Christopher Brown v. John Calamos
2011 U.S. App. LEXIS 22653
| 7th Cir. | 2011Background
- SLUSA generally bars securities class actions not exclusively derivative where 50+ members, state-law relief sought, and allegations involve misrepresentation/omission in connection with a covered security.
- Calamos Convertible Opportunities and Income Fund is a closed-end fund; its common stock owners cannot redeem shares and the fund issued perpetual-appearing AMPS (auction-market preferred stock) with liquidity via frequent auctions.
- AMPS payments are perpetual debt-style instruments; the fund financed leverage by using AMPS proceeds along with common equity to invest, affecting risk and returns.
- The complaint alleges that the fund’s public statements promised indefinite leverage due to AMPS’ perpetual term, and that a related entity’s actions (redeeming AMPS, funding from higher-cost short-term borrowings) harmed common shareholders.
- Plaintiff characterizes the suit as breach of fiduciary duty rather than securities fraud, but the alleged misrepresentations/omissions are tied to the claims about leverage and concentration of conflicts of interest.
- The district court dismissed the case with prejudice on the merits, concluding SLUSA barred the action.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does SLUSA bar the suit as alleging misrepresentation/omission about a covered security? | Calamos contends the claim rests on breach of loyalty, not fraud. | SLUSA bars suits alleging misrepresentation or omission in connection with a covered security regardless of label. | Barred under SLUSA. |
| Is dismissal with prejudice appropriate when SLUSA bars the action? | Dismissal without prejudice would allow re-filing in state court. | SLUSA precludes the action; dismissal with prejudice follows as a merits-based bar. | Dismissal with prejudice affirmed. |
| Can the suit be saved by deleting the fraud allegation and proceed as a pure breach of loyalty claim? | Removal of fraud would avoid SLUSA and permit remand. | Forum-manipulation concerns prevent salvaging the case; the fraud-injection is central and not severable. | No; cannot save the suit by removing fraud allegations. |
| Whether the complaint’s structure and board/unitary governance affect SLUSA applicability? | Unitary board and fiduciary duties may permit a non-fraud claim. | Even with unitary governance, the pleaded theory may rely on misrepresentation/omission; SLUSA governs | SLUSA bars the action under any reasonable reading; process concerns do not save it. |
Key Cases Cited
- Kircher v. Putnam Funds Trust, 403 F.3d 478 (7th Cir. 2005) (SLUSA preemption framework and removal/remand guidance)
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (U.S. 2006) (preemption of state-law securities fraud actions)
- Gavin v. AT&T Corp., 464 F.3d 634 (7th Cir. 2006) (SLUSA interpretation and scope)
- LaSala v. Bordier et Cie, 519 F.3d 121 (3d Cir. 2008) (distinguishing essential vs. inessential allegations under SLUSA)
- Segal v. Fifth Third Bank, N.A., 581 F.3d 305 (3d Cir. 2009) (focus on whether fraud is essential to the claim for SLUSA applicability)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (derivative suit avenue as alternative to direct securities suit)
- Kamen v. Kemper Financial Services, Inc., 500 U.S. 90 (U.S. 1991) (demand futility and derivative suit mechanics)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (plausibility standard for complaint pleading)