Federal Court Asserts Jurisdiction over State Securities Case

• Author: Erik A. Christiansen
• Pages: 21-21

Published in Litigation News Volume 45, Number 4, Summer 20 20. © 2020 by the Ameri can Bar Association. Re produced with per mission. All rights re served. This info rmation or any porti on thereof may not be c opied or disseminated in any

form or by any means or sto red in an electronic da tabase or retrieval sy stem without the ex press writt en consent of the Amer ican Bar Associatio n.

Published in Litigation News Volume 45, Number 4, Summer 20 20. © 2020 by the Ameri can Bar Association. Re produced with per mission. All rights re served. This info rmation or any porti on thereof may not be c opied or disseminated in any

form or by any means or sto red in an electronic da tabase or retrieval sy stem without the ex press writt en consent of the Amer ican Bar Associatio n.

U.S. circu it court of appeals has held that state

law–based class ac tions can now proceed in federal

court again st trustees for i mprudent discretionary

investment decision s. In a case of rst impres-

sion, the U.S. C ourt of Appeals for the Ninth

Circuit invoked the prem ature death of the Nig ht King in

the Game of Thro nes HBO television series and ru led that

the Secur ities Litigation Uni form Standards Act of 1998

(SLUSA) does not deprive a federa l court of jurisdiction

over state law–based cla ss actions involving trustee invest-

ment decisions.

The U.S. di strict court in Banks v. Nor thern Trust

Corporation dismissed a putative state law–based class

action led by a bene ciary against a truste e of an irrevo-

cable trust on SLUS A-preclusion grounds. SL USA precludes

plaintiffs f rom circumventing the stringent ple ading require-

ments of the Private Sec urities Litigation Reform Act of

1995 (PSLRA) by bar ring certain types of st ate law–based

securities f raud class actions. The federal dist rict court held

that state law class ac tion claims of tr ustee self-dea ling,

elder abuse, and excessive fe es were covered securit ies fraud

claims made “in con nection with” securities tran sactions,

which are barred by S LUSA.

The court of appea ls in Northern Trust reversed. Rely ing

on the U.S. Supreme C ourt case of Chadbour ne & Park

LLP v. Troice, the cour t held that where the trustee is both

the buyer of securitie s and the fraudster, the trading mis-

conduct is not “in connec tion with” a covered security. The

court reasoned t hat the Supreme Court had interpreted

SLUSA to require a mi srepresentation that makes a signi -

cant differenc e in an investment decision. Bene ciaries of

an irrevocable tr ust do not make trading decisions. Without

an investment deci sion, there is no “connection with” a pur-

chase or sale of a secu rity. Accordingly, SLUSA preclusion

did not apply.

Northern Trust ar gued that there was no d ifference for

the purposes of SL USA between a n agent, like a stockbro -

ker, and a trustee, l ike Northern Trust, as they are both

duciaries. T he court of appeals d isagreed, st ating that

while “both agents a nd trustees a re duciaries . . . there

are signic ant differences between t he two.” An agent acts

for his or her principal subje ct to the principal’s control. A

trustee in a n irrevocable trust acts for benec iaries, but are

not subject to their control . Without control of the invest-

ments, there is no con nection to secu rities necessa ry to

implicate SLUSA preclusion.

Northern Trust al so tried to rely on two pre-Tro ic e ca ses.

The court of appea ls instead relied on t he post-Troi ce deci-

sion of Henderso n v. Bank of New York Mellon C orp.

The Henderson case explained Troic e’s modi cation of the

Supreme Court’s earlie r decision in Merrill Lynch, Pierce,

Fenner & S mith Inc. v. Dabit. Tro ic e claried Dabit and

illuminate d the “in connect ion with” requirement. The

court of appeals ex plained that “[the Trustee] would li ke us

to read Dabit without considering its c larication i n Troic e.

But we will not render Tr oi ce meaningle ss in the way that

Game of Thron es rendered the entire Night King stor yline

meaningle ss in its nal season.”

In the Game of T hrones television ser ies, a threat from

a White Walker Night K ing had been built up prominently,

only to end abruptly half way through the nal season when

Arya Stark k illed the Night King. The cour t of appeals

seemingly saves Tr oi ce from a simila r fate at the hands of

the earlier Dabit decision.

A question remain s after Northern Trust about whether a

beneciar y’s unexercised ability to c ontrol a trustee i nvokes

SLUSA preclusion. The c ourt of appeals hi nted at the poten-

tial outcome when it rejec ted the defendant’s arg ument that

there is SLUSA preclusion whe n a stockbroker is granted

full disc retionary author ity to trade secur ities. The appellate

court reasoned t hat with a discretionary trad ing account,

“[u]nlike in the irrevocable t rust context, a principal can

revoke control from an agent in the c ourse of their relation -

ship. In the irrevoc able trust context, by contrast, u nless

otherwise sp ecied in th e trust inst rument, a beneciary

cannot alter the p owers of a trustee or remove the t rustee

without petitioni ng a court of law.”

Despite the contrast b etween irrevo cable trustee s and

discretiona ry stock brokers, “it rema ins to be seen whet her

the ability to control is e nough, even if it is not exercis ed

in the case of a tr ustee and a bene ciary,” offers John

E. Clabby, Tampa, FL, coc hair of the ABA S ection of

Litigation’s Class Actions S ubcommitte e of theSecurit ies

Litigation Co mmittee .

Part of the lack of clar ity in recent SLUS A decisions

is that “SLUSA juri sprudence is an incoherent mess. The

statute is in the top ve of t he worst drafted s tatutes in his -

tory and is incomprehens ible,” laments Nicholas I. Porrit t,

Washington, DC , cochair of the Section of Litigat ion’s

Derivative Suit s Subcommit tee of the Securitie s Litigation

Committee.

RESOURCES

Flores v. City of S an Gabriel, 824 F.3d 890 (9 th Cir. 2016).

Hampton v. Pac . Inv. Mgmt. Co. LLC, 869 F.3 d 844 (9th Cir. 2017).

Segal v. Fifth T hird Bank, N.A ., 581 F.3d 305 (6th Cir. 2009) .

Siepel v. Ban k of Am., N.A., 5 26 F.3d 1122 (8th Cir. 2008).

Federal Court Asserts Jurisdiction

over State Securities Case

By Erik A. Christia nsen, Litigation N ews Associate Editor

AMERICA N BAR ASSOCIATION SUMMER 2 020 • VOL. 45 NO. 4 | 21