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U.S. Securities and Exchange Commission

Legal Brief:
Network Associates, Inc., et al.

HARVEY J. GOLDSCHMID
General Counsel

ERIC SUMMERGRAD
Deputy Solicitor

LUIS de la TORRE
Attorney

SECURITIES AND EXCHANGE COMMISSION
450 5th Street, N.W.
Washington, D.C. 20549-0606
(202) 942-0813 (de la Torre)

Counsel for amicus curiae

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA

___________________________________
)
FRANK W. KNISLEY, et al., ) No. C 99-01729 WHA
on behalf of themselves and )
all others similarly situated, ) CLASS ACTION
)
Plaintiffs, )
)
v. )
)
NETWORK ASSOCIATES, INC., et al., )
)
Defendants. )
___________________________________)

MEMORANDUM OF THE SECURITIES AND
EXCHANGE COMMISSION, AMICUS CURIAE

TABLE OF CONTENTS

INTRODUCTION AND SUMMARY OF THE COMMISSION'S POSITION

THE STATUTORY PROVISION AT ISSUE

DISCUSSION

    THE LANGUAGE, PURPOSE, AND HISTORY OF 15 U.S.C 78o(c)(8) SHOW THAT THE
    "REMUNERATION" PROHIBITED BY THAT PROVISION IS PAYMENT FOR THE VALUE OF
    REFERRING POTENTIAL CLIENTS, NOT REIMBURSEMENT OF REASONABLE EXPENSES

    A. A Well-Established Meaning of Remuneration Is Payment for the Value of a Service

    B. Other Language of the Reform Act, the Act's Purposes, and Its History Show That in the Context of 15 U.S.C. 78o(c)(8), Remuneration Means a Referral Fee

    C. NALPG's Policy Arguments Are Unpersuasive

CONCLUSION

MEMORANDUM OF SECURITIES AND EXCHANGE
COMMISSION, AMICUS CURIAE, NO. C 99-01729 WHA

TABLE OF AUTHORITIES

CASES:

In re Advanced Tissue Sciences Sec. Litig.,
184 F.R.D. 346 (S.D. Cal. 1998)

Almendarez-Torres v. United States,
118 S. Ct. 1219 (1998)

American Airlines, Inc. v. United States,
40 Fed. Cl. 712 (1998)

Anchor Coal Co. v. Public Service Commission,
15 S.E.2d 406 (W. Va. 1941)

Anglo California Nat'l Bank of San Francisco v. Lazard,
106 F.2d 963 (9th Cir. 1939)

In re Baan Company Sec. Litig.,
186 F.R.D. 214 (D.D.C. 1999)

In re Bargain Busters, Inc.,
287 A.2d 554 (Vt. 1972)

Bateman Eichler, Hill Richards, Inc. v. Berner,
472 U.S. 299 (1985)

Beets v. Johnson,
180 F.3d 190 (5th Cir. 1999)

Beets v. State,
767 S.W.2d 711 (Tex. Crim. App. 1988)

Bell v. Health-Mor, Inc.,
549 F.2d 342 (5th Cir. 1977)

Bennett v. United States,
399 F.2d 740 (9th Cir. 1968)

Bloomgarden v. Coyer,
479 F.2d 201 (D.C. Cir. 1973)

Buss v. Unemployment Compensation Bd. of Review,
410 A.2d 779 (Pa. 1980)

Central Illinois Public Service Co. v. United States,
435 U.S. 21 (1978)

Charles Bridge v. Warren Bridge,
36 U.S. 420 (1837)

Chill v. Green Tree Financial Corp.,
181 F.R.D. 398 (D. Minn. 1998)

In re Donnkenny Inc. Sec. Litig.,
171 F.R.D. 156 (S.D.N.Y. 1997)

Dunn v. CFTC,
519 U.S. 465 (1997)

E & B Marketing Enterprises, Inc. v. Ryan,
568 N.E.2d 339 (Ill. App. 1 Dist. 1991)

Golon v. Ohio Savings Bank,
1999 WL 184402 (N.D. Ill. Mar. 29, 1999)

Green v. Bock Laundry Machine Co.,
490 U.S. 504 (1989)

Guernsey v. Rich Plan of the Midwest,
408 F. Supp. 582 (N.D. Ind. 1976)

Hatfield v. Richardson,
380 F. Supp. 1048 (D. Kan. 1974)

John Hancock Mutual Life Ins. Co. v. Harris Trust &
Savings Bank, 510 U.S. 86 (1993)

Kirby v. Indiana Employment Security Board,
304 N.E.2d 225 (Ind. App. 3 Dist. 1973)

LaBelle v. State Employees Retirement System,
638 N.E.2d 412 (Ill. App. 2 Dist. 1994)

Lake Shore & M. S. Ry. Co. v. Prentice,
147 U.S. 101 (1893)

Ludington Service Corp. v. Acting Comm'r of Ins.,
511 N.W.2d 661 (Mich. 1994)

Manning v. Princeton Consumer Discount Co.,
397 F. Supp. 504 (E.D. Pa. 1975)

Martelli v. R.A. Chambers & Assocs.,
783 P.2d 31 (Or. Ct. App. 1989)

Metropolitan Edison Co. v. People Against Nuclear Energy,
460 U.S. 766 (1983)

In re Milestone Scientific Sec. Litig.,
183 F.R.D. 404 (D.N.J. 1998)

In re Milestone Scientific Sec. Litig.,
187 F.R.D. 165 (D.N.J. 1999)

Mitchell v. Complete Mgmt., Inc.,
1999 WL 728678 (S.D.N.Y. Sept. 17, 1999)

Moskal v. United States,
498 U.S. 103 (1990)

Muscarello v. United States,
118 S. Ct. 1911 (1998)

In re Nice Systems Sec. Litig.,
1999 WL 551357 (D.N.J. June 10, 1999)

North Haven Bd. of Educ. v. Bell, 456 U.S. 512 (1982)

In the Matter of Noss,
519 N.Y.S.2d 431 (App. Div. 3 Dept. 1987)

Overseas Development Disc Corp. v. Sangamo Constr. Co.,
840 F.2d 1319 (7th Cir. 1988)

In re Oxford Health Plans Sec. Litig.,
182 F.R.D. 42 (S.D.N.Y. 1998)

Palmer v. Breyfogle,
535 P.2d 955 (Kan. 1975)

Panos v. Island Gem Enter., Ltd.,
880 F. Supp. 169 (S.D.N.Y. 1995)

In re Party City Sec. Litig.,
1999 WL 688195 (D.N.J. Aug. 6, 1999)

Patterson v. Shumate,
504 U.S. 753 (1992)

People v. Palma,
48 Cal. Rptr. 2d 334 (App. 2 Dist. 1995)

Petroleum Resource Dev. Corp. v. State,
585 P.2d 346 (Okla. 1978)

Polk County v. Peters,
800 F. Supp. 1451 (E.D. Tex. 1992)

PPG Indus., Inc. v. NLRB,
671 F.2d 817 (4th Cir. 1982)

Price Fire & Water Proofing Co. v. United States,
261 U.S. 179 (1923)

Red Ball Motor Freight, Inc. v. Shannon,
377 U.S. 311 (1964)

Robinson v. Shell Oil Co.,
519 U.S. 337 (1997)

Schneider v. Citicorp Mortgage, Inc.,
982 F. Supp. 897 (E.D.N.Y. 1997)

Seiple v. Prudential Ins. Co.,
1994 WL 702931 (E.D. Pa. Dec. 13, 1994)

Sherleigh Assocs. LLC v. Windmere-Durable Holdings, Inc.,
184 F.R.D. 688 (S.D. Fla. 1999)

Sirianni v. SEC,
677 F.2d 1284 (9th Cir. 1982)

Smith v. Johnston,
391 N.E.2d 1092 (Ill. App. 2 Dist. 1979)

State ex rel. Murphy v. Welch & Brown,
103 P.2d 533 (Okla. 1940)

Switzenbaum v. Orbital Sciences Corp.,
187 F.R.D. 246 (E.D. Va. 1999)

Takeda v. Turbodyne Technologies, Inc.,
1999 U.S. Dist. LEXIS 8965 (C.D. Cal. May 28, 1999)

In re Telxon Corp. Sec. Litig.,
199 WL 826076 (N.D. Ohio Aug. 25, 1999)

Tonti v. Petropoulous,
656 F.2d 212 (6th Cir. 1981)

Trotter v. Nelson,
684 N.E.2d 1150 (Ind. 1997)

United States v. Covarrubias,
179 F.3d 1219 (9th Cir. 1999)

United States v. Duz-Mor Diagnostic Laboratory, Inc.,
650 F.2d 223 (9th Cir. 1981)

United States v. Greber,
760 F.2d 68 (3d Cir. 1985)

United States v. Kats,
871 F.2d 105 (9th Cir. 1989)

