Vested interests were using the device of class action litigations to claim damages on the complaint that they had been caused by fraudulent misrepresentations to retain securities that they otherwise would have sold off or on the allegation that they were duped to make fraud induced purchase or sale of securities. These frivolous litigations were seriously damaging the US securities market and the economy.
In this background in 1995 the Congress passed the Private Securities Litigation Reform Act (PSLRA) to prevent abuse of the process of securities law through such frivolous class action litigations in federal courts. The PSLRA not only mandated rigorous particulars of pleadings for such allegations of deception or fraud relating to security transactions in class action litigations but also limited the maximum amount of recoverable damages to the prescribed ceiling.
As a result of the said strictures applicable to federal court proceedings, plaintiffs of class action litigations on security dealings started moving the state courts instead of federal courts on the ground of violation of state securities laws. Though earlier security cases were few and far between in state courts but in the wake of PSLRA, state law based class action against allegations of security fraud became more and more frequent in state forums. There was a corresponding decline in similar federal litigation. This proliferation of litigation in state courts was defeating the very purpose of the federal enactment. Accordingly the government decided to take steps to curb this phenomenon of this litigation immigration to state courts.
In order to address this issue, another federal legislation being the Securities Litigation Uniform Standards Act (SLUSA) was passed. The SLUSA bars class actions in both state and federal courts over complaints of fraud induced purchase or sale of nationally traded securities on any national stock exchange, based on state securities regulation. In this context class action denotes any proceeding where 50 or more plaintiffs have joined for redress of their common grievance.
A defendant who asserts that a lawsuit filed in state court is preempted by SLUSA may remove it to federal court; if the federal court holds that the suit is not preempted, it will remand it to state court.
The SLUSA exempts from its scope specified class actions. Class actions based on the law of the concerned state or jurisdiction, where the issuer of the securities in question is incorporated, is maintainable. Moreover, similarly derivative action brought by shareholders on behalf of a corporation, class actions by a state agency or a state pension plan and legal action under contracts between issuer and trustees are also maintainable.