On January 24, 2019, the United States Court of Appeals for the Seventh Circuit affirmed the dismissal of a putative securities class action against several investment advisory and financial services firms for allegedly mismanaging the accounts of the putative class plaintiffs and failing to act in their best interests. Susan Nielen-Thomas v. Concorde Investment Services LLC, et al., No. 18-cv-00229 (7th Cir. Jan. 24, 2019). Plaintiff brought claims under Wisconsin and Nebraska securities laws, common law claims under Wisconsin and Nebraska law for breach of contract, fraud, fraudulent misrepresentation, negligence, failure to supervise, and breach of fiduciary duty, and a claim for breach of the Securities Act of 1933 that the district court dismissed with prejudice for failure to state a claim that plaintiff did not appeal. Defendants removed the case to federal court pursuant to the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), and thereafter moved to dismiss the state law claims on the basis that the suit constituted a “covered class action” that was precluded by SLUSA. Plaintiff, in moving to remand and in opposing the motion to dismiss, argued that the case is not governed by SLUSA because the proposed class action contained fewer than fifty members and therefore could not be a covered class action as defined by SLUSA. Chief District Judge James D. Peterson of the United States District Court for the Western District of Wisconsin agreed with defendants, finding that the suit was a covered class action, denying plaintiff’s motion to remand, and dismissing plaintiff’s state law claims with prejudice. Plaintiff appealed and the Seventh Circuit affirmed.
The Seventh Circuit first considered the meaning of SLUSA’s “covered class action” definition. Under SLUSA, covered class actions based upon the statutory or common law of any State are precluded if a plaintiff alleges either “a misrepresentation or omission of material fact in connection with the purchase or sale of a covered security” or that the defendant “used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.” 15 U.S.C. § 78bb(f)(1). A “covered security” is defined under SLUSA as a “security traded nationally and listed on a regulated national exchange.” Further, SLUSA defines a “covered class action” in relevant part as either of the following: Subparagraph (I) of 15 U.S.C. § 78bb(f)(5)(B)(i) provides that a single lawsuit qualifies as a covered class action when (1) damages are sought, (2) on behalf of more than fifty prospective class members, and (3) common questions of law or fact predominate “without reference to issues of individualized reliance on an alleged misstatement or omission”; Subparagraph (II) provides that a single lawsuit qualifies as a covered class action when (1) damages are sought, (2) by “one or more named parties” who seek to recover damages “on a representative basis on behalf of themselves and other unnamed parties similarly situated,” and (3) common questions of law or fact predominate. Plaintiff did not dispute that her claims were based on state law, involved a covered security, and alleged misrepresentations in connection with the purchase of that covered security. Plaintiff argued, however, that her case was not a “covered class action” as defined by SLUSA because she alleged that the putative class would consist of “no more than 49 members.
” The Seventh Circuit determined that SLUSA’s definition of what constituted a “covered class action” was clear and unambiguous, and that Subparagraph (I) applied to actions brought on behalf of more than fifty people, while Subparagraph (II) applied to actions brought on behalf of unnamed parties. According to the Seventh Circuit, Congress’s use of “or” in between Subparagraphs (I) and (II) clearly demonstrated that the criteria must be considered in the disjunctive, rejecting plaintiff’s argument that she could proceed so long as her claims survived under one of the two Subparagraphs. In so holding, the Seventh Circuit noted that while no other circuit has directly opined on the difference between these two Subparagraphs, the Second and Eighth Circuits have “referenced SLUSA’s definition of a covered class action in a way that supports our interpretation.” As such, the Seventh Circuit concluded that plaintiff could not proceed with her state law claims because—while her proposed class was fewer than fifty people—she filed a “Class Action Complaint,” brought her claims “individually and on behalf of all others similarly situated,” pled that “common questions of law and fact exist as to all members” of the putative class, and sought to recover damages from defendants on a representative basis, all of which clearly is precluded under Subparagraph (II)’s definition of a “covered class action.” The Court held that to accept plaintiff’s interpretation that Subparagraphs (I) and (II) are separate, independent bases for excluding securities class actions under SLUSA would “completely read Subparagraph (II) out of the statute.” The Court also rejected plaintiff’s argument that the fifty-person threshold identified in Subparagraph (I) must apply to Subparagraph (II) to avoid making the former “superfluous,” holding that to adopt plaintiff’s position would be “untenable” and contravene the plain text of the statute.
The Seventh Circuit then considered plaintiff’s additional argument that the Court’s reading of the statute would sweep too broadly and that no putative securities class actions based on state law and otherwise meeting SLUSA’s criteria could thus proceed in either federal or state court. Citing the legislative history of SLUSA, the Court explained that Congress enacted SLUSA in order to address the problem of litigants bringing class actions under state law in order to circumvent the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which “impos[ed] burdens on plaintiffs who sought to bring federal securities fraud class actions, including by limiting recoverable damages and attorney’s fees and by mandating sanctions for frivolous litigation.” According to the Court, Congress’s enactment of SLUSA was meant to close this loophole by “limit[ing] the conduct of securities class actions under State law,” and that “[t]his purpose could be easily frustrated if plaintiffs bringing a state-law securities class action could simply allege that they represented a class of no more than fifty people.
” The Court noted that individuals may still pursue claims on their own behalf in state court under state law, and nothing in SLUSA would prevent them from doing so, provided that there are fewer than fifty such plaintiffs for which common questions or law or fact predominate. The Court concluded, however, that “what SLUSA does preclude these individuals from doing is continuing to pursue their claims in the form of a class action.” Accordingly, the Court held that SLUSA appropriately precluded plaintiff’s putative class claims from proceeding in either federal or state court, and affirmed the judgment of the District Court.