FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CHARLES T. MADDEN; SHASHIDHAR 

ACHARYA, M.D.; ACHAUER FAMILY

LIMITED PARTNERSHIP, a limited

partnership; ANGELA ALLEVATO,

M.D.; ROBERT A. BAIRD, M.D.;

ANNETTE C. BERNHUT-CAPLIN,

D.O.; THOMAS W. BRODERICK,

M.D.; NANCY K. BROWNELL, M.D.;

DAWN LYNN BRUNER, M.D.;

ROBERT BUDMAN, M.D.; ROBERT

WILLIAM BUSTER, M.D.; MICHAEL

W. C No.07-15900 ATER, M.D.; ANNA LISA

CHAVEZ, M.D.; JANAK R. CHOPRA, D.C. No.

M.D.; RAMAN CHOPRA, M.D.;  CV-06-04886-JSW

GASTON CILLIANI, M.D.; CARMELITA ORDER AND

R. CO-CASQUEJO, M.D.; WILLIAM J. OPINION

COLLINS, M.D.; LEO H. CUMMINS,

M.D.; CHRISTINA K. ELLIOTT; MARK

H. ELLIS, M.D.; STANLEY P.

GALANT, M.D.; SHERWIN A.

GILLMAN, M.D. and BONNIE S.

GILLMAN, as Trustees for the

Gillman Community Property

Trust; KEITH L. GLADSTIEN, M.D.;

STUART M. GORDON; KENNETH E.

GRUBBS, D.O.; NORAH GUTRECHT,

M.D.; 

10577
THOMAS A. HRYNIEWICKI, M.D.; R. 

JUDD JESSUP; STANLEY KANOW,

M.D.; LEONARD FRANK KELLOGG

JR., M.D.; MARK E. KRUGMAN,

M.D.; LAWRENCE N. KUGELMAN;

SANDRA BARRY LIEBERMAN, as

successor in interest to Melvyn B.

Lieberman, M.D., Trustee for the

Melvyn B. Lieberman Trust; ALAN

MADERIOUS, M.D.; MARK C.

MARTEN; WILLIAM C. MCMASTER,

M.D.; MARIA E. MIÑON, M.D.;

JUDITH HARRISON-MONGE, M.D., as

Trustee for the Harrison-Monge

1996 Family Trust; RONALD W.

MORELAND; STANLEY K.

NAKAMOTO, M.D.; CHRISTOPHER C. 

OHMAN; KUSUM OHRI, M.D.; JACK

M. OSBORN, M.D.; RICHARD T.

PITTS, D.O.; NORMAN J. ROSEN,

M.D.; ERIC MURROW ROWEN,

M.D.; HELEN ROWEN, as Trustee

for the Rowen Family Trust Dated

May 5, 1982; MARK STEVEN

ROWEN; MARSHALL ROWEN, M.D.,

individually and as Trustee for the

Rowen Family Trust Dated May 5,

1982; SCOTT JEFFREY ROWEN,

M.D.; PRAVIN V. SHARMA, M.D.;

HAL S. SHIMAZU, M.D.; SIERRA

VENTURES V, L.P., a California

limited partnership; AISHA SIMJEE,

M.D.; JAMES B. TANANBAUM; 

10578 MADDEN v. COWEN & CO.
ALLAN G. WEISS; DANIEL L. 

WEISSBERG, M.D.; LINDA F.

WEISSBERG; LAURENCE D.

WELLIKSON, M.D.; ANGELA F.

WINTHEISER; and ALLAN WONG,

M.D.,

Plaintiffs-Appellants,

v. 

COWEN & COMPANY, a New York

limited partnership; SG COWEN

SECURITIES CORPORATION, a New

York corporation; COWEN

COMPANY, LLC, a Delaware

limited liability company,

Defendants-Appellees. 

Appeal from the United States District Court

for the Northern District of California

Jeffrey S. White, District Judge, Presiding

Argued and Submitted

November 21, 2008—San Francisco, California

Filed August 7, 2009

Before: Procter Hug, Jr., John T. Noonan, and

Sandra S. Ikuta, Circuit Judges.

Opinion by Judge Ikuta

MADDEN v. COWEN & CO. 10579
COUNSEL

Philip Borowsky, San Francisco, California, for the plaintiffsappellants.

Linda Goldstein, New York, New York, for the defendantsappellees 

ORDER

Judges Hug, Noonan, and Ikuta vote to deny Cowen’s petition for rehearing. Judge Ikuta votes to deny Cowen’s petition

for rehearing en banc, and Judges Hug and Noonan so recommend. The full court has been advised of the petition for

rehearing en banc and no judge has requested a vote on

whether to rehear the matter en banc. See Fed. R. App. P. 35.

Cowen’s petition for rehearing and petition for rehearing en

banc are therefore denied.

The opinion filed February 11, 2009, appearing at 556 F.3d

786, is hereby withdrawn. A superseding opinion will be filed

simultaneously with this order. Further petitions for rehearing

or rehearing en banc may be filed. 

OPINION

IKUTA, Circuit Judge:

Sixty-three shareholders brought a state-law action against

an investment bank for misleading them in connection with

the sale of their closely held corporation to a publicly traded

acquiring corporation. The suit was removed to federal district court under the Securities Litigation Uniform Standards

Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227

(“SLUSA”), which allows for the removal and preclusion1 of

1The Supreme Court recently explained that SLUSA precludes, rather

than preempts, state law claims: “The preclusion provision is often called

10584 MADDEN v. COWEN & CO.
“private state-law ‘covered’ class actions alleging untruth or

manipulation in connection with the purchase or sale of a

‘covered’ security.” Kircher v. Putnam Funds Trust, 547 U.S.

633, 636-37 (2006) (quoting 15 U.S.C. § 77p(b)).2 The district

court held that the suit was properly removed and precluded

under SLUSA. We conclude that the district court erred by

applying the wrong legal standard to determine whether Madden’s suit was preserved by SLUSA’s savings clause (known

as the “Delaware carve-out”), and we remand to the district

court so that it can apply the correct standard.

I

Charles T. Madden, along with sixty-two other individuals

and entities (collectively, “Madden”), brought a state-law

action in state court against Cowen & Company, SG Cowen

Securities Corporation, and Cowen and Company, LLC (collectively, “Cowen”). Madden and his fellow plaintiffs, most

of whom are physicians, owned a majority interest in St.

Joseph Medical Corporation, which in turn owned a controlling share in Orange Coast Managed Care Services. Both St.

Joseph and Orange Coast were closely held corporations. St.

Joseph was incorporated in California, and Orange Coast in

Delaware. The following facts are taken from the allegations

in Madden’s complaint: 

In 1997, the management of St. Joseph and Orange Coast

a preemption provision; the Act, however, does not itself displace state

law with federal law but makes some state-law claims nonactionable

through the class action device in federal as well as state court.” Kircher

v. Putnam Funds Trust, 547 U.S. 633, 636 n.1 (2006). 

