Plaintiffs' counsel are well aware of certain jurisdictions which are extremely favorable to their clients, such as Madison County, Illinois. Securities class actions can proceed in state courts because §22(a) of the Securities Act of 1933 gives plaintiffs' a choice of filing the complaint in either state or federal court. If filed in state court, the complaint cannot be removed to federal court.

After the passage of the Private Securities Litigation Reform Act of 1995, securities class action plaintiffs have looked to bring their suits involving “non-covered securities” in a favorable state court rather than in federal court. To stop this type of forum shopping, Congress adopted the Class Action Fairness Act of 2005. CAFA established original jurisdiction in federal court for most significant securities class actions, the only requirement being minimal diversity of citizenship and an aggregate amount in controversy of at least $5,000,000 exclusive of interest and costs. The question is whether CAFA supersedes the provisions of the 1933Act preventing the removal of state cases to federal court.

Federal courts have been divided on whether CAFA trumps the anti-removal provisions of § 22(a) of the 1933 Act. In Luther v. Countrywide Home Loans, 2008 U.S. Dist. LEXIS 26534 (C.D. Cal. Feb. 28, 2008, aff’d 533 F.3d 1031 (9th Cir. 2008), the court held that the anti-removal provisions of § 22(a) control. In direct contrast, New Jersey Carpenters Vacation Fund v. Harbor View Mortg. Loan Trust, 2006-4 __ F.Supp2d ___, 2008 WL 4369840 (S.D.N.Y. Sept. 24, 2008) held that CAFA trumps the anti-removal provisions in § 22(a) of the 1933 Act.

In Luther, which was decided first, the District Court took the position that the removal provisions of §22(a) of the 1933 Act specifically apply to the narrow subject of securities claims arising under the 1933 Act. In contrast, CAFA applies to a generalized spectrum of class actions. The Court held that §22 (a) controls because it is more specific than the general provisions of CAFA. The District Court’s analysis in Luther was followed in Katz v. Gerardi, 2008 WL 4376815 (N.D. Ill. Sept. 23, 2008).

In adopting the District Court’s view that §22(a) trumps CAFA’s general grant of the right to remove, the Ninth Circuit cited the following reasons: (i) it is a basic principle of statutory construction that a statute dealing with a narrow, precise and specific subject is not submerged by a subsequently enacted statute covering a more generalized spectrum; (ii) removal statutes are strictly construed against removal; (iii) a defendant seeking removal has the burden of establishing that removal is proper and any doubt is resolved against removablity; and (iv) Estate of Pew v. Carderelli, 527 F.3d 25 (2d Cir. 2008) is inapposite because it did not involve a claim arising solely under the 1933 Act.

New Jersey Carpenters came to the opposite conclusion. There, the Court opined hat the underlying purpose of CAFA was to specifically prohibit the type of forum shopping condoned in Luther. The desire to reform class action litigation sprung from Congress’ view that it had co-opted by unscrupulous attorneys who aggressively forum shopto “magnet” or “magic” state jurisdictions. The plaintiffs’ counsel in New Jersey Carpenters pleaded only claims arising under the 1933 Act in an attempt to avoid removal to federal court. This type of clever draftsmanship has been criticized in the Second Circuit. Since it was the intent of Congress to have significant class actions affecting securities holders throughout the country to be subject to federal court jurisdiction rather than state court jurisdiction, this litigation fit squarely within the statute.

To support his statutory analysis, Judge Baer cited the Worldcom litigation in which the Second Circuit considered the conflict between the provisions of the bankruptcy laws and SLUSA. The Court held that the reasoning was applicable because the overriding interest in uniformly applying the federal bankruptcy law to all creditors throughout the country trumped claims of some creditors arising under the 1933 Act. Judge Baer also cited Estate of Pew v. Carderelli, comparing CAFA and SLUSA, regarding the question of 1 If it is a covered security in a class action involving fraudulent statements or omissions in connection with the purchase or sale of that covered security, under SLUSA the federal courts have exclusive jurisdiction. Generally, covered securities encompass all securities which are publicly traded. Unlike, SLUSA, however, CAFA did not amend the 1933 Act removal provisions.federal jurisdiction and removal:

“[r]eview of SLUSA and CAFA confirms an overall design to ensure that the federal courts are available for all securities cases that have national impact (including those that involve securities traded on national exchanges) without impairing the ability of state courts to decide cases of chiefly local import, or that concern traditional state regulation of the corporate creatures.”

CAFA limited remand of cases to the state courts involving (i) non-federally “covered securities”¹ (ii) and to disputes relating to corporate governance under the entities’ state of formation; or (iii) the rights, duties (including fiduciary duties) and obligations relating to, created by or pursuant to any security. Judge Baer rejected laintiff’s contention that it came within the third exemption.

First, he noted that the legislative history indicates that CAFA exceptions should be construed narrowly. Second, allow this exception to include any claim relating to a security would render the exceptions to CAFA’s applicability meaningless. Third, the phrase “rights, duties and obligations” has a specific and limited meaning involving the rights and duties of the holders under the documents creating a particular security. For example, the exception would apply to the interpretation of liquidation rights of a preferred stock under the corporate document creating that security, but would not apply to a fraud claim involving the preferred stock.

By initiating litigation, plaintiff’s counsel initially gets to choose where the suit will be filed. CAFA was a legislative attempt to prevent plaintiffs’ counsel from abusing that privilege by forum shopping in certain types of major securities class action litigation. The cases interpreting CAFA are extremely recent. This is a battle that will doubtless be reenacted on a number of occasions. Financial and other securities professionals must be aware of this conflict to be in a position to avoid a “magic” forum.

1 If it is a covered security in a class action involving fraudulent statements or omissions in connection with the purchase or sale of that covered security, under SLUSA the federal courts have exclusive jurisdiction. Generally, covered securities encompass all securities which are publicly traded. Unlike, SLUSA, however, CAFA did not amend the 1933 Act removal provisions.

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CHARLES HECHT has been a principal of his own law firm specializing in securities law since 1971. He was previously on the staff of the Division of Corporate Finance of the Securities and Exchange Commission at its headquarters in Washington, DC. Contact him at 212.490.3232 or visit www.securitiescounselors.com