# Petition for Writ of Certiorari — Kircher v. Putnam Funds Trust

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2006
- **Citation:** 547 U.S. 633

## Text

No.

IN THE
Supreme Court of the Anited States

CARL KIRCHER, ET AL.,
Petitioners,

Vv.

PUTNAM FUNDS TRUST, ET AL..,
Respondents.

On Petition for a Writ of Certiorari
to the United States Court of Appeals
for the Seventh Circuit

PETITION FOR A WRIT OF CERTIORARI

ROBERT L. KING DAVID C. FREDERICK

701 Market Street Counsel of Record

Suite 350 PRIYA R. AIYAR

St. Louis, Missouri 63101 KELLOGG, HUBER, HANSEN,

(314) 241-4844 TODD, EVANS & FIGEL,
P.L.L.C.

1615 M Street. N.W.

Suite 400

Washington, D.C. 20036
September 29, 2005 (202) 326-7900

QUESTIONS PRESENTED

1. Whether the court of appeals had jurisdiction, con-
trary to the holdings of three other circuits, to review a
district court order remanding for lack of subject-matter
jurisdiction a suit removed under the Securities Litigation
Uniform Standards Act of 1998 (““SLUSA”), notwithstand-
ing 28 U.S.C. § 1447(d)’s bar on appellate review of re-
mand orders based on lack of subject-matter jurisdiction
and the district courts’ conclusion that petitioners’ claims

are not preempted by and thus not removable under
SLUSA.

2. Whether the court of appeals erred in holding, in
acknowledged conflict with three other circuits, that
SLUSA preempts claims brought by holders of securities,
notwithstanding SLUSA’s language limiting preemption
to claims “in connection with the purchase or sale of a
covered security,” and this Court's interpretation of iden-
tical language to cover only claims brought by purchasers
or sellers in Blue Chip Stamps, Inc. v. Manor Drug Stores,
421 U.S. 723 (1975).

il

LIST OF PARTIES TO THE PROCEEDINGS

Petitioners Carl Kircher, Beth Dudley, Steve Dudley,
Avery Jackson, Dorothy Leuttinger, T.K. Parthasarathy,
Robert Potter, Terry Spurgeon, as Custodian for the Bene-
fit of James E. Spurgeon, and Gary Vogeler were plain-
tiffs in the district court and appellees in the court of
appeals.”

Robert Brockway, Sharon Smith, Stuart A. Smith, and
Edmund Woodbury also were plaintiffs in the district
court but did not participate in the court of appeals pro-
ceedings, and thus are not parties to the petition for a
writ of certiorari.

The following were defendants in the district court and
appellants in the court of appeals, and are respondents
here:

Artisan Funds, Inc.

Artisan Partners Limited Partnership

Columbia Acorn Trust

Columbia Wanger Asset Management L.P.

Deutsche Investment Management Americas Inc.

Janus Capital Management LLC

Janus Investment Fund

Pacific Life Insurance Company

Putnam Funds Trust

Putnam International Equity Fund

Putnam Investment Funds

Putnam Investment Management, LLC

Scudder International Fund, Inc.

Van Kampen Investment Advisory Corporation

Van Kampen Series Fund, Inc.

Petitioners each filed suit as individuals and on behalf of all others
sip ularly situated.

il

AIM Advisors, Inc., AIM International Funds, Inc.,
Evergreen International Trust, Evergreen Investment
Management Company LLC, T. Rowe Price International
Funds, Inc., T. Rowe Price International, Inc., Templeton
Funds, Inc., Templeton Global Advisors Limited, Tem-
pleton Global Smaller Companies Fund, Inc., Templeton
Growth Fund, Inc., and Templeton Investment Counsel
LLC also were defendants in the district court but did not
participate in the court of appeals proceedings, and thus
are not parties to the petition for a writ of certiorari.

Be ts
Sige Og Se

Vv

TABLE OF CONTENTS

Page
QUESTIONS PRESENTED ..................cccccccssesssereeeesteeeeeeees i
LIST OF PARTIES TO THE PROCEEDINGG.................. il
TABLE OF AUTHORITIES ............cccccccccceesereeeeenteeeeeeees vil
STEITEIITINIIEN ‘<icidethtntesinesbeseneapedusaseoces sdiilamilputdiiansdibindiaia ]
SU IIIT IIIT setinncicnccdsetusehntinndcntennchencntetnenesstetesesssverencee 4
JURISDICTION ....... iiciiddeacaniscenitanaibebisdatieenenecesetiabesesnichensstenesies 4

STATUTORY AND REGULATORY PROVISIONS
SiITIIIIIIE assincccbsndaniidlebiildameuteiacndhtdcnesteneengntnonssecencsesesescesees 4

STATEMENT OF THE CASE:

A. The Statutory Framework .......................ccccccceceeeeess 4
B. Petitioners’ Common-Law Claims .............0.00c0008 5
I sncsulvenncanded )

REASONS FOR GRANTING THE PETITION:

1. THE COURT SHOULD GRANT CERTIO.-

~-RARI TO REVIEW THE SEVENTH CIR.
CUITS HOLDING THAT REMAND OR.
DERS UNDER SLUSA ARE SURJECT TO
APPELLATE REVIEW .............. pubeiiebsdoninatateandentesove 13

A. The Seventh Circuit's Exercise Of Appel-
late Jurisdiction Squarely Conflicts With

Decisions Of Three Other Circuits .................. 13
1. Second Circuit — Spielman ...............6...00005 14
a. es GED = SUG. 1. nncdccnncnscccocoss 15

3. Eleventh Circuit — Williams ...................... 15

vi

B. The Seventh Circuit's Exercise Of Appel-
late Jurisdiction Is Inconsistent With
This Court’s Precedents And The Lan-
SINT Eee aicniteintibnteinnsncbdatnatebanientinintnnaiils 17

C. The Reviewability Of Remand Orders
Under SLUSA Is An Issue of Great Im-
portance Warranting This Court's Reso-
II. csthdsncisiemmainiandnaptaniitiianentngrenitatidianiimesbnines 20

