Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.


June 8, 2004.

W. CAFFEY NORMAN, III, On Behalf of Himself and All Others Similarly Situated, Plaintiff, V. SALOMON SMITH BARNEY INC., Defendant

The opinion of the court was delivered by: GERARD E. LYNCH, District Judge


This action involves claims by customers of defendant Salomon Smith Barney ("Salomon") that Salomon breached its fiduciary and contractual duties to those customers and violated the Investment Advisors Act of 1940 ("IAA"). Plaintiffs are a proposed class of investors who held Guided Portfolio Management ("GPM") accounts at Salomon, which offered individualized investment management services based on the recommendations of Salomon research analysts, recommendations that plaintiffs allege were tainted by conflicts of interest that were undisclosed to Salomon's GPM customers. Salomon moves to dismiss the complaint in its entirety, arguing that (i) plaintiffs' state law claims are preempted by the Securities Litigation Uniform Standards Act ("SLUSA"), (ii) plaintiffs' IAA claims must be dismissed because the named plaintiff has no remedy under IAA and the IAA claims are time-barred, and (iii) the complaint fails to plead fraud with particularity as required by Federal Rule of Civil Procedure 9(b). For the reasons that follow, the motion will be denied.


  Defendant Salomon is a financial services firm that offers a range of products and services to both individual and corporate clients, including investment banking, research and analysis, and individual investment accounts. One of the products offered by Salomon was a custodial account service called Guided Portfolio Management ("GPM"), in which individual investors hired Salomon to act as investment adviser with full discretion to make all investment decisions for the account. (Compl. ¶ 8.) The GPM account agreement specifically provided that the Guided Portfolio Manager would be responsible for making investment management decisions, "within guidelines set forth by [the Portfolio Management Group] and based upon the recommendations of the Research Department of Salomon Smith Barney." (Id. ¶ 9.) Salomon's advertising and public statements regarding the GPM program emphasized that the key benefit offered to GPM investors was individual portfolio management guided by the experience and "breadth and depth" of Salomon's research department. (Id. ¶ 12.) In exchange for these services and benefits, GPM clients paid Salomon an annual fee based on the market value of account assets — ranging from 2.5% on the first $500,000 in assets, to 1.4% on assets worth more than $2 million. (Id. ¶ 8.) Plaintiffs allege that while Salomon was trumpeting the value of its research department and collecting fees from GPM account-holders, Salomon and its executives and officers privately believed those research services and recommendations to be "worthless" and "ridiculous," and expressed a growing concern over the "objectivity" and "integrity" of Salomon's research analysts. (Id. ¶ 19.) Plaintiffs allege that Salomon's own policies and practices were the cause of the problems with Salomon's research department — that, rather than providing independent and objective coverage of corporations and their securities, Salomon's research analysts were instructed on how to create reports that would assist the investment banking division in securing lucrative business from corporate issuers (id. ¶ 24), and were compensated according to how much Salomon earned in investment banking fees from corporations in the analyst's coverage sector (id. ¶ 26). Neither the opinions of Salomon executives about the allegedly conflicted research department, nor the policies that created and encouraged the conflict, were disclosed to GPM account-holders.

  Plaintiff Norman opened a GPM account at Salomon on November 16, 1999, and maintained the account until May 15, 2002. (Compl. ¶ 6.) He seeks to represent a class of individuals who held GPM accounts during the period January 3, 1998, through August 15, 2002. (Compl. ¶ 41.) Norman filed the Complaint in this action on January 2, 2003, alleging that Salomon breached its contractual and fiduciary duties to plaintiff and to the class of similarly situated investors by managing their GPM accounts based on recommendations it knew to be conflicted and unreliable, and placing the profits of the firm above the best interests of its GPM clients. The Complaint further alleges that Salomon's management of the GPM accounts was in violation of the Investment Advisers Act of 1940. The Complaint seeks to recover the fees paid for GPM services and the losses incurred as a result of Salomon's alleged misconduct. This action was originally filed in the United States District Court for the District of Columbia, and was transferred to this Court by consent in June 2003. Salomon now moves to dismiss the Complaint in its entirety for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) and failure to plead fraud with particularity as required by Federal Rule of Civil Procedure 9(b).


