FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

WHISTLER INVESTMENTS, INC., a 

Nevada corporation; SALIM S.

RANA INVESTMENTS CORP., a

corporation; AMERICAN DREAM

HOLDINGS, INC., a corporation, No. 06-16088

Plaintiffs-Appellants, D.C. No.

v.  CV-05-00634-

RCJ/GWF THE DEPOSITORY TRUST AND

CLEARING CORPORATION; THE OPINION

DEPOSITORY TRUST COMPANY; THE

NATIONAL SECURITIES CLEARING

CORPORATION,

Defendants-Appellees. 

Appeal from the United States District Court

for the District of Nevada

Robert C. Jones, District Judge, Presiding

Argued and Submitted

March 10, 2008—Phoenix, Arizona

Filed August 22, 2008

Before: Michael Daly Hawkins, Sidney R. Thomas, and

Richard R. Clifton, Circuit Judges.

Opinion by Judge Thomas

11531
COUNSEL

Michael J. Morrison, Reno, Nevada, and John R. Knight

(argued), Memphis, Tennessee, for the appellants. 

Don Nomura and Daniel T. Hayward, Laxalt & Nomura,

Reno, Nevada, Gregg M. Mashberg (argued) and Karen D.

Coombs, Proskauer Rose LLP, New York, New York, for the

appellees. 

WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11535
Scott K. Attaway (argued), Washington, DC, for North American Securities Administrators Association, as amicus curiae

in support of the appellants. 

Mark R. Pennington (argued), Securities and Exchange Commission, Washington, DC, for Securities and Exchange Commission, as amicus curiae in support of the appellees. 

OPINION

THOMAS, Circuit Judge: 

This case requires us to consider whether the Securities

Exchange Act of 1934 preempts state-law claims against registered clearing agencies in connection with their clearance

and settlement services, where those services were performed

pursuant to a program approved of by the Securities Exchange

Commission. Although we conclude that the state law claims

asserted here were not precluded by field preemption, we hold

the claims were barred by conflict preemption. We therefore

affirm the judgment of the district court. 

I

Whistler Investments, Inc., Salim S. Rana Investments

Corp., and American Dream Holdings, Inc. (collectively

“Whistler”) brought an action for damages under Nevada state

law against three registered clearing agencies. Whistler

Investments is a Nevada corporation whose common stock is

publicly traded. Salim S. Rana Investments and American

Dream Holdings are shareholders who purchased and sold

Whistler common stock in the open market between April

2002 and November 2004. 

Whistler alleges that short sellers drove down the market

price for Whistler stock by selling Whistler shares without

11536 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
having stock available for delivery, and then intentionally

failing to deliver the stock. Such a technique is referred to as

“naked short selling.” See Amendments to Regulation SHO,

Exchange Act Release No. 54,154, 2006 WL 2712000, at *1

(July 14, 2006). 

“A short sale is a term of art used for a security trading

practice in which a party ‘speculates that a particular stock

will go down in price and seeks to profit from that drop.’ ”

Lapidus v. Hecht, 232 F.3d 679, 680-81 (9th Cir. 2000) (quoting Levitin v. PaineWebber, Inc., 159 F.3d 698, 700 (2d Cir.

1998)). The seller sells a security he does not own, borrows

the security from a broker to meet the delivery obligation, and

then purchases an identical security to return to the broker. If

the security has declined in price between the sale and the

purchase, the seller profits. See id. at 681; 17 C.F.R.

§ 242.200(a) (defining short sale). In contrast, “a ‘naked short

sale’ occurs when a seller sells a security without owning or

borrowing it and does not deliver the security when due.” In

re Phylo Corp., 2007 WL 966943, 16 Exchange Act Release

No. 55,562, at *4 n.22 (March 30, 2007). 

Whistler’s complaint is premised on its claim that the

naked short selling was facilitated by alleged defects in a program operated by the National Securities Clearing Corporation, one of the defendants in this action. Defendants moved

to dismiss the action on the ground that federal securities law

preempts Whistler’s claims. The district court granted Defendants’ motion, holding Whistler’s claims preempted under the

doctrines of field preemption and conflicts preemption. We

review de novo a district court’s decision regarding preemption. Indep. Towers of Washington v. Washington, 350 F.3d

925, 928 (9th Cir. 2003). 

