Eventually, Plaintiffs filed suit against Edward Jones alleging multiple claims, only one of which was on appeal. Citing
FINRA Rule 2111, Plaintiffs argued that Edward Jones breached state law fiduciary duties to Plaintiffs by recommending the fee-based model without first conducting a suitability analysis. In particular, Plaintiffs asserted that, because they were buy-and-hold investors, they gained little, if anything, by enrolling in the fee-based model, and that Edward Jones violated its fiduciary duties by failing to determine whether the fee-based model was suitable for Plaintiffs’ goals and interests before recommending the change.
Applying SLUSA, the district court dismissed the class claim for lack of jurisdiction. SLUSA is a federal statute that bars a plaintiff class from bringing (1) a covered class action (2) based on state law claims (3) alleging that the defendant made a misrepresentation or omission or employed any manipulative or deceptive device (4) in connection with the purchase or sale of (5) a covered security.
See Northstar Fin. Advisors, Inc. v. Schwab Invs., 904 F.3d 821, 828 (9th Cir. 2018); 15 U.S.C. § 78bb(f)(1). In essence, a class claim is barred if it could have been pursued under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and the district court answered that question in the affirmative.
The Ninth Circuit reversed. In a decision authored by Judge Milan D. Smith, Jr., the court focused its analysis on the fourth prong, holding that “in connection with” requires materiality. To be “in connection with the purchase or sale of a covered security,” the court explained that the fraudulent misrepresentation or omission must be “material to a decision by one or more individuals (other than the fraudster) to buy or sell a covered security.” More specifically, the misrepresentation or omission must make “a significant difference to someone’s decision to purchase or sell a covered security.”
Applying that standard, the court held that Edward Jones’s purported failure to conduct a suitability analysis with respect to the fee-based account was not material to whether Plaintiffs would purchase or sell a security. Instead, the court reasoned, the lack of a suitability analysis informed Plaintiffs’ selection of an advisor, a decision “fundamentally different than choosing to buy or sell a covered security.” Accordingly, the court reversed the district court and remanded for further proceedings.
Although the court rendered its decision with respect to SLUSA, the opinion could have broader impacts in securities litigation, particularly with respect to fraud claims under § 10(b). In particular, because SLUSA includes many of the same statutory terms that Congress used in § 10(b), including “in connection with the purchase or sale of a covered security,” courts consider decisions in both contexts when interpreting and applying statutory language.
See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 86 (2006). While courts have long required materiality for § 10(b) claims,
Anderson v. Edward D. Jones & Co. may provide new guidance as to what sorts of misrepresentations and omissions meet that threshold.