United States v. Marbella,
73 F.3d 1508 (9th Cir. 1966)

United States v. National Treasury Employees Union,
513 U.S. 468 (1995)

United States v. Starks,
157 F.3d 833 (11th Cir. 1998)

United States v. Universal Trade and Indus., Inc.,
695 F.2d 1151 (9th Cir. 1983)

United States v. Wood,
943 F.2d 1048 (9th Cir. 1991)

Upton v. Trinidad Petroleum Corp.,
652 F.2d 424 (5th Cir. 1981)

In re Victor Technologies Sec. Litig.,
792 F.2d 862 (9th Cir. 1986)

Wenderhold v. Cylink Corp.,
1999 WL 706027 (N.D. Cal. Sept. 3, 1999)

Worcester Telegram Publishing Co. v. Director of Div. of Employment Security, 198 N.E.2d 892 (Mass. 1964)

Yang v. State of California,
183 F.3d 953 (9th Cir. 1999)

Yousefi v. Lockheed Martin Corp.,
1999 U.S. Dist. LEXIS 8966 (C.D. Cal. May 25, 1999)

STATUTES AND RULES:

Securities Act of 1933, 15 U.S.C. 77a, et seq.:

    Section 20, 15 U.S.C. 77t(f)

Securities and Exchange Act of 1934, 15 U.S.C. 78a et seq.:


    Section 15(c)(8), 15 U.S.C. 78o(c)(8)
    Section 21(d)(4), 15 U.S.C. 78u(d)(4)
    Section 21D(a), 15 U.S.C. 78u-4(a)
    Section 21D(a)(2)(A), 15 U.S.C. 78u-4(a)(2)(A)
    Section 21D(a)(3)(A), 15 U.S.C. 78u-4(a)(3)(A)
    Section 21D(a)(3)(B)(iii), 15 U.S.C. 78u-4(a)(3)(B)(iii)
    Section 21D(a)(3)(B)(v), 15 U.S.C. 78u-4(a)(3)(B)(v)
    Section 21D(a)(3)(B)(vi), 15 U.S.C. 78u-4(a)(3)(B)(vi)
    Section 21D(a)(4), 15 U.S.C. 78u-4(a)(4)

Public Utility Holding Company Act of 1935:

    Section 7(d)(4), 15 U.S.C. 79g(d)(4)
    Section 10(b)(2), 15 U.S.C. 79j(b)(2)

Investment Company Act of 1940:

    Section 17(e)(2), 15 U.S.C. 80a-17(e)(2)
    Section 57(k)(2), 15 U.S.C. 80a-56(k)(2)

Rule 14a-2(a)(1)(i), 17 C.F.R. 240.14a-2(a)(1)(i) (1994)

Federal Rule of Civil Procedure 23

LEGISLATIVE HISTORY:

Joint Explanatory Statement of the Committee of Conference, Conference Report on Securities Litigation Reform, H.R. Conf. Rep. No. 104 (Nov. 28, 1995)

Report on the Private Securities Litigation Reform Act of 1995, S. Rep. No. 104 (June 19, 1995)

Report on the Common Sense Legal Reform Act of 1995, H.R. Rep. No. 104 (Feb. 24, 1995)

141 Cong. Rec. H2755 (Mar. 7, 1995)
141 Cong. Rec. S8892 (June 22, 1995)
141 Cong. Rec. S8912 (June 22, 1995)
141 Cong. Rec. S8966 (June 23, 1995)
141 Cong. Rec. S9040 (June 26, 1995)
141 Cong. Rec. S9072 (June 26, 1995)
141 Cong. Rec. S9074 (June 26, 1995)
141 Cong. Rec. S9093 (June 26, 1995)
141 Cong. Rec. S9172 (June 27, 1995)
141 Cong. Rec. S9173 (June 27, 1995)
141 Cong. Rec. S9208 (June 28, 1995)
141 Cong. Rec. S9209 (June 28, 1995)
141 Cong. Rec. S9212 (June 28, 1995)
141 Cong. Rec. S17934 (Dec. 5, 1995)
141 Cong. Rec. S17944 (Dec. 5, 1995)
141 Cong. Rec. S17969 (Dec. 5, 1995)
141 Cong. Rec. S17974 (Dec. 5, 1995)
141 Cong. Rec. S17986 (Dec. 5, 1995)
141 Cong. Rec. S17993 (Dec. 5. 1995)
141 Cong. Rec. S17995 (Dec. 5. 1995)
141 Cong. Rec. S19056 (Dec. 21, 1995)

Securities Investors Legal Rights: Hearing Before the Subcomm. on Communications and Finance of the House Comm. on Energy and Commerce, 102nd Cong., 1st Sess. (Nov. 21, 1991)

Securities Litigation Reform: Hearings Before the Subcomm. on Telecommunications and Finance of the House Committee on Energy and Commerce, 103rd Cong., 2nd Sess. (July 22 and Aug. 10, 1994)

Securities Litigation Reform Proposals: Hearings Before the Subcomm. on Securities of the Senate Committee on Banking, Housing, and Urban Affairs, 104th Cong., 1st Sess, (Mar. 2, 22, and Apr. 6, 1995)

S. 3181 (Aug. 12, 1992)
S. 1976 (Mar. 24, 1994)
S. 240 (Jan. 18, 1995)
S. 667 (Apr. 4, 1995)

H.R. 5828 (Aug. 11, 1992)
H.R. 417 (Jan. 5, 1993)
H.R. 10 (Jan. 4, 1995)
H.R. 555 (Jan. 18, 1995)
H.R. 675 (Jan. 25, 1995)
H.R. 681 (Jan. 25, 1995)
H.R. 1058 (Feb. 27, 1995)

MISCELLANEOUS:

The American Heritage Dictionary of the English Language (3d ed. 1996)

Barron's Dictionary of Business Terms (2d ed. 1994)

Black's Law Dictionary (6th ed. 1990)

Funk & Wagnalls New International Dictionary of the English Language (Comprehensive ed. 1997)

Office of the General Counsel, SEC, Report to the President and the Congress on the First Year of Practice Under the Private Securities Litigation Reform Act of 1995

Webster's Third New International Dictionary of the English Language (Unabridged ed. 1993)

MEMORANDUM OF THE SECURITIES AND

EXCHANGE COMMISSION, AMICUS CURIAE

INTRODUCTION AND SUMMARY OF THE COMMISSION'S POSITION

Pursuant to the Court's order dated October 7, 1999, the Securities and Exchange Commission respectfully submits this memorandum, as amicus curiae, to address, as requested by the Court, "whether it is a violation of 15 U.S.C. 78o(c)(8) for a broker/dealer to assist an attorney in establishing communication with potential clients by (i) supplying to the attorney mailing labels for its investors in securities involved in a potential class action and accepting from the attorney reimbursement for the cost of labels; or (ii) mailing directly to such investors a letter with the attorney's notice of the suit inviting investors to communicate with the attorney and accepting from the attorney reimbursement for the labels and mailing costs in doing so." This provision was enacted as part of the Private Securities Litigation Reform Act of 1995 ("Reform Act" or "Act").

The Commission, the agency principally responsible for the administration and enforcement of the federal securities laws, has long expressed the view that legitimate private actions under these laws serve an important role. Such actions work to compensate investors who have been harmed by securities law violations and, as the Supreme Court has repeatedly recognized, they "provide `a most effective weapon in the enforcement' of the securities laws and are `a necessary supplement to Commissionaction.'" Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985) (citation omitted).

In adopting the Reform Act, Congress affirmed that "[p]rivate securities litigation is an indispensable tool with which defrauded investors can recover their losses." It further stated that private lawsuits "promote public and global confidence in our capital markets and help to deter wrongdoing and to guarantee that corporate officers, auditors, directors, lawyers and others properly perform their jobs." Joint Explanatory Statement of the Committee of Conference, Conference Report on Securities Litigation Reform, H.R. Conf. Rep. No. 104-369, at 31 (Nov. 28, 1995) ("Conf. Rep.").

Congress sought through the Reform Act's lead plaintiff provisions, 15 U.S.C. 78u-4(a), to ensure more effective representation of investors' interests in private securities class actions by transferring control of the actions from lawyers to investors. Conf. Rep. 32-35. The Act establishes specific procedures and criteria for the appointment of lead plaintiff; it further provides that the lead plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class. 15 U.S.C. 78u-4(a)(3)(B)(iii)(I)-(II) & (v).

Other provisions of the Reform Act, including 15 U.S.C. 78o(c)(8), target practices surrounding private securities litigation that Congress regarded as abusive. Among these is the use of so-called professional plaintiffs by law firms.

Based upon statutory language, purpose, and history, the Commission believes that 15 U.S.C. 78o(c)(8) prohibits a certain practice: brokers, dealers, and associated persons recruiting plaintiffs for attorneys in exchange for referral fees. In the Commission's view, the provision does not apply to bona fide reimbursement of reasonable expenses of generating address labels and mailing information to investors.

