Opinion ID: 149655
Heading Depth: 2
Heading Rank: 4

Heading: In Connection with the Purchase or Sale of Covered Securities

Text: We next consider the more difficult question of whether, under SLUSA, the amended complaints alleged misrepresentations and omissions in connection with the purchase or sale of covered securities. In Merrill Lynch, Fenner & Smith, Inc. v. Dabit , the Supreme Court considered this issue and looked to its prior interpretations of § 10(b) and Rule 10b-5 because the in connection with language is the same as in SLUSA. See 547 U.S. at 85-87, 126 S.Ct. 1503. In SEC v. Zandford, decided prior to Dabit, the Supreme Court concluded that § 10(b)'s in connection with requirement is met where a fraudulent scheme and a purchase or sale of securities coincide. 535 U.S. 813, 822, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002); see also United States v. O'Hagan, 521 U.S. 642, 656, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997) (determining that the in connection with element was satisfied because the securities transaction and the breach of duty [ ] coincide). Much the same, the Dabit Court ruled that defendant's alleged fraud must coincide with plaintiff's purchase or sale of covered securities to meet SLUSA's in connection with requirement. 547 U.S. at 85, 126 S.Ct. 1503. The coincide requirement is broad in scope, id. at 86, 126 S.Ct. 1503, and courts have used various terms to describe it. [5] In our opinion in Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., which the Supreme Court overruled on other grounds, we considered the coincide requirement articulated in Zandford and concluded 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. Dabit v. Merrill Lynch, Fenner & Smith, Inc., 395 F.3d 25, 48, 50 (2d Cir.2005) (citing Zandford, 535 U.S. at 820, 825, 122 S.Ct. 1899), overruled by 547 U.S. 71, 126 S.Ct. 1503, 164 L.Ed.2d 179. We have also found that the more exacting induced standard satisfies § 10(b)'s in connection with requirement. See, e.g., Press v. Chem. Invest. Servs. Corp., 166 F.3d 529, 537 (2d Cir.1999) (The Second Circuit has broadly construed the phrase `in connection with,' ... mandat[ing] only that the act complained of somehow induced the purchaser to purchase the security at issue.) (emphasis added); United States v. Ostrander, 999 F.2d 27, 32-33 (2d Cir. 1993) (Any payment to a portfolio manager intended to induce the purchase of a firm's securities on behalf of an investment company easily qualifies as a `fraudulent, deceptive or manipulative' act `in connection with' the investment company's acquisition of securities.) (emphasis added). As discussed below, we conclude that the misrepresentations and omissions in question induced securities transactions, and that the claims we are considering necessarily involve and necessarily rest on them. See Dabit v. 395 F.3d 25, 48, 50. Appellants maintain that the connectivity required by Dabit is absent for a number of reasons. They note that they specifically aver that they do not bring claims for violation of state or federal securities laws and that their amended complaints contain no allegations relating to defendants' investment of appellants' retirement funds. Rather, appellants contend that they assert only garden variety state negligence and breach of fiduciary duty claims that do not relate to the value of any given security and exclusively concern matters such as financial and retirement planning and tax advice, all of which are divorceable from appellants' ultimate purchase of securities. Appellants also point out that they seek only employment damages and do not seek any damages which relate to the performance of any investments they may have made with defendants. Thus, appellants urge, their eventual purchases and sales of securities are too far removed from defendants' alleged negligence and misrepresentations to trigger SLUSA preemption. Appellants' contentions are misplaced because the task of determining whether SLUSA applies is not limited simply to an examination of the relevant pleadings. If that were so, the statute could be avoided merely by consciously omitting references to securities or to the federal securities law. SLUSA requires our attention to both the pleadings and the realities underlying the claims. In any event, defendants, focusing on the pleadings, contend that the amended complaints are replete with allegations concerning securities investments. For example, defendants point out that Lawton asserts that he attended a seminar where, [w]ithout mentioning or recommending any specific security or other asset allocation strategy, Isabella assured the Plaintiffs that the future returns on their retirement assets would be sufficient to sustain their retirement income for the