According to the House Report, the purpose of "strike suits"
was to "extract a sizable settlement from companies that are
forced to settle, regardless of the lack of merits of the suit,
simply to avoid the potentially bankrupting expense of
litigating." Id. Therefore, "in order to prevent certain State
private securities class action lawsuits alleging fraud from
being used to frustrate" federal objectives, Congress found it
"appropriate to enact national standards for securities class
action lawsuits involving nationally traded securities." Id. at
2. It appears that Congress's intention when it enacted SLUSA,
with the exception of certain "preserved actions," was to
completely preempt state securities class actions alleging fraud
or manipulation relating to covered securities.
Must defendant be an "issuer" or affiliate of an issuer for
SLUSA to apply?
Plaintiff argues that this action "is not the type of action
intended for regulation [under PSLRA or SLUSA] because plaintiff
was not an investor in the securities issued by defendants, nor
did the fraud complained of arise out of the acts and omissions
of a company in which plaintiff was an investor." (Pl.Br. at 8.)
Neither the language of the statutes nor their legislative
history indicate that they were intended to apply only to
situations in which issuers of securities are accused of
misrepresentation. Adopting plaintiff's proffered limitation on
SLUSA's reach would frustrate Congress's clear intent to make
federal courts the "exclusive venue" for securities class actions
because it would preserve all state law securities claims
alleging fraud "in connection with the purchase or sale of a
covered security" by anyone other than a securities issuer or
affiliate thereof: brokers, dealers, clearinghouses, and others.
There is no indication that Congress intended to limit SLUSA in
that manner or to that extent. Moreover, Congress explicitly
provided that certain types of actions — none of which apply here
— are exempt from SLUSA. 15 U.S.C. § 78bb(f)(3). It is logical to
conclude that had Congress intended to limit SLUSA's application
in the manner propounded by plaintiff, it would have done so
Contrary to plaintiff's contention, it does not necessarily
follow that Congress intended SLUSA to apply only in cases
involving issuers or their affiliates simply because the majority
of cases to which SLUSA has been applied involved such
situations. Additionally, courts have applied both PSLRA and
SLUSA in cases involving non-issuers of securities. In Abada v.
Charles Schwab & Co., Inc., 68 F. Supp.2d 1160, 1161 (S.D.Ca.
1999), the plaintiff alleged various state law claims concerning
Schwab's on-line brokerage account services arising from
allegedly false representations that Schwab "would provide fast,
high quality executions" of trades. As in this case, the
plaintiff argued that SLUSA was intended to apply only to
securities issuers or their affiliates and because Schwab was
neither, SLUSA did not apply. See id. at 1168. The court
considered the language and legislative history of SLUSA and
found, as found here, no indication that SLUSA was intended to
apply only to issuers or their affiliates. Id. The court
observed that it could not have been Congress's intent to
preserve all state securities fraud claims against anyone that
was not an issuer or its affiliate, especially in light of the
"wide-sweeping limitation" of SLUSA. Id. Moreover, because
Congress explicitly provided for exceptions to SLUSA, Congress
could not have intended to limit the statute's applicability to
issuers or their affiliates by remaining silent on the issue.
Id.; see also Ellison v. American Image Motor Co., 36 F. Supp.2d 628,
642 (S.D.N.Y. 1999) (applying PSLRA to broker/dealers and
"market maker"); Newton v. Merrill, Lynch, Pierce, Fenner &
Smith, Inc., 135 F.3d 266, 269 (3d Cir. 1998) (en banc)
(applying § 10 of 1934 Securities Act and Rule 10b-5 to
broker/dealer and "market maker").
Has plaintiff pleaded securities fraud claims?
Plaintiff argues that four of his five causes of action are not
claims that may be adjudicated under the federal securities laws.
(Pl.Rep.Br. at 8-9.) With respect to the fifth claim, pled
pursuant to the New Jersey Consumer Fraud statute, plaintiff
contends the issue is whether the complaint alleges intent to
defraud. In essence, plaintiff argues that since the majority of
his claims against Knight are not securities fraud claims, SLUSA
does not govern.
