Source: https://www.dandodiary.com/2015/02/articles/securities-litigation/guest-post-despite-slusa-plaintiffs-file-ipo-lawsuits-in-state-court/
Timestamp: 2020-04-06 09:13:59
Document Index: 486235693

Matched Legal Cases: ['§ 77', '§ 77', '§ 77', '§ 77', '§ 1441', '§ 77']

Guest Post: Despite SLUSA, Plaintiffs File IPO Lawsuits in State Court | The D&O Diary
By Kevin LaCroix on February 25, 2015
In a recent post, I noted the curious phenomenon of plaintiffs filing IPO-related securities class lawsuits in state court. Plaintiffs have this option under the concurrent jurisdiction provisions of the ’33 Act, but I still wondered why a plaintiff would chose to proceed in state court. I also noted that there is a split in authority within the federal circuit on the question whether subsequent legislation (SLUSA and CAFA) preempts the ’33 Act’s concurrent jurisdiction provisions.
In the following guest post, Maeve O’Connor and Elliot Greenfield of the Debevoise & Plimpton law firm take a look at these issues surrounding the ’33 Act’s concurrent jurisdiction provisions and discuss the reasons why we have been seeing more state court securities class action lawsuits, particularly in California.
I would like to thank Maeve and Elliot for their willingness to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you are interested in submitting a guest post. Here is Maeve and Elliot’s guest post.
As The D&O Diary recently noted, there has been an increase in securities class actions filed in state court in recent years, the majority of them in California. This increase results not only from a surge in IPO activity, but from widespread confusion and disagreement among federal district courts regarding whether, after SLUSA, state courts retain concurrent jurisdiction over class actions asserting claims under the Securities Act of 1933, and whether such actions filed in state court may be removed. To date, of 37 cases, district courts granted remand in 23 and denied remand in 14.[i] In California district courts, plaintiffs have successfully remanded in 11 cases and have been denied remand in only 3. Excluding those California decisions, the national numbers are even closer, with 12 courts granting remand and 11 denying remand.
This trend raises several questions, including (1) why plaintiffs prefer to file in state court, (2) why federal courts disagree on such a fundamental issue of securities law, and (3) why plaintiffs have enjoyed relatively more success avoiding removal in California.
Why Plaintiffs Prefer State Court:
Plaintiffs – and plaintiffs’ attorneys – have several reasons to prefer to file a securities class action in state court rather than federal court.
For one thing, filing in state court allows a plaintiff to avoid certain procedural protections provided by the PSLRA. In particular, the numerous requirements set forth in 15 U.S.C. § 77z-1(a) expressly apply only to actions brought “pursuant to the Federal Rules of Civil Procedure” – i.e., brought in federal court. This provision requires, among other things, that the plaintiff publish nationwide notice of the pending action, alerting members of the purported class that they can seek to be appointed lead plaintiff, and that the court thereafter appoint lead plaintiff based on the rebuttable presumption that the plaintiff with the largest alleged loss is the “most adequate plaintiff.” It also places important limitations on any award of damages to the named plaintiff and on the payment of attorneys’ fees and expenses.
The PSLRA’s stay of discovery during the pendency of a motion to dismiss, set forth in 15 U.S.C. § 77z-1(b), applies to “any private action” arising under the Securities Act, which on its face includes an action filed in state court. Despite this language, a plaintiff could argue that the discovery stay does not apply in state court, and there are surprisingly few cases addressing this issue. See Milano v. Auhll, 1996 WL 33398997, at *3 (Cal. Super. Ct. Oct. 2, 1996) (discovery stay applies to state court actions).
By filing in state court, a plaintiff also can avoid consolidation with any pending or later-filed federal actions, even where those federal actions assert identical claims against identical defendants. Avoiding consolidation may have important consequences for how attorneys’ fees are allocated if the case leads to a settlement.
And, as with any case, a plaintiff may feel, correctly or not, that it has a certain “home court” advantage in its local state court. There also appears to be a widespread perception, accurate or not, that state courts generally are less likely to grant a motion to dismiss on the pleadings.
