## United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 08-2114

___________

Pet Quarters, Inc.; * Clyde A. Jester, an individual; * Michael Parnell, an individual; * Walter D. O'Hearn, Jr., an individual; * Demetri Betzios, an individual, *
* Plaintiffs – Appellants, *
* v. * * Appeal from the United States Depository Trust and Clearing * District Court for the Eastern Corporation; Depository Trust * District of Arkansas. Company; National Securities * Clearing Corporation, *
* Defendants – Appellees, *
* -------------------------- *
* North American Securities * Administrators Association, * Incorporated, *
* Amicus on Behalf of Appellant, *
* Securities and Exchange Commission, *
* Amicus on Behalf of Appellee. *

___________1 The Honorable Stephen N. Limbaugh, Jr., United States District Judge for the Eastern District of Missouri, sitting by designation.

2 The Honorable Rodney S. Webb, United St ates District Judge for the District of North Dakota, sitting by designation in the Eastern District of Arkansas.
- 2 - Submitted: January 16, 2009 Filed: March 9, 2009

___________ Before MURPHY and SMITH, Circuit Judges, and LIMBAUGH 1 , District Judge.

___________ MURPHY, Circuit Judge.

Pet Quarters, Inc., a pet supply busin ess, and several of its shareholders (collectively Pet Quarters) filed this dama ges action in Arkansas state court against Depository Trust and Clearing Corporation and its subsidiaries, Depository Trust Company (DTC) and National Securities Clearance Corporation (NSCC), self regulated organizations registered pursu ant to Section 17A amendments to the Securities Exchange Act of 1934 (Section 17A). 15 U.S.C. § 78q-1. Pet Quarters seeks $400 million in compensatory dama ges and punitive dama ges under state law, alleging that a program created and operated by the defendants with the approval of the Securities and Exchange Commission (the Commission) permits "naked short selling" which drove down the market price fo r its shares and eventually put it out of business. Defendants removed the case to federal court on th e basis of federal preemption, and the district court 2granted their subsequent motion to dismiss. Pet Quarters appeals, and we affirm.

I.

Pet Quarters claims it fell victim to a "death spiral" financing scheme by predator investors while it was trying to implement a capital intensive business plan.3 The Commission has recognized that manipulative short selling could pose problems for the markets and has taken steps to restrict or prohibit it in various situations. See Regulation SHO Proposed Releas e, SEC Rel. No. 34-48709, 68 Fed. Reg. 62972, 62975-78 (Nov. 6, 2003); Short Sales, SEC Rel. No. 34-50103, 69 Fed. Reg. 48008, 48009 (Aug. 6, 2004); Amendments to Regulation SHO, SEC Rel. No. 34-56212, 72 Fed. Reg. 45544 (A ug. 7, 2007); Emergency Order, SEC Rel. No. 34- 58166 (July 15, 2008). These public statem ents restrict the actions of market participants and do not affect the operati on of the clearing agencies, suggesting that the Commission believes manipulative short se lling is a marketplace issue rather than a clearing agency issue.
- 3 - As a small company it was susceptible to manipulation and control of its share price by investors who allegedly sold its shares "s hort." A short sale occurs when investors offer to sell shares which they do not ow n for less than the current trading price. Because there is generally a lag of several days between the trade date and the delivery or settlement date, th e seller profits if the share price drops and the seller is able to purchase shares for delivery at a price lower than the amount for which it agreed to sell.

Short sales can be interpre ted by investors as an indi cation that the share price of a stock will decline, and in some cases may actually cause th e decline. Successful death spiral investors deliberately push dow n the share price of a stock through short selling to profit from the decline. Such actions can eventually make the shares worthless. 3 Pet Quarters sued the outside financiers whom it alle ges engaged in a death spiral financing scheme against it in a different case now stayed for arbitration, Pet Quarters, Inc. v. Badian, et al. , No. 4:04-CV-697 (E.D. Ark. ). In the case before our court, Pet Quarters a lleges that the Stock Borrow Program (the program) created and operated by the defendants with the approval of the Commission facilitated the death spiral financing scheme whic h damaged the value of its stock.

DTC and NSCC are wholly owned subs idiaries of the holding company Depository Trust and Clearing Corporation, which in turn is owned by many financial- 4 - industry entities including the New York Stock Exchange. DTC and NSCC serve distinct functions, but together they provi de more securities settlement and clearing services than any other entity in the world.

