Madden v. Cowen & Company

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

CHARLES T. MADDEN; SHASHIDHAR 
ACHARYA, M.D.; ACHAUER FAMILY
LIMITED PARTNERSHIP, a limited
partnership; ANGELA ALLEVATO,
M.D.; ROBERT A. BAIRD, M.D.;
ANNETTE C. BERNHUT-CAPLIN,
D.O.; THOMAS W. BRODERICK,
M.D.; NANCY K. BROWNELL, M.D.;
DAWN LYNN BRUNER, M.D.;
ROBERT BUDMAN, M.D.; ROBERT
WILLIAM BUSTER, M.D.; MICHAEL
W. CATER, M.D.; ANNA LISA No.07-15900
CHAVEZ, M.D.; JANAK R. CHOPRA, D.C. No.
M.D.; RAMAN CHOPRA, M.D.;  CV-06-04886-JSW
GASTON CILLIANI, M.D.; CARMELITA ORDER AND
R. CO-CASQUEJO, M.D.; WILLIAM J. OPINION
COLLINS, M.D.; LEO H. CUMMINS,
M.D.; CHRISTINA K. ELLIOTT; MARK
H. ELLIS, M.D.; STANLEY P.
GALANT, M.D.; SHERWIN A.
GILLMAN, M.D. and BONNIE S.
GILLMAN, as Trustees for the
Gillman Community Property
Trust; KEITH L. GLADSTIEN, M.D.;
STUART M. GORDON; KENNETH E.
GRUBBS, D.O.; NORAH GUTRECHT,
M.D.;


10577
10578 MADDEN v. COWEN & CO.

THOMAS A. HRYNIEWICKI, M.D.; R. 
JUDD JESSUP; STANLEY KANOW,
M.D.; LEONARD FRANK KELLOGG
JR., M.D.; MARK E. KRUGMAN,
M.D.; LAWRENCE N. KUGELMAN;
SANDRA BARRY LIEBERMAN, as
successor in interest to Melvyn B.
Lieberman, M.D., Trustee for the
Melvyn B. Lieberman Trust; ALAN
MADERIOUS, M.D.; MARK C.
MARTEN; WILLIAM C. MCMASTER,
M.D.; MARIA E. MIÑON, M.D.;
JUDITH HARRISON-MONGE, M.D., as
Trustee for the Harrison-Monge
1996 Family Trust; RONALD W.
MORELAND; STANLEY K.
NAKAMOTO, M.D.; CHRISTOPHER C. 
OHMAN; KUSUM OHRI, M.D.; JACK
M. OSBORN, M.D.; RICHARD T.
PITTS, D.O.; NORMAN J. ROSEN,
M.D.; ERIC MURROW ROWEN,
M.D.; HELEN ROWEN, as Trustee
for the Rowen Family Trust Dated
May 5, 1982; MARK STEVEN
ROWEN; MARSHALL ROWEN, M.D.,
individually and as Trustee for the
Rowen Family Trust Dated May 5,
1982; SCOTT JEFFREY ROWEN,
M.D.; PRAVIN V. SHARMA, M.D.;
HAL S. SHIMAZU, M.D.; SIERRA
VENTURES V, L.P., a California
limited partnership; AISHA SIMJEE,
M.D.; JAMES B. TANANBAUM;

 MADDEN v. COWEN & CO. 10579

ALLAN G. WEISS; DANIEL L. 
WEISSBERG, M.D.; LINDA F.
WEISSBERG; LAURENCE D.
WELLIKSON, M.D.; ANGELA F.
WINTHEISER; and ALLAN WONG,
M.D.,
Plaintiffs-Appellants,
v. 
COWEN & COMPANY, a New York
limited partnership; SG COWEN
SECURITIES CORPORATION, a New
York corporation; COWEN
COMPANY, LLC, a Delaware
limited liability company,
Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of California
Jeffrey S. White, District Judge, Presiding

Argued and Submitted
November 21, 2008—San Francisco, California

Filed August 7, 2009

Before: Procter Hug, Jr., John T. Noonan, and
Sandra S. Ikuta, Circuit Judges.

Opinion by Judge Ikuta
10584 MADDEN v. COWEN & CO.
COUNSEL

Philip Borowsky, San Francisco, California, for the plaintiffs-
appellants.

Linda Goldstein, New York, New York, for the defendants-
appellees

ORDER

Judges Hug, Noonan, and Ikuta vote to deny Cowen’s peti-
tion for rehearing. Judge Ikuta votes to deny Cowen’s petition
for rehearing en banc, and Judges Hug and Noonan so recom-
mend. The full court has been advised of the petition for
rehearing en banc and no judge has requested a vote on
whether to rehear the matter en banc. See Fed. R. App. P. 35.
Cowen’s petition for rehearing and petition for rehearing en
banc are therefore denied.

The opinion filed February 11, 2009, appearing at 556 F.3d
786, is hereby withdrawn. A superseding opinion will be filed
simultaneously with this order. Further petitions for rehearing
or rehearing en banc may be filed.

OPINION

IKUTA, Circuit Judge:

Sixty-three shareholders brought a state-law action against
an investment bank for misleading them in connection with
the sale of their closely held corporation to a publicly traded
acquiring corporation. The suit was removed to federal dis-
trict court under the Securities Litigation Uniform Standards
Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227
(“SLUSA”), which allows for the removal and preclusion1 of
1
The Supreme Court recently explained that SLUSA precludes, rather
than preempts, state law claims: “The preclusion provision is often called
 MADDEN v. COWEN & CO. 10585
“private state-law ‘covered’ class actions alleging untruth or
manipulation in connection with the purchase or sale of a
‘covered’ security.” Kircher v. Putnam Funds Trust, 547 U.S.
633, 636-37 (2006) (quoting 15 U.S.C. § 77p(b)).2 The district
court held that the suit was properly removed and precluded
under SLUSA. We conclude that the district court erred by
applying the wrong legal standard to determine whether Mad-
den’s suit was preserved by SLUSA’s savings clause (known
as the “Delaware carve-out”), and we remand to the district
court so that it can apply the correct standard.

