To Remove or Not To Remove: Is that the Question in 1933 Act Securities Cases?

When the removal provisions of the Securities Act of 1933 (1933 Act) and the Class Action Fairness Act of 2005 (CAFA) conflict, the 1933 Act should prevail. The conflict arises in cases involving initial offerings of noncovered securities when plaintiffs file in state court, seek class treatment, and base their claims solely on alleged violations of the 1933 Act. In these cases, CAFA appears to broadly allow removal to federal courts, while the 1933 Act strictly prohibits it. Courts are currently split on which statute should prevail,[1] but the recent trend appears to be in favor of removal under CAFA.[2] That trend should be reversed.

The question of whether to allow removal is important. Plaintiffs and defendants spend massive amounts of time and money fighting over what court should hear a case. Federal courts are less likely than state courts to certify class actions, and class certification can transform individual small claims that otherwise would not be worth pursuing into threats so large that defendants are compelled to settle for large amounts.[3] While the conflict between the 1933 Act and CAFA arises only in a narrow category of cases, the stakes are high and growing – especially since that category includes offerings of securities like cryptocurrencies that are exploding in popularity and thus creating increasing opportunities for the two acts to clash.

Laws should be interpreted in ways that avoid conflict when possible, and here, CAFA can reasonably be so interpreted.[4] It contains exclusions rendering certain categories of securities cases outside its coverage. One such exclusion can be reasonably interpreted to exclude the cases in which the two acts’ removal provisions would otherwise conflict. Thus, the acts should be read to avoid the conflict, and the Securities Act should prevail.

Even if one were to decide avoiding the conflict is not possible, contrary to the view that favors CAFA, comparing the two acts’ removal provisions reveals that the 1933 Act is more specific than CAFA and should prevail for this reason as well.[5] The view that neither act is more specific than the other relies on comparing the whole of the two acts, rather than comparing the two acts’ removal provisions.[6] The 1933 Act’s removal provision applies only to the small category of cases alleging claims based only on the 1933 Act and involving only securities that are not traded on a national exchange.[7] By contrast, CAFA’s removal provisions apply to nearly all large, national class actions. Assuming CAFA’s exclusions do not apply, as long as the alleged class has at least 100 members, seeks total damages that exceed $5 million, and includes at least one defendant who is a citizen of a state that is different from a plaintiff, CAFA’s removal provisions apply.[8] Being more specific, the 1933 Act should prevail.

In addition, nothing in either act’s legislative history[9] or language[10] suggests Congress intended to overturn the long-standing removal prohibition contained in the 1933 Act. Indeed, in Cyan v. Beaver County Employees Retirement Fund, involving a conflict between the 1933 Act and the Securities Litigation Uniform Standards Act (SLUSA), the Supreme Court rejected an argument that the 1933 Act’s prohibition against removal should be read in a way not explicitly incorporated into the 1933 Act.[11] The court recognized that, historically, state courts had great power over the 1933 Act’s enforcement.[12] The act’s removal provision codified that power as long plaintiffs filed in state courts. In deciding Cyan, the Supreme Court observed Congress was unlikely to have made such a “radical – but entirely implicit” change to the 1933 Act, observing, as it has before, that “Congress does not ‘hide elephants in mouseholes.’”[13] Contrary to the Supreme Court’s holding in Cyan, concluding CAFA’s removal provisions prevail over the 1933 Act’s prohibition would suggest that Congress made a radical but implicit change and, in doing so, attempted to hide an elephant in a mousehole.

In recent years, 1933 Act filings have reached “unprecedented levels.”[14] With the rise in coin offerings, removal conflicts will occur with increasing frequency, as long as plaintiffs continue to seek redress in state courts through class actions for alleged 1933 Act violations. Faced with this question, courts should rule against allowing removal. If Congress intended otherwise, it should amend the statutes to make its intent clear.

ENDNOTES

[1] Compare, e.g., Luther v. Countrywide Home Loans Servicing, L.P., 533 F.3d 1031 (9th Cir. 2008); with Katz v. Gerardi, 552 F.3d 561 (7th Cir. 2008).

[2] See, e.g., Coffee v. Ripple Labs Inc., 333 F. Supp. 3d 952, 958 (N.D. Cal. 2018).

[3] Pierce, supra note 1, at 597 (citing, e.g., Stephen B. Burbank, The Class Action Fairness Act of 2005 in Historical Context: A Preliminary View, 156 U. Pa. L. Rev. 1439, 1442 (2008); Samuel Issacharoff, Settled Expectations in a World of Unsettled Law: Choice of Law After the Class Action Fairness Act, 106 Colum. L. Rev. 1839, 1861 (2006)).

[4] See Pierce, supra note 1, at 626-35.

[5] See Pierce, supra note 1, at 622-24.

[6] See, e.g., Katz v. Gerardi, 552 F.3d 558, 561 (7th Cir. 2009).

[7] 15 U.S.C. § 77v(a).

[8] 28 U.S.C. § 1453.

[9] See Pierce, supra note 1, at 635-38.

[10] Id. at 624-26.

[11] 138 S. Ct. 1061, 1074 (2018).

[12] Id. at 1068.

[13] Id. at 1071 (citing Whitman v. Am. Trucking Assn’s., 531 U.S. 457, 468 (2001)).

[14]Cornerstone Res., Securities Class Actions filings—2019 Year in Review, 1, comparing average annual class action filings from 1997 – 2018 of 215 with 2019’s class action filings of 428) available at https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2019-Year-in-Review.

This post comes to us from Professor Tanya Pierce at Texas A&M University School of Law. It is based on her recent article, “Remove or Not to Remove—Is that the Question in 1933 Act Securities Cases?” published in the Baylor Law Review and available here.

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