Until 1975 stock sales involved delivery of the physical stock certificates to the buyer, typically through a web of brokers and dealers. As trading volumes increased and systems for clearing and settling stock transactions multiplied, physical transfer of stock certificates became impractical. In 1975 Congress added Section 17A to the Securities Exchange Act of 1934, which di rected the Commission "to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities," and to eliminate the physical movement of securities certificates among brokers and d ealers. 15 U.S.C. §§ 78q-1(a)(2)(A)(i), (e). Under the new system securities may be he ld directly through possession of a stock certificate or entry on the issuer's stock registry or indirectly by acquisition of a "security entitlement" from an intermediary such as a clearing company, bank, or broker dealer. UCC § 8-101. A security en titlement is a property interest entitling the holder to exercise all of the right s attached to the security. See UCC § 8-501(b), cmt. 1.

Section 17A also authorized the Commi ssion to register and regulate clearing agencies. Two of the agen cies registered and regulated by the Commission under this authority are defendants DTC and NSCC. DTC is the nation's principal securities depository; its nominee Cede & Co . is the direct holder of stock certificates for all of its members which include most securities brokers and dealers in the country and NSCC. DTC's automated system tracks tr ansfers of indirect security entitlement positions among its members, eliminating the need to transfer the physical stock certificates.

NSCC provides centralized clearance, settle ment, and information services for virtually all securities transactions in the United States. When a security's ownership- 5 - changes hands, NSCC acts as the intermediary between buyer and se ller. It verifies the transaction information and assumes the rights and obligations of buyers and sellers to receive, pay for, and deliver s ecurities. NSCC Rules & Procedures, Rule 11 §§ 1(b)-(c),(e), Procedure VII(A ). NSCC clears the trades through its continuous net settlement system, which nets each member's purchases and sales of a given security at the end of each day. For example, the NSCC account for a member who purchased 800 shares and sold 1800 shares of Pet Qu arters in one day would reflect a net obligation to deliver 1000 Pet Quarters sh ares to NSCC. NS CC Rules & Procedures, Procedure VII(c)(1).

At the close of business on the settlement date, typically three days after the trade date, NSCC instructs DTC to deliversecurities from the selling member's DTC account to NSCC's account to satisfy the ob ligation. On that same date, NSCC instructs DTC to deliver securities from its account to the accounts of those members who made net purchases of a security on a given trade date and therefore have the right to receive security entitlements from NSCC. See NSCC Rules & Procedures, Rule 11 §§ 3-4.

In theory these transactions should be completed in one day, but sometimes a member "fails to deliver" shares of a s ecurity to NSCC because it does not have the shares in its DTC account. There can be several reasons for this failure, including administrative problems or uncovered "naked short sales." In a "covered short sale," the seller offers to sell a security he doe s not own but arranges to borrow the security from a broker to meet his potential delivery obligation. If someone buys the offered shares, the seller delivers th e borrowed shares to the buyer and then purchases shares in the same entity to return to the broker within the agreed time period. In a naked short sale, however, the seller offers to se ll a security which he does not own and has not arranged to borrow. In some cases the seller will not deliver the security by the settlement date; this failure to deliverleaves the seller with an open position.- 6 - Before 1981, a buyer who was the victim of a failure to deliver could wait for the seller to cure the failure through delivery, or could buy the stock on the open market and charge the seller for the differe nce between the agreedprice and the price the buyer paid in the market. NSCC creat ed the automated Stock Borrow Program in 1981 to cover such failures to deliver. Under this programthe seller can electronically borrow the number of shares of undeliveredstock from other members' accounts and deliver the borrowed shares to the purchaser. The rule s governing the program were developed by NSCC and approved by the Commissi on under its Section 17A authority.

According to the Stock Borrow Programrules, a member who wishes to participate in the program notifies NSCC daily which securitie s it has on deposit at DTC that it is making available to the program . If a seller fails to deliver shares of a security by the settlement date, NSCC's acc ount will not have enough shares to meet all of its delivery obligations. In that situation, the program automatically borrows shares from loaning members and covers th e sale without the buyer ever knowing that a failure to deliver has occurred. The DT C system records a book entry increasing the buyer's security entitlement position, and the buyer receives all voting and trading rights as with a normal purchase.