I

Charles T. Madden, along with sixty-two other individuals
and entities (collectively, “Madden”), brought a state-law
action in state court against Cowen & Company, SG Cowen
Securities Corporation, and Cowen and Company, LLC (col-
lectively, “Cowen”). Madden and his fellow plaintiffs, most
of whom are physicians, owned a majority interest in St.
Joseph Medical Corporation, which in turn owned a control-
ling share in Orange Coast Managed Care Services. Both St.
Joseph and Orange Coast were closely held corporations. St.
Joseph was incorporated in California, and Orange Coast in
Delaware. The following facts are taken from the allegations
in Madden’s complaint:

In 1997, the management of St. Joseph and Orange Coast

a preemption provision; the Act, however, 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, 636 n.1 (2006).
2
SLUSA amended section 16 of the Securities Act of 1933 (“1933
Act”), codified at 15 U.S.C. § 77p, and made a substantially identical
amendment to section 28(f) of the 1934 Act, codified at 15 U.S.C.
§ 78bb(f). For simplicity, we follow Kircher and cite to the relevant provi-
sion in the 1933 Act, 15 U.S.C. § 77p, except as noted. See 547 U.S. at
637 n.3.
10586 MADDEN v. COWEN & CO.
sought a buyer for the two companies and formed a “Special
Committee” for that purpose. The Special Committee, which
included members of the boards of directors of St. Joseph and
Orange Coast, retained Cowen, an investment bank, to look
for prospective buyers, give advice regarding the structure of
any potential sale, and render a “fairness opinion” regarding
any proposed transaction. Cowen’s contract provided that it
would receive a $50,000 retainer fee plus 1% of any sale
price, payable in cash.

Cowen found four possible buyers, two of which are rele-
vant here. St. Joseph’s Hospital of Orange County, already a
part-owner of Orange Coast, offered $40 million ($30 million
in cash and a $10 million note). FPA Medical Management,
a publicly traded corporation, offered shares of its stock val-
ued at $66.5 million. Cowen recommended FPA as the buyer,
and St. Joseph and Orange Coast began exclusive negotiations
with FPA. In January 1998, these discussions resulted in an
agreement on the terms of a merger. Under the merger agree-
ment, FPA would acquire all outstanding shares of St. Joseph
and Orange Coast. In exchange, FPA would issue shares of its
stock valued at $60 million to St. Joseph and Orange Coast
shareholders. Cowen concluded that this transaction would be
financially fair to the shareholders of Orange Coast and St.
Joseph.

On January 13, 1998, the boards of directors of Orange
Coast and St. Joseph approved the merger agreement. A week
later, the agreement was executed by the boards of directors
of St. Joseph and Orange Coast, although it had not yet been
approved by St. Joseph’s and Orange Coast’s shareholders.
On February 5, 1998, Cowen issued a letter memorializing its
fairness opinion. FPA then filed a registration statement for
the new stock that it would issue to Madden under the terms
of the merger agreement.3 The registration statement, which
3
A registration statement is a statutorily required document that must be
approved by the SEC before an issuer can lawfully sell securities. See SEC
v. Phan, 500 F.3d 895, 901-02 (9th Cir. Cal. 2007); see also Sec. & Exch.
Comm’n, Securities Offering Reform, 85 S.E.C. Docket 2871, 2005 WL
1692642, *17 (Aug. 3, 2005) (discussing the pre-2005 offering process).
 MADDEN v. COWEN & CO. 10587
included Cowen’s fairness letter and Cowen’s consent to the
inclusion of the letter in the registration statement, was
approved by the Securities and Exchange Commission (SEC)
on February 17, 1998. After receiving a copy of the registra-
tion statement and fairness letter, Madden voted in favor of
the merger agreement. The merger became effective on
March 20, 1998.

A few months later, on May 15, 1998, FPA issued a calam-
itous first-quarter report for 1998: earnings per share were 30
cents below expectation, and FPA’s share price tumbled 75%
in the next two trading days. Two months later FPA declared
bankruptcy, with a share price that was approximately 0.5%
of its value at the time of the merger agreement. Madden
agreed with Cowen to toll the statute of limitations so that
Madden could first sue FPA’s management, auditor, and
financial advisor in California court. Those defendants
removed the action to federal district court; FPA’s manage-
ment settled, and the district court entered judgment in the
remaining defendants’ favor. We upheld the grant of sum-
mary judgment on appeal. Madden v. Deloitte & Touche,
LLP, 118 F. App’x 150, 153-54 (9th Cir. 2004). Madden then
brought the present action against Cowen in California court,
alleging that Cowen committed negligent misrepresentation
and professional negligence under California law. Cowen
removed the action to federal district court. Applying SLUSA,
the district court denied Madden’s motion to remand to state
court and granted Cowen’s motion to dismiss. Madden timely
appealed.

II

SLUSA is part of a recent congressional attempt to rein in
private securities litigation. Section 10(b) of the Securities
and Exchange Act of 1934 (“1934 Act”), 15 U.S.C. § 78j(b),
and Rule 10b-5 of the SEC’s regulations, 17 C.F.R.
§ 240.10b-5, broadly prohibit “deception, misrepresentation,
and fraud in connection with the purchase or sale of any
10588 MADDEN v. COWEN & CO.
security,” Merrill Lynch, Pierce, Fenner & Smith Inc. v.
Dabit, 547 U.S. 71, 78 (2006) (internal quotation marks omit-
ted).4 The Supreme Court has long recognized an implied pri-
vate right of action under these provisions. See id. at 79
(citing Superintendent of Ins. of N.Y. v. Bankers Life & Cas.
Co., 404 U.S. 6 (1971)).

In 1995, Congress adopted “legislation targeted at per-
ceived abuses of the class-action vehicle in litigation involv-
ing nationally traded securities.” Dabit, 547 U.S. at 81. The
Private Securities Litigation Reform Act of 1995 (“Reform
Act”), 109 Stat. 737 (codified at 15 U.S.C. §§ 77z-1 and 78u-
4), was intended “to deter or at least quickly dispose of” abu-
sive class actions, particularly those alleging violations of
Section 10(b), by limiting the potential liability of defendants
and by requiring plaintiffs who bring private securities fraud
actions in federal court to surmount a number of procedural
hurdles. See Dabit, 547 U.S. at 81-82. However, rather “than
face the obstacles set in their path by the Reform Act, plain-
tiffs and their representatives began bringing class actions
under state law, often in state court.” Id. at 82. In response to
this unintended consequence of the Reform Act, Congress
enacted SLUSA to “stem this shift from Federal to State
courts and prevent certain State private securities class action
lawsuits alleging fraud from being used to frustrate the objec-
tives of the Reform Act.” Id. (internal quotation marks and
alterations omitted).
4
Section 10(b) and Rule 10b-5 make it unlawful to “use or employ, in
connection with the purchase or sale of any security . . . any manipulative
or deceptive device or contrivance,” 15 U.S.C. § 78j(b), and to “make any
untrue statement of a material fact or to omit to state a material fact neces-
sary in order to make the statements made, in the light of the circum-
stances under which they were made, not misleading,” 17 C.F.R.
§ 240.10b-5(b). Because Rule 10b-5 “is coextensive with,” and in fact
cabined by, the scope of Section 10(b), SEC v. Zandford, 535 U.S. 813,
816 n.1 (2002), we refer to Section 10(b) and Rule 10b-5 collectively as
“Section 10(b).”
 MADDEN v. COWEN & CO. 10589
[1] SLUSA sought to achieve these goals by generally pre-
cluding “covered class actions” alleging fraud or misrepresen-
tation under state law in connection with “covered securities.”
SLUSA’s preclusion provision states:

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—

(1) an untrue statement or omission of a
material fact in connection with the pur-
chase or sale of a covered security; or

(2) that the defendant used or employed any
manipulative or deceptive device or con-
trivance in connection with the purchase or
sale of a covered security.

