Feitelberg v. Merrill Lynch & Co., Inc.

• Decision Date: 09 October 2002
• Docket Number: No. C 02-3072 MHP.,C 02-3072 MHP.
• Citation: 234 F.Supp.2d 1043
• Court: U.S. District Court — Northern District of California
• Parties: Jerome FEITELBERG, On Behalf of Himself, All Others Similarly Situated, and The General Public, Plaintiff, v. MERRILL LYNCH & CO., INC., a Delaware Corporation, Thomas Mazzucco, Henry Blodget, and Does 1-30, Defendants.

234 F.Supp.2d 1043

Jerome FEITELBERG, On Behalf of Himself, All Others Similarly Situated, and The General Public, Plaintiff, v. MERRILL LYNCH & CO., INC., a Delaware Corporation, Thomas Mazzucco, Henry Blodget, and Does 1-30, Defendants.

No. C 02-3072 MHP.

United States District Court, N.D. California.

October 9, 2002.

C. Andrew Dirksen, Gwendolyn R. Giblin, Solomon B. Cera, Gold Bennett Cera & Sidener LLP, San Francisco, CA, for Plaintiff.

Jonathan C. Dickey, Gibson, Dunn & Crutcher LLP, Palo Alto, CA, for Defendants.

MEMORANDUM AND ORDER

PATEL, Chief Judge.

Jerome Feitelberg brought this class action in state court against Merrill Lynch & Co., Thomas Mazzucco, Henry Blodget, and Does 1-30 on behalf of himself and all others resident in the State of California who are similarly situated. Plaintiff brings this motion to remand pursuant to 28 U.S.C. sections 1441 and 1447 on the grounds that this court lacks subject matter jurisdiction. Plaintiff alleges that this court does not have jurisdiction regarding his single claim under section 17200 et seq. of the California Business & Professional Code. Defendant removed this action to federal court based on the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). 15 U.S.C. § 77p, 78bb(f). Now before the court is plaintiff's motion to remand the action to state court. Having considered the parties' arguments and submissions, and for the reasons set forth below, the court now enters the following memorandum and order.

BACKGROUND

This action is one in a series of cases filed in the wake of Merrill Lynch's announcement in May 2002 of a tentative settlement with the Attorney General of the State of New York. Following the investigation by the New York Attorney General regarding alleged misconduct on the part of Merrill Lynch analysts, a wellpublicized tentative settlement was announced. Merrill Lynch admitted no wrongdoing but agreed, among other things, to pay a total of $100 million to implement policies establishing a new industry standard for independent and objective research. Compl. ¶¶ 21 & 28.

Plaintiff alleges that defendants engaged in unfair business practices, deceived the public, and should be required to disgorge profits acquired from their unlawful conduct under California state law. Specifically, plaintiff alleges that the dissemination by Merrill Lynch of "unfair and deceptive ratings and/or research reports resulted from defendants' failure to adequately separate Merrill Lynch's investment banking operations and the stock analysis functions performed by its Internet Group." Compl. ¶ 38. Plaintiff relies on evidence uncovered by the Attorney General of the State of New York where some analysts' ("Internet Group") internal comments sharply contrasted with the publicly announced ratings. Compl. ¶ 21.

On June 7, 2002, plaintiff filed a complaint on behalf of himself and the general public of California in the Superior Court for the County of San Francisco. Plaintiff's complaint asserts a single claim alleging that defendants issued deceptive purchase-and-sale advice in the form of stock ratings and analyst research reports for a group of publicly traded internet stocks that were purchased by plaintiff and the general public. Compl. ¶¶ 3, 6, 18, 19, 22, 24, 26, 33, 36 & 38. The complaint is based on sections 17200 et seq. of the California Business & Professions Code, California's Unfair Competition Act ("UCL"). Cal. Bus. & Prof.Code §§ 17200-09. On June 26, 2002, defendants removed this action from state court based on federal preemption under SLUSA. Plaintiff subsequently filed a motion to remand on July 26, 2002. In response, defendants filed a motion to dismiss, or in the alternative, to stay proceedings on August 1, 2002. Both motions were noticed for hearing on September 30, 2002.

