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Class Action Defense Cases-In re Mutual Funds: Federal District Court Grants Defense Motion To Dismiss Class Action Because “Plaintiffs’ Artful Attempt At Avoiding SLUSA Preemption Ultimately Fails”

Maryland Federal Court Grants Defense Motion to Dismiss Class Action Despite Plaintiffs’ Attempt to Plead Around Securities Litigation Uniform Standards Act of 1998 (SLUSA)

Plaintiffs filed putative class action lawsuits in Illinois state court alleging state law causes of action carefully pleaded “to avoid the preemptive scope of the Securities Litigation Uniform Standards Act” and focusing on the theory “that the defendants negligently breached state common law duties” by using “stale” mutual fund prices – that is, mutual fund prices not based on “the most recent market information.” In re Mutual Funds Investment Litig., 437 F.Supp.2d 439, 440 (D. Md. 2006). Defense attorneys removed the action to federal court, and the Judicial Panel on Multidistrict Litigation transferred the cases to Judge Motz of the Maryland district court. After the defense moved to dismiss the case as preempted by SLUSA, “plaintiffs filed amended complaints . . . that eliminate any explicit mention of misrepresentation and deception, and that plead only one cause of action: common law negligence.” Id., at 442.

Under SLUSA, “No 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 by any private party alleging-(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.” In re Mutual Funds, at 443-43 (15 U.S.C. § 78bb(f)(1)). The annuities at issue in this case were “covered securities” within the meaning of SLUSA, and the lawsuits are “covered class actions,” id., at 443. The district court granted the defense motion to dismiss finding that the negligence claims fell within subparagraph (A). The district court explained at page 443:

“The element of a misrepresentation or omission of a material fact is satisfied when a plaintiff alleges a misrepresentation concerning the value of the securities sold or the consideration received in return.” [Citation.] That is exactly what the plaintiffs have done here, despite their emphatic disavowal of their prior explicit allegations of misrepresentation, and their pared-down amended complaint. Putting aside the convoluted terminology and formulas associated with variable annuities, at bottom the plaintiffs simply allege that the defendants incorrectly priced certain investment options provided under the annuities. [Citation.]

The district court concluded, “the plaintiffs’ artful attempt at avoiding SLUSA preemption ultimately fails” and accordingly granted the defense motions to dismiss. In re Mutual Funds, at 444.

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