The People of the State of New York by Andrew M. Cuomo,, Respondent,v.Maurice R. Greenberg, et al., Appellants.BriefN.Y.May 28, 2013Supreme Court, New York County, Index No. 401720/2005 ~tate of jfletu !l?ork QCourt of ~ppeal5 PEOPLE OF THE STATE OF NEW YORK BY ANDREW M. CUOMO, ATTORNEY GENERAL OF THE STATE OF NEW YORK , Plaintiff-Respondent, v. MAURICE R. GREENBERG and HOWARD 1. SMITH, Defendants-Appellants. BRIEF OF AMICUS CURIAE NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC., IN SUPPORT OF PLAINTIFF-RESPONDENT JOSEPH BRADY** General Counsel RICK A. FLEMING* Deputy General Counsel A. VALERIE MIRKO Assistant General Counsel JOSEPH J. OPRON, nI** Counsel NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC. 750 First Street, NE, Suite 1140 Washington, D.C. 20002 Tel.: (202) 737-0900 Fax: (202) 783-3571 (fax) Counsel for proposed amicus curiae *Request for Admission Pro Hac Vice Pending **Not admitted in New York Dated: January 31, 2013 DISCLOSURE STATEMENT PURSUANT TO RULE 500.1(0 In Compliance with Rule SOO.I(t) of the Rules of Practice for the Court of Appeals of the State of New York, the North American Securities Administrators Association, Inc. ("NASAA") states that it is a non-profit corporation located in and organized under the laws of the District of Columbia. It does not have a parent entity and does not have any subsidiaries or affiliates. 1 TABLE OF CONTENTS Page DISCLOSURE STATEMENT PURSUANT TO RULE 500.1(F) ............................ .i TABLE OF AUTHORITIES .................................................................................... .iii IDENTITY AND INTEREST OF AMICUS CURIAE ............................................... 1 QUESTION PRESENTED ......................................................................................... 9 STATEMENT OF THE CASE ................................................................................... 9 ARGUMENT .............................................................................................................. 9 I. THE AUTHORITY OF STATE SECURITIES REGULATORS TO BRING ENFORCEMENT ACTIONS TO PROTECT INVESTORS AND MAINTAIN THE INTEGRITY OF THE CAPITAL MARKETS WAS NOT DIMINISHED BY NSMIA. ........................................................ 10 II. SLUSA DID NOT ALTER THE ROLE OF STATE SECURITIES REGULATORS OR LIMIT THEIR ABILITY TO PURSUE ENFORCEMENT ACTIONS ........................................................................ 18 III. THE NEW YORK ATTORNEY GENERAL'S ACTION IS NOT PREEMPTED BY NSMIA OR SLUSA. ....................................................... 22 A. The New York Attorney General's Action Is Not Expressly Preempted by SLUSA. ......................................................................... 23 1. An Action Brought By a State Securities Regulator Seeking Victim Compensation is an Enforcement Action that Qualifies for the SLUSA Savings Clause .................................. 25 2. An Action By a State Securities Regulator Is Not a "Class Action" By a "Private Party." .................................................... 28 B. The New York Attorney General's Action is not Impliedly Preempted by Federal Law ................................................................... 32 CONCLUSION ......................................................................................................... 36 11 TABLE OF AUTHORITIES Page CASES Cippollone v. Liggett Group Inc., 505 U. S. 504 (1992) ....................................................................................... 3 3 Connecticut Nat. Bank v. Germain, 503 U. S. 249 (1992) ....................................................................................... 15 CPC Int 'I., Inc. v. McKesson Corp., 120 A.D. 2d 221,507 N.Y.S.2d 984 (N.Y. App. Div. 1986) ........................ 10 CSX Transp., Inc. v. Easterwood, 507 U. S. 658 (1993) ....................................................................................... 22 EEOC v. Waffle House, Inc., 534 U. S. 279 (2002) ....................................................................................... 29 Jevne v. Superior Court, III P. 3d 954 (Cal. 2005) ............................................................................... 23 Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947) ....................................................................................... 23 Roussejfv. Dean Witter & Co., 453 F. Supp. 774 (D.C. Ind. 1978) ................................................................ 34 State v. Short, 247 P. 114(Kan. 1926) ................................................................................... 10 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U. S. 148 (2008) ....................................................................................... 3 5 Zuri-Invest AG v. Natwest Fin., Inc., 177 F.Supp.2d 189 (S.D.N.Y. 2001) ................................................ 22, 23, 33 11l STATUTES AND RULES 15 U.S.C. § 7246 ............................................................................................... 26,30 15 U.S.C. § 77p(e) ............................................................................................ 24,27 15 U.S.C. § 77q ........................................................................................................ 33 15 U.S.C. § 77r. ................................................................................................. l3, 14 15 U.S.C. § 78bb ...................................................................................................... 21 15 U.S.C. §77p .................................................................................................. 21,24 ARIZ. REV. STAT. ANN. § 44-2032 ........................................................................... 25 ARK. CODE ANN. § 23-42-209 .................................................................................. 25 CAL. CORP. CODE § 25530 ........................................................................................ 25 COLO. REv. STAT. At..1N. § 11-51-602 ....................................................................... 25 CONN. GEN. STAT. ANN. § 36b-72 ............................................................................ 25 D.C. CODE § 31-5606.03 .......................................................................................... 25 DEL. CODE ANN. tit. 73, § 602 ................................................................................. .25 FLA. STAT. ANN. § 517.191 ...................................................................................... 25 GA. CODE ANN. § 1 0-5-72 ........................................................................................ 25 HAW. REv. STAT. § 485A-603 .................................................................................. 25 IDAHO CODE ANN. § 30-14-603 ................................................................................ 25 ILL. COMPo STAT. ANN. § 5111 ................................................................................. .25 IND. CODE § 23-19-6-3 ............................................................................................. 25 IOWA CODE ANN. § 502.603 ..................................................................................... 25 IV KAN. STAT. ANN. § 17-12a603 ................................................................................. 25 Ky. REv. STAT. ANN. § 292.470 ............................................................................... 25 MD. CODE ANN., CORPS. & ASS'NS § 11-702 .......................................................... 25 ME. REv. STAT. ANN. tit. 32, § 16603 ....................................................................... 25 MICH. COMPo LAWS ANN. § 451.2603 ...................................................................... 25 MINN STAT. ANN. § 80A.80 ..................................................................................... .25 MISS. CODE ANN. § 75-71-603 ................................................................................. 25 Mo. ANN. STAT. § 409.6-603 .................................................................................... 