2SLUSA amended section 16 of the Securities Act of 1933 (“1933

Act”), codified at 15 U.S.C. § 77p, and made a substantially identical

amendment to section 28(f) of the 1934 Act, codified at 15 U.S.C.

§ 78bb(f). For simplicity, we follow Kircher and cite to the relevant provision in the 1933 Act, 15 U.S.C. § 77p, except as noted. See 547 U.S. at

637 n.3. 

MADDEN v. COWEN & CO. 10585
sought a buyer for the two companies and formed a “Special

Committee” for that purpose. The Special Committee, which

included members of the boards of directors of St. Joseph and

Orange Coast, retained Cowen, an investment bank, to look

for prospective buyers, give advice regarding the structure of

any potential sale, and render a “fairness opinion” regarding

any proposed transaction. Cowen’s contract provided that it

would receive a $50,000 retainer fee plus 1% of any sale

price, payable in cash.

Cowen found four possible buyers, two of which are relevant here. St. Joseph’s Hospital of Orange County, already a

part-owner of Orange Coast, offered $40 million ($30 million

in cash and a $10 million note). FPA Medical Management,

a publicly traded corporation, offered shares of its stock valued at $66.5 million. Cowen recommended FPA as the buyer,

and St. Joseph and Orange Coast began exclusive negotiations

with FPA. In January 1998, these discussions resulted in an

agreement on the terms of a merger. Under the merger agreement, FPA would acquire all outstanding shares of St. Joseph

and Orange Coast. In exchange, FPA would issue shares of its

stock valued at $60 million to St. Joseph and Orange Coast

shareholders. Cowen concluded that this transaction would be

financially fair to the shareholders of Orange Coast and St.

Joseph.

On January 13, 1998, the boards of directors of Orange

Coast and St. Joseph approved the merger agreement. A week

later, the agreement was executed by the boards of directors

of St. Joseph and Orange Coast, although it had not yet been

approved by St. Joseph’s and Orange Coast’s shareholders.

On February 5, 1998, Cowen issued a letter memorializing its

fairness opinion. FPA then filed a registration statement for

the new stock that it would issue to Madden under the terms

of the merger agreement.3 The registration statement, which

3A registration statement is a statutorily required document that must be

approved by the SEC before an issuer can lawfully sell securities. See SEC

v. Phan, 500 F.3d 895, 901-02 (9th Cir. Cal. 2007); see also Sec. & Exch.

Comm’n, Securities Offering Reform, 85 S.E.C. Docket 2871, 2005 WL

1692642, *17 (Aug. 3, 2005) (discussing the pre-2005 offering process).

10586 MADDEN v. COWEN & CO.
included Cowen’s fairness letter and Cowen’s consent to the

inclusion of the letter in the registration statement, was

approved by the Securities and Exchange Commission (SEC)

on February 17, 1998. After receiving a copy of the registration statement and fairness letter, Madden voted in favor of

the merger agreement. The merger became effective on

March 20, 1998.

A few months later, on May 15, 1998, FPA issued a calamitous first-quarter report for 1998: earnings per share were 30

cents below expectation, and FPA’s share price tumbled 75%

in the next two trading days. Two months later FPA declared

bankruptcy, with a share price that was approximately 0.5%

of its value at the time of the merger agreement. Madden

agreed with Cowen to toll the statute of limitations so that

Madden could first sue FPA’s management, auditor, and

financial advisor in California court. Those defendants

removed the action to federal district court; FPA’s management settled, and the district court entered judgment in the

remaining defendants’ favor. We upheld the grant of summary judgment on appeal. Madden v. Deloitte & Touche,

LLP, 118 F. App’x 150, 153-54 (9th Cir. 2004). Madden then

brought the present action against Cowen in California court,

alleging that Cowen committed negligent misrepresentation

and professional negligence under California law. Cowen

removed the action to federal district court. Applying SLUSA,

the district court denied Madden’s motion to remand to state

court and granted Cowen’s motion to dismiss. Madden timely

appealed.

II

SLUSA is part of a recent congressional attempt to rein in

private securities litigation. Section 10(b) of the Securities

and Exchange Act of 1934 (“1934 Act”), 15 U.S.C. § 78j(b),

and Rule 10b-5 of the SEC’s regulations, 17 C.F.R.

§ 240.10b-5, broadly prohibit “deception, misrepresentation,

and fraud in connection with the purchase or sale of any

MADDEN v. COWEN & CO. 10587
security,” Merrill Lynch, Pierce, Fenner & Smith Inc. v.

Dabit, 547 U.S. 71, 78 (2006) (internal quotation marks omitted).4

 The Supreme Court has long recognized an implied private right of action under these provisions. See id. at 79

(citing Superintendent of Ins. of N.Y. v. Bankers Life & Cas.

Co., 404 U.S. 6 (1971)).

In 1995, Congress adopted “legislation targeted at perceived abuses of the class-action vehicle in litigation involving nationally traded securities.” Dabit, 547 U.S. at 81. The

Private Securities Litigation Reform Act of 1995 (“Reform

Act”), 109 Stat. 737 (codified at 15 U.S.C. §§ 77z-1 and 78u4), was intended “to deter or at least quickly dispose of” abusive class actions, particularly those alleging violations of

Section 10(b), by limiting the potential liability of defendants

and by requiring plaintiffs who bring private securities fraud

actions in federal court to surmount a number of procedural

hurdles. See Dabit, 547 U.S. at 81-82. However, rather “than

face the obstacles set in their path by the Reform Act, plaintiffs and their representatives began bringing class actions

under state law, often in state court.” Id. at 82. In response to

this unintended consequence of the Reform Act, Congress

enacted SLUSA to “stem this shift from Federal to State

courts and prevent certain State private securities class action

lawsuits alleging fraud from being used to frustrate the objectives of the Reform Act.” Id. (internal quotation marks and

alterations omitted).

4Section 10(b) and Rule 10b-5 make it unlawful to “use or employ, in

connection with the purchase or sale of any security . . . any manipulative

or deceptive device or contrivance,” 15 U.S.C. § 78j(b), and to “make any

untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading,” 17 C.F.R.

§ 240.10b-5(b). Because Rule 10b-5 “is coextensive with,” and in fact

cabined by, the scope of Section 10(b), SEC v. Zandford, 535 U.S. 813,

816 n.1 (2002), we refer to Section 10(b) and Rule 10b-5 collectively as

“Section 10(b).” 

10588 MADDEN v. COWEN & CO.
[1] SLUSA sought to achieve these goals by generally precluding “covered class actions” alleging fraud or misrepresentation under state law in connection with “covered securities.”

