As I noted at the time, on March 20, 2018, the U.S. Supreme Court issued its unanimous decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, holding that state courts retain concurrent jurisdiction for liability actions under the Securities Act of 1933. In the following guest post, Doug Greene, Jessie Gabriel, Marco Molina, and Brian Song of the Baker & Hostetler law firm take a comprehensive look at the decision, including its context and significance. As the authors note, the decision has important implications for companies and their D&O insurers, as well as for claims going forward. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.




On March 20, 2018, the Supreme Court unanimously held in Cyan, Inc. v. Beaver County Employees Retirement Fund that securities plaintiffs could bring class actions under the Securities Act of 1933 (“1933 Act”) in state courts.[1]

The Court’s unanimous decision contrasts sharply with the rancor the ruling will cause: Cyan portends a paradigm shift in how defense lawyers defend securities class actions and D&O insurers cover and monitor them. Cyan permits a class action asserting Section 11 or 12(a)(2) claims under the 1933 Act to proceed in state court while a related Section 10(b) class action is proceeding under the Securities Exchange Act of 1934 Act (“1934 Act”) in federal court.

This bifurcation is highly dysfunctional. 1933 Act claims are often closely related to 1934 Act claims. For instance, plaintiffs alleging false or misleading corporate statements in the context of an initial public offering (“IPO”) almost invariably challenge these same statements under both Section 11 and Section 10(b). Likewise, the class of purchasers harmed by a stock price drop will comprise the same members in both actions. Questions of causation will be common to both actions as well, since the alleged misrepresentations must be causally related to what made the stock price drop. Yet these related claims can be split apart and litigated in different courts, with different pleading burdens, lead-plaintiff rules, discovery practices, and case schedules. Yikes.

In addition to increasing the burdens of securities litigation defense, bifurcation deprives defendants of the protections set out under the Private Securities Litigation Reform Act of 1995 (“Reform Act”). After a review of Cyan’s history, we discuss the pre-Cyan difficulty of parallel litigation and preview the post-Cyan world – a world where effective securities litigation defense will require a high thought-to-action ratio and D&O insurance will require new tools and resources.[2]

The Reform Act, SLUSA, and Plaintiffs’ State Court Stratagem

Cyan disrupts a securities litigation system that Congress and the Supreme Court have developed over the past 85 years. To understand Cyan and the paradigm shift it portends, it is necessary to examine the structure of securities law.

Congress Passes the 1933 Act and the 1934 Act

Congress enacted the 1933 Act and the 1934 Act in response to the stock market crash of 1929 and the resulting Great Depression. The key provisions of the 1933 Act are Section 11, which establishes that any purchaser of a security may bring a private action for damages against the issuer if the registration statement is false or misleading,[3] and Section 12(a)(2), which similarly establishes a private right of action against any person who offers or sells a security through a prospectus or oral communication that is false or misleading.[4]

The key provision of the 1934 Act is Section 10(b), which, along with Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder, broadly prohibits deception, misrepresentation, and fraud “in connection with the purchase or sale of any security” based on any public corporate statement.[5] Unlike with Section 11 or 12(a)(2) cases under the 1933 Act, the 1934 Act established that federal courts have exclusive jurisdiction over cases brought under Section 10(b).[6]

The Supreme Court Shapes Securities Jurisprudence

Although Section 10(b) does not include private right of action, the Supreme Court held in Blue Chip Stamps v. Manor Drug Stores that Section 10(b) contains an implied right of action.[7] But the Court repeatedly declined to expand the scope of the implied private right of action – which it described as “a judicial oak which has grown from little more than a legislative acorn” – largely due to policy concerns related to the danger that Rule 10b-5 will be used as a vehicle for particularly vexatious litigation.[8] Throughout its securities jurisprudence, the Court has long balanced the goal of preventing corporate fraud with the need to protect against “open-ended litigation [that] would itself be an invitation to fraud.”[9] Maintaining this balance is especially important because it is shareholders who “ultimately bear the burden” of meritless litigation.[10]

Congress Passes the Reform Act

By the 1990s, private securities litigation had gotten out of control. The class action mechanism had enabled plaintiffs’ lawyers to file abusive “strike suits” targeting deep-pocketed defendants, often on behalf of “professional plaintiffs” with only nominal holdings in the company.[11] Congress found that these abuses resulted in extortionate settlements, chilled discussion of issuers’ future prospects, and deterred qualified individuals from serving on boards of directors, injuring the “investing public and the entire U.S. economy[.]”[12] Shareholders bear the brunt of these abuses; “[i]nvestors always are the ultimate losers when extortionate ‘settlements’ are extracted from issuers.”[13]