II

Congress added Section 17A to the Securities Exchange

Act of 1934 (“the Exchange Act”), 15 U.S.C. §§ 78a et seq.,

WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11537
in 1975 in order to remove impediments to a uniform national

system for the prompt and accurate clearance and settlement

of securities transactions. See 15 U.S.C. § 78q-1(a)(1)(A).

Among other provisions, Section 17A provided for the registration of “clearing agencies” by the Securities Exchange

Commission (“the Commission”). See 15 U.S.C. § 78q-1(b).

The role of the clearing agencies was to replace an inefficient

and outmoded system of clearing agencies with a more modern and efficient system. See 15 U.S.C. § 78q-1(a)(1). Congress directed the Commission to use its authority to facilitate

the establishment of a national system for the prompt and

accurate clearance and settlement of securities transactions as

well as to coordinate or link facilities for such clearance and

settlement. See 15 U.S.C. § 78q-1(a)(2)(A). 

The three defendants in this action are the Depository Trust

& Clearing Corporation (“DTCC”), the Depository Trust

Company (“DTC”) and the National Securities Clearing Corporation (“NSCC”). DTC and NSCC are subsidiaries of

DTCC and are registered clearing agencies pursuant to Section 17A. DTC is the nation’s principal securities depository.

It operates an automated, centralized system for book-entry

transfers of securities positions among its participants, the

beneficial owners of the securities, in accordance with their

instructions. NSCC provides centralized clearance, settlement,

and information services for virtually all broker-to-broker

equity, corporate bond, municipal bond and other securities

transactions in the United States. The changes in beneficial

ownership of securities resulting from transactions that are

cleared and settled at NSCC are implemented by book-entry

transfers among brokers’ accounts at DTC. 

At times, a seller does not deliver to NSCC’s system the

securities it has sold by the settlement date. Such an occurrence is called a “fail-to-deliver.” In 1981, NSCC created the

Stock Borrow Program to deal electronically with temporary,

short term fails-to-deliver. NSCC has promulgated rules to

govern the operation of the Stock Borrow Program, and the

11538 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
Commission has approved those rules. See National Securities

Clearing Corp. Proposed Rule Changes by Self-Regulatory

Organization, 45 Fed. Reg. 5867, 5867-68 (Jan. 24, 1980)

(notice of filing of NSCC proposed rule change adopting as

a one year pilot program procedures for borrowing securities

to meet system needs); National Securities Clearing Corp.

Proposed Rule Change, 46 Fed. Reg. 3104-01, 3104 (Jan. 13,

1981) (notice of filing of NSCC proposed rule change making

pilot program permanent); Depository Trust Co., Exchange

Act Release No. 20,221, 48 Fed. Reg. 45167-02, 45167-68

(Oct. 3, 1983) (granting NSCC’s application for full registration). 

The Stock Borrow Program allows NSCC to facilitate the

settlement of fail-to-deliver transactions by electronically

“borrowing” the requisite number of shares of the undelivered

stock from one of its members who is willing to lend the

shares, and then delivering the “borrowed” shares to the purchaser.1

 NSCC guarantees the transactions it processes by

assuming the obligation of sellers to deliver shares to buyers.

The buyer is credited with the shares and never knows that

there has been a fail-to-deliver. 

Whistler alleges that at times fails-to-deliver are not cured

for long periods, which creates more electronic shares in the

marketplace than are reflected in the paper share certificates

held by DTC. Whistler argues that Defendants are liable

under state law because this “defect” in the Stock Borrow

Program depressed the value of Whistler stock. 

1To eliminate the movement of paper certificates in settlement of securities transactions, DTC keeps physical custody of virtually all such certificates. Purchase and sale transactions are done, cleared, and settled in

book-entry form, based on the actual paper certificates held by DTC. In

theory, the electronic universe of securities purchased and sold by DTC’s

members should more or less match the paper universe of the underlying

certificates. The gravamen of Whistler’s complaint is that Defendants have

manipulated the system, causing artificial inflation of electronic stock,

such as Whistler’s. 

WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11539
III

[1] Congress has the constitutional power to preempt state

law, Art. VI, cl. 2; Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1

(1824), and may do so either expressly—through clear statutory language—or implicitly. Defendants acknowledge that

Congress has not expressly preempted any of Whistler’s

claims, but argue that Section 17A of the Securities Act

implicitly preempts the claims. 

[2] There are two types of implied preemption: field preemption and conflict preemption. Under field preemption,

preemption is implied when Congress “so thoroughly occupies a legislative field,” that it effectively leaves no room for

states to regulate conduct in that field. Cipollone v. Liggett

Group, Inc., 505 U.S. 504, 516 (1992). Under conflict preemption, Congress’s intent to preempt state law is implied to

the extent that federal law actually conflicts with any state

law. Hillsborough County v. Automated Med. Labs., Inc., 471

U.S. 707, 713 (1985). Conflict preemption analysis examines

the federal statute as a whole to determine whether a party’s

compliance with both federal and state requirements is impossible or whether, in light of the federal statute’s purpose and

intended effects, state law poses an obstacle to the accomplishment of Congress’s objectives. Crosby v. Nat’l Foreign

Trade Council, 530 U.S. 363, 373 (2000). 

A

[3] Defendants do not argue that Congress intended to

occupy the entire field of securities regulation. Rather, Defendants argue that Section 17A of the Exchange Act reflects

Congress’s intent to occupy the field of clearing and settling

securities transactions. However, an examination of the statutory framework of the Exchange Act does not reveal the comprehensiveness necessary to infer that Congress intended to

11540 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
wholly occupy even the narrower field of clearing and settling

securities transactions to the exclusion of state law.2

When Congress enacted the Exchange Act, it included a

provision which recognizes that the Act does not impact any

non-conflicting state securities laws:

[T]he rights and remedies provided by [the

Exchange Act] shall be in addition to any and all

other rights and remedies that may exist at law or in

equity . . . . [N]othing in this [Act] shall affect the

jurisdiction of the securities commission . . . of any

State over any security or any person insofar as it

does not conflict with the provisions of this [Act] or

the rules and regulations thereunder. 

15 U.S.C. § 78bb(a). This provision does not indicate congressional intent to occupy the entire field of securities regulation, but rather, to occupy that field only inasmuch as state

laws “conflict with the provisions of [the Act] or the rules and

regulations thereunder.” Id.

[4] With respect to the narrower field of clearing and settling securities transactions, a provision within Section 17A

and a subsequent amendment indicate that Congress did not

intend to wholly occupy that legislative field either. First,

2Our analysis is guided in part by a recent decision of the Nevada

Supreme Court, which affirmed a trial court’s dismissal of a substantively

identical complaint against the same defendants, on the ground of conflict

preemption. See Nanopierce Technologies, Inc. v. Depository Trust and

Clearing Corp., 168 P.3d 73 (Nev. 2007). Although we are of course not

bound by that court’s conclusions, we find the analysis thorough and

sound. As a result, our own analysis proceeds in a similar manner. 

We note also that similar complaints against the same defendants have

been filed in at least two other jurisdictions, and both have been dismissed

on preemption grounds. See Pet Quarters, Inc. v. Depository Trust &

Clearing Corp., 545 F.Supp.2d 845 (E.D. Ark. 2008); Caprece v. Depository Trust & Clearing Corp., 2005 WL 4050118 (S.D. Fla. 2005). 

WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11541
Congress included a provision in Section 17A stating that

Section 17A shall not “be construed to impair the authority of

any State banking authority or other State . . . regulatory

authority having jurisdiction over a person registered as a

clearing agency . . . to make and enforce rules . . . which are

not inconsistent with [Section 17A] and the rules and regulations thereunder.” 15 U.S.C. § 78q-1(d)(4). That provision

unambiguously signifies that Congress did not intend to

occupy the entire field of national clearance and settlement of

securities transactions, as Congress explicitly left room for

state banking and regulatory authorities to supplement that

legislative field’s regulation, so long as any state regulation is

not inconsistent with Section 17A. 

