United States District Court, E.D. New York
For Alexander Marchak, Holly Marchak, Ann Marie Delia, Estate of William Delia, Shirley Abrams, Lynne Belaief, Janice Bini, Connie Boccia, Frank Boccia, Margot Boccia, Thomas Bogan, Joan Bogan, Giuliana Bona, Mary Cameron, Andrea Chiarappa, Yolanda Chiarappa, Oliver Colonna, Rita Correale, Doreen Daly, Francis Daly, Lorraine Daly, Adelia Del Trecco, Domenic DeSantis, Linda DeSantis, Lorenzo DeSantis, Maria DeSantis, Adele Disarmato, Elvira Federico, Silvio Federico, Onelia Federico, Carl Gambello, Sandra Ferraro, Carole Gambello, Barbara Grebin, Stephanie Grebin, Ludvig Haugedal, Dominick Iocco, Maria LoCascio, Joseph LoVecchio, Janet LoVecchio, Edward Mahoney, Tara Mahoney, Leonard Mandato, Joseph Mannanice, Doreen Mannanice, Brian Marchese, Barbara McIntosh, Lidia Ohryn, Marika Ohryn, Peter Ohryn, Ohryn Family Trust, Inga Poslitur, Joseph Rudis, Irene Rudis, Lois Sarli-Krebs, Myron Sech, Lisa Caprara Sech, Anthony Sech, by his mother and natural guardian Lisa Caprara Sech, Maria Shaw, Robert Sweeney, Veronica Sweeney, Tara Sroka, Dylan Tarrazi, Caroline Tarazzi, Frederick Tarazzi, Gregory Tarazzi, Victor Tarazzi, Jr., George Tarazzi, Kathleen Tarazzi, Manuel Tutunjian, Sandra Wetrich Trust, Maureen Zawislak, Alice Zinna, Plaintiffs: Nicholas I. Timko, LEAD ATTORNEY, Kahn Gordon Timko & Rodriques PC, New York, NY.
For JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., Defendants: Andrea Likwornik Weiss, LEAD ATTORNEY, Levi Lubarsky & Feigenbaum, LLP, New York, NY; Adam David Weiss, Alan H. Scheiner, Levi Lubarsky & Feigenbaum LLP, New York, NY.
For M& T Bank Corporation, Defendant: S. Robert Schrager, LEAD ATTORNEY, Hodgson Russ LLP, New York, NY.
For HSBC North America, Inc., doing business as HSBC Bank USA, N.A., Defendant: Louis Smith, LEAD ATTORNEY, Greenberg Traurig LLP, Florham Park, NJ; Aaron Van Nostrand, Greenberg Traurig LLP, Florham Park, NJ.
For TD Bank, N.A., as successor in interest to Commerce Bank, Defendant: Allison D Charney, McGuire Woods, LLP, LEAD ATTORNEY, New York, NY.
MEMORANDUM & ORDER
MARGO K. BRODIE, United States District Judge.
Plaintiffs, seventy-four individual investors, commenced this action on October 27, 2011, in the Supreme Court of New York, Kings County, against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., M& T Bank Corporation, HSBC North America, Inc., d/b/a HSBC Bank USA, N.A., and TD Bank, N.A., alleging state law claims of knowing participation in a breach of trust, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, aiding and abetting conversion, unjust enrichment, fraud on the regulator, and common law negligence. On December 1, 2011, Defendants TD Bank and JPMorgan Chase Bank, with the consent of the other Defendants, removed the action to this Court arguing that the claims are precluded by the Securities Litigation Uniform Standards Act (" SLUSA" ), 15 U.S.C. § § 77p(b), (c) and 78bb(f)(1), (2), or, in the alternative, are removable pursuant to 28 U.S.C. § § 1331, 1441, and 1446, as Plaintiffs' state law claims necessarily present federal questions arising under the laws of the United States. (Notice of Removal, Docket Entry No. 1.) Plaintiffs moved to remand the action to state court and, on March 14, 2013, the Court stayed this action at the request of the parties, pending the Supreme Court's decision in Chadbourne & Parke LLP v. Troice, 571 U.S., 134 S.Ct. 1058, 188 L.Ed.2d 88 (2014). Following the publication of Troice, the parties submitted additional briefing based on Troice.
