District Court Properly Found Class Action’s State Law Claims Fell within Scope of Securities Litigation Uniform Standards Act (SLUSA) Sixth Circuit Holds
Plaintiff filed a putative class action against Fifth Third Bank and its holding company, Fifth Third Bancorp., alleging breach of fiduciary duty and breach of contract. Segal v. Fifth Third Bank, N.A., 581 F.3d 305, 308 (6th Cir. 2009). According to the allegations underlying the class action complaint, Fifth Third “ breached its fiduciary and contractual duties to the class in three ways: (1) It invested fiduciary assets in proprietary (and often higher-fee) Fifth Third mutual funds rather than superior funds operated by the Bank’s competitors; (2) it promised trust beneficiaries that their fiduciary accounts would receive ‘individualized’ management and breached that agreement by providing standardized and largely automated management…, often by ‘relatively inexperienced’ and ‘low-level’ employees…; and (3) it invested too many of the funds’ assets in low-yielding investments in order to cover the accounts’ near-term tax liabilities.” Id. Defense attorneys moved to dismiss the class action on the grounds that the state law claims were preempted by the Securities Litigation Uniform Standards Act of 1998 (SLUSA); the district court agreed and dismissed the class action complaint. Id. The Sixth Circuit affirmed.
The Sixth Circuit explained that Congress enacted Private Securities Litigation Reform Act (PSRLA) to “curb ‘perceived abuses’ of federal class-action securities litigation by imposing special requirements and obstacles on claimants filing such actions.” Segal, at 308 (citations omitted). However, “some claimants responded by ‘avoid[ing] the federal forum altogether,’ bringing ‘class actions under state law, often in state court’ instead.” Id., at 309 (citation omitted). Because this “was not what Congress had in mind,” it enacted SLUSA: its purpose was to “‘prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of’ PLSRA…[by] expressly prohibit[ing] certain state law class actions,” id. (citation omitted). The Circuit Court explained that “SLUSA prohibits a claimant from filing a class action when four things are true: (1) the class action is ‘covered,’ which means it involves more than fifty members; (2) the claims are based on state law; (3) the action involves a ‘covered security,’ which means a nationally listed security; and (4) the complaint alleges ‘an untrue statement or omission of a material fact in connection with’ buying or selling a covered security or a ‘manipulative or deceptive device or contrivance in connection with’ buying or selling a covered security.” Id. (citations omitted). The parties agreed that the first three of these requirements were satisfied by the class action – the question on appeal was whether the last requirement had been met. Id.
The Sixth Circuit summarized that SLUSA barred the class action complaint if it “allege[d] an ‘untrue statement’ or a ‘material omission’ of fact ‘in connection with the purchase or sale’ of Fifth Third mutual funds or allege[d] that the Bank used a ‘manipulative or deceptive device or contrivance in connection with the purchase or sale’ of Fifth Third mutual funds[.]” Segal, at 309 (citation omitted). The Court found that the complaint “alleges misrepresentations, material omissions and manipulation,” id., and that “Fifth Third made misrepresentations to the trust beneficiaries and otherwise manipulated them ‘in connection with’ the sale of Fifth Third mutual funds,” id., at 310. The Court rejected plaintiff’s attempt to recast the allegations in the class action complaint, finding that it “would ‘frustrate the objectives’ of PSLRA and SLUSA…, and re-open the ‘“federal flight” loophole’ SLUSA sought to close.” Id., at 311 (citation omitted). Accordingly, it affirmed the district court order dismissing the class action. Id., at 312.