Big Bang

The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) pre-empts certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. The “in connection with” requirement has been a continuous source of litigation and was the subject of the Dabit decision by the U.S. Supreme Court earlier this year.

Not to be outdone, the U.S. Court of Appeals for the Seventh Circuit has issued its own opinion discussing the scope of the “in connection with” requirement. In Gavin v. AT&T Corp., 2006 WL 2548238 (7th Cir. Sept. 6, 2006), the court addressed a class action arising out of the merger between MediaOne and AT&T in 2000. The terms of the merger entitled shareholders of MediaOne to obtain, in exchange for their MediaOne shares, a certain amount of AT&T stock plus cash and any accrued but unpaid dividends. After AT&T solicited MediaOne shareholders twice to make this exchange, it hired a shareholder communications company to “clean up” any MediaOne shareholders who had not yet responded. The letter from the shareholder communications company specified a fee of $7 per MediaOne share for the exchange service, without mentioning that MediaOne shareholders could still do the exchange at no cost through AT&T’s exchange agent. The failure to mention the “no cost” option is the fraud charged in the complaint.

In an opinion by Judge Posner, the court was highly critical of the defendants’ position that the case should be pre-empted by SLUSA because the alleged fraud was in connection with the purchase or sale of MediaOne stock. Noting that MediaOne’s shareholders “became the beneficial owners of AT&T stock” when the merger was consummated, the court found that the alleged fraud “happened afterwards and had nothing more to do with the federal securities law than if [the shareholder communication company] had asked the MediaOne shareholders ‘do you want your AT&T shares sent to you by regular mail or by courier?’ and had charged an inflated fee for the courier service.” Accordingly, the court reversed the pre-emption decision and instructed the district court to remand the case back to state court.

Quote of note: “Of course there is a literal sense in which anything that happens that would not have happened but for some prior event is connected to that event. In that sense the fraud of which the plaintiff complains is connected to the merger, without which there would not have been such a fraud against the plaintiff and her class. But in the same sense the fraud is connected to the Big Bang, without which there would never have been a MediaOne or even an AT&T.”