[Senate Report 107-146]
[From the U.S. Government Printing Office]



                                                       Calendar No. 366
107th Congress                                                   Report
                                 SENATE
 2d Session                                                     107-146

======================================================================



 
      THE CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY ACT OF 2002

                                _______
                                

                  May 6, 2002.--Ordered to be printed

                                _______
                                

Mr. Leahy, from the Committee on the Judiciary, submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

    [Including the cost estimate of the Congressional Budget Office]

                         [To accompany S. 2010]

    The Committee on the Judiciary, to which was referred the 
bill (S. 2010) to provide for criminal prosecution of persons 
who alter or destroy evidence in certain Federal investigations 
or defraud investors of publicly traded securities, to disallow 
debts incurred in violation of securities fraud laws from being 
discharged in bankruptcy, to protect whistleblowers against 
retaliation by their employers, and for other purposes, having 
considered the same, reports favorably thereon, with an 
amendment in the nature of a substitute, and recommends that 
the bill, as amended, do pass.

                                CONTENTS

                                                                   Page
  I. Purpose..........................................................2
 II. Background and need for the legislation..........................2
III. Section-by-section analysis and discussion......................11
 IV. Committee consideration.........................................21
  V. Votes of the Committee..........................................21
 VI. Congressional Budget Office cost estimate.......................23
VII. Regulatory impact statement.....................................23
VIII.Additional Views................................................26

 IX. Changes in existing law made by the bill, as reported...........32

                               I. Purpose

    The purpose of S. 2010, the ``Corporate and Criminal Fraud 
Accountability Act of 2002,'' is to provide for criminal 
prosecution and enhanced penalties of persons who defraud 
investors in publicly traded securities or alter or destroy 
evidence in certain Federal investigations, to disallow debts 
incurred in violation of securities fraud laws from being 
discharged in bankruptcy, to protect whistleblowers who report 
fraud against retaliation by their employers, and for other 
purposes.

              II. Background and Need for the Legislation


A. Introduction

    The ``Corporate and Criminal Fraud Accountability Act of 
2002,'' S. 2010, was introduced by Senator Patrick Leahy, with 
Senators Daschle, Durbin, and Harkin as original cosponsors, on 
March 12, 2002. This legislation aims to prevent and punish 
corporate and criminal fraud, protect the victims of such 
fraud, preserve evidence of such fraud, and hold wrongdoers 
accountable for their actions.
    In the wake of the continuing Enron Corporation (``Enron'') 
debacle, the trust of the United States' investors and 
pensioners in the nation's stock market has been seriously 
eroded. This is bad for our markets, bad for our economy, and 
bad for the future growth of investment in American companies. 
This bill would play a crucial role in restoring trust in the 
financial markets by ensuring that the corporate fraud and 
greed may be better detected, prevented and prosecuted. While 
greed cannot be legislated against, the federal government must 
do its utmost to ensure that such greed does not succeed. This 
bill contains a number of provisions intended to increase the 
criminal penalties for serious fraud, ensure that evidence--
both physical and testimonial--is preserved and available in 
fraud cases, provide prosecutors with the tools they need to 
prosecute those who commit securities fraud, and make sure that 
victims of securities fraud have a fair chance to pursue their 
claims and recoup their losses.

B. Enron's collapse

    Enron began in 1985 as a pipeline company in Houston, 
Texas. It garnered profits by promising to deliver agreed-upon 
numbers of cubic feet of gas to a particular utility or 
business on a specific day at market price. That changed with 
the deregulation of electrical power markets, a change due in 
part to lobbying from senior Enron officials. Under the 
direction of former Chairman Kenneth L. Lay, Enron expanded 
into an energy broker, trading electricity and other 
commodities.
    According to a Report of Investigation commissioned by a 
Special Investigative Committee of Enron's Board of Directors 
(``the Powers Report''), Enron apparently, with the approval or 
advice of its accountants, auditors and lawyers, used thousands 
of off-the-book entities to overstate corporate profits, 
understate corporate debts and inflate Enron's stock price.
    The alleged activity Enron used to mislead investors was 
not the work of novices. It was the work of highly educated 
professionals, spinning an intricate spider's web of deceit. 
The partnerships--with names like Jedi, Chewco, Rawhide, 
Ponderosa and Sundance--were used essentially to cook the books 
and trick both the public and federal regulators about how well 
Enron was doing financially. The actions of Enron's executives, 
accountants, and lawyers exhibit a ``Wild West'' attitude which 
valued profit over honesty.
    Some Enron executives, with the knowledge and approval of 
its Board of Directors, managed these entities, reaped millions 
of dollars in salary and stock options, and received conflict-
of-interest waivers from Enron's Board. As the Powers Report 
states, ``[m]any of the most significant transactions 
apparently were designed to accomplish favorable financial 
statement results, not to achieve bona fide economic objectives 
or to transfer risk'' (Powers Report at 4). Much of this 
conduct occurred with ``extensive participation and structuring 
advice from [Arthur] Andersen,'' (``Andersen'') which was 
simultaneously serving as both consultant and ``independent'' 
auditor for Enron.\1\
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    \1\ Powers Report at 5. For example, Enron's records show that 
Andersen billed Enron $5.7 million for advice in connection with the 
now infamous ``LJM'' and ``Chewco'' transactions, beyond its regular 
audit fees. Id.
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    With the assistance of Andersen and its other auditors, 
Enron apparently successfully deceived the investing public and 
reaped millions for some select few insiders.\2\ To the outside 
world, Enron and its auditors were either not reporting their 
massive debt at all, or were making ``disclosures [that] were 
obtuse, did not communicate the essence of [Enron] transactions 
completely or clearly, and failed to convey the substance of 
what was going on between Enron and its partnerships'' (Powers 
Report at 17). In short, through the use of sophisticated 
professional advice and complex financial structures, Enron and 
Andersen were able to paint for the investing public a very 
different picture of the company's financial health than the 
true picture revealed. By the fall of 2001, the painting bore 
little or no resemblance to the reality.
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    \2\ For example, in one insider transaction, known as 
``Southhampton Place,'' insider Andrew Fastow, a senior Enron official, 
invested $25,000 and received $4.5 million in return in a period of two 
months. Powers Report at 16. On an annual basis, this represents a 
profit margin of over 100,000%.
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    According to a federal indictment, on October 16, 2001, 
Enron announced a $618 million net loss for the third quarter 
of 2001 and that it would reduce shareholder equity by $1.2 
billion.\3\ Six days later, the Securities and Exchange 
Commission (``SEC'') began investigating the financial 
practices of Enron and Andersen. On November 8, 2001, Enron 
announced that it had overstated earnings during the prior four 
years by $586 million and was responsible for $3 billion in 
obligations that were never publicly reported. Upon these 
disclosures, Enron stock fell to $8.41 a share and has since 
fallen to less than $1 (the stock had been trading at near $90 
per share). Less than a month later Enron filed for 
bankruptcy--the largest corporate bankruptcy in the history of 
the United States.
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    \3\ See Indictment, United States v. Arthur Andersen LLP, Cr. No. 
CRH-02-121, United States District Court for the Southern District of 
Texas at 2-3. (``Andersen Indictment''). The indictment, filed on March 
7, 2002, charges Andersen with persuading others to destroy documents 
in violation of 18 U.S.C. Sec. 1512(b)(2).
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    On February 6, 2001, at a Senate Judiciary Committee 
hearing on ``Accountability Issues: Lessons Learned from 
Enron's Fall'' (``Committee hearing''), witnesses testified 
that Enron's sudden collapse left thousands of investors 
holding virtually worthless stock, and most Enron employees 
with a worthless retirement account. Pension funds nationwide, 
including state and union-owned pension funds, literally lost 
billions on Enron-related investments. Bruce Raynor, President 
of the Union of Needletrades, Industrial and Textile Employees 
(``UNITE'') and Vice President of the American Federation of 
Labor-Congress of Industrial Organizations (``AFL-CIO''), and 
Co-Chair of the Council of Institutional Investors, testified 
that UNITE members lost millions in the Enron collapse and that 
institutional investments, such as pension funds, are 
``particularly vulnerable'' to such fraud because of their 
reliance on index funds, which ``rely on the market to 
accurately price securities.'' Firefighters, teachers, garment 
workers, and police officers who had no way of knowing or 
finding out about Enron's apparently deceitful conduct ahead of 
time lost millions in pension fund investments.
    Mr. Raynor, Washington State Attorney General Christine O. 
Gregoire, and securities and legal ethics expert Professor 
Susan P. Koniak, of the Boston University School of Law, also 
testified that Enron was merely one extreme example of numerous 
other cases of fraud on investors. Like those cases, the few at 
Enron who profited appear to be senior officers and directors 
who cashed out while they and professionals from accounting 
firms, law firms and business consulting firms, who were paid 
millions to advise Enron on these practices, assured others 
that Enron was a solid investment.

C. The aftermath of Enron's collapse and the cover up

    As investors and regulators attempted to ascertain both the 
extent and cause of their losses, employees from Andersen were 
allegedly shredding ``tons'' of documents, according to the 
Andersen Indictment. Instead of preserving records relevant and 
material to the later investigation of Enron or any private 
action against Enron, ``Andersen partners assigned to the Enron 
engagement team launched on October 23, 2001, a wholesale 
destruction of documents at Andersen's offices in Houston, 
Texas.'' Moreover, ``instead of being advised to preserve 
documentation so as to assist Enron and the SEC, Andersen 
employees on the Enron engagement team were instructed by 
Andersen partners and others to destroy immediately 
documentation relating to Enron, and told to work overtime if 
necessary to accomplish the destruction'' (Andersen Indictment 
at 5-6).
    The systematic destruction of records apparently extended 
beyond paper records and included efforts to ``purge the 
computer hard drives and E-mail system of Enron related files'' 
not only in Houston but in Andersen's offices in Portland, 
Chicago, Illinois, and London, England (Id. at 6). Indeed, the 
current rules on audit record retention are so vague that 
Andersen's lawyers issued ambiguous adviceencouraging such 
document destruction--advice that they linked to highly questionable 
interpretations of current law. In addition to the indictment of 
Andersen, Andersen partner David Duncan, who did significant work for 
Enron, has pleaded guilty to the same obstruction charge. Allegedly, 
these actions were undertaken in anticipation of a SEC subpoena to 
Andersen for its auditing and consulting work related to Enron.
    The apparent efforts to cover up any alleged misconduct by 
Enron or Andersen were not limited to Andersen and the 
destruction of physical evidence and documents. In a variety of 
instances when corporate employees at both Enron and Andersen 
attempted to report or ``blow the whistle'' on fraud, but they 
were discouraged at nearly every turn. For instance, a shocking 
e-mail from Enron's outside lawyers to an Enron official was 
uncovered. This e-mail responds to a request for legal advice 
after a senior Enron employee, Sherron Watkins, tried to report 
accounting irregularities at the highest levels of the company 
in late August 2001. The outside lawyer's counseled Enron, in 
pertinent part, as follows:

          You asked that I include in this communication a 
        summary of the possible risks associated with 
        discharging (or constructively discharging) employees 
        who report allegations of improper accounting 
        practices: 1. Texas law does not currently protect 
        corporate whistleblowers. The supreme court has twice 
        declined to create a cause of action for whistleblowers 
        who are discharged * * *

