Securities Reforms Could Backfire Some Lawmakers Say Proposals Threaten Middle Class Investors

A far-reaching bill to limit class-action securities fraud lawsuits, which raced through the House with broad support, faces major surgery in the Senate, several Senators said Wednesday.

Critics sharpened their attack on the litigation reform bills, telling a Senate Banking securities subcommittee a House proposal is “immoral” because it would make it extremely unlikely that middle class investors would sue in securities fraud cases.

The hearing was the first formal effort to size up the House and Senate proposals that would make it easier for corporations to defend themselves from securities fraud lawsuits.

The bills are strongly pushed by accounting …

A far-reaching bill to limit class-action securities fraud lawsuits, which raced through the House with broad support, faces major surgery in the Senate, several Senators said Wednesday.

Critics sharpened their attack on the litigation reform bills, telling a Senate Banking securities subcommittee a House proposal is “immoral” because it would make it extremely unlikely that middle class investors would sue in securities fraud cases.

The hearing was the first formal effort to size up the House and Senate proposals that would make it easier for corporations to defend themselves from securities fraud lawsuits.

The bills are strongly pushed by accounting firms and high-technology companies, which claim they’ve been forced to pay out millions to settle frivolous shareholder lawsuits in recent years. They claim the current system fails to screen out flimsy claims.

Sheldon H. Elsen, representing the New York City Bar Association, objected to a provision in the House bill that would make investors who lose a securities fraud case pay the winner’s legal bills if a judge found the case to be frivolous.

“If we try to bleed these little guys, we’ve just knocked them out of court,” said Elsen, in an exchange with Sen. Phil Gramm, R-Texas, subcommittee chairman. “And that’s what the bill is intended to do, senator. And that’s wrong. That’s absolutely wrong. It’s immoral.”

This “loser pays” rule isn’t part of the main Senate bill, sponsored by Sens. Chris Dodd, D-Conn. and Pete Domenici, R-N.M. But an attorney representing the National Association of Securities and Commercial Law Attorneys said another element of the Senate bill “has the same result” as a loser-pays rule.

David Guin, a Birmingham, Ala., attorney representing NASCAT, referred to the Senate bill’s “alternative dispute resolution” feature, a proposal to resolve cases out of court prior to trial. Under such a plan, the defense can offer a settlement to investors who sued; if they refuse the settlement and wind up losing the case, they can be forced to pay the other side’s legal bills, Guin said.

“Well, that’s like putting a gun to my head and say take this money or else,” Guin said. The proposal wouldn’t let plaintiffs conduct the necessary pretrial investigations to make an informed decision, he said.

Dodd defended his bill as fair to investors. Turning to the House bill, Dodd said there’s agreement on basic reforms, but made it clear he wants major changes in the House measure.

“I continue to have a number of concerns about provisions in this bill,” said Dodd, who didn’t elaborate. “Resolving the remaining differences won’t be easy.”