Why Federal Courts Disagree on State Court Jurisdiction Over 1933 Act Class Actions:
Congress passed the PSLRA in 1995 to curb “perceived abuses of the class-action vehicle in litigation involving nationally traded securities.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81 (2006). The PSLRA, however, “had an unintended consequence: It prompted at least some members of the plaintiffs’ bar to avoid the federal forum altogether.” Id. at 82. Plaintiffs were able to escape the PSLRA by filing in state court because, prior to SLUSA, the 1933 Act gave state courts concurrent jurisdiction and barred removal.
In passing SLUSA three years later, Congress stated that “the purpose of [SLUSA] is to prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State, rather than in Federal, court.” H.R. Conf. Rep. No. 105-803, at 13 (1998). SLUSA “makes Federal court the exclusive venue for most securities class action lawsuits.” Id.
Congress sought to accomplish this goal in two ways:
First, SLUSA required that securities class actions be filed in federal court. It amended the 1933 Act’s jurisdictional provision, divesting state courts of concurrent jurisdiction over class actions asserting 1933 Act claims. As a result, those actions are no longer subject to the 1933 Act’s removal bar, which is expressly limited to actions “brought in any State court of competent jurisdiction.” 15 U.S.C. § 77v(a).
Second, SLUSA required that securities class actions be filed under federal law. It precludes class actions asserting certain state law claims that mirror the elements of a 1933 Act claim, and provides that such actions may be removed to federal court, 15 U.S.C. § 77p(c) (“Section 77p(c)”).
After SLUSA, therefore, class actions asserting 1933 Act claims are removable under the general removal statute, 28 U.S.C. § 1441(a), and class actions asserting precluded state law claims are removable under Section 77p(c). Both parties and district courts have struggled to understand and apply this statutory scheme, mainly because they confuse these two separate bases for removal.
Most federal courts faced with motions to remand 1933 Act class actions have ignored SLUSA’s amendment to the jurisdictional provision and, instead, have considered only whether those actions were removable under Section 77p(c). That approach is erroneous because, as noted, Section 77p(c) governs only the removal of actions asserting precluded state claims and has no bearing on the removal of actions asserting federal claims. See Kircher v. Putnam Funds Trust, 547 U.S. 633, 643-44 (2006).
Those courts that do address SLUSA’s amendment to the jurisdictional provision have disagreed about its impact. SLUSA limited the 1933 Act’s broad grant of concurrent state court jurisdiction by inserting the phrase “except as provided in section 77p with respect to covered class actions.” 15 U.S.C. § 77v(a). The most straightforward reading of that amendment is that state courts no longer have jurisdiction over “covered class actions” asserting Securities Act claims. The reference to “section 77p” points readers to the lengthy definition of “covered class action” set forth in Section 77p(f). See Knox v. Agria Corp., 613 F. Supp. 2d 419, 423-24 (S.D.N.Y. 2009).
Some courts, however, have found that the reference to “section 77p” refers to Section 77p(c), which governs removal of actions asserting precludes state law claims. Because class actions asserting 1933 Act claims do not fall within that section, those courts conclude, state courts retain jurisdiction over such actions. The problem with that analysis is that it would render SLUSA’s jurisdictional amendment meaningless. A provision that deals exclusively with actions asserting state law claims, such as Section 77p(c), cannot limit jurisdiction over actions asserting 1933 Act claims. SLUSA’s jurisdictional amendment would be mere surplusage, as it would not carve out any category of actions asserting 1933 Act claims from concurrent state court jurisdiction.
