The United States is famous for having the most highly developed and complex securities litigation regime in the world. But recent decisions from the United States Supreme Court have added even further complexity. These decisions not only create bigger risks for US and non-US issuers concerning the outcome of the litigation against them, but also make managing US securities litigation more difficult. Below we discuss some of these decisions, their impact on companies, and how companies can protect themselves as a result.
Cyan, Inc. v. Beaver Cty. Employees Ret. Fund, 138 S. Ct. 1061 (2018)
In Cyan, the Supreme Court held that, under the Securities Act of 1933, plaintiffs challenging issuer statements in public offerings can bring class action claims in state court rather than federal court. Defendants had argued that a more recent statute, the Securities Litigation Uniform Standards Act of 1998 (SLUSA), gave defendants the right to "remove" Securities Act cases to federal court, but the Supreme Court rejected that argument.
The outcome of Cyan does not simply resolve a technical issue of which court hears a case: state courts are perceived as better fora for securities plaintiffs for a variety of reasons. State court judges are typically less familiar with securities cases, and so are less likely–15% less likely according to one study1–to dismiss those cases at the outset of the litigation–a key decision that often determines the overall value of a case. Moreover, in federal court, plaintiffs must survive a motion to dismiss before they can receive discovery, but no such requirement applies in many state courts. Thus, plaintiffs filing in certain state courts can more quickly force defendants into expensive document production and executive-distracting depositions, thereby gaining more leverage in extracting settlements. Litigating in state court is also inconvenient for Securities Act defendants: Although federal courts can transfer cases across state lines or consolidate overlapping cases filed in different federal courts into a single multidistrict litigation, no mechanism exists for transferring cases between state-court systems or for consolidating overlapping cases filed in different state-court systems.
Cyan has already had a significant result: In 2018, plaintiffs filed 30 Securities Act class actions in state court, more than triple the average number from 2010-2017.2 Issuers are still assessing potential options for dealing with Cyan. One option, though currently untested, would be for issuers to require purchasers of securities in public offering to agree to bring any Securities Act claims in federal court. Procuring such an agreement requires more than simply including a forum selection clause in a company's articles of incorporation, according to a recent Delaware Court of Chancery decision.3 Another option for defendants is to reduce the "lock up" period between the public offering and when company insiders can sell their own shares; such a strategy can make it more difficult for plaintiffs to bring Securities Act claims, because plaintiffs must show that the actual shares they purchased were issued in the challenged offering, as opposed to after the offering.
California Public Employees' Ret. Sys. v. ANZ Secs., Inc., 137 S. Ct. 2042 (2017)
The Supreme Court's decision in ANZ has a significant impact on the timing of securities class actions and the potential for increased "opt out" litigation. In ANZ, the Court held that the pendency of a securities class action does not stop the running of the statute of repose for members of the putative class.4 In other words, if investors ever wish to pursue their own claims outside of a class action context, they must file those claims before the statute of repose expires. That holding impacts securities cases, because Securities Act cases are subject to a three-year statute of repose5 and claims under the Securities Exchange Act of 1934 (Exchange Act)6 are subject to a five-year statute of repose.7
ANZ Securities may encourage large institutional investors to file their own separate securities lawsuits, instead of relying on class action plaintiffs' counsel to prosecute their claims. This is largely because these institutional plaintiffs may not know whether the class will be certified before the relevant statute of repose expires. If a court denies class certification, plaintiffs cannot pursue their claims on an individual basis unless they file a case before the statute of repose expires. And even if a court certifies the class and the parties reach a settlement that the institutional investors think is insufficient, these investors cannot effectively exercise their right to opt out of the class settlement unless they filed an individual case before the statute of repose expires. A recent example of such opt out litigation came in the VEREIT securities class action litigation, where Vanguard and several other investors opted out of the class action and brought their own cases, forcing the defendants to litigate multiple cases in New York and Arizona federal court on the same topic at the same time. Ultimately, VEREIT reached settlements with the class and the opt outs.
To avoid having to litigate many separate class actions and opt out cases simultaneously, defendants can seek to consolidate those cases. If overlapping cases are filed in the same district within the federal system, the federal rules permit the court to completely consolidate the actions.8 If overlapping cases are filed in different districts within the federal system, the cases can generally still be consolidated for pretrial proceedings, though the Arizona federal court in the VEREIT case declined to do so.9 But no mechanism exists to consolidate cases in federal court with cases in state court or to consolidate cases brought in the courts of different states, so ANZ Securities can create real difficulties for defendants that face claims in state courts that, post-Cyan, cannot be removed to a federal court.
Lorenzo v. Sec. & Exch. Comm.
In addition to those two recent decisions, the US Supreme Court is currently considering a case that could have a large impact on substantive securities law. The question in Lorenzo is whether an individual or company can be held liable for preparing or publishing a false statement without actually making the statement. A 2011 Supreme Court decision held that, for purposes of certain provisions of the US securities laws, only the actual "maker" of the statement can be held liable.10 But, in Lorenzo, the SEC is arguing to the Court that an individual who helps prepare a statement, but did not make it, violated a different provision of the securities laws that prohibits "any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person."11 If the Supreme Court concludes that such liability is permissible, that will expand the scope of the securities laws and likely encourage plaintiffs–both the SEC and private litigants–to file more securities cases.
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Even if the Supreme Court’s Lorenzo decision rejects the SEC’s attempt to expand securities liability, issuers will still need to deal with problems originating from the nation’s highest court. Cyan and ANZ Securities likely will make US securities litigation more inconvenient for defendants, particularly in Securities Act cases. Future judicial developments—for example, decisions enforcing forum selection clauses against Securities Act plaintiffs—might allow issuers to manage the consequences of Cyan and ANZ Securities, but a comprehensive solution might require legislative action—something that seems very unlikely in the current US political climate of partisan division