State of W. Va. v. Morgan Stanley & Co. Inc., Civ. A. No. 2:89-1463.

• Decision Date: 19 July 1990
• Docket Number: Civ. A. No. 2:89-1463.
• Citation: 747 F. Supp. 332
• Court: U.S. District Court — Southern District of West Virginia
• Parties: STATE OF WEST VIRGINIA, Plaintiff, v. MORGAN STANLEY & CO. INCORPORATED; Salomon Brothers, Inc.; and Goldman, Sachs & Co., Defendants.

747 F. Supp. 332

STATE OF WEST VIRGINIA, Plaintiff, v. MORGAN STANLEY & CO. INCORPORATED; Salomon Brothers, Inc.; and Goldman, Sachs & Co., Defendants.

Civ. A. No. 2:89-1463.

United States District Court, S.D. West Virginia, Charleston Division.

July 19, 1990.

Roger W. Tompkins, Atty. Gen., Thomas J. Gillooly, Deputy Atty. Gen., State of W.Va., Rudolph L. DiTrapano, Rebecca A. Baitty, Charleston, W.Va., Mary Lee Wolff, Memphis, Tenn., for plaintiff.

Stephen G. Jory, Elkins, W.Va., Davis, Polk & Wardwell, New York City, Robert B. King, Charleston, W.Va., Douglas Liebhafsky, Ralph M. Levene, New York City, John C. Palmer, IV, Charleston, W.Va., Sullivan & Cromwell, New York City, for defendants.

MEMORANDUM ORDER

COPENHAVER, District Judge.

This matter is before the court on the plaintiff's motion to remand the above-styled civil action to the Circuit Court of Kanawha County, West Virginia.

I. The Case

Plaintiff originally commenced this action on October 23, 1989, in the Circuit Court of Kanawha County, West Virginia. An amended complaint was filed on November 1, 1989.¹ Defendants Morgan Stanley and Salomon are citizens of Delaware and New York, both being Delaware corporations with principal places of business in New York. Defendant Goldman Sachs is not a citizen of West Virginia, being a New York limited partnership with its principal place of business in New York and none of its general partners residing in the State of West Virginia.²

Plaintiff's complaint alleges violations of sections 32-1-101 and 32-4-410(a)(2) and (b) of the West Virginia Securities Act; violation of section 12-6-12 of the West Virginia Investment Management Law; breach of common law fiduciary duties; common law fraud; common law constructive fraud; common law civil conspiracy; and negligence by all defendants. The complaint also alleges violation of section 12(2) of the Securities Act of 1933 by defendants Morgan Stanley and Goldman Sachs. The action is brought on the State's own behalf and "as parens patriae on behalf of its citizens and of those political subdivisions located within the State harmed by the acts of the Defendants." Complaint, ¶ 1.

By way of relief, plaintiff seeks compensatory, consequential and punitive damages in an unspecified amount in excess of $100,000,000. Id. at ¶ 45. Defendants have brought counterclaims, alleging that in the event they are found liable to the State and/or the Board of Investments, as its instrumentality or alter ego, they are entitled to a setoff or recovery of profits realized on similar trading transactions which are not a subject of this action. While the other defendants have not placed a dollar value on the past profits, defendant Salomon contends that it is not less than $150 million.

On November 22, 1989, defendants removed the action to this court pursuant to Title 28, United States Code, Section 1441, on the basis of the diversity provisions of Title 28, United States Code, Section 1332. Defendants' removal petition asserts that the West Virginia State Board of Investments, rather than the State itself, is the real party in interest in this action and that the Board, as a "body corporate," is a citizen of West Virginia for purposes of diversity jurisdiction. Defendants agree that Title 15, United States Code, Section 77v(a), provides that claims properly brought in a state court under the 1933 Securities Act are not removable. However, defendants assert that section 77v(a) does not preclude removal of the entire action when the separate and independent claim provisions of section 1441(c) of the removal statute are met. Alternatively, defendants contend that the 1933 Securities Act claims are sham claims interposed for the purpose of thwarting removal and that completely baseless 1933 Act claims do not bar removal.

Plaintiff seeks to remand this action to the Circuit Court of Kanawha County, asserting that this court lacks subject matter removal jurisdiction. First, plaintiff denies defendants' contention that the 1933 Securities Act claim is a sham claim and asserts that section 77v(a) of the 1933 Act precludes federal question removal jurisdiction. Second, plaintiff asserts that the State itself is the real party in interest, with the Board acting merely as a conduit for investing State funds. In addition, plaintiff contends that even if the Board is the real party in interest, it is an arm or alter ego of the State, and, like the State, not a "citizen" of any state for diversity purposes. Consequently, the court would lack removal jurisdiction on diversity grounds. Finally, plaintiff contests defendants' position that the action is removable under the separate and independent claim provision of section 1441(c). Plaintiff asserts that none of the claims are removable if sued on alone and, even if they were, they are not "separate and independent."

