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September 30, 1999

Traders Told: Millennium Law Won't Save Them

By William Hoffman

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  • Traders Told: Millennium Law Won't Save Them
  • Page 2

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.