Plaintiff refers to Burns v. Prudential Securities,
116 F. Supp.2d 917, 922 (N.D.Ohio 2000), for its analysis of whether
the plaintiffs alleged that the defendant "either `misrepresented
or omitted a material fact' or `used or employed any manipulative
or deceptive device or other contrivance'" as required by
SLUSA.*fn2 (Pl.Rep. Br. at 7.) The Burns court concluded that
removal to federal court was improper because the complaint did
not allege "specific facts giving rise to a strong inference"
that the defendant "acted deceitfully" as required by the
securities laws and SLUSA. Id. at 926. Plaintiff states that
"[w]hat apparently was missing from the allegation in the Burns
complaint were allegations demonstrating intent to defraud" and
argues that the complaint in the instant action is similarly
deficient. (Pl.Rep.Br. at 7-9.)
Plaintiff is correct that the Burns court considered whether
the complaint satisfied Fed.R.Civ.P. 9(b) and the heightened
pleading requirements of PSLRA requiring that allegations of
fraud be pled with enough specificity to give rise to a strong
inference that the defendant acted with the required state of
mind: "intent to deceive, manipulate or defraud." See Burns,
116 F. Supp.2d 917, 922, 923 (quoting Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 194, 96 S.Ct. 1375, 47 L.Ed.2d 668
(1976)). The Burns court concluded that the plaintiffs had not
alleged facts suggesting that the defendant's conduct involved
any "element of deception." Id. at 924. Specifically, the court
noted that the plaintiffs had not alleged that the defendant "had
anything to gain financially, that he was churning plaintiffs'
accounts, or that he intended to benefit by contravening the
terms of the brokerage contracts." Id. Further, the court
[T]his case involves an allegation of one instance of
unauthorized trading. While this may sustain
conversion, breach of contract, breach of fiduciary
duty, or negligence claims, it does not suggest, much
less strongly so as is mandated by PSLRA, that [the
defendant] meant to defraud plaintiffs by liquidating
their accounts. Only additional "facts giving rise to
a strong inference" that (the defendant) acted with
intent to defraud could support a tenable securities
Unlike the facts alleged in Burns, the facts alleged in this
case give "rise to a strong inference" that Knight acted with
intent to defraud. Specifically, the complaint alleges that
Knight falsely stated in various public filings that it
guaranteed to execute retail customers' trades at the best
available market price, yet Knight traded "in advance of such
retail customers," thus giving Knight "an informational advantage
amounting to exclusive intelligence on which it can trade for its
own profit." (Compl. ¶¶ 11-20.) Plaintiff asserts that Knight
"concealed, suppressed and omitted the fact that it was
executing" trades in a manner that caused customers "to pay
artificially higher prices than they would have otherwise paid.
Defendant failed to disclose this information with the intent
that Plaintiff and Class members rely upon such concealment,
suppression or omission." (Compl. ¶ 44.) Unlike Burns, which
involved "one instance of unauthorized trading," 116 F. Supp.2d at
924, the complaint in this case alleges a four-year period in
which Knight made false and misleading statements upon which it
intended that plaintiff rely and engaged in a pattern and
practice of trading in advance of its retail customers and the
selling or buying at a profit at the expense of its customers.
(Compl. ¶¶ 13-15, 19, 20, 24, 37, 42-44.)
Plaintiff dissects his individual causes of action in an
attempt to argue that they are state law claims "not capable of
being adjudicated under the federal securities laws." (Pl.Rep.Br.
at 8.) Additionally, plaintiff asserts that Burns cites cases
for the proposition that many "courts have not found securities
laws violations `based on allegations of conversion, breach of
contract, breach of fiduciary duty and negligence.'" (Pl.Rep.Br.
at 8, n. 3.) However, unlike Burns and the cases cited in
footnote 2 of that opinion, allegations of Knight's pattern and
practice of misrepresentation and intent to deceive, manipulate,
or defraud pervade the complaint and are incorporated by
reference in each cause of action in the complaint.*fn3 See
Abada, 68 F. Supp.2d at 1166 ("Plaintiff's characterization of
his claims are not at issue. The issue, rather, is the substance
of the claims contained in the complaint, not the particular
semblance in which it is cloaked."). It must be concluded,
therefore, that plaintiff has pleaded what are, in essence,
securities fraud claims, even though they were framed as state
law claims, and that SLUSA governs.
For the reasons set forth above, removal of the case to federal
district court was proper. Plaintiff will have twenty days to
file an amended complaint that conforms with PSLRA. If plaintiff
fails to do so, the matter will be dismissed pursuant to SLUSA.
An appropriate order shall be entered.