The issue of the interpretation of 15 U.S.C. 78o(c)(8) appears to have arisen in this case because of attempts to amass the largest lead plaintiff "group." The Commission wishes to make clear that the amalgamation of large numbers of unrelated shareholders into a proposed lead plaintiff group is a serious concern because such a "group" cannot provide the kind of monitoring that the Reform Act contemplates. But this is a concern that can be dealt with through proper application of the Reform Act's lead plaintiff provisions, 15 U.S.C. 78u-4(a), and should not be addressed through a strained interpretation of the word "remuneration" in 15 U.S.C. 78o(c)(8). In the Commission's view, a lead plaintiff "group" should generally be limited to three to five members, and thus be able to actively oversee the conduct of the litigation and monitor the effectiveness of counsel for the protection of the class. 1

THE STATUTORY PROVISION AT ISSUE

The Reform Act provision at issue in this case was enacted in the following form and codified at Section 15(c)(8) of the Securities Exchange Act of 1934, 15 U.S.C. 78o(c)(8):

TITLE I -- REDUCTION OF ABUSIVE LITIGATION

* * *

      SEC. 103. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.

        (a) PROHIBITION OF REFERRAL FEES. -- Section 15(c) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(c)) is amended by adding at the end the following new paragraph:

          "(8) PROHIBITION OF REFERRAL FEES. -- No broker or dealer, or person associated with a broker or dealer, may solicit or accept, directly or indirectly, remuneration for assisting an attorney in obtaining the representation of any person in any private action arising under this title or under the Securities Act of 1933."

It was enacted as one of two provisions in Title I, Section 103 of the Reform Act. The other, Section 103(b), codified at 15U.S.C. 77t(f) and 15 U.S.C. 78u(d)(4), is a prohibition on attorneys' fees paid from Commission disgorgement funds.

The Reform Act also contains a provision, entitled "Early Notice to Class Members," which states:

Not later than 20 days after the date on which the complaint is filed, the plaintiff or plaintiffs shall cause to be published, in a widely circulated national business-oriented publication or wire service, a notice advising members of the purported plaintiff class --

(I) of the pendency of the action, the claims asserted therein, and the purported class period; and

(II) that, not later than 60 days after the date on which the notice is published, any member of the purported class may move the court to serve as lead plaintiff of the purported class.

* * *

If more than one action on behalf of a class asserting substantially the same claim or claims arising under this title is filed, only the plaintiff or plaintiffs in the first filed action shall be required to cause notice to be published in accordance with [the above].

15 U.S.C. 78u-4(a)(3)(A).

DISCUSSION

THE LANGUAGE, PURPOSE, AND HISTORY OF 15 U.S.C. 78o(c)(8) SHOW THAT THE "REMUNERATION" PROHIBITED BY THAT PROVISION IS PAYMENT FOR THE VALUE OF REFERRING POTENTIAL CLIENTS, NOT REIMBURSEMENT OF REASONABLE EXPENSES.

Section 15(c)(8), 15 U.S.C. 78o(c)(8), prohibits a broker, dealer, or associated person from soliciting or accepting "remuneration for assisting an attorney in obtaining the representation of any person in any private action arising under" the Securities Act of 1933 or the Securities Exchange Act of 1934. "Remuneration" is a broad term that is used in many legalcontexts and might, in some contexts, include reimbursement of expenses. However, the language, purposes, and history of the Reform Act all demonstrate that the term, as used in 15(c)(8), does not encompass the bona fide reimbursement of expenses.

The starting point in interpreting Section 15(c)(8) is, of course, its language. See Moskal v. United States, 498 U.S. 103, 108 (1990) ("`In determining the scope of a statute, we look first to its language,' giving the `words used' their `ordinary meaning.'"). To ascertain the meaning of statutory language, courts consider "the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997). Courts are not limited to "`a single sentence or member of a sentence, but look[] to the provisions of the whole law, and to its object and policy.'" John Hancock Mutual Life Ins. Co. v. Harris Trust & Savings Bank, 510 U.S. 86, 94-95 (1993). They often consult legislative history as a source of information about statutory purpose, see Muscarello v. United States, 118 S. Ct. 1911, 1916, 1917 (1998); Dunn v. CFTC, 519 U.S. 465, 473 (1997); Metropolitan Edison Co. v. People Against Nuclear Energy, 460 U.S. 766, 772-74 (1983), and, more generally, "`to resolve statutory ambiguity,'" see Patterson v. Shumate, 504 U.S. 753, 761 (1992). 2

A. A Well-Established Meaning of Remuneration Is Payment for the Value of a Service.

As even the opposing parties in this case seem to acknowledge, the language "remuneration for assisting an attorney in obtaining the representation of any person" in Section 15(c)(8) describes a service provided by a broker/dealer to an attorney. Remuneration is thus used in 15(c)(8) in the context of a payment by one commercial actor to another for a service.

This is a common use of the word. As one court has stated, remuneration "`is generally defined as payment for services performed.'" Buss v. Unemployment Compensation Bd. of Review, 410 A.2d 779, 781 (Pa. 1980); accord, e.g., Worcester Telegram Publishing Co. v. Director of Div. of Employment Security, 198 N.E.2d 892, 898 (Mass. 1964) ("remuneration paid for services rendered"). 3 A court interpreting a statute prohibitingreferral fees in Medicare programs defined remuneration as "an equivalent for service." See United States v. Greber, 760 F.2d 68, 71 (3d Cir. 1985).

An equivalent for a service suggests some payment for the value, not merely the cost, of the service. Both case law 4 and dictionaries 5 support this point. Indeed, remuneration is commonly used to connote benefit or gain. 6

A number of cases illustrate that the word remuneration has a well-established meaning of compensation, which is distinct from mere reimbursement of expenses. In Bloomgarden v. Coyer, 479 F.2d 201, 204-12 (D.C. Cir. 1973), a case involving a claim for a finder's fee for introducing businesspeople, the court described remuneration as compensation, recompense, reward, payment, benefit, "quid pro quo for value conferred," and "the value of services which have inured to another's benefit."

In United States v. Wood, 943 F.2d 1048, 1051 (9th Cir. 1991), involving whether a broker or trader has customers for purposes of a tax code section providing that property is not a capital asset if held for sale to customers, the court stated:

A dealer is a person who purchases the securities or commodities with the expectation of realizing a profit "not because of a rise in value during the interval of time between purchase and resale, but merely because they have or hope to find a market of buyers who will purchase from them at a price in excess of their cost. This excess or mark-up represents remuneration for their labors as a middle man bringing together buyer and seller, and performing the usual services of retailer or wholesaler of goods." [Emphasis added.]

And in Upton v. Trinidad Petroleum Corp., 652 F.2d 424, 426 (5th Cir. 1981), the court interpreted an Alabama private offering exemption that required that "[n]o commission or other remuneration [be] paid or given directly or indirectly for soliciting any prospective buyer." It held that because the offerors of interests in a planned oil well had "collected funds from the investors which greatly exceeded the actual costsattributable to the drilling of" the well, they had received remuneration, and the interests in the well were not exempt from registration. Id. at 426-27; accord Petroleum Resource Dev. Corp. v. State, 585 P.2d 346, 347-48 (Okla. 1978).

On the other hand, the word remuneration is at times used in a context that suggests that it can encompass the reimbursement of expenses. For example, in Commission Rule 14a-2(a)(1)(i), 17 C.F.R. 240.14a-2(a)(1)(i) (1994), a proxy solicitation is exempt from certain rules if, among other requirements, the securities holder making the solicitation "[r]eceives no commission or remuneration for such solicitation, directly or indirectly, other than reimbursement of reasonable expenses." The word remuneration is defined in one major dictionary as: "Payment; reimbursement. Reward; recompense; salary; compensation." Black's Law Dictionary 1296 (6th ed. 1990). Another dictionary defines "remunerate" as "1: to pay an equivalent for (as a service, loss, expense) 2: to pay an equivalent to (a person) for a service, loss, or expense: RECOMPENSE, COMPENSATE syn see PAY." Webster's Third New International Dictionary of the English Language 1921 (Unabridged ed. 1993). Moreover, some cases suggest that remuneration can include cost reimbursement. 7

These cases do not, however, appear to suggest that the mere reimbursement of out-of-pocket expenses constitutes remuneration. Courts typically refer to remuneration in the context of discussing an overall sum that includes or covers reimbursement of expenses, or even as a cost-reimbursement item in a larger compensation package. 8 One person might reimburse another person's costs, unrelated to their transaction, or in an amount that provides a residual benefit, as a payoff for favors. 9 Webster's reference to remuneration as an "equivalent for expense" need not mean the amount of the expenses; rather, it could mean the value of the benefit conferred by virtue of the expenses having been incurred. 10 A person might accept reimbursement in lieu of remuneration. In none of these usages need remuneration mean cost reimbursement alone. 11

B. Other Language of the Reform Act, the Act's Purposes, and Its History Show That in the Context of 15 U.S.C. 78o(c)(8), Remuneration Means a Referral Fee.

