Opinion
No. C-03-3451 SC
October 21, 2003
JUDGMENT
In accordance with this Court's ORDER GRANTING PLAINTIFF'S MOTION to REMAND, it is HEREBY ORDERED, ADJUDGED, and DECREED that:
Judgement shall be entered in favor of PLAINTIFF and against DEFENDANTS.
IT IS SO ORDERED.
ORDER RE: PLAINTIFF'S MOTION TQ REMAND
I. INTRODUCTIONThis action was originally filed in California state court. Plaintiff Jerome Feitelberg ("Plaintiff") brings this class action alleging that Credit Suisse First Boston ("CSFB") and Frank P. Quattrone ("Quattrone") (collectively "Defendants") engaged in unfair business practices in violation of California Business and Professions Code section 17200. Defendants removed to this Court, contending that Plaintiff's action satisfies all of the requirements of the Securities Litigation Uniform Standards Act, 15 U.S.C. § 78bb ("SLUSA"). Defendants then moved to dismiss the complaint. Plaintiff has cross-moved to remand the action back to state court on the grounds that this Court lacks subject matter jurisdiction. Plaintiff also seeks an award of costs and attorney's fees incurred in connection with Defendants allegedly improper removal of this action. The Court has considered thoroughly all submissions and argument related to these motions. For the following reasons, Plaintiff's motion to remand is granted.
II. BACKGROUND
The following allegations of the complaint are taken as true for purposes of the pending motions. On June 16, 2003, Plaintiff commenced a civil action against Defendants in the Superior Court of the State of California for the County of Santa Clara. This is a putative class action brought on behalf of Plaintiff, all others similarly situated and the general public. Plaintiff claims that he held shares of "one or more" technology companies (the "Issuers") for which CFSB published research reports. Compl. ¶¶ 9, 17. The putative class consists of "residents in the State of California who held shares [in any of the Issuers] anytime during the period from July 1, 1998 to December 31, 2001. . . ." Compl. ¶ 72. The class "specifically excludes claims based upon the purchase or sale of these companies during the class period." Id.
Plaintiff alleges that during the class period "CSFB held its analysts out as providing objective and unbiased research and other investment guidance" but that "[i]n reality, the research analysts . . . worked for and were controlled by CSFB'S investment banking group." Compl. ¶ 3. As a result, according to Plaintiff, analyst research reports misled the general public and contained investment recommendations based not on objective research but rather upon what CSFB'S actual and prospective investment banking clients supposedly wanted. Compl. ¶ 16. Plaintiff alleges that Defendants' conduct in this respect violates California Business and Professions Code section 17200 as an unfair and/or unlawful business practice. Compl. ¶ 7. Such wrongful conduct included, inter alia, "creating an institutional structure that allowed investment bankers to unduly influence CSFB research analyst reports. . . ." Compl. ¶ 79. According to Plaintiff, "Defendants made substantial profits and/or received substantial compensation as a result of these wrongful and unfair business practices." Id. Frank Quattrone, a senior manager at CSFB, allegedly had authority over the analysts. Compl. ¶¶ 6, 11, 23, 35-36. Plaintiff's complaint alleges a single claim for relief under Business and Professions Code section 17200 et seq. Plaintiff seeks disgorgement of Defendants' "illegally obtained profits" and injunctive relief to put investors on notice of any conflict of interest and to stop any other improper conduct by Defendants. Compl. ¶ 7.
On July 24, 2003, Defendants removed the case to this Court, contending that we have exclusive original jurisdiction pursuant to the provisions of 28 U.S.C. § 1331, and that this case may be removed under 28 U.S.C. § 1441 (a) and (b) because the action satisfies all of the requirements of the Securities Litigation Uniform Standards Act, 15 U.S.C. § 78bb (SLUSA), which provides that "[a]ny covered class action brought in any State court involving a covered secuirty . . . shall be removable to the Federal district court for the district in which the action is pending." 15 U.S.C. § 78bb(f)(2). Plaintiff argues that removal was improper because, inter alia, their action is not governed by SLUSA. The Court has reviewed the record and the arguments of the parties and, for the reasons set out below, concludes that removal of this action was improper and therefore Plaintiff's motion for remand should be granted.