To protect the interests of shareholders and the economy as a whole, and to restore balance to the system to enable it to function fairly and efficiently once again, the Reform Act implemented procedural reforms designed to discourage plaintiffs from filing abusive cases and encourage defendants to fight them. The Reform Act’s provisions apply to federal court class actions brought under the 1933 Act and 1934 Act.[14]

Under the Reform Act, lead plaintiffs asserting 1933 Act or 1934 Act claims on behalf of a class are no longer selected based on who wins the “race to the courthouse” – instead, courts must engage in a process to determine which purported class member is “most capable of adequately representing the interests of class members” as the lead plaintiff.[15] This discourages plaintiffs’ lawyers from filing class actions on behalf of “professional plaintiffs” who receive a “bounty for their services” and have no real interest in the outcome of the litigation.[16] Congress understood that plaintiffs with more significant holdings – principally institutional investors – would exercise more control over class counsel, thereby improving the quality of the representation to the benefit of all shareholders.[17]

Naturally, Congress intended for the most adequate lead plaintiff to represent the class as to all its related securities claims. The Reform Act accordingly amended both the 1933 Act and the 1934 Act to require courts to make the lead-plaintiff determination after deciding any motions to consolidate, and to appoint a single “most adequate plaintiff” as the lead plaintiff for all consolidated actions.[18]

In addition, the Reform Act imposes heightened pleading standards that make it easier for courts to dismiss unfounded fraud allegations. For example, securities plaintiffs must plead falsity, materiality, and scienter with particularity as to each statement challenged under Section 10(b).[19] Likewise, Congress understood that the heightened pleading standard under Federal Rule of Civil Procedure 9(b), which applies to allegations concerning fraud or mistake, would apply to the element of falsity under all federal securities statutes, including the 1933 Act. [20]

As a complement to the heightened pleading standards, the Reform Act also amended both the 1933 Act and the 1934 Act to establish an automatic stay of discovery while any motion to dismiss is pending.[21] The automatic stay enables defendants to seek dismissal of unsupported claims before having to face “fishing expeditions” or exorbitant discovery costs.[22] Prior to the Reform Act, securities plaintiffs were able to file lawsuits without even knowing the basis for their own claims, and could “search through all of the company’s documents and take endless depositions” in an effort to find one.[23] The high costs associated with responding to such invasive discovery often coerce defendants into settling even frivolous lawsuits. By disallowing these abusive discovery practices, the Reform Act’s discovery stay essentially requires plaintiffs to have a valid basis for their claims before filing a lawsuit, which discourages strike suits.

Congress Passes SLUSA to Block Plaintiffs’ State Court Stratagem

Prior to the Reform Act, state court litigation of class actions involving nationally traded securities had been rare. But because the Reform Act made it more difficult for unmeritorious suits to survive past the pleading stage in federal court, it had the “unintended consequence” of “prompt[ing] at least some members of the plaintiffs’ bar to avoid the federal forum altogether” by filing class actions in state court instead.[24] Congress enacted the Securities Litigation Uniform Standards Act (“SLUSA”) to prevent such circumvention of the Reform Act and to ensure that class actions involving nationally traded securities would be subject to “uniform standards” under a single federal framework. SLUSA accomplishes this goal by eliminating state court jurisdiction over “covered class actions,” broadly defined as any damages action on behalf of more than 50 people.

The legislative history of SLUSA makes it abundantly clear that Congress designed the statute to give federal courts exclusive jurisdiction over virtually all private class actions involving nationally traded securities. The House Conference Report explains that SLUSA “makes Federal court the exclusive venue for most securities class action lawsuits” and that SLUSA’s purpose is “to prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State, rather than in Federal, court.”[25] These protections include the substantive and the procedural provisions of the Reform Act, “essentially none” of which apply in state courts.[26]

Taken together, the 1933 and 1934 Acts, the Reform Act, and SLUSA create a system in which related securities class actions are considered at the same time, in the same federal forum, prosecuted by one lead plaintiff, and subject to the same substantive and procedural standards.


Cyan Destroys This System: An Overview of the Decision

In a unanimous decision authored by Justice Kagan, the Supreme Court held that state courts have jurisdiction to adjudicate class actions under the 1933 Act that do not concern covered securities.[27] The Supreme Court ruled that this was the more “straightforward” interpretation of the statutory text of the concurrent jurisdiction provision under the 1933 Act.[28] Specifically, the Supreme Court noted that SLUSA framed its amendments to that provision as creating an exception to the general rule that state courts have concurrent jurisdiction. If Congress truly intended to deprive state courts of jurisdiction altogether, the Supreme Court reasoned, then it would not have created an exception to the concurrent jurisdiction provision – it would have just struck that provision in its entirety.


