Court Opinion

ID: 2684162
Source: CourtListenerOpinion
Date Created: 2014-07-17 04:02:17.178591+00
Date Added: 2024-06-11T13:13:49.366230
License: Public Domain

United States Court of Appeals
                         For the First Circuit

No. 13-1574

                     EDUARDO HIDALGO-VÉLEZ, ET AL.,

                        Plaintiffs, Appellants,

                                   v.

                SAN JUAN ASSET MANAGEMENT, INC., ET AL.,

                         Defendants, Appellees.

              APPEAL FROM THE UNITED STATES DISTRICT COURT

                    FOR THE DISTRICT OF PUERTO RICO

            [Hon. Steven J. McAuliffe, U.S. District Judge*]
           [Hon. Carmen Consuelo Cerezo, U.S. District Judge]

                                 Before

                  Thompson and Selya, Circuit Judges,
                    and McConnell, District Judge.**

     Luis A. Avilés, with whom Jorge M. Izquierdo-San Miguel and
Izquierdo-San Miguel Law Offices, PSC were on brief, for
appellants.
     Eric Pérez-Ochoa, with whom Adsuar Muñiz Goyco Seda & Pérez-
Ochoa, P.S.C. was on brief, for appellees San Juan Asset
Management, Inc. and Vizcarrondo-Ramírez de Arellano.
     Michael S. Flynn, with whom Francisco G. Bruno-Rovira, Leslie
Yvette Flores-Rodriguez, McConnell Valdes LLC, Alicia L. Chang, and
Davis Polk & Wardwell LLP were on brief, for appellee
PricewaterhouseCoopers, LLP (whose brief was adopted by appellees
Puerto Rico & Global Income Target Maturity Fund, Inc., Luis
Rivera, Rivera Casiano, Lugo-Rivera, and Colón Ascar).

     *
      Of the District of New Hampshire, sitting by designation.
     **
          Of the District of Rhode Island, sitting by designation.
July 9, 2014
              SELYA, Circuit Judge. This case requires us to trace the

contours of the "in connection with" element of the Securities

Litigation     Uniform   Standards    Act    of   1998   (SLUSA),     15   U.S.C.

§ 78bb(f), in the reflected light of the Supreme Court's recent

decision in Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058

(2014). Giving full voice to Troice, we conclude that the district

court impermissibly extended the SLUSA's reach.               Accordingly, we

vacate the judgment below, reverse the denial of the plaintiffs'

motion to remand, and remit the case to the district court with

directions to return it to the Puerto Rico Court of First Instance.

I.    BACKGROUND

              We begin at the beginning, rehearsing the origin and

travel of the case.      Because "this appeal follows the granting of

a    motion   to   dismiss,   we    draw    the   relevant    facts    from   the

plaintiff[s']       complaint,"      supplemented        by    "documentation

incorporated by reference in the complaint." Rivera-Díaz v. Humana

Ins. of P.R., Inc., 748 F.3d 387, 388 (1st Cir. 2014).

              The plaintiffs are mostly investors in the Puerto Rico &

Global Income Target Maturity Fund (the Fund),1 a non-diversified

investment     company   licensed    under    the   Puerto    Rico    Investment

Companies Act, see P.R. Laws Ann. tit. 10, §§ 661-683.                 The Fund

solicited investors through a prospectus, which promised that the

       1
       Although nothing turns on the distinction, a few of the
plaintiffs sue derivatively as investors' conjugal partners and
conjugal partnerships. See P.R. Laws Ann. tit. 31, §§ 3621-3701.

                                      -3-
Fund would invest at least 75% of its assets in notes with an

"equally weighted exposure to both European and North American

investment     grade   corporate     bond    indices."          Relatedly,    the

prospectus promised that the Fund would invest no more than 25% of

its assets in securities issued by a single issuer.                  Consistent

with these two promises — the 75% promise and the 25% promise — the

complaint alleges that the primary purpose of the Fund was to

expose   its   investors    to   certain    specialized     notes    issued    by

"different international financial institutions such as Banco

Bilbao Vizcaya Argentaria, S.A."

