Breach of Fiduciary Duty – Investment Inducement

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7^th Circuit Court of Appeals

Case Name: Patricia Holtz, et al v. JPMorgan Chase Bank, N.A. et al

Case No.: 13-2609

Officials: EASTERBROOK, MANION, and SYKES, Circuit Judges.

Focus: Breach of Fiduciary Duty – Investment Inducement

JPMorgan Chase Bank offers to manage clients’ portfolios of securities. Its affiliates sponsor mutual funds in which these funds can be placed. We refer to JPMorgan Chase Bank and all of its affiliates collectively as “the Bank.” According to the complaint in this case, customers invested in these mutual funds believing that, when recommending them as suitable vehicles, the Bank acts in clients’ best interests (as its website proclaims). But Patricia Holtz, on behalf of a class of other investors, alleges that the Bank gives its employees incentives to place clients’ money in the Bank’s own mutual funds, even when those funds have higher fees or lower returns than competing funds sponsored by third parties. Holtz maintains that the Bank violated its promises and its fiduciary duties by inducing its investment advisers to make recommendations in the Bank’s interest rather than the clients’. Holtz filed this suit in federal court under the Class Action Fairness Act, 28 U.S.C. §1332(d)(2), because the class has more than 100 members, the stakes exceed $5 million, and at least one member of the class has citizenship different from the Bank’s. This suit is also a “covered class action” for the purpose of the Securities Litigation Uniform Standards Act of 1998 (SLUSA or the Litigation Act), 15 U.S.C. §78bb(f), because mutual funds are securities. SLUSA requires the district court to dismiss any “covered class action” in which the plaintiff alleges “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security” (§78bb(f)(1)(A)). Under SLUSA, securities claims that depend on the nondisclosure of material facts must proceed under the federal securities laws exclusively. See, e.g., Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006); In re Mutual Fund Market-Timing Litigation, 468 F.3d 439 (7th Cir. 2006) (Kircher IV). Holtz does not want to invoke federal law and framed her claims entirely under state contract and fiduciary principles. But the district court concluded that these claims necessarily rest on the “omission of a material fact” and dismissed the suit under SLUSA. 2013 U.S. Dist. LEXIS 90066 (N.D. Ill. June 26, 2013).

Affirmed

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Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.