Anderson v. Merrill Lynch Pierce Fenner & Smith, Inc.

FILED
United States Court of Appeals
Tenth Circuit

April 7, 2008
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

M. NORMAN ANDERSON;
BERNARD C. BAIER, Baier Family
Interests; HAROLD S. CARPENTER,
Carpenter Family Interests; LEE S.
CHAPMAN, Chapman Family
Interests; CLARK A. COLBY, Colby
Family Interests; MILTON E.
DAVEY; KEITH DENNER; JOE
FIEDLER, Joe Fiedler Family
Interests; VIRGINIA R. FIEDLER;
WILLIAM R. FIEDLER, Virginia and No. 07-2132
William Fiedler Family Interests;
JERRY V. FLATT; SAMUEL A.
FRANCIS, Francis Family Interests;
LOU GIARDINA, Giardina Family
Interests; KENNETH L. HAACK,
Haack Family Interests; ARMON
HELVIG, Helvig Family Interests;
JEFF HODDE; STEVEN M.
LINDELL, Lindell Family Interests;
JOHN LIPEROTE; MARGARET
LIPEROTE, Liperote Family Interests;
PAUL F. LOSTROH, MARY ANN
MICHAEL; TOBY MICHAEL; CLIFF
PHELPS; DON ROGERS; DEBORAH
A. ROSETH; RICK SHENEMAN;
MATHEW L. T. WALDOR; DON
WHITE,

Plaintiffs-Appellants,

and

EDWARD J. MICHAEL,
 Plaintiff,
v.
MERRILL LYNCH PIERCE FENNER
& SMITH, INC., a Delaware
Corporation,

Defendants-Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO
(D.C. No. CIV-06-1155-BB)

Clinton W. Marrs, Vogel Campbell & Blueher, P.C., Albuquerque, New Mexico,
(Michael W. Wile, Vogel Campbell & Blueher, P.C., Albuquerque, New Mexico;
Charles A. Pharris and James L. Rasmussen, Keleher & McLeod, P.A.,
Albuquerque, New Mexico, with him on the briefs), for Plaintiffs-Appellants.

Charles A. Gall (Joel R. Sharp with him on the brief), Hunton & Williams, LLP,
Dallas, Texas, for Defendant-Appellee.

Before HENRY, Chief Circuit Judge, BRISCOE, and HOLMES, Circuit Judges.

BRISCOE, Circuit Judge.

Plaintiffs/Appellants (“Plaintiffs”) are approximately 120 shareholders of

Solv-Ex, a now-defunct New Mexico corporation. They brought this class action

lawsuit against Defendant/Appellee Merrill Lynch, Pierce, Fenner, & Smith, Inc.

(“Merrill Lynch”) in New Mexico state court, alleging fourteen separate counts

under New Mexico law. Merrill Lynch removed the case to the United States

2
District Court for the District of New Mexico and then moved to dismiss pursuant

to Rule 12(b)(6) of the Federal Rules of Civil Procedure, citing the court to the

Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, 112

Stat. 3227 (1998) (codified at 15 U.S.C. §§ 77p, 78bb(f)). The district court

granted the motion to dismiss and denied Plaintiffs leave to amend their

Complaint. We have jurisdiction under 28 U.S.C. § 1291, and affirm.

I.

A. Statutory background

In 1995, Congress responded to perceived abuses of federal securities class

action litigation by passing the Private Securities Litigation Reform Act of 1995

(“PSLRA”), Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified at 15 U.S.C. §§

77z-1, 78u-4). See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547

U.S. 71, 81 (2006). The PSLRA imposed certain limits on such litigation,

including limits on recoverable damages and attorneys’ fees, a “safe harbor” for

forward-looking statements, mandated sanctions for frivolous litigation, a stay of

discovery pending any motion to dismiss, and heightened pleading requirements.

Id. at 81-82 (citing 15 U.S.C. § 78u-4; Dura Pharm., Inc. v. Broudo, 544 U.S.

336, 345 (2005)). These limits on federal securities class actions, however, had

an unintended consequence:

[They] prompted at least some members of the plaintiffs’ bar to
avoid the federal forum altogether. Rather than face the obstacles set
in their path by the [PSLRA], plaintiffs and their representatives

3
 began bringing class actions under state law, often in state court.
The evidence presented to Congress during a 1997 hearing to
evaluate the effects of the [PSLRA] suggested that this phenomenon
was a novel one; state-court litigation of class actions involving
nationally traded securities had previously been rare.

