Davis et a l . v . Kozlowski et a l . CV-04-1338-B 03/17/05
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
Scott Davis, et a l . MDL No. 02-1335-PB v. Civil No. 04-1338-PB Opinion No. 2005 DNH 049 Dennis Kozlowski, et. a l .
MEMORANDUM AND ORDER
In December 2003, Scott Davis filed a class action lawsuit
in Cook County, Illinois alleging state law claims for negligent
misrepresentation, common law fraud, breach of fiduciary duty,
and aiding and abetting breach of fiduciary duty. Asserting that
these claims fall within the purview of the Securities Litigation
Uniform Standards Act (“SLUSA” or the “Act”), defendants1 removed
the action from state to federal court. 15 U.S.C. §§ 77p(b),
(c). Davis has filed a motion to remand. (Doc. N o . 2 5 3 ) .
1 The named defendants are Dennis Kozlowski, Mark H . Swartz, Mark A . Belnick, Frank E . Walsh, Jr., Michael A . Ashcroft, Tyco International, Ltd. (“Tyco”), PricewaterhouseCoopers, L.L.P., Phua K. Young, and Merrill Pierce, Fenner and Smith (“Merrill Lynch”). Defendants oppose this motion and have filed cross-motions to
dismiss. (Doc. Nos. 2 6 7 , 2 7 1 , 2 7 5 ) . In what follows, I explain
why I grant Davis’s motion to remand and deny defendants’ motions
to dismiss.
I. BACKGROUND
A. Plaintiff’s Claims
Davis, a resident of Cook County Illinois, alleges that he
purchased stock in Tyco International, Ltd. on or before December
1 3 , 1999, and that he retained this stock through June 3 , 2002.
He argues that defendants knowingly and recklessly made or
permitted others to make misrepresentations and omissions of
material fact about Tyco’s operations, financial position, and
performance during this period. He asserts that these
misrepresentations and omissions were made to artificially
inflate the value of the company’s stock so that investors, like
him, would retain their stake in the company. The purported
class Davis seeks to represent are shareholders who “acquired
securities of Tyco prior to December 1 3 , 1999 and held them
through June 3 , 2002 inclusive (the “Class Period”).” Purchasers
-2- of Tyco’s stock during this period are expressly excluded from
the class.
B. SLUSA’s Removal and Dismissal Provisions
SLUSA provides in pertinent part:
(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 –- (1) a misrepresentation or omission of material fact in connection with the purchase or sale of a covered security; or
(2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a 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 ) .
15 U.S.C. §§ 77p(b), ( c ) .
Believing the Act to apply in this case, defendants removed
the suit to federal court.
-3- II. DISCUSSION
To establish that Davis’s claims fall within the scope of
SLUSA, defendants must demonstrate: (1) that this action is a
covered class action; (2) purporting to be based on state law;
and (3) that the action alleges a misrepresentation or omission
of material fact (4) in connection with the purchase or sale of a
covered security. See Pl.’s Mot. to Remand at 4 (Doc. N o . 253)
(citing Gordon v . Buntrock, 2000 WL 556763 at *2 (N.D. Ill., Apr.
2 8 , 2000)); Tyco’s Opp. to Mot. to Remand at 7 (Doc. N o . 2 7 7 ) .
Davis concedes that he has brought a “covered class action”
“based on state law” involving a “covered security” within the
meaning of the Act. Whether SLUSA applies thus turns on one
question: was the alleged misconduct committed “in connection
with the purchase or sale of a security?”