SLUSA’s preclusion provision states:

No covered class action based upon the statutory or

common law of any State or subdivision thereof may

be maintained in any State or Federal court by any

private party alleging—

(1) an untrue statement or omission of a

material fact in connection with the purchase or sale of a covered security; or 

(2) that the defendant used or employed any

manipulative or deceptive device or contrivance in connection with the purchase or

sale of a covered security. 

15 U.S.C. § 77p(b). 

[2] The breadth of this preclusion provision is limited in

several respects. It applies only to a “covered class action,”

which, as relevant here, is defined as an action in which

“damages are sought on behalf of more than 50 persons.” Id.

§ 77p(f)(2)(A)(i). The preclusion provision is also limited to

actions involving a “covered security,” which is defined as a

security “traded nationally and listed on a regulated national

exchange,” Dabit, 547 U.S. at 83, “at the time during which

it is alleged that the misrepresentation, omission, or manipulative or deceptive conduct occurred.” Id. § 77p(f)(3) (crossreferencing the statutory definition of “covered security” in

§ 77r(b)). 

Additionally, SLUSA contains a savings clause that preserves certain types of state-law claims that would otherwise

be subject to its preclusion provision. Relevant here is the

Delaware carve-out, § 77p(d), which provides that a private

MADDEN v. COWEN & CO. 10589
party may bring a covered class action “based upon the statutory or common law of the State in which the issuer is incorporated (in the case of a corporation) or organized (in the case

of any other entity),” id. § 77p(d)(1)(A), if the action

involves: 

(i) the purchase or sale of securities by the issuer or

an affiliate of the issuer exclusively from or to holders of equity securities of the issuer; or

(ii) any recommendation, position, or other communication with respect to the sale of securities of the

issuer that—

(I) is made by or on behalf of the issuer or

an affiliate of the issuer to holders of equity

securities of the issuer; and 

(II) concerns decisions of those equity holders with respect to voting their securities,

acting in response to a tender or exchange

offer, or exercising dissenters’ or appraisal

rights.

Id. § 77p(d)(1)(B).

To prevent actions precluded by SLUSA from being litigated in state court, SLUSA authorizes defendants to remove

such actions to federal court, effectively ensuring that federal

courts will have the opportunity to determine whether a state

action is precluded.5 As the Supreme Court has explained, any

5Section 77p(c) provides: 

Any covered class action brought in any State court involving a

covered security, as set forth in subsection (b) [15 U.S.C.

§ 77p(b), SLUSA’s preclusion provision], shall be removable to

the Federal district court for the district in which the action is

pending, and shall be subject to subsection (b). 

Id. § 77p(c). 

10590 MADDEN v. COWEN & CO.
suit removable under SLUSA’s removal provision, § 77p(c),

is precluded under SLUSA’s preclusion provision, § 77p(b),

and any suit not precluded is not removable. See Kircher, 547

U.S. at 644; see also Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116, 131-32 (2d Cir. 2003) (Newman, J., concurring) (noting that SLUSA’s removal and

preclusion provisions are “opposite sides of the same coin”).

If a federal court determines that an action is not precluded,

it “has no jurisdiction to touch the case on the merits, and the

proper course is to remand to the state court that can deal with

it.” Kircher, 547 U.S. at 644. Likewise, if a federal court “determines that the action may be maintained in State court pursuant to” the Delaware carve-out, “the Federal court shall

remand such action to such State court.” 15 U.S.C.

§ 77p(d)(4). We review de novo the district court’s denial of

a motion to remand a removed case. See Patenaude v. Equitable Life Assur. Soc’y of the United States, 290 F.3d 1020,

1023 (9th Cir. 2002).

III

The question presented in this case is whether Madden’s

complaint, which alleged state-law claims and was filed in

state court, is a covered class action that is both (1) precluded

by § 77p(b) of SLUSA and (2) not saved from preclusion by

the Delaware carve-out, § 77p(d).

A

Madden’s action will fall within SLUSA’s preclusion provision if the action is (1) a “covered class action” (2) “based

upon the statutory or common law” of any state (3) being

maintained by “any private party,” and if the action alleges

(4) either “an untrue statement or omission of material fact”

or “that the defendant used or employed any manipulative or

deceptive device or contrivance” (5) “in connection with the

purchase or sale” (6) of a “covered security.” 15 U.S.C.

§ 77p(b). 

MADDEN v. COWEN & CO. 10591
[3] Madden does not dispute that his suit is a “covered class

action,” id. § 77p(f)(2), that his suit is based upon state law,

or that the plaintiffs are private parties. It is also undisputed

that Madden’s suit alleges Cowen’s fairness opinion contained misrepresentations and therefore qualifies as an action

“alleging” either an “untrue statement or omission of material

fact” or “a manipulative or deceptive device or contrivance”

for purposes of § 77p(b). Thus the questions before us are: (1)

whether Cowen’s alleged misrepresentations were “in connection with the purchase or sale of” the FPA securities, and (2)

whether those FPA securities were “covered securities”

within the meaning of SLUSA.

1

[4] We begin by considering whether Cowen’s alleged misrepresentations were “in connection with the purchase or sale

of” the FPA securities. We construe the phrase “in connection

with the purchase or sale” of securities in SLUSA the same

way we construe it in the Section 10(b) context. See Dabit,

547 U.S. at 88-89. Under our Section 10(b) cases, a misrepresentation is “in connection with” the purchase or sale of

securities if there is “a relationship in which the fraud and the

stock sale coincide or are more than tangentially related.” Falkowski v. Imation Corp., 309 F.3d 1123, 1131 (9th Cir. 2002);

accord Dabit, 547 U.S. at 85 (noting the “broad construction

adopted by both this Court and the SEC” of “in connection

with”). We construe the phrase “purchase or sale” of securities to include a stock-for-stock merger. See SEC v. Nat’l Sec.,

Inc., 393 U.S. 453, 467-68 (1969).

Madden’s complaint alleges that Cowen made misrepresentations to the shareholders of St. Joseph and Orange Coast to

secure their approval of the stock-for-stock merger with FPA.

Specifically, the complaint alleges that Madden “relied on

[Cowen’s] representations because they caused Plaintiffs to

vote to approve the merger transaction and to consent to

receive FPA stock in place of their existing Orange Coast and

10592 MADDEN v. COWEN & CO.
St. Joseph stock.” The complaint further alleges that Madden

“would not have done so absent Defendants’ fairness opinion,

distributed to Plaintiffs with Cowen’s express consent, that

the transaction was fair, from a financial point of view, to

Plaintiffs as shareholders of Orange Coast and St. Joseph.” As

a result of approving the merger agreement, the “Plaintiffs

suffered damage in the full amount of the promised value of

the FPA shares they received, approximately $40 million.”

