Opinion
No. CV 00-13195 CBM (RNBx)
April 3, 2001
ORDER GRANTING PLAINTIFF'S MOTION TO REMAND FOR LACK OF SUBJECT MATTER JURISDICTION AND STRIKING DEFENDANT'S MOTION TO DISMISS AS MOOT.
The matters before the Court, the Honorable Consuelo B. Marshall, United States District Judge presiding, are: (1) Plaintiffs' Motion to Remand for Lack of Subject Matter Jurisdiction, and (2) Defendant's Motion to Dismiss pursuant to FED. R. Civ. P. 12(b)(6). Counsel appeared before the Court on March 26, 2001. Upon consideration of the arguments presented, the Court GRANTS Plaintiffs Motion to Remand pursuant to 28 U.S.C. § 1447 (c) and STRIKES Defendant's Motion to Dismiss as moot.
JURISDICTION
Defendant asserts that the Court has jurisdiction pursuant to 28 U.S.C. § 1441 because the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. § 78bb, preempts state actions by providing for removal of securities class actions alleging misrepresentation relating covered securities to federal court. Plaintiffs dispute subject matter jurisdiction.
BACKGROUND AND PROCEDURAL HISTORY
Plaintiffs are shareholders of Emulex Corporation ("Emulex"). Mark S. Jakob ("Jakob"), a non-party, concocted false assertions about Emulex and submitted them to Defendant, who published a fictitious press release on the Internet announcing that "Emulex would restate its 1998 and 1999 earnings, that the SEC launched an investigation into Emulex's accounting practices, and that its CEO resigned." Plaintiffs allege that Defendant negligently failed to verify the accuracy of the press release before publishing it. (Pls.' Mot. p. 2, ¶¶ 20-22). As a result of Defendant's publication, Emulex's stock price dropped and Plaintiffs suffered substantial losses.
Plaintiff filed a class action Complaint on November 21, 2000, asserting state law claims for negligence, gross negligence, and negligent misrepresentation. Defendant was served with the Complaint on November 27, 2000. Defendant timely removed the class action to this Court on December 15, 2000 pursuant to 28 U.S.C. § 1441, 1446(b), alleging that SLUSA preempts state law. Plaintiff filed a First Amended Complaint ("FAC") alleging only negligence on January 18, 2001.
Plaintiffs filed a Motion to Remand for Lack of Subject Matter Jurisdiction on February 26, 2001. Defendant filed its Opposition on March 12, 2001. Plaintiffs filed their Reply on March 19, 2001.
Defendant filed a Motion to Dismiss pursuant to FED. R. Civ. P. 12 (b)(6) on February 12, 2001. Plaintiffs' filed their Opposition on March 5, 2001. Defendant filed its Reply on March 19, 2001.
DISCUSSION
1. Plaintiffs' Motion to Remand for Lack of Subject Matter Jurisdiction A. Standard of Law
If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded. 28 U.S.C. § 1447 (c). A defendant may remove a civil action from state court if that action is within the original jurisdiction of the district court. 28 U.S.C. § 1441 (a) (b); Ramirez v. Fox Television Station, Inc., 998 F.2d 743, 747 (9th Cir. 1993). In the absence of diversity jurisdiction, removal is proper only if, on its face, the plaintiffs well-pleaded complaint presents a federal question. Caterpillar. Inc. v. Williams, 482 U.S. 386, 392 (1987). However, where federal law completely preempts state law, a claim based on state law is considered as a federal claim from its inception. Id. Defendant bears the burden to prove that state law is preempted and that removal is proper because there is a strong presumption against removal jurisdiction. See Gaus v. Miles. Inc., 980 F.2d 564, 566 (9th Cir. 1992).
B. Analysis
Defendant argues that the plain language of SLUSA completely preempts this action because the FAC's negligence allegation rests on an alleged "misrepresentation or omission of material fact." Plaintiff argues that the action is not preempted because Congress intended SLUSA to govern securities fraud class actions and the FAC only alleges negligence.
SLUSA provides that, "any covered class action brought in any State court involving a covered security . . . shall be removable to the Federal district court. . ." 15 U.S.C. § 78bb(f)(2). Specifically, SLUSA preempts and allows for removal of state-law covered class actions where plaintiffs allege:
Nationally traded security.
(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 other contrivance in connection with the purchase or sale of a covered security.15 U.S.C. § 78bb(f)(1). Based on the plain language of the statute, the court's removal jurisdiction is based on the intent of Congress. See Metropolitan Life Insurance v. General Motors Corp., 481 U.S. 58, 66 (1987); Ethridge v. Harbor House Restaurant, 861 F.2d 1389, 1395 (9th Cir. 1988) ("whether federal law `completely preempts' state law calls for a careful evaluation of congressional intent").