 I. Standard on a Motion to Dismiss

  On a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court accepts "as true the facts alleged in the complaint" and draws all reasonable inferences in favor of the plaintiff. Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 699-700 (2d Cir. 1994). The motion will be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Thomas v. City of New York, 143 F.3d 31, 36 (2d Cir. 1998) (internal citations omitted). To be deemed adequate at the pleading stage, a complaint need not use particular words nor demonstrate that plaintiff will prevail on the merits, but need only provide "a short and plain statement of the claim showing that the pleader is entitled to relief." Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512-13 (2002) (quoting Fed.R.Civ.P. 8(a)).

 II. SLUSA Pre-emption

  Salomon argues that the plaintiffs common law breach of fiduciary duty and breach of contract claims are pre-empted by the Securities Litigation Uniform Standards Act ("SLUSA"), 15 U.S.C. § 77p, and must be dismissed. SLUSA was enacted by Congress in 1998 to address the problem of securities litigation shifting to state courts to avoid the strictures of the Private Securities Litigation Reform Act of 1995. The SLUSA solution was "to make Federal court the exclusive venue for most securities fraud class action litigation involving nationally traded securities." Joint Explanatory Statement of the Committee of Conference, H.R. Conf. Rep. 105-803 (1998). SLUSA accomplishes this goal by providing that "[n]o 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 . . . a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security." 15 U.S.C. § 77bb(f(1)(A).

  The parties do not dispute that the present action is a "covered class action" and that the breach of contract and breach of fiduciary duty claims are based on state common law. As to the remaining factors, Salomon argues that the heart of the Complaint involves allegations that the Salomon research reports contained material misrepresentations or omissions regarding the value of securities, and that the purchase and sale of securities in the GPM accounts was based on these alleged misrepresentations and omissions. (D. Mem. 7-9.) In support of its claim that these allegations bring the present action within SLUSA's pre-emption provisions, Salomon cites to a litany of cases holding that actions against broker-dealers for the misrepresentations and omissions in their research analyst reports are covered by SLUSA. (D. Mem. 6 n.4). However, all of those cases involve actions brought by purchasers or sellers of securities, alleging either that their decisions to purchase or sell were made in direct reliance on false or misleading analyst reports, or that the false or misleading analyst reports perpetrated a "fraud on the market" that caused the plaintiffs' losses from the purchase or sale of securities, even though some of the plaintiffs styled their claims as a common law breach of fiduciary duty. See, e.g., Politzer v. Salomon Smith Barney, Inc., 03 CV 1187 (JFW), slip op. (C.D. Cal. June 16, 2003); Dacey v. Morgan Stanley Dean Witter & Co., 263 F. Supp.2d 706 (S.D.N.Y. 2003); Zoren v. Genesis Energy L.P., 195 F. Supp.2d 598 (D. Del. 2002). The present action is distinguishable from these cases.

