Class action attorney Stephen Tillery of St. Louis seeks punitive damages from Putnam Investment Management while admitting that Putnam didn't deceive his clients.
"This is not a case about anybody being deceived in any way, shape or form," Tillery associate Robert King told Circuit Judge Barbara Crowder at a March 17 hearing.
Crowder took under advisement a motion from Putnam to certify a question about the case for review at the Fifth District appellate court in Mount Vernon.
The suit alleges that Putnam allowed mutual fund shareholders to profit from market timing at the expense of other shareholders.
Tillery filed a batch of class action claims against mutual funds
Crowder's docket carries three such suits, circuit judges Nicholas
Byron and David Hylla each has one, and Associate Judge Ralph Mendelsohn has two.
In the Putnam case, Crowder ruled in October that Tillery did not allege deception.
After U.S. District Judge David Herndon rendered a decision in
another case that favored Putnam's position, Putnam asked Crowder to certify an appeal.
At Crowder's hearing, Peter Simshauser of Boston argued for Putnam that the federal Securities Litigation Uniform Standards Act precluded the complaint.
"Your honor and Judge Mendelsohn of this court are the only judges to rule that this complaint is not precluded," Simshauser said.
He said 50 cases are pending in multi district litigation against Putnam at federal court in Baltimore, with damage claims in nine figures.
"There is almost a complete overlap between this case and the federal MDL," Simshauser said.
He said the complaint alleged that Putnam knew of mispricing and it accused Putnam of willfully, wantonly and recklessly breaching its duties.
"We all should have the benefit of the appellate court evaluating whether plaintiffs can have it both ways," he said.
"To avoid SLUSA they say that they are alleging mere negligence, yet to attempt to recover punitive damages they allege knowing, willful and wanton wrongdoing," he said.
"There is no set of facts that the plaintiff can prove that will avoid preclusion," he said.
"There are going to be complex choice of law issues," he said. "Plaintiffs haven't said what law they contend should apply to their claims.
"If they contend Illinois law applies, why should a shareholder in a state other than Illinois have Illinois law applied to their claim?
"Our position is, the case is precluded and if the appellate court agrees then that's the end of the case."
King responded, "A motion to stay these proceedings has never been filed based upon the existence of the MDL proceedings and that's because the cases aren't the same."
"Everybody agrees on what SLUSA says," King said. "If you allege fraud or deceit in any way, shape or form, you are out.
"One thing I want to make real clear about this: Recklessness does not equal fraud. I mean you can drive a car recklessly. That's not fraud."
"Willful and wanton conduct under the law of the state of Illinois is not fraudulent conduct ipso facto."
King asked who was deceived. "I would like to hear Mr. Simshauser explain to us who it was that was deceived," he said.
"We are sure telling you we weren't deceived," he said.
"Nobody bought shares in the mutual fund because they were deceived," he said. "Nobody was deceived."
He said Putnam negligently or recklessly allowed market timers to trade. "We were injured by that whether we knew it was happening or not," he said.
"It has nothing to do with us being deceived," he said.
If Putnam disclosed in prospectuses that they exposed funds to short swing strategies, King said, that disclosure would squelch suits of this kind.
"We haven't alleged anything about their prospectuses," he said. "They are the ones that put their prospectuses in the record.
"You could be injured if you were holding a share of this mutual fund without having any idea what the price was on any given day.
"You don't need to know the price. You are going to get hurt simply by holding the stock.
"You aren't deceived in any way, shape or form."
Crowder told King, "What they want me to do is let them run it up the flagpole to the appellate court and see if the appellate court takes it. What's the harm in that?"
King said, "Then what's going to happen? Our case just goes away?"
"The case is going to come right back to you," King said. "We will file an amended complaint and we will be right back where we are today.
"Let's get the discovery. Let's get going."
Crowder asked Simshauser if plaintiffs could amend after a Fifth District decision.
Simshauser told her SLUSA says nothing about fraud or deceit.
"Those words are not in the statute," he said. "It talks about untrue statements or omissions."
He quoted the complaint: "The fund expressly states in the prospectus that it seeks to achieve its investment goal through a policy of investing in stocks and debt obligations of companies outside the United States."
"The prospectus is in the complaint, your honor," Simshauser said.
Crowder said the case would be appealed however it came out.
"If they take it and a year and a half later plaintiff gets to amend their complaint, then I haven't done anything other than put it off my docket for a year and a half," she said.
"If I send a question," she said, "I want to send a question that will really resolve the issue for me."
She asked Simshauser if it was his position that plaintiffs could never allege their claim without coming under SLUSA.
Simshauser said, "It is difficult for me to imagine a circumstance in which they can plead their claim around SLUSA, particularly given the scope of what's being addressed in the MDL proceeding in Maryland.
"It is impossible for me to imagine that they could plead around SLUSA and still include a claim seeking punitive damages."
Crowder said, "You think if they plead for punitive damages, that automatically brings them under SLUSA?"
Simshauser said, "It does."
Crowder said a certified question about punitive damages might be different from a question about rewriting a negligence count.
That lit King's fuse. "What Mr. Simshauser has said is preposterous," he snapped. "Recklessness as we all learned in our first torts class -"
Crowder doused his ire with humor. "In my torts class all he talked about was no fault auto insurance the whole semester," she said, "so don't assume I learned anything."
She asked King if he would hold Simshauser to the question he drafted.
"I sure would," King said. "The way the question ought to be worded is, does our complaint contain allegations of fraud?"
Crowder said, "I read your version."
She told the attorneys she would decide as quickly as she could.
Tillery and associate Klint Bruno attended the hearing but said nothing.
Charles Joley of Belleville represented Putnam along with Simshauser.