Griffin v. Capital Sec. of Am., Inc.

• Decision Date: 30 September 2010
• Docket Number: No. 09CA1659.,09CA1659.
• Parties: Faye GRIFFIN, in her official capacity as Treasurer of Jefferson County; and Board of County Commissioners of Jefferson County, Plaintiffs–Appellees and Cross–Appellants, v. CAPITAL SECURITIES OF AMERICA, Inc.; Jerry Manning; and Adam Alves, Defendants–Appellants and Cross–Appellees.
• Court: Colorado Court of Appeals

298 P.3d 970

Faye GRIFFIN, in her official capacity as Treasurer of Jefferson County; and Board of County Commissioners of Jefferson County, Plaintiffs–Appellees and Cross–Appellants,

v.CAPITAL SECURITIES OF AMERICA, Inc.; Jerry Manning; and Adam Alves, Defendants–Appellants and Cross–Appellees.

No. 09CA1659.

Colorado Court of Appeals,

Div. IV.

Sept. 30, 2010.

Ellen G. Wakeman, County Attorney, Patricia Gilbert, Assistant County Attorney, Eric T. Butler, Assistant County Attorney, James L. Burgess, Assistant County Attorney, Golden, Colorado, for Plaintiffs–Appellees and Cross–Appellants.

Snell & Wilmer, L.L.P., Scott C. Sandberg, Jessica E. Yates, Denver, Colorado, for Defendants–Appellants and Cross–Appellees.

John W. Suthers, Attorney General, Daniel D. Domenico, Solicitor General, Russell B. Klein, First Assistant Attorney General, Denver, Colorado, for Amicus Curiae Colorado Securities Commissioner.

Opinion by Judge WEBB.

This case involves remedies available to Jefferson County based on its purchase of unrated collateralized mortgage obligations (CMOs) from defendants, Capital Securities of America, Inc., Jerry Manning, and Adam Alves (Capital Securities). Plaintiffs, Faye Griffin in her official capacity as the Treasurer, and the Board of County Commissioners, of Jefferson County (Jefferson County), sued Capital Securities for damages on the basis that because the CMOs were unrated, the sale violated section 24–75–601.1, C.R.S.2010. According to Capital Securities, section 24–75–601.1 is preempted by federal law or, alternatively, section 24–75–601.1(1.5) does not provide a private damages remedy.

Following a bench trial, the court found that Capital Securities had violated section 24–75–601.1, which was not preempted. However, it denied Jefferson County's request for statutory damages measured under section 24–75–601.1(1.5) and instead ordered disgorgement of Capital Securities' commission on the sales.

We conclude that section 24–75–601.1 is not preempted by federal law; section 24–75–601.1(1.5) does not provide an implied damages remedy; and the trial court properly awarded disgorgement under common law principles. Therefore, we affirm the judgment.

I. Undisputed Facts

Under the prior version of section 24–75–601.1, a public entity such as Jefferson County could purchase unrated securities issued by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA). In August 2006, the legislature amended section 24–75–601.1 to provide, in pertinent part:

(1) It is lawful to invest public funds in any of the following securities:

....

(b)(I) Any security issued by, fully guaranteed by, or for which the full credit of the following is pledged for payment: The federal farm credit bank, the federal land bank, a federal home loan bank, the federal home loan mortgage corporation, the federal national mortgage association ....

(II) No security may be purchased pursuant to this paragraph (b) unless, at the time of purchase, the security is rated in its highest rating category by two or more nationally recognized organizations that regularly rate such obligations and no such organizations rate the security lower than its highest rating category....

...

(1.5) Any firm that sells any financial instrument that fails to comply with the provisions of this section to any public entity in the state of Colorado shall, upon demand of the public entity through the state treasurer, repurchase such instruments for the greater of the original purchase principal amount or the original face value, plus any and all accrued interest, within one business day of the demand.

(Emphasis added.)

After section 24–75–601.1 had been amended, Capital Securities sold four unrated FHLMC CMOs to Jefferson County. The sales had not been solicited by Capital Securities, but were made at the specific request of then County Treasurer Mark Paschall, whose term was about to expire. Capital Securities received commissions for the sales totaling $213,576.82.

On taking office, Griffin concluded that the purchase of these CMOs was unlawful under section 24–75–601.1. Based on section 24–75–601.1(1.5), she demanded that Capital Securities repurchase the CMOs. Capital Securities declined to do so.

Based on the requirement of section 24–75–601.3, C.R.S.2010, that a “public entity shall divest itself of any investment which is not included as a lawful investment in section 24–75–601.1 or other statutory authority within six months of the initial disclosure of the existence of such investment,” Jefferson County sold the CMOs. The trial court found that it did not suffer any damages as a result of these sales.

