holding that positive recommendations made by a research analyst with knowledge of a company's financial problems in order to boost Salomon's investment banking business was "in connection with" the purchase or sale of securitiesSummary of this case from Securities Exchange Commission v. Lee
01 Civ. 6085 (SWK)
January 9, 2002
Daniel A. Osborn, Beatie and Osborn LLP, New York, NY, for Plaintiff. Richard A. Rosen, Claudia Hammerman, Daniel H. Levi, Paul, Weiss, Rifkind, Wharton Garrison, New York, NY, for Defendants.
OPINION AND ORDER
Plaintiff Gersh Korsinsky ("Korsinsky") filed a class action complaint on behalf of himself and all other similarly situated persons who purchased stock in ATT Corporation ("ATT") pursuant to the recommendation of analysts at Defendant Salomon Smith Barney Inc. ("SSB"), and one analyst in particular, Jack Grubman ("Grubman") (collectively "defendants"). Korsinsky alleges that SSB and Grubman breached their fiduciary duties to SSB's retail customers by issuing and maintaining positive recommendations on shares of ATT despite d efendants' knowledge that ATT faced serious financial problems. Korsinsky originally filed this suit in the Supreme Court of the State of New York, New York County on June 15, 2001. Defendants later removed the action to the Southern District of New York pursuant to 15 U.S.C. § § 77p(c) and 778bb(f)(2), and 28 U.S.C. § 1331 and 1441. Korsinsky moves to remand this action to state court and defendants cross-move to dismiss the case. For the reasons set forth below, Korsinsky's motion to remand is denied and defendants' motion to dismiss is granted.
While a retail customer of SSB, Korsinsky purchased shares of ATT. Grubman, a well-known and highly respected telecommunications analyst for SSB, "covered" or followed ATT, along with many other telecommunications companies, and issued recommendations to SSB's retail customers in order to help them make more informed investment decisions. Korsinsky alleges that the previously independent analyst research evaluations are now increasingly influenced by SSB's desire to generate revenue for its investment banking business. Specifically, Korsinsky alleges that SSB began using Grubman's "Buy" recommendations on telecommunications stocks, including ATT, in order to induce companies to bring their investment banking business to SSB.
It is unclear from the complaint exactly when Korsinsky purchased shares of ATT, or whether he continues to own such shares today. However, as noted infra, the class is comprised of those persons who purchased ATT stock on or after November 29, 1999. Accordingly, the Court concludes that Korsinsky purchased his shares of ATT stock on or after November 29, 1999.
On or around November 29, 1999, Grubman issued a "Buy" rating for ATT, at a time when ATT was beginning to prepare for a large public offering of stock and was allegedly looking at a number of different investment banks for underwriting assistance with the stock offering. Although the number of shares traded in ATT increased dramatically after the "Buy" rating, the price of the stock began to decline. Despite the decline, Grubman's "Buy" recommendation remained in place, and in or around April 2000, ATT completed its proposed public offering, with SSB as a lead manager in the offering. SSB allegedly received fees in excess of $44 million for its role as a lead manager. Following the April 2000 offering, ATT reported a substantial decline in earnings, yet the "Buy" recommendation issued by defendants remained in place. Eventually, while SSB continued to reiterate the "Buy" rating to its retail customers, the stock lost half its value. Finally, on or around October 6, 2000, Grubman reduced his recommendation of ATT to "Outperform," and three weeks later Grubman again downgraded his recommendation of ATT to "Neutral."
Korsinsky alleges that SSB's reiteration of Grubman's "Buy" recommendation was strategically done in order to gain ATT's investment banking business, and defendants' actions therefore constitute a breach of their fiduciary duties owed to SSB's retail customers. The proposed class is comprised of retail customers of SSB who "purchased the common stock of ATT through Salomon Smith Barney between November 29, 1999 and [June 15, 2001]." Compl. § 49. The complaint alleges, inter alia, that by reiterating artificially positive recommendations for ATT's common stock in order to obtain ATT's investment banking business, defendants' actions caused millions of dollars in damages to SSB's retail customers. Defendants removed the action to federal court on July 5, 2001, on the grounds that the complaint is a covered class action falling under the removal provisions of the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. § 78bb(f)(1) and (2).