At most, NALPG has demonstrated that the word remuneration is ambiguous. Under such a circumstance, it is appropriate to look to other language in the Reform Act, to the Act's purposes, and to its legislative history to determine what meaning Congress ascribed to the term when it adopted Section 15(c)(8). These sources show that remuneration in this context means compensation for referring potential clients, i.e., a referral fee.

To begin with, Section 15(c)(8)'s heading is "Prohibition of Referral Fees." The Supreme Court has stated that "`the title of a statute and the heading of a section' are `tools available forthe resolution of a doubt' about the meaning of a statute." Almendarez-Torres v. United States, 118 S. Ct. 1219, 1226 (1998).

The Reform Act does not define "referral fees." Usually such fees take the form of a payment of a percentage or lump sum which is contingent on the outcome and fruits of the referral or the form of lump sum incentive payments per person referred. 12 None of the parties has cited an example of areferral fee that is in the form of mere reimbursement for the out-of-pocket cost of making the referral.

As a provision targeted at this particular abusive practice, Section 15(c)(8) fits within one of the well-recognized purposes of the Reform Act: to curb the use of so-called professional or figurehead plaintiffs who would serve the interests of plaintiffs' lawyers, not the class. This purpose is plain on the face of the statute, reflected in numerous of its provisions. See In re Telxon Corp. Sec. Litig., 1999 WL 826076, at *8-10 (N.D. Ohio Aug. 25, 1999).

For example, the Reform Act essentially bars from the lead plaintiff role a person who has been lead plaintiff in more than five securities class actions in three years (unless the court otherwise permits); a person who does not read the complaint before a lawsuit is filed in his or her name; a person who buys the stock at the direction of an attorney or to participate in litigation; or, most notably, a person who receives a bounty payment for serving as a class representative. See 15 U.S.C. 78u-4(a)(2)(A), (a)(3)(B)(vi), (a)(4). And although the largestfinancial interest requirement, 78u-4(a)(3)(B)(iii), serves the larger goal of appointment of the "most adequate plaintiff," it also "serves to prevent a nominal plaintiff from ever becoming the lead plaintiff." Telxon, 1999 WL 826076, at *10.

The objective of Section 15(c)(8), like the provision prohibiting bounty payments to plaintiffs, was to prevent lawyers from offering incentives to recruit plaintiffs. 13 Such plaintiffs would serve the interests of the lawyers, not the class. Thus, unless a payment by an attorney would give the broker/dealer an inducement to serve the attorney's interests, it would not pose the risk of abuse with which the statute is concerned. It is difficult to see how the mere reimbursement of out-of-pocket expenses, which puts the broker/dealer in no better position than if it had not provided mailing assistance, could be an inducement to the broker/dealer to do the attorney's bidding.

The legislative history of Section 15(c)(8) provides further support for interpreting remuneration to mean referral fees. The provision originated in 1991 Congressional testimony by the Securities Industry Association and Coopers & Lybrand. These organizations proposed it in hearings on private securitieslitigation reform as one of a number of specific measures to curtail the use of incentive payments by attorneys to recruit plaintiffs. 14 By August 1992, the proposal appeared in early House and Senate versions of reform legislation, and it was also part of bills introduced in 1993 and 1994. 15

In 1995, the referral fee provision enjoyed wide support in congressional hearings (although little, if any, empirical evidence was adduced about the practice). It was not only included in the leading House and Senate bills, 16 but also inevery major alternative bill introduced. 17 Even an organization of plaintiffs' counsel, the National Association of Securities and Commercial Law Attorneys, testified that "NASCAT supports targeted efforts to address a number of issues involved in securities litigation, including measures in the pending bills that would * * * [b]an referral fees." 18

The most extensive discussion of Section 15(c)(8) by lawmakers took place during the floor debate on the Reform Act. The Statement of Managers in the Reform Act Conference Report does not mention the provision at all. The House and Senate Reports each contain a single sentence on it. 19

In floor debate, leading proponents of the Reform Act stated that Section 15(c)(8), like certain other provisions, sought to curb the use of professional plaintiffs in bringing frivolous securities lawsuits. Invariably, sponsors and managers of the legislation discussed 15(c)(8) in terms of "referral fees" or "bonuses." They often discussed it in conjunction with the bill's prohibition on "bounty" payments to class representatives.

For example, Senator Domenici, one of the original co-sponsors of the bill and one of its managers, stated:

[The bill] eliminates many of the unfair practices currently associated with generating a securities class action. Lawyers will no longer be able to pay bonuses out of the settlement fund to individuals who lend their name to the lawsuit and act as the named plaintiff. Nor will they be allowed to pay bonuses to brokers or dealers for referring potential clients.

141 Cong. Rec. S17969 (Dec. 5, 1995) (emphasis added). Senator D'Amato, another manager of the bill, explained that it "discourages the use of professional plaintiffs by eliminating bonus payments to name plaintiffs and prohibiting referral fees." Id. at S17934 (Dec. 5, 1995). And Senator Mikulski, a sponsor of the bill, stated:

[L]et us stop the bounty hunters. This bill says that lawyers can't shop around for clients. I mean -- a lawyer will not be able to pay a commission to someone else to find them a client. I have heard of instances where lawyers seek out clients just so they can have cases to litigate. * * * Accountants tell me that some attorneys pay stockbrokers, and others, in return for information about possible lawsuits and possible clients. That is unacceptable. Courts are for protecting the rights of people and promoting fairness, not for frivolous lawsuits.

Id. at S9173 (June 27, 1995). 20

These views were shared by opponents of the Reform Act, who, as noted, nonetheless supported Section 15(c)(8) and even included it in alternative bills. Senator Bryan, the co-sponsor with Senator Shelby of the alternative bill in the Senate, said:

[P]rohibit[ing] the payment of referral fees to brokers * * * is legitimate and is designed specifically to deal with the issue of potential frivolous lawsuits. The concern is that we should not give stockbrokers, or anyone else, incentives for referral of potential securities fraud cases, and, indeed, these actions ought to be prohibited and the legislation does that. * * * The referral fees to brokers, the bonus payments, [and certain other provisions] * * * "[t]hat, my friends, is what frivolous lawsuit legislation reform ought to be about.

141 Cong. Rec. S17944 (Dec. 5, 1995). Senator Shelby explained that "prohibiting referral fees" is "aimed at * * * eliminating incentives for frivolous and abusive litigation." Id. at S8966 (June 23, 1995). 21 Statements at hearings that preceded thefloor debates reflect this same understanding of the provision. 22

The Commission therefore disagrees with a submission by one of NALPG's counsel in another case asserting that payment of postage and label costs is "the very abusive practice Congress sought to eliminate." Memorandum of Law filed September 10, 1999 in In re Landry's Seafood Restaurants, Inc. Sec. Litig., No. H-99-1948 (S.D. Tex.), at 2. The only direct evidence cited for this proposition is a single phrase, in the Senate Report on the Reform Act, that the provision bars "any type of fee or remuneration." But this begs the question of what is meant byremuneration. It is too insubstantial a basis for concluding, as NALPG insists, that Section 15(c)(8) must apply even to reimbursement of postage. 23

C. NALPG's Policy Arguments Are Unpersuasive.

NALPG's interpretation of Section 15(c)(8) is neither dictated by the language, purposes, and history of the Reform Act, nor mandated by policy considerations. NALPG and/or its counsel argue that unless Section 15(c)(8) is interpreted to outlaw even the reimbursement of postage costs, it would: (1) be impossible to enforce; (2) raise "very serious concerns regarding customer confidentiality" and the prospect that "every time a major securities fraud is exposed, investors are going to be inundated with competing solicitation packages from different law firms"; (3) create a system where "at the end of the day * * * the ability to represent a class does not depend upon one's capacities as a litigator, but it depends upon one's capacities to do marketing"; (4) result in investors being misled and manipulated, defeating the Reform Act's purpose of knowing client participation in the formation of a lead plaintiff "group," in the selection of counsel, and in the conduct and resolution of the litigation; and (5) "result in securities class actions involving thousands of so-called lead plaintiffs with all themanagement problems that entails." Although these may be valid policy concerns, they are not sufficient reasons to interpret Section 15(c)(8) in the manner NALPG advocates.