Id. at 82 (citing H.R. Rep. No. 105-640, at 10 (1998); S. Rep. No. 105-182, at 3-4

(1998)); see also H.R. Rep. No. 105-803, at 13-15 (1998) (Conf. Rep.).

The unanticipated shift in securities class actions from federal to state

court, and from federal to state law, created several problems. As the Senate

Report explained:

Disparate, and shifting, state litigation procedures may expose
issuers to the potential for significant liability that cannot easily be
evaluated in advance, or assessed when a statement is made. At a
time when we are increasingly experiencing and encouraging national
and international securities offerings and listings, and expending
great effort to rationalize and streamline our securities markets, this
fragmentation of investor remedies potentially imposes costs that
outweigh the benefits. Rather than permit or foster fragmentation of
our national system of securities litigation, we should give due
consideration to the benefits flowing to investors from a uniform
national approach.

S. Rep. No. 105-182, at 3 (citation omitted). In addition, this shift to state court

re-introduced many of the abuses that the PSLRA had attempted to mitigate,

allowing plaintiffs to avoid the comparatively stringent federal pleading

requirements, federal discovery stays, and other substantive and procedural

provisions of the PSLRA. See id.

Congress responded by passing the Securities Litigation Uniform Standards

Act of 1998 (“SLUSA”), Pub. L. No. 105-353, 112 Stat. 3227 (1998). SLUSA

4
provides for preclusion of certain securities class actions brought under state law:

(f) Limitations on remedies

(1) Class action limitations

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.

15 U.S.C. § 78bb(f)(1); see also Potter v. James Inv. Fund, 483 F. Supp. 2d 692,

696 (S.D. Ill. 2007) (“Thus, an action will be dismissed under SLUSA if it is (1) a

‘covered class action,’ (2) that is based on a 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’ the purchase or sale of a

covered security, and all of these elements must be present for preclusion to

apply.”). 1, 2 This is not a “preemption provision,” but rather a “preclusion

1
“A ‘covered class action’ is a lawsuit in which damages are sought on
behalf of more than 50 people.” Dabit, 547 U.S. at 83 (citing 15 U.S.C. §
78bb(f)(5)(B)). “A ‘covered security’ is one traded nationally and listed on a
regulated national exchange.” Id. (citing 15 U.S.C. § 78bb(f)(5)(E)).
2
The statutory provisions cited herein are SLUSA’s amendments to the
Securities Exchange Act of 1934. SLUSA “amends the 1933 Act and the 1934
(continued...)

5
provision”: it “does not itself displace state law with federal law but makes some

state-law claims nonactionable through the class action device in federal as well

as state court.” Kircher v. Putnam Funds Trust, 547 U.S. 633, 637 n.1 (2006).

Moreover, SLUSA provides federal courts with removal jurisdiction over

class actions that are precluded under § 78bb(f)(1):

(2) Removal of covered class actions

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). If, after removal, the federal court determines that

SLUSA does not preclude the class action, then the federal court must remand it

to state court:

(3) Preservation of certain actions–

***

(D) Remand of removed actions

In an action that has been removed from a State court
pursuant to paragraph (2), if the Federal court

2
(...continued)
Act in substantially identical ways.” Dabit, 547 U.S. at 82 n.6. Compare 15
U.S.C. § 77p (codifying SLUSA’s amendments to the Securities Act of 1933),
with 15 U.S.C. § 78bb(f) (codifying SLUSA’s amendments to the Securities
Exchange Act of 1934). For convenience, and because all parties appear to agree
that the amendments to the Securities Exchange Act of 1934 are more pertinent
here, we will continue to cite only to those provisions unless otherwise noted.
See Dabit, 547 U.S. at 82 n.6 (“For convenience and because they are more
pertinent here, we quote the amendments to the 1934 Act.”).

6
 determines that the action may be maintained in State
court pursuant to this subsection, the Federal court shall
remand such action to such State court.

