
fact of attorneys' fees.
Judge?
Judge Walker. The award is not payable until the judgment
is final, and the final--
Mr. Davis of Alabama. What about attorneys' fees that
accumulate in the interim--
Judge Walker.--appeal has been exhausted.
But distinguish, Congressman, if you would, determining the
amount of fees from whether fees should be awarded. It's the
latter that is complicated.
Determining the amount of fees is generally pretty
uncomplicated.
Mr. Davis of Alabama. Yes, I think you're right.
Judge Walker. It's generally just hours and a reasonable
fee rate and--
Mr. Davis of Alabama. The point I was making, though,
gentlemen, is obviously there's a period of time in which a
litigant--these cases don't happen on contingency, typically.
There's a period of time in which a litigant is having to bear
the legal cost of not just adjudicating the appeal or pursuing
the appeal, but also the legal cost of challenging the finding
of pay by the plaintiff.
And my only concern--I don't want to spend my whole 5
minutes on this--my only concern is that if you have multiple
tracks that are being pursued, an appeal plus the question of
who pays, that it simply builds a lot of complexity and a lot
of burden for the plaintiff.
Judge Walker. Well, but would you use that logic then to
say that a plaintiff who is successful should not recover fees?
And we have lots of provisions, and quite properly--
Mr. Davis of Alabama. What I would say, Your Honor, is that
if we contemplate--
Judge Walker.--that the plaintiff is entitled to fees, and
so we have to go through that determination.
Mr. Davis of Alabama. But the question is, if we're going
to make a change in the rules as we know them, who has the
burden of persuasion?
And I would argue that if there are reasons of complexity,
reasons of redundancy, that might argue against a change,
perhaps we should err on the side of caution.
Let me raise another line of questions.
Let me go back to Professor Cox's point. He and Mr. McHenry
had an exchange over the question of is the little guy, is the
little plaintiff, excluded from bringing these kinds of claims.
I'm more on Professor Cox's side of the argument than
either the judge or Mr. Frank, but if I just wrap up, Your
Honor, let me tell you why I think there's a lot to Professor
Cox's argument.
By definition, for a plaintiff investor to even bring this
kind of case, that person has to wade through a lot of
transactional costs, and has to wade through a lot of gaps of
information. It is not an evenly situated playing field.
It's difficult under the best of circumstances, I think
you'd agree, Professor Cox, that it's hard under the best of
circumstances to get plaintiffs to fully exercise and pursue
their rights.
Now, you add the disincentive of a penalty at the end, of
having to pay the cost of the litigation, you add that
possibility, and I can't imagine that you don't raise a
significant impediment to these kinds of cases being brought,
and I think that's something we ought to be concerned about.
Mr. Frank, you were trying to speak to that?
Mr. Frank. Yes, you raise an impediment to cases that
aren't substantially justified. I'm not sure why--
Mr. Davis of Alabama. This is the problem, though, Mr.
Frank. Some of the cases will be and some won't be. They all
won't be found to be in the not substantially justified
category.
The disincentive accrues for everybody who might be a
plaintiff in one of these cases, doesn't it, Professor Cox?
Mr. Cox. There's going to be heavy discounting on the
benefits of me bringing this suit if there is a loser pay rule,
and that's the point that Congressman McHenry was missing.
You start squeezing out the fees and you introduce the
uncertainty of the loser pay rule, and those widows, those
orphans, retirees' funds, etc., are going to not think twice,
they're going to think seven, eight, nine times about--
Mr. Davis of Alabama. Well, let me just end on this point.
What I think you're missing, frankly, Mr. Frank, sure,
people who bring frivolous lawsuits shouldn't be able to
collect anything and probably ought to bear the costs of
litigation.
What I'm concerned about is the class of people who lose,
but who still have a merit to their lawsuit, who lost because
their judge wasn't as wise as Vaughn Walker, or who lost
because their lawyer didn't file a discovery motion in time, or
who lost because a witness went south in a deposition, you name
it.
Chairman Baker. Or lost because his time has expired.
[Laughter]
Mr. Davis of Alabama. People bring a lot of good cases that
are not successful, and those of us who practice law understand
that.
Chairman Baker. I thank the gentleman.
Mr. Pearce.
Mr. Pearce. The University of Southern California would
like the same option, to go back and play the last 4 minutes of
that national championship game. Everyone would always like the
ability to replay.
