Momentary Forgetfulness

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 fertile ground for litigation more than 13 years after the legislation’s adoption. A persistent issue is to what extent a plaintiff can disclaim that his case is based on an alleged misrepresentation, even if the nature of the case suggests otherwise, and thereby avoid SLUSA preclusion.

In Brown v. Calamos, 2011 WL 5505375 (7th Cir. Nov. 10, 2011), the U.S. Court of Appeals for the Seventh Circuit reviewed a SLUSA dismissal in a case about a fund’s issuance of “auction market preferred stock.” Although it was a “suit for breach of fiduciary obligation and not securities fraud,” the complaint included allegations that the fund had falsely stated the term of the security “was perpetual” and omitted to disclose a material conflict of interest. Judge Posner found that SLUSA preclusion was appropriate under either (a) the Sixth Circuit’s “literalist approach,” because the complaint could be interpreted as alleging a misrepresentation; or (b) the Third Circuit’s “looser approach,” because the allegations of the complaint made “it likely that an issue of fraud will arise in the course of the litigation.”

Holding: Dismissal affirmed.

Quote of note: “[I]t can be argued that a dismissal with prejudice is too severe a sanction for what might be an irrelevancy added to the complaint out of an anxious desire to leave no stone unturned – a desire that had induced momentary forgetfulness of SLUSA. But a lawyer who files a securities suit should know about SLUSA and ought to be able to control the impulse to embellish his securities suit with a charge of fraud.”

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