Opinion ID: 3039127
Heading Depth: 2
Heading Rank: 4

Heading: Counts III and IV — Violation of Swiss money-

Text: laundering laws In addition to pressing aiding-and-abetting claims in counts I and II, the Trust has alleged in counts III and IV that the Banks violated Swiss banking regulations by failing properly to 22 investigate and interdict the Directors’ alleged money-laundering transactions. The Trust has further alleged that it, as assignee of the Purchasers, is entitled, under Swiss law, to recover damages for the Banks’ violations. It is important to recognize that these counts, unlike counts I and II, are not alleged to have been owned by AremisSoft or its bankruptcy estate. These Swiss-law claims are, rather, claims owned by the Purchasers as individual purchasers of AremisSoft stock. They were assigned by the Purchasers to the Trust so that they could be prosecuted together with counts I and II. Thus, in contrast to counts I and II, these counts likely are brought to recover damages “on behalf of more than 50 persons,” 15 U.S.C. § 78bb(f)(5)(B)(i)(I), so they would seem to take the form of a covered class action. SLUSA, however, only preempts covered class actions “based upon the statutory or common law of any State,” 15 U.S.C. § 78bb(f)(1) (emphasis added), where “State” is defined as “any State of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, or any other possession of the United States,” id. § 78c(a)(16). Despite this seemingly clear language, the Banks contend that SLUSA preempts the Trust’s Swiss-law claims because: (1) Congress intended to preempt foreign-law claims (though it did not so state in the text of the statute); (2) the Swiss-law claims are “based upon” state law because the Banks’ violation of Swiss law is dependent on the Directors’ breach of their state-law fiduciary duties—that is, only if the Directors breached their state-law fiduciary duties can the Banks be liable under Swiss law; (3) the Swiss-law claims are “based upon” state law because New Jersey’s choice-of-law rules are “state laws” that trigger application of Swiss law to the present dispute; (4) the Swiss-law claims incorporate the allegations of the state-law claims; and (5) the Swiss-law claims are too closely tied to the state-law claims.
The Banks argue that the purpose of SLUSA is to create uniform standards for class-action securities-fraud lawsuits, and that allowing plaintiffs to avail themselves of different foreign23 law standards is inconsistent with that purpose. Thus, they argue that SLUSA should be read as preempting foreign-law claims that otherwise contain the class-action and securities-trade ingredients. Essentially, this is an argument that Congress implicitly preempted foreign law because allowing more than 50 plaintiffs to initiate a foreign-law-based securities fraud suit in a state or federal court would impede the federal objective of providing uniform standards for class-action securities fraud litigation. Cf. Perez v. Campbell, 402 U.S. 637 (1971) (holding that federal bankruptcy law preempted a state law that interfered with federal bankruptcy law’s goal of providing uniform standards for determining discharge of debt). In determining legislative purpose, “[i]t is not our job to speculate upon congressional motives,” Riegel v. Medtronic, Inc., 552 U.S. ___, 2008 WL 4407744 (Feb. 20, 2008); our job is to hew as closely as possible to the meaning of the words Congress enacted. “We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there.” Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54 (1992). Here, the difficulty with divining congressional intent to preempt foreign-law claims is that Congress specifically described the claims preempted as those “based upon the law of any State.” SLUSA constitutes an amendment of the Securities Exchange Act of 1934 (the “1934 Act”), which expressly defines “state” throughout the Act as “any State of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, or any other possession of the United States,” 15 U.S.C. § 78c(a)(16). Though Congress was at pains to set out separate definitions of various terms used in SLUSA, it left the 1934 Act definition of “state” intact. Moreover, Congress has demonstrated its ability to extend the reach of securities statutes to foreign law when it so desires. E.g., 15 U.S.C. § 78o(b)(4)(B) (requiring punishment of a broker or dealer convicted of any “felony or misdemeanor or of a substantially equivalent crime by a foreign court,” if (among other things) the offense arises from the conduct of any entity required to be registered under the Commodity Exchange Act “or any substantially equivalent foreign statute or regulation”) (emphasis added). Moreover, SLUSA’s legislative history refers 24 to state, not foreign, law. E.g., S. Rep. No. 105-182, at 1 (1998); H.R. Rep. No. 105-803, at 1 (1998) (stating that Congress’s intent is to “limit the conduct of securities class actions under State law”). Given that Congress made the explicit policy choice in the 1934 Act of defining “state” so as not to include foreign countries, and, in SLUSA, chose not to alter that definition while defining other terms, see 15 U.S.C. § 78bb(f)(5) (defining terms), we conclude that, when Congress extended SLUSA preemption to claims “based upon the law of any State,” it meant just that. In addition, the notion that allowing the Trust to litigate counts III and IV would impede a federal objective is overblown. According to those counts, Switzerland imposes liability for the complained-of conduct on banking institutions organized under Swiss law. To state the obvious, Switzerland is a sovereign nation. It may regulate institutions organized under its laws in any manner it sees fit. Congress, through 28 U.S.C. § 1332, has instructed United States district courts to entertain “all civil actions” (provided the matter in controversy is of sufficient value), as long as there is complete diversity of citizenship. To be sure, Congress has the authority to counter-instruct district courts not to entertain particular categories of civil actions arising under foreign law, but we do not believe that we should readily imply such a result from statutory text that appears to direct otherwise.
