Opinion ID: 170539
Heading Depth: 2
Heading Rank: 1

Heading: Plaintiffs' claims under SLUSA

Text: The district court correctly held that SLUSA precluded Plaintiffs' claims and mandated dismissal. We review de novo a district court's decision on a Rule 12(b)(6) motion for dismissal for failure to state a claim. Alvarado v. KOB-TV, L.L.C., 493 F.3d 1210, 1215 (10th Cir.2007). In doing so, [w]e must accept all the well-pleaded allegations of the complaint as true and must construe them in the light most favorable to the plaintiff. Id. (citation and internal quotation marks omitted). In addition, in determining whether to grant a motion to dismiss for failure to state a claim, we look to the specific allegations in the complaint to determine whether they plausibly support a legal claim for relief. Id. at 1215 n. 2. The seminal case on the scope of SLSA is the Supreme Court's 2006 decision in Dabit, in which the Court concluded that SLUSA precluded claims by holders  and not just purchasers or sellers  of covered securities. The Court rejected a narrow interpretation of the statutory phrase, in connection with the purchase or sale of a covered security, 15 U.S.C. § 78bb(f)(1)(A), (B), despite the plaintiffs' argument that those words incorporated the same purchaser-seller requirement into SLUSA that the Court had adopted in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), for private actions under Rule 10b-5. See Dabit, 547 U.S. at 84-88, 126 S.Ct. 1503. The Court explained that the purchaser-seller limitation adopted in Blue Chip Stamps for private actions did not stem from the text of 10b-5, but rather from policy considerations. Id. at 84, 126 S.Ct. 1503 (citing Blue Chip Stamps, 421 U.S. at 737, 749, 95 S.Ct. 1917). The Court had espoused a broad interpretation when giv[ing] meaning to the phrase in the context of § 10(b) and Rule 10b-5, and this broader interpretation of the statutory language comports with the longstanding views of the SEC. Id. at 85, 126 S.Ct. 1503. Under the ordinary principles of statutory construction, therefore, Congress intended to incorporate this broad construction when it incorporated the identical language into SLUSA. Id, at 85-86, 126 S.Ct. 1503. Further, the Court in Dabit based its broad reading of SLUSA on the purpose of statute: The presumption that Congress envisioned a broad construction follows not only from ordinary principles of statutory construction but also from the particular concerns that culminated in SLUSA's enactment. A narrow reading of the statute would undercut the effectiveness of the [PSLRA] and thus run contrary to SLUSA's stated purpose, viz., to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the [PSLRA]. As the Blue Chip Stamps Court observed, class actions brought by holders [(rather than just purchasers or sellers)] pose a special risk of vexatious litigation. It would be odd, to say the least, if SLUSA exempted that particularly troublesome subset of class actions from its pre-emptive sweep. Id. at 86, 126 S.Ct. 1503 (citations and internal quotation marks omitted). A narrow interpretation of SLUSA would squarely conflict[] with the congressional preference for national standards for securities class action lawsuits involving nationally traded securities. Id. at 86-87, 126 S.Ct. 1503 (citation and internal quotation marks omitted). In addition, the Court in Dabit concluded that the general presumption against preemption of state-law causes of action carries less force here than in other contexts because SLUSA does not actually pre-empt any state cause of action. It simply denies plaintiffs the right to use the class action device' to vindicate certain claims. The Act does not deny any individual plaintiff, or indeed any group of fewer than 50 plaintiffs, the right to enforce any state-law cause of action that may exist. Moreover, the tailored exceptions to SLUSA's pre-emptive command demonstrate that Congress did not by any means act cavalierly here. The statute carefully exempts from its operation certain class actions based on the law of the State in which the issuer of the covered security is incorporated, actions brought by a state agency or, state pension plan, actions under contracts between issuers and indenture trustees, and derivative actions brought by shareholders on behalf of a corporation. The statute also expressly preserves state jurisdiction over state agency enforcement proceedings. The existence of these carve-outs both evinces congressional sensitivity to state prerogatives in this field and makes it inappropriate for courts to create additional, implied exceptions. Id. at 87-88, 126 S.Ct. 1503 (citing 15 U.S.C. § 