  First, the Complaint simply contains no allegation of fraud, misrepresentation or omission "in connection with" the purchase or sale of securities. The claims at issue are for breach of contract and breach of fiduciary duty, neither of which has fraud or misrepresentation as an element. Breach of contract claims under New York law require that plaintiff show: (1) a valid contract; (2) plaintiff's performance; (3) defendant's failure to perform; and (4) damages resulting from the breach. See, e.g., Furia v. Furia, 498 N.Y.S.2d 12, 13 (2d Dep't 1986); 22A N.Y. Jur.2d Contracts § 432. Similarly, breach of fiduciary duty claims under New York law require only that plaintiff demonstrate (1) a breach by a fiduciary of an obligation owed to plaintiff; (2) defendant's knowing participation in the breach; and (3) damages resulting therefrom. See, e.g., SCS Communications, Inc. v. Herrick Co., 360 F.3d 329, 342 (2d Cir. 2004). While plaintiffs may not avoid SLUSA pre-emption simply by artful pleading that avoids the actual words "misrepresentation" or "fraud," neither may defendants avoid every possible claim by recasting any lawsuit in which a securities broker is a defendant into a securities fraud action. See MDCM Holdings Inc. v. Credit Suisse First Boston, 216 F. Supp.2d 251, 257 n.12 (S.D.N.Y. 2002) (noting that facts underlying a complaint may give rise to multiple possible allegations, but "[b]ecause the determination of whether SLUSA applies may only be made by reference to what a party has alleged, and not what it could have alleged, courts should be wary of a defendant's attempts to recast the plaintiffs complaint as a securities lawsuit in order to have it pre-empted by SLUSA."); Gray v. Seaboard Securities, Inc., 241 F. Supp.2d 213, 219 (N.D.N.Y. 2003) (reading SLUSA so broadly as "to preempt state law claims that require no proof of misrepresentations or omissions and are, at most, tangentially connected to the purchase or sale of a covered security . . . is at odds with the well-settled principle that federalism concerns impel `the presumption that Congress did not intend to displace state law.'") (quoting Greater New York Metro. Food Council Inc. v. Giuliani, 195 F.3d 100, 105 (2d Cir. 1999)).

  Here, the gravamen of the Complaint is plainly a straightforward breach claim: plaintiffs purchased a service (portfolio management) pursuant to a contract, paid the fees for that service under the contract, and now allege that they did not receive the full range of services paid for, and suffered damages as a result. Plaintiffs further allege that, in the course of providing some of the contracted-for services, defendant breached its fiduciary duty to plaintiffs to act in their best interests and not engage in activities that would place its interests in conflict with theirs. Regardless of the factual merits of these claims, they are not securities fraud claims, nor claims that depend on establishing material misrepresentations or omissions in connection with the purchase or sale of securities, within the meaning of SLUSA. See Magyery v. Transamerica Financial Advisors, Inc., 03 Civ. 0777 (AS), 2004 WL 926941, at *7-8 (N.D. Ind. Apr. 16, 2004) (breach of contract action for unauthorized trading is not preempted by SLUSA; "attempting to read a fraud claim into a breach of contract claim blurs the distinction between two separate causes of action and merges them into one."); Gray, 241 F. Supp.2d at 220-21 (claims for breach of contract and fraud in the inducement on behalf of class of plaintiff investors who claimed they paid elevated commission fees for services they didn't receive are not covered by SLUSA); MDCM 216 F. Supp.2d at 257 (allegations that defendant failed to carry out promises made in connection with a securities transaction are not fraud allegations and are not preempted by SLUSA); Spielman v. Merrill Lynch. Pierce. Fenner & Smith. Inc., 01 Civ. 3013 (DLC), 2001 WL 1182927 (S.D.N.Y. Oct. 9, 2001), aff'd 332 F.3d 116 (2d Cir. 2003) (although plaintiffs alleged misrepresentation, case does not fall within SLUSA because misrepresentations were about broker-defendant's "bargain with its accountholders" and "not sufficiently connected to the underlying securities").

  Second, unlike the plaintiffs in the cases cited by Salomon, plaintiffs here did not purchase or sell any securities to or from Salomon, or in the market generally. It is undisputed that the GPM accounts were discretionary custodial accounts and all decisions about the purchase and sale of securities for those accounts were made by employees of Salomon. Moreover, to the extent the factual recitation in the Complaint may be read to suggest that Salomon analysts may have made material misstatements or omissions in their analysis of securities, plaintiffs do not claim that they ever saw these reports, relied on them in any way, or made any investment decisions based on their specific recommendations or on the effects those recommendations may have had on the stock market in general. Plaintiffs' claim is simply that Salomon said it would do something in exchange for plaintiffs' fees, and then didn't do what it had promised. The fact that the actions underlying the alleged breach could also form the factual predicate for a securities fraud action ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.