[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
________________________ ELEVENTH CIRCUIT
OCT 29, 2008
No. 07-15079 THOMAS K. KAHN
________________________ CLERK
D. C. Docket No. 05-22721-CV-KMM
INSTITUTO DE PREVISION MILITAR,
Plaintiff-Appellant,
versus
MERRILL LYNCH,
EDUARDO COLOMA,
MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Southern District of Florida
_________________________
(October 29, 2008)
Before BIRCH and MARCUS, Circuit Judges, and FORRESTER,* District Judge
*
Honorable J. Owen Forrester, United States District Judge for the Northern District of
Georgia, sitting by designation.
MARCUS, Circuit Judge:
The central question presented on appeal is whether the Securities Litigation
Uniform Standards Act of 1998 (“SLUSA”) bars the appellant, Instituto de
Prevision Militar (“IPM”), from pursuing state law claims against Merrill Lynch &
Co. and its affiliates for their role in a fraud committed on IPM by Pension Fund of
America, L.C. (“PFA”), a non-party to this action. In a nutshell, PFA allegedly
defrauded investors throughout Latin America -- including IPM -- by stealing their
money rather than investing it. IPM claims that, under Florida law, Merrill Lynch
is liable for PFA’s fraud because it allowed PFA to hold itself out as Merrill
Lynch’s agent, and because it failed to stop PFA from misappropriating IPM’s
funds. After granting IPM’s request to consolidate this case with two related cases
for discovery purposes, the district court granted Merrill Lynch’s motion to
dismiss, concluding that SLUSA precluded IPM’s state law claims and that IPM
failed to state a claim for fraud under the federal securities laws. After thorough
review, we affirm.
I.
Because the district court decided this case on a motion to dismiss, we
accept as true the facts contained in IPM’s second amended complaint. Bryant v.
Avado Brands, Inc., 187 F.3d 1271, 1273 n.1 (11th Cir. 1999). The essential facts
2
are these. IPM “is a decentralized agency of the Republic of Guatemala, which
administers social security for the Guatemalan Armed Forces.” Second Amended
Compl. ¶ 2. Under Guatemalan law, IPM holds legal title to the pension funds it
administers and may sue and be sued in its own name.
In July 2001, Pension Fund of America began soliciting IPM’s board of
directors. With Merrill Lynch’s permission, PFA used “Merrill Lynch’s brochures,
literature and company seal” to represent to IPM that it was “a business partner of
Merrill Lynch.” Id. ¶ 20. “Relying upon Merrill Lynch’s reputation,” id. ¶ 21,
IPM agreed to invest in “retirement trust accounts” comprised of a life insurance
component and a mutual fund component. IPM and PFA signed a trust agreement
that provided for Merrill Lynch “to act as trustee of IPM’s pension funds.” Id.
Pursuant to the agreement, IPM wired over $7.7 million to Merrill Lynch, which
deposited those funds in an account “titled in the name of ‘Pension Fund of
America, LLC[.]’” Id. ¶¶ 22, 25. Within two months, Merrill Lynch allowed PFA
to transfer more than $3 million out of the account. According to the second
amended complaint, PFA “was taking money from the IPM account for its own
benefit and for its principals’ personal use.” Id. ¶ 34.
Meanwhile, Merrill Lynch was “actively promot[ing]” PFA and vouching
for the character of PFA’s principals. Id. ¶ 35. Specifically, on December 4, 2001,
3
Eduardo Coloma, a Merrill Lynch employee, wrote a letter touting PFA to Jennifer
Lloyd, Corporate Services Administrator at Offshore Company Services Limited.
Coloma informed Lloyd that he had been doing business with PFA principal Luis
Cornide for one year and could recommend him “with complete confidence.” Id.
IPM alleges that “misleading recommendation letters” such as this one “were
distributed to IPM to guarantee the safety of the funds entrusted to Merrill Lynch
and maintain IPM’s false sense of security in Pension Fund of America.” Id. ¶ 36.
In January 2002, IPM arranged a meeting with PFA and Merrill Lynch
because it was not receiving statements “on a regular basis.” Id. ¶ 37. At the
meeting on January 22, “Merrill Lynch ratified its relationship with [PFA] . . . , and
IPM instructed Coloma, as Merrill Lynch’s representative, that no transactions be
authorized in the IPM Account without IPM’s written consent.” Id. Nevertheless,
Merrill Lynch executed unauthorized transfers of $150,000 in September 2002 and
of over $4 million in December 2002. “Unauthorized transfers of $1,080,000 and
$17,804.65 followed.” Id. ¶ 38. “In short, Merrill Lynch permitted Pension Fund
of America to ransack IPM’s pension funds account.” Id. ¶ 41.
