By Gary M. Brown, Partner, Nelson Mullins Riley & Scarborough LLP (Note: Gary Teaches our SEC Reporting and Practice Skills for Lawyers workshop)
On March 20, 2018, the U.S. Supreme Court decided Cyan, Inc. et al. v. Beaver County Employees Retirement Fund. The question in this case was the extent to which SLUSA (the Securities Litigation Uniform Standards Act) preempts litigation of claims under the Securities Act of 1933 (the “’33 Act”) in state as opposed to federal courts. Short answer – it doesn’t – at all.
The decision is more of a grammatical exercise (and an example of poor Congressional draftsmanship) than it is a work of judicial scholarship. The decision focused on two sections of SLUSA found in section 16 of the ’33 Act and two sentences in Section 22 (Jurisdiction of Offenses and Suits) of the ’33 Act.
Sections 16(b) and 16(c) provide, respectively, that class actions based on state securities law claims in connection with the purchase or sale of “covered securities” may not be maintained in any state or federal court (the “State Law Bar”) and that any such suit (a class action based on state securities law claims) involving a “covered security,” if brought in state court, is removable to federal court where, presumably it will be dismissed (the “Removability Provision”).
NOTE – simply stated, the sections apply to class actions based on state securities law claims
Beaver County’s case, however, was not an action brought in state court based on state law claims – the case was based upon federal law (i.e., ’33 Act claims). But surely Congress meant to restrict litigation of those claims to federal court just like cases under the Securities Exchange Act of 1934 (the “’34 Act”) – right?
Well – Section 22 of the ’33 Act provides in part that “[Federal] courts . . . shall have jurisdiction of offenses and violations under [the ’33 Act] . . ., and, concurrent with State . . . courts, except as provided in [SLUSA] section 16 with respect to covered class actions, of all suits . . . brought to enforce any liability or duty created by [the ’33 Act]. Section 16’s State Law Bar provision, however, applies only to state law claims – not to claims created by the ’33 Act. Accordingly, the Supreme Court read the “except” clause essentially as a nullity, removing nothing from state court jurisdiction except the ability to hear class actions based on state law claims – and Beaver County’s case was based on federal claims.
Next considered was Section 22’s non-removal provision, which provides that “[e]xcept as provided in [SLUSA] section 16(c), no case arising under [the ‘33Act] and brought in any State court . . . shall be removed to [federal] court. . . .” Section 16’s Removability Provision was similarly dealt with as it applied (or did not apply) to Beaver County’s case. Because their case was based on federal claims, the Removability Provision simply did not apply – it again was a nullity and did not affect the Section 20’s prohibition on removal from state court of properly filed ‘33 Act cases.
Is this what Congress intended? Great question – but, as the Supreme Court pointed out, Congress knows how to create exclusive jurisdiction as it has done with the ’34 Act. The “except” clauses supposedly meant something to the drafters. The Supreme Court, however, could not ascertain the meaning nor was the Court willing to do more than take Congress at its words (which, interestingly enough were referred to as “gibberish” during oral argument).
 The case must allege untrue statements or omission of material facts in connection with the purchase or sale of a covered security; or that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.
 “Covered securities” for these purposes are certain securities that satisfy certain specified standards for federal preemption of state authority under NSMIA (the National Securities Markets Improvement Act) – i.e., exchange listed securities, securities issued by investment companies).