TOUGHER CLASS ACTION BILL DESIGNED TO HELP THE LITTLE GUY, SENATOR SAYS: PROPOSAL SAID TO BOOST FLOW OF INFORMATION

Investors and financial advisers will be able to get better forecasts about corporate business plans if legislation approved last week by the Senate Banking Committee becomes law.

The bill, the Securities Litigation Uniform Standards Act, was approved, 14-4, after the committee voted down a number of Democrat-sponsored amendments that called for letting states continue to set some standards for securities class actions.

The bill was pushed by the chairman of the subcommittee on securities, Sen. Phil Gramm, R-Tex., and its ranking Democrat, Sen. Christopher Dodd, D-Conn., in response to increased state filings by plaintiffs’ lawyers in the wake of 1995 legislation that raised the bar for such suits in federal court.

federal takeover

The legislation approved last week would require that all securities class actions involving nationally traded companies be filed in federal court, which would make them subject to the 1995 law. Both pieces of legislation are intended to prevent the filing of suits whenever a company’s stock price declines — suits that seem to have the primary intent of enriching plaintiffs attorneys.

The last decade saw many such suits against high-tech companies, whose stock is very volatile.

Among other things, the 1995 law includes a safe-harbor provision insulating companies from suits for making forecasts that turn out to be incorrect — as long as the forecast is made in good faith.

“There has been a phenomenon of two-tiered disclosure, where there’s more disclosure going on between companies and huge investors because there’s less risk of being sued on that,” says Mark Gritenstein of the Washington office of Chicago law firm Mayer Brown & Platt. Mr. Gritenstein is counsel to the Uniform Standards Coalition, a group encompassing the legislation’s major supporters — technology companies, the securities industry, accountants and venture capitalists.

The information given by companies to large investors “didn’t usually go to small investors or advisers,” he says. “It is of tremendous value to investors to have a free flow of information. Now everybody will get more information.”

adviser angle

In addition, the legislation could help protect financial planners who are affiliated with large companies like American Express Financial Advisors Inc. and LPL Financial Services, says Duane Thompson, director of government relations for the Institute of Certified Financial Planners in Denver. “When they’re acting as advisers on behalf of large firms they are affected,” he says.

Nationally traded securities, he says, “are typically traded even by small advisers. We think this kind of legislation is very helpful, particularly because of the migration of suits to state courts, especially in California.”

The bill appears to have good prospects for passage. Even one of its Democratic opponents, Nevada Sen. Richard Bryan, predicted last week that it would be enacted.

Letters of support were released last week by the White House and by three members of the Securities and Exchange Commission — Chairman Arthur Levitt, Isaac Hunt Jr. and Laura Unger.

Once the Senate acts on the bill — possibly this month — the House Commerce Committee is likely to take up similar legislation.

The amendments brought by Sen. Bryan and fellow Democrats Paul Sarbanes of Maryland and Tim Johnson of South Dakota would have let investors continue to use their own states’ standards of liability in fraud suits for parties accused of aiding and abetting, as well as state statutes of limitations governing the filing of such suits.

feds make it tougher to sue

Forty-nine states allow investors to go after aiders and abettors. Federal law does not permit that, and limits to three years the window for filing suits once a fraudulent act is discovered. Thirty-three states give investors a longer time to file.

“It takes the SEC with all their resources longer than three years on average to bring a case,” Sen. Bryan says. “New York had allowed you up to six years to discover you had been ripped off, but we want national uniformity so you are out of luck if the criminal was able to keep you from discovering the fraud for three years.”

But Sen. Gramm stressed that the bill does not prevent individuals from filing suits, nor does it stop the SEC or states from taking action against fraudulent securities activity. He said the amendments would have defeated the purpose of the bill — to set national standards for nationally traded securities.