The Ninth Circuit recently overturned a District Court decision, holding that the lower court applied the wrong standard in ruling that a lawsuit against an investment bank arising out of a securities transaction was properly removed to federal court and that state law claims asserted in the action were precluded under the Securities Litigation Uniform Standards Act of 1988 (SLUSA). Plaintiffs filed their suit in state court, alleging that the defendant committed negligent misrepresentation and professional negligence based on statements included in a fairness opinion it provided in connection with a merger and acquisition involving three corporate entities.
SLUSA, which was enacted as part of a congressional effort to rein in private securities litigation, normally operates to preclude state law claims based on securities fraud actions. However, under an exception in the statute, claims asserted under the law of the state in which the defendant issuer is incorporated are permitted in certain narrow circumstances. One element of the exception’s applicability at issue before the Ninth Circuit was whether the defendant investment bank made a statement “on behalf of” one of two companies being acquired. Without such a statement, the exception would not apply.
The lower court ruled that the defendant investment bank could only be deemed to be making a statement “on behalf of” the company being acquired if it was an officer, director or employee of that company. Because it was not, the District Court ruled that the exception did not apply and that SLUSA precluded plaintiffs’ state law claims. The Ninth Circuit rejected this narrow view of the “on behalf of” requirement, ruling instead that a common sense construction of the term was required and that the investment bank should be considered to be acting “on behalf of” the company being acquired when it makes a communication to the company’s stockholders in the interest of, as a representative of, or for the benefit of the company. (Madden v. Cowen & Co., No. 07-15900, 2009 WL 2413804 (9th Cir. Aug. 7, 2009))