Institutional Trustees

While institutional trustees may have once slept soundly considering themselves immune from class action lawsuits relating to the purchase or sale of securities on behalf of a trust, the Ninth Circuit’s recent ruling in Banks v. Northern Trust Corp. (9th Cir. 2019) 929 F.3d 1046, sounds a rousing wake up call for every trustee who professionally manages multiple trusts.

Federal law generally prohibits class actions relating to (1) misrepresentations of material fact in connection with the purchase or sale of a security, and (2) the alleged use of any manipulative device in connection with the purchase or sale of a security.  Thus, for the most part, cases involving these types of allegations can only be brought individually.  While institutional trustees have always had to be careful in what representations they make in the purchase or sale of securities, the potential for massive liability from class action litigation has largely been a non-issue.

However, the court in Banks v. Northern Trust Corp. clarified that this general rule does not apply to claims brought against a trustee by beneficiaries of an irrevocable trust.  Therefore, institutional trustees with a large volume of trust administration files, and especially those associated with an institution that provides investment products, should now be on high alert for the potential for class action claims to be brought against them.