25 MONT. CODE ANN. § 30-10-309 ............................................................................... 25 N.C. GEN. STAT. Ar-..'N. § 78C-28 .............................................................................. 25 N.D. CENT. CODE § 51-23-13 ................................................................................... 25 N.H. REv. STAT. ANN. § 421-B:21 ........................................................................... 25 N.J. STAT. ANN. § 49:3-69 ........................................................................................ 25 N.M. STAT. § 55-8-502 (1978) ................................................................................. 25 N.Y. GEN. Bus. LAW § 353 ..................................................................................... .25 National Securities Markets Improvement Act of 1996, Pub. L. No.1 04-290, 1 10 Stat. 34 16 (1996) ................................................. 13 NEB. REV. STAT. § 8-1 116 ........................................................................................ 25 NEV. REV. STAT. ANN. § 90.640 .............................................................................. .25 OHIO REv. CODE ANN. § 1707.261 ........................................................................... 25 OKLA. STAT. ANN. tit. 71, § 1-603 ............................................................................ 25 OR. REv. STAT. § 59.255 .......................................................................................... 25 v PA. STAT. Al'-.'N. § 1-509 ............................................................................................ 25 R.I GEN. LAWS § 7-11-603 (1956) ............................................................................ 25 S.C. CODE ANN. § 35-1-603 ..................................................................................... 25 S.D. CODIFIED LAWS § 47-3IB-603 ......................................................................... 25 Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227 (1998) .............................. 19,21,24,27 TEX. REv. CIVIL STAT. ANN. art. 581, § 32 .............................................................. 25 Uniform Securities Act (1956) § 101 ...................................................................... 11 Uniform Securities Act (1956) § 201 ...................................................................... 11 Uniform Securities Act (1956) § 301 ...................................................................... 11 Uniform Securities Act (1956) § 409 ...................................................................... 32 Uniform Securities Act (2002) § 301 ...................................................................... 11 Uniform Securities Act (2002) § 306(a)(7) ............................................................. 12 Uniform Securities Act (2002) § 401 ...................................................................... 11 Uniform Securities Act (2002) § 403 ...................................................................... 11 Uniform Securities Act (2002) § 501 ............................................................... 11,33 Unifonn Securities Act (2002) § 508 ...................................................................... 32 Uniform Securities Act (2002) § 603 ...................................................................... 27 Uniform Securities Act (2002) § 603(b )(3) ............................................................. 25 Uniform Securities Act (2002) § 604(d) .................................................................. 30 UTAH CODE ANN. § 61-1-20 (1953) ......................................................................... 25 VA. CODE ANN. § 13.1-521 ...................................................................................... 25 VI VT. STAT. ANN. tit. 9, § 5603 ................................................................................... .25 W. VA. CODE § 32B-2-3 .......................................................................................... .25 WASH. REV. CODE ANN. § 21.20.390 ....................................................................... 25 WIS. STAT. ANN. § 551.603 ...................................................................................... 25 WYO. STAT. ANN. § 17-4-124 ................................................................................. .25 OTHER AUTHORITIES 143 CONGo REc. S10477 (1997) ............................................................................... 20 144 CONGo REc. H10779 (1998) .............................................................................. 19 144 CONGo REC. Hl0780 (1998) .............................................................................. 27 144 CONGo REc. HlO781 (1998) .............................................................................. 19 144 CONGo REC. HlO786 (1998) ........................................................................ 20,22 Ala. Sec. Comm'n, Procedure For Filing A Complaint, http://www.asc.state.al.us/CoMPLAINT.htm ................................................... 31 Blue SkyL. Rep. (CCH)~ 6431 .............................................................................. 11 Brian 1. Fahrney, State Blue Sky Laws: A Stronger Case for Federal Pre- Emption Due to Increasing Internationalization of Securities Markets, 86 Nw. U. L. REv. 753 (1992) ....................................................................... 13 Christopher Cox, Chairman, SEC, Remarks to the North American Securities Administrators Association (May 9, 2006), available at http://www.sec.gov/news/speech/2006/spch050906cc.htm ............................ 5 Christopher R. Lane, Halting the March Toward Preemption: Resolving Conflicts Between State and Federal Securities Regulators, 39 New Eng. L. Rev. 317 (2005) ................................................................................ 16 H.R. CONF. REp. No. 104-369, (1995), reprinted in 1995 U.S.C.C.A.N. 730 ......... 34 H.R. CONF. REP. No. 104-864 (1996) ...................................................................... 16 Vll H.R. REp. No. 104-622 (1996) ................................................................................. 16 H.R. REp. No.1 05-803 (1998) (Conf. Rep.) ........................................................... 18 JOHN M. DOYLE, INVESTORS MAY GET MONEY BACK IN PRUDENTIAL SETTLEMENT, http://www.apnewsarchive.coml1993/Investors-May-Get- Money-Back -in-Prudentia1-Securities-Settlement/id- 1ge9984fD58a16fc6389416971dedb5 ........................................................... 16 Joint Br. for Defs.-Appellants ........................................................................ 9, 15,26 Joint Press Release, SEC, NASD, NYSE, and NASAA, Ten of Nation's Top Investment Finns Settle Enforcement Actions Involving Conflicts of Interest Between Research and Investment Banking (Apr. 28, 2003), available at http://www.sec.gov/news/press/2003.54.htm .............................. 4 Kenneth I. Denos, Blue and Gray Skies: The National Securities Markets Improvement Act of1996 Makes the Case for Uniformity in State Securities Law, 1997 UTAH L. REV. 101 (1997) ..................................... 12, 14 KURT EICHENW ALD, SERPENT ON THE ROCK: BACKSTABBING. LYING. E~v1BEZZLING. COVER-UPS. JUST l~lt.NOTHER DAY ON V.l ALL STREET IN HISTORY'S BIGGEST CORPORATE SWINDLE 445 (2005) ................................. 16 Louis Loss, Joel Seligman & Troy Paredes, Securities Regulation (4th ed. 2012) ................................................................................. 1,11,12,13 Louis Loss, Securities Regulation (l st ed. 1951) .................................................... 12 Luis Aguilar, Commissioner, SEC, Taking a No-Nonsense Approach to Enforcing the Federal Securities Laws at the Securities Enforcement Forum 2012 (October 18, 2012), available at http://www.sec.gov/news/speech12012/spch101812Iaa.htm ......................... 