Missouri ex rel. Carnahan v. Stifel, Nicolaus & Co., Inc.

• Decision Date: 21 July 2009
• Docket Number: No. 4:09-CV-560 CAS.,4:09-CV-560 CAS.
• Citation: 648 F.Supp.2d 1095
• Court: U.S. District Court — Eastern District of Missouri
• Parties: State of MISSOURI, ex rel. Secretary of State Robin CARNAHAN and the Missouri Attorney General, Plaintiff, v. STIFEL, NICOLAUS & COMPANY, INCORPORATED, et al., Defendants.

Page 1095

648 F.Supp.2d 1095

State of MISSOURI, ex rel. Secretary of State Robin CARNAHAN and the Missouri Attorney General, Plaintiff, v. STIFEL, NICOLAUS & COMPANY, INCORPORATED, et al., Defendants.

No. 4:09-CV-560 CAS.

United States District Court, E.D. Missouri, Eastern Division.

July 21, 2009.

Douglas M. Ommen, John R. Phillips, Katie D. Whitman, Attorney General of Missouri, Jefferson City, MO, for Plaintiff.

Jeffrey J. Kalinowski, Adam S. Hochschild, Richard H. Kuhlman, Husch

Blackwell Sanders, LLP, David B. Cosgrove, Richard D. Worth, Cosgrove Law, LLC, St. Louis, MO, for Defendants.

MEMORANDUM AND ORDER

CHARLES A. SHAW, District Judge.

This removed matter is before the Court on plaintiff the State of Missouri, ex rel. Secretary of State Robin Carnahan and the Missouri Attorney General's motion to remand. Defendants oppose the motion. For the following reasons, the Court concludes that plaintiff's motion to remand should be granted.

Background.

This action was originally filed by plaintiff the State of Missouri in the Circuit Court of Franklin County, Missouri on March 12, 2009.¹ In the petition, plaintiff seeks damages on behalf of customers who purchased auction rate securities from the defendants.

On April 13, 2009, defendants removed the action to this Court pursuant to 28 U.S.C. §§ 1331, 1441, 1446, and the applicable provisions of the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), including 15 U.S.C. §§ 78bb(f) and 77p(c). In support of the Notice of Removal, defendants state that the action is a "covered class action" brought in a state court involving a "covered security" and is therefore removable under SLUSA § 77p(c).

Legal Standard.

Removal statutes are strictly construed, and any doubts about the propriety of removal are resolved in favor of state court jurisdiction and remand. See In re Business Men's Assurance Co. of America, 992 F.2d 181, 183 (8th Cir.1993); McHugh v. Physicians Health Plan, 953 F.Supp. 296, 299 (E.D.Mo.1997). The party invoking jurisdiction bears the burden of proof that all prerequisites to jurisdiction are satisfied. See Hatridge v. Aetna Cas. & Sur. Co., 415 F.2d 809, 814 (8th Cir.1969).

Discussion.

The SLUSA was passed in 1998 to close a loophole in the Private Securities Litigation Reform Act of 1995 ("PSLRA"). To discourage frivolous litigation, the PSLRA created heightened pleading requirements for class actions alleging fraud in the sale of securities. See 15 U.S.C. § 78u-4. Class action plaintiffs, however, avoided these stringent procedural requirements by bringing suit in state rather than federal court. See generally Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 107-07 (2d Cir.2001). In passing the SLUSA, Congress found that "to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the [PSLRA], 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." Pub.L. No. 105-353 §§ 2(5) (emphasis added).

The SLUSA makes federal court the exclusive venue for private party class actions alleging fraud in the sale of certain securities and mandates that such class actions be governed exclusively by federal law. See 15 U.S.C. § 77p(b)-(c). Subsection § 77p(b), or the "preclusion section," precludes any private party class action alleging fraud in the sale of securities based on the statutory or common law of the state. Both sides agree that this class action was not brought by a private party and therefore is not precluded under subsection § 77p(b). See Pl. Mem. at 9; Def. Resp. at 3. Subsection § 77p(c), or the "removal section," provides for the removal to federal court of any covered class action involving a covered security as set forth in the preclusion section. These subsections state:

(b) 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 [fraud in the sale of a covered security].

(c) Removal of covered class actions. 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).