law The Banks argue that the Swiss-law claims are preempted because they are actually based on Delaware fiduciary-duty law. Specifically, they argue that only if the Directors breached their Delaware-law fiduciary duties can the Banks be liable under Swiss law. This argument appears to be based upon a misreading of the complaint. The Swiss laws invoked in the complaint allegedly require that, inter alia, Swiss banks conduct due diligence (e.g., verify the customer’s identity), investigate unusual or suspicious transactions, and freeze assets in accounts whose owner has been concealed. App. at 54–57, 80–81. We read the complaint as alleging that a bank can violate these 25 Swiss laws regardless whether the account owners in fact breached a state-law fiduciary duty.23
Jersey law because of the application of New Jersey choice-of-law rules The Banks’ third argument—that New Jersey’s choice-oflaw rules are “state laws” that trigger application of Swiss law to the present dispute, thus forming the Swiss laws’ basis—is creative but unpersuasive.24 The Banks point out that the District Court’s subject matter jurisdiction is based on diversity of citizenship, which, under Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938) and Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941), requires that the forum state’s (here, New Jersey’s) choice-of-law rules govern the dispute. It is these choice-of-law rules that, the Trust contends, direct application of Swiss law. Id. The Banks, invoking Klaxon, argue that, if the Trust’s characterization of New Jersey’s choice-of-law rules is correct, those New Jersey choice-of-law rules form the basis of the Trust’s Swiss-law claims. The Banks read more into Klaxon than is there. In Klaxon, a diversity action brought by a New York corporation against a Delaware corporation in the District Court for the District of Delaware, plaintiff, having secured a jury verdict in the amount of $100,000, then moved for an award of prejudgment interest covering the years in which the suit was pending. The District Court granted the motion. This court affirmed: without addressing Delaware law with respect to contract damages, this court ruled, in reliance on two provisions 23 Of course, should further examination of the Swiss-law claims on remand reveal that the Trust’s characterization of Swiss law is in error, the District Court may reconsider this issue at that time. 24 This argument emerges from the Banks’ attempt to characterize the Swiss-law claims as “based upon the statutory or common law of any State,” see 15 U.S.C. § 78bb(f)(1), here, New Jersey. 26 of the Restatement of Conflicts, that “[t]he measure of damages for breach of contract is determined by the law of the place of performance,” and that interest was an element of damages. Stentor Elec. Mfg. Co. v. Klaxon Co.,115 F.2d 268, 275 (3d Cir. 1940). The Supreme Court reversed: The conflict of laws rules to be applied by the federal court in Delaware must conform to those prevailing in Delaware’s state courts. Otherwise the accident of diversity of citizenship would constantly disturb equal administration of justice in coordinate state and federal courts sitting side by side. Any other ruling would do violence to the principle of uniformity within a state upon which the Tompkins decision is based. Whatever lack of uniformity this may produce between federal courts in different states is attributable to our federal system, which leaves to a state, within the limits permitted by the Constitution, the right to pursue local policies diverging from those of its neighbors. It is not for the federal courts to thwart such local policies by enforcing an independent ‘general law’ of conflict of laws. Subject only to review by this Court on any federal question that may arise, Delaware is free to determine whether a given matter is to be governed by the law of the forum or some other law. 313 U.S. at 496–97. In the case at bar, the Trust contends that New Jersey’s choice-of-law rules require that, in a dispute in a New Jersey court in which Swiss banks are charged with failing to comport with proper standards of oversight of entities utilizing the services of Swiss banks, Swiss law, not New Jersey law, should govern. If the Trust’s formulation of New Jersey’s choice-oflaw rules, as embodied in counts III and IV of it complaint, is accurate, this would reflect the unsurprising conclusion by New Jersey’s lawgivers, whether judicial or legislative, that, whatever New Jersey’s law with respect to bank misconduct may be, when the allegedly miscreant bank is a Swiss enterprise executing Swiss banking transactions, Swiss banking law, not New Jersey banking law, should control. To conclude that, within the intendment of SLUSA, those claims are “based upon the . . . law 27 of” New Jersey would require attributing to Congress a subtlety of such exquisite reach as to have no place in the legislative process.
