Alert June 24, 2008

Eighth Circuit Rules State Law Securities Claims Brought by Trust Account Beneficiaries Preempted by SLUSA

In two recent cases, the United States Court of Appeals for the Eighth Circuit (the “Eighth Circuit”) upheld the dismissal of related class action lawsuits brought by trust account beneficiaries against a bank (the “Bank”) on the grounds that the suits were preempted by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”).  In both cases, plaintiffs alleged that the Bank failed to make appropriate disclosures regarding the investment of trust account assets in mutual funds managed by a subsidiary of the Bank.

In the first suit, plaintiffs filed federal securities claims and state law claims of unjust enrichment and breach of fiduciary duty against the Bank.  The trial court dismissed the federal claims on the merits and dismissed the state claims as preempted by SLUSA.  The plaintiffs only appealed the dismissal of the state-law claims and the Eighth Circuit affirmed the dismissal.  SLUSA “expressly preempts all ‘covered’ state-law class actions that allege: (1) an untrue statement or omission of a material fact, or (2) use of a manipulative or deceptive device or contrivance, ‘in connection with the purchase or sale of a covered security.’” Plaintiffs conceded that their claim met all of the elements for SLUSA preemption except that the alleged misrepresentation and omission of material facts were not committed “in connection with the purchase or sale of a covered security” because the plaintiffs themselves did not purchase the securities at issue – the Bank did.  The Eighth Circuit rejected that argument, holding that “in connection with” must be interpreted broadly since SLUSA was intended to prevent plaintiffs from filing state-law class actions in securities cases.  The court followed the rule established by the United States Supreme Court in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006), which stated that “it is enough that the fraud alleged ‘coincide’ with a securities transaction—whether by the plaintiff or by someone else” for it to occur “in connection with” a securities purchase or sale under SLUSA.  Applying Dabit, the Eighth Circuit held that the Bank’s alleged misrepresentations and omissions “clearly coincided” with its purchases of the stock, since the Bank allegedly omitted information about those specific purchases.  Thus, the Eighth Circuit held that the plaintiffs had in fact alleged misrepresentations and omissions “in connection with the purchase or sale of a covered security” and therefore their state-law claims were preempted by SLUSA. 

In the second suit, plaintiffs sought redress for the same injuries by the Bank that were alleged in the first case.  They filed twelve state-law claims, including breach of fiduciary duty, breach of contract, and unjust enrichment.  However, unlike the plaintiffs in Siepel, they did not concede that they had alleged misrepresentation and omission of facts in their complaint.  They attempted to distinguish their complaint from the Siepel complaint and argued that their claims should not be preempted because their complaint only alleged “failing to disclose” and “failing to be honest,” which was not the same as alleging “omissions of facts or misrepresentations.”  The Eighth Circuit disagreed, holding that such subtle differences in language could not remove their claims from SLUSA preemption.  The court held that “SLUSA preemption is based on the conduct alleged, not the words used to describe the conduct.” Since the plaintiffs’ claims were based on the same alleged conduct as in Siepel, which included both misrepresentations and omissions, the court found plaintiffs’ claims preempted by SLUSA.