Pet Quarters alleges that the Stock Bo rrow Program created "phantom shares" which diluted the value of its stock becausethe shares were credited to the buyer's account without being debited from the loaning member's account. According to the program rules, however, the loaning member 's account restricts the borrowed shares, and the lending member may not sell or relend the shares until they are returned. NSCC Rules add. C(4). The borrowed shar es are returned to the loaning member automatically when there is a net daily gain in deliveries of the stock to NSCC, i.e., when more shares of the borrowed stock are delivered to NS CC than are purchased in one day. This typically occurs wh en a member cures an open position by buying the shares in the marketplace.- 7 - If loaning members have not made enough shares available to the program to cover all failures to deliver in a day, the buyer will be no tified. Then the buyer may wait for the seller to cure the failure, ask NS CC to cure the failure , or cure the failure itself by buying shares on the open market and charging the seller for any difference between the agreed upon purchase pr ice and the actual purchase price.

II.

Pet Quarters's complaint includes sixteen state law claims. After the case was removed, the federal districtcourt concluded that the co mplaint presented substantial federal questions and dismi ssed it with prejudice, concluding that any attempt to amend would be futile. The court concl uded that Claims 9 through 16, including market manipulation, illegal tying, c onversion and conspiracy, were preempted because they amounted to direct, facial attacks on the operation of the Commission approved program and that Claims 1 through 8, alleging various misrepresentations, were preempted because they attack ed elements of that program.

A.

Pet Quarters appeals the district court' s decision not to remand the case to state court. We review de novo a district court's exercise of rem oval jurisdiction and its denial of a motion to remand. Motion Control Corp. v. SICK, Inc. , 354 F.3d 702, 704-05 (8th Cir. 2003). A timely notice of re moval must be file d within 30 days of the date of service of the complaint and c ontain "a short and plain statement of the grounds for removal." 28 U.S.C. § 1446(a)-(b).

Pet Quarters first claims procedural e rror, arguing that the defendants' notice of removal did not properly invoke removal jurisdiction because it did not correctly identify the grounds for removal. Several types of actions are removable, including those over which "the [federal] district c ourts have original jurisdiction founded on- 8 - a claim or right arising under the Constitution, treaties, or laws of the United States." 28 U.S.C. § 1441(b). The defendants' notice of removal alleges that because Pet Quarters's complaint "seeks to challenge , on its face, a program that has been expressly approved by the SEC" under authority granted to it in 15 U.S.C. § 78q-1 (Section 17A), the federal c ourts would have had origin al jurisdiction over the case and it should be removed pursuant to § 1441.

Pet Quarters claims that the defendants' notice of removal was deficient because the notice asserted that Section 17A comple tely preempts state law regulation in the area covered by the complaint rather than simply stating th at the complaint presented a substantial federal question, the basis for the district court's conclusion that removal jurisdiction existed. A defe ndant generally is required to cite the proper statutory basis for removal and to allege facts fro m which a district court may determine whether removal jurisdiction exists. Failureto cite the proper statutory basis for removal is not fatal in every case, however. See, e.g. , Wiles v. Capitol Indem. Corp. , 280 F.3d 868, 871 (8th Cir. 2002) (failure to cite § 1441 as grounds for removal did not deprive court of removal jurisdicti on because § 1441 jurisdictional requirements were met). In this case the defendants cited § 1441, the proper statutory basis for removal, and alleged facts fro m which the district court could determine that removal was appropriate. The district court did not commit procedural error in denying the motion to remand.

As to the merits of removal, Pet Quarte rs claims that its complaint presents no substantial federal question justifying removal. Fede ral question jurisdiction is available only where (1) the right to relie f under state law depends on the resolution of a substantial, disputed fe deral question, and (2) the ex ercise of jurisdiction will not disrupt the balance between federal and state jurisdicti on adopted by Congress. See Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg. , 545 U.S. 308, 313-14 (2005).- 9 - Removal based on federal que stion jurisdiction is governed by the well pleaded complaint rule: jurisdiction is established onl y if a federal questi on is presented on the face of the plaintiff's properly plead ed complaint. Phipps v. FDIC , 417 F.3d 1006, 1010 (8th Cir. 2005). Federal jurisdiction may be found from a complaint if adjudication of a state claim would turn on a federal constitutional or other important federal question, even where only stat e law issues have been pled. See Merrell Dow Pharms. Inc. v. Thompson , 478 U.S. 804, 808-09 (1986). If even one claim in the complaint involves a substan tial federal question, the en tire matter may be removed. See Beneficial Nat'l Bank v. Anderson , 539 U.S. 1, 9 (2003).

