The scope of the Securities Litigation Uniform Standards Act ("SLUSA"), which precludes certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities, continues to be the subject of litigation. A key issue is to what extent a plaintiff can plead around the preclusive effect of the statute.
In Romano v. Kazacos, 2010 WL 2574143 (2d Cir. June 29, 2010), the Second Circuit considered a pair of state law class actions alleging that Morgan Stanley gave inappropriate retirement advice, which led the plaintiffs to retire early, place their lump sum retirement benefits with Morgan Stanley for investment, and subsequently suffer investment losses. The district court found that SLUSA preempted both actions and dismissed them.
On appeal, the Second Circuit made two key findings.
First, the court held that although a plaintiff is normally the master of his complaint, he "cannot avoid removal by declining to plead 'necessary federal questions.'" Based on this "artful pleading" rule, in a SLUSA case courts can look beyond the face of the complaint to determine whether the plaintiff has "allege[d] securities fraud in connection with the purchase or sale of securities."
Second, SLUSA's "in connection" requirement must be given a broad construction. In the cases at issue, the plaintiffs "in essence, assert that defendants fraudulently induced them to invest in securities with the expectation of achieving future returns that were not realized." Even though the plaintiffs "did not invest in any covered securities for up to eighteen months" after receiving the relevant retirement advice, the court concluded this time lapse was "not determinative here because . . . 'this was a string of events that were all intertwined.'" In sum, the court held that "[b]ecause both the misconduct complained of, and the harm incurred, rests on and arises from securities transactions, SLUSA applies."
Holding: Dismissal based on SLUSA preclusion affirmed.Posted by Lyle Roberts at July 23, 2010 7:39 PM | TrackBack