Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, March 20, 2018

Justices make sense of ‘gibberish,’ state court can hear Securities Act claim

By Mark S. Nelson, J.D.

The Supreme Court unanimously held that the Securities Litigation Uniform Standards Act did not oust state courts from exercising jurisdiction over claims alleging only violations of the Securities Act of 1933 and that state court defendants in such cases are not entitled to seek removal to federal court. In so holding, the justices have attempted to make sense of provisions within SLUSA that Justice Alito had called "gibberish" during oral argument and resolved one of the lingering questions about the reach of SLUSA, which Congress had enacted to bar plaintiffs from end-running the substantive and procedural barriers raised by the Private Securities Litigation Reform Act, itself enacted to prevent abusive practices associated with securities class actions (Cyan, Inc. v. Beaver County Employees’ Retirement Fund, March 20, 2018, Kagan, E.).

Beaver County Employees’ Retirement Fund had sued Cyan, Inc. in California state court alleging only that Cyan’s offering documents violated the Securities Act. Despite the Securities Act’s long-standing concurrent jurisdictional scheme, Cyan asked the California court to dismiss the case under the company’s broad interpretation of SLUSA. The trial court declined to dismiss the case and the California appellate courts declined to review that decision, primarily on the authority of the California Court of Appeals decision in Luther v. Countrywide, which held that SLUSA did not bar a covered class action (not involving a covered security) and alleging only Securities Act claims. The Cyan case is undoubtedly destined for federal courts casebooks discussing how Congress allocates federal and state court jurisdiction.

The "except" clauses. SLUSA re-worked the Securities Act in two ways: it amended Section 16 to preclude certain state law claims and it added two "except clauses" to Section 22(a). The separate amendments must be read together. As a result, the question for the court was whether either of the except clauses operated as a limiting rule on state court jurisdiction. One of the except clauses, the court said, pointed to the entirety of Section 16 and functioned to resolve a conflict between Section 22(a) and Section 16 in favor of Section 16. But this conclusion does not deprive state courts of jurisdiction over Securities Act claims.

Cyan had argued for broad federal preclusion of state courts under SLUSA, a view the justices balked at. Specifically, the court rejected Cyan’s argument that the except clause should be read to point to Section 16’s definition of "covered class action," which applies to actions for damages on behalf of more than 50 plaintiffs. The court reasoned that Section 22(a) refers to the entirety of Section 16 and not the latter section’s subparts. Given that more than 30 securities law provisions use the phrase "except as provided," the court found it odd that Congress would have used similar language in SLUSA to point to a definitional term when it could have used language akin to what is contained in the Exchange Act to oust state courts. Moreover, the justices said Cyan’s argument overlooked Congress’s use of a pinpoint cross-reference in one of the except clauses (i.e., to Section 16(c), a rule, not just a definition).

The court also concluded that Cyan misconstrued the federal concerns expressed in SLUSA. Here, the court said Cyan’s argument could be understood to apply to both "covered" and "uncovered" securities, but that Congress was not worried about uncovered securities because they are not listed on national stock exchanges. The court further suggested that Cyan was asking the court to accord too much weight to "conforming amendment[s]" that were not intended to achieve "radical" changes in the law. Said the court, citing an earlier case, "Congress does not hide elephants in mouseholes."

Next, the court rejected Cyan’s assertions about SLUSA’s legislative purpose and goals. Cyan had argued that SLUSA could not achieve its purposes if Securities Act class actions were brought in state courts where the procedural rules are at odds with those contained in the PSLRA, for which SLUSA was enacted to give additional support. But according to the justices, SLUSA’s stated goals do not necessarily contemplate ousting state courts from hearing Securities Act claims. Although the justices conceded they cannot intuit why Congress did not preclude all Securities Act claims in state court (the court suggested the Securities Act’s history of concurrent jurisdiction), they also said the court was loath to re-write a "legislative choice" regarding SLUSA in "a most improbably way" for the sake of legislative purity. The court began this section of the opinion by summing up its view: "Even assuming clear text can ever give way to purpose, Cyan would need some monster arguments on this score to create doubts about SLUSA’s meaning."

As for one last "indubitable puzzle," the justices declined to draft their own legislative language, despite the many remaining questions about why Congress wrote SLUSA as it did. Cyan had again asked the court to look at the definition of "covered class action," while Beaver County had asked the justices to mull the status of "mixed" state law and Securities Act claims. The court expressed doubt about whether Congress had considered the mixed case scenario, but the court also suggested that Congress may have included the except clause out of a "hypervigilant" attempt to close another possible mode of bypassing SLUSA and the PSLRA.

The SG’s "halfway-house". The Solicitor General, arguing as amicus curiae, told the justices for the first time at oral argument that the case could be resolved in favor of what the government saw as SLUSA’s purpose: to bring Securities Act cases into federal rather than state courts. In other words, a case alleging only Securities Act claims could be removed to federal court. To achieve this end, the government asked the justices to apply the rule of the last antecedent to only part of Section 16(c). But the court said the more natural understanding is to apply that rule of construction to the entire phrase at issue. The court supported its view with an explanation of how it had previously applied the rule of the last antecedent and with a string of hypotheticals. A final rebuff of the government’s argument involved looking at how SLUSA deals with removed cases: SLUSA’s goal here is to remove such cases to federal court for the purpose of dismissing or terminating them; by contrast, the government had asked the court to interpret SLUSA to allow removal for the purpose of continued litigation.

Moreover, the court suggested why it had decided to decide the government’s removal question. The court said that, although Cyan never sought removal, the question was related to the jurisdictional issues in the case and the parties, not just the government, had briefed and argued it. The court’s words also may be of use in another case, Lucia v. SEC, in which the government has likewise sought to raise an issue that was not dealt with by the courts below, albeit in another context, regarding the removal of administrative law judges.

The case is No. 15-1439.

Attorneys: Thomas C. Goldstein (Goldstein & Russell, PC) for Beaver County Employees Retirement Fund. Neal Kumar Katyal (Hogan Lovells US LLP) for Cyan, Inc.; Allon Kedem, Assistant to the Solicitor General, for the U.S., as amicus curiae.

Companies: Cyan, Inc.; Beaver County Employees Retirement Fund; Washington Legal Foundation; Public Citizen, Inc.; Los Angeles County Employees Retirement Association

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers FederalPreemption FedTracker Securities FraudManipulation IPOs SecuritiesOfferings SupremeCtNews

Back to Top

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.

A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.