Yesterday, the United States Supreme Court, in a unanimous decision, handed class action plaintiffs a victory by holding that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) allows them to pursue alleged violations of the Securities Act of 1933 (the 33 Act) in state court. Securing plaintiffs’ ability to pursue these claims in state court, the Supreme Court also held that defendants are barred from removing the claims to federal court.
As background, the 33 Act applies only to securities offerings and requires offerors to make full and fair disclosures related to such offerings. The 33 Act may be enforced through private suits and is often enforced through class actions, primarily through Section 11, which applies to registration statements. Initially, Congress authorized both state and federal courts to exercise jurisdiction over lawsuits alleging violations of the 33 Act. See § 22(a), 48 Stat. 86. Strangely, however, Congress barred the removal of such suits from state to federal court. Id. at 87.
Congress passed the Private Securities Litigation Reform Act of 1995 (PSLRA) to curtail “perceived abuses of the class-action vehicle in litigation involving nationally traded securities.” The PSLRA heightened the requirements for maintaining a class action under the Securities Act by, for instance, enacting a mandatory discovery stay, increasing the pleading requirement for alleged misstatements, and providing a safe harbor to forward-looking statements. To avoid the strictures of the PSLRA, plaintiffs began bringing their actions under state rather than federal law. Again seeking to curtail perceived abuses of the class action vehicle, Congress enacted SLUSA in 1998. SLUSA definitively bars securities class actions containing 50 or more class members founded on state law claims. SLUSA, however, did not eliminate the bar on removing 33 Act class actions to federal court.
In Cyan, Inc. v. Beaver County Employees Retirement Fund, the Supreme Court was faced with the principal question of whether SLUSA stripped state courts of jurisdiction over class actions alleging violations of the 33 Act only. The plaintiffs in that case purchased shares of defendant Cyan, Inc.’s stock in an initial public offering. Following a drop in the price of Cyan stock, the plaintiffs brought a class action alleging the registration statement for the shares was misleading, and seeking damages against Cyan in California Superior Court exclusively for violation of the 33 Act. Cyan moved to dismiss the lawsuit for lack of subject matter jurisdiction arguing principally that SLUSA stripped state courts of the power to adjudicate 33 Act class actions. Their argument was based on congressional intent, and specifically that the purpose of SLUSA was to ensure state courts do not adjudicate substantial securities class actions. In response, the plaintiffs argued that, pursuant to its plain meaning, SLUSA does not strip state courts of jurisdiction over class actions alleging only violations of the 33 Act. In addition, although not specifically at issue in the litigation, the Court also answered a question submitted by the federal government as amicus curiae: whether SLUSA enabled defendants to remove 33 Act class actions to federal court.
Addressing the principal issue, the Supreme Court held the plain language of SLUSA “does nothing to deprive state courts of their jurisdiction to decide class actions brought under the 33 Act.” The Court further stated, “[e]ven assuming the clear text can ever give way to purpose, Cyan would need some monster arguments on this score to create doubts about SLUSA’s meaning.” Unsurprisingly, the Court held that Cyan’s arguments “come nowhere close” to the “monster arguments” required to overcome SLUSA’s plain language. Responding to the question posed by the federal government, the Supreme Court kept the 33 Act’s removal prohibition in place by holding “[n]either did SLUSA authorize removing such suits from state to federal court.” As such, securities class action plaintiffs can bring class actions alleging violations of the 33 Act in state court, and defendants may not remove those claims to federal court.
In the months leading up to the release of this opinion, some commentators cautioned that allowing state courts to retain jurisdiction over 33 Act claims will reopen the floodgates of securities class actions. While Cyan did not expand the scope of liability under the 33 Act, the number of 33 Act class actions may increase because actions may be brought in each state in which an injury is alleged. However, even if the opinion results in more class actions being filed, it applies only to class actions alleging violations of the 33 Act (i.e., claims related to securities offerings). As the Supreme Court recognized in Cyan, Inc., most securities class actions are brought under the Securities Act of 1934 – which governs the trading of securities. Given that, the overall number of securities class actions is unlikely to see a significant rise.