rest of their lives. (emphasis added). Lawton also contends that he planned to live off the assets [of his investment plan] and leave the pension proceeds for Defendants to invest without substantial risk of depletion by periodic withdrawals. The Romano appellants' amended complaint, defendants point out, alleges that Kazacos marketed himself as advising clients retiring from companies and primarily investing their lump sum portfolios and assured appellants that future returns on their retirement assets would sustain them through their retirement. Defendants point out that the amended complaints allege that Romano retired and placed approximately $170,000 ... with Defendants for investment and that, after the bear market from 2000-2003, Defendants affirmatively assured ... Plaintiffs that their retirement income remained secure for their lifetimes. In so saying, Defendants misrepresented or concealed material facts they knew, or should have known.... Both complaints allege that defendants told them that they could base his/her retirement and financial plan on, and justifiably rely upon, secure income each year in the amount of approximately 10% on the client's retirement plan accumulations and cash-out values at that time for the expected lifetime of the client, enabling the client to receive regular income sufficient to maintain the client's lifestyle and retirement and financial goals without significant risk of depletion of principal. We agree with defendants that these allegations satisfy SLUSA's in connection with requirement because appellants, in essence, assert that defendants fraudulently induced them to invest in securities with the expectation of achieving future returns that were not realized. In reaching this conclusion, we bear in mind that we must give a broad construction to the in connection with requirement. As the Supreme Court has observed, [t]he 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. Dabit, 547 U.S. at 86, 126 S.Ct. 1503. Though appellants contend that they seek only employment damages, the amended complaints are inconsistent with this characterization. Lawton and Miller's amended complaint alleges that plaintiffs suffered no measurable damage until the point in time when their expectations were actually not met, and they were then forced to either reduce their retirement income, or return to the workforce and seek employment, or accept the total depletion of their retirement savings. (emphasis added). Romano's amended complaint includes similar language. Even though appellants attempt to recharacterize their investment losses as employment damages rather than portfolio losses, it is apparent to us that the injury complained of resulted from the diminution in value of appellants' investment accounts. Finally, citing affidavits appended to their motions to remand, appellants emphasize that they did not invest in any covered securities for up to eighteen months after defendants advised them of the retirement income premise. We are not persuaded that the lapse of any particular amount of time necessarily defeats the in connection with requirement, though it does complicate the analysis. Dabit, we note, does not pivot on temporal limitations. 547 U.S. at 86-87, 126 S.Ct. 1503. Rather, the Dabit Court focused on the broad scope of SLUSA's in connection with requirement to construct a flexible standard for determining whether SLUSA applies to a particular class action. Id. This flexible approach comports with Zandford, which requires that the phrase in connection with be construed not technically and restrictively but flexibly to effectuate its remedial purposes. Zandford, 535 U.S. at 819, 122 S.Ct. 1899. Therefore, we decline to find that the passage of eighteen months between the alleged fraud and the purchase or sale of securities necessarily defeats SLUSA's in connection with requirement. We are persuaded that the time that lapsed is not determinative here because, as defendants argue, this was a string of events that were all intertwined. See SEC v. Pirate Investor LLC, 580 F.3d 233, 245 (4th Cir.2009) (The `in connection with' test is satisfied when the proscribed conduct and the sale are part of the same fraudulent scheme.) (alterations omitted) (citing Alley v. Miramon, 614 F.2d 1372, 1378 n. 11 (5th Cir.1980)). And so, at the end of the day, this is a case where defendants' alleged misrepresentations induced appellants to retire early, receive lump sum benefits, and invest their retirement savings with defendants, where the savings were used to purchase covered securities. When the securities plummeted in value, appellants sued to be made whole. Because both the misconduct complained of, and the harm incurred, rests on and arises from securities transactions, SLUSA applies.