FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
WHISTLER INVESTMENTS, INC., a
Nevada corporation; SALIM S.
RANA INVESTMENTS CORP., a
corporation; AMERICAN DREAM
HOLDINGS, INC., a corporation, No. 06-16088
Plaintiffs-Appellants, D.C. No.
v. CV-05-00634-
THE DEPOSITORY TRUST AND RCJ/GWF
CLEARING CORPORATION; THE OPINION
DEPOSITORY TRUST COMPANY; THE
NATIONAL SECURITIES CLEARING
CORPORATION,
Defendants-Appellees.
Appeal from the United States District Court
for the District of Nevada
Robert C. Jones, District Judge, Presiding
Argued and Submitted
March 10, 2008—Phoenix, Arizona
Filed August 22, 2008
Before: Michael Daly Hawkins, Sidney R. Thomas, and
Richard R. Clifton, Circuit Judges.
Opinion by Judge Thomas
11531
WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11535
COUNSEL
Michael J. Morrison, Reno, Nevada, and John R. Knight
(argued), Memphis, Tennessee, for the appellants.
Don Nomura and Daniel T. Hayward, Laxalt & Nomura,
Reno, Nevada, Gregg M. Mashberg (argued) and Karen D.
Coombs, Proskauer Rose LLP, New York, New York, for the
appellees.
11536 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
Scott K. Attaway (argued), Washington, DC, for North Amer-
ican Securities Administrators Association, as amicus curiae
in support of the appellants.
Mark R. Pennington (argued), Securities and Exchange Com-
mission, Washington, DC, for Securities and Exchange Com-
mission, as amicus curiae in support of the appellees.
OPINION
THOMAS, Circuit Judge:
This case requires us to consider whether the Securities
Exchange Act of 1934 preempts state-law claims against reg-
istered clearing agencies in connection with their clearance
and settlement services, where those services were performed
pursuant to a program approved of by the Securities Exchange
Commission. Although we conclude that the state law claims
asserted here were not precluded by field preemption, we hold
the claims were barred by conflict preemption. We therefore
affirm the judgment of the district court.
I
Whistler Investments, Inc., Salim S. Rana Investments
Corp., and American Dream Holdings, Inc. (collectively
“Whistler”) brought an action for damages under Nevada state
law against three registered clearing agencies. Whistler
Investments is a Nevada corporation whose common stock is
publicly traded. Salim S. Rana Investments and American
Dream Holdings are shareholders who purchased and sold
Whistler common stock in the open market between April
2002 and November 2004.
Whistler alleges that short sellers drove down the market
price for Whistler stock by selling Whistler shares without
WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11537
having stock available for delivery, and then intentionally
failing to deliver the stock. Such a technique is referred to as
“naked short selling.” See Amendments to Regulation SHO,
Exchange Act Release No. 54,154, 2006 WL 2712000, at *1
(July 14, 2006).
“A short sale is a term of art used for a security trading
practice in which a party ‘speculates that a particular stock
will go down in price and seeks to profit from that drop.’ ”
Lapidus v. Hecht, 232 F.3d 679, 680-81 (9th Cir. 2000) (quot-
ing Levitin v. PaineWebber, Inc., 159 F.3d 698, 700 (2d Cir.
1998)). The seller sells a security he does not own, borrows
the security from a broker to meet the delivery obligation, and
then purchases an identical security to return to the broker. If
the security has declined in price between the sale and the
purchase, the seller profits. See id. at 681; 17 C.F.R.
§ 242.200(a) (defining short sale). In contrast, “a ‘naked short
sale’ occurs when a seller sells a security without owning or
borrowing it and does not deliver the security when due.” In
re Phylo Corp., 2007 WL 966943, 16 Exchange Act Release
No. 55,562, at *4 n.22 (March 30, 2007).
Whistler’s complaint is premised on its claim that the
naked short selling was facilitated by alleged defects in a pro-
gram operated by the National Securities Clearing Corpora-
tion, one of the defendants in this action. Defendants moved
to dismiss the action on the ground that federal securities law
preempts Whistler’s claims. The district court granted Defen-
dants’ motion, holding Whistler’s claims preempted under the
doctrines of field preemption and conflicts preemption. We
review de novo a district court’s decision regarding preemp-
tion. Indep. Towers of Washington v. Washington, 350 F.3d
925, 928 (9th Cir. 2003).
