SLUSA Class Action Defense Cases-In re Lord Abbett: Federal Court Grants Defense Motion To Dismiss Class Action Complaint With Prejudice Holding SLUSA Preemption Of One Claim Requires Dismissal Of Entire Class Action

Mar 29, 2007 | By: Michael J. Hassen

New Jersey Federal Court Holds as Matter of First Impression that Dismissal of One Claim for Relief under Federal Securities Litigation Uniform Standards Act (SLUSA) Requires Dismissal of Entire Complaint

Plaintiffs filed a putative securities class action against various Lord Abbett entities and numerous other defendants as “a federal class action complaint based upon the failure of defendant Lord Abbett … to disclose excessive fees and commissions they siphoned from Lord Abbett mutual fund investors in order to improperly pay and induce brokers to steer investors into Lord Abbett mutual funds.” In re Lord Abbett Mut. Funds Fee Litig., 463 F.Supp.2d 505, 506-07 (D. N.J. 2006). The class action complaint contained 10 claims for relief under both state and federal law, all premised on the allegation that Lord Abbett “compensated brokers excessively as an incentive to steer new investors into Lord Abbett mutual funds,” id., at 507. Defense attorneys moved to dismiss the class action under Rule 12(b)(6); the district court granted the motion, ruling in part that the state law claims were preempted by the federal Securities Litigation Uniform Standards Act (SLUSA), but granted leave to amend with respect to two of the federal claims in the class action complaint. Id. Relying on Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294 (3d Cir.2005), defense attorneys sought reconsideration on the ground that because the court dismissed Counts 7-10 under SLUSA, the court was required to dismiss the entire class action. Id., at 507-08. Ultimately, the district court vacated its order granting leave to amend and dismissed the class action complaint with prejudice.

The class action complaint advanced claims for relief under the Investment Company Act of 1940 (ICA) (Counts 1-4), the Investment Adviser Act of 1940 (IAA) (Count 5), the New Jersey Consumer Fraud Act (Count 6) which plaintiff later dismissed, and for unjust enrichment and alleged breaches of fiduciary duties and duties of good faith, loyalty, fair dealing, due care, and/or candor (Counts 7-10). In re Lord Abbett, at 507 and n.1. The district court dismissed Counts 1-5 for failure to state a claim, and dismissed Counts 7-10 as preempted by SLUSA. Id., at 507. However, the court also concluded that Counts 3 and 4 under ICA §§ 36(b) and 48(a) failed “because no direct cause of action exists under those statutes,” and granted plaintiffs leave to amend the class action complaint so as to replead them derivatively. Id. The defense moved the district court to dismiss the class action complaint with prejudice on the ground that preemption of one class action claim under SLUSA required dismissal of the entire class action complaint. Id., at 508.

The basis of the defense argument is 15 U.S.C. § 78bb(f)(1) (2006), which provides:

Class Action Limitations. No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any party alleging … a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or … that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

After discussing Rowinski and LaSala v. Bordier et CIE, 452 F.Supp.2d 575 (D. N.J. 2006), each of which addressed SLUSA preemption of class actions, In re Lord Abbett, at 508-10, the district court characterized as a matter of first impression whether SLUSA preempts entire class actions or only individual claims, id., at 510. After a detailed analysis of SLUSA’s statutory text, id., at 511-13, the federal court concluded “SLUSA preempts entire class actions, and not mere claims in a complaint,” id., at 513.

NOTE: The district court rejected plaintiffs’ effort to distinguish Rowinski only involved state law claims while the present class action complaint contained state and federal law claims. Relying on Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, ___ U.S. ___, 126 S.Ct. 1503, 1514 (2006), which states that SLUSA “denies plaintiffs the right to use the class action device to vindicate certain claims,” the court concluded that whether the class action complaint includes properly pled federal claims is irrelevant. In re Lord Abbett, at 511 n.4.

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