Court Opinion

ID: 4198777
Source: CourtListenerOpinion
Date Created: 2017-08-24 20:01:08.61442+00
Date Added: 2024-06-11T14:39:34.341470
License: Public Domain

NOT FOR PUBLICATION                          FILED
                     UNITED STATES COURT OF APPEALS                     AUG 24 2017
                                                                     MOLLY C. DWYER, CLERK
                                                                      U.S. COURT OF APPEALS
                            FOR THE NINTH CIRCUIT

 WILLIAM T. HAMPTON, individually and            No.   15-56841
 on behalf of all others similarly situated,
                                                 D.C. No.
                  Plaintiff-Appellant,           8:15-cv-00131-CJC-JCG

   v.
                                                 MEMORANDUM*
 PACIFIC INVESTMENT
 MANAGEMENT COMPANY LLC; et al.,

                  Defendants-Appellees.

                    Appeal from the United States District Court
                       for the Central District of California
                    Cormac J. Carney, District Judge, Presiding

                        Argued and Submitted June 7, 2017
                              Pasadena, California

Before: THOMAS, Chief Judge, REINHARDT, Circuit Judge, and KORMAN,**
District Judge.

        Because we write only for the parties, we assume familiarity with the facts

and prior proceedings in this case. The parties do not dispute that, under the

Securities Litigation Uniform Standards Act (“SLUSA”), 112 Stat. 3227 (1998)

   *
          This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
   **
          The Honorable Edward R. Korman, United States District Judge for the
Eastern District of New York, sitting by designation.
(codified in relevant part at 15 U.S.C. §§ 77p(b)–(f), 78bb(f)), Hampton’s suit raises

state-law claims in a “covered class action,” see 15 U.S.C. § 77p(f)(2), or that all the

relevant events took place “in connection with the purchase or sale of a covered

security,” see id. § 77p(f)(3). Nor does Hampton appeal the district judge’s

conclusion that his claims do not come within what is commonly referred to as the

“Delaware carve-out.” See 15 U.S.C. § 77p(d)(1). Under that provision, covered

class actions based on state law are exempt from SLUSA’s class-action bar, so long

as 1) they are based on the law of the state in which the securities issuer is organized,

id. § 77p(d)(1)(A), and 2) involve either transactions exclusively between the issuer

and its existing stockholders, or a communication the issuer makes to its

stockholders respecting the exercise of certain shareholder rights, id. § 77p(d)(1)(B).

The district judge held that Hampton’s claims—which he asserts under

Massachusetts law against a Massachusetts trust—satisfied the carve-out’s first

prong but not the second. Hampton does not argue otherwise here.

      In this memorandum disposition, we address only whether Hampton

“alleg[es]” a material falsehood or omission. See 15 U.S.C. § 77p(b)(1). We address

whether his claims should have been dismissed with or without prejudice in a

simultaneously-filed opinion. SLUSA applies only to private plaintiffs “alleging” an

untrue statement or omission of material fact. As Hampton points out, however, his

complaint is carefully drafted to 1) avoid making any such allegations expressly, and

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2) plead contract and fiduciary duty claims that do not depend on any showing of

false statements. Under well-established law, that is not enough to avoid SLUSA’s

class-action bar.

      Off the bat, the basic principles underlying SLUSA disfavor Hampton’s

narrow, technical approach. Most fundamentally, as the Supreme Court counseled

in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 86 (2006),

interpreting the statute starts with the “presumption that Congress envisioned a broad

construction,” of SLUSA in order to effectuate its “stated purpose” of preventing

state-law claims from making an end-run around the safeguards imposed by the

Private Securities Litigation Reform Act.

      For that reason, courts broadly recognize that SLUSA’s applicability does not

depend on whether the plaintiff expressly makes the predicate allegations. We “look

to the substance of the allegations,” rather than the presence or absence of “magic

words,” precisely because doing otherwise would allow even minimally competent

plaintiffs to circumvent Congress’s purpose “through artful pleading that removes

the covered words but leaves in the covered concepts.” Freeman Invs., L.P. v. Pac.

Life Ins. Co., 704 F.3d 1110, 1115 (9th Cir. 2013) (quoting Segal v. Fifth Third Bank,

N.A., 581 F.3d 305, 310–11 (6th Cir. 2009) (internal modifications omitted)).

      SLUSA’s “alleging” standard is satisfied when “deceptive statements or

conduct form the gravamen or essence of the claim.” Id. (emphasis added).

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Deception forms the essence of a claim when its core factual allegations, taken as

true and viewed as a whole, show a likelihood that the defendant made a materially

misleading statement. The question is not whether some reading of some facts in the

complaint might support an inference of falsity, but whether the allegations

underlying a given claim—the facts essential to its theory of the defendant’s

liability—“make it likely” that the case will wind up centering on a materially

misleading statement or omission. See Brown v. Calamos, 664 F.3d 123, 128–29

(7th Cir. 2011) (emphasis added).

