Whistler Inv. V. Depository Trust and Clearing

• Decision Date: 22 August 2008
• Docket Number: No. 06-16088.,06-16088.
• Citation: 539 F.3d 1159
• Parties: WHISTLER INVESTMENTS, INC., a Nevada corporation; Salim S. Rana Investments Corp., a corporation; American Dream Holdings, Inc., a corporation, Plaintiffs-Appellants, v. The DEPOSITORY TRUST AND CLEARING CORPORATION; The Opinion Depository Trust Company; The National Securities Clearing Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

539 F.3d 1159

WHISTLER INVESTMENTS, INC., a Nevada corporation; Salim S. Rana Investments Corp., a corporation; American Dream Holdings, Inc., a corporation, Plaintiffs-Appellants, v. The DEPOSITORY TRUST AND CLEARING CORPORATION; The Opinion Depository Trust Company; The National Securities Clearing Corporation, Defendants-Appellees.

No. 06-16088.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 10, 2008.

Filed August 22, 2008.

Michael J. Morrison, Reno, NV, and John R. Knight (argued), Memphis, TN, for the appellants.

Don Nomura and Daniel T. Hayward, Laxalt & Nomura, Reno, NV, Gregg M. Mashberg (argued) and Karen D. Coombs, Proskauer Rose LLP, New York, NY, for the appellees.

Scott K. Attaway (argued), Washington, DC, for North American Securities Administrators Association, as amicus curiae in support of the appellants.

Mark R. Pennington (argued), Michael L. Post, Securities and Exchange Commission, Washington, DC, for Securities and Exchange Commission, as amicus curiae in support of the appellees.

Appeal from the United States District Court for the District of Nevada; Robert C. Jones, District Judge, Presiding. D.C. No. CV-05-00634-RCJ/GWF.

Before: HAWKINS, SIDNEY R. THOMAS, and RICHARD R. CLIFTON, Circuit Judges.

THOMAS, Circuit Judge:

This case requires us to consider whether the Securities Exchange Act of 1934 preempts state-law claims against registered clearing agencies in connection with their clearance and settlement services, where those services were performed pursuant to a program approved of by the Securities and Exchange Commission. Although we conclude that the state law claims asserted here were not precluded by field preemption, we hold the claims were barred by conflict preemption. We therefore affirm the judgment of the district court.

I

Whistler Investments, Inc., Salim S. Rana Investments Corp., and American Dream Holdings, Inc. (collectively "Whistler") brought an action for damages under Nevada state law against three registered clearing agencies. Whistler Investments is a Nevada corporation whose common stock is publicly traded. Salim S. Rana Investments and American Dream Holdings are shareholders who purchased and sold Whistler common stock in the open market between April 2002 and November 2004.

Whistler alleges that short sellers drove down the market price for Whistler stock by selling Whistler shares without having stock available for delivery, and then intentionally failing to deliver the stock. Such a technique is referred to as "naked short selling." See Amendments to Regulation SHO, Exchange Act Release No. 54,154, 2006 WL 2712000, at *1 (July 14, 2006).

"A short sale is a term of art used for a security trading practice in which a party `speculates that a particular stock will go down in price and seeks to profit from that drop.'" Lapidus v. Hecht, 232 F.3d 679, 680-81 (9th Cir.2000) (quoting Levitin v. PaineWebber, Inc., 159 F.3d 698, 700 (2d Cir.1998)). The seller sells a security he does not own, borrows the security from a broker to meet the delivery obligation, and then purchases an identical security to return to the broker. If the security has declined in price between the sale and the purchase, the seller profits. See id. at 681; 17 C.F.R. § 242.200(a) (defining short sale). In contrast, "a `naked short sale' occurs when a seller sells a security without owning or borrowing it and does not deliver the security when due." In re Phlo Corp., 2007 WL 966943, 16 Exchange Act Release No. 55,562, at *4 n. 22 (March 30, 2007).

Whistler's complaint is premised on its claim that the naked short selling was facilitated by alleged defects in a program operated by the National Securities Clearing Corporation, one of the defendants in this action. Defendants moved to dismiss the action on the ground that federal securities law preempts Whistler's claims. The district court granted Defendants' motion, holding Whistler's claims preempted under the doctrines of field preemption and conflict preemption. We review de novo a district court's decision regarding preemption. Indep. Towers of Washington v. Washington, 350 F.3d 925, 928 (9th Cir. 2003).

