Opinion ID: 75890
Heading Depth: 2
Heading Rank: 2

Heading: Does SLUSA Apply to Performance Plan's Claims

Text: 18 SLUSA is the most recent in a line of federal securities statutes originating with Congress' passage of the Securities Act of 1933 (1933 Act), 48 Stat. 74 (1933) (codified as amended at 15 U.S.C. § 77a et seq. ), and the Securities Exchange Act of 1934 (1934 Act), 48 Stat. 881 (1934)(codified as amended at 15 U.S.C. § 78a et seq. ), and continuing through Congress' 1995 passage of the Private Securities Litigation Reform Act of 1995 (PSLRA), Pub.L. 104-67, 109 Stat. 737 (1995) (codified in part at 15 U.S.C. §§ 77z-1, 78u). In construing the meaning of SLUSA's key terms, we must view SLUSA in this larger statutory context. 19 The 1933 Act deals with the contents of stock registration statements and prospectuses, giving purchasers a private right of action against stock issuers who fail to comply with the statute's requirements. In relevant part, the 1934 Act, Section 10, makes it unlawful for any person ... [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities Exchange Commission (`SEC')] may prescribe.... 15 U.S.C. § 78j(2)(b) (emphasis supplied). The SEC accordingly promulgated Rule 10b-5, 17 CFR § 240.10b-5, the basis for a vast amount of modern securities litigation, which provides as follows: 20 It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, 21 (a) To employ any device, scheme, or artifice to defraud, 22 (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or 23 (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 24 17 CFR § 240.10b-5 (emphasis added). 25 In 1995, after determining that the federal securities laws, and especially § 10b-5, were being abused through the bringing of strike suits, 11 Congress passed the PSLRA. The PSLRA set heightened pleading requirements for class actions alleging fraud in the sale of national securities, see 15 U.S.C. § 78u-4, and also provided for a mandatory stay of discovery to allow district courts, prior to discovery, to determine the legal sufficiency of claims brought in securities class actions, see 15 U.S.C. § 77z-1(b). These reforms were designed to enable securities defendants to obtain early dismissal of frivolous class actions, and thereby avoid the high expense of discovery. See, e.g., Lander v. Hartford Life and Annuity Ins. Co., 251 F.3d 101, 107 (2d Cir.2001). 26 By 1998, however, Congress realized that many of the goals of PSLRA were being frustrated because plaintiffs were simply shifting their securities class actions from federal to state court, where the PSLRA did not restrict their claims. See Pub.L. No. 105-353 § 2(2). 12 By suing in state court under state statutory or common law (rather than under the federal securities laws), litigants were able to circumvent the restrictions placed upon securities claims in federal court. See id. To close this loophole in the PSLRA, Congress passed SLUSA, making federal court the exclusive venue for class actions alleging fraud in the sale of covered securities. Congress accomplished this by providing for removal of state actions to federal court, and requiring the immediate dismissal of covered lawsuits. To this end, SLUSA provides, in relevant part: 27 (1) Class action limitations 28 No covered class action 13 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 — 29 (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security 14 ; or 30 (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. 31 (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). 32 15 U.S.C. § 78bb(f) (emphasis added). 33 Thus, in order to remove an action to federal court under SLUSA, the removing party must show that (1) the suit is a covered class action, (2) the plaintiffs' claims are based on state law, (3) one or more covered securities has been purchased or sold, and (4) the defendant misrepresented or omitted a material fact  in connection with the purchase or sale of such security.  See Spielman v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., No. 01 Civ. 3013(DLC), 2001 WL 1182927 (S.D.N.Y. Oct. 9, 2001) (unpublished opinion); Shaev v. Claflin, Fed. Sec. L. Rep. P 91,452, 2001 WL 548567 (N.D. Cal. May 17 2001); Shaw v. Charles Schwab & Co., Inc., 128 F.Supp.2d 1270, 1272 (C.D.Cal. 2001). 34 SLUSA does not define the term in connection with the purchase or sale of a covered security. Nor has the Supreme Court yet had occasion to address this phrase in the context of SLUSA, although it has construed and applied the identical phrase as it appears in § 10b-5. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). As Performance Plan points out, however, one court of appeals and several district courts have had an opportunity to construe the meaning of this phrase in SLUSA. See Green v. Ameritrade, Inc., 279 F.3d 590, 597-98 (8th Cir.2002); Shaev, at 91456, 2001 WL 548567; Gordon v. Buntrock, No. 00 CV 303, 2000 WL 556763 (N.D.Ill. Apr.28, 2000) (unpublished opinion); Shaw, 128 F.Supp.2d at 1273-74; Gutierrez v. Deloitte & Touche, L.L.P., 147 F.Supp.2d 584, 595 (W.D.Tex.2001); Simon v. Internet Wire, Inc., Fed. Sec. L. Rep. P 91,408, 2001 WL 688542 (C.D.Cal. Apr. 3, 2001); Burns v. Prudential Sec., 116 F.Supp.2d 917, 922-23 (N.D.Ohio 2000). In interpreting this key term in SLUSA, each of these courts has looked, for guidance, to the law interpreting the same phrase, in connection with the purchase or sale of a covered security, in the context of § 10b-5. They have done so based on the principle that [w]here 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 of these terms. NLRB v. Amax Coal Co., 453 U.S. 322, 329, 101 S.Ct. 2789, 69 L.Ed.2d 672 (1981). 15 35 Analogizing to § 10b-5 is particularly appropriate because SLUSA was specifically enacted as an amendment to the 1933 and 1934 Acts (and their successor statutes). In enacting SLUSA, therefore, Congress was not writing on a blank slate; instead, it was legislating in an area that had engendered tremendous amounts of litigation and received substantial judicial attention. In using the phrase in connection with the purchase or sale of a covered security, Congress was not creating language from a vacuum; instead, it was using language that, at the time of SLUSA's enactment, had acquired settled, and widely-acknowledged, meaning in the field of securities law, through years of judicial construction in the context of § 10b-5 lawsuits. Under these circumstances, we must presume that Congress intended the phrase in connection with the purchase or sale of a covered security to have the same meaning in SLUSA that it has in § 10b-5. 36 Because, in this case, the parties stipulate that the securities involved are covered securities, that Performance Plan actually purchased shares of Growth Fund, and that Performance Plan's claims are based on state law, the only remaining question is whether the statements allegedly made by Merrill Lynch were made in connection with the purchase or sale of covered securities, and therefore whether Performance Plan's action was properly removed to federal court, and subsequently dismissed, under SLUSA. 37 Performance Plan argues that its action was properly brought in state court, under state law because Merrill Lynch's alleged misrepresentations caused it to hold shares of Growth Fund rather than to purchase or sell them. Therefore, Performance Plan argues, its complaint falls outside the scope of SLUSA, which covers only claims involving misrepresentations made in connection with purchase or sale.  Performance Plan asserts that Supreme Court precedent interpreting the phrase in connection with the purchase or sale of a covered security, in the context of § 10b-5, compels this conclusion. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Performance Plan also relies heavily on Gutierrez v. Deloitte & Touche, L.L.P., 147 F.Supp.2d 584 (W.D.Tex.2001), which applied Blue Chip's § 10b-5 ruling in the context of SLUSA to hold that SLUSA does not cover claims based purely upon retention of securities. Subsequent to the briefing in this case, the Eighth Circuit issued Green v. Ameritrade, Inc., 279 F.3d 590 (8th Cir.2002), which also relied on Blue Chip to hold that SLUSA did not bar a state law claim for breach of contract. 38 In Blue Chip, the Supreme Court expressly held that there is no right of action under § 10b-5 unless a challenged misrepresentation or omission caused the plaintiff actually to buy or sell a particular stock. Blue Chip, 421 U.S. at 727, 95 S.Ct. 1917. The plaintiffs in Blue Chip brought a class action alleging that Blue Chip had intentionally issued an overly pessimistic prospectus in order to dissuade them from purchasing Blue Chip stock in accordance with their first-purchase right, so that the stock could later be sold to the public at a higher price. Because they had rejected Blue Chip's offer to buy at the initial low price as a result of the misleading prospectus, the plaintiffs sought the right to buy the stock — which had since risen dramatically — from Blue Chip at the original price. The Court framed the central question in the case as follows: whether respondent may base its action on Rule 10b-5 of the Securities and Exchange Commission without having either bought or sold the securities described in the allegedly misleading prospectus. Id. The Court answered the question in the negative, making clear that § 10b-5's cause of action is limited to actual purchasers or sellers of stock. It also noted however, that [o]bviously, this disadvantage is attenuated to the extent that remedies are available to nonpurchasers and nonsellers under state law.  