In November 2002, IPM sued PFA and its principals in Florida state court,
alleging numerous state law claims. Pursuant to a court order in that proceeding,
Merrill Lynch transferred nearly $4.9 million into a trust account for IPM. Out of
4
the approximately $7.7 million IPM had entrusted to PFA, more than $2.8 million
remained unaccounted for.
It turns out that IPM was only one of many Latin American investors
allegedly defrauded by PFA. On March 28, 2005, the Securities and Exchange
Commission sued PFA in the United States District Court for the Southern District
of Florida, alleging widespread fraud and theft of investors’ money. In that
proceeding -- which we will refer to as the “SEC Action” -- the district court froze
PFA’s assets and appointed a receiver for the company. One month later, several
PFA investors filed a putative class action (the “Class Action”) against PFA’s
principals and several other defendants, including Merrill Lynch, alleging that they
helped PFA commit the fraud. Shortly thereafter, the district court in the SEC
Action entered a case management order requiring all lawsuits against PFA’s
former “banks, brokerage houses, service providers or other third parties” to be
filed as ancillary proceedings to the SEC Action. SEC v. Pension Fund of Am.,
L.C., No. 05-cv-20863 (S.D. Fla. June 22, 2005) (receivership case management
order).
Abiding by the case management order, on October 14, 2005, IPM filed this
lawsuit against Merrill Lynch & Co., its affiliates, and Coloma (collectively
“Merrill Lynch”). IPM’s verified amended ancillary complaint asserted seven state
5
law tort claims, including negligence, breach of fiduciary duty, and fraud. On
November 1, 2005, IPM commenced a similar lawsuit against Lehman Brothers
(the “Lehman Action”) based on its role in the larger PFA fraud. Thus, by
November 2005, there were four related actions pending in the Southern District of
Florida: this case, the SEC Action, the Class Action, and the Lehman Action.
On December 19, 2005, Merrill Lynch moved to dismiss this case in its
entirety, arguing, among other things, that SLUSA precluded all of IPM’s claims.
While the parties were briefing Merrill Lynch’s motion to dismiss in this case, IPM
moved to consolidate for discovery purposes the Class Action and the Lehman
Action. Faced with that motion, the district court issued an order to show cause to
IPM why this case should not also be consolidated with those two cases. IPM
responded by expressly asking the district court to “permit consolidation of the
discovery process in this case[.]” (Pl.’s Resp. to Order to Show Cause ¶ 4, Jan. 25,
2006.) The district court agreed with IPM, concluding that “it is in the best
interests of all parties concerned, as well as in the interests of judicial economy, to
consolidate [this case, the Class Action, and the Lehman Action] for purposes of
discovery.” (Consolidation Order at 3, Feb. 13, 2006.) Seven months after
consolidating the cases, the district court granted Merrill Lynch’s motion to
dismiss, concluding that IPM’s claims were precluded by SLUSA. The district
6
court noted, however, that IPM could “adequately plead claims under SLUSA”
(Order at 7, Sept. 15, 2006), and, therefore, granted IPM leave to file a second
amended complaint.
IPM’s second amended complaint alleged essentially the same facts and
state law theories as it had in its previous complaint, but added a claim for
securities fraud under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Merrill
Lynch promptly moved to dismiss the second amended complaint, arguing that
SLUSA precluded the state law claims, and that it failed to state a claim under
§ 10(b) and Rule 10b-5 as well. On September 28, 2007, the district dismissed
IPM’s second amended complaint in its entirety, reprising its conclusion that
SLUSA barred the state law claims and holding that the federal securities fraud
claim failed because the second amended complaint did not adequately plead
scienter, reasonable reliance, and loss causation; most of the second amended
complaint’s allegations rested on the invalid theory of aiding-and-abetting liability;
and the second amended complaint failed to plead the alleged misrepresentations
with particularity.
This timely appeal ensued.
II.
7
We review de novo both the district court’s conclusion that SLUSA
precludes IPM from bringing its state law claims, Riley v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 292 F.3d 1334, 1336 (11th Cir. 2002), and the district
court’s determination that IPM failed to state a claim under § 10(b) and Rule 10b-
5, Garfield v. NDC Health Corp., 466 F.3d 1255, 1261 (11th Cir. 2006).
