Securities Roundup: SLUSA Bars Investors’ State Securities Case Alleging Trust Account Management Negligence, Blocks Investors From Remanding Fraud Case to Puerto Rico & FINRA Enhances Proposed Rules’ Cost-Benefit Analysis, Looks at Non-Traded REIT Ads

According to the U.S. Court of Appeals for the Sixth Circuit, the Securities Litigation Uniform Standards Act bars state law breach of contract and negligence claims related to the way the plaintiffs’ trust accounts were managed. The appeals court’s ruling affirms the district court’s decision that the claims “amounted to allegations” that the defendants did not properly represent the way investments would be determined and left out a material fact about the latters’ conflicts of interest that let them invest in in-house funds.

SLUSA shuts a loophole in the Private Securities Litigation Reform Act that allows plaintiffs to sue in state court without having to deal with the latter’s more stringent pleading requirements. In Daniels v. Morgan Asset Management Inc., the plaintiffs sued Regions Trust, Morgan Asset Management, and affiliated entities and individuals in Tennessee state court. Per the court, Regions Trust, the record owner of shares in a number of Regions Morgan Keegan mutual funds, had entered into two advisory service agreements with Morgan Asset Management, with MAM agreeing to recommend investments to be sold or bought from clients’ trust accounts. The plaintiffs are claiming that MAM was therefore under obligation to continuously assess whether continued investing in the RMK fund, which were disproportionately invested in illiquid mortgage-backed securities that they say resulted in their losses, was appropriate.

The defendants were able to remove the action to federal district court, which, invoking SLUSA, threw out the lawsuit. The appeals court affirms this dismissal.

SLUSA also blocks other fund investors from being able to remand their proposed classed action case over alleged fraudulent omissions and disclosures in fund offering materials to a Puerto Rican court.

In Hidalgo-Velez v. San Juan Asset Management Inc., the plaintiffs sued officers and directors of San Juan Asset Management Inc., Puerto Rico Global Income Target Maturity Fund Inc., BBVA Securities Puerto Rico Inc., the fund’s investment adviser, outside auditor PricewaterhouseCoopers LLP, and a number of John Does. The plaintiffs contended that fraudulent omissions and disclosures were made in the prospectus that they referred to when buying fund shares and that these defective offering materials that are a violation of Puerto Rico law.

PricewaterhouseCoopers (PRICWP) removed the action to the U.S. District Court for the District of Puerto Rico, asserting that the case falls within SLUSA’s removal provision. The plaintiffs then made a motion to remand the lawsuit to the Commonwealth court. The district court, however, chose to deny the plaintiffs’ motion, noting that SLUSA precludes lawsuits over a “covered class action” in state court claiming fraud involving the sale or purchase of a “covered security” and that removal is appropriate under the act when the complaint is a covered class action grounded in common law or state statutory and alleges omissions or misrepresentations of material fact or the employ of any manipulative device related to the sale or purchase of a covered security. Also, per the judge, the Fund’s common stock is a “covered security” and therefore does fall within the removal provision of the act.

In other securities news, Financial Industry Regulatory Authority Chairman and Chief Executive Officer Richard G. Ketchum told BNA that the SRO plans to more thoroughly examine the benefits and costs of proposed rules before turning them over to the Securities and Exchange Commission for approval. FINRA Chief Legal Officer Robert Colby will spearhead these efforts.

FINRA will also be taking a closer look at ad data for non-traded real estate investment trusts. The SRO sent targeted exam letters titled “Spot-Check of Non-Traded REIT Communications” to certain broker-dealer members. Per FINRA rules, the sales literature and ads of member firms may have to contend with periodic spot checks. Also, the firms that received the letters have been asked to turn in a list of their communications related to their non-traded REITs. FINRA is also seeking proof that the ads were given written approval.

Daniels v. Morgan Asset Management Inc.

Securities Litigation Uniform Standards Act

Hidalgo-Velez v. San Juan Asset Management Inc.

FINRA Will Enhance Cost-Benefit Analysis Of Proposed Rules, Chairman Ketchum Says, BNA/Bloomberg, October 1, 2012

Targeted Examination Letters: Spot-Check of Non-Traded REIT Communications

More Blog Posts:
Texas Securities Fraud: State Law Class Action in R. Allen Stanford’s Ponzi Scam Not Barred by SLUSA, Stockbroker Fraud Blog, March 28, 2012

Annuity Investors Should Not Rely on Class Actions to Recover Their Losses, Stockbroker Fraud Blog, February 14, 2009

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012