In a precedent-setting opinion, the Sixth Circuit recently held that mutual fund shareholders are barred from asserting state-law fraud claims for periods when the plaintiffs held their shares, versus fraud that occurred during the purchase of those shares. This decision also foreshadows the Sixth Circuit's view that improper class actions must be dismissed in their entirety under SLUSA (not just selected counts) when they include improper state-law claims – an issue that has been the subject of a circuit split for many years. As noted by Britt Latham and Jason Hale in their article for Thomas Reuters, this ruling will likely be cited extensively as other Circuits deal with these issues.
In Atkinson v. Morgan Asset Mgmt. (09-6265), the Sixth Circuit addressed who can bring certain claims for securities fraud. SLUSA (Securities Litigation Uniform Standards Act of 1998) applies to claims that "involve...the purchase or sale of securities" and bars class actions with more than 50 members that involve state-law claims of untrue statements or omissions "in connection with the purchase or sale" of a nationally-listed security. 15 U.S.C. 77p(b), (f)(2)(A), (f)(3). Instead, plaintiffs must bring federal securities fraud claims under the heightened pleading standards set forth in the Private Securities Litigation Reform Act of 1995 (PLSRA).
Given the severe consequences of running afoul of SLUSA, Plaintiffs argued that their state fraud claims fell within an exception to SLUSA commonly known as "the first Delaware carve-out." To come within this carve-out, the claims must "involve...the purchase or sale of securities." Relying on the plain language of the statute, the Court held that “purchase” means purchase, and holding an already-acquired security isn't a purchase. Because there was no alleged fraud relating to the purchase of a security, the plaintiffs could not overcome SLUSA preclusion.
The Court rejected several creative arguments by plaintiffs. First, the Court rejected plaintiffs' argument that holding a security that could be sold by the investor to the mutual fund at any time was really a contract to purchase sufficient to "involve the purchase" of a security. But the Court reiterated that “purchase” means purchase, not hold. Second, plaintiffs argued that if fraud during the holding period comes within SLUSA's general requirement of fraud "in connection with" a purchase, it should also come within the exception's requirement that the fraud "involve" a purchase. The Court rejected this argument as well, pointing to "in connection with" language as a term of art that Congress intentionally adopted. Finally, the Court rejected plaintiffs' legislative-intent argument, holding that extending the Delaware exception to holders of securities would create an enormous and unintended loophole in the federal protections tha the PSLRA imposes.
Importantly, this case also lends insight into where the Sixth Circuit may come down in the circuit split on the question of whether SLUSA requires complete dismissal of a complaint that includes barred fraud claims, as opposed to dismissal only of those claims that necessarily require a finding of fraud. As noted by the Latham and Hale's article and the post by Fred Isquith for Law 360, the Court indicated without deciding that the entire complaint should be dismissed, which is in contrast to decisions in the Third and Ninth Circuits. See Lord Abbett Mutual Funds Fee Litigation, 553 F. 3d 248 (3rd Cir. 2009); Proctor v. Vishay Intertechnology, Inc., 584 F.3d 1208 (9th Cir. 2009). It is in line, though, with decisions out of the Second, Fifth, and Eleventh Circuits. In Re Enron Corp. Securities, 535 F.3d 325 (5th Cir. 2008); In re Dabit v. Merrill Lynch, Pierce, Fenner, 395 F.3d 25 (2nd Cir. 2005); Behlen v. Merrill Lynch, 311 F.3d 1087 (11th Cir. 2002).