Hidalgo-Vélez v. San Juan Asset Management, Inc.
758 F.3d 98
1st Cir.2014Background
- Plaintiffs are investors in the Puerto Rico & Global Income Target Maturity Fund, a non‑diversified Puerto Rico investment company whose prospectus promised ≥75% exposure to certain specialized notes and ≤25% exposure to any single issuer.
- In 2008 the Fund allegedly invested >75% of assets in Lehman Brothers notes, violating the prospectus and Puerto Rico law, causing severe losses and liquidation.
- Plaintiffs filed a putative class action in Puerto Rico state court asserting state‑law misrepresentation and derivative claims; defendants (including PwC) removed under SLUSA and moved to dismiss; plaintiffs moved to remand.
- The district court denied remand and later (before the Supreme Court decided Troice) granted defendants’ SLUSA‑based motions to dismiss; plaintiffs appealed.
- The First Circuit reviewed whether the SLUSA precluded the claims under the Supreme Court’s Troice decision and concluded the district court erred: the alleged misrepresentations were too attenuated from any covered securities to trigger SLUSA preclusion, so the case must be remanded to Puerto Rico court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SLUSA precludes (removal/preclusion) state‑law class claims alleging misrepresentations about the Fund's investments | Misrepresentations induced purchases of Fund shares (uncovered securities); SLUSA does not apply because plaintiffs bought uncovered securities and did not intend to acquire ownership in covered securities | SLUSA applies because the Fund anticipated investments in covered securities, so misrepresentations were “in connection with” covered securities | SLUSA does not apply: under Troice, misrepresentation must be material to a decision to buy/sell a covered security; here link to covered securities is too attenuated |
| Whether plaintiffs preserved their SLUSA‑opposition for appeal despite not opposing dismissal motions directly | Remand briefing sufficiently and timely raised SLUSA inapplicability; substantive presentation preserved the issue | Plaintiffs forfeited/waived the argument by not objecting in response to dismissal motions | Court held plaintiffs preserved the argument because remand briefing put the issue squarely before the district court and substance trumped form |
| Whether this case is like “feeder‑fund” or Madoff cases (intent to acquire covered securities) | Plaintiffs primarily sought ownership of Fund shares tied to uncovered notes; not primarily intended to obtain covered securities | Defendants analogize to feeder‑fund cases where investor intent was to gain exposure to covered securities, so SLUSA should apply | Not a feeder‑fund situation: prospectus’ primary purpose and alleged misrepresentations concerned uncovered securities; Herald‑type approach inapplicable here |
Key Cases Cited
- Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014) (misrepresentation is "in connection with" a covered‑security purchase only if it is material to a decision to buy/sell a covered security)
- Dabit v. Merrill Lynch, Pierce, Fenner & Smith Inc., 547 U.S. 71 (2006) (SLUSA construed broadly to cover holder claims; fraud must "coincide" with a securities transaction)
- Kircher v. Putnam Funds Trust, 547 U.S. 633 (2006) (SLUSA contains complementary removal and preclusion provisions; proper removal means preclusion)
- SEC v. Zandford, 535 U.S. 813 (2002) (Rule 10b‑5 in‑connection‑with analysis focuses on defendant’s deception in relation to securities transactions)
- In re Herald, 730 F.3d 112 (2d Cir. 2013) (feeder‑fund/Madoff context: claims precluded where funds were marketed as vehicles to obtain exposure to covered securities)