Court Refuses to Stay Securities Class Action in Favor of Later-Filed Federal Class Action

On November 25, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Matter of Greensky, Inc. Sec. Litig., 2019 NY Slip Op. 33515(U), refusing to stay a securities class action in favor of a later-filed federal securities class action, explaining:

New York State was plaintiffs' first choice of forum and there is no basis for a stay in favor of federal court adjudication. In Cyan, Inc. v Beaver County Employees Retirement Fund (138 S Ct 1061 [2018)), the Unites States Supreme Court made clear that state courts can preside over 1933 Act cases and that most unusually Congress barred their removal to federal court so if a plaintiff chooses to bring a 1933 Act suit in state court, the defendant generally cannot change the forum. Staying 1933 Act state court litigation in deference to federal court proceedings without a compelling reason to do so would undermine this principle. Additionally, pre-Cyan, most 1933 Act cases were brought in federal court; thus, those courts undeniably have more experience dealing with securities litigation. State courts are just as capable. Ceding responsibility .to federal courts without good cause for doing so simply based on tradition would erode what Congress expressly intended as recognized by the Supreme Court in Cyan.

The stay in Gordon v Gridsum Holding Inc., which was issued in favor of a first-filed federal action, does not support a different result. There, plaintiffs counsel chose a federal forum first and, only after losing the lead-counsel contest, refiled in state court. A stay was warranted to avoid incentivizing gamesmanship. Here, by contrast, plaintiffs never filed in federal court. There is no reason not to honor their selection of state court for resolution of their 1933 Act claims.

Discovery, however, will be stayed pending determination of defendants' motion to dismiss. Courts, even in this County, are split on whether the stay set forth in the Private Securities Litigation Reform Act of 1995 (the PSLRA) necessarily applies to state proceedings.

This court is not convinced that the PSLRA, by its terms, expressly mandates a stay in state court. That said, where discovery is an integral part of the legal framework governing proceedings, the rules of the jurisdiction giving rise to the substantive cause of action apply in New York. The important purpose underlying enactment of the automatic stay-- ensuring that cases have merit at the outset--should not be disregarded merely because a federal cause of action is being prosecuted in state court. It is therefore appropriate to give effect to the PSLRA's policy of staying discovery until a plaintiff has demonstrated that its 1933 Act claims have merit.

(Internal quotations and citations omitted).

We have substantial experience in litigation regarding securities, both in state and federal court. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help regarding a claim related to stocks, bonds or other financial instruments.