A removing party bears the burden of establishing that the case falls within the Court's removal jurisdiction. See Crazy Eddie, Inc. v. Cotter, 666 F. Supp. 503, 508 (S.D.N.Y. 1987). "It is settled that the removal statutes are to be strictly construed against removal and all doubts should be resolved in favor of remand." Steel Valley Auth. v. Union Switch and Signal Div., 809 F.2d 1006, 1010 (3d Cir. 1987), cert.dismissed, 484 U.S. 1021, 108 S.Ct. 739, 98 L.Ed.2d 756 (1988); see also Leslie v. BancTec Serv. Corp., 928 F. Supp. 341, 347 (S.D.N.Y. 1996).
In order to state a federal claim, "a right or immunity created by the Constitution or laws of the United States must be an element, and an essential one, of the plaintiff's cause of action." Gully v. First Nat'l Bank, 299 U.S. 109, 112 (1936). A non-diverse action cannot be removed to federal court if no federal question exists on the face of the complaint. See, e.g., Ferro v. Ass'n of Catholic Schs., 623 F. Supp. 1161 (S.D.N Y 1985); Hamilton v. Hertz Corp., 607 F. Supp. 1371 (S.D.N.Y. 1985). The plaintiff, moreover, is generally the master of its own complaint and thus entitled to decide what law to rely on. See N. Am. Phillips Corp. v. Emery Air Freight Corp., 579 F.2d 229 (2d Cir. 1978). The "master of the complaint" rule does not limit the Court to the face of the complaint, however, or to plaintiff's characterization of his claims. Still v. DeBuono, 927 F. Supp. 125, 128 (S.D.N.Y. 1996). "In certain limited circumstances, a federal court may look behind the complaint to preclude a plaintiff from defeating federal question jurisdiction through `artful pleading,' that is, by disguising a federal claim as a claim arising under state law." Bowlus v. Alexander Alexander Servs., Inc., 659 F. Supp. 914, 918 (S.D.N.Y 1987); see also Travelers Indem. Co. v. Sarkisian, 794 F.2d 754, 758-59 (2d Cir. 1986),cert. denied, 479 U.S. 885, 107 S.Ct. 277, 93 L.Ed.2d 253 (1986);Greenfield v. Nat'l Westminster Bank USA, 846 F. Supp. 302 (S.D.N.Y. 1994).
SLUSA closes a loophole in the 1995 Private Securities Litigation Reform Act ("PSLRA"), which required plaintiffs to plead with particularity any omissions or allegedly misleading statements, "including on what bases they believe there to be an omission and precisely which statements were misleading and why they were misleading." Hardy v. Merrill Lynch, Pierce, Fenner Smith, No. 01 Civ. 5973, 2001 WL 1524471, *2 (S.D.N.Y. November 30, 2001); see also Private Securities Litigation Reform Act, Pub.L. 104-67, 109 Stat. 737 (codified as amended at 15 U.S.C. § 78a et seq). SLUSA preempts certain types of securities class actions and provides that they cannot be maintained in any court in the United States. The purpose of SLUSA is to "prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State court, rather than Federal court." H.R. Rep. No. 105-803 (1998). Prior to the passage of SLUSA, many class action plaintiffs filed suit in state court alleging fraud in the sale of securities based upon state statutory or common law, primarily in order to avoid the stringent procedural hurdles for federal securities lawsuits erected by the PSLRA. See Lander v. Hartford Life Annuity Ins. Co., 251 F.3d 101, 107-08 (2d Cir. 2001).
SLUSA bars a private party from bringing a "covered class action" based upon the statutory or common law of any state alleging a misrepresentation or omission of a material fact or the use of any manipulative device or contrivance in connection with the sale of a "covered security." 15 U.S.C. § 78bb(f)(1)(A)-(B); see also Derdiger v. Tallman, 75 F. Supp.2d 322, 324 (D. Del. 1999). SLUSA provides that all cases falling within its purview are both removable to federal court and subject to automatic dismissal. See 15 U.S.C. § 78bb(f)(1)-(2). In order to defeat a motion to remand an action to state court, the defendant must show that: (1) the action is a "covered class action" under SLUSA; (2) the action purports to be based upon state law; (3) the action involves a "covered security" under SLUSA; (4) that the defendant is alleged to have misrepresented or omitted a material fact; and (5) the alleged misrepresentation or omission was made "in connection with" the purchase or sale of the covered security. See 15 U.S.C. § 78bb(f) (1)-(2); see also Hardy v. Merril Lynch, 2001 WL 1524471 at *3; Prager v. Knight/Trimark Group, Inc., 124 F. Supp.2d 229, 233 (D.N.J. 2000).