15 U.S.C. § 78bb(f)(3)(D). Under these provisions, the jurisdiction conferred

upon the federal courts by SLUSA is, in essence, limited to determining whether

15 U.S.C. § 78bb(f)(1) precludes the plaintiffs’ claims:

Once removal jurisdiction under [15 U.S.C. § 78bb(f)(2)] is
understood to be restricted to precluded actions defined by [§
78bb(f)(1)], a motion to remand claiming the action is not precluded
must be seen as posing a jurisdictional issue. If the action is
precluded, neither the District Court nor the state court may entertain
it, and the proper course is to dismiss. If the action is not precluded,
the federal court likewise has no jurisdiction to touch the case on the
merits, and the proper course is to remand to the state court that can
deal with it. In either event, . . . the district court’s order comes
because its adjudicatory power has been exercised and its work is
done.

Kircher, 547 U.S. at 643-44.

B. Procedural and factual background

Solv-Ex is a defunct New Mexico corporation whose stock was previously

listed on the NASDAQ exchange. John S. Rendall, who is not a party to this

action, founded Solv-Ex in 1980 to develop processes for the extraction of

bitumen from oil sands. During all relevant time periods, Mr. Rendall was the

chairman, CEO, and largest individual shareholder of Solv-Ex. In March 1997,

Merrill Lynch made a personal loan to Mr. Rendall for $2 million. As part of the

loan agreement, Mr. Rendall moved an existing $2 million margin account loan to

Merrill Lynch, and he agreed to secure the $4 million in total loan amounts with

7
2.61 million shares of his Solv-Ex common stock, which represented more than

ten percent of the issued and outstanding shares of Solv-Ex common stock. In

April 1997, barely a month later, Merrill Lynch informed Mr. Rendall that it was

demanding payment of the entire $4 million debt, and that it intended to sell 1.1

million of his Solv-Ex shares if he could not pay. Starting in May 1997, Merrill

Lynch sold 634,100 of Mr. Rendall’s shares on the open market. During this time

period, the share price of Solv-Ex common stock plunged from $13 on April 1,

1997, to slightly under $4 on June 30, 1997. In July 1997, Solv-Ex filed a

petition for bankruptcy, and in September 1997, the NASDAQ de-listed its stock. 3

Solv-Ex was, and remains, dormant.

On October 24, 2006, Plaintiffs filed the instant action against Merrill

Lynch in New Mexico state court. Plaintiffs alleged that Martin Zweig and his

related entities (the “Zweig Entities”) had maintained prime brokerage

relationships with Merrill Lynch during the time that Mr. Rendall had pledged his

shares to Merrill Lynch as security for the loans. According to Plaintiffs, the

Zweig Entities engaged in short-selling of Solv-Ex stock throughout 1996 and

1997, using Merrill Lynch prime brokerage accounts, often without closing out

their positions within UPC Rule 71’s ten-day closeout period. The Complaint

3
Plaintiffs’ Complaint describes, in detail, several of the problems that
Solv-Ex faced in 1996 and 1997, including a wave of bad publicity, federal
criminal investigations, and lawsuits. These details are largely irrelevant to the
instant appeal, so we will not discuss them with additional specificity.

8
alleged fourteen separate counts against Merrill Lynch. In Count I, Plaintiffs

requested an equitable bill of discovery, permitting them to conduct depositions

and compel document production in order to determine whether Merrill Lynch

and/or other parties acted inappropriately in short-selling Solv-Ex stock. In the

alternative, in Counts II through XIV of the Complaint, Plaintiffs set forth claims

against Merrill Lynch under New Mexico common and statutory law, alleging

breach of fiduciary duty (Count II), aiding and abetting tortious action (Count

III), oppressive conduct (Count IV), prima facie tort (Count V), civil conspiracy

(Count VI), negligence (Count VII), violations of the New Mexico Securities Act

of 1986 (Counts VIII and IX), violations of the New Mexico Unfair Practices Act

(Count X), negligent supervision (Count XI), control person liability (Count XII),

respondeat superior (Count XIII), and punitive damages (Count XIV). The

essence of the claims was that Merrill Lynch induced Mr. Rendall to open the

margin loan account, secured by the 2.61 million shares of Solv-Ex, and then

liquidated those shares, flooding the market and driving down the price of Solv-

Ex stock.

