The Reform Act focused exclusively on securities fraud class actions in federal court. There is no evidence in its legislative history that Congress considered the Act's potential impact on private securities fraud lawsuits filed in state court. One possible reason for this is that there were reportedly very few state court securities class actions brought before 1995. State law claims brought pendent to federal claims in federal courts, however, historically have been commonplace. Since the Reform Act has become law, there has been an increase in the number of state court securities class actions, though the overall number remains small. This increase in state filings has caused widespread attention and has led to the introduction of preemption bills in both the Senate and the House.

Current Developments

In July of this year, Chairman Levitt testified before this Subcommittee, on behalf of the Commission, that broad preemption of state remedies to address specific areas of concern would be premature. The Commission continues to believe that additional experience under the Act will better inform our efforts to identify the Act's shortcomings and to craft appropriate solutions to them. In particular, there are several developments we are following in the state courts that may significantly limit the availability and attractiveness of state courts as a venue for securities class actions. In addition, there are developing interpretations of the Act in the federal courts that may critically weaken the ability of investors to pursue meritorious claims in federal court, thus making state court remedies more important than ever.

Developments in State Courts

Several judicial developments may sharply limit the ability of plaintiffs to bring state court class actions. Most significantly, in Pass v. Diamond Multimedia, the California Supreme Court will be called upon to decide the currently unsettled question of whether the state's securities laws apply to transactions taking place outside of California. If the court rules in favor of the defendant issuer, then nationwide class actions will be unavailable in California. Plaintiffs' lawyers would be less likely to file in state court if they could not bring a nationwide class action to recover damages on behalf of a nationwide class. We recognize that this decision will only govern class actions filed in California state courts. California, however, has been far and away the leading jurisdiction for the filing of state court class actions, with about 60% of the cases to date.

Developments in Federal Courts