In the

United States Court of Appeals

For the Seventh Circuit

No. 00-2028

Robert F. Rifkin, Raymond G.

Scachitti, and Patrick J. Houlihan,

Plaintiffs-Appellants,

Derivatively on behalf of County of

Cook, Nominal Plaintiff, on behalf of

itself and all other municipal and

governmental entities similarly

situated,

Plaintiff-Appellee,

v.

Bear Stearns & Co., Inc., Public

Sector Group, Inc., Seaway

National Bank of Chicago, and

Ernst & Young, L.L.P.,

Defendants-Appellees.

Appeal from the United States District Court 

for the Northern District of Illinois, Eastern

Division.

No. 99 C 3549--Charles R. Norgle, Sr., Judge. 

Argued January 25, 2001--Decided April 19,

2001 

 Before Coffey, Ripple, and Diane P. Wood,

Circuit Judges.

 Diane P. Wood, Circuit Judge. In 1992,

Bear Stearns & Co., with the help of the

other defendants in this case,

orchestrated a bond refinancing plan for

Cook County. According to the plaintiffs,

the way the defendants handled the

transaction cheated Cook County and the

United States Treasury out of almost

$250,000. The plaintiffs, citizens of

Cook County who were not purchasers of

the bonds and had no direct involvement

in the refinancing transactions, brought

this suit alleging violations of the

federal Investment Advisers Act of 1940,

15 U.S.C. sec. 80b-1 et seq. ("the
Advisers Act"), the Illinois Recovery of

Fraudulently Obtained Public Funds Act,

725 ILCS 5/20-101 et seq. ("Article XX"),

and Illinois common law. The district

court dismissed the case on the ground

that the plaintiffs lacked standing to

bring their claims in federal court. We

agree, with respect to the Advisers Act

claim, and we conclude further that the

court did not have even supplemental

jurisdiction over the state law claims,

as there were no proper federal claims to

which the state claims could be appended.

We therefore affirm the judgment of the

district court.

I

 In 1992, interest rates were dropping.

Cook County wanted to take advantage of

the new lower rates by retiring old

municipal bonds it had issued at higher

rates and replacing them with new bonds

issued at the lower rates. It could not

accomplish this goal directly, for the

simple reason that the old bonds had not

yet matured. Bear Stearns helped the

county develop a plan to get around this

problem. First, using Bear Stearns as

broker, the county issued new bonds,

known as "advance refunding bonds," at

the new, lower rates. The proceeds from

these bonds were used to purchase U.S.

Treasury Bonds, which were placed in an

escrow account and used to pay off the

old bonds as they matured. The interest

on advance refunding bonds is generally

tax exempt, which makes them attractive

to investors. On the other hand, in order

to maintain the bonds’ tax exempt status,

the local government issuing the bonds is

not permitted to earn a profit from the

escrowed Treasury bonds. If the escrowed

bonds generate revenues over the amount

needed to pay off the old bonds, the

excess must be turned over to the

Treasury; if that does not happen, the

IRS may declare the interest on the

advance refunding bonds taxable. 

 This feature of the advance refunding

bond mechanism gives brokers such as Bear

Stearns an opening to engage in a

practice known as "yield burning."

Because the yield of a Treasury security

is inversely related to its price, a

broker who wanted to reduce the yield

(and thus the potential that excess

yields would need to be returned to the

Treasury) would mark up the price of the
bonds. Although at first blush one might

think that the local government would

object to an inflated price, its

incentive to do so might be reduced

because of the effect of the higher price

on the interest generated by the escrowed

Treasury bonds: less interest (as long as

there is enough to pay the holders of old

bonds) means less that the local

government has to return to the federal

government. 

 That is what the plaintiffs in this case

allege happened to Cook County and its

taxpayers. Bear Stearns, they claim,

engaged in yield burning when it served

as the lead underwriter for the issuance

of the 1992 Cook County advance refunding

bonds, earning almost $250,000 in

improper profits in the process.

