REVISED MARCH 20, 2012

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 11-10932

JAMES ROLAND; MICHAEL J. GIAMBRONE; THOMAS E. BOWDEN,

Individually and On Behalf Of Thomas E. Bowden S.E.P. I.R.A.;

T. E. BOWDEN, SR., Ret. Trust; G. KENDALL FORBES, Individually and on

Behalf of G. Kendall Forbes I.R.A.; ET AL,

Plaintiffs–Appellants

v.

JASON GREEN; CHARLES JANTZI; TIFFANY ANGELLE; JAMES

FONTENOT; THOMAS NEWLAND; GRADY LAYFIELD; HANK MILLS;

JOHN SCHWAB; RUSS NEWTON; JIM WELLER; SEI INVESTMENTS

COMPANY; CERTAIN UNDERWRITERS AT LLOYDS LONDON, in

Syndicates 2987, 1866, 1084, 1274, 4000 & 1183; ET AL,

Defendants–Appellees

LEAH FARR; ET AL,

Plaintiffs–Appellants

v.

JASON GREEN; DIRK HARRIS; TIMOTHY E. PARSONS; CHARLES

JANTZI; TIFFANY ANGELLE; GRADY LAYFIELD; HANK MILLS; JOHN

SCHWAB; RUSS NEWTON; JIM WELLER; SEI INVESTMENTS

COMPANY; CERTAIN UNDERWRITERS AT LLOYDS LONDON, in

Syndicates 2987, 1866, 1084, 1274, 4000 & 1183; ET AL,

Defendants–Appellees

United States Court of Appeals

Fifth Circuit

F I L E D

March 19, 2012

Lyle W. Cayce

Clerk
No. 11-10932

2

Consolidated with 11-11031

SAMUEL TROICE; HORACIO MENDEZ; ANNALISA MENDEZ; PUNGA

PUNGA FINANCIAL, LIMITED, individually and on behalf of a class of all

others similarly situated, 

Plaintiffs–Appellants

v.

PROSKAUER ROSE, L.L.P.; THOMAS V. SJOBLOM; P. MAURICIO

ALVARADO; CHADBOURNE AND PARKE, L.L.P.,

Defendants–Appellees

Consolidated with 11-11048

SAMUELTROICE; MARTHA DIAZ; PAULA GILLY-FLORES; PUNGA PUNGA

FINANCIAL, LIMITED, Individually and on behalf of a class of all others

similarly situated; PROMOTORA VILLA MARINO, CA; DANIEL GOMEZ

FERREIRO; MANUEL CANABAL, 

Plaintiffs–Appellants

v.

WILLIS OF COLORADO INCORPORATED; WILLIS GROUP HOLDGINGS

LIMITED; AMY S. BARANOUCKY; ROBERT S. WINTER; BOWEN,

MICLETTE & BRITT, INCORPORATED; WILLIS LIMITED,

Defendants–Appellees

Appeals from the United States District Court

for the Northern District of Texas
No. 11-10932

3

Before REAVLEY, DAVIS, and PRADO, Circuit Judges.

EDWARD C. PRADO, Circuit Judge:

This consolidated appeal arises out of an alleged multi-billion dollar Ponzi

scheme perpetrated by R. Allen Stanford through his various corporate entities.

These three cases deal with the scope of the preclusion provision of the

Securities Litigation Uniform Standards Act (“SLUSA”). That provision states:

“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.” 15 U.S.C.

§ 78bb(f)(1)(A). All three cases seek to use state class-action devices to attempt

to recover damages for losses resulting from the Stanford Ponzi scheme.

Because we find thatthe purchase or sale of securities (or representations about

the purchase or sale of securities) is only tangentially related to the fraudulent

schemes alleged by the Appellants, we hold that SLUSA does not preclude the

Appellants from using state class actions to pursue their recovery and

REVERSE.

I

A

In 1995, because of “perceived abuses of the class-action vehicle in

litigation involving nationally traded securities,” Congress passed the Private

Securities Litigation Reform Act (“PSLRA”). Merrill Lynch, Pierce, Fenner &

Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006). “Its provisions limit recoverable

damages and attorney’s fees, provide a ‘safe harbor’ for forward-looking

statements, impose new restrictions on the selection of (and compensation

awarded to) lead plaintiffs, mandate imposition of sanctions for frivolous

litigation, and authorize a stay of discovery pending resolution of any motion to

dismiss.” Id. (citing 15 U.S.C. § 78u-4). These reforms were enacted to combat
No. 11-10932

1 Although various courts have referred to this provision as a preemption provision, see,

e.g., Dabit, 547 U.S. at 74; In re Enron, 535 F.3d at 341, the Supreme Court has said that

4

the “rampant” “nuisance filings, targeting of deep-pocket defendants, vexatious

discovery requests,” and manipulation of clients by class counsel in securities

litigation. Id. (citing H.R. Rep. No. 104-369, at 31 (1995) (Conf. Rep.)). Perhaps

the most consequential reform, however, was that the PSLRA “impose[d]

heightened pleading requirements in actions brought pursuant to § 10(b) [of the

Securities and Exchange Act of 1934] and Rule 10b-5.” Id.

The reforms had their intended effect, “[b]ut the effort also had an

unintended consequence: It prompted at least some members of the plaintiffs’

bar to avoid the federal forum altogether.” Id. at 82. “[R]ather than confronting

the restrictive conditions set forth by the PSLRA, plaintiffs began filing

class-action securities lawsuits under state law, often in state court.” In re

Enron Corp. Secs., 535 F.3d 325, 337 (5th Cir. 2008) (citing Dabit, 547 U.S. at

82). “To stem this shift from Federal to State courts and prevent certain State

private securities class action lawsuits alleging fraud from being used to

frustrate the objectives of the [PSLRA], Congress enacted SLUSA.” Dabit, 547

U.S. at 82 (internal quotation marks omitted).

“The stated purpose of SLUSA is ‘to prevent certain State private

securities class action lawsuits alleging fraud from being used to frustrate the

objectives’ of the PSLRA . . . [by advancing] ‘the congressional preference for

national standards for securities class action lawsuits involving nationally

traded securities.’” In re Enron, 535 F.3d at 338 (quoting Dabit, 547 U.S. at

86–87). Specifically, the “core provision,” Dabit, 547 U.S. at 82, provides that

“[n]o 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.”1 15 U.S.C.
No. 11-10932

because SLUSA “does not itself displace state law with federal law but makes some state-law

claims nonactionable through the class-action device in federal as well as state court,” the

provision is best characterized as a preclusion provision. Kircher v. Putnam Funds Trust, 547

U.S. 633, 637 n.1 (2006).

5

§ 78bb(f)(1)(A). To effectuate this, SLUSA mandates: “Any covered class action

brought in any State court involving a covered security . . . shall be removable

to the Federal district court for the district in which the action is pending” and

subject to dismissal. Id. at § 78bb(f)(2).

B

In February 2009, the Securities and Exchange Commission (“SEC”)

brought suit against the Stanford Group Company, along with various other

Stanford corporate entities, including the Antigua-based Stanford International

Bank (“SIB”), for allegedly perpetrating a massive Ponzi scheme.

According to the SEC, the companies’ core objective was to sell

certificates of deposit (“CDs”) issued by SIB. Stanford achieved and

maintained a high volume of CD sales by promising above-market

returns and falsely assuring investors that the CDs were backed by

safe, liquid investments. For almost 15 years, SIB represented that

it consistently earned high returns on its investment of CD sales

proceeds. . . . In fact, however, SIB had to use new CD sales

proceeds to make interest and redemption payments on pre-existing

CDs, because it did not have sufficient assets, reserves and

investments to cover its liabilities.

