Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, August 5, 2014

Edwards on Securities Litigation and State Preemption

Benjamin P. Edwards has posted Securities Fraud, Federalism & the Rise of the Disaggregated Class: The Case for Pruning the State Law Exit Option on SSRN with the following abstract:

In the securities litigation world, changes to federal law have repeatedly caused unintended consequences in state courts. This article explores two consequences of securities litigation reform and calls for further reform. First, the federal scheme for securities class action litigation has effectively excluded many individual state law claims from federal court. This reality, in connection with a well-documented trend toward institutional investors “opting out” of class actions to pursue higher-value individual claims in state court, has led to the second new and unexplored dynamic: a new procedural vehicle to aggregate lower-value individual claims outside of a securities fraud class, a vehicle I call the “disaggregated class.”

This article explores these dynamics and argues that the partial preclusion structure of the Securities Litigation Uniform Standards Act (“SLUSA”) should be extended to preempt many state law claims. At present, SLUSA only makes state law claims nonactionable in the class action form. To breathe life into precluded class claims, plaintiffs have begun to go to great lengths to aggregate individual claims in ways that do not trigger SLUSA’s application. As this trend continues, the distinction between class and individual actions begins to break apart and the rationales behind SLUSA’s ban on state law class action litigation begin to apply to individual actions. Expanding SLUSA to limit plaintiffs’ ability to exit federal class action litigation in favor of state law suits in state courts seems likely improve securities fraud deterrence by reducing over-deterrence costs, more appropriately aligning state and federal authority over the national securities markets, and by making private securities class counsel more responsive to exit threats from large investors.

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