II
Congress added Section 17A to the Securities Exchange
Act of 1934 (“the Exchange Act”), 15 U.S.C. §§ 78a et seq.,
11538 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
in 1975 in order to remove impediments to a uniform national
system for the prompt and accurate clearance and settlement
of securities transactions. See 15 U.S.C. § 78q-1(a)(1)(A).
Among other provisions, Section 17A provided for the regis-
tration of “clearing agencies” by the Securities Exchange
Commission (“the Commission”). See 15 U.S.C. § 78q-1(b).
The role of the clearing agencies was to replace an inefficient
and outmoded system of clearing agencies with a more mod-
ern and efficient system. See 15 U.S.C. § 78q-1(a)(1). Con-
gress directed the Commission to use its authority to facilitate
the establishment of a national system for the prompt and
accurate clearance and settlement of securities transactions as
well as to coordinate or link facilities for such clearance and
settlement. See 15 U.S.C. § 78q-1(a)(2)(A).
The three defendants in this action are the Depository Trust
& Clearing Corporation (“DTCC”), the Depository Trust
Company (“DTC”) and the National Securities Clearing Cor-
poration (“NSCC”). DTC and NSCC are subsidiaries of
DTCC and are registered clearing agencies pursuant to Sec-
tion 17A. DTC is the nation’s principal securities depository.
It operates an automated, centralized system for book-entry
transfers of securities positions among its participants, the
beneficial owners of the securities, in accordance with their
instructions. NSCC provides centralized clearance, settlement,
and information services for virtually all broker-to-broker
equity, corporate bond, municipal bond and other securities
transactions in the United States. The changes in beneficial
ownership of securities resulting from transactions that are
cleared and settled at NSCC are implemented by book-entry
transfers among brokers’ accounts at DTC.
At times, a seller does not deliver to NSCC’s system the
securities it has sold by the settlement date. Such an occur-
rence is called a “fail-to-deliver.” In 1981, NSCC created the
Stock Borrow Program to deal electronically with temporary,
short term fails-to-deliver. NSCC has promulgated rules to
govern the operation of the Stock Borrow Program, and the
WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11539
Commission has approved those rules. See National Securities
Clearing Corp. Proposed Rule Changes by Self-Regulatory
Organization, 45 Fed. Reg. 5867, 5867-68 (Jan. 24, 1980)
(notice of filing of NSCC proposed rule change adopting as
a one year pilot program procedures for borrowing securities
to meet system needs); National Securities Clearing Corp.
Proposed Rule Change, 46 Fed. Reg. 3104-01, 3104 (Jan. 13,
1981) (notice of filing of NSCC proposed rule change making
pilot program permanent); Depository Trust Co., Exchange
Act Release No. 20,221, 48 Fed. Reg. 45167-02, 45167-68
(Oct. 3, 1983) (granting NSCC’s application for full registra-
tion).
The Stock Borrow Program allows NSCC to facilitate the
settlement of fail-to-deliver transactions by electronically
“borrowing” the requisite number of shares of the undelivered
stock from one of its members who is willing to lend the
shares, and then delivering the “borrowed” shares to the pur-
chaser.1 NSCC guarantees the transactions it processes by
assuming the obligation of sellers to deliver shares to buyers.
The buyer is credited with the shares and never knows that
there has been a fail-to-deliver.
Whistler alleges that at times fails-to-deliver are not cured
for long periods, which creates more electronic shares in the
marketplace than are reflected in the paper share certificates
held by DTC. Whistler argues that Defendants are liable
under state law because this “defect” in the Stock Borrow
Program depressed the value of Whistler stock.
1
To eliminate the movement of paper certificates in settlement of securi-
ties transactions, DTC keeps physical custody of virtually all such certifi-
cates. Purchase and sale transactions are done, cleared, and settled in
book-entry form, based on the actual paper certificates held by DTC. In
theory, the electronic universe of securities purchased and sold by DTC’s
members should more or less match the paper universe of the underlying
certificates. The gravamen of Whistler’s complaint is that Defendants have
manipulated the system, causing artificial inflation of electronic stock,
such as Whistler’s.
