A divided panel of the Seventh Circuit recently held that the Securities Litigation Uniform Standards Act (“SLUSA”) requires any covered class action that “could have been pursued under federal securities law” to be brought in federal court.  The plaintiff maintained an investment account at LaSalle Bank, which was later acquired by Bank of America.  Each night, LaSalle invested (“swept”) the account’s balance into a mutual fund approved by the plaintiff.  Without the plaintiff’s knowledge, LaSalle also allegedly pocketed the fees that some of the mutual funds paid each time a balance was transferred.  When the plaintiff found out, he brought a class action in state court, arguing that LaSalle had breached its contractual and fiduciary duties to its customers by secretly paying itself fees generated by their accounts.

LaSalle and Bank of America successfully argued before the district court that SLUSA required removal of the case to federal court. SLUSA authorizes defendants to demand removal of any class action with at least fifty members that alleges “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.”  Congress drafted SLUSA to force securities class actions out of state courts and into federal courts, where plaintiffs must clear higher pleading hurdles.

The Seventh Circuit affirmed the district court’s decision, holding that the plaintiff’s contract and fiduciary duty claims “depend[ed] on the omission of a material fact – that some mutual funds paid, and the Bank kept, fees extracted from the ‘swept’ balances.” Because the plaintiff could have asserted a securities fraud claim on the basis of those alleged facts, the Seventh Circuit held that SLUSA required the action to be filed as a federal securities case in federal court.  Judge Flaum, in a concurring opinion, agreed, adding that the holding will prevent plaintiffs from avoiding removal by amending their complaints to “remove the SLUSA-triggering allegations” only to “‘reinsert’ them later upon returning to state court.”

In a dissent, Judge Hamilton argued that the Court’s holding makes SLUSA a powerful weapon for banks and securities firms defending against state and common law claims brought by their customers. Because claims for breach of contract and breach of fiduciary duty often involve allegations that information was withheld, defendants can invoke SLUSA to dismiss the complaint from state court and force the plaintiff to refile the case under a securities law theory in federal court.  “Thus can virtually any breach of contract claim by the customer of a securities firm be transformed into a doomed securities fraud claim that must be dismissed.”

The dissent teed up the issue for a petition to the Supreme Court by highlighting the “three – or four – way circuit split” developing around SLUSA’s reach. Judge Hamilton advocated for an approach similar to that of the Second, Third, and Ninth Circuits, which would require dismissal from state court and removal to federal court only if the plaintiff must prove a misrepresentation or omission of a material fact to win the case.  It is difficult to forecast where the Seventh Circuit fits into the growing circuit split because the opinion relies on prior Seventh Circuit precedent rather than precedent from sister circuits.  Nevertheless, if the dissent’s analysis proves accurate, the Seventh Circuit is a friendlier place for banks and securities firms than it was last month.