30 NASAA Auction Rate Securities Infonnation Center, available at http://www .nasaa.org/regulatory-activity I enforcement -Iegal- activity/auction-rate-securities-infonnation-centerl (last visited Jan. 25, 2013) ................................................................................................................ 7 Vlll NASAA Enforcement Report (Oct. 2012), available at http://www.nasaa.org/wp-content/uploads/20 11/08/20 l2-Enforcement- Report-on-201l-Datal.pdf ............................................................................ 26 Press Release, A.G. Schneideiman Obtains $210 Million Settlement With Ivy Asset Management In COlmection With MadoffPonzi Scheme (Nov. 13, 2012) .......................................................................................................... 8 Press Release, Office of New York State Attorney General, State Investigation Reveals Mutual Fund Fraud (Sept. 3, 2003) ................................................ 5, 6 Press Release, SEC, Prudential to Pay $600 Million in Global Settlement of Fraud Charges in Counection With Deceptive Market Timing of Mutual Funds (Aug. 28, 2006) ..................................................................................... 6 Richard B. Smith, A New Uniform Securities Act, 6 No.9 GLWSLA W 8 (Westlaw) (Feb. 2003) ................................................................................... 17 Rick Fleming, 100 Years o[Securities Law: Examining a Foundation Laid in the Kansas Blue Sky, 50 WASHBURN LJ. 583 (2011) ............................. 1 0, 11 S. REP. No. 104-293 (1996) ............................................................................... 13, 35 SEC News Digest 92-99, SEC Files and Settles Salomon Brothers Case (May 21, 1992), available at http://www.sec.gov/news/digest/1992/dig052192.pdf.. ................................ 26 Statement on Signing the Securities Litigation Uniform Standards Act of 1998,2 Pub. Papers 2247 (Nov. 3, 1998) ...................................................... 18 Testimony Concerning Recent Commission Activity to Combat Misconduct Relating to Mutual Funds, Hearing Before the Sen. Comm. on Banking, Housing, and Urban Affairs (Nov. 20, 2003) (statement of Stephen M. Cutler, Director, Division of Enforcement, SEC), available at http://www.sec.gov/news/testimony/tsI12003smc.htm .................................. 6 Testimony Concerning Spurring Job Growth Through Capital Formation While Protecting Investors, Before the Sen. Comm. on Banking, Housing, and Urban Affairs (December 1,2011) (Statement of Jack E. Herstein, President, NASAA), available at IX http://www.nasaa.org/8409/spurring-job-growth-through-capital- forrnation-while-protecting-investors/ ........................................................... 34 Testimony Concerning the Securities Fraud Deterrence and Investor Restitution Act of2003, Before the Sen. Subcommittee on Capital Mkt. Insurance, and Gov't Sponsored En ter. (June 5, 2003) (statement of Christine A. Bruenn), available at http://www.nasaa.org/880/the- securi ties-fraud -deterrence-and -investor -restitution -act -of-200 3 -h -r- 2179/ .............................................................................................................. 28 Testimony Ensuring Appropriate Regulatory Oversight of Broker-Dealers and Legislative Proposals to Improve Investment Adviser Oversight, Before the House Subcommittee on Capital Mkt. and Gov't Sponsored Enter. (September 13, 2011) (statement of Steven D. Irwin, Pa. Sec. Comm'r and Chainnan, Fed. Legislation Comm., NASAA), available at http://www .nasaa.orgl 5587/ ensuring-appropriate-regulatory-oversight- of-broker -dealers-and -legislative-propo sals-to-improve-investment- adviser -oversight/ ............................................................................................ 7 x IDENTITY AND INTEREST OF AMICUS CURIAE Fonned in 1919, the North American Securities Administrators Association, Inc. ("NASAA") is the non-profit association of state, provincial, and telTitorial securities regulators in the United States, Canada, and Mexico. It has 67 members, including the securities regulators in a11 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The Office of the Attorney General is the member from the State of New York. The U.S. members ofNASAA are the state agencies responsible for administering state securities laws, commonly known as "Blue Sky Laws." See generally LOUIS Loss, JOEL SELIGMAN & TROY PAREDES, SECURITIES REGULATION ch. l.B.1 (4th ed. 2012). Ultimately, NASAA's mission, and the mission of its members, is to protect investors from fraud and abuse. NASAA and all of its U.S. members have an interest in this case because the Defendants seek a ruling that the N ew York Attorney General is preempted by federal law from pursuing an enforcement action that includes a claim for money damages based on hanns to investors. Such a ruling would substantially nan-ow the states' traditional antifraud authority in a way that Congress did not intend. The decision below should be upheld to preserve the states' ability to pursue remedies designed to protect investors by deten-ing misconduct in the securities marketplace and obtaining appropriate compensation for defrauded investors. 1 NASAA supports the work of its members by promulgating model rules and providing training opportunities for state regulatory personnel. NASAA frequently represents the interests of its members in the federal legislative and rulemaking processes by offering testimony in Congress and submitting comment letters to the Securities and Exchange Commission ("SEC") and other regulatory agencies. NASAA also coordinates multi-state enforcement actions in which state regulators exercise their broad antifraud authority to eradicate dishonest practices originating not just in local communities but also on Wall Street. Drawing from this experience, NASAA offers its legal analysis and policy perspective to state and federal courts as amicus curiae in significant enforcement actions and other cases involving the interpretation of the securities laws and the rights of investors. This case has enormous significance for NASAA members for two reasons. First, it is critical that this Court preserve the right of the New York Attorney General to deter serious fraudulent practices and obtain compensation for victims of such practices. N ASAA members support the efforts of the New York Attorney General to combat fraud and protect the integrity of the securities markets, not merely because of the remuneration that may flow to investors in other states, but because each state has a legitimate interest in discouraging anyone - including a powerful business executive - from engaging in fraudulent conduct. 2 Second, this case has important implications for state securities regulators and investors on a broader level. As explained below, many state securities regulators have statutory authority to pursue victim-specific monetary relief for the benefit of han ned investors, and these remedies are vital weapons in the regulatory arsenal. In New York, the Martin Act gives the New York Attorney General similar authority. By asserting a strained interpretation of federal law and preemption, the Defendants attempt to eliminate one of the states' most effective tools for deterring future misconduct. The states' historic role in policing national securities offerings for fraud is at risk in this appeal, and such a dranlatic restriction of the states' authority cannot be reconciled with Congress's language and intent. Many cases, in addition to the instant one, illustrate the value of state enforcement in addressing large scale misconduct in the securities marketplace. For example, the states and their federal counterparts discovered in 2002 that research analysts at the country's leading investment banking finns issued inflated stock ratings in order to attract and keep lucrative underwriting business from the companies rated by the finns' analysts. After a coordinated state and federal investigation, ten of the country's largest investment banks consented to what has come to be known as the "global