The Commission recognizes that the August 16, 1999 order in this case expressed concern (at 3) that if remuneration "were not to encompass reimbursement, brokers could easily circumvent 78o(c)(8) by arranging their transactions with attorneys such that any compensation they receive is in the form of reimbursement for their costs in providing services to the attorneys." However, a court may go behind an attorney's or broker/dealer's assertion of why it made payments, to determine if those payments were merely for reimbursement of such things as mailing costs. If a bona fide reimbursement of expenses is not involved -- if the payment is in fact for other services, or represents some sort of bounty or premium to the brokerage firm -- the court can take appropriate action. In this regard, established practice with regard to class action certification and settlement notices would seem to provide a ready benchmark for reasonable administrative and mailing expenses. 24

Moreover, many statutes, including the Reform Act itself, distinguish between prohibited payments, on the one hand, and reasonable expenses or fair market compensation on the other. See 15 U.S.C. 78u-4(a)(4) (prohibiting a bounty payment to a class representative but contemplating recovery of "reasonable costs and expenses (including lost wages) directly relating to the representation of the class"). 25 The Commission respectfully submits that such a regime is neither unthinkable nor unworkable.

Concerns about attorney marketing and about investors being misled by a communication from a law firm, signed up as lead plaintiff without their knowledge, and amassed into huge proposed"groups" can equally arise with published notices. These concerns are not distinctive to mailings through broker/dealers.

In its Report to the President and the Congress on the First Year of Practice Under the Private Securities Litigation Reform Act of 1995 (Apr. 1997), the Commission's Office of General Counsel noted (at 65-66) that some lawyers, "[t]aking advantage of [the Act's] provision" allowing appointment of a "group of persons" as lead plaintiff, have attempted "to recruit investors as additional clients." They have done so, the Report explained, by phrasing Reform Act notices "in a way more likely to attract clients, rather than competition from investors (and other law firms) independently vying to be named lead plaintiff." 26

A striking example of abuse is provided by Parnes v. Digital Lightwave, Inc., No. 98-152-CIV-T-24(C) (M.D. Fla.), appeal pending, 99-11293-FF (11th Cir.), a case in which at least one member of a ten-person lead plaintiff group (and likely others as well) did not know he was appointed lead plaintiff until after lead counsel had submitted a proposed settlement for court approval. After responding to a law firm's internet notice about the class action, the investor received a series of cryptic mailings from the law firm's non-attorney Shareholder RelationsManager. They did not inform the investor, who signed a certification stating that he was "willing to serve as a representative party," that he had in fact been put forward as a member of a lead plaintiff group, who "our group of plaintiffs" was, what the "lead plaintiff" was, or that multiple lead law firms had been proposed. Although a later mailing said that "the Court appointed a group of plaintiffs represented by this firm and two other firms as lead plaintiffs and appointed this firm and the other two firms as lead counsel," it did not identify the "group of plaintiffs," its function, or the "other firms."

No attorney at the law firm spoke or wrote to the investor until almost six months after he had responded to the law firm's internet notice and a month after a settlement had been reached in the case. Despite the investor's repeated requests over a six-week period, lead counsel did not provide him with the information for which he asked about the action, including a copy of the stipulation of settlement filed with the district court. Only after the court had preliminarily approved the settlement and asked at that hearing if the lead plaintiff group had seen it, did lead counsel send the stipulation to the investor.

Concerns about a proposed lead plaintiff group consisting of too many investors or of investors who may have been misled by counsel, or both, are better addressed under provisions of the Reform Act other than Section 15(c)(8). First, if a notice published or mailed to an investor in a Reform Act case is false, misleading, or inadequate, the court can -- and should -- takeappropriate action, including requiring proper notice, subjecting any affected lead plaintiff motion to intense scrutiny, and disciplining counsel involved with the notice.

Second, as the Commission has argued as amicus curiae in Digital Lightwave and in other cases, 27 a "person or group of persons" within the meaning of the Reform Act's lead plaintiff provisions, 15 U.S.C. 78u-4(a)(3)(B)(iii)(I), should be capable of actively overseeing the conduct of the litigation and monitoring the effectiveness of counsel for the protection of the class. To ensure adequate stakes, monitoring, coordination, and accountability, a group generally should have no more than three to five members. 28

To enable a court to assess whether a proposed group is capable of performing the lead plaintiff function, the "group" should provide appropriate, reasonably available information about the circumstances of its formation and about its members, structure, and intended functioning. Such information should include descriptions of its members, including any pre-existing relationships among them; an explanation of how its members would function collectively; and a description of the mechanism thatits members and the proposed lead counsel have established to communicate with one another about the litigation. If the proposed group fails to explain and justify its composition and structure to the court's satisfaction, its motion should be denied or modified as the court sees fit.

In case after case in which the so-called "aggregation" issue has been litigated or in which courts themselves have addressed it, the courts have refused to appoint large, random assemblages of unrelated persons as lead plaintiff "groups" under the Reform Act. See, e.g., Wenderhold v. Cylink Corp., 1999 WL 706027, at *7-10 (N.D. Cal. Sept. 3, 1999). 29 In one case, one such proposed "group" was so confused and disorganized that the court determined that it did not even meet minimum standards of adequacy of representation under Rule 23. See Switzenbaum v. Orbital Sciences Corp., 187 F.R.D. 246, 248-51 (E.D. Va. 1999).

In addition, the Commission has urged district courts to actively exercise their traditional discretion to review proposals for multiple lead counsel. See, e.g., In re Baan Co. Sec. Litig., 186 F.R.D. 214 (D.D.C. 1999) (appending SEC amicus memorandum). Although the Reform Act gives the lead plaintiff a large role in the choice of lead counsel, and contemplates that a court would impose additional or different counsel on the lead plaintiff only in very unusual circumstances, the selection of counsel remains "subject to the approval of the court." 15 U.S.C. 78u-4(a)(3)(B)(v). The Commission has argued that greater scrutiny is warranted where it appears that the lead plaintiff has not played an active, effective role in choosing counsel.

With regard to the concerns that mailings will invade the privacy of, or burden, customers of broker/dealers, broker/dealers and their customers can themselves work out solutions to such problems in which they decide whether or not to make or accept the mailings. Or a regulatory scheme truly addressed to such problems could be created.

Finally, NALPG fails to discuss any countervailing policy considerations. Congress specified in 15 U.S.C. 78u-4(a)(3)(A) that investors must be provided with a notice of the pendency of a class action, the claims asserted therein, the purported class period, and the right to move to be lead plaintiff. If done in conformity with applicable legal and ethical standards, distributing mailings could have the beneficial effect of gettingthis information to investors. As the 1997 SEC Staff Report on the Reform Act noted (at 66):

Representatives of institutional investors have informed us that they are having difficulty discovering and reviewing the [Reform Act] notices in a timely fashion. Moreover, other representatives have informed us that once they discover the notice, they have insufficient time to complete the process required to enter the suit.

The effect of mailings could be to encourage additional investors to come forward, negotiate with and retain counsel, and move to be lead plaintiff, thereby enhancing competition for lead plaintiff and lead counsel. As the court rightly stated in

In re Milestone Scientific Sec. Litig., 187 F.R.D. 165, 180 (D.N.J. 1999), "the identification of the most adequate plaintiff may necessitate, and the [Reform Act] provisions encourage, competing motions for lead plaintiff and counsel."

In sum, the Commission does not believe that any and all mailings by attorneys to customers of broker/dealers are either so bereft of value or so prone to abuse that, absent clear direction from Congress, they warrant adoption of the interpretation of Section 15(c)(8) urged by NALPG. 30

CONCLUSION

For the foregoing reasons, the Commission urges the Court to hold that 15 U.S.C. 78o(c)(8) does not apply to the situations described in the Court's October 7, 1999 order.

Respectfully submitted,

HARVEY J. GOLDSCHMID
General Counsel

ERIC SUMMERGRAD
Deputy Solicitor

LUIS DE LA TORRE
Attorney

Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0606
(202) 942-0813 (de la Torre)

Dated: November 10, 1999

CERTIFICATE OF SERVICE

I hereby declare under penalty of perjury that on this 10th day of November, 1999, I caused to be served by Federal Express overnight delivery service the original and 2 copies of the foregoing Memorandum of the Securities and Exchange Commission, Amicus Curiae, on the Clerk of Court, as well as copies on the following counsel:

Michael D. Braun, Esq.
Stull Stull & Brody
10940 Wilshire Blvd., Ste. 2300
Los Angeles, CA 90024
(310) 209-2468

Boris Feldman, Esq.
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
(650) 565-5100

Edward M. Gergosian, Esq.
Barrack Rodos & Bacine
600 West Broadway, Ste. 1700
San Diego, CA 92101
(619) 230-0800

Reed R. Kathrein, Esq.
Milberg Weiss Bershad Hynes & Lerach
100 Pine St., Ste. 2600
San Francisco, CA 94111
(415) 288-4534

Roger W. Kirby, Esq.
Kirby, McInerny & Squire
830 Third Avenue, 10th Fl.
New York, NY 10022
(212) 371-6600

Colleen Duffy Smith, Esq.
McManis, Faulkner & Morgan
160 W. Santa Clara St. 10th Floor
San Jose, CA 95113
(408) 279-3244


Kevin J. Yourman, Esq.
Weiss & Yourman
10940 Wilshire Blvd.
24th Floor
Los Angeles, CA 90024
(310) 209-2348

__________________________________
Luis de la Torre, Attorney
Office of General Counsel
Securities and Exchange Commission

FOOTNOTES

1 / Because the Commission concludes that the conduct described in the Court's October 7 order does not violate 15 U.S.C. 78o(c)(8), this memorandum does not address whether, if the broker/dealers violate that section, the law firms paying the expenses might violate 18 U.S.C. 2. Nor does theCommission take a position on any other issue not discussed in this memorandum, such as whether the conduct described in the Court's order: (1) violates state bar rules on attorney solicitation, advertising, or contact with represented persons; (2) violates Federal Rule of Civil Procedure 23 regarding attorney contact with class members; or (3) "constitutes acts of unfair and illegal competition * * * in violation of federal and state law."

