Dabit v. Merrill Lynch, Pierce, Fenner
| Decision Date | 11 January 2005 |
| Docket Number | No. 03-7499.,No. 03-7458.,03-7499.,03-7458. |
| Parties | Shadi DABIT, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a corporation, Defendant-Appellee. IJG Investments and Irlys Guy, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. Merrill Lynch & Co., Inc., Defendant-Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
Clell I. Cunningham, Dunn, Swan & Cunningham (William B. Federman and Stuart B. Emmons, Federman & Sherwood, on the brief), Oklahoma City, Oklahoma, for plaintiff-appellant Shadi Dabit.
Ira Neil Richards (Joanne G. Noble), Trujillo Rodriguez & Richards, LLC (Mark Wermerskirchen, Darval, Wermerskirchen & Frank P.A., Samuel D. Heins and Stacey Mills, Heins Mills & Olson, P.L.C., Kenneth A. Wexler, The Wexler Firm, and Anthony J. Bolognese, Bolognese & Associates, LLC, on the brief), Philadelphia, Pennsylvania, for plaintiffs-appellants IJG Investments and Irlys Guy.
Jay B. Kasner, Skadden, Arps, Slate, Meagher & Flom LLP (Edward J. Yodowitz, Scott D. Musoff, Joanne Gaboriault, on the brief), New York, New York, for defendants-appellees.
Before: OAKES, SOTOMAYOR and WESLEY, Circuit Judges.
These two separate appeals, consolidated for purposes of oral argument and opinion, present an issue of first impression in this Circuit: whether the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Pub.L. No. 105-353, 112 Stat. 3227, which preempts certain class actions based upon state law brought by private parties alleging a misrepresentation or omission "in connection with the purchase or sale" of certain nationally traded securities, SLUSA § 101(b), 112 Stat. at 3230 (codified at 15 U.S.C. § 78bb(f)), preempts claims that do not allege that putative class members purchased or sold particular securities in reliance upon the defendant's alleged misconduct. Plaintiffs brought the instant actions in the wake of an investigation by the New York Attorney General into conflicts of interest that arose within certain large investment firms. Both actions alleged that defendants-appellees Merrill Lynch & Co., Inc. and Merrill Lynch Pierce Fenner Smith, Inc. (collectively, "Merrill Lynch")1 issued biased research and investment recommendations designed to garner investment banking business and sought relief under state law. Plaintiff-appellant Shadi Dabit ("Dabit") brought a putative class action against Merrill Lynch in the United States District Court for the Western District of Oklahoma on diversity grounds. Plaintiffs-appellants IJG Investments Limited Partnership ("IJG Investments") and Irlys Guy (collectively, "IJG") brought a putative class action against Merrill Lynch in Minnesota state court. After removal of the IJG action to federal court and subsequent coordinated proceedings of both actions in the Southern District of New York, the district court dismissed the lawsuits under Federal Rule of Civil Procedure 12(b)(6) as preempted by SLUSA.
On appeal, plaintiffs contend that SLUSA does not preempt their actions because their complaints do not allege misrepresentations or omissions of material fact "in connection with the purchase or sale of ... covered securit [ies]." Dabit argues that SLUSA's "in connection with" requirement is not satisfied because he seeks only (i) "holding" damages — damages incurred because Merrill Lynch fraudulently induced him to retain certain securities — and (ii) commissions that he would have earned from clients that he lost by recommending securities touted in Merrill Lynch's allegedly false research reports. IJG argues that preemption is inappropriate because it seeks merely "the cost of doing business" — specifically, flat fees and commissions — relating to IJG's payments for access to Merrill Lynch's proprietary research, a nexus asserted to be insufficiently "in connection with" the purchase or sale of securities to trigger preemption.
For reasons to be discussed, we hold that (i) the meaning of "in connection with" under SLUSA is coterminous with the meaning of the nearly identical language of § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), Pub.L. No. 73-291, 48 Stat. 881, 891 (1934) (codified at 15 U.S.C. § 78j(b)), and its corresponding Rule 10b-5, 17 C.F.R. § 240.10b-5, and (ii) the purchaser-seller rule of Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), applies as a limit on SLUSA's "in connection with" requirement such that SLUSA does not preempt claims that do not allege purchases or sales made by the plaintiff or the alleged class members. Dabit's "holding" and IJG's commissions-based claims satisfy SLUSA's conditions requiring preemption because they contain implicit allegations of purchases made by plaintiffs and putative class members. Thus, we affirm the judgment below to the extent it found these claims preempted. We vacate, however, so much of the judgment as dismissed Dabit's lost-commission claim and dismissed the remaining claims with prejudice, and remand to the district court to dismiss these claims without prejudice so that plaintiffs may (if the pertinent facts warrant) bring new actions that do not include allegations of fraud "in connection with the purchase or sale of a ... security."
We summarize below the allegations of Dabit's and IJG's complaints, and assume their truth, as we must upon review of a dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6). Ideal Steel Supply Corp. v. Anza, 373 F.3d 251, 254 (2d Cir.2004).