            In May of 2008, the Fund spurned these promises and

invested more than 75% of its assets in notes sold by a single

issuer, Lehman Brothers. The complaint alleges that this lop-sided

investment transgressed both the terms of the prospectus and Puerto

Rico law.

            These transgressions had dire consequences.              The Lehman

notes soon lost most of their value, and the Fund was forced to

adopt a plan of liquidation.

            In due course, the plaintiffs, suing on their own behalf

and on behalf of all other investors similarly situated, filed a

putative class action in a Puerto Rico court.                   Their complaint

asserted    both   direct   claims   on     behalf   of   the    investors    and

shareholder derivative claims on behalf of the Fund.                 The named

defendants included the Fund; its officers and directors; its

                                     -4-
investment advisor, San Juan Asset Management; its sales agent,

BBVA Securities of Puerto Rico; and its independent auditor,

PricewaterhouseCoopers (PwC).      Although the complaint is not a

model of clarity, it is clear that its gravamen is that the Fund

did not comply with the investment policies promised in the

prospectus and that the strategy it did pursue flouted Puerto Rico

law.2

            PwC, later joined by other defendants, removed the action

to the federal district court, asserting that it fell within the

ambit of the SLUSA.    See 15 U.S.C. § 78bb(f)(2); 28 U.S.C. § 1446.

The plaintiffs moved to remand.     The district court (Cerezo, J.)

denied the plaintiffs' motion. See Hidalgo-Vélez v. San Juan Asset

Mgmt., Inc. (Hidalgo-Vélez I), No. 11-2175, 2012 WL 4427077, at *3

(D.P.R. Sept. 24, 2012).

            At that point, the plaintiffs asked the district court to

certify the jurisdictional question for interlocutory appeal.    See

28 U.S.C. § 1292(b).    The defendants not only opposed this request

but also pressed dismissal motions premised on SLUSA preclusion.

See Fed. R. Civ. P. 12(b)(6).    The district court (McAuliffe, J.)

refused to certify the question and granted the motions to dismiss.

See Hidalgo-Vélez v. San Juan Asset Mgmt., Inc., No. 11-2175, 2013

        2
      According to the complaint, Puerto Rico law prohibits a non-
diversified investment company (like the Fund) from investing more
than 25% of its assets in the securities of a single issuer. See
P.R. Laws Ann. tit. 10, § 662(b).

                                 -5-
WL 1089745, at *7 (D.P.R. Mar. 15, 2013).        This timely appeal

ensued.

II.   ANALYSIS

            We review a district court's disposition of a motion to

dismiss for failure to state a claim de novo.   See Artuso v. Vertex

Pharm., Inc., 637 F.3d 1, 5 (1st Cir. 2011).      In conducting this

review, "we accept as true all well-pleaded facts alleged in the

complaint and draw all reasonable inferences therefrom in the

pleader's favor."    Butler v. Balolia, 736 F.3d 609, 612 (1st Cir.

2013).

            The defendants invite us to alter this standard of review

on the ground that the plaintiffs failed to preserve their central

argument.    We decline this invitation.

            The defendants insist that the plaintiffs' failure to

oppose their motions to dismiss constitutes a waiver or, at least,

a forfeiture.    See generally United States v. Olano, 507 U.S. 725,

733 (1993) (limning distinction between waiver and forfeiture).

But this hypertechnical view of the record gives too little weight

to the plaintiffs' consistent and vigorous opposition to the

defendants' contention that the SLUSA pretermitted the plaintiffs'

claims. Common sense suggests that in certain situations substance

ought to prevail over form and — in the peculiar circumstances of

this case — we believe that the fact that the plaintiffs presented

                                 -6-
their opposition in their motion for remand rather than as part of

formal objections to the motions to dismiss is of no moment.

           We briefly explain our reasoning.        The SLUSA contains

both "a preclusion provision and a removal provision."        Kircher v.

Putnam Funds Trust, 547 U.S. 633, 636 (2006) (footnotes omitted).

