Supreme Court preserves state court securities class actions

A few securities litigation defendants hoping to avoid fighting class actions in state court saw those dreams dashed after the U.S. Supreme Court on Tuesday clarified confusing language in a 1998 federal law.

The justices ruled that specific securities class actions can continue to be filed in state court even though the act involves federal law.

Securities plaintiffs prefer to file in state court when possible because the Securities Litigation Uniform Standards Act of 1998 (known as SLUSA) added additional procedural rules that only apply to federal courts.

The case involves Cyan Inc., a telecommunications company, which argued a state court class action against it should be dismissed for lack of subject matter jurisdiction. The California appellate courts denied to review the case, but the U.S. Supreme Court decided to take it up.

The 1998 law was meant to clarify aspects of the Securities Exchange Acts of 1933 and 1934, but poor writing created a new mess.

Several justices referred to various aspects of the law's written language as "gibberish" during oral arguments. Cyan Inc. et al. v. Beaver County Employees Retirement Fund et al., 15-1439.

Justice Elena Kagan reasoned, in a unanimous opinion, that the law must have been written in a convoluted manner to convey something additional, because it would have been much simpler to write that no securities litigation can occur in state court under any circumstances.

"Cyan wants to cherry pick from the material covered by the statutory cross-reference," she wrote. "Cyan relies on an indubitable puzzle."

Kagan added that the company was attempting to read a narrow section of the language of the law in a different manner than the rest of the statute. She said the company failed to provide a coherent argument for why that one section should be read differently than the rest.

"Nor has Cyan pointed to a single such example from the whole rest of the U.S. Code," she wrote. "And the Congress enacting SLUSA had no reason to attempt that peculiar maneuver for the first time."

Darren J. Robbins, a partner with Robbins Geller Rudman & Dowd LLP who represented the class bringing securities litigation, said Cyan was in search of a solution to a problem that doesn't actually exist. Robbins said Cyan painted an alarmist picture of state courts overrun with securities class actions, which doesn't match reality.

"There's probably been 50 of these cases in the entire country in state court in the last 10 years," Robbins said.

This new ruling only applies to securities cases involving initial public offerings, covered under the 1933 law. All other forms of securities litigation are handled under the 1934 law, which can only be enforced in federal court.

Neal Katyal of Hogan Lovells US LLP, who argued on behalf of Cyan, did not respond to a request for comment.