Today, my colleague Kristin Beneski and I were honored to file a US Supreme Court amicus brief on behalf of the Washington Legal Foundation (“WLF”) in Cyan, Inc. v. Beaver County Employees Retirement Fund.
In Cyan, the Supreme Court will decide whether state courts have jurisdiction over securities class actions alleging violations of the Securities Act of 1933, or if federal courts have exclusive jurisdiction.
In support of Cyan’s position that federal courts have exclusive jurisdiction, WLF argues that Congress intended that all securities class actions, both under Sections 11 and 12 of the 1933 Act as well as under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, be brought in federal court and decided under federal substantive and procedural law. WLF agrees with the defendants’ interpretation of the statute at issue, the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). WLF then examines the entire statutory and judicial framework within which SLUSA operates—including the Private Securities Litigation Reform Act of 1995 (“Reform Act”), which SLUSA sought to reinforce—to argue that allowing state-court 1933 Act class actions would undermine the carefully balanced securities litigation system that Congress and the Court created and have sought to maintain.
Here is WLF’s Summary of Argument:
“WLF agrees with the textual arguments advanced by Petitioners in this case. SLUSA’s full context reinforces them. SLUSA is one piece of a multipart and interconnected regulatory scheme governing securities litigation. WLF submits this brief to clarify the meaning of SLUSA by examining the broader legislative framework within which the statute was designed to operate.
SLUSA was designed to prevent plaintiffs from circumventing the Reform Act, which in turn was designed to discourage the filing of abusive, unmeritorious class actions resulting in extortionate settlements—to the ultimate detriment of shareholders and the economy as a whole. When viewed in that context, it is overwhelmingly clear that SLUSA meant to establish exclusive federal-court jurisdiction over virtually all securities class actions, and thereby maintain a system in which related claims are consolidated and heard in the same federal forum at the same time, governed by the consistent standards established by the Reform Act.
The proper interpretation of SLUSA becomes even more clear upon examining the practical consequences of upholding Countrywide. The same class of plaintiffs commonly asserts closely related claims for violation of Sections 11 or 12(a)(2) (under the 1933 Act) and Section 10(b) (under the 1934 Act). These claims often challenge the very same allegedly false or misleading statements, and by definition involve identical class-wide causation issues. The Reform Act and SLUSA envision that these intimately related claims will be consolidated and heard in the same federal forum, and would be subject to the “uniform standards” applied by all federal courts.
But under the interpretation of SLUSA adopted by Countrywide, plaintiffs can decide to split the Section 11 and 12(a)(2) claims from the 10(b) claims, filing the former in state court while the latter proceed in federal court. Because Countrywide holds that a removal bar applies to securities class actions filed in state court, the 1933 Act claims cannot be consolidated with related 10(b) claims and must proceed in different courts, heard by different judges, subject to different procedural standards and pleading rules. This results in wasted judicial resources, inconsistent results, and undue burdens on parties that must defend themselves on multiple fronts in already-expensive litigation. More importantly, concurrent jurisdiction is antithetical to SLUSA’s stated purpose of preventing circumvention of the Reform Act and establishing a system of “uniform standards” governing class actions involving nationally traded securities.
Concurrent jurisdiction of 1933 Act claims would have broad ramifications for 1934 Act claims as well. Under Countrywide’s interpretation of SLUSA, not only would the Reform Act’s protections be inapplicable to Section 11 and 12(a)(2) claims filed in state courts, but its consolidation and lead-plaintiff appointment procedure, automatic discovery stay, and heightened pleading standards would also be seriously undermined as to any related Section 10(b) claims proceeding simultaneously in federal court. For instance, the automatic stay of discovery in a Section 10(b) case becomes a weaker shield against abusive lawsuits when discovery can proceed full bore in a closely related state-court case. Likewise, plaintiffs who file their Section 11 and 12(a)(2) claims in state court do not have to hand control of the lawsuit to the lead plaintiff who is the “most adequate” class representative, and can more easily avoid the requirement of pleading claims that sound in fraud with particularity.
Thus, interpreting SLUSA to allow for concurrent jurisdiction of 1933 Act claims would undermine the Reform Act in a far-reaching way that Congress could not have intended. In practical effect, allowing for concurrent jurisdiction would expand the Rule 10b–5 implied right of action beyond the limited scope Congress understood it to have. See Stoneridge Inv. Partners, LLC v. Scientific–Atlanta, 552 U.S. 148, 165–66 (2008) (“[W]hen [the Reform Act] was enacted, Congress accepted the *** private cause of action as then defined but chose to extend it no further.”). This would be a drastic shift. Absent a clear directive otherwise, this Court should decline to upset the carefully balanced securities litigation framework that Congress created and sought to reinforce by enacting SLUSA.”
You can read the entire brief here.
In addition to the WLF lawyers with whom we worked, we would like to thank our colleagues Heidi Bradley, Aaron Brecher, Genevieve York-Erwin, and Taylor Washburn for their help with the brief. We would also like to thank John McCarrick of White and Williams for his helpful strategic contributions.