The Sixth Circuit Court of Appeals affirmed the dismissal
of a securities class action tied to the market crisis and brought against
three mutual funds issued by Morgan Keegan Select Fund, Inc., an open-ended
investment company. Atkinson v. Morgan Asset Management, Inc., No.
09-6265 (6th Cir. Sept. 8, 2011). The decision is based on the
Securities Litigation Uniform Standards Act of 1998 or SLUSA.
Plaintiffs filed suit in state court against the funds'
advisers, officers, directors, distributor, auditor, and affiliated trust
company. The complaints asserted thirteen state law claims for breach of
contract, violations of the Maryland Securities Act, breach of fiduciary duty,
negligence and negligent misrepresentation. The complaint centers on the claim
that in 2007 and 2008 the defendants took unjustified risks in allocating fund
assets which were concealed from the shareholders. If plaintiffs had known
about the mismanagement, they would have redeemed their shares prior to the
drop in value according to the complaint.
Defendants removed the state court action to federal
court under SLUSA. Plaintiffs moved for remand. The district court concluded
that SLUSA precludes the action and dismissed the action with prejudice.
SLUSA was enacted with the purpose of preventing class
action plaintiffs from evading the requirements of the Private Securities
Litigation Reform Act of 1995, or the PSLRA, by bringing the case in state
rather than federal court. Accordingly, the Act precludes plaintiffs from
filing a class action in state court if four elements are met: 1) the case
consists of more than fifty prospective members; 2) it asserts state law
claims; 3) it involves a nationally listed security; and 4) the complaint
alleges "an untrue statement or omission of a material fact in connection with
the purchase or sale of" that security. If these elements are met SLUSA
authorizes the removal of the suit to federal court. A subsequent motion to
remand raises a jurisdictional issue. Accordingly, if the court determines that
the suit is precluded the proper course is to dismiss it.
Here plaintiffs claim that their suit is not precluded
based on what is known as the Delaware carve-out. Under this section the action
can go forward and is not precluded if it "involves . . .the purchase or sale
of securities by the issuer or an affiliate of the issuer exclusively from or
to holders of equity securities of the issuer." In this case however plaintiffs
are neither purchasers or sellers. Rather, they are "holders," that is, they
claim they did not sell but held their securities because of the acts of the
defendants. While plaintiffs claim that the term purchase should be construed
to include contracts to purchase securities, this argument would not save them
the Court held. This is because in that instance the relevant purchase under
the Delaware carve-out is the acquisition of their contract. Here the complaint
does not allege any acquisition misconduct.
Likewise, plaintiffs' supposition that their claims are
based on state law and do not involve any "untrue statement or omission of a
material fact" is inconsistent with the complaint, the Court concluded. It is
true that SLUSA is only aimed at fraud based claims. The critical question here
is whether "the complaint includes these types of allegations, pure and
simple." To make this determination the court must analyze the substance of the
claims asserted in the complaint. Artful pleading will not save a complaint the
Court cautioned. An analysis of the complaint in this case demonstrates that it
is grounded in allegations of fraud. While the Court noted that it had not
previously decided if SLUSA precludes only the fraud based claims or the entire
complaint, that issue need not be resolved here since all of the allegations
are tied to fraud.
Finally, the Court rejected plaintiffs' suggestion that
the action could be amended by reducing the number of plaintiffs or deleting
the fraud claims. This point was not raised in the district court.
Nevertheless, these modifications will not save this case the Court held
because "SLUSA cannot be tricked."
Program: ABA Seminar: Is the
DOJ and SEC War On Insider Trading Rewriting the Rules? ABA program, live in
New York City, webcast nationally. Friday September 23, 2011 from 12 - 1:30
p.m. at Dorsey & Whitney, 51 West 52 St. New York, New York 10019.
Co-Chairs: Thomas O. Gorman, Dorsey & Whitney LLP and Frank C.
Razzano, Pepper Hamilton LLP.
Panelists: Christopher L. Garcia, Chief, Securities and Commodities
fraud Task Force, Assistant U.S. Attorney, Southern District of New York;
Daniel Hawke, Chief, Market Abuse Unit, Securities and Exchange Commission;
Stuart Kaswell, Executive Vice President & Managing Director, General
Counsel, Managed Funds Association; Tammy Eisenberg, Chief Compliance Officer,
General Counsel and Senior Vice President, DIAM U.S.A., Inc.
For further information please click here.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
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