The Supreme Court acknowledged that it does “not know why Congress declined to require that 1933 Act class actions be brought in federal court,” as Congress had with claims under the Exchange Act.[29] But the Supreme Court held that it “will not revise that legislative choice,” noting that it “has no license to disregard clear language based on an intuition that Congress must have intended something broader.”[30]


What Is Wrong With Parallel State and Federal Securities Class Actions?

It is fair to ask why it is unfair to force defendants to defend themselves in state and federal court. The answer is that our system of securities litigation revolves around a carefully constructed set of procedural and substantive rules that parallel state court litigation subverts. This, in turn, imposes inordinate risk of liability and litigation burdens. It is far fairer and more efficient to litigate everything in one court under one set of uniform rules and standards. This is precisely what Congress set out to do when it passed SLUSA. According to the Supreme Court in Cyan, however, Congress failed.

Concurrent Jurisdiction Prevents Consolidation of Related Cases

The Reform Act’s consolidation and lead-plaintiff appointment process was a centerpiece of the legislation. As noted above, Congress was deeply concerned that “professional plaintiffs” with no real stake in the company “do not adequately represent other shareholders,” and have little interest in exercising oversight over class counsel.[31] Congress addressed this problem by mandating that courts “shall appoint the most adequate plaintiff” as lead plaintiff over all consolidated actions.[32] This protects absent class members whose interests are aligned with the lead plaintiff’s. For instance, settlements negotiated under the supervision of adequate lead plaintiffs are generally more “‘fair and reasonable’ than is the case with settlements negotiated by unsupervised plaintiffs’ attorneys.”[33]

Consolidation is an important step in the lead-plaintiff process, since class members’ interests cannot be adequately represented by competing lead plaintiffs in parallel class actions. That is why the Reform Act requires appointment of a lead plaintiff over all consolidated actions following adjudication of any consolidation motions.[34] Further, “consolidation of enforcement control in a single liability regime without the ability to shift fora” is a critical component of a successful system for securities-fraud deterrence, which was an animating idea behind SLUSA.[35] After all, a system in which related cases are not consolidated, and which allows for the possibility of “parallel class actions proceeding in state and federal court,” gives rise to “wasteful, duplicative litigation” and “squarely conflicts with the congressional preference for ‘national standards for securities class action lawsuits involving nationally traded securities.’”[36]

But, under Cyan, related securities class actions cannot be consolidated in a single forum because state court securities class actions cannot be removed, undermining the intent and policy goals behind the Reform Act’s consolidation and lead-plaintiff appointment process. Under Cyan, plaintiffs can file wasteful, duplicative, parallel securities class actions in state courts, where the “uniform standards” established by the Reform Act and reinforced by SLUSA do not apply. Fractured class actions not only waste judicial resources and unduly burden defendants, but can harm absent class members as well. For instance, when cases are not consolidated under the direction of a single lead plaintiff, the lead plaintiffs representing competing classes could end up undermining each other or taking inconsistent positions, to the detriment of class members who lack control over the litigation.

In addition, under Cyan, plaintiffs who file class claims in state court are once again incentivized to “race to the state courthouse” regardless of whether they have a genuine interest in the lawsuit, because the Reform Act’s lead-plaintiff provisions do not apply in state courts. The consequences of this are felt not only in the state court 1933 Act case, but also in any simultaneously proceeding federal court Section 10(b) case. Because Section 10(b) claims must be filed in federal court, the “most adequate plaintiff” will have control over those proceedings – including, for instance, deciding whether to settle the case under certain terms. However, an individual investor with no more than a nominal stake in the company can hijack this process by filing a related Section 11 class action in state court. The individual investor, whose interests may not align with those of the class, can then inject himself into the strategic driver’s seat, depriving the “most adequate plaintiff” of the power to agree to a strategic course of action, and, among other things, undermine a settlement that is in the best interests of the class. Congress surely did not intend to return such power to the hands of “professional plaintiffs.”

Concurrent Jurisdiction Disrupts Key Procedural Elements of the Reform Act

Taken together, the Reform Act and SLUSA prescribe that once related cases are consolidated, they will be subject to the Reform Act’s automatic discovery stay and heightened pleading standards, and to the Federal Rules of Civil Procedure. But when 1933 Act cases are filed in state court, these important protections are lost. State courts apply their own procedural rules and more-relaxed pleading standards to securities class actions, which is precisely why they are attractive venues for plaintiffs seeking to circumvent federal standards. Moreover, filing 1933 Act claims in state court seriously undermines the Reform Act as to any simultaneously proceeding 1934 Act claims as well.

