Magyery v. Transamerica Financial Advisors, Inc.
| Decision Date | 16 April 2004 |
| Docket Number | No. 3:03 CV 0777 AS.,3:03 CV 0777 AS. |
| Court | U.S. District Court — Northern District of Indiana |
| Parties | Michael MAGYERY, individually and for all others similarly situated, Plaintiff, v. TRANSAMERICA FINANCIAL ADVISORS, INC., Lawrence Hill and Hill & Associates, Inc. Defendants. |
Scott L. Starr, Logansport, Thomas R. Hamilton, South Bend, IN, for Plaintiff.
Alison G. Fox, Paul Fischer and James Jorden, Washington, DC, Paul J. Peralta, South Bend, IN, for deft. Transamerica.
Kevin M. O'Hagan, Chicago, IL, Michael W. Van Zalingen, Forest Park, IL, for defts Hill & Associates, Inc. and Hill.
This cause is before the Court on the Defendant's Motion to Dismiss pursuant to Federal Rule of Civil Procedure Rule 12(b)(6), and the Plaintiffs' Motion to Remand the action to State Court. Plaintiffs filed this litigation as a putative class action in state court under four state law theories: conversion; breach of contract; breach of fiduciary duty; and negligent supervision. The Defendants removed to federal court, alleging that Plaintiffs' state law claims are completely preempted by the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb(f) ("SLUSA"). Plaintiffs seek remand to state court alleging that SLUSA preemption does not apply to this litigation.
The issues have been briefed, and all appropriate replies and responses submitted. This Court heard oral arguments on the motions on March 3, 2004, and now rules as follows.
The following statement of facts is the Plaintiffs' version, which must be taken as true for purposes of the Motion to Dismiss. Defendant Transamerica Financial Advisors, Inc., is a brokerage firm, and Defendant Lawrence Hill is an agent for Transamerica with an office in Elkhart, Indiana. Pls' Mem. in Supp. at 1-2. Plaintiff Michael Magyery invested his retirement funds with Transamerica and Hill. Id. at 2. When Magyery opened his account, he signed an agreement on a standard, preprinted form provided by the Defendants. Id. at 3. This form contains statements which he claims create a binding contract with the Defendants that they would only buy or sell securities in Magyery's account with his express permission. Id. For example, the agreement states, "I appoint TFR (Transamerica Financial Resources) as my agent for the purposes of carrying out my directions with respect to the purchase or sale of securities." Id.
On September 21, 2001, "there was a lot of panic selling" because many analysts, including Hill, believed financial markets were poised for a dramatic downturn due to the September 11 tragedy. Id., citing Magyery Affidavit at ¶ 9. Hill believed he had to act swiftly to protect his clients, so on Friday, September 21, 2001, Hill reallocated funds in Magyery's account from several sub-accounts invested in the equities markets to the ASP Money Market sub-account. Id. The following Monday, instead of collapsing, the market improved. Id. at 5. Hill immediately reallocated Magyery's account back into the equities market, but by the end of the day, the indexes increased in value by four to five percent. Id.
Magyery claims that this unauthorized trading caused his retirement account to lose a substantial sum of money. In addition, he believes that Hill sold and repurchased the equity accounts of other clients, causing them to suffer losses. Therefore, on September 22, 2003, he filed a putative class action in Elkhart Superior Court on his own behalf and on behalf of other clients who suffered losses in connection with Hill's unauthorized trading, alleging breach of contract, conversion, breach of fiduciary duty, and negligent supervision, all State law causes of action. On October 21, 2003, the Defendants removed the case to federal court relying on the removal provision in SLUSA, 28 U.S.C. § 1441(b), and 15 U.S.C. 78bb(f)(1).
Jurisdiction is the key issue in all motions currently before the Court in this case. If the Plaintiffs' state law claims are preempted by SLUSA, they must be dismissed. If they are not preempted, this Court lacks jurisdiction, and the case must be remanded to state court. Therefore, the Court must determine first if this is the kind of claim that Congress intended to preempt as part of the overall remedial purpose of SLUSA.
A state court civil action may be removed to federal court under 28 U.S.C. § 1441(b) if the claim arises under federal law. Fedor v. Cingular Wireless Corp., 355 F.3d 1069, 1071 (7th Cir.2004), citing, Beneficial Nat. Bank v. Anderson, 539 U.S. 1, 123 S.Ct. 2058, 156 L.Ed.2d 1 (2003). However, under the "well-pleaded complaint rule", the plaintiff who has both state and federal claims may avoid federal court by limiting his or her complaint to only state law claims. Id. Under this rule, a case will not be removable if the complaint does not affirmatively allege a federal claim. Id. Even the availability of a federal defense to the state law claims does not provide a basis for removal. Id.
