By: Esmat Hanano, IAC Intern Spring 2018
A big part of our work at the Investor Advocacy Clinic is staying on top of recent changes, or clarifications, in the law surrounding investors and securities. These shifts can have a significant impact on retail investors who might not be following legal news. Accordingly, we strive to make sure that recent changes in the law can be found in an understandable manner and convenient forum.
On March 20th, the Supreme Court handed down a unanimous decision in Cyan, Inc. v. Beaver County Employees Retirement Fund that clarifies the jurisdiction of state and federal courts hearing claims brought under the Securities Act of 1933 (“1933 Act”).
A group of investors brought a class action lawsuit alleging material misstatements in Cyan’s initial public offering. Material misstatements are a violation of the 1933 Act. The 1933 Act was passed by Congress in the immediate wake of the stock market crash of 1929, and its main accomplishment was requiring that offers and sales of every security be registered with the Securities and Exchange Commission. Thus, the 1933 Act allowed defrauded investors to bring federal claims in addition to state claims.
The case focused on an amendment to the 1933 Act, the Securities Litigation Uniform Standards Act (“SLUSA”). SLUSA amended parts of the 1933 Act to bar certain class action lawsuits alleging state law claims. Class action lawsuits are when an individual, or small group, brings a lawsuit on behalf of a much larger group. In securities litigation, class action lawsuits have a huge impact and are common when dealing with large companies.
Justice Elena Kagan wrote the opinion for the Court. The Court held that because SLUSA only banned class action lawsuits alleging state law claims, state courts still had jurisdiction to decide class action lawsuits alleging federal claims—as was the situation in this case. Additionally, the court held that class action lawsuits alleging federal claims cannot be brought in federal court. This means that the only avenue for class action lawsuits based on federal claims is state court as set out in the 1933 Act. The Court reasoned that the definition of what was considered a permissible class action in the 1933 Act still controlled. This definition expressly excludes federal lawsuits from being considered a permissible class action that can be brought in federal court.
This decision has a number of implications for investors, chief among them being where investors can bring class action lawsuits. For class actions alleging federal claims, state court is the only avenue available under the decision in Cyan. Because of the change in how securities class action lawsuits can be brought, investors must seriously contemplate their options for deciding whether to join or initiate such a class action lawsuit.