settlement," resolving claims for fraud and other misconduct in connection with their false and misleading analyst reports. See Joint Press Release, SEC, NASD, NYSE, and NASAA, Ten of Nation's Top Investment 3 Firms Settle Enforcement Actions Involving Conflicts ofInterest Between Research and Investment Banking (Apr. 28, 2003).1 These firms agreed to pay a total of almost $1.4 billion in restitution, fines, and investor education support, and further agreed to institute refonns designed to eliminate conflicts of interest between their investment banking and research departments. Id. Officials from the agencies involved cited not only the benefits for investors, but also the extraordinary importance of collaboration between state regulators, the SEC, and the industry self-regulatory organizations (SROs) in tackling large scale frauds. The head of the New York Stock Exchange stated that "[t]he partnership between the SEC, state regulators, and the SROs and our lawmakers remains the best and most effective system of market regulation and the global settlement reflects that." Id. at 5 (statement of Dick Grasso). Then SEC Chairman Christopher Cox praised the collaborative enforcement efforts of the SEC and state securities regulators, citing the analyst settlement and a long list of other successes in large scale cases: "Partly as a result of our improved coordination in allocating enforcement resources, the SEC and state regulators have recently achieved some spectacular results in a number of high profile cases. The historic global analyst settlement is an excellent example of how much we can accomplish working I Available at http://www.sec.gov/news/press/2003-54.htm. 4 together." See Christopher Cox, Chaim1an, SEC, Remarks to the North American Securities Administrators Association, at 2 (May 9, 2006)? Another dramatic example of the states' contribution to investor protection occurred in 2003, when the New York Attomey General uncovered two widespread trading schemes in the mutual fund industry. Mutual funds allowed favored companies and individuals to engage in practices known as "late trading" and "market timing" to the detriment of average citizens holding mutual fund shares and in contravention of prospectus language disavowing such practices. New York first brought an enforcement action under the Martin Act and Executive Law § 63(12) against a hedge fund known as Canary Capital Partners, LLC, and it resulted in a settlement that included restitution payments of 830 million for the benefit of injured investors and a fine of$10 million. See State a/New York v. Canary Capital Partners, LLC, Complaint, at 41-43 (Sept. 3,2003);3 see also Press Release, Office of New York State Attomey General, State Investigation Reveals Mutual Fund Fraud (Sept. 3, 2003).4 Then, New Yark's continuing investigation exposed similar misconduct at other mutual funds and triggered a wave of enforcement actions by federal and state regulators. See, e.g., Press Release, SEC, 2 Available at http://www.sec.gov/news/speechl2006/spch050906cc.htm. 3 Available at http://www.ag.ny.gov/sites/defaultifiles/press-release/archived/canary- complainLpdf. 4 Available at http://www.ag.ny.gov/press-release/state-investigation-reveals-mutual-fund-fraud. 5 Prudential to Pay $600 Million in Global Settlement of Fraud Charges in Connection With Deceptive Market Timing of Mutual Funds (Aug. 28, 2006).5 The SEC and other securities experts applauded New York for its aggressive work on behalf ofthe nation's investors. Stephen Cutler, then Director ofthe SEC's Division of Enforcement, testified before the Senate Banking Committee that the SEC was aggressively pursuing wrongdoing in the mutual fund industry and would "continue to work closely and cooperatively with state officials who also are taking steps to protect investors." See Testimony Concerning Recent Commission Activity to Combat Misconduct Relating to Mutual Funds, Hearing Before the Sen. Comm. on Banking, Housing, and Urban Affairs, at 5, 9 (Nov. 20, 2003) (statement of Stephen M. Cutler, Director, Division of Enforcement, SEC).6 Mercer Bullard, one of the nation's leading experts on mutual funds, declared that "[t]hese findings that prominent mutual fund managers collude with hedge funds to pick the pockets of fund shareholders nndermines the integrity of the fund industry and reminds us of the impOliance of state regulators' enforcement efforts in uncovering and fighting securities fraud." See Press Release, Office of New York State Attorney General, State Investigation Reveals Mutual Fund Fraud, at 2 (Sept. 3, 2003), cited supra. 5 Available at http://www.sec.gov/news/press/2006/2006-14S.htm. 6 Available at http://www.sec.gov/news/testimony/tsl12003smc.htm. 6 A third example of state-level policing of the securities markets occurred after the collapse of the market for auction rate securities in 2008. Wall Street firms had assured investors that the securities were safe and liquid - calling these securities "cash equivalents" - despite warning signs known to the firms. When the market collapsed and liquidity froze, thousands of investors were left without access to the money they needed and expected to be readily available to purchase homes, make tuition payments, and in some instances pay employees. As complaints to the states increased, state regulators formed a multi-state task force to investigate whether the nation's most prominent brokerage firms had misled investors. See NASAA Auction Rate Securities Information Center, available at http://www.nasaa.org/regulatory-activity/enforcement-Iegal-activity/auction-rate- securities-information-centerl (last visited Jan. 25, 2013). In the end, twelve firms were ordered to repay more than $61 billion to harmed investors. Id. (see links to individual enforcement actions); Testimony Ensuring Appropriate Regulatory Oversight of Broker-Dealers and Legislative Proposals to Improve Investment Adviser Oversight, Before the House Subcommittee on Capital Mkt. and Gov 't Sponsored Enter. (September 13, 2011) (statement of Steven D. Irwin, Pa. Sec. Comm'r and Chainnan, Fed. Legislation Comm., NASAA).7 7 Available at http://www.nasaa.org/5 587 /ensuring-appropliate-regulatory-oversight -of-broker- dealers-and -legislative-proposals-to-improve-investment-adviser-oversight! 7 Other examples abound. More recent cases include the New York Attorney General's case against Ivy Asset Management, in which an investment adviser concealed negative facts it knew about Bernard Madoff in order to keep earning millions of dollars in fees, 8 and the earlier settlement by AIG in this very case. These cases, and countless others like them, illustrate the vital role of the states in policing the securities markets, a role which Congress allowed to continue unabated after the passage of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), the National Securities Markets Improvement Act of 1996 ("NSMIA"), and the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). While Congress has preempted certain aspects of state registration requirements, Congress has consistently acknowledged the importance of state securities regulators and has explicitly preserved their antifraud authority. The Defendants-Appellants' arguments should be rejected by this Court because they are wholly without merit and contrary to the plain language of the applicable statutes and the legislative history behind them. Preserving state power as Congress intended is vital, not only in this case, but for the sake of promoting investor confidence in our securities markets. 8 See Press Release, A.G. Schneidennan Obtains $210 Million Settlement With Ivy Asset Management In Connection With MadoffPonzi Scheme (Nov. 13,2012), available at http;/ /www.ag.ny . gov /press-release/ ag -schneidennan-obtains-21 O-million-settlement -ivy-asset- management-connection-madoff. 