II. Federal Preemption

Capital Securities first contends section 24–75–601.1 is preempted by two federal statutes—15 U.S.C. § 77r of the National Securities Markets Improvement Act (NSMIA), and, as applied here, the Federal Home Loan Mortgage Corporation Act (FHLMCA), 12 U.S.C. § 1451, et seq. We discern no preemption.¹

A. Law

Under the Supremacy Clause of the United States Constitution, U.S. Const. art. 6, cl. 2, state statutes that conflict with federal statutes are invalid. Colorado Mining Ass'n v. Bd. of County Comm'rs, 199 P.3d 718, 737 (Colo.2009).

Federal preemption of state law is “fundamentally a question of congressional intent,” Banner Advertising, Inc. v. City of Boulder, 868 P.2d 1077, 1080 (Colo.1994), subject to de novo review. Kohn v. Burlington N. & Santa Fe R.R., 77 P.3d 809, 811 (Colo.App.2003). “An analysis of federal preemption issues begins with ‘the basic assumption that Congress did not intend to displace state law.’ ” Middleton v. Hartman, 45 P.3d 721, 731 (Colo.2002) (quoting Maryland v. Louisiana, 451 U.S. 725, 746, 101 S.Ct. 2114, 68 L.Ed.2d 576 (1981)).

Express preemption occurs when federal law explicitly preempts state law. State v. The Mill, 887 P.2d 993, 1004 (Colo.1994); see English v. General Electric Co., 496 U.S. 72, 78–79, 110 S.Ct. 2270, 110 L.Ed.2d 65 (1990). Federal law also preempts state law when the two conflict, making simultaneous compliance with both laws impossible. English, 496 U.S. at 79, 110 S.Ct. 2270;The Mill, 887 P.2d at 1004;see City of Grand Junction v. Ute Water Conservancy Dist., 900 P.2d 81, 87 (Colo.1995) (“Actual conflict occurs ... when the state law stands as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress.”). ²

B. 15 U.S.C. § 77r(a)

Capital Securities first argues that the NSMIA, “expressly preempts state laws that impose qualifications or merit-based limits on covered securities,” such as the rating requirement in section 24–75–601.1(1)(b)(II). We disagree.

The NSMIA provides in relevant part:

(a) Scope of exemption

Except as otherwise provided in this section, no law, rule, regulation, or order, or other administrative action of any State ...

(1) requiring, or with respect to, registration or qualification of securities, or registration or qualification of securities transactions, shall directly or indirectly apply to a security that ...

(A) is a covered security ...

(3) shall directly or indirectly prohibit, limit, or impose conditions, based on the merits of such offering or issuer, upon the offer or sale of any security described in paragraph (1).

15 U.S.C. § 77r (emphasis added).³

“Each state has its own statutory law governing securities offerings. These state statutes are often referred to as ‘blue sky’ laws.” Thomas Lee Hazen, Treatise on the Law of Securities Regulation § 8.1(1)(C) (6th ed. 2009). Such laws, many patterned on the Uniform Securities Act, “are constructed so that registration of securities is the norm and exemption from such registration the exception.” 12 Joseph C. Long, Blue Sky Law § 6:2; see Uniform Securities Act 2002 § 301 (every security offered or sold in a state must be registered or exempt). As a corollary of the registration requirement, these statutes prohibit selling or offering to sell unregistered securities absent an exemption. See Uniform Securities Act 2002 § 301.

In contrast to state patchwork regulation, the purpose of the NSMIA was to “advance the development of national securities markets and eliminate the costs and burdens of duplicative and unnecessary regulation by ... designating the Federal government as the exclusive regulator of national offerings of securities.” Report of Committee on Commerce, H.R. Rep. 104–622, 104th Cong., 2d Sess., at 16 (1996), reprinted in 1996 U.S.C.C.A.N. 3877, 3878; see alsoHazen, § 8.1(3) (“In 1996, Congress significantly limited the role of state law in securities regulation” when it passed the NSMIA).

Capital Securities concedes that the NSMIA would not preempt a state law that only prohibited the purchase of covered securities by public entities, as does section 24–75–601.1(1)⁴. Nevertheless, it argues that because section 24–75–601.5, C.R.S.2010, imposes liability on “[a]ny person who sells or causes to be sold to a public entity any investment which is not a lawful investment for such public entity pursuant to section 24–75–601.1,” ⁵ it impermissibly “directly or indirectly prohibit[s], limit[s], or impose[s] conditions, based on the merits of such offering or issuer, upon the ... sale of any [covered] security.” 15 U.S.C. § 77r(a)(3) (emphasis added).

But section 77r(a)(3) must be viewed in the context of the broader prohibition on state registration or qualification. See Sobitan v. Glud, 589 F.3d 379, 382 (7th Cir.2009) (“Context, not just literal text, will often lead a court to Congress' intent in respect to a particular statute.” (quoting City of Rancho Palos Verdes v. Abrams, 544 U.S. 113, 127, 125 S.Ct. 1453, 161 L.Ed.2d 316 (2005) (Breyer, J., concurring))). From this perspective, Capital Securities' argument is unpersuasive for two reasons. First, section 24–75–601.1(1) does not require registration or otherwise limit offerings of covered securities in Colorado. Second, while the “highest...