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ATENCIO v. BARNEY

February 1, 2005.

ALONZO ATENCIO, individually and on behalf of all others similarly situated, Plaintiffs,
v.
SMITH BARNEY, CITIGROUP INC., CITIGROUP GLOBAL MARKET HOLDINGS, INC., f/k/a SALOMON SMITH BARNEY HOLDINGS, INC., and CITIGROUP GLOBAL MARKETS, MARKETS, INC., f/k/a SALOMON SMITH BARNEY, INC., Defendants.



The opinion of the court was delivered by: MICHAEL MUKASEY, Chief Judge, District

OPINION & ORDER

Plaintiff Alonzo Atencio, on behalf of himself and all other similarly situated, sues Smith Barney, Citigroup, Inc., Citigroup Market Holdings, Inc. (CGMHI), and Citigroup Global Markets, Inc. (CGMI), alleging that defendants Smith Barney and CGMI breached their fiduciary duty to plaintiffs, and that all defendants thereby were unjustly enriched. Plaintiff filed this action initially in New York Supreme Court, New York County, specifically noting the "absence of grounds for removal" to federal court. (Compl. ¶ 12) Defendants then removed the action to this District, claiming that plaintiff's state law cause of action was preempted by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), Pub.L. No. 105-353, 112 Stat. 3227 (2000). Plaintiff now moves to remand this action to state court and seeks attorneys' fees and expenses in connection with this proceeding. Defendants oppose plaintiff's motion, and move to dismiss the complaint. For the following reasons, plaintiff's motion to remand is denied, and the complaint is dismissed without prejudice. Plaintiff's request for attorneys' fees is also denied.

  I.

  Plaintiff Atencio filed his class action complaint in New York Supreme Court, New York County, on June 18, 2004. Page 2 Defendants removed the complaint to this District on July 20, 2004, and plaintiff moved to remand the action to state court 10 days later. In his complaint, plaintiff alleges that defendants surreptitiously collected kickbacks from certain mutual fund groups, referred to as "families," in exchange for encouraging plaintiff and class members to hold shares of those fund families. Plaintiff alleges that in so doing, defendants violated New York Consumer Law, breached their fiduciary duties to him and other class members, and were unjustly enriched. (Compl. ¶¶ 49-60)

  Defendant Smith Barney provides financial consulting and investment management services, and is a division of defendant CGMI. (Id. ¶ 6) Defendant Citigroup is the parent company of all defendant companies: CGMHI is a wholly owned subsidiary of Citigroup, and CGMI is an indirect wholly owned subsidiary of CGMHI. (Id. ¶¶ 7-9) In its 2003 Annual Report, Citigroup touted Smith Barney as "successfully focused on its role as the trusted adviser to clients and its position as a market leader in 2003" (id. ¶ 19), concluding that Smith Barney's mission was to "develop and manage the strongest relationships in the industry. . . ." (id. ¶ 20).

  Defendants allegedly had agreements with more than 60 Page 3 large mutual fund companies — the "Listed Fund Families,"*fn1 — whereby those funds would remit "retention kickbacks" to CGMI. These payments were calculated as a percentage of the average aggregate value of defendants' clients' listed fund holdings per quarter: In 2004, the Listed Fund Families paid as much as 0.12% of the average aggregate value of clients' holdings, with a minimum payment of $25,000 to $50,000, depending on the number of individual funds listed by each family.*fn2 (Id. ¶ 31) These payments were not disclosed to defendants' clients until March 2004. (Id. ¶¶ 24-26)

  Plaintiff claims that "Smith Barney's fiduciary relationships with its clients were extremely important to defendants, not primarily because of the advisory fees that they generated, but because such relationships enabled defendants to influence their clients' investment decisions and, specifically, steer them to the Listed Fund Families." (Id. ¶ 23) Plaintiff also notes that defendants have acknowledged that the potential for payments under the scheme might have led Smith Barney's financial consultants to focus on certain of the Listed Fund Families "when recommending mutual fund investments" (id. ¶ 34), Page 4 and that "unbeknownst to its clients, Smith Barney had a strong incentive to encourage its clients to hold on[to] the Fund Families." (Id. ¶ 35)

  Plaintiff claims that defendants violated New York Consumer Protection Law and breached their fiduciary duties to him and the plaintiff class by secretly profiting from clients' investments and creating conflicts of interest. (Id. ¶¶ 51-52, 62-66) Plaintiff requests punitive damages (id. ¶ 54), disgorgement of the money wrongfully received by defendants (id. ¶ 59), imposition of a constructive trust on defendants' unlawful profits (id. ¶ 60), and an injunction against further deceptive business practices (id. ¶ 67).

  Defendants claim that plaintiff's claims necessarily involve the purchase and sale of securities, and therefore must be pursued in federal court under SLUSA. Plaintiff counters that his complaint is specifically framed to exclude "claims based upon the purchase or sale of shares of [the Listed Fund Families] during the Class Period." (Compl. ¶ 43)

  II.

  A. Scope of SLUSA

  1. Background

  In 1995, Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA), Pub.L. No. 104-67, 109 Page 5 Stat. 737 (codified in part at 15 U.S.C. §§ 77z, 78u), with the goal of reducing the number of meritless class actions alleging securities fraud — so-called "strike suits." The PSLRA, inter alia, imposed heightened pleading requirements for class actions alleging fraud in the sale of securities, 15 U.S.C. § 78u-4, and mandated discovery stays pending judicial determination of the legal sufficiency of class claims, 15 U.S.C. § 77z-1(b). See Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 107 (2d Cir. 2001). After enactment of the PSLRA, congressional investigation revealed that class action plaintiffs were evading its stringent requirements simply by filing their actions in state court rather than in federal court. See Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Nos. 03-7499 & 03-7458, 2005 U.S. App. LEXIS 410, at *18-*19 (2d Cir. Jan. 11, 2005); see also Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116, 123 (2d Cir. 2003) (noting that the PSLRA proved ineffective in its goal of preventing litigation of meritless suits).

  To close this perceived "federal flight" loophole in the PSLRA, in 1998 Congress enacted SLUSA, which provided that federal court was to be "the exclusive venue for class actions alleging fraud in the sale of certain covered securities and by mandating that such class actions be governed exclusively by federal law." Lander, 251 F.3d at 108 (citing Page 6 15 U.S.C. §§ 77p(b) — (c)).*fn3 A state ...


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