On November 2, 2015, the U.S. District Court for the Central District of California dismissed claims brought in January 2015 by William T. Hampton, on behalf of himself and other shareholders of the PIMCO Total Return Fund, against Pacific Investment Management Company, LLC (“PIMCO”), PIMCO Funds, a Massachusetts business trust, and seven trustees of PIMCO Funds. The plaintiff’s initial complaint, filed as a shareholder class action lawsuit, alleged a violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder based on an allegation that the Fund, for which PIMCO serves as investment adviser, invested in derivative instruments beyond a limit set forth in the Fund’s prospectus. The plaintiff alleged that, as a result of the deviation from the Fund’s investment restrictions, the value of the Fund’s shares fell.
In July 2015, the plaintiff filed an amended complaint that replaced the claim under Section 10(b) and Rule 10b-5 with a number of state law claims, similar to those alleged by the plaintiffs in the recently decided Northstar Financial Advisors, Inc. v. Schwab Investments case, based on breach of contract, breach of trust and breach of the implied covenant of good faith and fair dealing. These claims all related to an allegation that, between early 2012 and September 2014, the Fund violated an investment restriction set forth in its prospectus by investing more than 15% of its assets in securities and other instruments tied to emerging markets, causing the value of the Fund’s shares to fall. In September 2014, the Fund changed the 15% policy without a shareholder vote.
On October 5, 2015, the defendants filed a motion to dismiss each of the plaintiff’s claims. The defendants argued that all of the plaintiff’s claims should be precluded by the Securities Litigation Uniform Standards Act (“SLUSA”), which prohibits private “covered class action” lawsuits (i.e., class actions seeking damages on behalf of more than 50 plaintiffs) that are based on state law claims alleging either a material misrepresentation or omission or the use of manipulation or deception in connection with the purchase or sale of a “covered security” (i.e., a security listed on a national securities exchange or issued by a registered investment company).
On November 2, 2015, as noted above, the District Court granted the defendants’ motion to dismiss all of the plaintiff’s claims, agreeing with the defendants that SLUSA applied to preclude all of the plaintiff’s claims.
The parties agreed that the case was a covered class action and involved a covered security under SLUSA. The District Court determined that the plaintiff’s claims were all essentially misrepresentation claims—the defendants promised to do one thing in the Fund’s prospectus but instead did another, resulting in harm to the putative class members. The District Court noted that SLUSA precludes a variety of state law claims because they are based on misrepresentation, and that “[m]isrepresentation need not be a specific element of the claim to fall within [SLUSA]’s preclusion.” The District Court also determined that the plaintiff’s claims all involved activity “in connection with” the purchase or sale of a security, noting that the U.S. Supreme Court has instructed courts to apply this element of SLUSA “broadly,” and that it is satisfied if the alleged fraud relates merely “to the nature of the securities, the risks associated with their purchase or sale, or some other factor with similar connection to the securities themselves.”
Finally, the District Court concluded that a SLUSA provision commonly referred to as the “Delaware carve-out” did not apply to the plaintiff’s claims. This carve-out applies when (1) state law claims are brought under the law of the state in which the issuer is organized and (2) the claims are part of an action involving either (a) the purchase or sale of securities by the issuer or its affiliate exclusively from or to holders of the issuer’s equity securities or (b) any recommendation, position or other communication with respect to the sale of the issuer’s securities made by or on behalf of the issuer or its affiliate to holders of the issuer’s equity securities that concerns decisions of those holders with respect to voting their securities, responding to a tender or exchange offer or exercising dissenters’ or appraisal rights. The first prong of this carve-out was met because the claims were brought under Massachusetts law. The plaintiff argued that the second prong should be met because shareholders should have been able to vote on changing the Fund’s 15% investment restriction. The District Court disagreed, concluding that the second prong was not satisfied because there was no shareholder vote.
In dismissing the plaintiff’s claims, the District Court frequently cited the recent decision in the Northstar case, a shareholder class action lawsuit in which the U.S. District Court for the Northern District of California concluded that SLUSA applied to preclude several similar state law contract claims based on misrepresentations in a fund’s proxy statement and prospectus, which is discussed below.
On November 30, 2015, the plaintiff filed a notice of appeal of the District Court decision with the Ninth Circuit Court of Appeals.