For the reasons set forth below, the Court denies Plaintiffs' motion to remand, and dismisses Plaintiffs' claims pursuant to SLUSA.
a. Factual background
This action arises from a $40 million Ponzi scheme carried out by Philip Barry (" Barry" ) and allegedly enabled by Defendants. (Compl. ¶ 1.) From January 1978 through February 2009, Barry operated Leverage Group, Leverage Option Management Inc. and Northern America Financial Services (collectively, " Leverage" ), and induced Plaintiffs to " invest in or maintain their investments with Leverage," promising them a guaranteed annual rate of return of 12.55%. ( Id. ¶ 91.) Barry placed Plaintiffs' funds in accounts opened with JPMorgan Chase Bank, N.A. (" Chase" ), M& T Bank Corporation (" M& T" ), HSBC North America, N.A. (" HSBC" ), and Commerce Bank, which was later acquired by TD Bank, N.A. (" TD Bank" ). ( Id. ¶ 97.) Barry used these accounts to conduct large dollar transactions by check, routinely made large cash withdrawals, and wrote at least 1,623 checks that were returned for insufficient funds between 2004 and 2009. ( Id. ¶ ¶ 100-01.)
To induce Plaintiffs to invest in or to maintain their investments in Leverage, Barry " falsely represented that he would use the investors' funds to trade in options or other securities." ( Id. ¶ 91.) Barry " claimed that he would employ a proven trading strategy to protect investors' principal and generate a guaranteed rate of return[,] . . . . claimed to some investors that their investment in [L]everage would be protected from loss by private insurance and/or by the Securities Investors Protection Corporation," and " routinely fabricated quarterly statements for investors that reported lofty investment performance." ( Id. ¶ ¶ 91, 94.) However, " [c]ontrary to Barry's representations that he would trade securities for the benefit of Leverage investors, he did no securities trading at all for several years." ( Id. ¶ 93.) Instead, Barry used the funds to meet withdrawal demands from the investors and diverted significant funds for his own use. ( Id. ¶ ¶ 93, 115.)
Plaintiffs allege that Defendants breached various duties imposed by federal banking regulations, including federal anti-money laundering (" AML" ) rules found in Section 352 of the United States Patriot Act and rules imposed by the Bank Secrecy Act (" BSA" ). ( Id. ¶ ¶ 2-5). Plaintiffs further allege that Defendants failed to fully comply with regulatory duties to institute programs to " know your customer" (" KYC" ), to monitor Barry's account activity, to investigate suspicious activity in Barry's accounts, and to take action in light of the evidence of illegal activity being conducted in and through Barry's accounts with Defendants. ( Id. ¶ ¶ 6-11.) Plaintiffs allege that in failing to abide by these duties, Defendants " facilitated and enabled substantial financial fraud that was being conducted with their knowledge . . . ." ( Id. ¶ 1.)
Plaintiffs raise seven causes of action pursuant to state law. Common to many of these claims are the allegations that Defendants " knew that the transactions taking place in each of [the] accounts did not coincide with any legitimate enterprise and thus could only be plausibly explained by fraud," but nonetheless Defendants " moved funds in and out of [the] accounts at Barry['s] behest and allowed Barry['s] customer funds to be used to make payments to Barry, to allow Barry to purchase speculative real estate, and to fund redemptions from other investors rather than to purchase securities from the Barry accounts." ( Id. ¶ ¶ 249-50, 260, 264, 277, 285, 289.) Plaintiffs also allege that " each of the [D]efendants knew, or at least consciously avoided knowing that Barry did not purchase securities bu[t] instead stole customers' money . . . . [and] knew that the inexplicable transactions taking place in the Barry accounts did not coincide with any legitimate securities investment," ( id. ¶ 285), and that " [e]ach of the [D]efendants was aware that Barry purported to be an investment advisor who would invest customers' funds in various securities," ( id. ¶ 272).
b. Procedural background
Defendants removed this action on December 1, 2011, claiming that Plaintiffs' claims are precluded by SLUSA or, in the alternative, are removable pursuant to 28 U.S.C. § § 1441 and 1331, as Plaintiffs' state law claims necessarily present federal questions arising under the laws of the United States. (Notice of Removal ¶ ¶ 8-9.)
Defendants claim that removal was appropriate pursuant to SLUSA because the action is a " covered class action," based on state common law alleging misrepresentation in connection with the purchase or sale of a " covered security." ( Id. ¶ 39.) Defendants argue that the claim is a " covered class action" because there are at least 50 plaintiffs with common issues of law or fact, and the Complaint does not distinguish between them with regard to questions of law or fact. ( Id. ¶ 23.) Defendants further contend that the action pertains to " covered securities" because the Complaint alleges that Defendants knew or consciously disregarded Barry's fraud in " manipulating investors to believe he would invest their money in securities," when Barry never invested the money in securities. ( Id. ¶ 35.) In the notice of removal, Defendants state that on or about September 23, 2009, Barry had entered into a consent judgment with the Securities and Exchange Commission (" SEC" ) consenting, inter alia, to an order barring him from association with an investment advisory business, and that in November 2010, Barry was convicted by a federal jury of one count of securities fraud and 33 counts of mail fraud. ( Id. ¶ ¶ 12-14.)
