Brown v. Calamos

777 F.Supp.2d 1128

Christopher BROWN, individually and on behalf of all others similarly situated, Plaintiff,

v.John P. CALAMOS, Sr. Trusted of the Calamos Convertible Opportunities and Income Fund, Weston W. Marsh, Trustee of the Calamos Convertible Opportunities and Income Fund, Joe F. Hanauer, former Trustee of the Calamos Convertible Opportunities and Income Fund, John E. Neal, Trustee of the Calamos Convertible Opportunities and Income Fund, William R. Rybak, Trustee of the Calamos Convertible Opportunities and Income Fund, Stephen B. Timbers, Trustee of the Calamos Convertible Opportunities and Income Fund, David D. Tripple, Trustee of the Calamos Convertible Opportunities and Income Fund, Calamos Advisors, LLC, an investment advisor and Delaware Limited Liability company, Calamos Asset Management, Inc., a Delaware corporation and publicly-held holding company, Calamos Convertible Opportunities and Income Fund, a Delaware statutory trust, and John and Jane Does 1–100, Defendants.

No. 10 C 6558.

United States District Court, N.D. Illinois, Eastern Division.

March 14, 2011.

Carol V. Gilden, Cohen, Milstein, Sellers & Toll, PLLC, Chicago, IL, Gary A. Gotto, James A. Bloom, Keller Rohrback, PLC, Phoenix, AZ, Joshua S. Devore, Joshua Kolsky, Steven J. Toll, Cohen, Milstein, Sellers & Toll, PLLC, Washington, DC, Lynn Lincoln Sarko, Keller Rohrback, LLP, Seattle, WA, for Plaintiff.Kevin Bernard Dreher, Michael Frederik Derksen, Morgan, Lewis & Bockius, LLP, John William Rotunno, Molly K. McGinley, Paul J. Walsen, K & L Gates, LLP, Chicago, IL, for Defendants.

MEMORANDUM OPINION AND ORDER

ELAINE E. BUCKLO, District Judge.

Plaintiff Christopher Brown filed this action in Cook County Circuit Court on behalf of a class comprised of common shareholders of the Calamos Convertible Opportunities and Income Fund (the “Fund”). The complaint alleges that defendants breached their fiduciary duty to the Fund's common shareholders, and were unjustly enriched, by causing the Fund to redeem certain preferred shares in a manner that unfairly benefited the preferred shareholders at the expense of the common shareholders. Defendants removed the case to this court, then moved to dismiss, arguing that the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. §§ 77p and 78bb (“SLUSA”), permits the removal of, and precludes, plaintiff's claim.¹ Plaintiff disputes the applicability of SLUSA and has moved to remand to state court. For the reasons that follow, I deny plaintiff's motion for remand and grant defendants' motion to dismiss.

I.

The basic story plaintiff tells is this: the Fund is an investment company that issued both common shares and auction market preferred shares (“AMPS”). AMPS provided certain advantages not only to the holders of those shares, but also to the holders of common shares. The complaint explains that the AMPS “represented quite favorable financing for the Fund's common shareholders,” because, among other reasons, the AMPS “had no maturity and did not ever have to be repaid.” Compl. at ¶ 2. Indeed, plaintiff alleges that the Fund stated publicly that “a key piece of the return to the Fund's common shareholders was financial leverage,” and that one of the “significant benefits” of investing in the Fund was “leverage that would continue indefinitely, because ... the term of the AMPS was perpetual.” Id. at ¶ 13.

Notwithstanding these representations, defendants caused the Fund to redeem all of the outstanding AMPS between June of 2008 and August of 2009, and to replace them with financing that was less advantageous for common shareholders. Compl. at ¶ 25. The complaint alleges that the Fund had no valid business reason to redeem the AMPS. Id. After the financial meltdown of 2008, however, which caused the auction mechanism that had previously provided liquidity to the AMPS to fail, defendants decided to redeem the AMPS “to provide liquidity to the holders of the AMPS and ... to placate their investment banks and brokers.” Id. at ¶ 27. Plaintiff explains that the investment banks and brokers who had sold the AMPS to investors were “a key part” of a business model from which defendants reaped significant economic benefits. Id. at ¶¶ 27, 14–19. Accordingly, defendants had an economic interest in maintaining their relationships with these banks and brokers, which they did at the expense of, and in violation of their fiduciary duties to, the common shareholders. Id. at 27.