8 QUESTION PRESENTED 1. Whether the Attorney General's authority to obtain damages in this enforcement action under the Mmiin Act and Executive Law § 63(12) is preserved rather than preempted by two federal statutes that (a) preclude certain private securities class actions under state law and (b) preempt certain state-law securities registration requirements, but expressly preserve state officials' longstanding authority to enforce state securities fraud statutes. Both lower courts found that the Attorney General's claim is not preempted. STATEMENT OF THE CASE NASAA relies upon the Statement of the Case provided by the New York Attorney General in the Brief for Respondent. ARGUMENT The Defendants argue that the civil enforcement action brought against them by the New York Attorney General is expressly preempted by SLUSA, insofar as it seeks damages, because it is purportedly a de facto private class action (Joint Bf. for Defs.-Appellants 26). They further assert that the action is impliedly preempted by the supposed interplay between NSMIA, the PSLRA, and SLUSA. !d. at 33. The Defendants' arguments rest on a fundmnental misunderstanding of the complementary state-federal regulatory structure in the United States and, more specifically, the role of state securities regulators in pursuing enforcement actions. 9 The clear, unambiguous language of these statutes preserves, not preempts, state enforcement authority, including the authority of the New York Attorney General to obtain damages in an enforcement action against the Defendants for alleged violations of state law. I. The Authoritv of State Securities Regulators to Bring Enforcement Actions to Protect Investors and Maintain the Integrity of the Capital Markets was not Diminished by NSMIA. To understand the impact ofNSMIA and the later changes brought about by the PSLRA and SLUSA, it is important to understand the historic role of the states in regulating securities. Governmental regulation of securities began in 1911 at the state level, not the federal level, when Kansas became the first state to adopt a blue sky law. See Rick Fleming, 100 Years a/Securities Law: Examining a Foundation Laid in the Kansas Blue Sky, 50 WASHBURN L.J. 583 (2011). The law was intended to place the offer and sale of securities under "rigid governmental control" for the protection of investors. State v. Short, 247 P. 114, 116 (Kan. 1926). Nearly every other state soon followed suit, including New York, which adopted the Martin Act in 1921. CPC Int'I., Inc. v. McKesson Corp., 120 A.D. 2d 221,234,507 N.Y.S.2d 984, 992 (N.Y. App. Div. 1986). The purpose of the Martin Act is to "protect the public by curbing abuses in the offer and sale of securities and commodities in and from New York." Id. 10 In general, blue sky laws build upon tiu-ee fundamental rules. See LOUIS Loss, JOEL SELIGMAN & TROY PAREDES, SECURITIES REGULATION ch. 1.B.4 (4th ed. 2012); Fleming, 50 WASHBURN L.J. 583, 601. First, before securities can be sold, they must be properly registered with the government or qualify for an exemption from registration. See Uniform Securities Act (1956) § 301; Uniform Securities Act (2002) § 301.9 The registration process requires the filing of detailed offering materials designed to provide full disclosure to investors of the terms and risks of the offering. lO Second, a person selling securities (a "broker- dealer") or giving advice concerning securities (an "investment adviser") must be properly licensed, thereby subjecting the licensed person to ethical rules and a full panoply of regulatory requirements. See Uniform Securities Act (1956) § 201; Uniform Securities Act (2002) §§ 401 & 403. Third, a person is prohibited from engaging in fraudulent or deceptive conduct in connection with a transaction in securities, which may involve either affirmative misrepresentations or omissions of material fact. See Uniform Securities Act (1956) § 101; Unifonn Securities Act (2002) § 501. 9 According to the Prefatory Note to the Unifonn Securities Act (2002), the UnifOlID Securities Act of 1956 was adopted by 37 states. The 2002 Act was created to replace the 1956 Act and has been adopted by 17 states. See Jurisdictions Adopting the Uniform Securities Act 0/2002, Blue Sky L. Rep. (CCH) ~ 6431. 10 New York's Martin Act is distinctive among state blue sky laws because it does not impose registration requirements for securities offerings, except in limited circumstances not relevant here. 11 With respect to the first fundamental rule, states took two different philosophical approaches to the registration requirements. LoUIS Loss, SECURITIES REGULATION 36-37 (1 st. ed. 1951); Uniform Securities Act (2002) § 306(a)(7), Official Comment #8. Some states, known as "disclosure" states, granted registration to any security, regardless of whether it was offered on fair terms or was otherwise equitable, provided that accurate and adequate information was made available to the public so that each investor could make an informed investment decision. Id. Other states, known as "merit" states, required the disclosure of all material risks to investors but retained the authority to deny registration if a securities offering was deemed unfair to investors. Id. These competing philosophies led to disparities in the registration requirements of different states. See Kenneth I. Denos, Blue and Gray Skies: The National Securities Markets Improvement Act of 1996 Makes the Case for Uniformity in State Securities Law, 1997 UTAH L. REV. 101, 110 (1997). Furthermore, when the federal govemrnent began to regulate the sale of securities in 1933, Congress chose to follow the model of disclosure regulation. LoUIS Loss, JOEL SELIGMAN & TROY PAREDES, SECURITIES REGULATION ch. l.G (4th ed. 2012). Critics complained that the varying registration requirements were unduly burdensome and made it too difficult to conduct nationwide securities offerings. They sought relief in the form offederallegislation that would streamline state and 12 federal regulatory requirements for nationwide securities offerings. See, e.g., Brian J. Fahrney, State Blue Sky Laws: A Stronger Case for Federal Pre-Emption Due to Increasing Internationalization of Securities Markets, 86 Nw. U. L. REv. 753 (1992). The result was the passage ofNSMIA in 1996. The Congressional intent behind NSMIA is clear. Congress was primarily focused upon solving the problem of a patchwork of varying state securities registration requirements ~ especially merit standards ~ being applied to nationwide offerings. S. REp. No. 104-293, at 5 (1996) ("This 'crazy quilt' of regulation has made registration of mutual fund shares unnecessarily cumbersome"); see LOUIS Loss, JOEL SELIGMAN & TROY PAREDES, SECURITIES REGULATION ch. LBA.c.ii (4th ed. 2012) ("In the period before enactment of [NSMIA], the wisdom of merit standards emerged as the leading policy debate concerning state securities regulation."). Toward this end, Congress amended Section 18 of the Securities Act of 1933, 15 U.S.C. § 77r, to preclude state registration of any "covered security." National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, 11 0 Stat. 3416, § 102 (1996). A covered security was defined to include securities sold on national stock exchanges, securities issued by investment companies (i.e., mutual fund shares), and securities sold in certain offerings that are exempt from federal registration requirements. Id. 13 While NSMIA made significant changes in the regulation of securities offerings, it had a smaller impact on the regulation of securities professionals such as broker-dealers and investment advisers. Congress preempted some ofthe state- level regulations governing broker-dealers, including certain requirements related to record-keeping and the use of margin, but states retained their full authority to license broker-dealers and regulate their sales practices. Pub. L. No. 104-290, § 103. NSMIA had even less impact on the states' ability to police fraud. Denos, 1997 UTAH L. REv. 101, 131 ("The preservation of state police power to prosecute fraud, regardless of the size of the transaction, remains one of the last vestiges of state authority unhindered by the NSMIA"). NSMIA included a broad savings clause that expressly retained state-level authority to institute enforcement proceedings for fraudulent or deceptive conduct: (c) PRESERVATION OF AUTHORITY.