Il. THIS COURT HAS GRANTED CERTIO-
RARI IN MERRILL LYNCH V. DABIT TO
DECIDE WHETHER SLUSA PREEMPTS
CLAIMS BROUGHT BY HOLDERS OF
Fe Die erensccocscsiinetensicuntensinncanigumnitagarevinsianes 23

A. The Seventh Circuit’s Decision That
SLUSA Preempts Holder Claims Square-
ly Conflicts With The Decisions Of Three

rT vicccnscitnitininnisscinemmmemenvcnnionsnetie 24
1. Second Circuit — Dabit ................:cccceeseeeeees 24
Z. Hbgtaths Civewit — Gir GG0 ....ccccccccsccsccvcsscsscesees 26
3. Eleventh Circuit — Rilev.......................00006 26

B. The Seventh Circuit’s Interpretation Of
SLUSA’s Preemptive Scope Is Contrary
To This Court’s Blue Chip Stamps Deci-
sion And Congressional Intent ........................ 27

C. Whether SLUSA Preempts’ Holder
Claims Is An Issue Of Great Importance........ 29

Te
APPENDIX

vil

TABLE OF AUTHORITIES
Page
CASES
Abada v. Charles Schwab & Co., 300 F.3d 1112
NR re Soc ee oe 2, 10, 15, 21
Bates v. Dow AgroSciences LLC, 125 S. Ct. 1788
STEED csliihuriicsteinantiilaiemsemericaictnseiiliadcadtaineiaaibcisduniphiatiabaiinaiid 28, 29
Birnbaum v. Newport Steel Corp., 193 F.2d 461
PRED: TUITE cciailisicindia tcihcpenibinniiaaiiniidiasibaatinianiiiasibiieebiadtaeieesitesini’ 27
Blue Chip Stamps v. Manor Drug Stores, 421 U.S.
Pe cctinctsstncnnsteninies 3, 12, 13, 24, 25, 26, 27, 28, 29
Bradfisch v. Templeton Funds, Inc.. Case No. 03-CV-
0760-MJR (S.D. Ill. Jan. 23, 2004) 200.0... ceceeeeeeeeee i)
Chick Kam Choo v. Exxon Corp., 486 U.S. 140 (1988) .....19
Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
395 F.3d 25 (2d Cir. 2005), cert. granted, No. 04-
1371 (U.S. Sept. 27, 2005)..........3, 23, 24, 25, 26, 29, 30
Disher v. Citigroup Global Markets Inc., 419 F.3d
hs SID cei intinnitihinininisndabtensibielaeibiies 17, 20-21, 27
Gravitt v. Southwestern Bell Tel. Co., 430 U.S. 723
SITET Ui ccianiteli detieiasidinndcitliddiiclnatdabatiasidigiimidddapyisiiiminadiiabibummiing 17,18
Green v. Ameritrade, Inc., 279 F.3d 590 (8th Cir.
STII itecesatiaibaduagansbevatineinasdudeaessadeideipeiinnibinntinubiciatedneiiniiins 3, 26
Kontrick v. Rvan, 124 8S. Ct. 906 (2004) ................ 19, 20, 21
Medtronic, Inc. v. Lohr, 518 U.S. 470 (1996) ...0....00..00000. 28

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

No. 04-1371 (U.S. Sept. 27, 2005)...000 ee 3, 23, 30

vill

Riley v. Merrill Lynch, Pierce, Fenner & Smith, Inc..,
292 F.3d 1334 (11th Cir. 2002).................... 3, 16, 26, 27

Rowinski v. Salomon Smith Barney Inc., 398 F.3d
SEE CEES ERE, SITTIa sccshrictcietinestieieibiecncencssinatinteadiendiniatiaaneaantainame 17

Scarborough v. Principi, 124 S. Ct. 1856 (2004) ..19, 20, 21
Silkwood v. Kerr-McGee Corp., 464 U.S. 238 (1984)........ 29

Spielman v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 332 F.3d 116 (2d Cir. 2003) .....2, 10, 14, 15, 20, 21

Thermtron Products, Inc. v. Hermansdorfer, 423 U.S.
SEITEN icciinntttienlincteuiteieiniedhininaiheieeeicinbapeciaiiieamladieipiihdemeiidapil 21, 22

Things Remembered, Inc. v. Petrarca, 516 U.S. 124
IIT cdicelasesiiie abasic iin lina iedinlhlen ih idimaaanidiiis 17, 18, 21

United Investors Life Ins. Co. v. Waddell & Reed
Inc., 360 F.3d 960 (9th Cir. 2004)................ 2, 10, 15, 21

Williams v. AFC Enters., Inc., 389 F.3d 1185 (11th
EE ee a a Oe Oe 2.15, 16

STATUTES AND REGULATIONS

Class Action Fairness Act of 2005, Pub. L. No. 109-2,
SE ESTES “RR ESe ane ene me See ee Sw Ee ie 22

§ 4(a)(2), 119 Stat. 11 (to be codified at 28 U.S.C.
a 22

§ 5(a):

