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Hidalgo-Velez v. San Juan Asset Mgmt., Inc.: Case Removal to Federal Court Proper under the Securities Litigation Uniform Standards Act

In Hidalgo-Velez v. San Juan Asset Mgmt., Inc., No. 11-2175CCC, 2012 WL 4427077 (D.P.R. Sep. 27, 2012), the United States District Court for the District of Puerto Rico denied the plaintiffs’ motion to remand, finding that the defendants’ removal to federal court was proper under the Securities Litigation Uniform Standards Act (“SLUSA”).

The plaintiffs, investors in defendant Puerto Rico Global Income Target Maturity Fund Inc. (the “Fund”), brought a class action and derivative suit in Puerto Rican courts alleging fraudulent disclosures and omissions of material information against the respective officers and directors of the Fund; the Fund’s investment adviser, San Juan Asset Management, Inc.; the Fund’s sales agent, BBVA Securities Puerto Rico, Inc.; the Fund’s outside auditor, PricewaterhouseCoopers LLP (“PwC”); and various other individuals. PwC removed the action to the United States District Court according to the removal provision contained in the SLUSA, and the plaintiffs subsequently moved to remand.

The SLUSA removal provision is a three-prong test. The suit must (1) be “a ‘covered’ class action, (2) be based on state statutory or common law [, and] (3) allege[] that defendants made a ‘misrepresentation or omission of a material fact’ or ‘used or employed any manipulative device or contrivance in connection with the purchase or sale’ of a covered security.”

The district court found the first two prongs of the test were clearly met. The plaintiffs’ argued, however, that the case did not involve a “covered security.” Plaintiffs alleged that their investments were not used to purchase securities expressly listed in the definition of “covered securities.” The district court held, however, that SLUSA applied to investments in funds that acquired covered securities.

The district court pointed to prior United States Supreme Court cases which held that the “in connection with” language should be “interpreted broadly.” Furthermore, the court noted other decisions that applied SLUSA “to cases brought by investors of a fund that invests, or represents that it will invest, in a covered security, even when the shares of the fund in which the class invested are not covered securities.”

Financial statements included by PwC with its Notice of Removal showed that the Fund had purchased securities in companies traded on NASDAQ. The securities fell within the definition of a “covered security.” Finally, the district court rejected the plaintiffs’ claim-by-claim analysis because the statutory language of the SLUSA precluded actions, not claims. Therefore the district court denied the plaintiffs’ motion to remand.

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

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