Finally, the complaint alleges: “Cowen could have prevented

the damage to Plaintiffs if it had correctly carried out its

duties, by obtaining and disclosing the information available

to it that raised grave questions about FPA’s financial condition, and by urging serious consideration of the cash bid by

St. Joseph’s Hospital of Orange. But Cowen failed to do so.”

[5] Because the complaint alleges that Cowen made misrepresentations to the shareholders of St. Joseph and Orange

Coast to secure their approval of the stock-for-stock merger

with FPA, we conclude that the misrepresentations and omissions alleged in the complaint “are more than tangentially

related” to Madden’s “purchase” of the FPA securities. Falkowski, 309 F.3d at 1131. Cowen’s alleged misrepresentations

were therefore “in connection with the purchase or sale of”

the FPA securities.

Citing Falkowski and Green v. Ameritrade, Inc., 279 F.3d

590 (8th Cir. 2002), Madden argues that such a conclusion is

erroneous because his complaint made a state-law tort claim

not related to the purchase and sale of covered securities. In

Falkowski, we considered a state-law complaint bringing two

different sets of claims based on distinct factual allegations.

First, the complaint made fraud claims based on allegations

that the defendant employer had made misrepresentations to

the employees regarding the value of the company’s stock and

the employees’ stock options. Second, the complaint made

breach-of-contract claims based on allegations that the

employer had breached the employees’ stock-option contract

by treating the employees’ options as forfeited when the

MADDEN v. COWEN & CO. 10593
employees were transferred to another company. See 309 F.3d

at 1127, 1131. We held that the fraud claims were precluded

by SLUSA because they “involve[d] a misrepresentation

about the value of the options,” but that the employees could

proceed with their breach-of-contract claims, which did not.

Id. at 1131. Similarly, in Green, the Eighth Circuit held that

SLUSA did not preclude a class action brought by an

Ameritrade subscriber who alleged that “he did not receive

the type of information from Ameritrade for which he

believed he had contracted and paid twenty dollars monthly.”

279 F.3d at 598. In both Falkowski and Green, the plaintiffs

made distinct breach-of-contract claims that did not allege

misrepresentations in connection with the purchase and sale

of securities, and therefore such claims were not precluded by

SLUSA. 

According to Madden, his complaint similarly alleges a distinct state-law claim: that Cowen committed malpractice by

failing to give good advice during the period when Madden

was considering the cash offer from St. Joseph’s Hospital of

Orange County. To the extent Cowen’s alleged bad advice did

not relate to a transaction involving a covered FPA security,

Madden argues, Cowen’s professional negligence was not “in

connection with” Madden’s later acceptance of FPA’s securities, and therefore this claim is not precluded by SLUSA. 

[6] We disagree, because Madden’s complaint cannot be

read as making a distinct claim that Cowen committed professional negligence by failing to advise Madden to take the cash

offer. Rather, the complaint references the offer from St.

Joseph’s Hospital of Orange County only to highlight

Cowen’s error in promoting the FPA offer as a better alternative. Indeed, the complaint claims damages measured by “the

full amount of the promised value of the FPA shares” rather

than by the lost value of the cash offer or the fees paid

Cowen. Because Madden’s complaint does not allege a statelaw professional negligence claim distinct from Madden’s

central allegation that Cowen’s misrepresentations resulted in

10594 MADDEN v. COWEN & CO.
Madden’s purchase of the FPA securities, we reject Madden’s

argument that we must construe all or part of his complaint

as raising a distinct state-law claim not precluded by SLUSA.

2

[7] Having determined that Madden’s action meets the

requirement that it allege a misrepresentation “in connection

with the purchase and sale” of the FPA securities, we must

next address whether the FPA securities were “covered

securit[ies]” as defined in § 77p(f)(3). Section 77p(f)(3)

defines a “covered security” as one that (1) “satisfies the standards for a covered security” (2) “at the time during which it

is alleged that the misrepresentation, omission, or manipulative or deceptive conduct occurred.” 15 U.S.C. § 77p(f)(3).

The first prong of this definition is explained in

§ 77r(b)(1)(A): any security “listed, or authorized for listing,

on the . . . Nasdaq Stock Market” satisfies the standards for

a covered security. Id. § 77r(b)(1)(A). In order to interpret the

second prong correctly, we must read the definition of “covered security” in § 77p(f)(3) in light of SLUSA’s preclusion

provision in § 77p(b). Specifically, we must determine

whether the complaint alleges an “untrue statement or omission of material fact” or “a manipulative or deceptive device

or contrivance” in connection with the purchase or sale of a

security, id. § 77p(b), where that security “[1] satisfies the

standards for a covered security . . . [2] at the time during

which it is alleged that the misrepresentation, omission, or

manipulative or deceptive conduct occurred,” id. § 77p(f)(3).

[8] The parties agree that the FPA securities “satisf[y] the

standards for a covered security” as of February 17, 1998. The

parties do not dispute that on that date the FPA securities

were registered with the SEC and authorized for listing on the

Nasdaq Stock Market. We therefore turn to the temporal element of the definition of “covered security,” i.e., whether the

securities were registered at the time the alleged misrepresentation “occurred.” Because the verb, “occurred,” is not

MADDEN v. COWEN & CO. 10595
defined in the statute, we look to the word’s plain meaning.

See Ariz. Health Care Cost Containment Sys. v. McClellan,

508 F.3d 1243, 1249 (9th Cir. 2007). The dictionary defines

“occur” to mean, among other things, to “present itself,”

“come to pass,” or “take place.” Webster’s Third New Int’l

Dictionary 1561 (2002). Accordingly, the FPA securities will

meet the temporal element of “covered securit[ies]” under

SLUSA if Madden’s complaint alleges that Cowen’s misrepresentation in connection with the purchase or sale of those

securities took place at a time during which the securities

were authorized for listing on the NASDAQ stock market. 

[9] We conclude that the FPA securities satisfy this definition. Madden’s complaint alleges that Cowen wrote a misleading fairness opinion that was then included in the

registration statement for the FPA securities. The complaint

further alleges that this registration statement was circulated

to St. Joseph and Orange Coast shareholders after the FPA

securities were registered with the SEC on February 17, 1998.

Madden does not dispute that the publication of Cowen’s

allegedly misleading fairness opinion in the FPA securities’

registration statement constituted an (alleged) “misrepresentation.” Madden’s complaint therefore alleges that a misrepresentation (i.e., the publication of Cowen’s allegedly

misleading fairness opinion in the registration statement) took

place after the FPA securities were registered. Also, for the

reasons explained above, this misrepresentation was “in connection with” Madden’s purchase of the FPA securities after

they became registered. Because Madden’s complaint alleges

that Cowen’s misrepresentation “occurred” during a period

when the FPA securities satisfied the standards for “covered

securit[ies]” under 15 U.S.C. § 77r(b)(1)(A), we conclude that

the FPA securities were “covered securit[ies]” under SLUSA.