11540 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
III
[1] Congress has the constitutional power to preempt state
law, Art. VI, cl. 2; Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1
(1824), and may do so either expressly—through clear statu-
tory language—or implicitly. Defendants acknowledge that
Congress has not expressly preempted any of Whistler’s
claims, but argue that Section 17A of the Securities Act
implicitly preempts the claims.
[2] There are two types of implied preemption: field pre-
emption and conflict preemption. Under field preemption,
preemption is implied when Congress “so thoroughly occu-
pies a legislative field,” that it effectively leaves no room for
states to regulate conduct in that field. Cipollone v. Liggett
Group, Inc., 505 U.S. 504, 516 (1992). Under conflict pre-
emption, Congress’s intent to preempt state law is implied to
the extent that federal law actually conflicts with any state
law. Hillsborough County v. Automated Med. Labs., Inc., 471
U.S. 707, 713 (1985). Conflict preemption analysis examines
the federal statute as a whole to determine whether a party’s
compliance with both federal and state requirements is impos-
sible or whether, in light of the federal statute’s purpose and
intended effects, state law poses an obstacle to the accom-
plishment of Congress’s objectives. Crosby v. Nat’l Foreign
Trade Council, 530 U.S. 363, 373 (2000).
A
[3] Defendants do not argue that Congress intended to
occupy the entire field of securities regulation. Rather, Defen-
dants argue that Section 17A of the Exchange Act reflects
Congress’s intent to occupy the field of clearing and settling
securities transactions. However, an examination of the statu-
tory framework of the Exchange Act does not reveal the com-
prehensiveness necessary to infer that Congress intended to
WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11541
wholly occupy even the narrower field of clearing and settling
securities transactions to the exclusion of state law.2
When Congress enacted the Exchange Act, it included a
provision which recognizes that the Act does not impact any
non-conflicting state securities laws:
[T]he rights and remedies provided by [the
Exchange Act] shall be in addition to any and all
other rights and remedies that may exist at law or in
equity . . . . [N]othing in this [Act] shall affect the
jurisdiction of the securities commission . . . of any
State over any security or any person insofar as it
does not conflict with the provisions of this [Act] or
the rules and regulations thereunder.
15 U.S.C. § 78bb(a). This provision does not indicate con-
gressional intent to occupy the entire field of securities regu-
lation, but rather, to occupy that field only inasmuch as state
laws “conflict with the provisions of [the Act] or the rules and
regulations thereunder.” Id.
[4] With respect to the narrower field of clearing and set-
tling securities transactions, a provision within Section 17A
and a subsequent amendment indicate that Congress did not
intend to wholly occupy that legislative field either. First,
2
Our analysis is guided in part by a recent decision of the Nevada
Supreme Court, which affirmed a trial court’s dismissal of a substantively
identical complaint against the same defendants, on the ground of conflict
preemption. See Nanopierce Technologies, Inc. v. Depository Trust and
Clearing Corp., 168 P.3d 73 (Nev. 2007). Although we are of course not
bound by that court’s conclusions, we find the analysis thorough and
sound. As a result, our own analysis proceeds in a similar manner.
We note also that similar complaints against the same defendants have
been filed in at least two other jurisdictions, and both have been dismissed
on preemption grounds. See Pet Quarters, Inc. v. Depository Trust &
Clearing Corp., 545 F.Supp.2d 845 (E.D. Ark. 2008); Caprece v. Deposi-
tory Trust & Clearing Corp., 2005 WL 4050118 (S.D. Fla. 2005).
11542 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
Congress included a provision in Section 17A stating that
Section 17A shall not “be construed to impair the authority of
any State banking authority or other State . . . regulatory
authority having jurisdiction over a person registered as a
clearing agency . . . to make and enforce rules . . . which are
not inconsistent with [Section 17A] and the rules and regula-
tions thereunder.” 15 U.S.C. § 78q-1(d)(4). That provision
unambiguously signifies that Congress did not intend to
occupy the entire field of national clearance and settlement of
securities transactions, as Congress explicitly left room for
state banking and regulatory authorities to supplement that
legislative field’s regulation, so long as any state regulation is
not inconsistent with Section 17A.
