1993). We may also consider documents and facts included in a plaintiff's response

brief so long as they are consistent with the allegations in the complaint. Hentosh v.

Herman M. Finch Univ., 167 F.3d 1170, 1173 n. 3 (7th Cir. 1999), With these

principles in mind, we turn to the motion before us.
DISCUSSION
Olde argues that Denton’s class action complaint should be dismissed because

his state law claim of breach of fiduciary duty is preempted by the Securities Liti

Uniform Standards Act of 1998 (“SLUSA”).

In the 1990's, Congress passed two statutes to curb the problems corporations

suffered as a result of class action lawsuits. Lander v. Hartford Life & Annuity I

Co., 251 F.3d 101,107 (2nd Cir. 2001). First, Congress passed the Private Securities
Litigation Reform act of 1995 (“PSRLA”). See 15 U.S.C. §§ 77z-1, 78u-4. The
PSLRA was enacted to curb “strike suits. ” “Strike suits” are lawsuits started to

“extract a sizable settlement from companies that are forced to settle, regardless of the

lack of merits of the suit, simply to avoid the potentially bankrupting expense of

litigation.”” Burns v. Prudential Securities, 116 F. Supp. 2d 917, 921 (N.D. Ohio 2001)

(quoting H.R. Conf. Rep. No. 803, 105th Cong., 2d Sess. At 13). The PSLRA’s attack

on meritless strike suits came in the form of heightened pleading requirements,

mandatory staying of discovery pending motions to dismiss, and the creation of a “safe

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Pore a ean

practices...that are intended to mislead investors by artificially affecting market

activity.” Santa Fe Indus. Inc., 430 U.S. at 476-77, In addition, “nondisclosure is

usually essential to the success of a manipulative scheme.” Id. at 477. Here, the

conduct with which Denton has charged Olde can fairly be viewed as manipulative or
deceptive in the securities context.

Finally, Denton refers this court to two cases in which courts concluded that

breach of fiduciary duty claims were not preempted by the SLUSA, Lalondriz v. USA

Networks, Inc., 68 F. Supp. 2d285(S.D.N.Y. 1 999), and Gordonv. Buntrock, 2000 WL

556763 (ND. Ill. 2000). These cases do not support Denton’s position. The issue in
both cases was the fourth requirement, that the misrepresentations or manipulation

occurred “in connection with the purchase or sale of the covered securities.” Lalondriz,

68 F. Supp. 2d at 286; Gordon, 2000 WL 556763, at *2. Both courts found that the

allegations in those cases did not meet this requirement because the plaintiffs alleged

that the defendants’ conduct occurred while the plaintiffs were holding the securities

and not “in connection with the purchase or sale” of the securities. Lalondriz, 68 F.

Supp. 2d at 286; Gordon, 2000 WL 556763, at *3; see Shaev v. Claflin, 2001 WL

548567, at 5 (N.D. Cal. May 17, 2001) (finding no preemption where “purported injury
arose from the mere holding of 3Com stock, and not from any trading of 3Com

securities”); Hines, 1999 WL 1705503, at *6 (finding no preemption where plaintiff

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woe "TERRE EEN YP PNR men

(3) alleging a misrepresentation or omission of a material fact or use of any
manipulative or deceptive device or contrivance (4) “in connection with” the purchase
or sale of a covered security. All four elements are required for preemption. See

Prager, 124 F, Supp. 2d at 231; Bertram v. Terayon Communications Systems, Inc.,

2001 U.S. Dist. LEXIS 6215, at *14 (Mar. 27, 2001); Simon v. Internet Wire, Inc.,

2001 WL 688542 (April 3, 2001); Hines v. ESC Strategic Funds Inc., 1999 WL

1705503 (M.D. Tenn. 1999). Additionally, the focus is on the substance of the claim
and not the plaintiff's characterization of it. See Abada v. Charles Schwab & Co., Inc.,
127 F. Supp. 1101, 1166 (S.D. Cal. 2000); Prager, 124 F. Supp. 2d at 235.

The only element in dispute in this case is the third element. Olde argues that
Denton’s breach of fiduciary duty claim meets this element because Denton alleges
throughout his complaint that Olde “intentionally, willfully, and wantonly” omitted or
failed to disclose the fact that brokers received greater payouts on Special Venture
stocks and misrepresented that Special Venture stocks were “great investment
Opportunities” when in fact they were unsuitable, “high risk speculative stocks.”
Indeed, as Olde points out, Denton’s complaint is full of allegations of
misrepresentations and omissions of material facts and deceptive practices made by

Olde in connection with the purchase or sale of the Special Venture stocks. Compl.


— ere SEITE SISTENT $M ts er Pee RR NW ne pe

harbor” for certain forward looking statements. Lander, 251 F.3d at 107; Burns, 116

F. Supp. 2d at 921. Soon after the PSLRA was passed, however, plaintiffs tried to
circumvent its stricter procedural standards by filing claims in state courts based on

state law. Lander, 251 F.3d at 107-08.

