In the midst of the Great Depression, Congress enacted two laws to shore up practices that were considered to have led in part to the Market Crash of 1929: the Securities Act of 1933 (“1933 Act”), which governs initial securities offerings; and the Securities and Exchange Act of 1934 (“1934 Act”), which governs all subsequent trading. The 1933 Act permits both state and federal courts to hear claims brought under that Act, and bars defendants from removing such claims to federal court. The 1934 Act, however, grants federal court exclusive jurisdiction to hear claims brought under that Act.
In 1995, Congress passed the Private Securities Litigation Reform Act (“Reform Act”) to curb apparent abuses of plaintiff’s use of the class action vehicle in litigation involving nationally traded securities. The Reform Act included substantive reforms in both state and federal court, and procedural reforms only in federal court. The Reform Act fell prey to the law of unintended consequences, and, following its passage, plaintiffs began circumventing the obstacles imposed by the Reform Act by filing securities class actions in state court. To prevent the run-around of the Reform Act, Congress responded in 1998 with the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). In relevant part, SLUSA provided an exception to the 1933 Act’s general rule that state and federal courts exercise concurrent jurisdiction over claims brought under that Act. Following the passage of SLUSA, a split developed between state and federal courts as to whether SLUSA deprived state courts of subject matter jurisdiction over cases involving “covered class actions” (actions in which damage are sought on behalf of 50 of more people) asserting only 1933 Act claims.
On March 20, 2018, in Cyan v. Beaver County Employees Retirement Fund, No. 15-1439, the Supreme Court resolved the split and issued a unanimous opinion authored by Justice Kagan. The Cyan case arose out of the purchase of shares of stock in Cyan, a telecommunications company, by three pension funds and one individual in an initial public offering. After the stock declined in value, the plaintiffs brought a damages class action in California Superior Court against Cyan. The allegations stemmed from material misstatements contained Cyan’s offering documents. The plaintiffs alleged that Cyan violated the 1933 Act, but did not allege any violations of California state law claims. Cyan moved to dismiss the case alleging that SLUSA stripped state courts of subject matter jurisdiction over class actions arising solely under the 1933 Act. The California Superior Court denied the dismissal, and the state appellate courts denied review of that ruling. The Supreme Court granted certiorari to resolve the split among state and federal courts. The Supreme Court also addressed a related removal question raised by the federal government as amicus curiae.
The Court unanimously held that: (1) “SLUSA did nothing to strip state courts of their longstanding jurisdiction to adjudicate class actions alleging only 1933 Act violations;” and (2) “SLUSA [does not] authorize removing such suits from state to federal court.”
Although the Supreme Court is unsure “why Congress declined to require . . . that 1933 Act class actions be brought in federal court” like 1934 Act class actions, it noted that “in any event, [the Court] will not revise that legislative choice.” The Court provided that “[e]ven if Congress could or should have done more, still it ‘wrote the statute it wrote’” and therefore, the Court must interpret the plain statutory language. The Courts interpretation of SLUSA and its holding in Cyan create the strange result that class actions based on state-law can be removed to federal court, but claims asserting only federal 1933 Act claims cannot. As a result of the Cyan decision, until and unless Congress amends SLUSA, plaintiffs will continue to strategically file claims arising under the 1933 Act in plaintiff-friendly state courts. In doing so, Plaintiffs will continue to circumvent some of the procedural restrictions imposed by the Reform Act.
STSW attorneys have a great deal of experience defending and prosecuting complicated securities matters, both as local and primary counsel in Delaware, Maryland and elsewhere. Our deep ties to the bench, particularly with Judges Alex Williams (Ret.) and Joe Murphy (Ret.), provide us with an unparalleled insight into how Maryland judges might address the complex issues presented in securities litigation. For more information, please contact Bill Sinclair, or Steve Grygiel at (410) 385-2225.