119 Stat. 12 (to be codified at 28 U.S.C.
iF TIED dua: indetubiesiniiaiainiedssiidindineiiniatiaiatiiagll 22

ix

119 Stat. 13 (to be codified at 28 U.S.C.

ON DOTTIE LD IT AE OTA T 22
Private Securities Litigation Reform Act of 1995,

Pub. L. No. 104-67, 109 Stat. 737 .00.........cccccceseseeeeereeees 4

Securities Act of 1933, 15 U.S.C. §§ 77a et seq. ..........00..... 5

BB UBL. © TIE cocccccsccccccsessese 2, 5, 9, 11, 16, 18, 19, 23

BD BAI. © FED cccncrvcsecsesesivinneciensend 5, 9, 11, 18, 20, 23

BB De © Fe ccc cncacatsesencnnnnnpesncnmesseincosined 5, 19, 23

BS DBA. © Te ee Rc cceccccnesconsessssececnnscctoniensonnnntenin 1]

i a 4
Securities Exchange Act of 1934, 15 U.S.C. §§ 78a

SEGUE: ieccciadndtinatinhonineinimmeniibimemniininipedensnelial 5, 10, 12

§ 10(b), 15 U.S.C. § 78)(b) .......... 3, 10, 12, 13, 24, 26, 27

eS, Pee ele et UE intisdicitremnncntntientnniiapecnnnsitaninnnenininsbabile 4

§ 28(f)(1), 15 U.S.C. § 78bb(f)(1)...... eee 5, 15

§ 28(f)(2), 15 U.S.C. § T8bb(f)(2)....... eee eeeeeeeeeee 5, 15

§ 28(f)(3)(D), 15 U.S.C. § 78bb(F)(3B)(D) «0.0. eeeeee 5
Securities Litigation Uniform Standards Act of 199%,

Pub. L. No. 105-353, 112 Stat. 3227............. ce eeeecee eens 2

BS UIC. § CBa-DeG IID 000 ccces: ccoscccevcsvscsnszccsscnccesonsionl 6

RE. © Pee ctcotccsctnsencnscincccnemnssecentescettinvasasevmunsnsitions 4

a i penne 10, 17

28 U.S.C. § 1447(d).................05.. 2, 10, 11, 13, 15, 16, 17, 20

17 C.F.R.:
§ 240.10b-5 (Rule 10b-5) .................. 3, 12, 13, 24, 26, 27
SEE SS ee ee AMO SENN RT 6

LEGISLATIVE MATERIALS
H.R. Conf. Rep. No. 105-803 (1998) .............ccccccccceeeeeeeeeeeees 4

Mutual Funds - Trading Practices and Abuses that
Harm Investors: Hearing Before the Subcomm.
on Federal Financial Management, Government
Information, and International Security of the
Senate Comm. on Homeland Security and Gov-
ernmental Affairs, 108th Cong. (Nov. 3, 2003)
(Statement of New York Attorney General Eliot

Spitzer, available at http://hsgac.senate.gov/
eR ciderictdideinsesimenvidéedienenliateesnbianiods 6-7

OTHER MATERIALS

Jennifer Barrett, “Inexcusable,” MSNBC.com, Nov.
11, 2003, available at http://www.msnbc.com/id/
3403565/site/mnewsweek ...........0..0.ccccccccceccececcceeecececeeeees 29

Financial Policy Forum, Special Policy Brief 13 —
Overview of Mutual Fund Scandal: “A Gauntiet
of Fraud” (Dec. 14, 2003; updated May 21, 2004),
available at http://www.financialpolicy.org/
SEED ciccsischinscninseicidiiigiitlniniddtasiieeiamnonastibbunertaibiintalamisidd 6

Investment Company Institute, Trading Abuse Re-
forms & Actions, available at http://www.ici.org/
I iccuscapidiihicincsintiamnummecinataiisicbaubiatigihindbdididainiediiiiie 7

xi

Jennifer O’Hare, Preemption under the Securities
Litigation Uniform Standards Act: If It Looks
Like a Securities Fraud Claim and Acts Like a
Securities Fraud Claim, Is It a Securities Fraud
Claim?, 56 Ala. L. Rev. 325 (2004) .............ccccccceeeeeeeees 23

United States Government Accountability Office,
Mutual Fund Trading Abuses: Lessons Can Be
Learned from SEC Not Having Detected Viola-
tions at an Earlier Stage (Apr. 2005), available at
http://www.gao.gov/new.items/d05313.pdf................ 1,7

Eric Zitzewitz, Who Cares About Shareholders?
Arbitrage-Proofing Mutual Funds, 19 J.L. Econ.
Sy is TUTE OIIITTT El idiep sicdinensincibiickguttcindadinabececorsdiniubadiniansées 29

Carl Kircher, Beth Dudley, Steve Dudley, Avery Jack-
son, Dorothy Leuttinger, T.K. Parthasarathy, Robert Pot-
ter, Terry Spurgeon, as Custodian for the Benefit of
James E. Spurgeon, and Gary Vogeler (collectively, “peti-
tioners”) respectfully petition for a writ of certiorari to re-
view the judgment of the United States Court of Appeals
for the Seventh Circuit in this case.

INTRODUCTION

These eight consolidated cases involve two frequently
litigated issues of securities law of vital importance to the
administration of the federal courts and the investing
community. The circuits are deeply divided on the juris-
dictional and substantive questions presented. In the two
opinions below, the Seventh Circuit created conflicts with
four other circuits, leaving petitioners and investors like
them without a remedy for a practice by arbitrageurs that
costs investors an estimated $5 billion every year. |

Petitioners are long-term investors in international mu-
tual funds. They sued respondent funds and their man-
agers in state court, alleging that the funds negligently or
recklessly failed to calculate share prices accurately and
thereby exposed petitioners to an investment-diluting
practice known as “stale price trading” or “market tim-
ing.” That practice involves arbitrageurs trading on time
differences between the closing of U.S. markets and for-
eign exchanges. It dilutes the value of investors’ long-
term holdings as well as their voting rights. Because
market timing injures non-trading shareholders of mutual
funds - not purchasers or sellers — petitioners sought to
represent classes of individuals who held shares in funds
that experienced market-timing activity.

The respondent mutual funds removed the lawsuits to
federal district court and moved for dismissal under the

' See United States Government Accountability Office, Mutual Fund
Trading Abuses: Lessons Can Be Learned from SEC Not Having De-
tected Violations at an Earlier Stage 4-5 (Apr. 2005) (GAO Report’).
avatlable at http://www.gao.gov/new.items/d053 L3.pdf.