Merrill Lynch removed the action to the United States District Court for the

District of New Mexico. As its jurisdictional bases for removal, Merrill Lynch

relied upon 28 U.S.C. § 1441, as well as SLUSA, 15 U.S.C. §§ 77p(c), 78bb(f)(2).

Merrill Lynch then filed a motion to dismiss under Rule 12(b)(6) of the Federal

Rules of Civil Procedure, relying upon SLUSA, 15 U.S.C. § 78bb(f)(1).

9
 On April 4, 2007, the district court granted the motion to dismiss, holding

that SLUSA barred all of Plaintiffs’ claims. The district court held that Plaintiffs’

claims were a “covered class action” under SLUSA, despite Plaintiffs’ attempt to

seek an equitable bill of discovery as an alternative remedy. The district court

also rejected Plaintiffs’ request for leave to amend their Complaint to assert a

derivative action against Merrill Lynch on behalf of Solv-Ex. The district court

explained that “Plaintiffs have not attached a proposed amended complaint to

their Response as is required by this District’s local rules.” Dist. Ct. Op., ROA,

Vol. I, at 171 (citing D.N.M. Civ. R. 15.1). In addition, Plaintiffs did not

“explain how they will be able to meet the requirements for filing an exclusively

derivative action under Rule 23.1 of the Federal Rules of Civil Procedure,” or

“offer any enlightenment on how they could pursue the required ‘exclusive

derivative action’ on these facts.” Id. The district court further noted that New

Mexico law does not permit a shareholder “to recover for injuries done to the

corporation.” Id. (citing Marchman v. NCNB Tex. Nat’l Bank, 898 P.2d 709

(N.M. 1995)).

The district court then held that SLUSA barred Plaintiffs’ claims. The

district court rejected Plaintiffs’ argument that SLUSA only precluded claims

having “elements identical to those required for federal securities fraud,” such as

scienter. Id. at 172. The district court explained that “it is not necessary that the

state law claim line up exactly with the requirements of federal securities statutes

10
to be barred by SLUSA.” Id. Plaintiffs made several allegations in their

Complaint regarding “misrepresentation[s] or omission[s] of a material fact” and

“manipulative or deceptive device[s],” “in connection with the purchase or sale of

a covered security,” and the district court held that this was all that SLUSA

required. Id. at 173.

On appeal, Plaintiffs argue that the district court erred in determining that

SLUSA precluded their claims. Alternatively, they argue that the district court

should have granted them leave to amend their Complaint.

II.

A. Plaintiffs’ claims under SLUSA

The district court correctly held that SLUSA precluded Plaintiffs’ claims

and mandated dismissal. “We review de novo a district court’s decision on a Rule

12(b)(6) motion for dismissal for failure to state a claim.” Alvarado v. KOB-TV,

L.L.C., 493 F.3d 1210, 1215 (10th Cir. 2007). In doing so, “[w]e must accept all

the well-pleaded allegations of the complaint as true and must construe them in

the light most favorable to the plaintiff.” Id. (citation and internal quotation

marks omitted). In addition, in determining whether to grant a motion to dismiss

for failure to state a claim, we “look to the specific allegations in the complaint to

determine whether they plausibly support a legal claim for relief.” Id. at 1215

n.2.

The seminal case on the scope of SLUSA is the Supreme Court’s 2006

11
decision in Dabit, in which the Court concluded that SLUSA precluded claims by

holders—and not just purchasers or sellers—of covered securities. The Court

rejected a narrow interpretation of the statutory phrase, “in connection with the

purchase or sale of a covered security,” 15 U.S.C. § 78bb(f)(1)(A), (B), despite

the plaintiffs’ argument that those words incorporated the same purchaser-seller

requirement into SLUSA that the Court had adopted in Blue Chip Stamps v.

Manor Drug Stores, 421 U.S. 723 (1975), for private actions under Rule 10b-5.

See Dabit, 547 U.S. at 84-88. The Court explained that the purchaser-seller

limitation adopted in Blue Chip Stamps for private actions did not stem from the

text of 10b-5, but rather from “policy considerations.” Id. at 84 (citing Blue Chip

Stamps, 421 U.S. at 737, 749). The Court had “espoused a broad interpretation”

when “giv[ing] meaning to the phrase in the context of § 10(b) and Rule 10b-5,”

and “this broader interpretation of the statutory language comports with the

longstanding views of the SEC.” Id. at 85. Under the “ordinary principles of

statutory construction,” therefore, Congress intended to incorporate this broad

construction when it incorporated the identical language into SLUSA. Id. at 85-

86.

