Opinion ID: 1975412
Heading Depth: 1
Heading Rank: 5

Heading: Has Plaintiff Alleged Federal Securities Fraud Claims Merely Labeled as State Contract Claims?

Text: The parties agree that this Court reviews de novo a trial court's decision to grant a motion to dismiss. [13] We must determine if there is any ground asserted by Viacom that can sustain the judgment of the Superior Court. We start with the holding of the Superior Court transforming Rossdeutscher's claims for breach of contract and unjust enrichment into a claim for securities fraud under section 10(b) of the '34 Act, and concluding that these claims were, therefore, time-barred. Contrary to the Superior Court's view, Rossdeutscher's ability to maintain a Rule 10b-5 suit is not free from doubt. The Superior Court concluded that Rossdeutscher was entitled to maintain an action under Rule 10b-5 because he is a purchaser of securities under that Rule. The Superior Court reasoned that plaintiff `sold' securities when Viacom `purchased' the CVR's ... from the plaintiff by redeeming them for cash and stock. [14] A number of federal courts have squarely rejected this reasoning. In this case, the CVR holders held the CVRs until Viacom exercised its redemption rights. Based on similar facts, federal courts have found either that the alleged fraud was not in connection with a purchase or sale, or that the reliance or transaction causation element of a 10b-5 claim is lacking because no investment decision was made as a result of the alleged fraud. [15] Although some federal courts might not have dismissed Rossdeutscher's suit, [16] it is not clear that Rossdeutscher had a viable securities claim. Therefore we do not view his complaint as recasting a securities action as a common law action in order to avoid the shorter federal statute of limitations. Section 28(a) of the '34 Act expressly states that the federal statutory remedies of the Act over which federal courts have exclusive jurisdiction [17] are intended to coexist with claims based on state law and not preempt them: The rights and remedies provided by [the '34 Act] shall be in addition to any and all other rights and remedies that may exist at law or in equity. [18] This language, which is not limited to state securities statutes or common law fraud actions, suggests that the express intention of Congress was that the federal securities law would not dilute any remedies allowed by the states, either in law or equity. The scope of that language appears to include the breach of contract and unjust enrichment claims of Rossdeutscher. Common law and 10b-5 both provide relief for the same wrong  in other words, just because 10b-5 provides a remedy [it] will not preempt the common law and, similarly, that common law permits recovery will not bar a 10b-5 suit. [19] Contract claims and securities claims arising out of the same operative facts may co-exist. [20] It is well-settled that federal law does not enjoy complete preemptive force in the field of securities and `far from preempting the field,' Congress has expressly preserved the role of the states in securities regulation. [21] Rule 10b-5 is almost universally viewed as broader than common law fraud claims, the differences being their respective treatment of reliance, privity, materiality, causation, injury, and scienter. [22] Accordingly, because Rule 10b-5 generally encompasses common law claims, the implication of Viacom's argument and the position of the trial court is that all state common law fraud actions involving the purchase or sale of a security would be transformed into a federal securities fraud action. Such a result is antithetical to the savings clause of the '34 Act and would ignore material differences in the elements and remedies of the claims. [23] Although Viacom resists having its argument labeled as a preemption argument, adoption of its position would effectively result in preemption of common law claims by federal securities laws. Viacom asserts that even if Rossdeutscher could not assert a 10b-5 action, he could have asserted an action under Section 9 of the '34 Act, which Viacom describes as prohibiting market manipulation of any kind. This argument fails for two reasons: (1) the '34 Act does not preempt state common law actions; and (2) the type of manipulation claimed by Rossdeutscher focuses on certain accounting and business decisions that are different from the type of market manipulations normally addressed by Section 9. [24] Therefore, not only would Rossdeutscher be unable to proceed under 10b-5, but also his ability to pursue a claim under Section 9 is doubtful. Even if he had elected to pursue a timely Section 9 claim in the federal court, it does not follow that his state court contract claims would perforce be barred.