2005 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

2-16-2005

Rowinski v. Salomon Smith Barney

Precedential or Non-Precedential: Precedential

Docket No. 03-4762

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 03-4762

RYAN ROWINSKI,

On Behalf of Himself and

All Others Similarly Situated

v.

SALOMON SMITH BARNEY INC.

 Ryan Rowinski,

 Appellant

On Appeal from the United States District Court

for the Middle District of Pennsylvania

D.C. Civil Action No. 02-cv-02014

(Honorable James M. Munley)

Argued October 28, 2004
2

Before: SCIRICA, Chief Judge,

FISHER and GREENBERG, Circuit Judges

(Filed February 16, 2005)

IRA N. RICHARDS, ESQUIRE (ARGUED)

Trujillo Rodriguez & Richards, LLC

The Penthouse

226 West Rittenhouse Square

Philadelphia, Pennsylvania 19103

ROBERTA D. LIEBENBERG, ESQUIRE

ARTHUR M. KAPLAN, ESQUIRE

Fine Kaplan & Black

1845 Walnut Street, 23rd Floor

Philadelphia, Pennsylvania 19103

MICHAEL J. BONI, ESQUIRE

Kohn Swift & Graf, P.C.

One South Broad Street, Suite 2100

Philadelphia, Pennsylvania 19107

Attorneys for Appellant

RICHARD A. ROSEN, ESQUIRE (ARGUED)

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, New York 10019-6064
3

JOSEPH G. FERGUSON, ESQUIRE

Rosenn, Jenkins & Greenwald, L.L.P.

120 Wyoming Avenue

Scranton, Pennsylvania 18503

Attorneys for Appellee

OPINION OF THE COURT

SCIRICA, Chief Judge.

The Securities Litigation Uniform Standards Act of 1998

(“SLUSA”) provides for the removal and federal preemption of

certain state court class actions alleging “a misrepresentation or

omission of a material fact in connection with the purchase or

sale of a covered security.” 15 U.S.C. § 78bb(f)(1)(A) (West

Supp. 2004). At issue is whether this action on behalf of a

putative class of Salomon Smith Barney retail brokerage

customers is preempted by SLUSA.

Plaintiff Ryan Rowinski filed this class suit in

Pennsylvania state court alleging Salomon Smith Barney’s

dissemination of “biased investment research” breached the

parties’ services contract, unjustly enriched Salomon Smith

Barney, and violated state consumer protection law. Salomon

Smith Barney removed to federal court, where the District Court
4

granted its motion to dismiss based on SLUSA preemption. We

will affirm.

I.

Salomon Smith Barney is one of the world’s largest stock

brokerage and investment banking firms. Among its customers

are corporate clients who receive investment banking services

such as equity and debt underwriting, and individual investors

who maintain Salomon Smith Barney retail brokerage accounts.

In servicing its retail brokerage customers, Salomon Smith

Barney produces investment research compiled by a team of inhouse analysts. This action alleges that Salomon Smith

Barney’s research was unlawfully biased in favor of the firm’s

investment banking clients, to the detriment of its retail

brokerage customers.

Purporting to represent a class of “[a]ll persons who

maintained a Salomon Smith Barney retail brokerage account

and who paid any charges[,] commissions or fees to Salomon

Smith Barney,” plaintiff sued Salomon Smith Barney in

Pennsylvania state court for breach of contract, unjust

enrichment, and violation of state consumer protection statutes.

The gravamen of the action is the allegedly “biased investment

research and analysis” provided by Salomon Smith Barney to

the putative class. (Compl. ¶ 2.) Specifically, plaintiff alleges

Salomon Smith Barney “artificially inflates the ratings and

analysis of its investment banking clients” in order to “curry

favor with investment banking clients and reap hundreds of
5

millions of dollars in investment banking fees.” Plaintiff also

alleges the National Association of Securities Dealers

(“NASD”) fined Salomon Smith Barney for “issuing materially

misleading research reports,” and that “examples of Defendant’s

providing retail brokerage customers with biased and misleading

analyst reports abound.” 

Count I seeks damages under state law for breach of

contract. This count alleges Salomon Smith Barney “failed to

provide unbiased analysis and instead provided biased and

misleading analysis that was intended to curry favor with

Defendant’s existing and potential investment banking clients.

