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By: Theodore C. Peters
For years, litigants have battled over whether and to what extent state courts have concurrent jurisdiction over securities class actions brought under the Securities Act of 1933. The 1933 Act was enacted during the Great Depression following the stock market crash of 1929. The Act requires that, absent an exclusion, every offer or sale of securities that uses the means and instrumentalities of interstate commerce to be registered with the SEC. Prior to the Act, securities regulation was primarily governed by state laws, also known as blue sky laws. Such laws, however, were left intact after the passing of the 1933 Act, paving the way for continued state court jurisdiction over many types of securities claims.
In 1988, Congress enacted the Securities Litigation Uniform Standards Act (“SLUSA”) which provided that “[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging – (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security, or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.” Additionally, SLUSA provided that all “covered class actions” (defined as a suit brought on behalf of more than 50 plaintiffs) filed in state courts could be removed to federal court. The U.S. Supreme Court ruled in 2006 that SLUSA operated to preempt certain state law claims arising from the fraud-induced purchase or sale of securities. Merrill Lynch v. Dabil, 547 U.S. 71 (2006).
On March 20, 2018, in the case of Cyan v. Beaver County Employees Retirement Fund, a case arising from a California Court of Appeal, the U.S. Supreme Court unanimously concluded that while SLUSA may limit state court jurisdiction over certain securities class actions based on state law, SLUSA “does nothing to deprive state courts of jurisdiction over class actions based on federal law.” (Opinion at pg. 3) Cyan, a former telecommunications company, urged the court to decide that SLUSA preempted securities class actions, and that the statute should be interpreted as mandating that federal courts have exclusive jurisdiction of such actions. Not only did the high court find that SLUSA does not strip state courts of jurisdiction over class actions alleging violations of only the 1993 Act, it also concluded that SLUSA does not provide defendants with a right to remove such action from state to federal court.
If you have questions or would like more information, please contact Ted Peters at [email protected].