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.
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