78bb(f)(3)(A)-(C), (f)(4), (f)(5)(C)). Plaintiffs' argument in the instant case parallels the argument that the Supreme Court rejected in Dabit. The essence of Plaintiffs' argument is that, because SLUSA employs language similar to that in Rule 10b-5, [4] SLUSA only precludes state law claims that are virtually identical to a federal securities fraud claim under 10b-5  i.e., claims requiring plaintiffs to allege the essential elements of scienter and reliance. Under this standard, Plaintiffs argue, SLUSA does not preclude any of their claims under New Mexico law, because none of their claims allege  or are required to allege  the elements of scienter and reliance. Plaintiffs are not unique in making this argument, and courts have almost uniformly rejected it as contrary to the structure, intent, and plain language of SLUSA. As the Eleventh Circuit has explained: 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 [the plaintiffs'] contention that scienter is the dispositive factor in determining whether a given lawsuit falls within the scope of SLUSA. Riley v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 292 F.3d 1334, 1346 (11th Cir.2002); see also Potter, 483 F.Supp.2d at 698-703 (conducting a similar textual and structural analysis and reaching the same conclusion); Winne v. Equitable Life Assurance Soc'y of the U.S., 315 F.Supp.2d 404, 413-15 & n. 5 (S.D.N.Y.2003) (reaching the same conclusion by relying on a similar textual and structural analysis, as well as the fact that the statute itself contains no language requiring scienter for SLUSA to apply, and that, in light of the purpose of SLUSA, [i]t would make little sense . . . to preempt claims that exactly track federal law, but permit state class actions where state law permits even broader liability than federal securities law); Feitelberg v. Merrill Lynch & Co., 234 F.Supp.2d 1043, 1051 (N.D.Cal.2002) (This argument proves too much, for if by merely omitting scienter allegations plaintiff can avoid SLUSA's preemption effect, SLUSA would be totally eviscerated. . . . In other words, if it looks like a securities fraud claim, sounds like a securities fraud claim and acts like a securities fraud claim, it is a securities fraud claim, no matter how you dress it up.), aff'd per curiam, 353 F.3d 765 (9th Cir.2003). But see Green v. Ameritrade, Inc., 120 F.Supp.2d 795, 798 (D.Neb.2000), aff'd on other grounds, 279 F.3d 590 (8th Cir.2002); Burns v. Prudential Sec, Inc., 116 F.Supp.2d 917, 923-24 (N.D.Ohio 2000). Moreover, as long as claims meet all of the elements of SLUSA, courts have generally held that SLUSA precludes those claims  regardless of how artfully or cleverly plaintiffs attempt to plead them. See, e.g., Rowinski v. Salomon Smith Barney, Inc., 398 F.3d 294, 299-304 (3d Cir.2005) (holding that SLUSA precluded certain claims under Pennsylvania law for breach of contract, unjust enrichment, and deceptive consumer practices); Miller v. Nationwide Life Ins. Co., 391 F.3d 698, 701-02 (5th Cir.2004) (holding that SLUSA precluded a breach of contract action under Louisiana law); Dudek v. Prudential Sec, Inc., 295 F.3d 875, 879-30 (8th Cir.2002) (holding that SLUSA precluded nine causes of action under New York law, including fraud and deceit, breach of fiduciary duty, deceptive business practices, negligent misrepresentation, and unjust enrichment). In its amicus brief to the Second Circuit in Dabit, the SEC provided a cogent analysis of the proper scope of SLUSA, much of which is relevant here. See Brief of the SEC as Amicus Curiae on Issues Addressed, Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2d Cir.2005), vacated, 547 U.S. 71, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006). [5] The SEC explained that the statute's language makes clear that SLUSA preemption does not require an allegation of scienter. Id. at 25; see also id. at 27 ([T]he language of SLUSA does not on its face require that the plaintiffs allegations state a scienterbased claim, as required under Rule 10b-5.). The SEC further explained: The imposition of a scienter requirement would also be inconsistent with SLUSA's principal purpose. . . . While part of Congress's concern was the procedural constraints on class action litigation, another concern was compelling compliance with the PSLRA's heightened scienter pleading standard, which requires plaintiffs in Rule 10b-5 cases to allege scienter with greater specificity than many courts had previously required. To the extent that migration toward state courts had been fueled by this requirement, it would have been because plaintiffs found it difficult, after the PSLRA, to make an adequate claim of scienter in Rule 10b-5 cases. If it were to be held that