Feitelberg v. Credit Suisse First Boston, LLC, H027476.

Citation36 Cal.Rptr.3d 592,134 Cal.App.4th 997
Decision Date09 December 2005
Docket NumberNo. H027476.,H027476.
CourtCalifornia Court of Appeals
PartiesJerome FEITELBERG, Plaintiff and Appellant, v. CREDIT SUISSE FIRST BOSTON, LLC, et al., Defendant and Respondent.

Solomon B. Cera, Thomas C. Bright, Gwendolyn R. Giblin, Gold Bennett Cera & Sidener, San Francisco, for Appellant.

Erik M. Zissu, New York, NY, Zachary S. McGee, Menlo Park, Lawrence J. Portnoy, Davis Polk & Wardwell, New York, NY, for Respondent Credit Suisse First Boston LLC.

Elliot R. Peters, John W. Keker, Keker, Brockett & Van Nest, Jerome B. Falk, Jr., Kenneth G. Hausman, Barbara A. Winters, Mark A. Sheft, Howard Rice Nemerovski Canaday Falk & Rabkin, San Francisco, for Respondent Frank P. Quattrone.

McADAMS, J.

This is an appeal from a judgment of dismissal entered after the trial court sustained defendants' demurrer. The dispositive issue before us is whether the remedy of nonrestitutionary disgorgement is available in a class action asserting violation of the state's unfair competition statutes. We conclude that it is not. We therefore affirm the judgment.

BACKGROUND

In June 2003, plaintiff Jerome Feitelberg filed this action "on behalf of himself and all others similarly situated ... and on behalf of the General Public," against defendants Credit Suisse First Boston LLC (CSFB) and its former employee Frank P. Quattrone. The complaint asserts that defendants engaged in unfair business practices, in violation of the California statutory scheme commonly known as the "unfair competition law" or "UCL." (Bus. & Prof.Code, § 17200 et seq.;1 see generally, 11 Witkin, Summary of Cal. Law (2004 supp.) Equity, § 93, p. 493.)

The complaint makes these assertions: Defendant CSFB issued biased stock research reports to gain favor with investment banking clients. As a result of this conflict of interest, the reports produced by CSFB's stock analysts "contained exaggerated or unwarranted claims" and failed to provide those holding the subject companies' stock with "a sound basis for evaluating" their investments. This conduct is "unfair and unlawful." It also violates rules of the New York Stock Exchange (N.Y.SE) and the National Association of Securities Dealers (NASD). Defendants made "substantial profits and/or received substantial compensation as a result of these wrongful and unfair business practices."

The complaint also notes the existence of a "global settlement" between "10 Wall Street firms, including CSFB" and various regulatory bodies, including the Securities and Exchange Commission (SEC) and state regulators. As to CSFB, the settlement was entered as a consent judgment in October 2003 in United States District Court for the Southern District of New York. That judgment imposed injunctive relief and monetary sanctions.

The complaint in this matter seeks class certification, an injunction, disgorgement of defendants' "ill-gotten gains," and other relief.

In July 2003, the case was removed to federal court by defendants, based on their contention that the action satisfies the requirements of the federal Securities Litigation Uniform Standards Act, 15 U.S.C. § 78bb (SLUSA). (See Feitelberg v. Credit Suisse First Boston LLC (N.D.Cal., Oct. 24, No. C 03-3451 SC) 2003 WL 22434098, *1, 2.) In October 2003, the action was remanded to state court on plaintiff's motion. (Id. at p. *2.) In its order for remand, the federal district court concluded that the case did not fall within the standards for mandatory removal under SLUSA, because the complaint does not allege misrepresentations in connection with the purchase or sale of a covered security. (Id. at pp. *3, 5.)

Once the action was back in state court, defendants demurred to the complaint. They also moved to strike plaintiff's prayer for nonrestitutionary disgorgement. In supporting papers, defendants argued that the court should sustain the demurrer because plaintiff failed to allege any injury. They also argued that the unfair competition law does not apply to this case, which involves securities, and they urged the court to apply the abstention doctrine. In support of their motion to strike plaintiff's prayer for nonrestitutionary disgorgement, defendants argued that no such remedy is available under the UCL. In making that argument, defendants relied on two recent California Supreme Court decisions: Kraus v. Trinity Management Services, Inc. (2000) 23 Cal.4th 116, 96 Cal.Rptr.2d 485, 999 P.2d 718 (Kraus) and Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 131 Cal.Rptr.2d 29, 63 P.3d 937 (Korea Supply).

