Broker-Dealer Litigation - Greenberg Traurig LLP

circumvent SLUSA, the Court of Appeals reversed the appellate court’s decision as to the
preclusion of the bondholder’s claims and reinstated the decision of the trial court.
Luther v. Countrywide Fin. Corp., 195 Cal. App. 4th 789 (Cal. Ct. App. 2011).
The California appellate court reversed the trial court’s holding that plaintiff’s claims
were precluded by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) and held
that the state trial court had concurrent jurisdiction over investors’ claims asserted under the
1933 Act. The trial court had found that although the Securities Act of 1933, as amended under
SLUSA, generally provides for concurrent state and federal jurisdiction, SLUSA expressly
provides an exception with respect to “covered class actions.” The appellate court held that this
exception was not broad enough to include all “covered class actions” and, instead, only applies
to covered class actions that involved misrepresentations, omissions, or deceptive devices or
contrivances in connection with the purchase or sale of a “covered security.” Here, plaintiff’s
claims concerned mortgage-backed securities that were not traded nationally and listed on a
regulated national exchange and, thus, were not covered securities. In reaching its conclusion
the California appellate court rejected the reasoning in Knox v. Agria Corp., 613 F. Supp. 2d 419
(S.D. N.Y. 2009), that SLUSA exempted all covered class actions from concurrent jurisdiction,
while distinguishing the Knox holding as a case involving covered securities.
E.
F. Liabilities under State Statutory and Common Law
1. Blue Sky Laws
F.1
Ashland, Inc. v. Oppenheimer & Co. Inc., 648 F.3d 461 (6th Cir. 2011).
Plaintiff purchased auction rate securities (“ARS”) and student-loan-backed ARS
(“SLARS”) from defendant, a securities broker-dealer that brokered ARS and SLARS. When
the ARS and SLARS market collapsed in early February 2008, plaintiff held $194 million in
illiquid SLARS. Plaintiff sued defendant in the Eastern District of Kentucky asserting numerous
claims including violation of Kentucky Blue Sky Laws. Plaintiff claimed that defendant knew
about the ARS collapse and withheld material information. The district court dismissed the
claims and plaintiff appealed. The Sixth Circuit affirmed, stating that because the Kentucky
Blue Sky Law provision claimed by plaintiff is nearly identical to its federal counterpart, Rule
10b-5 promulgated under Section 10(b) of the Securities Exchange Act of 1934, a plaintiff must
allege the same elements as under Rule 10b-5. The court found that many of defendant’s
supposed misstatements and omissions were not actionable because they lacked materiality or
because there was no duty to disclose them. The court held that in this instance there was no
duty to disclose the incentives the defendant provided to its employees and that the correlation
between ARS’ credit ratings and low penalty rates is public information. As to plaintiff’s crucial
claim, that defendant withheld vital market factors relating to underwriters abandoning the ARS
market, the court held that there were no facts showing why or how defendant possessed
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