References herein to "NALPG" are to the 2,000-member Network Associates Lead Plaintiff Group, represented by Milberg Weiss Bershad Hynes & Lerach, Kirby McInerny & Squire, and Barrack Rodos & Bacine; "NIG" refers to the 3,400-member Network Institutional Group, represented by Weiss & Yourman and Stull Stull & Brody.

2 / Where it is appropriate to consult legislative history, courts frequently rely on explanatory floor statements made by leading proponents of the legislation during the courseof passage. See, e.g., Metropolitan Edison, 460 U.S. at 772-74 (examining "the context of the statute," including "[t]he statements of two [of its] principal sponsors" and "the congressional concerns that lead to [its] enactment"); Green v. Bock Laundry Machine Co., 490 U.S. 504, 522, 523 (1989); North Haven Bd. of Educ. v. Bell, 456 U.S. 512, 526-27 (1982); Red Ball Motor Freight, Inc. v. Shannon, 377 U.S. 311, 318 (1964); Yang v. State of California, 183 F.3d 953, 959-60 (9th Cir. 1999).

3 / See also, e.g., State ex rel. Murphy v. Welch & Brown, 103 P.2d 533, 534 (Okla. 1940) ("It is clear that the secretary was not an employee for `remuneration' as that term is defined, since she received no compensation for her services."); LaBelle v. State Employees Retirement System, 638 N.E.2d 412, 415 (Ill. App. 2 Dist. 1994) (state regulation regarding payment of nonoccupational disability benefits defines "remuneration" as "`any compensation for personal services including fees, wages, salary,commissions, and similar items'"); In the Matter of Noss, 519 N.Y.S.2d 431, 432-33 (App. Div. 3 Dept. 1987) ("strike benefits paid by labor unions to their members are not considered remuneration within the meaning of the Unemployment Insurance Law so long as the payments are not conditioned upon the rendering of services to the union").

4 / See, e.g., In re Bargain Busters, Inc., 287 A.2d 554, 556, 557 (Vt. 1972) (where newspaper publisher hired salesmen "to solicit and procure advertisements from prospective customers," "remuneration" under unemployment compensation law is "payment for the time and effort of the salesmen in performing a personal service for the company in the furtherance, and for the benefit, of its business"); Anchor Coal Co. v. Public Serv. Comm'n, 15 S.E.2d 406, 409 (W. Va. 1941) ("[r]emuneration should include a fair profit on the performance of any service"); Martelli v. R.A. Chambers & Assocs., 783 P.2d 31, 33 (Or. Ct. App. 1989) (remuneration contemplates "quid pro quo between payment and services"); Kirby v. Indiana Employment Security Bd., 304 N.E.2d 225, 227, 228 (Ind. App. 3 Dist. 1973) (state employment security act defines "remuneration" as "all compensation for personal services," which "words describe a situation where workers perform services directly or indirectly for another, receiving a quid pro quo in return").

5 / Under the definition of "pay," Webster's Third New International Dictionary of the English Language 1659 (Unabridged ed. 1993) states that "REMUNERATE, generally more formal than PAY, is applicable to rewards generous, not contracted for, or unexpected <the king remunerated his retainers with large grants>." See The American Heritage Dictionary of the English Language 1527 (3d ed. 1996) ("1. To pay (a person) a suitable equivalent in return for goods provided, services rendered, or losses incurred; recompense. 2. To compensate for; make payment for: remunerate hisefforts."); Funk & Wagnalls New International Dictionary of the English Language 1066 (Comprehensive ed. 1997) ("To make just or adequate return to or for; compensate; pay or pay for; reward.); Barron's Dictionary of Business Terms 515 (2d ed. 1994) ("REMUNERATION direct or indirect compensation for services performed. WAGES are a form of direct remuneration, while fringe benefits are a form of indirect remuneration."). (Underlining added.)

6 / See, e.g., Beets v. Johnson, 180 F.3d 190, 195 (5th Cir. 1999) (equating "remuneration" with "benefit"), citing Beets v. State, 767 S.W.2d 711, 734-37 (Tex. Crim. App. 1988) (quoting dictionary, "`Remunerate frequently adds to compensate the implication of reward;'" and describing remuneration in terms of "pecuniary gain," "some benefit or compensation," "gain or reward," "gain or profit"); United States v. Covarrubias, 179 F.3d 1219, 1226 (9th Cir. 1999) ("The defendants' motive in committing both crimes was identical: they sought to obtain financial remuneration for transporting * * * immigrants."); United States v. Universal Trade and Indus., Inc., 695 F.2d 1151, 1153 (9th Cir. 1983) (doctor was paid, as remuneration, "a percentage of the profits [of medical laboratory] equivalent to a percentage of the gross revenues, so he would have an incentive to order extensive laboratory tests on as many patients as possible"); United States v. Duz-Mor Diagnostic Laboratory, Inc., 650 F.2d 223, (9th Cir. 1981) (lab accused of "offering to pay a remuneration as an inducement for the referral of medical services"); Bennett v. United States, 399 F.2d 740, 742 (9th Cir. 1968) ("On many occasions the bank loaned money to individuals procured by [an intermediary]. As remuneration for bringing business to the bank, [the intermediary] received a portion of the `points' * * * charged for the loans."); Anglo California Nat'l Bank v. Lazard, 106 F.2d 693, 698 (9th Cir. 1939) (equating "remuneration" with "reward"); Trotter v. Nelson, 684 N.E.2d 1150, 1152 (Ind. 1997) (describing as remuneration the compensation or reward under an arrangement whereby clerical employee of law firm received 5% "of any fees which resulted from a personal injury or worker's compensation case that she had a role in referring to [her attorney boss]"); Ludington Service Corp. v. Acting Comm'r of Ins., 511 N.W.2d 661, 666, 667 (Mich. 1994) (dividends paid to real estate brokers based on profits of title companies incorporated by them, sometimes "proportionate to the amount of referral business expected to be generated by each broker," would be "direct remuneration in violation of" state insurance code).

7 / See United States v. National Treasury Employees Union, 513 U.S. 454, 469 (1995) ("The honoraria ban is unlikely to reduce significantly the number of appearances by high-ranking officials as long as travel expense reimbursement for the speaker and one relative is available as an alternative form of remuneration."); Price Fire & Water Proofing Co. v. United States, 261 U.S. 179, 180-81 (1923)(in awarding fair and just compensation, Court of Claims could not "include in the award `prospective or possible profits on any part of the contract beyond the goods and supplies delivered to and accepted * * * and a reasonable remuneration for expenditures and obligations or liabilities necessarily incurred in performing or preparing to perform' the contract"); PPG Indus., Inc. v. NLRB, 671 F.2d 817, 819 (4th Cir. 1982) (in determining whether in-plant organization committee was agent of union, noting that members were asked to distribute literature but were not "reimbursed for expenses nor did they receive any other remuneration from the Union"); Hatfield v. Richardson, 380 F. Supp. 1048, 1050 (D. Kan. 1974) (quoting agency decision, "`how much of the remuneration received by the claimant was for actual out-of-pocket expenses and how much was remuneration for work rendered'").

8 / See note 7, supra; see also Tonti v. Petropoulous, 656 F.2d 212, 221 (6th Cir. 1981) (referring to court-awarded litigation costs that accompany an award of attorney's fees); Seiple v. Prudential Ins. Co., 1994 WL 702931, at *3 (E.D. Pa. Dec. 13, 1994) (employer reimburses costs of some outside training); compare American Airlines, Inc. v. United States, 40 Fed. Cl. 712 (1998) (per diem payments for meals and travel expenses for overnight trips were remuneration subject to withholding), cited by NALPG, with Central Illinois Public Service Co. v. United States, 435 U.S. 21 (1978) (reimbursement of lunch expenses on non-overnight travel was not remuneration subject to withholding).

