Andrew Clubok, Melissa Sherry, and Gavin Masuda are partners at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Clubok, Ms. Sherry, Mr. Masuda, Roman Martinez, Elizabeth Deeley, and Joseph Hansen.
Key Points:
- While federal district courts have consistently applied the Private Securities Litigation Reform Act (PSLRA) automatic stay to halt discovery until a determination that the complaint states a viable claim for relief, state trial courts have been divided as to whether that stay applies to actions filed in state court.
- If the Supreme Court rules in favor of petitioners, securities plaintiffs will not be able to use state court as an end-run to impose discovery on defendants before stating a viable claim for relief.
- The scope of the PSLRA discovery stay has far-reaching implications for public companies and financial institutions that underwrite IPOs, which have been subjected to a wave of parallel federal-state securities litigation in recent years.
On July 2, 2021, the US Supreme Court granted certiorari in Pivotal Software, Inc. v. Superior Court of California on a critical issue of first impression at the federal appellate level: whether the PSLRA automatic stay of discovery pending a motion to dismiss in Securities Act cases applies to actions filed in state court.
Background
The Securities Act of 1933 provides certain private rights of action for materially false or misleading statements contained in securities registration statements. Principally, under Section 11 of the Securities Act, persons who purchased securities pursuant or traceable to a materially false or misleading registration statement may sue for statutory damages. [1] The Securities Act further provides that certain private actions, including those arising under Section 11, may be brought in either federal or state court. [2]