Attorney: H. Adam Prussin
Pomerantz Monitor March/April 2018
Since the Securities Act of 1933 (the “Securities Act”) was first enacted, it has provided that state and federal courts have “concurrent” jurisdiction over cases brought under that Act. So Congress passed SLUSA, the Securities Litigation Uniform Standards Act of 1998, which prevents investors from bringing so-called “covered class actions” under state law which parallel misrepresentation claims under federal securities laws. Generally speaking, section 77p of SLUSA defines “covered class actions” as cases, brought on behalf of fifty or more investors in securities listed on a national exchange, that allege that defendants made misstatements or omissions in connection with initial public offerings, in violation of state law. The intent was to prevent investor plaintiffs from bringing state law cases alleging misrepresentations in securities transactions.
As we reported in the September/October 2017 edition of the Monitor, the Supreme Court had granted certiorari in a case called Cyan. That case poses the question of whether SLUSA deprives state courts of jurisdiction over class actions under the Securities Act.
The Cyan case concerns one of SLUSA’s “conforming” amendments, which added the following phrase to the Securities Act’s provision allowing state court concurrent jurisdiction over Securities Act claims: “except as provided in section 77p of this title with respect to covered class actions.” Since “covered class actions” are defined as actions raising state law claims, not securities laws claims, this “exception clause” seems to be a non sequitur.
So what does SLUSA’s “exception” clause mean? Defendants said that it means that class actions under the Securities Act can no longer be prosecuted in state courts. Plaintiffs said that section 77p does not actually say that and applies only when a complaint contains claims under both the Securities Act and state law. The government had a third position, which is that such cases could still be brought in state courts, but that defendants could then have them “removed” (transferred) to federal courts.
The Supreme Court has now spoken. In a unanimous opinion, it agreed with the plaintiffs, holding that Securities Act cases can still be brought in state courts, and cannot be removed to federal courts. According to the Court, section 77p “says nothing, and so does nothing, to deprive state courts of jurisdiction over class actions based on federal law. That means the background rule of §77v(a)— under which a state court may hear the Investors’ 1933 Act suit – continues to govern.”
What, then, does the “exception clause” actually remove from state court jurisdiction? In our article last fall, we noted that “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.” As it turns out, the Court could not figure that out either.
The opinion states that the investors might be right that the “exception” clause applies only when the case involves both state law and Securities Act claims. Or it might be there for some other reason. It concluded that “[i]n the end, the uncertainty surrounding Congress’s reasons for drafting that clause does not matter. Nor does the possibility that the risk Congress addressed (whether specific or inchoate) did not exist. Because irrespective of those points, we have no sound basis for giving the “except” clause a broader reading than its language can bear.”
In cases involving statutory interpretation the Supreme Court has, in recent years, been relying heavily on the “plain meaning” of statutory language, a doctrine that presupposes that Congress, in passing statutes, means exactly what it says and says exactly what it means. Sometimes, though, Congress uses language that makes no sense. That seems to be what happened here.
Defendants in securities cases often believe that state courts will be more favorably disposed towards investor plaintiffs than the federal courts will be. If that is true, the Supreme Court’s decision in Cyan will preserve this tactical advantage for investors.