Romano v. Patrick
| Decision Date | 29 June 2010 |
| Docket Number | Docket No. 08-6187-cv,08-6190-cv. |
| Citation | 609 F.3d 512 |
| Parties | John D. ROMANO, Stanley J. Morrill, Richard V. Patrick, Plaintiffs-Appellants,v.Michael J. KAZACOS, Morgan Stanley & Co., Incorporated, Defendants-Appellees.William D. Lawton, Gerald G. Miller, Jr., Plaintiffs-Appellants,v.David Isabella, Morgan Stanley & Co., Incorporated, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
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Robert J. Pearl, Pearl Malarney Smith, P.C., Pittsford, NY, for Plaintiffs-Appellants William D. Lawton, Gerald G. Miller, Jr., John D. Romano, Stanley J. Morrill, and Richard V. Patrick.
Richard A. McGuirk, Nixon Peabody LLP, Rochester, NY, for Defendants-Appellees David Isabella, Michael J. Kazacos, and Morgan Stanley & Co. Incorporated.
Before B.D. PARKER, WESLEY, Circuit Judges, RESTANI, Judge. *
The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) precludes plaintiffs from filing certain class actions in state courts that allege fraud in connection with the purchase or sale of nationally traded securities. 15 U.S.C. § 78bb(f)(1). Plaintiffs-appellants in these consolidated appeals, who are Xerox and Kodak retirees, filed class action complaints in New York State Supreme Court, which purported to raise state law claims. They alleged that employees of Morgan Stanley & Co., Inc. misrepresented that if appellants were to retire early, their investment savings would be sufficient to support them through retirement. If SLUSA applies, appellants are precluded from bringing the actions in state court and defendants are entitled to remove them to federal court, where they are subject to dismissal. 15 U.S.C. § 78bb(f)(1). Defendants-appellees removed the actions to the United States District Court for the Western District of New York (Larimer J.), where appellants moved to remand the cases and defendants moved to dismiss them. After affording appellants an opportunity to amend their complaints to state federal claims, an opportunity appellants declined, the District Court denied the motions to remand and dismissed the actions. We find that SLUSA's preclusion provision applies and, therefore, we affirm.
The following facts are taken from appellants' amended complaints unless otherwise noted. Appellants William D. Lawton and Gerald G. Miller, Jr. were both longtime employees of Xerox. Xerox employees who were eligible for retirement could elect to receive either lifetime monthly retirement benefits or a one-time lump sum retirement benefit. Appellee David Isabella was a Senior Vice-President of Morgan Stanley, a “retirement specialist,” and a former Xerox employee. At various times between 1994 and 2001, Lawton and Miller consulted with Isabella about retirement. Lawton and Miller allege that during these meetings, Isabella provided retirement but not investment advice, performed various calculations, and advised them that they had sufficient savings to retire early and comfortably. Specifically, Lawton and Miller allege that Isabella advised them that if they could live on annual withdrawals of approximately ten percent of their retirement savings, they could retire early without exhausting their savings' principal, a concept appellants refer to as the “retirement income premise.” Lawton and Miller further allege that they elected early retirement in reliance on Isabella's advice, leaving behind job security and substantial benefits. Both elected to take a lump sum retirement benefit, which they invested, about eighteen months after they first met with Isabella, in various securities through Morgan Stanley. Subsequently, the value of their portfolios dropped precipitously, resulting in substantially reduced monthly withdrawals and significant financial hardship.
Lawton and Miller filed (and subsequently amended) a putative class action against Isabella and Morgan Stanley. The amended complaint asserted various state law causes of action, including negligence, breach of fiduciary duty, negligent misrepresentation, and breach of contract, as well as an unfair and deceptive trade practices claim under Section 349 of the New York General Business Law. N.Y. Gen. Bus. L. § 349 (McKinney 2010). The amended complaint defined the putative class as Xerox employees who received similar retirement advice from Isabella and alleged that the putative class's size was between 100 to 300 or more persons. Morgan Stanley and Isabella, relying on SLUSA, removed the case to federal court, and moved to dismiss. Lawton and Miller cross-moved to remand on the ground that they had not asserted federal claims.
