As the authors note, the decision has important implications for companies and their D&O insurers, as well as for claims going forward.
I would like to thank the authors for allowing me to publish their article as a guest post on this site.
In a unanimous decision authored by Justice Kagan, the Supreme Court held that state courts have jurisdiction to adjudicate class actions under the 1933 Act that do not concern covered securities. The Supreme Court ruled that this was the more “straightforward” interpretation of the statutory text of the concurrent jurisdiction provision under the 1933 Act. Specifically, the Supreme Court noted that SLUSA framed its amendments to that provision as creating an exception to the general rule that state courts have concurrent jurisdiction.
According to the Supreme Court in The Reform Act’s consolidation and lead-plaintiff appointment process was a centerpiece of the legislation.As noted above, Congress was deeply concerned that “professional plaintiffs” with no real stake in the company “do not adequately represent other shareholders,” and have little interest in exercising oversight over class counsel. Congress addressed this problem by mandating that courts “shall appoint the most adequate plaintiff” as lead plaintiff over all consolidated actions. This protects absent class members whose interests are aligned with the lead plaintiff’s. As a complement to the heightened pleading standards, the Reform Act also amended both the 1933 Act and the 1934 Act to establish an automatic stay of discovery while any motion to dismiss is pending. The automatic stay enables defendants to seek dismissal of unsupported claims before having to face “fishing expeditions” or exorbitant discovery costs. Prior to the Reform Act, securities plaintiffs were able to file lawsuits without even knowing the basis for their own claims, and could “search through all of the company’s documents and take endless depositions” in an effort to find one. The high costs associated with responding to such invasive discovery often coerce defendants into settling even frivolous lawsuits.By disallowing these abusive discovery practices, the Reform Act’s discovery stay essentially requires plaintiffs to have a valid basis for their claims Prior to the Reform Act, state court litigation of class actions involving nationally traded securities had been rare.The key provisions of the 1933 Act are Section 11, which establishes that any purchaser of a security may bring a private action for damages against the issuer if the registration statement is false or misleading, and Section 12(a)(2), which similarly establishes a private right of action against any person who offers or sells a security through a prospectus or oral communication that is false or misleading. The key provision of the 1934 Act is Section 10(b), which, along with Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder, broadly prohibits deception, misrepresentation, and fraud “in connection with the purchase or sale of any security” based on any public corporate statement. Unlike with Section 11 or 12(a)(2) cases under the 1933 Act, the 1934 Act established that federal courts have exclusive jurisdiction over cases brought under Section 10(b). that Section 10(b) contains an implied right of action. But the Court repeatedly declined to expand the scope of the implied private right of action – which it described as “a judicial oak which has grown from little more than a legislative acorn” – largely due to policy concerns related to the danger that Rule 10b-5 will be used as a vehicle for particularly vexatious litigation. Throughout its securities jurisprudence, the Court has long balanced the goal of preventing corporate fraud with the need to protect against “open-ended litigation [that] would itself be an invitation to fraud.” Maintaining this balance is especially important because it is shareholders who “ultimately bear the burden” of meritless litigation. By the 1990s, private securities litigation had gotten out of control.
The class action mechanism had enabled plaintiffs’ lawyers to file abusive “strike suits” targeting deep-pocketed defendants, often on behalf of “professional plaintiffs” with only nominal holdings in the company. Congress found that these abuses resulted in extortionate settlements, chilled discussion of issuers’ future prospects, and deterred qualified individuals from serving on boards of directors, injuring the “investing public and the entire U. economy[.]” Shareholders bear the brunt of these abuses; “[i]nvestors always are the ultimate losers when extortionate ‘settlements’ are extracted from issuers.” To protect the interests of shareholders and the economy as a whole, and to restore balance to the system to enable it to function fairly and efficiently once again, the Reform Act implemented procedural reforms designed to discourage plaintiffs from filing abusive cases and encourage defendants to fight them.The consequences of this are felt not only in the state court 1933 Act case, but also in any simultaneously proceeding federal court Section 10(b) case.Because Section 10(b) claims must be filed in federal court, the “most adequate plaintiff” will have control over those proceedings – including, for instance, deciding whether to settle the case under certain terms.Questions of causation will be common to both actions as well, since the alleged misrepresentations must be causally related to what made the stock price drop.Yet these related claims can be split apart and litigated in different courts, with different pleading burdens, lead-plaintiff rules, discovery practices, and case schedules. In addition to increasing the burdens of securities litigation defense, bifurcation deprives defendants of the protections set out under the Private Securities Litigation Reform Act of 1995 (“Reform Act”).For instance, plaintiffs alleging false or misleading corporate statements in the context of an initial public offering (“IPO”) almost invariably challenge these same statements under both Section 11 and Section 10(b).