After Federal Securities Reform: Blue Sky Ahead for Colorado Class Actions-part Ii
| Publication year | 1996 |
| Pages | 45 |
| Citation | Vol. 25 No. 8 Pg. 45 |
1996, August, Pg. 45. After Federal Securities Reform: Blue Sky Ahead for Colorado Class Actions-Part II
Following recent legislative and judicial reform of the federal securities laws, Colorado investors with fraud claims now must grapple with a difficult question: what is the preferred forum for filing a class action lawsuit to recover damages?
Because federal courts have exclusive jurisdiction over claims alleging violations of § 10(b) and Rule 10b-5,(fn1) plaintiffs traditionally pursued securities class actions in federal court, requesting that the court take pendent (now supplemental) jurisdiction over all state law claims. Only investors willing to forego their Rule 10b-5 claims filed their complaints in state court.
As a result of the federal reforms, plaintiffs shopping for the most favorable forum must re-evaluate the state court alternative. If investors perceive a diminished likelihood of prevailing under Rule 10b-5, or if plaintiffs cannot convince federal courts to accept supplemental jurisdiction over their state law claims, then filing suit in state court becomes more attractive as a forum option. Furthermore, new procedural hurdles instituted by the Private Securities Litigation Reform Act of 1995(fn2) apply only to cases brought in federal court pursuant to the Federal Rules of Civil Procedure. If plaintiffs can obtain the same or better recovery in state court, and if their bargaining position in settlement negotiations is unaffected by their choice of forum, plaintiffs may choose to file their claims in state court to avoid these procedural obstacles. This trend already is becoming evident in other states, such as California.(fn3)
This article is the second in a two-part series discussing the differences between litigating claims under the antifraud provisions of the Securities Exchange Act of 1934 ("1934 Act"), § 10(b) and Rule 10b-5, and its Colorado counterpart, CRS §§ 15-21-501 and 604 ("Colorado Act"). Part I, which was published in the July issue, considered the substantive differences between these federal and state statutory claims. This Part II examines the procedural and strategic considerations affecting class action plaintiffs in choosing a forum. It also reviews the different rules of recovery available to investors under the federal and Colorado securities statutes.
Before initiating a lawsuit, investors wishing to pursue claims under the Colorado Act must consider whether the federal court even will entertain jurisdiction over state claims filed there. Before the Judicial Improvements Act of 1990(fn4) was enacted, federal courts in Colorado often declined jurisdiction over pendent state law securities fraud claims, despite those courts' exclusive jurisdiction over related federal claims.(fn5) The Judicial Improvements Act modified the law by adopting the concept of mandatory supplemental jurisdiction except under limited circumstances.(fn6) A federal court may decline jurisdiction over state law claims based on the same case or controversy as federal claims if state law claims predominate over federal claims or raise novel or complex issues, federal claims are dismissed, or there are "exceptional" circumstances creating "compelling reasons" for denying jurisdiction.(fn7)
Changes to the federal securities laws, coupled with Colorado courts' willingness to interpret the Colorado Act expansively, may provide federal judges with new reasons to refuse jurisdiction over state law securities fraud claims. Indeed, after the recent federal reforms, plaintiffs attempting to capitalize on substantive differences in Colorado and federal law may focus their claims more on alleged violations of the Colorado statute.(fn8) Federal judges perceiving this shift in emphasis could determine that state law issues predominate over those of federal law and decline to exercise supplemental jurisdiction.
Furthermore, because Colorado state courts have published relatively few decisions interpreting the Colorado Act, litigation of blue sky claims often raises issues of first impression. The opinions that have been published, most notably the recent decision in Rosenthal v. Dean Witter Reynolds, Inc.(fn9) reflect the Colorado Supreme Court's willingness to depart from federal precedent when construing the Colorado analog. Federal judges may refuse supplemental jurisdiction if they believe that resolution of the state law claims requires interpretation of the Colorado Act and, without further guidance from the Colorado Supreme Court, raises novel or complex issues of state law.
Finally, courts exercising federal question jurisdiction routinely refuse to exercise supplemental jurisdiction if they grant
a defendant's motion to dismiss the federal claims.(fn10) Insofar as the Reform Act increases the probability of early dismissal of federal claims, even plaintiffs who initially file all their claims in federal court are more likely, in the end, to litigate their state law claims in state court.
Plaintiffs who file class actions in federal court also will encounter a different process for appointment of the class representative and class counsel. Through the Reform Act, Congress sought to eliminate "the routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price," often "without regard to the underlying culpability" of the defendants.(fn11) Congress heard testimony explaining that such "lawyer-driven lawsuits" are initiated quickly because courts customarily select the counsel filing the first lawsuit to represent the class.(fn12) In response, the Reform Act establishes rules discouraging attorneys from entering the "race to the courthouse."(fn13)
Under the Reform Act, the named plaintiff must give notice to members of the putative class within twenty days after filing a federal class action.(fn14) Any class member then has sixty days to move the court for designation as the lead plaintiff.(fn15) The court must appoint the lead plaintiff within ninety days after the lawsuit...
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