Congress enacted the Securities Litigation Uniform Standards Act to ensure
that securities fraud class actions were brought under federal law and in federal
court. The history of SLUSA began in 1995, when Congress became concerned
that private securities fraud class actions were “injur[ing] the entire U.S. economy”
by rewarding “nuisance filings, targeting of deep-pocket defendants, vexatious
discovery requests, and manipulation by class action lawyers of the clients whom
they purportedly represent.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit,
547 U.S. 71, 81 (2006) (quotation marks omitted). To curb these perceived abuses,
Congress passed the Private Securities Litigation Reform Act of 1995 (PSLRA),
which included a number of provisions that made life more difficult for plaintiffs
litigating federal securities fraud claims in federal court, such as erecting a
substantially heightened pleading standard for scienter and an automatic stay of
discovery pending the resolution of a motion to dismiss. See id. at 81-82. Rather
than risk tripping over the hurdles imposed by the PSLRA, plaintiffs and their
8
attorneys began bringing securities fraud class actions under state law, often in
state court. See id. at 82. Congress then passed SLUSA “to stem this ‘shif[t] from
Federal to State courts’ and ‘prevent certain State private securities class action
lawsuits alleging fraud from being used to frustrate the objectives of’” the PSLRA.
Id. (quoting SLUSA §§ 2(2), (5), Pub. L. No. 105-353, 112 Stat. 3227 (1998)).
The core provision of SLUSA provides:
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). As the plain language of the statute makes clear, “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.” Dabit, 547 U.S. at
87. Thus, SLUSA would preclude IPM’s state law claims only if Merrill Lynch
could establish that this case is (1) a “covered class action” that (2) is “based upon
the statutory or common law of any State,” and that (3) alleges a misrepresentation
or omission or the use of a manipulative device “in connection with the purchase or
9
sale” of (4) a “covered security.” 15 U.S.C. § 78bb(f)(1); see also Riley, 292 F.3d
at 1341-42. IPM concedes that the second element has been met because its
claims are based on the statutory and common law of Florida, but argues that
Merrill Lynch has satisfied none of the remaining three elements. We are
unpersuaded and, like the district court, conclude that, under its unambiguous
terms, SLUSA applies here and precludes IPM’s state law claims perfected as a
“covered class action.”
A.
We begin with whether this case qualifies as a “covered class action,” which
SLUSA defines as:
(i) any single lawsuit in which--
(I) damages are sought on behalf of more than 50 persons or
prospective class members, and questions of law or fact
common to those persons or members of the prospective class,
without reference to issues of individualized reliance on an
alleged misstatement or omission, predominate over any
questions affecting only individual persons or members; or
(II) one or more named parties seek to recover damages on a
representative basis on behalf of themselves and other unnamed
parties similarly situated, and questions of law or fact common
to those persons or members of the prospective class
predominate over any questions affecting only individual
persons or members; or
(ii) any group of lawsuits filed in or pending in the same court and
involving common questions of law or fact, in which --
10
(I) damages are sought on behalf of more than 50 persons; and
(II) the lawsuits are joined, consolidated, or otherwise proceed
as a single action for any purpose.
15 U.S.C. § 78bb(f)(5)(B).
Section (i)(I) of the definition, 15 U.S.C. § 78bb(f)(5)(B)(i)(I), plainly does
not apply here because IPM is suing on behalf of 1 person (itself), not “more than
50 persons.” The second amended complaint says that IPM is a pension plan that
owns legal title to the funds it administers and can sue and be sued in its own
name. And SLUSA expressly states that “pension plan[s],” such as IPM, “shall be
treated as one person or prospective class member, but only if the entity is not
established for the purpose of participating in the action.” Id. § 78bb(f)(5)(D).
Merrill Lynch does not and cannot argue that IPM was “established for the purpose
of participating in [this] action.” It follows that IPM is seeking damages on behalf
of only 1 person, not 50 as section (i)(I) of the definition of “covered class action”
requires.
The question, then, boils down to whether this case satisfies either the
requirements of section (i)(II) of the definition of “covered class action,” 15 U.S.C.
§ 78bb(f)(5)(B)(i)(II), or the requirements of the “group of lawsuits” provision in
section (ii) of the definition, 15 U.S.C. § 78bb(f)(5)(B)(ii). The district court
believed that both of these provisions were met here. Because we conclude that
11
this case is part of a “group of lawsuits” covered by SLUSA, we have no occasion
to address whether section (i)(II) is also satisfied.
