In re Waste Management, Inc. Securities Litigation

• Citation: 194 F.Supp.2d 590
• Decision Date: 05 February 2002
• Docket Number: No. CIV.A.H-01-4381.,CIV.A.H-01-4381.
• Parties: In re WASTE MANAGEMENT, INC. SECURITIES LITIGATION, This Document Relates to: Willard Miller, Glen Miller, David Coslett, and Michael Dougherty, Individually and on Behalf of Others Similarly Situated, Plaintiffs v. Waste Management, Inc., Rodney R. Proto, Earl E. Defrates, Bruce E. Snyder, and Gregory T. Sangalis, Defendants.
• Court: U.S. District Court — Southern District of Texas

194 F.Supp.2d 590

In re WASTE MANAGEMENT, INC. SECURITIES LITIGATION,

This Document Relates to: Willard Miller, Glen Miller, David Coslett, and Michael Dougherty, Individually and on Behalf of Others Similarly Situated, Plaintiffs v. Waste Management, Inc., Rodney R. Proto, Earl E. Defrates, Bruce E. Snyder, and Gregory T. Sangalis, Defendants.

No. CIV.A.H-01-4381.

United States District Court, S.D. Texas, Houston Division.

February 5, 2002.

R. Bruce McNew, Taylor & McNew, Greenville, DE, James A. McShane, Morris & Morris, Wilmington, DE, for Plaintiffs.

Allen M. Terrell, Jr., Richards Layton et al., Wilmington, DE, Rodney Acker, Jenkins & Gilchrist, Dallas, TX, Sharon Katz, Eric F. Grossman, Christopher Falkenberg, Davis Polk & Wardwell, New York City, for Defendants.

ORDER OF RECONSIDERATION AND REMAND

HARMON, District Judge.

The above referenced proposed class action composed of parties that exchanged securities issued by Eastern Environmental Services, Inc. for securities issued by Waste Management, Inc. during a merger on or about December 31, 1998, grounded in sections 11, 12(a)(2) and 15 of the Securities Act of 1933 ("the Act"), 15 U.S.C. §§ 77k, 77l(a)(2), and 77o, was removed from the Superior Court for the State of Delaware pursuant to 28 U.S.C. § 1441(a) and the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. § 77p, and the general removal statute, 28 U.S.C. § 1441(a). In its last order (# 49), this Court denied Plaintiffs' motion to remand under 28 U.S.C. § 1447(c). Since then the Court has continued to mull over what appears to be a case of first impression, has reconsidered its ruling, and has concluded after all that removal under SLUSA was improper and that this case should be remanded.

Plaintiffs' suit arises out of a stock swap when Waste Management, Inc. ("WMI") merged with Eastern Environmental Services, Inc. ("Eastern") in December 1998. With an exchange ratio of 0.646 WMI shares for each Eastern share, WMI issued newly registered stock to Eastern shareholders pursuant to a Registration Statement and Prospectus filed with the Securities and Exchange Commission on September 24, 1998, and subsequently amended. WMI had previously repeatedly represented that an earlier July 1998 merger of Old Waste Management and USA Waste Services, leading to the formation of WMI, would result in an annual cost savings of $800 million in operating synergies and enhanced efficiencies, and that representation was incorporated into the Registration Statement at issue as well as other SEC filings and documents incorporated into it. On July 6, 1999, WMI began issuing statements of adverse financial results and earnings. On November 9, 1999, it announced it would take a $1.23 billion after-tax accounting charge, that integration of Old Waste Management with USA Waste had not been proceeding as previously represented, and that the $800 million in cost savings would not be realized. The price of WMI stock plummeted. Plaintiffs in this action sued solely under the Securities Act of 1933 on behalf of themselves and all others similarly situated who had exchanged Eastern securities for WMI stock and were damaged as a result.

Title 28 U.S.C. § 1441(a) states,

Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending.

The Securities Act of 1933, 15 U.S.C. § 77v, which allows for concurrent federal and state court jurisdiction, expressly states that "no case ... brought in any State court of competent jurisdiction shall be removed."