Defendant thereby breached its contracts with Plaintiff and the

Class.” Count II, for unjust enrichment, seeks recovery of the

“fees and charges” paid to Salomon Smith Barney in exchange

for “objective and unbiased investment research and analysis.”

Count III alleges deceptive consumer practices in violation of

Pennsylvania’s Unfair Trade Practices and Consumer Protection

Law, 73 P.S. § 201-1 et seq. This count seeks recovery of

“millions of dollars in unnecessary and unwarranted brokerage

fees and charges” attributable to Salomon Smith Barney’s

failure “to disclose material facts to its retail brokerage

customers” regarding “the relationship between its analysts and

its investment bankers.”

Plaintiff’s prayer for relief seeks, inter alia, damages in

“an amount equal to the amount of any and all fees and charges

collected” from the class and “all available compensatory

damages.”
6

Salomon Smith Barney removed the action to the United

States District Court for the Middle District of Pennsylvania.

After plaintiff filed a motion to remand to state court, Salomon

Smith Barney filed a cross-motion to dismiss based on SLUSA

preemption. The District Court denied the motion to remand

and granted Salomon Smith Barney’s motion to dismiss.

Relying in part on the Supreme Court’s decision in SEC v.

Zandford, 535 U.S. 813 (2002), the District Court held the

complaint, though framed in terms of state law, nevertheless

alleged a misrepresentation or omission of a material fact in

connection with the purchase or sale of a covered security.

Accordingly, the District Court dismissed plaintiff’s claims

under SLUSA. Rowinski v. Salomon Smith Barney, Inc., 2003

U.S. Dist. LEXIS 20918 (M.D. Pa. Nov. 20, 2003).

II.

The Securities Litigation Uniform Standards Act of 1998

provides, in part: 

(1) Class action limitations

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 . . . a misrepresentation or omission of a

material fact in connection with the purchase or

sale of a covered security; or . . . that the

defendant used or employed any manipulative or
 

1

SLUSA amends both the Securities Act of 1933 and the

Securities Exchange Act of 1934. The 1933 Act amendments

are codified at 15 U.S.C. § 78p. The 1934 Act amendments,

which are functionally identical, are codified at 15 U.S.C. §

78bb(f). For ease of reference, we cite only the 1934 Act

codification. 

 

2We note, but need not address, a division among the courts

of appeals on an issue of appellate jurisdiction under SLUSA.

Compare Kircher v. Putnam Funds Trust, 373 F.3d 847 (7th Cir.

2004), with Spielman v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 332 F.3d 116 (2d Cir. 2003), and United Investors Life Ins.

Co. v. Waddell & Reed, Inc., 360 F.3d 960 (9th Cir. 2004). The

7

deceptive device or contrivance in connection

with the purchase or sale of a covered security.

(2) Removal of covered class actions

Any covered class action brought in any

State court involving a covered security, as set

forth in paragraph (1), shall be removable to the

Federal district court for the district in which the

action is pending, and shall be subject to

paragraph (1).

15 U.S.C. § 78bb(f)(1)-(2).1

The SLUSA removal provision, § 78bb(f)(2), is

jurisdictional.2 It creates an express exception to the well-
question – whether SLUSA remand orders are appealable – is

not implicated by this case, and we express no opinion on the

matter. 

 

3

See Franchise Tax Bd. v. Constr. Laborers Vacation Trust,

463 U.S. 1, 9-10 (1983); Louisville & Nashville R.R. Co. v.

Mottley, 211 U.S. 149, 152 (1908).

 

4The definition of “covered class action” is set forth at 15

U.S.C. § 78bb(f)(5)(B). In general, a covered action is one for

damages on behalf of more than fifty class members in which

common issues of law or fact are alleged to predominate. The

definition of “covered security” is set forth at 15 U.S.C. §

78bb(f)(5)(E), which references those securities specified in

paragraphs (1) or (2) of § 18(b) of the Securities Act of 1933,

excluding any debt security that is exempt from registration

under that Act. 

8

pleaded complaint rule,3 conferring federal removal jurisdiction

over a unique class of state law claims. See Beneficial Nat’l

Bank v. Anderson, 539 U.S. 1, 8 (2003) (distinguishing between

removal of state law claims “when Congress expressly so

provides” and removal “when a federal statute wholly displaces

the state-law cause of action through complete pre-emption”).

