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Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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The Honorable Robert W. Pratt, United States District Judge for the Southern

District of Iowa.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 05-3734

___________

Donald S. Sofonia, *

*

Appellant, *

*

v. * Appeal from the United States

* District Court for the

Principal Life Insurance Company; * Southern District of Iowa.

Principal Financial Group, Inc.; *

Principal Financial Services, Inc., *

*

Appellees. *

___________

Submitted: April 20, 2006

Filed: October 20, 2006

___________

Before LOKEN, Chief Judge, BOWMAN and BYE, Circuit Judges.

___________

BOWMAN, Circuit Judge.

Donald Sofonia appeals an order of the District Court1

 dismissing his state-law

claims for fraud, breach of fiduciary duty, and unjust enrichment against Principal

Life Insurance Company, Principal Financial Group, Inc., and Principal Financial

Services, Inc. (collectively, Appellees) in connection with the demutualization of

Principal Life Insurance Company. The District Court denied Sofonia's motion to

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Although most eligible policyholders, including Sofonia, received shares of

PFG common stock in the demutualization, a small number of policyholders elected

to receive or were required by regulatory, tax, or administrative reasons to receive

cash or other consideration in lieu of PFG common stock. 

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remand the action to Iowa state court and dismissed Sofonia's complaint based on

application of the Securities Litigation Uniform Standards Act of 1998 (SLUSA or

the Act), Pub. L. No. 105-353, 112 Stat. 3227 (codified as amended in scattered

sections of 15 U.S.C.). We affirm. 

In March 2001, the Board of Directors of Principal Mutual Holding Company

(PMHC), an Iowa mutual insurance holding company, adopted a plan to demutualize,

i.e., to convert from a mutual company into a stock company. As a mutual insurance

holding company, PMHC had no stockholders. Instead, PMHC was governed by the

policyholders of its wholly owned subsidiary, Principal Life Insurance Company

(Principal Life), a stock life insurance company. Principal Life policyholders held

membership interests in PMHC entitling them to, inter alia, vote on the election of

PMHC directors and receive proceeds in the improbable event of PMHC's liquidation.

Pursuant to the demutualization plan, all eligible Principal Life policyholders would

receive shares of common stock of Principal Financial Group, Inc. (PFG), a publicly

traded company, in exchange for their membership interests in PMHC.2

 The

demutualization plan was submitted for approval to eligible Principal Life

policyholders, each of whom received a notice package containing a Policyholder

Information Booklet explaining the demutualization, a proxy card for voting on the

plan, and other related materials (collectively, the PIB). The Iowa Commissioner of

Insurance reviewed and authorized the demutualization plan and the PIB, the required

number of Principal Life policyholders voted in favor of the transaction, and the

demutualization became effective in October 2001.

In April 2001, Principal Life policyholders settled a class action lawsuit

alleging that Principal Life had engaged in deceptive sales practices. See Grove v.

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Principal Mut. Life Ins. Co., 200 F.R.D. 434 (S.D. Iowa 2001) (the Grove class

action). Sofonia estimates that Appellees paid approximately $375

million—including attorney fees—to settle the Grove class action. 

After the demutualization was completed, Donald Sofonia, a member of the

Grove class and the putative class representative in this appeal, filed a complaint in

Iowa state court alleging that Appellees made deceptive statements in the PIB that

induced Principal Life policyholders to vote in favor of the demutualization.

According to Sofonia, this fraudulent conduct enabled Appellees to improperly shift

the economic costs of the Grove settlement back to the Grove class members because

the Grove class members received fewer shares of PFG common stock in the

demutualization than they would have received absent Appellees' misconduct. 

Asserting application of SLUSA, Appellees removed the action to federal court

and moved for dismissal, arguing that Sofonia's complaint alleged misrepresentations

or omissions in connection with the purchase or sale of covered securities under the

Act. Sofonia moved to remand the case to Iowa state court, disputing Appellees'

contention that SLUSA applied to preempt state-court jurisdiction.

The District Court denied Sofonia's motion to remand and granted Appellees'

motion to dismiss. Sofonia now appeals, arguing that the District Court erred in

concluding that the exchange of PMHC membership interests for shares of PFG

common stock in the demutualization was a purchase of covered securities under

SLUSA. Sofonia also contends that the District Court erred in concluding that his

complaint asserts misrepresentations or omissions of material fact in connection with

the purchase or sale of covered securities under SLUSA. We review de novo both the

District Court's denial of Sofonia's motion to remand, see Nichols v. Harbor Venture,

Inc., 284 F.3d 857, 860 (8th Cir. 2002), and its dismissal of Sofonia's action for

failure to state a claim upon which relief could be granted, see In re Acceptance Ins.

Cos. Sec. Litig., 423 F.3d 899, 903 (8th Cir. 2005). 