Lack of a discovery stay. State courts often refuse to stay discovery while a motion to dismiss is pending on the grounds that the Reform Act’s automatic discovery stay applies only in federal court. When facing a Section 11 claim in state court where discovery has not been stayed, defendants are much more susceptible to being coerced into settling unmeritorious claims by unbearable discovery costs – just as they were before the Reform Act was passed. Moreover, when a Section 10(b) class action is proceeding in federal court at the same time, there is a risk that the Reform Act’s discovery stay will lose its teeth in that case as well. Although discovery is stayed as to the Section 10(b) claim while a motion to dismiss is pending, discovery that is directly related to that claim may move ahead in the state court 1933 Act case. Defendants then face the same onerous discovery costs that the Reform Act was designed to rein in, before they are able to obtain dismissal of a meritless Section 10(b) claim. This is precisely what the Reform Act and SLUSA try to avoid.

While defendants in that scenario could move the federal court to stay discovery in the state action under section 27(b)(4) of the 1933 Act,[37] that provision is an antique tool that is rarely used and “quite limited,” since federal courts only invoke it in aid of their jurisdiction or to protect or effectuate judgments.[38] And at least one court has held that this provision can only be used to stay discovery in state class actions under the 1933 Act, but not in individual state actions under the 1933 Act.[39] In short, defendants should prepare for incongruous discovery rules when fending off parallel securities actions in federal and state court.

Lack of heightened pleading standards. A similar incongruity occurs with respect to the standards for pleading a claim under the securities laws, which differ in state and federal courts. At a minimum, Congress understood when it passed the Reform Act that the Federal Rules of Civil Procedure would apply to claims of misrepresentation under the securities laws, as it assumed these claims would be filed in federal court. But, as discussed below, Cyan permits plaintiffs to avoid the more demanding federal pleading standards by filing in state courts, which often require no more than notice pleading. This is particularly problematic with respect to Section 11 claims that “sound in fraud,” because filing such claims in state court – where they can be alleged separately from claims of fraud under Section 10(b) – makes it easier for plaintiffs to disclaim any reliance on a fraud theory.

Today, it is well established that Section 11 claims that sound in fraud are subject to Rule 9(b). Although Section 11 does not necessarily require proof of fraud, Rule 9(b) refers to “alleging fraud” – not to causes of action in which fraud is an element. Requiring Section 11 claims that sound in fraud to be pleaded with particularity prevents plaintiffs from performing an end run around the pleading requirements by “adding a superficial label of negligence or strict liability.”[40] It is often difficult for plaintiffs to plead around their Section 10(b) fraud allegations in framing a Section 11 claim when they are asserting both claims in the same case. After all, the element of loss causation (as well as its companion defense of negative causation under Section 11) requires that the alleged misrepresentations be causally related to what made the stock price drop.[41] This means that the essence of the 1933 Act and 1934 Act claims is necessarily the same. Thus, when Section 11 and Section 10(b) claims are asserted in the same consolidated federal case, as contemplated by the Reform Act, Section 11 claims often sound in fraud and so are subject to Rule 9(b). Yet Cyan enables plaintiffs to plead around the sounds-in-fraud rule simply by permitting plaintiffs to split Section 11 claims from 10(b) claims – a highly unfair and unprincipled result that is contrary to Congress’ intent.

This difference is pivotal. In many states, the pleading standard for falsity is far lower than the standard established by Rule 9(b), requiring no more than notice pleading.[42] Worse, as in many other states, California’s equivalent of Federal Rule of Civil Procedure 8 does not even incorporate the “plausibility” requirement established by Bell Atlantic Corp. v. Twombly[43] and Ashcroft v. Iqbal.[44] California courts considering demurrers (the California equivalent of a motion to dismiss) consider the facts alleged in the complaint to be true “however improbable they may be.”[45] Naturally, this means that significantly fewer Section 11 claims are dismissed at the pleading stage in state courts than in federal courts.

Pre-Cyan Experience Shows Litigation of Parallel State and Federal Claims Is Disheveled

The dysfunction inherent in a system that permits concurrent state and federal jurisdiction is far from hypothetical. Simultaneous state and federal proceedings are riddled with logistical and substantive problems.

To take an example, in Altayyar v. Etsy, Inc.,[46] plaintiffs filed a securities class action complaint in federal court against e-commerce giant Etsy, Inc., in connection with Etsy’s initial public offering. While motions to appoint a lead plaintiff in the federal action were pending, a different plaintiff filed suit in California Superior Court alleging 1933 Act claims only, on behalf of essentially the same class, in connection with the same alleged conduct. The defendants removed the state action to federal court and moved to transfer it to the Eastern District of New York – where Etsy is headquartered, most of the conduct at issue took place, and nearly all documents and witnesses were located – for potential consolidation with the 1934 Act case.[47] But the district court granted the state plaintiff’s motion to remand the California action, and the defendants were left litigating essentially the same claims in two different fora, before two different decision-makers, with two different sets of procedural rules.