Dabit, a former broker of Merrill Lynch, initially sued on April 26, 2002, on behalf of himself and other current and former Merrill Lynch brokers who, from December 1, 1999, through December 31, 2000, (i) purchased and refrained from selling Merrill Lynch-recommended securities because of Merrill Lynch's misleading research and recommendations, and (ii) lost clients as a result of purchases of recommended stocks on behalf of clients and Merrill Lynch's alleged misconduct. Dabit alleged breaches of fiduciary duty and of the covenants of good faith and fair dealing (presumably under Oklahoma law — the complaint does not tell us). Dabit filed his action in the United States District Court for the Western District of Oklahoma, alleging jurisdiction on diversity grounds. The complaint attached two exhibits: a list of stocks purchased by Dabit and recommended to Dabit's alleged lost customers during the class period based on Merrill Lynch's recommendation (the "ML stocks"); and a report prepared by the Office of the Attorney General of New York concerning Merrill Lynch's scheme to attract investment banking business by overrating certain stocks and causing the inflation of their prices. The complaint further alleged that Merrill Lynch's "manipulative efforts," which included illegal sales efforts described as "the hallmarks of stock manipulation," caused these stocks to trade at "artificially inflated" prices. On October 11, 2002, the district court dismissed Dabit's initial complaint as preempted by SLUSA, calling it a "hopeless melange of purchase-related and holding-related assertions." Nevertheless, the district court allowed Dabit to re-plead because it was "conceivable that claims based on wrongfully-induced holding could be pleaded."
In his amended complaint, filed on October 21, 2002, Dabit replaced the original complaint's numerous references to purchases of securities with references instead to the owning or holding of securities. For example, Dabit's putative class was amended to include those brokers who
owned and continued to own one or more of the [Merrill Lynch] recommended securities ... or recommended such securities to their clients during the period of December 1, 1999 through December 31, 2000[,] ... and who suffered damages as a result of owning and holding such [Merrill Lynch] Stocks during this time period, or who suffered damages as a consequence of the loss of clients due to [Merrill Lynch's] wrongful actions....
Dabit also removed the original complaint's discussion of Merrill Lynch's alleged illegal sales efforts. The amended complaint, however, attached the same exhibits as the original complaint and contained several of the same allegations concerning Merrill Lynch's causing certain stocks to trade at "artificially inflated" prices through the use of deceptive devices alleged to be the "hallmarks of stock manipulation." As in the initial complaint, the breach of fiduciary duty and breach of covenants of good faith and fair dealing were the only claims asserted.
On October 23, 2002, the Judicial Panel for Multidistrict Litigation conditionally transferred the Dabit action to the Southern District of New York where more than 120 additional cases against Merrill Lynch arising from the New York Attorney General's investigation were being centralized. The Panel also transferred five other putative class actions alleging state law claims in connection with Merrill Lynch's false research (including IJG's action) to the Southern District of New York for coordinated proceedings before Judge Pollack. Merrill Lynch moved to dismiss Dabit's complaint under Rule 12(b)(6) as preempted by SLUSA.
On June 7, 2002, IJG filed its putative class action in Minnesota state court, asserting breach of contract and consumer fraud claims under Minnesota law for damages arising from its relationship as a retail brokerage customer of Merrill Lynch.2 The crux of IJG's complaint is that Merrill Lynch provided biased investment advice in violation of its contract with IJG.
The contracts at issue arose out of retail cash management accounts opened by IJG Investments, an investment partnership, and Guy, an individual investor, with Merrill Lynch. Specifically,...
To continue reading
Request your trial
-
Augusto Fernandes, Maria Fernandes, Acf Family Holding Corp v. Moran
...273 F. Supp. 2d 351, 356-57 (S.D.N.Y. 2003), aff'd in part and vacated in part on other grounds sub nom. Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2d Cir. 2005), vacated on other grounds, 547 U.S. 71, 126 S. Ct. 1503, 164 L. Ed. 2d 179 (2006)); accord Healthnow New ......
-
Soundview Assoc.s v. Town Of Riverhead
...(internal citations omitted), aff'd in part and vacated in part on other grounds sub nom., Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2d Cir.2005), vacated on other grounds, 547 U.S. 71, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006); see also Cortec Indus., Inc. v. Sum Hold......
-
Young v. Suffolk County
...(internal citations omitted), aff'd in part and vacated in part on other grounds sub nom., Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2d Cir.2005), vacated on other grounds, 547 U.S. 71, 126 S.Ct. 1503, 164 L.Ed.2d 179 see also Cortec Indus., Inc. v. Sum Holding L.P.......
-
Sung ex rel. Lazard Ltd. v. Wasserstein
...securities fraud litigation arising under the Securities Act of 1933 . .. and the Exchange Act." Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25, 31 (2d Cir.2005), cert. granted, ___ U.S. ___, 126 S.Ct. 34, 162 L.Ed.2d 932 SLUSA "make[s] federal court the exclusive venue f......