[5] A subsequent amendment also reveals congressional
intent to avoid comprehensively regulating the entire national
securities clearance and settlement field. Congress amended
Section 17A in 1990 to add provisions allowing the Commis-
sion to adopt rules inconsistent with state law, but permitting,
within two years’ time, the states to then enact laws that con-
tradict the Commission’s rules:
Notwithstanding any provision of State law . . . [after
making certain findings,] the Commission may adopt
rules concerning . . . the transfer of certificated or
uncertificated securities . . . or limited interests
(including security interests) therein; and . . . [the]
rights and obligations of purchasers, sellers, owners,
lenders, borrowers, and financial intermediaries
(including . . . clearing agencies) involved in or
affected by such transfers, and the rights of third par-
ties whose interests in such securities devolve from
such transfers.
15 U.S.C. § 78q-1(f)(1).
Any State may, prior to the expiration of 2 years
after the Commission adopts a rule under this sub-
WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11543
section, enact a statute that specifically refers to this
subsection and the specific rule thereunder and
establishes, prospectively from the date of enactment
of the State statute, a provision that differs from that
applicable under the Commission’s rule.
15 U.S.C. § 78q-1(f)(3).
[6] In light of these two provisions, we hold that Congress
explicitly left room for state laws to supplement the federal
regulatory scheme and thus did not reveal the necessary “clear
and manifest” intent to occupy the field of regulating clearing
agencies. See Bates v. Dow Agrosciences, 544 U.S. 431, 449
(2005) (internal quotation marks omitted). Accordingly, there
is no field preemption and the district court erred in dismiss-
ing on that ground.
B
[7] Conflict preemption analysis examines the federal stat-
ute as a whole to determine whether a party’s compliance
with both federal and state requirements is impossible or
whether, in light of the federal statute’s purpose and intended
effects, state law poses an obstacle to the accomplishment of
Congress’s objectives. Crosby, 530 U.S. at 373. Thus, our
task is to determine whether imposing the requirements impli-
cated by Whistler’s state law claims on Defendants is incon-
sistent with Section 17A’s purpose of allowing the
Commission to regulate and control a national system for
clearing and settling securities transactions. See 15 U.S.C.
§ 78q-1(a)(2)(A) and (B) (directing the Commission to “facil-
itate the establishment of a national system for the prompt and
accurate clearance and settlement” of securities transactions,
including registering and regulating clearing agencies).
Because the Commission, in accordance with the congressio-
nal directive set forth in Section 17A, has approved NSCC’s
creation of the Stock Borrow Program and the rules it has pro-
mulgated to govern Stock Borrow Program operations, we
11544 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
hold that state-law challenges to the existence or the operation
of the Stock Borrow Program are federally preempted because
they would conflict with Congressional directive, as set forth
under Section 17A.
Whistler’s complaint contains twenty-two claims for relief.
To analyze each of the claims, we find it useful to divide the
claims into two categories: misrepresentation claims and non-
misrepresentation claims.
Claims 1-4 and 7-18 of the complaint allege four theories
of misrepresentation, each repeated separately to constitute
four claims each of misrepresentation, negligent misrepresen-
tation, intentional misrepresentation, and fraudulent misrepre-
sentation.
[8] Whistler’s first misrepresentation theory alleges that
Defendants misrepresented that NSCC is borrowing shares
from lending members of the Stock Borrow Program to cover
fail-to-deliver positions when, in fact, the transfer of shares
from lending members to NSCC is actually a “sale” of securi-
ties. Whistler alleges that the transfer is a sale “because the
NSCC delivers the borrowed shares to the buyer who acquires
all right, title and interest in the shares.” As the complaint
itself acknowledges, the description of the Stock Borrow Pro-
gram as a procedure involving borrowing shares comes from
NSCC rules. Thus, Whistler’s challenge to NSCC’s character-
ization of Stock Borrow Program procedure is a direct chal-
lenge to Commission-approved rules. Such a claim is
federally preempted under conflict preemption.
Whistler’s second misrepresentation theory alleges that
Defendants misrepresented that they efficiently clear and set-
tle trades when, in fact, Defendants are not clearing and set-
tling trades that result in open fail-to-deliver positions.