Id. at 738 n. 9, 95 S.Ct. 1917 (emphasis supplied). In so stating, the Court recognized that while holding claims are not actionable under the federal securities laws, they may well be actionable under state laws that are more stringent than their federal counterparts. 39 Based substantially on the rule of Blue Chip, the Eighth Circuit held, in Green, that SLUSA did not bar a state law claim for breach of contract where the plaintiffs failed to allege that the defendants made misrepresentations that caused them to buy or sell a covered security. Green sued Ameritrade for breach of contract in state court alleging that he had contracted with Ameritrade to receive real time stock quotes on Ameritrade's web site, but the quotes provided were not real time. Ameritrade removed under SLUSA, claiming that the suit was really one for misrepresentations made in connection with the purchase or sale of a covered security. The trial court held that Green's claim was not a securities fraud claim within the purview of SLUSA, but simply a claim for breach of contract, and the Eighth Circuit affirmed. See Green, 279 F.3d at 598-99. In reliance on Blue Chip, the Green Court stated: 40 [T]he critical question is whether Green's amended complaint can reasonably be read as alleging a sale or purchase of a covered security made in reliance on the allegedly faulty information provided to himself and to putative class members by Ameritrade ... Green's amended complaint completely omits any mention of such reliance. He alleges no sale or purchase of a covered security, only that he did not receive the type of information from Ameritrade for which he believed he had contracted and paid twenty dollars monthly. We are satisfied that nothing in Green's amended complaint suggests that his cause of action arises from a sale or purchase of a security in reliance on information gained from Ameritrade's real-time quote service. The amended complaint simply is not susceptible to being read as alleging anything of the sort. It therefore does not satisfy the criteria for SLUSA preemption. 41 Id. 42 Also relying on Blue Chip, the federal district in Gutierrez held that SLUSA does not apply to claims of misrepresentations that caused plaintiffs to retain securities, rather than actually to buy or sell them. In Gutierrez, the plaintiffs brought a class action alleging that the defendant's acts of accounting misfeasance caused them to hold securities that they otherwise would have sold. Specifically, the complaint identified a subclass of 43 [a]ll persons or entities that held any covered security as that term is defined in the Private Securities Litigation Reform Act of 1995 at all relevant times through 1993 through present and did not sell or otherwise dispose of said products prior to June 1999.... 44 Gutierrez, 147 F.Supp.2d at 592 (emphasis added). 45 In arguing that SLUSA did not bar their claim, but that they were entitled to bring their retention claim in state court, under state law, the Gutierrez plaintiffs argued (in the court's words), that: 46 category (iii) is explicitly limited to damages caused by the holding of covered securities and the loss of value which resulted from such holding. [It does not seek] purchaser or seller damages arising out of any alleged misrepresentation which may or may not have occurred when the[ plaintiffs] purchased the covered stock. Rather, plaintiffs seek damages for being fraudulently induced to continue to hold stock after they and the category (iii) putative class members had purchased the securities. Plaintiffs maintain they are not asserting a claim in connection with the sale or purchase of a covered security and thus their claims are not subject to mandatory removal under the SLUSA. 47 Id. 48 Based on Blue Chip, the court held that retention claims were not claims of misrepresentations in connection with the purchase or sale of a covered security, and that the plaintiffs, therefore, were entitled to bring those claims in state court. The court emphasized that plaintiffs have `gone to great lengths' to stress that their first amended petition alleges misrepresentations only in the holding of covered securities. Id. at 593 (emphasis added). The Court further stated: 49 Although the stocks purchased by subclass category (iii) claimants are covered securities for purposes of the Act, the first amended petition alleges misrepresentations only in the holding of these covered securities and nowhere do plaintiffs allege subclass category (iii) includes purchasers. Rather, as plaintiffs argue, they have expressly carved out and excluded [purchasers] when they elected to allege only claims for holding covered securities, not the purchase or sale of covered securities. 