The “group of lawsuits” provision found in the statute has four elements: (1)
a “group of lawsuits filed in or pending in the same court”; (2) “common questions
of law or fact”; (3) “damages are sought on behalf of more than 50 persons”; and
(4) “the lawsuits are joined, consolidated, or otherwise proceed as a single action
for any purpose.” 15 U.S.C. § 78bb(f)(5)(B)(ii). This case, the Class Action, and
the Lehman Action are a “group of lawsuits . . . pending in the same court,” so the
first element is easily met. In addition, the Class Action seeks damages on behalf
of more than 3,400 class members, so the third element is satisfied as well. That
leaves only elements (2) and (4).
Although IPM suggests that this case, the Class Action, and the Lehman
Action do not raise “common questions of law or fact” as required by element (2),
we remain unpersuaded. How PFA represented itself to IPM is a common issue of
fact critical to all three cases. Moreover, whether these representations were “in
connection with the purchase or sale” of a security is a common question of law.
Indeed, IPM implicitly acknowledged the substantial overlap among the cases
when it affirmatively requested that they be consolidated for discovery purposes.
We think that is enough, particularly because, unlike the definition’s single-lawsuit
12
provisions, the “group of lawsuits” provision in SLUSA’s definition of “covered
class action” does not require common issues of law and fact to “predominate.”
Compare 15 U.S.C. § 78bb(f)(5)(B)(ii) (defining “covered class action” as a
“group of lawsuits” that involve “common questions of law or fact”); with id.
§ 78bb(f)(5)(B)(i) (defining “covered class action” as “any single lawsuit” that is
filed on behalf of 50 or more persons or on a representative basis and that involves
common questions of law or fact that “predominate over any questions affecting
only individual persons or members”) (emphasis added).
Similarly, the plain language of element (4) is easily satisfied. This case, the
Class Action, and the Lehman Action undeniably were consolidated by the district
court for discovery purposes. Thus, this “group of lawsuits” satisfies element (4)’s
requirement that they be “consolidated . . . for any purpose.” 15 U.S.C. §
78bb(f)(5)(B)(ii) (emphasis added); see In re Worldcom, Inc. Sec. Litig., 308 F.
Supp. 2d 236, 246 (S.D.N.Y. 2004) (concluding that cases consolidated for pretrial
purposes qualified as a “group of lawsuits” under 15 U.S.C. § 78bb(f)(5)(B)(ii));
Gordon Partners v. Blumenthal, No. 02-Civ-7377, 2007 WL 431864, at *18
(S.D.N.Y. Feb. 9, 2007) (same); In re Fed. Nat’l Mortgage Ass’n Sec. Derivative &
“ERISA” Litig., 503 F. Supp. 2d 25, 33 (D.D.C. 2007) (concluding that two
lawsuits brought by plaintiffs who opted out of a class action were “covered class
13
actions” after they had been consolidated with the class action).
IPM suggests, however, that, notwithstanding the breadth of the clause,
“consolidation . . . for any purpose” cannot be read to cover what happened here
because the Congress that enacted SLUSA intended to preserve bona fide
individual actions like this case. To be sure, IPM’s theory of congressional intent
draws some support from the overall structure of SLUSA -- which relies on
limiting the use of the class action device rather than on outright preemption of
state law -- and the Senate Banking Committee Report on the Act, which says that
“[t]he Committee does not intend for the bill to prevent plaintiffs from bringing
bona fide individual actions simply because more than fifty persons commence the
actions in the same state court against a single defendant.” S. Rep. 105-182
(1998), 1998 WL 226714, at *7. But in light of the provision’s unambiguous
language, we need not resort to inferences from the Act’s overall structure or the
results of a hunt through its legislative history.
Simply put, the plain meaning of “consolidation . . . for any purpose”
includes consolidation for purposes of discovery only, and we cannot ignore that
meaning. See, e.g., Sullivan v. Stroop, 496 U.S. 478, 482 (1990) (“If the statute is
clear and unambiguous that is the end of the matter[.]”) (quotation marks omitted).
At the end of the day, what Congress did controls, not what a party thinks
14
Congress may have meant to do.
Rather than try to rearrange the deck chairs of its sinking ship in this appeal,
IPM might have avoided this plain-language iceberg altogether if it had argued to
the district court that consolidation was inappropriate because the joinder for
discovery purposes would result in SLUSA preclusion. But IPM did not do that.
Instead, after the district court asked why this case should not be consolidated with
the Class Action and the Lehman Action, IPM expressly requested that the court
consolidate all three cases for discovery purposes. IPM cannot now complain
about the consequences of its own request, and, therefore, we have no occasion to
address whether a consolidation over the plaintiff’s objection that results in
preclusion under SLUSA may amount to an abuse of discretion.