Whistler complains that “sellers routinely fail to deliver secur-
ities and that unfulfilled obligations to deliver securities can
have negative effects on the market when fails to deliver per-
WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11545
sist for an extended period of time,” and that for this reason
the Stock Borrow Program’s clearing and settling of securities
is not efficient. This claim also constitutes a direct challenge
to the operation of the Stock Borrow Program.
Congress enacted Section 17A precisely for the purpose of
replacing an inefficient and outmoded system of clearing
agencies with a more modern and efficient system. See 15
U.S.C. § 78q-1(a)(1). However, Congress did not impose any
specific standards of efficiency and instead relied on the
Commission to regulate the clearing agencies, see id., which
is precisely what the Commission did in approving NSCC’s
rules and procedures governing the Stock Borrow Program.
Imposing any state standard of efficiency would directly inter-
fere with the approved operation of the Stock Borrow Pro-
gram, and such claims are federally preempted under conflict
preemption.
Whistler’s third misrepresentation theory alleges that
Defendants misrepresented the number of Whistler shares
actually held by lending members at DTC by providing mis-
leading information in the lending members’ DTC and NSCC
account statements. Essentially, Whistler argues that the
Stock Borrow Program’s method of borrowing shares artifi-
cially inflates the number of shares actually held. Once again,
this claim amounts to a direct challenge to the Commission-
approved operation of the Stock Borrow Program and conflict
preemption applies.
Finally, Whistler alleges that Defendants misrepresented
that open fail-to-deliver positions will be cured by buying
shares in the open marketplace when, in fact, the open posi-
tions are actually cured with shares borrowed from lending
members through the Stock Borrow Program. The complaint
explicitly acknowledges that “[i]nstead of executing the buy-
in by going into the market, NSCC executes the buy-in by
borrowing shares from lending Members” of the Stock Bor-
row Program. Thus, Whistler is directly challenging NSCC
11546 WHISTLER INVESTMENTS v. DEPOSITORY TRUST
rules, which have been approved by the Commission and thus
preempt any conflicting state law claim.
Whistler raises six additional claims: market manipulation,
in violation of Nev. Rev. Stat. §§ 90.580 and 90.660; viola-
tion of Nevada’s Unfair Trade Practices Act, Nev. Rev. Stat.
§ 598A.060; conversion; intentional interference of contrac-
tual relations; breach of implied covenant of good faith and
fair dealing; and conspiracy. Each of these claims is also fed-
erally preempted, under conflict preemption, because each
attacks either the existence or the operation of the Stock Bor-
row Program.
[9] Whistler’s market manipulation, intentional interference
of contractual relations, breach of implied covenant of good
faith and fair dealing, and conspiracy claims all reassert the
allegation that the Stock Borrow Program’s method of bor-
rowing shares artificially inflates the number of shares actu-
ally held. These claims amount to a direct challenge to the
federally-approved operation of the Stock Borrow Program
and are, thus, preempted under conflict preemption.
[10] Whistler’s unfair trade claim asserts that “Defendants
have illegally tied the Stock Borrow Program to the separate
and distinct functions of clearing and settling stock trades.”
However, the Stock Borrow Program was created by NSCC
specifically to comply with the congressional directive to “fa-
cilitate the establishment of a national system for the prompt
and accurate clearance and settlement” of securities transac-
tions, 15 U.S.C. § 78q-1(a)(2)(A)(i). Thus, this claim conflicts
with the Commission’s approval of the existence and opera-
tion of the Stock Borrow Program and is preempted.
[11] Finally, Whistler’s conversion claim reasserts the the-
ory that Stock Borrow Program security transfers are “sales.”
As discussed above, the description of the Stock Borrow Pro-
gram as a procedure involving borrowing shares is derived
from NSCC rules. Thus, Whistler’s challenge to NSCC’s
WHISTLER INVESTMENTS v. DEPOSITORY TRUST 11547
characterization of Stock Borrow Program procedure is a
direct challenge to Commission-approved rules and is also
preempted.
IV
In summary, each of Whistler’s 22 claims amount to chal-
lenges to the rules and operation of the Stock Borrow Pro-
gram and, as such, conflict with federal securities law. We
thus affirm the district court’s dismissal of the complaint on
the ground that Whistler’s claims are preempted by Section
17A of the Exchange Act, under the doctrine of conflict pre-
emption.
AFFIRMED.