In a recent post, I commented on the settlement of a state court securities class action lawsuit relating to the defendant company’s secondary offering, suggesting in the post among other things that the state court suit was noteworthy because it was the first state court secondary offering-related securities suit of which I was aware. In response to the post, I received a helpful and informative email from my friends at Stanford Securities Litigation Analytics, who pointed out that over time there actually have been quite a number of state court secondary offering-related securities suits. Following their direction, I was able to research this issue further myself using their site’s analytic tools and confirm a number of their observations to me about these kinds of lawsuits. Turns out, as they informed me, there have in fact been a number of state court secondary offering-related securities lawsuits, both pre- and post-Cyan, as set out below. This information could have significant implications both for companies conducting secondary offerings and for their D&O insurers.
Filtering the 3939 securities suits in the SSLA securities class action litigation database for two factors – cases filed in state court and cases involving secondary offering-related allegations – I was able to confirm that there have in fact been a total of 42 state court secondary offering-related securities class action lawsuits filed. The first of these 42 lawsuits was filed in 2003, the most recent just a few days ago. Of the 42, ten have been filed since the U.S. Supreme Court issued its opinion in the Cyan case. (The state court litigation in the SSLA database includes only cases involving public companies; it does not include cryptocurrencies, mutual funds, and municipal bond offerings, or cases only targeting underwriters or auditors in connection to a public company offering, so the SSLA state court litigation figures may differ from information available on other sources or sites.)
Of the 42 secondary offering-related state court-filed cases, nine were removed to federal court (obviously, all of these removals took place prior to Cyan). The remaining 33 were litigated in state court (either because they were remanded back to state court after a failed removal attempt or because they were never removed). Pertinent to the observation made by my good friend Priya Cherian Huskins in a guest post on this site about state court merger objection litigation alleging violations of the federal securities laws, eight of the 42 state court secondary offering-related securities lawsuits related to M&A transactions.
The 42 state court secondary offering related securities lawsuits were filed in the courts of 13 different states (California, New York, Texas, New Jersey, Wisconsin, Pennsylvania, Oregon, Arizona, Tennessee, Massachusetts, Delaware, Ohio, and Florida). California, with 20 of the 42, and New York, with seven of the 42, accounted for well over half of the state court secondary offering-related securities suits.
Of the 42 state court secondary offering-related cases, ten have been filed since the U.S. Supreme Court issued its opinion in Cyan in March 2018. Of the ten post-Cyan state court secondary offering-related securities lawsuits, at least six of the companies involved also are the subject of pending federal court securities class action lawsuits, all of which were filed at or about the same time as the state court actions. Interestingly, as far as I can tell, none of the six federal court lawsuits involve the specific secondary offering-related allegations raised in the state court lawsuits, suggesting that opportunistic plaintiffs lawyers are seizing on the fact of the secondary offering as a way to try to get in on the securities litigation action – possibly filing in state court as they simply don’t want their lawsuit consolidated with the federal court lawsuit.
Thus, in these post-Cyan instances where there is state and federal court litigation at the same time, the state court secondary offering-related lawsuits are not so much parallel actions to the federal court lawsuits as they are merely co-existing lawsuits filed against companies that have experienced disappointing results and falling share prices. The suggestion is that the opportunity for plaintiffs’ lawyers to file a state court secondary offering-related securities class action lawsuit, even if there is a pending federal court lawsuit, is encouraging the proliferation of litigation – the very thing that the class action procedure was designed to protect against.
The bottom line is that – contrary to what I may have suggested in my prior post — there has been a significant amount of state court secondary offering-related securities class action litigation, both pre- and post-Cyan. In the post-Cyan world, if facts exist permitting them to do so, plaintiffs’ lawyers may seek to pursue separate state court secondary offering-related securities litigation, secure in the knowledge that the state court suit cannot be removed to federal court or consolidated with a separate federal court lawsuit.
For potential target companies, the possibility of a separate state court lawsuit when the companies are already facing a federal court lawsuit means that the companies’ litigation burden is compounded, as the companies are forced to fight a multi-front war. For these companies’ D&O insurance carriers, the possibilities for the separate state court litigation means that defense costs could quickly multiply. This has implications not only for primary D&O insurers, but also for excess D&O insurers, because of the increased possibility that underlying layers will be eroded by defense expenses.
