Kenneth Rothschild Trust v. Morgan Stanley

• Decision Date: 27 March 2002
• Docket Number: No. CV0110816MMMMANX.,CV0110816MMMMANX.
• Parties: The KENNETH ROTHSCHILD TRUST, on behalf of itself and all others similarly situated and as a private attorney general on behalf of the members of the general public residing within the State of California, Plaintiff, v. MORGAN STANLEY DEAN WITTER, and Does 1 through 20, inclusive Defendants.
• Court: U.S. District Court — Central District of California

199 F.Supp.2d 993

The KENNETH ROTHSCHILD TRUST, on behalf of itself and all others similarly situated and as a private attorney general on behalf of the members of the general public residing within the State of California, Plaintiff, v. MORGAN STANLEY DEAN WITTER, and Does 1 through 20, inclusive Defendants.

No. CV0110816MMMMANX.

United States District Court, C.D. California.

March 27, 2002.

COPYRIGHT MATERIAL OMITTED

Mike M. Arias, Arias Ozzello & Gignac, Los Angeles, CA, J. Paul Gignac, Arias Ozello Gignac, Santa Barbara, CA, for Plaintiff.

C. Robert Boldt, Heiko Kai Schultz, Rick Lloyd Richmond, Kirkland & Ellis, Los Angeles, CA, for Defendants.

ORDER DENYING PLAINTIFF'S MOTIONS TO REMAND ACTION TO STATE COURT AND TO STRIKE DECLARATION OF SIMON FARAHDEL, AND GRANTING DEFENDANT'S MOTION TO DISMISS COMPLAINT

MORROW, District Judge.

On December 14, 2002, defendant Morgan Stanley Dean Witter removed this putative class action to federal court, asserting that it falls both within the court's federal question and diversity jurisdiction. The complaint alleges that Morgan Stanley defrauded its clients by misrepresenting the interest to be paid on funds deposited with it for the purchase of certificates of deposit to be issued by a separate financial institution, South Shore Bank. Morgan Stanley contends that plaintiff's state law claims are preempted by the Securities Litigation Uniform Standards Act. Morgan Stanley also asserts that the matter falls within the court's diversity jurisdiction, as plaintiff is a citizen of California, it is a citizen of New York and Delaware, and the matter in controversy exceeds $75,000.

Plaintiff has now moved to remand, asserting that the suit is not covered by the federal act, and that the complaint does not allege damages satisfying the minimum threshold for diversity jurisdiction. Morgan Stanley has filed a motion to dismiss, asserting that plaintiff's state law claims are preempted by federal law. Because the complaint involves, at least in part, the purchase of a "covered security," the court denies the motion to remand and grants Morgan Stanley's motion to dismiss.

I. FACTUAL BACKGROUND

On November 1, 2001, plaintiff Kenneth Rothschild Trust filed a class action complaint against defendant Morgan Stanley Dean Witter. Plaintiff, which sues on its behalf, on behalf of all others similarly situated, and on behalf of the general public, alleges violations of California Business and Professions Code §§ 17200 et seq., California Civil Code §§ 1750 et seq., common law fraudulent nondisclosure, negligent misrepresentation, and breach of contract. The complaint seeks restitution, injunctive and declaratory relief.¹ Plaintiff sues on behalf of a putative class of individuals and entities that purchased Certificates of Deposit ("CDs") from Morgan Stanley during the last four years.²

The complaint alleges that Mary Thomas, a Morgan Stanley representative, contacted Kenneth Rothschild, trustee of the Kenneth Rothschild Trust, and offered him the opportunity to purchase a CD through Morgan Stanley.³ After determining that Morgan Stanley's CDs offered a favorable rate of return, Rothschild purportedly decided to invest $85,000 in CDs on behalf of the Trust.⁴ The complaint alleges that there is a 10-day "settlement period" between the deposit with Morgan Stanley of the funds that will be used to purchase a CD and the purchase itself. During this period, Morgan Stanley allegedly represents that the funds will be deposited in a money market account and will earn interest at a "money market rate."⁵ In the case of the Trust, Rothschild purchased the shares of a money market mutual fund known as the Morgan Stanley Dean Witter Liquid Asset Fund.⁶ Plaintiff asserts that, contrary to Morgan Stanley's representations, interest was initially paid for only three of the ten days of the "settlement period."⁷ After Rothschild complained, Morgan Stanley agreed to credit the Trust's account for an additional two days of interest.⁸ It refused to pay an additional five days' interest, amounting to $70.⁹

