Gavin v. At & T Corp., 05-4398.

• Decision Date: 06 September 2006
• Docket Number: No. 05-4398.,05-4398.
• Parties: Lila T. GAVIN, on behalf of herself and of all persons similarly situated, Plaintiff-Appellant, v. AT & T CORP. and Georgeson Shareholder Communications, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 634

464 F.3d 634

Lila T. GAVIN, on behalf of herself and of all persons similarly situated, Plaintiff-Appellant, v. AT & T CORP. and Georgeson Shareholder Communications, Inc., Defendants-Appellees.

No. 05-4398.

United States Court of Appeals, Seventh Circuit.

Argued June 6, 2006.

Decided September 6, 2006.

As Amended September 11, 2006.

COPYRIGHT MATERIAL OMITTED

Clinton A. Krislov (argued), Krislov & Associates, Chicago, IL, for Plaintiff-Appellant.

Rachel B. Niewoehner, Sidley Austin LLP, Chicago, IL, M. Norman Goldberger (argued), Jennifer E. Biderman, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, PA, Steven A. Levy, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Chicago, IL, Eli R. Mattioli, Thelen Reid & Priest, New York City, for Defendants-Appellees.

Before FLAUM, Chief Judge, and POSNER and KANNE, Circuit Judges.

POSNER, Circuit Judge.

This appeal requires us to consider the meaning of "in connection with the purchase or sale of a covered security" in the Securities Litigation Uniform Standards Act of 1998 (SLUSA). The Act provides that a class action, though filed in state court under state law, may be removed to federal district court if the suit alleges "(1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or (2) 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. § 77p(b); see also § 78bb(f). A "covered security," defined in §§ 78bb(f)(5)(E), 77p(f)(3), 77r(b), is any security "traded nationally and listed on a regulated national exchange." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, ___ U.S. ___, ___, 126 S.Ct. 1503, 1512, 164 L.Ed.2d 179 (2006); see also Green v. Ameritrade, Inc., 279 F.3d 590, 596 n. 4 (8th Cir.2002). The Act further provides that a suit properly removed under it must forthwith be dismissed by the federal court because a suit based on fraud in the sale of securities regulated under the federal securities laws cannot be brought under state law. §§ 77p(b), 78bb(f)(1).

The defendants, sued for fraud in an Illinois state court on behalf of a class of shareholders of MediaOne Group, Inc., removed the case to federal district court under SLUSA. The judge denied the plaintiff's motion to remand the case to the state court and dismissed the suit, whereupon the plaintiff filed a complaint in the district court under Rule 10b-5, which the district judge dismissed on the merits. The appeal mainly challenges the removal; the plaintiff wants to be back in state court, suing under state law. Only if we refuse to order the case remanded to the state court does she want us to proceed to the Rule 10b-5 issue and reverse the district court on the merits. That would place us in conflict with the Second Circuit, which in a similar case brought by other MediaOne shareholders (but under federal law, so avoiding SLUSA) held that there was no fraud. Starr v. Georgeson Shareholder, Inc., 412 F.3d 103 (2d Cir.2005).

In June 2000, MediaOne merged with AT & T. The terms of the merger entitled shareholders in MediaOne to obtain in exchange for each of their shares 0.95 shares of AT & T stock plus $36.27 and any accrued but unpaid dividends. This package was the "Standard Election." But MediaOne shareholders could if they preferred select other combinations of shares and cash that would be equal in value to the "Standard Election" share-cash package.

AT & T notified the MediaOne shareholders of their choices on June 15 and explained that they could obtain the cash and/or AT & T shares to which the choice they made entitled them by mailing their MediaOne share certificates to EquiServe Trust Company, AT & T's exchange agent. There was no charge for this service. The notice fixed a deadline of July 14 for choosing any of the alternatives to the Standard Election, but no deadline for the Standard Election itself.

On August 1, AT & T sent a follow-up notice to those MediaOne Group shareholders who had not responded to the first notice. The letter explained that they could still exercise the Standard Election (though not the other options, the July 14 deadline having passed), again through EquiServe and again without charge.

