September 9, 2011

Pulling the Rug Out

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. In Atkinson v. Morgan Asset Mgmt., Inc., 2011 WL 3926376 (6th Cir. Sept. 8, 2011), the court considered whether SLUSA preempted claims brought by the holders of mutual fund shares, who were entitled to redeem their shares at any time for their "proportionate share of the issuer's current net assets."

The plaintiffs argued that as the holders of mutual fund shares, their claims were covered by what is known as the "first Delaware carve-out" to SLUSA, which preserves state-law class actions that involve "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." The first Delaware carve-out generally applies to cases challenging corporate transactions, such as tender offers and mergers, or share buybacks directed exclusively to existing shareholders. The plaintiffs claimed that it also should apply to the holders of mutual fund shares, because the "funds' obligation to redeem Plaintiffs' shares amounts to an ongoing contract to purchase them."

The Sixth Circuit rejected the plaintiffs' argument, holding that the redemption obligation did not convert the holders of mutual fund shares into continuous purchasers or sellers. Moreover, the U.S. Supreme Court, in its Dabit decision, has held that holder claims are precluded under SLUSA. Permitting the plaintiffs' construction of the first Delaware carveout would create an impermissible exception for mutual fund shareholders. The court also held that for purposes of SLUSA preclusion it was sufficient that the plaintiffs' claims included allegations of misrepresentations in connection with the buying and selling of securities; it was not necessary for fraud to be an element of the claims.

Holding: Dismissal affirmed.

Quote of note: "Plaintiffs' construction of the carve-out invites us to pull the rug out from under Dabit's holding, creating an exemption for a large set of the very holder claims over which Dabit extended SLUSA's bar. Indeed, Plaintiffs ask us to shield from PSLRA's federal protections nearly every class action involving shareholders in open-end mutual funds. In the absence of clear language, precedent, or policy supporting this exemption, we decline to extend the carve-out so far."

Posted by Lyle Roberts at September 9, 2011 10:50 PM | TrackBack
Email this entry to:


Your email address:


Message (optional):