. . . At the SEC’s request, the district court issued a temporary

order restraining the payment or expenditure of funds belonging to

the Stanford parties. The district court also appointed [a] Receiver

for the Stanford interests and granted him the power to conserve,

hold, manage, and preserve the value of the receivership estate.

Janvey v. Alguire, 647 F.3d 585, 590 (5th Cir. 2011) (internal quotation marks

omitted). Lastly, the district court in the SEC action entered a case

management order requiring all lawsuits against SIB’s service providers or third

parties to be filed as ancillary proceedings to the SEC action.
No. 11-10932

6

1

Two groups of Louisiana investors, represented by the same counsel, filed

separate lawsuits in the 19th Judicial District Court, East Baton Rouge Parish

on August 19, 2009—Roland v. Green and Farr v. Green. In those actions, each

set of plaintiffs sued the SEI Investments Company (“SEI”), the Stanford Trust

Company (the “Trust”), the Trust’s employees, and the Trust’s investment

advisors (collectively,the “SEI Defendants”) for their alleged role in the Stanford

Ponzi scheme. The plaintiffs alleged violations of Louisiana law including

breach of contract, negligent representation, breach of fiduciary duty, unfair

trade practices, and violations of the Louisiana Securities Act.

The plaintiffs in the Roland and Farr actions (the “Roland Plaintiffs”)

allege that SIB sold CDs to the Trust (located in Baton Rouge, Louisiana), which

in turn served as the custodian for all individual retirement account (“IRA”)

purchases of CDs. According to the plaintiffs, the Trust contracted with SEI to

have SEI be the administrator of the Trust, thereby making SEI responsible for

reporting the value of the CDs. Plaintiffs finally allege misrepresentations by

SEI induced them into using their IRA funds to invest in the CDs. Specifically,

the plaintiffs allege that the SEI Defendants represented to them that the CDs

were a good investment because (1) they could be “readily liquidated”; (2) SEI

had evaluated SIB as being “competent and proficient”; (3) SIB “employed a

sizeable team of skilled and experienced analysts to monitor and manage [its]

portfolio”; (4) “independent” auditors “verified” the value of SIB’s assets; (5) the

SEI Defendants had “knowledge” about the companies that SIB invested in and

thatthose companies were adequately capitalized; (6)the Antiguan government

regularly “examined” SIB; (7) the CDs were a “safe investment vehicle suitable

for long term investment with little or no risk”; (8) SIB had “retained legal

counsel”that ensured thatthe investments were structured so as to comply with

state and federal law; (9) the CDs would produce “consistent, double-digit
No. 11-10932

7

returns”; and (10) SIB’s assets were “invested in a well-diversified portfolio of

highly marketable securities issued by stable national governments, strong

multinational companies, and major international banks.”

The SEI Defendants sought removal to the United States District Court

for the Middle District of Louisiana on the basis that SLUSA precluded the state

court from entertaining the suits. The Multi-District Litigation (“MDL”) Panel

subsequently transferred the case to the Northern District of Texas (Judge

Godbey) where the separate Roland and Farr suits were consolidated. The

Roland Plaintiffs then filed a motion to remand their cases back to the Louisiana

state court.

2

The Roland action has been consolidated on appeal with two other actions.

In these cases, a group of Latin American investors (the “Troice Plaintiffs”)

broughttwo separate class actions against, respectively, SIB’s insurance brokers

(the “Willis Defendants”) and SIB’s lawyers (the “Proskauer Defendants”). The

Troice Plaintiffs brought claims under Texas law—specifically, violations of the

Texas Securities Act, aiding and abetting these violations, and civil conspiracy.

Similar to the Roland Plaintiffs, the Troice Plaintiffs allege that the Willis

Defendants represented to them that the CDs were a good investment because

(1) SIB was based in the United States and “regulated by the U.S. Government”;

(2) SIB was “insured by Lloyd’s”; (3) SIB was “regulated by the Antiguan

banking regulatory commission”;(4) SIB was “subjected to regular stringent risk

management evaluations” conducted by “an outside auditfirm”; (5) the CDs were

safe and secure; (6) SIB’s portfolio produced “consistent, double-digit returns”;

(7) the CDs’ “high return rates . . . greatly exceed those offered by commercial

banks in the United States”; and (8) SIB’s assets were “invested in a welldiversified portfolio of highly marketable securities issued by stable national

governments, strong multinational companies, and major international banks.”
No. 11-10932

8

The Troice Plaintiffs only alleged aiding and abetting violations of the Texas

Securities Act and civil conspiracy against the Proskauer Defendants. That is

to say that the Troice Plaintiffs did not allege that the Proskauer Defendants

made any (mis)representations to them.

The Troice Plaintiffs sued the Willis Defendants and Proskauer

Defendants in separate suits in the United States District Court for the

Northern District of Texas, invoking that court’s jurisdiction under the Class

Action Fairness Act. See 28 U.S.C. § 1332 (d)(2)(B). Both suits were assigned

to Judge Godbey pursuant to the MDL order. The Willis and Proskauer

Defendants moved to dismiss the suits pursuant to SLUSA.

C

Judge Godbey, due to the “multitude of Stanford-related cases” pending

before him with similar issues, decided to “select one case initially in which to

address the applicability of [SLUSA].” The case the district court chose was

Roland v. Green. On August 31, 2010, the district court issued its opinion on the

applicability of SLUSA preclusion to the Stanford litigation. 

In that opinion, after briefly discussing the history and purpose of SLUSA,

see supra I.A, the district court turned to the central question of “whether the

plaintiff alleges the use of misrepresentations, omission, or deceptive devices ‘in

connection with the purchase or sale of a covered security.’” First, the district

court concluded that the SIB CDs themselves were not “covered securities”

within the meaning of SLUSA because SIB never registered the CDs, nor were

they traded on a national exchange. See 15 U.S.C. § 77r(b). This finding, the

district court stated “did not end the SLUSA inquiry.” 

Noting thatthe Supreme Court has urged a “‘broad interpretation[]’ ofthe

‘in connection with’ [requirement] . . . in order to further the PSLRA’s goals,” the

district court stated that “the strength of the nexus between an allegedly

fraudulent scheme and the securities transactions serves as the primary thread
No. 11-10932

9

tying the caselaw together.” Given the “melange” of other circuit courts’

formulations of the test to determine what connection between a fraud and

transactions in covered securities is required for SLUSA preclusion to apply and

the “apparent absence of controlling Fifth Circuit authority,” the district court

decided to employ the Eleventh Circuit’s approach from Instituto de Prevision

Militar v. Merrill Lynch (“IPM”), 546 F.3d 1340 (11th Cir. 2008).

Applying the Eleventh Circuit’s test, the district court found that the

Roland Plaintiffs had alleged two distinct factual bases connecting the fraud to

transactions in covered securities. First, the district court found that “[t]he

[Roland] Plaintiffs’ purchases of SIB CDs were ‘induced’ by the

misrepresentation that SIB invested in a portfolio including SLUSA-covered

securities.” It noted that the CDs’ promotional material touted that the bank’s

portfolio of assets was invested in “highly marketable securities issued by stable

governments, strong multinational companies and major international banks.”

The district court also found that the purported investment of the bank’s

portfolio in SLUSA-covered securities gave its CDs certain qualities that induced

Plaintiffs’ purchases. The instruments were labeled CDs “to create the

impression . . . that the SIB CDs had the same degree of risk as certificates of

deposit issued by commercial banks regulated by the FDIC and Federal

Reserve.” However, they were advertised to function “[l]ike well-performing

equities” by offering “liquidity combined with the potential for high investment

returns.” This was supposedly made possible by “the consistent, double-digit

returns on the bank’s investment portfolio,” which stemmed, in part, from the

presence of SLUSA-covered securities. The Roland Plaintiffs allege in their

petition that had they “been aware of the truth” that SIB’s “portfolio consisted

primarily of illiquid investments or no investments at all,” they “would not have

purchased the SIB CDs.” The district court therefore found that the Roland

Plaintiffs sufficiently alleged that their “CD purchases were induced by a belief
No. 11-10932

10

that the SIB CDs were backed in part by investments in SLUSA-covered

securities.”