2

Securities Litigation Uniform Standards Act of 1998
(“SLUSA”). Petitioners moved for remand based on lack
of subject-matter jurisdiction. All of the district court
judges in these eight consolidated cases concluded that
SLUSA did not preempt petitioners’ claims, because the
claims were in connection with the retention or holding of
securities, rather than “in connection with the purchase or
sale of a covered security.” 15 U.S.C. § 77p(b). The dis-
trict judges further found that, because petitioners’ claims
were not preempted, they were also not removable under
SLUSA and therefore had to be remanded to state court
for lack of subject-matter jurisdiction.

On respondents’ appeal of those remand orders, the
Seventh Circuit issued two decisions that independently
warrant certiorari. First, the court held that 28 U.S.C.
§ 1447(d), which precludes appellate review of remands
based on a district court's conclusion that it lacked
subject-matter jurisdiction, did not bar review of the or-
ders in these cases. The Seventh Circuit rejected the dis-
trict courts’ characterization of their own orders as
grounded on a lack of jurisdiction. See Pet. App. 10a-17a
(“Kircher I~). In doing so, the Seventh Circuit acknowl-
edged that it was creating a conflict with the Second and
Ninth Circuits, which have held that § 1447(d) bars re-
view of a district court’s remand order under SLUSA. See
Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
332 F.3d 116 (2d Cir. 2003); United Investors Life Ins. Co.
v. Waddell & Reed Inc., 360 F.3d 960 (9th Cir. 2004):
Abada v. Charles Schwab & Co... 300 F.3d 1112 (9th Cir.
2002). Since the Seventh Circuit's decision on this re-
mand issue, the Eleventh Circuit has rejected the ap-
proach adopted by the Seventh Circuit and has agreed
with the Second and Ninth Circuits. See Williams v. AFC
Enters., Inc.. 389 F.3d 1185 (11th Cir. 2004).

After concluding that it had appellate jurisdiction, the
court then issued an opinion on the merits, where it again
created a split. this time with the Second, Eighth, and
Eleventh Circuits. Those circuits hold that SLUSA’s pre-

3

emption provision — which preempts class-action securi-
ties fraud claims “in connection with the purchase or sale
of a covered security” — does not apply to claims brought
by holders of securities, as opposed to purchasers or sell-
ers. See Dabit v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 395 F.3d 25, 43 (2d Cir. 2005), cert. granted, No. 04-
1371 (U.S. Sept. 27, 2005); Riley v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 292 F.3d 1334 (11th Cir. 2002);
Green v. Ameritrade, Inc., 279 F.3d 590 (8th Cir. 2002). In
those ‘courts, the “in connection with” language of SLUSA
has the same meaning as the nearly identical language in
§ 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78}(b), and its corresponding Rule 10b-5, 17 C.F.R.
§ 240.10b-5, which this Court has interpreted to cover
only claims brought by purchasers or sellers. See Blue
Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).
The Seventh Circuit, by contrast, concluded below that a
class-action plaintiff need not be a purchaser or seller of
securities for SLUSA to preempt his or her claims. See
Pet. App. la-9a (“Kircher 11°). Two days ago, this Court
granted certiorari to resolve this issue in Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Dabit, No. 04-1371.

The Seventh Circuit's decision below not only created a
conflict with three other circuits and countless district
courts, but also completely extinguished an entire cate-
gory of claims that have existed for more than 50 vears
and with this Court's blessing for the last 30. See Blue
Chip Stamps, 421 U.S. at 739 n.9 (noting availability of
“remedies ... to nonpurchasers and nonsellers under
state law”). Shareholders like petitioners who have no
§ 10(b) or Rule 10b-5 claim because they do not allege mis-
conduct “in connection with’+the purchase or sale of a se-
curity under those provisions are now simultaneously de-
nied a cause of action under state law because their
claims are deemed preempted under SLUSA as “in con-
nection with” the purchase or sale of a security. The Sev-
enth Circuit's holdings thus snuff out the claims of tens of
millions of mutual fund investors who have collectively

4

suffered an annual multi-billion-dollar dilution in the
value of their holdings from the funds’ negligent and reck-
less practices. The Seventh Circuit's decision strips such
investors of any direct private cause of action, on the the-
ory that their “claims must be left to public enforcement.”
Pet. App. 8a.

OPINIONS BELOW

The district courts’ opinions granting plaintiffs’ motions
to remand (Pet. App. 23a-64a) are unreported. The court
of appeals’ opinions finding appellate jurisdiction (id. at
10a-17a), and reversing and remanding the district courts’
judgments with instructions to undo the remand orders
and to dismiss plaintiffs’ state-law claims (id. at la-9a),
are reported at 373 F.3d 847 and 403 F.3d 478.

JURISDICTION

The court of appeals entered its judgment on April 5,
2005. A timely petition for rehearing was denied on May
2, 2005. Pet. App. 65a. On July 22, 2005, Justice Stevens
extended the time for filing a petition for a writ of certio-
rari to and including August 30, 2005, id. at 143a, and, on
August 26, 2005, further extended the time for filing to
and including September 29, 2005, id. at 144a. The juris-
diction of this Court is invoked under 28 U.S.C. § 1254(1).

STATUTORY AND REGULATORY
PROVISIONS INVOLVED

Relevant statutory and regulatory provisions are set
forth at Pet. App. 118a-142a.

STATEMENT OF THE CASE

A. The Statutory Framework

In 1995, Congress passed the Private Securities Litiga-
tion Reform Act (“PSLRA”) (codified in part at 15 U.S.C.
$$ 77z-1. 78u) to prevent “strike suits.” or meritless class
actions alleging fraud in the securities market. See H.R.
Conf. Rep. No. 105-803, at 13 (1998). To deter those suits,
the PSLRA imposes stringent pleading and other proce-
dural requirements on securities class-action plaintiffs.
To avoid the PSLRA’s requirements, plaintiffs increas-

5

ingly brought suit against issuers in state court alleging
securities fraud under state statutory or common law.