The jurisdictional inquiry under SLUSA tracks the plain

language of the statute. No matter how an action is pleaded, if

it is a “covered class action . . . involving a covered security,”

removal is proper.4 The removing party bears the burden of
9

establishing these elements. DiFelice v. Aetna U.S. Healthcare,

346 F.3d 442, 445 (3d Cir. 2003).

The District Court exercised removal jurisdiction under

§ 78bb(f)(2) and 28 U.S.C. § 1331, and granted Salomon Smith

Barney’s motion to dismiss based on SLUSA preemption. We

have jurisdiction under 28 U.S.C. § 1291. Our review,

accepting the facts alleged in the complaint as true and drawing

all reasonable inferences in favor of the plaintiff, is plenary. In

re Adams Golf, Inc. Sec. Litig., 381 F.3d 267, 273 (3d Cir.

2004).

III.

In 1995, Congress enacted the Private Securities

Litigation Reform Act, 15 U.S.C. § 78u-4 et seq. (“PSLRA”), to

curb abuses in private class action securities litigation. See H.R.

Conf. Rep. No. 104-369, at 32-37 (1995), reprinted in 1995

U.S.C.C.A.N. 730, 730-32. The PSLRA implemented a host of

procedural and substantive reforms, including “more stringent

pleading requirements to curtail the filing of meritless lawsuits.”

In re Advanta Sec. Litig., 180 F.3d 525, 532 (3d Cir. 1999)

(quoting H.R. Conf. Rep. No. 104-369, at 37).

By 1998, Congress concluded that plaintiffs were

circumventing the requirements of the PSLRA by filing private

securities class actions in state rather than federal court.

SLUSA was designed to close this perceived loophole by

authorizing the removal and federal preemption of certain state

court securities class actions. See 15 U.S.C. § 78a (stating
10

SLUSA aims “to prevent certain State private securities class

action lawsuits alleging fraud from being used to frustrate the

objectives of the Private Securities Litigation Reform Act of

1995”). As the Senate Banking Committee Report explained,

Congress envisioned a broad interpretation of SLUSA to ensure

the uniform application of federal fraud standards. S. Rep. No.

105-182, available at 1998 WL 226714, *8 (Leg. Hist.) (“[I]t

remains the Committee’s intent that the bill be interpreted

broadly to reach mass actions and all other procedural devices

that might be used to circumvent the class action definition.”)

SLUSA preempts, inter alia, covered class actions

alleging “a misrepresentation or omission of a material fact in

connection with the purchase or sale of a covered security.” 15

U.S.C. § 78bb(f)(1)(A). This language mirrors existing federal

securities law under § 10(b) and Rule 10b-5 of the 1934 Act.

See 15 U.S.C. § 78j(b) (prohibiting fraud “in connection with

the purchase or sale of any security”); 17 C.F.R. § 240.10b-5

(2004) (prohibiting, inter alia, material misrepresentations and

omissions “in connection with the purchase or sale of any

security”). A threshold question, then, is whether existing case

law under § 10(b) and Rule 10b-5 informs the interpretation of

SLUSA’s “in connection” requirement.

We believe it does. “Where Congress uses terms that

have accumulated settled meaning under either equity or the

common law, a court must infer, unless the statute otherwise

dictates, that Congress means to incorporate the established

meaning.” NLRB v. Amax Coal Co., 453 U.S. 322, 329 (1981)
 

5Other courts have adopted this approach. See, e.g., Dabit v.

Merrill Lynch, Pierce, Fenner & Smith, Inc., 2005 U.S. App.

LEXIS 410, *27-28 (2d Cir. Jan. 11, 2005); Riley v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 292 F.3d 1334, 1342 (11th

Cir. 2002); Falkowski v. Imation Corp., 309 F.3d 1123, 1129

(9th Cir. 2002). But see Spielman, 332 F.3d at 132-33

(Newman, J., concurring) (questioning whether “in connection”

has the same meaning under SLUSA and § 10(b)). 

11

(citation omitted); see also Molzof v. United States, 502 U.S.

301, 307 (1992). Because SLUSA employs terms with settled

meaning under existing federal securities law, Congress

evidently intended to preempt those actions sufficiently

“connected” to a securities transaction to be actionable under §

10(b) and Rule 10b-5. In other words, SLUSA furthers the

uniform application of federal fraud standards without

expanding or constricting the substantive reach of federal

securities regulation. See 15 U.S.C. § 78a (emphasizing

considerations of federalism in SLUSA’s legislative findings).

