By: Ian Robertson

On January 24, 2019, the Seventh Circuit handed down a decision that restricted class-action lawsuits under the Securities Litigation Uniform Standards Act (“SLUSA”) in Nielen-Thomas v. Concorde Inv. Services, LLC.[1] The central issue in the case is whether the SLUSA’s[2] definition of a “covered class” in securities class action lawsuits included classes of less than 50 individuals.[3] There is not yet a decision from the Supreme Court on this issue, and his was an case of first impression for the Seventh Circuit.[4] the statute’s definition of covered class action “unambiguously” precludes Nielen-Thomas’s lawsuit.[5]

A brief review of the trends in legislation and litigation show that this was a predictable decision from the Seventh Circuit. The Supreme Court’s seminal SLUSA decision is Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit.[6] In that case, the Court tracked the development of the SLUSA.[7] In 1995, Congress passed the Private Securities Litigation Reform Act of 1995 in response to the perceived abuses of the class-action vehicle in securities litigation.[8] Congress then passed the SLUSA in 1998 in order to preempt class action securities fraud suits brought under state law.[9] Ultimately, the Court ruled against the class designation in Dabit, while noting that the SLUSA should be read broadly, so as not to undercut its intention.[10]

Nielen-Thomas took the next step in this trend by virtually eliminating the ability to bring securities fraud class action lawsuits under state law.[11] Under the SLUSA, a “covered class action” is any single lawsuit in which “[I] damages are sought on behalf of more than 50 persons or prospective class members . . . or . . . [II] one or more named parties seek to recover damages on a representative basis.”[12] However, the Seventh Circuit found that the district court opinions the plaintiffs relied[13] on were inapplicable because they did not properly emphasize part two.[14] The court held that part two swallows part one’s exception entirely, and therefore the plaintiffs were a “covered class.”[15]

The upshot of Nielen-Thomas is that it closes yet another plaintiff’s loophole in securities fraud class action suits, a task that has occupied Congress and the Supreme Court more than twenty years.[16] The Seventh Circuit’s decision is well-supported; however, the decision does not eliminate the possibility that creative plaintiff’s attorneys will attempt to exploit the same exception in the state in front of a more sympathetic circuit. Still, this decision is a win for businesses. But beyond that, this case is a win for overburdened courts and the rest of society that bears the costs frivolous litigation. On the whole, the only real losers in this case are aggressive plaintiff’s attorneys and their class action invoices.

[1] Nielen-Thomas v. Concorde Inv. Servs., LLC, No. 18-2875, 2018 U.S. Dist. LEXIS 125073 (add pincite, I think the proper form for this citation is on page 111 of the Bluebook) (7th Cir. Jan. 24, 2019).

[2] 15 U.S.C. § 78(f)(5)(B) (2018).

[3] Nielen-Thomas, No. 18-2875 at *6.

[4] Id. at 6

[5] Id. at 21–22.

[6] See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006) (insert parenthetical).

[7] Id.

[8] Id.

[9] Id. at 82–83.

[10] Id. at 86 (“A narrow reading of the statute would undercut the effectiveness of the 1995 Reform Act and thus run contrary to SLUSA’s stated purpose . . . “).

[11] Nielen-Thomas v. Concorde Inv. Servs., No. 18-cv-229-jdp, 2018 U.S. Dist. LEXIS 125073, at *5-6, 7 (W.D. Wis. July 26, 2018).

[12] 15 U.S.C. § 78bb(f)(5)(B)(i) (2018).

[13] See Kirschner v. Bennett, No. 07-cv-8165, 2012 U.S. Dist. LEXIS 200177, 2012 WL 13060078, at *16 (S.D.N.Y. June 18, 2012); Contreras v. Host Am. Corp., 453 F. Supp. 2d 416, 419 (D. Conn. 2006) (parenthetical); In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d 236, 244-45 (S.D.N.Y. 2004) (parenthetical).

[14] Nielen-Thomas, No. 18-cv-229-jdp at *7-8.

[15] Id. at

[16] See15 U.S.C. § 78(f);  Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006).

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