“SLUSA in age Madoff”
“SLUSA in age Madoff”
Litigation arising from Bernard Madoff’s Ponzi plan has produced multiple legal developments, including new situation law concerning the Securities Litigation Uniform Standards Act of 1998 (SLUSA). SLUSA supplies a effective legal defense in securities class actions, frequently enabling defendants to secure dismissal in the start from the situation.
Congress enacted SLUSA to avoid plaintiffs from maintaining securities class actions under condition law to be able to circumvent stringent pleading needs relevant to claims of federal securities fraud. To that particular finish, SLUSA provides in pertinent part:
No covered class action lawsuit based on the statutory or common law associated with a Condition or subdivision thereof might be maintained in almost any Condition or Federal court by private party alleging … a misrepresentation or omission of the material fact regarding the the acquisition or purchase of the covered security[.]
An element that frequently arises under SLUSA is whether or not a condition law claim satisfies the statute’s “regarding theInch requirement. Quite simply, will the claim allege a misrepresentation “regarding theInch the acquisition or purchase of the covered security (one that’s traded or registered for buying and selling on the national exchange)? Within the seminal situation Merrill Lynch, Pierce, Fenner & Cruz Corporation. v. Dabit, the U.S. Top Court construed the necessity broadly, discovering that the requisite connection exists whenever a claim alleges a misrepresentation that “‘coincide[s]’ having a securities transaction – whether through the complaintant or by another person.”
Dabit, however, left open the issue – that has loomed large in Madoff cases – of whether “another person” means “other people.” Before his arrest, Madoff’s clients primarily were hedge funds that approved Madoff to purchase and sell “covered securities” on their own account. The plaintiffs within the Madoff cases, however, typically haven’t been Madoff’s former hedge fund clients. Rather, they primarily happen to be investors in individuals funds (feeder funds) and, consequently, had only indirect contact with Madoff’s investment strategy, that they acquired by obtaining restricted securities from the funds privately placement transactions. In most of the cases, the plaintiffs alleged condition law claims asserting that they are caused to purchase feeder funds by misrepresentations produced by the funds’ managers yet others concerning the authenticity of Madoff’s operations and investment strategy. As a result of threshold motions produced by defendants seeking dismissal of individuals claims, plaintiffs contended partly their purchases of uncovered hedge fund securities were taken off – and, therefore, not “regarding theInch – Madoff’s purported investments in covered securities with respect to the funds.
While lower courts were grappling with this particular issue, the final Court made its decision in Chadbourne & Parke LLP v. Troice, a situation stemming in the Stanford Ponzi plan. For the reason that decision, a legal court held the “another person” referenced within the Dabit opinion didn’t mean other people but, rather, only persons apart from the fraudster who bought or offered covered securities. The 2nd Circuit then applied Troice to rule the needs of SLUSA might be satisfied once the “another person” caused to take part in a challenged securities transaction is definitely an indirect purchaser of covered securities – namely, a trader in hedge funds managed by Madoff. In re Herald, Primeo & Thema.
Herald is among numerous significant SLUSA rulings handed lower in Madoff-related litigation, that also range from the following:
A sizable number of complaintant investors cannot always avoid SLUSA preclusion by filing several related lawsuits, each naming less than 50 plaintiffs, in numerous courthouses found in the same condition. Assuming individuals cases are transferred one judge and therefore are coordinated by any means, they become “covered class actions” for purpose of SLUSA. Spectrum Select II, L.P. v. Tremont Group Holdings, Corporation.
To fulfill the “alleging … a misrepresentation” prong of SLUSA, the alleged misrepresentation or any other “false conduct” should be made or committed with a named defendant (no unnamed 3rd party), and evidence of such conduct should be “necessary to the prosperity of the condition law claim” – while not always an important aspect of the claim. In re Kingate Mgmt. Limited. Litigation.
A condition law claim alleging an incorrect promise to take part in covered securities transactions might be precluded under SLUSA even when no such transactions are really performed. In re Herald.
SLUSA preclusion should be determined on the claim-by-claim basis. When only one of many condition law claims alleged within the complaint is susceptible to SLUSA, that claim can and should be ignored pursuant towards the statute, and also the balance from the action may proceed. In re Kingate.
Although a lot of questions arising under SLUSA happen to be addressed in Madoff litigation, several remain unresolved. For instance, after Kingate, what the law states awaits further development around the question of when an alleged misrepresentation is going to be considered necessary to the prosperity of a condition law claim, although not an important aspect of the claim. Something, that also surfaced in Kingate, is whether or not SLUSA preclusion of condition law claims introduced by foreign investors comes down to an impermissible extraterritorial use of the statute. The district court in Kingate clarified this within the negative, and also the Second Circuit affirmed about this point sub silentio. We anticipate seeing further litigation about this issue, specifically in cases introduced by investors in offshore hedge funds contemplating transactions in covered securities. Meanwhile, litigation as a direct consequence from the Madoff debacle has clarified the scope of SLUSA and strengthened the defense by expanding its application to putative class securities claims alleged under condition law.