Lakeview Investment v. Schulman: Case Dismissed Pursuant to SLUSA

In Lakeview Investment v. Schulman, et al., Lakeview Investment (“Plaintiff”) filed a class action in California state court alleging that Tremont Partners, Tremont Group Holdings, Oppenheimer Acquisition Corporation, MassMutual Holding, Massachusetts Mutual Life Insurance Company, and various senior executives of the corporate defendants (collectively “Defendants”) violated the state’s securities laws by making false statements about the sale of limited partnership interests in two hedge funds.  2012 WL 4461762 (S.D.N.Y. Sept. 27, 2012).  Defendants removed the case to federal court, asserting that the Securities Litigation Uniform Standards Act (“SLUSA”) precluded Plaintiff from maintaining the state court action.  The court granted Defendants’ motions for judgment on the pleadings and for failure to state a claim, and dismissed the case.

Plaintiff invested approximately $25 million in two hedge funds, Rye Select Broad Market XL Fund, L.P. (“XL Fund”) and Rye Select Broad Market Fund, L.P. (“Market Fund”).  The Market Fund was a “feeder fund” that was subsequently invested into Bernard L. Madoff Investment Securities, which purported to use a “split-strike investment” method.  Though the XL Fund operated differently than the Market Fund and was not managed by Bernie Madoff, it was designed to mimic the returns of the Market Fund.  In late 2008, after Madoff revealed his massive Ponzi scheme, Plaintiff lost its entire $25 million investment.

SLUSA prohibits “covered class action” securities claims in any state or federal court by a private party.  A case that is removed from state court pursuant to SLUSA should be dismissed by the federal court.  To successfully remove a case from state court to federal court, the defendant must prove that the state court action is “(1) a covered class action (2) based on state statutory or common law that (3) alleges that defendants made a misrepresentation or omission of material fact or used or employed any manipulative device or contrivance (4) in connection with the purchase or sale of a covered security.”

The covered class action element is satisfied when the complaint is seeking damages for fifty or more plaintiffs.  The court found that this element was satisfied because the plaintiff did not argue that there were less than fifty plaintiffs.  The court found the state statutory or common law element was satisfied because all the claims were based on California state law.  Additionally, the court found the misrepresentation element satisfied because all the claims referred to Defendants’ “duty of ‘candor’ toward the plaintiff when ‘soliciting investments’” and Defendants’ breach of this duty.

Plaintiff argued that the fourth element, in connection with a covered security, was not satisfied because the XL Fund and the Market Fund did not trade in covered securities.  Nonetheless, the court found that it was sufficient that the Market Fund invested with Madoff and Madoff “purported to trade in covered securities using his fictional ‘split-strike conversion’ method.”  The court further found that since the XL Fund mimicked the Market Fund and that Madoff was trading in covered securities was a central portion of the compliant, that this element was also satisfied

Plaintiff tried to avoid dismissal of the entire complaint by arguing that SLUSA did not require the whole claim to be dismissed, just the class action portion.  Individual claims, therefore, were still permissible.  The court found that the plaintiff’s complaint did not distinguish between class action claims and individual claims, and thus dismissed the entire case. 

The primary materials for this case may be found on the DU Corporate Governance website.