because they incorporated the allegations of the state-law claims The District Court held, and the Banks argue, that because counts III and IV “reallege and incorporate by reference herein in their entirety the allegations” supporting the state-law claims, App. at 78, 80, and the state-law claims are, as the Banks contend, preempted, the Swiss-law claims must also be preempted. Aside from the fact that we are not persuaded that the state-law claims are preempted, the view advanced by the District Court and the Banks appears to stem from a misinterpretation of language in this court’s opinion in Rowinski, 398 F.3d at 305. In Rowinski, we held that a claim alleges “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), which subjects it to SLUSA preemption, when an allegation of a misrepresentation in connection with a securities trade is a “factual predicate” of the claim, even if misrepresentation is not a legal element of the claim. Rowinski, 398 F.3d at 300. Thus, when, as in Rowinski, a plaintiff alleges that a misrepresentation made in connection with a securities trade breaches a contract, the plaintiff cannot avoid SLUSA preemption by arguing that misrepresentation is not an element of a breach-of-contract action. In other words, when one of a plaintiff’s necessary facts is a misrepresentation, the plaintiff cannot avoid SLUSA by merely altering the legal theory that makes that misrepresentation actionable. It is important to recognize that Rowinski did not hold that any time a misrepresentation is alleged, the misrepresentation-inconnection-with-a-securities-trade ingredient is present. (Nor does it follow that failing to make such an allegation explicit necessarily avoids the ingredient). Rather, the point we made in Rowinski was that when an allegation of misrepresentation in 28 connection with a securities trade, implicit or explicit, operates as a factual predicate to a legal claim, that ingredient is met. To be a factual predicate, the fact of a misrepresentation must be one that gives rise to liability, not merely an extraneous detail. This distinction is important because complaints are often filled with more information than is necessary. While it may be unwise (and, in some cases, a violation of Rule 8) to set out extraneous allegations of misrepresentations in a complaint, the inclusion of such extraneous allegations does not operate to require that the complaint must be dismissed under SLUSA. Here, as to the Swiss-law claims, the allegations of misrepresentation appear to be extraneous. As explained in Part IV.B, supra, the Swiss-law counts allege that the Banks violated their Swiss-law duty properly to investigate and freeze the Directors’ various money-laundering transactions. The Directors’ prior alleged misrepresentations are not factual predicates to these claims because, according to the Trust’s characterization of the Swiss-law claims, they have no bearing on whether the Banks’ conduct is actionable; rather, they are merely background details that need not have been alleged, and need not be proved.25
the state-law claims that they are preempted The District Court also held, and the Banks argue, that the Swiss claims are preempted because they are tied so closely to the state-law claims. This argument is also unpersuasive because it relies on a readily distinguishable case. The District Court and the Banks invoke a decision of the District Court for the District of Delaware, ruling that a particular state-law claim, though it did not specifically allege conduct that would constitute fraud “in connection with” a security, was nonetheless “in connection with” a security (and thus preempted), see 15 U.S.C. § 78bb(f)(1)(A), because it alleged conduct by the defendant that was part of a “‘unitary scheme of fraud’ which 25 Again, if, on remand, it is revealed that the Trust’s characterization of Swiss law on this point is inaccurate, the District Court may reconsider this issue at that time. 29 began before the ‘purchase or sale’ of securities and continued afterward.” Zoren v. Genesis Energy, L.P., 195 F. Supp. 2d 598, 604–06 (D. Del. 2002). Because the claim was in this sense “tie[d] . . . so closely” to the other claims that clearly alleged fraud in connection with securities trading, the claim was itself deemed a claim of fraud in connection with securities trading and therefore preempted. Id. Zoren simply involved an application of SLUSA’s “in connection with” language, 15 U.S.C. § 78bb(f)(1)(A), concluding that the claim in question alleged fraud in connection with securities trading. Zoren is distinguishable in two respects. First, unlike the Banks here, the defendants in Zoren were accused of orchestrating a “unitary scheme of fraud.” Here, the Banks are not accused of any misrepresentations or omissions; rather, their alleged participation in the Directors’ scheme is limited to participating in insider-trading transactions and assisting in laundering the proceeds. Second, Zoren involved exclusively state-law claims and applied the “in connection with” language, not the ingredient that any preempted claims be based upon “state” law. It did not address a foreign-law claim or even purport to address how its analysis would affect foreign-law claims. Thus, we conclude that the Banks’ contention that the Swiss claims are preempted as “closely tied” to the state-law claims is without merit.