Pet Quarters alleges that its state law claims do not depend on resolution of any federal question. It argues th at federal law is implicated only as part of the defendants' preemption defense, which is not a proper basis for removal. See Franchise Tax Bd. of Cal. v. Constr. Laborers Vacation Trust for S. Cal. , 463 U.S. 1, 14 (1983). But Claim 12 of Pet Quarters's complaint, for example, states that "The Stock Borrow Program, by its mere existence , hinders competition. The Stock Borrow Program is anticompetitive. . . ." (Emphasis added.) Claim 12 presents a substantial federal question because it directly implicates actions taken by the Commission in approving the creation of the Stock Borrow Program and the rules governing it. Resolution of this dispute would control the outcome in numerous other cases. See Empire Healthchoice Assurance, Inc. v. McVeigh , 547 U.S. 677, 700 (2006); see also Franchise Tax Bd. , 436 U.S. at 14 (plaintiff's claim preempted where relief would require construction of federal law or adjudication of its preemptive effect and constitutionality). We conclude that the cl aims in Pet Quarters's complaint including Claim 12 present substantial federal questions and that the district court did not err by permitting removal of the matter to federal court or by denying its motion for remand.- 10 - B.

Pet Quarters next argues that the distri ct court erred by dismissing its state law misrepresentation claims, Claims 1 through 8, because they do not attack the Commission approved program itself, but rather the way in which the defendants represent program operations to the public. Appellant does not appeal dismissal of Claims 9 through 16 which the district c ourt concluded amounted to direct facial attacks on the program itself. Pet Quarters contends that Claims 1 through 8 could succeed without challenging the existence or operations of the Commission approved program or its rules. Appellees counter that each misrepresentation cause of action amounts to an attack on some Commission approved aspect of the program. They point out that two cases in other courts i nvolving the same plaintiff lawyers, the same defendants, and complaints which employ th e same theories as this case have been dismissed on the basis of conflict preempti on. Whistler Invests., Inc. v. Depository Trust & Clearing Corp. , 539 F.3d 1159 (9th Cir. 2008); Nanopierce Tech., Inc. v. Depository Trust & Clearing Corp. , 168 P.3d 73 (Nev. 2007), cert. denied , 128 S. Ct. 2428 (2008). We review de novo the district court's dismissal of the complaint on grounds of preemption, accepting as true the pl aintiff's factual allegations and granting all reasonable inferences in favor of the plaintiff. Phipps , 417 F.3d at 1010.

The Supremacy Clause provides Congre ss the authority expressly to preempt state law by defining the scope of preempti on, or impliedly where congressional intent to supersede state law may be inferred. SeeU.S. Const. art. VI, cl. 2; Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta , 58 U.S. 141, 152-53 (1982). Implied preemption exists where a federal statutory or regulatory scheme is so pervasive in scope that it occupies the field, leaving no room for state action—this is termed field preemption. Seeid. at 153. Implied preemption also occurs where state law has not been completely displaced but is superseded to the extent that it conflicts with federal law—this is known as conflict preemption. Id. The district court concluded that in this case- 11 - conflict preemption applies because Sec tion 17A conflicts with and therefore preempts each of Pet Quarte rs's state law claims.

Conflict preemption exists where a party's compliance with both federal and state law would be impossible or where state law would pose an obstacle to the accomplishment of congressional objectives. Whistler , 539 F.3d at 1166; see De la Cuesta , 58 U.S. at 153 (federal regul ations have no less preemp tive effect than federal statutes). Through Section 17A Congress directed the Commission to facilitate the establishment of a prompt, accurate national clearance and settlement system to protect investors and the public interest. The Commission carried out this congressional directive when it approved NSCC's creation of the Stock Borrow Program and the rules governing the program's operations. To the extent that any of Pet Quarters's state law clai ms challenge the program or its rules, a favorable ruling on them would necessarily conflict with Commission regulation and control of the national securities clearing and settlement system and pose an obstacle to the congressional objectives in Section 17A. Acco rdingly, any of Pet Quarters's state law claims that challenge the existence or operation of the program or its rules are federally preempted. See Whistler , 539 F.3d at 1166; Credit Suisse First Boston Corp. v. Grunwald , 400 F.3d 1119, 1128 (9th Cir. 2005) ("se lf regulated organization rules approved by the Commission preempt c onflicting state law"); see also Barnett Bank of Marion County, N.A. v. Nelson , 517 U.S. 25, 31 (1996) (conflict preemption applies where state law forbids conduct that fe deral law authorizes). The district court concluded that each of Pet Quarters's claims challenged some aspect of the Commission approved Stock Borrow Program ope rations or rules and was preempted.