Merrill Lynch has established all four elements of the “group of lawsuits”
provision found in the statute, 15 U.S.C. § 78bb(f)(5)(B)(ii). This case is a
“covered class action” under SLUSA.
B.
We also hold that Merrill Lynch has established that IPM’s claims are based
on misrepresentations and omissions “in connection with the purchase or sale” of a
security -- the third element of SLUSA preclusion. SLUSA contains the same “in
connection with the purchase or sale” language that is found in § 10(b) of the
15
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). The Supreme Court has said
repeatedly that the phrase “in connection with the purchase or sale” of a security in
§ 10(b) “should be construed not technically and restrictively, but flexibly to
effectuate its remedial purposes.” SEC v. Zandford, 535 U.S. 813, 819 (2002)
(quotation marks omitted); accord Superintendent of Ins. of the State of N.Y. v.
Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971). “It is enough that the scheme to
defraud and the sale of securities coincide.” Zandford, 535 U.S. at 822. But the
Supreme Court has long recognized that so broad an interpretation of “in
connection with the purchase or sale” of a security would create immense potential
liability if private parties were granted the right to enforce § 10(b)’s full scope. To
deal with this problem, the Court has limited the judicially created private right of
action under § 10(b) and Rule 10b-5 to plaintiffs who allege that a fraud induced
them to purchase or sell a security. Blue Chip Stamps v. Manor Drug Stores, 421
U.S. 723 (1975). Others, such as investors who held securities because of a
misrepresentation or omission, have no private right of action under § 10(b) and
Rule 10b-5. Thus, there are frauds that both fall within the ambit of § 10(b) and
Rule 10b-5 and still fail to support a private cause of action under those provisions,
even though the SEC could bring an enforcement action on the same facts.
In Riley, a panel of this Court concluded that the scope of SLUSA’s “in
16
connection with the purchase or sale” of a security requirement should follow the
contours of the private right of action under § 10(b). Thus, the panel held that
“under Blue Chip, SLUSA does not apply to claims dealing solely with the
retention of securities, rather than with purchase or sale.” 292 F.3d at 1345; see
also Behlen v. Merrill Lynch, 311 F.3d 1087, 1093 (11th Cir. 2002) (“[I]n Riley,
we looked to Blue Chip when we determined that Congress intended the phrase ‘in
connection with’ to have the same meaning under the SLUSA that it has under
section 10b-5 . . . .”).
Riley, however, is no longer good law. Four years after we decided Riley,
the Supreme Court squarely held in Dabit that by including the words “in
connection with the purchase or sale” of a security in SLUSA, Congress meant to
incorporate the actual meaning of those words, and not the limitations the Court
had placed on the judicially created private right of action. See 547 U.S. at 89
(“For purposes of SLUSA pre-emption . . . the identity of the plaintiffs does not
determine whether the complaint alleges fraud ‘in connection with the purchase or
sale’ of securities.”). Thus, under Dabit, “in connection with the purchase or sale”
of a security under SLUSA covers the same range of activities that the SEC could
prosecute as violations of § 10(b) and Rule 10b-5. See Siepel v. Bank of Am.,
N.A., 526 F.3d 1122, 1127 (8th Cir. 2008). Put another way, “in connection with
17
the purchase or sale” of a security under SLUSA covers, at minimum, claims by
purchasers, sellers, and holders of securities.
IPM nevertheless argues that its claims are not covered by this broad
interpretation of “in connection with the purchase or sale” of a security because
“[t]he gravamen of [the second amended complaint] is that Merrill Lynch and
Coloma by their actions or inactions facilitated the theft of IPM’s funds, which
occurred post investment.” Appellant’s Br. at 46. In other words, IPM argues that
Merrill Lynch aided and abetted PFA’s theft, and that embezzlement of funds by
an investment manager is not conduct “in connection with the purchase or sale” of
a security under § 10(b) and Rule 10b-5. We remain unpersuaded.
