A probable accompaniment of the increased IPO activity during 2013 and 2014 is an increase in IPO-related litigation, as I have previously noted. There has already been one high-profile IPO-related securities suit filed this year, the securities class action lawsuit filed last week against the Chinese e-commerce giant Alibaba. And if the two additional new filings late last week are any indication, we are likely to see further IPO-related securities suit activity involving the IPO classes of 2013 and 2014. But interestingly, though the two most recent IPO-related securities suits allege violation of the federal securities laws, the cases themselves were not filed in federal court. Instead, the cases were filed in state court, in California.
A little bit of background will help explain these recent developments. Section 22(a) of the Securities Act of 1933 provides for concurrent state court jurisdiction for civil actions alleging a violation of the ’33 Act’s liability provisions. Section 22(a) specifies further that when an action is brought in state court alleging a ’33 Act violation, the case shall not be removed to federal court.
These provisions were significantly litigated in connection with state court lawsuits filed during the financial crisis, as discussed here. One question in particular was whether the provisions of SLUSA, requiring “covered class actions” to be litigated in federal court, pre-empt the concurrent state court jurisdiction provisions in the ’33 Act. Suffice it to say here that the determinations of these issues were not uniform, but that in the Ninth Circuit, the state of the law seems to be that ’33 Act cases filed in state court in reliance on Section 22’s concurrent jurisdiction provisions are not removable notwithstanding the provisions of SLUSA. (I will stipulate that there is probably a great deal more that might be said on all of these issues, I am trying to summarize here so that the context of the recently filed cases may be generally understood).
In apparent reliance on the concurrent jurisdiction provisions, plaintiffs filed two IPO-related securities class action lawsuits last week in California state court.
First, on February 5, 2015, plaintiffs filed a securities lawsuit in California (Santa Clara County) Superior Court against A10 Networks, Inc. and certain of its officers. A10 completed its IPO on March 21, 2014. According to the plaintiffs’ lawyers’ February 5, 2015 press release (here), the company sold nine million shares in the IPO at $15 per share, and certain “Selling Shareholders” sold another 3.855 million shares, including the underwriters’ overallotment. The lawsuit purports to be filed on behalf of a class consisting of all persons or entities who purchased A10 Networks securities pursuant and/or traceable to the Registration Statement and Prospectus issued in connection with A10’s initial public stock offering.
The press release states that the complaint alleges that on October 8, 2014, the Company announced third quarter revenue of approximately $43.0 million to $43.5 million, below the company’s prior guidance of $48.0 million to $50.0 million. On this news, shares of A10 Networks fell $3.35, or 42%, to close at $4.55 on October 8, 2014, or more than $10 per share below the company’s IPO share price.
Second, on February 6, 2015, plaintiffs filed a securities class action lawsuit in California (San Francisco County) Superior Court against Xoom Corp. and certain of its directors and officers. Xoom completed its IPO on February 14, 2013. The complaint purports to be filed on behalf of all shares purchased in or traceable to the initial public offering.
The complaint against Xoom relates to the company’s January 5, 2015 filing on form 8-K (here), in which the company announced that “On December 30, 2014, Xoom Corporation (the “Company”) determined that it had been the victim of a criminal fraud. The incident involved employee impersonation and fraudulent requests targeting the Company’s finance department, resulting in the transfer of $30.8 million in corporate cash to overseas accounts. As a result, the Company expects to record a one-time charge of $30.8 million in its fourth quarter of 2014.” The Company also announced that its Chief Financial Officer had resigned and that the board’s audit committee had launched an independent investigation.
According to the plaintiff’s lawyers’ February 7, 2015 press release (here), the complaint alleges that the company and certain of its directors and officers “made false and misleading statements and failed to disclose that its internal controls were deficient.”
There are a number of interesting things about these two new lawsuits. I should hasten to add that at this point I have only seen the plaintiffs’ law firms’ press releases about the suits. I have not yet been able to get my hands on the actual complaints that were filed. (I would be grateful if any readers out there that have a copy of either complaint would be willing to forward me a copy. I will of course update this post with links once I do get copies of the complaints.)Based on the press releases, I note the following.
UPDATE: The Xoom state court complaint can be found here. Interestingly, and notwithstanding the non-removal provision in Section 22 and the current state of case law in the Ninth Circuit, the defendant has filed a petition to remove the Xoom state court action to United States District Court for the Northern District of California. Thanks to a loyal reader for sending me both documents.
