Federal securities statutes say what they say

This week, a unanimous U.S. Supreme Court ruled that the Securities Litigation Uniform Standards Act grants state courts the jurisdiction to hear class action claims under the Securities Act of 1933. Cyan v. Beaver County Employees Retirement Fund, 2018 DJDAR 2511 (March 20, 2018). For the plaintiffs' bar, it is an unequivocal win that allows the bar to shop for more favorable forums. For companies and defense lawyers in California, it means that they will increasingly face class actions filed in California state court, a forum of choice for the plaintiffs' bar because of the laxer procedural rules and lower likelihood of dismissal. Courts in California had already ruled that plaintiffs could choose their forum, federal or state. And the Supreme Court's affirmance of that approach means the defense bar will need to find some other bases to limit state court filings -- all while such filings likely increase.

The Road to Cyan

The Cyan ruling reflects an ongoing struggle, involving the defense bar and Congress, to determine (and limit) where securities class actions can be filed. To explain, we begin, like the Cyan opinion, with a brief review of the infrastructure of our federal securities laws.

In the wake of the Great Depression, Congress passed two statutes: the Securities Act of 1933 and the Securities Exchange Act of 1934. Together, these statutes were designed to promote honest practices in the issuance and trading of public securities. The 1933 act created disclosure requirements in initial securities offerings (such as IPOs); the 1934 act regulated conduct in all subsequent trading of securities that takes place after initial offerings.

But the jurisdictional provisions in the 1933 and 1934 acts for bringing claims to enforce their various provisions operate very differently. The 1933 act allowed plaintiffs to bring actions in either federal or state courts and prohibited the removal of cases to federal court. This means that the plaintiff can choose the forum. By contrast, the 1934 act required that all suits be brought exclusively in federal court.

In 1995, Congress attempted to "stem perceived abuses of the class action vehicle" in securities litigation by enacting the Private Securities Litigation Reform Act, which amended both the 1933 and 1934 acts. The PLSRA included procedural mechanisms expressly designed to make it more difficult for plaintiffs to bring securities class actions. But these procedural mechanisms applied only in federal court. Predictably, plaintiffs increasingly chose to bring their 1933 act claims in state court to avoid the additional federal procedural requirements.

In 1998, Congress tried again, passing the Securities Litigation Uniform Standards Act. To respond to the increased use of state forums, SLUSA created the morass of jurisdictional provisions that were at issue in this case.

The court below (the California Court of Appeal) held that, even after SLUSA, state courts retained jurisdiction to hear class actions bringing exclusively federal claims under the 1933 act. Appellants argued that this was incorrect, and the jurisdictional provisions in SLUSA stripped state courts of the concurrent jurisdiction they were given in the 1933 act. Appellants invoked the purpose of SLUSA, which was enacted to limit plaintiff's ability to use state forums to avoid more rigid federal-court procedures.

The Supreme Court's Ruling

The Supreme Court held that, by its terms, SLUSA strips state courts of jurisdiction over class actions that bring state law claims. See Section 77p(b) (referring only to class actions "based upon the statutory or common law of any State or subdivision thereof"). But the statute says nothing about stripping state courts of their jurisdiction, granted by the 1933 act, to adjudicate class actions based on federal law claims. As the court noted, "If Congress had wanted to deprive state courts of jurisdiction over 1933 Act class actions, it had an easy way to do so: just insert into §77p an exclusive federal jurisdiction provision (like the 1934 Act's) for such suits."

The court also held that SLUSA still does not permit defendants to remove to federal court class actions alleging only claims under the 1933 act. In affirming the California Court of Appeal, the court said: "SLUSA did nothing to strip state courts of their longstanding jurisdiction to adjudicate class actions alleging only 1933 Act violations. Neither did SLUSA authorize removing such suits from state to federal court."

The Statutes "Say What They Say"

In the past month, the Supreme Court has decided two securities cases that present questions of interpretation of federal securities statutes. And in those cases, both unanimous decisions, the court reaffirmed the threshold importance of the plain language of the relevant securities statutes. Last month, the court decided Digital Realty Trust Co. v. Somers. See "The Impact of Digital Realty," Daily Journal (Feb. 23, 2018). In that case, the court unanimously followed the plain text of the Dodd-Frank statute, holding that an individual only qualifies as a "whistleblower" if that individual reports conduct to the SEC (over arguments relating to the structure and purpose of the statute that reporting to a company internally should suffice). As Justice Elena Kagan commented at oral argument, the statute "says what it says." And in her opinion in this case, Justice Kagan continued that theme, writing that class actions bringing federal law claims under the 1933 act can still be brought in state court -- SLUSA, too, "says what it says."