December 10, 2019 Articles

The Securities Litigation Uniform Standards Act’s Prohibition of Artful Pleading

In reviewing a class action complaint involving securities, be mindful of the gravamen of the complaint when evaluating whether the act may bar non-fraud state law claims that may be fraud or omission claims in disguise.

By John N. Bolus and Mary K. Mangan

A key component of the federal regulatory scheme for securities litigation is the Securities Litigation Uniform Standards Act, or SLUSA, 15 U.S.C. § 78bb(f)(1). This act prevents plaintiffs from bringing mass or class actions asserting state law claims that could have been brought as federal securities fraud claims under the Securities Act of 1933 or the Securities Exchange Act of 1934. Most such claims also must be brought in federal court or may be removed to federal court. A notable exception is that 1933 Act claims may also be brought in state court under concurrent jurisdiction. Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1066, 1078 (2018). Because Congress has enacted heightened requirements for plaintiffs to assert securities fraud claims on a class (or mass) basis, SLUSA requires courts to prevent plaintiffs from artfully characterizing their claims to evade those requirements. The U.S. District Court for the Southern District of New York recently applied this artful-pleading requirement to conclude that SLUSA precluded claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and negligence, when the gist of those claims really was allegedly deceptive conduct.

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