15 U.S.C. § 77p(b).

[2] The breadth of this preclusion provision is limited in
several respects. It applies only to a “covered class action,”
which, as relevant here, is defined as an action in which
“damages are sought on behalf of more than 50 persons.” Id.
§ 77p(f)(2)(A)(i). The preclusion provision is also limited to
actions involving a “covered security,” which is defined as a
security “traded nationally and listed on a regulated national
exchange,” Dabit, 547 U.S. at 83, “at the time during which
it is alleged that the misrepresentation, omission, or manipula-
tive or deceptive conduct occurred.” Id. § 77p(f)(3) (cross-
referencing the statutory definition of “covered security” in
§ 77r(b)).

Additionally, SLUSA contains a savings clause that pre-
serves certain types of state-law claims that would otherwise
be subject to its preclusion provision. Relevant here is the
Delaware carve-out, § 77p(d), which provides that a private
10590 MADDEN v. COWEN & CO.
party may bring a covered class action “based upon the statu-
tory or common law of the State in which the issuer is incor-
porated (in the case of a corporation) or organized (in the case
of any other entity),” id. § 77p(d)(1)(A), if the action
involves:

(i) the purchase or sale of securities by the issuer or
an affiliate of the issuer exclusively from or to hold-
ers of equity securities of the issuer; or

(ii) any recommendation, position, or other commu-
nication with respect to the sale of securities of the
issuer that—

(I) is made by or on behalf of the issuer or
an affiliate of the issuer to holders of equity
securities of the issuer; and

(II) concerns decisions of those equity hold-
ers with respect to voting their securities,
acting in response to a tender or exchange
offer, or exercising dissenters’ or appraisal
rights.

Id. § 77p(d)(1)(B).

To prevent actions precluded by SLUSA from being liti-
gated in state court, SLUSA authorizes defendants to remove
such actions to federal court, effectively ensuring that federal
courts will have the opportunity to determine whether a state
action is precluded.5 As the Supreme Court has explained, any
5
Section 77p(c) provides:
Any covered class action brought in any State court involving a
covered security, as set forth in subsection (b) [15 U.S.C.
§ 77p(b), SLUSA’s preclusion provision], shall be removable to
the Federal district court for the district in which the action is
pending, and shall be subject to subsection (b).
Id. § 77p(c).
 MADDEN v. COWEN & CO. 10591
suit removable under SLUSA’s removal provision, § 77p(c),
is precluded under SLUSA’s preclusion provision, § 77p(b),
and any suit not precluded is not removable. See Kircher, 547
U.S. at 644; see also Spielman v. Merrill Lynch, Pierce, Fen-
ner & Smith, Inc., 332 F.3d 116, 131-32 (2d Cir. 2003) (New-
man, J., concurring) (noting that SLUSA’s removal and
preclusion provisions are “opposite sides of the same coin”).
If a federal court determines that an action is not precluded,
it “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.” Kircher, 547 U.S. at 644. Likewise, if a federal court “de-
termines that the action may be maintained in State court pur-
suant to” the Delaware carve-out, “the Federal court shall
remand such action to such State court.” 15 U.S.C.
§ 77p(d)(4). We review de novo the district court’s denial of
a motion to remand a removed case. See Patenaude v. Equita-
ble Life Assur. Soc’y of the United States, 290 F.3d 1020,
1023 (9th Cir. 2002).

III

The question presented in this case is whether Madden’s
complaint, which alleged state-law claims and was filed in
state court, is a covered class action that is both (1) precluded
by § 77p(b) of SLUSA and (2) not saved from preclusion by
the Delaware carve-out, § 77p(d).

A

Madden’s action will fall within SLUSA’s preclusion pro-
vision if the action is (1) a “covered class action” (2) “based
upon the statutory or common law” of any state (3) being
maintained by “any private party,” and if the action alleges
(4) either “an untrue statement or omission of material fact”
or “that the defendant used or employed any manipulative or
deceptive device or contrivance” (5) “in connection with the
purchase or sale” (6) of a “covered security.” 15 U.S.C.
§ 77p(b).
10592 MADDEN v. COWEN & CO.
[3] Madden does not dispute that his suit is a “covered class
action,” id. § 77p(f)(2), that his suit is based upon state law,
or that the plaintiffs are private parties. It is also undisputed
that Madden’s suit alleges Cowen’s fairness opinion con-
tained misrepresentations and therefore qualifies as an action
“alleging” either an “untrue statement or omission of material
fact” or “a manipulative or deceptive device or contrivance”
for purposes of § 77p(b). Thus the questions before us are: (1)
whether Cowen’s alleged misrepresentations were “in connec-
tion with the purchase or sale of” the FPA securities, and (2)
whether those FPA securities were “covered securities”
within the meaning of SLUSA.

1

[4] We begin by considering whether Cowen’s alleged mis-
representations were “in connection with the purchase or sale
of” the FPA securities. We construe the phrase “in connection
with the purchase or sale” of securities in SLUSA the same
way we construe it in the Section 10(b) context. See Dabit,
547 U.S. at 88-89. Under our Section 10(b) cases, a misrepre-
sentation is “in connection with” the purchase or sale of
securities if there is “a relationship in which the fraud and the
stock sale coincide or are more than tangentially related.” Fal-
kowski v. Imation Corp., 309 F.3d 1123, 1131 (9th Cir. 2002);
accord Dabit, 547 U.S. at 85 (noting the “broad construction
adopted by both this Court and the SEC” of “in connection
with”). We construe the phrase “purchase or sale” of securi-
ties to include a stock-for-stock merger. See SEC v. Nat’l Sec.,
Inc., 393 U.S. 453, 467-68 (1969).

Madden’s complaint alleges that Cowen made misrepresen-
tations to the shareholders of St. Joseph and Orange Coast to
secure their approval of the stock-for-stock merger with FPA.
Specifically, the complaint alleges that Madden “relied on
[Cowen’s] representations because they caused Plaintiffs to
vote to approve the merger transaction and to consent to
receive FPA stock in place of their existing Orange Coast and
 MADDEN v. COWEN & CO. 10593
St. Joseph stock.” The complaint further alleges that Madden
“would not have done so absent Defendants’ fairness opinion,
distributed to Plaintiffs with Cowen’s express consent, that
the transaction was fair, from a financial point of view, to
Plaintiffs as shareholders of Orange Coast and St. Joseph.” As
a result of approving the merger agreement, the “Plaintiffs
suffered damage in the full amount of the promised value of
the FPA shares they received, approximately $40 million.”
Finally, the complaint alleges: “Cowen could have prevented
the damage to Plaintiffs if it had correctly carried out its
duties, by obtaining and disclosing the information available
to it that raised grave questions about FPA’s financial condi-
tion, and by urging serious consideration of the cash bid by
St. Joseph’s Hospital of Orange. But Cowen failed to do so.”