50 Id. (emphases in original). 51 We agree with the Gutierrez court, that under Blue Chip, SLUSA does not apply to claims dealing solely with the retention of securities, rather than with purchase or sale. We also agree with the Gutierrez Court's implication, however, that when a claim that sweeps within its ambit actual purchases or sales of stock is covered by SLUSA, a plaintiff may not avoid SLUSA's restrictions simply by alleging that a given misrepresentation caused him both to purchase and hold a particular security. 52 For this reason, we agree with the district court that Performance Plan's suit is covered by SLUSA, and was not properly brought in state court, under state law. The simple fact is, unlike the carefully-crafted allegations in Gutierrez, Performance Plan's allegations in this case are not limited solely to the retention of covered securities. Paragraph 37, which Performance Plan submits as the principal source of its retention claim, states that Merrill Lynch made material Misrepresentations and Omissions [that] induced the Plaintiffs and other Class members to purchase and retain shares of the Growth Fund during the Class Period. (emphasis added). This language clearly alleges that Merrill Lynch's conduct caused Performance Plan to purchase covered securities and as retain them. The fact that class members purchased and then retained their Growth Fund shares does not necessarily add anything to the basic claim of purchasing, because all investors, by definition, hold their shares for at least some time after purchase. Thus, while in principle we agree with Performance Plan's argument that SLUSA does not apply to holding claims, and that such claims accordingly may be brought in state court, under state law, we do not find that the rule applies in this case. 53 Alternatively, Performance Plan argues that SLUSA does not apply to state law claims that lack the scienter requirement of the federal securities laws. Performance Plan's syllogistic argument appears to be as follows: Congress did not intend to bar claims pursuant to state laws that are stricter than federal securities laws; Performance Plan's state claims do not require scienter and are thus stricter than federal securities laws; therefore Performance Plan's lawsuit is not preempted by SLUSA. 16 In support of this argument, Performance Plan relies on the district court opinion in Green, supra, (reported at 120 F.Supp.2d 795 (D.Neb.2000)), and Burns v. Prudential Sec., 116 F.Supp.2d 917 (N.D.Ohio 2000). Performance Plan claims these cases stand for the proposition that the presence or absence of scienter in a state law securities claim is the determinative factor in deciding whether a pleaded state law claim is a mere substitute for the federal securities laws and, therefore, whether it is barred by SLUSA. 54 Initially, we find Performance Plan's reliance misplaced. Neither of the cases cited can support this proposition. Burns was a class action brought in state court by clients of Prudential Securities who alleged that over the course of a two-day period, one of Prudential's brokers liquidated their accounts without permission. The plaintiffs brought state law claims for conversion, breach of contract, breach of fiduciary duties, and negligent supervision. Prudential removed to federal court under SLUSA and the plaintiffs moved to remand. The district court granted the motion to remand, holding that SLUSA did not apply because the plaintiffs' claims, while related to securities, were not claims for securities fraud at all. No misrepresentation was alleged in that case. See Burns, 116 F.Supp.2d at 924. As noted above, exactly the same thing is true of Green. Thus, neither of these cases are applicable to Performance Plan's claim and we have found no case to support the proposition that the absence of scienter in a state securities claim suffices to remove it from SLUSA's scope. 55 More fundamentally, the premise of Performance Plan's argument is incorrect. SLUSA amends both the 1933 Act (15 U.S.C. § 77p) and the 1934 Act (15 U.S.C. § 78bb), preempting claims brought under both of those statutes. The sections of SLUSA that amend the 1933 Act track the language of §§ 11 and 12(a)(2), and claims under §§ 11 and 12(a)(2) of the 1933 Act do not require a showing of scienter. Thus, SLUSA preempts some claims — namely, those brought under § 11 or 12(a)(2) of the 1933 Act — that lack a scienter requirement. Accordingly, we cannot accept Performance Plan's contention that scienter is the dispositive factor in determining whether a given lawsuit falls within the scope of SLUSA. 56 In sum, we find no merit to Performance Plan's argument that the district court erred in declining to remand its lawsuit to state court, and in subsequently dismissing the action.