SLUSA Argument Rejected

Recently, in a decision arising out of the Bernard Madoff Ponzi scheme, Judge Victor Marrero of the U.S. District Court for the Southern District of New York  refused to dismiss the majority of plaintiffs’ allegations against defendant Fairfield Greenwich Group (“FGG”) —- one of the largest Madoff “feeder funds.” See Anwar v. Fairfield Greenwich, Ltd., No. 09 Civ. 0118 (VM), 2010 U.S. Dist. LEXIS 86716 (S.D.N.Y. Aug. 18, 2010)(“Anwar II”). 

The Fairfield class action is brought on behalf of individuals and entities who invested large sums of money in four hedge funds founded and operated by FGG. The majority of plaintiffs’ money was in turn invested with Madoff who was purporting to buy and sell securities.

As part of the opinion, which addressed various arguments for dismissal, Judge Marrero found that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) did not bar the plaintiffs’ state law claims from moving forward, finding that the funds at issue were not “covered securities” under the Act.

In Anwar II, the defendants argued that plaintiffs’ state law claims should be dismissed because they are preempted by SLUSA. To dismiss an action based on SLUSA, the moving defendant must demonstrate that “(1) the action is a covered class action, (2) the claims are based on state law, (3) the action involves a covered security, and (4) the claims allege a misrepresentation or omission of material fact in connection with the purchase or sale of the security.” Feiner Family Trust v. Xcelera Inc., No. 10-CV-3431 (RPP), at *10, 2010 U.S. Dist. LEXIS 81041 (S.D.N.Y. Aug. 6, 2010); 15 U.S.C. § 78bb(f)(1), 77p(b).  A security is deemed a “covered security” if it is “traded nationally and listed on a regulated national exchange” such as the New York Stock Exchange or on the National Market System of the Nasdaq Stock Market.  Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 83 (2006); 15 U.S.C. §77p(f)(3), 77r(b)(1)(A)-(B). 

Defendants could not and did not argue that the plaintiffs’ investments in the funds fell into the statutory definition of “covered securities” under SLUSA.  They instead claimed that the legal analysis should focus on the securities Madoff purportedly purchased using plaintiffs’ money –- securities that arguably did fall within the SLUSA definition of “covered” securities.  Anwar II, 2010 U.S. Dist. LEXIS 86716 at *48.  Judge Marrero rejected the defendants’ arguments because they overlooked the basic facts of this case, which concerned misrepresentations and breaches of duties concerning shares purchased in the FGG funds.  Id.   

Judge Marrero keenly noted that, “Though the Court must broadly construe SLUSA’s ‘in connection with’ phrasing, stretching SLUSA to cover this chain of investment — from Plaintiffs’ initial investment in the Funds, the Funds’ reinvestment with Madoff, Madoff’s supposed purchases of covered securities, to Madoff’s sale of those securities and purchases of Treasury bills — snaps even the most flexible rubber band.”