United States District Court, S.D. New York
February 1, 2005.
ALONZO ATENCIO, individually and on behalf of all others similarly situated, Plaintiffs,
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
Plaintiff Atencio filed his class action complaint in New York
Supreme Court, New York County, on June 18, 2004.
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
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),
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)
A. Scope of SLUSA
In 1995, Congress enacted the Private Securities Litigation Reform Act
of 1995 (PSLRA), Pub.L. No. 104-67, 109
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
15 U.S.C. §§ 77p(b) (c)).*fn3 A state court action falls within
SLUSA's reach and may be removed to federal court if it meets four
(1) the underlying suit must be a `covered class
action';*fn4 (2) the action must be based on
state or local law; (3) the action must concern a
security';*fn5 and (4) the defendant must have
misrepresented or omitted a material fact or employed
a manipulative or deceptive device or contrivance `in
connection with the purchase or sale of' that
Dabit, 2005 U.S. App. LEXIS 410, at *20 (quoting Riley v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 292 F.3d 1334, 1342 (11th Cir. 2002)). Our
Circuit has held that SLUSA "was intended to completely preempt the field
of certain types of securities class actions by essentially converting a
state law claim into a federal claim and creating federal jurisdiction
and venue for specified types of state securities fraud claims."
Spielman, 332 F.3d at 123.
Both parties in the instant case agree that the first three
requirements for removal under SLUSA have been met: Plaintiff's
allegations concern covered securities, the action is based on state
law, and the plaintiff class matches the statutory definition of a
covered class. They dispute whether the fourth requirement has been met
the alleged fraudulent conduct must have been committed "in connection
with the purchase or sale" of
a covered security. In his complaint, plaintiff disavows claims or
damages based upon purchases or sales of covered securities during the
period of the lawsuit, and states that his claims and those of the
plaintiff class relate solely to the "retention kickbacks" that defendants
collected while class members held listed funds.
Plaintiffs have brought so-called "holders suits" similar to this
action in the courts of many different states. Upon removal of these
actions, federal courts have been obligated to decide if the holders
claims came within the scope of SLUSA, and were therefore removable.
These federal courts generally have concluded that a holders suits is
impermissible unless the plaintiff's complaint specifically excludes all
claims related to the purchase or sale of securities during the period
alleged. See Riley, 292 F.3d at 1345 (allowing removal because complaint
did not exclude claims related to the purchase of securities); In re
Alger, Columbia, Janus, MFS, One Group, & Putnam Mut. Fund Litig.,
320 F. Supp. 2d 352, 354 (D. Md. 2004); (same); Cape Ann Investors
LLC v. Lepone, 296 F. Supp. 2d 4, 12 (D. Mass. 2003) (same); Ray v.
Citigroup Global Markets, Inc., No. 03-C-3157, 2003 U.S. Dist. LEXIS
20966, at *16-*19 (N.D. Ill. Nov. 20, 2003) (same); Tittle v. Enron
Corp., 284 F. Supp. 2d 511, 636 (S.D. Tex. 2003) (same); In re
Worldcom, Inc. ERISA Litig., 263 F. Supp. 2d 745, 771 (S.D.N.Y. 2003)
(same); cf. Bressler v. Edward
D. Jones & Co., No. 04-1219, at 6 (C.D. Cal. May 11, 2004) (holding that
plaintiff's explicit exclusion of claims resulting from purchases or sales
of securities removed the claims from the ambit of SLUSA); Gordon v.
Variable Ins. Prods. Fund III, No. 03-80911, 2003 U.S. Dist. LEXIS
24738, at *6 (S.D. Fla. Dec. 4, 2003) (same); Feitelberg v. Credit Suisse
First Boston, No. C-03-3451, 2003 U.S. Dist. LEXIS 19116, at *14-*16
(N.D. Cal. Oct. 21, 2003) (same); Chinn v. Belfer, No. 02-00131, 2002
U.S. Dist. LEXIS 20343, at *14-*16 (D. Or. June 19, 2002) (same). Our
Circuit recently considered the issue in Dabit v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 2005 U.S. App. LEXIS 410, and its holding in that
case bears directly on the issue before me.
2. Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc.
SLUSA does not define the phrase "in connection with the purchase or
sale of a covered security." However, that phrase also appears in Section
10(b) of the Securities and Exchange Act of 1934 (Exchange Act), and Rule
10b-5 promulgated thereunder,*fn6 see 15 U.S.C. § 78j(b);
17 C.F.R. § 240.10b-5, and the Supreme Court has interpreted the phrase
in the context of the Exchange Act. In Blue Chip Stamps v. Manor Drug
Stores, 421 U.S. 723, 754-55 (1975), the Court held that
that cause a shareholder simply to hold stock, rather than to buy or sell
shares, are not made "in connection with the purchase or sale" of
securities, and therefore are not actionable under federal law. One of
the questions presented in Dabit was whether the Blue Chip Court's
interpretation of the Exchange Act "in connection with" provision also
applies to that phrase as it appears in SLUSA. Dabit, 2005 U.S. App. LEXIS
410, at *37-*51.
The Dabit Court held that the phrase should be interpreted uniformly
under the two statutes: "[In SLUSA,] Congress employed language with a
settled judicial interpretation of which Blue Chip was a part and we see
no clear indication either in the text or the legislative history of
SLUSA of a congressional intent to abolish nonpurchaser and nonseller
state class action claims." Id. at *37 (footnote omitted). Accordingly,
the Court stated that "to be preempted, an action must allege a purchase
or sale of covered securities made by the plaintiff or members of the
alleged class. . . ." Id. at *51. In so holding, the Court noted that its
decision was in line with all the other circuit courts that had
considered the issue. Id. at *50-*51 (citing Riley, 292 F.3d at 1343-45
(11th Cir.); Falkowski v. Imation Corp., 309 F.3d 1123, 1130-31 (9th
Cir. 2002); Green v. Ameritrade, 279 F.3d 590, 598 (8th Cir. 2002)).
At first blush, Dabit appears to permit all holders suits to proceed in
state court. See Dabit, 2005 U.S. App. LEXIS
410, at *53 ("Our determination that the Blue Chip rule operates as a
limit on the preemptive scope of SLUSA similarly commits us to the view
that such holding claims are not preempted."). However, the Court noted
that where a plaintiff alleges that he purchased and retained stock as a
result of the alleged misrepresentation or omission, the claim does
satisfy the Blue Chip standard and falls within the preemptive scope of
SLUSA. Id. at *54. The Court also held that "a plaintiff who alleges the
purchase and retention of securities in reliance on the misrepresentation
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 specifically traceable to the initial
purchase." Id. at *55-56 (quoting 15 U.S.C. § 78bb(f)(1)) (citing Prof'l
Mgmt. Assocs., Inc. Employees Profit Sharing Plan v. KPMG LLP,
335 F.3d 800, 803 (8th Cir. 2003)). The Court acknowledged that the line
between pure (non-preempted) and mixed (preempted) holders claims can be
hard to draw, especially where the complaint does not specifically allege
sales or purchases based on misrepresentations or omissions. The Court
weighed the relevant policy considerations and established a procedure
for courts confronted with this issue:
While we must read SLUSA's preemptive provisions
narrowly to avoid interference with state police
that Congress did not clearly intend, we must also
give meaningful effect to SLUSA's remedial goals with
respect to the class of purchaser/seller claims that
are clearly preempted. Where . . . the complaint
does not include sufficient information to permit the
court to identify and separate the preempted and
non-preempted subclasses, we believe that the proper
approach will ordinarily be to dismiss the entire
claim pursuant to SLUSA. Given the close relationship
in most instances between a holding claim and the
purchase of actual securities, and given SLUSA's
manifest intent to preempt state-law claims alleging
fraud in connection with an actual purchase, it is
sensible to require a would-be "holding" lead
plaintiff expressly to exclude from the class
claimants who purchased in connection with the fraud
and who therefore could meet the standing requirement
for maintenance of a 10b-5 action. . . .