As one might expect, this created a host of inefficiencies for both the courts and the litigants. For the first few months, discovery in the federal action was stayed under the Reform Act, even as discovery moved forward in the state proceeding. Defendants eventually convinced the California court to stay the state proceedings on forum non conveniens grounds, allowing the federal case to take the lead. This led the state plaintiffs to seek to intervene in the federal action, asking the federal court to stay the federal case in favor of the California action, or, alternatively, relitigate appointment of the lead plaintiff in the federal suit so that the state plaintiff could participate. The federal court denied the motion to intervene, and a few months later granted the defendants’ motion to dismiss the federal action in its entirety with prejudice. That decision is now on appeal, while the state court case remains active. Messy, highly inefficient parallel proceedings of this type delay the litigation process, waste judicial resources, subject defendants to inconsistent discovery obligations, and carry a high risk of inconsistent results.

In some cases – particularly where the parallel proceedings move at vastly different speeds –1933 Act cases in state court will drive the results in related 1934 Act cases in federal court. For example, Pacific Biosciences of California was sued in connection with its initial public offering in five different actions at the end of 2011. Three of these were 1933 Act cases consolidated in California Superior Court; the other two, alleging 1933 Act and 1934 Act claims, were filed and consolidated in federal court.[48] The consolidated federal action was subject to the Reform Act’s discovery stay for the year and a half it took to complete the motion-to-dismiss process; on April 15, 2013, the court dismissed the federal action in its entirety, giving plaintiffs a month within which to file an amended complaint.

In the meantime, the state court action had advanced through the filing of two amended complaints, a decision on defendants’ motions to dismiss, answers to the complaint, some party and third-party discovery, and a mediation resulting in a settlement agreement (though the federal lead plaintiffs were excluded from this process and only informed after the fact). On June 3, 2013, the state court preliminarily approved the settlement and conditionally certified a settlement class that was identical to the class the plaintiffs in the federal suit claimed to represent. One day before the federal amended complaint was due, the defendants moved to stay the federal proceeding – still in the pleadings stage – on the theory that if and when the preliminary state settlement became final, it would extinguish the federal class claims in their entirety. Plaintiffs in the federal action opposed the defendants’ motion, arguing that the federal court had an obligation to preside over disposition of the 1934 Act claims, over which it had exclusive jurisdiction. Plaintiffs instead asked the court to enjoin the state proceedings, claiming that the parties in the state court action were improperly circumventing the Reform Act’s lead-plaintiff provisions and undermining the statutory scheme by seeking to settle the 1934 Act claims in the state forum. The federal court denied both motions to stay, the state court settlement received final approval; and the federal proceeding was voluntarily dismissed a few months later (after a lead plaintiff who had opted out of the state settlement reached his own settlement with defendants).

In short, because the 1933 Act case proceeded under state court rules and was not subject to the Reform Act’s automatic discovery stay, it advanced to a point where the parties needed to mediate and settle before the federal court could even decide the motion to dismiss (which it ultimately granted). In a very real way, allowing parallel proceedings of this type strips federal courts of the exclusive jurisdiction and decision-making authority over Exchange Act claims that the Reform Act and SLUSA sought to establish.

These Problems Will Increase Post-Cyan

But we are stuck with Cyan. In any case involving a registered offering, the defendants must brace for 1933 Act claims in state court and parallel claims in federal court. Count us as skeptical that Congress will act, but a bit more optimistic that the corporate bylaws solution Professor Grundfest has proposed will take hold and withstand challenge.[49] Even if one or both efforts get traction, plaintiffs’ lawyers will, in the meantime, leave skid marks in front of state courthouses around the country.

Just how many skid marks they leave is the key question. Plaintiffs’ lawyers have been filing state court cases for several years now, so it is possible the frequency of such cases will not increase dramatically. But we believe Cyan will have a profound impact on the rate of state court filings – plaintiffs’ firms can now file in state court without the risk or expense of a jurisdictional battle. Therefore, in our view, Cyan will significantly increase the overall number of unconsolidated securities class actions.


If there are more filings in state court, competition among the new, expanded set of plaintiffs’ securities law firms suggests these firms will file in multiple states to attempt to get around the traffic in the state where the company defendant is headquartered. In addition to the headquarters state, candidates for state court filings include: (i) New York, where the company’s stock is listed; (ii) any state with significant operations; (iii) any state where one of the named plaintiffs resides; and, of course, (iv) California, where securities plaintiffs have had unprecedented success litigating pre-Cyan.


