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Federal Court Dismisses "Covered Class Action" Involving Covered Securities" Action That Did Not Trigger The Delaware Carve-Out Under SLUSA

Posted In Securities
Golub v. Hilb, Rogal & Hobbs Co., 379 F.Supp.2d 639 (D.Del. 2005). Ninety-Nine shareholders represented by members of Hobb Group, L.L.C., and Hobbs IRA Corporation ("Sellers") entered into an agreement with defendant to sell its outstanding membership interest units for $270,000,000. Sellers alleged that the defendant company had not disclosed information that it knew before the closing. The defendant company moved to dismiss the Complaint. The Court granted the motion because the Complaint did not fall into the Delaware carve-out and therefore required dismissal. The plaintiff alleged that after the closing of the Purchase Agreement, defendant made several disclosures to the plaintiff that included: (1) disclosure that defendant had required a securities analyst to delay the issue of a market analyst report that would have downgraded the rating of defendant's stock until after the sale transaction occurred; (2) defendant was aware prior to the closing that a Phoenix company that held a major share of defendant's equity was planning on selling its shares; and (3) alleged facts and circumstances purporting to show that defendant was aware of the employment status of its CEO. Plaintiff sought damages on behalf of all ninety-nine sellers. Defendant moved to dismiss under Fed.R.Civ.P. 12(b)(6) for failure to state a claim. The Court analyzed the Complaint's allegations under the Securities Litigation Uniform Standards Act ("SLUSA"). Under SLUSA, any action founded on "covered class action" alleging misrepresentation or omission of material facts in connection with the buying or selling of a "covered security" was required to be removed and dismissed under 15 U.S.C. § 78bb(f)(1). "Covered class actions" were defined in 15 U.S.C. § 78bb(f)(5)(B). SLUSA also contained a "Delaware carve-out" exception that permitted the preservation of certain "covered class actions." Such "covered class actions" may be maintained under SLUSA if they fell under 15 U.S.C. § 78bb(f)(3)(A)(ii). The Court held that the Complaint did not state claims such that they triggered the Delaware carve-out provision because that section required: (1) transactions exclusively between holders of the securities; and (2) required communications to holders of the securities of the issuer. Applying SLUSA to the Complaint, the Court held that it did not find individualized claims of reliance on any alleged misstatement or omission although the Complaint sought damages for each of the ninety-nine sellers. The plaintiffs Complaint alleged two claims: (1) common law fraud; and (2) breach of contract. Both were based on state law. The Court observed that both claims were based on allegations of misrepresentation or omission of material facts. Thus, the Court held that where such allegations are predicated factually on state law claims, the prong relating to misrepresentation would be satisfied under SLUSA. Further, the Court found that defendant's stock was a "covered security" under SLUSA because it was listed on the New York Stock Exchange. The Court then applied a Third Circuit four-factor test to determine whether the misrepresentation was in connection with the sale of a "covered security." The factors were: (1) whether a fraudulent scheme was alleged that coincided with the purchase or sale of the "covered securities;" (2) whether the Complaint alleged a material misrepresentation or omission that a reasonable investor would have relied upon; (3) whether the relationship between the parties involved the purchase or sale of securities; and (4) whether the relief desired and prayed for connected the state claim to the purchase or sale of the securities. The Court analyzed the allegations of misrepresentation or omission set forth in the Complaint in the light of the four-factor test and found that they were satisfied. Therefore, the Court dismissed the action. Authored by: Raj Srivatsan 302-888 6831 Share


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