Further, the Court in Dabit based its broad reading of SLUSA on the

purpose of statute:

The presumption that Congress envisioned a broad construction
follows not only from ordinary principles of statutory construction
but also from the particular concerns that culminated in SLUSA’s

12
 enactment. A narrow reading of the statute would undercut the
effectiveness of the [PSLRA] and thus run contrary to SLUSA’s
stated purpose, viz., to prevent certain State private securities class
action lawsuits alleging fraud from being used to frustrate the
objectives of the [PSLRA]. As the Blue Chip Stamps Court
observed, class actions brought by holders [(rather than just
purchasers or sellers)] pose a special risk of vexatious litigation. It
would be odd, to say the least, if SLUSA exempted that particularly
troublesome subset of class actions from its pre-emptive sweep.

Id. at 86 (citations and internal quotation marks omitted). A narrow interpretation

of SLUSA would “squarely conflict[] with the congressional preference for

national standards for securities class action lawsuits involving nationally traded

securities.” Id. at 86-87 (citation and internal quotation marks omitted). In

addition, the Court in Dabit concluded that the general presumption against

preemption of state-law causes of action

carries less force here than in other contexts because 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. The Act does not deny any individual plaintiff, or indeed any
group of fewer than 50 plaintiffs, the right to enforce any state-law
cause of action that may exist.

Moreover, the tailored exceptions to SLUSA’s pre-emptive command
demonstrate that Congress did not by any means act “cavalierly”
here. The statute carefully exempts from its operation certain class
actions based on the law of the State in which the issuer of the
covered security is incorporated, actions brought by a state agency or
state pension plan, actions under contracts between issuers and
indenture trustees, and derivative actions brought by shareholders on
behalf of a corporation. The statute also expressly preserves state
jurisdiction over state agency enforcement proceedings. The
existence of these carve-outs both evinces congressional sensitivity
to state prerogatives in this field and makes it inappropriate for
courts to create additional, implied exceptions.

13
Id. at 87-88 (citing 15 U.S.C. § 78bb(f)(3)(A)-(C), (f)(4), (f)(5)(C)).

Plaintiffs’ argument in the instant case parallels the argument that the

Supreme Court rejected in Dabit. The essence of Plaintiffs’ argument is that,

because SLUSA employs language similar to that in Rule 10b-5, 4 SLUSA only

precludes state law claims that are “virtually identical” to a federal securities

fraud claim under 10b-5—i.e., claims requiring plaintiffs to allege the “essential

elements” of scienter and reliance. Under this standard, Plaintiffs argue, SLUSA

does not preclude any of their claims under New Mexico law, because none of

their claims allege—or are required to allege—the elements of scienter and

reliance.

4
Rule 10b-5 makes it “unlawful for any person”:

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not
misleading, or

(c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5; see also 15 U.S.C. § 78j(b) (making it “unlawful for any
person . . . [t]o use or employ, in connection with the purchase or sale of any
security registered on a national securities exchange or any security not so
registered, . . . any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the protection of investors”).

14
 Plaintiffs are not unique in making this argument, and courts have almost

uniformly rejected it as contrary to the structure, intent, and plain language of

SLUSA. As the Eleventh Circuit has explained:

SLUSA amends both the 1933 Act (15 U.S.C. § 77p) and the 1934
Act (15 U.S.C. § 78bb), preempting claims brought under both of
those statutes. The sections of SLUSA that amend the 1933 Act
track the language of §§ 11 and 12(a)(2), and claims under §§ 11 and
12(a)(2) of the 1933 Act do not require a showing of scienter. Thus,
SLUSA preempts some claims—namely, those brought under § 11 or
12(a)(2) of the 1933 Act—that lack a scienter requirement.
Accordingly, we cannot accept [the plaintiffs’] contention that
scienter is the dispositive factor in determining whether a given
lawsuit falls within the scope of SLUSA.

Riley v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 292 F.3d 1334, 1346 (11th

Cir. 2002); see also Potter, 483 F. Supp. 2d at 698-703 (conducting a similar

textual and structural analysis and reaching the same conclusion); Winne v.

