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From Securities Regulation Daily, August 29, 2017

Banks urge justices to decline SLUSA case on meaning of “alleging”

By Mark S. Nelson, J.D.

Bank of America, N.A. and JPMorgan Chase Bank, N.A. filed their oppositions to twin petitions for certiorari asking the Supreme Court to decline to hear Seventh Circuit cases that resulted in dismissal of state law claims brought against BofA and JPMorgan because those claims alleged misrepresentations or omissions that brought them within the Securities Litigation Uniform Standards Act. Both banks assert that no circuit split exists to justify the Supreme Court granting certiorari. The cases also highlight a SLUSA issue that recently prompted the Ninth Circuit to again discuss the meaning of “alleging” in SLUSA and the jurisdictional nature of SLUSA dismissals with reference to some of the same Seventh Circuit precedents at issue in the BofA and JPMorgan cases (Goldberg v. Bank of America, N.A., August 23, 2017; Holtz v. JPMorgan Chase Bank, N.A., August 23, 2017).

Different paths, same result. Both BofA and JPMorgan argue that the claims brought against them allege “an untrue statement or omission of a material fact,” one of the touchstones for dismissal of state-law claims under SLUSA (other aspects of SLUSA’s applicability to these cases are not in dispute). In the BofA case, LaSalle Bank (later acquired by BofA) was accused of failing to disclose sweep account fees charged to customers for investing excess cash balances in mutual funds. In the JPMorgan case, JPMorgan was accused of pushing customers into JPMorgan products that charged higher fees or otherwise failed to meet customers’ investment goals.

The petitioner in the BofA case sued the bank in Illinois state court, alleging state-law claims for breach of contract, breach of fiduciary duty, and unjust enrichment. The bank removed the case to federal court and a district judge dismissed the case under SLUSA. A divided Seventh Circuit issued a per curiam decision affirming dismissal. The path was somewhat more direct in the JPMorgan case, which had been filed in federal court, but made state-law claims similar to those in the BofA case. The district court dismissed the complaint and the Seventh Circuit, in a unanimous opinion authored by Judge Easterbrook, affirmed dismissal.

No meaningful circuit split. The crux of the parties’ briefing in the BofA and JPMorgan cases focuses on just how divided the several courts of appeal are with respect to the question of what it means to allege a misrepresentation or omission in the SLUSA context. The two petitioners (Goldberg petition in BofA case; Holtz petition in JPMorgan case) assert a clear split of authority on this question, which they also assert the Supreme Court has never directly addressed. Specifically, the petitioners posit a split of authority between the Seventh Circuit and the “majority” view represented by the Second, Third, and Ninth Circuits, and the “literalist” view of the Sixth Circuit.

By contrast, BofA and JPMorgan reply that the circuit courts are not split and instead emphasize the harmony between the various circuit court views of “alleging” and how the BofA and JPMorgan cases would have led to dismissal in any of the circuits that have addressed “alleging” under SLUSA. On this latter point, BofA noted that the concurring judge in the case against it observed that other circuits would have dismissed the Goldberg complaint.

Here are the standards underlying the parties’ arguments about the presence or absence of a circuit split:

  • Second Circuit—In In re Kingate Management Limited Litigation the court of appeals said SLUSA applies: “For the reasons discussed above, we conclude (with a limitation explained below) that SLUSA’s preclusion applies when the state law claim is predicated on conduct of the defendant specified in SLUSA’s operative provisions, which reference the anti-falsity provisions of the 1933 and 1934 Acts.”
  • Third Circuit—The court’s opinion in Rowinski stated: “Where, as here, allegations of a material misrepresentation serve as the factual predicate of a state law claim, the misrepresentation prong is satisfied under SLUSA.” In LaSala, the court said: “In Rowinski, we held that a claim alleges ‘a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security,’ which subjects it to SLUSA preemption, when an allegation of a misrepresentation in connection with a securities trade is a ‘factual predicate’ of the claim, even if misrepresentation is not a legal element of the claim” (internal citations omitted).
  • Sixth Circuit—According to the court’s Segal opinion: “The Act does not ask whether the complaint makes ‘material’ or ‘dependent’ allegations of misrepresentation in connection with buying or selling securities. It asks whether the complaint includes these types of allegations, pure and simple.”
  • Ninth Circuit—The court of appeals cited the Third Circuit’s Rowinski opinion and stated: “As our sister circuits have recognized, the statute operates wherever deceptive statements or conduct form the gravamen or essence of the claim.”

The parties in the BofA and JPMorgan cases observed that the Sixth Circuit’s view is an outlier to the extent it treats the “material” or “dependent” aspects of “alleging” differently from the Second, Third, and Ninth Circuits. The parties variously dubbed the Sixth Circuit’s view as the “literalist” or “expansive” view.

The Supreme Court has already agreed to hear one SLUSA case in OT17 (Cyan), albeit on a different aspect of SLUSA. BofA has separately asked the Supreme Court to dismiss the petition or affirm the Seventh Circuit’s decision.

The cases are No. 16-1541 and 16-1536.

Attorneys: Kannon K. Shanmugam (Williams & Connollly LLP) for Bank of America, N.A. Seth P. Waxman (Wilmer Cutler Pickering Hale and Dorr LLP) for JPMorgan Chase Bank, N.A. Thomas A. Doyle (Wexler Wallace LLP) for Margaret Richek Goldberg. Thomas C. Goldstein (Goldstein & Russell, P.C.) for Patricia Holtz.

Companies: Bank of America, N.A.; JPMorgan Chase Bank, N.A.

MainStory: TopStory BrokerDealers FederalPreemption FiduciaryDuties FinancialIntermediaries FraudManipulation InvestmentAdvisers InvestmentCompanies SupremeCtNews

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