Accordingly, we will interpret SLUSA’s “in connection”

requirement in light of existing doctrine under § 10(b) and Rule

10b-5.5 

IV.

As noted, the central issue on appeal is whether

plaintiff’s state law complaint alleges a material

misrepresentation or omission in connection with the purchase

or sale of a covered security. If so, the action must be dismissed
12

as preempted. Plaintiff contends neither the “misrepresentation”

nor the “in connection” elements are satisfied.

A.

The misrepresentation issue is straightforward.

Plaintiff’s complaint is replete with allegations that Salomon

Smith Barney disseminated biased and materially misleading

investment research. Plaintiff alleges Salomon Smith Barney

“provides customers with biased investment research and

analysis”; “artificially inflates the ratings and analysis of its

investment banking clients”; was fined by the NASD “for

issuing materially misleading research reports”; and “provided

biased and misleading analysis that was intended to curry favor

with Defendant’s existing and potential investment banking

clients.” These allegations, which are incorporated by reference

in every count in the complaint, readily satisfy the

misrepresentation requirement under SLUSA.

Plaintiff responds that the “breach of contract claim does

not involve a misrepresentation or omission.” In other words,

plaintiff contends that because “misrepresentation” is not an

essential legal element of his claim under Pennsylvania contract

law, the factual allegations of misrepresentation included in the

complaint are irrelevant to the SLUSA inquiry.

We disagree. Plaintiff’s suggested distinction – between

the legal and factual allegations in a complaint – is immaterial

under the statute. SLUSA preempts any covered class action

“alleging” a material misrepresentation or omission in
13

connection with the purchase or sale of securities. 15 U.S.C. §

78bb(f)(1). Under this provision, preemption does not turn on

whether allegations are characterized as facts or as essential

legal elements of a claim, but rather on whether the SLUSA

prerequisites are “alleged” in one form or another. A contrary

approach, under which only essential legal elements of a state

law claim trigger preemption, is inconsistent with the plain

meaning of the statute. Furthermore, it would allow artful

pleading to undermine SLUSA’s goal of uniformity – a result

manifestly contrary to congressional intent. 15 U.S.C. § 78a

(“The Congress finds that . . . . it is appropriate to enact national

standards for securities class action lawsuitsinvolving nationally

traded securities[.]”); S. Rep. No. 105-182, available at 1998

WL 226714, *8 (“[I]t remains the Committee’s intent that the

bill be interpreted broadly to reach mass actions and all other

procedural devices that might be used to circumvent the class

action definition.”).

Where, as here, allegations of a material

misrepresentation serve as the factual predicate of a state law

claim, the misrepresentation prong is satisfied under SLUSA.

B.

The “in connection” issue is more difficult. Plaintiff

contends the complaint states a straightforward breach of

contract claim, i.e., Salomon Smith Barney agreed to provide

unbiased investment research and failed to provide it. Salomon

Smith Barney responds that the action, while nominally resting
14

on state law, nevertheless alleges a material misrepresentation

in connection with the purchase or sale of securities. The issue

turns on whether plaintiff’s class-wide allegations, charging

Salomon Smith Barney with systematically and materially

misrepresenting its investment banking clients’ investment

ratings and analyses, are “connected” to the purchase or sale of

securities. As noted, our analysis is informed by “in

connection” case law under § 10(b), Rule 10b-5 and SLUSA.

The Supreme Court recently addressed the “in

connection” element in Zandford, an action under § 10(b) and

Rule 10b-5. The Court unanimously accepted the SEC’s “broad

reading of the phrase ‘in connection with the purchase or sale of

any security,’” 535 U.S. at 819, and held the requisite

connection is established where a “fraudulent scheme” and a

securities transaction “coincide.” Id. at 825. Zandford relied

upon and reaffirmed Superintendent of Insurance v. Bankers

Life & Casualty Co., 404 U.S. 6, 12 (1971), which likewise held

that a fraudulent scheme “touching” on a securities transaction

satisfied the “in connection” element of § 10(b) and Rule 10b-5.

At the same time, Zandford’s “broad” interpretation is

not boundless. It “does not transform every breach of fiduciary

duty into a federal securities violation.” 535 U.S. at 825 n.4.

