Ongstad v. Piper Jaffray & Co.
| Decision Date | 08 September 2008 |
| Docket Number | No. 20070260.,20070260. |
| Citation | 755 N.W.2d 877,2008 ND 167 |
| Court | North Dakota Supreme Court |
| Parties | Astrid ONGSTAD, individually and as Trustee of the Ongstad Family Trust, and on behalf of themselves and all others similarly situated, Plaintiffs and Appellants v. PIPER JAFFRAY & CO., Defendant and Appellee. |
Craig A. Boeckel (appeared), Pagel Weikum Law Firm, Bismarck, ND; Barbara Quinn Smith (argued), Maddox, Hargett & Caruso, PC, Cleveland, OH; Mark E. Maddox (on brief) and Thomas K. Caldwell (on brief), Maddox, Hargett & Caruso, PC, Fishers, IN, for plaintiffs and appellants.
Todd Ervin Zimmerman (appeared), Fargo, ND; George M. Garvey (argued), Munger, Tolles & Olson, LLP, Los Angeles, CA; James K. Langdon (argued) and Kristina W. Carlson (on brief), Dorsey & Whitney, Minneapolis, MN, for defendant and appellee.
[¶ 1] Astrid Ongstad, individually and as trustee of the Ongstad Family Trust, appeals from a district court order amending a prior order and decertifying the class in Ongstad's action against Piper Jaffray & Co. ("Piper Jaffray"). We affirm, concluding Ongstad's attempted class action against Piper Jaffray on state law claims is preempted by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA").
[¶ 2] Ongstad had an individual brokerage account with Piper Jaffray. She also served as trustee of the Ongstad Family Trust, which had a separate brokerage account with Piper Jaffray. Ongstad alleges that in January 2004 her broker at Piper Jaffray sold two mutual fund investments in her individual account and used the proceeds to purchase an annuity. Ongstad claims she did not authorize these transactions or give Piper Jaffray authority to exercise discretion in the account. She further alleges that in March 2004, she gave $35,000 to her broker to purchase an annuity in her individual account. She claims her broker instead diverted $18,000 of those funds to the Trust account to pay premiums on the previously purchased annuity and to purchase a municipal bond. The remaining $17,000 was used to purchase a municipal bond in Ongstad's individual account. Again, Ongstad alleges she did not authorize these transactions. Ongstad claims that these incidents are not isolated, but that Piper Jaffray has engaged in a wide-spread pattern of unauthorized transactions in customer accounts in its Bismarck, Fargo, and Grand Forks offices.
[¶ 3] Ongstad also claims that Piper Jaffray improperly reported one of the unauthorized trades in her accounts as "unsolicited." A transaction must be marked on the trade confirmation as solicited if the broker has initiated or solicited the transaction, or has provided information about the security purchased. A transaction is to be reported as unsolicited only if it was wholly initiated by the client. Transactions reported as solicited are subject to greater supervisory scrutiny and review. Piper Jaffray and its brokers have previously been sanctioned by the North Dakota Securities Commissioner for engaging in unauthorized transactions in customer accounts and improperly reporting the transactions as unsolicited when the clients had not initiated the transactions.
[¶ 4] Ongstad brought this class action on behalf of herself and all other similarly situated Piper Jaffray customers in North Dakota, alleging breach of contract, breach of fiduciary duty, conversion, and negligent supervision. The proposed class consisted of all individuals who maintained brokerage accounts with Piper Jaffray in its Bismarck, Fargo, or Grand Forks offices and whose securities had been traded without authorization after October 1, 1999.
[¶ 5] The district court initially certified the class. Piper Jaffray moved to alter or amend the court's order, arguing that Ongstad's claims were preempted by SLUSA. The district court concluded SLUSA preempted the class action and entered an order decertifying the class. Ongstad appeals, alleging SLUSA does not preempt her attempted class action.
