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: Jim Hamilton's World of Securities Regulation

By N. Peter Rasmussen

3rd Circuit: SLUSA No Bar to Aiding and Abetting, Foreign Claims by Trust

The Securities Litigation Uniform Standards Act did not preclude a trust from bringing state law claims for aiding and abetting breaches of fiduciary duties, concluded a 3rd Circuit panel. In addition, the trustees could bring, as assignees of individual investors in the bankrupt enterprise, may assert, in federal court, against foreign entities, claims characterized as arising under foreign law for aiding and abetting money laundering.

The case arose from the failure of a software company after some of its officers and directors allegedly ran a "pump and dump" scheme, and then attempted to conceal their actions by channeling funds through sham entities and accounts with the assistance and knowledge of foreign banks.

After the issuer filed for bankruptcy, the reorganization plan assigned the corporation's claims to a state law trust, as did individual purchasers of the company's securities. The trustees filed suit in federal court alleging that the foreign banks aided and abetting breaches of fiduciary duties and violated Swiss money-laundering laws.

The district court (DC NJ) dismissed the claims under the Uniform Standards Act. First, the court rejected the trustees' claims that the trust should be considered one "person" under the Uniform Standards Act because the trust was formed for the primary purpose of pursuing causes of action and recovering damages for shareholders. The trust was actually acting as a shareholder representative, pursuing the litigation on behalf of a class of 6,000 people, held the district court.

The court also held that the aiding and abetting action itself was preempted by the Uniform Standards Act because that statute prohibits claims in state court that plaintiffs are prohibited from pursuing under federal law. Recognizing that the U.S. Supreme Court's decision in Central Bank of Denver v. First Interstate Bank prohibited private plaintiffs from bringing aiding and abetting claims, under Section 10(b), the district court broadly interpreted the Uniform Standards Act to preempt state law claims where a plaintiff is unable to bring a federal securities claim (LaSala v. Bordier et Cie, CCH Federal Securities Law Reporter ¶93,975).

On appeal, the 3rd Circuit initially held that the damages resulting from the pump and dump scheme accrued to the corporation. The panel noted that

The fact that AremisSoft no longer exists does not convert its corporate claims into direct shareholder claims; rather, the corporate nature of the claims endures, and ownership of the claims passes to AremisSoft?s successor.

The court then disagreed with the trial court's finding that the trust entity should be disregarded and the stock purchasers should be counted for Uniform Standards Act purchases.

SLUSA preemption would prevent the estate from assigning certain legal claims to any class of creditors or equity holders containing more than 50 persons, but it would allow assignment to classes with fewer constituents. This result would make little sense, as we see no indication that Congress?s aim in fashioning the ?covered class action? definition was to control the number of constituents to whom a bankruptcy estate?s claim is assigned. Rather, the statutory text and legislative history signal that the definition was designed to prevent securities-claims owners from bringing what are, in effect, class actions by assigning claims to a single entity. Put simply, Congress?s goal was to prevent a class of securities plaintiffs from running their claims through a single entity, not to prevent a single bankruptcy estate from assigning its claims to an entity capable of acting to protect the common interests of a class of people.

Moreover, it is difficult to see what purpose would be served by holding otherwise. If we held that the key issue is to whom a claim is assigned, then we would likely see two results. First, we might see parties to bankruptcies engage in some rather creative class construction to keep numbers below 51. Parties? ability to do this would not turn on any factor related to preventing frivolous securities litigation, but on the creativity of the parties? lawyers and the particulars of a debtor?s pre-petition liabilities.

With regard to the Swiss banking law claims, the panel concluded that the Uniform Standards Act, which applies to claims ?based upon the statutory or common law of any State," did not preclude actions for foreign law violations. Initially, the court rejected the banks' claim that Congress intended to preempt such foreign law claims. The court cited language that "?[i]t is not our job to speculate upon congressional motives; our job is to hew as closely as possible to the meaning of the words
Congress enacted." Because Congress could have defined a state to include foreign jurisdictions, and had done so in other legislation, the court declined to extend the definition in this case.

The claims also did not arise from or incorporate state law claims, and were not dependent on state law, including New Jersey's choice of law provisions. To conclude that, within the intendment of SLUSA, those claims are ?based upon the . . . law of? New Jersey would require attributing to Congress a subtlety of such exquisite reach as to have no place in the legislative process," stated the court.

LaSala v. Bordier et Cie, CCH Federal Securities Law Reporter ¶94,597 (Dkt. No. 06-4323)

Full post as published by Jim Hamilton's World of Securities Regulation on March 12, 2008 (boomark / email).