Opinion
Civ. No. 03-5081 (DRD).
January 12, 2004
Jean-Marc Zimmerman, Esq., Eduard Korsinsky, Esq., ZIMMERMAN, LEVI KORSINSKY, L.L.P., Westfield, NJ and New York, NY, Attorneys for Plaintiff.
Robert H. Bell, Esq., Mark A. Perry, Esq., GIBSON, DUNN CRUTCHER LLP, New York, NY and Washington, D.C., Attorneys for Defendants Janus Capital Group, Inc. and Janus Capital Management, LLC.
William E. Goydan, Esq., WOLFF SAMSON PC, West Orange, NJ.
Robert J. Jossen, Esq., Adam B. Rowland, Esq., SWIDLER BERLING SHEEREFF FRIEDMAN, LLP, New York, NY, Attorneys for Defendants Canary Capital Partners, LLC and Canary Investment Management, LLC.
OPINION
This action, removed from the Superior Court of New Jersey, is one of many pending cases in numerous courts across the country in which plaintiffs allege that defendants (here Janus Capital Group, Inc.; Janus Capital Management, LLC; Canary Capital Partners, LLC; and Canary Investment Management, LLC) either engaged in or permitted improper trading (including "market timing") in mutual fund shares. Janus has moved before the Judicial Panel on Multidistrict Litigation for transfer of the numerous cases filed against it involving market timing allegations; and it has moved before this Court for a stay of proceedings pending a decision on transfer by the MDL Panel. Plaintiff has moved for remand to the Superior Court. Canary has joined Janus's motion for a stay and joined in its opposition to the motion for remand Because it appears that the interests of judicial economy will be best served by a stay, with little or no disadvantage to Plaintiff, the motion for a stay of proceedings will be granted, and the motion for remand will be denied without prejudice.
Janus Capital Group, Inc., and Janus Capital Management, LLC, will be referred to collectively as "Janus"; Canary Capital Partners, LLC; and Canary Investment Management, LLC, will be referred to collectively as "Canary."
BACKGROUND
Janus is an asset management firm that markets and manages mutual funds. Plaintiff was at relevant times (according to the Complaint) an investor in certain of Janus's mutual funds. The Complaint alleges that between September 4, 1999 and September 4, 2002 Janus permitted Canary, an investor and a privileged customer, to engage in market timing — rapid trading that permitted it to take advantage of inefficiencies in the pricing system for mutual fund shares, ultimately at the expense of other investors in the funds. Despite that fact that the prospectus for the affected funds stated that such trading activities would not be permitted, Janus allegedly allowed Canary to engage in market timing in exchange for Canary's depositing assets in a Janus money market fund (assets which generated management fees for Janus).
Plaintiff brings suit on behalf of "all investors in the Funds from September 5, 1999 through September 4, 2003 . . . who have been damaged by the defendants' actions." He asserts claims against Janus for breach of fiduciary duty and breach of contract (Counts I and III of the Complaint) and against Canary for aiding and abetting Janus's breach of fiduciary duty and for tortious interference with contract (Counts II and IV). The fiduciary breach claim asserts that Janus breached its duty as manager and adviser of the funds to act with "good faith, loyalty, fair dealing, and candor." The breach of contract claim alleges that the class members were "induced to purchase shares in the Funds in part as a result of promises by Janus in its prospectus to prevent market timing and excessive trading activity in its funds and enforce the `Excessive Trading Policy' outlined in the prospectus distributed by Janus in connection with its mutual funds." The breach of contract claim also describes the prospectus as outlining a contract in which Janus agreed to treat investors equally.
Janus and Canary have both moved before the MDL to have the market timing cases involving them transferred to a single district. Some of the cases within the scope of the transfer motions are actions that have been removed from state court.
Janus notes in its Consolidated Reply in support of its stay motion that stays have been granted in four cases that were removed from state court; and the reply brief it submitted to the MDL in support of its transfer motion lists seven cases (including this one) that it has removed from state court invoking the Securities Litigation Uniform Standards Act ("SLUSA"). (The brief submitted to the MDL is attached to the Consolidated Reply.)