A "covered class action" is a class action involving common questions of law or fact brought by a named plaintiff on behalf of one or more unnamed parties. 15 U.S.C. § 78bb(f)(5)(B). A "covered security" is a security listed on the New York Stock Exchange, the American Stock Exchange, or the Nasdaq National Market, or a security issued by an investment company that is registered, or for which a registration statement has been filed under the Investment Company Act of 1940. 15 U.S.C. § 78bb(f)(5)(E) (adopting definition of "covered security" from 15 U.S.C. § 77r(b)).
It is clear from the complaint that this action is a "covered class action" involving a "covered security," and is based upon claims arising under state common law. The complaint is a covered class action, as common questions of law or fact predominate and it was brought by a named plaintiff on behalf of one or more unnamed parties. See Compl. § § 49, 53; see also 15 U.S.C. § 78bb(f)(5)(B). Moreover, ATT common stock is listed and traded on the New York Stock Exchange, thereby satisfying the definition of a "covered security." See 15 U.S.C. § 78bb(f)(5)(E). Finally, Korsinsky's claim for breach of fiduciary duty is based upon New York common law. See Compl. § 4.
However, the parties disagree as to whether this action involves a misrepresentation or omission of a material fact and whether such misrepresentation or omission was made by the defendants in connection with the purchase or sale of a covered security. Korsinsky asserts that the complaint "does not allege that defendants employed a `device, scheme, or artifice to defraud' or made a `material misrepresentation or omission;'" nor does the complaint "allege any activity `in connection with' or `involving' the purchase or sale of a security." See Plaintiff's Memorandum of Law in Support of Motion to Remand ("Plf.'s Memo.") at 8. In contrast, defendants assert that the complaint clearly contains allegations that the class purchased ATT common stock in reliance on misrepresentations made by Grubman and SSB. Specifically, defendants contend that Korsinsky's statement that SSB "issued and maintained `favorable recommendations when they knew or should have know that [ATT's] business and prospects were deteriorating,'" constitutes an allegation of a misrepresentation or omission. Compl. § 53(c); see also Defendants' Memorandum of Law in Opposition to Plaintiff's Motion to Remand ("Defs.' Memo.") at 11, 13.
The requirement of a misrepresentation or omission is satisfied "where a plaintiff alleges a misrepresentation `concerning the value of the securities . . . sold or the consideration received in return.'" Spielman v. Merrill Lynch, Pierce, Fenner Smith Inc., No. 01 Civ. 3013, 2001 WL 1182927, *3 (S.D.N.Y. Oct. 9, 2001) (quoting Saxe v. E.F. Hutton Co., Inc., 789 F.2d 105, 108 (2d Cir. 1986). This requirement must be read "flexibly, not technically and restrictively." Superintendent of Ins. v. Bankers Life Cas. Co., 404 U.S. 6, 10 n. 7, 12 (1971) (interpreting the requirement of fraud in connection with the sale of a security under Section 10(b) of the Securities Exchange Act of 1934).
Although the complaint clearly states that "[t]his is not an action for fraud," it outlines several instances of alleged misrepresentations made by SSB and Grubman with regard to the value of ATT. See Compl. § 4. For example, Korsinsky alleges that despite the fact that ATT was losing business, had decreased earnings and had made substantial job cuts, Grubman's "Buy" rating remained in place. See Compl. § 36-37. Korsinsky also asserts that because ATT and other companies looked to Grubman to support their stock, his glowing recommendations were essential to SSB's ability to attract investment banking business, thereby leading SSB to place the interests of its investment banking business over the interests of its retail customers. See Compl. § § 45, 48. As a result, Korsinsky accuses SSB of maintaining "favorable recommendations when they knew or should have known that [ATT's] business was deteriorating." Compl. § 53(c).
The Court finds that Korsinsky's allegations regarding an alleged scheme by defendants to issue artificially positive ratings on ATT stock rise to the level of material misrepresentations or omissions regarding the value of the securities. See Spielman, 2001 WL 1182927 at *3 Therefore, the only question remaining is whether the misrepresentations or omissions alleged by Korsinsky were made in connection with the purchase or sale of a covered security.
