Judge Paul Oetken of the Southern District of New York recently held that a proposed class action asserting claims under the Securities Act of 1933 was properly removed to federal court because the state court lacked jurisdiction. In re iDreamSky Tech. Ltd. Securities Litigation, No. 1:15-cv-02514, 2016 WL 299034 (S.D.N.Y. Jan. 25, 2016). In doing so, the court addressed an issue that has "split federal district courts."
The question is whether state courts retained jurisdiction (concurrent with federal courts) over class action Securities Act claims after the passage of the Securities Litigation Uniform Standards Act (SLUSA). State courts have historically had concurrent jurisdiction over private actions under the Securities Act (unlike under the Securities Exchange Act of 1934, which from its enactment granted exclusive jurisdiction to federal courts), but SLUSA created an exception to that jurisdiction by inserting the italicized language below into the Securities Act (Section 77v):
The district courts of the United States . . . shall have jurisdiction of offenses and violations under this subchapter . . . and, concurrent with State and Territorial courts, except as provided in section 77p of this title with respect to covered class actions, of all suits in equity and actions at law brought to enforce any liability or duty created by this subchapter [emphasis added].
Section 77p was created by SLUSA, and includes these three sections, among others:
77p(f)(2)(a) defines a "[c]overed class action" to include actions with at least 50 prospective class members, and in which questions of law or fact common to the class allegedly "predominate over any questions affecting only individual persons or members."
77p(c) provides that "[a]ny covered class action brought in any State court involving a covered security, as set forth in subsection (b), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b)."
77p(b) provides 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—(1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or (2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security."
In iDreamSky, the investor-plaintiff filed a purported class action under the Securities Act in New York state court, and the defendants removed to federal court. Thereafter, the plaintiffs moved to remand, citing the Securities Act's removal bar (contained in Section 77v), which prohibits the removal of cases arising under the Securities Act "and brought in any State court of competent jurisdiction."
Opposing the motion to remand, the defendants argued that SLUSA's amendment to the Securities Act's jurisdictional provision (granting concurrent jurisdiction to state courts "except as provided in section 77p of this title with respect to covered class action") was intended to divest state courts of jurisdiction over covered class actions brought under the Securities Act. Thus, after SLUSA, a "New York court is not a court of competent jurisdiction," and "the bar on removal does not apply." Although the plaintiff admitted that his case was a covered class action, he argued that SLUSA's reference to Section 77p was primarily intended to incorporate Sections 77p(b)–(c), which the plaintiff argued precluded only "certain state-law class actions."
Judge Oetken analyzed both arguments, and determined that the "[d]efendants have the better reading of the text." The court held that plaintiff's reliance on Section 77p(b)–(c) was misplaced: Under the plaintiff's reading, the Securities Act would "grant[] state courts jurisdiction over federal claims 'except' for certain state claims [emphasis added]. But state claims, of course, are not a subset of federal claims, excisable through an exception."
The court also determined that the defendants' reading was supported by the purpose of SLUSA, which was "to make 'federal court the exclusive venue for class actions alleging fraud in the sale of certain covered securities.'" The plaintiff's reading, in contrast, would "produce an odd result":
State-law class actions alleging securities fraud could be removed and dismissed. Federal-law securities class actions would encounter the PSLRA's procedural protections if filed in federal court. But federal-law securities class actions filed in state court would have to stay in state court and proceed without the PSLRA's protections. Taken together, the PSLRA and SLUSA would encourage plaintiffs to litigate federal securities class actions in state court, with lessened procedural protections, and they would prohibit defendants from removing such cases to federal court.
Likewise, Judge Oetken held that SLUSA's legislative history supported the defendants' reading. For example, the court cited a conference report that "explains that SLUSA 'bars from State court . . . actions brought on behalf of more than 50 persons, actions brought on behalf of one or more unnamed parties, and so-called 'mass actions.'"
Although SLUSA became law in 1998, courts are split as to its effect on state court class actions advancing claims under the Securities Act. Judge Oetken's analysis in iDreamSky reaffirms the approach adopted by district courts in the S.D.N.Y., permitting removal of such actions to federal court. On the other hand, recent decisions from the California district courts (although not unanimous) generally favor remand, and some state courts addressing the issue have ruled in favor of maintaining jurisdiction. Given the S.D.N.Y.'s deep experience applying the federal securities laws, its most recent decision in iDreamSky may be influential among other courts confronting the issue, and could result in renewed analysis within jurisdictions, like California, where courts have remanded Securities Act cases.
An interesting twist could come from the state courts, if one determines that it lacks jurisdiction to hear class action Securities Act claims. A case to watch is Beaver County Emps. Ret. Fund v. Cyan, Inc., No. 14 538355 (Cal. Super. Ct.), where the defendants in a state court action moved for judgment on the pleadings on the jurisdictional issue. The trial court denied that motion, and the defendants have filed a petition for review in the California Supreme Court (Case No. S231299).