Securities Suit Dismissal Affirmed When Complaint, Notwithstanding Disclaimer, Alleged Omissions And Misrepresentations
BROWN v. CALAMOS (November 10, 2011)
The Calamos Convertible Opportunities and Income Fund is a closed-end investment fund. It issues common stock, which is not redeemable, and preferred stock, which is similar to a bond and can be traded at auction. Since the Fund's investments generally earned more than the interest paid to the holders of preferred stock, the fund's owners (holders of the common stock) benefit. During the 2008 financial crisis, the auction market for the preferred stock collapsed. The holders of the preferred stock could have been stock with their then-low interest rate and the holders of common stock would not have been affected. But the Fund redeemed the preferred stock -- at a premium. A class of common stock owners brought suit in state court against the Fund, alleging that it and its parent breached their fiduciary obligation to the shareholders in order to placate the banks and brokers that they did business with. The Securities Litigation Uniform Standards Act of 1998 prohibits state law class actions with more than 50 class members if the suit is not exclusively derivative and it alleges a misrepresentation or omission of a material fact in connection with the purchase or sale of a security. If such a case is brought, a defendant may remove the case to federal court and the court should dismiss the case. That is exactly what Judge Bucklo (N.D. Ill.) did here, with prejudice, and without addressing class certification. The class appeals.
In their opinion, Seventh Circuit Judges Posner, Flaum, and Sykes affirmed. The Court first recognized that the complaint contained a specific disclaimer that it was not a claim based on a misstatement or omission. Notwithstanding the disclaimer, however, the Court stated that the complaint does allege, either explicitly or implicitly, both misrepresentations and omissions. Before affirming on that rather simple ground, the Court addressed various approaches taken by the Circuits. The Sixth Circuit takes a literal approach and would dismiss if the complaint can be interpreted to allege a misrepresentation or omission. On the other end of the spectrum, the Third Circuit would not bar the suit if the misrepresentation or omission alleged is not essential to the suit's success. In the middle is the Ninth Circuit, which would follow the Sixth Circuit and dismiss the case but dismiss it without prejudice, in order to allow the plaintiff to remove the offending allegation. After some discussion and criticism of each of the various approaches, the Court concluded that the suit would be barred under any reasonable standard because the fraud allegations were central to the case. Furthermore, an amendment to the complaint would not be appropriate. Given the significance of the fraud allegations, the plaintiffs would certainly try to get them back into the case if it were to be remanded to state court.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select