The United States Court of Appeals for the Eleventh Circuit recently held that the Securities Litigation Uniform Standards Act (“SLUSA”) precludes state-law claims in cases that have been consolidated with related, federal securities class actions. Instituto de Prevision Militar v. Merrill Lynch, 2008 WL 4723777 (11th Cir. Oct. 29, 2008) (“IPM II”) (affirming 2007 WL 2900318 (S.D. Fla. Sept. 28, 2007) (“IPM I”)). However, IPM II leaves unanswered the question of whether a plaintiff could avoid SLUSA preclusion by objecting to such consolidation.

The Instituto de Prevision Militar (“IPM”), a Guatemalan, quasi-governmental agency that manages pension funds, sued Merrill Lynch based on IPM’s investment with a non-party, Pension Fund of America (“PFA”). PFA allegedly had held itself out as a business partner of Merrill Lynch and had represented to IPM that it would invest IPM’s money in secure accounts with Merrill Lynch. Instead, PFA allegedly misappropriated IPM’s money.

IPM initiated its lawsuit asserting only state-law claims on the ground that Merrill Lynch “knowingly provided substantial assistance to [PFA]’s fraudulent scheme and/or recklessly disregarded numerous red flags,” which allegedly caused damage to IPM. IPM II at *1. The district court consolidated IPM with two related, federal class actions for discovery purposes. Importantly, IPM “expressly requested that the court consolidate all three cases for discovery purposes.” IPM II at *6.

SLUSA precludes state-law claims in a case that is (1) a “covered class action” that (2) is “based upon the statutory or common law of any State,” and that (3) alleges a misrepresentation or omission or the use of a manipulative device “in connection with the purchase or sale” of (4) a “covered security.” The district court held that SLUSA preempted the state-law claims in each complaint.

Accordingly, IPM filed an amended complaint that retained the state-law claims and added federal securities claims. Last year, the district court dismissed the amended complaint with prejudice based on SLUSA preclusion and failure to state a claim for securities fraud.

The appellate court affirmed the dismissal. However, it noted that IPM might have avoided SLUSA preclusion altogether if it had argued against consolidating its lawsuit against Merrill Lynch with the two related class actions. The court acknowledged that it “ha[d] no occasion to address whether a consolidation over the plaintiff’s objection that results in preclusion under SLUSA may amount to an abuse of discretion.” IPM II at *6.