Federal securities law is circumscribed, and strikes a balance

between uniform regulation of a national market and

preservation of those areas “traditionally left to state regulation,”

such as corporate, contract and fiduciary law. Santa Fe Indus.

Inc. v. Green, 430 U.S. 462, 478-80 (1977) (emphasizing
15

principles of federalism and holding claims challenging

“internal corporate mismanagement” are not actionable under §

10(b)). 

We also have addressed the “in connection” requirement

in the context of § 10(b) and Rule 10b-5. In Semerenko v.

Cendant Corp., we held the “in connection” criteria is satisfied

where material misrepresentations are “disseminated to the

public in a medium upon which a reasonable investor would

rely.” 223 F.3d 165, 176 (3d Cir. 2000); see also McGann v.

Ernst & Young, 102 F.3d 390, 392-96 (9th Cir. 1996); SEC v.

Tex. Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968) (en

banc). Additionally, we have held that a broker/investor dispute

involving the credit terms of a margin account arises “in

connection” with the purchase or sale of securities, in part

because investors maintain brokerage accounts “for the very

purpose of trading in securities.” Angelastro v. PrudentialBache Sec., Inc., 764 F.2d 939, 944 (3d Cir. 1985).

Courts applying SLUSA generally have adhered to a

broad interpretation of the “in connection” element. In Behlen

v. Merrill Lynch, the Court of Appeals for the Eleventh Circuit

held that despite plaintiffs’ removal of “all explicit references to

any fraudulent activity” from their state law complaint, breach

of contract claims involving misrepresentations by a securities

broker were sufficiently connected to a securities transaction to

trigger preemption. 311 F.3d 1087, 1090 (11th Cir. 2002).

Other courts have similarly scrutinized the pleadings to arrive at

the “essence” of a state law claim, in order to prevent artful
 

6

Plaintiff cites Green v. Ameritrade, Inc., 279 F.3d 590, 599

(8th Cir. 2002), and KPMG, 335 F.2d at 804 (8th Cir. 2003), for

the proposition that the measure of damages is not relevant to

the SLUSA preemption inquiry. But those cases suggest the

contrary. Neither Green nor KPMG rejects the relevance of

damages under SLUSA, and Green explicitly considers the

16

drafting from circumventing SLUSA preemption. Dudek v.

Prudential Sec., Inc., 295 F.3d 875, 880 (8th Cir. 2002); see also

Prof’l Mgmt. Assoc., Inc. v. KPMG LLP, 335 F.3d 800, 803 (8th

Cir. 2003) (preempting state law claims where the “complaint

implicitly alleges” that “misrepresentations and omissions were

made in connection with the purchase or sale of securities”)

(emphasis added); Falkowski, 309 F.3d at 1131 (9th Cir. 2002)

(preempting state law claims involving employee stock options

because “[r]epresentations about the value of stock . . . are

properly subject to uniform federal standards”).

The plaintiff’s theory of damages also bears on the

SLUSA “in connection” inquiry. See, e.g., Behlen, 311 F.3d at

1094 (11th Cir. 2002) (considering allegations of “excess fees

and commissions” in determining whether claims are

“connected” to a securities transaction); Dabit, 2005 U.S. App.

LEXIS 410, at *65 (2d Cir. Jan. 11, 2005) (holding that “claims

for commissions paid . . . are preempted”). In other words, the

relief sought by plaintiffs – such as the recovery of investment

losses or trading fees – may be relevant in “connecting” the

allegations to the purchase or sale of securities.6
theory of damages in its “connection” analysis. The plaintiffs

in Green sought recovery only of an annual account fee – this

limited theory of damages was one reason the court concluded

the action was not preempted. 279 F.3d at 599 n.7. In KPMG,

the court merely stated SLUSA preemption “is not limited to

cases involving damages claimed as a result of the purchase or

sale of securities.” 335 F.3d at 803 (emphasis added). 

17

C.

