SEC Chief Shift on Investor Bill Is Linked to Senate Pressure : Legislation: Arthur Levitt now backs measure. Sources say key lawmakers threatened to cut his agency’s budget.

Securities and Exchange Commission ,Chairman Arthur Levitt supported legislation protecting Wall Street firms from investor lawsuits after key senators threatened to slash the SEC’s budget if Levitt continued to oppose the controversial bill, sources have told The Times.

The about-face by Levitt, a strong proponent of investors’ rights, has greatly increased the chances that President Clinton will sign the bill into law once the House and Senate, which have approved different versions, formally approve a compromise version already hammered out by staff members. Final approval is expected by early December.

Levitt reversed course last week. In a Nov. 14 letter to Senate Banking Committee Chairman Alfonse M. D’Amato (R-N.Y.), Levitt said he now approved of a key provision of the compromise bill that would shield potential targets of investor suits from challenges to their public forecasts of company earnings.

Levitt’s spokeswoman, Jennifer Scardino, said Levitt changed his stance because the House and Senate aides had weakened an earlier version of the protection from lawsuits.

Scardino denied that the letter was in response to any pressure from senators. So did Steven M.H. Wallman, the other SEC commissioner, who also signed the letter. Levitt was in London on SEC business Tuesday and did not respond when his office passed on to him a request for an interview.

But other sources, including congressional staff aides involved in drafting the bill, said Levitt sent the letter only after key senators, particularly Christopher J. Dodd (D-Conn.), who is also chairman of the Democratic National Committee, threatened to slash the SEC’s budget and delay appointment of new SEC commissioners to fill the three vacancies.

Andrew R. Vermilye, legislative director to Sen. Richard H. Bryan (D-Nev.), who opposes the bill, said Dodd and D’Amato “repeatedly threatened to turn off the lights” at the SEC by slashing its budget if Levitt did not back off from his opposition to key parts of the bill. Vermilye said the senators “just wore them [the SEC] down, and they just basically capitulated on the deal.”

In addition, sources said Levitt acted after receiving virtually no public support from the White House for his continued opposition.

Vermilye’s interpretation was echoed in background interviews with other Democratic congressional staff members and by consumer advocate Ralph Nader.

The bill would place many new restrictions on investor lawsuits. It was backed by corporations that claimed they had been vulnerable to numerous, frivolous lawsuits filed by unscrupulous class-action lawyers. But opponents say the bill would not only limit groundless suits but also curtail investors’ rights to sue when real fraud has occurred.

The bill was strongly backed by Silicon Valley high-technology companies, which have been sued following wide swings in their stock prices, and by big accounting firms, which have been successfully sued for failing to thoroughly audit companies that committed fraud.

White House and congressional staffers say the bill has also drawn unusually strong grass-roots opposition from investor and consumer groups, state and local government officials and pension fund managers.

Levitt’s Nov. 14 letter, addressed to D’Amato, was not a formal endorsement of the bill. However, it said the latest version of the legislation “responds to our principal concerns.”

The key provision endorsed by Levitt and Wallman is the so-called “safe harbor” section, which shields companies from legal liability for public forecasts about earnings and other matters. Earlier versions of the bill would have given companies even broader protection.

Levitt’s staffers insisted that he now genuinely supported the revised provision. But other sources said Levitt had been extremely reluctant to write the Nov. 14 letter to D’Amato because the rest of the bill contained provisions Levitt still opposed and it was clear that the letter would greatly increase the bill’s chances.

These provisions include a limit on the damages investors may recover, a clause on “proportionate liability” that makes the main defendant responsible for paying most of the damages.

Levitt also had criticized the bill for leaving out two provisions he strongly wanted in it. Both would have reversed recent Supreme Court decisions that sharply limit investors’ rights to sue in securities fraud cases. One decision reduces the statute of limitations on investors filing lawsuits to three years from the time of the fraud. Another cuts the right to sue for aiding and abetting securities fraud.

A White House aide said Tuesday that although it was not certain that Clinton would sign the bill, Levitt’s letter made it significantly more likely. The aide also confirmed that Dodd had been influential in getting the White House to limit any public opposition to the bill.

The reason has been Dodd’s consistent support of the President during times when even most congressional Democrats seemed to be abandoning him. “There were whole weeks,” the aide said, “when Chris Dodd was the only person on Capitol Hill who was helping the White House.”