According to the plaintiffs, the yield

burning harmed the county in two ways:

first, if Bear Stearns had charged only

the market rate for the Treasury bonds

and all of the accounting on the escrow

account had been done properly, the

county would have been entitled to keep

approximately $32,000 of the money Bear

Stearns appropriated before the escrow

accounts began generating profits.

Second, the yield burning meant that the

county was not paying the appropriate

amount to the Treasury, which jeopardized

the advance refunding bonds’ tax exempt

status. (The adverse consequences for

federal revenues are, it seems, the

principal evil of yield burning; it is

unclear to what extent the practice

inflicted other harm on the county or the

plaintiffs, and given our resolution of

the case on standing grounds we make no

comment on that point.)

 The plaintiffs brought this suit in May

1999, alleging claims under the Advisers

Act, Article XX, and various common law

theories. In addition to Bear Stearns,

the plaintiffs sued Public Sector Group,

Inc. (PSG) and Seaway National Bank of

Chicago, both of which served as

financial advisors to the county with

respect to the transaction, and Ernst &

Young, which prepared a report verifying

the mathematical accuracy of Bear

Stearns’ calculations with respect to the

escrow accounts. The plaintiffs relied on

general federal question jurisdiction, 28

U.S.C. sec. 1331, for their Advisers Act

claim, and supplemental jurisdiction, 28

U.S.C. sec. 1367, for their state-law

claims. They did not, and do not, allege
that the parties are diverse or that any

other grounds would support subject

matter jurisdiction over the state-law

claims. 

 The district court found that the

plaintiffs, whose only connection to the

transactions they challenge was as Cook

County taxpayers, lacked standing to

bring their claims in federal court under

both the core standing requirements of

Article III of the U.S. Constitution and

the prudential standing doctrines. In

this appeal, the plaintiffs argue that

Illinois’s Article XX, which allows

taxpayers to sue on behalf of local

governments in certain circumstances, is

sufficient to confer Article III standing

on them, and that where a state statute

specifically creates taxpayer standing,

prudential standing considerations are

irrelevant. We review the district

court’s decision to dismiss this case for

lack of standing de novo. Perry v.

Sheahan, 222 F.3d 309, 313 (7th Cir.

2000).

II

 This court has recently held, in a case

very similar to this one, that standing

to bring a federal claim in federal court

is exclusively a question of federal law

and that a state statute permitting

taxpayer standing cannot override federal

law. See Illinois ex rel. Ryan v. Brown,

227 F.3d 1042, 1045 (7th Cir. 2000). In

Ryan, the plaintiffs sought to bring RICO

claims on behalf of the State of

Illinois, alleging, as do the plaintiffs

here, that Article XX, which (as the

formal name suggests) allows citizen

suits to recover sums fraudulently

obtained from government entities in some

situations, see 735 ILCS 5/20-101 to -

104, conferred standing on the plaintiffs

to sue on behalf of Illinois in federal

court. In response to that argument, we

stated unequivocally that "[t]he mere

fact that Illinois courts would recognize

the plaintiff’s standing to bring such an

action . . . does not mean that he has

standing to bring a federal action

arising from the same occurrence. The

plaintiff’s standing to assert a

federally-created right is not controlled

by state law." 227 F.3d at 1045. Instead,

the appropriate question was "whether, as

a matter of federal law, a taxpayer

derivative suit or citizen suit [on this
kind of claim] is permissible." Id. This

holding governs our analysis in the

present case. It means that the

plaintiffs have standing to pursue their

Advisers Act claim in the federal courts

only if they can satisfy the requirements

of Article III without reference to

Illinois’s statute. 

 As the Supreme Court has emphasized, the

requirement that a plaintiff have

suffered an "injury in fact," defined as

"an invasion of a legally protected

interest which is . . . concrete and

particularized," is an "irreducible

constitutional minimum of standing."

Lujan v. Defenders of Wildlife, 504 U.S.