The Supreme Court addressed a similar argument in Zandford. There, a
broker convinced an elderly client to open an account and to grant the broker
discretion to manage it. The broker used his power over the account to steal his
client’s money. On the specific facts of the case, the Court held that the SEC could
state a claim in a civil enforcement proceeding under § 10(b) and Rule 10b-5:
According to the complaint, respondent “engaged in a scheme to
defraud” the Woods beginning in 1988, shortly after they opened their
account, and that scheme continued throughout the 2-year period
during which respondent made a series of transactions that enabled
him to convert the proceeds of the sales of the Woods’ securities to
his own use. The securities sales and respondent’s fraudulent practices
were not independent events. This is not a case in which, after a
lawful transaction had been consummated, a broker decided to steal
18
the proceeds and did so. Nor is it a case in which a thief simply
invested the proceeds of a routine conversion in the stock market.
Rather, respondent’s fraud coincided with the sales themselves.
535 U.S. at 820 (citation omitted). But in dicta, the Court cautioned that its
“analysis does not transform every breach of fiduciary duty into a federal securities
law violation. If, for example, a broker embezzles cash from a client’s account
. . . , then the fraud would not include the requisite connection to a purchase or sale
of securities.” Id. at 825 n.4.
We followed the Supreme Court’s lead in Grippo v. Perazzo, 357 F.3d 1218
(11th Cir. 2004), which arose from a money manager’s theft of his client’s money.
The client, however, could not prove that the manager ever used his money to buy
any securities. Nevertheless, we held that the investor could state a claim for fraud
under § 10(b) even though securities were never purchased on his behalf. It was
sufficient that the manager “accepted and deposited [the investor’s] monies as
payment for securities” with no intent to deliver them. Id. at 1224; see also Wharf
(Holdings) Ltd. v. United Int’l Holdings, Inc., 532 U.S. 588, 597 (2001) (holding
that the plaintiff alleged securities fraud where he claimed that the defendant sold
him a security “while secretly intending from the very beginning not to honor” it).
The question here, then, is whether the second amended complaint alleges
(1) fraud that induced IPM to invest with PFA (as in Grippo and Wharf) or a
19
fraudulent scheme that coincided and depended upon the purchase or sale of
securities (as in Zandford), both of which would be “in connection with the
purchase or sale” of securities under SLUSA; or instead (2) a simple embezzlement
that does not coincide with a securities transaction, which, like the hypothetical
discussed in Zandford, would not meet SLUSA’s “in connection with the purchase
or sale” of a security requirement.
After thoroughly reviewing the second amended complaint, we have little
doubt that, like the plaintiff in Grippo, IPM is complaining about fraud that
induced it to invest with PFA, which means that its claims are “in connection with
the purchase or sale” of a security under SLUSA. Thus, for example, the second
amended complaint emphasizes Merrill Lynch’s failure to prevent PFA’s use of its
corporate name and logo, representations that IPM claims “lur[ed]” it to “invest its
pension funds” with Merrill Lynch. Second Amended Compl. ¶ 20.
Moreover, throughout the second amended complaint’s discussion of
various state law causes of action, IPM repeatedly relies on the theory that Merrill
Lynch was responsible for PFA’s conduct because it allowed PFA to portray itself
as Merrill Lynch’s agent while soliciting IPM. The second amended complaint’s
negligence and breach of fiduciary duty claims, for instance, allege that Merrill
Lynch “breached [its] duty of reasonable care to IPM by . . . knowingly or
20
recklessly allowing Pension Fund of America to represent that Merrill Lynch was
the trustee bank for IPM’s funds [and] knowingly or recklessly permitting Pension
Fund of America to use Merrill Lynch’s stamps and other materials on the account
documents sent to IPM . . . .” Id. ¶¶ 56, 63. Likewise, IPM’s negligent supervision
claim alleges that PFA “was successfully marketed to IPM . . . through a series of
fraudulent schemes and devices, including the use of Merrill Lynch’s brochures,
literature and company seal.” Id. ¶ 73.
These allegations and others like them leave little doubt that one of the main
building blocks of the second amended complaint is that Merrill Lynch failed to
stop the fraudulent misrepresentations that induced IPM to invest with PFA. That
is enough, we think, to conclude that this case is a “covered class action . . .
alleging . . . a misrepresentation or omission of a material fact in connection with
the purchase or sale of” a security. 15 U.S.C. § 78bb(f)(1).
To be sure, the second amended complaint also includes some allegations
about Merrill Lynch’s purportedly negligent handling of IPM’s funds after the
alleged misrepresentations occurred. But even assuming that, in theory, these
allegations could support a state law claim that would not be precluded under
SLUSA, the second amended complaint fails to articulate such a claim. To begin
with, the Act says “[n]o covered class action . . . may be maintained” and defines
21
“covered class action” as a “single lawsuit” or “group of lawsuits.” Although at
least one court has gone as far as saying this language “suggest[s] that if any
claims alleged in a covered class action are preempted, the entire action must be
dismissed,” Rowinski v. Salomon Smith Barney, Inc., 398 F.3d 294, 305 (3d Cir.