Equitable Life Assurance Soc’y of the U.S., 315 F. Supp. 2d 404, 413-15 & n.5

(S.D.N.Y. 2003) (reaching the same conclusion by relying on a similar textual and

structural analysis, as well as the fact that “the statute itself contains no language

requiring scienter for SLUSA to apply,” and that, in light of the purpose of

SLUSA, “[i]t would make little sense . . . to preempt claims that exactly track

federal law, but permit state class actions where state law permits even broader

liability than federal securities law”); Feitelberg v. Merrill Lynch & Co., 234 F.

Supp. 2d 1043, 1051 (N.D. Cal. 2002) (“This argument proves too much, for if by

merely omitting scienter allegations plaintiff can avoid SLUSA’s preemption

15
effect, SLUSA would be totally eviscerated. . . . In other words, if it looks like a

securities fraud claim, sounds like a securities fraud claim and acts like a

securities fraud claim, it is a securities fraud claim, no matter how you dress it

up.”), aff’d per curiam, 353 F.3d 765 (9th Cir. 2003). But see Green v.

Ameritrade, Inc., 120 F. Supp. 2d 795, 798 (D. Neb. 2000), aff’d on other

grounds, 279 F.3d 590 (8th Cir. 2002); Burns v. Prudential Sec., Inc., 116 F.

Supp. 2d 917, 923-24 (N.D. Ohio 2000). Moreover, as long as claims meet all of

the elements of SLUSA, courts have generally held that SLUSA precludes those

claims—regardless of how artfully or cleverly plaintiffs attempt to plead them.

See, e.g., Rowinski v. Salomon Smith Barney, Inc., 398 F.3d 294, 299-304 (3d

Cir. 2005) (holding that SLUSA precluded certain claims under Pennsylvania law

for breach of contract, unjust enrichment, and deceptive consumer practices);

Miller v. Nationwide Life Ins. Co., 391 F.3d 698, 701-02 (5th Cir. 2004) (holding

that SLUSA precluded a breach of contract action under Louisiana law); Dudek v.

Prudential Sec., Inc., 295 F.3d 875, 879-80 (8th Cir. 2002) (holding that SLUSA

precluded nine causes of action under New York law, including fraud and deceit,

breach of fiduciary duty, deceptive business practices, negligent

misrepresentation, and unjust enrichment).

In its amicus brief to the Second Circuit in Dabit, the SEC provided a

cogent analysis of the proper scope of SLUSA, much of which is relevant here.

See Brief of the SEC as Amicus Curiae on Issues Addressed, Dabit v. Merrill

16
Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2d Cir. 2005), vacated, 547

U.S. 71 (2006). 5 The SEC explained that “the statute’s language makes clear that

SLUSA preemption does not require an allegation of scienter.” Id. at 25; see also

id. at 27 (“[T]he language of SLUSA does not on its face require that the

plaintiff’s allegations state a scienter-based claim, as required under Rule

10b-5.”). The SEC further explained:

The imposition of a scienter requirement would also be inconsistent
with SLUSA’s principal purpose . . . . While part of Congress’s
concern was the procedural constraints on class action litigation,
another concern was compelling compliance with the PSLRA’s
heightened scienter pleading standard, which requires plaintiffs in
Rule 10b-5 cases to allege scienter with greater specificity than many
courts had previously required. To the extent that migration toward
state courts had been fueled by this requirement, it would have been
because plaintiffs found it difficult, after the PSLRA, to make an
adequate claim of scienter in Rule 10b-5 cases. If it were to be held
that SLUSA does not apply to a case which cannot, for lack of an
allegation of scienter, be brought under Rule 10b-5, this objective of
SLUSA would be largely undercut. SLUSA could not compel
compliance with the PSLRA’s scienter pleading standard, since it
simply would not apply to any class action complaint that could not
comply with the PSLRA standard. Congress could not have intended
such a self-defeating result.

Id. at 27-29 (citations omitted). Along these lines, the SEC also noted that

“[n]othing in the language of SLUSA suggests that any of the other requirements

of a private Rule 10b-5 action—such as statute of limitations, reliance, loss

causation—must be met before SLUSA preemption will apply.” Id. at 29 n.7.

