State Lawsuit against Merrill Thrown Out

A federal appellate court ruled that a plan sponsor cannot rely on Florida state law to sue Merrill Lynch for allegedly aiding a plan provider in committing fraud against the plan.

The 11th U.S. Circuit Court of Appeals said the Instituto de Prevision Miltar (IPM) was precluded by a preemption provision in the federal Securities Litigation Uniform Standards Act (SLUSA) from moving forward with its claims against Merrill Lynch based on state law. IPM is a decentralized agency of the Republic of Guatemala, which administers retirement benefits for the country’s armed forces.

The federal appellate panel agreed with a lower-court federal judge that IPM’s state law fraud and misrepresentation claims against Merrill Lynch were the sort of legal disputes lawmakers intended through the SLUSA to restrict to being litigated under federal law.

According to the appeals court, the SLUSA was enacted by Congress to ensure that securities fraud class actions were brought under federal law and in federal court. In this case, the appeals court said, the SLUSA would preclude IPM’s state law claims only if the case was a “covered class action” that was “based upon the statutory or common law of any state” and that alleged a misrepresentation or omission or the use of manipulative device “in connection with the purchase or sale” of a “covered security.’

IPM claimed in its suit against Merrill Lynch that Merrill was liable for the fraud IPM said was perpetrated on it by the Pension Fund of America L.C. (PFA) because Merrill allowed PFA to hold itself out as Merrill Lynch’s agent. Merrill also failed to stop PFA from what the plan sponsor said was actions that misappropriated IPM’s funds.

The ruling said that in 2001, PFA began soliciting IPM’s board of directors and with Merrill Lynch’s permission, PFA used Merrill Lynch brochures and literature and represented to IPM that it was a business partner of Merrill Lynch.

IPM said it based its decision on Merrill Lynch’s reputation to invest in PFA’s “retirement trust accounts’ which were made up of a life insurance component and a mutual fund component. The court said IPM and PFA signed a trust agreement providing for Merrill Lynch to act as trustee of IPM’s pension funds.

IPM wired $7.7 million to Merrill Lynch, but within two months Merrill Lynch had allowed PFA to transfer more than $3 million out of the account, according to the court. While it was allowing PFA to take money out of the account, Merrill Lynch was also actively promoting PFA, the court said. Merrill Lynch later executed further transfers of IPM’s funds to PFA, allowing PFA to take almost all of the $7.7 million, the court said.

The case is Instituto de Prevision Miltar v. Merrill Lynch, 11th Cir., No. 07-15079, 10/29/08.