SLUSA Hypothetical -- Background and Questions

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The Securities Litigation Uniform Standards Act (SLUSA) became law on November 3, 1998 and is embodied in the identical provisions of Section 16(b) of the Securities Act and § 28(f) of the Exchange Act. See § 4.16. See also STAT (search [ctl+F] for class action limitations). The adoption of the Act was prompted by the fact that some counsel filed parallel private actions in state courts based on state blue sky laws and/or the common law and in federal court based on alleged violations of Rule 10b-5. Most of the states have blue sky laws that create private actions comparable to Section 12(a)(2) of the Securities Act and some also provide a private action counterparts to Rule 10b-5. The state actions in many instances are not subject to limitations under Rule 10b-5; for example, state actions generally permit an action against aiders and abetters. See § 4.15. The parallel state court actions filed after the adoption of the PSLRA  in many instances at least were intended as a means of obtaining discovery in the state courts while discovery in the federal action was stayed by the filing of a motion to dismiss under the PSLRA. SLUSA precludes the bringing of a “covered class action” relating to a “covered security” in federal or state court based on the common or statutory law of any state 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.

Section 16(c) of the Securities Act (and the counterpart provision of the Exchange Act) provides: “Any 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).” SLUSA also added a provision to the PSLRA stay of discovery provision authorizing a federal court upon a proper showing to “stay discovery proceedings in any private action in a State court as necessary in aid of its jurisdiction or to protect or effectuate its judgments.” SLUSA excludes from the definition of a class action an “exclusively derivative action brought by one or more shareholders on behalf of a corporation.” SLUSA also includes three carve outs that make SLUSA inapplicable to covered class actions relating to a covered security that would otherwise be within the SLUSA limitation on actions based on state law. The principal carve out is the so-called Delaware carve-out, although it is not limited to actions brought under Delaware law. See § 4.16.

 Questions

1. What actions are embraced within the definition of a covered class action? See § 4.16.
2. What securities are embraced within the definition of a covered security? See § 4.16.
3. What is the Delaware carve-out? See § 4.16. Click HERE [Click on No if asked to debug] for description of pending action in the Delaware Court of Chancery brought against Hewlitt Packard relating to recent proxy contest involving the HP/Compaq merger. Could defendants remove this action to federal court relying on SLUSA? If a parallel action is filed in federal court based on Rule 14a-9 (the anti-fraud proxy rule), could the federal court enjoin discovery in the state action?
4. Does the fact that a state action is within the Delaware carve-out necessarily mean that the Delaware court will retain jurisdiction if a private action is pending in federal court relating to the same matter? See § 4.18.
5. What procedures must the defendants follow in order to keep a state action within SLUSA from proceeding? See Securities Act § 16(c) above.
6. What must the plaintiff in the state action do to attempt to keep it in the state court?.
7. Plaintiffs in bringing state actions that might be subject to SLUSA strive to be in a position to assert that the state action is not “in connection with the purchase or sale of a security.” What success, if any, have they had and with respect to what type of actions? See § 4.17.
8. Consider the potential of avoiding the definition of a covered class action by filing an action in a state court not purporting to be a class action with less than 50 plaintiffs? Based on the success of that action, bringing individual actions on behalf of other similarly situated plaintiffs relying on collateral estoppel? See § 4.16.
9. Enron has also produced an attempt by one law firm to avoid SLUSA by filing individual actions against certain Enron former officers in three different state courts in Texas and a parallel action in the district court for the Southern District of Texas. The federal action was consolidated with the other federal actions in which the Regents of the University of California was named as lead plaintiff. The three actions filed in state court involved a total of 80 plaintiffs, but each action involved less than 50 plaintiffs. The law firm acknowledged that it had 670 additional plaintiffs for whom it was considering filing state actions; presumably, in other jurisdictions in the state. Click HERE. Where the plaintiffs in the state actions successful in avoiding SLUSA. How did Judge Harmon respond? What aspect of SLUSA did she rely on? Click HERE.
10. Plaintiff Washington State Investment Board  asserted a class action claim under the Texas Securities Act that was consolidated with the claims in in In re Enron, although we deleted most of Judge Harmon's opinion relating to that aspect of the case.  This claim related to an offering by Enron of $250 million of 6.95% Notes due July 15, 2028 and $250 million of 6.40% Notes due July 15, 2006. Click HERE and HERE. SLUSA  precludes a private party from bringing a “covered class action” in federal or state court based on the common or statutory law of any state if it involves the purchase or sale of covered securities. This was clearly a covered class action based on state statutory law, why wasn't it pre-empted under SLUSA even if brought in federal court supplemental to the claims under the federal securities laws? Did it pertain to a covered security? See § 4.16. In this connection, use Find (ctrl+f) to go to the Fourth Claim of the AMENDED complaint..

11. A puzzling aspect of SLUSA is the provision that an action preempted pursuant to the operative preemption language found in subsection 16(b) (and its Exchange Act counterpart) "shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b)."  It is not clear why it should be or is necessary to remove an action that the state court is preempted from considering. The Senate Report explains this provision as follows: Subsection 16(c) provides that any class action described in Subsection (b) that is brought in a State court shall be removable to a Federal district court, and may be dismissed pursuant to the provisions of subsection (b).  Does this imply that to preempt the state action defendant must follow the appropriate procedure to remove the action to federal court and have the federal court dismiss it? A general federal law separately sets forth procedures and imposes time limitations on seeking removal. Under these procedures, defendant, within thirty days of receipt of notice of the filing of the complaint must file with the federal district court for the state in which the action was filed a notice of removal. 28 U.S.C.A. §1446(a). A copy of the notice must be sent promptly to the adverse parties and to the clerk of the appropriate state court.  Thereupon, "the State court shall proceed no further unless and until the case is remanded." What result if the defendant fails to timely file a notice of removal with the federal court and attempts to have the action dismissed in the state court on the grounds that it is preempted. Compare. Guice v. Charles Schwab & Co., Inc., 89 N.Y.2d 31, 651 N.Y.S.2d 352, 674 N.E.2d 282 (1996). Did Congress intend that the removal procedure be the exclusive means of testing the application of SLUSA?