Attorney: H. Adam Prussin
Pomerantz Monitor September/October 2017
The Exchange Act provides that federal courts have “exclusive” federal jurisdiction over all claims brought under the act, meaning that those claims, including anti-fraud claims, cannot be brought in state courts. In contrast, the Securities Act provides for “concurrent jurisdiction” of claims brought under that act, meaning that such claims, including claims relating to initial public offerings, can be brought in either federal or state courts. At least, that’s what we thought until now.
At the end of its last term, in a case called Cyan, the Supreme Court granted cert in a case involving SLUSA, the “Securities Law Uniform Standards Act.” That law was primarily designed to limit investors’ ability to bring class action claims under state law concerning securities transactions (so-called “covered class actions”) in state courts, rather than under federal securities laws in federal courts. To accomplish this goal, SLUSA requires that “covered class actions,” including state law claims involving misstatements in securities transactions, must be litigated in federal court under federal law. The act was passed in response to complaints that securities plaintiffs were recasting federal securities laws claims as state law claims in order to avoid the enhanced pleading requirements for federal claims imposed by the Private Securities Litigation Reform Act (“PSLRA”). The practical effect is that it is no longer possible to bring “covered class actions” under state law in either state or federal court; the claims must be made under the federal securities laws, in federal court, subject to the strictures of the PSLRA – or not at all.
But defendants have also been trying, with mixed success, to use SLUSA as a weapon to keep federal Securities Act claims out of state court as well; some companies and other securities defendants view state courts (so-called “judicial hellholes”) as overly sympathetic to securities laws claims.
The hook defendants have been using to advance this argument is a provision in SLUSA that amends section 22 of the Securities Act to provide that federal jurisdiction over Securities Act claims shall be “concurrent with State and Territorial courts, except as provided in section 77p of this title with respect to covered class actions.”
Although there have been no federal appeals courts rulings on what this exception means, there have been dozens of conflicting rulings by federal district courts and state courts, most notably in the two states where most securities class action litigation is conducted: California and New York. Courts in New York tend to read the exception to mean that state courts no longer have jurisdiction over covered class actions alleging violations of the Securities Act. Others, such as a California state appellate court in Luther v. Countrywide Financial, read the exemption language not as creating a new exemption for all covered class actions, but simply as acknowledging the exceptions to state court jurisdiction that are actually established in section 77p of SLUSA. The Countrywide court explained that
Section 77p does not say that there is an exception to concurrent jurisdiction for all covered class actions. Nor does it create its exception by referring to the definition of covered class actions in section 77p(f)(2). Instead, it refers to section 77p without limitation, and creates an exception to concurrent jurisdiction only as provided in section 77p “with respect to covered class actions.
The Countrywide court held that there was nothing in section 77p that eliminated state court jurisdiction over claims brought solely under the Securities Act, and that therefore SLUSA’s exception to concurrent jurisdiction did not apply in such cases. Yet, the exemption is codified in the jurisdictional provision of the Securities Act, so it must mean that concurrent jurisdiction does not exist for some claims under the Act. What those claims are is a puzzlement that only the Supreme Court can resolve.
It goes without saying that the drafting of this confusing exemption to state court jurisdiction was not among Congress’s finest hours. But given that the overriding purpose of SLUSA was to keep misrepresentation claims under state law out of state court, it would be anomalous if this provision were construed as a backhanded way to restrict jurisdiction over federal claims as well.