In an opinon issued yesterday, Judge Griesa reinstated state law fraud claims of investors in so-called Madoff “feeder funds” that he had previously dismissed under the Securities Litigation Uniform Standards Act (SLUSA). SLUSA bars large class actions brought under state law that allege “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” A “covered security” is defined as, among other things, a security traded on a national stock exchange. In a prior decision, Judge Griesa had held that SLUSA barred plaintiffs state law claims even though their own investments were not in “covered securities” but in funds that invested with Madoff. Madoff’s subsequent purported transactions in covered securities was sufficient for SLUSA to apply and bar any claims based on Madoff’s fraud. Plaintiffs moved to reinstate their state law claims after the Supreme Court ruled in Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014). Judge Griesa agreed that Troice had changed the landscape:

The Supreme Court refined SLUSA’s preclusion standard in Troice by clarifying what “connection” to covered securities is sufficient. There, the plaintiffs bought certificates of deposit in a bank and were promised a fixed rate of return on that investment. Troice, 134 S. Ct. at 1065. The certificates of deposit were not themselves “covered securities.” The plaintiffs expected that the bank would use the money it received to buy, among other things, covered securities. Instead, the money was lost in a Ponzi scheme run by the bank’s proprietor. The question was whether plaintiffs’ claims of fraud—based on the purchase of uncovered securities—were precluded by SLUSA based on the bank’s misrepresentation about purchasing covered securities for itself. The Supreme Court held that the real issue was what the plaintiffs bought, not what the bank might buy. This obviously related to the language of the statute, which only precludes state-law class-action claims that allege fraud “in connection with the purchase or sale of a covered security,” and goes on to define “covered security” in a way that does not include a certificate of deposit. The fact that the bank might purchase covered securities was not sufficient to bring the plaintiffs’ claims within the statute. Essentially, the Court stated that the only “connection” that matters under SLUSA was whether the plaintiffs themselves bought or sold “an ownership interest” [in] covered securities. Id. at 1066. The Court found that the allegations in the complaints specified that the plaintiffs’ claims rested upon their purchases of uncovered securities, the certificates of deposit, and thus were not precluded by SLUSA.

Applying Troice to the case at hand, Judge Griesa reversed his prior dismissal of the state law claims:

Here, plaintiffs’ state-law claims are not precluded by SLUSA. In this court’s September 3, 2013, decision, the court did not really come to grips with whether plaintiffs’ bought or sold a covered security. Other considerations arising from various judicial decisions were discussed, but the crucial issue about whether plaintiffs’ had “an ownership interest” in a “covered security” was not really analyzed. It’s now time to make such an analysis, and the court is reminded of the need to do this by the Supreme Court’s decision in Troice. SLUSA requires that the fraud underlying the claims must be in connection with the purchase or sale of covered securities. Plaintiffs did not buy an ownership interest in covered securities; they bought limited partnership interests in funds. There is no dispute that these limited partnership interests are not covered securities. Thus, like the plaintiffs in Troice, plaintiffs here did not acquire any ownership interest in covered securities, so there is not a sufficient connection between the material misrepresentations alleged and transactions in covered securities.

(H/t AmLaw.)