The Plaintiffs in this case carefully crafted their complaint to plead only state law claims. That would end the inquiry except that the well-pleaded complaint rule has an exception, where a federal statute so occupies the field that it completely preempts the state-law cause of action. Id. In that case, the claim, although pleaded in terms of state law, is in reality based on federal law, making the claim removable under Section 1441(b). Id., citing Beneficial, 123 S.Ct. at 2063.
In the 1990's, Congress enacted two statutes designed to provide relief to corporations from abuses in private securities fraud litigation. H.R. Conf. Rep. No. 105-803, 1998 WL 703964, see also, Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 107 (2nd Cir.2001), and Green v. Ameritrade, 279 F.3d 590, 595 (8th Cir.2002). The first of these, the Private Securities Litigation Reform Act of 1995 (PSLRA), U.S.C. §§ 77z-1, 78u-4, was enacted to curb "strike suits", lawsuits started to extract a sizeable settlement from companies that are forced to settle, regardless of the merits of the suit, simply to avoid the potentially bankrupting expense of litigation. Id.,see also, Green v. Ameritrade, 279 F.3d 590 (8th Cir.2002), and Burns v. Prudential Securities, 116 F.Supp.2d 917, 921 (N.D.Ohio 2001).
To accomplish its purpose of limiting meritless strike suits, the PSLRA contains heightened pleading requirements, mandatory staying of discovery pending motions to dismiss, and the creation of a "safe harbor" for certain forward looking statements. Green v. Ameritrade, 279 F.3d 590, 595, see also, Lander, 251 F.3d at 107; and Burns, 116 F.Supp.2d at 921. However, one immediate effect of the PSLRA was to drive many would-be class action plaintiffs to file their claims in state court, based on state law, in order to circumvent the strong requirements established by the statute. Id.
Congress responded by passing SLUSA, which makes federal courts the exclusive venue for class actions alleging a misrepresentation or omission of a material fact in connection with a covered security. See, H.R. Conf. Rep. No. 803 at 13; 15 U.S.C. §§ 77p(b)-(c): and 15 U.S.C. §§ 78bb(f)(1)(A). SLUSA provides:
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 a covered security;
15 U.S.C. §§ 77bb(f)(1)(A). In other words, Plaintiffs' state law claims are completely preempted under SLUSA if Defendants can establish four elements: (1) a "covered class action," (2) that is based on state law; (3) alleging a misrepresentation or omission of material fact, (4) "in connection with" the purchase or sale of a covered security. Green v. Ameritrade, 279 F.3d at 596.
The parties agree that this is a class action, and that it involves covered securities. The primary dispute is on the third element, whether there is a misrepresentation or omission of material fact. The parties' briefs contain some discussion of the "in connection with" element, but the Plaintiffs' Complaint is based on the illegal selling and then repurchasing of the funds in their equity accounts, therefore, the claims have some connection with the purchase or sale of covered securities. The issue is whether the Defendants made misrepresentation or omissions of material fact in connection with those sales.
In this case, the removal issue is dispositive on the question of jurisdiction, and on all pending motions. Because it was enacted in 1998, the case law is limited on the scope of SLUSA's preemptive reach, and the Seventh Circuit Court of Appeals has yet to rule on the issue. In cases from other circuits, the Eighth Circuit has considered the issue in Green v. Ameritrade, 279 F.3d 590 (8th Cir.2002). In Green, the district court held that SLUSA preempted the plaintiffs' state-law claims, and dismissed them with leave to file an amended complaint. Green, 279 F.3d at 598 n. 7. The plaintiffs' amended complaint had only one count, for breach of contract, with no references to fraud, misrepresentation, or omission. Id. The Eighth Circuit then ruled that the amended complaint was not preempted, and the district court's remand to state court was affirmed. Id. at 599.
In a case from the Second Circuit, Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., the Court examined SLUSA's statutory language and determined that SLUSA's "preemption" and "removal" provisions provide broad, but not unlimited, scope. Spielman, 332 F.3d 116, 123 (2nd Cir.2003)(emphasis in the original), citing 15 U.S.C. §§ 77p(b)-(c): and 15 U.S.C. §§ 78bb(f)(1)(A). Its scope is limited by the statutory requirements. The Second Circuit reasoned that, under SLUSA, securities fraud class...
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...Ongstad further argues that unauthorized trading, by itself, does not constitute securities fraud, citing Magyery v. Transamerica Fin. Advisors, Inc., 315 F.Supp.2d 954 (N.D.Ind.2004), and Burns v. Prudential Sec., Inc., 116 F.Supp.2d 917 (N.D.Ohio 2000). In each of those cases a single bro......