A. Recent Rulings by Federal Courts Interpreting SLUSA
All of the circuit courts that have ruled on this issue,
including panels of the Second, Eighth, Ninth and Eleventh
Circuit Courts of Appeals, have concluded that misconduct is
committed “in connection with the purchase or sale of a
security,” only if a defendant’s malfeasance has induced a class
-4- of plaintiffs to actually purchase or sell securities. See
Dabit, 395 F.3d 2 5 , 43 (2d Cir. 2005) (noting that its holding
“aligns [it] with every circuit court that has considered the
question thus far”); Green v . Ameritrade, Inc., 279 F.3d 5 9 0 ,
597-99 (8th Cir. 2002); Falkowski v . Imation Corp., 309 F.3d
1123, 1131 (9th Cir. 2002); Riley v . Merrill Lynch, Pierce,
Fenner & Smith, 292 F.3d 1334, 1342-43 (11th Cir. 2002); Atencio
v . Smith Barney, Citigroup, Inc., 2005 WL 267556, *4 (S.D.N.Y.,
Feb. 2 , 2005); Grabow v . PriceWaterhouseCoopers LLP, 313 F. Supp.
2d 1152, 1156 (N.D. Okla. 2004); Feitelberg v . Credit Suisse
First Boston, LLC, 2003 WL 22434098, *4-*5 (N.D. Cal., Oct. 2 4 ,
2003); Gutierrez v . Deloitte & Touche, L.L.P., 147 F. Supp. 2d
584, 595 (W.D. Tex 2001); Chinn v . Belfer, 2002 WL 31474189, *5
(D. Or., June 1 9 , 2002). Claims by “holders” of securities,
these courts have held, do not qualify.
The Second Circuit’s recent decision in Dabit provides the
most detailed analysis of the issue. After addressing each of
the arguments that the defendants make in this case, the Dabit
court concluded that a plaintiff who is injured only in his
capacity as a holder of covered securities does not have a claim
-5- that is subject to removal and preemption under SLUSA. Id. at
43-44. I agree with this conclusion.
B. Does SLUSA Apply to Davis’s Claims?
The question that remains is whether SLUSA applies to
Davis’s claims. Defendants argue that it does. First,
defendants assert that SLUSA applies because Davis “alleged” that
he purchased stock during the class period. Next defendants
argue that SLUSA applies because Davis included in his complaint
a description of facts that occurred prior to the beginning of
the class period. These facts, defendants argue, occurred before
some members of the class purchased Tyco stock. Defendants thus
maintain that their inclusion provides the “connection” with
security purchases necessary to bring the case under SLUSA’s
provisions. I treat each argument in turn.
1. Allegations of Purchases During the Class Period
As to the defendants’ first argument, they are correct that
the mere allegation of a purchase or sale of stock during the
class period would be enough to bring Davis’s case under SLUSA’s
provisions. In Dabit, the court held that
a plaintiff who alleges the purchase and retention of
-6- securities. .
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Davis et a l . v . Kozlowski et a l . CV-04-1338-B 03/17/05
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
Scott Davis, et a l . MDL No. 02-1335-PB v. Civil No. 04-1338-PB Opinion No. 2005 DNH 049 Dennis Kozlowski, et. a l .
MEMORANDUM AND ORDER
In December 2003, Scott Davis filed a class action lawsuit
in Cook County, Illinois alleging state law claims for negligent
misrepresentation, common law fraud, breach of fiduciary duty,
and aiding and abetting breach of fiduciary duty. Asserting that
these claims fall within the purview of the Securities Litigation
Uniform Standards Act (“SLUSA” or the “Act”), defendants1 removed
the action from state to federal court. 15 U.S.C. §§ 77p(b),
(c). Davis has filed a motion to remand. (Doc. N o . 2 5 3 ) .
1 The named defendants are Dennis Kozlowski, Mark H . Swartz, Mark A . Belnick, Frank E . Walsh, Jr., Michael A . Ashcroft, Tyco International, Ltd. (“Tyco”), PricewaterhouseCoopers, L.L.P., Phua K. Young, and Merrill Pierce, Fenner and Smith (“Merrill Lynch”). Defendants oppose this motion and have filed cross-motions to
dismiss. (Doc. Nos. 2 6 7 , 2 7 1 , 2 7 5 ) . In what follows, I explain
why I grant Davis’s motion to remand and deny defendants’ motions
to dismiss.