    In other words, after this high level employee at Enron 
reported improper accounting practices, Enron did not consider 
firing Andersen; rather, the company sought advice on the 
legality of discharging the whistleblower. Of course, Enron's 
lawyers would claim that they merely provided their client with 
accurate legal advice--there is no protection for corporate 
whistleblowers under current Texas law. In the end, Ms. Watkins 
did not report the matter to the authorities until after she 
had been subpoenaed, and after ``tons'' of documents had been 
destroyed.\4\
---------------------------------------------------------------------------
    \4\ ``Enron Changes Climate for Whistle-blowers,'' The Christian 
Science Monitor, March 1, 2002.
---------------------------------------------------------------------------
    According to media accounts, this was not an isolated 
example of whistleblowing associated with the Enron case. In 
addition, a financial adviser at UBS Paine Webber's Houston 
office claims that he was fired for e-mailing his clients to 
advise them to sell Enron stock.\5\ A top Enron risk management 
official alleges he was cut off from financial information and 
later resigned from Enron after repeatedly warning both orally 
and in writing as early as 1999 of improprieties in some of the 
company's off-balance sheet partnerships.\6\ An Andersen 
partner was apparently removed from the Enron account when he 
expressed reservations about the firm's financial practices in 
2000.\7\ These examples further expose a culture, supported by 
law, that discourage employees from reporting fraudulent 
behavior not only to the proper authorities, such as the FBI 
and the SEC, but even internally. This ``corporate code of 
silence'' not only hampers investigations, but also creates a 
climate where ongoing wrongdoing can occur with virtual 
impunity. The consequences of this corporate code of silence 
for investors in publicly traded companies, in particular, and 
for the stock market, in general, are serious and adverse, and 
they must be remedied.
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    \5\ ``Man Says Advice to Sell Enron Led to Firing,'' New York 
Times, March 5, 2002.
    \6\ ``Economist Raised Doubts About Partnerships; Enron Researcher 
Raised Issue in '99,'' Houston Chronicle, March 19, 2002.
    \7\ ``Andersen Whistleblower was Removed,'' New York Times, April 
3, 2002.
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D. The legal and ethical landscape and the need for reform

    The Committee hearing of February 6, 2002, revealed that 
while Enron and Andersen were taking advantage of a system that 
allowed them to behave in an apparently fraudulent manner, as 
well as engage in both the destruction of valuable evidence and 
retaliation against potential witnesses, the regulators, the 
victims of fraud, and the corporate whistleblowers were faced 
with daunting challenges to punish the wrongdoers and protect 
the victims' rights. The legal regime that, on one hand, 
allowed this conduct to take place, and, on the other, may 
serve as an impediment to punishing all the wrongdoers and 
protecting all the victims has led to widespread calls for 
reform and support for S. 2010, in particular.
    The following groups and individuals have written in 
support of S. 2010: a bipartisan group of State Attorneys 
General from Kansas, Oklahoma, Oregon, Georgia, Washington, 
Ohio, and Vermont, including both the current and incoming 
heads of the National Association of Attorneys General; the 
North American Securities Administrators Association, whose 
membership consists of the securities administrators in all 
fifty states, the District of Columbia, Canada, Mexico, and 
Puerto Rico; the AFL-CIO; numerous whistleblower protection 
groups, including the Government Accountability Project, 
Taxpayers Against Fraud, and the National Whistleblower Center; 
consumer protection groups, including the Consumers Union and 
the Consumer Federation of America; the Vermont Department of 
Banking, Insurance, Securities and Health Care Administration; 
and the California State Teachers' Retirement System.
    Outlined below are some of the shortcomings in current law 
that the Enron matter has publicly exposed.
    First, unlike bank fraud, health care fraud, and bankruptcy 
fraud, there is no specific ``securities fraud'' provision in 
the criminal code to outlaw the breadth of schemes and 
artifices to defraud investors in publicly traded companies.\8\ 
Currently, in securities fraud cases, prosecutors must rely on 
generic mail and wire charges that carry maximum penalties of 
up to only five years imprisonment and require prosecutors to 
carry the sometimes awkward burden of proving the use of the 
mail or the interstate wires to carry out the fraud. 
Alternatively, prosecutors may charge a willful violation of 
certain specific securities laws or regulations, but such 
regulations often contain technical legal requirements, and 
proving willful violations of these complex regulations allows 
defendants to argue that they did not possess the requisite 
criminal intent.\9\ There is no logical reason for imposing 
such awkward and heightened burdens on the prosecution of 
criminal securities fraud cases. The investing public is 
entitled to no less protection than those who keep money in 
federally insured financial institutions enjoy under the bank 
fraud statute.
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    \8\ See 18 U.S.C. 1344 (bank fraud), 1347 (health care fraud), and 
157 (bankruptcy fraud).
    \9\ See e.g., SEC v. Zandford, 238 F.3d 559 (4th Cir. 559) (holding 
that straight out stealing of investors' money did not violate SEC rule 
10b-5 because stealing was not sufficiently related to technical 
``purchase or sale'' requirement), cert. granted, 122 S. Ct. 510 
(2001). This case is one, although not the only example, of why federal 
prosecutors are justifiably hesitant to include technical SEC 
regulations as part of a criminal indictment.
---------------------------------------------------------------------------
    Second, current federal obstruction of justice statutes 
relating to document destruction is riddled with loopholes and 
burdensome proof requirements. Those provisions are a patchwork 
of various prohibitions that have been interpreted very 
narrowly by federal courts. For instance, certain current 
provisions in Title 18, such as section 1512(b), make it a 
crime to persuade another person to destroy documents, but not 
a crime for a person to destroy the same documents personally. 
Other provisions, such section 1503, have been narrowly 
interpreted by courts, including the Supreme Court in United 
States v. Aguillar, 115 S. Ct. 593 (1995), and the First 
Circuit in United States v. Frankhauser, 80 F.3d 641 (1st Cir. 
1996), to apply only to situations when the obstruction of 
justice may be closely tied to a judicial proceeding. Still 
other provisions, such as sections 152(8), 1517 and 1518, apply 
to obstruction in certain limited types of cases, such as 
bankruptcy fraud, examinations of financial institutions, and 
healthcare fraud. In short, the current laws regarding 
destruction of evidence are full of ambiguities and limitations 
that must be corrected.
    Indeed, even in the current Andersen case, prosecutors have 
been forced to use the ``witness tampering'' statute, 18 U.S.C. 
1512, and to proceed under the legal fiction that the 
defendants are being prosecuted for telling other people to 
shred documents, not simply for destroying evidence themselves. 
Although prosecutors have been able to bring charges thus far 
in the case, in a case with a single person doing the 
shredding, this legal hurdle might present an insurmountable 
bar to a successful prosecution. When a person destroys 
evidence with the intent of obstructing any type of 
investigation and the matter is within the jurisdiction of a 
federal agency, overly technical legal distinctions should 
neither hinder nor prevent prosecution and punishment.
    Even more surprising, in the context of audits and reviews 
conducted under the Securities and Exchange Act of 1934, there 
is currently no clear statutory requirement that accountants 
retain the most basic work papers to support the conclusions 
reached and opinions expressed in their audits, much less more 
detailed records, to facilitate determinations by federal 
regulators and law enforcement officials of whether a 
corporation or its accountants tried to mislead the public, as 
in the Enron matter.
    Third, federal sentences sufficiently neither punish 
serious frauds and obstruction of justice nor take into account 
all aggravating factors that should be considered in order to 
enhance sentences for the most serious fraud and obstruction of 
justice cases. Currently, United States Sentencing 
Guidelines(U.S.S.G.) Sec. 2J1.2 recognizes that a wide variety of 
conduct falls under the offense of ``obstruction of justice.'' For 
obstruction cases involving the murder of a witness or another crime, 
the Guidelines allow, by cross reference, significant enhancements 
based on the underlying crimes, such as murder or attempted murder. For 
cases when obstruction is the only offense, however, the guidelines 
provide little assistance in differentiating between different types of 
obstruction--including the organized, large scale shredding that 
apparently occurred in the Enron/Andersen matter.
    The current fraud sentencing guidelines also fail to 
provide for sufficient additional punishment based upon certain 
important aggravating factors. For instance, the fraud 
guidelines in U.S.S.G. Sec. 2B1.1, require the sentencing judge 
to take the number of victims into account, but only to very 
limited degrees in small and medium-sized cases. Specifically, 
once there are more than fifty victims, the guidelines do not 
require any further enhancement of the sentence, so that a case 
with fifty-one victims may be treated the same as a case with 
five thousand victims. As the Enron matter demonstrates, 
serious frauds, especially for cases in which publicly traded 
securities are involved, can leave thousands of victims robbed 
of their life savings. In addition, while the 2B1.1 guidelines 
provide a specific offense characteristic to enhance sentences 
where a financial institution's solvency is jeopardized, there 
is no similar enhancement for the risk of devastating a 
substantial number of private fraud victims, which is instead 
treated only as a ground for departure. That distinction is 
unsound and should be reconsidered. Finally, the Chapter 8 
Guidelines relating to Sentencing Organizations for criminal 
conduct are outdated and do not sufficiently deter 
organizational or corporate misconduct.
    Fourth, innocent, defrauded investors attempting to recoup 
their losses face unfair time limitations under current law. 
The current statute of limitations for most securities fraud 
cases is three years from the date of the fraud or one year 
after the fraud was discovered. This can unfairly limit 
recovery for defrauded investors in some cases. As Washington 
State Attorney General Gregoire testified at the Committee 
hearing, in the Enron state pension fund litigation, the 
current short statute of limitations has forced some states to 
forgo claims against Enron based on alleged securities fraud 
in1997 and 1998. In Washington state alone, the short statute 
of limitations may cost hard-working state employees, 
firefighters and police officers nearly $50 million in lost 
Enron investments, which they will never recover.
    Especially in complex securities fraud cases, the current 
short statute of limitations may insulate the worst offenders 
from accountability and rewards those who can successfully 
cover up their misconduct for at least a year. As Justices 
O'Connor and Kennedy said in their dissent in Lampf, Pleva. 
Lipkind, Prupis, & Petigrow v. Gilbertson, 111 S. Ct. 2773 
(1991), the 5-4 Supreme Court decision that changed decades of 
presumably settled law, and imposed a uniform, short statute of 
limitations in most securities fraud cases, the current ``one 
and three'' limitations period makes securities fraud actions 
``all but a dead letter for injured investors who by no 
conceivable standard of fairness or practicality can be 
expected to file suit within three years after the violation 
occurred.''\10\
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    \10\ Lampf, Pleva. Lipkind, Prupis, & Petigrow v. Gilbertson, 111 
S. Ct. 2773, 2790 (1991). In Lampf, the 5-4 majority changed the 
decades old practice of deferring to state limitations period in 
securities fraud cases, and it adopted a national statute of 
limitations instead. In addition, as opposed to adopting the longer 
federal limitations period that the SEC and then Solicitor General 
Kenneth Starr supported from a 1988 securities law, id. at 2781, the 
Court held not only that the shorter ``1 and 3'' period imported from 
Sec. 9(e) of the 1934 Act (15 U.S.C. Sec. 78i(e)) governed, but that 
fraud victims did not even have the right to raise the customary 
doctrine of ``equitable tolling,'' which can protect them in cases 
where they can demonstrate that the defendant took affirmative steps to 
conceal the fraud. Id. at 2782. In short, current law encourages fraud 
artists to game the system.
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    Other experts agree with Justices Kennedy and O'Connor. In 
fact, the last two SEC Chairmen supported extending the statute 
of limitations in securities fraud cases. Then Chairman Arthur 
Levitt testified before a Senate subcommittee in 1995 that 
``extending the statute of limitations is warranted because 
many securities frauds are inherently complex, and the law 
should not reward the perpetrator of a fraud, who successfully 
conceals its existence for more than three years.'' Before 
Chairman Levitt, in the first Bush administration, then SEC 
Chairman Richard Breeden also testified before Congress in 
favor of extending the statute of limitations in securities 
fraud cases. Reacting to the Lampf opinion, Breeden stated in 
1991 that ``[e]vents only come to light years after the 
original distribution of securities, and the Lampf cases could 
well mean that by the time investors discover they have a case, 
they are already barred from the courthouse.'' Both the FDIC 
and the State securities regulators joined the SEC in calling 
for a legislative reversal of the Lampf decisions at that time.
    The one year statute of limitations from the date the fraud 
is discovered is also particularly harsh on innocent defrauded 
investors. This short limitations period has the effect of 
placing true fraud victims on a ``stop watch,'' from the moment 
they know that they have been cheated. As most prosecutors and 
victims will confirm, however, the best cons are designed so 
that even after victims are cheated, they will not know who 
cheated them, or how. Especially in securities fraud cases, the 
complexities of how the fraud was executed often take well over 
a year to unravel, even after the fraud is discovered. Even 
with use of the full resources of the FBI, a Special Task Force 
of Justice Department Attorneys, and the power of a federal 
grand jury, complex fraud cases such as Enron are difficult to 
unravel and rarely can be charged within a year.
    This one year ``stop watch'' is even more unfair when 
considered in light of the significant obstacles that current 
law places between a victim and the courthouse in securities 
fraud cases. A lead plaintiff must be selected by the court, a 
process that can take months. Discovery is automatically stayed 
during the pendency of any motion to dismiss, consideration of 
which can take over a year in itself. During that period the 
stop watch continues to run on the claim, even though the 
victim has little or no ability to find out more about exactly 
who participated in the fraudulent activity and how the fraud 
was accomplished. With the higher pleading standards that also 
govern securities fraudvictims, it is unfair to expect victims 
to be able to negotiate such obstacles in the span of 12 months (See 15 
U.S.C. Sec. 78u-4).
    In short, by the time a victim learns enough facts to file 
a complaint under a heightened pleading standard, survives a 
motion to dismiss, begins discovery, and learns that an 
additional wrongdoer or theory should be added to the case, 
that claim is likely to be time barred, then the wrongdoer is 
able to avoid liability and the victim is left holding the 
proverbial bag. Moreover, current law sets up a perverse 
incentive for victims to race into court, so as not to be 
barred by time, and immediately sue. Plaintiffs who wish to 
spend more time investigating the matter or trying to resolve 
the matter without litigation are punished under the current 
law.
    Furthermore, the short statute of limitations does nothing 
to discourage frivolous cases, as a plaintiff operating in bad 
faith would have little trouble meeting the one year deadline 
and simply throwing in every possible defendant and every 
claim. After all, by definition of the so-called ``strike 
suit,'' filing occurs almost immediately upon a change in the 
stock price. Instead of stopping bad faith suits, the short 
statute merely blocks the meritorious claims of fraud victims. 
Statutes of limitations are simply not proper means of deciding 
legitimate cases which should be decided on the merits--that is 
the role of the underlying substantive law.
    In many securities fraud cases the short limitations period 
under current law is an invitation to take sophisticated steps 
to conceal the deceit. The experts have long agreed on that 
point, and unfortunately they have been proven right. Based on 
the Enron and Andersen cases, it only takes a few seconds to 
warm up the shredder, but it will take years for victims to put 
this complex case back together again. It is time that the law 
is changed to provide victims the time they need to prove their 
cases to recoup their losses.
    Fifth, victims of securities fraud can be thwarted from 
fair recovery when a debtor, such as Enron, declares 
bankruptcy. Current bankruptcy law permits wrongdoers to 
discharge their obligations under court judgments or 
settlements based on securities fraud and other securities 
violations. This loophole in the law should be closed to help 
defrauded investors recoup their losses and to hold accountable 
those who incur debts by violating our securities laws.
    State regulators are also unfairly disadvantaged under the 
current system. Under current laws, state regulators are often 
forced to ``re-prove'' their fraud cases in bankruptcy court to 
prevent discharge because remedial statutes often have 
different technical elements than the analogous common law 
causes of action. Moreover, settlements may not have the same 
collateral estoppel effect as judgments obtained through fully 
litigated legal proceedings. In short, with limited resources 
already stretched to protect fraud victims, state regulators 
must plow the same ground twice in securities fraud cases.\11\
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    \11\ The North American Securities Administrators Association 
(NASAA) has endorsed S. 2010, stating that it would ``enhance the 
ability of state and federal regulators to help defrauded investors 
recoup their losses and to hold accountable those who perpetrate 
securities fraud.'' See letter from Joseph P. Borg, NASAA President and 
Director of Alabama Securities Commission.
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    Sixth, corporate whistleblowers are left unprotected under 
current law. This is a significant deficiency because often, in 
complex fraud prosecutions, these insiders are the only 
firsthand witnesses to the fraud. They are the only people who 
can testify as to ``who knew what, and when,'' crucial 
questions not only in the Enron matter but in all complex 
securities fraud investigations. Although current law protects 
many government employees who act in the public interest by 
reporting wrongdoing, there is no similar protection for 
employees of publicly traded companies who blow the whistle on 
fraud and protect investors. With one in every two Americans 
investing in public companies, this distinction fails to serve 
the public good.
    Corporate employees who report fraud are subject to the 
patchwork and vagaries of current state laws, although most 
publicly traded companies do business nationwide. Thus, a 
whistleblowing employee in one state may be far more vulnerable 
to retaliation than a fellow employee in another state who 
takes the same actions. Unfortunately, as demonstrated in the 
tobacco industry litigation and the Enron case, efforts to 
quiet whistleblowers and retaliate against them for being 
``disloyal'' or ``litigation risks'' transcend state lines. 
This corporate culture must change, and the law can lead the 
way. That is why S. 2010 is supported by public interest 
advocates, such as the National Whistleblower Center, the 
Government Accountability Project, and Taxpayers Against Fraud, 
who have called this bill ``the single most effective measure 
possible to prevent recurrences of the Enron debacle and 
similar threats to the nation's financial markets.''

