In Holtz v. JPMorgan Chase Bank, N.A., 846 F.3d 928 (7th Cir. 2017), the United States Court of Appeals for the Seventh Circuit affirmed the district court’s ruling granting JPMorgan Chase Bank (“JPMorgan Chase”) and all its affiliates motion to dismiss under the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). The Seventh Circuit held Patricia Holtz (“Plaintiff”) and a group of similarly situated investors could not invoke state contract and fiduciary principles to bring a suit under the Class Action Fairness Act, since her claim rested on an “omission of material fact” and thus SLUSA preempted.

The complaint alleged that JPMorgan Chase “proclaim[ed]” on its website to make investment recommendations on the basis of the clients’ best interest.  As Plaintiff alleged, JPMorgan Chase gave its employees incentives to place clients’ money in the banks own mutual funds, even when those funds had higher fees or lower returns than competing funds sponsored by third parties. Plaintiff maintained JP Morgan Chase “violated its promises and its fiduciary duties by inducing its investment advisers to make recommendations in the Bank's interest rather than the clients”. 

Plaintiff filled suit under the Class Action Fairness Act.  Seeking to avoid invoking federal law, Plaintiff framed her claim entirely under state contract and fiduciary principles. Plaintiff asserted that JPMorgan “failed to provide the independent research, financial advice, and due diligence required by the parties’ contract and their fiduciary relationship.”

Where the plaintiff alleges “a misrepresentation or omission of material fact in connection with the purchase or sale” of a security, the claim must  proceed exclusively under the federal securities laws. The purpose of the SLUSA is to prevent persons injured by securities transactions from engaging in “artful pleading or forum shopping” in order to evade the limits prescribed to securities litigation.

Noting that mutual funds were securities, the Seventh Circuit quickly characterized the matter as a “covered class action” for purposes of the SLUSA.   Plaintiff, however, argued that SLUSA did not apply because the claim was not based upon false statements or omissions. The court, however, concluded that the suite depended upon the “assertion that the Bank concealed the incentives it gave its employees.”  As a result, nondisclosure was “a linchpin of this suit no matter how [Plaintiff] chose to frame the pleading.” Nor did the absence of allegations of scienter change the result.  “Every other circuit that has addressed the question likewise has held that a plaintiff cannot sidestep SLUSA by omitting allegations of scienter or reliance.”

The court also expressed unwillingness to treat contract claims involving securities as somehow taking the claim outside of SLUSA.  Such an approach would “[a]llow[] plaintiffs to avoid [SLUSA] by contending that they have ‘contract’ claims about securities, rather than ‘securities’ claims” thereby rendering SLUSA “ineffectual, because almost all federal securities suits could be recharacterized as contract suits about the securities involved.”

The court also found that the claims occurred “in connection with” the purchase or sale of a covered security. The alleged omissions were made in connection with an impeding investment decision, rather than with a record-keeping decision. Finally, SLUSA did allow for state law claims in which the misrepresentation or omissions were not material to the transaction, but Plaintiff did not argue JPMorgan Chase’s incentives to its employees were too small to be “material” under the statute.

Accordingly, the Seventh Circuit affirmed the District Court’s ruling granting JPMorgan’s motion to dismiss. Dismissal did not, however, mean that the case could not be maintained elsewhere.  As the court reasoned:

If she wants to pursue a contract or fiduciary-duty claim under state law, she has only to proceed in the usual way: one litigant against another. The Litigation Act is limited to “covered class actions,” which means that Holtz could litigate for herself and as many as 49 other customers.  What she can't do is litigate as representative of 50 or more other persons when the suit involves “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security”. If the Bank did wrong by its customers, the SEC could file its own suit (or open an administrative proceeding) without regard to the Litigation Act—and the Commission sometimes can obtain relief without showing scienter. What's more, states and their subdivisions can litigate in state court; the Litigation Act exempts them.  Thus there are plenty of ways to bring wrongdoers to account—but a class action that springs from lies or material omissions in connection with federally regulated securities is not among them. (citations omitted). 

The primary material for this case may be found on the DU Corporate Governance Website.