(Article from Securities Law Alert, January 2019)
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On January 24, 2019, the Seventh Circuit held that the Securities Litigation Uniform Standards Act (“SLUSA”) precluded a state-law-based securities fraud class action brought on behalf of a class consisting of fewer than fifty proposed members. Nielen-Thomas v. Concorde Inv. Svcs., 2019 WL 302766 (7th Cir. 2019) (Flaum, J.). The Seventh Circuit found that “SLUSA’s ‘covered class action’ definition includes any class action brought by a named plaintiff on a representative basis, regardless of the proposed class size.” The court explained that an “obvious implication” of its “interpretation is that no putative securities class actions that are based on state law and otherwise meet SLUSA’s requirements (they involve a covered security, allege a misrepresentation in connection with that security, etc.) can proceed in either federal or state court under SLUSA.” In reaching its decision, the Seventh Circuit emphasized that “Congress envisioned a broad construction” of SLUSA. Id. (quoting Merrill Lynch, Pierce, Fenner & Smith v. Dabit, 547 U.S. 71 (2006)).
SLUSA provides that a “single lawsuit” constitutes a “covered class action” if, inter alia, “(I) damages are sought on behalf of more than 50 persons or prospective class members,” or “(II) one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties similarly situated.” 15 U.S.C. § 78bb(f)(5)(B)(i). The court found that while “there is overlap between” Subparagraphs (I) and (II), “each subparagraph has a separate meaning.” The court explained that “Subparagraph (I) includes in its scope all actions brought by groups of more than fifty ‘prospective class members,’” as well “single lawsuits brought by groups of more than fifty ‘persons’ without any ‘prospective’ or ‘representative’ caveat on their plaintiff status.” Subparagraph (II), on the other hand, “includes any action brought as a putative class action in the traditional Rule 23 meaning of the term.” The court determined that “Subparagraph (II) includes all putative class actions that otherwise meet the relevant requirements in scope, regardless of the proposed class’s size.”
The Seventh Circuit recognized that under this construction, “a putative class action in which the proposed class exceeds fifty members could be ‘covered’ under both Subparagraph (I) and Subparagraph (II).” The court noted that “this redundancy is not unusual or problematic.” The court explained that “this reading gives separate effect to both subparagraphs so that each covers something the other does not.” Subparagraph I encompasses lawsuits brought on behalf of more than fifty plaintiffs that are not styled as class actions. Subparagraph II “includes all putative class actions with fifty or fewer proposed class members.”
The Seventh Circuit reasoned that interpreting SLUSA to “preclude all [state-law-based securities fraud] actions brought using the class-action device, not just classes alleged to include more than fifty people,” comports with “SLUSA’s enactment history and legislative purpose.”[1] The court explained that “Congress passed these amendments to combat a specific problem—litigants were attempting to circumvent the PSLRA’s barriers to federal securities class actions by filing their class actions under state law instead.” The Seventh Circuit explained that “[t]his purpose could be easily frustrated if plaintiffs bringing a state-law securities class action could simply allege that they represented a class of no more than fifty people.” Absent SLUSA preclusion, “such suits could proceed through the courts until discovery identified the entire class of plaintiffs.” If it turned out that “the actual class could include more than fifty persons, . . . by that time the abuses that the PLSRA sought to prevent would have already taken place.”
[1] The Seventh Circuit acknowledged that there have been “statements by both the Supreme Court and the Seventh Circuit indicating that class actions brought on behalf of fewer than fifty persons are not covered by SLUSA.” For instance, in Cyan v. Beaver County Employees Retirement Fund, 138 S.Ct. 1061 (2018), the Court stated that “[a]ccording to SLUSA’s definitions, the term ‘covered class action’ means a class action in which ‘damages are sought on behalf of more than 50 persons.’” The Seventh Circuit found that these statements were all dicta because “[t]he Supreme Court and the Seventh Circuit in these cases did not have the opportunity or need to opine on the contexts in which Subparagraphs (I) or (II) could apply.”