[5] Because the complaint alleges that Cowen made mis-
representations to the shareholders of St. Joseph and Orange
Coast to secure their approval of the stock-for-stock merger
with FPA, we conclude that the misrepresentations and omis-
sions alleged in the complaint “are more than tangentially
related” to Madden’s “purchase” of the FPA securities. Fal-
kowski, 309 F.3d at 1131. Cowen’s alleged misrepresentations
were therefore “in connection with the purchase or sale of”
the FPA securities.

Citing Falkowski and Green v. Ameritrade, Inc., 279 F.3d
590 (8th Cir. 2002), Madden argues that such a conclusion is
erroneous because his complaint made a state-law tort claim
not related to the purchase and sale of covered securities. In
Falkowski, we considered a state-law complaint bringing two
different sets of claims based on distinct factual allegations.
First, the complaint made fraud claims based on allegations
that the defendant employer had made misrepresentations to
the employees regarding the value of the company’s stock and
the employees’ stock options. Second, the complaint made
breach-of-contract claims based on allegations that the
employer had breached the employees’ stock-option contract
by treating the employees’ options as forfeited when the
10594 MADDEN v. COWEN & CO.
employees were transferred to another company. See 309 F.3d
at 1127, 1131. We held that the fraud claims were precluded
by SLUSA because they “involve[d] a misrepresentation
about the value of the options,” but that the employees could
proceed with their breach-of-contract claims, which did not.
Id. at 1131. Similarly, in Green, the Eighth Circuit held that
SLUSA did not preclude a class action brought by an
Ameritrade subscriber who alleged that “he did not receive
the type of information from Ameritrade for which he
believed he had contracted and paid twenty dollars monthly.”
279 F.3d at 598. In both Falkowski and Green, the plaintiffs
made distinct breach-of-contract claims that did not allege
misrepresentations in connection with the purchase and sale
of securities, and therefore such claims were not precluded by
SLUSA.

According to Madden, his complaint similarly alleges a dis-
tinct state-law claim: that Cowen committed malpractice by
failing to give good advice during the period when Madden
was considering the cash offer from St. Joseph’s Hospital of
Orange County. To the extent Cowen’s alleged bad advice did
not relate to a transaction involving a covered FPA security,
Madden argues, Cowen’s professional negligence was not “in
connection with” Madden’s later acceptance of FPA’s securi-
ties, and therefore this claim is not precluded by SLUSA.

[6] We disagree, because Madden’s complaint cannot be
read as making a distinct claim that Cowen committed profes-
sional negligence by failing to advise Madden to take the cash
offer. Rather, the complaint references the offer from St.
Joseph’s Hospital of Orange County only to highlight
Cowen’s error in promoting the FPA offer as a better alterna-
tive. Indeed, the complaint claims damages measured by “the
full amount of the promised value of the FPA shares” rather
than by the lost value of the cash offer or the fees paid
Cowen. Because Madden’s complaint does not allege a state-
law professional negligence claim distinct from Madden’s
central allegation that Cowen’s misrepresentations resulted in
 MADDEN v. COWEN & CO. 10595
Madden’s purchase of the FPA securities, we reject Madden’s
argument that we must construe all or part of his complaint
as raising a distinct state-law claim not precluded by SLUSA.

2

[7] Having determined that Madden’s action meets the
requirement that it allege a misrepresentation “in connection
with the purchase and sale” of the FPA securities, we must
next address whether the FPA securities were “covered
securit[ies]” as defined in § 77p(f)(3). Section 77p(f)(3)
defines a “covered security” as one that (1) “satisfies the stan-
dards for a covered security” (2) “at the time during which it
is alleged that the misrepresentation, omission, or manipula-
tive or deceptive conduct occurred.” 15 U.S.C. § 77p(f)(3).
The first prong of this definition is explained in
§ 77r(b)(1)(A): any security “listed, or authorized for listing,
on the . . . Nasdaq Stock Market” satisfies the standards for
a covered security. Id. § 77r(b)(1)(A). In order to interpret the
second prong correctly, we must read the definition of “cov-
ered security” in § 77p(f)(3) in light of SLUSA’s preclusion
provision in § 77p(b). Specifically, we must determine
whether the complaint alleges an “untrue statement or omis-
sion of material fact” or “a manipulative or deceptive device
or contrivance” in connection with the purchase or sale of a
security, id. § 77p(b), where that security “[1] satisfies the
standards for a covered security . . . [2] at the time during
which it is alleged that the misrepresentation, omission, or
manipulative or deceptive conduct occurred,” id. § 77p(f)(3).

[8] The parties agree that the FPA securities “satisf[y] the
standards for a covered security” as of February 17, 1998. The
parties do not dispute that on that date the FPA securities
were registered with the SEC and authorized for listing on the
Nasdaq Stock Market. We therefore turn to the temporal ele-
ment of the definition of “covered security,” i.e., whether the
securities were registered at the time the alleged misrepresen-
tation “occurred.” Because the verb, “occurred,” is not
10596 MADDEN v. COWEN & CO.
defined in the statute, we look to the word’s plain meaning.
See Ariz. Health Care Cost Containment Sys. v. McClellan,
508 F.3d 1243, 1249 (9th Cir. 2007). The dictionary defines
“occur” to mean, among other things, to “present itself,”
“come to pass,” or “take place.” Webster’s Third New Int’l
Dictionary 1561 (2002). Accordingly, the FPA securities will
meet the temporal element of “covered securit[ies]” under
SLUSA if Madden’s complaint alleges that Cowen’s misrep-
resentation in connection with the purchase or sale of those
securities took place at a time during which the securities
were authorized for listing on the NASDAQ stock market.

[9] We conclude that the FPA securities satisfy this defini-
tion. Madden’s complaint alleges that Cowen wrote a mis-
leading fairness opinion that was then included in the
registration statement for the FPA securities. The complaint
further alleges that this registration statement was circulated
to St. Joseph and Orange Coast shareholders after the FPA
securities were registered with the SEC on February 17, 1998.
Madden does not dispute that the publication of Cowen’s
allegedly misleading fairness opinion in the FPA securities’
registration statement constituted an (alleged) “misrepresenta-
tion.” Madden’s complaint therefore alleges that a misrepre-
sentation (i.e., the publication of Cowen’s allegedly
misleading fairness opinion in the registration statement) took
place after the FPA securities were registered. Also, for the
reasons explained above, this misrepresentation was “in con-
nection with” Madden’s purchase of the FPA securities after
they became registered. Because Madden’s complaint alleges
that Cowen’s misrepresentation “occurred” during a period
when the FPA securities satisfied the standards for “covered
securit[ies]” under 15 U.S.C. § 77r(b)(1)(A), we conclude that
the FPA securities were “covered securit[ies]” under SLUSA.