We therefore hold that when the class definition
includes persons with SLUSA-preempted claims and does
not permit the court to distinguish any preempted
subclass, SLUSA requires that the claim be dismissed.
Ordinarily such dismissal should be without prejudice
in order to allow the plaintiff to plead a claim
sounding only in state law if possible.
Id. at *60-*61 (citing Gordon, 2003 U.S. Dist. LEXIS 24738, at *5-*8
(excluding plaintiff's claims from the ambit of SLUSA because the
complaint specifically eliminated all class members who purchased
securities after the fraud occurred)). What appears below is an
application of the above analysis to the complaint in this action.
Plaintiff defines the class in this case as follows: "[A]ll persons and
entities who held shares of the Listed Fund Families in a brokerage
account with Defendants from at least
June 18, 2000 to March 22, 2004, (the "Class Period") and were damaged
thereby. The class specifically excludes claims based upon the purchase
or sale of shares of these funds during the Class Period." (Compl. ¶ 43)
The complaint for the most part scrupulously avoids referring to any
purchases or sales made by class members, instead referencing the
"retention kickbacks" defendants received by virtue of plaintiff class's
holdings of the Listed Fund Families. See, e.g., id. ¶¶ 36-38. However, as
defendants note, the complaint does allege that defendants' conflicts of
interest led them to "steer" plaintiffs to the Listed Fund Families (id.
¶ 23), and to "recommend?" certain funds over others (id. ¶ 34).
Additionally, the class definition makes no attempt to exclude class
members who may have purchased or sold shares of the Listed Fund Families
during the class period. Indeed, as defendants point out, plaintiff
himself purchased and sold shares of the Listed Fund Families during the
class period. See Defendant's Memorandum in Opposition to Plaintiff's
Motion to Dismiss at 5; Reisert Decl., Exhs. 7-15.
Plaintiff's claims as set forth in the complaint are closely
intertwined with the purchase and sale of shares in the Listed Fund
Families. Although plaintiff disavows claims based on purchases or
sales, shares in the Listed Fund Families were purchased during the class
period by plaintiff and undoubtedly by other class members. If, as
alleged, defendants' receipt of
kickbacks caused defendants to steer class members to certain funds, then
those class members' claims for damages from "retention kickbacks" are
inextricably related to their purchases of shares of those funds. As the
Dabit Court held, "[d]amages suffered from `owning' stocks during the
class period include damages incurred by purchasing them during that
period, and nothing in the complaint excludes such claims." 2005 U.S.
App. LEXIS 410, at *58.
Plaintiff's complaint therefore is dismissed without prejudice, and
plaintiff is given leave to replead his state court complaint excluding
all class members who purchased shares of the listed fund families after
the commencement of the class period. It bears mention that because
plaintiff himself purchased and sold shares of the Listed Fund Families
during the class period, if the class period remains as it is, he would
be ineligible for membership in the class.
Plaintiff also requests attorneys' fees in connection with his motion
to remand. That request is denied. Under 28 U.S.C. § 1447(c), a district
court has the discretion to award attorneys' fees upon making an order
remanding the case. However, our Circuit has held that § 1447(c) does not
authorize a grant of attorneys' fees where plaintiff's remand motion is
denied: "Providing for attorneys' fees when granting a motion to remand
serves the purpose of deterring improper removal, whereas awarding fees,
whereas awarding fees when denying a motion for remand does not." Circle
Indus. USA v. Parke Constr. Group, Inc., 183 F.3d 105, 100 (2d Cir.
* * *
For the above reasons, plaintiff's motion to remand and request for
attorneys' fees are denied. Defendant's motion to dismiss the complaint
is granted and the complaint is dismissed without prejudice.