Battle over blue sky laws brewing in Stack's court

Steve Korris Mar. 6, 2009, 4:40am


Blue sky laws of 38 states look the same to investors suing Wells Fargo and Fifth Third banks in Madison County, but the banks see 38 distinct shades of blue.

Circuit Judge Daniel Stack must choose between those views as he ponders certification of a class action over nursing home construction bonds.

Fred Thompson of Motley Rice in South Carolina seeks to represent 2,013 bond buyers in claims against Wells Fargo and Fifth Third.

He also seeks damages from Indianapolis accounting firm Blue and Company and Kansas City bond counsel firm Gilmore and Bell.

He claims they ran a Ponzi scheme that left buyers in 38 states with worthless bonds.

He initially sued 31 defendants, but some ceased to exist and others he didn't pursue.

At a class certification hearing last September, Stack asked both sides for briefs on differences in laws from state to state.

Thompson's brief minimized the differences and assured Stack that he could manage them at trial.

For Fifth Third, Michael Nester of Belleville responded on Feb. 27 that Thompson didn't design a workable trial plan.

"Plaintiffs have not proposed any specific subclasses, nor have they suggested how the variations of law can be reconciled into a comprehensible and manageable set of jury instructions," Nester wrote.

Statutes of limitations on blue sky laws range from a year to six years, he wrote.

"Correctly anticipating the futility of trying to demonstrate uniformity across the wildly divergent Blue Sky laws of the 38 states, plaintiffs attempt to sidestep the issue by arguing that traditional conflict of law analysis does not apply to state securities law," he wrote.

A Georgia decision that Thompson quoted for his argument didn't count, Nester wrote, because it compared blue sky laws of only three states.

"To call plaintiffs' analysis superficial is generous," he wrote.

Nester bid to shrink the case by two fifths, arguing that New York's blue sky law provides no civil private cause of action for investors.

"New York also is the home state of the purchaser in 821 of 2,013 bond transactions at issue in this case," he wrote.

"Thus, the purchasers in 40 percent of the bond transactions have no cause of action under their home state's Blue Sky law," he wrote.

He wrote that variation in reliance law was the biggest obstacle to class action.

Each class member's right to recovery would depend on the manner of purchase, the identity of the seller and the buyer's experience, he wrote.

It would also depend on whether the buyer read written materials, he wrote.

Thompson failed to show uniformity from state to state on common law fraud, fraudulent concealment and negligent misrepresentation, he wrote.

On fraud and negligent misrepresentation, he wrote, statutes of limitations range from a year to 10 years.

"Wells Fargo has identified no fewer than 13 variations among the limitations periods imposed by the 38 states," he wrote.

Nester wrote that because Thompson sued the banks as indenture trustees, Stack would have to address variations in laws on secondary liability for transaction professionals.

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