5
A copy of the SEC’s amicus brief to the Second Circuit is available at
http://www.sec.gov/litigation/briefs/dabit062204.pdf.

17
The SEC was quick to clarify, however, that “[t]he clear language of SLUSA . . .

requires that the action allege a misrepresentation or misleading omission or other

deception,” so “a pure breach-of-contract claim—with no allegation of

misrepresentation—[does not] come[] within the terms of the preemption

provisions.” Id. at 24.

In light of these authorities, the district court was correct that SLUSA

precluded Plaintiffs’ claims, and that Plaintiffs did not have to allege scienter or

reliance for SLUSA to apply. Plaintiffs do not contest that their claims constitute

a “covered class action,” that is based on state law, and that is “in connection

with the purchase or sale of a covered security.” 15 U.S.C. § 78bb(f)(1). Nor do

Plaintiffs’ claims fit within one of the exceptions provided under SLUSA. See 15

U.S.C. § 78bb(f)(3)-(4). Most importantly, in their Complaint, Plaintiffs make

several allegations regarding “misrepresentation[s] or omission[s] of a material

fact” and/or “manipulative or deceptive device[s] or contrivance[s].” See, e.g.,

Compl., ROA, Vol. I, at 13, ¶ 46 (“Naked short selling can present substantial

manipulation concerns.”); id. at 15, ¶ 54 (“It is the inevitable market imbalances,

the unfair leverage gained, and the largely unchecked potential for manipulation

in the naked short seller-prime broker context that is at the heart of this action.

And, it is the interaction between one or more major short sellers of Solv-Ex

stock and their prime broker Merrill Lynch, and how those interactions caused

Merrill Lynch to abruptly set in motion the events necessitating the sale of

18
Rendall’s pledged shares, that is the necessary subject for inquiry in this

action.”); id. at 24-25, ¶¶ 92, 94, 96-99 (contending that, on several occasions, the

“Zweig Entities sold Solv-Ex shares through their Merrill Lynch prime brokerage

accounts,” that “[e]ach sale was a short sale,” and that they did not later purchase

Solv-Ex shares to cover these short sales, or otherwise “close[] out their short

positions in Solv-Ex”); id. at 35, ¶ 153 (“The reasonable inferences to be drawn

from the facts now known, however, are that Merrill Lynch, alone or in concert

with other persons or parties, intentionally acted to harm Mr. Rendall and thereby

the Plaintiffs.”). All of the substantive counts listed in Plaintiffs’ Complaint

incorporate these allegations by reference. 6 Also, several of the individual counts

6
A few courts have held that, because SLUSA uses the word “action,”
SLUSA requires dismissing the entire class action complaint if one or more of the
individual claims is precluded by SLUSA. See, e.g., In re Lord Abbett Mut.
Funds Fee Litig., 463 F. Supp. 2d 505, 508 (D.N.J. 2006) (“[O]nce we found
Counts Seven through Ten preempted by SLUSA, we were required to dismiss the
entire class action, including Counts Three and Four, and not grant Plaintiffs
leave to file a new complaint alleging an entirely new and different action.”); see
also Rowinski, 398 F.3d at 305 (“As an initial matter, we question whether
preemption of certain counts and remand of others is consistent with the plain
meaning of SLUSA. The statute does not preempt particular ‘claims’ or ‘counts’
but rather preempts ‘actions,’ 15 U.S.C. § 78bb(f)(1), suggesting that if any
claims alleged in a covered class action are preempted, the entire action must be
dismissed.”).
In the instant case, however, Plaintiffs have incorporated their general
allegations into each of their substantive counts—which are based only on New
Mexico law—so SLUSA precludes all of Plaintiffs’ claims individually. Thus, we
need not decide whether, in another action, SLUSA would permit the preclusion
of certain claims and the remand of others. See Rowinski, 398 F.3d at 305 (“But
we need not decide whether a count-by-count analysis is appropriate in this case,
because plaintiff has incorporated every allegation into every count in his
(continued...)

