In a recently issued opinion, Associate Justice Sandra Day
O'Connor, sitting by designation on the Sixth Circuit, issued
an opinion reinforcing the statutory restrictions designed to
prevent abusive class action securities litigation. Jerry L.
Demings¸ et al., v. Nationwide Life Insurance, et al.,
6th Cir. Nos. 08-4476 (Feb. 3, 2010). Discussing the Securities
Litigation Uniform Standards Act of 1988 ("SLUSA"), the
Court ruled that a sheriff's class action suit filed on behalf
of all public employers who sponsor § 457 deferred
compensation plans was precluded by SLUSA. Justice O'Connor
noted that this conclusion "is bolstered by the fact that
Congress meant SLUSA's preclusive effect to be broad and far
reaching."
The case involved Sheriff Jerry L. Demings of Orange County,
Florida, bringing a class action lawsuit against Nationwide Life
Insurance Company and related entities. Nationwide had provided
certain mutual funds and other products in which plan participants
could invest their money. The claims arose out of the Sheriff's
allegation that Nationwide received revenue-sharing payments from
the mutual funds in which participants' funds were invested. He
argued that Nationwide should have provided any revenue-sharing
payments to the plan participants, instead of retaining those for
itself.
The District Court ruled that the Sheriff's claim was precluded
by SLUSA, since it was a class action suit alleging
Nationwide's misrepresentation with respect to certain mutual
funds. SLUSA precludes certain class actions from being brought in
"any state or federal court alleging either "(1) an
untrue statement or omission of material fact in connection with
the purchase or sale of a covered security; or (2) that the
defendant used or employed any manipulative or deceptive device in
such a purchase or sale."
On appeal, the Sheriff did not dispute SLUSA's preclusive
reach, but cited an express exception written into the law, the
so-called "state-actions exception." This exception
states "nothing in this section may be construed to preclude a
state or political subdivision thereof, or a state pension plan
from bringing an action involving a covered security on its own
behalf, or as a member of a class comprised solely of other states,
political subdivisions, or state pension plans that are named
plaintiffs, and that have authorized participation in such
action."
The Sixth Circuit ruled that a sheriff is certainly not a state or
a state pension plan. The Court then examined whether he could
arguably be a "political subdivision," but rejected that
argument since the sheriff clearly brought the suit "on behalf
of the plan," not on behalf of any political subdivision. The
Court found Congressional intent for SLUSA's preclusive effect
to be broad, counseling in favor of interpreting any exceptions
narrowly.
In its ruling, the Sixth Circuit followed a similar interpretation
by the Supreme Court in Merrill Lynch, Pearce, Fenner and
Smith, Inc. v. Dabut, 547 U.S. 71 (2006). The Dabut
decision discusses the history and purpose of SLUSA in light of
prior case law, statutes, and regulations. SLUSA is simply one of
the latest refinements of the Securities Act of 1933, the
Securities Exchange Act of 1934, and SEC Rule 10b-5. Rule 10b-5
broadly prohibits deception, misrepresentation, and fraud in
connection with the purchase or sale of any security. U.S. Courts
have recognized that "litigation under Rule 10b-5 presents a
danger of vexatiousness different in degree and in kind from that
which accompanies litigation in general." Blue Chip Stamps
v. Manor Drug Stores, 421 U.S. 723, 739 (1975). Even weak
cases can have substantial settlement value because the "very
pendency of the lawsuit may frustrate or delay normal business
activity." Id. at 740.
These policy considerations lead Congress in 1995 to adopt the
Private Securities Litigation Reform Act ("PSLRA"), aimed
at class action suits. The PSLRA imposed certain limits on damages
and attorney fees, provided a safe harbor for forward-looking
statements, imposed restrictions on selection of lead plaintiffs,
and mandated imposition of sanctions for frivolous litigation,
among other provisions. The effort had an unintended consequence in
that it prompted some plaintiffs attorneys to avoid the federal
forum altogether, and file instead under state law, often in state
court. This reality lead Congress to adopt SLUSA, which precluded
certain class action suits from being "maintained in any state
or federal court."
Against this background of Congressional intent, Justice
O'Connor issued her decision, sitting by designation on the
Sixth Circuit. Her decision shows that counsel seeking to bring
class action securities litigation are finding their options to be
limited. Unless the complaint clearly invokes some of the statutory
safe harbors or exceptions, Courts can easily find basis to dismiss
the suit. In dismissing a sheriff's securities-related class
action in this case, Justice O'Connor has further reinforced
SLUSA's broad preclusive effect.
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