Anderson v. Merrill Lynch
| Decision Date | 07 April 2008 |
| Docket Number | No. 07-2132.,07-2132. |
| Citation | 521 F.3d 1278 |
| Parties | M. Norman ANDERSON; Bernard C. Baier, Baier Family Interests; Harold S. Carpenter, Carpenter Family Interests; Lee S. Chapman, Chapman Family Interests; Clark A. Colby, Colby Family Interests; Milton E. Davey; Keith Denner; Joe Fiedler, Joe Fiedler Family Interests; Virginia R. Fiedler; William R. Fiedler, Virginia and William Fiedler Family Interests; Jerry V. Flatt; Samuel A. Francis, Francis Family Interests; Lou Giardina, Giardina Family Interests; Kenneth L. Haack, Haack Family Interests; Armon Helvig, Helvig Family Interests; Jeff Hodde; Steven M. Lindell, Lindell Family Interests; John Liperote; Margaret Liperote, Liperote Family Interests; Paul F. Lostroh, Mary Ann Michael; Toby Michael; Cliff Phelps; Don Rogers; Deborah A. Roseth; Rick Sheneman; Mathew L.T. Waldor; Don White, Plaintiffs-Appellants, and Edward J. Michael, Plaintiff, v. MERRILL LYNCH PIERCE FENNER & SMITH, INC., a Delaware Corporation, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Clinton W. Marrs, Vogel Campbell & Blueher, P.C., Albuquerque, New Mexico, (Michael W. Wile, Vogel Campbell & Blueher, P.C., Albuquerque, NM; Charles A. Pharris and James L. Rasmussen, Keleher & McLeod, P.A., Albuquerque, New Mexico, with him on the briefs), for Plaintiffs-Appellants.
Charles A. Gall (Joel R. Sharp with him On the brief), Hunton & Williams, LLP, Dallas, Texas, for Defendant-Appellee.
Before HENRY, Chief Circuit Judge, BRISCOE, and HOLMES, Circuit Judges.
Plaintiffs/Appellants ("Plaintiffs") are approximately 120 shareholders of Solv-Ex, a now-defunct New Mexico corporation. They brought this class action lawsuit against Defendant/Appellee Merrill Lynch, Pierce, Fenner, & Smith, Inc. ("Merrill Lynch") in New Mexico state court, alleging fourteen separate counts under New Mexico law. Merrill Lynch removed the case to the United States District Court for the District of New Mexico and then moved to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, citing the court to the Securities Litigation Uniform Standards Act of 1998, Pub.L. No. 105-353, 112 Stat. 3227 (1998) (codified at 15 U.S.C. §§ 77p, 78bb(f)). The district court granted the motion to dismiss and denied Plaintiffs leave to amend their Complaint. We have jurisdiction under 28 U.S.C. § 1291, and affirm.
In 1995, Congress responded to perceived abuses of federal securities class action litigation by passing the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub.L. No. 104-67, 109 Stat. 737 (1995) (codified at 15 U.S.C. §§ 77z-l, 78u-4). See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006). The PSLRA imposed certain limits on such litigation, including limits on recoverable damages and attorneys' fees, a "safe harbor" for forward-looking statements, mandated sanctions for frivolous litigation, a stay of discovery pending any motion to dismiss, and heightened pleading requirements. Id. at 81-82, 126 S.Ct. 1503 (citing 15 U.S.C. § 78u-4; Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 345, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005)). These limits on federal securities class actions, however, had an unintended consequence:
[They] prompted at least some members of the plaintiffs' bar to avoid the federal forum altogether. Rather than face the obstacles set in their path by the [PSLRA], plaintiffs and their representatives began bringing class actions under state law, often in state court. The evidence presented to Congress during a 1997 hearing to evaluate the effects of the [PSLRA] suggested that this phenomenon was a novel one; state-court litigation of class actions involving nationally traded securities had previously been rare.
Id. at 82, 126 S.Ct. 1503 (citing H.R.Rep. No. 105-640, at 10 (1998); S.Rep. No. 105-182, at 3-4 (1998)); see also H.R.Rep. No. 105-803, at 13-15 (1998) (Conf.Rep.).
