Opinion ID: 2998112
Heading Depth: 2
Heading Rank: 2

Heading: Removal and Preemption under SLUSA

Text: On appeal, SSB challenges the district court’s conclusion that Mr. Disher’s action did not fall within SLUSA’s pre- 1 emptive scope. 1 Because, for the reasons we shall discuss in this opinion, we hold that Mr. Disher’s cause of action is subject to removal and preemption under SLUSA, we have no occasion to address whether we have jurisdiction to review the district court’s remand order, or to evaluate the merits of that order, with respect to the absence or presence of federal jurisdiction on any basis other than SLUSA. No. 04-3073 5
As a threshold matter, Mr. Disher contends that we lack appellate jurisdiction over this matter because the district court remanded the case for lack of subject matter jurisdiction. See 28 U.S.C. § 1447(d). This court already has determined that a district court’s remand of a case to state court based on SLUSA is appealable. See Kircher v. Putnam Funds Trust (“Kircher I”), 373 F.3d 847 (7th Cir. 2004). The substance of Mr. Disher’s submissions in this case were addressed in Kircher I, and we decline to revisit this court’s decision.
SLUSA is the most recent in a line of federal securities statutes that originated with the enactment of the Securities Act of 1933 (“1933 Act”), 15 U.S.C. § 77a et seq., and the Securities Exchange Act of 1934 (“1934 Act”), 15 U.S.C. § 78a et seq. See Riley v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 292 F.3d 1334, 1340 (11th Cir.), cert. denied, 537 U.S. 950 (2002). Section 10(b) of the 1934 Act made 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 added). The SEC then promulgated Rule 10b-5, which provides: 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, 6 No. 04-3073 (a) To employ any device, scheme or artifice to defraud, (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 (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. 17 C.F.R. § 240.10b-5 (emphasis added). In 1995, Congress enacted the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. §§ 77z-1, 78u, to protect against meritless shareholder suits that were being initiated for the sole purpose of obtaining large attorneys’ fees through private settlements. See Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116, 122 (2d Cir. 2003). To achieve this aim, the PSLRA imposed heightened pleading standards and mandatory stays of discovery for securities fraud class actions filed in federal court. Id. After the enactment of the PSLRA, plaintiffs increasingly began to file suits in state courts under state securities law. Id. at 123. Congress responded by enacting SLUSA. Kircher v. Putnam Funds Trust (“Kircher II”), 403 F.3d 478, 482 (7th Cir. 2005) (“SLUSA is designed to prevent plaintiffs from migrating to state court in order to evade rules for federal securities litigation in the [PSLRA].”). SLUSA attempts to close this “ ‘federal flight’ loophole” by making federal courts the exclusive forum for class actions alleging fraud in the sale or purchase of covered securities and by mandating that federal law governs such class actions. Spielman, 332 F.3d at 123. To that end, SLUSA contains the following preemption and removal provisions:
No. 04-3073 7 [2] 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) a misrepresentation or omission of a material fact in connection with the purchase or [3] sale of a covered security; or 2 SLUSA defines the term “covered class action” as
(I) damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members; or
ages on a representative basis on behalf of themselves and other unnamed parties similarly situated, and questions of law or fact common to those persons or members of the prospective class predominate over any questions affecting only individual persons or members; or (ii) any group of lawsuits filed in or pending in the same court and involving common questions of law or fact, in which— (I) damages are sought on behalf of more than 50 persons; and (II) the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose. 15 U.S.C. § 78bb(f)(5)(B). 3 SLUSA defines the term “covered security” as a security that satisfies the standards for a covered security (continued...) 8 No. 04-3073 (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.
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). 4 15 U.S.C. § 78bb(f)(1)-(2).
A defendant may remove a case to federal court only if the federal district court would have original subject matter jurisdiction over the action. 28 U.S.C. § 1441; Caterpillar Inc. (...continued) specified in paragraph (1) or (2) of section 18(b) of the Securities Act of 1933 [15 U.S.C. § 77r(b)], at the time during which it is alleged that the misrepresentation, omission, or manipulative or deceptive conduct occurred . . . . 15 U.S.C. § 78bb(f)(5)(E). Section 77r(b)(2), in turn, states: A security is a covered security if such security is a security issued by an investment company that is registered, or that has filed a registration statement, under the Investment Company Act of 1940. 15 U.S.C. § 77r(b)(2). 4 SLUSA amended both the 1933 Act, see 15 U.S.C. § 77p, and the 1934 Act, see id. § 78bb(f). The amendments are functionally identical; for ease of reference, we shall cite only the 1934 Act codification. No. 04-3073 9 v. Williams, 482 U.S. 386, 392 (1987). The party seeking removal has the burden of establishing federal jurisdiction. Boyd, 366 F.3d at 529. As a general rule, the plaintiff is the master of his own complaint and can avoid federal question jurisdiction by pleading exclusively state-law claims. Bastien v. AT&T Wireless Servs., Inc., 205 F.3d 983, 986 (7th Cir. 2000) (citing Franchise Tax Bd. v. Constr. Laborers Vacation Trust for S. Cal., 463 U.S. 1, 10 (1983)). Ordinarily, when a claim arises under state law, the assertion of federal preemption as a defense will not create federal jurisdiction. Id. “Congress has, however, created certain exceptions to” the well-pleaded complaint rule. Beneficial Nat’l Bank v. Anderson, 539 U.S. 1, 6 (2003). The Supreme Court has declared that “a state claim may be removed to federal court in only two circumstances—when Congress expressly so provides . . . or when a federal statute wholly displaces the state-law cause of action through complete pre-emption.” Id. at 8. SLUSA expressly provides for the removal to federal court of covered fraud claims that are “in connection with the purchase or sale of a covered security.” 