Eleventh Circuit Affirms Dismissal Of State-Law Class Action Claims Against Brokerage Firm As Barred By SLUSA
On May 31, 2022, the United States Court of Appeals for the Eleventh Circuit affirmed the dismissal of a putative class action asserting claims under Georgia state law for breach of fiduciary duty against a brokerage firm and its parent company. Cochran v. Penn Mut. Life Ins., No. 20-13477 (11th Cir. May 31, 2022). Plaintiff alleged that the brokerage firm breached a fiduciary duty when it advised plaintiff to use funds in a retirement account to invest in a variable annuity, a product that allegedly resulted in higher fees for the broker and no benefit to plaintiff because his retirement account was already tax-advantaged. The district court dismissed the class action allegations and the Eleventh Circuit affirmed, holding that the Securities Litigation Uniform Standards Act (“SLUSA”) precludes bringing such claims as a class action.
Because the parties did not dispute that the claims at issue were brought pursuant to state law and involved the purchase of “covered securities” under SLUSA, the Court’s analysis was limited to one disputed element of SLUSA—whether the claims alleged misrepresentations in connection with the purchase of the securities. Slip op. at 8-9. The Court observed that, as articulated by other circuit courts, whether a complaint alleges misrepresentations within the meaning of SLUSA depends on the substance of the allegations, not on whether the complaint uses the labels “fraud” or “misrepresentation.” Id. at 9-10.
The Court determined that the essence of plaintiff’s complaint was that the brokerage company, “through its investment advice and recommendations,” allegedly made misrepresentations by providing false information or failing to disclose material information about the suitability of variable annuities. Id. at 11. The Court pointed to numerous such references in the complaint where it was alleged that the brokerage company “recommend[ed],” “urged and directed,” provided “advice,” and “convinced” plaintiff to invest in the securities in question. Id. at 10-13.
In addition, the Court rejected plaintiff’s argument that the crux of the alleged breach of fiduciary duty was a conflict of interest—the brokerage company’s purported self-interest in earning fees by recommending variable annuities—rather than a misrepresentation. Id. at 14. The Court noted that, under this theory, no amount of disclosure could cure the alleged breach, and a breach could be established without any false statements or omissions. To the contrary, the Court explained, under Georgia law a broker with a conflict of interest has a “heightened duty not to misrepresent” material facts, but a “conflicted broker can nonetheless advise and recommend with full disclosure and without misrepresentation.” Id. at 15. Indeed, the Court further observed that, “[t]o be viable under Georgia law,” the class action allegations would be barred by SLUSA, and that persuading a court that plaintiff was not claiming any misrepresentation or omission “would earn [plaintiff] only the right to have his entire complaint dismissed for failure to state a claim.” Id. at 15.