Madden, however, argues that no misrepresentation
occurred for purposes of § 77p(f)(3), because Cowen is not
liable for the publication of its fairness opinion in the FPA
securities’ registration statement. According to Madden,
 MADDEN v. COWEN & CO. 10597
Cowen cannot incur liability for this misrepresentation
because publication in the registration statement constituted
“non-culpable repetition by Orange Coast and St. Joseph of
misrepresentations that Cowen had made before that time.”
Madden relies on the tort-law doctrine of “indirect deception”
to support this theory, citing Shapiro v. Sutherland, 64 Cal.
App. 4th 1534, 1548 (Cal. App. 2d Dist. 1998). Under Sha-
piro, a person who makes a misrepresentation to a party who
then repeats it to a third party is not liable to the third party
unless “the maker intends or has reason to expect that its
terms will be repeated or its substance communicated to the
other, and that it will influence his conduct in the transaction
or type of transaction involved.” Id. (quoting Restatement
(Second) Torts § 533).

[10] We disagree. To begin with, Madden’s complaint
alleges that Cowen expressly consented to the inclusion of its
fairness opinion in the FPA registration statement, and the
fairness opinion squarely recommended that the proposed
merger was fair to Madden as a shareholder of St. Joseph and
Orange Coast. If Shapiro‘s doctrine of indirect deception
applies to federal securities law,6 then Cowen could be held
liable if the complaint’s allegations are true, because Cowen
would have reason to expect that the terms of the fairness
opinion would be repeated to Madden and that they would
influence Madden’s conduct in the merger. Moreover, Mad-
den offers no support for his assumption that a misrepresenta-
tion occurs under § 77p(f)(3) only if the defendant can be held
liable for the misrepresentation. Nothing in the definition of
“covered security” in § 77p(f)(3) involves a liability determi-
nation or requires a court to evaluate the merits of a plaintiff’s
claim that a defendant is liable for the misrepresentation.
Under the plain language of § 77p(f)(3), a security may meet
6
We note that the construction of federal securities law is a matter of
federal, not state law, see Thompson v. Paul, 547 F.3d 1055, 1061 (9th
Cir. 2008), and so Cowen’s reliance on Shapiro is relevant only to the
extent that case informs federal law regarding securities fraud.
10598 MADDEN v. COWEN & CO.
the definition of “covered security” so long as the security
was listed on the NASDAQ at the time the defendant’s
alleged misrepresentation occurred, regardless of the merits of
the plaintiff ’s claim based on that misrepresentation.

[11] We have already explained why the publication of
Cowen’s allegedly misleading fairness opinion in the FPA
securities’ registration statement was a misrepresentation “in
connection with” Madden’s purchase of the FPA securities.
15 U.S.C. § 77p(b). Whether or not Cowen is liable for this
misrepresentation, it is undisputed that this alleged misrepre-
sentation took place after the FPA securities “satisfie[d] the
standards for a covered security specified” in § 77r(b). We
therefore conclude that the FPA securities were “covered
securit[ies]” under SLUSA, id. § 77p(f)(3), and that Cowen’s
action is precluded under SLUSA unless the Delaware carve-
out applies. In light of this conclusion, we need not address
Cowen’s alternative argument that Madden is collaterally
estopped from arguing that the FPA securities were not “cov-
ered securities” by our memorandum disposition in Madden
v. Deloitte & Touche, LLP, 118 F. App’x 150 (9th Cir. 2004).

B

[12] Madden alternatively argues that his suit survives
SLUSA’s preclusion provision, § 77p(b), because it falls
within a subsection of the Delaware carve-out,
§ 77p(d)(1)(B)(ii). For Madden’s suit to qualify under this
subsection, it must (1) involve a “communication with respect
to the sale” of the issuer’s securities and (2) be “based on the
law of the” state in which “the issuer” is incorporated; the
communication also must have been (3) “made by or on
behalf of” the issuer or its affiliate (4) to the shareholders of
the issuer (5) “concern[ing]” specified shareholder decisions,
including a “response to a tender or exchange offer.” 15
U.S.C. § 77p(d)(1)(A), (B)(ii).

Madden asserts that Cowen’s allegedly misleading fairness
opinion is a “communication with respect to the sale” of St.
 MADDEN v. COWEN & CO. 10599
Joseph’s and Orange Coast’s securities. According to Mad-
den, St. Joseph and Orange Coast are “issuer[s]” under
§ 77p(d)(1)(B)(ii) because they were the issuers of the securi-
ties that were sold to FPA in response to FPA’s exchange
offer. Madden further argues that because he brought his neg-
ligent misrepresentation and professional negligence claims
under the law of California, the state of incorporation of St.
Joseph, and because such claims are also recognized in Dela-
ware, the state of incorporation of Orange Coast, his suit is
“based on the law of the” states in which both St. Joseph and
Orange Coast are incorporated. Finally, Madden argues that
Cowen’s fairness opinion was a communication “made by or
on behalf of” St. Joseph and Orange Coast to their sharehold-
ers concerning the shareholders’ response to FPA’s exchange
offer, because Cowen was retained by St. Joseph’s and
Orange Coast’s management to make such a communication.

Cowen disputes Madden’s arguments as follows: First,
Cowen argues that neither St. Joseph and Orange Coast are
“issuers” within the meaning of the Delaware carve-out. Sec-
ond, Cowen argues that Madden’s action is not “based on the
law of” Delaware, the state in which Orange Coast is incorpo-
rated. Third, Cowen argues that it was not acting “on behalf
of” either Orange Coast or St. Joseph when it provided its
fairness opinion. We consider each of these issues in turn.

1

Cowen first argues that neither St. Joseph nor Orange Coast
is “the issuer” for purposes of the Delaware carve-out because
neither was the issuer of the “covered security” in this case.
According to Cowen, only FPA can be “the issuer” for pur-
poses of the Delaware carve-out. Cowen reasons that the Del-
aware carve-out, § 77p(d), refers to “the issuer” rather than
“an issuer,” and contends that “the issuer” must refer to the
issuer of the “covered security” referred to in SLUSA’s pre-
clusion provision, § 77p(b). Otherwise, Cowen argues, the
definite article in “the issuer” would have no antecedent.
10600 MADDEN v. COWEN & CO.
Cowen also notes that in Dabit the Supreme Court described
the Delaware carve-out as applying to “class actions based on
the law of the State in which the issuer of the covered security
is incorporated.” 547 U.S. at 87 (emphasis added). Under
Cowen’s interpretation of § 77p(d), the Delaware carve-out
would apply only to FPA and not to St. Joseph, which as a
closely held corporation was not an issuer of covered securi-
ties. In this case, Cowen argues, the Delaware carve-out
would preserve only suits involving communications to FPA
shareholders concerning their decisions in voting their FPA
securities. Because Madden’s action does not involve commu-
nications to FPA shareholders, Cowen argues that the Dela-
ware carve-out is inapplicable to Madden’s suit.