555, 560 (1992). It is axiomatic that

being a citizen or taxpayer of an injured

governmental body, without more, is not a

sufficient injury in fact to create

standing for the taxpayer to seek redress

of the government’s injury. See Lujan,

504 U.S. at 573-74; Schlesinger v.

Reservists Committee to Stop the War, 418

U.S. 208, 220 (1974) ("[S]tanding to sue

may not be predicated upon an interest of

the kind alleged here which is held in

common by all members of the public,

because of the necessarily abstract

nature of the injury all citizens

share."). As we stated in Ryan, "general

taxpayer actions are not permitted" in

federal court. 227 F.3d at 1046. Because

the plaintiffs here assert only a

generalized injury shared by all

taxpayers of Cook County, they have not

met the irreducible constitutional

minimum requirements for standing in

federal court.

 In an effort to avoid that result, the

plaintiffs reiterate an argument that the

parties in Ryan asserted unsuccessfully,

both in the principal case and in their

arguments for rehearing. They urge that

their case is no different from the well

recognized device of shareholder

derivative suits, which are an example of

an individual bringing a claim on behalf

of a larger entity. There, as here, one

entity’s claim (that of the corporation)

is assigned to the volunteer plaintiff

essentially by operation of law, after

the efforts by the plaintiff to have the

corporation assert its own rights have

failed or would have been futile, as long

as the plaintiff would be an adequate

representative for the corporation. But

there is an important difference between
shareholder suits and the kind of

taxpayer suit these plaintiffs wish to

bring that they have not confronted. As

Kamen v. Kemper Financial Servs., Inc.,

500 U.S. 90 (1991), pointed out, state

law governs the rules for allocating

power within a corporation, and it is

thus logical to hold that state law

governs the circumstances under which a

shareholder may be empowered to speak for

the corporation in a derivative suit. Id.

at 99. When the criteria for a derivative

suit are met, the shareholder may bring

whatever substantive claim the

corporation may have had. 

 The current taxpayer suit is quite

different. Not even the plaintiffs allege

that there is a state law that

establishes a procedure under which a

taxpayer or citizen may displace an

Illinois county for all substantive

purposes. If there were, then we agree

our case would look much more like Kamen,

and we would need to decide if the

plaintiffs had properly qualified

themselves to speak for the county and

whether the county had Article III

standing to sue. We would also confront

the difficult question whether, in light

of the Supreme Court’s repeated

admonitions that taxpayers suits are not

permitted in federal court, a suit

brought under this hypothetical state

statute would be exempt from the standing

doctrines that normally bar such suits.

But Illinois has not enacted such a

statute. Instead, there is a specific

statute, Article XX, that makes it

unlawful fraudulently to obtain monies

from a state governmental unit and that

empowers citizens under very specific

circumstances to sue to recover that

money. Article XX therefore creates both

a claim and a remedy, including a limited

delegation of authority to citizenplaintiffs. Nothing in Article XX

purports to allow county citizens or

taxpayers to speak for the government on

claims outside its scope, and we do not

have the authority so to expand it. 

 The plaintiffs’ remaining attempts to

distinguish their case from Ryan are

easily disposed of. First, the plaintiffs

suggest that the Ryan opinion dealt only

with state common law taxpayer standing,

not with a state statute specifically

authorizing taxpayer suits. But this

represents too narrow a view of the
holding of Ryan. The point there was that

state law in general, whether Article XX

or common law, was irrelevant to the

question whether suit could be brought

under a particular federal statute, there

RICO. See 227 F.3d at 1044-45. The same

analysis applies here. Whether taxpayers

can sue to vindicate Cook County’s rights

under the Advisers Act is a question that

must be answered with reference to

federal law, both at the level of Article

III and prudential standing, and if need

be at the statutory level. This argument

is therefore without merit. 

 The plaintiffs’ final argument is that

the Supreme Court’s recent decision in

Vermont Agency of Natural Resources v.

United States ex rel. Stevens, 120 S. Ct.