E. The future

    Many people and institutions contributed to the Enron 
debacle, including the corporate officers and directors whose 
actions led to Enron's failure, the well-paid professionals who 
helped create, carry out, and cover up the complicated 
corporate ruse when they should have been raising concerns, the 
regulators who did not protect the public and our public 
markets, and the Congress and the courts, which have thrown 
obstacles in the way of securities fraud victims. Now Congress 
must contribute to making the Enron situation right and 
ensuring that this never happens again. Without discipline, 
professionalism, an effective legal structure, and 
accountability, greed can run rampant, with devastating 
results. Unfortunately, business failures during a permissive 
era rarely happen in isolation.
    Accountability is important and must be restored because 
Enron is not alone. It is only a case study exposing the 
shortcomings in our current laws. At the Committee hearing, 
experts gave investors the grave warnings that it is likely 
that there are more ``Enrons'' lurking out there, simply 
eluding discovery. Future debacles wait to be discovered not 
only by investigators or the media, but by the more than one in 
two Americans who depend on the transparency and integrity of 
our public markets.
    The majority of Americans depend on capital markets to 
invest in the future needs of their families--from their 
children's college fund to their retirement nest eggs. American 
investors deserve action.Congress must act now to restore 
confidence in the integrity of the public markets and deter fraud 
artists who believe their crimes will go unpunished. Restoring such 
accountability is the aim of the Corporate and Criminal Fraud 
Accountability Act of 2002.
    Accountability and transparency help our markets work as 
they should, in ways that benefit investors, employees, 
consumers and our national economy. The Enron debacle has 
arrived on our doorstep, and our job is to make sure that there 
are adequate doses of accountability in our legal system to 
prevent such occurrences in the future, and to offer a 
constructive remedy and decisive punishment should they occur. 
The time has come for Congress to rethink and reform our laws 
in order to prevent corporate deceit, to protect investors and 
to restore full confidence in the capital markets.

            III. Section-by-Section Analysis and Discussion

    S. 2010 has three major components that will enhance 
accountability. First, it provides prosecutors with new and 
better tools to effectively prosecute and punish those who 
defraud investors, which means ensuring criminal laws are 
flexible enough to keep pace with the most sophisticated and 
clever con artists. It also means providing for criminal 
penalties tough enough to make them think twice before 
defrauding the public.
    Second, this bill establishes tools to improve the ability 
of investigators and regulators to collect and preserve 
evidence which proves fraud. This ensures that corporate 
whistleblowers are protected and that those who destroy 
evidence of fraud are punished.
    Third, the bill protects victims' rights to recover from 
those who have cheated them. In short, S. 2010 will not only 
save documents from the shredder, but also send wrongdoers to 
jail once they are caught.

                      section-by-section analysis

    Section 1.--Title. ``Corporate and Criminal Fraud 
Accountability Act.''

Section 2. Criminal penalties for altering documents

    This section provides two new criminal statutes which would 
clarify and plug holes in the current criminal laws relating to 
the destruction or fabrication of evidence and the preservation 
of financial and audit records.
    First, this section would create a new 10-year felony which 
could be effectively used in a wide array of cases where a 
person destroys or creates evidence with the intent to obstruct 
an investigation or matter that is within the jurisdiction of 
any federal agency or any bankruptcy.
    Second, the section creates a new 5-year felony which 
applies specifically to the willful failure to preserve audit 
papers of companies that issue securities. Section (a) of the 
statute has two sections which apply to accountants who conduct 
audits under the provisions of the Securities and Exchange Act 
of 1934. Subsection (a)(1) is an independent criminal 
prohibition on the destruction of audit or review work papers 
for five years, as that term is widely understood by regulators 
and in the accounting industry. Subsection (a)(2) requires the 
SEC to promulgate reasonable and necessary regulations within 
180 days, after the opportunity for public comment, regarding 
the retention of categories of electronic and non electronic 
audit records which contain opinions, conclusions, analysis or 
financial data, in addition to the actual work papers. Willful 
violation of such regulations would be a crime. Neither the 
statute nor any regulations promulgated under it would relieve 
any person of any independent legal obligation under state or 
federal law to maintain or refrain from destroying such 
records.

Section 3.--Debts nondischargeable if incurred in violation of 
        securities fraud laws

    This provision would amend the federal bankruptcy code to 
make judgments and settlements arising from state and federal 
securities law violations brought by state or federal 
regulators and private individuals non-dischargeable. Current 
bankruptcy law may permit wrongdoers to discharge their 
obligations under court judgments or settlements based on 
securities fraud and securities law violations.

Section 4.--Statute of limitations

    This section would set the statute of limitations in 
private securities fraud cases to the earlier of five years 
after the date of the fraud or two years after the fraud was 
discovered. The current statute of limitations for most private 
securities fraud cases is the earlier of three years from the 
date of the fraud or one year from the date of discovery. This 
provision states that it is not meant to create any new private 
cause of action, but only to govern already existing private 
causes of action under federal securities laws.

Section 5.--Review and enhancement of criminal sentences in cases of 
        fraud and evidence destruction

    This section would require the United States Sentencing 
Commission (``Commission'') to review and consider enhancing, 
as appropriate, criminal penalties in cases involving 
obstruction of justice and in serious fraud cases. The 
Commission is also directed to generally review the U.S.S.G. 
Chapter 8 guidelines relating to sentencing organizations for 
criminal misconduct, to ensure that such guidelines are 
sufficient to punish and deter criminal misconduct by 
corporations.
    Subsection 1 requires that the Commission generally review 
all the base offense level and sentencing enhancements under 
U.S.S.G. Sec. 2J1.2. Subsection 2 specifically directs the 
Commission to consider including enhancements or specific 
offense characteristics for cases based on various factors 
including the destruction, alteration, or fabrication of 
physical evidence, the amount of evidencedestroyed, the number 
of participants, or otherwise extensive nature of the destruction, the 
selection of evidence that is particularly probative or essential to 
the investigation, and whether the offense involved more than minimal 
planning or the abuse of a special skill or position of trust. 
Subsection 3 requires the Commission to establish appropriate 
punishments for the new obstruction of justice offenses created in this 
Act.
    Subsections 4 and 5 require the Commission to review 
guideline offense levels and enhancements under U.S.S.G. 
Sec. 2B1.1, relating to fraud. Specifically, the Commission is 
requested to review the fraud guidelines and consider 
enhancements for cases involving significantly greater than 50 
victims and cases in which the solvency or financial security 
of a substantial number of victims is endangered. Subsection 6 
requires a comprehensive review of Chapter 8 guidelines 
relating to sentencing organizations.

