SLUSA Class Action Defense Cases–In re Enron: Fifth Circuit Affirms Dismissal Of Class Action Lawsuits Holding SLUSA Preempts Securities Fraud Class Action Claims Originally Filed In State Court Were Covered Class Actions

Aug 26, 2008 | By: Michael J. Hassen

Class Action Claims Preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998) because Ten Class Actions had been Litigated as a Single Proceeding by Plaintiffs’ Common Counsel Fifth Circuit Holds

Numerous class action complaints were filed against various defendants following the collapse of Enron; ten of those class action complaints, which filed by former Enron investors against various financial institutions, certain former members of Enron’s management, and Arthur Anderson (Enron’s former accounting firm) and certain Arthur Anderson partners, but not against Enron itself, were consolidated into the action now at issue. In re Enron Corp. Securities, Derivative & ERISA Litig., ___ F.3d ___, 2008 WL 2689248, *1 (5th Cir. 2008). Most of the class actions had been filed in state court, but they were removed to federal court based on Enron’s bankruptcy filing on the ground that they were “‘related to’ bankruptcy jurisdiction,” and the class actions were later consolidated in the Southern District of Texas by order of the Judicial Panel on Multidistrict Litigation. Id., at *3. The class actions “allege virtually identical state law claims for fraud, fraud on the market, civil conspiracy, aiding and abetting, negligent misrepresentation, negligence, violations of the Texas Business and Commerce Code, and violations of the Texas Securities Act.” Id. Defense attorneys moved to dismiss the class action complaints as preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998). Id., at *1. The district court granted the defense motion and dismissed all of the class action claims, id., at *3. In dismissing the class actions, the district court denied class action plaintiffs leave to amend because it found that amendment would be futile. Id. Plaintiffs appealed, arguing that the district court lacked jurisdiction to enter the order dismissing the class action complaints and, alternatively, that the class actions that had been removed to federal court were not “covered class actions” within the meaning of SLUSA; the Fifth Circuit affirmed.

We do not summarize the facts surrounding the rise and fall of Enron. See In re Enron, at *2 and Newby v. Enron Corp., 394 F.3d 296, 299 (5th Cir. 2004). The issues on appeal were (1) whether the district court had jurisdiction over the class actions, and (2) whether the class action claims were preempted by SLUSA. In re Enron, at *3. We do not here discuss the bankruptcy jurisdiction issue; the Fifth Circuit’s analysis, leading to its conclusion that bankruptcy jurisdiction did exist, may be found at pages *3 through *6 of the Circuit Court’s opinion. With respect to the SLUSA preemption issue, plaintiffs’ argued that “for preemption purposes, SLUSA’s definition of a ‘covered class action’ should be applied only at the time a state action is removed to federal court, not after a federal court issues a consolidation order.” Id., at *6. As a backdrop to is legal analysis, the Circuit Court provided a summary of the “evolution of federal securities law,” including the Private Securities Litigation Reform Act (PSLRA). See id., at *7-*8. This summary including the language in SLUSA that “[n]o 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 private party,” see id., at *8 (citation omitted) (italics added by court). The central issue was whether the class actions were “covered class actions” within the meaning of SLUSA.

Under SLUSA, “A group of lawsuits…constitutes a ‘covered class action’ if: (1) the suits are ‘pending in the same court;’ (2) the suits involve ‘common questions of law or fact;’ (3) ‘damages are sought on behalf of more than 50 persons;’ and (4) ‘the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose.’” In re Enron, at *9 (quoting 15 U.S.C. § 78bb(f)(5)(B)(ii)). While this was a matter of first impression in the Fifth Circuit, the Court found persuasive the legal analysis of the district court in In re WorldCom, Inc. Sec. Litig., 308 F.Supp.2d. 214 (S.D.N.Y.2004), and, based thereon, held the class action claims did indeed fall within the scope of SLUSA. See id., at *9-*10. All of the requirements for SLUSA preemption existed: the class action lawsuits involve “more than fifty plaintiffs and common questions of law or fact,” and are each pending in the same court. Id., at *10. The only question, then is whether the class actions “‘are joined, consolidated, or otherwise proceed as a single action for any purpose.’” Id. (quoting 15 U.S.C. § 78bb(f)(5)(B)(ii)).

The Fifth Circuit held that the actions were “proceed[ing] as a single action” because “the plaintiffs have acted in unison throughout the litigation.” In re Enron, at *11. In fact, plaintiffs’ damages expert “provided a single damages figure for the plaintiffs in all ten cases.” Id. At bottom, then, the Circuit Court concluded that “it was the…plaintiffs who created the foundation for SLUSA preemption by filing nearly identical complaints, jointly scheduling discovery, filing joint motions, providing nearly identical discovery responses, and using the same experts and expert reports. Consolidation did not force the…plaintiffs to act in unison. They did so on their own, and they must now face the consequences.” Id., at *12. Accordingly, the Circuit Court affirmed the judgment of the district court. Id., at *13.

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