Madden, however, argues that no misrepresentation

occurred for purposes of § 77p(f)(3), because Cowen is not

liable for the publication of its fairness opinion in the FPA

securities’ registration statement. According to Madden,

10596 MADDEN v. COWEN & CO.
Cowen cannot incur liability for this misrepresentation

because publication in the registration statement constituted

“non-culpable repetition by Orange Coast and St. Joseph of

misrepresentations that Cowen had made before that time.”

Madden relies on the tort-law doctrine of “indirect deception”

to support this theory, citing Shapiro v. Sutherland, 64 Cal.

App. 4th 1534, 1548 (Cal. App. 2d Dist. 1998). Under Shapiro, a person who makes a misrepresentation to a party who

then repeats it to a third party is not liable to the third party

unless “the maker intends or has reason to expect that its

terms will be repeated or its substance communicated to the

other, and that it will influence his conduct in the transaction

or type of transaction involved.” Id. (quoting Restatement

(Second) Torts § 533). 

[10] We disagree. To begin with, Madden’s complaint

alleges that Cowen expressly consented to the inclusion of its

fairness opinion in the FPA registration statement, and the

fairness opinion squarely recommended that the proposed

merger was fair to Madden as a shareholder of St. Joseph and

Orange Coast. If Shapiro‘s doctrine of indirect deception

applies to federal securities law,6 then Cowen could be held

liable if the complaint’s allegations are true, because Cowen

would have reason to expect that the terms of the fairness

opinion would be repeated to Madden and that they would

influence Madden’s conduct in the merger. Moreover, Madden offers no support for his assumption that a misrepresentation occurs under § 77p(f)(3) only if the defendant can be held

liable for the misrepresentation. Nothing in the definition of

“covered security” in § 77p(f)(3) involves a liability determination or requires a court to evaluate the merits of a plaintiff’s

claim that a defendant is liable for the misrepresentation.

Under the plain language of § 77p(f)(3), a security may meet

6We note that the construction of federal securities law is a matter of

federal, not state law, see Thompson v. Paul, 547 F.3d 1055, 1061 (9th

Cir. 2008), and so Cowen’s reliance on Shapiro is relevant only to the

extent that case informs federal law regarding securities fraud. 

MADDEN v. COWEN & CO. 10597
the definition of “covered security” so long as the security

was listed on the NASDAQ at the time the defendant’s

alleged misrepresentation occurred, regardless of the merits of

the plaintiff ’s claim based on that misrepresentation. 

[11] We have already explained why the publication of

Cowen’s allegedly misleading fairness opinion in the FPA

securities’ registration statement was a misrepresentation “in

connection with” Madden’s purchase of the FPA securities.

15 U.S.C. § 77p(b). Whether or not Cowen is liable for this

misrepresentation, it is undisputed that this alleged misrepresentation took place after the FPA securities “satisfie[d] the

standards for a covered security specified” in § 77r(b). We

therefore conclude that the FPA securities were “covered

securit[ies]” under SLUSA, id. § 77p(f)(3), and that Cowen’s

action is precluded under SLUSA unless the Delaware carveout applies. In light of this conclusion, we need not address

Cowen’s alternative argument that Madden is collaterally

estopped from arguing that the FPA securities were not “covered securities” by our memorandum disposition in Madden

v. Deloitte & Touche, LLP, 118 F. App’x 150 (9th Cir. 2004).

B

[12] Madden alternatively argues that his suit survives

SLUSA’s preclusion provision, § 77p(b), because it falls

within a subsection of the Delaware carve-out,

§ 77p(d)(1)(B)(ii). For Madden’s suit to qualify under this

subsection, it must (1) involve a “communication with respect

to the sale” of the issuer’s securities and (2) be “based on the

law of the” state in which “the issuer” is incorporated; the

communication also must have been (3) “made by or on

behalf of” the issuer or its affiliate (4) to the shareholders of

the issuer (5) “concern[ing]” specified shareholder decisions,

including a “response to a tender or exchange offer.” 15

U.S.C. § 77p(d)(1)(A), (B)(ii).

Madden asserts that Cowen’s allegedly misleading fairness

opinion is a “communication with respect to the sale” of St.

10598 MADDEN v. COWEN & CO.
Joseph’s and Orange Coast’s securities. According to Madden, St. Joseph and Orange Coast are “issuer[s]” under

§ 77p(d)(1)(B)(ii) because they were the issuers of the securities that were sold to FPA in response to FPA’s exchange

offer. Madden further argues that because he brought his negligent misrepresentation and professional negligence claims

under the law of California, the state of incorporation of St.

Joseph, and because such claims are also recognized in Delaware, the state of incorporation of Orange Coast, his suit is

“based on the law of the” states in which both St. Joseph and

Orange Coast are incorporated. Finally, Madden argues that

Cowen’s fairness opinion was a communication “made by or

on behalf of” St. Joseph and Orange Coast to their shareholders concerning the shareholders’ response to FPA’s exchange

offer, because Cowen was retained by St. Joseph’s and

Orange Coast’s management to make such a communication.

Cowen disputes Madden’s arguments as follows: First,

Cowen argues that neither St. Joseph and Orange Coast are

“issuers” within the meaning of the Delaware carve-out. Second, Cowen argues that Madden’s action is not “based on the

law of” Delaware, the state in which Orange Coast is incorporated. Third, Cowen argues that it was not acting “on behalf

of” either Orange Coast or St. Joseph when it provided its

fairness opinion. We consider each of these issues in turn.

1

Cowen first argues that neither St. Joseph nor Orange Coast

is “the issuer” for purposes of the Delaware carve-out because

neither was the issuer of the “covered security” in this case.

According to Cowen, only FPA can be “the issuer” for purposes of the Delaware carve-out. Cowen reasons that the Delaware carve-out, § 77p(d), refers to “the issuer” rather than

“an issuer,” and contends that “the issuer” must refer to the

issuer of the “covered security” referred to in SLUSA’s preclusion provision, § 77p(b). Otherwise, Cowen argues, the

definite article in “the issuer” would have no antecedent.

MADDEN v. COWEN & CO. 10599
Cowen also notes that in Dabit the Supreme Court described

the Delaware carve-out as applying to “class actions based on

the law of the State in which the issuer of the covered security

is incorporated.” 547 U.S. at 87 (emphasis added). Under

Cowen’s interpretation of § 77p(d), the Delaware carve-out

would apply only to FPA and not to St. Joseph, which as a

closely held corporation was not an issuer of covered securities. In this case, Cowen argues, the Delaware carve-out

would preserve only suits involving communications to FPA

shareholders concerning their decisions in voting their FPA

securities. Because Madden’s action does not involve communications to FPA shareholders, Cowen argues that the Delaware carve-out is inapplicable to Madden’s suit. 