Section 6.--Whistleblower protection for employees of publicly traded 
        companies

    This section would provide whistleblower protection to 
employees of publicly traded companies. It specifically 
protects them when they take lawful acts to disclose 
information or otherwise assist criminal investigators, federal 
regulators, Congress, supervisors (or other proper people 
within a corporation), or parties in a judicial proceeding in 
detecting and stopping fraud. If the employer does take illegal 
action in retaliation for lawful and protected conduct, 
subsection (b) allows the employee to file a complaint with the 
Department of Labor, to be governed by the same procedures and 
burdens of proof now applicable in the whistleblower law in the 
aviation industry.\12\ The employee can bring the matter to 
federal court only if the Department of Labor does not resolve 
the matter in 180 days (and there is no showing that such delay 
is due to the bad faith of the claimant) as a normal case in 
law or equity, with no amount in controversy requirement. 
Subsection (c) governs remedies and provides for the 
reinstatement of the whistleblower, backpay, and compensatory 
damages to make a victim whole, including reasonable attorney 
fees and costs, as remedies if the claimant prevails.
---------------------------------------------------------------------------
    \12\ See 49 U.S.C. Sec. 42121 et seq.
---------------------------------------------------------------------------

Section 7.--Criminal penalties for securities fraud

    This provision would create a new 10-year felony for 
defrauding shareholders of publicly traded companies. The 
provision would supplement the patchwork of existing technical 
securities law violations with a more general and less 
technical provision, with elements and intent requirements 
comparable to current bank fraud and health care fraud 
statutes.

