Northern Trust v. Banks, No. 19-440, U.S. Supreme Court

SECURITIES LITIGATION UNIFORM STANDARDS ACT
Northern Trust Corp. v. Banks 
Date: Oct. 31, 2019 
 
Issue: Under the Securities Litigation Uniform Standards Act of 1988 (SLUSA), do allegations concerning a trustee’s imprudent investments constitute activity “in connection with” the purchase or sale of securities if the allegations are brought by the beneficiaries of an irrevocable trust? 
 
Case Summary: ABA filed an amicus brief urging the Supreme Court to grant Northern Trust’s certiorari petition and hold there is no “trustee exception” to SLUSA.  
 
SLUSA deprives a federal court of jurisdiction to hear (1) a covered class action (2) based on state law claims (3) alleging that the defendants made a misrepresentation or omission or employed any 
manipulative or deceptive device (4) in connection with the purchase or sale of a covered security. 
 
Lindie Banks and her daughter Erica LeBlanc (Lindie) is the beneficiary of the irrevocable Lindstrom Trust under California law. As trustee, Northern Trust has sole discretion on how to manage the trust’s assets. According to the complaint, Northern Trust invested the trust’s assets in Northern Trust’s own affiliated “Funds Portfolio,” rather than seeking superior investments outside its financial umbrella. Lindie alleged that Northern Trust’s investment in the Funds Portfolio caused the trust to suffer suboptimal returns, which violated Northern Trust’s duties of prudent investment and loyalty to Lindie. 
 
The Ninth Circuit concluded that Lindie’s imprudent investment claims do not meet the “in connection with” requirement for SLUSA preclusion. The Ninth Circuit relied on the Supreme Court’s 2014 decision in Chadbourne & Parke LLP v. Troice. In Troice, the Supreme Court ruled that SLUSA did not apply if the only party that makes the decision to buy or sell a covered security was the person who was perpetuating the fraud. The Ninth Circuit reasoned that Troice is “directly on point,” because Lindie does not claim that Northern Trust’s activities as trustee were “in connection with” any purchase or sale of covered securities by anyone other than Northern Trust. The Ninth Circuit reasoned that Troice created a new “control” test: whether a defendant may invoke SLUSA depends upon whether the plaintiff had “control” over the defendant. 
 
In its petition for certiorari, Northern Trust contended that the Ninth Circuit took an "impossibly narrow" view of Supreme Court precedent, and as a result, created an “arbitrary exception to SLUSA’s broad preclusive force."  According to Northern Trust, the Ninth Circuit’s decision conflicts with rulings in other circuits.  
 
ABA filed an amicus brief urging the Supreme Court to grant Northern Trust’s petition. The brief asserted that no “trustee exception” exists under SLUSA. ABA explained that “a trustee who is alleged to have engaged in self-dealing in nationally-traded securities is almost by definition alleged to have engaged in prohibited conduct “in connection with” securities transactions.” The brief also addressed two issues. First, the brief contended that the Ninth Circuit’s decision creates the very situation Congress sought to prevent in passing SLUSA. Specifically, Congress enacted SLUSA to stop plaintiffs from making end-runs around the Private Securities Litigation Reform Act of 1995 (PSLRA). Additionally, the Ninth Circuit’s creation of a new “trustee exception” runs contrary to Congress’s intent. Second, the brief contended that the Ninth Circuit misread the Troice decision. ABA emphasized that Troice turned 
on the fact that the defendant purchased uncovered securities for the plaintiffs’ benefit, not whether the plaintiffs “controlled” the defendant. 
 
Bottom Line: Lindie’s response brief is due December 18, 2019.   

Download the amicus brief to read the full text.