Under existing “in connection” case law, we find several

factors relevant in distinguishing between preempted claims and

those remaining within the province of state law: first, whether

the covered class action alleges a “fraudulent scheme” that

“coincides” with the purchase or sale of securities, Zandford,

535 U.S. at 825; second, whether the complaint alleges a

material misrepresentation or omission “disseminated to the

public in a medium upon which a reasonable investor would

rely,” Semerenko, 223 F.3d at 176; third, whether the nature of

the parties’ relationship is such that it necessarily involves the

purchase or sale of securities, see Angelastro, 764 F.2d at 944

(noting that customers maintain brokerage accounts “for the

very purpose of trading in securities”); and fourth, whether the

prayer for relief “connects” the state law claims to the purchase
 

7The non-inclusive four factors identified here are not

requirements, but rather guideposts in a flexible preemption

inquiry. Cf. Zandford, 535 U.S. at 819 (stating the in connection

requirement “should be construed not technically and

restrictively, but flexibly” to effectuate the goals of the 1934

Act) (citations omitted). In a SLUSA case involving different

facts or allegations, other considerations also may be relevant.

18

or sale of securities, see Dabit, 2005 U.S. App. LEXIS 410, at

*65.7

Applying this flexible framework, Rowinski’s state law

action is preempted by SLUSA. First, under Zandford, the

complaint alleges a fraudulent scheme coinciding with the

purchase or sale of securities. Plaintiff alleges that Salomon

Smith Barney systematically misrepresented the value of

securities to the investing public in order to “curry favor with

investment banking clients and reap hundreds of millions of

dollars in investment banking fees.” For this purported scheme

to work, investors must purchase the misrepresented securities.

Absent purchases by “duped” investors and a corresponding

inflation in the share price, Salomon Smith Barney’s biased

analysis would fail to benefit its banking clients and, in turn,

would fail to yield hundreds of millions of dollars in investment

banking fees. The scheme, in other words, necessarily

“coincides” with the purchase or sale of securities. Zandford,

535 U.S. at 825; see also Alley v. Miramon, 614 F.2d 1372,

1378 n.11 (5th Cir. 1980) (stating the “in connection” test is
19

satisfied where “the proscribed conduct and the sale are part of

the same fraudulent scheme”).

Second, plaintiff repeatedly alleges that Salomon Smith

Barney disseminated material misrepresentations “in a medium

upon which a reasonable investor would rely,” namely,

investment research reports. The requisite connection to a

securities transaction is therefore established under Semerenko,

223 F.3d at 176. This factor is particularly significant given

SLUSA’s goal of facilitating the uniform application of

“national standards for securities class action lawsuits involving

nationally traded securities.” 15 U.S.C. § 78a. Where the

defendant in a covered class action is alleged to have

misrepresented the value of nationally traded securities to the

investing public, SLUSA requires that federal fraud standards

govern the claims.

Third, the action arises from the broker/investor

relationship, the “very purpose” of which is “trading in

securities.” Angelastro, 764 F.2d at 944. If the purpose of a

brokerage account is to enable the purchase and sale of

securities, as Angelastro sensibly observed, then a class of

brokerage customers whose action alleges misleading

investment advice is almost certain to include “purchasers” or

“sellers” of the misrepresented securities.

Plaintiff contends, however, that investment research is

not necessarily disseminated in connection with the purchase or

sale of securities, citing investors who “hold,” rather than
 

8

See generally Small v. Fritz Cos., 65 P.3d 1255 (Cal. 2003)

(recognizing securities fraud claims by “holders,” as distinct

from purchasers and sellers, under California law).

20

purchase or sell, the recommended securities.8 But this

argument fails in light of plaintiff’s complaint, which defines the

putative class as: “All persons who maintained a Salomon Smith

Barney retail brokerage account and who paid any charges[,]

commissions or fees to Salomon Smith Barney.” This broad

class definition is not limited to non-purchasers and non-sellers,

and it necessarily encompasses claims by Salomon Smith

Barney retail brokerage customers who purchased or sold the

misrepresented securities – claims that are squarely preempted

under SLUSA.

Fourth, plaintiff seeks recovery of “any and all fees and

charges collected from Plaintiff and the Class,” as well as “all

available compensatory damages.” This prayer for relief

encompasses trading fees and commissions – charges incurred

only in connection with the purchase or sale of securities.