Additionally, the district court found the Roland Plaintiffs’ “allegations

. . . reasonably imply that the Stanford scheme coincided with and depended

upon the [Roland] Plaintiffs’ sale of SLUSA-covered securities to finance SIB CD

purchases.” It noted that the Roland Plaintiffs claim that the fraud was a

scheme targeting recent retirees who were urged to roll the funds in their

retirement account into an IRA administered by SEI, of which the Trust was the

custodian and which was fully invested in the CDs. The district court noted that

“retirement funds come in a variety of forms that might not all involve

SLUSA-covered securities,” but that “stocks, bonds, mutual funds, and other

SLUSA-covered securities commonly comprise IRA investment portfolios.” From

this, the court stated “that at least one of the [Roland] Plaintiffs acquired SIB

CDs with the proceeds of selling SLUSA-covered securities in their IRA

portfolios,” and therefore, this “modest finding” independently supported the

district court’s ruling that the Roland Plaintiffs’ claims were precluded by

SLUSA. Accordingly, the district court denied the Roland Plaintiffs’ motion for

remand and dismissed the action pursuant to 15 U.S.C. § 78bb(f)(1)(A).

In a separate order, the district court considered the Willis Defendants’

and the Proskauer Defendants’ motions to dismiss. Stating “[b]ecause [the

Troice] Plaintiffs bring class claims ‘based upon the statutory or common law of’

Texas and ‘alleging . . . a misrepresentation or omission of a material fact in

connection with the purchase or sale of a covered security,’” the discussion in the

district court’s order in Roland v. Green compels the finding that SLUSA

precludes the Troice Plaintiffs’ action, and therefore it must be dismissed. 

The Roland and Troice Plaintiffs timely appealed their dismissals, which

this court consolidated for the purposes of oral argument and disposition.
No. 11-10932

11

II

The Roland case is before us from a denial of a motion to remand, and the

Troice cases are before us on motions to dismiss. On each procedural posture,

our review is the same—de novo. Martin v. PepsiAmericas, Inc., 628 F.3d 738,

740 (5th Cir. 2010) (motion to dismiss); In re 1999 Exxon Chem. Fire, 558 F.3d

378, 384 (5th Cir. 2009) (motion to remand).

III

A

Though the question of the scope of the “in connection with” language

under SLUSA is one of firstimpression in this circuit, we do not write on a blank

slate. The Supreme Court directly addressed the issue of what constitutes “in

connection with the purchase or sale of a covered security” in Merrill Lynch,

Pierce, Fenner & Smith, Inc. v. Dabit. In that case, a former broker joined with

customers of Merrill Lynch in a class action against the firm for breaches of

fiduciary duty and contract, alleging that Merrill Lynch had issued biased

research and investment recommendations. Dabit, 547 U.S. at 75. These

misrepresentations, according to Dabit’s complaint, harmed the class members

in two ways. First, as to the customers, the misrepresentations allegedly

“caused them to hold onto overvalued securities.” Id. at 76. Second, as to the

brokers,the misrepresentations allegedly caused them to “los[e] commission fees

when their clients, now aware that they had made poor investments, took their

business elsewhere.” Id. The district court dismissed all of the claims based on

SLUSA. Id. The Second Circuit affirmed as to the claims of buyers and sellers,

but said SLUSA did not preclude the claims of “holders,” those who had not

purchased or sold a security but suffered merely by retaining or “holding” their

existing shares in reliance on Merrill Lynch’s allegedly fraudulent research. Id.

at 77. The central question in Dabit, therefore, was whether the holders’ claims
No. 11-10932

12

were precluded given SLUSA’s requirement that a fraud alleged be “in

connection with the purchase or sale of a covered security.” Id. at 84. 

After discussing the purposes of Section 10(b) and the history of Rule 10b-5

litigation, the Court noted that the reason it had barred holders from asserting

a private right of action under Rule 10b-5 in Blue Chip Stamps v. Manor Drug

Stores was “policy considerations,”including the special danger that“‘vexatious[]

. . . litigation’” posed in the realm of securities. Dabit, 547 U.S. at 80 (quoting

Blue Chip Stamps, 421 U.S. 723, 739 (1975)). The same policy considerations

that led to that limitation on Rule 10b-5’s private right of action, see supra I.A,

motivated Congress in its passage of the PSRLA and SLUSA. Dabit, 547 U.S.

at 81–82. In using the “in connection with” language that had been the focus of

so much litigation in the Rule 10b-5 context, the Courtfound that“Congress can

hardly have been unaware of the broad construction adopted by both this Court

and the SEC.” Id. at 85. It also found that by using the exact same

language—“in connection with the purchase or sale of [covered] securities”—

Congress intended to incorporate the judicial interpretations given to that

phrase into SLUSA as well. Id. at 85–86. 

Since Congress intended “in connection with” to mean the same thing in

SLUSA as it does in Section 10(b), “it is enough that the fraud alleged ‘coincide’

with a securities transaction—whether by the plaintiff or by someone else. The

requisite showing, in other words, is ‘deception “in connection with the purchase

or sale of any security,” not deception of an identifiable purchaser or seller.’” Id.

at 85 (quoting United States v. O’Hagan, 521 U.S. 642, 651, 658 (1997) (internal

citation omitted)); see also SEC v. Zandford, 535 U.S. 813, 824 (2002) (“[T]he

SEC complaint describes a fraudulent scheme in which the securities

transactions and breaches of fiduciary duty coincide. Those breaches were

therefore ‘in connection with’ securities sales within the meaning of § 10(b).”).
No. 11-10932

13

From these principles, the Court held that SLUSA precludes state-law holder

class actions like Dabit’s. Dabit, 547 U.S. at 87.

B

Since Dabit, six of our sister circuit courts have tried to give dimension to

the “coincide” requirement announced in SEC v. Zandford and brought into the

SLUSA scheme in Dabit. Romano v. Kazacos, 609 F.3d 512 (2d Cir. 2010); Segal

v. Fifth Third Bank, N.A., 581 F.3d 305 (6th Cir. 2009); Madden v. Cowen & Co.,

576 F.3d 957(9th Cir. 2009); Instituto de Prevision Militar v. Merrill Lynch, 546

F.3d 1340 (11th Cir. 2008); Siepel v. Bank of Am., N.A., 526 F.3d 1122 (8th Cir.

2008); Gavin v. AT&T Corp., 464 F.3d 634 (7th Cir. 2006). To be sure, we are

only bound by decisions of the Supreme Court, which has stated that “in

connection with” must be interpreted broadly, Zandford, 535 U.S. at 819. But

the test it has offered—whether or not “the fraud alleged ‘coincide[s]’ with a

securities transaction,” Dabit, 547 U.S. at 85 (emphasis added)—is not

particularly descriptive. Moreover, when the Court first set forth the “coincide”

requirement, it cautioned that “the statute must not be construed so broadly as

to convert every common-law fraud that happens to involve [covered] securities

into a violation of § 10(b).” Zandford, 535 U.S. at 820 (emphasis added). In light

of this tension, consideration of how our sister circuits have construed and

applied this “coincide” requirement is helpful in deciding how best to approach

our present case. Cf. United States v. Villegas, 494 F.3d 513, 514 (5th Cir. 2007).

