SCOTUS Case To Clarify Use Of State Venue For Securities Cases

On behalf of Wolf Popper LLP

The Securities Act governs the issuance of stock and bonds by companies, such as IPOs, and prohibits, among other things, the company, as well as other designated persons, from making "untrue statement[s] of a material fact or omit[ing] a material fact required to be stated therein or necessary to make the statements therein not misleading." If a company violates this provision, then investors may sue for damages. (The Securities Act itself provided that cases could be brought in either state or federal court.)

The number of class actions that allege violations of the Securities Act filed in California state court increased from 5 in 2014 to 18 in 2016. Why the increase? According to some critics of filing these cases in state court, the reason is that only 6 percent of such cases filed in California state court are involuntarily dismissed, while the dismissal rate in U.S. federal courts is 31 percent. Therefore, the critics contend, state venues are more favorable to plaintiffs. (Plaintiffs contend that the uptick in 2016 was an isolated event and that the average number of such cases filed annually was only 6 and in the first half of 2017 there were only 4 such cases.)

Critics also contend that the federal securities laws require that these cases be brought in federal court, and filing these cases in state court is improper. On November 28, 2017, the Supreme Court will hear oral argument in Cyan, Inc. v. Beaver County Employees Retirement Fund, a case that will likely determine whether Securities Act class actions can be brought in state court.

A bit of history, how does securities law apply in these matters?

In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA). One of the reasons the PSLRA was enacted was that there was concern, founded or unfounded, that a large number of filed securities class actions were meritless and abusive. Among other things, the PSLRA increases the pleading and proof standards for securities class actions, requiring, among other things, specific allegations concerning falsity and a strong inference of intent.

Shortly after passage of the PSLRA, Congress noticed an increase in class actions concerning securities and alleging state law claims, instead of federal securities law claims, being filed in state courts. To combat this trend, Congress enacted the Securities Litigation Uniform Standards Act of 1998 (SLUSA). SLUSA prohibits state law class actions on behalf of more than 50 people alleging misrepresentations, omissions, or the use of manipulative or deceptive devices in connection with the purchase or sale of a securities traded nationally and listed on a regulated national exchange (i.e. the NYSE or NASDAQ). In sum, SLUSA prohibits state law class actions alleging claims identical to the federal securities laws. SLUSA also allows the removal, or transfer, of these cases from state court to federal court.

How does this apply to Cyan?

The plaintiffs in Cyan brought their case in California State Court, and alleged claims under the Securities Act. They claim that Cyan's IPO documents misrepresented Cyan's customer base and likely future sales. Once the truth was revealed, Cyan's stock price lost more than half its value. Defendants want the case dismissed, arguing that SLUSA and the Securities Act required the case to be brought in federal court. The plaintiff shareholders argue that neither SLUSA nor the Securities Act preclude state jurisdiction in their matter. They state that as long as the case does not involve "mixed cases that assert prohibited state law claims in connection with the purchase or sale of covered securities, combined with a Securities Act claim," state jurisdiction is allowed. Since their claim does not involve any of these issues, it can move forward in a state venue. The lower court agreed with and found in favor of the plaintiff shareholders.

Impact of the Supreme Court's decision?

The Supreme Court will most likely issue its decision by the end of June 2018. The holding will be significant for those with similar securities issues. A holding in favor of state venues is often one in favor of plaintiffs, while one opposed to state venues would often weigh in favor of defendants.

Beware Statutes Of Repose, They Can Sneak In And Cost You Your Case

By Patricia I. Avery and Joshua W. Ruthizer

Anyone who has watched law or crime television shows probably has heard of the term "statute of limitations," which protects a defendant from facing a lawsuit or prosecution based on old events. In civil litigation, a "statute of limitations" is the fixed time period that starts to run once the plaintiff can file a lawsuit, an event known as "accrual." "Accrual" typically occurs when the plaintiff is injured, or when the plaintiff discovers, or should have discovered, the injury. A statute of limitations is different from a "statute of repose," which imposes an absolute bar to a lawsuit after the expiration of a fixed time period. For example, in order to ensure fairness, a statute of limitations may sometimes be "tolled" (i.e. the court may "stop the clock from running"). A statute of repose, however, cannot be tolled. Indeed, a statute of repose may expire before an injury is even discovered.

