(Article from Securities Law Alert, June 2022)
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On May 31, 2022, the Eleventh Circuit affirmed the dismissal of a putative class action against a brokerage firm/investment adviser alleging that, under Georgia law, the brokerage firm breached its fiduciary duties by recommending certain investments to clients. Cochran v. Penn Mut. Life Ins., 2022 WL 1744239 (11th Cir. 2022) (Carnes, J.). The court held that the Securities Litigation Uniform Standards Act (“SLUSA”) barred plaintiff from using a class action to bring his state law claims because the claims involved allegations of misrepresentation or omission that should have been brought under the federal securities laws. Referencing 15 U.S.C. Section 77p(b), the court concluded that the class action had been properly dismissed because the complaint alleged “an untrue statement or omission of material fact in connection with the purchase or sale of a covered security.”
Background and Procedural History
Plaintiff alleged that the brokerage firm breached its fiduciary duties by recommending variable annuities to clients with individual retirement accounts, causing them to pay high fees without getting an extra tax benefit because the individual retirement accounts were already tax advantaged. The brokerage firm moved to dismiss, arguing that the use of a class action was barred by federal law. The district court granted the motion, agreeing that federal law barred the class action.
SLUSA Was Intended to Prevent Plaintiffs From Using State Law Claims to Circumvent the PSLRA
The court noted that SLUSA was a response to plaintiff attempts to circumvent the Private Securities Litigation Reform Act (which heightened pleading requirements for class actions alleging fraud in the sale or purchase of securities) by basing their securities fraud class action claims on state law, rather than federal law. SLUSA limits class actions by stating, “[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 alleging – (1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or (2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.” 15 U.S.C. § 77p(b).
To Determine if a Misrepresentation or Omission Is Alleged, the Court Looks to the Gravamen or Essence of the Complaint
Citing Behlen v. Merrill Lynch, 311 F.3d 1087 (11th Cir. 2002), the court explained that “SLUSA’s bar applies when (1) the suit is a covered class action, (2) the plaintiffs’ claims are based on state law, (3) one or more covered securities has been purchased or sold, and (4) the defendant allegedly misrepresented or omitted a material fact in connection with the purchase or sale of such security.” The court stated that the only issue in the case was whether the complaint alleged a misrepresentation or omission, stating that if it does so, then it is barred. The court explained that under Behlen, “[t]o determine whether a complaint alleges a misrepresentation or omission, we look to its gravamen or the essence of it.” The court further explained that a court should focus “on the substance of the complaint, not on the labels the plaintiff chooses to give his claims, and not on the artful way a plaintiff words his allegations.”
The court determined that the essence of the complaint was that the brokerage firm, through its investment advice and recommendations, “affirmatively made false statements, or failed to disclose material facts, about the suitability of the variable annuity investment for the type of account plaintiff had, and in that way made misrepresentations to the plaintiff.” The court observed that if the brokerage firm’s recommendations had fully disclosed all material facts, including that a variable annuity would not have tax benefits and would be an unsuitable investment, that plaintiff would have no cause of action. While plaintiff argued the conflict of interest related to the brokerage firm recommending variable annuities to generate larger fees was enough to establish his breach of fiduciary duty claim, the court explained that alleging a conflict of interest alone was not enough under Georgia law and that instead plaintiff must allege both a conflict of interest and a material misrepresentation or omission. Thus, plaintiff’s claim was necessarily premised on an allegation of a misrepresentation or omission and was barred by SLUSA.