III. LEGAL STANDARD 1. Motions to Remand
Federal courts have limited subject matter jurisdiction. A suit filed in state court may be removed to federal court only if the federal court would have had original subject matter jurisdiction over the suit.28 U.S.C. § 1441 (a); Caterpillar, Inc. v. Williams, 482 U.S. 386 (1987). A motion to remand is the proper procedure for challenging removal. Remand to state court may be ordered for lack of subject matter jurisdiction under 28 U.S.C. § 1447 (c).
A removal statute is to be narrowly construed and the court must reject jurisdiction if there is any doubt as to whether removal was proper.Duncan v. Steutzle, 76 F.3d 1480, 1485 (9th Cir. 1996);Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992). Moreover, the burden of establishing federal jurisdiction is on the party seeking removal. Duncan, 76 F.3d at 1485. Here, Defendants bear the burden of establishing by a preponderance of the evidence that Plaintiff's class action was properly removed pursuant to SLUSA.
2. Removal Under SLUSA
The origin of and congressional intent behind SLUSA has been discussed at length by many courts in recent years. See, e.g., Hardy v. Merrill Lynch, Pierce, Fenner Smith, Inc., 189 F. Supp.2d 14, 16-17 (S.D.N.Y. 2001); Riley v. Merrill Lynch, Pierce, Fenner Smith, Inc., 292 F.3d 1334, 1340-42 (11th Cir. 2002). Accordingly, we will only summarize the context surrounding this legislation. Congress passed SLUSA in 1998 in order to close a loophole in the 1995 Private Securities Litigation Reform Act ("PSLRA"). The PSLRA was intended to deter so-called "strike suits" by imposing more stringent procedural and substantive requirements for private securities actions in federal courts. In an effort to avoid the PSLRA's heightened pleading requi rements, plaintiff's began filing an increasing number of securities claims in state courts alleging state law causes of action. See Hardy, 189 F. Supp.2d at 16. Congress enacted SLUSA to deter this practice and to make federal court the primary venue for the litigation of class action security claims. H.R. Rep. No. 105-803 (1998). See also Shaw v. Charles Schwab Co., Inc., 2001 WL 62903 at *2 (C.D. Cal.).
The relevant part of SLUSA states:
(1) Class action limitations: 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 act 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.
(2) Removal of covered class action — 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).15 U.S.C. § 78bb (f)(5)(B)
Therefore, in order to remove an action to federal court under SLUSA, the removing party must show that (1) the suit is a "covered class action," (2) the plaintiff's claims are based on state law, (3) one or more "covered securities" has been purchased or sold, and (4) the defendant misrepresented or omitted a material fact "in connection with the purchase or sale of such security." See, e.g.,Riley, 292 F.3d at 1342; Shaw v. Charles Schwab Co., Inc., 128 F. Supp.2d 1270, 1272 (C.D. Cal. 2001).
IV. DISCUSSION
In support of his motion to remand, Plaintiff argues that (1) this case is not a "covered class action" within the meaning of SLUSA and (2) that SLUSA does not apply because Plaintiff has not alleged any wrongdoing "in connection with" the purchase or sale of a covered security. The Court finds this second argument dispositive on Plaintiff's motion to remand, and therefore will not address Plaintiff's arguments that this is not a "covered class action".
