Not Congress’s Concern

The Securities Litigation Uniform Standards Act (“SLUSA) is designed to limit the ability of plaintiffs to avoid the heightened pleading standards (and other procedural and substantive protections) applicable to federal securities class actions by pleading their cases as violations of state law.  Accordingly, the statute precludes certain class actions based upon state law that allege a misrepresentation or deceptive conduct in connection with the purchase or sale of nationally traded securities.  Although SLUSA was enacted in 1998, the exact scope of its preclusive effect continues to be a hot topic, with a recent Supreme Court decision addressing the “in connection with” requirement.

In In re Kingate Management Ltd. Litigation, 2015 WL 1839874 (2d Cir. April 23, 2015), the court considered a different interpretive question: what does SLUSA mean when it proscribes the “main[tenance]” of a covered class action “alleging . . . [false conduct] in connection with the purchase or sale of a covered security”?  The Second Circuit concluded that “alleging” must be interpreted narrowly to only cover “conduct by the defendant falling within SLUSA’s specifications of conduct prohibited by the anti-falsity provisions” of the federal securities laws.  A broader application – e.g., to claims where the requisite falsity is a “necessary predicate of the plaintiffs’ claim” but “the falsity is not chargeable to the defendant and the claim could not have been brought against the defendants under the federal securities laws” – would improperly “bar state law claims in a manner unrelated to SLUSA’s purposes.”

The Second Circuit, however, did add some important caveats to its holding.  First, plaintiffs cannot engage in artful pleading to avoid SLUSA preclusion.  Any time “the success of a class action claim depends on a showing that the defendants committed false conduct conforming to SLUSA’s specifications, the claims will be subject to SLUSA,” even if the plaintiffs choose to invoke a state law theory that does not include false conduct as an element.  Second, consistent with the Supreme Court’s Dabit decision, SLUSA preclusion may apply even if the alleged conduct could not lead to a private claim (as opposed to an enforcement action by the SEC).  Finally, even if the plaintiffs do not specifically allege that the requisite false conduct was in connection with the purchase or sale of nationally traded securities, “the court may nonetheless ascertain those facts independently of the plaintiffs’ allegations and apply SLUSA.”

Holding: District court’s dismissal of complaint vacated; case remanded to district court for claim-by-claim assessment of whether SLUSA preclusion applies.

Quote of note: “Interpreting SLUSA to apply more broadly to state law claims that are altogether outside the prohibitions of the federal securities laws, and could not be subject to the PSLRA, would . . . construe ambiguous provisions of SLUSA in a highly improbable manner – as prohibiting state law claims involving matters that were not Congress’s concern in passing SLUSA, that have never been a subject of congressional concern, and that in a number of instances might even lie outside the powers of Congress.”

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