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SLUSA, which amended the Securities Act of 1933 and the Securities and

Exchange Act of 1934, "expressly preempts all state law class actions based upon

alleged untrue statements or omissions of a material fact, or use of a manipulative or

deceptive device or contrivance, in connection with the purchase or sale of a covered

security." Dudek v. Prudential Sec., Inc., 295 F.3d 875, 879 (8th Cir. 2002). The Act

was intended to "prevent plaintiffs from seeking to evade the protections that Federal

law provides against abusive litigation by filing suit in State, rather than in Federal,

court." H.R. Rep. No. 105-803 (Oct. 9, 1998) (Conf. Rep.). An action is subject to

removal and dismissal under SLUSA if the party seeking to invoke SLUSA's

application shows that (1) the action is a "covered class action" as defined in the Act

(2) the action purports to be based on state law, (3) the action alleges that the

defendant misrepresented or omitted a material fact (or used or employed a

manipulative or deceptive device or contrivance), and (4) the action alleges that the

defendant's misrepresentations or omissions of material fact were made "in

connection with the purchase or sale of a covered security." 15 U.S.C. §§ 77p(b)–(c),

78bb(f)(1)–(2); see also Green v. Ameritrade, Inc., 279 F.3d 590, 596 (8th Cir. 2002).

Sofonia concedes that Appellees have satisfied the first and second criteria—his

lawsuit is a covered class action based on Iowa state law. Sofonia also concedes that

Appellees have satisfied the third criterion—his lawsuit alleges that Appellees

misrepresented or omitted material facts in documents disseminated in connection

with the demutualization. Sofonia disputes, however, that Appellees have satisfied

the fourth criterion—that his action alleges misrepresentations or omissions made by

Appellees in connection with a purchase or sale of a covered security. Therefore, "the

critical question is whether [the] complaint can reasonably be read as alleging a sale

or purchase of a covered security made in reliance on the allegedly faulty information

provided to [Sofonia] and to putative class members by [Appellees]." Green, 279

F.3d at 598. 

Sofonia first argues that the District Court erred in concluding that the

demutualization involved covered securities as required for application of SLUSA.

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During oral argument, Sofonia suggested for the first time that because the

process for registering PFG common stock with the New York Stock Exchange was

not complete when the alleged misrepresentations or omissions were made by

Appellees, the shares of PFG common stock received by Principal Life policyholders

in the demutualization were not covered securities. Sofonia did not present this

argument to the District Court nor did he raise it in his briefs to this Court. "'[I]t is

well established that, unless a manifest injustice would result, a claim not articulated

to the district court is subject to forfeit on appeal.'" Ace Elec. Contractors, Inc. v. Int'l

Bhd. of Elec. Workers Local 292, 414 F.3d 896, 903 (8th Cir. 2005) (citation to

quoted case omitted). Because no manifest injustice would result, we decline to

address this argument.

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According to Sofonia, "[T]his case involves insurance products, not covered

securities, and is therefore outside the scope" of SLUSA. Brief of Appellant at 9.

This argument is unavailing. 

SLUSA defines a covered security as, inter alia, a security "listed, or authorized

for listing, on the New York Stock Exchange." 15 U.S.C. § 77r(b)(1)(A); see also

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 126 S. Ct. 1503, 1512 (2006).

While this definition excludes the PMHC membership interests surrendered by

Principal Life policyholders in the demutualization, it includes the shares of PFG

common stock received by the policyholders in exchange for their membership

interests. Because PFG common stock is traded on the New York Stock Exchange,

it falls precisely within SLUSA's definition of a "covered security."3

 The District

Court did not err in reaching this conclusion. 

Sofonia next argues that the District Court erred in determining that his

complaint asserted a claim that Appellees misrepresented or omitted material facts "in

connection with the purchase or sale" of a covered security. After concluding that the

receipt of shares of PFG common stock by Principal Life policyholders in the

demutualization was a "purchase" within the scope of SLUSA, the District Court

went on to conclude that Sofonia's claim that Appellees made fraudulent statements

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in the PIB in order to induce policyholders to approve the demutualization amounted

to a claim that Appellees misrepresented or omitted material facts "in connection

with" the purchase of PFG common stock. The District Court ultimately concluded

that all requirements for application of SLUSA were satisfied. We agree.