Congress intended to preempt state securities class actions alleging fraud or manipulation relating to covered securities when it enacted SLUSA. Prager v. Knight/Trimark Group Inc., 124 F. Supp.2d 229, 233 (D.N.J. 2000). Its purpose was to "eliminate strike-suits — i.e., suits in which issuers of securities were being accused of defrauding the public by disseminating false prospectuses, tender offers, initial public offerings, proxies, and similar materials." Burns v. Prudential Securities, 116 F. Supp.2d 917, 920 (N.D. Ohio 2000). Because case law interpreting SLUSA is limited, courts have looked to Section 10(b) of the Securities Exchange Act of 1934 to interpret SLUSA. See Id., at 923; Green v. Ameritrade Inc., 120 F. Supp.2d 795, 798 (D. Neb. 2000). Federal securities fraud claims require "scienter" as an essential element. See In re Silicon Graphics Inc. Securities Litigation v. MeCracken, et al., 183 F.3d 970, 975 (9th Cir. 1999). "Scienter is the mental state embracing intent to deceive, manipulate, or defraud." Ernst Ernst v. Hochfelder, 425 U.S. 185, 193-194 n. 12 (1976). Moreover, Congress enacted the SLUSA in response to the Private Securities Litigation Reform Act, which requires at a minimum strong inference of deliberate recklessness. Silicon Graphics Inc., 183 F.3d at 977 (emphasis added); Green, 120 F. Supp.2d at 798; see also, Burns, 116 F. Supp.2d at 923 (stating that the PSLRA heightened the pleading requirements under FED. R. Civ. P. 9(b) so that allegations of securities fraud must be pled with enough specificity to give rise to a strong inference that the defendant acted with scienter). Plaintiffs in this case have not pled scienter. Defendant argues that the FAC implies a claim for negligent misrepresentation, which supports a finding of fraud.
Strike suits are "Shareholder derivative actions begun with the hope of winning large attorney fees or private settlements, and with no intention of benefiting corporation on behalf of which suit is theoretically brought." BLACK'S LAW DICTIONARY 1423 (6th ed. 1990).
Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful to use any "manipulative or deceptive device" in connection with the purchase or sale of any security. 15 U.S.C. § 78j(b) (1988). Rule l0b-5, a regulation issued under § 10(b), makes it unlawful "[t]o 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 light of all the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5 (b). A plaintiff under § 10(b) must show reliance on the material misstatement, and scienter (an intent to defraud or deceive). Kaplan v. Rose, 49 F.3d 1363, 1375 (9th Cir. 1995).
The substance of this action does not involve securities fraud, as that term is interpreted under securities law. "Only additional facts giving rise to a strong inference that [defendant] acted with intent to defraud could support a tenable securities fraud claim. Burns, 116 F. Supp.2d at 925; 15 U.S.C. § 78u-4(b)(2). Plaintiffs have not alleged, and the facts do not support, a finding that Defendant acted fraudulently or deceitfully.
Alternatively, Defendant avers that if the Court remands this action, it would eviscerate the purpose of the SLUSA preemption requirement because a plaintiffs could merely characterize their lawsuits by not alleging scienter to avoid preemption. Plaintiffs argue that Defendant's argument is overly alarmist. "The issue . . . is the substance of the claims contained in the complaint, not the particular semblance in which it is cloaked." See Prager, 124 F. Supp.2d at 235. In this case, the Court finds that the substance of the claims do not give rise to a strong inference that Defendant acted with scienter.
Defendant relies on several cases for the proposition that courts have applied SLUSA to preempt claims for negligence and negligent misrepresentation. Defendant's reliance on those cases is misplaced because in each case the court found that the complaint alleged securities fraud. See e.g., Lasley v. New England Variable Life Ins. Co., 126 F. Supp.2d 1236 (N.D. Cal. 1999) (plaintiff alleged fraud and misrepresentation); Prager, 124 F. Supp.2d at 234-235 (court found that plaintiffs allegations were, in essence, securities fraud claims). In general, SLUSA preempts state law only when the allegations involve securities fraud violations. Similar to Burns, Plaintiffs' assertions do not give rise to a strong inference that Defendant acted deceitfully; a requirement for securities fraud violations. See Burns, 116 F. Supp.2d at 923-26.
Therefore, the Court GRANTS Plaintiffs Motion to Remand for Lack of Subject Matter Jurisdiction.
II. Defendant's Motion to Dismiss
Defendant's Motion to Dismiss is rendered MOOT since the Court does not have jurisdiction over this action.
CONCLUSIONS
Based on the foregoing, the Court GRANTS Plaintiffs' Motion to Remand. Further, the Court STRIKES Defendant's Motion to Dismiss as MOOT.
SO ORDERED.