Congress responded by passing the SLUSA. The SLUSA was enacted “to
‘prevent plaintiffs from seeking to evade the protections that Federal law provides
against abusive litigation by filing suit in State, rather than Federal, court.”” Prager v.
Knight/Trimark Group, Inc., 124 F. Supp. 2d 229, 232 (D.N.J. 2000). With some
limited exceptions, the SLUSA made the federal courts the exclusive venue for
covered class actions alleging that a covered security was sold through manipulation,

fraud, or deceit. Lander, 251 F.3d at 108; Prager, 124 F. Supp. 2d at 233; Gibson v.

PS Group Holdings, Inc., 2000 WL 777818, at *2 (S.D. Cal. June 14, 2000). The
SLUSA provides:

No covered class action based upon the statutory or common law
of any State or subdivision thereof may be maintained in the any
State or Federal court by any private party alleging--

(A) a misrepresentation or omission of a material fact in
connection with the purchase or sale of a covered security; or

(B) 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. § 78bb(f)(1). Therefore, an action will dismissed as preempted by the
SLUSA if the action is: (1) a “covered class action,” (2) that is based on a state law,

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ps



erastanen nis mame sete Sy a

Shamsi v. Dean Whitter Reynolds, Inc., 743 F. Supp. 87, 91 (D.Mass. 1989); Kayne v.
PaineWebber Inc., 703 F. Supp. 1334, 1340 (NLD. IIL. 1989)). ;

Unlike the complaint in Burns, Denton’s complaint does allege facts which

suggest, at a minimum, an “element of deception.” Denton repeatedly alleges that Olde
intentionally, willfully and wantonly misrepresented the nature of the Special Venture
stocks and did not disclose the commission structure in order to sell more Special
Venture stocks. He further alleges that these are material facts. Additionally, unlike
the one instance of alleged unauthorized trading in Burns, the conduct complained of
here involves misrepresentations, omissions, and deceit spanning a period of about nine
years.

Additionally, Denton argues that his claim is not preempted by the SLUSA
because allegations of breach of fiduciary duty cannot give rise to a securities fraud
claim under § 10(b) and Rule 10b-5. While it is true that allegations of breach of

fiduciary duty alone will not sufficiently plead a securities fraud claim, a breach of

fiduciary duty may give rise to a Rule 10b-5 claim where the alleged conduct “can fairly

be viewed as manipulative or deceptive within the meaning of the [Securities Act].”

Santa Fe Indus. Inc. v. Green etal., 430 U.S. 462, 473-74, 97 S.Ct. 1292 (1977); Fry v.

UAL Corp., 895 F. Supp. 1018 (N.D.IIl. 1995); of. Atchley v. Qonaar Corp., 704 F.2d

355 (7th Cir. 1983). “Manipulation” in the securities context “refers generally to

-8-


Minute Order Form (06/97)
United States District Court, Northern District of Illinois
‘wince | Chis P. Kocoms [| Su
CASE NUMBER 01 C 4185 DATE 10/3/2001
CASE Denton vs. H&R Block Financial Advisors
TITLE
Lin the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) stare briefly the nature

MOTION: of the motion being presented.}
DOCKET ENTRY:
q) i) Filed motion of [ use listing in “Motion” box above.]
(2) o Brief in support of motion due
(3) QO Answer brief to motiondue___. Reply to answer brief. due.
(4) oO Ruling/Hearingon____sset for___—_at.
(5) oOo Status hearing[held/continued to] [set for/re-set for] on —___setfor_ at
(6) o Pretrial conference[held/continued to] [set for/re-set for] on —_setfor_ at
(7) ag Trial{set for/re-set for]on__—_at
(8) Qo (Bench/Jury trial] [Hearing] held/continued to_ at
(9) im} This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

OFRCP4(m) (General Rule 21 COFRCP41(a)(1) C1 FRCP41(a)(2).

(0) «xf [Other docket entry) ENTER MEMORANDUM OPINION: Defendant’s motion (Doc 5-1) to
dismiss is granted.

dal ff {For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required.
‘0 not requ number of notices:

CT 9
dete

Notices mailed by judge's staff.

Notified counsel by telephone.

oY | Docketing to mail notices.

av | Mail AO 450 form.

ad
A strate i kav 5
Copy to. Judgefnagistrate, judge. .
courtroom weaen 3 ri
SCT deputy's gi ouire

initials
Date/time received in
central Clerk’s Office

railing deputy initials



sn nae omens ss Wwe

alleged that defendants’ breach of fiduciary duty occurred after plaintiff purchased her
stock). Here, Denton alleges that Olde failed to disclose the commission structure and
misrepresented the risk value o f Special Venture stock during sales of Special Venture

stock.

Accordingly, because the allegations in Denton’s complaint meet the SLUSA’s

requirements for preemption, Denton’s claim must be dismissed.

CONCLUSION

For the foregoing reasons, the defendant’s motion to dismiss is granted.

Charles P. Kocoras
United States District Judge

Dated: October 3, 2001
—Sctober 3, 2001

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7 14, 18, 19, 24, 26-35, 38, 45, 48. Thus, Denton’s allegations appear to fall exactly
within the types of allegations preempted by SLUSA.

