Wednesday, September 07, 2016

Court finds SLUSA divested state court of jurisdiction over federal claims

By Kevin Kulling, J.D.

A federal court in Delaware has concluded that a state court was divested of jurisdiction over “covered class actions” under the Securities Act. As a result, the court denied a motion to remand the action that alleged MoneyGram made materially false statements in a prospectus supplement associated with an offering of the company’s stock (Iron Workers District Council v. MoneyGram International, September 2, 2016, Stark, L.).

The state court action. Investors originally filed an action in the Superior Court for the State of Delaware against MoneyGram International alleging that materially false statements were made in a prospectus supplement associated with an offering for the sale of MoneyGram stock. The action alleged violations of Securities Act Sections 11, 12(a) (2), and 15.

MoneyGram filed a notice of removal, contending that the federal court had subject matter jurisdiction because the claims arose under federal law and the Securities Litigation Uniform Standards Act (SLUSA) divested state courts of jurisdiction over “covered class actions.”

In turn, investors filed its motion to remand, arguing that federal courts do not have exclusive jurisdiction over “covered class actions” but that Sections 16(b) and (c) of the Securities Act only provide for the removal of covered class actions arising under state law.

Investor arguments. Investors argued that Securities Act Section 22(a) acts as a bar to removal of Securities Act cases except as provided in Section 16(c), which does permit removal. Investors argued that Section 16(c) applies only to covered class actions as set forth in Section 16(b) and only to covered class actions alleging fraud that are based upon the statutory or common law of any state. Investors contended that the opportunity to remove a securities fraud-based class action is limited to such actions that are based on state law, and did not apply to those that were based on violations of the federal Securities Act.

In support of its contention, investors cited Supreme Court dicta and several district court cases that adopted the position that only actions based on state law were removable.

Money Gram arguments. MoneyGram argued that SLUSA, by amending Section 22(a), divested state courts of concurrent jurisdiction over covered class actions under the Securities Act, thereby giving federal courts exclusive jurisdiction over such suits. The removal bar and its exception prohibit the removal of actions involving only individual claims based on the Securities Act, allowing removal of cases involving both individual claims based on the Securities Act and covered class actions based on state law, the company argued.

Court conclusion. The court agreed with MoneyGram that its position was consistent with the pertinent statutory language and was further supported by the legislative history.

In SLUSA, Congress expressly eliminated state courts’ concurrent jurisdiction over covered class actions arising under the Securities Act when it referred to the entirety of Section 16 and not just Section (b) and (c) in providing an exception to concurrent jurisdiction for covered class actions, the court said. Concurrent jurisdiction was eliminated for all covered class actions rather than only for those based on state law, according to the court.

The court said the matter arose after it appeared that the PSLRA had the unintended consequence of incentivizing members of the plaintiffs’ bar to avoid the federal forum altogether. To address the situation, SLUSA added Section 16(b) and (c) to the Securities Act, providing for the removal of covered class actions alleging an untrue statement or omission of a material fact or any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. SLUSA also amended Section 22(a) of the Securities Act by cross-referencing Section 16 and creating an exception to states’ concurrent jurisdiction over cases arising under the Securities Act.

Highlighting the decision of another district court in the Third Circuit, the court said that a thorough analysis of the plain statutory language, legislative history of SLUSA, and a “healthy dose of common sense,” compelled the conclusion that the class action, which alleged only federal Securities Act claims, was removable.

The case is No. 15-cv-00402.

No comments: