Corporate Governance

SLUSA and securities fraud class action litigation

By Pardis Ostadi

In In re Lord Abbett Mutual Funds Fee Litigation, 2009 WL 117002 (3rd Cir. Jan. 20, 2009), the Third Circuit Court of Appeals considered whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) requires the court to dismiss an entire action when it includes claims SLUSA preempts and claims it does not preempt.  The district court dismissed the case because SLUSA preempted claims pled by the plaintiffs and plaintiffs appealed.  The Third Circuit held that SLUSA does not require a court to dismiss an entire action when SLUSA preempts only some of the claims and not others.  The court vacated and remanded the district court's decision.

SLUSA is a federal act that addresses private class action lawsuits for securities fraud.  It amended portions of the 33 Act and the 34 Act to preempt certain actions that alleged fraud under state law in connection with the purchase or sale of securities.  SLUSA prevents abusive lawsuits by making federal court the exclusive jurisdiction for most securities fraud class action litigation that involves nationally traded securities. 

To determine whether SLUSA preempted the entire class action that included some claims SLUSA preempts and claims it does not preempt, the court examined the statutory language, legislative history, and relevant case law.

First, the court examined the statutory language.  SLUSA provides, '[n]o covered class action based upon the statutory or common law of any state or subdivision thereof may be maintained in any state or federal court.'  The term 'covered class action' includes a 'single lawsuit' or 'group of lawsuits.'  The court reasoned that the word 'action' modified 'based upon the statutory or common law of any state,' and therefore did not refer to actions based in part on state law. 

Next, the court looked to the statue's legislative history.  The legislative history was silent as to whether Congress intended courts to dismiss claims entirely when only some preempted claims existed or whether only preempted claims must be dismissed.  To permit federal claims to proceed that do not specifically trigger SLUSA would not lead to abusive litigation or the application of different legal standards to national securities.  The court found that nothing in SLUSA's legislative history indicated intent to eviscerate such claims.  If SLUSA required a court to dismiss entire claims, plaintiffs could simply bring two or more actions to avoid having all of their claims dismissed. 

Lastly, the court looked to relevant case law.  The Third Circuit agreed with the Supreme Court's holding in Jones v. Bock, 549 U.S. 199 (2007), that rejected the argument that Congress could have used the word 'claim' instead of 'action' if it intended to prohibit only the filing of particular claims.  Furthermore, '[i]f a complaint contains good and bad claims, the court proceeds with the good and leaves the bad.  If Congress meant to depart from this norm, we would expect some indication of that, and we find none.'  Additionally, the court rejected the defendant's argument that Kircher v. Putnam Funds Trust, 547 U.S. 633 (2006) was controlling because Kircher addressed only state law claims; whereas here the plaintiffs alleged state and federal claims.  

Because nothing in the language, legislative history, or relevant case law mandates courts dismiss an entire action that SLUSA partly preempts, the court held that the district court erred.  The court further concluded that allowing those claims that do not fall within SLUSA's preemptive scope to proceed, while dismissing those fall within SLUSA's preemptive scope, is consistent with the goals of preventing abusive securities litigation while promoting national legal standards for nationally traded securities.  

Full post as published by The Race to the Bottom on March 20, 2009 (boomark / email).