In our consideration, we find most persuasive the decisions from the

Second, Ninth, and Eleventh Circuits. The cases from the other circuits do not

attempt to define the “coincide” requirement, but merely discuss what

connection above and beyond “coincide” is sufficient. For example, in Segal, the

Sixth Circuit noted that fraud allegations that “depend on” transactions in

covered securities meet the “coincide” requirement, but it does not state that for

a fraud to “coincide” requires that the fraud “depend on” transactions in covered
No. 11-10932

14

securities. It narrowly holds that where fraud depends on transactions in

covered securities, the fraud will also coincide with transactions in covered

securities. Segal, 581 F.3d at 310; see also Siepel, 526 F.3d at 1127 (8th Cir.);

Gavin, 464 F.3d at 639 (7th Cir.) (discussing how the “coincide” requirement

requires plaintiffs to allege fraud “involving” covered securities but noting that

a simple “butfor” relationship between an alleged fraud and the purchase or sale

of securities is insufficient). 

The Second, Ninth, and Eleventh Circuits have, however, attempted to

give dimension to what is sufficiently connected/coincidental to a transaction in

covered securities to trigger SLUSA preclusion. The Eleventh Circuit in

Instituto de Prevision Militar v. MerrillLynch (“IPM”) dealt with claims brought

by a Guatemalan government agency that administered a pension fund for

Guatemalan military veterans, which invested in Pension Fund of America

(“PFA”), and other Latin American PFA investors against Merrill Lynch. 546

F.3d at 1342–43. According to their complaint, Merrill Lynch “actively

promot[ed] PFA and vouch[ed] for the character of PFA’s principals.” Id. at 1343

(internal quotation marks omitted). After determining that the class met

SLUSA’s definition of a “covered class action,” see 15 U.S.C. § 78bb(f)(5)(B), the

Eleventh Circuit turned to the “coincide” requirement. IPM, 546 F.3d at

1345–48. It held that requirement met if either “fraud . . . induced [plaintiffs]

to invest with [the defendant(s)]” or “a fraudulent scheme . . . coincided and

depended upon the purchase or sale of [covered] securities.” Id. at 1349. The

court found that “IPM is complaining about fraud that induced it to invest with

PFA, which means that its claims are ‘in connection with the purchase or sale’

of a security under SLUSA.” Id.

The Ninth Circuit articulated its test for the “coincide” requirement

slightly differently in its Madden v. Cowen & Co. opinion. That case involved

shareholders of two medical care providers that were looking to merge with a
No. 11-10932

15

larger company. 576 F.3d at 962. In attempting to merge these two medical

care providers, the shareholders retained an investment bank, Cowen, “to look

for prospective buyers, give advice regarding the structure of any potential sale,

and render a fairness opinion regarding any proposed transaction.” Id. (internal

quotation marks omitted). Two suitors stepped up—one closely-held corporation

and another publicly-traded company. Id. Cowen recommended to the

shareholders that they accept the bid from the publicly-traded company. Id.

After the merger was complete, the stock price of the publicly-traded company

tumbled. Id. at 963. The shareholders then brought suit against Cowen for

“negligent misrepresentation and professional negligence under California law.”

Id. Based on Dabit’s statement that “in connection with” must be interpreted

the same way under SLUSA as it is under Section 10(b), the Ninth Circuit

looked to its prior precedent and held fraud is “‘in connection with’ the purchase

or sale of securities if there is ‘a relationship in which the fraud and the stock

sale coincide or are more than tangentially related.’” Id. at 966 (quoting

Falkowski v. Imation Corp., 309 F.3d 1123, 1131 (9th Cir. 2002)). Applying the

“more than tangentially related” test, the court found that “the

misrepresentations and omissions alleged in the complaint are more than

tangentially related to [the shareholders’] purchase of the [publicly-traded

company’s] securities.” Id. (internal quotation marks omitted).

The most recent circuit to consider the scope of the “coincide” requirement

post-Dabit was the Second Circuit in Romano v. Kazacos. Romano dealt with

two consolidated cases—one brought by Xerox retirees and one by Kodak

retirees—alleging that Morgan Stanley “misrepresented that if appellants were

to retire early, their investment savings would be sufficient to support them

through retirement.” 609 F.3d at 515. Based on these alleged

misrepresentations, the retirees “deposited their retirement savings into

Morgan Stanley IRA accounts, where covered securities were purchased on their
No. 11-10932

16

behalf.” Id. at 520. In discussing the “coincide” requirement, the Second Circuit

stated that “SLUSA’s ‘in connection with’ standard is met where plaintiff’s

claims turn on injuries caused by acting on misleading investment advice—that

is, where plaintiff’s claims necessarily allege, necessarily involve, or rest on the

purchase or sale of securities. . . . [Additionally,] the more exacting induced

standard satisfies § 10(b)’s ‘in connection with’ requirement.” Id. at 522

(citations and internal quotation marks omitted).

Each of the circuits that has tried to contextualize the “coincide”

requirement has come up with a slightly different articulation of the requisite

connection between the fraud alleged and the purchase or sale of securities (or

representations about the purchase or sale of securities): Segal, 581 F.3d at 310

(6th Cir.) (“depend on”); Siepel, 526 F.3d at 1127 (8th Cir.) (“related to”); Gavin,

464 F.3d at 639 (7th Cir.) (“involving,” meaning more than “but for”); IPM, 546

F.3d at 1349–50 (11th Cir.) (“induced by” or “depended upon”); Madden, 576F.3d

at 966 (9th Cir.) (“more than tangentially related to”); Romano, 609 F.3d at 522

(2d Cir.) (“necessarily allege, necessarily involve, or rest on”). Beyond these

various interpretations, we also think it useful before our standard to consider

cases more factually analogous to ours than Dabit and much of its progeny. That

is, cases where the fraud alleged was centered around the purchase or sale of an

uncovered security, like the CDs at issue in this appeal.

C

The preclusion analysis under SLUSA is slightly more complex in cases

where the fraudulent scheme alleged involves a multi-layered transaction, like

the one at issue in our case. In these cases, the plaintiffs often are fraudulently

induced into investing in some kind of uncovered security, like a CD or a share

in a “feeder fund,” which has some relationship either through the financial

product’s management company or through the financial product itself to

transactions (real or purported) in covered securities, such as stocks. Some of
No. 11-10932

2 The basic facts surrounding Madoff’s historic Ponzi scheme are

now well known. Madoff was a prominent and respected member

of the investing community . . . . Madoff’s investment company,

BMIS, had operated since approximately 1960. Madoff, who was

notoriously secretive, claimedheutilizeda “split-strike conversion

strategy” to produce consistently high rates of return on

investment. The split-strike conversion strategy supposedly

involved buying a basket of stocks listed on the Standard & Poor’s

100 index and hedging through the use of options.

However, since atleastthe early nineties, Madoff did not actually

engage in any trading activity. Instead, Madoff generated false

paper account statements and trading records; if a client asked to

withdraw her money, Madoff would pay her with funds invested

by other clients. During this time, Madoff deceived countless

investors and professionals, as well as his primary regulators, the

Securities and Exchange Commission (“SEC”) and the Financial

Industry Regulatory Authority (“FINRA”). On December 11,

2008, news broke that Madoff had been operating a multi-billion

dollar Ponzi scheme for nearly twenty years. Madoff pleaded

guilty to securities fraud and related offenses on March 12, 2009,

and was subsequently sentenced to 150 years in prison.

Many individuals and institutions that invested with Madoff did

so through feeder funds . . . . Investors would invest in the feeder

fund, which would then invest its assets with Madoff. . . . After

Madoff’s fraud became public, the [funds’] managing members

[usually] decided to liquidate the [funds] and distribute [their]

remaining assets. The fund[s’] liquidation forms the subject

matter of [the lawsuits].