[13] We disagree. As noted above, we start with the plain

language of the statute. See Ariz. Health Care, 508 F.3d at

1249. The Delaware carve-out does not use the phrase “issuer

of the covered securities.” Rather, the Delaware carve-out

refers only to “securities” or “equity securities.” 15 U.S.C.

§ 77p(d)(1)(B). SLUSA does not define the word “issuer” to

mean “issuer of the covered securities,” nor does SLUSA’s

preclusion provision, § 77p(b), refer to an “issuer of covered

securities” or any similar phrase. Thus, contrary to Cowen’s

argument, there is no clear antecedent to the phrase “the issuer” in the Delaware carve-out. Moreover, the significance of

the word “the” before “issuer” in the version of the Delaware

carve-out added to the 1933 Act is questionable, given that

SLUSA’s nearly identical Delaware carve-out in the 1934 Act

refers to both “the issuer” and “an issuer.” See 15 U.S.C.

§ 78bb(f)(3)(A)(ii)(II) (providing that the Delaware carve-out

applies to a covered class action that involves “any recommendation, position, or other communication with respect to

the sale of securities of an issuer“ that meets certain criteria)

(emphasis added). If the choice of the word “the” instead of

“an” had substantive meaning, we would expect that the word

“the” would have been used consistently in two otherwise

identical amendments. Cf. Kircher, 547 U.S. at 637 n.3 (noting that SLUSA amends the 1933 Act and 1934 Act “in sub10600 MADDEN v. COWEN & CO.
stantially identical ways”). Accordingly, we conclude that the

plain language of § 77p(d) allows a shareholder to bring a

covered class action under state law against any “issuer” that

has made certain communications regarding the sale of its

“securities,” and that these securities need not be the “covered

securit[ies]” referred to in § 77p(b). Also, though we do not

rely on legislative history in construing this unambiguous statutory language, see Lamie v. U.S. Trustee, 540 U.S. 526, 534

(2004), we note our disagreement with Cowen’s argument

that SLUSA’s legislative history suggests a congressional

intent to limit the Delaware carve-out to suits against issuers

of “covered securities.” The public debate surrounding Congress’s addition of the Delaware carve-out weighs against

Cowen’s interpretation. The testimony before Congress when

it inserted the Delaware carve-out into SLUSA suggests that

the purpose of § 77p(d) was to preserve state-law actions

brought by shareholders against their own corporations in

connection with extraordinary corporate transactions requiring shareholder approval, such as mergers and tender offers,

regardless whether the corporations issued nationally traded

securities.7

7

See, e.g., Securities Litigation Uniform Standards Act of 1997: Hearing on S. 1260 Before the S. Comm. on Banking, Housing, and Urban

Affairs, Subcomm. on Securities, 105th Cong. 48 (Oct. 29, 1997) (statement of SEC Chairman Arthur Levitt and Commissioner Isaac Hunt,

Securities and Exchange Commission) (expressing concern that the version of SLUSA originally introduced in the Senate “could preempt state

class actions for damages based on material misstatements or omissions in

proxy and tender offer materials in connection with an extraordinary corporate transaction”); Securities Litigation Uniform Standards Act of 1997:

Hearing on H.R. 1689 Before the H. Comm. on Commerce, Subcomm. on

Finance and Hazardous Materials, 105th Cong. 64 (May 19, 1998) (testimony of Jack Coffee) (noting the important role of state class actions in

the area of mergers and corporate reorganization and approving of the

Senate’s addition of the Delaware carve-out as an “attempt[ ]” to “carve

back into the statute a role for the Delaware courts, and the courts of other

States, to deal with fundamental questions of corporate governance”). 

MADDEN v. COWEN & CO. 10601
Nor does the Supreme Court’s passing reference in Dabit

to one type of class action covered by the Delaware carve-out

require us to adopt a different reading. See 547 U.S. at 87

(noting that the Delaware carve-out applies to “class actions

based on the law of the State in which the issuer of the covered security is incorporated”). In context, the Court’s reference to the Delaware carve-out in Dabit is simply part of the

Court’s explanation that “the tailored exceptions to SLUSA’s

pre-emptive command demonstrate that Congress did not by

any means act ‘cavalierly’ ” in displacing state law. Id. Dabit

did not purport to limit the scope of the Delaware carve-out

to covered securities; it neither considered nor addressed

whether the Delaware carve-out preserves state-law shareholder class actions against issuers of securities that are not

nationally traded.

[14] Finally, interpreting the Delaware carve-out as Cowen

suggests would have illogical results. Under Cowen’s narrow

interpretation of “the issuer,” the Delaware carve-out would

not preserve shareholders’ state-law remedies against their

own corporation for misrepresentations in connection with a

merger if the shareholders’ corporation exchanged its noncovered securities for covered securities. The Delaware carveout would, however, potentially apply in other types of mergers (e.g., if the corporation exchanged covered for covered

securities or covered for non-covered securities), and

SLUSA’s preclusion provision would not apply at all if the

corporation exchanged non-covered for non-covered securities. This result is unreasonable and inconsistent with the Delaware carve-out’s purpose. Given that the plain language of

the statute leads to “a rational, common-sense result,” Ariz.

State Bd. for Charter Schools v. U.S. Dept. of Educ., 464 F.3d

1003, 1008 (9th Cir. 2006), and one consistent with the statute’s purpose, we read the term “the issuer” in the Delaware

carve-out to refer to the corporation that is the issuer of the

securities described in the Delaware carve-out, rather than

being limited to an issuer of a “covered security” defined in

15 U.S.C. § 77p(f)(3). Accordingly, both Orange Coast and

10602 MADDEN v. COWEN & CO.
St. Joseph could potentially be “the issuer” on whose behalf

Cowen made its alleged misstatements.

2

Alternatively, Cowen argues that even if St. Joseph could

be the relevant issuer for purposes of the Delaware carve-out,

Orange Coast cannot. Cowen argues that because Madden’s

suit was brought in California and based on California law, it

cannot be “based upon the statutory or common law of” Delaware, “the State in which [Orange Coast] is incorporated.” Id.

§ 77p(d)(1)(A). But Madden claims that his action against

Cowen is “based upon the statutory or common law of” Delaware. Id. According to Madden, he may meet this requirement

merely by establishing that Delaware allows shareholders of

acquired companies to bring negligent misrepresentation and

professional negligence actions against the responsible parties. In short, Madden argues that, for purposes of SLUSA, an

action is “based upon” the law of any state in which the

action’s claims would be cognizable. 