Mr. Walker, Judge Walker, you had mentioned in your
testimony the need to awaken Congress to the need to review the
operations.
We've heard a lot of comments and I'm sorry I haven't been
able to be here for the questions, but does that seem like a
valid reason to have a hearing, to awaken Congress to the need
that lies out there in the circumstance?
And I have a lot more questions, so please, a shorter
answer rather than a longer one.
Judge Walker. Well, I don't think a judge is here to tell
Congress when it should have a hearing or not have a hearing.
That seems to me to be entirely up to Congress to decide.
Mr. Pearce. I understand, but I'm asking if you think
there's a compelling need for Congress to sit and listen to
this.
You heard the early opening statements--that we are making
a mistake that was foolish, that we're impeding the process of
the judiciary.
Judge Walker. I don't feel that this hearing or the
consideration of legislation to change the way securities class
actions are handled impedes what judges do in the least.
Mr. Pearce. Thank you, sir--
Judge Walker. It seems to me to be a fair and appropriate
matter for Congress to consider at any time that it perceives
that there's a problem.
Mr. Pearce. Okay.
The question I have for all of you is that there are
complaints that attorneys' fees are just not widely known in
these class action settlements and opinions have been given
that greater publication of those fees would be productive.
Again, short answers, because I have several questions in 5
minutes.
So Mr. Walker, Mr. Frank, and Mr. Cox, if you all would--
Judge Walker. It would be very helpful to have that. It
would be very helpful to judges who are called upon to set fees
in cases.
Mr. Pearce. Mr. Frank.
Mr. Frank. I concur.
Mr. Pearce. Mr. Cox?
Mr. Cox. I fully concur, too.
Mr. Pearce. Okay.
How would we go about that? What--would we post those on
the Internet a Web site that puts all fees of all actions of
this nature in one site?
Judge Walker. I don't want to mention a university that's a
rival of the University of Southern California, but Stanford
University Law School has a Web site that compiles a great deal
of information concerning securities litigation, and that would
be one appropriate vehicle.
Mr. Pearce. Okay. Mr. Frank, any comment?
Mr. Frank. I think that's right. I think we just need to
make the--if we require the disclosure of the information, then
existing private sources can disseminate it.
Mr. Pearce. Mr. Cox?
Mr. Cox. Our work has shown, as repeated in the filed
statement, that a significant problem in securities class
actions is that individuals, particularly institutions, with
provable claims do not submit those claims.
One of the problems is that there is no centrally located
mandatory place for notice of settlements to occur. There's no
uniformity in the form that has to be satisfied.
A great contribution could be made in putting money into
people's pocket by not just going with the Stanford site, which
is quite good, but making it a site that something has to
happen mandatorily.
That doesn't require legislation, it requires probably a
swift kick in the backside to the SEC to get this moving,
because that's where they could have the force to do that.
Mr. Pearce. Any suggestion, Mr. Cox, as to what that might
be that would be that swift kick?
Mr. Cox. Perhaps somebody on the football team.
Mr. Pearce. Mr. Cox, you had talked about--Mr. Galvin
actually had talked about it before I was called away--the risk
of the chilling effect on people from having to bear the
possible risk, and you had then I think an answer to Mr. Davis,
had supported something similar to that.
How can we avoid the chill on the other side, the chill
that causes companies never to get into things where there
might even be litigation?
That chill probably affects the price of stock just as much
as any wrongdoing.
Mr. Cox. I remain the eternal optimist here, and hope
springs eternal and I do think that part of the dip we're
seeing in the filings of securities claims, as documented in my
statement, is a result of the great strengthening that's
occurred since 2002 in the financial reporting process.
I think that that, following good procedures, running a
good ship, is the best way to avoid a cold chill down your
spine if you're a CFO or a CEO.
Mr. Pearce. Mr. Walker, do you have a comment on that?
Judge Walker. No, I would concur with Professor Cox.
One needs to bear in mind, however, that all of these rules
and regulations and disclosure requirements do come at a cost,
and I think it's fair in our system that those costs be borne
by public issuers of securities, but we do have to recognize
that there is a cost that these entail.
Mr. Pearce. Mr. Cox, would you have any--oops, I see my
time has expired. Thank you, Mr. Chairman.
