by T. GormanPosted on Posted in SECActions

The Sixth Circuit Court of Appeals affirmed the dismissal of a securities class action tied to the market crisis and brought against three mutual funds issued by Morgan Keegan Select Fund, Inc., an open-ended investment company. Atkinson v. Morgan Asset Management, Inc., No. 09-6265 (6th Cir. Sept. 8, 2011). The decision is based on the Securities Litigation Uniform Standards Act of 1998 or SLUSA.

Plaintiffs filed suit in state court against the funds’ advisers, officers, directors, distributor, auditor, and affiliated trust company. The complaints asserted thirteen state law claims for breach of contract, violations of the Maryland Securities Act, breach of fiduciary duty, negligence and negligent misrepresentation. The complaint centers on the claim that in 2007 and 2008 the defendants took unjustified risks in allocating fund assets which were concealed from the shareholders. If plaintiffs had known about the mismanagement, they would have redeemed their shares prior to the drop in value according to the complaint.

Defendants removed the state court action to federal court under SLUSA. Plaintiffs moved for remand. The district court concluded that SLUSA precludes the action and dismissed the action with prejudice.

SLUSA was enacted with the purpose of preventing class action plaintiffs from evading the requirements of the Private Securities Litigation Reform Act of 1995, or the PSLRA, by bringing the case in state rather than federal court. Accordingly, the Act precludes plaintiffs from filing a class action in state court if four elements are met: 1) the case consists of more than fifty prospective members; 2) it asserts state law claims; 3) it involves a nationally listed security; and 4) the complaint alleges “an untrue statement or omission of a material fact in connection with the purchase or sale of” that security. If these elements are met SLUSA authorizes the removal of the suit to federal court. A subsequent motion to remand raises a jurisdictional issue. Accordingly, if the court determines that the suit is precluded the proper course is to dismiss it.

Here plaintiffs claim that their suit is not precluded based on what is known as the Delaware carve-out. Under this section the action can go forward and is not precluded if it “involves . . .the purchase or sale of securities by the issuer or an affiliate of the issuer exclusively from or to holders of equity securities of the issuer.” In this case however plaintiffs are neither purchasers or sellers. Rather, they are “holders,” that is, they claim they did not sell but held their securities because of the acts of the defendants. While plaintiffs claim that the term purchase should be construed to include contracts to purchase securities, this argument would not save them the Court held. This is because in that instance the relevant purchase under the Delaware carve-out is the acquisition of their contract. Here the complaint does not allege any acquisition misconduct.

Likewise, plaintiffs’ supposition that their claims are based on state law and do not involve any “untrue statement or omission of a material fact” is inconsistent with the complaint, the Court concluded. It is true that SLUSA is only aimed at fraud based claims. The critical question here is whether “the complaint includes these types of allegations, pure and simple.” To make this determination the court must analyze the substance of the claims asserted in the complaint. Artful pleading will not save a complaint the Court cautioned. An analysis of the complaint in this case demonstrates that it is grounded in allegations of fraud. While the Court noted that it had not previously decided if SLUSA precludes only the fraud based claims or the entire complaint, that issue need not be resolved here since all of the allegations are tied to fraud.

Finally, the Court rejected plaintiffs’ suggestion that the action could be amended by reducing the number of plaintiffs or deleting the fraud claims. This point was not raised in the district court. Nevertheless, these modifications will not save this case the Court held because “SLUSA cannot be tricked.”

Program: ABA Seminar: Is the DOJ and SEC War On Insider Trading Rewriting the Rules? ABA program, live in New York City, webcast nationally. Friday September 23, 2011 from 12 – 1:30 p.m. at Dorsey & Whitney, 51 West 52 St. New York, New York 10019.
Co-Chairs: Thomas O. Gorman, Dorsey & Whitney LLP and Frank C. Razzano, Pepper Hamilton LLP.
Panelists: Christopher L. Garcia, Chief, Securities and Commodities fraud Task Force, Assistant U.S. Attorney, Southern District of New York; Daniel Hawke, Chief, Market Abuse Unit, Securities and Exchange Commission; Stuart Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association; Tammy Eisenberg, Chief Compliance Officer, General Counsel and Senior Vice President, DIAM U.S.A., Inc.
For furhter information please click here.