There is no ability to consolidate these multiple state court and related federal court filings. The only way to coordinate them is to file motions to stay, forum non conveniens, or to coordinate. But these types of motions are always unpredictable and often unsuccessful. And where the forum is the plaintiff’s residence, we believe it will be very difficult to move the case, and more difficult still when the plaintiff is a significant local institutional investor.


These plaintiff-friendly dynamics may well draw in new plaintiff-firm competitors or cause significant plaintiffs’ firms with diverse practices to refocus on securities cases. Many prominent plaintiffs’ firms have strong state court litigation and trial practices. This risks a real mismatch: we could well see savvy state court plaintiffs’ trial lawyers going up against white-shoe securities class action defense counsel. Cover your eyes – in some cases, it will be ugly. And since the supply of plaintiffs’ lawyers drives the number of cases they file, frequency will increase exponentially.


Worse, state court cases will effectively drive related state and federal litigation. In federal court, the Reform Act’s procedural protections – the lead-plaintiff, consolidation, and motion-to-dismiss procedures – can take more than a year to play out. While that neat-and-tidy process is playing out in federal court, state court cases will be careening through the litigation process toward trial. State court cases will move quickly. There is no lead-plaintiff and no 60-day notice requirements in state court. Also, with notice pleading being the norm, state court securities class actions typically survive pleading-motion challenges. And without a discovery stay, discovery will begin lickety-split, even during challenges to pleading through demurrers or motions to dismiss.

To add insult to injury, with the state court case in the driver’s seat, the Reform Act’s procedural protections in the related federal court case will be weakened as a practical matter. For instance, the automatic stay of discovery in a securities fraud case under the 1934 Act becomes a weaker shield against abusive lawsuits when discovery can proceed full bore in a closely related state court case. Worse still, the federal case will become even more virulent, because discovery produced in the state court case will inevitably become part of the federal court complaints.

Beyond this ability to construct stronger claims, getting plaintiffs over the scienter hurdle and closer to being able to prove liability, there are a number of reasons plaintiffs and plaintiffs’ firms will continue to file cases in federal court. For one, plaintiffs’ 1934 Act damages can be higher because the claims are based on secondary-market purchases and thus can involve a larger number of class members.

There is a subtler reason as well: Although the federal lead plaintiff may not be able to control the pace of the litigation, the litigation may still end up in the pole position. State court litigation filed in multiple states can only assert one claim on behalf of the class of purchasers in the registered offering at issue, so that a settlement of one of the state cases will foreclose claims in all of the other state cases. Defendants will seek out the right state plaintiff with which to settle for the lowest possible amount that will obtain settlement approval. Although the other state plaintiffs will object, a good settlement negotiation process and a high enough settlement amount will obtain approval more often than not.

Once the state court litigation is settled, the federal plaintiff will be in charge – but with a case that is more valuable because of the state court discovery, which allows more federal cases to survive motions to dismiss. A key exception to federal dominance after settlement of the state court litigation will be state court litigation filed in only one state – but that will be the exception, not the rule. In any event, we need to construct a new securities litigation system that can withstand the worst securities litigation crashes.

A Call to Action: Defense Counsel and D&O Insurers and Brokers Need to Develop New Tools and Resources

Defense lawyers and D&O insurers and brokers have neither a map nor a compass to navigate this new landscape. For the past 20 years, the blueprint for defending securities class actions has been simple: move to dismiss the case at the pleading stage, and, if unsuccessful, settle the case. But now, the most fundamental fights in the case will take place in state court, which will require a different way of litigating.


Most fundamentally, securities litigation will now require actual litigation. And because securities litigation specialists rarely litigate all the way through summary judgment, much less trial, securities litigation will require sharper litigation skills, and new team members who can assist with litigation strategy that realistically contemplates trial as the litigation’s destination. These necessary new lawyers, moreover, will need to be geographically diverse – since state court practice is local, the lead securities litigation partner will need help from colleagues in the states in which 1933 Act cases are filed.


Actual litigation in securities litigation would tend to drive down settlement values and deter frivolous lawsuits. Yet for many years now, the skyrocketing cost of defending securities class actions has made it uneconomical to defend most cases through summary judgment, much less to trial. Although state court litigation is not the ideal way for litigation to return to securities cases, we might be better off for it – if defense counsel and D&O insurers and brokers can dial up a well-run defense system.


Such a system must contain several elements:


  • A lead partner who is a securities litigation specialist is critical. He or she needs to be able to oversee potentially dozens of cases brought by the entire universe of plaintiffs’ lawyers. Only a lawyer who is well-known to the plaintiffs’ bar will be able to understand the intra-plaintiff dynamics and the often-subtle strategies the plaintiffs are trying to pull. The lead lawyer also needs to manage the settlement dynamics among large groups of plaintiffs’ lawyers and the tower of D&O insurers, among the fairly small number of repeat securities class action mediators.


