Duane Morris Class Action Review - 2023 - Report - Page 304
personally.” Id. at 248-49. To invoke the Basic presumption, a plaintiff must demonstrate
that the misrepresentation was publicly known; it was material; the stock traded in an
efficient market; and the plaintiffs traded the stock between the time the
misrepresentation was made and when the truth was revealed. If a plaintiff satisfies
these criteria, the burden shifts to the defendant to demonstrate, by a preponderance of
the evidence, that the price was not impacted by the alleged misstatement. The
defendant can rebut the presumption through evidence sufficient to sever the link
between the price received or paid, or the decision to trade at a fair market price.
Importantly, the defendant can attempt to show that no price impact occurred at the
class certification stage (and, if successful, likely defeat certification).
Basic paved the way for a significant expansion in securities class actions. In 1995,
Congress responded by enacting the Private Securities Litigation Reform Act (PSLRA).
The legislation was passed in response to growing concerns that a substantial increase
in nuisance filings, vexatious discovery, and manipulation of clients by the plaintiffs’ bar
had negatively affected the securities market. The PSLRA sought to curb speculative
claims whose nuisance value outweighs their merits by amending the Securities Act and
the Securities Exchange Act. The amendments included heightened pleading
requirements for misrepresentation claims under § 10(b) and Rule 10b-5, a safe harbor
for forward looking statements, restrictions on the selection of lead plaintiffs and
compensation to lead plaintiffs, sanctions for frivolous litigation, and a stay of discovery
pending resolution of any motion to dismiss.
Faced with more stringent requirements for claims under federal law, the plaintiffs’ bar
frustrated the purpose of the PSLRA by bringing class actions based on state law
(common law and “blue-sky” statutes), often filed in state court, to avoid its
requirements. Congress again responded, this time by enacting the Securities Litigation
Uniform Standards Act of 1998 (SLUSA). With certain exceptions (e.g., certain claims
based on the law of the state in which the issuer is incorporated and shareholder
derivative actions), the SLUSA prohibits securities fraud class actions involving
nationally-traded securities based on state law. The SLUSA also provides for removal of
such claims to federal court so they can be dismissed.
Plaintiffs were not completely shut out of state court, however. Unlike the Securities
Exchange Act, over which the federal courts have exclusive jurisdiction, the Securities
Act provides for concurrent jurisdiction in state and federal courts. Moreover, the
Securities Act bars removal of claims filed in state court. A split among courts gradually
developed as to whether the SLUSA changed that for class actions covered under that
statute. This issue was addressed by the U.S. Supreme Court in Cyan, et al. v. Beaver
County Employees Retirement Fund, 138 S. Ct. 1061 (2018). The Supreme Court held
that the SLUSA did not prohibit Securities Act actions from proceeding in state courts.
In the years following Cyan, state class actions and parallel state and federal class
actions increased dramatically, doubling from 16 filings in 2017 to 32 in 2018 and rising
nearly 40% again in 2019 to 53 filings. Although limited to Securities Act claims, the
expense and resources required to litigate claims in state court where pleading
requirements are often more lenient, or in federal and state courts simultaneously,
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Duane Morris Class Action Review – 2023
