THE COURTS CONTINUE TO STRICTLY APPLY SLUSA
The courts continue to broadly interpret the Securities Litigation Uniform Standards Act of 1998 (SLUSA) to prevent plaintiffs from circumventing the pleading and substantive restrictions of the Private Securities Litigation Reform Act (PSLRA) of 1995. In Segal v. Fifth Third Bank, N.A., No. 08-3576 (6th Cir. Decided Sept. 17, 2009), the court affirmed the decision of the district court concluding that the class action complaint based on state law breach of fiduciary duty claims is barred by SLUSA.
Plaintiff Daniel Segal, the beneficiary of trust accounts administered by the defendant bank, brought a class action which claimed breaches of fiduciary and contractual duties to a class of which he was a representative. Specifically, the complaint claimed that the bank: 1) invested fiduciary assets in proprietary and often higher fee Bank mutual funds rather than better funds operated by competitors; 2) failed to provide individualized management of the accounts as promised; and 3) placed to many assets in low yielding investments to cover near term tax liabilities.
On appeal, plaintiff offered three primary reasons to support his contention that SLUSA does not bar the complaint. First, the complaint specifically states that it is not based on misrepresentations or material omissions, the key claims in securities fraud suits. Second, plaintiff argued that his claims are simple “garden variety” state law claims. Finally, plaintiff claimed that precluding his complaint effectively eliminated causes of action against fiduciaries for breaches of their obligations and, in any event, the complaint should only be barred if the underlying facts would give rise to a cause of action under the federal securities laws. The Sixth Circuit rejected each of these arguments.
SLUSA, the court noted, was passed to prevent certain state private securities class actions alleging fraud from being used to frustrate the objectives of the PSLRA. The Act prohibits a claimant from filing a class action when four points are established: 1) the class action is “covered,” that is it involves more than 50 members; 2) the claims are based on state law; 3) the action involves a “covered security,” that is a nationally listed security; and 4) the complaint alleges an untrue statement or omission of a material fact or a manipulative or deceptive device in connection with the buying or selling of a covered security. The court’s opinion focused on the application of the fourth point since the parties agreed that the case involved a covered class action and security and that the claims are based on state law.
Construing the Act expansively to achieve its goals, the court rejected plaintiff’s first claim that because the complaint stated it does not involve a material misrepresentation or omission SLUSA does not apply. If this were true, then the omission of specific words would govern rather than the substance of the complaint. The Court rejected this approach as inconsistent with the Act. The real “question under SLUSA is not whether the complaint uses the prohibited words . . . It is whether the complaint covers the prohibited theories, no matter what words are used (or disclaimed) in explaining them.” A review of the allegations here demonstrates that in substance the claims are based on the type of conduct covered by the Act.
The Court also rejected plaintiff’s contention that the claims in the complaint are simple state law. This “is not how SLUSA works.” Rather, if the complaint includes the type of allegations or claims which are covered, it is prohibited. Under the Act the court has “no license to draw a line between SLUSA-covered claims that must be dismissed and SLUSA-covered claims that must not be.” If it is covered, it is dismissed.
Finally, plaintiff’s claim that dismissing its complaint would eliminate a cause of action for breach of fiduciary duty and, in any event, dismissal is only appropriate if the underlying facts would give rise to a claim under the federal securities laws is incorrect the Court held. As to the former, Plaintiff can chose to bring a cause of action for breach of fiduciary duty, but not as a class action. The latter point was rejected by the Supreme Court in Merrill Lynch Pierce, Fenner & Smith, Inc. v. Davit, 547 U.S. 71 (2006), discussed here. Accordingly the Court affirmed the dismissal of the complaint.