9 / See Polk County v. Peters, 800 F. Supp. 1451, 1456 (E.D. Tex. 1992) (part of "recruitment agreement" between hospital and doctor is "reimbursement for malpractice insurance").

10 / See, e.g., Charles Bridge v. Warren Bridge, 36 U.S. 420, 467, 529 (1837) ("upon the positive assurance of remuneration, in some other form [than exclusive contracts], capital and enterprise can always be commanded. * * * The grant is intended as a benefit, as a remuneration for risks, and for advances of capital * * * ."); Bloomgarden, 479 F.2d 201 (claim for value of services provided, not expenses).

11 / NALPG also cites cases using "remuneration" to refer to loss or damages, see Lake Shore & M. S. Ry. Co. v. Prentice, 147 U.S. 101, 108 (1893); Panos v. Island Gem Enters., Ltd., 880 F. Supp. 169, 176 (S.D.N.Y. 1995), but that is not the context in which the word is used in Section 15(c)(8).

12 / See, e.g., United States v. Starks, 157 F.3d 833, 836 (11th Cir. 1998) (company offering drug treatment paid community health aides "$250 for each patient they referred: $125 when a referred woman began inpatient drug treatment with [the company] and $125 after each such woman had stayed in [the] program for two weeks"); United States v. Marbella, 73 F.3d 1508, 1510 (9th Cir. 1996) (receipt of percentage of an insurance settlement for referring accident victims to a medical clinic and/or law firm); United States v. Kats, 871 F.2d 105, 106-07 (9th Cir. 1989) (owner of lab pays 50% of Medicare payments received as consequence of referrals from medical services company); Overseas Development Disc Corp. v. Sangamo Constr. Co., 840 F.2d 1319, 1329 (7th Cir. 1988) ("Because there is no certain way to measure influence and access, the construction market adopts a percentage of the project as the most reliable measure and the one that provides the right incentives to the [business] brokers at the right price to their clients."); Sirianni v. SEC, 677 F.2d 1284, 1287 (9th Cir. 1982) (representative of seller of mutual funds received referral fee of 15% of amount of any investment of anyone referred by him to enterprises holding coal mining leases); Bell v. Health-Mor, Inc., 549 F.2d 342, 344 (5th Cir. 1977) (vacuum cleaner salesman "received $10 for the name of each potential customer he submits to the sellers"); Guernsey v. Rich Plan of the Midwest, 408 F. Supp. 582, 589 (N.D. Ind. 1976) (persons "would receive twenty dollars each for each successful referral sale after they had purchased an FFSA [Food and Freezer Service Agreement] costing [$499]"); Manning v. Princeton Consumer Discount Co., 397 F. Supp. 504, 506 (E.D. Pa. 1975) (financing agency paid auto dealer "a 5% Referral fee on the transaction * * * involving cars sold by [dealer] and financed by [agency]"); Palmer v. Breyfogle, 535 P.2d 955, 965 (Kan. 1975) ("[F]or many years it was customary in Kansas for a forwarding attorney to receive one-third of anyfee which was generated in a particular lawsuit."); People v. Palma, 48 Cal. Rptr. 2d 334, 336 (App. 2 Dist. 1995) (flat fee paid per Medi-cal sticker for bringing in orders); E & B Marketing Enterprises, Inc. v. Ryan, 568 N.E.2d 339, 340 (Ill. App. 1 Dist. 1991) (agreement to promote doctor's practice through marketing campaign targeted at insurers for a "consultant's fee of 10% on all billings collected by [the doctor] in connection with such referrals"); Smith v. Johnston, 391 N.E.2d 1092 (Ill. App. 2 Dist. 1979) (referral fee of 20% of total commission earned on real estate sale).

13 / In discussing the vices of a referral fee arrangement in Trotter, 684 N.E.2d at 1154-55, the court noted that it "provides the incentive for a nonlawyer to recommend an attorney's services for their own pecuniary interests." See Schneider v. Citicorp Mortgage, Inc., 982 F. Supp. 897 (E.D.N.Y. 1997) (allegation that mortgage company paid mortgage brokers a referral fee, or premium, if brokers referred clients who would pay inflated rates); Golon v. Ohio Savings Bank, 1999 WL 184402 (N.D. Ill. Mar. 29, 1999) (payments to influence broker's choice of mortgage company).

14 / See Securities Investors Legal Rights: Hearing Before the Subcomm. on Communications and Finance of the House Comm. on Energy and Commerce, 102nd Cong., 1st Sess., at 92 (Nov. 21, 1991) (Testimony of Philip A. Lacovara, General Counsel, Morgan Stanley & Co., on behalf of SIA) ("the SIA and other groups that are concerned about unwarranted securities fraud litigation urge adoption of legislation designed to rid the system of baseless, harassment suits," including "[a]bolition of abusive practices -- Prohibit the payment of bounties to named plaintiffs, payments to stockbrokers for referring plaintiffs, and law firms' use of their profit-sharing plans as a means of providing in-house plaintiffs. Each of these practices contribute to the manufacture of lawsuits under the securities laws that are designed to coerce settlements."); at 155 (Testimony of Vincent M. O'Reilly, Deputy Chairman, Coopers & Lybrand) ("By adopting provisions to minimize frivolous suits, you can better direct the legal system toward assisting legitimate victims of fraud. * * * * Attorneys should be prohibited from paying `finders' fees' or `bounties' to induce potential plaintiffs to sue.").

15 / See H.R. 5828 (Aug. 11, 1992) (Reps. Tauzin, Lent, Hall of Texas, Ritter); S. 3181 (Aug. 12, 1992) (Sens. Domenici, Sanford); H.R. 417 (Jan. 5, 1993) (Reps. Tauzin, Parker, Hall of Texas, Rowland, Montgomery, Shaw, Machtley, Moran); S. 1976 (Mar. 24, 1994) (Sens. Dodd, Domenici, Mikulski, Johnston, Faircloth).

16 / See S. 240 (Jan. 18, 1995) (Sens. Domenici, Dodd, Hatch, Mikulski, Bennett, Moseley-Braun, Lott, Murray, Mack,Johnston, Faircloth, Conrad, Burns, Chafee, Gorton, Helms, Kyl, Thomas, Hutchison, Santorum, Pell); H.R. 10 (Jan. 4, 1995) (Reps. Hyde, Ramstad, Chenowith, Condit, et al.), superseded in relevant part by H.R. 1058 (Feb. 27, 1995) (Reps. Blilely, Fields of Texas, Cox of California, Tauzin).

17 / See S. 667 (Apr. 4, 1995) (Sens. Bryan, Shelby); H.R. 555 (Jan. 18, 1995) (Reps. Markey, Conyers, Nadler, Kennedy of Massachusetts, Schroeder); H.R. 675 (Jan. 25, 1995) (Reps. Mineta, Eshoo); H.R. 681 (Jan. 25, 1995) (Reps. Tauzin, Hall of Texas, Towns, Rush, Brown of Ohio). The language of all of these bills, as well as H.R. 10 and H.R. 1058, tracked the provision in S. 240, except for Representative Tauzin's bill, which was in the same form as he had introduced it in 1992 and 1993 and was phrased as "pay a fee." In 1995, Representative Tauzin joined the sponsors of H.R. 1058.

18 / Securities Litigation Reform Proposals: Hearing Before the Subcomm. on Securities of the Senate Committee on Banking, Housing, and Urban Affairs, 104th Cong., 1st Sess., 185 (Mar. 22, 1995) (Statement of David J. Guin on behalf of NASCAT) (emphasis in original).

19 / See Report on the Common Sense Legal Reform Act of 1995, H.R. Rep. No. 104-50(I), 37-38 (Feb. 24, 1995) ("Section 203. Prevention of Abusive Practices That Foment Litigation.* * * Section 203(b) amends Section 15(c) of the Exchange Act by adding a new paragraph prohibiting brokers, dealers, or their affiliated persons from soliciting or accepting fees for assisting attorneys in obtaining representation of their customers."); Report on the Private Securities Litigation Reform Act of 1995, S. Rep. No. 104-98, 24 (June 19, 1995) ("Title I -- Reduction of Abusive Litigation. Section 101. Elimination of certain abusive practices. Section 101(a) amends the Securities Exchange Act of 1934 (the `1934 Act') by adding a new paragraph (8) to Section 15(c), prohibiting brokers or dealers or any associated persons from soliciting or receiving any type of fee or remuneration for assisting an attorney in obtaining representation of any person in private actions under the Securities Act of 1933 (the `1933 Act') or the 1934 Act.").