To argue that they do not, Denton relies on the analysis in Burns v. Prudential
Securities, 116 F. Supp. 2d at 917, regarding whether the plaintiff's allegations in that
case met the third requirement for preemption under the SLUSA. In interpreting the
SLUSA’s third requirement, the Burns court determined that the language was similar
to that of § 10(b) of the Security Act, Bums, 116 F. Supp. 2d at 923. Because a
complaint alleging a violation of § 10(b) must allege that the defendant acted with
scienter, the Burns court concluded that the SLUSA likewise only preempts allegations
that plead that the defendant acted with scienter. 1d. “Scienter” is a “mental state

embracing intent to deceive, manipulate or defraud.” Id. (quoting Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 194, 96 S.Ct. 1375 (1976)). The court in Burns found that

the plaintiffs complaint could not support a securities fraud claim, and therefore was
not preempted by the SLUSA, because the plaintiff did not allege facts suggesting any
“element of deception.” Id. at 924. The plaintiff merely alleged one instance of
unauthorized trading, which, as the court noted, by itself is not sufficient to state a
securities fraud claim, though it may sufficiently allege claims based in state law. Id.

at 923 (citing Messer v. E.F. Hutton & Co., 833 F.2d 909, 916-17 (11th Cir. 1987);



LEGAL STANDARD

The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test the
sufficiency of the complaint, not to decide the merits of the case. Triad Associates, Inc.
vy. Chicago Housing Auth., 892 F.2d 583, 586 (1989). In roling on amotion to dismiss, 7
the Court must construe the complaint's allegations in the light most favorable to the
plaintiff and all well-pleaded facts and allegations in the plaintiff's complaint must be
taken as true. Brontkowski, 998 F.2d at 461. The allegations of a complaint should
not be dismissed for failure to state a claim unless it appears beyond a doubt that the
plaintiff can prove no set of facts in support of his claim which would entitle him to

relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see Hartford Fire Ins. Co. v.

California, 509 U.S. 764 (1 993); Sherwin Manor Nursing Center Inc. v. McAuliffe, 37

F.3d 1216, 1219 (7th Cir.1994), Nonetheless, to withstand a motion to dismiss, a
complaint must allege facts sufficiently setting forth the essential elements of a cause

of action. Lucien v. Preiner, 967 F.2d 1 166, 1168 (7th Cir.1992).

In reviewing a Rule 12(b)(6) motion to dismiss for failure to state a claim, the
Court is limited to the allegations contained in the pleadings themselves. Documents
incorporated by reference into the pleadings and documents attached to the pleadings
as exhibits are considered part of the pleadings for all purposes. Fed.R.Civ.P. 10(c);

Venture Associates Corp. v. Zenith Data Systems Corp., 987 F.2d 429, 431 (7th Cir.

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ocr navman SSR READE 5 ATE toni pn pnp nen

(“H & R Block”) acquired Olde in December 1999. Although H & R Block is the
named Defendant in this case, we refer to Olde as the Defendant in this opinion
because the bulk of the allegations occurred during Olde’s ownership.

Denton’s complaint centers around Olde’s sales of Special Venture stock.
Special Venture stocks allegedly are high risk speculative stocks. According to
Denton, Olde intentionally, willfully, and wantonly had its registered representatives
aggressively and deceptively market Special Venture stocks rather than established,
less risky stocks. To facilitate sales of Special Venture stock, registered representatives
were instructed to tell customers that the stocks were “great investment opportunities”
and to recommend such stocks when customers expressed an interest in less risky
stocks in a particular industry. The representatives did not disclose the higher risks
with Special Venture stock.

Additionally, registered representatives who sold Special Venture stock were
rewarded with much higher commissions and other incentives than if they sold the
more established stock. This commission structure was simi larly not disclosed to Olde
customers. Denton states that, had he known about the true nature of the Special
Venture stock or the commission structure, he would not have purchased Special
Venture stocks. He asserts that Olde breached its alleged fiduciary duty to disclose the

commission structure and not to misrepresent the nature of Special Venture stock.

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ne EDT tO SP SRE Hh nk eerie

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

RICHARD L. DENTON, individually and on )
behalf of all other persons similarly situated, )
)
Plaintiff, )
)
vs. ) 01 C 4185

)
H&R BLOCK FINANCIAL ADVISORS, INC., _)
)

Defendant. ) POCKETEN

OCT. 4 2001

MEMORANDUM OPINION

CHARLES P. KOCORAS, District Judge:

Before the court is Defendant’s Rule 12(b)(6) motion to dismiss Plaintiff's class
action complaint based on breach of fiduciary duty. For the following reasons, the
motion is granted.

BACKGROUND
Plaintiff Richard L. Denton’s (“Denton’s”) complaint contains the following
factual allegations, which the Court must accept as true for the purposes of this motion.

Brontkowski v. First Nat'l Bank of Cicero, 998 F.2d 459, 461 (7th Cir. 1993). Denton

maintained a non-discretionary account with Olde Discount Corporation (“Olde”) from

approximately 1991 through March 22, 2000. H & R Block Financial Advisors, Inc.

lle