To prevent private plaintiffs from such alieged circum-
ventions of the PSLRA, Congress passed SLUSA, which
added to the Securities Act of 1933 (“1933 Act”) and the
Securities Exchange Act of 1934 (“1934 Act”) identical
provisions that preempt certain class actions under state
law. Specifically, SLUSA’s preemption 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 purchase or sale of a cov-
ered security; or

(2) 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. § 77p(b): accord id. § 78bb(f)(1). SLUSA au-
thorizes such actions to be removed to federal court:

Any covered class action brought in any State
court involving a covered security, as set forth in
subsection (b) of this section, shall be removable to
the Federal district court for the district in which
the action is pending, and shall be subject to subsec-
tion (b).

Id. § 77p(c): accord id. § 78bb(f)(2)._ Following removal, if
the district court determines that the action is not in
fact within the scope of SLUSA’s preemption provision,

it must remand the action to state court. See id.
§§ 77p(dy(4), 78bb(f)(3)(D).
B. Petitioners’ Common-Law Claims

Petitioners are among the more than 90 million indi-
vidual long-term investors whom the Federal Reserve es-
timates have more than $4 trillion in long-term savings
invested in mutual funds with substantial holdings in

6

international stocks. See Financial Policy Forum, Special
Policy Brief 13 — Overview of Mutual Fund Scandal: “A
Gauntlet of Fraud” (Dec. 14, 2003; updated May 21, 2004),
available at http://www.financialpolicy.org/fpfspb13.htm.
The price at which one share of a mutual fund is sold and
redeemed is equal to the value of the fund’s portfolio of
securities, known as the fund's net asset value (“NAV”),
divided by the number of outstanding shares. The NAV is
calculated once a day at 4:00 p.m. Eastern Time. When a
fund holds assets that trade in competitive markets, it
must value those assets at their market price. See 15
U.S.C. § 80a-2(a)(41)(B)(ii); 17 C.F.R. § 270.2a-4(a).

Respondents value their assets using the final closing
price of the foreign security in its home market. For do-
mestic securities, that method yields a current price. For
securities of foreign issuers, however, the method pro-
duces prices that are up to 15 hours old and may no
longer reflect the current value of the foreign security,
causing mutual fund share prices to be either artificially
high or artificially low. For example, if the United States
market moves up following the close of Asian and Euro-
pean markets, investors can predict that foreign markets
will move up once trading begins on their next trading
day, and a share price based on foreign securities’ final
closing price will be artificially low. Or, as the Seventh
Circuit explained below, “[s]tock of a Japanese firm that
closes in Tokyo at ¥10,000 might trade in Frankfurt at
€ 75.22 (equivalent to ¥10,500) between the close in To-
kyo and the close in New York -— but the mutual fund
nonetheless would value each share at ¥10,000, because
that was its most recent price in the issuer's home mar-
ket.” Kircher II, Pet. App. 2a.

In early September 2003, New York Attorney General
Eliot Spitzer announced that his office’s investigation of
the mutual fund industry “revealed that some of the na-
tion's largest mutual fund companies permitted” a prac-
tice called “market timing.” Mutual Funds — Trading
Practices and Abuses that Harm Investors: Hearing

7

Before the Subcomm. on Federal Financial Management,
Government Information, and International Security of
the Senate Comm. on Homeland Security and Govern-
mental Affairs, 108th Cong. (Nov. 3, 2003) (Statement of
New York Attorney General Eliot Spitzer, available at
http://hsgac.senate.gov/_files/ACF1DE.pdf). Market tim-
ers exploit the time differences between U.S. and foreign
markets for short-swing profits. They do so by regularly
purchasing and redeeming mutual fund shares on days
when the foreign securities in the fund’s portfolio are un-
dervalued or overvalued, respectively. Studies have esti-
mated that such trading costs non-trading shareholders
like petitioners nearly $5 billion each year by diluting the
value of their investments. See GAO Report at 4-5.

Every purchase of a mutual fund share at an artificially
low price reduces the value of the investments of all exist-
ing, non-trading shareholders because the purchaser ac-
quires a larger share of the fund than if the fund had cal-
culated the NAV more accurately. Similarly, every re-
demption of a share at an artificially high price reduces
the value of the investments of non-trading shareholders
because the redemption depletes their pooled assets more
than if the fund had not relied on stale prices. The mu-
tual fund industry’s main trade organization has conceded
that “the discovery of trading abuses involving mutual
funds ... put at risk the reputation of the entire fund in-
dustry.” “shook the industry to its core,” and “triggered a
degree of Congressional oversight of mutual funds rarely
seen in the industry's history.””

Petitioners filed eight lawsuits in state court, charging
that respondents used pricing methods negligently’ or

* Investment Company Institute, Trading Abuse Reforms & Actions.
available at http://www.ic..org/issues/timing.

* See Pet. App. 69a (4 55) (Kircher), 74a. 76a (¥) 55. 68) (Potter).
8la (4 59) (Parthasarathy). 86a (§ 53) (Dudley), 9la-92a (4 53) (Voge-
ler), 96a-97a (© 52) Jackson), 109a-110a (4 53) (Spurgeon).

8

recklessly’ in a way that exposed petitioners’ investments
to dilution from market timing. The complaints alleged
that, because respondents should have known of the exis-
tence of market timing and of alternative pricing proce-
- dures that would prevent it, respondents breached their
duties of care to petitioners and similarly situated owners
or shareholders” of respondent funds.* For example, peti-
tioners alleged that respondents failed to make pricing
adjustments based on correlations between movements in
the U.S. and foreign markets. '

Petitioners filed their claims as class actions on behalf
of holders of the relevant securities: specifically, “all per-
sons in the United States who have held shares of |the
fund] for more than fourteen days from the date of pur-
chase to the date of sale (redemption) or exchange.”” The
Spurgeon complaint took the additional step of explicitly
excluding any claims based on purchase or sale. See Pet.
App. 106a (4 39) (Spurgeon) (defining plaintiff class as “all
persons in the United States who, through their owner-
ship of [the fund’s] products, held units of any [fund] sub-

* See Pet. App. 70a (% 60) (Kircher), 75a, 76a-77a (%" 60, 73) (Pot-
ter), 82a (4 64) (Parthasarathy), 86a-87a (4 54) (Dudley), 92a (" 54)
(Vogeler), 97a (9 53) (Jackson), Llla (4% 56-57) (Spurgeon).