The unanticipated shift in securities class actions from federal to state court, and from federal to state law, created several problems. As the Senate Report explained:
Disparate, and shifting, state litigation procedures may expose issuers to the potential for significant liability that cannot easily be evaluated in advance, or assessed when a statement is made. At a time when we are increasingly experiencing and encouraging national and international securities offerings and listings, and expending great effort to rationalize and streamline our securities markets, this fragmentation of investor remedies potentially imposes costs that outweigh the benefits. Rather than permit or foster fragmentation of our national system of securities litigation, we should give due consideration to the benefits flowing to investors from a uniform national approach.
S.Rep. No. 105-182, at 3 (citation omitted). In addition, this shift to state court reintroduced many of the abuses that the PSLRA had attempted to mitigate, allowing plaintiffs to avoid the comparatively stringent federal pleading requirements, federal discovery stays, and other substantive and procedural provisions of the PSLRA. See id.
Congress responded by passing the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Pub.L. No. 105-353, 112 Stat. 3227 (1998). SLUSA provides for preclusion of certain securities class actions brought under state law:
(f) Limitations on remedies
(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 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); see also Potter v. Janus Inv. Fund, 483 F.Supp.2d 692, 696 (S.D.Ill.2007) ().1, 2 This is not a "preemption provision," but rather a "preclusion provision": it "does not itself displace state law with federal law but makes some statelaw claims nonactionable through the class action device in federal as well as state court." Kircher v. Putnam Funds Trust, 547 U.S. 633, 637 n. 1, 126 S.Ct. 2145, 165 L.Ed.2d 92 (2006).
Moreover, SLUSA provides federal courts with removal jurisdiction over class actions that are precluded under § 78bb(f)(1):
(2) Removal of covered class actions
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)(2). If, after removal, the federal court determines that SLUSA does not preclude the class action, then the federal court must remand it to state court:
(3) Preservation of certain actions —
* * *
(D) Remand of removed actions In an action that has been removed from a State court pursuant to paragraph (2), if the Federal court determines that the action may be maintained in State court pursuant to this subsection, the Federal court shall remand such action to such State court.
15 U.S.C. § 78bb(f)(3)(D). Under these provisions, the jurisdiction conferred upon the federal courts by SLUSA is, in essence, limited to determining whether 15 U.S.C. § 78bb(f)(1) precludes the plaintiffs' claims:
Once removal jurisdiction under [15 U.S.C. § 78bb(f)(2)] is understood to be restricted to precluded actions defined by [§ 78bb(f)(1)], a motion to remand claiming the action is not precluded must be seen as posing a jurisdictional issue. If the action is precluded, neither the District Court nor the state court may entertain it, and the proper course is to dismiss. If the action is not precluded, the federal court likewise has no jurisdiction to touch the case on the merits, and the proper course is to remand to the state court that can deal with it. In either event, ... the district court's order comes because its adjudicatory power has been exercised and its work is done.
Solv-Ex is a defunct New Mexico corporation whose stock was previously listed on the NASDAQ exchange. John S. Rendall, who is not a party to this action, founded Solv-Ex in 1980 to develop processes for the extraction of bitumen from oil sands. During all relevant time periods, Mr. Rendall was the chairman, CEO, and largest individual shareholder of Solv-Ex. In March 1997, Merrill Lynch made a personal loan to Mr. Rendall for $2 million. As part of the loan agreement, Mr. Rendall moved an existing $2 million margin account loan to Merrill Lynch, and he agreed to secure the $4 million in total loan amounts with 2.61 million, shares of his Solv-Ex common stock, which represented more than ten percent of the issued and outstanding shares of Solv-Ex common stock. In April 1997, barely a month later, Merrill Lynch informed Mr. Rendall that it was demanding payment of the entire $4 million debt, and that it intended to sell 1.1 million of his Solv-Ex shares if he could not pay. Starting in May 1997, Merrill Lynch sold 634,100 of Mr. Rendall's shares on the open market. During this time period, the share price of Solv-Ex common stock plunged from $13 on April 1, 1997, to slightly under $4 on June 30, 1997. In July 1997, Solv-Ex filed a petition for bankruptcy, and in September 1997, the NASDAQ...
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