WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court on
Dec. 5 denied review of a California state appellate court's ruling that a
shareholder is not preempted from bringing his federal securities law claims
under the Securities Act of 1933 against Countrywide Financial Corp. and others
in state court (Countrywide Financial Corp., et al. v. David H. Luther, et
al., No. 11-572, U.S. Sup.; See May 2011, Page 14) (lexis.com subscribers
may access the petition for writ of certiorari).
Shareholder David H. Luther filed a class action lawsuit
in the Los Angeles County Superior Court on behalf of all purchasers of
Countrywide Home Loans Servicing LP common stock from January 2005 to
June 2007. He alleges that Countrywide, its subsidiaries, executive
officers and third-party investment banks violated Sections 11, 12(a)(2) and 15
of the Securities Act by issuing a series of false and misleading statements
with regard to certain information about the underlying mortgages and borrowers
of those mortgages for certain mortgage-backed securities.
On Dec. 14, 2007, the defendants removed the action to
the U.S. District Court for the Central District of California. Luther
moved to remand the action to the state court on Jan. 10, 2008.
Judge Marianna R. Pfaelzer granted Luther's motion, ruling that the Class
Action Fairness Act (CAFA) does not trump Section 22(e) of the Securities Act,
which prohibits claims filed in state court that arise under the act from being
removed to federal court. The defendants then appealed to the Ninth
Circuit U.S. Court of Appeals, which affirmed.
Demurrer
Upon remand, the defendants demurred, contending that the
trial court lacked jurisdiction under the Securities Act, as amended by the
Securities Litigation Uniform Standards Act (SLUSA) in 1998.
The trial court agreed, and Luther appealed to the Second
District California Court of Appeal, Division 5, which reversed, holding that
the amended language of the Securities Act does not preempt Luther from
bringing his claims in the state court, stating that "[w]e 'do not read
statutes in little bites,' and cannot endorse such a limited reading of section
77v" of the Securities Act.
The panel also ruled that the instant action is not
removable because it does not concern a covered security and that subsection
(f) of Section 77p "defines 'covered class action,' 'covered security,' and
another term not relevant here."
Knox v. Agria Corp.
Moreover, the panel rejected the defendants' contention
that the U.S. District Court for the Southern District of New York's ruling in Knox
v. Agria Corp. (613 F.Supp.2d 419 [2009]) is controlling because the
instant action "does not concern covered securities."
The panel further found that it sees "no need for
recourse to legislative history, but feel[s] constrained to note that
defendants' view of the legislative history is not the only one.
Plaintiffs, too, cite conference reports and so on, in support of their view
that Congress intended a much narrower result. One court has observed
that 'Nothing in SLUSA's text of the legislative history suggests that Congress
intended to place roadblocks in the way of federal claims or non-precluded
state law claims; its only discernible intent was to preclude the use of the
class-action device to prosecute certain state-law class action claims.'"
The appellate court denied the defendants' motion for
rehearing on June 17, and the California Supreme Court denied review on Sept.
14.
The defendants then file a petition for writ of certiorari
in the Supreme Court.
Question Presented
They asked the Supreme Court to determine "[w]hether §
22(a) of the Securities Act of 1933, 15 [U.S. Code] U.S.C. § 77v(a), as amended
by the Securities Litigation Uniform Standards Act of 1998, precludes a state
court from exercising jurisdiction over a class action that raises only claims
under the 1933 Act."
Luther is represented by Kevin K. Green of Rudman Geller
Robbins & Dowd in San Diego.
The defendants are represented by Jonathan D. Hacker of
O'Melveny & Myers in Washington.
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