1858 (2000), requires a finding of

standing here (and, they admit, by parity

of reasoning in Ryan). In Vermont Agency,

the Court held that a federal qui tam

statute in effect creates an assignment

of the federal government’s claim to the

qui tam relator, so that the appropriate

analysis of standing in a qui tam case

focuses on whether there has been a

cognizable injury to the government, not

whether there has been a cognizable

injury to the relator. 120 S. Ct. at

1863. The plaintiffs argue that the

holding in Vermont Agency is equally

applicable to state-law qui tam cases. In

a sense, they take the position that our

analysis of Advisers Act standing is

omitting a key step in the process. By

operation of Article XX, they claim, Cook

County’s claims against Bear Stearns and

the other defendants were assigned to

them. As the legal holders of claims that

satisfy all relevant standing criteria

for a federal action, they are no longer

mere taxpayers, but are the same as Cook

County itself. The appropriate question

is therefore whether Cook County has

suffered a cognizable injury, not whether

the qui tam relators have. 

 This argument, however, simply recasts

the basic point we have already rejected.

If we were to accept it, states could

confer taxpayer standing for any federal

claim they wished, simply by allowing

taxpayers to claim they were suing on

behalf of a governmental entity. Nothing

in the Advisers Act indicates that this

type of assignment is permissible, unlike

the situation in Vermont Agency where the

federal statute that provided the basis
of the claim also effected "a partial

assignment of the Government’s damages

claim." 120 S.Ct. at 1863. Were the

plaintiffs asserting an independent

ground for our subject matter

jurisdiction over the Article XX claim,

such as diversity jurisdiction, the

holding of Vermont Agency might be closer

on point. In such a case, however, we

would have to confront other difficult

questions in this case, such as whether

Article XX creates a valid assignment of

Cook County’s state law claim against the

defendants to these relators, whether the

extent of the assignment is sufficient to

give the relators a "concrete private

interest in the outcome of the suit,"

Vermont Agency, 120 S. Ct. at 1862, and

whether Article XX’s procedural

requirements were met in this case. As

the defendants point out, none of these

questions is easily answered. 

 We need not reach them in the case as

actually presented, because the

plaintiffs have not asserted that we have

jurisdiction over their Article XX claim

independent of our jurisdiction over

their Advisers Act claim. Rather, the

only ground for federal jurisdiction over

the Article XX claim that plaintiffs have

alleged is supplemental jurisdiction

under 28 U.S.C. sec. 1367. The district

court is empowered to take supplemental

jurisdiction over state claims only if

the court first has "original

jurisdiction" of the claim to which the

state claims are attached. See 28 U.S.C.

sec. 1367(a). Since we have concluded

that the lack of standing over the

Advisers Act claim was jurisdictional in

nature, the district court also had no

subject matter jurisdiction over the

Article XX claim.

 The plaintiffs seem to want us to treat

all three of their claims, in the

aggregate, as a "qui tam case." But, as

we have already noted, the Advisers Act

is not a qui tam statute, and nothing in

that statute suggests a congressional

intention to allow taxpayer derivative

actions under it. The plaintiffs must

establish the district court’s

jurisdiction over each of their claims

independently; they are not permitted to

use one count of their complaint to

establish federal subject matter

jurisdiction and a separate count to

establish standing. Compare Warth v.
Seldin, 422 U.S. 490, 500 (1975)

(standing analysis "often turns on the

nature and source of the claim asserted,"

because "[t]he actual or threatened

injury required by Article III may exist

solely by virtue of statutes creating

legal rights, the invasion of which

creates standing"). Vermont Agency’s

discussion of standing in qui tam cases

is simply irrelevant to the plaintiffs’

standing to bring their Advisers Act

claim. 

III

 The plaintiffs lack standing to bring

their claim under the Investment Advisers

Act in federal court. Because they lack

standing to bring their federal claim,

the district court had no authority to

exercise supplemental jurisdiction over

their remaining state law claims. In

light of these conclusions, we have no

occasion to discuss the question whether

claims under the Advisers Act are subject

to the same one year/ three year statute

of limitations that applies to similar

securities claims. See Lampf, Pleva,

Lipkind, Prupis & Petigrow v. Gilbertson,

501 U.S. 350 (1991); Kahn v. Kohlberg,

Kravis, Roberts & Co., 970 F.2d 1030 (2d

Cir. 1992). Nevertheless, we thank the

parties for their supplemental briefs on

that issue. The judgment of the district

court is Affirmed.