The difference between these two concepts was recently explored by the U.S. Supreme Court in California Public Employees Retirement System v. ANZ Securities, Inc., 137 S. Ct. 2042, (June 26, 2017), which concerned litigation over the demise of Lehman Brothers. In 2007 and 2008, Lehman Brothers raised capital through a number of securities offerings, and the California Public Employees Retirement System ("CalPERS"), the largest pension fund in the United States, purchased securities in some of these offerings. In September 2008, Lehman Brothers filed for bankruptcy, and a class action was filed against the underwriters of the offerings for violating Section 11 of the Securities Act of 1933.

The Securities Act requires companies issuing stock or bonds to fully disclose information relevant to the securities offering in a registration statement filed with the U.S. Securities and Exchange Commission. Under Section 11 of the Securities Act, if the company or other designated individuals, including underwriters, make an "untrue statement of a material fact or omit [] a material fact required to be stated therein or necessary to make the statements therein not misleading," then investors may sue for damages.

Section 13 of the Securities Act includes a statute of limitations, requiring an action under Section 11 to be brought within one year after the discovery of the untrue statement or omission or when such untrue statement or omission should have been discovered. Section 13 also includes a statue of repose, which provides that "in no event shall any such action be brought . . . more than three years after the security [was sold]...."

The class action at issue here was filed within one year of the discovery of the untrue statements and omissions and within the three year statute of repose. In February 2011, more than three years after the relevant securities offerings and while the Lehman class action was pending, CalPERS filed an individual lawsuit against the underwriters, raising claims nearly identical to those alleged in the class action. A settlement of the class action was later reached, and CalPERS opted out of participation in the settlement, seeking to pursue its own individual claims against the underwriters.

The underwriters moved to dismiss the CalPERS suit, claiming it was time-barred under Section 13's three year statute of repose. CalPERS opposed the motion, observing that a 40-year old Supreme Court precedent, American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), held that the filing of a class action tolls the statute of limitations on behalf of all members of a class. The District Court for the Southern District of New York and the Second Circuit Court of Appeals agreed with the underwriters and dismissed the complaint, finding that the CalPERS suit was untimely, and that American Pipe tolling was inapplicable to Section 13's statue of repose.

The Supreme Court affirmed, pointing to the policy differences between statutes of limitations and statutes of repose. While statutes of limitations are designed to encourage plaintiffs to diligently pursue their claims (and therefore begin to run when the injury occurred or was discovered), statues of repose are designed to completely shield a defendant from liability after a certain period of time set by lawmakers. Because of this legislative judgment, the Court held, a statute of repose cannot be tolled unless the legislature (in this case, Congress) specifically enacts an exception to, or provides for tolling of, the statute of repose. As the Securities Act's statute of repose did not have such an exception, it could not be tolled.

The Supreme Court's decision may well have impact beyond the Securities Act, as many other laws contain statutes of repose. For example, the antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, which make it unlawful, among other things, to use the mail, wire, or internet to make materially false and misleading statements and omissions concerning publicly traded securities, are subject to a five year statute of repose, commencing from the date the false statement is made. At least one federal district court and one federal appeals court have already relied on ANZ Securities to find that the five year statute of repose for these securities fraud claims is not subject to tolling by the filing of a class action within the relevant timeframe.

The primary lesson to be learned from the ANZ Securities case is that investors who have suffered losses due to a potential violation of the securities laws must be aware of the date the relevant statute of repose will expire, regardless of whether or not a related securities class action has been filed by another investor. Also, investors can no longer wait until a settlement is reached in a securities class action before deciding whether to opt out and prosecute an individual claim. Investors should analyze their damages and claims before the statute of repose expires so that they may, if warranted, file a complaint to protect individual claims. Reasons an investor would file an individual claim include: i) protecting significant potential individual damages, and ii) guarding against the danger that a class is not certified, a class is later "decertified," or, in the investor's view, an inadequate class settlement is reached. In addition, investors should examine the statute of repose before determining whether to opt out of a securities class action.