In re Beacon Assocs. Litig., 745 F. Supp. 2d 386, 393–94 (S.D.N.Y. 2010).

17

the more analogous cases arise out of the slew of recent suits stemming from the

Bernie Madoff Ponzi scheme, especially the so-called “feeder fund” cases.2 From

our reading of these uncovered securities cases, we glean three approaches: (1)

focus the analysis on whether the financial product purchased was a covered

security (the “product approach”); (2) focus on the “separation” between the

investment in the financial product and the subsequent transactions (real or

purported) in covered securities (the “separation approach”); and (3) focus on the

“purpose(s)” of the investment (the “purposes approach”).

1
No. 11-10932

18

Courts that take the product approach focus their analysis on the type of

financial product upon which the alleged fraudulent scheme centers. In doing

so, the crux of the analysis is not whether or not the “coincide” requirement of

SLUSA is met, but rather whether the financial product qualifies as a “covered

security” under 15 U.S.C. § 78bb(f)(5)(E). In Ring v. AXA Financial, Inc., the

Second Circuit held that claims of fraud relating to the sale of an interest in a

term life insurance policy, a Children’s Term Rider (“CTR”) ( a “classic insurance

product” and an uncovered security) were not SLUSA-precluded merely because

the insurance company held covered securities in its portfolio, which in turn

backed the plaintiffs’ interest in the CTR. 483 F.3d 95, 96, 99 (2d Cir. 2007). It

likewise found the fact that the CTR was attached to a variable life insurance

policy, which is a covered security under SLUSA, was insufficientto preclude all

claims relating to the CTR because “the CTR and the policy to which it is

appended must be considered separately.” Id. at 96. But see IPM, 546 F.3d at

1351 (“[H]ybrid securities . . . are ‘covered securities.’” (citing Herndon v.

Equitable Variable Life Ins. Co., 325 F.3d 1252 (11th Cir. 2003) (per curiam))).

Similarly, in Brehm v. Capital Growth Financial, the district court held that

“private placement securities or debentures” were not covered securities. No.

8:07CV315, 2008 WL 553238, at *2 (D. Neb. Feb. 25, 2008). Moreover, it found

that allegations that the defendants were also going to invest in “securities and

other intangible instruments that are traded in the public markets or issued

privately” were insufficient to bring the case within SLUSA’s preclusive ambit.

Id. at *3 (internal quotation marks omitted).

The most-cited case using this approach is Pension Committee of the

University of Montreal Pension Plan v. Banc of America Securities, LLC, 750 F.

Supp. 2d 450 (S.D.N.Y. 2010). That case was an “action to recover losses

stemming from the liquidation of two British Virgin Islands based hedge funds

. . . in which [the plaintiffs] held shares.” Id. at 451. The Montreal Pension court
No. 11-10932

19

held, “Because plaintiffs purchased shares in hedge funds, rather than covered

securities, SLUSA does not preempt plaintiffs’ state-law claims.” Id. at 453–54.

It went on to discuss Dabit and distinguished it by stating,

The interpretation of SLUSA urged by the [Defendants] stretches

the statute beyond its plain meaning. There are no grounds on

which to justify applying Dabit to statements made by the

[Defendants] concerning uncovered hedge funds—even when a

portion of the assets in those funds include covered securities. This

outcome is required because the alleged fraud relates to those hedge

funds rather than to the covered securities in the portfolios.

Id. at 454–55. Lastly, using some language more characteristic of the purpose

and separation approaches,the court also distinguished its case from the Madoff

feeder fund cases where SLUSA preclusion was found. It noted that the feeder

funds in those cases were “nothing but ghost entities—easily pierced,” and that

those funds essentially “did not exist and had no assets. Thus,” it found, the

plaintiffs in those cases “could claim that they deposited their money [in the

funds] for the purpose of purchasing covered securities.” Id. at 455 n.27. None

of those conditions were present in the funds purchased by the plaintiffs;

therefore, it concluded, “covered securities are not ‘at the heart’ of this case.”

Id. at 455.

2

The separation approach considers the degree of separation between the

fraud inducing the plaintiffs to buy the uncovered securities and the downstream

transactions in covered securities. This focus is somewhat like Montreal

Pension’s concern about what is at the “heart” of the case. The most cited case

using the separation approach is Anwar v. Fairfield Greenwich Ltd. (Anwar II).

Anwar II dealt with a feeder fund to invest in Madoff’s funds. 728 F. Supp. 2d

372, 387 (S.D.N.Y. 2010). The district court in Anwar II, however, found distinct

differences in how the funds at issue in that case operated and the usual way
No. 11-10932

20

Madoff feeder funds operated. Compare id. at 398–99 with supra note 2.

Finding that the funds at issue were “not . . . cursory, pass-through entit[ies],”

id. at 398, the Anwar II court held that “[t]hough the [c]ourt must broadly

construe SLUSA’s ‘in connection with’ phrasing, stretching SLUSA to cover this

chain of investment—from [p]laintiffs’ initial investment in the [f]unds, the

[f]unds’ reinvestment with Madoff, Madoff’s supposed purchases of covered

securities, to Madoff’s sale of those securities and purchases of Treasury

bills—snaps even the most flexible rubber band.” Id. at 399. Therefore, the

court found that the “coincide” requirement was not met because “[t]he

allegations in [that] case present[ed] multiple layers of separation between

whatever phantom securities Madoff purported to be purchasing and the

financial interests [p]laintiffs actually purchased.” Id. at 398; cf. Levinson v.

PSCC Servs., Inc. (Levinson II), No. 3:09-CV-269, 2010 WL 5477250, at *8 (D.

Conn. Dec. 29, 2010) (“A third party’s fraud—although the intervening and

primary cause ofthe plaintiff’s losses—does not supplantthe fraudulent conduct

on the part of the defendant that is necessary to trigger SLUSA preemption.”).

But see In re Herald, Primeo, & Thema Secs. Litig., No. 09 Civ. 289, 2011 WL

5928952, at *7 (S.D.N.Y. Nov. 29, 2011) (“[C]laims against these [d]efendants are

integrally tied to the underlying fraud committed by Madoff.”).

3

The third and most widely adopted approach is the purpose approach,

which primarily concerns itself with what the purpose of the investment was.

The clearest articulation ofthis approach asks whether the uncovered securities

(feeder funds) “were created for the purpose of investing in [covered] securities.”

Newman v Family Mgmt. Corp., 748 F. Supp. 2d 299, 312 (S.D.N.Y. 2010); see

also In re Beacon Assocs. Litig., 745 F. Supp. 2d 386, 430 (S.D.N.Y. 2010) (“[T]he

objective ofthe fund was to manage [p]laintiffs’ investment using a strategy that

inevitably included the purchase and sale of covered securities.”); Levinson v.
No. 11-10932

21

PSCC Servs., Inc. (Levinson I), No. 3:09-CV-269, 2009 WL 5184363, at *7 (D.

Conn. Dec. 23, 2009) (“[T]he omnibus account created by [d]efendants was

clearly for the purpose of allowing Madoff to purchase and sell securities using

[p]laintiffs’ funds.”). 

In ascertaining the purpose of the investment, these courts have

considered what the fraud “at the heart of the case” was. In re Kingate Mgmt.,

Ltd. Litig., No. 09 Civ. 5386, 2011 WL 1362106, at *9 (S.D.N.Y. Mar. 30, 2011);

see also Montreal Pension, 750 F. Supp. 2d at 455; Backus v. Conn. Cmty. Bank,

N.A., No. 3:09-CV-1256, 2009 WL 5184360, at *5 (D. Conn. Dec. 23, 2009). They

have also looked to the centrality of transactions in covered securities to the

fraud. See Barron v. Igolnikov, No. 09 Civ. 4471, 2010 WL 882890, at *5

(S.D.N.Y. Mar. 10, 2010); Backus, 2009 WL 5184360, at *8. Finally, some courts

have considered the “nature of the parties’ relationship, and whether it

necessarily involved the purchase or sale of securities.” Levinson I, 2009 WL

5184363, at *11 (citing Rowinski v. Salomon Smith Barney, Inc., 398 F.3d 294,

302 (3d Cir. 2005)); see also Backus, 2009 WL 5184360, at *8 (“[T]he very

purpose of the relationship . . . was to trade in securities.”).