2005), we need not go that far today. To resolve this case, it is enough to conclude
that, even if SLUSA requires a court to assess preclusion claim-by-claim, the Act
does not require district courts to act like a prospector panning for a few non-
precluded theories amid a river of precluded ones. Rather, to avoid preclusion
under SLUSA, a claim for relief should clearly state the ground on which it is
based, and that ground cannot be one that is “in connection with the purchase or
sale” of security under § 10(b) and SLUSA. If a single claim premises liability on
multiple factual theories, then that claim would be precluded if at least one of those
theories hinges on representations made “in connection with the purchase or sale”
of a security.1
None of the counts in the second amended complaint passes this test.
Although some of them rely in part on the charge that Merrill Lynch mishandled
1
Riley, for example, took this approach. After holding (erroneously as it turns out) that
SLUSA did not reach claims by “holders” of securities, as opposed to buyers and sellers, the
Riley panel nevertheless concluded that the claims at issue were precluded because they rested
on allegations that misrepresentations caused the plaintiffs to “purchase and retain” covered
securities. 292 F.3d at 1345 (emphasis omitted in part). Because the allegations mixed
precluded and non-precluded theories, Riley concluded that SLUSA pre-empted the plaintiff’s
claims.
22
IPM’s funds, each count also expressly incorporates by reference or reiterates
allegations that Merrill Lynch is liable for IPM’s losses because it aided and
abetted PFA’s fraudulent misrepresentations. Accordingly, the “in connection with
the purchase or sale” of a security element of SLUSA preclusion has been met
here.
C.
Finally, Merrill Lynch must establish the last element of SLUSA preclusion
-- that the alleged misrepresentations and omissions were “in connection with the
purchase or sale” of a “covered security.” The parties agree that mutual funds
qualify as “covered securities” under SLUSA, but life insurance policies do not.2
The “retirement trust accounts” PFA marketed to IPM were hybrid investments
comprised of both a life insurance component and a mutual fund component.
2
SLUSA says the phrase “covered security” means
a security that satisfies the standards for a covered security specified in paragraph
(1) or (2) of section 18(b) of the Securities Act of 1933 [15 U.S.C.A. § 77r(b)], at
the time during which it is alleged that the misrepresentation, omission, or
manipulative or deceptive conduct occurred, except that such term shall not
include any debt security that is exempt from registration under the Securities Act
of 1933 [15 U.S.C.A. § 77a, et seq.] pursuant to rules issued by the Commission
under section 4(2) of that Act [15 U.S.C.A. § 77d(2)].
15 U.S.C. § 78bb(f)(5)(E). Under § 18(b) of the Securities Act of 1933, the phrase “covered
security” includes “a security issued by an investment company that is registered, or that has
filed a registration statement, under the Investment Company Act of 1940.” 15 U.S.C.
§ 77r(b)(2). Because mutual funds are issued by investment companies registered under the
1940 Act, see United States v. NASD, 422 U.S. 694 (1975), they qualify as “covered securities”
under SLUSA.
23
Based on binding precedent, hybrid securities like these are “covered securities.”
In Herndon v. Equitable Variable Life Insurance Co., 325 F.3d 1252 (11th
Cir. 2003) (per curiam), the plaintiff alleged fraud in connection with a variable
life insurance policy, which contained both a variable annuity (a “covered
security”) and a life insurance policy (not a “covered security”). Because variable
annuities are “covered securites,” a panel of this Court held that the variable life
insurance policy was a covered security as well:
Equitable [was] required to and did register the respective plaintiffs’
individual annuity accounts with the SEC pursuant to the Investment
Company Act of 1940. The fact that a variable life insurance policy
account adds a life insurance component to the investment does not
negate the fact that the statutory requirements of SLUSA have been
met with regard to the annuity component of the insurance policy. As
such, a variable life insurance policy is a “covered security” under
SLUSA.
Id. at 1254.
Herndon controls this case. Like in Herndon, the mutual fund component of
the “retirement trust accounts” marketed to IPM are “covered securities” that had
to be registered under the Investment Company Act of 1940. Thus, the “retirement
trust account” also is a “covered security,” even though it includes a life insurance
component that does not qualify as a “covered security.”
