SLUSA Class Action Defense Cases-Instituto v. Lehman Brothers: Pension Manager Lawsuits Constituted “Covered Class Action” Under Securities Litigation Uniform Standards Act Florida Federal Court Holds

Jul 4, 2007 | By: Michael J. Hassen

Florida Federal Court Reaffirms Prior Ruling that Lawsuits by Quasi-Governmental Agency on Behalf of Military Personnel Against Financial Institutions for Pension Fund Losses Constituted “Covered Class Actions” Within the Meaning of SLUSA (Securities Litigation Uniform Standards Act)

Plaintiff, a quasi-governmental agency that manages pension funds for armed forces personnel, filed a putative class action in Florida state court against Lehman Brothers alleging violations of various Florida state laws. Instituto de Prevision Militar v. Lehman Bros., Inc., 485 F.Supp.2d 1340, 1342 n.1 (S.D. Fla. 2007). The district court sua sponte held that the federal Securities Litigation Uniform Standards Act (SLUSA) preempted plaintiff’s claims and dismissed the class action complaint with leave to amend. Plaintiff sought reconsideration on the ground, inter alia, that the lawsuit was not a “covered class action” within the meaning of SLUSA; the district court denied reconsideration.

“Plaintiff Instituto de Prevision Militar … is a quasi-governmental agency of the Republic of Guatemala that, inter alia, manages the pension funds for members of the Guatemalan Armed Forces.” Instituto, at 1342. In July 2001, plaintiff was solicited by Pension Fund of America (PFA) to deposit pension funds with Lehman Brothers in a retirement trust account; believing PFA was the agent of Lehman (it was not), plaintiff invested more than $28 million in PFA through Lehman, id. Plaintiff alleges that PFA was “carrying out an embezzlement and money laundering scheme,” and this formed the basis of a lawsuit it filed against PFA in November 2002. Id. Through that action, plaintiff obtained an order compelling Lehman to liquidate its account, but the funds thus obtained were insufficient to cover its investment so plaintiff filed suit against Lehman, id., at 1342-43. Plaintiff also filed a putative class action against Merrill Lynch, and the district court consolidated the three cases for discovery purposes. Id., at 1343.

The district court subsequently held that SLUSA preempted all state-law claims in the class action complaints against Lehman and Merrill Lynch, and so dismissed the class actions. Instituto, at 1343. Plaintiff sought reconsideration on the ground that the class actions against Lehman and Merrill Lynch are not “covered class actions” within the meaning of SLUSA. Id. The district court denied the motion.

The bases for federal court reconsideration of an order are well-established: “‘Courts have distilled three major grounds justifying reconsideration: (1) an intervening change in controlling law; (2) the availability of new evidence; and (3) the need to correct clear error or manifest injustice.’” Instituto, at 1343 (citation omitted). The district court summarized plaintiff’s arguments at page 1343 as follows:

Plaintiff argues that this Court erred in its Order Dismissing the Complaint … by holding that the instant case is a “covered class action” under the SLUSA. First, Plaintiff argues that it is the sole plaintiff and counts as “one person” under the SLUSA; therefore, this action is not a class action at all, but an individual lawsuit…. In the alternative, Plaintiff argues that because it is seeking damages for the entity and not on behalf of a class, this action is more like a shareholder derivative suit and should fall under the SLUSA exception excluding shareholder derivative suits from being covered by the SLUSA. (Citations omitted.)

Under SLUSA, “a corporation, investment company, pension plan, partnership, or other entity, shall be treated as one person or prospective class member, but only if the entity is not established for the purpose of participating in this action.” Instituto, at 1343 (quoting 15 U.S.C. § 78bb(f)(5)(D)). Despite plaintiff’s evidence that it is “one entity bringing an individual lawsuit,” id., at 1343-44, the court held that SLUSA still governed the action because under 15 U.S.C. § 78bb(f)(5)(B)(i), “a covered class action includes a single lawsuit in which ‘damages are sought on behalf of more than 50 persons or prospective class members,’ or a lawsuit in which ‘one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties,’” id., at 1344. Because plaintiff is seeking damages on a representative basis, the action constitutes a “covered class action” within the meaning of SLUSA, id., at 1344. The class actions complaints also fell within the scope of SLUSA because they are part of multiple lawsuits consolidated as a single action and seeking damages on behalf of more than 50 people, thus falling within the definition of ‘covered class action” set forth in 15 U.S.C. § 78bb(f)(5)(B)(ii). Id., at 1344-46. The court therefore denied plaintiff’s motion for reconsideration, id., at 1345-46.

NOTE: The district court rejected plaintiff’s argument, never previously raised, that an exception to SLUSA applied because plaintiff was bringing the action “derivatively,” because plaintiff “does not qualify for this special exception to SLUSA preemption,” Instituto, at 1346. The court also rejected plaintiff’s claim that dismissal sua sponte was improper, explaining that plaintiff had an opportunity to address SLUSA preemption before the class action complaints were dismissed, and that plaintiff was not prejudiced thereby because the court granted it leave to amend. Id., at 1347.

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