Class Action Challenging Secret Revenue-Sharing Payments in Purchase of Mutual Funds Fell Within Scope of “Covered Class Actions” under SLUSA (Securities Litigation Uniform Standards Act of 1998) and was Properly Dismissed because State-Actions Exception did not Apply Sixth Circuit Holds
Plaintiff filed a putative class action against various Nationwide Life Insurance entities on behalf of employee-participants in his employer’s “deferred compensation plan” alleging breach of fiduciary duty and unjust enrichment; the class action complaint alleged that Nationwide received “revenue-sharing payments from the mutual funds in which the § 457 plan invested its participants’ individual funds” and that “Nationwide implemented a scheme under which it would receive revenue-sharing payments from mutual funds and mutual fund advisors based upon a percentage of assets invested from the § 457 plans into the mutual funds.” Demings v. Nationwide Life Ins. Co., ___ F.3d ___, 2010 WL 364335, *1 (6th Cir. February 3, 2010). According to the allegations underlying the class action complaint, in selecting which mutual funds to use in the § 457 plans, Nationwide would not include a mutual fund in the plan unless it agreed to participate in this revenue-sharing scheme. Id. The thrust of plaintiff’s class action “was that plan participants, not Nationwide, were entitled to any revenue-sharing payments because such profits were directly derived from the assets of plan participants.” Id. Defense attorneys moved to dismiss the class action complaint on the ground that it was barred by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which prohibits certain “covered class action” lawsuits. Id., at *1-*2. Plaintiff admitted that his lawsuit was a “covered class action” within the meaning of SLUSA, but argued that it did not allege “fraud” or “deception in connection with the purchase or sale of any security,” id., at *2. The district court disagreed, finding that “although [plaintiff] did not specifically use the words ‘untrue statement’ or ‘omission’ in his complaint, the substance of his claim was that Nationwide misrepresented a relationship with mutual fund advisors or, at a minimum, failed to disclose material facts about the relationship.” Id. Accordingly, the district court dismissed the class action, id. The Sixth Circuit affirmed.
The Circuit Court began by observing that plaintiff’s theory on appeal differed from his theory in the district court: “[Plaintiff] Demings does not now dispute that his proposed class-action suit was a covered state-law class action that would generally be precluded under SLUSA’s terms. Instead, he argues that his suit fits within the ‘state actions’ exception to SLUSA preclusion.” Demings, at *1 (citation omitted). This is the only argument plaintiff raised on appeal, and it formed the foundation of plaintiff’s claim that the district court therefore erred in denying him leave to amend his class action complaint. Id., at *3. The Sixth Circuit explained SLUSA’s state-actions exception does not “preclude a State or political subdivision thereof or a State pension plan from bringing an action involving a covered security on its own behalf, or as a member of a class comprised solely of other States, political subdivisions, or State pension plans that are named plaintiffs, and that have authorized participation, in such action.” Id., at *4 (citation omitted). The Circuit Court held that this exception did not apply for two reasons. First, even though plaintiff is a sheriff, he is not “a state, political subdivision thereof, or a state pension plan bringing a suit on its own behalf.” See id., at *4-*5. Second, the class action was not “brought on behalf of a class comprised solely of other states, political subdivisions, or state pension plans that were named plaintiffs, and that had authorized participation, in such action.” See id., at *5-*8. In this regard, the Sixth Circuit held that the language of SLUSA requires that the State “authorize” its participation at the time the class action was filed, id., at *8. Accordingly, the state-actions exception did not apply, and the district court properly concluded that the class action was barred by SLUSA. Id. Accordingly, the Circuit Court affirmed the judgment of the district court, id.