On August 5, 2002, this court issued a related case order finding the instant case related to Cereghino v. Merrill Lynch & Co. and reassigning the action to this court. Plaintiff then filed an amended notice of motion and motion to remand on August 14, 2002 which re-noticed the motion for hearing in this court on September 30, 2002. The court held the motion to dismiss in abeyance pending resolution of the motion to remand.

LEGAL STANDARD

A court will remand a removed case "if at any time before final judgment it appears that the district court lacks subject matter jurisdiction." 28 U.S.C. § 1447(c). The presence or absence of federal-question jurisdiction is governed by the "well-pleaded complaint rule." The rule provides that "federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint." Caterpillar Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). As such, a case can generally not be removed to federal court on the basis of a federal defense, including the defense of preemption, unless the preemptive force of a statute is so "extraordinary" that it "converts an ordinary state common-law complaint into one stating a federal claim." Caterpillar, 482 U.S. 386, 392-93, 107 S.Ct. 2425, 96 L.Ed.2d 318 (citing Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 65, 107 S.Ct. 1542, 95 L.Ed.2d 55 (1987)).

Defendants removed this action on the grounds that it is preempted by SLUSA. At issue for the purposes of deciding the pending motion is whether plaintiff's class action is preempted by federal securities law.

DISCUSSION

Plaintiff makes three arguments to support his contention that his action is not a "covered class action" under SLUSA. First, plaintiff argues that a prayer for damages is a prerequisite for a claim to be considered a "covered class action." Plaintiff alleges that his action is not a "covered class action" as his claim for monetary relief is in the form of "disgorgement" and "restitution" rather than damages. Next, plaintiff alleges that SLUSA's language requiring "misrepresentations or omissions of material facts" and "manipulative or deceptive device or contrivance" has been interpreted to imply a scienter requirement and therefore removal under SLUSA is dependent on whether or not scienter had properly been pled in the complaint. Plaintiff argues that because he never explicitly or implicitly alleges scienter in his complaint, his state-law claim cannot be preempted by SLUSA. Finally, plaintiff argues that this action is not subject to removal under SLUSA because the alleged wrongdoing on defendants' part is not "in connection with" the purchase or sale of securities as required by SLUSA.

SLUSA provides that "[a]ny covered class action brought in any state court involving a covered security, as set forth in subsection (b), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b)." 15 U.S.C. § 78bb(f)(2). SLUSA expressly preempts such state-law claims by providing the following:

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).

SLUSA is the most recent in a line of federal securities statutes originating with Congress's passage of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77a et seq., and the Securities Act of 1934 ("1934 Act"), 15 U.S.C. § 78a et seq. In 1995, Congress passed the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 77z-1, 78u, which applies to federal securities fraud claims and sets forth rigorous pleading requirements designed to test the legal sufficiency of a complaint.¹ In enacting PSLRA, Congress sought to protect issuers from shareholder suits initiated for the sole purpose of winning large attorney fees or private settlements. In re Silicon Graphics Sec. Litig., 183 F.3d 970, 973 (1999).

In response, class action attorneys increasingly filed lawsuits in state court and under state law in order to circumvent the requirements of PSLRA. In California, for example, the number of securities case filings increased five-fold in the wake of PSLRA's passage. H.R. Conf. Rep. No. 105-803, at 15 (1998).

Congress responded by enacting SLUSA with the intent of making federal courts the primary venue for class action securities claims. Id. at 14-15.

A) Covered Class Action

Plaintiff argues that this is not a "covered class action" under SLUSA. Specifically, he argues that a prayer for damages is a prerequisite for a claim to be considered a "covered class action," and his complaint does not seek damages. Instead, he seeks "restitution, disgorgement of defendants' illegally obtained profits and injunctive relief to stop defendants' improper conduct." Compl. ¶¶ 3 & 39. Defendants argue that plaintiff's prayer for monetary relief equates to "damages" under SLUSA and suggest that plaintiff's omission of the term "damages" from his complaint is, in fact, an attempt to plead around SLUSA.

SLUSA defines the term "covered class action" as follows:

The term "covered class action" means—

(i) any single lawsuit in which—

(I) damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members; or

(II) one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties similarly situated, and questions of law or fact common to those persons or members of the prospective class...