- (1) FRAUD AUTHORITY. - Consistent with this section, the securities commission (or any agency or office perfonning like functions) of any state shall retain jurisdiction under the laws of such State to investigate and bring enforcement actions with respect to fraud or deceit, or unlawful conduct by a broker or dealer, in connection with securities or securities transactions. Securities Act of 1933, § 18( c), as adopted in NSMIA § 1 02 (codified at 15 U.S.C. § 77r). 14 The plain language ofNSMIA makes it clear that the Act does not preempt an enforcement action by the New York Attorney General that is based upon fraud or deceit, regardless of the state law remedies that are sought. When the text of a statute is unambiguous, "judicial inquiry is complete," and there is no need to look beyond the language for interpretive guidance. Connecticut Nat. Bank v. Germain, 503 U.S. 249, 253-254, (1992) (internal citations omitted). Despite the plain language of the savings clause, the Defendants argue that the New York Attorney General's enforcement action against them will obstruct Congressional intent to establish national standards for the securities markets. (Joint Br. for Defs.-Appellants at 33.) However, the legislative history ofNSMIA confirms its plain language and shows an unmistakable intent on the part of Congress to permit this type of enforcement action. In cases predating the passage ofNSMIA, states frequently took a lead role in cases with a nationwide impact, especially in cases involving fraud or deceit. For example, a multi-state task force led an enforcement action against Prudential Securities, alleging the unsuitable and fraudulent sale of 700 separate limited partnerships during the 1980' s. As pali of the settlement, Prudential Securities agreed to establish a fund of$330 million to compensate investors who were defrauded. JOHN M. DOYLE, INVESTORS MAY GET MONEY BACK IN PRUDENTIAL SETTLEMENT, http://www.apnewsarchive.comlI993/Investors-May-Get -Money- 15 Back-in-Prudential-Securities-Settlement/id-1ge9984 f058a16fc6389416971 dedb5. See also KURT EICHENW ALD, SERPENT ON THE ROCK: BACKSTABBING. LYING. EMBEZZLING. COVER-UPS. JUST ANOTHER DAY ON WALL STREET IN HISTORY'S BIGGEST CORPORATE SWINDLE 445 (2005). States also took a lead role in prosecuting fraudulent penny stock offerings in the late 1980's before Congress passed legislation to deal with the problem. Christopher R. Lane, Halting the March Toward Preemption: Resolving Conflicts Between State and Federal Securities Regulators, 39 New Eng. L. Rev. 317,328 (2005). The legislative history of NSMIA reveals that Congress was well aware of the states' important role in combating fraud and clearly intended to preserve their enforcement authority. The Congressional record accompanying the passage of NSMIA repeatedly affirmed this goal: • "The Committee intends to preserve the ability of the States to investigate and bring enforcement actions under the laws of their own State with respect to fraud and deceit." H.R. REP. No. 104-622, at 34 ( 1996) (emphasis added). • "It is also the Committee's intention not to alter, limit, expand, or otherwise affect in any way any State statutory or common law with respect to fraud and deceit .... " fd. (emphasis added). • "The Managers have preserved the authority of the states to protect investors through application of state antifraud laws. This preservation of authority is intended to permit state securities regulators to continue to exercise their police power to prevent fraud and broker-dealer sales practice abuses .... " H.R. CONF. REp. No. 104-864, at 40 (1996) (emphasis added). 16 Consistent with the savings clause in contained in NSMIA, states have continued to bring significant antifraud cases, including those involving securities sold on national exchanges. The research analyst conflict-of-interest cases, the mutual fund market timing cases, and the auction rate securities cases, discussed supra, were national in their scope and illustrate the value of state enforcement work in addressing large scale misconduct in the securities markets. In those cases alone, billions of dollars have been returned to investors, and those results would not have been possible had Congress preempted state authority as suggested by the Defendants. Moreover, the SEC would not be able to fill the enforcement gap if states were preempted because "[f1ederal regulators are unable to cope with all the enforcement that needs to be done." Richard B. Smith, A New Uniform Securities Act, 6 No.9 GLWSLAW 8, at 2 (Westlaw) (Feb. 2003). Fortunately, when Congress adopted NSMIA, it preserved the enforcement authority of state securities regulators. Its intent is evidenced in both the plain language of the Act and its legislative history. The very heading of Section 18(c) makes the Congressional intent crystal clear ~ the "preservation" of state antifraud authority ~ and states have relied upon this preservation of authority to carry out important work on behalf of investors. This Court should categorically reject any argument that NSMIA somehow places limits on the authority of states to bring enforcement actions that are grounded upon fraud or deceit. 17 II. SLUSA Did Not Alter the Role of State Securities Regulators or Limit Their Ability to Pursue Enforcement Actions. Two years after the passage ofNSMIA, Congress adopted SLUSA as pmi of an effort to reform private securities litigation, but did so in a way that maintained the role of state securities regulators. Like NSMIA, the text of SLUSA and the legislative record express a clear Congressional intent to preserve state enforcement authority. As a predecessor to SLUSA, Congress passed the PSLRA to reduce the risk that companies would be sued in abusive private class action lawsuits for making forwm·d-Iooking statements about their future prospects. Statement on Signing the Securities Litigation Uniform Standards Act of 1998, 2 PUB. PAPERS 2247 (Nov. 3, 1998). These companies had been subjected to "strike suits," the purpose of which was "to extract a sizeable 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." H.R. REp. No. 105-803, at 13 (1998) (Conf. Rep.). The refonns adopted in the PSLRA were designed to allow companies to "provide the public with valuable information about their prospects, thus benefiting investors by enabling them to make wiser decisions." 2 PUB. PAPERS 2247 (Nov. 3, 1998) (statement of President William J. Clinton). 18 The formal Congressional findings contained in Section 2 of SLUSA indicate the reasons Congress adopted it so soon after the PSLRA. Sec. 2. FINDINGS. The Congress finds that - (1) the Private Securities Litigation Refonn Act of 1995 sought to prevent abuses in private securities fraud lawsuits; (2) since enactment of that legislation, considerable evidence has been presented to Congress that a number of securities class action lawsuits have shifted from Federal to State courts; (3)this shift has prevented that Act from fully achieving its objectives. Securities Litigation Unifonn Standards Act of 1998, Pub. L. No. 105-353, § 2,112 Stat. 3227 (1998) Members of the Conference Committee on Senate Bill 1260 ("S. 1260"), the bili enacted as SLDSA, were expiicit in explaining the need for SLUSA. The goal of the legislation, according to Congressman Mike Oxley, was "preventing lawyers from using securities class actions filed in State court for their personal gains." 144 CONGo REC. Hl0779 (1998). Congressman Christopher Cox alleged that "[t]riallawyers, using professional plaintiffs, were filing class action lawsuits against publicly traded companies alleging fraud, often with no more evidence than a drop in the price of these companies' stock." 144 CONGo REc. H10781. Similarly, Congressman Billy Tauzin characterized the strike suits that were being brought in state court to avoid the PSLRA as "shakedown lawsuits" and 19 complained that "no grandmother ever got a dime out of this, just the unscrupulous trial lawyers who brought these kinds oflawsuits." 