DISCUSSION
Not surprisingly, the parties disagree on the threshold issue of which of their motions should be decided first. Plaintiff apparently concedes, correctly, that the Court has the power to consider Janus's motion for a stay without first determining conclusively that removal was proper and that it has jurisdiction over the merits of the case. See In re Ivy, 901 F.2d 7 (2d Cir. 1990) (holding that the MDL Panel could transfer a case even though a jurisdictional objection was pending). Plaintiff contends, however, that this is not a case where it would be appropriate to postpone consideration of the remand motion. Defendants' position is that deferring consideration of the remand motion will permit the most efficient possible use of the courts' (and the parties') resources because if the MDL Panel transfers this and other similar removed cases, the transferee court will be able to consider several remand motions (involving similar issues) simultaneously.The circumstances of the present case clearly favor a stay in advance of any decision on the motion for remand An immediate stay will permit the most efficient possible use of the courts' and the parties' resources, and it will eliminate the danger that a decision on this remand motion might be inconsistent with decisions by other courts on similar questions. If the relevant jurisdictional considerations clearly favored Plaintiff, or if there were no cases likely to present similar jurisdictional issues before a transferee court, it might be appropriate to address and grant the remand motion immediately. Cf. Meyers v. Bayer AG, 143 F. Supp. 2d 1044, 1048-49 (E.D. Wis. 2001) (concluding that a court faced with simultaneous remand and stay motions should assess the difficulty of issues relevant to remand and determine whether similar issues have been raised in other cases that have been or may be transferred). If remand were patently appropriate, the Court could grant Plaintiff's motion without expending significant time or effort on the analysis, allowing the case to proceed in state court, and there would be little danger that the decision to remand would be inconsistent with other courts' decisions. Alternatively, if no other cases were likely to present similar remand issues to a transferee court, judicial economy would not be served by postponing a decision on remand because a transferee court would not be in a position to resolve several motions by deciding one set of legal issues. Here however a preliminary examination of jurisdiction does not show decisively that remand is appropriate. In fact, Defendants appear to have at least one quite strong argument supporting removal. As for the likelihood that the transferee court will be confronted with similar issues, Defendants state that several class actions have been removed from state court on SLUSA grounds; and given the likely proliferation of cases arising from alleged market timing schemes, it appears highly probably that the application of SLUSA to claims arising from such schemes will be at issue in other cases.
It is not as clear that any real benefit would be derived from addressing and denying the remand motion if there were an obvious lack of jurisdiction. The parties agree that the case should be stayed if it is not remanded; so an immediate denial of the remand motion would not lead to any additional proceedings until a decision on transfer by the MDL Panel. In any event, although, as the discussion below shows, Defendants do seem to have the better of the jurisdictional arguments, their advantage is not so clear and compelling as to permit a quick resolution of the remand motion in their favor.
Defendants' principal asserted basis for removal is SLUSA. Enacted in 1998, SLUSA amended the Securities Act of 1934 to preclude a private party from bringing a "covered class action" in federal or state court, based on state law, alleging a "misrepresentation or omission of a material fact" or the use of "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). SLUSA, 15 U.S.C. § 78bb(f)(1) provides as follows:
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 —
(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.
Generally, a "covered class action" involves common questions of law or fact brought on behalf of more than 50 persons or an action brought on behalf of one or more unnamed parties. 15 U.S.C. § 78bb(f)(5)(B). A "covered security" is one that is, inter alia, listed or authorized for listing on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ Stock Market. 15 U.S.C. § 78r(b).
SLUSA further provides for the removal of covered class actions from state to federal court: "Any covered class action brought in any State court involving a covered security, as set forth in paragraph (1), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to paragraph (1)." 15 U.S.C. § 78bb (f)(2). Essentially, the removing party must establish that the action is (1) a "covered class action", (2) that is based on state law, (3) alleging a misrepresentation or omission of a material fact or use of any manipulative or deceptive device or contrivance (4) "in connection with" [or "involving," for removal purposes] (5) the purchase or sale of a covered security. See 15 U.S.C. § 78bb(f)(1).
Plaintiff appears to concede that most of the requirements for removal under SLUSA are satisfied here; but he contends that his case does not allege the required misrepresentation or omission or use of a deceptive device, and that even if it does, any such misrepresentation is not alleged to have taken place in connection with the purchase or sale of a covered security. Plaintiff emphasizes that the Complaint does not on its face assert causes of action labeled as fraud or misrepresentation, and he argues that his claims for breach of contract and breach of fiduciary duty do not involve allegations of deceptive conduct covered by SLUSA.
