Court Declines to Stay 1933 Act State Action In Favor of Parallel Federal Action Alleging Claims Under the 1933 Act and the Exchange Act

• Posted on: Aug 19 2020

On March 20, 2018, the United States Supreme Court decided Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061, 1069 (2018), in which it unanimously held that the Securities Litigation Uniform Standards Act of 1998 does not strip state courts of subject-matter jurisdiction over class actions involving claims exclusively brought under the Securities Act of 1933 (the “1933 Act”), and does not allow for the removal of those cases to federal court.

This Blog wrote about the decision here. 

Among the issues we discussed that could arise in the wake of the decision was the possibility that defendants would be subject to parallel securities litigation in state and federal court. 

Following Cyan, researchers at Stanford Securities Litigation Analytics performed at study, at the request of the Professional Liability Underwriting Society, that tracked the number of parallel state court actions filed under the 1933 Act. According to the report, titled “State Section 11 Litigation in the Post-Cyan Environment” (here), “[i]n the year since Cyan was decided, 26 Section 11 cases have been filed in state courts, compared to 10 cases filed in the prior year.” Of those cases, “48% … have been filed in both federal and state courts—meaning 48% of defendants have faced litigation for the same alleged violations in both state and federal court simultaneously.” Id. In the three years prior to Cyan, defendants only faced parallel litigation in 16% of the cases. Id.

The New York Experience

On July 1, 2019, this Blog wrote about Hoffman v. AT&T Inc., 2019 N.Y. Slip Op. 31811(U) (Sup. Ct. N.Y. County, June 21, 2019) (here). [The article can be found here.] Hoffman involved a motion, under CPLR § 2201, to stay a securities class action filed in state court, alleging claims under the 1933 Act, in favor of a parallel class action filed in federal court, alleging claims under the 1933 Act and the Securities Exchange Act of 1934 (the “Exchange Act”). As discussed in the article, the Hoffman court denied the motion, holding that a stay would be inimical to the first-filed rule, the establishment of the Commercial Division, and the U.S. Supreme Court’s decision in Cyan.

Shortly after we published our article examining Hoffman, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, decided a motion, under CPLR § 2201, to stay a securities class action alleging claims under the 1933 Act in favor of a parallel securities class action filed in federal court alleging claims under the 1933 Act and the Exchange Act. Matter of PPDAI Grp. Sec. Litig., 2019 N.Y. Slip Op. 51075(U) (Sup. Ct., N.Y. County July 1, 2019) (here).  Like the Court in Hoffman, Justice Scarpulla, who cited to Hoffman, denied the motion.  However, unlike the Hoffman court, Justice Scarulla applied CPLR § 2201 in making her decision.

Recently, Justice Andrea Masley of the Supreme Court, New York County, Commercial Division, was faced with a motion to stay an action arising under Section 11 of the 1933 Act. Convery v. Jumia Tech. AG, 2020 N.Y. Slip Op. 32639(U) (Sup. Ct., N.Y. County Aug. 7, 2020) (here). Like Justice Scarpulla, Justice Masley, who cited to and relied upon, inter alia, Matter of PPDAI Group, applied CPLR § 2201 in making her decision to deny the motion.

Convery v Jumia Tech. AG

Background

Convery was filed as a putative class action under the 1933 Act, brought on behalf of the purchasers of American Depository Shares (“ADS”) of Jumia Technologies AG (“Jumia”) pursuant or traceable to the Registration Statement issued in connection with Jumia’s April 2019 initial public offering (“IPO”) of 15.525 million ADS (including the exercise of an over-allotment option) at $14.50 per share. 

In a parallel securities class action, filed in the United States District Court for the Southern District of New York (In re Jumia Technologies AG Securities Litigation, No. 19-cv-4397 (S.D.N.Y.) (Castel, J.)), a different plaintiff, Steven Strugala, asserted claims under the Exchange Act and the rules promulgated thereunder. Strugala alleged that Jumia’s share price fell 28% on May 10, 2019 from $33.11 per ADS to $24.50 per ADS, the day after Citron Research issued a report (the “Citron Report”) asserting that “Jumia is a Fraud” that “deserves immediate SEC attention”. In addition to Jumia, Struglia named as defendants Jumia’s Co-Chief Executive Officers and Chief Financial Officer (the “Management Board Defendants”).