  • Law firms must police the partners in their firms who compete for securities cases. There is a growing number of general litigators who compete for securities cases or who are put in front of corporate clients because of their relationship with the corporate partner. This is simply a product of internal law firm politics and/or marketing and does not serve clients well. Firms need to feature their full-time securities litigators only. And, whether or not a firm has one, a firm needs to advise its corporate client defendants to audition multiple full-time securities litigation lawyers. It is a best practice in all cases for companies to audition several firms, including firms that did not do corporate work that may be at issue.


  • Defense firms need to defend parallel state and federal litigation with a sky-high thought-to-action ratio. To state the obvious, defense firms will be tempted to rev up their litigation engines and defend the myriad cases as though each case were the only one. But each individual case is not the only one – each is really part of one large litigation, and each needs to be handled that way. Defense firms have an obligation to their clients to be careful stewards of their clients’ insurance policy proceeds. The totality of the litigation needs to be handled carefully to avoid self-dealing. Here, too, the lead partner’s securities litigation expertise, along with tight case management, is critical.


  • Last but certainly not least: It is incumbent upon D&O insurers and brokers to steer defendants toward the right lead lawyer and insist on an audition process, and to then exercise greater strategic oversight than in non-Cyan We are not insurance lawyers, but we believe the defense counsel consent and cooperation clauses in current policies allow insurers to exercise this type of muscle. And if that is not the case, insurers could easily include a provision imposing greater control of defense counsel selection and strategic oversight for companies conducting an IPO. Insurers and brokers must carefully oversee defense counsel’s strategic decisions. We believe the cooperation clause gives insurers the right to be more than a backseat driver on litigation management as well as defense counsel selection, but here too, a simple policy modification would work.


If we as a D&O liability defense community can impose a system approaching this ideal, we will not only survive Cyan, but we may well end up with better outcomes. State court cases present many challenges, but our firm and others have excellent commercial litigators around the country who know how to defend complex cases. (Dear fellow full-time securities litigators: Let’s make a pact to have our trial-lawyer partners try securities cases and not get beyond our depth.) Some state court securities litigation cases will go to trial, and with the right lawyers in place and good decision-making and collegiality among defendants, defense counsel, and D&O insurers about which ones to take to trial, they can be defended to a defense verdict.


State court 1933 Act cases are difficult cases – in part because the 1933 Act does not contain a scienter requirement. But the individual defendants have a due-diligence defense, and the Supreme Court’s decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund[50] protects the company’s statements of opinion – a key type of challenged statement in 1933 Act cases. We build our defense on our clients’ lack of false statements even in 1934 Act cases, so the foundation of our defense is the same in 1933 Act cases. And the lack of a scienter element means that a judgment against the defendants will not trigger the fraud exclusion, which removes one reason securities cases do not go to trial.


If select state court cases go to trial, the federal plaintiffs will face greater pressure to settle earlier, rather than wait out resolution of the state court cases and hold out for larger settlements of their relatively more virulent cases. And the more state court cases go to trial, the more some plaintiffs and plaintiffs’ firms will hesitate before filing cases. This could be Cyan’s silver lining.

But without the right lead partner, and greater insurer and broker involvement in defense-counsel selection and strategy, Cyan will become the disaster so many fear.




There is no doubt about it: Cyan significantly disrupts a carefully balanced system of securities litigation that Congress and the Supreme Court have developed over the 85 years since Congress passed the 1933 Act. But if – and only if – we as a D&O liability defense community develop the right post-Cyan strategies, not only will we survive this change, we’ll be able to achieve better outcomes.



[1] — S.Ct. —-, 2018 WL 1384564 (2018).

[2] Rob Yellen of Willis Towers Watson provided excellent insights in the development of this article.

[3] 15 U.S.C. § 77k.

[4] 15 U.S.C. § 77l.

[5] 15 U.S.C. § 78j; 17 C.F.R. 240.10b-5.

[6] 15 U.S.C. § 78aa(a).

[7] 421 U.S. 723, 730 (1975).

[8] Id. at 737.

[9] Id. at 760-61 (Powell J., concurring).

[10] Id. at 761 n.5.

[11] S. Rep. No. 104-98, at 4 (1995); H.R. Rep. No. 104-369, at 31–32 (1995) (Conf. Rep.).

[12] H.R. Rep. No. 104-369, at 31–32 (1995) (Conf. Rep.).

[13] Id. at 32.

[14] 15 U.S.C. § 77z-1(a)(1); 15 U.S.C. § 78u-4(a)(1).