In the alternative, Defendants argue that removal was appropriate pursuant to 28 U.S.C. § 1441(a) because, although Plaintiffs plead only state common law claims, " [t]he foundation of Plaintiffs' entire complaint . . . is Defendants' alleged violations of federal laws and regulations, including the Patriot Act, the Bank Secrecy Act, guidance promulgated by the Office of the Comptroller of the Currency and various unspecified 'Federal . . . legislation and rules.'" ( Id. at ¶ 42.) Defendants state that " [a]s a practical matter, each of Plaintiffs' state common law causes of action seeks only to enforce duties or obligations allegedly created by and arising directly under these federal laws." ( Id. at ¶ 43.)
Plaintiffs moved to remand the action to state court, arguing that Defendants failed to meet their burden to show the action was properly removable under SLUSA. First, Plaintiffs contend that Defendants have not shown the action is a " covered class action" because Defendants did not identify which questions of law or fact predominate in the action, and because common questions of law or fact do not predominate the action. Plaintiffs argue that issues as to whether and how each Plaintiff relied on Barry's misrepresentations regarding Leverage's purpose, investment strategy and performance are central to their claims. (Plaintiffs' Memorandum in Support of Motion to Remand (" Pl. Mem." ), Docket Entry No. 17, at 11.) Plaintiffs further argue that the securities in question in this action are not " covered securities," because Plaintiffs invested directly in the Leverage funds rather than in covered securities. ( Id. at 13.) They contend that Barry never bought securities with the funds invested in Leverage accounts, nor did he ever receive the proceeds of securities sales into his accounts with the Defendant banks, and consequently the conduct that gives rise to the claims in this action " is too far removed from any securities transaction (and there were none) to be said to have" the requisite statutory connection with covered securities. ( Id. at 23.) Defendants opposed the motion for remand.
On November 15, 2012, Defendants submitted a letter notifying the Court that a petition for writ of certiorari had been filed with the United States Supreme Court in one of the cases cited by the parties in briefing the motion to remand, Roland v. Green, 675 F.3d 503 (5th Cir. 2012). (Docket Entry No. 22.) On January 18, 2013, the Supreme Court granted the petition for a writ of certiorari in Green and related cases. See Chadbourne & Parke LLP v. Troice, 571 U.S., 133 S.Ct. 977, 184 L.Ed.2d 757 (2013). At a pre-motion conference before this Court on March 14, 2013, the parties agreed that the Supreme Court's decision in Troice would impact the outcome of Plaintiffs' motion for remand and requested that the Court stay the litigation pending a decision. (See Minute Entry dated March 14, 2013.) The Court stayed the instant litigation pending the Supreme Court decision in Troice. On February 26, 2014, the Supreme Court issued its decision in Troice. 571 U.S., 134 S.Ct. 1058, 188 L.Ed.2d 88 (2014). The parties submitted supplemental briefing regarding the impact of Troice on this action.
a. Standard of review
A civil action brought in state court may be removed by a defendant to a federal court of original jurisdiction. 28 U.S.C. § 1441(a). Federal courts are to construe the statute narrowly, resolving any doubts against removability, " [i]n light of the congressional intent to restrict federal court jurisdiction, as well as the importance of preserving the independence of state governments." Lupo v. Human Affairs Int'l, Inc., 28 F.3d 269, 274 (2d Cir. 1994); Balram v. Cohen & Slamowitz, LLP, No. 13-CV-07213, 2014 WL 527899, at *1 (E.D.N.Y. Feb. 7, 2014). The party asserting jurisdiction bears the burden of proving that jurisdiction and procedural requirements are met. Mehlenbacher v. Akzo Nobel Salt, Inc., 216 F.3d 291, 296 (2d Cir. 2000); Balram, 2014 WL 527899, at *1. " An effective petition for the removal of a state action to federal court must allege a proper basis for the removal under sections 1441 through 1445 of Title 28." Bankhead v. New York, No. 13-CV-3377, 2013 WL 6145776, at *1 (E.D.N.Y. Nov. 21, 2013) (quoting Negron v. New York, No. 02-CV-1688, 2002 WL 1268001, at *1 (E.D.N.Y. Apr. 1, 2002)); see also In re Methyl Tertiary Butyl Ether Prods. Liab. Litig., 488 F.3d 112, 124 (2d Cir. 2007) (" In determining whether jurisdiction is proper, we look only to the jurisdictional facts alleged in the ...