The Supreme Court, SLUSA and Statutory Interpretation

The Supreme Court in Cyan, Inc. v. Beaver County Employees, 138 S.Ct. 1061(2018) concluded that a securities class action brought in state court based solely on claims arising under the Securities Act of 1933 could not be dismissed based on the Securities Litigation Uniform Standards Act of 1998 or SLUSA. In an opinion written by Justice Kagan for a unanimous Court, arguments posed by the SEC and others based on the legislative history of the statute demonstrating that the Act was intended to preclude securities class actions from proceeding in state court were rejected. Rather the Court relied on the plain language of SLUSA without reference to the legislative materials to reach its conclusion.

A similar approach was recently utilized by the Seventh Circuit in construing SLUSA. Citing Cyan for the proposition that when the statutory language is clear there is no need to resort to legislative materials, the Circuit Court concluded that a class action based solely on state law claims had to be dismissed under SLUSA. Nielen-Thomas v. Concorde Investment Services, LLC, No. 18-2875 (7th Cir. Jan 24, 2019).


Plaintiff Susan Nielen-Thomas brought an action in Wisconsin state court on behalf of herself and up to 45 others claiming that an investment adviser had defrauded them causing damage. The complaint alleged nine state law claims based on Wisconsin and Nebraska securities laws and other state statutes.

Defendants removed the case to federal court – the Western District of Wisconsin based on SLUSA. There the district court found SLUSA unclear but, based on the legislative history of the Act, concluded that the complaint should be dismissed. The Circuit Court agreed.

The opinion

The Court began and largely – but not quite — ended with the statutory language of SLUSA — it did consult legislative materials to bolster its conclusion. The Act “precludes specific securities class actions from proceeding under state law,” the Court stated. Specifically, “[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party if the that party alleges either a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security,” according to the Court. (internal quotations omitted).

There is no dispute that the complaint in this case presents class action claims based on state law, involves a covered security within the meaning of the statue and alleges misrepresentations in connection with the purchase or sale of that security – plaintiff admits these points. The critical question is if a single lawsuit qualifies as a “covered class action” under the statute.

Whether the suit involves a “covered security” is governed by two subsections of 78bb(f)(5)(B)(i) of Title 15. The first provides in part that three criteria must be met for a single lawsuit to qualify as a “covered class action:” 1) Damages; 2) for more than 50 persons or class members; and 3) common questions of law or fact. The second provision also has three criteria for a single lawsuit to qualify: 1) damages; 2) by “one or more named parties” and 3) a representative basis. The subsections are alternatives – they are presented in the disjunctive, separated by the word “or.”

The two subsections are similar but not identical. The first only applies if the action is on behalf of 50 or more persons. The second omits the numeric requirement while specifying that it “includes all actions in which one named plaintiff seeks to recover damages “on a representative basis on behalf of themselves and other unnamed parties similarly situated.’” Each subsection thus reaches conduct not covered by the other the Court concluded. At the same time both are complemented by a third section that focuses on groups of suits.

While the plain language of the statue is clear, consideration of the House Report confirms the fact that the statute was crafted to reach three situations: “’actions brought on behalf of more than 50 persons, actions brought on behalf of one or more unnamed parties, and so-called ‘mass action,’ in which a group of lawsuits filed in the same court are joined . . .’” The Report, the Court, concluded, explains the three pronged approach of the Act reflected in the statutory language.

Here the first subsection clearly does not apply in view of the 50 person limit. Equally clear, however, is the fact that the second subsection precludes this suit from proceeding. That subsection does not contain the 50 person limit. It does, however, preclude a representative action such as this from proceeding in state court based on state law claims. While no other circuit has expressly addressed this question, the Court found that decisions by the Second and Eighth Circuits have referenced the covered class action provision “in a way that supports our interpretation,” citing In re Kingtae Mgmt. Ltd., 784 F. 3d 128, 138 n.16 I2nd Cir. 2015); Green v Ameritrade, Inc., 279 F. 3d 590, 596 n.4 (8th Circ. 2002).


The approach of the Circuit Court here is consistent with that used in Cyan despite the fact that the legislative materials were in fact cited. There the Court’s approach of relying solely on the statutory text drew all nine members of the Court to joining the opinion.

In contrast, just a month before Cyan was handed down, the Court’s opinion interpreting the Exchange Act whistleblower provisions in Digital Radio v. Somers, 138 S.Ct. 767 (2018) was criticized by Justices Thomas, Alito and Gorsuch for citing legislative materials to bolster a reading of the statutory text – the same approach used here. Since the Supreme Court recently added a new conservative Justice, there is little doubt that this approach to statutory interpretation will continue. The more interesting question may be what approach the High Court will employ when the statutory text is not clear.

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