The state court action was filed on October 15, 2019, and amended on January 27, 2020. The federal court action was filed on May 14, 2010, and amended twice, on December 30, 2019 and March 13, 2020.

In the state court complaint, Plaintiff asserted claims under Sections 11 & 15 of the 1933 Act. Like the original federal complaint, the state court complaint was brought against Jumia and the Management Board Defendants and relied upon the Citron Report for its allegations. However, besides naming a different class representative, Plaintiff added the seven underwriters participating in the IPO, as defendants (the “Underwriter Defendants”).

The federal complaint was amended following consolidation and contested motions for appointment of lead plaintiffs and lead counsel. The amended complaint, brought by different plaintiffs, set forth the same allegations as those in the initial complaint, but enlarged the class period. Importantly, the plaintiffs asserted new claims under Sections 11 and 15 of the 1933 Act and named the Underwriter Defendants and eight members of Jumia’s supervisory board (the “Supervisory Board Defendants”), as parties. 

In the amended state court complaint, Plaintiff added a claim under Section 12(a)(2) of the 1933 Act, added the Supervisory Board Defendants, Donald J. Puglisi (“Puglisi”), Jumia’s U.S. representative who signed the company’s allegedly false and misleading Registration Statement, and Ernst & Young, the accounting firm who issued an audit report alleged to be materially misleading in violation of international accounting standards, as defendants.

Thereafter, the plaintiffs in the federal action filed a second amended complaint. The second amended complaint set forth the same allegations and claims as the amended federal complaint, but added Puglisi as a defendant.

On April 3, 2020, the defendants in the federal action filed a pre-motion letter explaining the grounds for their proposed motion to dismiss the second amended complaint. Pursuant to an April 10, 2020 scheduling order, the district court judge permitted defendants to file the motion on June 1, 2020, with the briefing to be completed on August 21, 2020. Discovery was stayed pending further order of the court.

Defendants moved, pursuant to CPLR § 2201, to stay all proceedings pending adjudication of the federal action.

The Court’s Decision

The Court analyzed the motion to stay the action through the lens of CPLR § 2201.

Under CPLR § 2201, “[e]xcept where otherwise prescribed by law, the court … may grant a stay of proceedings …, upon such terms as may be just.” A motion pursuant to CPLR § 2201 to stay an action pending in favor of another action is directed to the sound discretion of the trial court. Dietz v. Linde Gas N. Am., LLC, 178 A.D.3d 469, 470 (1st Dept. 2019); Mook v. Homesafe Am., Inc., 144 A.D.3d 1116, 1117 (2d Dept. 2016). In making the determination, a court may consider a number of factors, including: 1) which forum will offer a more complete disposition of the issues; 2) which forum has greater expertise in the type of matter; 3) which action was commenced first and the stage of the litigations; 4) whether there is substantial overlap between the issues raised in each court; 5) whether a stay will avert “duplication of effort and waste of judicial resources;” and 6) whether plaintiffs have demonstrated that they would be prejudiced by a stay. Asher v. Abbott Labs., 307 A.D.2d 211, 211-212 (1st Dept.), lv. dismissed, 98 N.Y.2d 728 (2003).

Applying the foregoing factors, the Court denied the motion to stay the state court action.

The Court held that the first and fourth factors weighed in favor of Plaintiffs. Slip Op. at *5. The Court explained that “[a]lthough there is substantial overlap between the claims and the defendants, neither action [would] completely dispose of all of the issues relating to the IPO.” Id.  The reason, noted the Court, was because the federal court had exclusive jurisdiction over the Exchange Act claims, but shared jurisdiction over the 1933 Act claims with the state court. Id. (“While both courts have jurisdiction over the 1933 Act claims, the federal court has exclusive jurisdiction over the claim brought under the 1934 Act, so it can only be disposed of there.”) (citing Cyan, 138 S.Ct. at 1078). The Court also noted that the state court action contained different parties and claims in that it “include[d] claims against the accounting firm, and a claim under section 12(a)(2) of the 1933 Act for which rescission is available.” Id. (citation omitted). The Court concluded that “the difference in the relief sought militate[d] against a stay.” Id. (citing Uni-Rty Corp. v. New York Guangdong Fin., Inc., 117 A.D.3d 427, 429 (1st Dept. 2014)).