[15] We reject Madden’s argument as inconsistent with

SLUSA’s statutory language. Madden’s complaint is not

based on “the statutory or common law” of Delaware merely

because Madden could have brought a similar complaint in

Delaware. Madden’s complaint alleges only violations of California law, and does not refer to Delaware law or contain any

claims for violations of Delaware law. Nor does Madden suggest that a California court should apply Delaware law to its

action. A plaintiff suing in a California court bears the burden

of “invok[ing] the law of a jurisdiction other than California,”

Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180, 1187

(9th Cir. 2001), amended by 273 F.3d 1266 (9th Cir. 2001),

and Madden did not invoke Delaware law in his complaint. 

[16] Because claims are not “based on” the law of a state

when they do not refer to or rely on that state’s common or

statutory law, the Delaware carve-out does not preserve MadMADDEN v. COWEN & CO. 10603
den’s action to the extent it involves misrepresentations made

solely on behalf of Orange Coast.8 We therefore must address

whether Cowen’s alleged misstatements to St. Joseph’s shareholders were made “on behalf of” St. Joseph, a California corporation.

3

Cowen argues that even if St. Joseph is deemed to be “the

issuer” for purposes of the Delaware carve-out, Cowen did

not make any statement “on behalf of” St. Joseph. Because

the Delaware carve-out applies to misleading communications

“made by or on behalf of” an issuer to its shareholders,

Cowen asserts that Madden’s complaint does not fall within

the Delaware carve-out. See 15 U.S.C. § 77p(d)(1)(B)(ii)(I). 

The district court agreed, holding that a defendant makes a

statement “on behalf of” an issuer for purposes of the Delaware carve-out only if the defendant was an officer, director,

or employee of the issuer. In support of the district court’s

holding, Cowen points us to the Reform Act, which defines

the phrase “person acting on behalf of an issuer” to mean “an

officer, director, or employee of the issuer.” Id. § 77z-2(i)(6).

Cowen argues that it did not act on behalf of St. Joseph

because it is not an “officer, director or employee” of St.

Joseph.

Madden counters that we should not rely on the Reform

8As noted above, the Delaware carve-out also applies to communications that are “made by or on behalf of . . . an affiliate of the issuer to

holders of equity securities of the issuer.” 15 U.S.C. § 77p(d)(B)(ii)(I)

(emphasis added). But Madden does not argue that Cowen’s alleged misrepresentations qualified under § 77p(d)(B)(ii)(I) as a communication

made “by or on behalf of” Orange Coast as “an affiliate” of St. Joseph,

and so we do not address this issue here. See Ind. Towers of Wash. v.

Washington, 350 F.3d 925, 929 (9th Cir. 2003) (“Our circuit has repeatedly admonished that we cannot manufacture arguments for an appellant

. . . .” (internal quotation marks omitted)). 

10604 MADDEN v. COWEN & CO.
Act, which provided the definition of “on behalf of” in the

context of creating a safe harbor for those who make forwardlooking statements. Rather, Madden argues, we should rely on

the plain language of the statute, or alternatively on the SEC’s

regulations implementing the National Securities Market

Improvement Act, which provide that an offering document is

“prepared by or on behalf of the issuer” if the issuer: “(1)

Authorizes the document’s production, and (2) Approves the

document before its use.” 17 C.F.R. § 230.146(a). Madden

claims that this definition is preferable because it relates to

offering documents such as the registration statement at issue

in this case. See 15 U.S.C. § 77r. 

[17] Again, we must start with the plain language of the

statute. See Ariz. Health Care, 508 F.3d at 1249. Because

there is no definition of the phrase “on behalf of” in SLUSA

itself, “we consider whether there is an unambiguous common

sense meaning of the word that resolves the question” before

us. Id. The common sense meaning of “on behalf of,” according to the dictionary, is “in the interest of,” “as a representative of,” or “for the benefit of.” Webster’s Third New Int’l

Dictionary 198 (2002). Because the language in

§ 77p(d)(B)(ii)(I) has an unambiguous, common sense meaning, we see no need to look to other statutes that Congress

chose not to cross-reference. Accordingly, we conclude that

§ 77p(d)(B)(ii)(I) refers to an individual or entity that makes

a communication to an issuer’s stockholders in the interest of,

as a representative of, or for the benefit of the issuer. 

[18] According to Madden’s complaint, the management of

both Orange Coast and St. Joseph formed a Special Committee to “assess the opportunities for a strategic affiliation or

sale,” and it was through this Special Committee that “Orange

Coast and St. Joseph had retained Cowen for the purpose of

determining whether the transaction was fair, from a financial

point of view, to Plaintiffs as the shareholders of Orange

Coast and St. Joseph.” The complaint further alleges that the

boards of directors of both Orange Coast and St. Joseph

MADDEN v. COWEN & CO. 10605
approved the merger on the basis of Cowen’s fairness opinion, that Cowen allowed its fairness opinion to be incorporated in the registration statement that was distributed to St.

Joseph’s shareholders, and that St. Joseph’s shareholders

relied on the fairness opinion when voting in favor of the

merger. Under the common sense definition of “on behalf of,”

discussed above, Madden’s complaint sufficiently alleges that

Cowen’s communication was “on behalf of” St. Joseph for

purposes of the Delaware carve-out. 

Cowen argues that we should not rely only on the allegations in Madden’s complaint when the record contains a number of relevant documents supporting Cowen’s argument that

it was acting exclusively on behalf of Orange Coast. Specifically, Cowen points to its engagement letter, which defines

Orange Coast as “the company” to which Cowen would, if

requested, “render an opinion as to whether or not the financial terms of” a proposed transaction were fair. Cowen also

points to the fact that the fairness opinion itself was addressed

to Orange Coast, not St. Joseph or the Special Committee, and

that the registration statement instructed Orange Coast’s

shareholders to read the fairness opinion but made no similar

instruction addressed to St. Joseph’s shareholders. 

We agree with Cowen that our inquiry as to whether

Cowen was acting on behalf of St. Joseph is not limited to the

allegations in Madden’s complaint. We have held that a

“court may permit the defendant to support removal by supplementing the pleadings with additional evidence of

SLUSA’s applicability,” U.S. Mortgage, Inc. v. Saxton, 494

F.3d 833, 842 (9th Cir. 2007) (emphasis omitted), consistent

with the general rule that a removing defendant bears the burden of showing that it is properly in federal court, see Abrego

Abgrego v. Dow Chem. Co., 443 F.3d 676, 685 (9th Cir.

2006). 

[19] Here, the district court did not consider these additional documents because it applied the wrong legal standard

10606 MADDEN v. COWEN & CO.
for determining whether Cowen’s communication was made

“on behalf of” an issuer for purposes of the Delaware carveout, asking whether Cowen was “an officer, director, or

employee of St. Joseph or Orange Coast.” As we have

explained, the correct inquiry is whether Cowen’s fairness

opinion was a communication “on behalf of” St. Joseph

within the ordinary meaning of the phrase: that is, whether the

communication was made in the interest of, as a representative of, or for the benefit of St. Joseph. Because a district

court “may permit the defendant to support removal by supplementing the pleadings with additional evidence of

SLUSA’s applicability,” Saxton, 494 F.3d at 842 (emphasis

omitted), and because a district court has the discretion to

allow or not allow additional jurisdictional discovery, Abrego

Abrego, 443 F.3d at 692, we remand to the district court so

it can exercise its discretion, apply the correct legal standard,

and determine, in the first instance, whether Cowen’s fairness

opinion constituted a communication “on behalf of” St.