The term "covered class action" means — (i) any single lawsuit in which — (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 (II) one or more named parties seek to recover damages 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)
A. Defendants Have Not Established That Plaintiff brought this Class Action Claim "In Connection With" the Purchase or Sale of a Covered Security
Plaintiff argues that removal here was improper because his complaint does not allege misconduct "in connection with" the purchase or sale of a security, as required by SLUSA. Plaintiff's complaint states in relevant part:
Plaintiff brings this lawsuit as a class action . . . on behalf of himself and all other persons and entities resident in the State of California who held shares anytime during the period from July 1, 1998 to December 31, 2001 in the following companies. . . . The class specifically excludes claims based upon the purchase or sale of shares of these companies during the Class Period.
Compl. ¶ 72 (emphasis added). Plaintiff argues that the plain language of the complaint excludes claims based upon the purchase or sale of stock and thus this action does not fall within the reach of SLUSA.
Defendants argue that the "in connection with" requirement is satisfied because the class period began before all of the holders purchased their stock. Defendants point to the fact that several of the Issuers did not offer stock to the public until after the class period began. Therefore, Plaintiff's class must include people who purchased stock during the class period, thereby satisfying the "in connection with" requirement. For the following reasons, the Court disagrees with Defendants' position.
1. "In Connection With"
SLUSA does not define the term "in connection with the purchase or sale of a covered security." Likewise the Supreme Court has not yet had occasion to interpret this phrase in the context of SLUSA, although it has construed and applied the identical phrase as it appears in § 10b-5 of the Securities Exchange Act of 1934. As a result, district courts that have interpreted the phrase "in connection with" as used in SLUSA have relied on the body of case law construing that term under 10b-5. See, e.g., Green v. Ameritrade, Inc., 279 F.3d 590, 597-98 (8th Cir. 2002); Behlen v. Merrill Lynch, 311 F.3d 1087, 1093 (11th Cir. 2002). They have done so based on the princple that "[w]here Congress uses terms that have accumulated settled meaning under either equity or the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms." NLRB v. Amax Coal Co., 453 U.S. 322, 329, 1010 S.Ct. 2789 (1981). As the Eleventh Circuit recently explained:
Analogizing to § 10b-5 is particularly appropriate because SLUSA was specifically enacted as an amendment to the 1933 and 1934 Acts (and their successor statutes). In enacting SLUSA, therefore, Congress was not writing on a blank slate; instead, it was legislating in an area that had engendered tremendous amounts of litigation and received substantial judicial attention. In using the phrase "in connection with the purchase or sale of a covered secuirty," Congress was not creating language from a vacuum; instead, it was using language that, at the time of SLUSA's enactment, had acquired settled, and widely acknowledged, meaning in the field of securities law. . . .Riley, 292 F.3d at 1342-43.
The Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), held that claims brought on behalf of persons who claimed that they were defrauded into not purchasing a stock or persons who were defrauded into continuing to hold a stock were not covered under § 10b of the 1934 Act. Id. at 748-49. The plaintiff's inBlue Chip brought a class action alleging that Blue Chip had intentionally issued an overly pessimistic prospectus in order to dissuade them from purchasing Blue Chip stock in accordance with their first-purchase right, so that the stock could later be sold to the public at a higher price. Because they had rejected Blue Chip's offer to buy at the initial low price as a result of the misleading prospectus, the plaintiff's sought the right to buy the stock — which had since risen dramatically in price — from Blue Chip at the original price. The Court framed the issue as "whether respondent may base its action on 10b-5 . . . without having either bought or sold the securities described in the allegedly misleading prospectus." Blue Chip, 421 U.S. at 727. The Court answered that question in the negative, holding that the cause of action under 10b-5 is limited to "actual purchasers or sellers" of stock. Id. at 748-49.