We construe the phrase "in connection with the purchase or sale of a covered

security" as used in SLUSA by looking to interpretations of identical language used

in § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and in

Securities and Exchange Commission (SEC) Rule 10b-5, 17 C.F.R. § 240.10b-5. See

Dabit, 126 S. Ct. at 1513 (confirming that reference to § 10(b) and Rule 10b-5 to

interpret this phrase is appropriate); Green 279 F.3d at 597 ("To interpret [the phrase

"in connection with a purchase or sale of a covered security,"] we look to cases

interpreting identical language found in SEC Rule 10b-5 . . . and § 10(b) of the

Securities Exchange Act of 1934 . . . ."); Kircher v. Putnam Funds Trust, 403 F.3d

478, 482 (7th Cir. 2005) ("Every court of appeals to encounter SLUSA has held that

its language has the same scope as its antecedent in Rule 10b-5."), cert. granted in

part, 126 S. Ct. 979 (2006). As used in § 10(b) and Rule 10b-5, the phrase "in

connection with the purchase or sale of a covered security" is "construed 'not

technically and restrictively, but flexibly.'" Affiliated Ute Citizens of Utah v. United

States, 406 U.S. 128, 151 (1972) (quoting SEC v. Capital Gains Research Bureau,

Inc., 375 U.S. 180, 195 (1963)); see also Dabit, 126 S. Ct. at 1513 (noting that when

the Court has "sought to give meaning to [this] phrase in the context of § 10(b) and

Rule 10b-5, it has espoused a broad interpretation").

We first address whether the exchange of PMHC membership interests for

shares of PFG common stock qualifies as a "purchase or sale." The exchange of an

existing security for a new security can qualify as a "purchase or sale" under federal

securities laws. See, e.g., SEC v. Nat'l Sec., Inc., 393 U.S. 453, 465–68 (1969)

(concluding that shareholders of one company "purchased" shares in a new company

within the meaning of §10(b) and Rule 10b-5 by exchanging their old shares for

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shares in the new company in a merger transaction); Davidson v. Belcor, Inc., 933

F.2d 603, 606 (7th Cir. 1991) ("It is well-established that the exchange of shares

during a merger transaction constitutes the purchase or sale of securities for purposes

of Section 10(b) and Rule 10b-5."); Knauff v. Utah Constr. & Mining Co., 408 F.2d

958, 961 (10th Cir.) (noting that "purchase or sale" includes the exchange of shares

that occurs in a merger), cert. denied, 396 U.S. 831 (1969). Courts have looked to the

economic reality of a transaction to determine whether it qualifies as a "purchase or

sale." If a transaction results in "a fundamental transformation" of ownership

interests, "whether in terms of total assets represented . . . or in relative voting

power," it constitutes a "purchase or sale" as contemplated under federal securities

laws. Watts v. Des Moines Register & Tribune, 525 F. Supp. 1311, 1320 (S.D. Iowa

1981); see also In re Penn Central Sec. Litig., 494 F.2d 528, 534 (3d Cir. 1974)

(concluding that in a merger transaction in which "the original shareholders of each

corporation end up with stock in a substantially different company with substantially

different assets and prospects," a purchase or sale under federal securities laws has

occurred). On the other hand, if a transaction amounts to a mere internal restructuring

of a business entity with no material change in ownership interests or risks, it is not

a "purchase or sale." See, e.g., Rathborne v. Rathborne, 683 F.2d 914, 918–19 (5th

Cir. 1982) (observing that "arms-length stock-for-assets trade between two distinct

and independent corporations" constitutes a "purchase or sale," but holding that an

exchange of shares between a parent company and a wholly owned subsidiary

amounting to "a mere transfer between corporate pockets" does not (citations

omitted)); Watts, 525 F. Supp. at 1319 (holding that recapitalization was not a

"purchase or sale" when conversion of voting shares to nonvoting shares in

prescribed ratio reflected internal corporate management decision only incidentally

involving exchange of shares). 

With the approval of policyholders and the authorization of the Iowa

Commissioner of Insurance, PMHC developed a demutualization plan ensuring that

each Principal Life policyholder would receive a "fair and equitable" allocation of

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Sofonia also contends that SLUSA should not apply because the putative class

includes some individual policyholders who received something other than shares of

PFG common stock in the demutualization and thus were not "purchasers" of

"covered securities." This argument is foreclosed by the Supreme Court's recent

decision in Merrill Lynch, Pierce, Fenner & Smith v. Dabit, 126 S. Ct. 1503, 1515

(2006), holding that it is not "the identity of the plaintiffs," but the alleged conduct

of the defendants that "determine[s] whether the complaint alleges fraud 'in

connection with the purchase or sale' of securities." Accordingly, Sofonia cannot

avoid SLUSA's application by including some nonpurchasers or nonsellers of covered

securities in the putative class. 

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PFG common stock in exchange for his PMHC membership interest. Pursuant to this

plan, Sofonia and other policyholders exchanged their non-transferable membership

interests in PMHC for tangible, transferable, value-certain, shares of PFG common

stock. In making this exchange, the policyholders—including Sofonia—dramatically

altered the nature of their investment "from a non-liquid, non-property interest into

a concrete equity and ownership interest in a freely transferable security." Order of

the District Court at 14. This transaction was not a mere internal restructuring or

exchange of equivalent instruments, for the economic reality of the transaction

demonstrates that the policyholders purchased covered securities—PFG common

stock—in the transaction. The District Court did not err in reaching this conclusion.4

We have concluded that the exchange of PMHC membership interests for

shares of PFG common stock was a purchase of covered securities under SLUSA.

