The Senate voted Friday to override President Clinton's veto of a bill restricting shareholders' ability to sue for securities fraud, completing the first veto override of the Clinton presidency.
Coupled with similar action in the House on Wednesday, the 68-30 vote also marked the first time Congress has enacted into law a major provision in the House Republican "contract with America."
The vote was a particular embarrassment to the president because the Senate defeat was at the hands of the chairman of the Democratic Party, Sen. Christopher Dodd (D-Conn.), who has worked since 1991 on changing securities law. It was also considered a personal victory for Rep. Christopher Cox (R-Newport Beach), who authored the bill.
Business reacted with jubilation. The override was "a victory for common sense over politics," said William Mitchell, chairman of the American Electronics Assn. and vice chairman of Texas Instruments.
Association President William T. Archey joked that "Washington, D.C., is maybe the only town in the world where you can go from outraged to ecstatic in less than 48 hours."
A pledge to limit lawsuits was a leading item in the "contract with America," a series of promises made by House Republican candidates during the 1994 campaign. When Republicans regained control of both houses of Congress for the first time in 40 years, the prospect for major legislative changes became a reality.
Major accounting firms, the brokerage industry, and the high-technology companies in California, all hit with frequent lawsuits, campaigned hard for tighter standards for those who would file the legal complaints.
Trial lawyers, consumer organizations, state securities regulators, and state and local finance officials expressed fears that the bill would make it much harder for individuals and pension funds to recover their financial losses from fraud.
Those groups expressed chagrin Friday. Taxpayers "will hold Congress accountable if there are further losses resulting from fraudulent activities where state and local governments are unable to recover from the wrongdoers," said a statement issued by the Government Finance Officers Assn., the National League of Cities, the National Assn. of Counties, and the National Assn. of County Treasurers and Finance Officers.
Michael Calabrese, director of Congress Watch, a liberal group supporting the President on this issue, said his organization expects "a slow but mounting financial crime wave that will force an equal and opposite reaction--in two or more years Congress will come back to this issue to tighten up on the abuses. . . ."
The new law basically makes it more difficult to bring successful lawsuits claiming fraud against publicly traded firms, their accountants and brokerage firms distributing the shares. Under the new law:
* Plaintiffs must now provide more detailed information about the motives and actions of those who committed the fraud.
* Outside firms such as accountants or underwriters are given additional protections from being sued. If they do lose, the penalties will be limited to their share of the damages. Currently, anyone found liable can be forced to assume all damages if the other defendants do not have any resources.
* Judges will determine if cases are filed frivolously, and can force the plaintiffs to pay all legal costs.
* Companies are given a "safe harbor" to protect their executives from lawsuits if they, in good faith, make bad predictions about future profits and product developments.
The bill originally caused Cox political turbulence a year ago when Orange County declared bankruptcy.
Opponents of the bill, including California Democratic Sen. Barbara Boxer, contended that had Cox's bill been in effect at that time, defrauded investors would not have been able to even file a claim--one of the worries detailed by Clinton in his veto message.
Orange County residents whose savings were tied up in the Orange County bankruptcy and other Californians who were defrauded by Charles H. Keating Jr. and his now defunct Irvine-based Lincoln Savings & Loan also appeared on Capitol Hill to protest Cox's bill.
During the Senate debate earlier this week, the Orange County bankruptcy was mentioned repeatedly by both sides, by those who thought the bill would hurt middle-class investors like some in Orange County and by those who argued those claims were exaggerated.
Boxer recited a long list of officials from states, cities and counties who opposed the bill, including some in Orange County.
But her California Democratic colleague, Sen. Dianne Feinstein, said the officials had objected to earlier versions of the bill but would not find fault with this one.
"I think one of the core lessons of Orange County is that cities should not be investing in speculative investments," Feinstein said. "Orange County, I believe, would not be altered" by the pending bill.
The Senate override came two days after the House voted, 319 to 100, to defy the president on the issue. Between the two votes, the president telephoned senators but could not persuade them to break with Dodd.
For his part, Dodd, who has been campaigning for changes in the law since 1991, expressed disappointment over disagreeing with the president on the issue.
"I deeply regret we're in this situation," Dodd said before the vote in which 20 Democrats joined 48 Republicans to defeat the president. Supporting the White House were 26 Democrats and four Republicans.
Dodd said the current system of securities litigation, by encouraging frivolous lawsuits, is "fatally flawed and broken."
A White House spokeswoman said after the vote that Clinton "hopes that the unintended effects of the legislation actually do not occur and, if they do, that Congress will act to make some of the very narrow corrections they will have to make."
Sen. Richard Bryan (D-Nev.), defending Clinton, said the new law would harm "a lot of innocent people who have lost money" through fraud because they will be unable to recoup damages through legal action.
American Electronics Assn. Chairman Mitchell praised Cox, the prime author of the bill in the House, and Rep. Anna G. Eshoo (D-Atherton), who represents a Silicon Valley district, for their work in forcing the override.
Eshoo said the GOP "could not have achieved a veto override in either House were it not for Democrats having worked so hard to put together a sound, good bill."
Cox predicted that the congressional override would weaken the president's position at the bargaining table on the federal budget.
"The truth is that the first veto override of a Clinton presidency was followed immediately by Senate approval of the welfare bill, which was followed immediately by budget negotiators arriving at the White House," Cox said. "So the president's position is not one of strength."
Democrats who voted to override Clinton's veto, however, said it was an isolated case and promised they would return to the president's side on issues such as the welfare bill and budget negotiations.
"I don't think these events are tied together at all," said Rep. Vic Fazio (D-West Sacramento), who supported the securities bill. "It was a difference of opinion over very narrow issues," he said.
Dodd and Sen. Edward M. Kennedy (D-Mass.) "are certainly going to sustain the presidential vetoes on the welfare bill and the budget bill and many other issues," Fazio said.
Eshoo said she does not believe "that securities litigation is tied to the budget negotiations. . . . We have huge, huge issues that are tied to those negotiations," she said.
Rep. Gary A. Condit (D-Ceres), another Democrat who broke with the president, said Clinton would weather the political storm his veto whipped up in California. "I think the president is doing fairly well in California," Condit said. "He's been very attentive to California. I don't think this one veto makes a bad situation for anyone."
However, Cox suggested that Clinton could suffer political fallout in California for his veto.
"While trial lawyers [who supported the bill] have been a significant source of support for liberal Democrats over the years, [Clinton] had reached out to gain the support of California's high-tech economy in the 1992 campaign," Cox said. "But selling out hundreds of thousands of workers on this issue is a stinging rebuke."
Jeri Mellon, chair of the Lincoln Bondholders Assn. in California, whose members lost millions of dollars when they bought bonds issued by Keating's savings and loan holding company, denounced the Senate action.
"A swindle was perpetrated against the American people today," said Mellon, who lost $40,000 in the S&L; fraud and recovered $24,000 as a participant in a class-action lawsuit. She also criticized an initiative which will appear on the California ballot next month to restrict lawsuits in state courts.
* INVESTOR IMPACT
Shareholder suits assessed. D1