When Judge Easterbrook of the U.S. Court of Appeals for the Seventh Circuit writes a securities law opinion, it is invariably going to be worth talking about. His latest is no exception.
The Securities Litigation Uniform Standards Act of 1998 ("SLUSA") preempts certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. The defendants are permitted to remove the case to federal district court for a determination on whether the case is preempted by the statute. If so, the district court must dismiss the case; if not, the district court must remand the case back to state court.
In an earlier opinion in the Putnam Fund cases, Judge Easterbrook found that the district court's decision to remand the actions back to state court was appealable. This week's opinion, Kircher v. Putnam Funds Trust, 2005 WL 757255 (7th Cir. April 5, 2005), addressed the merits of that remand decision. In particular, Judge Easterbrook grappled with the question that has confronted the Second and Third Circuits recently (see this post): what is the scope of SLUSA's "in connection with the purchase or sale of securities" requirement?
In contrast to the Second Circuit, the Seventh Circuit found that SLUSA preemption is not limited to actions where the plaintiffs are purchasers or sellers of securities. One of the complaints filed in the Putnam Fund cases defined its class as "all investors who held the fund's securities during a defined period and neither purchased or sold shares during that period." The court held that the "in connection with" language in SLUSA merely "ensures that the fraud occurs in securities transactions rather than some other activity." Although private actions under Rule 10b-5 (from which SLUSA adopted the "in connection with" requirement) can only be brought by purchasers or sellers, it "would be more than a little strange" if this judicially-created limitation on private actions "became the opening by which that very litigation could be pursued under state law, despite the judgment of Congress (reflected in SLUSA) that securities class actions must proceed under federal securities laws or not at all." Accordingly, the complaint was subject to dismissal under SLUSA.
Holding: Cases remanded with instructions to undo the remand orders and dismiss plaintiffs' state-law claims.
Quote of note: "[M]ost of the approximately 200 suits filed against mutual funds in the last two years alleging that the home-exchange-valuation rule can be exploited by arbitrageurs have been filed in federal court under Rule 10b-5. Our plaintiffs’ effort to define non-purchaser-non-seller classes is designed to evade PSLRA in order to litigate a securities class action in state court in the hope that a local judge or jury may produce an idiosyncratic award. It is the very sort of maneuver that SLUSA is designed to prevent."Posted by Lyle Roberts at April 8, 2005 10:10 PM | TrackBack