Importantly for this case, subsections (d) and (e) preserve certain actions, including those brought by a state or a political subdivision of a state:

(d) Preservation of certain actions. ... (2) State actions. (A) In general. Notwithstanding any other provision of this section, nothing in this section may be construed to preclude a State or political subdivision thereof ... from bringing an action involving a covered security on its own behalf....

(e) Preservation of State jurisdiction. The securities commission (or any agency or office performing like functions) of any State shall retain jurisdiction under the laws of such State to investigate and bring enforcement actions.

In its motion to remand, plaintiff cites to subsections (d) and (e) to support its position that this state enforcement action brought by the state in state court under state statutory law is not removable to federal court. In its reply brief, plaintiff bolsters its argument by citing a United States Supreme Court case, Kircher v. Putnam Funds Tr., 547 U.S. 633, 126 S.Ct. 2145, 165 L.Ed.2d 92 (2006), in which the Supreme Court stated the only cases removable to federal court under § 77p(c) are those cases precluded under § 77p(b).

Defendants' argument centers upon a distinction they make between dismissal or preclusion and removal.² Defendants state that removal provision of subsection (c) is not limited to those actions that are precluded by subsection (b). With respect to subsections (d) and (e), defendants argue the language in § 77p(d)(2) provides that this action is not precluded by federal law, but this subsection has nothing to do with whether this action is removable to federal court. Further, defendants argue subsection (e) does not provide for state court jurisdiction, but only the jurisdiction of the state's securities commission to investigate and bring enforcement actions against defendants.

Defendants' argument simply does not withstand scrutiny. The SLUSA expressly preserves the right of the state to retain jurisdiction under the laws of the state to investigate and bring enforcement actions. See 15 U.S.C. § 77p(e). Missouri statutory law provides for civil enforcement actions to be maintained by the commissioner of securities in the "circuit court of any county of the state." § 409.6-603(a). The civil enforcement provision of Missouri Revised Statute § 409.6-603 provides:

(a) If the commissioner believes that a person has engaged, is engaging, or is about to engage in an act, practice, or course of business constituting a violation of this act or a rule adopted or order issued under this act ... the commissioner may maintain an action in the circuit court of any county of the state ... to enjoin the act, practice, or course of business and to enforce compliance with this act or a rule adopted or order issued under this act.

Mo.Rev.Stat. § 409.6-603(a).

Defendants state that nothing by virtue of their removal "denies the State of Missouri jurisdiction to `investigate' defendants or to `bring enforcement actions' against defendants." Under the laws of the State of Missouri, however, the commissioner of securities is expressly permitted to bring an action in state court for securities fraud. Defendants' removal of this action to federal court, therefore, denies the State of Missouri its right under the laws of the State of Missouri to bring enforcement actions in state court.³

The Supreme Court removed any doubt about whether this case is removable in Kircher v. Putnam Funds Tr., 547 U.S. 633, 126 S.Ct. 2145, 165 L.Ed.2d 92, cited by plaintiff in its reply brief. In Kircher, the Court addressed the scope of appellate review over a remand decision where defendants had removed under the SLUSA. In finding that the district court's remand orders were not appealable, the Court directly addressed the issue raised by defendants—whether removal jurisdiction under subsection (c) is limited to cases precluded under subsection (b). The Supreme Court accepted the "straightforward reading" of subsections (b) and (c), stating "removal and jurisdiction to deal with removed cases is limited to those precluded by the terms of subsection (b)" Id. at 643, 126 S.Ct. 2145. Stated another way, as plaintiff has, a covered action is removable only if it is precluded. As the Supreme Court states further: "[R]emoval jurisdiction under subsection (c) is understood to be restricted to precluded actions defined by subsection (b)" and "[i]f the action is not precluded, the federal court likewise has no jurisdiction to touch the case on the merits, and the proper course is to remand to the state court." Id. at 643-44, 126 S.Ct. 2145. The Supreme Court's interpretation of the SLUSA's preclusion and removal provisions could not be more clear: only those cases precluded by the terms of subsection (b) are removable to federal court.

In light of the Supreme Court's opinion in Kircher, defendants would be hard pressed to argue that this case, which they concede is not precluded under subsection (b), is removable under subsection (c). Defendants moved for leave to file a surresponse to address this issue, which the Court granted. Quite surprisingly, defendants argued that the Supreme Court did not hold that an action must be precluded under the SLUSA to be removable and that plaintiff has "misread[ ]" and "misapplied]" Kircher. See Surresp. at 4. Defendants do not explain their interpretation of Kircher and how plaintiff has misread...