These symbiotic provisions are mirror images of each other: any

action that is properly removable under the removal provision is

per se precluded under the preclusion provision and, conversely,

any action not so precluded is not removable.       See id. at 643-44;

Madden v. Cowen & Co., 576 F.3d 957, 965 (9th Cir. 2009).            Thus,

the ruling on the plaintiffs' motion to remand would necessarily be

dispositive of the defendants' motions to dismiss.           Given this

juxtaposition, we hold that the plaintiffs' presentation of their

opposition to the SLUSA's applicability in their remand papers

sufficed to preserve their position for purposes of appeal.           This

holding   is   consistent,   we   think,   with   the   Supreme    Court's

admonition that "[r]ules of practice and procedure are devised to

promote the ends of justice, not to defeat them."             Hormel v.

Helvering, 312 U.S. 552, 557 (1941).

           We are equally unimpressed with the defendants' more

general importuning that the plaintiffs failed to develop their

central argument sufficiently to preserve it on appeal.           While the

plaintiffs certainly could have developed their argument more

fully, they did enough to put the dispositive issue in play before

                                   -7-
the district court.      In view of the fact that the Supreme Court

did not decide Troice until this case was pending on appeal,

treating the plaintiffs' argument as abandoned would require an

overly strict application of waiver principles.

            We turn now to the meat of this appeal.       The SLUSA is a

spare but sweeping statute, which for present purposes may be

viewed as the third in a trilogy of statutory enactments.         We find

it helpful, therefore, to trace its lineage.

            In the aftermath of the 1929 stock market crash, Congress

passed the Securities Exchange Act of 1934 (the Exchange Act), ch.

404, 48 Stat. 881.    See Merrill Lynch, Pierce, Fenner & Smith Inc.

v. Dabit, 547 U.S. 71, 78 (2006). As amended, that statute forbids

the use of any manipulative or deceptive devices or contrivances

"in connection with the purchase or sale of any security registered

on   a   national   securities   exchange   or   any   security   not   so

registered, or any securities-based swap agreement."          15 U.S.C.

§ 78j(b).   Exercising regulatory authority granted by the Exchange

Act, the Securities and Exchange Commission (SEC) promulgated Rule

10b-5, which likewise prohibits fraud in connection with the

purchase or sale of securities.      See 17 C.F.R. § 240.10b-5.         The

Supreme Court has read a private right of action into these

provisions.    See Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

723, 730 (1975); Sup't of Ins. of N.Y. v. Bankers Life & Cas. Co.,

404 U.S. 6, 13 & n.9 (1971).     Moreover, the Court has forged a link

                                   -8-
between, on the one hand, the "in connection with" provisions of

the Exchange Act and Rule 10b-5 and, on the other hand, the SLUSA's

parallel "in connection with" terminology.     See Dabit, 547 U.S. at

85-86.

            More than sixty years after the passage of the Exchange

Act, Congress enacted the second statute in the trilogy: the

Private Securities Litigation Reform Act of 1995 (PSLRA), Pub. L.

No. 104-67, 109 Stat. 737. Congress fashioned the PSLRA as a means

of combating unfounded strike suits against issuers of securities.

See Dabit, 547 U.S. at 81.      Consistent with this congressional

intent, the PSLRA imposed "heightened pleading requirements in

actions brought pursuant to § 10(b) and Rule 10b-5" and contained

a gallimaufry of provisions targeting abusive securities-fraud

litigation.   Id.

            Congress soon discovered that the PSLRA had not sounded

the death knell for abusive securities-fraud litigation; plaintiffs

simply started using state law as a vehicle for their claims.     In

an effort to close this loophole, Congress passed the third statute

in the trilogy in 1998: the SLUSA, Pub. L. No. 105-353, 112 Stat.

3227.    See Kircher, 547 U.S. at 636; see also H.R. Conf. Rep. No.

105-803, at 13.

            Pertinently, the SLUSA provides:

            [n]o 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

                                 -9-
           alleging—(A) a misrepresentation or omission
           of a material fact in connection with the
           purchase or sale of a covered security; or (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.

15 U.S.C. § 78bb(f)(1).3        Four requirements must be satisfied in

order for the SLUSA to attach.          There must be (i) a covered class

action,   (ii)    based    on   state    law,   (iii)   alleging   fraud   or

misrepresentation in connection with the purchase or sale of, (iv)

a covered security.       See Romano v. Kazacos, 609 F.3d 512, 518 (2d

Cir. 2010).      Although the courts of appeals have made this same

point in ways that differ slightly from circuit to circuit, see,

e.g., Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 615

(7th Cir. 2012); Madden, 576 F.3d at 965; LaSala v. Bordier et Cie,

519 F.3d 121, 128 (3d Cir. 2008), all of them agree with the

essence of this formulation.

