HOW TO PROTECT YOURSELF AGAINST GETTING HURT BY CONGRESS' SECURITIES REFORM
By FRANK LALLI MANAGING EDITOR

(MONEY Magazine) – MAKE NO MISTAKE. YOUR PROTEST OVER CONgress' misguided securities litigation reform was one of the factors in President Clinton's last-minute decision to veto that legislation. Just days before the President's surprise veto announcement in late December, his press secretary, Michael McCurry, called MONEY's Washington, D.C. bureau chief Teresa Tritch. "The White House is definitely feeling the heat from the investor community, including a lot of people who subscribe to MONEY the way I do," he said. "That is one of the President's principal concerns as he evaluates the bill."

Unfortunately, the more than $3 million in campaign contributions from the financial and high-tech industries was a far bigger concern among the congressional lawmakers who quickly voted to override the veto. So despite your efforts, a license to cheat small investors is now the law of the land.

"This law won't get rolled back until we see some huge scandal, maybe on the scale of the S&L mess, that shakes investor confidence," says Gerri Detweiler of the National Council of Individual Investors.

The question for small investors like you is: What should you do to protect yourself from being victimized by the frauds that this law invites? Here are three suggestions:

1. Don't believe a word they say. Executives can now lie about their company's prospects as long as they add words of warning--a so-called meaningful cautionary statement. However, the warning need not spell out the principal factors that could shatter the company's upbeat scenario. For example, Columbia Law School professor John Coffee says: "A company could say that it will produce a cure for cancer in 18 months if it wins Federal Drug Administration approval, without ever mentioning that the FDA has grave doubts and wants the drug retested."

Coffee's advice is to always double-check the company's happy-hour projections against its sober Management Discussion & Analysis. That formal document must disclose any known trend, event or uncertainty that could materially affect the firm's liquidity or results. You can find the MDA in the company's annual report, or in its 10-Q or 10-K filings with the Securities and Exchange Commission.

"And investors need to investigate before they invest," adds Wayne Klein, Idaho's former state securities regulator.

2. Keep meticulous records. In the name of blocking frivolous litigation, the law sets such high standards for suits that many meritorious cases will get derailed. Therefore, you may not be able to sue unless you have complete written documentation, including all relevant company statements as well as your notes of conversations with brokers, financial advisers and company officials.

3. Holler at the first hint of trouble. At the securities industry's insistence, the law did not lengthen the statute of limitations on securities fraud. You have only one year from when you discover a fraud--and a mere three from when the scam began--to sue. So you have to monitor your investments closely. At the first sign of a problem--say, the auditor resigns or the stock drops 10% to 20% quickly--get help. You can find a securities attorney through your state bar association or the Public Investors Arbitration Bar Association (404-365-0150). Other options include calling your state securities regulator or the SEC's Office of Investor Education and Assistance (202-942-7040). The point is, don't just sit there. The clock will be running on your right to sue.

One last point: You can count on MONEY to continue to report on this law's impact on investors. In the meantime, good luck.

FRANK LALLI, Managing Editor