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themselves allege “misrepresentation[s] or omission[s] of a material fact” and/or

“manipulative or deceptive device[s] or contrivance[s].” See, e.g., id. at 39, ¶ 164

(“Merrill Lynch dominated, interfered with, or misled the Plaintiffs in the

exercise of their rights in their Solv-Ex common stock shares.”); id. at 43, ¶ 174

(“Merrill Lynch’s acts and failures to act as alleged herein constitute a ‘device,

scheme or artifice to defraud’ Plaintiffs . . . .”); id. at 45, ¶ 181 (“Merrill Lynch’s

acts and failures to act as alleged herein constitute a ‘device, scheme or artifice to

manipulate’ the market in Plaintiff[s’] Solv-Ex common stock . . . .”); id. at 45, ¶

185 (“By acting and failing to act as alleged herein, Merrill Lynch knowingly

made false or misleading representations . . . .”). We conclude, therefore, that

Plaintiffs’ claims are precluded under SLUSA.

The cases that Plaintiffs cite in their brief do not compel a conclusion to the

contrary. For instance, in Contreras v. Host America Corp., 453 F. Supp. 2d 416,

419 (D. Conn. 2006), the court held that SLUSA did not apply, but only because

the suit—which involved less than 50 plaintiffs—did not qualify as a “covered

class action.” The court’s “virtual identity” analysis came later, in a different

jurisdictional context. See id. at 419-21. The Southern District of New York’s

opinion in Xpedior Creditor Trust v. Credit Suisse First Boston (USA) Inc., 341

F. Supp. 2d 258, 265-70 (S.D.N.Y. 2004), provides some support for Plaintiffs,

6
(...continued)
complaint. Our SLUSA analysis therefore applies to each of plaintiff’s counts,
and compels the conclusion that each is preempted.”).

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but as we have explained above, the weight of the authority is overwhelmingly

against them.

B. Denial of leave to amend the Complaint

The district court did not abuse its discretion in refusing to grant Plaintiffs

leave to amend their Complaint. “We review the denial of a motion to amend for

abuse of discretion.” Anderson v. Suiters, 499 F.3d 1228, 1238 (10th Cir. 2007).

The Federal Rules of Civil Procedure provide that the district court “should freely

give leave [to amend] when justice so requires.” Fed. R. Civ. P. 15(a)(2). The

district court is not required to grant leave to amend, however, if amendment

would be futile. Anderson, 499 F.3d at 1238. “A proposed amendment is futile if

the complaint, as amended, would be subject to dismissal.” Id. (citations and

internal quotation marks omitted). In the instant case, Plaintiffs requested leave

to amend their Complaint to allow them to “either recast their claims so as to cure

any SLUSA-related ‘defects,’ or recast their claims exclusively as a derivative

action.” Plaintiffs’ Response, ROA, Vol. I, at 145.

Any amendment by Plaintiffs here would have been futile. SLUSA

precluded all of the substantive counts that Plaintiffs alleged in their Complaint,

so Plaintiffs could not have saved their Complaint by withdrawing a few of the

counts. Additionally, Plaintiffs have nowhere explained how they could

transform their Complaint into a derivative action on behalf of Solv-Ex, nor did

they attach a proposed amended complaint to their response filed with the district

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court, as required by D.N.M. Civ. R. 15.1. As the Eighth Circuit has explained:

Finally, plaintiffs argue the district court abused its discretion in
denying them leave to file an amended complaint. Plaintiffs first
raised this issue at the end of their brief to the district court on the
removal and preemption issues, stating that “if defendants’ motion to
dismiss is granted, plaintiffs[] should be permitted to file an amended
complaint.” Plaintiffs did not include a proposed amended pleading,
as Local Rule 15.1 of the Northern District of Iowa requires. Nor did
plaintiffs describe what changes they would make to avoid SLUSA
preemption, or what non-futile federal causes of action they would
seek to assert. In these circumstances, the district court did not
abuse its discretion in granting defendants’ motion to dismiss.

Dudek, 295 F.3d at 880 (citation omitted). For similar reasons, the district court

in the instant case did not abuse its discretion. 7

AFFIRMED.

7
Because the district court did not abuse its discretion here, we need not
decide whether the provisions of SLUSA, by themselves, prohibit Plaintiffs from
amending their Complaint. See U.S. Mortgage, Inc. v. Saxton, 494 F.3d 833,
842-43 (9th Cir. 2007) (recognizing a split on this issue and concluding that
SLUSA does not prohibit post-removal amendment of a complaint).

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