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Class Action Provisions of the Securities Litigation Uniform Standards Act of 1998 (SLUSA) – A Brief Overview: Class Action Defense Issues

SLUSA (Securities Litigation Uniform Standards Act) was enacted by Congress in 1998. SLUSA followed the Private Securities Litigation Reform Act of 1995 (PSLRA), 109 Stat. 737 (codified at 15 U.S.C. §§ 77z-1 and 78u-4). The House Conference Report accompanying the PSLRA enumerated ways in which abusive class actions have hurt the U. S. economy. See, H.R.Rep. No. 104-369, p. 31 (1995). To address these concerns, Congress enacted sweeping changes to federal securities laws class actions, covering pleading, class representation, discovery, liability, attorney fee awards, expenses and more. This article discusses the salient points of class action provisions of SLUSA; SLUSA is discussed in more detail in a separate article.

One powerful change concerned new requirements for pleading fraud. As the Sixth Circuit explained,

Congress heightened the pleading standard for securities fraud. Before 1995, a plaintiff had to allege fraud “with particularity.” Fed.R.Civ.P. 9(b). Under the PSLRA, a plaintiff must now “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2) (emphasis added).

Helwig v. Vencor, Inc., 251 F.3d 540, 548 (6th Cir. 2001); see also, Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 345, 125 S.Ct. 1627 (2005).

The PSLRA also imposed limits on damages and attorney fees, imposed limits on the way lead plaintiffs were selected and the amounts they could be awarded, imposed sanctions for frivolous litigation, provided companies with a “safe harbor” for certain statements, and allowed courts to issue stays of discovery pending motions by a defendant to have the case dismiss. See, 15 U.S.C. § 78u-4.

Unfortunately, plaintiffs’ counsel thwarted Congress’ effort at tort reform by filing securities lawsuits in state courts. Congress responded by passing the Securities Litigation Uniform Standards Act, which gave federal courts exclusive jurisdiction over certain types of securities cases. In discussing the response to the PSLRA, the United States Supreme Court observed,

The effort to deter or at least quickly dispose of those suits whose nuisance value outweighs their merits placed special burdens on plaintiffs seeking to bring federal securities fraud class actions. But the effort also had an unintended consequence: It prompted at least some members of the plaintiffs’ bar to avoid the federal forum altogether. Rather than face the obstacles set in their path by the Reform Act, plaintiffs and their representatives began bringing class actions under state law, often in state court. The evidence presented to Congress during a 1997 hearing to evaluate the effects of the Reform Act suggested that this phenomenon was a novel one; state-court litigation of class actions involving nationally traded securities had previously been rare. See H.R.Rep. No. 105-640, p. 10 (1998); S.Rep. No. 105-182, pp. 3-4 (1998). To stem this “shif[t] from Federal to State courts” and “prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of” the Reform Act, SLUSA §§ 2(2), (5), 112 Stat. 3227, Congress enacted SLUSA.

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, __ U.S. ___, 126 S.Ct. 1503, 1511 (2006).

For purposes of class actions, the key provision of SLUSA provides:

Class Action Limitations. No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging

(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or

(B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

SLUSA, §§ 2(2), (5), 112 Stat. 3230 (codified as amended at 15 U.S.C. §78bb(f)(1)).

SLUSA defines “covered security” as “a security that satisfies the standards for a covered security specified in paragraph (1) or (2) of section 18(b) of the Securities Act of 1933, at the time during which it is alleged that the misrepresentation, omission, or manipulative or deceptive conduct occurred,” 112 Stat. 3232 (codified at 15 U.S.C. § 78bb(f)(5)(E)). Section 18(b), in turn, defines “covered security” as securities traded on a national exchange. § 77r(b). Thus, “a ‘covered security’ is one traded nationally and listed on a regulated national exchange:” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, __ U.S. ___, 126 S.Ct. 1503, 1512 (2006).

SLUSA also provides that all “covered class actions” filed in state court may be removed to federal court. 112 Stat. 3230 (codified at 15 U.S.C. § 78bb(f)(2)). A “covered class action” is a lawsuit in which damages are sought on behalf of more than 50 people. More specifically, SLUSA defines a “covered class action” as follows:

The term “covered class action” means

(i) any single lawsuit in which

(I) damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members; or

(II) one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties similarly situated, and questions of law or fact common to those persons or members of the prospective class predominate over any questions affecting only individual persons or members; or

(ii) any group of lawsuits filed in or pending in the same court and involving common questions of law or fact, in which-

(I) damages are sought on behalf of more than 50 persons; and

(II) the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose.

112 Stat. 3232 (codified at 15 U.S.C. § 78bb(f)(5)(B)).

Plaintiffs’ class counsels continue to seek ways to thwart the clear Congressional intent behind the PSLRA and SLUSA. Defense counsel are well-advised to scrutinize the House Conference Report and federal court opinions discussing Congressional intent, as these documents contain strong language that may be used to oppose such tactics.