Together, these factors connect plaintiff’s state law action

to the purchase or sale of securities, and bring it well within the

bounds of SLUSA. The complaint sets forth a scheme

“coinciding” with the purchase or sale of misrepresented

securities, and the broadly-defined putative class – comprised of

all Salomon Smith Barney retail brokerage customers seeking

recovery of any trading fees and commissions – necessarily

includes “purchasers” and “sellers” of the misrepresented
 

9Because this putative class includes “purchasers” and

“sellers,” we need not address whether SLUSA preempts actions

comprised solely of non-purchasers and non-sellers. Several

courts have held SLUSA does not preempt class actions on

behalf of non-purchasers or non-sellers. See, e.g., Dabit, 2005

U.S. App. LEXIS 410, *50 (2d Cir. Jan. 11, 2005); Riley, 292

F.3d at 1345 (11th Cir. 2002); Green, 279 F.3d at 598 (8th Cir.

2002). This view finds support in Blue Chip Stamps v. Manor

Drug Stores, 421 U.S. 723, 733 n.5 (1975) (“the wording of §

10(b), making fraud in connection with the purchase or sale of

a security a violation of the Act, is surely badly strained when

construed to” encompass claims by non-purchasers and nonsellers) (emphasis in original). 

On the other hand, Salomon Smith Barney directs our

attention to an amicus brief filed by the SEC in Dabit, 2005 U.S.

App. LEXIS 410. The SEC contends that Blue Chip Stamps

established a prudential rule of standing for private actions

under § 10(b) and Rule 10b-5, but not a limitation on the scope

of SLUSA preemption. That is, the SEC views SLUSA as

broadly preempting state law securities fraud class actions,

including those on behalf of non-purchasers and non-sellers,

even if such claims are not actionable in federal court under §

10(b) and Rule 10b-5. This position finds support in, inter alia,

Holmes v. Securities Investor Protection Corporation, 503 U.S.

258, 284 (1992) (“The purchaser/seller standing limitations in

Rule 10b-5 damage actions . . . does not stem from a

21

securities.9 Under the statutory language, inclusion of these
construction of the phrase ‘in connection with the purchase or

sale of any security.’”) (O’Connor, J., concurring). But the

Court of Appeals for the Second Circuit rejected the SEC’s

interpretation, holding SLUSA preemption is limited to actions

by purchasers or sellers. Dabit, 2005 U.S. App. LEXIS 410,

*50.

We need not explore this frontier of SLUSA. For the

reasons stated, we hold this particular class action alleges claims

by purchasers and sellers, and therefore arises “in connection”

with the purchase or sale of covered securities.

22

preempted claims within the putative class compels dismissal of

the entire action. 15 U.S.C. § 78bb(f)(1) (requiring dismissal of

any covered “action” alleging “a misrepresentation or omission

of a material fact in connection with the purchase or sale of a

covered security”).

D.

Green v. Ameritrade, Inc., 279 F.3d 590 (8th Cir. 2002),

on which plaintiff principally relies, is distinguishable. Decided

before the Supreme Court’s decision in Zandford, Green

involved breach of contract claims against Ameritrade, an online

broker. The plaintiffs alleged that Ameritrade had agreed to

provide its customers “real time” stock quotes for a flat monthly

fee, when in fact the quotes were not “real time.” The

customers sued for breach of contract, and the Court of Appeals

for the Eighth Circuit held the complaint could not “reasonably

be read as alleging” fraud in connection with the purchase or
23

sale of securities. Id. at 598. Notably, the court considered the

plaintiffs’ theory of damages, which was limited to recovery of

the flat monthly account fees, in determining the action was not

sufficiently connected to the purchase or sale of securities to

warrant preemption. Id. at 599 n.7.

But Green involved neither misleading investment

research nor a prayer for recovery of trading fees and

commissions. The plaintiffs in Green alleged Ameritrade

misrepresented its “real time” services, not the value of its

investment banking clients’ securities. And the Green plaintiffs

sought recovery of a flat monthly account fee, not “all fees and

charges collected from Plaintiff and the Class” (including

trading fees), as plaintiff seeks here. In short, Green does not

address the facts of this case. For the reasons stated, the

connection between the allegations here and the purchase or sale

of securities is substantially more direct.

Furthermore, the authority of Green is undermined by

Zandford’s “broad” interpretation of the “in connection”

requirement, 535 U.S. at 819, and by subsequent decisions from

the Eighth Circuit. See Dudek, 295 F.3d 875 (8th Cir. 2002);

KPMG, 335 F.3d 800 (8th Cir. 2003). For example, Dudek

holds that SLUSA preemption applies where the “essence” of a

state law complaint is the misleading marketing of securities.