                               discussion

    S. 2010 is one part of the response needed to solve the 
problems exposed by Enron's fall. Securities law experts, 
consumer protection groups, and others in Congress, both in the 
Senate and the Houseof Representatives, have made various 
proposals and introduced legislation that deserve careful 
consideration. Certainly, in light of recent events, careful 
reexamination is required of both the decisions of the Supreme Court 
and current laws. Despite the best of intentions, federal laws may have 
helped create an environment in which greed was inflated and integrity 
devalued. S. 2010 is an important starting point in that process. 
Following is a discussion and analysis of the bill's provisions.
    Section 2 of the bill would create two new felonies to 
clarify and close loopholes in the existing criminal laws 
relating to the destruction or fabrication of evidence and the 
preservation of financial and audit records. First, it creates 
a new general anti shredding provision, 18 U.S.C. Sec. 1519, 
with a 10-year maximum prison sentence. Currently, provisions 
governing the destruction or fabrication of evidence are a 
patchwork that have been interpreted, often very narrowly, by 
federal courts. For instance, certain current provisions make 
it a crime to persuade another person to destroy documents, but 
not a crime to actually destroy the same documents 
yourself.\13\ Other provisions, such as 18 U.S.C. Sec. 1503, 
have been narrowly interpreted by courts, including the Supreme 
Court in United States v. Aguillar, 115 S. Ct. 593 (1995), to 
apply only to situations where the obstruction of justice can 
be closely tied to a pending judicial proceeding. Still other 
statutes have been interpreted to draw distinctions between 
what type of government function is obstructed.\14\ Still other 
provisions, such as sections 152(8), 1517 and 1518 apply to 
obstruction in certain limited types of cases, such as 
bankruptcy fraud, examinations of financial institutions, and 
healthcare fraud. In short, the current laws regarding 
destruction of evidence are full of ambiguities and technical 
limitations that should be corrected. This provision is meant 
to accomplish those ends.
---------------------------------------------------------------------------
    \13\ See 18 U.S.C. Sec. 1512(b).
    \14\ See United States v. Frankhauser, 80 F.3d 641 (1st Cir. 1996) 
(1503 prohibits destroying evidence to thwart grand jury investigation, 
but not FBI investigation).
---------------------------------------------------------------------------
    Section 1519 is meant to apply broadly to any acts to 
destroy or fabricate physical evidence so long as they are done 
with the intent to obstruct, impede or influence the 
investigation or proper administration of any matter, and such 
matter is within the jurisdiction of an agency of the United 
States, or such acts done either in relation to or in 
contemplation of such a matter or investigation. This statute 
is specifically meant not to include any technical requirement, 
which some courts have read into other obstruction of justice 
statutes, to tie the obstructive conduct to a pending or 
imminent proceeding or matter. It is also sufficient that the 
act is done ``in contemplation'' of or in relation to a matter 
or investigation. It is also meant to do away with the 
distinctions, which some courts have read into obstruction 
statutes, between court proceedings, investigations, regulatory 
or administrative proceedings (whether formal or not), and less 
formal government inquiries, regardless of their title. 
Destroying or falsifying documents to obstruct any of these 
types of matters or investigations, which in fact are proved to 
be within the jurisdiction of any federal agency are covered by 
this statute.\15\ Questions of criminal intent are, as in all 
cases, appropriately decided by a jury on a case-by-cases 
basis. It also extends to acts done in contemplation of such 
federal matters, so that the timing of the act in relation to 
the beginning of the matter or investigation is also not a bar 
to prosecution. The intent of the provision is simple; people 
should not be destroying, altering, or falsifying documents to 
obstruct any government function. Finally, this section could 
also be used to prosecute a person who actually destroys the 
records himself in addition to one who persuades another to do 
so, ending yet another technical distinction which burdens 
successful prosecution of wrongdoers.\16\
---------------------------------------------------------------------------
    \15\ See 18 U.S.C. Sec. 1001.
    \16\ See 18 U.S.C. Sec. 1512(b).
---------------------------------------------------------------------------
    Second, Section 2 creates a five-year felony, 18 U.S.C. 
Sec. 1520, to punish the willful failure to preserve financial 
audit papers of companies that issue securities as defined in 
the Securities Exchange Act of 1934. The new statute, in 
subsection (a)(1), would independently require that accountants 
preserve audit work papers for five years from the conclusion 
of the audit. Subsection (b) would make it a felony to 
knowingly and willfully violate the five-year audit retention 
period in (1)(a). The materials covered in subsection (1)(b), 
which requires the SEC to issues reasonable rules and 
regulations, are intended to include additional records which 
contain conclusions, opinions, analysis, and financial data 
relevant to an audit or review. The regulations are intended to 
cover the retention of such substantive material, whether or 
not the conclusions, opinions, analyses or data in such records 
support the final conclusions reached by the auditor or 
expressed in the final audit or review so that state and 
federal law enforcement officials and regulators can conduct 
more effective inquiries into the decisions and determinations 
made by accountants in auditing public corporations. Non-
substantive materials, however, such as administrative records, 
which are not relevant to the conclusions or opinions expressed 
(or not expressed), need not be included in such retention 
regulations. The language of the provision is clear. The SEC 
``shall'' promulgate regulations relating to the retention of 
the categories of items which are specifically enumerated in 
the statutory provision. Willful violation of these regulations 
will also be a crime under this section.
    In light of the apparent massive document destruction by 
Andersen, and the company's apparently misleading document 
retention policy, even in light of its prior SEC violations, it 
is intended that the SEC promulgate rules and regulations that 
require the retention of such substantive material, including 
material which casts doubt on the views expressed in the audit 
of review, for such a period as is reasonable and necessary for 
effective enforcement of the securities laws and the criminal 
laws, most of which have a five-year statute of limitations. It 
should also be noted that criminal tax violations, which many 
of these documents relate to, have a six-year statute of 
limitations. By granting the SEC the power to issue such 
regulations, it is not intended that the SEC be prohibited from 
consulting with other government agencies, such as the 
Department of Justice, which has primary authority regarding 
enforcement of federal criminal law or pertinent state 
regulatory agencies. Nor is it the intention of this provision 
that the general public, private or institutional investors, or 
other investor or consumer protection groups be excluded from 
the SEC rulemaking process. These views of these groups, who 
often represent the victims of fraud, should be considered at 
least on an equal footing with ``industry experts'' and others 
who participate in the rulemaking process at the SEC.
    This section not only penalizes the willful failure to 
maintain specified audit records, but also will result in clear 
and reasonable rules that will require accountants to put 
strong safeguards in place to ensure that such corporate audit 
records are retained. Had such clear requirements and policies 
been established at the time Andersen was considering what to 
do with its audit documents, countless documents might have 
been saved from the shredder. The idea behind the statute is 
not only to provide for prosecution of those who obstruct 
justice, but to ensure that important financial evidence is 
retained so that law enforcement officials, regulators, and 
victims can assess whether the law was broken to begin with 
and, if so, whether or not such was done intentionally, or with 
or without the knowledge or assistance of an auditor.
    Section 3 of this bill would amend the Bankruptcy Code to 
make judgments and settlements based upon securities law 
violations non-dischargeable, protecting victims' ability to 
recover their losses. Current bankruptcy law may permit such 
wrongdoers to discharge their obligations under court judgments 
or settlements based on securities fraud and other securities 
violations. This loophole in the law should be closed to help 
defrauded investors recoup their losses and to hold accountable 
those who violate securities laws after a government unit or 
private suit results in a judgement or settlement against the 
wrongdoer.
    State securities regulators have indicated their strong 
support for this change in the bankruptcy law. Under current 
laws, state regulators are often forced to ``reprove'' their 
fraud cases in bankruptcy court to prevent discharge because 
remedial statutes often have different technical elements than 
the analogous common law causes of action. Moreover, 
settlements may not have the same collateral estoppel effect as 
judgments obtained through fully litigated legal proceedings. 
In short, with their resources already stretched to the 
breaking point, state regulators must plow the same ground 
twice in securities fraud cases. By ensuring securities law 
judgments and settlements in state cases are non-dischargeable, 
precious state enforcement resources will be preserved and 
directed at preventing fraud in the first place.
    Section 4 of S. 2010 would protect victims by extending the 
statute of limitations in private securities fraud cases. It 
would set the statute of limitations in private securities 
fraud cases to the earlier of five years after the date of the 
fraud or two years after the fraud was discovered. The current 
statute of limitations for most such fraud cases is three years 
from the date of the fraud or one year after discovery, which 
can unfairly limit recovery for defrauded investors in some 
cases. As Attorney General Gregoire testified at the Committee 
hearing, in the Enron state pension fund litigation the current 
short statute of limitations has forced some states to forgo 
claims against Enron based on alleged securities fraud in 1997 
and 1998. In Washington state alone, the short statute of 
limitations may cost hard-working state employees, firefighters 
and police officers nearly $50 million in lost Enron 
investments which they can never recover.
    Especially in complex securities fraud cases, the current 
short statute of limitations may insulate the worst offenders 
from accountability. As Justices O'Connor and Kennedy said in 
their dissent in Lampf, Pleva. Lipkind, Prupis, & Petigrow v. 
Gilbertson, 111 S. Ct. 2773 (1991), the 5-4 decision upholding 
this short statute of limitations in most securities fraud 
cases, the current ``one and three'' limitations period makes 
securities fraud actions ``all but a dead letter for injured 
investors who by no conceivable standard of fairness or 
practicality can be expected to file suit within three years 
after the violation occurred.'' The Consumers Union and 
Consumer Federation of America, along with the AFL-CIO and 
other institutional investors, strongly support the bill, and 
view this section in particular as a needed measure to protect 
investors.
    The experts agree with that view. In fact, the last two SEC 
Chairmen supported extending the statute of limitations in 
securities fraud cases. Former Chairman Arthur Levitt testified 
before a Senate Subcommittee in 1995 that ``extending the 
statute of limitations is warranted because many securities 
frauds are inherently complex, and the law should not reward 
the perpetrator of a fraud, who successfully conceals its 
existence for more than three years.'' Before Chairman Levitt, 
in the last Bush administration, then SEC Chairman Richard 
Breeden also testified before Congress in favor of extending 
the statute of limitations in securities fraud cases. Reacting 
to the Lampf opinion, Breeden stated in 1991 that ``[e]vents 
only come to light years after the original distribution of 
securities, and the Lampf cases could well mean that by the 
time investors discover they have a case, they are already 
barred from the courthouse.'' Both the FDIC and the State 
securities regulators joined the SEC in calling for a 
legislative reversal of the Lampf decisions at that time.
    In fraud cases the short limitations period under current 
law is an invitation to take sophisticated steps to conceal the 
deceit. The experts have long agreed on that point, but 
unfortunately they have been proven right again. As recent 
experience shows, it only takes a few seconds to warm up the 
shredder, but unfortunately it will take years for victims to 
put this complex case back together again.\17\ It is time that 
the law is changed to give victims the time they need to prove 
their fraud cases.
---------------------------------------------------------------------------
    \17\ Of course, the allegations in the Enron case as set forth in 
this report are still being investigated, and 8 months after the public 
disclosures of Enron's conduct, not one Enron executive has been 
charged, even with the resources of the FBI available. That is another 
example of why a one year statute of limitations for such complex fraud 
cases is simply unreasonable.
---------------------------------------------------------------------------
    Section 5 of S. 2010 ensures that those who destroy 
evidence or perpetrate fraud are appropriately punished. It 
would require the Commission to consider enhancing criminal 
penalties in cases involving obstruction of justice and serious 
fraud cases where a large number of victims are injured or when 
the victims face financial ruin.
    Currently, the U.S.S.G. recognize that a wide variety of 
conduct falls under the offense of ``obstruction of justice.'' 
For obstruction cases involving the murder of a witness or 
another crime, the U.S.S.G. allow, by cross reference, 
significant enhancements based on the underlying crimes, such 
as murder or attempted murder. For cases when obstruction is 
the only offense, however, they provide little guidance on 
differentiating between different types of obstruction. This 
provision requests that the Commission consider raising the 
penalties for obstruction where no cross reference is available 
and defining meaningful specific enhancements and adjustments 
for cases whereevidence and records are actually destroyed or 
fabricated (and for more serious cases even within that category of 
case) so as to thwart investigators, a serious form of obstruction.
    This provision, in subsections (4) and (5), also requires 
that the Commission consider enhancing the penalties in fraud 
cases which are particularly extensive or serious, even in 
addition to the recent amendments to the Chapter 2 guidelines 
for fraud cases. The current fraud guidelines require that the 
sentencing judge take the number of victims into account, but 
only to a very limited degree in small and medium-sized cases. 
Specifically, once there are more than 50 victims, the 
guidelines do not require any further enhancement of the 
sentence. A case with 51 victims, therefore, may be treated the 
same as a case with 5,000 victims. As the Enron matter 
demonstrates, serious frauds, especially in cases where 
publicly traded securities are involved, can affect thousands 
of victims.
    In addition, current guidelines allow only very limited 
consideration of the extent of devastation that a fraud offense 
causes its victims. Judges may only consider whether a fraud 
endangers the ``solvency or financial security'' of a victim to 
impose an upward departure from the recommended sentencing 
range. This is not a factor in establishing the range itself 
unless the victim is a financial institution. Subsection (5) 
requires the Commission to consider requiring judges to 
consider the extent of such devastation in setting the actual 
recommended sentencing range in cases such as the Enron matter, 
when many private victims, including individual investors, have 
lost their life savings. Finally this provision requires a 
complete review of the Chapter 8 corporate misconduct 
guidelines, which are outdated and need to be toughened to 
deter corporate crime.
    Section 6 of the bill would provide whistleblower 
protection to employees of publicly traded companies who report 
acts of fraud to federal officials with the authority to remedy 
the wrongdoing or to supervisors or appropriate individuals 
within their company. Although current law protects many 
government employees who act in the public interest by 
reporting wrongdoing, there is no similar protection for 
employees of publicly traded companies who blow the whistle on 
fraud and protect investors. With an unprecedented portion of 
the American public investing in these companies and depending 
upon their honesty, this distinction does not serve the public 
good.
    In addition, corporate employees who report fraud are 
subject to the patchwork and vagaries of current state laws, 
even though most publicly traded companies do business 
nationwide. Thus, a whistleblowing employee in one state (e.g., 
Texas, see supra) may be far more vulnerable to retaliation 
than a fellow employee in another state who takes the same 
actions. Unfortunately, companies with a corporate culture that 
punishes whistleblowers for being ``disloyal'' and ``litigation 
risks'' often transcend state lines, and most corporate 
employers, with help from their lawyers, know exactly what they 
can do to a whistleblowing employee under the law. U.S. laws 
need to encourage and protect those who report fraudulent 
activity that can damage innocent investors in publicly traded 
companies. S. 2010 is supported by groups such as the National 
Whistleblower Center, the Government Accountability Project, 
and Taxpayers Against Fraud, all of whom have written a letter 
placed in the Committee record calling this bill ``the single 
most effective measure possible to prevent recurrences of the 
Enron debacle and similar threats to the nation's financial 
markets.''
    This bill would create a new provision protecting employees 
when they take lawful acts to disclose information or otherwise 
assist criminal investigators, federal regulators, Congress, 
their supervisors (or other proper people within a 
corporation), or parties in a judicial proceeding in detecting 
and stopping actions which they reasonably believe to be 
fraudulent. Since the only acts protected are ``lawful'' ones, 
the provision would not protect illegal actions, such as the 
improper public disclosure of trade secret information. In 
addition, a reasonableness test is also provided under the 
subsection (a)(1), which is intended to impose the normal 
reasonable person standard used and interpreted in a wide 
variety of legal contexts (See generally Passaic Valley 
Sewerage Commissioners v. Department of Labor, 992 F. 2d 474, 
478). Certainly, although not exclusively, any type of 
corporate or agency action taken based on the information, or 
the information constituting admissible evidence at any later 
proceeding would be strong indicia that it could support such a 
reasonable belief.
    Under new protections provided by S. 2010, if the employer 
does take illegal action in retaliation for such lawful and 
protected conduct, subsection (b) allows the employee to elect 
to file an administrative complaint at the Department of Labor, 
as is the case for employees who provide assistance in aviation 
safety. Only if there is no final agency decision within 180 
days of the complaint (and such delay is not shown to be due to 
the bad faith of the claimant) may he or she may bring a de 
novo case in federal court with a jury trial available (See 
United States Constitution, Amendment VII; Title 42 United 
States Code, Section 1983). Should such a case be brought in 
federal court, it is intended that the same burdens of proof 
which would have governed in the Department of Labor will 
continue to govern the action. Subsection (c) of this section 
requires both reinstatement of the whistleblower, backpay, and 
compensatory damages to make a victim whole should the claimant 
prevail. The bill does not supplant or replace state law, but 
sets a national floor for employee protections in the context 
of publicly traded companies.
    Section 7 of the bill would create a new ten-year felony 
under Title 18 for defrauding shareholders of publicly traded 
companies. Currently, unlike bank fraud or health care fraud, 
there is no generally accessible statute that deals with the 
specific problem of securities fraud. In these cases, federal 
investigators and prosecutors are forced either to resort to a 
patchwork of technical Title 15 offenses and regulations, which 
may criminalize particular violations of securities law, or to 
treat the cases as generic mail or wire fraud cases and to meet 
the technical elements of those statutes, with their five year 
maximum penalties.
    This bill, then, would create a new ten-year felony for 
securities fraud--a more general and less technical provision 
comparable to the bank fraud and health care fraud statutes in 
Title 18. It adds a provision to Chapter 63 of Title 18 at 
section 1348 which would criminalize the execution or attempted 
execution of any scheme or artifice to defraud persons in 
connection with securities of publicly traded companies or 
obtain their money or property. The provision should not be 
read to require proof of technical elements from the securities 
laws, and is intended to provide needed enforcement flexibility 
in the context of publicly traded companies to protect 
shareholders and prospective shareholders against all the types 
schemes and frauds which inventive criminals may devise in the 
future. The intent requirements are to be applied consistently 
with those found in 18 U.S.C. Sec. Sec. 1341, 1343, 1344, 1347.
    By covering all ``schemes and artifices to defraud'' (see 
18 U.S.C. Sec. Sec. 1344, 1341, 1343, 1347), new Sec. 1348 will 
be more accessible to investigators and prosecutors and will 
provide needed enforcement flexibility and, in the context of 
publicly traded companies, protection against all the types 
schemes and frauds which inventive criminals may devise in the 
future.
    This bill is only part of the needed response to the 
problems exposed by the Enron debacle. For instance, a 
provision granting State Attorneys General and the SEC the 
authority to use the civil RICO statute would have been another 
important tool in battling fraud and protecting investors. The 
SEC has tremendous expertise in protecting investors, and the 
States, whose officials are more directly accountable to the 
public than federal officials, have traditionally played a 
major positive role in responsibly exercising their authority 
to protect our nation's investors and consumers. The tobacco 
industry litigation is but one recent example of this important 
role played by the States. Although the provision had received 
bipartisan support from State Attorneys General around the 
nation, it was removed from S. 2010 as a compromise, after 
objections were raised that such elected state officials could 
not be entrusted with the same enforcement powers as the 
federal government.
    Changes are clearly needed to restore accountability in 
U.S. markets, which have already been adversely affected by 
recent events. Instead of acting as gatekeepers who detect and 
deter fraud, it appears that Enron's accountants and lawyers 
brought all their skills and knowledge to bear in assisting the 
fraud to succeed and then in covering it up. Congress must 
reconsider the incentive system that has been set up that 
encourages accountants and lawyers who come across fraud in 
their work to remain silent.

                      IV. Committee Consideration

    On Thursday, April 25, 2002, the full Committee met in open 
session and ordered favorably reported the bill, S. 2010, by 
unanimous consent, with an amendment in the nature of a 
substitute sponsored by Senator Leahy and, after adopting an 
amendment sponsored by Senator Hatch and cosponsored by Senator 
Leahy and Senator Schumer, an amendment sponsored by Senator 
Feinstein and cosponsored by Senator Cantwell, and an amendment 
sponsored by Senator Grassley and cosponsored by Senator Leahy, 
a quorum being present.