SLUSA does not apply to a case which cannot, for lack of an allegation of scienter, be brought under Rule 10b-5, this objective of SLUSA would be largely undercut. SLUSA could not compel compliance with the PSLRA's scienter pleading standard, since it simply would not apply to any class action complaint that could not comply with the PSLRA standard. Congress could not have intended such a self-defeating result. Id. at 27-29 (citations omitted). Along these lines, the SEC also noted that [n]othing in the language of SLUSA suggests that any of the other requirements of a private Rule 10b-5 action  such as statute of limitations, reliance, loss causation  must be met before SLUSA preemption will apply. Id. at 29 n. 7. The SEC was quick to clarify, however, that [t]he clear language of SLUSA . . . requires that the action allege a misrepresentation or misleading omission or other deception, so a pure breach-of-contract claim  with no allegation of misrepresentation  [does not] come[] within the terms of the preemption provisions. Id. at 24. In light of these authorities, the district court was correct that SLUSA precluded Plaintiffs' claims, and that Plaintiffs did not have to allege scienter or reliance for SLUSA to apply. Plaintiffs do not contest that their claims constitute a covered class action, that is based on state law, and that is in connection with the purchase or sale of a covered security. 15 U.S.C. § 78bb(f)(1). Nor do Plaintiffs' claims fit within one of the exceptions provided under SLUSA. See 15 U.S.C. § 78bb(f)(3)-(4). Most importantly, in their Complaint, Plaintiffs make several allegations regarding misrepresentation[s] or omission[s] of a material fact and/or manipulative or deceptive device[s] or contrivance[s]. See, e.g., Compl., ROA, Vol. I, at 13, ¶ 46 (Naked short selling can present substantial manipulation concerns.); id. at 15, ¶ 54 (It is the inevitable market imbalances, the unfair leverage gained, and the largely unchecked potential for manipulation in the naked short seller-prime broker context that is at the heart of this action. And, it is the interaction between one or more major short sellers of Solv-Ex stock and their prime broker Merrill Lynch, and how those interactions caused Merrill Lynch to abruptly set in motion the events necessitating the sale of Rendall's pledged shares, that is the necessary subject for inquiry in this action.); id. at 24-25, ¶¶ 92, 94, 96-99 (contending that, on several occasions, the Zweig Entities sold Solv-Ex shares through their Merrill Lynch prime brokerage accounts, that [e]ach sale was a short sale, and that they did not later purchase Solv-Ex shares to cover these short sales, or otherwise close[] out their short positions in Solv-Ex); id. at 35, ¶ 153 (The reasonable inferences to be drawn from the facts now known, however, are that Merrill Lynch, alone or in concert with other persons or parties, intentionally acted to harm Mr. Rendall and thereby the Plaintiffs.). All of the substantive counts listed in Plaintiffs' Complaint incorporate these allegations by reference. [6] Also, several of the individual counts themselves allege misrepresentation[s] or omission[s] of a material fact and/or manipulative or deceptive device[s] or contrivance[s]. See, e.g., id. at 39, ¶ 164 (Merrill Lynch dominated, interfered with, or misled the Plaintiffs in the exercise of their rights in their Solv-Ex common stock shares.); id. at 43, ¶ 174 (Merrill Lynch's acts and failures to act as alleged herein constitute a `device, scheme or artifice to defraud' Plaintiffs. . . .); id. at 45, ¶ 181 (Merrill Lynch's acts and failures to act as alleged herein constitute a `device, scheme or artifice to manipulate' the market in Plaintiff[s'] Solv-Ex common stock. . . .); id. at 45, ¶ 185 (By acting and failing to act as alleged herein, Merrill Lynch knowingly made false or misleading representations. . . .). We conclude, therefore, that Plaintiffs' claims are precluded under SLUSA. The cases that Plaintiffs cite in their brief do not compel a conclusion to the contrary. For instance, in Contreras v. Host America Corp., 453 F.Supp.2d 416, 419 (D.Conn.2006), the court held that SLUSA did not apply, but only because the suit  which involved less than 50 plaintiffs  did not qualify as a covered class action. The court's virtual identity analysis came later, in a different jurisdictional context. See id. at 419-21. The Southern District of New York's opinion in Xpedior Creditor Trust v. Credit Suisse First Boston (USA) Inc., 341 F.Supp.2d 258, 265-70 (S.D.N.Y.2004), provides some support for Plaintiffs, but as we have explained above, the weight of the authority is overwhelmingly against them.