Chairman Baker. If you want to ask your final one and wrap
up, that's fine.
Mr. Pearce. The whole problem, Mr. Cox, of the improper
relationships that appear to be highlighted in this case that's
before the courts right now, how can we root that out?
I mean, you get somebody that does not do anything and gets
the $750,000 fee, and I mean, this is, according to the paper,
that's always going to be an attraction.
So how do you root that kind of behavior out?
Mr. Cox. Well, I always think that the first line of
defense in protecting the class members, and I think that's
what we're really talking about, and also the whole system, are
the presiding judges, and I defer to Judge Walker to say what
guidance we can have.
But I think the publicity surrounding the Milberg Weiss
indictment and also the recent revelations in the Chicago
Tribune all are wakeup calls to judges that they need to
inquire deeply into possible conflicting relationships.
And as I said before, I do support that part of H.R. 5491.
Mr. Pearce. Mr. Walker do you, and Mr. Frank, I'll give you
one last chance, then my time is expired.
Judge Walker. I quite agree with Professor Cox's last
statement. I think it is a wakeup call, both to Congress and to
the judges.
Mr. Pearce. Mr. Frank?
Mr. Frank. I agree.
Mr. Pearce. You guys are really compatible out there.
All right, thanks.
Thanks, Mr. Chairman.
Chairman Baker. You should have been here earlier.
[Laughter]
Chairman Baker. I thank the gentleman for yielding back.
By prior agreement, I had indicated that we would have a
second round of questions, and so keeping my commitment to Mr.
Ackerman, I'll recognize him, but it's my intention, and this
is a bit unusual, if we have additional members arrive, I will
not recognize them for questions.
There is a 2 o'clock hearing in this committee room, and
there is time needed to prepare for that, so Mr. Ackerman and
Mr. Davis will be the last of the day.
Please proceed, sir.
Mr. Ackerman. Thank you, I appreciate that, Mr. Chairman.
I just want to clarify a couple of points for the record.
The first one is that in the Milberg Weiss indictment,
which is referenced so extensively in the written testimony of
witnesses, that there is no charge or allegation that even one
dollar was lost to investors by the things that they were
charged with, that it basically charged--it was mostly a fight
between who gets to represent the class, etc.
Secondly, there is no charge that the firm that is cited so
extensively in the testimony is not a vigorous firm in the
prosecution for their clients.
Third, because people mentioned it as if it were a crime or
a charge that the firm received or earned $1.6 billion in fees
and reimbursements, that first, there is no fee that can be
paid that's not approved by the judge or the court, and second,
I find it curious that nothing was made, no point was made that
the firm, if that number is correct, received $1.6 billion,
that they also recovered $45 billion for the people in the
classes that they represented.
Fourth, I don't know of any CEO of any of the large, giant
corporations that have been found guilty of corporate
corruption in which the CEO of that company did not earn more
money than the attorneys for the lead plaintiffs.
That having been said, I want to turn to Mr. Frank's
testimony, if I may.
I find it highly unusual, because Mr. Frank's testimony
reads like the opening statement in a prosecution, by the
prosecutors.
The very first statement, Mr. Chairman, says, ``Hello.''
The second sentence says who he is, and that he's not
necessarily representing the people who pay for his livelihood.
And he waits all the way to the third sentence before
bringing up Milberg Weiss, and from that third sentence on,
there's hardly a page that goes by that he doesn't mention
Milberg Weiss, ripping them apart in the most vicious ways,
expressing opinions that he could not do in a court of law, the
purpose of which is only speculative, but certainly that's what
his testimony is all about, and that was the purpose of his
being here and the focus of so many who are involved in this,
I'll call it a movement.
Pages aren't numbered, but under number two, ``Abuses by
the plaintiffs' bar in securities legislation, the problem of
kickbacks,'' he says, quote:
``To illustrate the problem of illegal kickbacks, I
summarize the Milberg Weiss indictment from the government's
complaint.''
And then he goes on and on, and on and on and on and on,
about the Milberg Weiss case, testifying, in effect, as to what
the charges are in the case and what his opinions are.
I'll cite just a couple of examples.
``According to the indictment, Milberg Weiss paid kickbacks
to at least three groups of named plaintiffs,'' etc., etc.,
etc.
``Milberg Weiss obtained more than $216 million in
attorneys' fees.''
