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Sixth Circuit Dismisses Morgan Keegan Class Action Lawsuit

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By Robyn Hagan Cain on September 15, 2011 4:02 PM

The Sixth Circuit Court of Appeals dismissed a Morgan Keegan class action lawsuit last week, finding that the Securities Litigation Uniform Standards Act (SLUSA) precluded the action.

The plaintiffs in the case held shares in three mutual funds issued by Morgan Keegan Select Fund, Inc., an open-end investment company. Morgan Keegan structured these shares as "redeemable securities," entitling the holders to redemption at any time for their "proportionate share of the issuer's current net assets."

Like most investments, plaintiffs' shares lost value between 2007 and 2008 due to bad bets on sub-prime mortgage-backed securities; unlike most investors, they attributed their losses to fraud.

Plaintiffs filed a class action suit in state court against the funds' advisers, officers, directors, distributor, auditor, and affiliated trust company, (defendants) bringing 13 state-law claims for breach of contract, violations of the Maryland Securities Act, breach of fiduciary duty, negligence, and negligent misrepresentation.

The crux of plaintiffs' argument was that defendants took unjustified risks in allocating the funds' assets and concealed these risks from shareholders. Had plaintiffs been aware of the funds' mismanagement, they claimed, they would have redeemed their shares before they dropped in value.

Plaintiffs contended that their entire action falls within a specific exemption to SLUSA's general reach, and should be permitted to continue in state court. This exemption, known as the first Delaware carve-out, preserves a class action otherwise facing SLUSA preclusion if it "involves... the purchase or sale of securities by the issuer or an affiliate of the issuer exclusively from or to holders of equity securities of the issuer."

The Sixth Circuit Court of Appeals dismissal of the Morgan Keegan class action lawsuit is bad news for investors who wanted to avoid heightened federal pleading requirements by filing in state court, reports Investment News. The firm, however, is not finished with litigation; two Morgan Keegan class action lawsuits linger in federal court.

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