William Hampton v. Pacific Investment Management , 705 F. App'x 558 ( 2017 )

NOT FOR PUBLICATION FILED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.
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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
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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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