           This case does not demand an archaeological dig into

these four requirements.        For present purposes, it is enough to

emphasize a few points that are beyond cavil.           First, "[a] covered

class action is a lawsuit in which damages are sought on behalf of

more than 50 people."       Dabit, 547 U.S. at 83 (internal quotation

marks and footnote omitted).            Second, the most common type of

     3
       The SLUSA amended both the Securities Act of 1933, ch. 38,
48 Stat. 74, and the Exchange Act "in substantially identical
ways." Dabit, 547 U.S. at 82 n.6. We adopt the convention of both
the Troice and Dabit Courts and refer to the statutory
codifications of the amendments to the Exchange Act.

                                    -10-
"covered   security   is    one   traded   nationally    and   listed   on   a

regulated national exchange."          Id. (internal quotation marks and

footnote omitted).       Another standard type of covered security is

one issued by an investment company registered under the Investment

Company Act of 1940, 15 U.S.C. §§ 80a-1 to 80a-64.           See Troice, 134

S. Ct. at 1064.

           For   SLUSA     purposes,    Puerto   Rico   is   the   functional

equivalent of a state, see 15 U.S.C. § 78c(a)(16); and in this

instance, it is undisputed that the plaintiffs' suit is a covered

class action alleging fraud or misrepresentation in violation of

Puerto Rico law.      The critical question is whether the alleged

misrepresentations on which the suit is founded were made "in

connection with" a transaction in covered securities.

           The early appellate cases construing the SLUSA's "in

connection with" requirement primarily concerned representations

about or the marketing of covered securities, often in the context

of investment services.       See, e.g., Gray v. Seaboard Sec., Inc.,

126 F. App'x 14, 16-17 (2d Cir. 2005); Rowinski v. Salomon Smith

Barney Inc., 398 F.3d 294, 302-03 (3d Cir. 2005); Prof'l Mgmt.

Assocs., Inc. Emps.' Profit Sharing Plan v. KPMG LLP, 335 F.3d 800,

802-03 (8th Cir. 2003); Behlen v. Merrill Lynch, 311 F.3d 1087,

1094 (11th Cir. 2002); Dudek v. Prudential Sec., Inc., 295 F.3d

875, 878-79 (8th Cir. 2002); Green v. Ameritrade, Inc., 279 F.3d

590, 598-99 (8th Cir. 2002).           For the most part, the dispute in

                                    -11-
those cases did not involve whether the misrepresentations were

connected to covered securities but, rather, whether they were

sufficiently intertwined with a purchase or sale.              See, e.g.,

Rowinski, 398 F.3d at 302-03; Prof'l Mgmt. Assocs., 335 F.3d at

802-03; Behlen, 311 F.3d at 1094.

            The   tectonic   plates   shifted   when   the    Dabit    Court

authoritatively delineated the scope of the SLUSA's "purchase or

sale" language.     See 547 U.S. at 84-86.      The Court held that the

SLUSA should be construed to preclude so-called "holder" actions

(that is, actions in which the plaintiffs alleged injury from

merely holding covered securities) in addition to actions directly

involving purchases and/or sales of covered securities. See id. at

87-89.     Three important lessons emerged from the Dabit Court's

opinion.

            To begin, the Court made pellucid that the SLUSA's "in

connection with" requirement should be construed broadly.             See id.

at 85.   Next, the Court declared that "it is enough that the fraud

alleged 'coincide' with a securities transaction."           Id.   Finally,

the Court indicated that the focus of an "in connection with"

inquiry under the SLUSA should be on the defendant's actions, not

on the plaintiff's actions.           As the Court explained, "[t]he

requisite showing . . . is deception in connection with the

purchase or sale of any security, not deception of an identifiable

purchaser or seller."    Id. (internal quotation marks omitted).