295 F.3d at 880. Similarly, KPMG holds SLUSA preempts

actions “implicitly” alleging a misrepresentation or omission in

connection with the purchase or sale of securities. 335 F.3d
 

10We note that a majority of district courts addressing similar

state law claims involving “biased brokerage research” have

found them preempted by SLUSA. See, e.g., Cinicolo v.

Morgan Stanley Dean Witter & Co., 2004 U.S. Dist. LEXIS

24896 (S.D.N.Y. Dec. 9, 2004); Dacey v. Morgan Stanley Dean

Witter & Co., 263 F. Supp. 2d 706 (S.D.N.Y. 2003); Feitelberg

v. Merrill Lynch & Co, Inc., 234 F. Supp. 2d 1043 (N.D. Cal.

2002); McCullagh v. Merrill Lynch & Co., 2002 U.S. Dist.

LEXIS 3758 (S.D.N.Y. Mar. 6, 2002); Korsinsky v. Salomon

24

803. Both cases were decided after Green and both, like

Zandford, employ a broad and flexible “in connection” analysis.

Plaintiff also contends that as master of his own

complaint, he is entitled to plead around SLUSA. But SLUSA

stands as an express exception to the well-pleaded complaint

rule, and its preemptive force cannot be circumvented by artful

drafting. In this context – where Congress has expressly

preempted a particular class of state law claims – the question

is not whether a plaintiff pleads or omits certain key words or

legal theories, but rather whether a reasonable reading of the

complaint evidences allegations of “a misrepresentation or

omission of a material fact in connection with the purchase or

sale of a covered security.” 15 U.S.C. § 78bb(f)(1). Although

plaintiff scrupulously avoids pleading the words “purchase” or

“sale” of securities, a reasonable reading of the complaint,

informed by existing “in connection” doctrine, establishes that

the elements of SLUSA preemption are satisfied.10
Smith Barney, Inc., 2002 U.S. Dist. LEXIS 259 (S.D.N.Y. Jan.

10, 2002); Hardy v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 189 F. Supp. 2d 14 (S.D.N.Y. 2001). But see Norman v.

Salomon Smith Barney, Inc., 2004 U.S. Dist. LEXIS 10619

(S.D.N.Y. June 9, 2004); Gray v. Seaboard Securities, Inc., 241

F. Supp. 2d 213 (N.D.N.Y. 2003).

 

11Although plaintiff’s theory of damages is one of several

factors connecting this action to the purchase or sale of

securities, we do not suggest that the absence of a prayer for

trading fees, commissions or investment losses alone would

necessarily defeat preemption. Plaintiffs cannot circumvent

SLUSA simply by failing to plead damages with specificity in

state court.

25

On a motion to dismiss, we will draw all reasonable

inferences in favor of the plaintiff. In re Adams Golf, Inc. Sec.

Lit., 381 F.3d at 273. Even so, we hold that plaintiff alleges

material misrepresentations in connection with the purchase or

sale of securities. The complaint repeatedly alleges that

Salomon Smith Barney misrepresented the value of its

investment banking clients’ securities, it sets forth a broad class

definition encompassing purchasers and sellers, and it seeks

recovery of trading fees and commissions charged in connection

with the purchase or sale of securities.11 Accepting these factual

allegations as true, and evaluating them under SLUSA, we

conclude the putative class action is preempted.
 

12We note that the District Court dismissed plaintiff’s claims

without prejudice. 

26

Finally, plaintiff contends we should examine each count

in the complaint separately to determine whether it is preempted.

See Falkowski, 309 F.3d 1123 (9th Cir. 2002) (preempting state

law fraud counts but remanding breach of contract counts). As

an initial matter, we question whether preemption of certain

counts and remand of others is consistent with the plain meaning

of SLUSA. The statute does not preempt particular “claims” or

“counts” but rather preempts “actions,” 15 U.S.C. § 78bb(f)(1),

suggesting that if any claims alleged in a covered class action

are preempted, the entire action must be dismissed.12 But we

need not decide whether a count-by-count analysis is appropriate

in this case, because plaintiff has incorporated every allegation

into every count in his complaint. Our SLUSA analysis

therefore applies to each of plaintiff’s counts, and compels the

conclusion that each is preempted.

V. Conclusion

For the reasons set forth, we will affirm the judgment of

the District Court.