” See Pet. App. 69a (© 56) (Kircher), 74a-77a (V4 56, 60, 69, 73) (Pot-
ter), Sla-82a (449 60, 64) (Parthasarathy). 85a-86a (© 49) (Dudley). 9la
(* 49) (Vogeler), %« (% 49) (Jackson), 113a-ll4da (© 62) (Spurgeon)
(breach of fiduciary duties).

" Petitioner Spurgeon also alleged violations of several provisions of
the California Business & Profession Code (Count IV). See Pet. App.
L1l5a-116a (*% 67, 69, 73).

' See Pet. App. 66a-68a (*4 17, 32-33) (Kircher). Tla-73a (4 17, 32-
33) (Potter), 7&a-80a (44 22, 37-38) (Parthasarathy), 83a-85a (44 13,
28-29) (Dudley), 88a-90a (8% 13, 28-29) (Vogeler), 93a-95a (1% 13. Za-
2 (Jackson), 108a-104da (*© 31-32) (Spurgeon).

* See Pet. App. 68a (4 41) (Kircher), 73a (€ 41) (Potter), 80a (4 46)
(Parthasarathy), 85a (9 37) (Dudley), 90a (© 37) (Vogeler), 95a (% 37)
(Jackson) (omitting “from the date of purchase to the date of sale (re-
demption) or exchange’).

9

account invested in mutual funds which included foreign
securities in their portfolios and which experienced mar-
ket timing trading activity”); id. (4 40) (excluding “from
this Complaint ... any claims based upon [the fund’s]
conduct in connection with Plaintiff's or any class mem-
ber’s purchase or sale of any [fund]” product or units).
That exclusion is implicit in the other complaints, which
assert negligence and recklessness claims that only non-
trading shareholders possess. Only holders are injured by
market-timing activity: while respondents’ use of stale
prices may cause a purchaser to buy a fund share at an
artificially high price or a seller to redeem a fund share at
an artificially low price, those losses do not depend on
whether other individuals simultaneously engage in mar-
ket timing.

C. Proceedings Below

In each case, the respondent fund removed to federal
district court, arguing, inter alia, that the case fell within
the district court’s removal jurisdiction under SLUSA, see
15 U.S.C. § 77p(c), and that petitioners’ claims were pre-
empted by that Act, see id. § 77p(b). Petitioners moved to
remand the cases to state court for lack of subject-matter
jurisdiction. All three district judges to hear those mo-
tions agreed with petitioners that they lacked jurisdiction.

Specifically, the district judges found that petitioners’
common-law claims were outside the scope of SLUSA’s
preemption provision because the claims were brought —
indeed, could only be brought — by holders of securities,
not purchasers or sellers. See, ¢.g., Pet. App. 26a-27a
(Kircher), 30a (Dudley) (“Only holders of fund shares have
the dilution of ownership interests and voting rights
claims asserted in the complaints.”), 40a (Parthasarathy)
(agreeing that the “‘complaint alleges dilution claims that
only a holder of securities can bring’”) (quoting Bradfisch
v. Templeton Funds, Inc., Case No. 03-CV-0760-MJR, slip
op. at 6 (S.D. Ill. Jan. 23, 2004)), 44a-45a (Potter) (same),
50a-51la (Vogeler) (same), 56a-57a (Jackson) (same). The
district judges concluded that, because petitioners claims

10

were not “in connection with the purchase or sale of a cov-
ered security,” they were not cognizable under § 10(b) of
the 1934 Act; were not preempted by the Act as amended
by SLUSA; and were not removable under SLUSA. See,
e.g., id. at 26a-27a (Kircher), 30a (Dudley), 39a-40a (Par-
thasarathy), 44a-45a (Potter), 50a-51a (Vogeler), 56a-57a
(Jackson), 60a-6la (Spurgeon). The district judges re-
manded all eight cases to state court, expressly basing
each remand order on a lack of subject-matter jurisdic-
tion. See, e.g., id. at 27a (Kircher), 30a (Dudley), 40a
(Parthasarathy), 46a (Potter), 51a (Vogeler), 57a (Jack-
son), 64a (Spurgeon).

On respondents’ appeal of the Kircher remand order,
the Seventh Circuit initially ordered respondents to show
cause why their appeal should not be dismissed for lack of
jurisdiction under § 1447(d), which precludes appellate
review of remand orders based on a district court's conclu-
sion that it lacked subject-matter jurisdiction. The Sev-
enth Circuit then, in acknowledged conflict with the Sec-
ond and Ninth Circuits, issued a published decision hold-
ing that it had jurisdiction to review the district court's
remand order. See Kircher 1, Pet. App. 15a-16a (acknowl-
edging conflicts with Spielman, United Investors, and
Abada).

The Seventh Circuit noted that, under § 1447(d). a re-
mand on a ground listed in § 1447(c) is unappealable. See
id. at 12a. Section 1447(c) provides that a case must be
remanded if the court lacks subject-matter jurisdiction.
The court, however, did not accept the district court's ex-
planation that its remand order was based on a lack of
subject-matter jurisdiction. See id. at 27a. The court
characterized the district court opinion as holding that
removal was proper — notwithstanding the district court's
statements that “removal is appropriate only if the Court
has federal question jurisdiction over Plaintiffs’ claims”
(id. at 24a), and that “SLUSA does not permit removal of
Plaintiffs’ claims” because petitioners’ claims were not
preempted by SLUSA (id. at 26a-27a).

