With all of the recent hype over Facebook's forthcoming IPO, I thought it was only appropriate to feature a circuit split involving securities law in today's post. Historically, disputes arising from a corporation's issuance of securities were typically handled at the state rather than federal level. This is no longer the case, however. In the late 1990s, an anti-securities litigation sentiment swept over Congress as well as the Clinton Administration. Democrats, seeking to curry favor with tech companies in Silicon Valley, rallied around the Private Securities Litigation Reform Act (PSLRA) with their Republican counterparts. The PSLRA was intended to curb the “‘percieved abuses’ of federal class-action securities litigation by imposing special requirements and obstacles on claimants filing such actions.” Segal v. Fifth Third Bank, NA, 581 F.3d 305 (6th Cir. 2009).
Rather than putting a stop to frivolous securities litigation, however, the PSLRA merely directed enterprising plaintiffs’ attorneys into state court where the requirements for filing a class-action lawsuit were less onerous. Realizing this, in 1998, Congress passed the Securities Litigation Uniform Standards Act (SLUSA), which generally preempts securities claims under state law that rely on “misrepresentation" or "material omission.” As Judge Posner noted in a recent opinion, a split in authority exists among the circuits over the scope of state securities claims preempted by SLUSA. The opinion, Brown v. Calamos,identifies three approaches to carry out “SLUSA’s goal of preventing state-court end runs around” the PLSRA. Attorneys W. Brantley Phillips Jr. and Shayne R. Clinton wrote a piece for Thomson Reuters’ News & Insights blog (link below) that provides an excellent summary of this decision:
Approach #1: The “Literalist approach to SLUSA”
Under this approach, a court “does not ask whether the complaint makes ‘material’ or ‘dependent’ allegations of misrepresentation in connection with buying or selling securities. It asks whether the complaint includes these types of allegations, pure and simple.” Atkinson v. Morgan Asset Management, Inc., 658 F.3d 549, 554–55 (6th Cir. 2011); see also Segal v. Fifth Third Bank, N.A., 581 F.3d 305, 311 (6th Cir. 2009); accord Kutten v. Bank of America, 530 F.3d 669, 670-71 (8th Cir. 2008); Anderson v. Merrill Lynch Pierce Fenner & Smith, Inc., 521 F.3d 1278, 1285-86 (10th Cir. 2008).
Approach #2: The Intermediate Approach to SLUSA
The 9th Circuit holds that a “‘[m]isrepresentation need not be a specific element of the claim to fall within [SLUSA]'s preclusion.’” Stoody-Broser v. Bank of Am., 442 F. App’x 247 (9th Cir. 2011) (citing Proctor v. Vishay Intertechnology Inc., 584 F.3d 1208, 1222 n.13 (9th Cir. 2009)).
Judge Posner calls the 9th Circuit’s approach “intermediate” because it “allows the removed suit to be dismissed without prejudice, thus permitting the plaintiff to file an amended complaint that contains no allegation of a misrepresentation or misleading omission and so cannot be removed under SLUSA.” 2011 WL 5505375 at *4 (citing Stoody–Broser).
Judge Posner disagrees with this approach because plaintiffs will remove the preclusive language and then be “sorely tempted to reintroduce them” later with the state court. Id. at *5. He states that this approach thwarts “SLUSA’s goal of preventing state-court end runs around” the PSLRA. Id.
Approach #3: The "Incidental" or "Lasala" Approach
The final approach holds that “if proof of a misrepresentation or of a material omission is inessential to the plaintiff's success, the allegation is no bar to the suit.” 2011 WL 5505375 at *3 (citing LaSala v. Bordier et Cie, 519 F.3d 121, 141 (3d Cir. 2008)). Note, however, that the 6th Circuit has found this portion of the LaSala opinion to be mere dicta and not controlling in the 3rd Circuit. Segal, 581 F.3d at 312. Judge Posner disagrees. 2011 WL 5505375 at *3. Even under this approach though, SLUSA bars “a factual allegation that while not a necessary element of the plaintiff’s cause of action could be critical to his success in the particular case.” Id.
Judge Posner did not adopt a particular approach for the 7th Circuit in Brown. Rather, the court held that the facts at issue required dismissal under either the literalist or LaSala approach because the allegations of fraud in the complaint would make it “difficult and maybe impossible to disentangle from the charge of the breach of the duty of loyalty.” 2011 WL 5505375 at *5.
W. Brantley Phillips Jr. & Shayne R. Clinton, A split among the circuits when analyzing complaints under SLUSA?, Thomson Reuters News & Insights (Jan. 18, 2012).
[*Hat tip to David Hargis.]
[**Image courtesy of techieshome.com]