Securities Snapshot June 04, 2019

Supreme Court Limits Removal of Class-Action Counterclaims from State Court to Federal Court


Supreme Court limits removal of class-action counterclaims from state court to federal court; Connecticut Superior Court holds that PSLRA’s automatic stay of discovery applies in 1933 Act cases filed in state court; Fifth Circuit Court upholds lower court’s decision that Chinese Walls may successfully prevent the exchange of material, nonpublic information among banking units; Southern District of New York grants summary judgment in favor of acquiring company and its directors, finding that statements about the struggling target company reflected the actual state of affairs.

On May 28, 2019, in Lampkin v. UBS Painewebber, Inc., the Supreme Court decided Home Depot U.S.A., Inc. v. Jackson, holding that third-party counterclaim defendants may not remove class actions from state to federal court under either the general removal statute or the Class Action Fairness Act. The Supreme Court ruled that Home Depot could not remove the case because it was brought into the lawsuit by a counterclaim filed by the original defendant. According to the Supreme Court, the term “defendant” in the removal statutes refers only to the party sued by the original plaintiff—not to third-party counterclaim defendants.

This action was commenced in 2016, when Citibank, N.A. filed a debt-collection action in North Carolina state court against George W. Jackson, for charges incurred on a Home Depot credit card. In responding to Citibank’s complaint, Jackson asserted a counterclaim against Citibank and third-party class-action claims against Home Depot and Carolina Water Systems. In response, Home Depot filed a notice of removal to federal court, citing the general removal statute and CAFA. Under the general removal statute, 28 U. S. C. § 1441(a), “any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants” to federal court. Under the CAFA removal provision, 28 U. S. C. § 1453(b), a class action may be removed to federal court by “any defendant without the consent of all defendants.”

Affirming the judgment of the Fourth Circuit and the remand to state court, the Supreme Court held that Home Depot could not remove the case to federal court, concluding that the term “defendant” used in 28 U.S.C. § 1441(a) and CAFA does not include third parties who have been brought into the lawsuit through a counterclaim filed by the original defendant, i.e., a third-party counterclaim defendant, like Home Depot. The “defendants” who can remove must, therefore, be defendants named in the complaint, not counterclaim defendants.

Ultimately, this decision restricts removal strategies for companies facing class actions in state jurisdictions to potentially more favorable federal courts.


On May 21, 2019, the Connecticut Superior Court in City of Livonia Retiree Health and Disability Benefits Plan et al. v. Pitney Bowes Inc.held that the automatic stay of discovery provided in the federal Private Securities Litigation Reform Act applies in cases filed in state court under the Securities Act of 1933. This opinion follows the Supreme Court’s decision inCyan, Inc. v. Beaver County Employees Retirement Fund, holding that state courts have concurrent jurisdiction over such cases and that these cases may not be removed to federal court.

In August 2018, a putative class action was filed against Pitney Bowes and the underwriters of its September 2017 initial public offering of $700 million of bonds, alleging that the offering materials contained misstatements and omissions in violation of the 1933 Act. The plaintiff challenged four statements in Pitney Bowes’s registration statement, claiming that it failed to disclose supposed intra-quarter financial “trends” that were required to be disclosed under Item 303 of SEC Regulation S-K. The plaintiff immediately sought discovery after filing suit.

Although securities class actions filed in federal court are subject to an automatic stay of discovery pending the federal district court’s disposition of defendants’ motion to dismiss, the application of the automatic discovery stay to 1933 Act class actions filed in state court was less clear. The Connecticut Superior Court addressed this question, finding that the plain language of the PSLRA governs state courts under the Supremacy Clause of the U.S. Constitution, requiring that state courts apply the automatic discovery stay provision. This decision incorporates protections that are guaranteed in federal court under the PSLRA for securities actions that are brought in state court.

Goodwin represents the underwriters of Pitney Bowes’s initial public offering of bonds.


On May 24, 2019, the Fifth Circuit affirmed the decision of the Southern District of Texas inLampkin v. UBS Painewebber, Inc., denying the plaintiffs’ request for reconsideration of an order ending a proposed class action and 17-year battle over whether ex-Enron employees and other investors should have been warned that their stock options and equities were about to lose all their value. The plaintiffs alleged that certain UBS units could have done more to warn investors of Enron’s fraud scheme and claimed violations of the Securities Act of 1933 and Securities Exchange Act of 1934. Affirming the lower court’s ruling, the Fifth Circuit found that the plaintiffs failed to allege that the UBS entities had material, nonpublic knowledge to disclose, or had a duty to disclose, and thus did not violate securities laws.

The plaintiffs filed their case in March 2002, alleging that UBS PaineWebber—UBS’s brokerage unit—should have warned them of inside information known by UBS Warburg LLC—UBS’s investment banking unit—relating to Enron’s financial manipulations. In February 2017, the Southern District of Texas dismissed the suit, finding that there was no evidence that PaineWebber was aware of information known to Warburg or that it had a duty to disclose that information to investors.

On appeal, the Fifth Circuit affirmed the lower court’s decision. The court focused on the fact that the two divisions were not allowed to share information with each other by law due to “federally required Chinese Walls” between PaineWebber and Warburg, in its capacity as an investment bank. Therefore, the plaintiffs failed to allege that PaineWebber had knowledge of Enron’s financial misrepresentations. Moreover, the court rejected the plaintiffs’ claims that Warburg and PaineWebber had a duty to disclose because the plaintiffs failed to plead that they functioned as a single entity and failed to establish the existence of a joint venture.


On May 21, 2019, the Southern District of New York court granted the defendants’ motion for summary judgment in Binn v. Bernstein, dismissing claims brought against directors of a public shell company, Form Holdings, by former stockholders of XpresSpa Holdings for violations of the Securities Act of 1933 and Securities Exchange Act of 1934 and breach of contract. The plaintiffs alleged that the defendants had deceived them into an undesirable merger with Form Holdings, a merger that ultimately resulted in a massive loss of XpresSpa’s business investment.

Specifically, the plaintiffs claimed that they were misled to approve the merger through false statements and omissions by Form Holdings, including that the Form Holdings merger was XpresSpa’s “only option,” and that the merger was “more favorable than” a potential merger with another company. XpresSpa’s co-founders also alleged two members of their board hid their financial ties to and personal relationships with a Form Holdings board member and Form Holdings’ CEO before the 2016 merger. This allegedly allowed the defendants to mislead XpresSpa stockholders on how much they would earn if the merger was completed and induce those stockholders to vote to approve an all-stock, no-cash sale price. Accordingly, the plaintiffs alleged that there was an undisclosed quid pro quo that made the merger as favorable as possible for the defendants at the expense of the plaintiffs.

The court held that the misstatements and omissions that the directors of Form Holdings allegedly made to deceive the co-founders of XpresSpa were either accurate or did not need to be disclosed. The court found that the plaintiffs failed to offer evidence that XpresSpa’s limited options did not reflect “the actual state of affairs,” given evidence showing that XpresSpa Holdings was “running out of options.” The court also found no violation regarding the overlapping business relationships between the companies because these relationships were public information and did not need to be disclosed. With respect to the quid pro quo allegations, the court held that there was no evidence that the defendants were promised compensation, an appointment to the board, or other opportunities to invest in exchange for their support. The fact that the defendants benefitted from the merger was not alone sufficient to raise a genuine dispute as to the existence of quid pro quo arrangements.