                                  -12-
             Some elaboration is in order with respect to the second

of these lessons.      The Dabit Court imported this lesson from its

Exchange Act and Rule 10b-5 jurisprudence.             See SEC v. Zandford,

535 U.S. 813, 825 (2002); United States v. O'Hagan, 521 U.S. 642,

655-56 (1997).        In the wake of Dabit, the courts of appeals

interpreted    this   "coincide"      language   expansively,       though    not

uniformly.     See Roland v. Green, 675 F.3d 503, 512-14 (5th Cir.

2012) (surveying differing approaches).              In Troice, the Supreme

Court reviewed the Fifth Circuit's decision in Roland and shed new

light on the subject.     See 134 S. Ct. at 1066.

             Troice involved an action brought by victims of an

alleged    Ponzi   scheme.      The     fraudster     sold    the   plaintiffs

certificates of deposit (CDs) in a bank that he controlled.                   See

id. at 1064.    The CDs were uncovered "debt assets that promised a

fixed rate of return," not covered securities. Id. The defendants

(parties accused of abetting the fraud) argued that the SLUSA

applied because, even though the CDs themselves were not covered

securities, they were sold on the basis that they would be backed

by covered securities.       The Court found this argument unconvincing

and ruled that the SLUSA did not apply.          See id. at 1071-72.

             The Troice Court was careful to preserve Dabit's core

holding.      See id. at 1066; see also Calderón Serra v. Banco

Santander P.R., 747 F.3d 1, 6 (1st Cir. 2014).                  Nevertheless,

Justice    Breyer's   opinion   for    the   Court    broke   new    ground   in

                                      -13-
illuminating the contours of the "in connection with" requirement.

It held that "[a] fraudulent misrepresentation or omission is not

made 'in connection with' . . . a 'purchase or sale of a covered

security' unless it is material to a decision by one or more

individuals (other than the fraudster) to buy or to sell a 'covered

security.'"    Troice, 134 S. Ct. at 1066.       In other words, the "in

connection     with"   requirement    is    satisfied   only   "where     the

misrepresentation makes a significant difference to someone's

decision to purchase or to sell a covered security."           Id.      In an

effort to put the matter into perspective, Justice Breyer went on

to explain that the "in connection with" requirement reached only

those cases involving "victims who took, who tried to take, who

divested themselves of, who tried to divest themselves of, or who

maintained an ownership interest in financial instruments that fall

within the relevant statutory definition."              Id. (emphasis in

original).

             With the legal landscape set in place, we now move from

the general to the specific.     The court below, ruling without the

benefit of Troice, held that the SLUSA precluded the plaintiffs'

claims.4

     4
       Along the way, the district court concluded that, in
determining whether the SLUSA applied to the complaint, the
analysis should not proceed claim by claim but, rather, in terms of
the complaint as a whole. See Hidalgo-Vélez I, 2012 WL 4427077, at
*3. This conclusion is freighted with uncertainty, compare, e.g.,
Proctor v. Vishay Intertech. Inc., 584 F.3d 1208, 1228-29 (9th Cir.
2009) (holding that review should proceed claim by claim) and In re

                                     -14-
             At the outset, the district court acknowledged that the

securities actually held by the plaintiffs (the shares in the Fund)

were not themselves covered securities.              See Hidalgo-Vélez I, 2012

WL 4427077, at *2.           The court concluded, however, that this

circumstance alone did not place the plaintiffs' claims beyond the

SLUSA's reach: since "the Fund's anticipated investments included

various covered securities," the SLUSA's "in connection with"

requirement was satisfied.         Id.

             We agree with the district court's general approach, and

Troice confirms that approach. See Troice, 134 S. Ct. at 1071-72.

But as we explain below, we disagree with the district court's

particularized conclusion.

