On August 17, 2018, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a putative class action asserting breach of contract and tort claims against the managers, auditors, consultant, and administrator of two feeder funds for Bernard L. Madoff Investment Securities arising out of defendants’ management and oversight of the funds. In re Kingate Mgmt. Ltd. Litig., No. 16-3450 (2d. Cir. Aug. 17, 2018) (summary order). The decision marks a second trip of the case through the Circuit. The district court had previously dismissed all of plaintiffs’ claims as precluded by the Securities Litigation Uniform Standards Act of 1988 (“SLUSA”), but had its decision vacated by the Second Circuit, which held that SLUSA precluded only state law claims “predicated on conduct of the defendant specified in SLUSA’s operative provisions.” Slip op. at 5 (citing In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128, 149 (2d Cir. 2015)). On remand, the district court dismissed certain claims as precluded by SLUSA and dismissed the rest for lack of standing and failure to state a claim under British Virgin Islands/Bermuda law. The Second Circuit affirmed this second decision, holding in relevant part that certain negligent misrepresentation claims were preempted by SLUSA because they concerned statements that were material to a decision to buy or sell a covered security.
Plaintiffs argued that SLUSA did not preclude their negligent misrepresentation claims because the alleged misrepresentations involved the feeder funds’ audit reports, financial statements, and net asset value. Because they “ma[d]e no mention of Madoff or covered securities,” plaintiffs argued, they were not made “in connection with the purchase or sale of a covered security.” Id. at 8. In affirming the district court’s decision rejecting this argument, the Second Circuit emphasized that the “‘in connection with’ a purchase or sale of a covered security” element is satisfied if the alleged misrepresentations were “material to a decision by one or more individuals … to buy or to sell a ‘covered security.’” Id. at 8-9. Here, plaintiffs alleged they relied upon audit reports, financial statements, and net asset value of the funds in investing therein and, because plaintiffs believed the funds were investing in covered securities, plaintiffs had thus made “attempted investments in covered securities.” Id. at 9. The challenged statements were therefore “material to a decision” to buy or sell a covered security and, thus, satisfied SLUSA’s “in connection with” requirement. Id.
This case demonstrates that courts within the Second Circuit will give a broad interpretation to SLUSA’s “in connection with” requirement.