144 CONGo REC. HI0786. From the Congressional record, it is clear that Congress adopted the PSLRA to prevent unscrupulous private plaintiffs and their attorneys from profiting through meritless class action litigation, and SLUSA was adopted to prevent an end run around the PSLRA through state-level class actions. Congress was focused on reigning in the activities of private actors, not public officials, and nothing in the Congressional record indicates any concern with litigation by government officials who derive no monetary benefit from the recovery of funds on behalf of investors. On the contrary, the legislative history shows a deliberate choice by Congress to preserve state enforcement authority. Senator Chris Dodd, a sponsor of S. 1260, explained during its introduction that "[t]he legislation does not affect any State enforcement action, whether civil or criminal. State regulators retain their full authority to bring enforcement actions in any venue allowed under State law." 143 CONGo REc. S10477 (1997) (Statements on Introduced Bills and Joint Resolutions). He went on to "emphasize what the bill does not do: .. .it does not impact on State regulators." Id. (emphasis added). S. 1260 was later amended, and the final version of the bill made the Congressional intent explicit. In addition to the three formal Congressional 20 findings in Section 2 of SLUSA as set forth above, the findings contain two statements that reveal what the legislation was not intended to change: (4) State securities regulation is of continuing importance, together with Federal regulation of securities to protect investors and promote strong financial markets; and (5)In order to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the Private Securities Litigation Reform Act of 1995, it is appropriate to enact national standards for securities class action lawsuits involving nationally traded securities, while preserving the appropriate enforcement powers of State securities regulators and not changing the current treatment of individual lawsuits. Pub. L. No. 105-353, § 2 (1998) (emphasis added) For these reasons, Congress expressly preserved state enforcement authority by inserting a "savings clause" in SLUSA, as codified in subsection 16( e) of the Securities Act of 1933 and subsection 28(f)(4) of the Securities Exchange Act of 1934. 15 U.S.c. §§ 77p & 78bb. These sections, both entitled "Preservation of State Authority," contain identical language: "The securities commission (or any agency or office performing like functions) of any State shall retain jurisdiction under the laws of such State to investigate and bring enforcement actions." Id. As explained by Congressman Tauzin, the bill was carefully designed to make sure that "States themselves and our own Securities Exchange Commission can still 21 exercise its authority to prevent abuses of fraud in securities trading in America." 144 CONGo REc. H10786. 11 III. The New York Attornev General's Action is not Preempted by NSMIA or SLUSA. Under the Supremacy Clause of the Constitution, federal law displaces state law where (1) Congress expressly preempts state law; (2) Congress establishes a comprehensive regulatory regime over an entire field; or (3) state law "directly conflicts with federal law or interferes with the achievement of federal objectives." Zuri-Invest AG V. Natwest Fin., Inc., 177 F.Supp.2d 189, 191 (S.D.N.Y. 2001) (internal citations omitted). However, there remains a presumption against preemption. "In the interest of avoiding unintended encroachment on the authority of the States ... a court interpreting a federal statute pertaining to a subject traditionally governed by state law will be reluctant to find pre-emption." Id. at 191-92 (quoting CSXTransp., Inc. v. Eastenvood, 507 U.S. 658 (1993)). To overcome the presumption that federal law does not preempt a state's police powers, a party must show that preemption was the "clear and manifest purpose of Congress." Id. at 192 (internal citations omitted). 11 Interestingly, in a separate section of SLUSA, Congress demonstrated an intent to enhance state enforcement authority in multi-state cases, not restrict it. Section 102 of SLUSA directs the Securities and Exchange Commission to encourage state regulators to provide for reciprocal enforcement of out-of-state subpoenas issued by other state securities regulators. Pub. L. No. 105-353,112 Stat. 3227 (1998). 22 In the instant case, the Defendants assert that the Attorney General's action is expressly preempted by SLUSA to the extent that it seeks recovery that would benefit private investors. The Defendants also argue that the action is impliedly preempted because it conflicts with NSMIA, SLUSA, and the PSLRA, or that it interferes with the objectives sought by those acts. The Defendants do not assert a field preemption argument. 12 A. The New York Attorney General's Action Is Not Expressly Preempted by SLUSA. The Defendants argue that the New York Attorney General is precluded13 from pursuing its state-law antifraud claims because of SLUSA. The relevant section of SLUSA 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 ~ 12 Field preemption requires the extraordinary showing that the federal scheme of regulation is "so pervasive as to make reasonable the inference that Congress left no room for the State to supplement it," or that the federal statute in question "touch[ es] a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject." See Zuri-Invest AG v. Natwest Fin., Inc., 177 F.Supp.2d 189, 195 (S.D.N.Y. 2001) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 219 (1947». Few statutes have been held to preempt state regulation entirely, and "[i]t is well-settled that federal law does not enjoy complete preemptive force in the field of securities." Zuri-Invest AG, 177 F.Supp.2d at 195; see also Jevne v. Superior Court, III P.3d 954, 964 (Cal. 2005) (noting that because the 1934 Aet contains two savings clauses, field preemption is not at issue). !3 The Defendants assert express "preemption" under SLUSA, but this is a mischaracterization of the statute. The Supreme Court has explained that "SLUSA does not actually pre-empt any state cause of action. It simply denies plaintiffs the right to use the class-action device to vindicate certain claims." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dahit, 547 U.S. 71 (2006). 23 (1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or (2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. Pub. L. No. 105-353, § 101 (1998) (codified at 15 U.S.C. § 77p(b)). The Defendants stretch the plain statutory language of SLUSA beyond its breaking point to argue that the action brought by the New York Attorney General is a covered "class action" by a "private party." They also strain plain language in an attempt to convince the Court that the action does not qualify for the express savings clause in SLUSA that preserves state jurisdiction "under the laws of such State to investigate and bring enforcement actions." Pub. L. No. 105-353, § 101(1998) (codified at 15 U.S.c. § 77p(e)). The Defendants' arguments are wholly without merit and should be rejected by this Court. An action brought by a state regulator that seeks monetary relief for harn1ed investors is a traditional "enforcement action" that falls within the SLUSA savings clause for state regulators. Moreover, a state regulator is not transformed into a "private party," nor is an enforcement action converted into a "class action," merely because the regulator seeks monetary relief that, in addition to deterring fraud, will also result in recompense for widely dispersed victims who purchased a covered security. 24 1. An Action Brought By a State Securities Regulator Seeking Victim Compensation is an Enforcement Action that Qualifies for the SLUSA Savings Clause. Like the New York Attorney General, many state securities regulators have the authority to seek recompense for harmed investors. State securities administrators in at least 46 states have specific statutory authority to pursue restitution along with a broad range of other civil enforcement remedies. 