Conglomerate Blog: Business, Law, Economics & Society

Thanks for inviting me to guest blog! I'm a regular reader of the Conglomerate, so I'm looking forward to contributing to the dialogue over the next few weeks.

As Gordon said in his kind introduction, my area of scholarship is securities fraud, so it seems only appropriate that my first post is about our old friend, Rule 10b-5. For some time now, I've been interested in the relationship between private actions brought under Rule 10b-5 and under state antifraud provisions. The Securities Litigation Uniform Standards Act of 1998 expressly preempts state securities fraud class actions involving nationally-traded securities. Thus, at first glance, SLUSA doesn't seem to leave much room for state law as a remedy for false corporate disclosures. However, since state law is ordinarily more attractive than Rule 10b-5, plaintiff attorneys have been quite creative in finding ways to avoid the preemptive force of SLUSA. For some plaintiffs, the latest way around SLUSA has been to "opt out" of the class action to pursue an individual action under state law in state court.

Anecdotally, it seems as if a fair number of institutional investors have opted out of class actions brought in connection with several large securities frauds, and these plaintiffs have claimed that they negotiated larger settlements than they would have received had they remained in the class action. There doesn't seem to be a clearinghouse for individual securities fraud actions similar to Stanford's Securities Class Action Clearinghouse, so it's difficult to tell if this trend will continue. If it does, opting out seems to raise some interesting issues. Do opt outs undercut the goals of SLUSA? How does opting out jive with the lead plaintiff provision of the Private Securities Litigation Act of 1995, which envisions active participation by large stockholders in class actions? And, in any case, do we want to have a system that allows certain plaintiffs -- i.e., institutional investors -- their choice of law and/or forum, while forcing smaller plaintiffs into federal court with its unattractive procedural requirements?

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Thanks for inviting me to guest blog! I'm a regular reader of the Conglomerate, so I'm looking forward to contributing to the dialogue over the next few weeks.

As Gordon said in his kind introduction, my area of scholarship is securities fraud, so it seems only appropriate that my first post is about our old friend, Rule 10b-5. For some time now, I've been interested in the relationship between private actions brought under Rule 10b-5 and under state antifraud provisions. The Securities Litigation Uniform Standards Act of 1998 expressly preempts state securities fraud class actions involving nationally-traded securities. Thus, at first glance, SLUSA doesn't seem to leave much room for state law as a remedy for false corporate disclosures. However, since state law is ordinarily more attractive than Rule 10b-5, plaintiff attorneys have been quite creative in finding ways to avoid the preemptive force of SLUSA. For some plaintiffs, the latest way around SLUSA has been to "opt out" of the class action to pursue an individual action under state law in state court.

Anecdotally, it seems as if a fair number of institutional investors have opted out of class actions brought in connection with several large securities frauds, and these plaintiffs have claimed that they negotiated larger settlements than they would have received had they remained in the class action. There doesn't seem to be a clearinghouse for individual securities fraud actions similar to Stanford's Securities Class Action Clearinghouse, so it's difficult to tell if this trend will continue. If it does, opting out seems to raise some interesting issues. Do opt outs undercut the goals of SLUSA? How does opting out jive with the lead plaintiff provision of the Private Securities Litigation Act of 1995, which envisions active participation by large stockholders in class actions? And, in any case, do we want to have a system that allows certain plaintiffs -- i.e., institutional investors -- their choice of law and/or forum, while forcing smaller plaintiffs into federal court with its unattractive procedural requirements?

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