Plaintiff opposed the demurrer and the motion to strike. In responding to the demurrer, plaintiff countered each of defendants' arguments. He thus asserted that he sufficiently alleged injury, that his facts put him within the scope of the unfair competition law, and that the abstention doctrine does not apply here. In opposition to defendants' motion to strike the prayer, plaintiff argued that the high court decisions in Kraus and Korea Supply do not foreclose the remedy of nonrestitutionary disgorgement in cases such as this, where class certification is sought.

The hearing on defendants' demurrer and motion to strike took place in March 2004. All parties appeared through counsel. The court first asked plaintiff "to justify the complaint based on [section] 17200, claim for damages." Plaintiff responded: "First we are not seeking damages. We are seeking an equitable remedy...." When pressed by the court to explain how such relief would be computed, plaintiff stated that the remedy sought would "take into account" the stockholders' "loss in value over the period of time that Credit Suisse published what we contend were unjustified reports. And then allocate the monies we have recovered, the disgorgement of profits that we're seeking on a pro rata basis based on the number of shares traded and the dollar amounts involved." The court stated: "17200 does not authorize that type of recovery. The only recovery that you're permitted under 17200 is a restitutionary recovery based upon what has been received from the plaintiffs by the defendant improperly under the terms of the statute." Plaintiff disagreed, arguing that "nonrestitutionary disgorgement is [an] available remedy under section 17200 in the event the plaintiff is able to satisfy the court that the requirements of Code of Civil Procedure [section] 382 for [class] certification are met." The court was not persuaded by plaintiff's argument. It therefore sustained the demurrer to the complaint with leave to amend.

In April 2004, plaintiff gave notice that he did not intend to amend the complaint.

In May 2004, the court entered judgment of dismissal.

This appeal ensued. In addition to their opening, response, and reply briefs, the parties submitted supplemental letter briefing prior to oral argument, which we have considered.

CONTENTIONS

On appeal, plaintiff renews the arguments that he made in the trial court. First, he argues, California law allows for non-restitutionary disgorgement in unfair competition class action suits such as the one at issue here. Next, plaintiff contends, he is entitled to relief on the facts alleged in his complaint, since he is suing on behalf of holders of securities, not buyers or sellers. Third, plaintiff asserts, the abstention doctrine does not apply to this case.

Defendants dispute each of plaintiff's arguments. First, they contend, the remedy that plaintiff seeks is unavailable under unfair competition law, even in class actions. Next, defendants argue, the unfair competition law does not apply to securities claims, such as those asserted by plaintiff. Finally, defendants urge, this case calls for application of the abstention doctrine.

DISCUSSION

As we explain, we conclude that the remedy of nonrestitutionary disgorgement is not available in statutory unfair competition cases, even those brought as class actions. Our conclusion is compelled by the rationale of Korea Supply and it is consistent with voter-enacted amendments to the UCL statute. In light of that conclusion, we need not decide plaintiff's other claims, a point we also explain more fully below.

To establish the proper framework for our analysis, we first set forth the standards that guide our review and the precepts that govern our task of statutory construction. We next describe the relevant legal principles. We then apply those principles to the case before us.

I. Appellate Review
A. Scope and Standard of Review

This appeal challenges the judgment of dismissal that followed the order sustaining defendants' demurrer. "A demurrer tests the pleading alone, and not the evidence or the facts alleged." (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459, 80 Cal.Rptr.2d 329.) For that reason, "we take as true the well-pleaded factual allegations of the complaint." (Construction Protective Services, Inc. v. TIG Specialty Ins Co. (2002) 29 Cal.4th 189, 193, 126 Cal.Rptr.2d 908, 57 P.3d 372. See also, e.g., Korea Supply, supra, 29 Cal.4th at p. 1141, 131 Cal.Rptr.2d 29, 63 P.3d 937.)

"When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action." (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.) To the extent that the interpretation or application of a statute is at issue, "we exercise our independent judgment about whether the complaint states a cause of action as a matter of law." (Montclair Parkowners Assn. v. City of Montclair (1999) 76 Cal.App.4th 784, 790, 90 Cal.Rptr.2d 598.)

B. Principles of Statutory Construction

This case requires us to consider and apply the unfair competition law, statutes authorizing class actions, and the interplay between those provisions. For that reason, we begin by summarizing some familiar rules of statutory construction.

"Pursuant to established principles, our first task in construing ...

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