On November 15, 2019, Judge Robert F. Rossiter, Jr. of the United States District Court for the District of Nebraska dismissed a putative class action brought by investors who maintained investment accounts at a brokerage company. Plaintiffs asserted claims for breach of contract and negligence under Nebraska state law against the brokerage company and its affiliates, alleging that they failed to properly manage a tax-loss harvesting feature of certain investment portfolios. Knowles v. TD Ameritrade Holding Corp., No. 8:19-cv-47, slip op. (D. Neb. Nov. 15, 2019), ECF No. 36. The Court held that these claims were precluded by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) and dismissed the action with prejudice.

Plaintiffs alleged that, under the relevant management agreements, the company was to have invested account funds primarily in exchange-traded funds (“ETFs”) with only a small portion held in cash at any one time. Slip op. at 2. After the investors had opened their accounts, the company began offering a tax-loss harvesting tool that was supposed to automatically sell securities to generate a loss for tax purposes while reinvesting the proceeds immediately in comparable ETFs. Id. at 3. After plaintiffs enrolled in the tool, however, they found that more than 35% of their assets were in cash or cash equivalents for eighteen days, instead of being immediately reinvested, because a comparable asset was not immediately available. Id. at 4. Plaintiffs further alleged that during those eighteen days, they were harmed, because they did not receive the benefit of a market recovery in that time. Id.

The Court noted that SLUSA expressly preempts state-law class actions based on allegations of “an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security.” Id. at 7. For SLUSA to apply, the action must be a “covered class action” as defined therein, the action must purport to be based on state law, and plaintiffs must allege defendant misrepresented or omitted a material fact in connection with the purchase or sale of a “covered security.” Here, the parties agreed that the action was a covered class action, was based on state law, and involved the purchase or sale of a covered security. They disagreed only as to “whether the investors have alleged [defendants] misrepresented or omitted a material fact.” Id. at 7.

Although the investors insisted that they did not allege any misrepresentations or omissions, id. at 5, the Court held otherwise. The Court explained that SLUSA applies “even where a party cloaks allegations of misrepresentation or omissions of material fact in tort or breach-of-contract garb.” Id. at 8. The Court concluded that the complaint “[a]t its core” alleged that the company misrepresented how the tax-loss harvesting tool would work when a replacement security was not immediately available. Id. Reviewing plaintiffs’ prior pleadings, the Court also emphasized that plaintiffs had previously pointed to descriptions of the tax-loss harvesting tool on the company’s website, which the Court determined amounted to alleging that plaintiffs relied on a misrepresentation by the company. Id. at 9-10.

Knowles v. TD Ameritrade Holding Corp.