When California Copied Rule 10b-5 Did It Shut The State Courthouse Door To Securities Fraud Suits?

Section 27 of the Securities Exchange Act of 1934 provides:

“The district courts of the United States . . . shall have exclusive jurisdiction of violations of [the Exchange Act] or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by [the Exchange Act] or the rules and regulations thereunder.”

15 U.S.C. § 78aa.  This doesn't necessarily erase state causes of action involving securities because Section 28(a) of the Exchange Act provides:

[T]he rights and remedies provided by [the Exchange Act] shall be in addition to any and all other rights and remedies that may exist at law or in equity . . . .”

15 U.S.C. § 78bb.

Last year, California amended its basic securities fraud statute, Corporations Code Section 25401, to copy in all material respects Rule 10b-5 under the Exchange Act.  Below is a copy of Section 25401 which shows the changes from Rule 10b-5.

Given that Section 25401 is now nearly identical to Rule 10b-5, the question arises whether an action to enforce Section 25401 is now the same as an action to enforce a liability or duty created by a rule under the Exchange Act.  If the answser is "yes", then Section 27 would seem to vest jurisdiction exclusively in the federal courts.

It will be interesting to see how the federal and state courts answer this thorny question.

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