[13] We disagree. As noted above, we start with the plain
language of the statute. See Ariz. Health Care, 508 F.3d at
1249. The Delaware carve-out does not use the phrase “issuer
of the covered securities.” Rather, the Delaware carve-out
refers only to “securities” or “equity securities.” 15 U.S.C.
§ 77p(d)(1)(B). SLUSA does not define the word “issuer” to
mean “issuer of the covered securities,” nor does SLUSA’s
preclusion provision, § 77p(b), refer to an “issuer of covered
securities” or any similar phrase. Thus, contrary to Cowen’s
argument, there is no clear antecedent to the phrase “the issu-
er” in the Delaware carve-out. Moreover, the significance of
the word “the” before “issuer” in the version of the Delaware
carve-out added to the 1933 Act is questionable, given that
SLUSA’s nearly identical Delaware carve-out in the 1934 Act
refers to both “the issuer” and “an issuer.” See 15 U.S.C.
§ 78bb(f)(3)(A)(ii)(II) (providing that the Delaware carve-out
applies to a covered class action that involves “any recom-
mendation, position, or other communication with respect to
the sale of securities of an issuer“ that meets certain criteria)
(emphasis added). If the choice of the word “the” instead of
“an” had substantive meaning, we would expect that the word
“the” would have been used consistently in two otherwise
identical amendments. Cf. Kircher, 547 U.S. at 637 n.3 (not-
ing that SLUSA amends the 1933 Act and 1934 Act “in sub-
 MADDEN v. COWEN & CO. 10601
stantially identical ways”). Accordingly, we conclude that the
plain language of § 77p(d) allows a shareholder to bring a
covered class action under state law against any “issuer” that
has made certain communications regarding the sale of its
“securities,” and that these securities need not be the “covered
securit[ies]” referred to in § 77p(b). Also, though we do not
rely on legislative history in construing this unambiguous stat-
utory language, see Lamie v. U.S. Trustee, 540 U.S. 526, 534
(2004), we note our disagreement with Cowen’s argument
that SLUSA’s legislative history suggests a congressional
intent to limit the Delaware carve-out to suits against issuers
of “covered securities.” The public debate surrounding Con-
gress’s addition of the Delaware carve-out weighs against
Cowen’s interpretation. The testimony before Congress when
it inserted the Delaware carve-out into SLUSA suggests that
the purpose of § 77p(d) was to preserve state-law actions
brought by shareholders against their own corporations in
connection with extraordinary corporate transactions requir-
ing shareholder approval, such as mergers and tender offers,
regardless whether the corporations issued nationally traded
securities.7
7
See, e.g., Securities Litigation Uniform Standards Act of 1997: Hear-
ing on S. 1260 Before the S. Comm. on Banking, Housing, and Urban
Affairs, Subcomm. on Securities, 105th Cong. 48 (Oct. 29, 1997) (state-
ment of SEC Chairman Arthur Levitt and Commissioner Isaac Hunt,
Securities and Exchange Commission) (expressing concern that the ver-
sion of SLUSA originally introduced in the Senate “could preempt state
class actions for damages based on material misstatements or omissions in
proxy and tender offer materials in connection with an extraordinary cor-
porate transaction”); Securities Litigation Uniform Standards Act of 1997:
Hearing on H.R. 1689 Before the H. Comm. on Commerce, Subcomm. on
Finance and Hazardous Materials, 105th Cong. 64 (May 19, 1998) (testi-
mony of Jack Coffee) (noting the important role of state class actions in
the area of mergers and corporate reorganization and approving of the
Senate’s addition of the Delaware carve-out as an “attempt[ ]” to “carve
back into the statute a role for the Delaware courts, and the courts of other
States, to deal with fundamental questions of corporate governance”).
10602 MADDEN v. COWEN & CO.
Nor does the Supreme Court’s passing reference in Dabit
to one type of class action covered by the Delaware carve-out
require us to adopt a different reading. See 547 U.S. at 87
(noting that the Delaware carve-out applies to “class actions
based on the law of the State in which the issuer of the cov-
ered security is incorporated”). In context, the Court’s refer-
ence to the Delaware carve-out in Dabit is simply part of the
Court’s explanation that “the tailored exceptions to SLUSA’s
pre-emptive command demonstrate that Congress did not by
any means act ‘cavalierly’ ” in displacing state law. Id. Dabit
did not purport to limit the scope of the Delaware carve-out
to covered securities; it neither considered nor addressed
whether the Delaware carve-out preserves state-law share-
holder class actions against issuers of securities that are not
nationally traded.

[14] Finally, interpreting the Delaware carve-out as Cowen
suggests would have illogical results. Under Cowen’s narrow
interpretation of “the issuer,” the Delaware carve-out would
not preserve shareholders’ state-law remedies against their
own corporation for misrepresentations in connection with a
merger if the shareholders’ corporation exchanged its non-
covered securities for covered securities. The Delaware carve-
out would, however, potentially apply in other types of merg-
ers (e.g., if the corporation exchanged covered for covered
securities or covered for non-covered securities), and
SLUSA’s preclusion provision would not apply at all if the
corporation exchanged non-covered for non-covered securi-
ties. This result is unreasonable and inconsistent with the Del-
aware carve-out’s purpose. Given that the plain language of
the statute leads to “a rational, common-sense result,” Ariz.
State Bd. for Charter Schools v. U.S. Dept. of Educ., 464 F.3d
1003, 1008 (9th Cir. 2006), and one consistent with the stat-
ute’s purpose, we read the term “the issuer” in the Delaware
carve-out to refer to the corporation that is the issuer of the
securities described in the Delaware carve-out, rather than
being limited to an issuer of a “covered security” defined in
15 U.S.C. § 77p(f)(3). Accordingly, both Orange Coast and
 MADDEN v. COWEN & CO. 10603
St. Joseph could potentially be “the issuer” on whose behalf
Cowen made its alleged misstatements.

2

Alternatively, Cowen argues that even if St. Joseph could
be the relevant issuer for purposes of the Delaware carve-out,
Orange Coast cannot. Cowen argues that because Madden’s
suit was brought in California and based on California law, it
cannot be “based upon the statutory or common law of” Dela-
ware, “the State in which [Orange Coast] is incorporated.” Id.
§ 77p(d)(1)(A). But Madden claims that his action against
Cowen is “based upon the statutory or common law of” Dela-
ware. Id. According to Madden, he may meet this requirement
merely by establishing that Delaware allows shareholders of
acquired companies to bring negligent misrepresentation and
professional negligence actions against the responsible par-
ties. In short, Madden argues that, for purposes of SLUSA, an
action is “based upon” the law of any state in which the
action’s claims would be cognizable.