``The government alleges that the kickbacks were sometimes
given in cash,'' laundered through this and that, going into
specifics that are unproven, and really have no business before
this committee or Congress.
Those are points to make in a court of law, not in a
subcommittee holding a hearing on legislation, talking about
who allegedly put what money in what drawer and who gave it to
who.
That's no concern of ours, and the only purpose that I can
think of is to smear this company that has been indicted and
not yet tried.
Then on the next page:
``Some have suggested,'' you say, ``Some have suggested
that the monies were just what they were recorded as, referral
fees, but this is implausible.''
And you go and analyze for us why the firm is guilty and
why the defense that apparently they're going to put up,
according to you, should be knocked down.
That you're trying that case before me, whose only
experience at this, having not gone to law school, is that of a
schoolteacher, who did teach about the separation of powers to
small children, and being presumed innocent until proven
guilty, is very offensive.
The only purpose of doing this--you say, ``Why would
Milberg Weiss passively pay millions of dollars,'' as if they
did. I don't know. Maybe you do. ``Why would they do that,''
you say, unless this or that?
Chairman Baker. Can the gentleman begin to wrap up, please?
Mr. Ackerman. The only purpose is to defame, degrade, and
incriminate.
You mention the Chicago Tribune case.
``The Chicago Tribune revealed that Milberg Weiss''--the
former predecessor company, law firm--as if those are facts,
because a newspaper charged it--they revealed. It wasn't that
they charged. They revealed. You reveal something that's true.
That's a charge. There's a difference, and you know that, and
you make that look like a fact.
And then in number three, and I'm wrapping up, Mr.
Chairman, you say, ``The Milberg Weiss indictment shines a
small light on a small portion of a great problem of corruption
in the plaintiffs' bar. The very fact of kickbacks''--da da da
da da da da--the fact. You've now rendered a decision in your
own case.
You may not be representing the people who pay your
livelihood, but it seems to me that you've weighed in here in a
very, very unfair way the views to which you're entitled, but
testifying in this court, as if it were a court in absentia of
a real court, instead of presenting the evidence that you
apparently know, I don't know how, because you said you have no
involvement in that case--I do understand, I think, that as an
attorney, you appeared in cases on the other side of Milberg
Weiss--
Chairman Baker. If you can, sir, wrap up.
Mr. Ackerman. And I'd like your response to that, Mr.
Frank.
Mr. Frank. Well, I challenge your premises on many
different levels.
First of all, Mr. Vogel did, I believe it was Mr. Vogel who
did plead guilty and did plead that the United States
Government could prove that he took several million dollars in
kickbacks from Milberg Weiss.
With respect to the Chicago Tribune, Coughlin and Milberg
Weiss acknowledged that they made these payments and argue that
they were appropriate, and the Chicago Tribune simply quotes
judges who say, ``I didn't know about these payments, and it
would have made a difference in my opinion if somebody had told
me about them. I don't feel that they were disclosed to me.''
Mr. Ackerman. Excuse me. Just on that statement, isn't
their assertion that they paid finders fees to another law
firm?
Mr. Frank. No, sir, not in the Chicago Tribune.
With respect to kickbacks and whether or not plaintiffs are
hurt by this, I would note that this is not something that's
controversial. Other plaintiffs' law firms criticize this. They
say that this goes to the very center of what it is to be a
class counsel.
And the point of a lead plaintiff is to act as a watchdog,
and it's already a problem--
Mr. Ackerman. I'm sorry, their competition complained about
them?
Mr. Frank. I'm sorry?
Mr. Ackerman. You're saying--
Mr. Frank. Other law firms complained about them, yes.
Other law firms--
Mr. Ackerman. The other law firms being the law firms that
they were able to best at becoming the lead law firm, other law
firms--
Mr. Frank.--other law firms.
Mr. Ackerman.--that didn't get the fees?
Chairman Baker. If I may, sir, I really need to call on Mr.
Davis.
Mr. Ackerman. And I will yield to him.
Mr. Davis of Alabama. Thank you, Mr. Chairman. Thank you
Mr. Chairman.
Let me--I have a couple of questions to close with, but Mr.
Frank, you did something that's kind of remarkable a minute
ago, and I can't help but comment on it.