II. Background

By enactment of the Investment Management Law, W.Va.Code §§ 12-6-1 through 12-6-17 (1985 Repl.Vol. & 1989 Cum. Supp.), the West Virginia Legislature created the West Virginia Board of Investments for the purpose of "increasing the investment return" on funds belonging to the State and its political subdivisions. § 12-6-1. At all relevant times, the Board consisted of the governor, the auditor, and the treasurer of the State.³ § 12-6-3; Complaint ¶ 10. The Board is empowered generally, inter alia, to engage in transactions involving the purchase and sale of securities. § 12-6-5. In particular, the Board is empowered to "consolidate and manage moneys, securities and other assets" of a consolidated investment fund consisting of state funds (hereinafter, the "state account") and funds from political subdivisions choosing to participate in the common investment (hereinafter, the "local government account"). §§ 12-6-5(11), 12-6-8-(b). The Board is authorized to combine the state and local government accounts "for the common investment of the consolidated fund on an equitable basis." § 12-6-8(b).

Each unit of state government is authorized to make monies available to the Board for deposit in the state account, § 12-6-8(c), and, with a few exceptions, the Board is the sole agency for the investment of state funds, § 12-6-13. Political subdivisions of the state are authorized to enter into agreements with the Board for the investment of their monies. § 12-6-8(d). Costs and expenses of the Board are chargeable on a pro rata basis from the earnings of the Fund, §§ 12-6-6, 12-6-8(f), and earnings or losses are to distributed among the Fund participants in an equitable manner, § 12-6-8(f).

The funds at issue in this action were part of the Consolidated Investment Fund. The treasurer served as the custodian of all the funds, securities and assets of the Consolidated Investment Fund⁴ and the "office of the state treasurer acted as staff agency for the board." § 12-6-4. Staff in the treasurer's office managed the investments of the Fund under policy guidelines established by the Board. § 12-6-12. Among the funds in the state account were tax revenues, federal funds and service fees, all of which were used to fund state operations and capital improvements projects. Complaint at ¶ 9. During the years 1986 and 1987, the size of the Consolidated Fund ranged from approximately $2.2 billion to approximately $1.978 billion. Funds in the state account ranged from approximately $1.81 billion to $1.586 billion, while funds in the local account ranged from approximately $405 million to $392 million. Affidavit of D. Jerry Simpson at ¶ 9, attached to plaintiff's Reply Memorandum. Based upon these figures, it is apparent that approximately 80% of the funds were in the state account, with the remaining 20% being in the local government account.⁵

By rules and regulations promulgated under the authority of section 12-6-5(5), each participant in the Fund owns "an undivided interest in the portfolio of the Consolidated Fund based on the participant's pro-rata contribution of assets at any time," with one dollar ($1.00) of contribution equal to one unit of ownership. Rule 5.01, Legislative Rules, W.Va. State Board of Investments, Title 113, Code of State Rules, Series I (effective March 10, 1984), quoted in Letter from Roger W. Tompkins & John E. Shank to Thomas E. Loehr (Dec. 4, 1989) at 4, Exhibit I to Defendant's Memorandum in Opposition. While the manner in which losses are to be distributed is not clear, the Attorney General has opined that "losses must be apportioned ... on a pro rata basis among Fund participants who were participating in the Fund at the time the losses occurred." Id. at 5. Notwithstanding the Attorney General's opinion that losses are to be apportioned among all Fund participants, no losses at issue here had been assessed against participating political subdivisions at the time this suit was instituted. See id. at 4-5. To the contrary, the participating political subdivisions had received payments for earnings on their investments when their proportionate share of earnings was either a lesser sum or an actual loss. Id. at 1-3. Indeed, to date there is no indication that any action has been taken to recover those overpayments, or to assess any of the Fund's losses against the political subdivisions.

Plaintiff asserts that in the course of investing the monies in the Consolidated Investment Fund, accounts were opened with each of the defendants in the name of the State and the transactions complained of were conducted by staff in the treasurer's office and entered into in the name of the State or the treasurer as customer. Complaint at ¶ 12; Simpson Affidavit at ¶ 8 and attachments. Defendants do not dispute that the accounts were opened in the name of the State or that the transactions complained of were entered into in the name of the State or the treasurer. However, defendants contend that the treasurer's staff was acting as the Board's agent in managing the Fund and that it was the Board, not the State, who...