11

To reach its conclusion that the remand orders were
appealable, the Seventh Circuit opined that SLUSA per-
mits removal of all “covered class actions” — that is, all
class actions that seek damages on behalf of more than 50
investors, see 15 U.S.C. § 77p(f)(2)(A) - even though the
Act only preempts “covered class actions” that meet the
further requirement of alleging an untrue statement or
omission, or use of a manipulative or deceptive device, “in
connection with the purchase or sale of a covered secu-
rity,” id. § 77p(b). The court did not address petitioners’
argument that the words “as set forth in subsection (b)” in
§ 77pi(c) make clear that only those actions preempted by
SLUSA are subject to remand. Rather, it held that a dis-
trict court may find removal proper even though a lawsuit
is outside SLUSA’s preemptive scope when the lawsuit is
a “covered class action.” The court found that remand of
such a lawsuit is not based on a lack of subject-matter ju-
risdiction, because “a court lacks ‘subject-matter jurisdic-
tion’ only when Congress has not authorized the federal
judiciary to resolve the sort of issue presented by the
case.” Kircher I, Pet. App. 13a.

The Seventh Circuit concluded that a remand under
SLUSA is unlike a “[njormal” remand that “leave{s] all
substantive issues open to plenary resolution in the state
court,” because whether SLUSA preempts a class action is
“one specific substantive decision ... [that] must be made
by the federal rather than the state judiciary.” /d. at 15a.
The Seventh Circuit reasoned that, under SLUSA, state
judges are incapable of making a preemption ruling. and
thus “it is now or never for appellate review of the ques-
tion whether an action under state law is preempted.” /d.

Having determined that it could exercise appellate ju-
risdiction over the district court's remand order in the
Kircher case consistent with § 1447(d), the Seventh Cir-
cuit consolidated these eight cases, which present identi-
cal issues, for briefing and decision on the merits. The
Seventh Circuit began by rejecting petitioners’ renewed
jurisdictional objections and stating that, under Aircher 1.

12

the remand orders in all of the lawsuits were appealable.
On the merits, the Seventh Circuit then held that SLUSA
completely preempted petitioners’ state-law claims.

In so holding, the Seventh Circuit recognized that
“le]very court of appeals to encounter SLUSA has held
that its language has the same scope as its antecedent in
Rule 10b-5.” Kircher II, Pet. App. 5a. The court pur-
ported to agree with that conclusion, observing that
SLUSA was designed to prevent Rule 10b-5 private plain-
tiffs from migrating to state court to avoid the PSLRA.
The court acknowledged that its decision conflicted with
prior decisions of the Second, Eighth, and Eleventh Cir-
cuits; that, in Blue Chip Stamps, the Supreme Court had
held that investors who neither purchase nor sell securi-
ties have no cause of action under § 10(b) and Rule 10b-5;
and that the Spurgeon complaint defined a class of non-
trading shareholders who could not bring a private action
under Rule 10b-5. Jd. at 5a-7a.”

The Seventh Circuit nevertheless concluded that the
Spurgeon plaintiffs claims were “in connection with the
purchase or sale” of securities and were preempted by
SLUSA. The court read Blue Chip Stamps’ holding that
only purchasers or sellers can bring claims under § 10(b)
and Rule 10b-5 not as an interpretation of the “in connec-
tion with the purchase or sale” language in the 1934 Act.

” The Seventh Circuit ruled that the complaints in the other cases
did not succeed in defining classes of non-trading shareholders because
some of the investors who held shares during the class period undoubt-
edly purchased or sold shares during that period. Petitioners believe
that this ruling is incorrect. Whether the classes include some indi-
viduals who happen also to be purchasers or sellers is irrelevant. The
complaints assert negligence and recklessness claims on behalf of class
members who were injured by market timing. which. as explained
above. see supra p. 9. ts a clan that only holders can assert. Purchas-
ers or sellers could not bring the claims asserted in the complaints,
because they are not injured by market timing. In any event, because
the Seventh Circuit did find that the Spurgeon complaint defined a
class of holders wrthout claims under Rule 10b-5, the court's error on
this point is not material to the petition.

13

Rather, the court viewed the Blue Chip Stamps rule as a
policy-based, judicial limitation on the private right of ac-
tion to enforce § 10(b) and Rule 10b-5 that is not grounded
in the text of § 10(b). See id. at 7a (stating that “Blue
Chip Stamps came out as it did” because “the Court
wanted to confine [private] actions to situations where
litigation is apt to do more good than harm”). The court
concluded that, “[b]y depicting their classes as containing
entirely non-traders, plaintiffs do not take their claims
outside § 10(b) and Rule 10b-5; instead, they demonstrate
only that the claims must be left to public enforcement.”
Id. at 8a.

REASONS FOR GRANTING THE PETITION

I. THE COURT SHOULD GRANT CERTIORARI TO
REVIEW THE SEVENTH CIRCUIT'S HOLDING
THAT REMAND ORDERS UNDER SLUSA ARE
SUBJECT TO APPELLATE REVIEW

A. The Seventh Circuit’s Exercise Of Appellate
Jurisdiction Squarely Conflicts With Deci-
sions Of Three Other Circuits

In holding that 28 U.S.C. § 1447(d) does not bar courts
of appeals from reviewing a remand order based on a dis-
trict court’s finding that a plaintiff’s claims are not pre-
empted by SLUSA, the Seventh Circuit acknowledged it
was creating a conflict with the Second and Ninth Cir-
cuits. Those circuits hold that SLUSA’s preemption and
removal provisions are co-extensive, meaning that a state-
law action that falls outside of SLUSA’s preemptive scope
is not properly removed under SLUSA. In the Second
Circuit, Ninth Circuit, and Eleventh Circuit (which
agreed with the former two courts after the decision be-
low), a district court's remand of such a lawsuit is based
on a lack of subject-matter jurisdiction and is not review-
able under § 1447(d).