D

Given the Supreme Court’s express reliance on “policy considerations” in

its determination of the scope of the “in connection with” language in Section

10(b), Blue Chip Stamps, 421 U.S. at 737, and SLUSA, Dabit, 547 U.S. at 81, we

find it useful to consider such arguments in our formulation of the standard.

Specifically, we find persuasive Congress’s explicit concern aboutthe distinction

between national, covered securities and other, uncovered securities.

As we have stated previously, “SLUSA advances ‘the congressional

preference for national standards for securities class action lawsuits involving

nationally traded securities.’” In re Enron, 535 F.3d at 338 (quoting Dabit, 547

U.S. at 87) (emphasis added). The rationale for this preference is clear: Because
No. 11-10932

22

companies can not control where their securities are

traded after an initial public offering . . . , companies

with publicly-traded securities can not choose to avoid

jurisdictions which present unreasonable litigation

costs. Thus, a single state can impose the risks and

costs of its peculiar litigation system on all national

issuers. The solution to this problem is to make

Federal court the exclusive venue for most securities

fraud class action litigation involving nationally traded

securities. 

H.R. Rep. No. 105-803, at 15 (1998) (Conf. Rep.). Such concerns are unique to

the world of national securities. That SLUSA would be applied only to

transactions involving national securities appears to be Congress’s intent: “[T]he

securities governed by this bill—and it is important to emphasize this point—are

by definition trading on national exchanges. As we all know, securities traded

on national exchanges are bought and sold by investors in every State, and those

investors rely on information distributed on a national basis.” 144 Cong. Rec.

4799 (1998) (statement of Sen. Joseph Lieberman); see also 144 Cong. Rec. 10780

(1998) (statement of Rep. Anna Eshoo) (“This legislation is limited in scope and

only affects class action lawsuits involving nationally traded securities.”). 

Exempting non-national securities from SLUSA’s preclusive scope does not

render them unregulated. When enacting SLUSA, Congress recognized the

importance of maintaining the vital role of state law in regulating non-national

securities. Congress found “that in order to avoid . . . thwarting . . . the purpose

of the [PSLRA], national standards for nationally traded securities must be

enacted, while preserving the appropriate enforcement powers of state

regulators, and the right of individuals to bring suit.” S. Rep. 105-182, at 8

(1998). Notably, state common law breach of fiduciary duty actions provide an

important remedy not available under federal law. See Securities & Exchange

Commission, Study on Investment Advisers and Broker-Dealers (Jan. 2011),
No. 11-10932

23

http://sec.gov/news/studies/2011/913studyfinal.pdf, at 54. In addition to

fiduciary duty actions, over-extension of SLUSA also threatens state creditordebtor regimes, which we have held are likely available to the Appellants. See

Janvey v. Adams, 588 F.3d 831, 835 (5th Cir. 2009). The differences between the

federal and state remedies have led our colleagues on the Eleventh Circuit to

note that“[s]ince not every instance of financial unfairness or breach of fiduciary

duty will constitute a fraudulent activity under § 10(b) or Rule 10b-5, federal

courts should be wary of foreclosing common law breach of fiduciary duty actions

which supplement existing federal or state statutes.” Gochnauer v. A.G.

Edwards & Sons, Inc., 810 F.2d 1042, 1049 (11th Cir. 1987). This wariness is

echoed by the members of Congress appearing as amici on behalf of the

Appellants: “The interpretation of SLUSA and the ‘in connection with’

requirement adopted by the District Court . . . could potentially subsume any

consumer claims involving the exchange of money or alleging fraud against a

bank, without regard to the product that was being peddled.” As they point out,

every bank and almost every company owns some covered securities in its

portfolio, and every debt instrument issued by these banks and companies is

backed by this portfolio in the same way the CDs here were ultimately backed

by the assets in SIB’s portfolio. Precluding any group claim against any such

debt issue merely because the issuer advertises that it owns these assets in its

portfolio would be a major change in the scope of SLUSA. 

IV

It is against this backdrop that we must go about formulating our

standard for judging the connection of claims like the Appellants’ to the

purchase or sale of covered securities. As noted previously, there is tension in

the law between following the Supreme Court’s command that “in connection

with” must be interpreted broadly,Zandford, 535 U.S. at 819, and its concurrent

instruction that the same language “must not be construed so broadly as to
No. 11-10932

24

convert every common-law fraud that happens to involve [covered] securities into

a violation of § 10(b),” id. at 820.

The Eleventh Circuit’s test from IPM, employed by the district court, is a

good starting point because it identifies the two different perspectives from

which to approach the question of connectivity. IPM held that the “coincide”

requirement is met if either “fraud . . . induced [plaintiffs] to invest with [the

defendant(s)]” or “a fraudulent scheme . . . coincided and depended upon the

purchase or sale of [covered] securities.” IPM, 546 F.3d at 1349 (emphasis

added). The “induced” prong examines the allegations from the plaintiffs’

perspective by asking essentially whether the plaintiffs thought they were

investing in covered securities or investing because of (representations about)

transactions in covered securities. The “depended upon” prong views the

allegations from the opposite perspective, the defendants’, essentially asking

whether the defendants’ fraudulent scheme would have been successful without

the (representations about) transactions in covered securities. These two

perspectives—plaintiffs’ and defendants’—are also seen in the various uncovered

securities cases in the district courts. Compare Levinson I, 2009 WL 5184363,

at *11 (“[T]he crux of [the p]laintiffs’ allegations is that [the defendants’]

fraudulent statements caused [the p]laintiffs to make poor investment

decisions.”) (plaintiffs’ perspective) with In re Beacon, 745 F. Supp. 2d at 430

(“[T]he objective of the fund was to manage [p]laintiffs’ investment using a

strategy that inevitably included the purchase and sale of covered securities.”)

(defendants’ perspective).

Viewing the allegations from the plaintiffs’ perspective, however, asks the

wrong question. By tying the “coincide” requirement to “inducement,” it

unnecessarily imports causation into a test whose language (“coincide”)

specifically disclaims it. The defendant-oriented perspective, like IPM’s

“depends upon” prong, is more faithful to the Court’s statement that “[t]he
No. 11-10932

25

requisite showing . . . is deception in connection with the purchase or sale of any

security, not deception of an identifiable purchaser or seller.” Dabit, 547 U.S. at

85 (emphasis added) (internal quotation marks omitted). Dabit’s formulation

focuses the analysis on the relationship between the defendants’ fraud and the

covered securities transaction without regard to the fraud’s effect on the

plaintiffs. Additionally, IPM’s “depended upon” prong appears very similar to

the Second Circuit’s test from Romano, which found SLUSA preclusion is

appropriate where “plaintiff’s claims ‘necessarily allege,’ ‘necessarily involve,’ or

‘rest on’ the purchase or sale of securities.” Romano, 609 F.3d at 522. 