Joseph.

4

In light of our decision to remand this case to the district

court, we must also address the parties’ dispute over who

bears the burden of proving that Madden’s action is preserved

by the Delaware carve-out. In our decisions applying the

Class Action Fairness Act of 2005, Pub. L. 109-2, 119 Stat.

4 (2005), we have held that when a defendant removes a case

to federal court, the defendant bears the burden of proving

any prerequisites to federal jurisdiction, while the plaintiff

bears the burden of proving the existence of any “exceptions”

to the exercise of jurisdiction that “otherwise exists.” See Serrano v. 180 Connect, Inc., 478 F.3d 1018, 1020 & n.3 (9th

Cir. 2007). Applying this framework to SLUSA, we must

determine whether eligibility for the Delaware carve-out is a

prerequisite or exception to the district court’s exercise of

jurisdiction.

MADDEN v. COWEN & CO. 10607
[20] This question is answered by the Supreme Court’s

recent decision in Kircher, where the Supreme Court clarified

that a district court’s jurisdiction under SLUSA extends only

to actions that are not precluded. Kircher, 547 U.S. at 644. As

we previously noted, Kircher explained that “if the action is

precluded, neither the District Court nor the state court may

entertain it, and the proper course is to dismiss. If the action

is not precluded, the federal court likewise has no jurisdiction

to touch the case on the merits, and the proper course is to

remand to the state court that can deal with it.” Id. According

to the Court, “[t]here is no room for . . . a case to exist in a

limbo of colorable preclusion; if a claim is precluded, it may

not be maintained, and if the claim is not, the federal courts

no longer have any business being involved, as there is no

longer any federal question on which to moor the district

court’s jurisdiction.” 547 U.S. at 644 n.12 (alteration and

internal citation omitted).9

Accordingly, under Kircher, the district court has jurisdiction over Madden’s complaint under SLUSA’s removal provision only if the action is precluded. Madden’s complaint is

not subject to preclusion if it is preserved by the Delaware

carve-out. Thus the district court has jurisdiction over Madden’s complaint only if the Delaware carve-out is not applicable. Said otherwise, the non-applicability of the Delaware

carve-out is a prerequisite to the district court’s SLUSA jurisdiction. Because a removing defendant generally bears the

burden of showing that it is properly in federal court, see

Abrego Abgrego, 443 F.3d at 685, Cowen bears the burden of

proving that the Delaware carve-out is not applicable to Madden’s complaint. 

9This analysis assumes, as was the case in Kircher, that there is no separate basis for federal jurisdiction over the merits of the action. A state-law

diversity action, for example, might be properly brought in federal court

under 28 U.S.C. § 1332, in which case a federal court could reach the merits of the action if it were not precluded by SLUSA. See, e.g., Dabit, 547

U.S. at 75. 

10608 MADDEN v. COWEN & CO.
Cowen disagrees with this conclusion. It argues that the

applicability of the Delaware carve-out is an exception to

jurisdiction, and therefore Madden bears the burden of showing its applicability. Specifically, Cowen points to the language of SLUSA that instructs a federal court to remand an

action to state court if the district court determines that the

Delaware carve-out is applicable. 15 U.S.C. § 77p(d)(4) (“In

an action that has been removed from a State court pursuant

to subsection (c), if the Federal court determines that the

action may be maintained in State court pursuant to this subsection, the Federal court shall remand such action to such

State court.”). According to Cowen, this language demonstrates that a federal court has jurisdiction over a covered

class action meeting the requirements of § 77p(b), but must

nonetheless remand to state court under § 77p(d)(4) if the

Delaware carve-out is applicable.

This reading of § 77p(d), which would make the Delaware

carve-out an exception to jurisdiction rather than a prerequisite, is reasonable. Indeed, the Seventh Circuit adopted a similar reading of SLUSA in an analogous context, holding that

once a federal court has removal jurisdiction over an action

under SLUSA, it then has “adjudicatory competence” to consider the applicability of the Delaware carve-out and remand

if necessary. Kircher, 373 F.3d 847, 850 (7th Cir. 2004),

rev’d, 547 U.S. 633 (2006). If the carve-out is applicable, the

court reasoned, then the federal court does not dismiss for

lack of subject-matter jurisdiction but simply finishes its work

and “bow[s] out” by remanding the complaint to state court.

Id.

The trouble with this reasoning is that it was rejected by the

Supreme Court, which reversed the Seventh Circuit’s decision

in Kircher. The Supreme Court clarified that SLUSA gives a

federal court authority to do only two things with a removed

action: dismiss it as precluded or remand it to state court. 547

U.S. at 644. Under Kircher, there can be no “limbo of colorable preclusion,” id., in which a district court obtains jurisdicMADDEN v. COWEN & CO. 10609
tion over a complaint that meets the preclusion standards of

§ 77p(b) but must then exercise its jurisdiction by “bow[ing]

out” under § 77p(d)(4) if the complaint falls within the Delaware carve-out. 

[21] We conclude that the reasoning of Kircher does not

allow us to hold that the Delaware carve-out is an exception

to jurisdiction that otherwise exists. See Serrano, 478 F.3d at

1020 n.3. We therefore hold that the non-applicability of the

Delaware carve-out is a prerequisite to the district court’s

removal jurisdiction. Id. As such, on remand, Cowen must

bear the burden of establishing that Madden’s action is precluded because the Delaware carve-out does not apply.10

IV

In sum, we conclude that Madden’s suit is a covered class

action alleging a misrepresentation in connection with a covered security under 15 U.S.C. § 77p(b). Because Madden

brought his action under California law, rather than Delaware

law, the Delaware carve-out does not preserve Madden’s suit

to the extent it involves misrepresentations made on behalf of

Orange Coast. In light of our clarification of the meaning of

“on behalf of” under the Delaware carve-out, we remand this

case to allow the district court to determine, in the first

instance, whether Madden’s action involves a communication

made by Cowen on behalf of St. Joseph to St. Joseph’s shareholders. See 15 U.S.C. § 77p(d).

The judgment of the district court is therefore VACATED

and the case REMANDED for further proceedings consistent

with this opinion.

10Because we remand to the district court to determine whether it has

jurisdiction, we do not reach Cowen’s argument that Madden lacks standing under California state law to bring his professional negligence claim.

10610 MADDEN v. COWEN & CO.