We must next determine whether Sofonia's claim that Appellees made false

statements in the PIB in order to induce policyholders to approve the demutualization

plan constitutes a claim under SLUSA that the false statements were made "in

connection with" the purchase of covered securities. Sofonia argues that his claims

do not allege misrepresentations "in connection with" the purchase of covered

securities because any purchase of securities in the demutualization was merely

"incidental" to his underlying theory of recovery—that Appellees used the

demutualization to improperly recapture the costs of the Grove class action

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settlement. Specifically, Sofonia contends that "[t]he presence of securities in this

case is incidental to [his] main concern, which is the wrongful recapture by Appellees

in the demutualization of the settlement benefits paid out by Appellees to the class

members in the [Grove] class action." Brief of Appellant at 12. As a result of

Appellees' false statements, Sofonia argues, he and other putative class members

received fewer shares of PFG common stock—and therefore less value—in the

demutualization than they were entitled to receive for their PMHC membership

interests. 

The crux of Sofonia's complaint is that Appellees made false statements in the

PIB to induce policyholders to approve the demutualization and that he and the other

putative class members did not receive fair value when they exchanged their

membership interests for shares of PFG common stock in the transaction. As noted

by the District Court, "The alleged fraudulent conduct was, therefore, an integral step

in [Sofonia's] exchange of his membership interest for PFG stock and the present

action satisfies the 'in connection with' requirement for SLUSA preemption." Order

of the District Court at 10; see also In re MetLife Demutualization Litig., 322

F. Supp. 2d. 267 (E.D.N.Y. 2004) (accepting without discussion that putative class

action alleging similar facts was a claim asserting fraudulent conduct "in connection

with the purchase or sale" of a covered security). Sofonia's complaint alleges that the

exchange of PMHC membership interests for shares of PFG common stock was the

means by which Appellees improperly recaptured the costs of the Grove settlement.

Any fraudulent statements allegedly made by Appellees to persuade policyholders to

approve this transaction most assuredly were made "in connection with" the

policyholders' purchase of PFG common stock. The District Court did not err in

reaching this conclusion.

During oral argument, we raised an issue not addressed by Sofonia or

Appellees before the District Court or in the parties' briefs to this court. Specifically,

we asked whether the McCarran-Ferguson Act, 15 U.S.C. §§ 1011–1015, prevents

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application of SLUSA in this case. Appellees moved to file a supplemental brief

addressing this issue. We grant that motion, the brief is before us, and we conclude

that the McCarran-Ferguson Act does not preclude application of SLUSA. 

The McCarran-Ferguson Act prevents application of federal law if (1) the

application would "invalidate, impair, or supersede" a state law; (2) the state law was

"enacted . . . for the purpose of regulating the business of insurance"; and (3) the

federal law does not "specifically relate[] to the business of insurance." Id. § 1012(b).

A claim only incidentally involving insurance is insufficient to trigger application of

the McCarran-Ferguson Act. Rather, the claim must involve a state law enacted with

the specific purpose of regulating the business of insurance in order to trigger

application of the McCarran-Ferguson Act. See Humana, Inc. v. Forsyth, 525 U.S.

299, 308 (1999) ("We reject any suggestion that Congress intended to cede the field

of insurance regulation to the States, saving only instances in which Congress

expressly orders otherwise."). Here, Sofonia asserts only state common-law claims

against Appellees. Sofonia contends that Appellees breached their fiduciary duties

to policyholders, engaged in fraud and misrepresentation, and were unjustly enriched

as a result. Because each of these claims is based on state common-law principles

and none of the claims implicates a state statute enacted specifically to regulate the

business of insurance, the McCarran-Ferguson Act does not prevent application of

SLUSA. See id. 

Nor does application of SLUSA to bar Sofonia's state common-law claims

interfere with Iowa's regulation of insurance company demutualizations. Under

Iowa's system for regulating the insurance business, policyholders like Sofonia and

other members of the putative class who objected to PMHC's demutualization plan

had ample opportunity to present their objections at a public hearing before the Iowa

Insurance Commissioner, see Iowa Code § 508B.7, and, if the policyholders were still

dissatisfied, to have pursued direct judicial review of the Insurance Commissioner's

final decision in the Iowa courts, see id. §§ 17A.19; 508B.14. We are satisfied that

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the application of SLUSA to Sofonia's state common-law claims does not "invalidate,

impair, or supersede any law enacted by [the State of Iowa] for the purpose of

regulating the business of insurance." 15 U.S.C. § 1012(b). 

For the foregoing reasons, we affirm the judgment of the District Court.

______________________________

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