As I noted in my prior post about state court secondary offering-related securities litigation, the D&O insurance marketplace has adjusted in reaction to the post-Cyan possibilities for state court IPO-related litigation, but I don’t know that the D&O insurance marketplace has adjusted to the possibility of state court secondary offering-related securities litigation.
In any event, as I previously noted, the post-Cyan possibilities for proliferating lawsuits that cannot be consolidated – the very thing that class action litigation was intended to prevent – suggests that industry groups calling for securities class action litigation reform should focus on the need for Congress to revise the jurisdiction provisions of the Securities Act of 1933. It would be a relatively simple matter to revise Section 22 of the ’33 Act. The possibilities for co-existing state and federal court litigation should be addressed.
I would like to thank my friends at SSLA for calling my attention to this information and for guiding me to conduct my own research using the SSLA tools. I would particularly like to thank Jason Hegland at SSLA for reaching out with the information about the state court secondary offering-related litigation.
So What About State Court IPO-Related Lawsuits?: Once I finished the above analysis of state court secondary-offering related securities litigation, I went on to see what the SSLA tool could tell me about post-Cyan state court IPO-related litigation.
Filtering the database using two factors – one, cases filed in state court, and two, cases involving IPO-related allegations – I was able to determine that between the time the U.S. Supreme Court issued its opinion in the Cyan case and May 24, 2019, there have been 32 state court IPO-related cases filed. I should note that a number of these 32 IPO-related cases also involve secondary offering-related allegations, so care should be taken in using these data to avoid double-counting that might arise in considering both the IPO and secondary offering related cases. (Also the same caveats as noted above concerning categories of cases not counted in the SSLA’s state court database apply to these data as well.)
The 32 post-Cyan state court IPO-related cases were filed in the courts of nine different states: Pennsylvania, California, Illinois, Texas, New York, Tennessee, Connecticut, Wisconsin, and Nevada. Eleven of the post-Cyan state court IPO-related cases were filed in New York and eleven were filed in California, meaning that more than two thirds of these cases were filed in New York and California.
Of the 32 post-Cyan state court IPO-related cases, 20 have parallel federal court securities class action lawsuits that also raise allegations relating to the company’s IPO. At least as of now, 12 of the state court IPO-related lawsuits appear not to have a parallel action. Ten of the 32 cases were filed in 2019, the remainder in 2018 (after the Cyan decision). Where there is parallel state court and federal court litigation, the cases cannot be consolidated, meaning the courts will proceed on separate tracks, again forcing companies to fight a multi-front war, again multiplying defense expenses.
The clear implication is that the existence of concurrent state court jurisdiction for liability actions under the ’33 Act is both facilitating and encouraging the proliferation of duplicative or overlapping litigation.
Significant CT Court Decision on Stay of Discover in State Court IPO-Related Litigation: One of the more interesting and potential vexing questions that can come up in the state court IPO-related litigation in which violations of the ’33 Act are alleged is whether discovery should be stayed in the state court action while the motion to dismiss is pending, as would be the case if the lawsuit had been filed in federal court. Obviously the defendants would not want to have to deal with discovery they would not have faced in federal court simply because the action is pending in state court. These issues are even further exacerbated if there is a parallel federal action.
In a very interesting May 15, 2019 decision (here), Connecticut Superior Court Judge Charles T. Lee ruled that the PSLRA’s discovery stay applies to in the Connecticut state court IPO-related lawsuit that shareholders field against Pitney Bowes. There is no parallel federal court lawsuit pending against Pitney Bowes, so Judge Lee was asked to address the question directly, that is, whether discovery should be stayed in the state court action while the motion to dismiss is pending.
Among other things, Judge Lee said of the relevant statutory language that it is “not ambiguous and that its plain meaning compels the conclusion that the statute, providing for a stay of discovery during the pendency of a motion to dismiss, applies to actions commenced in state court under the Securities Act, as well as actions commenced in federal court.” The stay is warranted, Judge Lee said, because discovery would be “extensive and may be unnecessary” in light of the dismissal motion.
As the ruling of a trial court judge in Connecticut, Judge Lee’s ruling will have no formal precedential effect on courts in other jurisdictions. However, Judge Lee’s analysis is thorough, and so his ruling could have persuasive effect. If litigants in state court securities class action litigation can secure the same stay of discovery that would apply in federal court, that would eliminate one source of vexation and cost that could otherwise arise in this type of litigation, and could be a substantial help in the event of parallel state and federal litigation.