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Indiana Electrical Workers Pension Trust Fund v. Millard

July 25, 2007

INDIANA ELECTRICAL WORKERS PENSION TRUST FUND, IBEW, ON BEHALF OF ITSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
ROBERT B. MILLARD; ARTHUR L. SIMON; JOHN M. SHALIKASHVILI; THOMAS A. CORCORAN; ALAN H. WASHKOWITZ; ROBERT V. LAPENTA; CLAUDE R. CANIZARES; JOHN E. MONTAGUE; JOHN P. WHITE; PETER A. COHEN; THE ESTATE OF FRANK C. LANZA; AND L-3 COMMUNICATIONS HOLDINGS, INC., DEFENDANTS.



The opinion of the court was delivered by: John G. Koeltl, District Judge

OPINION AND ORDER

This case raises the question whether the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. § 78bb(f), preempts a class action filed in state court by a shareholder of the defendant L-3 Communications Holdings, Inc. ("L-3"). The plaintiff, Indiana Electrical Workers Pension Trust Fund (the "Pension Fund"), filed a Class Action Complaint ("Complaint") in the New York State Supreme Court, New York County, on November 20, 2006, alleging that the defendants, who include officers and directors of L-3 and the corporation itself, breached their fiduciary duty of disclosure under Delaware law by making misrepresentations and failing to disclose material facts about a scheme of improperly backdating stock options and thereby persuading shareholders to vote to authorize an increase in the number of shares available under L-3's stock option plan by 6.5 million.

On January 9, 2007, the defendants removed the action to this Court pursuant to 28 U.S.C. §§ 1331 and 1441 and the removal provision of SLUSA, 15 U.S.C. § 78bb(f)(2). The defendants now have moved to dismiss the Complaint pursuant to SLUSA's preemption provision, 15 U.S.C. § 78bb(f)(1). The plaintiff has cross-moved to remand the Complaint to the New York State Supreme Court and for an award of attorneys' fees pursuant to 28 U.S.C. § 1447(c). The two cross-motions turn on the same question: whether the Complaint asserts a claim that falls within SLUSA's preemption provision. Cf. Winne v. Equitable Life Assurance Soc'y, 315 F. Supp. 2d 404, 409 (S.D.N.Y. 2003) ("[T]he analysis for removal and dismissal is essentially the same."). More specifically, the case hinges on the proper interpretation of a clause in SLUSA titled "Preservation of certain actions," 15 U.S.C. § 78bb(f)(3), and commonly known as the "Delaware carve-out," which exempts certain class actions based on the statutory or common law of the issuer's state of incorporation.

For the reasons explained below, the Court finds that the claims asserted fall within the Delaware carve-out and thus are not preempted by SLUSA. The Complaint is therefore remanded to the New York State Supreme Court.

I.

The following facts alleged in the Complaint are accepted as true for the purposes of deciding the present motions. The defendants allegedly participated in a stock option backdating scheme between 1998 and 2003 by which L-3's executive officers and other employees received millions of dollars of undisclosed compensation. (Compl. ¶¶ 1, 27-28.) L-3's proxy statements from 2003 to 2006 falsely stated that the strike price for employee stock options would be set at the stock's fair market value on the date of the grant (id. ¶¶ 3, 38-39, 42, 45, 48, 51, 67-68, 74-75), and L-3's annual reports and Forms 10-K overstated its net income and retained earnings during the same period (id. ¶¶ 43-44, 46-47, 49-50, 52-53, 68, 75). L-3 publicly admitted in a July 27, 2006 press release that it granted options between May 1998 and July 2003 that carried unauthorized "dates of grant" that were earlier than the true date of the grants and thus resulted in artificially low strike prices. (Id. ¶¶ 29-31.) The 2004 proxy statement included a provision seeking shareholder approval to increase the number of shares available to cover L-3's stock option plan by 6.5 million shares. (Id. ¶¶ 38, 54.) If the option backdating scheme had been revealed to L-3's shareholders (the putative class members) prior to their 2004 proxy vote, they never would have approved the addition of 6.5 million shares to the stock option plan. (Id. ¶ 55.) The increase in shares dedicated to the stock option plan pursuant to the 2004 amendment and the "at least 1.84 million options" issued since that amendment have resulted in dilution to the shareholders' voting power and their proportionate share of the company. (Id. ¶ 71.)

Count One of the Complaint alleges that the defendants breached their fiduciary duty of disclosure by failing to disclose the option backdating scheme and by causing L-3 to publish false information about the option grants in its proxy statements, Forms 10-K, and annual reports. (Id. ¶¶ 65-71.) Count Two requests rescission of the shareholder-approved 2004 amendment to the stock option plan, which added 6.5 million shares to the number of shares authorized under the plan. (Id. ¶¶ 72-80.) The Complaint seeks relief in the form of declaratory judgment, rescission, injunctive relief, compensatory damages, and an award of costs and expenses.

II.

SLUSA confers upon federal courts exclusive jurisdiction over certain "covered class actions" that relate to securities fraud. 15 U.S.C. § 78bb(f)(1); see also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 126 S.Ct. 1503, 1511-12 (2006); Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116, 123 (2d Cir. 2003) (finding that SLUSA "completely preempt[s] the field of certain types of securities class actions"). SLUSA was enacted in response to an unintended consequence of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), 15 U.S.C. §§ 77z-1, 78u-4, which introduced various limitations designed to deter perceived nuisance suits including class actions involving nationally traded securities. See Dabit, 126 S.Ct. at 1510-11. The PSLRA "prompted at least some members of the plaintiffs' bar to avoid the federal forum altogether" by bringing class actions under state law. Id. at 1511. SLUSA was designed to "stem this shif[t] from Federal to State courts and prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of [the PSLRA]." Id. (internal quotation marks omitted). It accomplished this goal by prohibiting certain types of securities class actions from being brought in state or federal court. Alessi v. Beracha, 244 F. Supp. 2d 354, 357 (D. Del. 2003).

The core provision of SLUSA provides:

No 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--

(1) Class action limitations

(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or

(B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

15 U.S.C. § 78bb(f)(1); see also Dabit, 126 S.Ct. at 1511-1512. A "covered class action" is further defined to include a lawsuit in which damages are sought on behalf of more than fifty people, and a "covered security" is one traded nationally and listed on a regulated national exchange. 15 U.S.C. § 78bb(f)(5); see also Dabit, 126 S.Ct. at 1512 & nn.8-9.

SLUSA further provides that any "covered class action" meeting the provisions of § 78bb(f)(1) "shall be removable to the Federal district court for the district in which the action is pending." 15 U.S.C. § 78bb(f)(2). It is pursuant ...


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