Liability Lawsuits for Firms That Don't Make Y2K Program ChangesSecurities traders and broker dealers, who think their Millennium computer-bug headaches disappeared once President Clinton threw his weight behind civil liability limits on Y2K lawsuits, have got another thing coming, industry observers say.
The President's action, signing H.R. 775 "The Y2K Act" (P.L., 106-37) which was passed by Congress this summer, limits punitive damages awards to the lesser of $250,000, or three-times compensatory damages for most Y2K-related lawsuits.
The legislation, initially opposed by the president, also provides a cooling-off period and other time-outs designed to encourage disputants to settle their claims out of court. But it may not be enough to protect negligent traders. Experts note that the new Y2K Act offers little protection for companies that haven't taken steps to mitigate the problem for themselves and the businesses and people they work with.
The industry has spent $5 billion so far upgrading and testing computer hardware and software, as well as formulating contingency plans, according to the Securities Industry Association.
"This is the biggest computer technology project any industry has ever undertaken," said Margaret Draper, a spokewoman for the SIA. SIA alone has spent $10 million getting systems ready for Jan. 1, 2000.
The Year 2000 computer problem refers to the inability of many computers built or programmed before the late 1990s to accurately process the change of dates from 1999 to 2000. Since these older computers process dates by their final two digits and assume the century "19" to be a placeholder, it is believed that many of them will interpret the transition from "99" to "00" as taking them back to 1900. Computer experts are uncertain how costly the resulting confusion will be, but governments and businesses have been preparing for the rollover to Jan. 1, 2000 for several years.
So far, there have been few Y2K lawsuits. Jeffrey A. Klafter, partner in charge of the Y2K litigation practice group at Bernstein Litowitz Berger & Grossmann in New York, said he's seen about 40 Y2K-related class-action lawsuits. Only a few involved securities industry firms, he added.
Yet attorneys (including the chair of the American Bar Association's new Y2K subcommittee) have predicted, and businesses live in fear, that the year-end event could produce an avalanche of lawsuits if computer problems cost people money or even their lives.
Klafter and others note that the Y2K Act offers little protection for companies that haven't instituted measures to make themselves more Y2K compliant. Klafter said the new law shelters from damages any defendant who pleads an exceptional and unforeseeable "Y2K upset" incident. But that's as long as the defendant at the time of the incident was in compliance with applicable laws and regulations, including compliance directives from regulatory bodies.
Klafter noted that the Securities and Exchange Commission signaled its intent with temporary rules (15b7-3T, 17Ad-21T, and 17a-9T) this spring. The rules were finalized late this summer to ensure broker dealers and traders make their mission-critical systems Y2K compliant by November 15. SEC Chairman Arthur Levitt has made it clear he does not believe the Y2K Act safe harbor will shield any securities firm that hasn't abided by these new rules.
Alan Davidson, president of the Independent Broker Dealers Association said IBDA members understand the importance of Y2K compliance. "It would be counterproductive not to be able to execute your customers' orders," he said.
But some of the SEC's compliance demands are unreasonable, Davidson said, pointing to the recent announcement of $50,000 fines levied against each of four firms that failed to file Y2K compliance forms in time for an SEC deadline.
"What we have here is not the year 2000 problem, but the year 1984," Davidson said.
Most broker dealers, and securities firms in general, have finished their Y2K readiness programs, SIA's Draper said. They are now moving on to contingency planning. "It's only prudent to be prepared for the unforeseeable," she said.
This fall, the SIA plans to establish a Y2K coordination and communication center in New York, Draper said. Starting shortly before the Friday-to-Saturday year-end rollover, the SIA hub will be staffed 24 hours a day, seven days a week to monitor progress. The hub will have links to member firms, self-regulatory organizations, government agencies and international securities organizations.
Houses in Order
Meanwhile, investment planners feel confident that their houses are in Y2K order. Edward Bambauer, director for financial markets consulting at accounting firm Arthur Andersen in Boston, noted that federal bank examiners recently concluded that less than 0.1 percent of U.S. banks still have outstanding compliance issues. Securities firms are similarly well-prepared, Bambauer estimated.
Yet there is considerable debate about the effect that failures in non-compliant sectors of the economy in the U. S. or around the world, might have on the banking and securities industries here, Bambauer noted. "The estimation of most experts is that [investors'] exposure [to Y2K problems] in financial markets increases as the distance from the United States increases," he said.
Several strands of opinion have emerged among traders and their managers, said Lorraine H. DeLear, vice president of trading at First Allied Securities, Inc., in San Diego, Calif. A lot of investors are just going to ride out the event, she said.
Some traders hear investors voice a "head for the hills" mentality, preparing to sell off everything before the rollover occurs. And some believe that the U. S. – arguably the most Y2K compliant nation and traditionally a haven for capital in flight – may even see a mini-boom after the rollover. That could occur as investors seek a safe place to park their money until the chaos blows over.
