SLUSA Class Action Defense Cases–Siepel v. Bank of America: Eighth Circuit Affirms Dismissal Of Class Action Holding SLUSA Preempts Class Action Securities Fraud Claims Against BofA

Jul 10, 2008 | By: Michael J. Hassen

Class Action Claims Against Bank of America Preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998) Eighth Circuit Holds

Plaintiffs, beneficiaries of trust accounts at Bank of America, filed a class action against the Bank and other defendants alleging violations of federal securities law; the class action complaint also asserted state-law claims for unjust enrichment and breach of fiduciary duty, asserting that federal court jurisdiction existed under the Class Action Fairness Act (CAFA). Siepel v. Bank of America, N.A., 526 F.3d 1122, 1124 (8th Cir. 2008). The allegations underlying the class action were that the Bank decided to “implement[] a plan to consolidate the trust management activities of other banks it had acquired” and led class members to believe that “their assets were being managed on an individualized basis, when in fact the assets were being invested in shares of the Nations Funds mutual fund, managed by an investment company substantially owned by the Bank.” Id. The class action alleged further that “higher-yielding and better-managed mutual funds were available in the marketplace,” but the Bank directed customers to Nations Funds for the Bank’s economic benefit and that the Bank accomplished this by sending “misleading letters” to trustees and beneficiaries that, in part, threatened “adverse tax consequences” if they went elsewhere. Id. Defense attorneys moved to dismiss the federal claims on the merits, and moved to dismiss the state-law claims as preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998). Id. In part, the defense argued that the class action should be dismissed on the grounds of judge shopping because plaintiffs’ counsel “had already filed at least five class actions in various jurisdictions seeking redress for the same alleged injuries.” Id., at 1125. The district court granted the defense motion in its entirety, and denied plaintiffs’ request for leave to file an amended class action complaint. Id., at 1125. The Eighth Circuit affirmed.

The class action argued that the Bank failed to disclose “conflicts of interest, higher expenses, and increased tax liability” that would result from using Nations Funds, and plaintiffs argued on appeal that SLUSA did not preempt their class action’s state-law claims that a trustee breaches its fiduciary duty “by failing to disclose conflicts of interest in its selection of nationally-traded investment securities.” Siepel, at 1124. SLUSA “expressly preempts all ‘covered’ state-law class actions that allege: (1) an untrue statement or omission of a material fact, or (2) use of a manipulative or deceptive device or contrivance, ‘in connection with the purchase or sale of a covered security.’” Id., at 1126 (citations omitted). The district court had held that SLUSA preempted the state law claims because the alleged misrepresentations were made “in connection with the purchase or sale of a covered security,” and that the alleged misrepresentations were “central to the Plaintiffs’ state-law claims.” Id., at 1125. The Eighth Circuit easily concluded that the class action was a “covered class action” within the meaning of SLUSA, and that the alleged misrepresentations concern a “covered security” within the meaning of SLUSA. Id., at 1126. The issue on appeal, then, was “whether the alleged misrepresentations and omissions were ‘in connection with’ the purchase or sale of securities.” Id.

Plaintiffs argued that the relevant language should be read narrowly. Seipel, at 1127. Based on Supreme Court precedence, the Eighth Circuit held that the fraud allegedly committed by the Bank “coincided” with a securities-transaction, id. The Circuit Court explained at page 1127, “The Plaintiffs’ complaint alleges nondisclosures that clearly coincided with the Bank’s purchase of shares in the Nations Funds mutual fund. Given the identical coverage of Section 10(b) and SLUSA, it follows that the Plaintiffs’ state-law claims are preempted.” Accordingly, it affirmed the judgment, id., at 1127-28.

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