I. BACKGROUND
A. Plaintiff’s Claims
Davis, a resident of Cook County Illinois, alleges that he
purchased stock in Tyco International, Ltd. on or before December
1 3 , 1999, and that he retained this stock through June 3 , 2002.
He argues that defendants knowingly and recklessly made or
permitted others to make misrepresentations and omissions of
material fact about Tyco’s operations, financial position, and
performance during this period. He asserts that these
misrepresentations and omissions were made to artificially
inflate the value of the company’s stock so that investors, like
him, would retain their stake in the company. The purported
class Davis seeks to represent are shareholders who “acquired
securities of Tyco prior to December 1 3 , 1999 and held them
through June 3 , 2002 inclusive (the “Class Period”).” Purchasers
-2- of Tyco’s stock during this period are expressly excluded from
the class.
B. SLUSA’s Removal and Dismissal Provisions
SLUSA provides in pertinent part:
(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 –- (1) a misrepresentation or omission of material fact in connection with the purchase or sale of a covered security; or
(2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a 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 ) .
15 U.S.C. §§ 77p(b), ( c ) .
Believing the Act to apply in this case, defendants removed
the suit to federal court.
-3- II. DISCUSSION
To establish that Davis’s claims fall within the scope of
SLUSA, defendants must demonstrate: (1) that this action is a
covered class action; (2) purporting to be based on state law;
and (3) that the action alleges a misrepresentation or omission
of material fact (4) in connection with the purchase or sale of a
covered security. See Pl.’s Mot. to Remand at 4 (Doc. N o . 253)
(citing Gordon v . Buntrock, 2000 WL 556763 at *2 (N.D. Ill., Apr.
2 8 , 2000)); Tyco’s Opp. to Mot. to Remand at 7 (Doc. N o . 2 7 7 ) .
Davis concedes that he has brought a “covered class action”
“based on state law” involving a “covered security” within the
meaning of the Act. Whether SLUSA applies thus turns on one
question: was the alleged misconduct committed “in connection
with the purchase or sale of a security?”
A. Recent Rulings by Federal Courts Interpreting SLUSA
All of the circuit courts that have ruled on this issue,
including panels of the Second, Eighth, Ninth and Eleventh
Circuit Courts of Appeals, have concluded that misconduct is
committed “in connection with the purchase or sale of a
security,” only if a defendant’s malfeasance has induced a class
-4- of plaintiffs to actually purchase or sell securities. See
Dabit, 395 F.3d 2 5 , 43 (2d Cir. 2005) (noting that its holding
“aligns [it] with every circuit court that has considered the
question thus far”); Green v . Ameritrade, Inc., 279 F.3d 5 9 0 ,
597-99 (8th Cir. 2002); Falkowski v . Imation Corp., 309 F.3d
1123, 1131 (9th Cir. 2002); Riley v . Merrill Lynch, Pierce,
Fenner & Smith, 292 F.3d 1334, 1342-43 (11th Cir. 2002); Atencio
v . Smith Barney, Citigroup, Inc., 2005 WL 267556, *4 (S.D.N.Y.,
Feb. 2 , 2005); Grabow v . PriceWaterhouseCoopers LLP, 313 F. Supp.
2d 1152, 1156 (N.D. Okla. 2004); Feitelberg v . Credit Suisse
First Boston, LLC, 2003 WL 22434098, *4-*5 (N.D. Cal., Oct. 2 4 ,
2003); Gutierrez v . Deloitte & Touche, L.L.P., 147 F. Supp. 2d
584, 595 (W.D. Tex 2001); Chinn v . Belfer, 2002 WL 31474189, *5
(D. Or., June 1 9 , 2002). Claims by “holders” of securities,
these courts have held, do not qualify.
The Second Circuit’s recent decision in Dabit provides the
most detailed analysis of the issue. After addressing each of
the arguments that the defendants make in this case, the Dabit
court concluded that a plaintiff who is injured only in his
capacity as a holder of covered securities does not have a claim
-5- that is subject to removal and preemption under SLUSA. Id. at
43-44. I agree with this conclusion.
