Securities Litigation Uniform Standards Act (SLUSA)

March 28, 2005

Enacted in 1998, the Securities Litigation Uniform Standards Act (SLUSA) has been the subject of increasing litigation. Congress passed SLUSA to close an alleged loophole left in the Private Securities Litigation Reform Act of 1995 (PSLRA) – the ability to bring securities fraud class actions under state law or in state court. SLUSA applies when an investor attempts to bring a shareholder class action in the investor’s own state court alleging violations of state law. Defendants can “remove” the action to federal court, where defendants then seek to dismiss the claims. To invoke SLUSA, defendants must demonstrate that the complaint alleges false and misleading statements or fraud in connection with the purchase or sale of a publicly-traded security.

“SLUSA was just another attempt by corporate interests to restrict the ability of shareholders to hold corporate insiders accountable for abusive conduct. With careful research, pleading and planning, lawyers representing aggrieved shareholders can greatly improve the prospect of pursuing their important shareholder claims in favorable state court,” said William S. Lerach.

Certain remedies arising under the federal securities laws can be brought in the state courts where the investors, including private and public pension funds, are located. For example, Section 11 of the Securities Act of 1933 expressly permits claimants to bring their action in state court. Section 11 provides strict liability remedies for investors who purchase securities in a public offering pursuant to a false and misleading prospectus; plaintiffs need not prove the misstatements were intentional or even that they relied on them.

Shareholder derivative actions for breach of fiduciary duties brought in state court are exempted from SLUSA. This is true even if the action alleges insiders sold company stock while in possession of material, non-public information. For example, defendants in the Ashland Derivative suit removed the case to federal court claiming it was really a federal securities fraud lawsuit masquerading as a shareholder derivative action. The district court rejected this argument and remanded the case to state court, noting that “[w]hile Defendants may not like the way Plaintiff has framed its case, Plaintiff is the master of its cause of action, and the Court will not re-write Plaintiff's complaint.”1

In some instances, investors have been successful in keeping cases involving investor-broker/dealer disputes in state court by proper pleading – i.e., by pleading their claims so as not to include fraud or false statements regarding the purchase or sale of a security.2

Another group of cases, brought on behalf of long-term holders of investment fund securities –alleging that fund managers breached their fiduciary duties by permitting other investors to dilute their holdings through short-term investments – were sent back to state court because they did not assert claims by purchasers or sellers of publicly traded securities, but rather, the claims of holders of such securities.3

A number of Circuit Courts of Appeal decisions in 2004 held SLUSA decisions cannot be appealed. The 11th Circuit refused to hear an appeal on a SLUSA removal decision.4 Similarly, the 1st and 9th Circuits also denied defendants’ requests to appeal SLUSA decisions, sending those shareholder actions back to state court.5

One important decision went the other way. Acknowledging that it was creating a split in the circuits, the 7th Circuit held that so long as an action is properly removed, portions of the district’s court’s decision to remand under SLUSA are reviewable.6

Winning the battle to stop unwarranted removal does not always win the SLUSA war. Federal court judges can still stay discovery in state court proceedings – purportedly to prevent the discovery from being shared with litigants concurrently prosecuting federal court actions.

Several positive decisions were rendered this year protecting the right to litigate in state court. One court held that protective orders and/or confidentiality orders sufficiently mitigate any risk of “data sharing” and that the burden on state court litigants of not obtaining discovery outweighs any burden of producing duplicative discovery to both sets of plaintiffs.7

The same conclusion was reached where defendants in a federal securities fraud lawsuit against ITT Educational Services asked a federal court to enjoin a books and records inspection demand in Delaware state court.8 

1Cent. Laborers’ Pension Fund v. Chellgren, No.02-220-DLB, 2001 U.S. Dist. LEXIS 6066, at *45 (D. Ky. Mar. 29, 2004).
2Norman v. Salomon Smith Barney, Inc., No. 03 Civ. 4391 (GEL), 2004U.S. Dist. LEXIS 10619, at *9-*14 (S.D.N.Y June 9, 2004); Magyery v. Transamerica Fin. Advisors, Inc., 315 F. Supp 2d 954, 956-63 (N.D. Ind.2004); Xpedior Creditor Trust v. Credit Suisse First Boston (USA), Inc., 341 F. Supp. 2d 258, 268-71(S.D.N.Y. 2004).
3Vogeler v. Columbia Acorn Trust, No. 03-CV-0843-DRH, 2004 U.S Dist. LEXIS 9182, at *7-*8 (S.D. Ill. Feb. 12, 2004); Potter v. Janus Inv. Fund, No. 03-CV-0692-DRH, 2004 U.S. Dist. LEXIS 9181, at *6-*9 (S.D. Ill. Feb. 9, 2004); Meyer v. Putnam Int'l Voyager Fund, No. 03-12214-WGY, 2004; U.S. Dist. LEXIS 2545, at *3-*8 (D. Mass. Jan. 27, 2004); Kircher v. Putnam Funds Trust, No. 03-CV-0691-DRH, 2004 U.S Dist. LEXIS 10327, at *4-*9 (S.D. Ill. Jan. 27, 2004); Bradfisch v. Templeton Funds, Inc., 319 F. Supp. 2d 897, 901 (S.D. Ill. 2004).
4Williams v. AFC Enter., 389 F. 3d 1185, 1190 (11th Cir. 2004).
5Brazen, et al. v. Tyco Int’l et al., No 04-1929, slip op. (1st Cir. Dec. 29, 2004); United Investors Life Ins. Co. v. Waddell & Reed, Inc., 360 F. 3d 960, 964-67 (9th Cir. Cal. 2004).
6Kircher v. Putnam Funds Trust, 373 F. 3d 847, 851 (7th Cir. Ill. 2004).
7In re Gilead Scis. Sec. Litig., No. C 03-4999 MJJ, 2004 U.S. Dist. LEXIS 27309, at *8 (N.D. Cal. Nov. 22, 2004).
8City of Austin Police Ret. Sys. v. ITT Educ. Servs., No. 1:04-cv-0380-DFH-TAB, 2005 U.S. Dist. LEXIS 1646, at *7-*32 (S.D. Ind. Feb. 2, 2005).

This article originally appeared in the second quarter 2005 edition of the Corporate Governance Bulletin.

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