The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge.
Plaintiff Daniel Dacey ("Dacey") brings this pututative class action against Defendant Morgan Stanley Dean Witter Co. ("Morgan Stanley"), alleging that Defendant breached certain customer agreements by failing to perform certain duties to its customers in connection with stock purchase recommendations. Defendant has moved to dismiss the complaint as preempted by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). Plaintiff has cross-moved to remand the action to state court. In addition, Plaintiff seeks an award of attorneys' fees, costs and expenses under 28 U.S.C. § 1447(c).
The Court has considered thoroughly all submissions and argument related to this motion. For the following reasons, Defendant's motion to dismiss is granted in part and denied in part and Plaintiff's motion to remand is granted in part and denied in part. Plaintiff's request for attorneys' fees, costs and expenses is denied.
The following allegations of the Complaint are taken as true for purposes of the pending motions. Dacey maintained an account at Dean Witter, through which he purchased stocks recommended by the Dean Witter Technology Equity Research Team. (Complaint ¶ 5.) In connection with the account, Dacey entered into a Client Account Agreement ("Customer Agreement") with Dean Witter which provided that the securities accounts used by customers such as Dacey could be used to purchase, sell or hold securities on either a cash or a margin basis. (Id. ¶ 6.) Dean Witter also issued a standard form "Confirmation Agreement" in connection with the trades in the account; the Confirmation Agreement provided that "[a]ll transactions are subject to the rules and customs of the Exchange or Market where executed." (Id. ¶ 8.) Plaintiff asserts that the Customer Agreement and the Confirmation Agreement incorporated the rules and customs of the National Association of Securities Dealers ("NASD") and the New York Stock Exchange ("NYSE"). Those rules provide, inter alia, that members of the exchange must "observe high standards of commercial honor and just and equitable principles of trade," (NASD Manual & Notices of Members-Conduct Rules § 2110), that "communications with the public shall be based on principles of fair dealing and good faith and should provide a sound basis for evaluating facts in regard to any particular security" (id., Conduct Rules § 2210(d)(1)(A)), that "[e]xaggerated, unwarranted or misleading statements or claims are prohibited in all public communications . . . [and] no member shall, directly or indirectly, publish, circulate or distribute any public communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading" (id., Conduct Rules § 2210(d)(1)(B)), and further provide that "a member must have a reasonable basis for [a] recommendation [in sales literature]" (id. Conduct Rules § 2210(d)(2)(B)(i)).
Dean Witter's Technology Equity Research Team issued analyst reports on technology companies with which Dean Witter had investment banking relationships. (Complaint, ¶ 11.) The Technology analyst reports did not reflect fairly or accurately on the business of certain companies because the analysts were under pressure, due to Defendant's investment banking relationships, to issue favorable reports. (Id. ¶¶ 15-18.)
Dacey purchased stock in Sycamore Networks and Redback Networks which had been recommended by Defendant's Technology analysts. (Id. ¶ 19.) Defendant's analysts rated Sycamore Networks and Redback Networks highly at the time Dacey purchased shares in the companies and continued to rate the companies highly although the share prices of the companies' stock were steadily declining. (Id. ¶¶ 22-30.) At the time Defendant's analysts were recommending Sycamore Networks and Redback Networks to customers with trading accounts, Defendant was underwriting a secondary stock offering in Sycamore Network and an initial public offering in Redback Networks. (Id. ¶¶ 21, 28). Defendant overrated the stocks in these companies and encouraged customers to purchase shares at inflated prices. Plaintiff asserts that, after Defendant made billions of dollars in fees as underwriter for the companies' stock offerings, and after prices had collapsed, Defendant lowered its ratings. (Id. ¶ 31.)
Plaintiff asserts a breach of contract claim arising from the foregoing transactions, alleging that Defendant "failed to adhere to the industry regulations and guidelines that it warranted it would abide by, materially breaching the Customer Agreement and Confirmation Agreement." (Id. ¶ 43.)
The Complaint defines two plaintiff subclasses, as follows:
PURCHASER CLASS: All customers of [Morgan Stanley] who
(i) purchased shares of any of the companies
identified on Exhibit A from Morgan Stanley, (ii) held
those shares after the date on which Morgan Stanley
issued a post-purchase analyst report that contained a
positive recommendation, and (iii) were damaged
HOLDER CLASS. All customers of [Morgan Stanley] who
(i) purchased shares of any of the companies
identified on Exhibit A from [Morgan Stanley] (ii)
held those shares after the date on which [Morgan
Stanley] issued a post-purchase analyst report that
contained a positive recommendation, and (iii) were