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Purpose--The purpose of this paper is to survey the landscape of recent federal securities class actions filed in state court and explore arguments for removal of those cases to federal courts under the Securities Litigation Reform Act (SLUSA) or the Class Action Fairness Act (CAFA).
Design/methodology/approach--The paper discusses: US Congressional legislation designed to bring the bulk of securities class actions back into federal courts, including the Private Securities Litigation Reform Act (PSLRA) and SL USA; CAFA, another law designed to redirect class action litigation away from state courts; recent cases that have tested the limits of SLUSA and CAFA for removal from state to federal courts; and arguments for removal under SLUSA and CAFA.
Findings--Legislative history for both SL USA and CAFA suggests that these statutes should be read as evidence of Congressional intent to return most securities class actions to federal court. Nonetheless, plaintiffs have continued to devise legal schemes to litigate class actions in what they perceive to be friendlier forums in state courts.
Originality/value--Although the arguments discussed in this paper are not exhaustive, they are a starting point for defendants seeking removal once litigation arises.
Keywords United States of America, Supreme courts, Financial control
Paper type Technical paper
In recent years, Congress has passed legislation designed to bring the bulk of securities class actions back to federal court. After the passage of the Private Securities Litigation Reform Act (PSLRA)  in 1995, plaintiffs sought refuge from the new law's more onerous provisions, such as limitations on damages and attorneys' fees, heightened pleading standards, and an automatic stay of discovery. They styled their claims as state-law fraud claims and brought them in state court, thereby avoiding PSLRA's strictures. One court noted that the number of securities case filings in California state courts "increased five-fold in the wake of PSLRA's passage" .
In response , Congress passed the Securities Litigation Reform Act (SLUSA), which, in relevant part, preempts state-law class action claims brought by investors who allege fraud in the manipulation of stock prices. It also explicitly allows for the removal to federal court of any action covered by the preemption provision. Plaintiffs' state-law fraud claims were effectively transformed into questions of federal law, allowing the defendants to remove the lawsuits to federal court, where PSLRA's standards apply.
The passage of SLUSA, however, did not end the jockeying for a favorable forum. Plaintiffs responded by asserting state-law claims that they believed fell outside SLUSA's preclusion provision. Plaintiffs have achieved varying degrees of success. For example, by decreasing the size of the putative class from 50 to 39, one set of plaintiffs was able to skirt removal, despite the defendants' protestations that the plaintiffs manipulated the class solely to escape federal jurisdiction . On the other hand, a number of courts have held that it is appropriate to "look behind" the complaint to determine whether state-law claims for breach of contract or breach of fiduciary duty, for example, merely disguise allegations of fraud or misrepresentation that should be subject to SLUSA's preclusion provision. And in 2006 the Supreme Court of the United States dealt a significant blow to the plaintiffs' bar, when it rejected the argument that mere "holders" (as opposed to purchasers and sellers) were not subject to SLUSA and endorsed an expansive view of the scope of the preclusion provision.
In the meantime, Congress passed yet another law designed to redirect class action litigation away from state court. The Class Action Fairness Act (CAFA) expands jurisdiction based on diversity of citizenship for certain class actions. Under CAFA, only one plaintiff need be diverse from one defendant, and the aggregate amount in controversy must be at least $5 million. CAFA provides another outlet for defendants seeking to litigate in federal court, but the law includes exceptions that may limit its usefulness to defendants in securities class actions.
In light of SLUSA and CAFA, a new genre of securities class-action litigation has emerged. This new breed of securities-fraud case embodies plaintiffs' dual desires to:
1. Articulate claims that cannot be preempted by SLUSA and removed on that basis.
2. Escape the removal provisions of CAFA.
Instead of risking preclusion under SLUSA, putative classes have brought their claims in state court under federal law. By invoking federal law, the plaintiffs intend to avoid SLUSA's removal provision, which, they say, allows removal only of state-law fraud claims pertaining to securities transactions. The plaintiffs further argue that their claims of violations of federal securities law are covered by CAFA's "securities exception" and are not removable under that statute.
This strategy has been used in the context of litigation concerning so-called "subprime" securities, including securities not traded on national exchanges, n such cases, plaintiffs have filed federal claims under Section 11 of the Securities Act of 1933 ("1933 Act") in state court and have forgone adding a claim under Section 10(b) of the Securities and Exchange Act of 1934 to the case. In so doing, plaintiffs apparently seek to obtain several strategic advantages. First, because the action contains no claim under Section 10(b), the heightened pleading requirements applicable to such claims would not apply Second, plaintiffs take the position that such a pure Section 11 claim is not removable to federal court based on the 1933 Act's original proscription of such removal and that neither SLUSA nor CAFA would allow such removal. Third the combination of these factors means that PSLRA's stay of discovery and Fed. R. Civ. R 9(b)'s requirement of pleading fraud with particularity also would not apply to the case. Fourth, some plaintiffs' counsel believe that certain state courts provide a friendlier forum for plaintiffs in any event.
It might seem that plaintiffs have again devised a way to litigate securities class actions in what is perceived to be the more friendly confines of state court. But defendants have not been easily dissuaded from attempting removal all the same. In a small number of recent cases brought under Section 11 in state …