SLUSA Preemption does not Require Class Action Allegation of Purchase or Sale of Listed Security, and Securities Class Action was Properly Removed to Federal Court and District Court Properly Dismissed Class Action Complaint as Barred by SLUSA Ninth Circuit Holds
Plaintiffs-investors filed a securities fraud class action lawsuit against Nevada-based real estate development company Saxton and its Chairman, President and CEO, as well as against other defendants, alleging that they placed false financial information in Saxton’s public reports in violation of Arizona state laws. U.S. Mortgage, Inc. v. Saxton, 494 F.3d 833, 836 (9th Cir. 2007). Defense attorneys removed the class action complaint to federal court, arguing that it fell within the scope of the Securities Litigation Uniform Standards Act of 1998 (SLUSA), and the district court then granted a defense motion to dismiss the class action on the grounds that the class action complaint failed to “state a claim upon which relief can be granted in conformity with SLUSA.” Id. The Ninth Circuit affirmed both removal jurisdiction over the class action and dismissal of the class action complaint based on SLUSA preemption.
Saxton’s stock traded on the NASDAQ market. Saxton, at 836. The company was “engaged in several real estate development projects that it financed, in part, with loans from individuals, trusts, and commercial investors,” id. This putative class action was brought on behalf of hundreds of investors and “arise out of twelve separate loan investments that Saxton solicited from various members of the plaintiff class to finance several of its projects and activities,” id. The class action allegations common to each of twelve loan transactions is the lenders would not have done business with Saxton had they known its true financial condition. See id., at 836-39. In 2000, Saxton restated its financial results to “correct a miscalculation of certain interest expenses” that had “caused Saxton to overstate its earnings in several public filings and accompanying press releases in 1998 and 1999.” Id., at 839. As was to be expected, a securities fraud class action was filed in federal court against Saxton and others alleging that they misrepresented the company’s finances in order to artificially inflate the stock price, that class members purchased Saxton stock in reliance on the financial reports, and that Saxton “used its artificially-inflated shares as payment for its acquisition of several entities,” id. The federal court dismissed the class action complaint based on the Private Securities Litigation Reform Act of 1995 (PSLRA), and the Ninth Circuit affirmed. See id.
Apparently undeterred, “plaintiffs filed a substantially similar complaint in Arizona state court” based on “the same essential misconduct” but asserting “violations of Arizona state law rather than federal law.” Saxton, at 839. After defense attorneys removed the class action to federal court under SLUS, plaintiffs sought remand. The district court denied the motion and held that the class action complaint was barred by SLUSA. Id. However, the district court granted plaintiffs leave to amend the class action complaint “in an attempt to meet the requirements of SLUSA while avoiding the impediments of the PSLRA.” Id., at 839-40. Plaintiffs responded with a 207-page amended complaint that, in the words of the Ninth Circuit, “differed substantially from the [prior complaint] in form, but not in substance.” Id., at 840. The essential facts and the essential legal theories “remained unchanged,” id. The district court granted a defense motion to dismiss with prejudice the new class action complaint, and plaintiffs appealed. Id.
After discussing the statutory background of the PSLRA and SLUSA, see Saxton, at 840-41, the Ninth Circuit noted that “SLUSA permits removal and dismissal of ‘covered class actions,’ brought under state law, alleging a misrepresentation or omission of material fact in connection with the purchase or sale of a ‘covered security,’” id., at 841 (footnotes and citations omitted). The Circuit Court held that removal jurisdiction existed because “SLUSA expressly applies to covered class actions ‘alleging’ fraud in connection with the purchase or sale of a covered security…and authorizes removal and dismissal based on the allegations in the complaint and does not require any additional evidentiary showing from either party.” Id., at 842.
Turning to whether the class action complaint was properly dismissed, the Ninth Circuit held that Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006) “dramatically simplified the analysis of whether a particular complaint alleges fraud in connection with the purchase or sale of a covered security within the meaning of SLUSA.” Saxton, at 844. Here, plaintiffs made “the very argument that Dabit rejected” – viz., that they do not allege fraud in connection with purchase or sale of a security because the class action complaint does not allege that they purchased or sold any listed security. Id. The reasoning of Dabit compels a finding that SLUSA preempts the class action claims, id., at 845. The Circuit Court therefore affirmed the district court orders in their entirety, id., at 846.__
NOTE: The Ninth Circuit held as a matter of first impression that SLUSA does not preclude a plaintiff from amending a class action complaint post-removal to avoid federal court jurisdiction. Saxton, at 842-43. In reaching that conclusion, the Circuit Court recognized the general rule that a plaintiff “‘may not compel remand by amending a complaint to eliminate the federal question upon which removal was based,’” id., at 842 (citation omitted), and that “[a]llowing amendment of claims to avoid dismissal could allow plaintiffs to ‘artfully plead’ their way around federal jurisdiction and back into state court-by some accounts, precisely what SLUSA was meant to prevent,” id., at 843. On the other hand, Congress did not expressly preclude such amendments, id., at 842, and it may be inequitable to dismiss “otherwise valid and viable state law claims on the ground that plaintiff pled – perhaps inadvertently – a cause of action that may be construed as federal in nature.” Id., at 843. Accordingly, the Ninth Circuit held at page 843, “In light of the statutory silence on the issue in SLUSA, the existence of competing policy rationales, and the fact that the granting or denial of leave to amend is ordinarily a matter left to the discretion of the district court, we hold that SLUSA does not prohibit amendment of the complaint after removal.”
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