                       V. Votes of the Committee

    First, Senator Leahy offered an amendment in the nature of 
a substitute, clarifying that the statute of limitations 
provision in Section 5 of S. 2010 was not intended to establish 
any new private right of action, amending Section 7 of S. 2010 
dealing with whistleblowers, removing Section 3 from S. 2010, 
which would have authorized State Attorneys General and the 
Securities and Exchange Commission to bring suits under 18 
U.S.C. Sec. 1964 [civil provision of the Racketeering 
Influenced Corrupt Organizations Act (``RICO'')], and 
renumbering the remaining provisions accordingly. This 
substitute was accepted by unanimous consent.
    Second, Senator Hatch offered an amendment to the 
substitute, cosponsored by Senator Leahy and Senator Schumer, 
to make technical corrections to the criminal provisions, 
defining a publicly tradedcompany in Section 7 of the 
substitute, narrowing the scope of the new audit records destruction 
crime created in Section 2 of the substitute, raising the maximum 
penalty for the general anti-shredding provision created in Section 2 
of the substitute (new 18 U.S.C. Sec. 1519) from 5 to 10 years, and 
modifying and adding additional provisions to Section 5 of the 
substitute relating to review of the sentencing guidelines in fraud and 
obstruction of justice cases a well as for organizational misconduct. 
The amendment was adopted by vote of 18 yeas to 0 nays.
        Yeas                          Nays
Leahy
Kennedy (proxy)
Biden (proxy)
Kohl
Feinstein
Feingold
Schumer
Durbin
Cantwell
Edwards (proxy)
Hatch
Thurmond (proxy)
Grassley
Kyl (proxy)
DeWine
Sessions (proxy)
Brownback
McConnell (proxy)

    Third, Senator Feinstein offered an amendment, cosponsored 
by Senator Cantwell, to Section 4 of the substitute to lower 
the statute of limitations created in that provision from the 
earlier of 3 years from the date of discovery of the fraud or 
five years from the fraud to the earlier of 2 years from the 
date of discovery of the fraud or 5 years from the fraud. 
Senator Hatch offered a second degree amendment to the 
Feinstein-Cantwell amendment to strike the statute of 
limitations provision in Section 4 of the substitute. Senator 
Hatch's second degree amendment was rejected by vote of 7 yeas 
to 11 nays.
        Yeas                          Nays
Hatch                               Leahy
Thurmond (proxy)                    Kennedy (proxy)
Grassley                            Biden (proxy)
Kyl (proxy)                         Kohl
DeWine                              Feinstein
Sessions (proxy)                    Feingold
McConnell (proxy)                   Schumer
                                    Durbin
                                    Cantwell
                                    Edwards (proxy)
                                    Brownback

    The Feinstein-Cantwell amendment was then adopted by voice 
vote.
    Fourth, Senator Grassley offered an amendment, cosponsored 
by Senator Leahy, to Section 5 of the substitute dealing with 
whistleblower rights. This amendment replaced the option for 
immediate suit in federal court with an administrative remedy 
and resort to federal court if the administrative decision is 
not made within six months, removed enhanced penalties in 
whistleblower matters, removed the provision dealing with 
arbitration agreements, and lowered the statute of limitations 
in whistleblower cases from 180 to 90 days. The amendment was 
adopted by unanimous consent.
    The Committee agreed to favorably report S. 2010, as 
amended, by unanimous consent.

             VI. Congressional Budget Office Cost Estimate

    In compliance with paragraph 11(a) of rule XXVI of the 
standing rules of the Senate, the Committee sets forth, with 
respect to the bill, S. 2010, the following estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 403 of the Congressional Budget Act of 
1974:

                    VII. Regulatory Impact Statement

                                     U.S. Congress,
                               Congressional Budget Office,
                                       Washington, DC, May 2, 2002.
Hon. Patrick J. Leahy,
Chairman, Committee on the Judiciary,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 2010, the Corporate 
and Criminal Fraud Accountability Act of 2002.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Ken Johnson 
(for federal costs), Susan Sieg Tompkins (for the state and 
local costs), and Paige Piper/Bach (for the private-sector 
impact).
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Encloures:

S. 2010--Corporate and Criminal Fraud Accountability Act of 2002

    Summary: S. 2010 would create new crimes for persons who 
destroy records that could aid a federal investigation, people 
who commit securities fraud, or auditors who intentionally fail 
to retain certain audit records five years. In addition, the 
bill would prohibit certain fines assessed for violations of 
securities laws from being discharged in bankruptcy 
proceedings. Under S. 2010, employees who aid the SEC with 
investigations of publicly traded companies and who are 
subsequently discriminated against by their employer would have 
access to the Occupational Safety and Health Administration's 
(OSHA's) program for investigating illegal discrimination and 
termination of whistleblowers.
    CBO estimates that implementing S. 2010 would cost about $2 
million over the 2003-2007 period, subject to the availability 
of appropriated funds. The bill also would increase direct 
spending and receipts by less than $500,000 a year; therefore, 
pay-as-you-go procedures would apply.
    S. 2010 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA) and would not affect 
the budgets of state, local, or tribal governments. This 
legislation would impose private-sector mandates, as defined by 
UMRA, but CBO estimates that the direct cost of the mandates 
would fall well below the annual threshold established by UMRA 
($115 million in 2002, adjusted annually for inflation).
    Estimated cost to the Federal Government: CBO estimates 
that implementing S. 2010 would cost about $2 million over the 
2003-2007 period, subject to the availability of appropriated 
funds. This bill also would increase direct spending and 
receipts by less than $500,000 a year. The costs of this 
legislation fall within budget functions 370 (mortgage and 
housing credit) and 550 (health).
    Basis of estimate: For this estimate, CBO assumes that S. 
2010 will be enacted before the start of fiscal year 2003, and 
that the necessary amounts will be appropriate each fiscal 
year. Components of the estimated costs are described below.

Spending subject to appropriation

    Under S. 2010, employees who provide information or 
otherwise assist investigations could file claims with OSHA in 
the event of discrimination or termination by their employer as 
a result of their whistleblowing activities. OSHA currently 
investigates whistleblower claims of discrimination against 
employers who violate occupational or environmental laws and 
regulations. To handle the additional claims that would arise 
if S. 2010 were enacted. CBO assumes OSHA would have to hire 
three additional employees. Subject to the availability of 
appropriated funds, CBO estimates that implementing the bill 
would cost less than $500,000 in 2003 and about $2 million over 
the 2003-2007 period.
    Under S. 2010, the federal government would be able to 
pursue cases that it otherwise would not be able to prosecute. 
CBO expects that any increase in federal costs for law 
enforcement, court proceedings, or prison operations would not 
be significant, however, because of the small number of cases 
likely to be involved. Any such additional costs would be 
subject to the availability of appropriated funds.

Direct Spending and Revenues

    Because those prosecuted and convicted under S. 2010 could 
be subject to criminal fines, the federal government might 
collect additional fines if the bill is enacted. Collections of 
such fines are recorded in the budget as governmental receipts 
(revenues), which are deposited in the Crime Victims Fund and 
spent in subsequent years. CBO expects that any additional 
receipts and direct spending would be less than $500,000 each 
year.
    S. 2010 also would affect revenues by preventing certain 
fines the SEC assesses for violations for securities laws from 
being discharged in bankruptcy proceedings. This provision 
would apply to disgorgement funds, under which the SEC collects 
payments from violators and distributes them directly to the 
victims of the violation. Typically, these disgorgement funds 
are deposited in the Treasury only if the administrative costs 
of distributing the funds to the victims are prohibitive. Under 
current law, a violator could escape paying disgorgement funds 
under bankruptcy proceedings. S. 2010 would no longer allow 
such payments to be discharged in bankruptcy, and therefore, in 
certain cases could result in an increase of receipts to the 
Treasury. CBO estimates that any such increase would not be 
significant.
    Pay-as-you-go-considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts through 
2006. CBO estimates that any such effects would be less than 
$500,000 a year.
    Estimated impact on state, local, and tribal governments: 
S. 2010 contains no intergovernmental mandates as defined in 
UMRA and would not affect the budgets of state, local, or 
tribal governments.
    Estimated impact on the private sector: S. 2010 would 
impose private-sector mandates, as defined by UMRA, but CBO 
estimates that the direct cost of the mandates would fall well 
below the annual threshold established by UMRA ($115 million in 
2002, adjusted annually for inflation).
    The bill would impose a private-sector mandate by requiring 
that any accountant who conducts certain corporate audits to 
maintain all audit or review work papers for a five-year time 
period. According to the American Institute of Certified Public 
Accountants and industry representatives, the accounting 
industry currently retains financial statement working papers 
and records for seven years. Therefore, CBO estiamtes that the 
direct cost, if any, to comply with this mandate would be 
small.
    The bill also would protect employees of certain publicly 
traded companies who provide information to the U.S. government 
(whistleblowers). Those companies would not be able to 
discharge, demote, suspend, threaten, harass, or discriminate 
against such employees in the terms and conditions of their 
employment. Based on information from the Occupational Safety 
and Health Administration, the agency that would enforce this 
provision, CBO estimates that those publicly traded companies 
would incur minimal, if any, direct cost to comply with the 
whistleblower protection requirements.
    Estimate prepared by: Federal Costs: Ken Johnson and Alexis 
Ahlstrom; Impact on State, Local, and Tribal Government: Susan 
Sieg Tompkins; and Impact on the Private Sector: Paige Piper/
Bach.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

  VIII. ADDITIONAL VIEWS OF SENATORS HATCH, THURMOND, GRASSLEY, KYL, 
               DeWINE, SESSIONS, BROWNBACK, AND McCONNELL

                               A. General

    The Chairman's Report contains a lengthy dissertation of 
facts and circumstances that allegedly gave rise to Enron's 
bankruptcy. We do not ascribe to the particulars outlined in 
the Report because at this point, a determination of the facts 
is the subject of ongoing investigations and court proceedings. 
We also do not necessarily agree that the Enron situation can 
be attributed to loopholes in current law; rather, it appears 
to be the result of bad actors violating existing laws.
    In its amended form, S. 2010 is a marked improvement from 
the original version as introduced, and thus, the bill passed 
out of this committee unanimously by voice vote. We note that 
the amended version incorporates some of the provisions Senator 
Hatch included in his original amendment to S. 2010. 
Specifically, it further strengthens and refines prosecutorial 
tools and penalties for criminal conduct. In addition, as 
amended, S. 2010 removes a particularly troubling and 
unnecessary provision that would have extended the Department 
of Justice's (DOJ) automatic standing to bring suit under the 
civil provision of the Racketeer Influenced and Corrupt 
Organizations Act (RICO) to the 50 State Attorneys General and 
the Securities and Exchange Commission (SEC). To date, the 
Enron situation has left no doubt that the DOJ and SEC are 
aggressively investigating and bringing charges against 
offending parties. Moreover, to allow all 50 State Attorneys 
General and the SEC to bring multiple and duplicative civil 
RICO actions would result in inconsistent applications of the 
statute and undermine DOJ's proper role in this area. We know 
that other members of this committee, on both sides, shared 
these concerns, and we are pleased that we were able to remove 
this section from the bill.
    Another improvement to S. 2010 resulted from a revision to 
the proposed new protections for corporate whistleblowers. As 
originally drafted, the proposal would have provided for overly 
expansive damage awards which could have encouraged frivolous 
claims that abuse the protections we seek to bestow. We believe 
that protections for corporate whistleblowers should track 
those already existing for airline employees. Those 
protections, contained in the Aviation Safety Protection Act of 
2000, do not include a private cause of action, excessive 
damages or voluntary arbitration. To reach a compromise, we 
agreed to allow whistleblowers access to federal district court 
in cases where the Secretary of Labor has failed to issue a 
final decision on a whistleblower claim within 6 months.
    Despite these improvements, we believe that S. 2010 still 
contains language that is problematic and even unnecessary to 
address the concerns that have arisen in light of the Enron 
bankruptcy, the consequences of which have indeed been 
devastating to a great many people. We are hopeful that 
improvements to S. 2010 will continue.
    Below we clarify our intent and understanding with regard 
to specific provisions of S. 2010, as amended.

