Lippitt v. Raymond James Financial Services, Inc.

• Decision Date: 25 August 2003
• Docket Number: No. 01-17049.,01-17049.
• Citation: 340 F.3d 1033
• Parties: John LIPPITT, on behalf of the general public, Plaintiff-Appellant, v. RAYMOND JAMES FINANCIAL SERVICES, INC.; Merrill Lynch, Pierce, Fenner & Smith, Incorporated; First Union Securities, Inc.; Salomon Smith Barney, Inc.; Painewebber Incorporated; A.G. Edwards & Sons, Inc.; Edward D. Jones & Co., L.P.; Providian Financial; Prudential Securities, Inc.; E Trade Group Inc.; U.S. Bancorp Piper Jaffray, Inc.; Morgan Stanley Dean Witter & Co., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

340 F.3d 1033

John LIPPITT, on behalf of the general public, Plaintiff-Appellant, v. RAYMOND JAMES FINANCIAL SERVICES, INC.; Merrill Lynch, Pierce, Fenner & Smith, Incorporated; First Union Securities, Inc.; Salomon Smith Barney, Inc.; Painewebber Incorporated; A.G. Edwards & Sons, Inc.; Edward D. Jones & Co., L.P.;

Providian Financial; Prudential Securities, Inc.; E Trade Group Inc.; U.S. Bancorp Piper Jaffray, Inc.; Morgan Stanley Dean Witter & Co., Defendants-Appellees.

No. 01-17049.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted January 14, 2003 — San Francisco, California.

Submission Withdrawn May 12, 2003.

Resubmitted August 18, 2003.

Filed August 25, 2003.

As Amended September 5, 2003.

Second Amendment September 22, 2003.

George S. Trevor and James V. Weixel, Jr., Trevor & Weixel LLP, Corte Madera, California, Scot D. Bernstein, Law Offices of Scot D. Bernstein, Mather Field, California, and Tracy Pride Stoneman, Tracy Pride Stoneman, P.C., Westcliffe, Colorado, for the plaintiff-appellant.

William F. Alderman, Orrick, Herrington & Sutcliffe, San Francisco, California, for defendant-appellee Salomon Smith Barney, Inc.; James A. Hughes, Sullwold & Hughes, San Francisco, California, for defendants-appellees Raymond James Financial Services, Inc. and U.S. Bancorp Piper Jaffray, Inc.; Gregory P. Lindstrom, Joshua Holian, Latham & Watkins, San Francisco, California, for defendant-appellee Morgan Stanley Dean Witter & Co.

Appeal from the United States District Court for the Northern District of California; Vaughn R. Walker, District Judge, Presiding. D.C. No. CV-01-00748-VRW.

Before: Mary M. Schroeder, Chief Judge, Alfred T. Goodwin and Richard R. Clifton, Circuit Judges.

ORDER

The parties' joint motion for corrections to opinion is GRANTED. The opinion filed August 25, 2003, and amended September 5, 2005, slip op. 12979, is further amended as follows:

1. Slip op. at 12984, replace the first two words at the top of page "a security" to "an instrument".

2. Slip op. at 12989, replace the last sentence of the last paragraph beginning: "Because callable CDs are vulnerable...." with "Accordingly, callable CDs may not be suitable for elderly investors looking for stable, fixed income instruments with short maturity periods."

OPINION

GOODWIN, Circuit Judge:

John Lippitt originally sued a number of brokerage firms in state court, praying for relief under California's Unfair Competition Law ("UCL") that was unavailable in federal court. He now appeals the district court's denial of his motion to remand the removed case back to state court. For the reasons set forth below, we reverse the decision to retain the case as exclusively within federal jurisdiction.

I. BACKGROUND

A. Lippitt's Complaint

Lippitt has nominated himself as a private attorney general to bring an action on behalf of the general public to challenge the marketing by national brokerage firms ("Defendants")¹ of an instrument known as a "callable certificate of deposit" or "callable CD." The complaint scrupulously avoided any pretense of complying with Fed.R.Civ.P. 8, which calls for a short and plain statement of the claim. Instead, it expended some 11 pages of prolixity in an effort to describe a cause of action under California's Unfair Competition Law, codified at Cal. Bus. & Prof.Code § 17200 et seq. Defendants removed the case asserting that the district court had original jurisdiction under 28 U.S.C. § 1331 and exclusive jurisdiction under § 27 of the 1934 Securities Exchange Act (the "Exchange Act" or the "Act").

In their removal papers, Defendants argued that Lippitt's UCL claim sought to implement and enforce rules and regulations promulgated by the New York Stock Exchange (N.Y.SE) pursuant to the self-regulatory directive of the Exchange Act. Because Lippitt had no private right of action in federal court for the violation of an NYSE rule or regulation, see infra, removal of his complaint to federal court, if not remanded to state court, would result in a quick dismissal of the action as soon as requested by the Defendants.