In Claims 1 and 5 Pet Quarters alleges that the defe ndants represent that under the program shares are borrowed from lo aning members when they are actually bought and sold because NSCC delivers the borrowed shares to the buyer. Acting under its Section 17A authority the Co mmission approved the Stock Borrow Program and its rules which characterize the trans actions as involving loaning and borrowing,- 12 - not selling and purchasing. A state court fi nding that a transaction within the program is a sale rather than a loan would c onflict directly with the Commission approved rules, and the district court did not err in concluding that Pet Quarters's claims seeking that result are preempted. See Whistler , 539 F.3d at 1166; Nanopierce , 168 P.3d at 83.

In Claims 2 and 6 Pet Quarters alleges that the defe ndants represent that "they efficiently clear and settle trades" when infact the program does not efficiently clear and settle trades because it allows failure s to deliver to remain open for extended periods. One of the Commission approved program rules states, "In order to improve the efficiencyof the clearing system in deali ng with [open positions], the [NSCC] Board has authorized the implementation of [the Stock Borrow Program]." (Emphasis added.) We conclude the district court di d not err in deciding that these claims are preempted because they seek a determination from a state factfinder that a program declared efficient in rules approved under federal law was in fact not. See also Whistler , 539 F.3d at 1166 (same claims preempted because imposing state standard of efficiency would interfere direc tly with Commission approved operation of program).

In Claims 3 and 7 Pet Quarters allege s that the defendants misrepresent the number of its shares that a lending memb er has on account with DTC and NSCC after it loans shares to the programbecause that number is not reduced, inflating the total number of shares actually held (its phantom shares argument). The methods of accounting for loaned shares are descri bed in detail in the Commission approved program rules, NSCC Rules add. C(4). Footnote 9 of Pet Qu arters's complaint describes those methods the same way, a nd Pet Quarters does not allege that the defendants accounted for loaned shares differe ntly than directed under the rules. Pet Quarters's claim that the accounting methods create phantom shares is nothing more than a complaint about the Commission approved accounting methods. The district- 13 - court did not err in concluding that these claims were preempted because they amount to a direct challenge to the operation of the Commission approved program.

In Claims 4 and 8 Pet Quarters alleges th at when a seller fails to deliver shares to a buyer, NSCC rules allow the buyer to notif y NSCC of its intent to cure the failure by buying shares on the open market, but thatdespite the rules NSCC denies the buyer that opportunity by curing failures with sh ares borrowed through the program. Pet Quarters claims that this amounts to a misrepresentation because buyers are actually not allowed to initiate buy inprocedures. Pet Quarters simply misreads the rules. Under the Commission approved NSCC rules, a failure to deliver is cured through the Stock Borrow Program if there are enough shares available from lending members to credit the buyer's account and c over the seller's failure to deliver. When this happens the buyer is never aware of the failure and would have no ne ed to initiate buy in procedures because the shares are credited to its account as normal. If, however, there are not enough shares available from lendi ng members to credit the buyer's account, the buyer will know that there has been a failure to deliver and may initiate buy in procedures at that point. These claims by Pet Quarters would succeed only if a state court found that the Commission approved rule s were invalid; accordingly, the district court did not err in concluding that they are preempted.

In short, all of the damages that Pet Qu arters claims to have suffered stem from activities performed or statements made by the defendants in conformity with the program's Commission approved rules. A favorable ruling on any of them would conflict with the Commission's control of the national securities clearing and settlement system and pose an obstacle to the congressional objectives in Section 17A. We conclude that the district court did not err in dismissing the complaint on the basis of preemption.- 14 - C.

Pet Quarters claims in the alternative th at the district court erred in dismissing its complaint with prejudice rather than a llowing it to file a first amended complaint to refine its claims. It contends thatit should have been allowed to amend its complaint as a matter of right because the defendants had not yet filed an answer or that the district court abused its discretion by not allowing it to amend. The defendants respond that granting leave to amend would have been inappropriate because Pet Quarters never submitted a proposed amended complaint, nor did it indicate to the court what it would add to its complaint to make it viable.

Leave to amend a complaint "shall be gi ven freely when justice so requires." Fed. R. Civ. P. 15(a). L eave to amend generally is in appropriate, however, where the plaintiff has not indicated how it would make the complaint viable, either by submitting a proposed amendment or indicati ng somewhere in its court filings what an amended complaint would have contained. Wolgin v. Simon , 722 F.2d 389, 394- 95 (8th Cir. 1983). The record does not indi cate that Pet Quarters has ever submitted a proposed amended complaint or clarified what one might have contained. The district court did not err or abuse its di scretion in concluding that amendment would be futile and in dismissing with prejudice.

III.

For these reasons we affirm the judgment of the district court.

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