                         B. Specific Provisions

         section 2.--criminal penalties for altering documents

    Section 2 of S. 2010 creates two new Title 18 offenses: an 
obstruction statute specifically directed to the destruction of 
documents, 18 U.S.C. 1519, and a document retention provision 
that applies to auditors of publicly traded securities, 18 
U.S.C. 1520. Although it certainly appears, to date, that 
existing criminal obstruction of justice statutes are adequate 
to prosecute those who may be culpable in the Enron matter, we 
support providing prosecutors with all the tools they need to 
ensure that individuals who destroy evidence with the intent to 
impede a pending or future criminal investigation are punished. 
We also support the view that there is a need for a baseline 
retention standard that will apply to audit or review 
workpapers, which are the most critical documents relating to 
audits of publicly traded companies.
Section 1519
    We recognize that section 1519 overlaps with a number of 
existing obstruction of justice statutes, but we also believe 
it captures a small category of criminal acts which are not 
currently covered under existing laws--for example, acts of 
destruction committed by an individual acting alone and with 
the intent to obstruct a future criminal investigation.
    We have voiced our concern that section 1519, and in 
particular, the phrase ``or proper administration of any matter 
within the jurisdiction of any department or agency of the 
United States'' could be interpreted more broadly than we 
intend. In our view, section 1519 should be used to prosecute 
only those individuals who destroy evidence with the specific 
intent to impede or obstruct a pending or future criminal 
investigation, a formal administrative proceeding, or 
bankruptcy case. It should not cover the destruction of 
documents in the ordinary course of business, even where the 
individual may have reason to believe that the documents may 
tangentially relate to some future matter within the 
conceivable jurisdiction of an arm of the federal bureaucracy.
Section 1520
    Although the scope of section 1520, the document retention 
provision, has been significantly narrowed since S. 2010 was 
introduced, we are concerned that the Chairman's Report does 
not reflect the full extent to which this provision was 
narrowed.
    As we made clear before S. 2010 was amended, we strongly 
believe that a broad federal mandate requiring accountants of 
publicly traded companies to retain all documents sent, 
received or created in connection with any audit, review or 
other similar engagement, would create an unworkable standard--
one that would require auditors to retain warehouses of 
documents, including those immaterial to an audit's 
conclusions. We believe that any such mandate would have a 
substantial and adverse effect on this nation's economy.
    In its current form, section 1520 requires accountants of 
publicly traded companies to maintain audit and review 
workpapers for a period of 5 years. It does not impose any such 
requirement with respect to other documents, such as memoranda, 
correspondence, communications, and electronic records. 
Instead, with respect to other such documents, section 
1520(a)(2) directs the SEC to promulgate, after adequate notice 
and opportunity for comment from industry experts, regulators 
and government agencies, such rules and regulations ``as are 
reasonably necessary''.
    It is our intention that the SEC will exercise its 
discretion prudently in determining the necessity for and the 
scope of document retention regulations. In so doing, we 
anticipate that the SEC may well determine that the retention 
of many documents that fall within the list of categories of 
documents enumerated in section 1520(a)(2) is unecessary. 
Similarly, the SEC may also determine that it is unreasonable 
to apply a 5-year retention period, to all regulated documents.
    We understand that the accounting profession has 
implemented standards relating to the retention of workpapers. 
We encourage the profession to review their existing standards, 
and we urge the SEC to consider such standards when 
implementing regulations pursuant to section 1520(a)(2).
    In supporting section 1520, it is our intention to strike a 
fair balance between the legitimate needs of investigators and 
the accounting profession. In our view, it is not the role of 
Congress to impose unnecessary and draconian retention 
requirements on a profession, particularly where broad criminal 
obstruction statutes serve to deter and punish severely those 
who destroy documents with the intent to impede a pending or 
future investigation.

                   Section 4.--Statute of limitations

1. General views

    We believe current law likely provides an adequate length 
of time in which people who have been defrauded can file suit--
one year after an individual knows he or she has been defrauded 
or three years after the date of the fraud. This period mirrors 
legislatively enacted limitations that apply to statutory 
claims that are most analogous to those contemplated here. Such 
statutes of limitations provide for certainty in the markets 
and adequately protect genuinely aggrieved consumers. There has 
been no evidence to indicate that the time period after a 
claimant has discovered a fraud needs to be doubled, let alone 
tripled, as was proposed originally in S. 2010. It is worthy to 
note that even though they dissented from the majority holding 
in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 
U.S. 350, 369, 374 (1991) Justices O'Connor and Kennedy were 
clear in their support for the current one-year limitation 
after discovery of the fraud. Regrettably, the sponsors of S. 
2010 prevailed in their effort to extend the current statute of 
limitations, and we would like to clarify our understanding of 
the intended parameters of that extension.
    Section 4(a) of this bill amends section 1658 of Title 28, 
United States Code to address the Lampf holding. Specifically, 
it sets a five-year outer limit on implied private rights of 
action involving a claim of fraud, deceit, manipulation, or 
contrivance, which are in contravention of a regulatory 
requirement concerning the federal securities laws. 
Consequently, section 4(a) is not intended to conflict with 
existing limitations periods for any express private rights of 
action under the federal securities laws.

2. Five-year maximum limit

    In addition, because of the two-year limitation provided in 
section 1658(b)(2) of Title 28, United States Code, as amended 
by this bill, the five-year outer limit is not subject to 
equitable tolling. This is consistent with existing law 
applying statutes of limitation to securities fraud actions. 
Where there is a bifurcated limitations period, with an inner 
limit running from the time when the fraud was or should have 
been discovered, the inner limit ``by its terms, begins after 
discovery of the facts constituting the violation, making 
tolling unnecessary. The [outer limit] is a period of repose 
inconsistent with tolling.'' Lampf, 501 U.S. at 363.

3. Two-year discovery limit

    Section 4 of this bill is not intended to change existing 
case law holding that an objective standard should be used to 
measure the starting point as to when a securities fraud should 
have been discovered for purposes of a limitations period. In 
other words, this provision is intended to be consistent with 
established case law in that the ``discovery'' limitations 
period for private antifraud actions under section 10(b) of the 
Exchange Act begins to run when the plaintiff is on ``inquiry 
notice'' of a fraud. Rather than requiring actual knowledge to 
begin the running of the statute of limitations, the 
limitations period begins to run after discovery should have 
been made by exercise of reasonable diligence. This 
requirement, which has ``long applied in fraud cases outside as 
well as in the securities field,'' Tregenza v. Great American 
Communications Co., 12 F.3d 717, 722 (7th Cir. 1993) and cases 
cited therein, is necessary to limit ``the opportunistic use of 
federal securities law to protect investors against market 
risk.'' Id. When ``the circumstances would suggest to an 
investor of ordinary intelligence that she has been defrauded, 
a duty of inquiry arises, and knowledge will be imputed to the 
investor who does not make such an inquiry.'' Dodds v. Cigna 
Sec., Inc., 12 F.3d 346, 350 (2d Cir. 1993), cert. denied, 511 
U.S. 1019 (1994). See also, inter alia, Menowitz v. Brown, 991 
F.2d 36, 41 (2d Cir. 1993); Kahn v. Kohlberg, Kravis, Roberts & 
Co., 970 F.2d 1030, 1042 (2d Cir.), cert. denied, 506 U.S. 986 
(1992).

4. No expansion of existing private rights of action

    We agree that Section 4 of this bill is not intended to 
create a new private right of action or to broaden any existing 
private right of action.

 Section 5.--Review and enhancement of criminal sentences in cases of 
                     fraud and evidence destruction

    We support the provisions of section 5 which have 
incorporated many of our suggestions. We strongly endorse the 
view that the Sentencing Commission should revisit the 
guidelines that apply to corporate misconduct, as well as to 
those that apply to obstruction of justice and fraud offenses. 
We believe that tougher penalties, coupled with new criminal 
offenses, will enhance the ability of prosecutors to respond to 
egregious acts of obstruction and fraud.

 Section 6.--Whistleblower protection for employees of publicly traded 
                               companies

    This bill provides federal protection for corporate 
whistleblowers, who should be shielded from illegal retaliatory 
action. The amendment offered by Senators Grassley and Leahy 
revises the original bill to make these protections consistent 
with the Aviation Safety Protection Act of 2000 in which we 
provided whistleblower protections to another class of non-
government employees. Because we had already extended 
whistleblower protections to non civil service employees, we 
thought it best to track those protections as closely as 
possible.
    To make the corporate whistleblower protections consistent 
with those provided to airline employees, the amendment struck 
the excessive damages included in the original bill and 
subsequent compromises. It also removed a provision that 
allowed immediate access to federal district courts. However, 
this compromise does provide whistleblowers with access to 
federal court in the event the Secretary of Labor fails to 
issue a final decision within 6 months.

          Section 7.--Criminal penalties for securities fraud

    Although we believe that existing criminal statutes are 
adequate to prosecute criminal acts involving securities fraud, 
we support the creation of a new securities fraud offense. In 
our view, this provision will make it easier, in a limited 
class of cases, for prosecutors to prove securities fraud by 
eliminating, for example, the element that the mails or wires 
were used to further the scheme to defraud.
    This new securities fraud offense does not lower the 
standard of criminal intent prosecutors must meet to convict 
securities fraud offenders. Like the bank and health care fraud 
statutes on which this provision is modeled, prosecutors must 
prove that a defendant knowingly engaged in a scheme or 
artifice to defraud, or knowingly made false statements or 
representations to obtain money in a securities transaction. 
This standard, which includes knowledge and intent elements, is 
consistent with existing securities fraud statutes.

                             3. Conclusion

    As we consider legislative reforms to address concerns 
highlighted by the Enron debacle, it should be noted that there 
are a host of issues, many of which are outside of the 
jurisdiction of this Committee. While S. 2010 tightens and 
strengthening criminal penalties, among other things, it does 
not address issues relating to corporate and professional 
responsibility and disclosure. Complementary legislation is 
necessary to address these issues which are the focus of the 
President's ``10 Point Plan'' and debate in other Senate and 
House committees.
    Not only does legislation need to address corporate and 
professional responsibility and disclosure, it also must be 
deliberate and measured so that our economy is not adversely 
affected. We look forward to working with the full Senate, the 
other legislative chamber and the President to find the 
appropriate balanced solution to these complex issues.

                                   Orrin G. Hatch.
                                   Strom Thurmond.
                                   Chuck E. Grassley.
                                   Jon Kyl.
                                   Mike DeWine.
                                   Jeff Sessions.
                                   Sam Brownback.
                                   Mitch McConnell.

       IX. Changes in Existing Law Made by the Bill, as Reported

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, changes in existing law made by 
S. 2010, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in brackets, new matter is 
printed in italic, and existing law in which no change is 
proposed is shown in roman):

UNITED STATES CODE

           *       *       *       *       *       *       *


                          TITLE 11--BANKRUPTCY

Chap.                                                               Sec.
    1. General Provisions.....................................       101
    3. Case Administration....................................       301
501. Creditors, the Debtor, and the Estate..................

           *       *       *       *       *       *       *


            CHAPTER 5--CREDITORS, THE DEBTOR, AND THE ESTATE


                  Subchapter I--Creditors and Claims

           *       *       *       *       *       *       *



               SUBCHAPTER II--DEBTOR'S DUTIES AND BENEFITS

Sec.
521. Debtor's duties.
522. Exemptions.
523. Exceptions to discharge.

