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