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(The news featured
below is a selection from the news covered in Federal Securities Law Reporter,
which is distributed to subscribers of Federal
Securities Law Reporter.)
3rd Circuit:
SLUSA No Bar to Aiding, Abetting Claims by Trust
The Securities
Litigation Uniform Standards Act did not preclude a trust from bringing state
law claims for aiding and abetting breaches of fiduciary duties, concluded a 3rd
Circuit panel. In addition, the trustees could bring claims, as assignees of
individual investors in the bankrupt enterprise, against foreign entities under
foreign law for aiding and abetting money laundering.
The case arose from the failure of a software company after some of its officers
and directors allegedly ran a "pump and dump" scheme, and then
attempted to conceal their actions by channeling funds through sham entities and
accounts with the assistance and knowledge of foreign banks. After the issuer
filed for bankruptcy, the reorganization plan assigned the corporation's claims
to a state law trust, as did individual purchasers of the company's securities.
The trustees filed suit in federal court alleging that the foreign banks aided
and abetting breaches of fiduciary duties and violated Swiss money-laundering
laws.
The district court (DC NJ) dismissed the claims under the Uniform Standards Act.
First, the court rejected the trustees' claims that the trust should be
considered one "person" under the Uniform Standards Act because the
trust was formed for the primary purpose of pursuing causes of action and
recovering damages for shareholders. The trust was actually acting as a
shareholder representative, pursuing the litigation on behalf of a class of
6,000 people, held the district court.
On appeal, the 3rd Circuit initially held that the damages resulting from the
pump and dump scheme accrued to the corporation. The panel noted that the fact
that the company "no longer exists does not convert its corporate claims
into direct shareholder claims; rather, the corporate nature of the claims
endures, and ownership of the claims" passed to its successor, the trust.
The court then disagreed with the trial court's finding that the trust entity
should be disregarded and the stock purchasers should be counted for Uniform
Standards Act purchases, as
SLUSA preemption
would prevent the estate from assigning certain legal claims to any class of
creditors or equity holders containing more than 50 persons, but it would
allow assignment to classes with fewer constituents. This result would make
little sense, as we see no indication that Congress's aim in fashioning the
"covered class action" definition was to control the number of
constituents to whom a bankruptcy estate's claim is assigned. Rather, the
statutory text and legislative history signal that the definition was designed
to prevent securities-claims owners from bringing what are, in effect, class
actions by assigning claims to a single entity. Put simply, Congress's goal
was to prevent a class of securities plaintiffs from running their claims
through a single entity, not to prevent a single bankruptcy estate from
assigning its claims to an entity capable of acting to protect the common
interests of a class of people. Moreover, it is difficult to see what purpose
would be served by holding otherwise. If we held that the key issue is to whom
a claim is assigned, then we would likely see two results. First, we might see
parties to bankruptcies engage in some rather creative class construction to
keep numbers below 51. Parties' ability to do this would not turn on any
factor related to preventing frivolous securities litigation, but on the
creativity of the parties' lawyers and the particulars of a debtor's
pre-petition liabilities.
With regard to the
Swiss banking law claims, the panel concluded that the Uniform Standards Act,
which applies to claims "based upon the statutory or common law of any
State," did not preclude actions for foreign law violations. Initially, the
court rejected the banks' claim that Congress intended to preempt such foreign
law claims. The court cited language that "[i]t is not our job to speculate
upon congressional motives; our job is to hew as closely as possible to the
meaning of the words Congress enacted." Because Congress could have defined
a state to include foreign jurisdictions, and had done so in other legislation,
the court declined to extend the definition in this case.
The claims also did not arise from or incorporate state law claims, and were not
dependent on state law, including New Jersey's choice of law provisions. To
conclude that, within the intendment of SLUSA, those claims are "based upon
the . . . law of New Jersey would require attributing to Congress a subtlety of
such exquisite reach as to have no place in the legislative process,"
stated the court.
LaSala v. Bordier et Cie (3rdCir) is reported at 94,597.
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