Though the defendant-oriented perspective is the proper point of view from

which to consider the allegations, the problem we see with the test from that

perspective as articulated by the Second and Eleventh Circuits is that it is too

stringent a standard. Specifically, a reading of the opinions of the Sixth and

Eighth Circuits on SLUSA preclusion suggests that those courts would find the

“depended upon” standard to be too high a bar. The Sixth Circuit in Segal

seemed to suggestthat while a claim that“depended on” a securities transaction

was sufficient, there were other connections that would also meet the “coincide”

requirement. Segal, 581F.3d at 310 (“Segal’s allegations do not merely ‘coincide’

with securities transactions; they depend on them. Under these circumstances,

the district court properly concluded that SLUSA requires the dismissal of this

complaint.” (citations omitted)); compare id. with IPM, 546 F.3d at 1349 (The

“coincide” requirement is met if “a fraudulent scheme . . . coincided and

depended upon the purchase or sale of [covered] securities.”). In Siepel, the

Eighth Circuit found that the “coincide” requirement is less stringent than a

standard requiring the fraud “relate to” transactions in covered securities.

Siepel, 526 F.3d at 1127; compare id. with Romano, 609 F.3d at 522 (SLUSA

preclusion is appropriate where “plaintiff’s claims . . . ‘rest on’ the purchase or

sale of securities.”).
No. 11-10932

26

In light of this, we find Ninth Circuit’s test from Madden, which is that “a

misrepresentation is ‘in connection with’ the purchase or sale of securities if

there is a relationship in which the fraud and the stock sale coincide or are more

than tangentially related,” to be the best articulation of the “coincide”

requirement. Madden, 576 F.3d at 965–66 (emphasis added and internal

quotation marks omitted). This articulation nicely deals with the Courtexpressed tension in Zanford that the requirement “must not be construed so

broadly as to [encompass] every common-law fraud that happens to involve

[covered] securities.” Zandford, 535 U.S. at 820. It also heeds the Seventh

Circuit’s advice that “‘the “connection” requirement must be taken seriously.’”

Gavin, 464 F.3d at 640 (Posner, J.) (quoting Frymire-Brinati v. KPMG Peat

Marwick, 2 F.3d 183, 189 (7th Cir. 1993) (Easterbrook, J.)). Lastly, it

incorporates the significant policy and legislative intent considerations, all of

which militate against an overbroad formulation. See supra III.D; see also Dabit,

547 U.S. at 81. Therefore, we adopt the Ninth Circuit’s test. Accordingly, if

Appellants’ allegations regarding the fraud are more than tangentially related

to (real or purported) transactions in covered securities, then they are properly

removable and also precluded. See Kircher v. Putnam Funds Trust, 547 U.S.

633, 644 (2006).

V

Having established the standard by which the Appellants’ allegations will

be judged, we turn now to the Roland and Troice complaints. “The plaintiff is

‘the master of her complaint,’ and, as such, a determination that a cause of

action presents a federal question depends upon the allegations of the plaintiff’s

well-pleaded complaint.” Medina v. Ramsey Steel Co., 238 F.3d 674, 680 (5th

Cir. 2001) (internal quotation marks omitted). The artful pleading doctrine is

an independent corollary to the well-pleaded complaint rule: “[u]nder this

principle, even though the plaintiff has artfully avoided any suggestion of a
No. 11-10932

27

federal issue, removal is not defeated by the plaintiff’s pleading skills in hiding

[a] federal question.” Bernhard v. Whitney Nat’l Bank, 523 F.3d 546, 551 (5th

Cir. 2008). We have stated previously that the artful pleading doctrine “applies

only where state law is subject to complete preemption.” Id. (citing Terrebone

Homecare, Inc. v. SMA Health Plan, Inc., 271 F.3d 186, 188–89 (5th Cir. 2001).

However, as the Second Circuit has noted, there is another situation where the

artful pleading doctrine applies: “when Congress has . . . expressly provided for

the removal of particular actions asserting state law claims in state court.”

Romano, 609 F.3d at 519 (citing Beneficial Nat’l Bank v. Anderson, 539 U.S. 1,

6 (2003)).

Application of the first prong is a bit tricky because SLUSA is a

statute of preclusion, rather than preemption. But its effect is the

same: where plaintiffs proceed as a class of fifty or more, state law

securities claims are no longer available to them and federal law,

which compels the dismissal of those claims, controls. Application

of the second prong is straightforward. Since SLUSA expressly

provides for the removal of covered class actions, it falls under the

“removal” exception to the well-pleaded complaint rule.

Consequently, we are free to look beyond the face of the amended

complaints to determine whether they allege securities fraud in

connection with the purchase or sale of covered securities. 

Id.(citations and footnotes omitted); see also Segal, 581F.3d at 310 (“Courts may

look to—they must look to—the substance of a complaint’s allegations in

applying SLUSA. Otherwise, SLUSA enforcement would reduce to a formalistic

search through the pages of the complaint for magic words . . . and nothing

more.”); Rowinski, 398 F.3d at 298 (“No matter how an action is pleaded, if it is

a covered class action involving a covered security, removal is proper.”

(quotations and alterations omitted)). 

Because of the need to examine the actualities of the alleged schemes, we

find the product approach taken by some district courts, see supra III.C.1, which

focuses its analysis on the type of financial product upon which the alleged
No. 11-10932

3 As noted above, see supra I.B, the Roland Plaintiffs alleged that the SEI Defendants

represented to them that the CDs were a good investment because (1) they could be “readily

liquidated”; (2) SEI had evaluated SIB as being “competent and proficient”; (3) SIB “employed

a sizeable team of skilled and experienced analysts to monitor and manage [its] portfolio”; (4)

“independent” auditors “verified” the value of SIB’s assets; (5) the SEI Defendants had

“knowledge” about the companies that SIB invested in and that those companies were

adequately capitalized; (6) the Antiguan government regularly “examined” SIB; (7) the CDs

were a “safe investment vehicle suitable for long term investment with little or no risk”; (8) SIB

had “retained legal counsel”that ensured thatthe investments were structured so as to comply

with state and federal law; (9) the CDs would produce “consistent, double-digit returns”; and

(10) SIB’s assets were “invested in a well-diversified portfolio of highly marketable securities

issued by stable national governments, strong multinational companies, and major

international banks.” Similarly, the Troice Plaintiffs allege that the Willis Defendants

represented to them that the CDs were a good investment because (1) SIB was based in the

United States and “regulated by the U.S. Government”; (2) SIB was “insured by Lloyd’s”; (3)

SIB was “regulated by the Antiguan banking regulatory commission”; (4) SIB was “subjected

to regular stringent risk management evaluations” conducted by “an outside audit firm”; (5)

the CDs were safe and secure; (6) SIB’s portfolio produced “consistent, double-digit returns”;

(7) the CDs’ “high return rates . . . greatly exceed those offered by commercial banks in the

United States”; and (8) SIB’s assets were “invested in a well-diversified portfolio of highly

marketable securities issued by stablenational governments, strong multinational companies,

and major international banks.”

28

fraudulent scheme centers, to be too rigid. Our conclusion, in accord with the

district court,thatthe CDs were uncovered securities therefore does not end our

inquiry. We must instead closely examine the schemes and purposes of the

frauds alleged by the Appellants.

A

With respect to the claims against the SEI Defendants and the Willis

Defendants, we find the Appellants’ allegations to be substantially similar such

that they can be analyzed together.

1

The district court found that Appellants’ claims were precluded because

Appellants invested in the CDs, at least in part, because they were backed by

“covered securities.” To be sure, the CDs’ promotional material touted that SIB’s

portfolio of assets was invested in “highly marketable securities issued by stable

governments, strong multinational companies and major international banks.”

This is, however, but one of a host of (mis)representations3 made to the
No. 11-10932

4

In re Kingate Mgmt., 2011 WL 1362106, at *9 (“Madoff’s fraud is at the heart of the

case.”).

5 Levinson I, 2009 WL 5184363, at *11 (“[T]he crux of [the p]laintiffs’ allegations is that

[the defendants’] fraudulent statements caused [the p]laintiffs to make poor investment

decisions.”).

