1997CRE1607A UNITED STATES INVESTORS IN LLOYD'S OF LONDON DESERVE THEIR DAY IN

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Archive-Name: gov/us/fed/congress/record/1997/aug/01/1997CRE1607A
[Congressional Record: August 1, 1997 (Extensions)]
[Page E1607-E1608]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]
[DOCID:cr01au97-86]

UNITED STATES INVESTORS IN LLOYD'S OF LONDON DESERVE THEIR DAY IN
UNITED STATES COURT

______

HON. HENRY J. HYDE

of illinois

in the house of representatives

Thursday, July 31, 1997

Mr. HYDE. Mr. Speaker, as chairman of the House Judiciary Committee,
I am interested in matters concerning Federal court jurisdiction. For
many years, citizens of Illinois and other States were solicited in
their States to invest in Lloyd's of London insurance syndicates. In
many instances, these investors have been denied access to the Federal
courts where they attempted to assert their rights and remedies under
the Federal securities statutes. Investors asserting securities claims
against Lloyd's have seen their cases thrown out of court based on
clauses in Lloyd's investment contracts which provide for the
application of English law and the forum of the English courts. (Choice
Clauses). I am heartened, however, by the recent appeals court ruling
in Richards v. Lloyd's of London and strong pronouncements by the
Securities and Exchange Commission in that appeal, which recognize the
statutory bar against agreements which waive compliance with the
Federal securities laws. The Richards decision, unless set aside by the
full ninth circuit court of appeals or the Supreme Court, clears the
way for the investors to have the chance to prove their case where it
belongs--in U.S. district court.
The plaintiffs in Richards--known as ``Names''--allege that Lloyd's
defrauded them by concealing that the insurance syndicates to which
they furnished capital were saddled with massive asbestos and toxic
waste liabilities. They assert that, for two decades, Lloyd's undertook
a major recruitment program in the United States by offering investment
contracts by which residents of the United States could become
``External Names'' at Lloyd's--passive investors who were prohibited
from being involved with the operations and management of Lloyd's
syndicates or business operations. Plaintiffs in Richards claim that
Lloyd's alleged fraud cost them many million of dollars. They also seek
rescission of their agreements with Lloyd's on the grounds that Lloyd's
allegedly sold them unregistered, nonexempt securities and made
material representatives or omitted material facts.
Mr. Speaker, for over 60 years there has been a statutory bar against
contracts with investors that waive compliance with the Federal
securities laws. Section 14 of the Securities Act of 1933 provides:

Any condition, stipulation, or provision binding any person
acquiring any security to waive compliance with any provision
of this title or of the rules and regulations of the
Commission [the SEC] shall be void.

15 U.S.C. Sec. 77 n. The bar of Section 29(a) of the 1934 Act is
substantially the same. 15 U.S.C. Sec. 78cc(a).
In Richards, a panel of the Ninth Circuit ruled, 2-1, that because of
the Choice Clauses would strip plaintiffs of all their rights under the
Federal securities laws, they violate the anti-waiver statutes and are
thus void. The court remanded the case to the federal district court
where the plaintiffs will have the opportunity to present a case that
Lloyd's fraudulently sold them unregistered securities and that the
court should order rescission of their investment contacts with Lloyd's
and other relief.
I would like to cite several portions of the Richards opinion which
show the eminent logic of this result:

The district court made an error of law in supposing that
the Choice Clauses were unenforceable only if unreasonable.
Congress had already determined that such clauses were void.
It was not for a court to weigh their reasonableness, not for
a court to say whether they offended any policy of the United
States. The policy decision had been made by the legislature.

* * * * *

Is there a significant difference between a policy
objection to enforcement of the anti-waiver bars and a
statutory obstacle to such enforcement? We believe there is.
Where a statute exists, a policy has been given form and
focus and precise force. A statute represents a decision by
the elected representatives of the people as to what
particular policy should prevail, and how.

* * * * *

There is no question that the Choice Clauses operate in
tandem as a prospective waiver of the plaintiffs' remedies
under the 1933 and 1934 Acts. If the Supreme Court would
condemn such clauses where they work against a public policy
embodied in statutes even through the statutes themselves do
not void the clauses, a fortiori the Supreme Court would
condemn similar clauses when the run in the teeth of two
precise statutory provisions making them void.

* * * * *

Congress was no ignorant of the potential international
character of securities transactions. Congress specifically
modified the 1933 Act to cover transactions in foreign
commerce. S. Rep. No. 47, 73d Cong., 1st Sess. (1933)
(accompanying S. 875.) A court should not apply the
reasonableness test or say whether the clauses offended any
policy of the United States when Congress has expressly made
that determination. We do not believe that we should turn the
clock back to 1929 or introduce caveat emptor as a rule
governing the solicitation in the United States of
investments in securities by residents of the United States.

In addition, the SEC filed two briefs, amicus curiae in Richards and
participated in oral argument in favor of reversing the district
court's enforcement of the Choice Clauses. The SEC's position is
correct in my view, and I would like to share some of the SEC's
compelling statements:

The issue addressed is an important one to the enforcement
of the federal securities laws. The district court's
decision, if upheld, would allow foreign promoters of
securities undertaking large scale selling efforts in the
United States to avoid private liability under the securities
laws simply by requiring the American investors to agree to
resolve disputes in a foreign jurisdiction under foreign law,
even if the remedies available under the foreign law were far
less effective than those available under United States law.
Such a holding would seriously impair the ability of
defrauded investors to obtain compensation for their losses,
and would hamper the deterrent function of the federal
securities laws by discouraging private actions. The
Commission strongly urges this court to reverse the
district court's erroneous dismissal of this action.

* * * * *

The fact that the investors agreed to these provision is
irrelevant, since the very objective of the antiwaiver
provisions is to invalidate such agreements. As the Supreme
Court held in Shearson/American Express Inc. v. McMahon, 482
U.S. 220, 230 (1987), ``[t]he voluntariness of the agreement
is irrelevant to this inquiry: if a stipulation waives
compliance with a statutory duty, it is void under [the
antiwaiver provisions], whether voluntary or not.

* * * * *

In this case, in contrast, the requirement that investors
litigate in England, coupled with the requirement that they
do so under English law, not only ``weakens'' the investors'
ability to recover, but in fact precludes any possibility of
recovery under the federal securities laws. These clauses are
directly contrary to express statutory prohibitions in the
antiwaiver provisions and should be held void.

* * * * *

The antiwaiver provisions, however, are not simply an
expression of public policy that favors United States
securities laws unless other comparable laws are available.
Rather, they are an express and unequivocal directive that
the rights and obligations under the securities laws cannot
be waived.

[[Page E1608]]

This determination has been made by Congress, and the courts
are not free to substitute their own public policy
determinations.

The Richards court is not alone in its interpretation of this
statutory bar to waiver. In Leslie v. Lloyd's of London, a Federal
district court, after hearing evidence, struck down the Choice Clauses,
stating that they were procured by fraud and violated public policy.
The case is currently on appeal to the Fifth Circuit, where the SEC has
participated in oral argument, arguing that the Choice Clauses are
void.
Mr. Speaker, what is involved here is a very basic proposition. When
foreign promoters come into Illinois and other States to raise capital,
they cannot effectuate waivers of substantive rights under the
securities laws that belong to those form whom they solicit capital.
Congress has said no and that should be the end of the story.

____________________