Stanford’s Joe Grundfest on Two Major Securities and Corporate Law Decisions

Washington, D.C.: Stanford Law Review Reception

Thursday, June 1, 2023, was a busy day in the world of securities and corporate litigation.

In Slack v. Pirani, a unanimous United States Supreme Court voted in support of the amicus position I advocated with former SEC Chairman Jay Clayton. Plaintiffs alleged violations of Section 11 of the Securities Act of 1933—a provision that is notoriously difficult to defend against because it creates strict liability for the corporate issuer. The Court held that plaintiffs have to demonstrate that the shares they purchased on the open market were issued pursuant to the allegedly defective registration statement, and not any other shares, even if those other shares are perfectly fungible with the registered shares. That burden can be impossible for many plaintiffs to bear and will often cause complaints to be dismissed in their entirety, or reduce potential damage awards. The opinion relies on several points of statutory construction and regulatory interpretation unique to our brief.

 1
Stanford Law Professor Joseph Grundfest

But the defense’s victory is far from complete. The Supreme Court also remanded the case to the Ninth Circuit. There, plaintiffs can try to prove their shares were covered by the allegedly defective registration statement. They will also argue that Slack is liable under Section 12 of the Securities Act. Thus, plaintiffs aren’t dead yet. Indeed, this remand will likely lead to very complicated additional litigation, and it’s easy to see Pirani coming back to the Supreme Court and presenting novel questions about the scope of Section 12 liability.

The second victory of the day was in Lee v. Fisher where a 6 to 5 sharply split en banc Ninth Circuit enforced a forum selection clause that the Rock Center’s Kristen Savelle and I originally laid out in this article requiring that derivative claims be heard in the courts of the state of incorporation. The clause was enforced even though its enforcement effectively extinguished the underlying claim because only federal courts are authorized to rule on the violation of federal securities law at issue in the case. The opinion addresses complex questions at the intersection of statutory interpretation, civil procedure, securities regulation, and corporate law, and relies on scholarship I co-authored with Professor Mohsen Manesh of Oregon Law School as well as on an amicus brief submitted by us. The opinion also creates a split with a Seventh Circuit case that drew a sharply worded dissent from Judge Easterbrook.

This case has cert written all over it. The Seventh and Ninth Circuits have taken diametrically opposed positions in sharply split opinions addressing complex procedural questions that are catnip for this court. As for the likelihood of prevailing on the merits, I say “bring it on.” This case gives the court an opportunity to clarify a range of important questions regarding federal securities litigation, and I very much like our chances.

Joseph A. Grundfest, JD ’78, is a nationally prominent expert on capital markets, corporate governance, and securities litigation. His scholarship has been published in the Harvard, Yale, and Stanford law reviews, and he has been recognized as one of the most influential attorneys in the United States. Professor Grundfest founded the award-winning Stanford Securities Class Action Clearinghouse, which provides detailed, online information about the prosecution, defense, and settlement of federal class action securities fraud litigation. He launched Stanford Law School’s executive education programs and continues to co-direct Directors’ College, the nation’s leading venue for the continuing professional education of directors of publicly traded corporations. He is also a senior faculty member with the Arthur and Toni Rembe Rock Center for Corporate Governance. Additionally, he is co-founder and director of Financial Engines and a director of Kohlberg, Kravis, Roberts & Co.