      Hampton’s claims are bottomed on the following facts: 1) The Total Return

Fund was an open-end fund engaged in a continuous offering of shares; 2) the Fund’s

offering documents stated that it would follow the Emerging Markets Policy; 3)

those documents were effective through the entire class period; and 4) during the

same period, the Fund adopted an aggressive emerging markets strategy which

entailed accumulating a larger position in those assets than the Emerging Markets

Policy would allow. Although Hampton styles these allegations in terms of

contractual and fiduciary duties, the complaint unmistakably describes PIMCO

Funds telling its investors it would do one thing—limit its exposure to certain risky

assets—while it was in fact, at the same time, doing another—betting big on those

same assets. The fact that PIMCO Funds promised to follow one course of action, at

the same time as it did the exact opposite, raises the likelihood of falsity that SLUSA

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requires.

      Hampton contends that the prospectus’s statement committing the Fund to the

Emerging Markets Policy could not, in fact, have been false at the time it was made.

He points out that the Fund first announced the policy well before the class period

(April 1 through September 12, 2014), and adhered to it at least until April of 2014.1

Therefore, Hampton argues, this is a straightforward case of a promise made once,

kept for a while, and then broken later, without the implication of falsity that arises

from simultaneously saying one thing and doing another. The problem with that

argument, as the defendants point out, is that the statement was made more than

once. As an open-end fund, the Total Return Fund was by definition engaged in a

continuous offering of shares, effected through the dissemination of a prospectus,

the statements in which were effectively “made” every day the prospectus was put

forward to solicit new investors, including during the period where the Emerging

Markets Policy had become a lie. The fact that the statement of policy was true at

some prior point in time is irrelevant; the complaint unambiguously alleges facts

demonstrating that it was also made while the Fund was over the 15% cap, which is

1
  The complaint does not allege a specific date on which the Fund exceeded its 15%
cap on emerging markets investments. Rather, it points to the Fund’s quarterly
reports to allege that at the close of the quarter ending March 31, 2014, the Fund was
under the cap, and at the beginning of the quarter starting July 1, 2014, it had
exceeded the cap. This explains why the class period begins on April 1, 2014—the
first day of the fiscal quarter during which the cap was first breached. The exact date
on which that breach first occurred, however, remains unknown.
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enough to raise a likelihood that PIMCO Funds made an untrue statement of material

fact relevant to the core of Hampton’s claim, and to bar Hampton’s suit under

SLUSA.2

      That strong implication of falsity distinguishes this case from Falkowski v.

Imation Corp., 309 F.3d 1123 (9th Cir. 2002), and Freeman Investments, L.P. v.

Pacific Life Insurance Co., 704 F.3d 1110 (9th Cir. 2013), in which we held that

SLUSA did not bar claims for breach of contract. Hampton leans heavily on those

cases, arguing that he, too, pleads only “garden variety” claims for breach of contract

and fiduciary duty. Freeman and Falkowski are inapposite, however, because neither

of those cases involved any allegations—beyond the bare fact of a broken promise—

suggesting that the statements at issue were false when made. To be sure, given a

broken promise, one can always infer the possibility that the promisor lied when they

made it—but unlike in the cases upon which Hampton relies, the facts alleged here

are enough to tip a possibility of falsity into a likelihood. Cf. Bell Atlantic Corp. v.

Twombly, 550 U.S. 544, 570 (2007) (“[T]he plaintiffs . . . have not nudged their

claims across the line from conceivable to plausible . . . .”).

      Hampton’s remaining two arguments against SLUSA’s applicability similarly

2
 Hampton seeks to represent all persons who purchased or otherwise acquired Fund
shares during the entire class period. He does not raise, and we do not address, the
question of whether a class composed only of people who bought shares while the
Emerging Markets Policy was still being followed would have their claims barred
by SLUSA on account of the policy later becoming false.
                                          6
fail. First, Hampton makes much of the fact that he does not allege the defendants

“never intended” to follow the Emerging Markets Policy—that is to say, that he does

not allege fraud. But SLUSA is not limited to barring claims based on facts that

would amount to securities fraud. It encompasses claims involving simple false

statements. See In re Kingate Mgmt. Ltd. Litig, 784 F.3d 128, 151 (2d Cir. 2015).

Second, it does not matter that PIMCO Funds announced once during the relevant

timeframe that its emerging markets position was worth about 21% of the Fund’s

total value. That isolated snapshot of a disclosure, which was not made until three

months into the class period, does not negate the likelihood that the continuing

description of the Emerging Markets Policy as one of the Total Return Fund’s

“principal strategies” was false.

      Finally, Hampton challenges the district judge’s decision to dismiss his claims

with prejudice and without leave to replead. As we explain in a simultaneously-filed

opinion, the dismissal should have been without prejudice because SLUSA enacts a

jurisdictional bar rather than a defense on the merits. We do not, however, disturb

the district judge’s decision that it would be futile for Hampton to replead state-law

claims on a classwide basis. Because the representations in the Fund’s prospectus

were made continuously throughout the class period, it would be impossible for

Hampton to plead that PIMCO Funds’ investment practices diverged from its public

statements without creating a likelihood that those statements were false at the time

                                          7
they were made.

                                 CONCLUSION

      For the reasons stated above and in our simultaneously-filed opinion, the

judgment of the district court is AFFIRMED to the extent it concludes that

Hampton’s claims are barred, and VACATED to the extent it dismissed

Hampton’s claims with prejudice. The case is REMANDED for further

proceedings consistent with this opinion.

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