20 / See, e.g., 141 Cong. Rec. H2755 (Mar. 7, 1995) (Rep. Bliley) ("Most Members of Congress now understand and agree with us that lawyers should not pay referral fees to brokers who send them clients, or that named plaintiffs should be barred from receiving bounty payments."); id. at S8892 (June 22, 1995) (Sen. D'Amato) ("S. 240 discourages the use of professional plaintiffs by eliminating the bonus payments to plaintiffs and prohibiting referral fees."); id. at S9040 (June 26, 1995) (Sen. Domenici) (bill "stops brokers from selling names of investors to lawyers"); id. at S9074 (June 26, 1995) (Sen. Hatch) ("Often, the firms [involved in abusive strike suits] use the same professional plaintiffs in multiple suits. Some will pay referral fees to get plaintiffs."); id. at S9209 (June 28, 1995) (Sen. Chafee) ("S. 240 seeks to reduce abusive practices by prohibiting brokers or dealers from receiving a referral fee from attorneys seeking clients for class action suits; * * * [i]t seeks to limit frivolous lawsuits by eliminating professional plaintiffs"); id. at 9212 (June 28, 1995) (Sen. Domenici) (bill "stops brokers from selling names of investors to lawyers"); id. at S17993 (Dec. 5, 1995) (Sen. Grams) (to deal with "the high cost of meritless and abusive litigation," the bill "[e]liminat[es] [] bounty payments to named plaintiff, [and] plaintiff referral fees").

21 / See id. at S17995 (Dec. 5, 1995) (Sen. Bryan) ("bonus payments being paid to brokers * * * is dead wrong. * * * [P]ayments that would be made as bonus payments to certain plaintiffs are wrong as well."); id. at S19056 (Dec. 21, 1995) (Sen. Bryan) ("There has been a practice that has grown up that ought to be eliminated. That is the payment of referral fees to brokers. We ought not give incentives to brokers to refer potential security fraud to class action lawyers. So this legislation, my friends, prohibits the payment of referral fees to brokers."); see also id. at S9208-09 (June 28, 1995) (Sen. Lautenberg) (discussing "prohibitions against referral fees and * * * requirements that the share of the settlement awarded to the name plaintiffs be calculated in the same manner as the shares awarded to all other members of the class and that the name plaintiff certify that he did not purchase the security at the direction of his attorney"); id. at S9093 (June 26, 1995) (Sen. Sarbanes) ("There is a provision called no bonus to the named plaintiff, which has been going on, which we do not think ought to be happening. The lawyer cannot pay brokers for referring clients. * * * Those professional plaintiffs can be knocked out by all of those provisions that I am talking about."); id. at S9172 (June 27, 1995) (Sen. Dorgan) ("[The bill] prohibits bonus payments and referral fees which may create an incentive to file frivolous cases."); id. at S17974 (Dec. 5, 1995) (Sen. Boxer) ("We should also ban the payment of referral fees to stockbrokers who drum up plaintiffs and litigation for plaintiffs' attorneys. Securities lawsuits should redressreal wrongs and not promote strike suits to shake down innocent defendants."); id. at S17986 (Dec. 5, 1995) (Sen. Lautenberg) ("prohibitions against referral fees [and other practices]" would "curb frivolous securities lawsuits").

22 / See Securities Litigation Reform Proposals: Hearing Before the Subcomm. on Securities of the Senate Committee on Banking, Housing, and Urban Affairs, 104th Cong., 1st Sess., 9 (Mar. 2, 1995) (Statement of Sen. D'Amato) ("We need to get professional plaintiffs out of the picture by banning the absurd practices of referral fees to brokers and bonus payments to named plaintiffs."); Securities Litigation Reform: Hearing Before the Subcomm. on Telecommunications and Finance of the House Committee on Energy and Commerce, 103rd Cong., 2nd Sess., 3 (July 22, 1994) (Statement of Rep. Markey) ("[I]t is clear that we can improve the process of initiating and managing securities fraud class actions * * * * [T]he unseemly race to the courthouse, the fees allegedly paid by some lawyers to brokers for referrals, and the rare but not unheard of practice of filing form complaints all can and should be addressed."); 5 (Statement of Rep. McMillan) ("In order to discourage these professional plaintiffs, H.R. 417 will forbid the payment of bonuses or bounties to plaintiffs in these class action suits. Third parties such as stockbrokers will be prohibited from receiving referral fees for finding plaintiffs to participate in these frivolous lawsuits.").

23 / The Commission disagrees with NIG that Section 15(c)(8) only applies to the initiation of litigation. Its language is broad enough to reach the process of forming a proposed lead plaintiff "group," which could perpetuate a frivolous lawsuit and lead to various class action abuses.

24 / See In re Victor Technologies Sec. Litig., 792 F.2d 862, 865 (9th Cir. 1986) (in affirming an order requiring plaintiff's counsel to reimburse broker/dealers' costs of distributing a notice of a class action settlement, noting evidence that "brokerage houses, as a matter of business practice, often do not forward such notices unless they are also reimbursed for the administrative costs of searching their records to find the names and addresses of the beneficial owners and for mailing the notices"). We understand from the record in this case that (in addition to postage when the broker/dealer sends out the mailing) the broker/dealerscharge either a per-label fee that includes the search costs or separately charge for the materials and labor.

25 / See, e.g., Public Utilities Holding Company Act of 1935, 15 U.S.C. 79g(d)(4) (specifying consequences if "the fees, commissions, or other remuneration, to whomsoever paid, directly or indirectly, in connection with the issue, sale, or distribution of [a] security are not reasonable"); id., 15 U.S.C. 79j(b)(2) (approval of acquisition of securities or utility assets can be withheld if "all fees, commissions, and other remuneration, to whomsoever paid, to be given, directly or indirectly, in connection with such acquisition is not reasonable or does not bear a fair relation to the sums invested in or the earning capacity of the utility assets"); Investment Company Act of 1940, 15 U.S.C. 80a-17(e)(2) (regarding transactions of certain affiliated persons and underwriters, limiting remuneration in connection with the sale of securities to "the usual and customary broker's commission if the sale is effected on a securities exchange"); id., 15 U.S.C. 80a-56(k)(2) (similar regarding person in a certain relationship to a business development company acting as a broker). (Emphases added.)

26 / One case even seems to suggest that, notwithstanding the Reform Act's language requiring that notice be published once in the first of a series of substantially similar actions, the perceived advantages of publishing notices early and often may be reviving the "race to the courthouse" and resulting in the filing of multiple, duplicative complaints. See Sherleigh Assocs. LLC v. Windmere-Durable Holdings, Inc., 184 F.R.D. 688, 694 & n.4 (S.D. Fla. 1999).

27 / Copies of the Commission's amicus curiae briefs on lead plaintiff and lead counsel issues are posted on its internet site (www.sec.gov/news/leglindx.htm).

28 / There may, of course, be unusual circumstances that warrant departure from these limits. They might include pre-existing relationships among the members or other factors indicating that they have a special capacity to provide able and unified decisionmaking independent of counsel.

29 / See also In re Baan Company Sec. Litig., 186 F.R.D. 214, 216-17 (D.D.C. 1999) (collecting cases); Sherleigh Assocs. LLC v. Windmere-Durable Holdings, Inc., 184 F.R.D. 688, 692 & n.1 (S.D. Fla. 1999); In re Advanced Tissue Sciences Sec. Litig., 184 F.R.D. 346, 352-53 (S.D. Cal. 1998); In re Oxford Health Plans Sec. Litig, 182 F.R.D. 42, 46 (S.D.N.Y. 1998); Chill v. Green Tree Financial Corp., 181 F.R.D. 398, 409 (D. Minn. 1998); In re Donnkenny Inc. Sec. Litig., 171 F.R.D. 156, 157 (S.D.N.Y. 1997); Mitchell v. Complete Mgmt., Inc., 1999 WL 728678, at *2-4 (S.D.N.Y. Sept. 17, 1999); In re Telxon Corp. Sec. Litig., 1999 WL 826076, at *5-12 (N.D. Ohio Aug. 25, 1999); In re Nice Systems Sec. Litig., 1999 WL 551357, at *13-16 (D.N.J. June 10, 1999); Takeda v. Turbodyne Technologies, Inc., 1999 U.S. Dist. LEXIS 8965, at *17 (C.D. Cal. May 28, 1999); Yousefi v. Lockheed Martin Corp., 1999 U.S. Dist. LEXIS 8966, at *18 (C.D. Cal. May 25, 1999); see generally In re Milestone Scientific Sec. Litig., 183 F.R.D. 404, 417-18 (D.N.J. 1998); In re Party City Sec. Litig., 1999 WL 688195, at *20-22 (D.N.J. Aug. 6, 1999).

30 / The Commission wishes to make clear that this memorandum, like the August 16, 1999 opinion in this case, is not "sanctioning the methods utilized by Weiss & Yourman" in forming a proposed lead plaintiff group. As noted, concerns about abuses in that process can be dealt with by other, more direct means.

http://www.sec.gov/litigation/briefs/netassoc.htm


Modified:12/07/1999