6 Backus, 2009 WL 5184360, at *11 (“The gravamen of the Amended Complaint is a

fraudulent scheme in connection with the purchase and sale of securities.”).

29

Appellants in an attempt to lure them into buying the worthless CDs. Viewing

the allegations, as we must, from how the advisors at SEI and Willis allegedly

structured their fraudulent scheme, we find the references to SIB’s portfolio

being backed by “covered securities” to be merely tangentially related to the

“heart,”4“crux,”5or “gravamen”6of the defendants’ fraud.

When we look over the complaints against the SEI Defendants and the

Willis Defendants, we find that the heart, crux, and gravamen of their allegedly

fraudulent scheme was representing to the Appellants that the CDs were a “safe

and secure” investment that was preferable to other investments for many

reasons. For example, as alleged by the Roland Plaintiffs, the CDs were

principally promoted as being preferable to other investments because of their

liquidity, consistently high rates of return, and the fact that SEI and other

regulators were keeping a watchful eye on SIB. Similarly, the so-called “safety

and soundness letters” sent by the Willis Defendants focused on the

“professionalism” of SIB and the “stringent” reviews. That the CDs were

marketed with some vague references to SIB’s portfolio containing instruments

that might be SLUSA-covered securities seems tangential to the schemes

advanced by the SEI and Willis Defendants.

Our conclusion that the allegations do not amount to being “in connection

with” transactions in covered securities is bolstered by the distinction between

the present cases and the Madoff feeder fund cases. Comparing the allegations

in the uncovered securities cases we surveyed, we find the most similarity with
No. 11-10932

30

the allegations in the Montreal Pension case. The CDs, like the uncovered hedge

funds in Montreal Pension, were not mere “ghost entities” or “cursory

pass-through vehicles” to investin covered securities. The CDs were debt assets

that promised a fixed rate of return not tied to the success of any of SIB’s

purported investments in the “highly marketable securities issued by stable

national governments, strong multinational companies, and major international

banks.” Unlike in the Madoff feeder fund cases, “plaintiffs could [not] claim that

they deposited their money in the bank for the purpose of purchasing covered

securities.” Montreal Pension, 750 F. Supp 2d at 455 n.27. Finally, as was the

case in Anwar II, there are “multiple layers of separation” between the CDs and

any security purchased by SIB. Anwar II, 728 F. Supp. 2d at 398.

Therefore, we find thatthe fraudulent schemes ofthe SEI Defendants and

the Willis Defendants, as alleged by the Appellants, are not more than

tangentially related to the purchase or sale of covered securities and are

therefore not sufficiently connected to such purchases or sales to trigger SLUSA

preclusion.

2

The district court also justified its decision based on the fact that “at least

one of the [Roland] Plaintiffs acquired SIB CDs with the proceeds of selling

SLUSA-covered securities in their IRA portfolios” and that those transactions

brought the action within the ambit of SLUSA preclusion. While we do not

quarrel with the district court’s finding that some plaintiffs sold covered

securities to buy the CDs, we think that the way the district court approached

this alleged connection was incorrect. The appropriate inquiry under SLUSA is

whether the fraudulent scheme, as alleged by the Appellants, was connected

with a transaction in a covered security. While the fact that covered securities

were in fact traded as a part of the fraud is evidence of the defendants’ intent,

it is not dispositive.
No. 11-10932

7 Construing SLUSA to depend on the source of funds where the defendant does not care

leads to absurd results. For example, if two putative class members buy adjacent parcels of

fraudulently-marketed Texas ranch land (clearly not a covered security) and one pays for his

land out of his checking account but the other pays for his by selling some nationally-traded

stock, then the first’s claim is not precluded by SLUSA but the second’s is, even though their

claims and actions are identical. Therefore, absent allegations about the defendant’s focus on

the source of the funds, the fact that a purchaser may have sold covered securities does not

make the injury suffered “in connection with” the purchase or sale of covered securities.

31

Appellants argue that “[t]he source of funds used to buy uncovered

securities is irrelevant.” In response, the defendants posit that this cannot be

the case in light ofthe Supreme Court’s decisions in Superintendent of Insurance

v. Bankers Life & Casualty Co. and Zandford. In Bankers Life, the Court dealt

with a company president who allegedly conspired to acquire the company’s

stock using the company’s assets and caused the company to liquidate its bond

portfolio and to investthe proceeds in a worthless certificate of deposit. 404 U.S.

6, 8–9 (1971). The Court held that the scheme was “in connection with” the

purchase or sale of securities such that suits by defrauded investors of the

company could be maintained under Section 10(b). Id. at 12–13. In Zandford,

the Court found that where a broker took over a customer’s portfolio to

purportedly manage and invest the assets but in fact, liquidated covered

securities in order to steal the customer’s funds, 535 U.S. at 815–16, the fraud

was “in connection with”transactions in securities because “[t]he securities sales

and respondent’s fraudulent practices were not independent events” and “each

sale was made to further respondent’s fraudulent scheme.” Id. at 820. 

Based on our reading of the allegations in the Appellants’ complaints, the

connection between the fraud and sales of covered securities is not met here.

Unlike Bankers Life and Zandford, where the entirety of the fraud depended

upon the tortfeasor convincing the victims of those fraudulent schemes to sell

their covered securities in order for the fraud to be accomplished, the allegations

here are not so tied with the sale of covered securities.7 To be sure, it was
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necessary for fraud for the defendants to have the Appellants investtheir assets

into the CDs, but based on the allegations, there is no similar focus to Bankers

Life and Zandford on the sale of covered securities. Therefore, we find that the

factthat some ofthe plaintiffs sold some “covered securities”in order to puttheir

money in the CDs was not more than tangentially related to the fraudulent

scheme and accordingly, provides no basis for SLUSA preclusion.

B

We view the claims against the Proskauer Defendants as different from

those alleged against the other defendants. Unlike the claims against the SEI

Defendants and the Willis Defendants, the Troice Plaintiffs’ claims against the

Proskauer Defendants are solely for aiding and abetting the Stanford Ponzi

scheme. That is to say, the allegations against the SEI and Willis Defendants

were, inter alia, that they made misrepresentations to the Appellants about the

liquidity, soundness, and safety of investing in the CDs whereas the Troice

Plaintiffs do not allege that the Proskauer Defendants made any

misrepresentations to them. The core allegation is that without the aid of the

Proskauer Defendants the Stanford Ponzi could not have been accomplished.

However, when we examine the substance of the claims against the Proskauer

Defendants, it is clear that there are misrepresentations involved. 

Specifically, the Proskauer Defendants allegedly misrepresented to the

SEC the Commission’s ability to exercise its oversight over Stanford and SIB.

By telling the SEC that it could not investigate the operations of Stanford and

SIB, the Proskauer Defendants obstructed any chance of an SEC investigation

uncovering the fraud, thereby allowing it to continue and harm the Troice

Plaintiffs to occur. These alleged misrepresentations were one level removed

from the misrepresentations made by SIB or the SEI and Willis Defendants.

The connection that the Proskauer Defendants would have us find is that the

misrepresentations to the SEC about its regulatory authority allowed SIB to
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recruit the Willis Defendants to sell CDs, who in turn misrepresented to the

Troice Plaintiffs a host of things in order to convince them that the CDs were

good investments, including vague references to SIB’s portfolio containing

instruments that might be SLUSA-covered securities. Like with the SEI and

Willis Defendants, the misrepresentations made by the Proskauer Defendants

are not more than tangentially related to the purchase or sale of covered

securities and therefore, SLUSA preclusion does not apply. 

VI

For the foregoing reasons, the judgments are REVERSED. The Troice

cases are remanded to the district court, and the Roland case is remanded to the

state court.

REVERSED.