             For purposes of a motion to remand, we must credit the

plaintiffs' thesis that the defendants' misrepresentations induced

the plaintiffs to purchase uncovered securities.                    By the same

token, it is undisputed that the only securities involved in any

transactions     carried     out    by     the   plaintiffs    were    uncovered

securities.    Troice teaches that a misrepresentation in connection

with   the   purchase   of    an    uncovered     security,    by     itself,   is

insufficient    to   bring    a    claim    within    the   SLUSA's    grasp:   "a

connection matters where the misrepresentation makes a significant

Lord Abbett Mut. Funds Fee Litig., 553 F.3d 248, 255-56 (3d Cir.
2009) (same), with, e.g., Superior Partners v. Chang, 471 F. Supp.
2d 750, 757 (S.D. Tex. 2007) (holding that under the SLUSA a court
should "examine a lawsuit in its entirety"), and this case does not
require us to resolve the question.

                                         -15-
difference to someone's decision to purchase or to sell a covered

security, not to purchase or to sell an uncovered security."                      Id.

at 1066; cf. Calderón Serra, 747 F.3d at 6 (holding Rule 10b-5's

"in connection with" requirement satisfied when there was "no

dispute as to whether the plaintiffs actually bought securities

covered by the Exchange Act").

             To be sure, the analysis does not invariably end there.

In certain cases, the primary intent or effect of purchasing an

uncovered security is to take an ownership interest in a covered

security.       The defendants strive to convince us that this is such

a case.

             In    advancing    this   proposition,         the     defendants    rely

heavily on the so-called "feeder fund" cases.                       Those are cases

where     the     plaintiffs    invested     in     funds    that,     directly    or

indirectly, acquired or purported to acquire covered securities.

See Roland, 675 F.3d at 514-17 (canvassing cases).                    Typical is In

re Herald, 730 F.3d 112 (2d Cir. 2013), in which the court

addressed "feeder funds" in the context of the infamous Ponzi

scheme initiated by Bernie Madoff.                 There, investors in Madoff-

affiliated feeder funds sued Madoff's bankers for facilitating the

fraud.     The Second Circuit held that their claims were SLUSA-

precluded       because   the   claims      were    "integrally       tied   to   the

underlying       fraud    committed    by   Madoff,"        which    "indisputably"

involved "purported investments in covered securities."                      Id. at

                                       -16-
119. It did not matter, the court said, that Madoff never actually

carried out transactions in covered securities; it was enough that

his "purported trading strategy utilized indisputably covered

securities."    Id. at 118; see Grippo v. Perazzo, 357 F.3d 1218,

1223-24 (11th Cir. 2004) (holding that plaintiff could maintain a

section 10(b) action even though "no proof exist[ed] that a

security was actually bought or sold").

            Herald is readily distinguishable. The Madoff funds were

marketed primarily as vehicles for exposure to covered securities.

See In re Herald, Primeo, & Thema Sec. Litig., No. 09-289, 2011 WL

5928952, at *1 (S.D.N.Y. Nov. 29, 2011) (stating that Madoff "told

investors that he was buying and selling Standard and Poor's 100

stocks and options for their accounts").       Thus, on a petition for

rehearing   following   the   Troice    decision,   the   Second   Circuit

concluded with little apparent difficulty that the victims of the

fraud had intended to take an ownership interest in covered

securities.    See In re Herald, ___ F.3d ___, ___ (2d Cir. 2014)

[Nos. 12-156, 12-162, May 28, 2014, slip op. at 8] (per curiam).

What is more, the fraud depended heavily on misrepresentations

about   transactions    in    covered     securities.        Given    that

interrelationship, the case fits comfortably within the confines of

the "in connection with" requirement.        See, e.g., Zandford, 535

U.S. at 822 (holding SLUSA precluded claims when plaintiffs were

"duped into believing [the defendant] would 'conservatively invest'

                                 -17-
their assets in the stock market"); Instituto de Prevision Militar

v. Merrill Lynch, 546 F.3d 1340, 1352 (11th Cir. 2008) (explaining

that because the alleged fraudster "marketed 'covered securities'

. . ., any misrepresentations and omissions [that the fraudster]

made were 'in connection with the purchase or sale of a covered

security'").

           The case at hand is at a considerable remove from Herald.

Although the prospectus suggested that some (relatively small) part

of the Fund's portfolio might include covered securities, any such

holdings were incidental to the primary purpose of the Fund: the

main allocative stipulation contained in the prospectus was that at

least 75% of the Fund's assets would be invested in certain

specialized notes offering exposure to North American and European

bond   indices.     The   defendants       have    not    asserted   that   these

particular     investments    were       covered    securities.        In   these

circumstances, the link between the alleged misrepresentations and

the covered securities in the Fund's portfolio is too attenuated to

bring the complaint within the maw of the SLUSA.