Plaintiff's complaint asserts claims on behalf of putative class members for misrepresentations regarding the interest to be paid on funds during the "settlement period," including failure to inform CD purchasers that the funds may not be credited to their accounts until the day following deposit, that interest does not begin to accrue until the first business day after deposit, and that no interest is paid between the date of redemption and the date the CD is purchased.¹⁰

On December 14, 2001, Morgan Stanley removed the action to this court, asserting that the court had jurisdiction under both 28 U.S.C. §§ 1331 and 1332.¹¹ Specifically, Morgan Stanley asserts that the court has federal question jurisdiction under the Securities Litigation Uniform Standards Act, which states that "any covered class action brought in any State court involving a covered security ... shall be removable." 15 U.S.C. § 77p(c). Further, it asserts that the action is between citizens of different states and that the amount in controversy exceeds $75,000. On January 16, 2002, plaintiff filed a motion to remand the action to state court. On February 5, 2002, Morgan Stanley responded with a motion to dismiss, asserting that plaintiff's state law claims are preempted by federal law.

II. DISCUSSION

A. Motion to Remand: Federal Question Jurisdiction

1. Standard Governing Removal Under The Securities Litigation Uniform Standards Act

Congress enacted the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") to ensure that litigants do not circumvent the limitations of the Private Securities Litigation Reform Act by filing their securities actions in state court. See Bertram v. Terayon Communications Systems, Inc., No. CV 00-12653 SVW (RZx), 2001 WL 514358, * 1(C.D.Cal. Mar. 27, 2001). See also Gibson v. PS Group Holdings, Inc., No. 00-CV-0372 W(RBB), 2000 WL 777818, * 2 (S.D.Cal. June 14, 2000) ("Congress determined that class action attorneys were attempting to circumvent the Reform Act's requirements by filing frivolous securities lawsuits in state court and under state law, rendering virtually all of the Reform Act's protections inapplicable"). For this reason, SLUSA preempts many state class action securities claims. See Green v. Ameritrade, 279 F.3d 590, 595 (8th Cir.2002) ("With some exceptions, SLUSA made the federal courts the exclusive fora for most class actions involving the purchase and sale of securities"). Pursuant to 15 U.S.C. § 77p(c),

"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, and shall be subject to subsection (b)."¹²

Thus, SLUSA "obligates the removing party to prove that: 1) the class action sought to be removed is a `covered class action,' 2) the class action complaint is based on state law claims, 3) there has been a purchase or sale of a `covered security,' and 4) in connection with that purchase or sale, plaintiffs allege that defendants either `misrepresented or omitted a material fact' or `used or employed any manipulative or deceptive device or other contrivance.'" Shaev v. Claflin, No. C 01-0009 MJJ, 2001 WL 548567 * 3 (N.D.Cal. May 17, 2001)(quoting Burns v. Prudential Securities, 116 F.Supp.2d 917, 921 (N.D.Ohio 2000); see also Bertram, supra, 2001 WL 514358 at * 2; Gibson, supra, 2000 WL 777818 at * 3.

In the present case, three of these requirements are clearly met on the face of the complaint. This is a putative class action that pleads state law causes of action.¹³ Those causes of action in turn allege that defendants made fraudulent and deceptive statements.¹⁴ The fourth requirement — whether plaintiff's claim arises in connection with the purchase or sale of a "covered security" — is thus the key in determining whether this action was properly removed under SLUSA.¹⁵

B. Whether Plaintiff's Claim Arises In Connection With A Covered Security

Section 77b(a)(1) of the Securities Act of 1933 defines a security as

"any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, reorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a `security', or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing." 15 U.S.C. § 77b(a)(1).

Section 77p(f) defines "covered security" for purposes of SLUSA by reference to sections 77r(b)(1) and (2). These sections define "covered security" as one (1) listed on a national securities exchange, or (2) one "issued by an investment company that is registered, or that has filed a registration statement, under the Investment Company Act of 1940." 15 U.S.C. § 77r(b)(1), (2).

Plaintiff contends that the CDs purchased by the trust are not "securities," much less "covered securities," and it appears that Morgan Stanley concedes this point. The case law confirms that certificates of deposit, of the type at issue here, are not considered "securities" as that term is used in the Securities Acts. In Marine Bank v. Weaver, 455 U.S. 551, 102 S.Ct. 1220, 71 L.Ed.2d 409 (1982), the Supreme Court held that...