Why Cyan Has Investors Seeing Green and Corporate Issuers Feeling Blue
By Mike Lange, Securities Litigation Counsel, Financial Recovery Technologies
“Cyan: a greenish-blue color …” (Merriam-Webster Dictionary)
On March 20, in Cyan, Inc. v. Beaver County Employees Retirement Fund, 583 U.S. ___ (2018), the Supreme Court unanimously held that securities class actions solely alleging claims under the Securities Act of 1933 (the Securities Act) can be prosecuted in state rather than federal court. The decision is a rare but refreshing win for investor rights and, although narrow in applicability, will likely yield significant outcomes for institutional investors.
The Decision is Narrow in Application
The decision offers a limited exception to the federal court mandate for securities class actions, applying only to complaints solely pleading securities claims under Section 11 or other provisions of the Securities Act in connection with company offerings. Most class actions allege fraud claims under section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act) for securities traded in the post-offering markets. Those cases must still be in federal court along with cases involving claims under both the Securities and Exchange Acts.
But It Will Likely Yield Significant Outcomes
According to Cornerstone Research, between 2012 and 2017, there was an average 126 company IPOs each year. To date, most solely section 11 cases have been filed in the California state courts. That Circuit was applying the Cyan logic before the Supreme Court decision, allowing cases filed in state court to remain there.
After Cyan, solely section 11 cases will likely be filed in other state courts as well, typically where the issuers involved are headquartered. If California offers any indication, we’re likely to see more settlements of these matters. In contrast to federal court treatment of these cases, California state courts are less likely to dismiss (19% vs. 25%) and more likely to let matters continue (33% vs. 19%). They’re more likely to settle as a result (35% vs. 25%).
More Claim Opportunities Will Create Challenges
While more settlements mean more claim opportunities, institutional investors relying on in-house resources to prepare proof of claim forms will find monitoring for state court settlements challenging. Federal class action settlements can be tracked via third-party data feeds or via the Stanford University Securities Class Action Clearing House. Federal court pleadings can be easily obtained online using PACER, the federal court docket system. By contrast, state courts vary widely in their docket information available online, and most require pleadings to be retrieved in person. In sum, the Cyan decision should make all institutional investors happy except for their internal claim filing teams.
- Law360, March 20, 2018: Justices Keep Securities Class Actions Alive In State Courts
- Law360, March 26, 2018: After Cyan: Creative Lawyering Can’t Displace Clear Statute
To learn more about monitoring state court settlements, contact your FRT representative or email us at email@example.com.
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