Due to the strictures imposed by the Private Securities Litigation Reform Act (“PSLRA”) and Securities Litigation Uniform Standards Act (“SLUSA”), securities fraud class actions are burdened by slow dockets, limited available causes of action, exclusive federal court jurisdiction, and discovery stays. Individual purchasers of securities that are the subject of a class action have means of avoiding all of these limitations and procuring outcomes that are both quicker and more favorable than those that might realistically be obtained by class plaintiffs.
Securities Class Actions are Notoriously Slow
The following factors lead to stiflingly slow dockets for securities class actions:
- After filing of a securities class action, intensive motion practice to determine who will be the provisional class representatives and class counsel consumes many months before any substantive litigating occurs.
- Once provisional class representatives and counsel are appointed, a schedule is imposed that permits plaintiffs time to develop a consolidated amended complaint and defendants an opportunity to attack it with a typically large scale motion to dismiss. After a lengthy briefing process, such motions can be sub judice for over a year.
- Discovery is automatically stayed during the motion to dismiss.
- If the motion succeeds, plaintiffs, as often as not, are permitted an opportunity to replead, thus replicating an already lengthy process.
- If the motion does not succeed, discovery may initially be limited to class certifications issues, and the class motion may further delay litigation of the merits.
Securities Class Actions are Limited to Federal Court
- Under SLUSA, securities class actions only may be brought in federal court.
- Individual plaintiffs may bring actions state courts with far faster dockets, which may pose significant threats to defendants and provide motivation for resolution.
- The automatic discovery stay imposed by the PSLRA is not applicable to an individual state court action. Federal court defendants may seek a discretionary stay of discovery in the state court action under SLUSA, but they are difficult to obtain. The absence of a stay of discovery may provide further impetus for resolution.
Individual Investors Have Better Causes of Action Available than Class Plaintiffs
- Under SLUSA, class plaintiffs are limited to federal causes of action. Unless all class members can trace their market purchases to a specific registration statement, this typically means the focal point must be a fraud action under Rule 10b-5. The PSLRA imposes an exacting standard of scienter, the requisite mental state of the defendant, for such actions.
- An individual investor who can trace his purchase to a particular registration statement can bring a claim under Section 11 of the Securities Act of 1933, which does not require scienter. Although some uncertainty remains, a Section 11 claim brought in state court is probably not subject to removal to federal court.
- If an individual investor seeks to sue under representations made in certain SEC filings, such as Form 10-K, he or she may utilize Section 18 of the Securities Exchange Act of 1934, which also does not require scienter. Such a claim is subject to removal to federal court. Section 18 is not available to class plaintiffs because it requires a showing of individual reliance on the misleading statements.
- Common law fraud claims are available to individual but not class plaintiffs. Depending on the state, such claims may impose joint and several liability and aiding and abetting liability, both of which are not available for class plaintiffs bringing claims under Rule 10b-5.
- State Blue Sky laws, which typically do not require scienter, are available only to individual plaintiffs. The standards for the degree of privity required between a plaintiff and a seller of securities may be fuzzier with respect to Blue Sky laws than with parallel federal causes of action.
- Negligent misrepresentation claims may be available for an individual plaintiff, especially if he or she is a member of a limited class of foreseen relying parties on a misleading statement. Purchasers in a private placement may be a qualifying limited foreseen class. Purchasers of debt securities in private placements by public companies should give careful attention to this possibility. The issuer’s equity securities may be the subject of a class action, but purchasers of debt in a private placement, even if it was intended to be subsequently registered, have better causes of action.
Individual Action or Opt-Out
An individual investor may, upon the filing of a class action, bring an individual action, possibly in state court, or wait until settlement of the class action and opt-out. The former approach may involve more work and a more public role but offers the possibility of outflanking the class action and obtaining a speedier and more favorable result. The latter approach permits a more passive role but, with the class action settling, does not offer the leverage implied by the threat of negatively impacting the much larger case. Moreover, there is ambiguity as to the extent to which the statute of limitations for causes of action not brought by the class plaintiffs, causes brought in state court, and statutes of repose are tolled for opt-outs during the pendency of the class action.
Individual investors with large losses have significant opportunities to improve upon the recoveries typically available in class actions. They are not limited by many laws applicable to class actions but can rely on class plaintiffs to do some of the “heavy lifting” in building a case against defendants. Individual investors can also increase their leverage by joining with a limited number of similarly situated investors in bringing a joint non-class action, spreading potential costs.