That interpretation also directly contradicts SLUSA’s clearly stated purpose of ensuring that securities class actions are governed by the PSLRA. As one court put it: “[G]iven the intent of SLUSA, it just makes no sense to prohibit the removal of federal securities class actions to federal court. Such a prohibition would permit the sort of end run around the PSLRA that [SLUSA] attempted to stop.” Unschuld v. Tri-S Sec. Corp., 2007 WL 2729011, at *9 (N.D. Ga. Sept. 14, 2007)
Why Plaintiffs Have Enjoyed Greater Success in California Courts:
The absence of any Court of Appeals or Supreme Court authority addressing SLUSA’s effect on state court jurisdiction has allowed the disagreement among district courts to persist. There appears to be a common belief that orders granting remand of 1933 Act class actions may not be appealed. Only the Eleventh Circuit has so held, however, and other circuit courts might disagree. Williams v. AFC Enterprises Inc., 389 F.3d 1185, 1191 (11th Cir. 2004). Barring that, unifying appellate authority will come about only if a plaintiff appeals a denial of remand – which none have chosen to do as of yet.
Although the Courts of Appeals have not provided any binding authority, they have made statements on the issue in cases addressing related questions. These dicta have, to some degree, guided the decisions of district courts, resulting in jurisdictions that plaintiffs consider “friendly” and others that they avoid entirely.
The Second Circuit, for example, is the most popular venue for securities litigation, but plaintiffs do not appear to have filed a single 1933 Act class action in state court in New York since the Knox decision in 2009, which was adopted by another S.D.N.Y. court shortly thereafter. In re Fannie Mae 2008 Sec. Litig., 2009 WL 4067266, at *2 (S.D.N.Y. Nov. 24, 2009). The Knox court based its decision on its own analysis of the statutory scheme, but it also cited statements by the Second Circuit to the effect that SLUSA gave federal courts exclusive jurisdiction over securities class actions. Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 108 (2d Cir. 2001); Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116, 123 (2d Cir. 2003).
By contrast, nine of the twelve decisions on remand motions issued in the past five years have come from California federal courts, where plaintiffs have enjoyed considerable success in avoiding removal. The primary reason for this success is dicta from the Ninth Circuit’s decision in Luther v. Countrywide Home Loans Servicing LP, 533 F.3d 1031 (9th Cir. 2008). Since Luther, eight remand motions have been granted by California federal courts, and only one has been denied.
The defendants in Luther removed the case under the Class Action Fairness Act (“CAFA”). Both parties agreed that SLUSA did not allow the case to be removed because the securities at issue were not “covered securities,” i.e., securities traded on a national exchange. The question for the district court, and the Ninth Circuit on appeal, was whether the right to removal under CAFA trumped the bar to removal under the 1933 Act. The Ninth Circuit held that it did not. In coming to that conclusion, the court stated that the 1933 Act “strictly forbids the removal of cases brought in state court and asserting claims under the Act.” Id. at 1033. While it is true that the 1933 Act barred removal of the class action in Luther, the court’s statement is incorrect as to 1933 Act class actions involving “covered securities.” Nonetheless, virtually all of the California district courts granting remand since Luther have relied on that dicta.
Unless and until a federal appeals court squarely addresses SLUSA’s effect on state court jurisdiction and removal of 1933 Act class actions, one can expect current trends to continue. Plaintiffs will continue to file these actions primarily in California state courts, avoiding New York courts, and district courts will remain divided, as they have been for more than a decade.
About the Authors: Maeve O’Connor is a litigation partner at Debevoise & Plimpton LLP. Her practice focuses on complex civil litigation and regulatory inquiries. She has significant experience in defending securities litigation and in representing life insurance companies in a range of litigation and regulatory matters. Ms. O’Connor can be reached at (212) 909-6315 or at mloconnor@debevoise.com. Elliot Greenfield is a litigation associate at Debevoise & Plimpton LLP whose practice focuses on complex civil litigation. He has significant experience defending companies and officers and directors in securities class actions, shareholder derivative lawsuits, and merger and acquisition litigation. Mr. Greenfield can be reached at (212) 909-6772 or at egreenfield@debevoise.com.
[i] In an additional case, City of Birmingham Ret. & Relief Sys. v. MetLife, Inc., No. 2:12-CV-02626 (N.D. Ala.), the order of a magistrate judge granting remand was stayed pending de novo review by the district court judge. The authors represent MetLife, Inc. and other defendants in that case.
Tags: Concurrent Jurisdiction, Initial Public Offering Securities Litigation, IPO-related litigation, IPOs, Securities Act of 1933