[15] 15 U.S.C. § 78u-4(a)(3); 15 U.S.C. § 77z-1(a)(3); see H.R. Rep. No. 104-369, at 33 (1995) (Conf. Rep.).

[16] H.R. Rep. No. 104-369, at 33 (1995) (Conf. Rep.).

[17] Id. at 34.

[18] 15 U.S.C. § 78u-4(a)(3)(B)(ii); 15 U.S.C. § 77z-1(a)(3)(B)(ii).

[19] 15 U.S.C. § 78u-4(b)(1)–(2).

[20] At the time the Reform Act was passed, the application of Rule 9(b) to securities claims was well-established and has since become nearly uniform. Indeed, the Reform Act’s pleading requirements for 1934 Act cases arguably codified the standard for pleading falsity adopted by the Ninth Circuit in In re GlenFed Securities Litigation, 42 F.3d 1541, 1548 (9th Cir. 1994) (en banc), superseded by statute on other grounds as stated in SEC v. Todd, 642 F.3d 1207, 1216 (9th Cir. 2011). See William S. Lerach & Eric Alan Isaacson, Pleading Scienter under Section 21D(b)(2) of the Securities 1934 Act of 1934: Motive, Opportunity, Recklessness, and the Private Securities Litigation Reform Act of 1995, 33 San Diego L. Rev. 893, 894–95 (1996). Since the element of falsity is common to claims under both the 1933 Act and 1934 Act, Congress understood that Rule 9(b) applied to the falsity element of 1933 Act claims.

[21] 15 U.S.C. § 78u-4(b)(3)(B); 15 U.S.C. § 77z-1(b).

[22] H.R. Rep. No. 104-369, at 37 (1995) (Conf. Rep.).

[23] Id.

[24] Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 82 (2006).

[25] H.R. Rep. No. 105-803, at 13 (1998) (Conf. Rep.).

[26] Id. at 15.

[27] BakerHostetler partner Doug Greene authored an amicus brief for Washington Legal Foundation in support of Cyan.

[28] Cyan, 2018 WL 1384564, at *8.

[29] Id. at *11.

[30] Id.

[31] H.R. Rep. No. 104-369, at 32–35 (1995) (Conf. Rep.).

[32] 15 U.S.C. § 78u-4(a)(3)(B)(ii); 15 U.S.C. § 77z-1(a)(3)(B)(ii).

[33] H.R. Conf. Rep. No. 104-369, at 35 (1995) (Conf. Rep.).

[34] 15 U.S.C. § 78u-4(a)(3)(B)(ii); 15 U.S.C. § 77z-1(a)(3)(B)(ii).

[35] Benjamin P. Edwards, Disaggregated Classes, 9 Va. L. & Bus. Rev. 305, 362 (2015).

[36] Dabit, 547 U.S. at 86–87 (quoting SLUSA § 2(5), 112 Stat. 3227).

[37] 15 U.S.C. § 77z-1(b)(4).

[38] Tobias Holdings, Inc. v. Bank United Corp., 177 F. Supp. 2d 162, 168-69 (S.D.N.Y. 2001).

[39] In re Transcrypt Intern. Sec. Litig., 57 F. Supp. 2d 836, 842-47 (D. Neb. 1999).

[40] Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 629 (4th Cir. 2008).

[41] Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 346 (2005); In re Flag Telecom Holdings, Ltd. Sec. Litig., 574 F.3d 29, 35–37 (2d Cir. 2009).

[42] See, e.g., In re Mobileiron, Inc. S’holder Litig., Santa Clara Cty. No. 2015-1-CV-284001, 2016 WL 9137540, at *4 (Oct. 4, 2016) (finding that plaintiffs’ Section 11 claim did not sound in fraud and therefore was “subject to the general pleading standard in California”).

[43] 550 U.S. 544 (2007).

[44] 556 U.S. 662 (2009).

[45] See, e.g., Berg & Berg Enters., LLC v. Boyle, 178 Cal. App. 4th 1020, 1034 (2009) (citation omitted).

[46] No. 15-cv-2785 (E.D.N.Y., filed May 13, 2015).

[47] See Cervantes v. Dickerson et al., Case No. 15-cv-3825 (N.D. Cal., filed Aug. 20, 2015).

[48] See In re Pacific Biosciences of Cal. Inc. Sec. Litig., Case No. CIV 509210 (San Mateo Cty. Sup. Ct., filed Oct. 21, 2011); Primo v. Pacific Biosciences of Cal., Inc., Case No. 11-cv-6599 (N.D. Cal., filed Dec. 21, 2011).

[49] For more on federal-forum bylaws, see B. Feldman & I. Salceda, “After Cyan: Some Prognostications,” available at

[50] 135 S. Ct. 1318 (2015).