SLUSA CLASS ACTION BAR IS BROAD ENOUGH TO COVER EVEN SOME BREACH OF FIDUCIARY DUTY CLAIMS

In Cochran v. Penn Mutual Life Insurance Co., 35 F.4th 1310 (11th Cir. May 31, 2022), the Eleventh Circuit affirmed the district court’s dismissal of a claim for breach of fiduciary duty as barred by the Securities Litigation Uniform Standards Act (SLUSA).

After Jeffrey Cochran’s 401(k) retirement plan was terminated by his employer, he transferred his funds into a rollover individual retirement account with HTK, a brokerage firm and investment adviser wholly owned by Penn Mutual Life Insurance Company (“Penn Mutual”). An HTK advisor “urged and directed” Cochran to invest his retirement funds into a Penn Mutual variable annuity. After doing so, Cochran became dissatisfied with his investment. He alleged that the advice to invest in the variable annuity was improper. One of the main benefits of investing in a variable annuity is its tax advantages, but because Cochran’s rollover individual retirement account was already tax advantaged, he received no additional tax benefit from the variable annuity. The variable annuity also had high management fees. He argued HTK breached its fiduciary duties to him and other Georgia investors by routinely recommending that clients use tax-qualified funds to purchase variable annuities managed by Penn Mutual. HTK moved to dismiss Cochran’s class action claim on the basis that it was barred by federal law. The district court granted the motion.

In an opinion written by Judge Ed Carnes and joined by Judges Wilson and Lagoa, the Eleventh Circuit affirmed. Judge Carnes explained that SLUSA bars claims when four elements are met: (1) the suit is a “covered class action”; (2) the plaintiffs’ claims are based on state law; (3) one or more “covered securities” has been purchased or sold; and (4) the defendant allegedly misrepresented or omitted a material fact in connection with the purchase or sale of such security. The only element at issue on appeal was that last one: whether Cochran’s complaint alleged a misrepresentation or omission within the purview of SLUSA.

Turning to Cochran’s allegations, the court looked to the “gravamen” or essence of the complaint. SLUSA’s bar, the court emphasized, is not limited to complaints which studiously avoid referring to misrepresentations, fraud, and deception. Instead, the proper approach is a search to see whether the complaint covers the prohibited theories. The court noted that this interpretation of SLUSA is in line with the Third, Fifth, Sixth, Eighth, and Ninth Circuits. 

Ultimately, the court held that the essence of Cochran’s complaint was that, through its investment advice and recommendations, HTK affirmatively made false statements, or failed to disclose material facts, about the suitability of variable annuities for tax advantaged accounts. The court laid out eleven references to “recommendations, advice, or other communications” contained in the complaint and concluded that Cochran’s real issue was that HTK had not fully disclosed all material facts, including that a variable annuity would not have tax benefits and would be an unsuitable investment.

Attempting to evade SLUSA’s bar, Cochran argued that it is categorically a breach of fiduciary duty to sell a variable annuity to an investor with a tax advantaged account such that there does not need to be any misstatement or omission to be actionable. The court quickly dismissed that argument, holding that Georgia law does not recognize that cause of action.

Because the court held that the complaint really alleged a false statement or omission of a material fact, and accordingly was barred by SLUSA, the court affirmed the district court’s dismissal.

Posted by Rebekah Whittington.

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