Posner Prose

Classic Judge Posner.Just classic.I never get tired of reading his opinions, and believe you me I get tired of many of them quick.So, listen to this from yesterday’s Seventh Circuit opinion in the AT&T/Georgeson class action.You see, as he puts it, “after you buy a car and drive away with your new possession, much can happen to affect the value of your purchase. If what happens is traceable to something that occurred before the sale was complete, such as a defective engine block, you may be able to undo the sale on the basis that that something happened ‘in connection with’ the sale. But if something happens after the transaction is complete to make it less worthwhile to you, such as the dealer’s replacing a tire that has worn out with one that is the wrong size, it is a separate wrong, not anything connected with the original sale unless the wrong is a breach of warranty.”

But “of course there is a literal sense in which anything that happens that would not have happened but for some prior event is connected to that event. In that sense the fraud of which the plaintiff complains is connected to the merger, without which there would not have been such a fraud against the plaintiff and her class. But in the same sense the fraud is connected to the Big Bang, without which there would never have been a MediaOne or even an AT&T.”

There’s more where that came from, so if you like Posner (Yeah!), or you really can’t wait to read another SLUSA case (until now, always a big Zzzzz), you can read the opinion or listen to the oral argument in Gavin v. AT&T & Georgeson, issued September 6, 2006, right here.

Nugget: “Georgeson’s lawyer told us that the defendants had not sought removal on the alternative ground of diversity because they were certain there was jurisdiction under SLUSA. That was a mistake, but he added that he doubted that the plaintiff’s complaint satisfied the requirement that the amount in controversy exceed $ 75,000. That was another mistake.”

You Gotta Know When to Hold ‘Em

Yesterday, a Panel of the Seventh Circuit issued a SLUSA-based opinion reversing Chief Judge G. Patrick Murphy’s (S.D. IL) remand of a state law securities class action brought against
Citigroup Global Markets (formerly known as Salomon Smith Barney (“SSB”)). The key issue under SLUSA boiled down to whether or not Plaintiffs alleged misrepresentations “were in connection with the purchase or sale of securities.” If so connected, Plaintiffs lose. If not, they head back to state court in southern Illinois, and Citigroup had best get its checkbook ready.

Since the U.S. Supreme Court has never decided what is or isn’t “connected” in the SLUSA context, the Panel (with Judge Kenneth F. Ripple as lead author, and Judges William J. Bauer and Michael S. Kanne in standard 0ne-by-two cross-cover formation) had to settle for the next best thing, and that’s Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), in which “the Court held that investors who neither purchase nor sell securities have no standing to maintain private litigation to recover damages under section 10(b) and Rule 10b-5, even if the failure to purchase or sell was the result of fraud.” Having anticipated this definition, Plaintiff’s pointed out that his complaint says “SSB’s misrepresentations caused him and other class members to hold securities, not to purchase or sell them.”

But this didn’t work, as the Panel concluded “that the present claims are connected sufficiently to the purchase and sale of a covered security for the purposes of SLUSA preemption and removal” because “by depicting their classes as containing entirely non-traders, plaintiffs do not take their claims outside § 10(b) and Rule 10b-5; instead they demonstrate only that the claims must be left to public enforcement. It would be more than a little strange if the Supreme Court’s decision to block private litigation by non-traders became the opening by which that very litigation could be pursued under state law, despite the judgment of Congress (reflected in SLUSA) that securities class actions must proceed under federal securities law or not at all.”

Result? Remand vacated and Plaintiff’s claims tossed.

You can listen to the oral argument here.

Plus, you can read Disher v. CitiGroup, issued August 17, 2005, here or at at 2005 U.S. App. LEXIS 17334.

Nugget: “Blue Chip Stamps combined with SLUSA may mean that claims of the sort plaintiffs want to pursue must be litigated as derivative actions or committed to public prosecutors, but this is not a good reason to undercut the statutory language.”

Court Wields SLUSA in Tossing Mutual Fund Action

In October 2003, an investor filed a putative class action in Madison County, Illinois against the Templeton Funds, alleging that the Fund “breached a duty of care owed to investors by using stale pricing information to value securities in their open end mutual funds” (to be more specific, during the interval that elapses between when the Fund sets its share Net Asset Value (or “NAV”) and releases it to the NASD for communication to the public, securities markets in countries such as Japan, Russia, Germany, and Australia have traded for an entire session, thus making the prices stale).

Anyway, a month after the case was filed, Templeton promptly removed the action to the Southern District of Illinois. However, Judge Michael J. Reagan sent the case back to the state court, finding that his federal forum had no subject matter jurisdiction. Over a year later, Defendants again removed the case, “claiming that the Seventh Circuit’s April 5, 2005 opinion in an unrelated case, Kircher v. Putnam Funds Trust, 403 F.3d 478 (7th Cir. 2005), rendered” the action “freshly removable.” Judge Reagan noted that the Seventh Circuit’s opinion held that “SLUSA’s removal and preemption provisions are triggered when four conditions are met: (1) the underlying suit is a “covered class action,” (2) the action is based on state or local law, (3) the action concerns a “covered security,” and (4) the defendant misrepresented or omitted a material fact for employed a manipulative or deceptive device or contrivance “in connection with the purchase or sale” of that security.” Since the judge found that the four conditions had been satisfied, he held removal proper, and further found that “Kircher mandates that this Court dismiss all of Plaintiffs’ state law claims as barred by SLUSA,” as SLUSA “effectively blocks state court litigation of such claims.”

You can read the decision, issued July 12, 2005, at 2005 U.S. Dist. LEXIS 14500.

Nugget: “Plaintiffs — whose briefs focused on removal under 28 U.S.C. § 1446(b) — have not addressed the removability of the case under the above-cited SLUSA provision. Nor have Plaintiffs disputed Defendants’ argument that the allegations in this action are ‘identical’ to those examined by the Seventh Circuit in Kircher.”

Split Continues with Securities Act Claims Remanded

Further widening the split of authority on whether SLUSA allows defendants to remove covered class actions from state to federal court when the complaint only asserts federal causes of action under the 1933 Act, Judge R. Gary Klausner (C.D. Cal.) has ruled in the Salem Communications Corporation action that he will not permit it. In finding that the “plain meaning” of SLUSA prohibits removal, the court declared that “the language of the 1933 Act clearly states that removal is allowed only for class actions” “based upon the statutory or common law of any State.” “Thus, the plain language of the amended 1933 Act allows only for the removal of state claims or for federal claims brought along with state claims.”

As for Defendants’ reliance on SLUSA’s legislative history, Judge Klausner recognized that “while some pieces of SLUSA’s legislative history might, standing alone, show a desire by Congress to move many security class action claims to federal court, when taken as a whole the legislative history does not show a clearly contrary congressional intent,” because “for instance, the Senate and the House stated that SLUSA was designed to limit the conduct of securities class actions under state law,” and “these statements are consistent with Plaintiffs’ proposed interpretation.”

You can read the decision, issued June 28, 2005, at 2005 U.S. Dist. LEXIS 14202.

Nugget: “Two district courts in this Circuit have reached opposite conclusions.”