FURTHER UPDATE: The A10 Networks state court complaint can be found here. Thanks to yet another loyal reader for sending me the A10 Networks complaint.
First, though I expect that the securities lawsuit against A10 was filed in reliance on the ’33 Act’s concurrent jurisdiction provision, the press release at least says not that action asserts liability claims under the ’33 Act; rather, the press release says that the complaint alleges “violations of the federal securities laws under the Securities Exchange Act of 1934.” I have to assume that this was an error in the press release. (There are, in fact, some other rather obvious errors in the press release; for example, the press release says that the complaint was filed in the “United States California Superior Court, Santa Clara County,” which obviously is a goof.) I suspect that contrary to the press release the complaint itself asserts claims not under the ’34 Act, but rather under the ’33 Act. It is not just that the claimants’ claims purport to relate to the company’s IPO, and therefore presumably would support ’33 Act claims, but also if the complaint asserts only ’34 Act claims, the claimants would not have benefit of Section 22’s non-removal provisions and the state court action would be immediately removable to federal court. UPDATE: As expected, the A10 Networks complaint to which I linked above does indeed assert claims under the ’33 Act, not under the ’34 Act.
Second, although the facts that Xoom disclosed in its January 5 filing on Form 8-K are quite sensational, and although it may not be surprising that allegations of this type might lead to litigation, it is less than clear, at least from the plaintiff’s lawyers’ press release, that there is a link between the events reported in the 8-K and the company’s IPO. Obviously, the claimants have every incentive to try to invoke the company’s IPO in order to try to assert claims under the ’33 Act, with its lower standard of liability, and they also appear motivated to invoke the IPO in order to try to rely on the ’33 Act’s concurrent jurisdiction provision. However, the filing of the 8-K took place nearly 23 months after the IPO and the complaint was filed just a week short of two years after the IPO. The plaintiffs will have to show how the fraudulent transfers that are at the heart of the complaint are connected to the company’s IPO nearly two years prior. UPDATE: The state court complaint, to which I linked above, does not in fact shed all the much light on the connection that the plaintiff seeks to draw between events described in the Form 8-K and Xoom’s IPO offering documents. The complaint says only that the events described in the 8-K “are a result of seriously deficient internal controls at the Company, which the Company failed to disclose during [sic] in its Registration Statement and Prospectus.”
As I noted in connection with the recent lawsuit against Alibaba, well over 500 companies completed their IPOs during 2013 and 2014. Because companies within three years of their IPOs are susceptible to IPO-related securities suits, and because plaintiffs’ lawyers will be attracted to potential suits in which they can assert ’33 Act liability claims (which have a lower standard of liability than ’34 Act claims), it seems probable that in 2015 and even on into 2016 we will see an upsurge of IPO-related securities lawsuits. If these two most recent cases are any indication, some of these upcoming IPO-related securities suits will be filed in state court, at least where plaintiffs’ lawyers have a basis to file their suits in a state court in one of the states within the Ninth Circuit.
I would be very interested in hearing from readers out there on a question that has always puzzled me about these state court suits – that is, why is state court preferable for the plaintiffs’ lawyers? I guess I can understand it if the plaintiffs think there is some “home court” advantage to proceeding in the local state court courthouse. I also recall from when these issues were debated during the financial crisis that there is an argument that certain of the PSLRA’s requirements do not apply to actions filed in state court. (My recollection of this argument is that some of the PSLRA’s provisions apply by their own terms only to actions “filed in federal court,” so the argument is that these provisions do not apply to actions filed in state court.) I welcome comments from anyone who can shed any light on the supposed advantage the plaintiffs’ lawyers think they can gain by proceeding in state court rather than in federal court.
In any event, I note here a concern that I previously noted when these issues came up in connection with the financial crisis lawsuit filings. My concern has to do with the fact that while Ninth Circuit has held that neither SLUSA nor CAFA preempt Section 22’s non-removal provisions, other federal circuit courts (particularly the Second and Seventh Circuits) have held that SLUSA’s provisions or CAFA’s provisions should prevail over Section 22’s non-removal provisions. It is an uncomfortable situation when federal court jurisdictional provisions are not applied uniformly across the federal circuits. Given the United States Supreme Court’s recent enthusiasm for taking up securities cases, particularly where circuit splits are involved, it may be that this issue will eventually make its way to the Supreme Court at some point in the future.