As conceded by plaintiff, misrepresentations or omissions concerning the value of a covered security satisfy the "in connection with" requirement. See Saxe v. E.F. Hutton Co., Inc., 789 F.2d 105, 108 (2d Cir. 1986); see also Plf.'s Memo, at 12. "Statements directed to the general public which affect the public's interest in the corporation's stock are made in connection with sales or purchases of that stock." In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d 953, 966 (2d Cir. 1993). The Second Circuit's decision in In re Ames recognized that a broad construction of the "in connection with" requirement is warranted when dealing with shareholder suits. See In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d at 965; see also Ross v. A.H. Robins Co., Inc., 607 F.2d 545 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980). In language Particularly applicable to the instant case, the Second Circuit clearly stated,
when the fraud alleged is that the plaintiff bought or sold a security in reliance on misrepresentations as to its value, made by a defendant who position made it reasonable for the plaintiff to rely on the representation and imposed some duty on the defendant to be honest or to disclose information, then whatever problems there may be with the case, a connection between the fraud and the transaction should not be one of them. In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d at 967.
It is clear from the complaint that the misrepresentations and omissions alleged were in connection with the purchase or sale of a covered security. Although Korsinsky contends that some of the statements in his complaint are merely background facts, the complaint contains numerous references to the purchase of ATT stock by class members, and specifically states that Grubman's "Buy" recommendation "causes (1) investors who follow his advice to purchase the stock, and (2) the price of the stock to go up." Compl. § 26. In addition, plaintiff defined the class as those retail customers of SSB who purchased shares of ATT subsequent to the November 29, 1999 "Buy" rating issued by Grubman and SSB. Therefore, each member of the class is a person who purchased shares of ATT common stock ostensibly because of the allegedly misleading "Buy" rating issued that day.
In a strikingly similar case recently decided by Judge Buchwald, nearly identical allegations regarding the actions of Merrill Lynch were held to fall under the purview of SLUSA, and the case was therefore dismissed.See Hardy v. Merrill Lynch, 2001 WL 1524471. In Hardy, the plaintiff alleged that Merrill Lynch reiterated artificially positive recommendations for a stock in order to obtain further underwriting business, causing Merrill Lynch to place its interest in obtaining lucrative underwriting agreements above the interests of its retail customers, to whom it was alleged they owed a fiduciary duty. See id at *2. In Hardy, the class included all Merrill Lynch customers who purchased the stock between the initial public offering and the date of the filing of the complaint. However, because the allegedly inaccurate "Buy" rating came out subsequent to the initial public offering, it could not be determined which members of the class bought in reliance on the rating and which had not, and the complaint was therefore dismissed with leave to replead for those members who purchased prior to the allegedly misleading rating. See id. at *5
The distinction in Hardy between those customers who may have purchased stock prior to the issuance of an allegedly misleading or inaccurate rating and those who may have purchased after is missing in the instant case. Here, Korsinsky chose to define the relevant class members as those who purchased ATT stock on or after the date SSB and Grubman issued the "Buy" rating, November 29, 1999. The chosen class definition therefore excludes anyone who may have purchased stock prior to the "Buy" rating, and thus defeats plaintiff's argument that the class is comprised only of members who decided to hold their shares of ATT stock in reliance on the "Buy" rating. See Pltf.'s Memo. at 10. In Hardy, the only potential class members who could maintain a suit that would not be removable under SLUSA would be those members who purchased before any allegedly misleading rating and continued to hold their shares after the allegedly misleading rating was issued. See Hardy, 2001 WL 1524471 at *5; see also Gutierrez v. Deloitte Touch, L.L.P., 147 F. Supp.2d 584 (W.D. Tex. 2001) (holding that covered class actions which allege misrepresentations in connection with holding a covered security are not removable to federal court);Gordon v. Buntrock, No. 00 Civ. 303, 2000 WL 556763, at *3 (N.D. Ill. Apr. 28, 2000) (remanding a state law claim on the ground that the complaint explicitly limited the class to all persons holding shares before any of the alleged misrepresentations took place). That class of persons does not exist in this case. Therefore, the Court finds that the proposed class consists of persons who have alleged that they purchased shares of a covered security in connection with a material misrepresentation or omission, and the claims alleged in the complaint therefore fall under the purview of SLUSA and must be dismissed.
Therefore, for the reasons set forth above, plaintiff's motion to remand is DENIED, and defendants' motion to dismiss is GRANTED.