[¶ 6] The district court had jurisdiction under N.D. Const. art. VI, § 8, and N.D.C.C. § 27-05-06. The appeal was timely under N.D.R.App.P. 4(a). This Court has jurisdiction under N.D. Const. art VI, §§ 2 and 6, N.D.C.C. § 28-27-02, and N.D.R.Civ.P. 23(e)(4).
[¶ 7] The dispositive issue presented on appeal is whether Ongstad's class action is barred by the preemption provision in SLUSA. SLUSA precludes class actions based upon state-law claims in cases involving securities fraud:
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; 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.
15 U.S.C. § 78bb(f)(1). For purposes of this provision, "covered class action" is defined in 15 U.S.C. § 78bb(f)(5)(B):
The term "covered class action" means —
(I) damages are sought on behalf of more than 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, predominate over any questions 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
(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.
[¶ 8] SLUSA was enacted in response to increasing attempts by plaintiffs to avoid the more stringent pleading and procedural requirements under federal securities fraud law by bringing state-law based class actions in state courts. In Rowinski v. Salomon Smith Barney, Inc., 398 F.3d 294, 298-99 (3d Cir.2005), the court outlined the historical underpinnings of SLUSA:
In 1995, Congress enacted the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4 et seq. ("PSLRA"), to curb abuses in private class action securities litigation. See H.R. Conf. Rep. No. 104-369, at 32-37[, 104th Cong., 1st Sess.] (1995), reprinted in 1995 U.S.C.C.A.N. [U.S.Code Cong. & Admin.News] 730, 730-32. The PSLRA implemented a host of procedural and substantive reforms, including "more stringent pleading requirements to curtail the filing of meritless lawsuits." In re Advanta Corp. Sec. Litig., 180 F.3d 525, 532 (3d Cir.1999) (quoting H.R. Conf. Rep. No. 104-369, at 37).
By 1998, Congress concluded that plaintiffs were circumventing the requirements of the PSLRA by filing private securities class actions in state rather than federal court. SLUSA was designed to close this perceived loophole by authorizing the removal and federal preemption of certain state court securities class actions. See 15 U.S.C. § 78a (). As the Senate Banking Committee Report explained, Congress envisioned a broad interpretation of SLUSA to ensure the uniform application of federal fraud standards. S.Rep. No. 105-182, [105th Cong., 2nd Sess. 1998] available at 1998 WL 226714, *8 (Leg. Hist.) ("[I]t remains the Committee's intent that the bill be interpreted broadly to reach mass actions and all other procedural devices that might be used to circumvent the class action definition.")
SLUSA preempts, inter alia, covered class actions alleging "a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security." 15 U.S.C. § 78bb(f)(1)(A). This language mirrors existing federal securities law under § 10(b) and Rule 10b-5 of the 1934 Act. See 15 U.S.C. § 78j(b) (); 17 C.F.R. § 240.10b-5 (2004) ().
[¶ 9] A party seeking to invoke application of federal preemption under SLUSA must show that: (1) the action is a "covered class action" under the Act; (2) the action purports to be based upon state law; (3) the action alleges the defendant misrepresented or omitted a material fact, or used or employed a manipulative or deceptive device or contrivance; and (4) the action alleges the defendant's misrepresentations, omissions, manipulations, or deceptions were made in connection with the purchase or sale of a covered security. E.g., Sofonia v. Principal Life Ins. Co., 465 F.3d 873, 876 (8th Cir.2006). Ongstad challenges only the third prong of this four-part test, arguing that her complaint did not allege a "manipulative or deceptive device or contrivance" in connection with the sale or purchase of a covered security.
[¶ 10] The fact that Ongstad's complaint does not expressly use terms like "fraud," "misrepresentation," "deception," or "deceptive device" is not determinative of SLUSA's application. Federal courts construing SLUSA have consistently held that they will look to the actual nature of the conduct alleged and that plaintiffs may not avoid SLUSA's preemptive effect by creative or artful pleading. For example,...
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