           This assessment is confirmed by the intrinsic nature of

the misrepresentations alleged.             Those misrepresentations — in

stark contrast to the misrepresentations in Herald — comprised

mainly   false    promises   to   purchase     uncovered      securities.      As

pleaded,   the    plaintiffs'     case    depends    on    averments   that,   in

substance, the defendants made misrepresentations about uncovered

                                     -18-
securities (namely, those investments that were supposed to satisfy

the   75%    promise);    that   the   plaintiffs   purchased   uncovered

securities (shares in the Fund) based on those misrepresentations;

and that their primary purpose in doing so was to acquire an

ownership interest in uncovered securities.         Seen in this light,

the connection between the misrepresentations alleged and any

covered securities in the Fund's portfolio is too tangential to

justify bringing the SLUSA into play.

             In arriving at this conclusion, we read Troice for all

that it is worth.    When courts are confronted with plaintiffs who

allege that a misrepresentation has induced them to purchase

uncovered securities, the SLUSA precludes the claim only if the

circumstances of the purchase evince an intent to take an ownership

interest in covered securities.        Troice itself represents one end

of this continuum.       When a plaintiff purchases a fixed-rate debt

asset, the SLUSA does not apply even though that debt may be backed

in part by covered securities.         Such a debt arrangement does not

evince an intent to take an ownership position in the underlying

(covered) securities.      Herald represents the opposite end of the

continuum.    When the primary purpose of a plaintiff's purchase of

an uncovered security is to reap the benefit of trading in covered

securities, the SLUSA does apply.

             In cases, like this one, that fall between these two

poles, courts must carefully consider whether and to what extent

                                   -19-
the plaintiffs sought to take an ownership interest in covered

securities.       The relevant questions include (but are not limited

to)    what    the     fund       represents    its    primary       purpose   to    be   in

soliciting investors and whether covered securities predominate in

the promised mix of investments.                  Of course, an inquiring court

should also look at the nature, subject, and scope of the alleged

misrepresentation.

               In conducting this appraisal, the court should bear in

mind the Troice Court's admonition that "only . . . those who do

not sell or participate in selling securities traded on U.S.

national exchanges" should be exempted from the SLUSA and subjected

to state-law class actions.                    134 S. Ct. at 1068 (emphasis in

original).            As    applied     here,    this       admonition    cuts      against

preclusion.       After all, the Fund was chartered under a particular

Puerto Rico statutory framework and marketed to residents of Puerto

Rico       principally        as    a   vehicle       for     exposure    to     uncovered

securities.5

               In the circumstances of this case, the relevant mix of

factors       leads    to     a    determination       that    the    district      court's

       5
       For the sake of completeness, we note that the analysis
might be different in cases "where the entirety of the fraud
depended upon the [fraudster] convincing the victims . . . to sell
their covered securities in order for the fraud to be
accomplished." Troice, 134 S. Ct. at 1072 (quoting Roland, 675
F.3d at 523). Here, however, the allegations of the complaint "are
not so tied with the sale of covered securities." Id. (quoting
Roland, 675 F.3d at 523).

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preclusion ruling fell on the wrong side of what is admittedly a

fine line. The link between the misrepresentations alleged and the

covered securities in the Fund's portfolio is simply too fragile to

support a finding of SLUSA preclusion under Troice.

III.    CONCLUSION

            The SLUSA is strong medicine and should be dispensed only

in compliance with Congress's statutory prescription.      Given the

nature of the misrepresentations asserted and the circumstances of

this case, we do not think that Congress's prescription applies

here.   It follows that the district court was without jurisdiction

to grant the defendants' motions for dismissal but, instead, should

have granted the plaintiffs' motion to remand.

            We need go no further.      We vacate the judgment of

dismissal, reverse the order denying remand, and remit the case to

the district court with instructions to return it to the Puerto

Rico Court of First Instance.   Costs shall be taxed in favor of the

plaintiffs.

So Ordered.

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