II.

Congress enacted SLUSA to remediate an “unintended consequence” of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), which was a spike in previously rare state-court litigation of class actions involving nationally traded securities. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 82, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006). The goal of the PSLRA was to curb nuisance suits and other perceived abuses of securities class actions. Id. at 81–82, 126 S.Ct. 1503. But rather than stem the tide of such suits, the PSLRA prompted some plaintiffs (or rather their lawyers) to avoid the PSLRA's stringent pleading requirements and other provisions designed to ward off meritless suits by simply reformulating their claims as state law causes of action and bringing them in state courts. Id. To prevent private plaintiffs from frustrating the objectives of the PSLRA in this way, Congress enacted SLUSA, which provides:

No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging-

(1) an untrue statement or omission of a material fact in connection with the

purchase or sale of a covered security; or

(2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security

15 U.S.C. § 77p(b).

SLUSA thus precludes any suit that: 1) is a “covered class action” (i.e., an action seeking damages on behalf of more than fifty people); 2) is based on state law; 3) alleges a misrepresentation or omission of a material fact, or the use of any manipulative or deceptive device or contrivance; 4) in connection with the purchase or sale of a covered security. Rabin v. JPMorgan Chase Bank, N.A., 06 C 5452, 2007 WL 2295795 at *5 (N.D.Ill.2007) (Hibbler, J.).

“Consistent with Congress's intent, courts construe SLUSA's ‘expansive language broadly’ to prevent frustration of the PSLRA's objectives.” Daniels v. Morgan Asset Management, Inc., 743 F.Supp.2d 730, 736 (W.D.Tenn.2010) (quoting Segal v. Fifth Third Bank, N.A., 581 F.3d 305 (6th Cir.2009)). In particular, the Supreme Court held in Dabit that the “in connection with the purchase or sale of securities” requirement should be construed broadly to preclude suits by holders of securities, not just purchasers and sellers. 547 U.S. at 86–87, 126 S.Ct. 1503.

III.

Plaintiff does not dispute that this is a “covered class action,” that it is based on state law, or that the securities in question are “covered securities.” He argues, however, that the complaint does not allege any misrepresentation in connection with the purchase or sale of a security. Defendants insist that, to the contrary, alleged misrepresentations are at the heart of plaintiff's claims.

Defendants argue that the “overarching theme” of the complaint is that defendants misled common shareholders by portraying the financing provided by AMPS as a significant benefit that they would enjoy “indefinitely,” but later redeemed the AMPS in favor of less favorable financing. Defendants liken this case to numerous others in which courts have dismissed claims that they concluded amounted to “a securities fraud wolf dressed up in a [state law] sheep's clothing.” See, e.g., Daniels, 743 F.Supp.2d at 740 (dismissing breach of contract and breach of fiduciary duties claims); Kurz v. Fidelity Management & Research Co., No. 07–cv–709–JPG, 2008 WL 2397582 (S.D.Ill. June 10, 2008) (dismissing breach of contract claim), aff'd, 556 F.3d 639 (7th Cir.2009); Kutten v. Bank of America, N.A., No. 06–0937(PAM), 2007 WL 2485001 at *6 (E.D.Mo. Aug. 29, 2007) (dismissing breach of fiduciary duty claims), aff'd, 530 F.3d 669 (8th Cir.2008); Felton v. Morgan Stanley Dean Witter & Co., 429 F.Supp.2d 684, 693 (S.D.N.Y.2006) (dismissing breach of contract claim).

Plaintiff disputes that the complaint alleges any misrepresentation or omission by defendants and points to the allegation that expressly states, “[p]laintiff does not assert by this action any claim arising from a misstatement or omission in connection with the purchase or sale of a security, nor does Plaintiff allege that Defendants engaged in fraud in connection with the purchase or sale of a security.” Compl. At ¶ 4. Of course, this type of disclaimer is of little moment, since whether SLUSA...