15 U.S.C. § 78bb(f)(2). SLUSA does not, however, preclude all securities fraud actions based on state law. To invoke SLUSA, the removing party must show: (1) that the action is a “covered class action” for purposes of SLUSA; (2) that the action purports to be based on state law; (3) that the defendant is alleged to have misrepresented or omitted a material fact (or to have employed a manipulative device or contrivance); and (4) that the defendant’s alleged conduct was “in connection with the purchase or sale of a covered security.” 15 U.S.C. § 78bb(f)(1)-(2); Green v. Ameritrade, Inc., 279 F.3d 590, 596 (8th Cir. 2002). The primary issue in this case concerns whether or not Mr. Disher’s state-law class action complaint alleged misrepresentations that were “in connection with 10 No. 04-3073 the purchase or sale” of securities. Mr. Disher contends that this action falls outside the scope of SLUSA because the complaint alleges that SSB’s misrepresentations caused him and other class members to hold securities, not to purchase or sell them. Moreover, the complaint specifically disavows any claim related to the purchase or sale of stock. SLUSA does not define “in connection with the purchase or sale of a covered security.” The Supreme Court has not yet had occasion to consider this phrase in the context of SLUSA. For guidance, then, this court and other courts of appeals have relied on Supreme Court case law construing the identical phrase in the context of section 10(b) of the 1934 Act and Rule 10b-5. See Kircher II, 403 F.3d at 482-84 (collecting cases). The analogy to section 10(b) and Rule 10b- 5 is appropriate because, in enacting SLUSA, Congress “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.” Riley, 292 F.3d at 1342-43. Analogizing to the case law interpreting section 10(b) also makes sense, in terms of our obligation to interpret the statute so as to give effect to the intent of Congress, because “SLUSA can do its job only if subsection (b) covers those claims that engage Rule 10b-5 (and thus come within the 1995 statute) if presented directly under federal law.” Kircher II, 403 F.3d at 482. The Supreme Court has limited the universe of investors who may bring private securities fraud actions under the statute. In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), the Court held that investors who neither purchase nor sell securities have no standing to maintain private litigation to recover damages under section 10(b) and Rule 10b-5, even if the failure to purchase or sell was the result of fraud. Mr. Disher submits that, under Blue Chip No. 04-3073 11 Stamps, because claims related solely to the retention of securities, as opposed to a purchase or sale, are not cognizable under section 10(b), such claims also are not preempted by SLUSA. This position has the support of some of our sister courts of appeals. See Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25, 43 (2d Cir. 2005) (“[I]n enacting SLUSA Congress sought only to ensure that class actions brought by plaintiffs who satisfy the Blue Chip purchaserseller rule are subject to the federal securities laws.”); Green, 279 F.3d at 598; Riley, 292 F.3d at 1345. However, this court recently has concluded that SLUSA’s “in connection with the purchase or sale of a covered security” requirement does not incorporate the Blue Chip Stamps standing rule. See Kircher II, 403 F. 3d at 483-84. Our opinion in Kircher II was issued after the district court’s decision in this case and, indeed, after briefing and oral arguments on appeal. In Kircher II, one of the plaintiffs’ classes was defined as all investors who held the defendant mutual fund’s securities during a defined period and did not purchase or sell shares during that period. See id. at 483. We held that the claims were “connected to their own purchase of securities” and thus were blocked by SLUSA. We explained: Decisions since Blue Chip Stamps reiterate that it deals with private actions alone and does not restrict coverage of the statute and regulation. See United States v. O’Hagan, 521 U.S. 642, 664, 117 S. Ct. 2199, 138 L.Ed.2d 724 (1997); Holmes v. SIPC, 503 U.S. 258, 284, 112 S. Ct. 1311, 117 L.Ed.2d 532 (1992); United States v. Naftalin, 441 U.S. 768, 774 n.6, 99 S. Ct. 2077, 60 L.Ed.2d 624 (1979). By depicting their classes as containing entirely non-traders, plaintiffs do not take their claims outside § 10(b) and Rule 10b-5; instead they demonstrate only that the claims must be left to public enforcement. It 12 No. 04-3073 would be more than a little strange if the Supreme Court’s decision to block private litigation by nontraders became the opening by which that very litigation could be pursued under state law, despite the judgment of Congress (reflected in SLUSA) that securities class actions must proceed under federal securities law or not at all. Blue Chip Stamps combined with SLUSA may mean that claims of the sort plaintiffs want to pursue must be litigated as derivative actions or committed to public prosecutors, but this is not a good reason to undercut the statutory language. Kircher II, 403 F.3d at 483-84. Mr. Disher’s class definition of all SSB customers who retained certain securities in reliance on SSB’s misrepresentations is no more narrowly drawn than the class definitions discussed in Kircher II. Thus, we must conclude that the present claims are connected sufficiently to the purchase and sale of a covered security for the purposes of SLUSA preemption and removal.