The unchallenged removal of an arguably viable state law action from a court where some form of recovery is theoretically available, to a federal district court where a private remedy is categorically impossible results in the case being dismissed. This state of affairs exists because the Securities Exchange Act, which regulates the securities industry, expressly denies a remedy in an action brought by a private class representative to enforce NYSE rules, the judicial supervision of which resides exclusively in federal agencies and courts. Because the laws of California do provide remedies for the kind of fraud and mendacity alleged by Lippitt's complaint, he contends that the district court has denied him his day in court.

Within the same legislative scheme Congress enacted two subsections which, if read literally, create tension between each other. Section 27 of the Act, now codified at 15 U.S.C. § 78aa, provides in relevant part:

The district courts of the United States... shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder.²

While we agree that any claim that properly falls within the scope of § 27 is necessarily federal in character, Lippitt asserts that his claim falls outside the scope of § 27, and squarely within § 28, codified at 15 U.S.C. § 78bb, which provides in relevant part:

[T]he rights and remedies provided by this chapter shall be in addition to any and all other rights and remedies that may exist at law or in equity ... Except as otherwise specifically provided in this chapter, nothing in this chapter shall affect the jurisdiction of the securities commission (or any agency or officer performing like functions) of any State over any security or any person insofar as it does not conflict with the provisions of this chapter or the rules and regulations thereunder....

On its face, § 28 preserves both common law and statutory authority over securities matters and thus reflects Congressional recognition of state competence in the securities field. See Murphy v. Gallagher, 761 F.2d 878, 885 (2d Cir.1985) (recognizing that § 28 reflects Congress' cognizance of "the long-established state securities acts and the well-developed common law of fraud"). In contrast, Section 27 "confers exclusive jurisdiction upon the federal courts for suits brought to enforce the Act or rules and regulations promulgated thereunder." Matsushita Elec. Industrial Co. v. Epstein, 516 U.S. 367, 370, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996).

As both parties correctly recognize, the Exchange Act does not completely preempt or occupy the field of securities regulation. See id. at 383, 116 S.Ct. 873 ("Congress plainly contemplated the possibility of dual litigation in state and federal courts relating to securities transactions."). Because the Act contains an explicit savings clause at § 28, and an exclusive federal jurisdiction clause at § 27, we arrive at the following question: Does § 27 trump § 28, or vice versa, or can they both be given effect?

Both parties agree that the Exchange Act saves existing state laws that provide private remedies to enforce a state's own laws to protect its citizens from conduct that is actionable under state law. Both parties also agree that federal courts have exclusive jurisdiction to enforce the rules authorized by federal law. Disagreement arises from the jurisdictional effect of commencing an action in state court to enforce state law. Here, the complaint alleges in a string of wholly needless epithets, state-proscribed misconduct. The alleged misconduct overlaps with conduct that is likewise proscribed by NYSE rules, the enforcement of which is exclusively delegated to the NYSE and the SEC. Enforcement is the key word here. Lippitt seeks only to enforce state law. He seeks no enforcement of any NYSE rule or regulation.

While Lippitt contends that his complaint does not assert any rights under NYSE rules or regulations, and that he is not seeking to enforce those rules, his complaint unnecessarily describes the alleged conduct of the defendants in terms that track almost verbatim the misdeeds proscribed by NYSE rules. This, of course, prompted the defendants to "federalize" the case by removal.

The able and experienced district court denied Lippitt's motion to remand his case to state court on the ground that § 27 created exclusive federal jurisdiction over the subject matter of the claim. Lippitt then voluntarily dismissed his case with prejudice, obtaining an appealable final order. We have appellate jurisdiction pursuant to 28 U.S.C. § 1291. See Concha v. London, 62 F.3d 1493, 1507 (9th Cir.1995) ("[P]laintiffs may appeal from a voluntary dismissal with prejudice, at least where the plaintiff is not acting pursuant to a settlement agreement intended to terminate the litigation.") (emphasis in original).

B. Self-Regulation By the NYSE Under the 1934 Exchange Act

The Exchange Act establishes a broad regulatory regime over issuers, markets, and market professionals. Congress intended the Act to deter fraud and manipulative practices in the securities markets, and thus established full disclosure requirements for information material to investment decisions and administrative avenues for compensating defrauded investors.

While the Act provides for direct market oversight by the Securities Exchange Commission, the day-to-day trading activities of market professionals, like Defendants, are overseen by "self-regulatory organizations" such as the New York Stock Exchange (NYSE)³ or the National Association of Securities Dealers (NASD). See 15 U.S.C. § 78c(a)(26); see also Barbara v. New York Stock Exchange, Inc., 99 F.3d 49, 51 (2d Cir.1996) (detailing...