The companion case involving Kodak employees presents a roughly similar picture. Kodak employees who reach retirement are eligible to receive retirement benefits in the form of either a fixed monthly annuity or a one-time lump sum benefit. Employees who elect to retire early forfeit their employment, job benefits, and annual salary. Appellants John D. Romano, Stanley J. Morrill, and Richard V. Patrick (the “Romano appellants”) are former longtime Kodak employees who, in connection with their retirement planning, consulted with Michael J. Kazacos, a Senior Vice President, financial consultant, and retirement specialist at Morgan Stanley.
According to the Romano appellants' amended complaint, Kazacos represented that he was an expert on Kodak's retirement benefits and, starting in 1990, hosted free seminars offering retirement advice. The Romano appellants allege that, during these seminars as well as during individual appointments, Kazacos advised them that they had sufficient assets to retire and encouraged them to retire early and take lump sum retirement benefits. The Romano appellants insist that, during these meetings, Kazacos gave no investment advice and did not mention or recommend specific investment vehicles or asset allocation strategies. The Romano appellants each elected to retire early and take a lump sum retirement benefit, which they placed with Morgan Stanley for investment. As was the case with Lawton and Miller, the Romano appellants' retirement accounts suffered “disastrous” declines in value, allegedly because Kazacos's retirement advice was inappropriate and “had a significant probability of failure.” Because of this drop in value, the Romano appellants allege that their incomes and standards of living have fallen markedly. Also, a number of class members allege that they have been required to leave retirement and seek new employment.
The Romano appellants filed (and subsequently amended) a putative class action against Morgan Stanley and Kazacos in New York State Supreme Court alleging common law claims of negligence, breach of fiduciary duty, negligent misrepresentation, breach of contract, and violations of Section 349 of New York's General Business Law, and seeking as damages lost wages and lost employment benefits. The amended complaint defined the class as “persons who were Kodak employees and who received from the Defendants retirement advice, projections of income, and representations as to sustainable retirement income distributions from their retirement savings that were material to the Plaintiffs” and describes the class as including 100 persons to 1000 persons “or more.” Morgan Stanley removed the action to federal court, where it was consolidated with the Lawton action, and moved to dismiss pursuant to SLUSA and Rule 12(b)(6). At the same time, appellants moved to remand for lack of federal jurisdiction.
While considering defendants' motions to dismiss and appellants' motions to remand, the District Court concluded that it could “look beyond the face of the complaint” to determine whether SLUSA applies. Upon doing so, the District Court ruled that appellants' state law actions were “based on misrepresentations or omissions of material facts” since the “foundation of the retirement and financial planning services centered upon certain misrepresentations and certain concealments.” The District Court also ruled that although “plaintiffs say [their] claims are about bad retirement advice and tax planning,” and despite a lapse in time between defendants' alleged fraud and appellants' purchases of covered securities, defendants' alleged misconduct “coincided” with appellants' securities purchases under Merrill Lynch, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006). On this basis, the District Court denied the motions to remand, held that SLUSA preempted both actions, and dismissed them. These appeals followed. We review de novo both the District Court's denial of appellants' motions to remand and its grant of defendants' motions to dismiss for failure to state a claim under Rule 12(b)(6). Pac. Capital Bank, N.A. v. Connecticut, 542 F.3d 341, 351 (2d Cir.2008); Ortiz v. McBride, 380 F.3d 649, 653 (2d Cir.2004).
17 C.F.R. § 240.10b-5. Private rights of action are, of course, available to enforce Rule 10b-5. See
Dabit, 547 U.S. at 79, 126 S.Ct. 1503. In 1995, in response to perceived abuses of the class-action vehicle...
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