Tuesday, April 18, 2006

American University Law Review Publishes Article on Private Rights of Action Under Federal Securities Law

American University Law Review has just published an article by Jeffrey T. Cook entitled Recrafting the Jurisdictional Framework for Private Rights of Action Under the Federal Securities Law 55 Am. Univ. L. Rev. 621 (2006), which discusses jurisdictional inconsistencies in federal securities law. Here’s an excerpt from the Introduction:

Congress recently enacted the Class Action Fairness Act of 2005 ("CAFA") to expand federal jurisdiction over class action lawsuits. Congress was particularly alarmed by the targeting of plaintiff-friendly jurisdictions in state courts for the determination of lawsuits of national scope and interest. This type of forum shopping has thrived in recent years in the securities context. Stemming from the largest corporate frauds in history such as Enron and WorldCom, lawsuits have proliferated in state courts across the country for the sole purpose of avoiding federal court jurisdiction. Despite addressing these very concerns in the general class action context, Congress curiously exempted the federal securities laws from the provisions of CAFA. The explanation is apparent: an underappreciation of the overly nuanced jurisdictional framework for private rights of action under the federal securities laws.

Private rights of action have been an integral part of the federal securities enforcement scheme since its original formulation in the wake of the stock market crash of 1929. These provisions are, in essence, a means of investor protection. With the ebbs and flows of the securities markets, however, investor protection has been a fluctuating concept in the eyes of Congress. In bad times, investors merit protection from corporate wrongdoers and securities professionals manipulating the markets. In good times, investors become the pawns of plaintiffs' lawyers seeking to exploit their clients' misfortunes for their own gains. Under these competing forces, the evolution of the private rights of action under the federal securities laws is far from a model of clarity or consistency.

. . .

. . . Part I of this Article provides an overview of the sequence of legislation that has shaped private securities actions and, more specifically, their jurisdictional provisions. That sequence comprises: (1) the 1933 Act and the "interrelated" provisions of the 1934 Act; (2) the substantial revisions to private securities litigation in the 1990s in the PSLRA and SLUSA; and (3) the recent enactments of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") and CAFA which, despite having less direct impact on private securities litigation, suggest how to remedy the federal securities jurisdictional framework in a manner consistent with current legislative intent.

Part II discusses recent judicial interpretations of the non-removal provision of the 1933 Act in light of its amendment by SLUSA. Courts have had to grapple with not only how to interpret the plain language of the amendment (especially in light of clear legislative intent to the contrary), but also how to minimize the actual exploitation of its loopholes as highlighted in the massive litigation generated by the likes of Enron and WorldCom. Judicial uncertainty on both issues--coupled with the expanse and impact of the exploitation--highlight the need for immediate legislative reform in the manner proposed here.

Part III details a proposed amendment to the non-removal provision of the 1933 Act as a means of harmonizing the overall jurisdictional framework for private rights of action under the federal securities laws. Specifically, the non-removal provision should be amended to permit removal of those 1933 Act claims which "sound in fraud"--that is, those premised on allegations of fraudulent conduct. This proposal has a number of advantages. First, the proposal reinforces a growing trend in federal securities litigation and jurisprudence to apply certain federal procedural and securities provisions to claims of fraud in both form and substance. Second, the proposal would make the federal securities jurisdictional framework consistent with various expressions of legislative intent by: (1) preserving a plaintiff's choice of forum as presumably intended in the original enactment of the non-removal provision in 1933; (2) curtailing the forum shopping targeted--but thus far missed--in the PSLRA and SLUSA in the 1990s; and (3) reflecting a number of the measures recently implemented in CAFA in 2005. Third, this proposal would nullify yet another byproduct of forum shopping: piecemeal litigation of "otherwise non-removable" claims under Section 1441(c) of the general removal statutes. Fourth, the proposal would promote both judicial economy and fairness to investors by streamlining the "race for [the] assets" in securities fraud litigation under uniform standards in federal court.


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