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by T. GormanPosted on Posted in SECActions

Primary liability in a Section 10(b)-5(b) false statement case was defined by the Supreme Court in terms of control and authority over the statement in Janus capital Group, Inc. v. First derivative Traders, 131 S.Ct. 2296 (2011). Closely parsing the word “make” in the rule the Court held that “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Janus however did not consider the question of liability under subsections (a) and (c) of the rule.

The question of primary liability is of critical importance in private damage actions where there is no liability for aiding and abetting. It is also significant in SEC enforcement actions in certain instances. See, e.g., SEC v. Daifotis, No. 3:11-c-00137 (N.D. CA.)(here). In Hawaii Ironworkers Annuity Trust Fund v. Cole, Case No. 3:10CV371 (N.D.Oh. Decided Sept. 7, 20911) the court considered the question of primary liability under each subsection of the rule.

Cole arose out of the bankruptcy of Dana Corporation. Prior to seeking bankruptcy protection a widespread financial fraud took place at the company orchestrated by its former CEO and CFO. Senior officials at the company repeatedly made false statements regarding the financial condition of the company. Ultimately the fraud was exposed, a restatement filed and the company collapsed.

The four defendants were officers of the company who worked in the operating divisions. According to the amended complaint, Dana’s former CEO and CFO and top management set a 6% profit margin for the company which was not based on forecasts or performance. The operating divisions were essentially required to prepare results showing the specified profit margin. The defendants, in accord with the directives of senior management, participated in the preparation of results ultimately furnished to investors which falsely specified the performance of the company.

Prior to the decision in Janus the court denied a motion to dismiss, concluding that the four defendants could be held primarily. The court held that “[t]he complaint here alleges more than mere incidental and insignificant help in creating the false bright picture that others presented to the public. According to the complaint the defendants sketched out and helped fill in the picture during the entire period it was on display.”

The court reversed this decision in part following Janus. The court began by concluding that Janus applies to corporate insiders such as the defendants. While the defendants in that case were legally separate entities, there is noting in the decision which confines it to such a fact pattern. The holding of the case focus on the language of the rule which applies equally to all defendants.

At the same time however the key question under Janus is who is the ultimate authority as to the making of the statement. The four defendants here clearly were not that authority according to the pending complaint. Rather, they acted in response to the mandatory directives of senior officers. Accordingly, the court reversed its earlier ruling as to Rule 10b-5(2).

While subsection (b) of the rule focuses on the maker of a false statement, subsections (a) and (c) of Rule 10b-5 are concerned with deceptive conduct. Such conduct can be a basis for primary liability as the Court made clear in Stoneridge Inv. Partners, LLC v. Scientific-Atlanta Inc., 552 U.S. 148 (2008). While a plaintiff must establish reliance to sustain such a claim, neither Stoneridge nor Janus require attribution of the conduct to the specific individual as a predicate for such liability. Here the defendants clearly engaged in manipulative conduct according to the allegations of the pending complaint. Accordingly, the court declined to reconsider that portion of its earlier ruling which held that under subsections (a) and (c) of the rule the four defendants can be held primarily liable.

Program: ABA Seminar: Is the DOJ and SEC War On Insider Trading Rewriting the Rules? ABA program, live in New York City, webcast nationally. Friday September 23, 2011 from 12 – 1:30 p.m. at Dorsey & Whitney, 51 West 52 St. New York, New York 10019.
Co-Chairs: Thomas O. Gorman, Dorsey & Whitney LLP and Frank C. Razzano, Pepper Hamilton LLP.
Panelists: Christopher L. Garcia, Chief, Securities and Commodities fraud Task Force, Assistant U.S. Attorney, Southern District of New York; Daniel Hawke, Chief, Market Abuse Unit, Securities and Exchange Commission; Stuart Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association; Tammy Eisenberg, Chief Compliance Officer, General Counsel and Senior Vice President, DIAM U.S.A., Inc.
For furhter information please click on the following link: file:///C:/Users/tom/AppData/Local/Temp/CET1DSW-DS1.html

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