Disher v. Citigroup Global Markets Inc.

• Decision Date: 17 August 2005
• Docket Number: No. 04-3073.,04-3073.
• Parties: Richard DISHER, individually and on behalf of all others similarly situated, Plaintiff-Appellee, v. CITIGROUP GLOBAL MARKETS INCORPORATED, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

419 F.3d 649

Richard DISHER, individually and on behalf of all others similarly situated, Plaintiff-Appellee, v. CITIGROUP GLOBAL MARKETS INCORPORATED, Defendant-Appellant.

No. 04-3073.

United States Court of Appeals, Seventh Circuit.

Argued March 30, 2005.

Decided August 17, 2005.

Robert L. King (argued), Korein Tillery, St. Louis, MO, for Plaintiff-Appeellee.

Richard Rosen, Walter Rieman (argued), Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Scott C. Hecht, Stinson, Morrison & Hecker, Kansas City, MO, for Defendant-Appellant.

Before BAUER, RIPPLE and KANNE, Circuit Judges.

RIPPLE, Circuit Judge.

On March 22, 2004, Richard Disher filed this action as a state-law putative class action against Citigroup Global Markets Incorporated, formerly known as Salomon Smith Barney ("SSB" or "Smith Barney"). SSB timely removed the case to the district court on the basis of federal question jurisdiction, see 28 U.S.C. § 1331; diversity of citizenship jurisdiction, see id. § 1332; jurisdiction related to bankruptcy proceedings, see id. § 1334(b); and preemption under the Securities Litigation Uniform Standards Act ("SLUSA"), see 15 U.S.C. § 78bb(f). On Mr. Disher's motion, the district court remanded the case to state court. For the reasons set forth in the following opinion, we now reverse the judgment of the district court and remand the case for further proceedings.

I BACKGROUND

A. State-Law Suit

Mr. Disher was a customer of SSB, which operated as a full-service securities firm. He purchased shares of MCI WorldCom Incorporated between April 16, 1998, and March 5, 1999. He also purchased shares of Rhythms Netconnections Inc. on August 11, 1999. As part of its services for its customers, SSB issued investment research reports and ratings on a stock's future performance. The subject of Mr. Disher's complaint included unspecified stocks researched and rated by SSB's Internet and Telecommunications research groups.

SSB represented that its reports employed a five-point rating system: "buy," "outperform," "neutral," "underper-form" and "sell." R.2 at 3. Mr. Disher's complaint alleged that "no later than March 2000," SSB "secretly abandoned its published five-point rating system and instead utilized a de facto three-point system (`buy,' `outperform,' and `neutral')." Id. at 5. Specifically, a neutral recommendation allegedly was a coded message from SSB to certain institutional customers to sell a security. Also, instead of assigning an underperform or sell rating for a particular stock, SSB allegedly would stop covering that stock, with no public announcement or explanation. Thus, the complaint alleged, SSB's research ratings did not reflect its actual beliefs concerning the future performance of a stock.

The gravamen of the complaint was that SSB's misleading ratings induced Mr. Disher and class members to continue holding their securities in reliance on SSB's positive ratings when SSB's analysts no longer believed that such ratings were warranted. In addition, SSB also allegedly used its research reports, ratings and recommendations of certain stock to attract new, and to retain current, investment banking clients "by agreeing to issue a research rating for [those clients'] stock more favorably than Smith Barney's research warranted." Id. at 6.

Mr. Disher defined the putative class to include himself and "all customers of Smith Barney who held one or more of the Internet or Telecom Stocks in their Smith Barney accounts at times when those stocks were declining in value and when Smith Barney was rating those stocks as `buy' `outperform' or `neutral' when such ratings were not warranted by Smith Barney's research." Id. at 8. The complaint specifically excluded "any claims based on Smith Barney's conduct in connection with Plaintiff's or any Class member's purchases or sales of any of the Internet Stocks or Telecom Stocks." Id. (emphasis added).

B. District Court Proceedings

SLUSA provides for the removal to federal court of certain class actions based on state law in which the plaintiffs allege "a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security." 15 U.S.C. § 78bb(f) (emphasis added). The district court ruled that SLUSA did not apply in this case because the alleged misconduct was not connected sufficiently to any purchase or sale of stock. Rather, the complaint alleged harm solely from the retention of securities in reliance on SSB's misleading research reports and ratings. The district court also concluded that there was no basis for removal under the general removal statute, 28 U.S.C. § 1441.

II DISCUSSION

A. Standard of Review

A district court's decision regarding the propriety of removal is a question of federal jurisdiction that we review de novo. Boyd v. Phoenix Funding Corp., 366 F.3d 524, 529 (7th Cir.2004). We also apply de novo review to the district court's interpretation of SLUSA. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Lauer, 49 F.3d 323, 326 (7th Cir.1995).

B. Removal and Preemption under SLUSA

On appeal, SSB challenges the district court's conclusion that Mr. Disher's action did not fall within SLUSA's preemptive scope.¹

1.

As a threshold matter, Mr. Disher contends that we lack appellate jurisdiction over this matter because the district court remanded the case for lack of subject matter jurisdiction. See 28 U.S.C. § 1447(d). This court already has determined that a district court's remand of a case to state court based on SLUSA is appealable. See Kircher v. Putnam Funds Trust ("Kircher I"), 373 F.3d 847 (7th Cir.2004). The substance of Mr. Disher's submissions in this case were addressed in Kircher I, and we decline to revisit this court's decision.

2.

SLUSA is the most recent in a line of federal securities statutes that originated with the enactment of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77a et seq., and the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78a et seq. See Riley v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 292 F.3d 1334, 1340 (11th Cir.), cert. denied, 537 U.S. 950, 123 S.Ct. 395, 154 L.Ed.2d 296 (2002). Section 10(b) of the 1934 Act made it "unlawful for any person ... [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities Exchange Commission (`SEC')] may prescribe." 15 U.S.C. § 78j(2)(b) (emphasis added). The SEC then promulgated Rule 10b-5, which provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme or artifice to defraud,

(b) To 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 the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5 (emphasis added). In 1995, Congress enacted the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. §§ 77z-1, 78u, to protect against merit-less shareholder suits that were being initiated for the sole purpose of obtaining large attorneys' fees through private settlements. See Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116, 122 (2d Cir.2003). To achieve this aim, the PSLRA imposed heightened pleading standards and mandatory stays of discovery for securities fraud class actions filed in federal court. Id.

After the enactment of the PSLRA, plaintiffs increasingly began to file suits in state courts under state securities law. Id. at 123. Congress responded by enacting SLUSA. Kircher v. Putnam Funds Trust ("Kircher II"), 403 F.3d 478, 482 (7th Cir.2005) ("SLUSA is designed to prevent plaintiffs from migrating to state court in order to evade rules for federal securities litigation in the [PSLRA]."). SLUSA attempts to close this "`federal flight' loophole" by making federal courts the exclusive forum for class actions alleging fraud in the sale or purchase of covered securities and by mandating that federal law governs such class actions. Spielman, 332 F.3d at 123. To that end, SLUSA contains the following preemption and removal provisions:

(1) Class action limitations

No covered class action² 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;³ 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 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)(1)-(2).⁴

3.

A defendant may remove a case to federal court only if the federal district court would have original subject matter jurisdiction over the action. 28 U.S.C. § 1441; Caterpillar Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). The party seeking removal has the burden of establishing federal jurisdiction. Boyd, 366 F.3d at 529. As a general rule, the plaintiff is the master of his own complaint and can avoid federal question jurisdiction by pleading exclusively state-law claims. Bastien v. AT & T Wireless Servs., Inc., 205 F.3d...