IPM tries to distinguish Herndon by suggesting that we evaluate the security
at the time PFA made the fraudulent misrepresentations. At that time, IPM says,
24
the mutual fund component had not yet been purchased, and, thus, the retirement
trust accounts were not yet “covered securities.” This argument cannot be squared
with Grippo. In that case, we held that misrepresentations were “in connection
with the purchase . . . of a security” under § 10(b) even though no securities were
purchased because the defendant “accepted and deposited [an investor’s] monies as
payment for securities.” 357 F.3d at 1224. What controlled in Grippo was the
product that was marketed to the investor, not what the defendant actually did with
the investor’s money. The same rule applies under SLUSA. Because PFA
marketed “covered securities” to IPM, any misrepresentations and omissions PFA
made were “in connection with the purchase or sale of a covered security.”
In short, Merrill Lynch has established all four elements of SLUSA
preclusion: (1) this case qualifies as a “covered class action”; (2) the second
amended complaint asserts state law causes of action; and (3) the state law claims
are based on misrepresentations or omissions “in connection with the purchase” of
(4) a “covered security.” Accordingly, we affirm the district court’s order
dismissing IPM’s state law claims because SLUSA precluded them.
III.
The only remaining question is whether the second amended complaint
adequately pleaded a federal securities fraud claim under § 10(b) and Rule 10b-5.
25
At the outset, we acknowledge that this argument is an awkward one for IPM
because, as we explained in Section II, supra, it spent the bulk of its brief arguing
that its allegations would not support a claim under § 10(b). The Federal Rules of
Civil Procedure, however, allow plaintiffs to plead inconsistent theories, see Fed.
R. Civ. P. 8(d)(3) (“A party may state as many separate claims . . . as it has,
regardless of consistency.”), so we accept IPM’s § 10(b) allegations as a good faith
attempt to plead a valid claim. Nevertheless, IPM has abandoned any argument
that the second amended complaint validly pleaded a § 10(b) claim.
A securities fraud claim brought under § 10(b), 15 U.S.C. § 78j(b), and Rule
10b-5, 17 C.F.R. § 240.10b-5, contains six elements: (1) a material
misrepresentation or omission; (2) made with scienter; (3) a connection with the
purchase or sale of a security; (4) reliance on a misstatement or omission; (5)
economic loss; and (6) a causal connection between the material misrepresentation
or omission and the loss, commonly called “loss causation.” Dura Pharms., Inc. v.
Broudo, 544 U.S. 336, 341-42 (2005). Under Fed. R. Civ. P. 9(b), allegations
about the material misrepresentations or omissions “must state with particularity
the circumstances constituting fraud.” See also Ziemba v. Cascade Int’l, Inc., 256
F.3d 1194, 1202 (11th Cir. 2001). Moreover, “[t]he § 10(b) implied private right
of action does not extend to aiders and abettors. The conduct of a secondary actor
26
must satisfy each of the elements or preconditions for liability . . . .” Stoneridge
Inv. Partners, LLC v. Scientific-Atlanta, 128 S. Ct. 761, 769 (2008).
According to IPM, the district court “based its [dismissal] of IPM’s Section
10(b) and Rule 10b-5 claims almost exclusively on IPM’s failure to plead the
requisite scienter[.]” Appellant’s Br. at 55 n.18 (emphasis added). But in fact, the
district court spent sixteen pages describing five fatal flaws in the second amended
complaint’s § 10(b) claim: (1) it pleaded aiding-and-abetting liability as to Merrill
Lynch, rather than primary liability; (2) it failed to plead the allegedly fraudulent
statements with particularity; (3) it failed to plead scienter adequately; (4) it failed
to plead reasonable reliance; and (5) it failed to plead loss causation. IPM’s brief
contests only the district court’s conclusion about scienter. Because it has failed to
challenge the district court’s holdings on the other four grounds, IPM has
abandoned the argument that it has adequately pleaded a § 10(b) claim. See United
States v. Campa, 529 F.3d 980, 989 (11th Cir. 2008) (arguments not made in a
party’s initial brief are abandoned); Adler v. Duval County School Bd., 112 F.3d
1475, 1480 (11th Cir. 1997) (claim is abandoned on appeal if the appellant offers
no “grounds in [its] briefs for finding trial court error”). Accordingly, we affirm
the district court’s dismissal of IPM’s federal securities fraud claim too.
IV.
27
In sum, we affirm the district court’s order dismissing IPM’s second
amended complaint because IPM’s state law claims are precluded by SLUSA, and
because IPM failed to adequately plead a federal securities fraud claim.
AFFIRMED.
28