Based on this rule, many courts have held that SLUSA does not bar a state law claim where the plaintiff does not allege that Defendant's misrepresentations caused them to buy or sell a stock. See, e.g., Gordon v. Buntrock, 2000 WL 556763 (N.D. Ill. 2000). In Green v. Ameritrade Inc., the Eighth Circuit held that SLUSA did not bar plaintiff's state law claim for breach of contract because "nothing in Green's amended complaint suggests that his cause of action arises from a sale or purchase of security. . . ." Green, 279 F.3d at 598-99. The court in Green concluded that Congress, in enacting SLUSA, "did not make class actions on behalf of `nonsellers' and `nonpurchasers' removable to federal court." Id. at 598. InRiley the Eleventh Circuit agreed, stating that "SLUSA does not apply to claims dealing solely with the retention of securities, rather than with purchase or sale." 292 F.3d at 1345. In Shaev v. Claflin, 2001 WL 548567 at *5 (N.D. Cal.), this Court held that the "in connection with" requirement was not satisfied because plaintiff's' claims were unrelated to their purchase or sale of a security. Finally, in a case very similar to the instant action, the court in Chinn v. Belfer, 2002 WL 31474189 at *5 (D.Or.) stated that "plaintiff's' express exclusion of a claim based upon a purchase or sale of securities is sufficient to eliminate the theoretical possibility of a claim by a holder who purchased during the period of the alleged misrepresentations." In Chinn the plaintiff's1 complaint read, "This class action specifically excludes claims based upon the purchase or sale of Enron Securities." Id. The court found that this express disavowal of any claim based on a purchase a sale is "not legally or factually difficult" and therefore remanded the case back to the state court. Id.
This Court finds that, because Plaintiff expressly disclaims any harm based upon the purchase or sale of a security, his complaint was not properly removable under SLUSA. Despite Defendants' argument that some members of the putative class must have purchased shares of the companies at issue during the class period, paragraph 72 of Plaintiff's complaint makes clear that Plaintiff alleges no claim based upon a purchase or sale of stock. Plaintiff expressly limits the class to individuals who held shares during the class period, and therefore we cannot find that this claim arises "in connection with" the purchase or sale of a covered security.
The Court is aware that Congress, with SLUSA, attempted to bring all securities cases into federal court and subject them to the PSLRA. The Court is convinced, however, that the plain language of the statute precludes mandatory removal of this action. We are bound by the plain language of the statute, and that language provides that only those covered class actions which allege misrepresentations in connection with the purchase or sale of a covered security shall be removable to federal court. As the court in Gordon v. Buntrock concluded:
In enacting the Uniform Standards Act, Congress was aware of the interpretation of § 10b-5 of the 1934 Act, which acknowledged that causes of actions for the `nonpurchase' or `nonsale' of securities were not covered by the 1934 Act, and that state law would fill those gaps. Congress could have expanded the scope of actions covered by the Uniform Standards Act by providing that actions alleging misrepresentations in connection with the failure to purchase or sell a covered security also shall be removable to federal court. Because Congress did not so provide, this court must conclude that the Uniform Standards Act subjects only those actions in which the plaintiff alleges that misrepresentations occurred in connection with the failure to purchase or sell a covered security to removal in federal court.Gordon, 2000 WL 556763 at M.
B. Attorney's Fees and Costs Will Not be Awarded
Plaintiff seeks his attorney's fees and costs in connection with bringing this motion. While such an award is permissible under 28 U.S.C. § 1447 (c), we decline Plaintiff's request. This is a complicated and evolving area of the law, and it would be inappropriate to penalize Defendants for removing this action.
V. CONCLUSION
In this case, Defendants have not established that Plaintiff brought the class action claim "in connection with" the purchase or sale of securities to satisfy the requirements for removal. The removing parties bear the burden of establishing the facts necessary to show that federal jurisdiction exists. See, e.g., Prize Frize, Inc. v. Matrix Inc., 167 F.3d 1261, 1265 (9th Cir. 1999). Removal jurisdiction is to be strictly construed, and any doubts concerning removal must be resolved in favor of remanding the case back to state court.See, e.g., Duncan v. Stuetzle, 76 F.3d 1480, 1485 (9th Cir. 1996). For these reasons, Plaintiff's Motion to Remand this case is HEREBY GRANTED. Each side will pay their own expenses and costs in connection with bringing these motions.
IT IS SO ORDERED.