Court Grants Post-Cyan Discovery Stay In State Court Securities Class Action

On May 15, 2019, a Connecticut Superior Court found that defendants in a claim under the Securities Act of 1933 (Securities Act) were entitled to the mandatory discovery stay pending a motion to dismiss under the Private Securities Litigation Reform Act of 1995 (PSLRA)—a significant ruling due to its reasoning and the possibility that other state courts may follow the decision.1

Background

The Securities Act states that suits brought under the Act may be filed in either state or federal courts and includes an anti-removal provision that prevents defendants from removing a case from state to federal court.2 The Securities Act also allows for class-action suits. In 1995, in order "to stem perceived abuses of the class-action vehicle,"3 Congress amended the Securities Act and the Securities Exchange Act of 1934 (the primary mechanism for bringing anti-fraud class action suits) and enacted the PSLRA. In its discovery stay subsection, the PSLRA states: "In any private action arising under this subchapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds, upon the motion of any party, that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party."4

To avoid the PSLRA's procedural reforms, such as the discovery stay, plaintiffs began bringing Securities Act suits in state courts. To make federal court the "exclusive venue for most securities fraud class actions," Congress enacted the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which precludes sizeable class actions based on state law in either state or federal courts, and provides for the removal of those cases to federal court.5 Following the passage of SLUSA, district courts issued conflicting decisions on the removability of suits alleging only violations of the Securities Act, and state courts were divided over whether they retain subject matter jurisdiction over such cases.6

On March 20, 2018, the Supreme Court unanimously decided Cyan, Inc. v. Beaver County Employees Retirement Fund, et al., holding that SLUSA neither stripped state courts of jurisdiction over class actions alleging violations of only the Securities Act nor permitted defendants to remove those actions to federal court.7 The Court did not address the applicability of the discovery stay provision found in the PSLRA on state courts. At least two other state courts have declined to stay discovery...

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