II

Congress added Section 17A to the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. §§ 78a et seq., in 1975 in order to remove impediments to a uniform national system for the prompt and accurate clearance and settlement of securities transactions. See 15 U.S.C. § 78q-1(a)(1)(A). Among other provisions, Section 17A provided for the registration of "clearing agencies" by the Securities and Exchange Commission ("the Commission"). See 15 U.S.C. § 78q-1(b). The role of the clearing agencies was to replace an inefficient and outmoded system of clearing agencies with a more modern and efficient system. See 15 U.S.C. § 78q-1(a)(1). Congress directed the Commission to use its authority to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of securities transactions as well as to coordinate or link facilities for such clearance and settlement. See 15 U.S.C. § 78q-1(a)(2)(A).

The three defendants in this action are the Depository Trust & Clearing Corporation ("DTCC"), the Depository Trust Company ("DTC") and the National Securities Clearing Corporation ("NSCC"). DTC and NSCC are subsidiaries of DTCC and are registered clearing agencies pursuant to Section 17A. DTC is the nation's principal securities depository. It operates an automated, centralized system for book-entry transfers of securities positions among its participants, the beneficial owners of the securities, in accordance with their instructions. NSCC provides centralized clearance, settlement, and information services for virtually all broker-to-broker equity, corporate bond, municipal bond and other securities transactions in the United States. The changes in beneficial ownership of securities resulting from transactions that are cleared and settled at NSCC are implemented by book-entry transfers among brokers' accounts at DTC.

At times, a seller does not deliver to NSCC's system the securities it has sold by the settlement date. Such an occurrence is called a "fail-to-deliver." In 1981, NSCC created the Stock Borrow Program to deal electronically with temporary, short term fails-to-deliver. NSCC has promulgated rules to govern the operation of the Stock Borrow Program, and the Commission has approved those rules. See National Securities Clearing Corp. Proposed Rule Changes by Self-Regulatory Organization, 45 Fed.Reg. 5867, 5867-68 (Jan. 24, 1980) (notice of filing of NSCC proposed rule change adopting as a one year pilot program procedures for borrowing securities to meet system needs); National Securities Clearing Corp. Proposed Rule Change, 46 Fed.Reg. 3104-01, 3104 (Jan. 13, 1981) (notice of filing of NSCC proposed rule change making pilot program permanent); Depository Trust Co., Exchange Act Release No. 20,221, 48 Fed Reg. 45167-02, 45167-68 (Oct. 3, 1983) (granting NSCC's application for full registration).

The Stock Borrow Program allows NSCC to facilitate the settlement of fail-to-deliver transactions by electronically "borrowing" the requisite number of shares of the undelivered stock from one of its members who is willing to lend the shares, and then delivering the "borrowed" shares to the purchaser.¹ NSCC guarantees the transactions it processes by assuming the obligation of sellers to deliver shares to buyers. The buyer is credited with the shares and never knows that there has been a fail-to-deliver.

Whistler alleges that at times fails-to-deliver are not cured for long periods, which creates more electronic shares in the marketplace than are reflected in the paper share certificates held by DTC. Whistler argues that Defendants are liable under state law because this "defect" in the Stock Borrow Program depressed the value of Whistler stock.

III

Congress has the constitutional power to preempt state law, Art. VI, cl. 2; Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 6 L.Ed. 23 (1824), and may do so either expressly—through clear statutory language—or implicitly. Defendants acknowledge that Congress has not expressly preempted any of Whistler's claims, but argue that Section 17A of the Securities Act implicitly preempts the claims.

There are two types of implied preemption: field preemption and conflict preemption. Under field preemption, preemption is implied when Congress "so thoroughly occupies a legislative field," that it effectively leaves no room for states to regulate conduct in that field. Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516, 112 S.Ct. 2608, 120 L.Ed.2d 407 (1992). Under conflict preemption, Congress's intent to preempt state law is implied to the extent that federal law actually conflicts with any state law. Hillsborough County v. Automated Med. Labs., Inc., 471 U.S. 707, 713, 105 S.Ct. 2371, 85 L.Ed.2d 714 (1985). Conflict preemption analysis examines the federal statute as a whole to determine whether a party's compliance with both federal and state requirements is impossible or whether, in light of the federal statute's purpose and intended effects, state law poses an obstacle to the accomplishment of Congress's objectives. Crosby v. Nat'l Foreign Trade Council, 530 U.S. 363, 373, 120 S.Ct. 2288, 147 L.Ed.2d 352 (2000).

A

Defendants do not argue that Congress intended to occupy the entire field of securities regulation. Rather, Defendants argue that Section 17A of the Exchange Act reflects Congress's intent to occupy the field of clearing and settling securities transactions. However, an examination of the statutory framework of the Exchange Act does not reveal the comprehensiveness necessary to infer that Congress intended to wholly occupy even the narrower field of clearing and settling securities transactions to the exclusion of state law.²

When Congress enacted the Exchange Act, it included a provision which recognizes that ...