[15] We reject Madden’s argument as inconsistent with
SLUSA’s statutory language. Madden’s complaint is not
based on “the statutory or common law” of Delaware merely
because Madden could have brought a similar complaint in
Delaware. Madden’s complaint alleges only violations of Cal-
ifornia law, and does not refer to Delaware law or contain any
claims for violations of Delaware law. Nor does Madden sug-
gest that a California court should apply Delaware law to its
action. A plaintiff suing in a California court bears the burden
of “invok[ing] the law of a jurisdiction other than California,”
Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180, 1187
(9th Cir. 2001), amended by 273 F.3d 1266 (9th Cir. 2001),
and Madden did not invoke Delaware law in his complaint.

[16] Because claims are not “based on” the law of a state
when they do not refer to or rely on that state’s common or
statutory law, the Delaware carve-out does not preserve Mad-
10604 MADDEN v. COWEN & CO.
den’s action to the extent it involves misrepresentations made
solely on behalf of Orange Coast.8 We therefore must address
whether Cowen’s alleged misstatements to St. Joseph’s share-
holders were made “on behalf of” St. Joseph, a California cor-
poration.

3

Cowen argues that even if St. Joseph is deemed to be “the
issuer” for purposes of the Delaware carve-out, Cowen did
not make any statement “on behalf of” St. Joseph. Because
the Delaware carve-out applies to misleading communications
“made by or on behalf of” an issuer to its shareholders,
Cowen asserts that Madden’s complaint does not fall within
the Delaware carve-out. See 15 U.S.C. § 77p(d)(1)(B)(ii)(I).

The district court agreed, holding that a defendant makes a
statement “on behalf of” an issuer for purposes of the Dela-
ware carve-out only if the defendant was an officer, director,
or employee of the issuer. In support of the district court’s
holding, Cowen points us to the Reform Act, which defines
the phrase “person acting on behalf of an issuer” to mean “an
officer, director, or employee of the issuer.” Id. § 77z-2(i)(6).
Cowen argues that it did not act on behalf of St. Joseph
because it is not an “officer, director or employee” of St.
Joseph.

Madden counters that we should not rely on the Reform
8
As noted above, the Delaware carve-out also applies to communica-
tions that are “made by or on behalf of . . . an affiliate of the issuer to
holders of equity securities of the issuer.” 15 U.S.C. § 77p(d)(B)(ii)(I)
(emphasis added). But Madden does not argue that Cowen’s alleged mis-
representations qualified under § 77p(d)(B)(ii)(I) as a communication
made “by or on behalf of” Orange Coast as “an affiliate” of St. Joseph,
and so we do not address this issue here. See Ind. Towers of Wash. v.
Washington, 350 F.3d 925, 929 (9th Cir. 2003) (“Our circuit has repeat-
edly admonished that we cannot manufacture arguments for an appellant
. . . .” (internal quotation marks omitted)).
 MADDEN v. COWEN & CO. 10605
Act, which provided the definition of “on behalf of” in the
context of creating a safe harbor for those who make forward-
looking statements. Rather, Madden argues, we should rely on
the plain language of the statute, or alternatively on the SEC’s
regulations implementing the National Securities Market
Improvement Act, which provide that an offering document is
“prepared by or on behalf of the issuer” if the issuer: “(1)
Authorizes the document’s production, and (2) Approves the
document before its use.” 17 C.F.R. § 230.146(a). Madden
claims that this definition is preferable because it relates to
offering documents such as the registration statement at issue
in this case. See 15 U.S.C. § 77r.

[17] Again, we must start with the plain language of the
statute. See Ariz. Health Care, 508 F.3d at 1249. Because
there is no definition of the phrase “on behalf of” in SLUSA
itself, “we consider whether there is an unambiguous common
sense meaning of the word that resolves the question” before
us. Id. The common sense meaning of “on behalf of,” accord-
ing to the dictionary, is “in the interest of,” “as a representa-
tive of,” or “for the benefit of.” Webster’s Third New Int’l
Dictionary 198 (2002). Because the language in
§ 77p(d)(B)(ii)(I) has an unambiguous, common sense mean-
ing, we see no need to look to other statutes that Congress
chose not to cross-reference. Accordingly, we conclude that
§ 77p(d)(B)(ii)(I) refers to an individual or entity that makes
a communication to an issuer’s stockholders in the interest of,
as a representative of, or for the benefit of the issuer.

[18] According to Madden’s complaint, the management of
both Orange Coast and St. Joseph formed a Special Commit-
tee to “assess the opportunities for a strategic affiliation or
sale,” and it was through this Special Committee that “Orange
Coast and St. Joseph had retained Cowen for the purpose of
determining whether the transaction was fair, from a financial
point of view, to Plaintiffs as the shareholders of Orange
Coast and St. Joseph.” The complaint further alleges that the
boards of directors of both Orange Coast and St. Joseph
10606 MADDEN v. COWEN & CO.
approved the merger on the basis of Cowen’s fairness opin-
ion, that Cowen allowed its fairness opinion to be incorpo-
rated in the registration statement that was distributed to St.
Joseph’s shareholders, and that St. Joseph’s shareholders
relied on the fairness opinion when voting in favor of the
merger. Under the common sense definition of “on behalf of,”
discussed above, Madden’s complaint sufficiently alleges that
Cowen’s communication was “on behalf of” St. Joseph for
purposes of the Delaware carve-out.

Cowen argues that we should not rely only on the allega-
tions in Madden’s complaint when the record contains a num-
ber of relevant documents supporting Cowen’s argument that
it was acting exclusively on behalf of Orange Coast. Specifi-
cally, Cowen points to its engagement letter, which defines
Orange Coast as “the company” to which Cowen would, if
requested, “render an opinion as to whether or not the finan-
cial terms of” a proposed transaction were fair. Cowen also
points to the fact that the fairness opinion itself was addressed
to Orange Coast, not St. Joseph or the Special Committee, and
that the registration statement instructed Orange Coast’s
shareholders to read the fairness opinion but made no similar
instruction addressed to St. Joseph’s shareholders.

We agree with Cowen that our inquiry as to whether
Cowen was acting on behalf of St. Joseph is not limited to the
allegations in Madden’s complaint. We have held that a
“court may permit the defendant to support removal by sup-
plementing the pleadings with additional evidence of
SLUSA’s applicability,” U.S. Mortgage, Inc. v. Saxton, 494
F.3d 833, 842 (9th Cir. 2007) (emphasis omitted), consistent
with the general rule that a removing defendant bears the bur-
den of showing that it is properly in federal court, see Abrego
Abgrego v. Dow Chem. Co., 443 F.3d 676, 685 (9th Cir.
2006).