[5] A subsequent amendment also reveals congressional

intent to avoid comprehensively regulating the entire national

securities clearance and settlement field. Congress amended

Section 17A in 1990 to add provisions allowing the Commission to adopt rules inconsistent with state law, but permitting,

within two years’ time, the states to then enact laws that contradict the Commission’s rules:

Notwithstanding any provision of State law . . . [after

making certain findings,] the Commission may adopt

rules concerning . . . the transfer of certificated or

uncertificated securities . . . or limited interests

(including security interests) therein; and . . . [the]

rights and obligations of purchasers, sellers, owners,

lenders, borrowers, and financial intermediaries

(including . . . clearing agencies) involved in or

affected by such transfers, and the rights of third parties whose interests in such securities devolve from

such transfers. 

15 U.S.C. § 78q-1(f)(1). 

Any State may, prior to the expiration of 2 years

after the Commission adopts a rule under this sub11542 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
section, enact a statute that specifically refers to this

subsection and the specific rule thereunder and

establishes, prospectively from the date of enactment

of the State statute, a provision that differs from that

applicable under the Commission’s rule. 

15 U.S.C. § 78q-1(f)(3). 

[6] In light of these two provisions, we hold that Congress

explicitly left room for state laws to supplement the federal

regulatory scheme and thus did not reveal the necessary “clear

and manifest” intent to occupy the field of regulating clearing

agencies. See Bates v. Dow Agrosciences, 544 U.S. 431, 449

(2005) (internal quotation marks omitted). Accordingly, there

is no field preemption and the district court erred in dismissing on that ground.

B

[7] Conflict preemption analysis examines the federal statute as a whole to determine whether a party’s compliance

with both federal and state requirements is impossible or

whether, in light of the federal statute’s purpose and intended

effects, state law poses an obstacle to the accomplishment of

Congress’s objectives. Crosby, 530 U.S. at 373. Thus, our

task is to determine whether imposing the requirements implicated by Whistler’s state law claims on Defendants is inconsistent with Section 17A’s purpose of allowing the

Commission to regulate and control a national system for

clearing and settling securities transactions. See 15 U.S.C.

§ 78q-1(a)(2)(A) and (B) (directing the Commission to “facilitate the establishment of a national system for the prompt and

accurate clearance and settlement” of securities transactions,

including registering and regulating clearing agencies).

Because the Commission, in accordance with the congressional directive set forth in Section 17A, has approved NSCC’s

creation of the Stock Borrow Program and the rules it has promulgated to govern Stock Borrow Program operations, we

WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11543
hold that state-law challenges to the existence or the operation

of the Stock Borrow Program are federally preempted because

they would conflict with Congressional directive, as set forth

under Section 17A. 

Whistler’s complaint contains twenty-two claims for relief.

To analyze each of the claims, we find it useful to divide the

claims into two categories: misrepresentation claims and nonmisrepresentation claims. 

Claims 1-4 and 7-18 of the complaint allege four theories

of misrepresentation, each repeated separately to constitute

four claims each of misrepresentation, negligent misrepresentation, intentional misrepresentation, and fraudulent misrepresentation. 

[8] Whistler’s first misrepresentation theory alleges that

Defendants misrepresented that NSCC is borrowing shares

from lending members of the Stock Borrow Program to cover

fail-to-deliver positions when, in fact, the transfer of shares

from lending members to NSCC is actually a “sale” of securities. Whistler alleges that the transfer is a sale “because the

NSCC delivers the borrowed shares to the buyer who acquires

all right, title and interest in the shares.” As the complaint

itself acknowledges, the description of the Stock Borrow Program as a procedure involving borrowing shares comes from

NSCC rules. Thus, Whistler’s challenge to NSCC’s characterization of Stock Borrow Program procedure is a direct challenge to Commission-approved rules. Such a claim is

federally preempted under conflict preemption. 

Whistler’s second misrepresentation theory alleges that

Defendants misrepresented that they efficiently clear and settle trades when, in fact, Defendants are not clearing and settling trades that result in open fail-to-deliver positions.