The Court also found dispositive the different standard of review for the Exchange Act claims, noting that “the fraud claims in the federal action may be subject to heightened scrutiny.” Id. 

The Court held that the second factor weighed against a stay. Similar to the courts in Hoffman and PPDAI Grp., the Court held that the federal court had no greater expertise in adjudicating the claims asserted in the state action, “including federal law as it pertains to securities cases.” Id. at *6 (quoting Labourers’ Pension Fund of Cent. and Eastern Canada v. CVS Health Corp., 2020 WL 2857654, at *6 (Sup. Ct., N.Y. County June 1, 2020), and citing In re PPDAI Grp. Sec. Litig., 2019 WL 2751278, at *5 (Sup Ct., N.Y. County 2019) (“the Commercial Division is a longstanding, specialized business court which deals exclusively with complex commercial litigation”); and Hoffman v. AT&T Inc., 2019 WL 2578360, at *2 (Sup. Ct., N.Y. County 2019) (“[t]he liability issues in a 1933 Act case are, if anything, less complex than issues the Commercial Division resolves every week”)).

The Court found the third factor to weigh against the grant of a stay. Slip Op. at *6. “Although the federal action was commenced first,” observed the Court, “it was not ‘first in time’ with respect to claims under the 1933 Act, which were first interposed in [the state court] action – over two months before being added to the federal complaint by way of amendment.” Id. “Indeed,” said the Court, “it appears that at the time federal action was filed, plaintiff could not have sought 1933 Act damages because the ADSs price was still above the IPO offering price.” Id. (citations to the record omitted). 

Moreover, said the Court, because discovery had been stayed in each case, the “first to file” factor was “not dispositive” and “not particularly meaningful.” Id. (citing Labourers’ Pension Fund, 2020 WL 2857654, at *7). 

Further, noted the Court, “nothing of significance happened in the five months between the original filing of the federal action and [the state court action], because the parties in the federal action were litigating over the appointment of lead plaintiffs and lead counsel.” Id. “And,” explained the Court, “although the federal action ha[d] progressed slightly further with the partial briefing of a motion to dismiss, [the state court] action would likely have been at a more advanced stage had defendants not disrupted the previously stipulated litigation schedule by filing this stay motion.” Id.

The fifth factor, held the Court, weighed against a stay. The Court explained that because the two actions involved differing claims, “‘[t]he possibility or actuality of two trials [was] of no importance.’” Id. at *7 (quoting Mt. McKinley Ins. Co. v. Coming, Inc., 33 A.D.3d 51, 59 (1st Dept. 2006), and citing PPDAI Grp., 2019 WL 2751278, at *6)). Further, said the Court, “‘[d]uplication of efforts or waste [was] also not a concern because the parties and courts can cooperate as they do in so many other sophisticated securities cases.’” Id. (quoting Labourers’ Pension Fund, 2020 WL 2857654, at *3 (citation omitted)). 

Finally, the Court found that “due to the differences between the parties named, remedies sought and standards of review, the plaintiff and the class might be prejudiced by a stay in pursuing [the state court] action.” Id.

Takeaway

In this Blog’s takeaway of PPDAI Group, we said that the decision “may portend things to come in New York. While two decisions do not make a tidal wave of authority, they do indicate the current thinking of Commercial Division judges who will have to decide motions to stay 1933 Act claims under CPLR § 2201. And, that thinking points to the denial of motions to stay state court actions alleging claims under the 1933 Act in favor of parallel actions filed in federal court alleging claims under the 1933 Act and the Exchange Act.” 

With the decisions in Labourers’ Pension Fund and Convery, the Commercial Division judges continue to deny motions to stay 1933 Act actions in favor of parallel federal court actions alleging claims under 1933 Act and the Exchange Act. Regardless of the reasons – such as parity with their federal court colleagues in handling complex securities matter or the dictates of the cases decided under CPLR § 2201 – the judges in the Commercial Division are increasingly denying motions to stay parallel securities actions. While these decisions do not constitute a tidal wave, they do constitute a trend that cannot be ignored.