The impact of the options backdating scandal on shareholders
The consequences of this are felt not only in the state court 1933 Act case, but also in any simultaneously proceeding federal court Section 10(b) case.
Because Section 10(b) claims must be filed in federal court, the “most adequate plaintiff” will have control over those proceedings – including, for instance, deciding whether to settle the case under certain terms.
As the authors note, the decision has important implications for companies and their D&O insurers, as well as for claims going forward.
I would like to thank the authors for allowing me to publish their article as a guest post on this site.
It is far fairer and more efficient to litigate everything in one court under one set of uniform rules and standards.
For example, securities plaintiffs must plead falsity, materiality, and scienter with particularity as to each statement challenged under Section 10(b). Likewise, Congress understood that the heightened pleading standard under Federal Rule of Civil Procedure 9(b), which applies to allegations concerning fraud or mistake, would apply to the element of falsity under all federal securities statutes, including the 1933 Act.
The answer is that our system of securities litigation revolves around a carefully constructed set of procedural and substantive rules that parallel state court litigation subverts.
This, in turn, imposes inordinate risk of liability and litigation burdens.
But because the Reform Act made it more difficult for unmeritorious suits to survive past the pleading stage in federal court, it had the “unintended consequence” of “prompt[ing] at least some members of the plaintiffs’ bar to avoid the federal forum altogether” by filing class actions in state court instead. Congress enacted the Securities Litigation Uniform Standards Act (“SLUSA”) to prevent such circumvention of the Reform Act and to ensure that class actions involving nationally traded securities would be subject to “uniform standards” under a single federal framework.
SLUSA accomplishes this goal by eliminating state court jurisdiction over “covered class actions,” broadly defined as any damages action on behalf of more than 50 people.The legislative history of SLUSA makes it abundantly clear that Congress designed the statute to give federal courts exclusive jurisdiction over virtually all private class actions involving nationally traded securities.