On February 12, 2009, the U.S. Court of Appeals for the Ninth Circuit held that shareholders of St. Joseph Medical Corp. (“St. Joseph”) could bring a securities class action against Cowen & Company (“Cowen”), an investment bank, in California state court under the Delaware carve-out of SLUSA for poor advice provided during the merger of the closely-held corporation with FPA Medical Management (“FPA”), a publicly-held company. Madden, et al. v. Cowen & Co., et al., No. CV-06-04886 (U.S. Court of Appeals, 9th Cir. Feb. 12, 2009).
 
St. Joseph contracted Cowen to provide advice in finding a prospective buyer and provide a “fairness opinion” regarding any proposed mergers. Cowen recommended FPA and a $60 million deal between FPA and St. Joseph was reached in March of 1998. By May of the same year, FPA released a disastrous first quarter earnings report, resulting in a 75 percent loss of the company’s stock value. Shortly thereafter, FPA filed for bankruptcy with its stock at 0.5 percent of the value it had when FPA and St. Joseph finalized the deal. Subsequently, the shareholders sued FPA in state court before having the case transferred to federal court. The plaintiffs then filed a complaint alleging state-law claims in state court against Cowen. The Cowen action was also removed to federal court, where it was dismissed.
 
On appeal, Cowen argued that the shareholders were precluded from suing because their company did not issue nationally traded securities but was sold to a publicly traded company. Furthermore, Cowen argued that it did not make statements on behalf of St. Joseph, and therefore it was not an officer, director or employee of St. Joseph for purposes of the Delaware carve-out.
 
Reversing the lower court’s ruling, Judge Sandra S. Ikuta, rejected most of Cowen’s arguments, calling Cowen’s interpretation of the Delaware carve-out “unreasonable” and “illogical.” Following a thorough review of the statutory language, Judge Ikuta ruled that SLUSA preserves state law actions by shareholders against their corporations, or any firm or individual charged with speaking on behalf of the corporation, in any corporate transaction that needs shareholder approval. Specifically, the Delaware carve-out provides that a private party may bring a covered class action, “based upon the statutory or common law of the State in which the issuer is incorporated, … if the action involves … any recommendation, position, or other communication with respect to the sale of securities of the issuer that – (I) is made by or on behalf of the issuer; ... and (II) concerns decisions of those equity holders to voting their securities, acting in response to a tender or exchange offer, or dissenters’ or appraisal rights. The Court noted that the nature of the securities case should not dictate where a plaintiff can sue. The case was remanded to district court, with instructions for the shareholder’s claim to be reviewed by the state court.
 
For a copy of the decision, please click here.