The 2nd U.S. Circuit Court of Appeals said Senior U.S. District Judge David G. Larimer of the U.S. District Court for the Western District of New York properly ruled the allegations leveled at the advisers under New York state law were pre-empted by the federal Securities Litigation Uniform Standards Act (SLUSA). The appellate court ruling came in a consolidated case involving both Morgan Stanley suits.
Writing for the appellate court, Circuit Judge Barrington D. Parker rebuffed arguments by lawyers for the retirees that applying SLUSA was inappropriate because the suits do not allege the advisers’ fraud or misrepresentation in connection with the purchase or sale of nationally traded securities. The retirees also insisted that the time lag between meetings with the advisers and their eventual investments with Morgan Stanley made the SLUSA pre-emption argument not applicable.
“And so, at the end of the day, this is a case where defendants’ alleged misrepresentations induced appellants to retire early, receive lump sum benefits, and invest their retirement savings with defendants (Morgan Stanley), where the savings were used to purchase covered securities,” Parker wrote. “When the securities plummeted in value, appellants sued to be made whole. Because both the misconduct complained of, and the harm incurred, rests on and arises from securities transactions, SLUSA applies.”
Suits from Kodak and Xerox Retirees
According to Parker’s opinion, the Morgan Stanley cases involved:
- Allegations by William D. Lawton and Gerald G. Miller, Jr., long-time Xerox employees, that David Isabella, a Senior Vice-President of Morgan Stanley, a “retirement specialist,” and a former Xerox employee, told them that if they could live on annual withdrawals of approximately 10% of their retirement savings, they could retire early without exhausting their savings’ principal. Lawton and Miller further allege that they elected early retirement in reliance on Isabella’s advice, leaving behind job security and substantial benefits. Both men opted for a lump-sum retirement benefit, which they invested, about 18 months after they first met with Isabella, in various securities through Morgan Stanley. The value of their portfolios later dropped precipitously, resulting in substantially reduced monthly withdrawals and significant financial hardship.
- Allegations by John D. Romano, Stanley J. Morrill, and Richard V. Patrick, former longtime Kodak employees who consulted with Michael J. Kazacos, a Senior Vice President, financial consultant, and retirement specialist at Morgan Stanley. The Kodak retirees allege that, during seminars as well as during individual appointments, Kazacos advised them that they had sufficient assets to retire and encouraged them to retire early and take lump sum retirement benefits. The three men each elected to retire early and take a lump sum retirement benefit, which they placed with Morgan Stanley for investment, which suffered “disastrous” declines in value, allegedly because Kazacos’s retirement advice was inappropriate and “had a significant probability of failure,” the suit alleged.
In arguing for the applicability of SLUSA, the opinion said that Morgan Stanley pointed out that the retirees in both cases had deposited their retirement savings into Morgan Stanley IRA accounts, where covered securities were purchased on their behalf - mutual funds in the case of the Kodak suit and mutual funds and listed securities or securities authorized for listing in the case of the Xerox allegations. Both cases were being pursued as class actions, reportedly on behalf of hundreds of other Xerox or Kodak retirees.
The 2nd Circuit ruling is available here.