However, Plaintiff's own general characterizations of his claims do not control the SLUSA analysis, see Prager v. Knight/Trimark Group, Inc., 124 F. Supp. 2d 229, 230 (D.N.J. 2000) ("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."); and the Complaint might quite readily be construed as asserting claims removable under SLUSA. Among the fiduciary duties that Janus is alleged to have breached is a duty of candor, and Plaintiff's allegations generally describe a scheme involving, indeed requiring, deception on an enormous scale over a long period of time. Janus allegedly represented to investors, apparently continuously during all relevant times, that it enforced policies preventing market timing and excessive trading, while throughout the class period it actually permitted market timing by preferred customers in exchange for disguised kickbacks. Plaintiff contends that his allegations reach no further than breaches of contract and of fiduciary duty. As Plaintiff would have it, he alleges only that Janus undertook obligations to prevent market timing and then failed to do so — without deceiving investors as to its intentions. But his allegations could also be read to give rise to an inference of deception on Janus's part. The Complaint does not simply describe a sequence of events in which Janus made a promise and then breached it; rather, it depicts a continuing scheme in which Janus purported to maintain its policy against market timing even after it had ceased to enforce that policy for preferred customers. A strong argument can be made that deception was clearly, and necessarily, part of the alleged market timing arrangement: the scheme could not have continued if ordinary investors had known how they were being taken advantage of. In describing such continuing exploitation of a position of trust, Plaintiff appears to allege deception sufficiently for his claims to be removable under SLUSA, setting forth facts that "give rise to a strong inference" of fraudulent intent. Cf. Prager, 124 F. Supp. 2d at 234 (internal quotation marks omitted).
Plaintiff's alternative argument — that even if it alleges deception, the Complaint does not allege deception "in connection with" the purchase or sale of a covered security for the purposes of SLUSA, is also less than compelling. Plaintiff argues that he asserts claims only on behalf of holders (as opposed to purchasers or sellers) of shares in Janus mutual funds, and that he does not allege that investors were fraudulently induced to purchases their shares. But there are at least two respects in which the Complaint might reasonably be regarded as alleging deception in connection with purchases or sales.
First, the Complaint could be read to include allegations that holders of Janus mutual fund shares who purchased those shares during the class period were deceived "in connection with" their purchases. The Complaint alleges, at least arguably, that Janus deceived the investing public generally, more or less throughout the class period, as to its policies on market timing; and it does not limit the proposed class to investors who already held shares in Janus mutual funds before that deception began. Accordingly, Janus argues persuasively that the Complaint alleges deception in connection with purchases by class members during the period in which improper market timing was going on.
Second, the Complaint also might fairly be read to allege deception "in connection with" purchases and sales of Janus mutual fund shares by Canary. To be sure, Canary, the purchaser and seller, was not deceived. But the transactions themselves were concealed from other investors, to whom those transactions were allegedly disadvantageous. Deceptions "in connection with" purchases or sales of securities are not limited to those that induce transactions or refer to the value of securities; and it is not inconceivable that the concealment of Canary's market timing trades would amount deception in connection with purchases or sales for the purposes of SLUSA. Cf. S.E.C. v. Zandford, 535 U.S. 813, 891-23 (2002) (finding the "in connection with" requirement under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 satisfied where a broker secretly appropriated the proceeds of sales of securities from a customer's investment account).
Even though a preliminary examination of the jurisdictional issues does not permit a quick decision in Plaintiff's favor (or even suggest that he is ultimately likely to prevail on the remand motion), it might nevertheless be sensible and appropriate to consider the remand motion immediately if there were no substantial chance that a transferee court would be presented with similar issues in other cases. However here the parties submissions indicate that several class actions removed from state court are among the cases that may ultimately be transferred; and Defendants have apparently invoked SLUSA in removing several cases from state court. Assuming (apparently reasonably) that the removed class actions involve at least broadly similar factual allegations, there is a considerable likelihood that a transferee court will have to address jurisdictional issues closely resembling those discussed above. Accordingly, judicial economy will be best served by leaving the remand motion to the transferee court. The courts' resources, along with those of the parties (especially the Defendants) will best conserved by a stay; and any prejudice to the Plaintiff from a relatively brief delay in pursuing his claims will be minimal.
Janus has advanced grounds for removal other than SLUSA, but because there is a substantial argument for removal under SLUSA, there is no need to address that alternative bases.
CONCLUSION
For the reasons stated above, Defendant Janus's motion for stay of proceedings pending a decision on transfer by the MDL Panel will be granted, and Plaintiff's motion for remand will be denied without prejudice. An appropriate order will be entered.