Corporate & Securities Law

By Jim Hamilton

Eleventh Circuit: SLUSA Dismissal of Claims Against Merrill Lynch Proper

State law claims brought by the Instituto de Prevision Militar, a Guatemalan agency charged with administering benefits for the country's military personnel, against Merrill Lynch were preempted by the Securities Litigation Uniform Standards Act, concluded an 11th Circuit panel. As alleged, an entity called Pension Fund of America solicited IPM to invest agency funds and deposit those funds with Merrill Lynch. IPM claimed that it relied on Merrill Lynch's reputation when it decided to invest more than $7.7 million in ?retirement trust accounts? comprised of a life insurance component and a mutual fund component.

IPM claimed that Merrill Lynch subsequently allowed Pension Fund of America to unlawfully transfer to itself more than $3 million from the IPM account. In Florida state court, IPM sued Merrill Lynch, but re-filed the action in federal court to comply with a federal case management order. The complaint alleged state law claims of negligence, breach of fiduciary duty and fraud. Subsequently, pursuant to an order of the federal district court, on IPM's motion, the instant case, a securities class action and a similar lawsuit against Lehman Brothers were consolidated for discovery purposes. The district court then held that all IPM claims were preempted by the Uniform Standards Act. A second complaint, which added an Exchange Act fraud claim, was also dismissed.

The first step in the appellate panel's analysis was to determine if the claim was a "covered class action." There are two definitions of such a claim under the Uniform Standards Act. The first is a single lawsuit involving more than 50 persons, or an action with a representative of unnamed parties similarly situated, while the second involves any group of lawsuits filed in in the same court involving common questions of law or fact, in which damages are sought on behalf of more than 50 persons and the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose.

The single suit definition was inapplicable, as IPM was a single entity suing in its own name, and was not established for the purpose of litigation. With regard to the second, the court found that the claims fit within the "group of lawsuits" definition of a covered class action.

The actions were in the same court and satisfied the numerosity requirement. Despite IPM's claims that the suits did not involve common legal and factual questions, the appellate panel found that how "PFA represented itself to IPM is a common issue of fact critical to all three cases" and "whether these representations were `in connection with the purchase or sale' of a security is a common question of law."

Finally, the court found that the "plain language" the consolidation requirement was easily satisfied because the actions "undeniably were consolidated by the district court for discovery purposes." The court rejected the plaintiff's argument that the ?consolidation . . . for any purpose? language was not meant to cover bona fide individual actions like this case. Even though the panel conceded that IPM?s theory of congressional intent draws some support from the overall structure of SLUSA, the provision?s unambiguous language was controlling. The court cautioned that if IPM sought to avoid Uniform Standards Act preclusion, it should have raised that issue as an objection to discovery consolidation. Because "IPM expressly requested that the court consolidate all three cases for discovery purposes," it "cannot now complain about the consequences of its own request."

Instituto de Prevision Militar v. Merrill Lynch

Full post as published by Jim Hamilton's World of Securities Regulation on November 03, 2008 (boomark / email).