B. Does SLUSA Apply to Davis’s Claims?
The question that remains is whether SLUSA applies to
Davis’s claims. Defendants argue that it does. First,
defendants assert that SLUSA applies because Davis “alleged” that
he purchased stock during the class period. Next defendants
argue that SLUSA applies because Davis included in his complaint
a description of facts that occurred prior to the beginning of
the class period. These facts, defendants argue, occurred before
some members of the class purchased Tyco stock. Defendants thus
maintain that their inclusion provides the “connection” with
security purchases necessary to bring the case under SLUSA’s
provisions. I treat each argument in turn.
1. Allegations of Purchases During the Class Period
As to the defendants’ first argument, they are correct that
the mere allegation of a purchase or sale of stock during the
class period would be enough to bring Davis’s case under SLUSA’s
provisions. In Dabit, the court held that
a plaintiff who alleges the purchase and retention of
-6- securities. . .but who forswears damages from the purchase and seeks only “holding damages” has still run afoul of SLUSA, which by its plain terms preempts claims “alleging” fraud in connection with the purchase or sale, and not merely claims seeking damages.
395 F.3d at 4 5 . Such suits, the court held, “sweep in the claims
of [plaintiffs] who purchased the stock during the class period,”
id. at 4 6 , and must therefore be dismissed without prejudice.
See id. at 4 7 . I agree with the court’s reasoning on this point.
The rule does not apply, however, where the “lead plaintiff”
has expressly excluded from the class claimants who purchased
securities in connection with the alleged fraud. Id. at 4 6 .
Here, Davis has done exactly that. Not only does his complaint
explicitly seek to represent only plaintiffs who were induced to
retain Tyco securities, Compl. ¶ 3 , it expressly excludes
purchasers from the class definition. Compl. ¶ 413. Unlike the
plaintiffs in Dabit, then, Davis has not swept stock purchases
into the complaint.
2. Allegations of Purchases Prior to the Class Period
As to defendants’ second argument, in the context of SLUSA
actions, facts included in the complaint that occurred prior to
the beginning of the class period have been treated as
-7- “background facts,” and have therefore been deemed irrelevant in
determining whether SLUSA applies. See, e.g., Gordon, 2000 WL at
*3. The distinction that courts have drawn between “background
facts” and “ultimate facts” is a useful one. The first category
of facts merely adds context. The second category provides the
actual factual basis upon which the claims are based. Courts
have been particularly willing to distinguish between the two
where a plaintiff has gone “to great lengths to stress that his
complaint alleges misrepresentations only in the holding of
securities and expressly disavows any injury resulting from the
purchase or sale of securities.” Id. ; see also, Gutierrez, 147
F. Supp. 2d 5 8 4 , 594-95 (treating thirty-nine pages describing
how plaintiff was duped into purchasing stock as “background
facts” that did not bring the plaintiff’s case under SLUSA’s
provisions). As noted above, Davis has gone to great lengths to
do so here. I therefore conclude that the facts alleged by Davis
describing defendants’ pre-class period conduct merely provide
background information. Defendants’ argument that the presence
of these facts brings plaintiffs claims under SLUSA must thus be
rejected.
-8- III. CONCLUSION
Davis otherwise alleges only that he retained stock as a
result of defendants’ alleged malfeasance. As explained, this
action falls outside of SLUSA’s purview. No other federal
question is raised. I therefore lack subject matter jurisdiction
over the suit, and am required to remand the removed action to
Cook County. Plaintiff’s motion to remand (Doc. N o . 253) is thus
granted and defendants’ motions to dismiss (Doc. Nos. 2 6 7 , 2 7 1 ,
275) are denied. All other pending motions between the parties
are mooted (Doc. Nos. 271-73, 2 8 1 ) . The clerk is instructed to
enter judgment accordingly.
SO ORDERED.
Paul Barbadoro United States District Judge
March 1 7 , 2005
cc: Counsel of Record
-9-