Finally, on December 15, defendant Georgeson, hired by AT & T to perform a postmerger "clean up" or "round up," mailed a notice on AT & T letterhead to those MediaOne shareholders who still had not responded to either of the previous notices. The letter urged them to exercise their Standard Election rights by submitting their MediaOne shares to Georgeson in exchange for either a combination of cash and stock or an all-cash equivalent. The letter warned that "eventually, if you continue to do nothing, your [AT & T] stock and underlying assets will be turned over to certain state authorities under the abandoned property laws." Remember that AT & T had set no deadline for the Standard Election. Georgeson was reminding those MediaOne shareholders who had not yet made an election, and now were confined to the Standard Election because the deadline for the alternatives had passed, that state abandonment law set a deadline.

Abandoned property escheats to the state after a specified period, Uniform Disposition of Unclaimed Property Act (1966), codified in Illinois as 765 ILCS 1025/0.05 et seq., and shares of stock that are not claimed by the beneficial owner are deemed abandoned. 765 ILCS 1025/2a. Either that Act or the superseding Uniform Unclaimed Property Act (1995) have been adopted in 29 states plus the District of Columbia, and most, perhaps all, other states have similar laws. E.g., N.Y. Personal Property Law §§ 251-258 (McKinney 1992). In the state court, the plaintiff requested certification of a nationwide class and in the alternative a statewide (Illinois) class consisting of "all residents, or persons or legal entities, who [are MediaOne shareholders and] may properly avail themselves of the Illinois Consumer Fraud Act." No class was ever certified.

Georgeson's letter specified a fee of $7 per MediaOne share for the exchange service offered in the letter and did not mention that the recipients of the letter could still obtain the Standard Election package at no charge through EquiServe. The failure to mention that option is the fraud charged in the complaint.

We do not think the alleged fraud can be said to be "in connection with the purchase or sale of a covered security," namely stock in MediaOne. When the merger was consummated in June of 2000, MediaOne's shareholders became the beneficial owners of AT & T stock. Those shareholders whose MediaOne shares had been held by their brokerage firms were immediately credited with the receipt of AT & T stock plus cash. Those shareholders (the plaintiff and the members of her class) who possessed share certificates might not get their new cash/stocks right away, but they had a firm entitlement to their proportionate share of the cash and stock that AT & T had set aside to fund the acquisition of MediaOne. The alleged fraud—the omission in Georgeson's letter of December 15 of any mention of the free option—happened afterwards and had nothing more to do with federal securities law than if Georgeson had asked the MediaOne shareholders "do you want your AT & T shares sent to you by regular mail or by courier?" and had charged an inflated fee for the courier service. Or if AT & T had said "if you don't want your spouse to learn about your good fortune, we'll send you your shares in a brown paper envelope"; and later the spouse failed to claim the shares in her divorce proceeding and sued AT & T and her husband for fraud.

AT & T didn't want the shareholders of the firm it had just bought to wake up one day and find that their part of the sale price had gone not to themselves but to a state. Hence the three notices—though why the last one neglected to remind the shareholders that they could still protect their stock from being escheated without having to pay $7 a share to another company is a puzzle, as well as the foundation of the fraud claim (about the merits of which we express no opinion). Presumably Georgeson showed AT & T the letter before mailing it; it was, after all, on AT & T's stationery.

This would be a different case from the standpoint of SLUSA had the MediaOne shareholders been induced by fraudulent representations by AT & T to vote for the merger and as a result ended up with AT & T stock worth less than the MediaOne stock that they had exchanged. E.g., Dasho v. Susquehanna Corp., 380 F.2d 262 (7th Cir.1967); Dennis F. Dunne, "Stock Repurchase Agreements in Bankruptcy: A Tale of State Law Rights Discarded," 12 Bank. Dev. J. 355, 386 (1996). It is true that one option offered in the December 15 letter was that Georgeson would sell the recipient's shares and send him the cash if he preferred that to stock plus cash. But it's not as if Georgeson was trying to buy the shares on the cheap. The $7 fee it was charging for its service was its entire consideration and was the same whether the recipient wanted cash or shares. Georgeson acquired no investment interest. Shareholders would take up Georgeson's offer of the cash alternative only if they didn't want to own AT & T shares; it was their choice entirely.

One could speculate—though the plaintiff does not—that someone who had planned to sell the AT & T stock to which he was entitled as a result of the merger, but to do so later on rather than immediately, might accelerate his decision when he learned that it would cost him $7 per share to obtain the stock; he might do this in order to avoid a future brokerage fee on top of the $7. But that is no different from what would happen if a bank charged an exorbitant fee for a safe deposit box in which to keep one's shares of stock: some people would decide to sell their stock rather than pay the fee. One would hardly say that a...