14 Some of those states - California, Colorado, Illinois, Oregon, and Washington- expressly give the securities regulator the power to seek damages as well as restitution, and many other states have the general authority to seek "other relief as the court considers appropriate," which may include damages. ls The pursuit of restitution and damages is frequently used by state securities regulators as part of their enforcement arsenals, leading to judgments ordering the return of more than 14 ALA. CODE § 8-6-16 (1975); ARIZ. REV. STAT. ANN. § 44-2032; ARK. CODE ANN. § 23-42- 209; CAL. CORP. CODE § 25530; COLO. REV. STAT. ANN. § 11-51-602; CONN. GEN. STAT. ANN. § 36b-72; DEL. CODE ANN. tit. 73, § 602; D.C. CODE § 31-5606.03; FLA. STAT. ANN. § 517.191; GA. CODE ANN. § 10-5-72; HAW. REV. STAT. § 485A-603; IDAHO CODE ANN. § 30- 14-603; 815 ILL. COMPo STAT. ANN. § 5111; IND. CODE § 23-19-6-3; IOWA CODE ANN. § 502.603; KAN. STAT. ANN. § 17-12a603; Ky. REV. STAT. ANN. § 292.470; ME. REV. STAT. ANN. tit. 32, § 16603; MD. CODE ANN., CORPs. & ASS'NS § 11-702; MICH. COMPo LAWS ANN. § 451.2603; MINN STAT. ANN. § 80A.SO; MIss. CODE ANN. § 75-71-603; Mo. ANN. STAT. § 409.6-603; MONT. CODE ANN. § 30-10-309; NEB. REV. STAT. § 8-1116; NEV. REV. STAT. ANN. § 90.640; N.H. REv. STAT. ANN. § 421-B:21; N.J. STAT. ANN. § 49:3-69; N.M. STAT. § 55-8-502 (1978); N.Y. GEN. Bus. LAW § 353; N.C. GEN. STAT. ANN. § 78C-28; N.D. CENT. CODE § 51-23-13; OHIO REV. CODE ANN. § 1707.261; OKLA. STAT. ANN. tit. 71, § 1- 603; OR. REV. STAT. § 59.255; 70 PA. STAT. ANN. § 1-509; R.I GEN. LAWS § 7-11-603 (1956); S.C. CODE ANN. § 35-1-603; S.D. CODIFIED LAWS § 47-3IB-603; TEX. REV. CIVIL STAT. ANN. art. 581, § 32; UTAH CODE ANN. § 61-1-20 (1953); VT. STAT. ANN. tit. 9, § 5603; VA. CODE ANN. § 13.1-521; WASH. REV. CODE ANN. § 21.20.390; W. VA. CODE § 32B-2-3; WIS. STAT. ANN. § 551.603; WYO. STAT. ANN. § 17-4-124. 15 Id. See Unifonn Securities Act (2002) § 603(b )(3). 25 $20 billion to investors in the past three years. NASAA Enforcement Report, Oct. 2012, at 6. 16 To promote its preferred interpretation of SLUSA, the Defendants argue that the meaning of the term "enforcement action" must be detennined by reference to federal law. (Joint Br. for Defs.-Appellants 32.) This is an important distinction to the Defendants because, in their view, federal law does not empower the SEC to seek damages on behalf of private shareholders. Id. Although federal law may not empower the SEC to sue for damages directly, SEC actions often result in payments to individual investors. This happens through the administration of the Fair Fund whereby civil penalties and disgorgement collected by the SEC are deposited into a fund that is used to pay defrauded investors. 15 U.S.c. § 7246. 17 Thus, SEC "enforcement" actions commonly result in compensation to victims. More importantly, there is simply no support for the argument that the tenn "enforcement action" should be defined by reference to federal law. The very text of the SLUSA savings clause says that a state securities regulator shall retain jurisdiction to investigate and bring enforcement actions "under the laws of such 16 Available at http://www.nasaa.org/wp-contentluploads/20l1l08/2012-Enforcement-Report-on- 20Il-Datal.pdf. 17 Even before the creation of Fair Funds in the Sarbanes-Oxley Act of2002, Pub. L. 107-204, 116 Stat. 745, the SEC has made repayment of investors a priority in its settlements. For example, a 1992 settlement with Salomon Brothers included the creation of a $100 million fund to compensate victims of a fraud involving Treasury bond auctions. See SEC News Digest 92- 99, SEC Files and Settles Salomon Brothers Case (May 21,1992), available at http://www.sec.gov/news/digestIl992/dig052l92.pdf. 26 State." Pub. L. No. 105-353, § 102, 112 Stat. 3227 (1998) (codified at 15 U.S.C. 77p(e)). As explained by Congresswoman Anna Eshoo, the chief Democratic sponsor of the House version of SLUSA that was ultimately adopted, "State regulators would continue to have the ability to enforce State laws and bring civil actions." 144 CONGo REC. HlO780 (1998) (emphasis added). This obviously means that members of Congress intended for state authorities to pursue the enforcement remedies available to them under state statutes. Under state law, an action brought by a state securities regulator for restitution or damages is clearly an "enforcement action." The Unifonn Securities Act of 1956, adopted by 37 states, included restitution as an enforcement remedy in section 408. 18 Later, when the 1956 model act was replaced by the Unifonn Securities Act (2002), the new section that empowered regulators to seek restitution was specifically entitled "Civil Enforcement.,,19 Since 1956, these model statutes have been adopted in many states to provide the authority for the state securities regulators to obtain restitution for investors in their lawsuits against securities law violators.2o As stated by Christine A. Bruenn, a fonner Maine 18 See supra, n. 9. 19 Uniform Securities Act (2002) § 603 (emphasis added). At least IS states use the word "Enforcement" in the heading of the statute that gives the secUlities regulator the authority to pursue restitution or damages, including Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Michigan, Minnesota, Mississippi, New Mexico, Oklahoma, South Carolina, South Dakota, Vermont, and Wisconsin. Supra, n. 14. 20 See supra, n. 14. Interestingly, according to the Prefatory Note to the 2002 Act, the drafters were consciously attempting to reconcile the 2002 Act with the preemption contained in NSMIA and SLUSA. As a result, the private cause of action in Section 509 expressly refers to SLUSA. 27 Securities Administrator and NASAA President, "[A] primary and routine objective of state securities regulators is to obtain restitution for investors as part of enforcement actions." Testimony Concerning the Securities Fraud Deterrence and Investor Restitution Act of 2003, Before the Sen. Subcommittee on Capital Mkt. Insurance, and Gov't Sponsored Enter. (June 5, 2003) (statement of Christine A. Bruenn).21 The power to seek monetary remedies on behalf of investors is a traditional state enforcement power that predates SLUSA. As discussed above, when Congress adopted SLUSA, it was aware of the states' important role in policing the markets and expressed an unambiguous intent to preserve state enforcement authority. This authority had long included the power to seek monetary relieffor victims, and Congress expressed no desire to constrain the ability of states to continue seeking compensation for harmed investors. 2. An Action By a State Securities Regulator Is Not a "Class Action" By a "Private Party." The Defendants argue that the instant case should be treated as a covered "class action" by a "private party" for purposes of SLUSA because the Attorney General seeks recompense for widely dispersed victims who purchased a security However, Section 603 authorizes civil actions by regulators and makes no reference to SLUSA, presumably because the drafters saw no conflict between SLUSA and an enforcement action brought by a state regulator in which restitution is sought. 21 Available at http;llwww.nasaa.org/880/the-securities-fraud-deterrence-and-investor- restitution-act-of-2003-h-r-2179/. 28 traded on a national securities market. However, the pursuit of damages serves a broader public interest than merely the repayment of investors. EEOC v. Waffle House, Inc., 534 U.S. 279, 296 (2002) (an enforcement action may "vindicate a public interest. .. even when it pursues entirely victim-specific relief'). An action by a public official is clearly distinct from a private class action, even if the official seeks damages that flow to the investor. To create a meaningful deterrent, regulators need the full arsenal of enforcement remedies, including the ability to require full recompense for the damages caused by misconduct. SEC Commissioner Luis Aguilar recently remarked about the lack of deterrence when a wrongdoer is not required to pay in full for the d