           *       *       *       *       *       *       *


Sec. 523. Exceptions to discharge

    (a) A discharge under section 727, 1141, 1228(a), 1228(b), 
or 1328(b) of this title does not discharge an individual 
debtor from any debt--
          (1) for a tax or a customs duty--

           *       *       *       *       *       *       *

          (17) for a fee imposed by a court for the filing of a 
        case, motion, complaint, or appeal, or for other costs 
        and expenses assessed with respect to such filing, 
        regardless of an assertion of poverty by the debtor 
        under section 1915(b) or (f) of title 28, or the 
        debtor's status as a prisoner, as defined in section 
        1915(h) of this title 28; [or]
           (18) owed under State law to a State or municipality 
        that is--
                  (B) enforceable under part D of title IV of 
                the Social Security Act (42 U.S.C. 601 et 
                seq.)[.]; or
          (19) that--
                  (A) arises under a claim relating to--
                          (i) the violation of any of the 
                        Federal securities laws (as that term 
                        is defined in section 3(a)(47) of the 
                        Securities Exchange Act of 1934 (15 
                        U.S.C. 78c(a)(47)), any State 
                        securities laws, or any regulations or 
                        orders issued under such Federal or 
                        State securities laws; or
                          (ii) common law fraud, deceit, or 
                        manipulation in connection with the 
                        purchase or sale of any security; and
                  (B) results, in relation to any claim 
                described in subparagraph (A), from--
                          (i) any judgment, order, consent 
                        order, or decree entered in any Federal 
                        or State judicial or administrative 
                        proceeding;
                          (ii) any settlement agreement entered 
                        into by the debtor; or
                          (iii) any court or administrative 
                        order for any damages, fine, penalty, 
                        citation, restitutionary payment, 
                        disgorgement payment, attorney fee, 
                        cost, or other payment owed by the 
                        debtor.

           *       *       *       *       *       *       *


                TITLE 18--CRIMES AND CRIMINAL PROCEDURE

Part                                                             Section
1 I. CRIMES.................................................

           *       *       *       *       *       *       *


PART I--CRIMES

           *       *       *       *       *       *       *



                         CHAPTER 63--MAIL FRAUD

Sec.
1341. Frauds and swindles.
     * * * * * * *
1347. Health care fraud.
1348. Securities fraud.

           *       *       *       *       *       *       *


Sec. 1341. Frauds and swindles

    Whoever, having devised * * *

           *       *       *       *       *       *       *


Sec. 1347. Health care fraud

    Whoever knowingly and willfully executes, or attempts to 
execute, a scheme or artifice--
          (1) to defraud any health care benefit program; or
          (2) to obtain, by means of false or fraudulent 
        pretenses, representations, or promises, any of the 
        money or property owned by, or under the custody or 
        control of, any health care benefit program.
in connection with the delivery of or payment for health care 
benefits, items, or services, shall be fined under this title 
or imprisoned not more than 10 years, or both. If the violation 
results in serious bodily injury (as defined in section 1365 of 
this title), such person shall be fined under this title or 
imprisoned not more than 20 years, or both; and if the 
violation results in death, such person shall be fined under 
this title, or imprisoned for any term of years or for life, or 
both.

Sec. 1348. Securities fraud

    Whoever knowingly executes, or attempts to execute, a 
scheme or artifice--
          (1) to defraud any person in connection with any 
        security of an issuer with a class of securities 
        registered under section 12 of the Securities Exchange 
        Act of 1934 (15 U.S.C. 78l) or that is required to file 
        reports under section 15(d) of the Securities Exchange 
        Act of 1934 (15 U.S.C. 78o(d)); or
          (2) to obtain, by means of false or fraudulent 
        pretenses, representations, or promises, any money or 
        property in connection with the purchase or sale of any 
        security of an issuer with a class of securities 
        registered under section 12 of the Securities Exchange 
        Act of 1934 (15 U.S.C. 78l) or that is required to file 
        reports under section 15(d) of the Securities Exchange 
        Act of 1934 (15 U.S.C. 78o(d));
shall be fined under this title, or imprisoned not more than 10 
years, or both.

           *       *       *       *       *       *       *


                   CHAPTER 73--OBSTRUCTION OF JUSTICE

Sec.
1501. Assault on process server.
     * * * * * * *
1514. Civil action to restrain harassment of a victim or witness.
1514A. Civil action to protect against retaliation in fraud cases.
     * * * * * * *
1518. Obstruction of criminal investigations of health care offenses.
1519. Destruction, alteration, or falsification of records in Federal 
          investigations and bankruptcy.
1520. Destruction of corporate audit records.

Sec. 1501. Assault on process server

    Whoever knowingly * * *

           *       *       *       *       *       *       *


Sec. 1514. Civil action to restrain harassment of a victim or witness

    (a)(1) A United States * * *

           *       *       *       *       *       *       *

    (c) As used in this section--
          (1) the term ``harassment'' means a course of conduct 
        directed at a specific person that--
                  (A) causes substantial emotional distress in 
                such person; and
                  (B) serves no legitimate purpose; and
          (2) the term ``course of conduct'' means a series of 
        acts over a period of time, however short, indicating a 
        continuity of purpose.

Sec. 1514A. Civil action to protect against retaliation in fraud cases

    (a) Whistleblower Protection for Employees of Publicly 
Traded Companies.--No company with a class of securities 
registered under section 12 of the Securities Exchange Act of 
1934 (15 U.S.C. 78l), or that is required to file reports under 
section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 
78o(d)), or any officer, employee, contractor, subcontractor, 
or agent of such company, may discharge, demote, suspend, 
threaten, harass, or in any other manner discriminate against 
an employee in the terms and conditions of employment because 
of any lawful act done by the employee--
          (1) to provide information, cause information to be 
        provided, or otherwise assist in an investigation 
        regarding any conduct which the employee reasonably 
        believes constitutes a violation of sections 1341, 
        1343, 1344, or 1348, any rule or regulation of the 
        Securities and Exchange Commission, or any provision of 
        Federal law relating to fraud against shareholders, 
        when the information or assistance is provided to or 
        the investigation is conducted by--
                  (A) a Federal regulatory or law enforcement 
                agency;
                  (B) any Member of Congress or any committee 
                of Congress; or
                  (C) a person with supervisory authority over 
                the employee (or such other person working for 
                the employer who has the authority to 
                investigate, discover, or terminate 
                misconduct); or
          (2) to file, cause to be filed, testify, participate 
        in, or otherwise assist in a proceeding filed or about 
        to be filed (with any knowledge of the employer) 
        relating to an alleged violation of sections 1341, 
        1343,1344, or 1348, any rule or regulation of the 
Securities and Exchange Commission, or any provision of Federal law 
relating to fraud against shareholders.
    (b) Enforcement Action.--
          (1) In general.--A person who alleges discharge or 
        other discrimination by any person in violoation of 
        subsection (a) may seek relief under subsection (c), 
        by--
                  (A) filing a complaint with the Secretary of 
                Labor; or
                  (B) if the Secretary has not issued a final 
                decision within 180 days of the filing of the 
                complaint and there is no showing that such 
                delay is due to the bad faith of the claimant, 
                bringing an action at law or equity for de novo 
                review in the appropriate district court of the 
                United States, which shall have jurisdiction 
                over such an action without regard to the 
                amount in controversy.
          (2) Procedure.--
                  (A) In general.--An action under paragraph 
                (1)(A) shall be governed under the rules and 
                procedures set forth in section 42121(b) of 
                title 49, United States Code.
                  (B) Exception.--Notification made under 
                section 42121(b)(1) of title 49, United States 
                Code, shall be made to the person named in the 
                complaint and to the employer.
                  (C) Burdens of proof.--An action brought 
                under paragraph (1)(B) shall be governed by the 
                legal burdens of proof set forth in section 
                42121(b) of title 49, United States Code.
                  (D) Statute of limitations.--An action under 
                paragraph (1) shall be commenced not later than 
                90 days after the date on which the violation 
                occurs.
    (c) Remedies.--
          (1) In general.--An employee prevailing in any action 
        under subsection (b)(1) shall be entitled to all relief 
        necessary to make the employee whole.
          (2) Compensatory damages.--Relief for any action 
        under paragraph (1) shall include--
                  (A) reinstatement with the same seniority 
                status that the employee would have had, but 
                for the discrimination;
                  (B) the amount of back pay, with interest; 
                and
                  (C) compensation for any special damages 
                sustained as a result of the discrimination, 
                including litigation costs, expert witness 
                fees, and reasonable attorney fees.
    (d) Rights Retained by Employee.--Nothing in this section 
shall be deemed to diminish the rights, privilege, or remedies 
of any employee under any Federal or State law, or under any 
collective bargaining agreement.

Sec. 1518. Obstruction of criminal investigation of health care 
                    offenses.

    (a) Whoever willfully prevents, obstructs, misleads, delays 
or attempts to prevent, obstruct, mislead, or delay the 
communication of information or records relating to a violation 
of a Federal health care offense to a criminal investigator 
shall be fined under this title or imprisoned not more than 5 
years, or both.
    (b) As used in this section the term ``criminal 
investigator'' means any individual duly authorized by a 
department, agency, or armed force of the United States to 
conduct or engage in investigations for prosecutions for 
violations of health care offenses.

Sec. 1519. Destruction, alteration, or falsification of records in 
                    Federal investigations and bankruptcy

    Whoever knowingly alters, destroys, mutilates, conceals, 
covers up, falsifies, or makes a false entry in any record, 
document, or tangible object with the intent to impede, 
obstruct, or influence the investigation or proper 
administration of any matter within the jurisdiction of any 
department or agency of the United States or any case filed 
under title 11, or in relation to or contemplation of any such 
matter or case, shall be fined under this title, imprisoned not 
more than 10 years, or both.

Sec. 1529. Destruction of corporate audit records

    (a)(1) Any accountant who conducts an audit of an issuer of 
securities to which section 10A(a) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78j-1(a)) applies, shall maintain all 
audit or review workpapers for a period of 5 years from the end 
of the fiscal period in which the audit or review was 
concluded.
    (2) The Securities and Exchange Commission shall 
promulgate, within 180 days, after adequate notice and an 
opportunity for comment, such rules and regulations, as are 
reasonably necessary, relating to the retention of relevant 
records such as workpapers, documents that form the basis of an 
audit or review, memoranda, correspondence, communications, 
other documents, and records (including electronic records) 
which are created, sent, or received in connection with an 
audit or review and contain conclusions, opinions, analyses, or 
financial data relating to such an audit or review, which is 
conducted by any accountant who conducts an audit of an issuer 
of securities to which section 10A(a) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78j-1(a)) applies.
    (b) Whoever knowingly and willfully violates subsection 
(a)(1), or any rule or regulation promulgated by the Securities 
and Exchange Commission under subsection (a)(2), shall be fined 
under this title, imprisoned not more than 5 years, or both.
    (c) Nothing in this section shall be deemed to diminish or 
relieve any person of any other duty or obligation, imposed by 
Federal or State law or regulation, to maintain, or refrain 
from destroying, any document.

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               TITLE 28--JUDICIARY AND JUDICIAL PROCEDURE

Part                                                                Sec.
    I. ORGANIZATION OF COURTS.................................         1
     * * * * * * *
    V. PROCEDURE..............................................      1651
     * * * * * * *

                            PART V--PROCEDURE

Chapter                                                             Sec.
    III. General Provisions...................................      1651
     * * * * * * *

                     CHAPTER 111--GENERAL PROVISIONS

Sec.
1651. Writs.
     * * * * * * *
1658. Time limitations on the commencement of civil actions arising 
          under Acts of Congress.

Sec. 1658. Time limitations on the commencement of civil actions 
                    arising under Acts of Congress

    (a) Except as otherwise provided by law, a civil action 
arising under an Act of Congress enacted after the date of the 
enactment of this section may not be commenced later than 4 
years after the cause of action accrues.
    (b) Notwithstanding subsection (a), a private right of 
action that involves a claim of fraud, deceit, manipulation, or 
contrivance in contravention of regulatory requirement 
concerning the securities laws, as defined in section 3(a)(47) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), 
may be brought not later than the earlier of--
          (1) 5 years after the date on which the alleged 
        violation occurred; or
          (2) 2 years after the date on which the alleged 
        violation was discovered.

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