The U.S. Supreme Court wrestled Tuesday with whether state courts have jurisdiction to hear certain securities class actions, in a case brought by a public pension fund and followed closely by companies worried about excessive securities class actions in state and federal courts concurrently.
Cyan Inc. was sued by the Beaver County (Pa.) Employees' Retirement Fund in California state court over alleged flaws in the company's 2013 initial public offering documents, as permitted by the Securities Act of 1933. Cyan later challenged the pension fund's standing, arguing that the 1998 Securities Litigation Uniform Standards Act, enacted to prevent a perceived rush of class actions in state courts along with federal actions, bars state court jurisdiction when federal securities violations are alleged.
That had several Supreme Court justices questioning Congress' intent in passing the changes in 1998, and a lack of legislative guidance. "What are we supposed to do when Congress writes gibberish?" Justice Samuel Alito asked during arguments.
Arguing for Cyan, attorney Neal Katyal, partner at Hogan Lovells law firm, said the lack of clarity "is a huge problem on the ground" for companies going public, including Alibaba Group Holding Ltd., which said in its amicus brief that 50% of the investor lawsuits against it involve these parallel actions in state courts.
Twelve amicus briefs were filed in support of Beaver County Employees' Retirement Fund, including one from the $50 billion Los Angeles County Employees' Retirement Association arguing that state courts offer "an expeditious forum for institutional shareholders to litigate securities claims."
While the issue is most prevalent in California, where Cyan's bid to stop the class action was denied at all state court levels including the California Supreme Court, if the U.S. Supreme Court justices decline to limit concurrent state actions, it could have a dampening effect on new companies going public, said Anna White, a securities litigation partner at law firm Morrison & Foerster. The opposite conclusion "will have an impact. New issuers in particular would not have to face the likelihood that they will be sued in state court," said Ms. White in an interview.