Whistler complains that “sellers routinely fail to deliver securities and that unfulfilled obligations to deliver securities can

have negative effects on the market when fails to deliver per11544 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
sist for an extended period of time,” and that for this reason

the Stock Borrow Program’s clearing and settling of securities

is not efficient. This claim also constitutes a direct challenge

to the operation of the Stock Borrow Program. 

Congress enacted Section 17A precisely for the purpose of

replacing an inefficient and outmoded system of clearing

agencies with a more modern and efficient system. See 15

U.S.C. § 78q-1(a)(1). However, Congress did not impose any

specific standards of efficiency and instead relied on the

Commission to regulate the clearing agencies, see id., which

is precisely what the Commission did in approving NSCC’s

rules and procedures governing the Stock Borrow Program.

Imposing any state standard of efficiency would directly interfere with the approved operation of the Stock Borrow Program, and such claims are federally preempted under conflict

preemption. 

Whistler’s third misrepresentation theory alleges that

Defendants misrepresented the number of Whistler shares

actually held by lending members at DTC by providing misleading information in the lending members’ DTC and NSCC

account statements. Essentially, Whistler argues that the

Stock Borrow Program’s method of borrowing shares artificially inflates the number of shares actually held. Once again,

this claim amounts to a direct challenge to the Commissionapproved operation of the Stock Borrow Program and conflict

preemption applies. 

Finally, Whistler alleges that Defendants misrepresented

that open fail-to-deliver positions will be cured by buying

shares in the open marketplace when, in fact, the open positions are actually cured with shares borrowed from lending

members through the Stock Borrow Program. The complaint

explicitly acknowledges that “[i]nstead of executing the buyin by going into the market, NSCC executes the buy-in by

borrowing shares from lending Members” of the Stock Borrow Program. Thus, Whistler is directly challenging NSCC

WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11545
rules, which have been approved by the Commission and thus

preempt any conflicting state law claim. 

Whistler raises six additional claims: market manipulation,

in violation of Nev. Rev. Stat. §§ 90.580 and 90.660; violation of Nevada’s Unfair Trade Practices Act, Nev. Rev. Stat.

§ 598A.060; conversion; intentional interference of contractual relations; breach of implied covenant of good faith and

fair dealing; and conspiracy. Each of these claims is also federally preempted, under conflict preemption, because each

attacks either the existence or the operation of the Stock Borrow Program. 

[9] Whistler’s market manipulation, intentional interference

of contractual relations, breach of implied covenant of good

faith and fair dealing, and conspiracy claims all reassert the

allegation that the Stock Borrow Program’s method of borrowing shares artificially inflates the number of shares actually held. These claims amount to a direct challenge to the

federally-approved operation of the Stock Borrow Program

and are, thus, preempted under conflict preemption. 

[10] Whistler’s unfair trade claim asserts that “Defendants

have illegally tied the Stock Borrow Program to the separate

and distinct functions of clearing and settling stock trades.”

However, the Stock Borrow Program was created by NSCC

specifically to comply with the congressional directive to “facilitate the establishment of a national system for the prompt

and accurate clearance and settlement” of securities transactions, 15 U.S.C. § 78q-1(a)(2)(A)(i). Thus, this claim conflicts

with the Commission’s approval of the existence and operation of the Stock Borrow Program and is preempted. 

[11] Finally, Whistler’s conversion claim reasserts the theory that Stock Borrow Program security transfers are “sales.”

As discussed above, the description of the Stock Borrow Program as a procedure involving borrowing shares is derived

from NSCC rules. Thus, Whistler’s challenge to NSCC’s

11546 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
characterization of Stock Borrow Program procedure is a

direct challenge to Commission-approved rules and is also

preempted. 

IV

In summary, each of Whistler’s 22 claims amount to challenges to the rules and operation of the Stock Borrow Program and, as such, conflict with federal securities law. We

thus affirm the district court’s dismissal of the complaint on

the ground that Whistler’s claims are preempted by Section

17A of the Exchange Act, under the doctrine of conflict preemption. 

AFFIRMED.

WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11547