The Securities Litigation Uniform Standards Act’s Bar Against Claims

In Richek v. Bank of America, 2011 WL 3421512, N.D. Ill (August 4, 2011), the United States District Court granted Bank of America and LaSalle Bank’s (“Defendants”) motion to dismiss a class action lawsuit.  The claim alleged that Defendants misrepresented and omitted material facts related to the transfer of trust assets into mutual funds.  The court dismissed the claim because the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. § 77p(b) and § 78bb(f)(1) precluded the plaintiffs’ claim.

Stephen Richek filed the lawsuit as the trustee of the Seymour Richek Revocable Trust (“Trust”), on behalf of the Trust and all other entities who had similar accounts with LaSalle Bank or Bank of America (“Plaintiffs”).  In July 1985, Richek entered into a written agreement with LaSalle Bank (“LaSalle”) on behalf of the Trust.  Under the agreement, LaSalle managed and maintained an investment account for the Trust, subject to Richek’s instructions.  The Trust account had a “sweep” feature, which automatically reinvested the account’s cash balances into another investment vehicle at the end of every day.  Plaintiffs selected which investment vehicles to use, however, LaSalle never disclosed the existence of the sweep feature to Plaintiffs.  In turn, these investment vehicle companies paid cash reinvestment fees (or “sweep fees”) to LaSalle.  Plaintiffs never agreed to the sweep fees.  In August 2009, LaSalle merged with Bank of America, which notified Plaintiffs that sweep fees were eliminated.  This was the first time Plaintiffs realized that sweep fees on the trust account existed.  Plaintiffs filed suit in the Circuit Court of Cook County and Defendants removed the claim to District Court.

In 1995, Congress enacted the Private Securities Litigation Reform Act (“PSLRA”) to reduce frivolous lawsuits and other perceived abuses of securities class actions.  As a result, state court litigation of class actions involving nationally traded securities began to increase.  To remedy this “unintended consequence,” Congress enacted SLUSA.  SLUSA precludes a claim when plaintiffs allege that a defendant misrepresented or employed a deceptive device in connection with the purchase or sale of a covered security, the lawsuit is a covered class action based on a violation of state law, and plaintiffs are a private party. A “covered class action” is a lawsuit in which damages are sought on behalf of more than 50 people.  A “covered security” is one traded nationally and listed on a regulated national exchange. 

Plaintiffs did not dispute that the claim involved a “covered class action,” that it was based on state law, or that the securities in question were “covered securities.”  Instead, Plaintiffs argued that the sweep fees were incidental to Defendants’ alleged misconduct and not “in connection with” the purchase of covered securities.  Plaintiffs further argued that the court should construe SLUSA’s “in connection with” requirement narrowly.  However, the court disagreed and “construe[d] SLUSA’s ‘expansive language broadly’ to prevent frustration of the PSLRA’s objectives.” 

In an attempt to distinguish the case from controlling authorities, Plaintiffs highlighted that none of the precedent cases cited by Defendants involved a “written contract” or situations in which the defendant made “discretionary” investments on the plaintiff’s behalf.  However, the court rejected these arguments because the precedent did not turn on whether Plaintiff was dissatisfied with Defendants’ “discretionary” investments.  Rather, SLUSA applied because Defendants’ representations applied to the purchase or sale of a covered security.

The court concluded that, at a minimum, LaSalle’s alleged fraudulent conduct “coincided” with a securities transaction and Plaintiffs’ claim was barred by SLUSA. 

The primary materials for this case may be found on the DU Corporate Governance website.