You were asked about your prejudgment of various facts in
the case by my friend from New York, and your response was
that, well, someone has entered a guilty plea and made certain
assertions.
Mr. Frank, if you've practiced in anybody's court for any
period of time, to take one guilty plea in a case and to make a
dispositive judgment about the case based on that is
remarkable.
But let me move on to my other two questions.
General proposition. We hear these arguments a lot, that,
``Well, we're concerned about the costs of litigation on
defendants, we don't like frivolous claims,'' and the arguments
tend to spill over. We'll hear them in the securities context.
And then we're told, ``Well, we're just talking about
securities cases.''
And then we'll hear them in the medical malpractice
context. And then we'll hear them in the civil rights context.
And then we'll hear them in the products liability context.
Just so I'm clear, Mr. Frank, is your enthusiasm for losers
pay limited to securities litigation or is it pretty much
anytime a plaintiff walks in court?
Mr. Frank. I believe it's appropriate in several other
areas.
Mr. Davis of Alabama. When is it not appropriate? Give me a
class of civil litigation where it's not appropriate.
Mr. Frank. I think civil rights litigation is a very good
place for where it's not appropriate. I think there is a
problem there, where you do have widows and orphans and
indigent people who are bringing litigation.
Mr. Davis of Alabama. Products liability?
Mr. Frank. Products liability, I think that can be judged
by the attorneys firms. These are very well-financed law firms
that have received billions of dollars from tobacco litigation
and other sources.
And in England, where there is losers pay, there is not a
problem of bringing products liability suits, because well, the
law firms that bring them--
Mr. Davis of Alabama. This is the only concern, well, not
the only, but it's one major concern I have with your argument.
The argument keeps turning into, whenever plaintiffs make a
lot of money off these cases, we think the loser ought to pay.
Now, that's a nice subjective standard, but I can't imagine
it's guidance for Congress.
What happens if plaintiffs have a bad year? Then we switch
over and we take them out of losers pay?
I mean, it seems like that seems to be your constant
refrain, that if the plaintiffs' attorneys are making a lot of
money, they somehow need to be bearing the burden of losers
pay, whereas if, in civil rights cases, they're not making that
much money, that somehow exempts them from it. I think we need
a harder principle than that.
The final point that I will make today, we have--and I
don't have all the details and legal theories in front of me,
but by my recollection, we've made it harder to bring
securities claims in the last 10 years, we've made it harder to
bring State claims in Federal court, we've made it harder to
prove securities claims by requiring a higher degree of
knowledge of wrongdoing. There are a number of substantive
things that have been done with the law to make it harder to
bring these cases.
And I think, frankly, we ought to be content with that. If
by narrowing the scope of claims and narrowing the class of
people who can bring them, and making Rule 23 harder as a
general proposition, if that hasn't had a sufficient deterrent
effect, if that hasn't had the effect of casting out a lot of
frivolous or unsubstantial claims, then maybe we need to heed
that lesson.
As a practical matter, it's the last point I will make,
Congress has done a lot, and the Supreme Court and the
appellate courts have done a lot to narrow the scope of these
kinds of legislation and claims. That itself is a disincentive,
is it not, Professor Cox?
Mr. Cox. That's correct.
Mr. Davis of Alabama. That itself is something which ought
to put a crimp in these cases, and I don't think that Congress
needs to weigh in and have this heavy hand sitting out there.
Because you're right. It's not just securities cases you
want to do, Mr. Frank. You and a lot of people on your side
want to do as many plaintiffs' cases as you can, and I think
it's the wrong direction.
I yield back the balance of my time.
Chairman Baker. I thank the gentleman for yielding back.
Let me express appreciation to all of you for your time and
contribution. It is my intent to move forward with H.R. 5491
subject to suggested modifications that you have brought to the
committee's attention.
This hearing was a bit different from our customary
practice in that witnesses were sworn before testimony.
It is my intention to leave the hearing record open for an
additional 45 days. A number of members who could not be here
have interest in forwarding questions of interest for them.
The responses to those inquiries would be subject to the
same rules of sworn testimony.
Just to state for the record purposes, I do have my own
interrogatories that I would like to forward for a number of
reasons.
But having said that, I am appreciative for members'
attendance and for the very productive discussion I believe we
engaged in today.
Thank you, and our meeting stands adjourned.
[Whereupon, at 1:33 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 28, 2006
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