In enacting removal statutes, Congress intended to "restrict the jurisdiction of federal courts on removal" and therefore removal statutes must be strictly construed. Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108, 61 S.Ct. 868, 85 L.Ed. 1214 (1941). The party removing the action to federal court bears the burden of affirmatively establishing that subject matter jurisdiction exists. Wilson v. Republic Iron & Steel Co., 257 U.S. 92, 97-98, 42 S.Ct. 35, 66 L.Ed. 144 (1921).

Enacted on November 3, 1998, SLUSA, Pub.L. No. 105-353, 112 Stat. 3227, codified as amended in part at 15 U.S.C. §§ 77p and 78bb(f), amended section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a), to preempt class actions based on state statutory or common law involving a "covered security" as defined in that act. SLUSA states in part that ("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 ... an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security ...."). 15 U.S.C. § 77p(c).

Congress has enacted several federal statutes¹ in the past few years to attempt to establish uniformity in the securities markets. The Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. §§ 77z-1, 78u, which amended the 1933 Securities Act and the 1934 Securities Exchange Act, set out heightened pleading requirements² and for complaints under Rule 10b-5 mandated pleading of specific facts creating a strong inference of scienter for private class actions and other suits alleging securities fraud in an effort to minimize meritless lawsuits. 15 U.S.C. § 78 et seq. H. Conf. Rep. No. 105-803 (1998). When, as a result, plaintiffs began filing in state rather than federal court, asserting claims under state statutory or common law to avoid the PSLRA's stringent procedural and pleading hoops, Congress passed SLUSA in 1998 to close the loophole. 144 Cong. Rec. H10771 (daily ed. Oct. 13, 1998, 1998 WL 712049). SLUSA in essence made federal court the exclusive venue for securities fraud class actions meeting its definitions and ensured they would be governed exclusively by federal law. 15 U.S.C. § 77p(b)-(c). Congress' purpose in enacting the statute was to "`prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State court, rather than Federal court.'" Korsinsky v. Salomon Smith Barney, Inc., No. 01 6085(SWK), 2002 WL 27775, *3 (S.D.N.Y.2002) quoting H.R. Conf. Rep. No. 105-803 (1998). Moreover, the Court observes that the same report indicates that in SLUSA Congress did not evidence an intent to occupy the entire field of securities regulation, but expressly delineated the scope of preemption:

[I]n order to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the Private Securities Litigation Reform Act of 1995, it is appropriate to enact national standards for securities class action lawsuits involving nationally traded securities, while preserving the appropriate enforcement powers of State securities regulators and not changing the current treatment of individual lawsuits.

H.R. Conf. Rep. 105-803, *2.

With respect to removal, the plain language of SLUSA, 15 U.S.C. § 77p(c), evidences Congress' intent to preempt a specifically defined category of state-law class actions, which it defines as follows: "Any 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 ...." Title 15 U.S.C. § 78bb(f)(5)(B) defines a "covered class action" as

(i) any single lawsuit in which—

(I) damages are sought on behalf of more that 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, predominated over any question 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 predominate over any questions affecting only individual persons or members; or

(ii) any group of lawsuits filed in or pending in the same court and involving common questions of law or fact, in which—

(I) damages are sought on behalf of more than 50 persons; and

(II) the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose.

15 U.S.C. § 78bb(f)(5)(B).

A "covered security" is defined as "a security that satisfies the standards for covered security specified in paragraph (1) or (2) of section 77r(b) of this title, at the time during which it is alleged that the misrepresentation, omission, or manipulative or deceptive conduct occurred ...." 15 U.S.C. § 77p(f)(3). Section 77r(b), adopted by § 78bb(f)(5)(E), defines a "covered security" as one listed on the New York Stock Exchange, the American Stock Exchange, or the Nasdaq National Market, or a security issued by an investment company that is registered, or for which a registration statement has been filed under the Investment Company Act of 1940. SLUSA provides for mandatory removal and dismissal of a specific kind of class action:

(f) LIMITATIONS ON REMEDIES.—

(1) CLASS ACTION LIMITATIONS. —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 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.

(2) REMOVAL OF COVERED CLASS ACTIONS.—Any...