[19] Here, the district court did not consider these addi-
tional documents because it applied the wrong legal standard
 MADDEN v. COWEN & CO. 10607
for determining whether Cowen’s communication was made
“on behalf of” an issuer for purposes of the Delaware carve-
out, asking whether Cowen was “an officer, director, or
employee of St. Joseph or Orange Coast.” As we have
explained, the correct inquiry is whether Cowen’s fairness
opinion was a communication “on behalf of” St. Joseph
within the ordinary meaning of the phrase: that is, whether the
communication was made in the interest of, as a representa-
tive of, or for the benefit of St. Joseph. Because a district
court “may permit the defendant to support removal by sup-
plementing the pleadings with additional evidence of
SLUSA’s applicability,” Saxton, 494 F.3d at 842 (emphasis
omitted), and because a district court has the discretion to
allow or not allow additional jurisdictional discovery, Abrego
Abrego, 443 F.3d at 692, we remand to the district court so
it can exercise its discretion, apply the correct legal standard,
and determine, in the first instance, whether Cowen’s fairness
opinion constituted a communication “on behalf of” St.
Joseph.

4

In light of our decision to remand this case to the district
court, we must also address the parties’ dispute over who
bears the burden of proving that Madden’s action is preserved
by the Delaware carve-out. In our decisions applying the
Class Action Fairness Act of 2005, Pub. L. 109-2, 119 Stat.
4 (2005), we have held that when a defendant removes a case
to federal court, the defendant bears the burden of proving
any prerequisites to federal jurisdiction, while the plaintiff
bears the burden of proving the existence of any “exceptions”
to the exercise of jurisdiction that “otherwise exists.” See Ser-
rano v. 180 Connect, Inc., 478 F.3d 1018, 1020 & n.3 (9th
Cir. 2007). Applying this framework to SLUSA, we must
determine whether eligibility for the Delaware carve-out is a
prerequisite or exception to the district court’s exercise of
jurisdiction.
10608 MADDEN v. COWEN & CO.
[20] This question is answered by the Supreme Court’s
recent decision in Kircher, where the Supreme Court clarified
that a district court’s jurisdiction under SLUSA extends only
to actions that are not precluded. Kircher, 547 U.S. at 644. As
we previously noted, Kircher explained that “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.” Id. According
to the Court, “[t]here is no room for . . . a case to exist in a
limbo of colorable preclusion; if a claim is precluded, it may
not be maintained, and if the claim is not, the federal courts
no longer have any business being involved, as there is no
longer any federal question on which to moor the district
court’s jurisdiction.” 547 U.S. at 644 n.12 (alteration and
internal citation omitted).9

Accordingly, under Kircher, the district court has jurisdic-
tion over Madden’s complaint under SLUSA’s removal provi-
sion only if the action is precluded. Madden’s complaint is
not subject to preclusion if it is preserved by the Delaware
carve-out. Thus the district court has jurisdiction over Mad-
den’s complaint only if the Delaware carve-out is not applica-
ble. Said otherwise, the non-applicability of the Delaware
carve-out is a prerequisite to the district court’s SLUSA juris-
diction. Because a removing defendant generally bears the
burden of showing that it is properly in federal court, see
Abrego Abgrego, 443 F.3d at 685, Cowen bears the burden of
proving that the Delaware carve-out is not applicable to Mad-
den’s complaint.
9
This analysis assumes, as was the case in Kircher, that there is no sepa-
rate basis for federal jurisdiction over the merits of the action. A state-law
diversity action, for example, might be properly brought in federal court
under 28 U.S.C. § 1332, in which case a federal court could reach the mer-
its of the action if it were not precluded by SLUSA. See, e.g., Dabit, 547
U.S. at 75.
 MADDEN v. COWEN & CO. 10609
Cowen disagrees with this conclusion. It argues that the
applicability of the Delaware carve-out is an exception to
jurisdiction, and therefore Madden bears the burden of show-
ing its applicability. Specifically, Cowen points to the lan-
guage of SLUSA that instructs a federal court to remand an
action to state court if the district court determines that the
Delaware carve-out is applicable. 15 U.S.C. § 77p(d)(4) (“In
an action that has been removed from a State court pursuant
to subsection (c), if the Federal court determines that the
action may be maintained in State court pursuant to this sub-
section, the Federal court shall remand such action to such
State court.”). According to Cowen, this language demon-
strates that a federal court has jurisdiction over a covered
class action meeting the requirements of § 77p(b), but must
nonetheless remand to state court under § 77p(d)(4) if the
Delaware carve-out is applicable.

This reading of § 77p(d), which would make the Delaware
carve-out an exception to jurisdiction rather than a prerequi-
site, is reasonable. Indeed, the Seventh Circuit adopted a simi-
lar reading of SLUSA in an analogous context, holding that
once a federal court has removal jurisdiction over an action
under SLUSA, it then has “adjudicatory competence” to con-
sider the applicability of the Delaware carve-out and remand
if necessary. Kircher, 373 F.3d 847, 850 (7th Cir. 2004),
rev’d, 547 U.S. 633 (2006). If the carve-out is applicable, the
court reasoned, then the federal court does not dismiss for
lack of subject-matter jurisdiction but simply finishes its work
and “bow[s] out” by remanding the complaint to state court.
Id.

The trouble with this reasoning is that it was rejected by the
Supreme Court, which reversed the Seventh Circuit’s decision
in Kircher. The Supreme Court clarified that SLUSA gives a
federal court authority to do only two things with a removed
action: dismiss it as precluded or remand it to state court. 547
U.S. at 644. Under Kircher, there can be no “limbo of color-
able preclusion,” id., in which a district court obtains jurisdic-
10610 MADDEN v. COWEN & CO.
tion over a complaint that meets the preclusion standards of
§ 77p(b) but must then exercise its jurisdiction by “bow[ing]
out” under § 77p(d)(4) if the complaint falls within the Dela-
ware carve-out.

[21] We conclude that the reasoning of Kircher does not
allow us to hold that the Delaware carve-out is an exception
to jurisdiction that otherwise exists. See Serrano, 478 F.3d at
1020 n.3. We therefore hold that the non-applicability of the
Delaware carve-out is a prerequisite to the district court’s
removal jurisdiction. Id. As such, on remand, Cowen must
bear the burden of establishing that Madden’s action is pre-
cluded because the Delaware carve-out does not apply.10

IV

In sum, we conclude that Madden’s suit is a covered class
action alleging a misrepresentation in connection with a cov-
ered security under 15 U.S.C. § 77p(b). Because Madden
brought his action under California law, rather than Delaware
law, the Delaware carve-out does not preserve Madden’s suit
to the extent it involves misrepresentations made on behalf of
Orange Coast. In light of our clarification of the meaning of
“on behalf of” under the Delaware carve-out, we remand this
case to allow the district court to determine, in the first
instance, whether Madden’s action involves a communication
made by Cowen on behalf of St. Joseph to St. Joseph’s share-
holders. See 15 U.S.C. § 77p(d).

The judgment of the district court is therefore VACATED
and the case REMANDED for further proceedings consistent
with this opinion.

10
Because we remand to the district court to determine whether it has
jurisdiction, we do not reach Cowen’s argument that Madden lacks stand-
ing under California state law to bring his professional negligence claim.