The Seventh Circuit. by contrast. insisted that SLUSA
authorizes removal of lawsuits that the statute does not
preempt; disregarded the district courts’ own characteri-

14

zations of their remand orders as predicated on a lack of
jurisdiction; and held that the remands of non-preempted
lawsuits were not based on lack of jurisdiction. The divi-
sion between the circuits is clear and stems from two op-
posing interpretations of SLUSA’s removal provision: one
(the Seventh Circuit's) that regards the provision as au-
thorizing removal of all “covered class actions,” and an-
other (the Second, Ninth, and Eleventh Circuits’) that re-
gards it as authorizing removal only of those actions de-
scribed in SLUSA’s preemption provision.

1. Second Circuit - Spielman

In Spielman, the Second Circuit addressed whether it
could review a district court order granting a motion to
remand after determining that the defendant’s alleged
misrepresentations were not “in connection with the pur-
chase or sale” of securities, and that the plaintiff's claims
were therefore not preempted by SLUSA. The Second
Circuit stated that “SLUSA’s removal provision makes
removable any ciass action preempted by 15 U.S.C.
§ 78bb(f)(1)(A) [SLUSA’s preemption provision].”. 332
F.3d at 123. Thus, in the Second Circuit’s view, “SLUSA
only converts into federal claims those state claims that
fall within its clear preemptive scope, thereby confining
federal question jurisdiction under this statutory regime
to a subset of securities fraud cases.” /d. at 124.

The Second Circuit explained that, after a defendant
removes an action under SLUSA, the district court must
determine whether the action meets “the substantive re-
quirements necessary to sustain removal under SLUSA’s
preemption provision” (id.): “If a district court determines
the action is not a ‘preempted class action’ and, therefore,
removal was improper, the district court lacks subject
matter jurisdiction to further entertain the action.” /d. at
125. The Second Circuit concluded that, even though the
district court in Spielman had not expressly stated that it
was remanding for lack of jurisdiction, because the court
had found the plaintiff's claims not to be preempted by
SLUSA, its remand order was necessarily based on a lack

15

of jurisdiction and was not reviewable under § 1447(d).
The Second Circuit’s decision squarely conflicts with
Kircher I, which held that a remand order that followed a
finding of no preemption was not based on a lack of juris-
diction and was reviewable under § 1447(d). As Judge
Newman succinctly explained in his Spielman concur-
rence, the issues “of complete preemption and the exis-
tence of subject matter jurisdiction ... are the opposite
sides of the same coin.” Id. at 132.

2. Ninth Circuit —- Abada

In Abada, the Ninth Circuit stated that SLUSA’s re-
moval provision “provides for the removal of ‘any covered
class action’ ‘based upon the statutory or common law of
any State’ ‘alleging a misrepresentation or omission of a
material fact in connection with the purchase or sale of a
covered security.” 300 F.3d at 1119 (quoting 15 U.S.C.
§ 78bb(f)(1) and (2)). The district court in Abada, like the
district courts in this case, had found that the plaintiffs’
claims were not preempted by SLUSA because they were
not “in connection with the purchase or sale” of securities.

In accord with the Second Circuit, and in square conflict
with the Seventh Circuit, the Ninth Circuit found that the
district court’s remand order was grounded on the absence
of subject-matter jurisdiction and was not reviewable.
The court held that, “|iJn order to decide whether it had
subject matter jurisdiction, the district court was required
to decide whether Abada’s claims were completely pre-
empted by SLUSA. Because construction of SLUSA was
necessary for the resolution of subject matter jurisdiction,
[Ninth Circuit precedent] does not apply to create appel-
late jurisdiction.” /d. See also United Investors, supra
(reaffirming the rule of Abada).

3. Eleventh Circuit —- Williams
_ In Williams, decided after Kircher 1, the Eleventh Cir-
cuit addressed whether it could review a district court or-

der remanding a lawsuit that had been removed under
SLUSA, but that asserted claims only under federal law.

16

The Eleventh Circuit found that the lawsuit was a “cov-
ered class action” involving a “covered security” as those
terms are defined by SLUSA. 389 F.3d at 1186. How-
ever, the Eleventh Circuit also found that the lawsuit was
not covered by SLUSA’s preemption provision, because
one of the requirements for preemption is that the action
be “based upon the statutory or common law of any State
or subdivision thereof.” 15 U.S.C. § 77p(b). See 389 F.3d
at 1188. The Eleventh Circuit observed that SILLUSA’s
removal provision refers to SLUSA’s preemption provi-
sion. /d. at 1189 n.6. The court concluded that, even
though the district court never explicitly mentioned
subject-matter jurisdiction, its remand order was based on
a lack of removal jurisdiction and was not reviewable un-
der § 1447(d). See id. at 1190 (“We therefore hold that the
district court’s remand order based on lack of removal ju-
risdiction, entered in response to a timely motion to re-
mand, is not reviewable under § 1447(d).”).'° The Wil-
liams decision thus squarely conflicts with Kircher 1,
which held that, where the district court found that plain-
tiff’s lawsuit was a “covered class action” but was not pre-
empted, its remand order could not be based on a lack of
subject-matter jurisdiction, notwithstanding the court's
express statements that it was remanding for lack of
jurisdiction.

A clear and acknowledged conflict thus exists between
the Seventh Circuit and the Second, Ninth, and Eleventh
Circuits. The Seventh Circuit has no intention of revisit-
ing its position in light of the views of other circuits, be-
cause it recently reaffirmed Kircher’s holding that “a dis-
trict court's remand of a case to state court based on

"In Riley. the Eleventh Circuit had stated that, “in order to remove
un action to federal court under SLUSA, the removing party must
show that (1) the suit is a ‘covered class action, (2) the plaintiffs’
claims are based on state law, (3) one or more ‘covered securities’ has
been purchased or sold, and (4) the defendant misrepresented or omit-
ted a material fact ‘in connection with the purchase or sale of such secu-
rity.” 292 F.3d at 1342.

17

SLUSA is appealable.” -Disher v. Citigroup Global Mar-
kets Inc., 419 F.3d 649, 652 (7th Cir. 2005). Moreover,
even a circuit that has not yet addressed the issue has
similarly recognized the circuit conflict. See Rowinski v.
Salomon Smith Barney Inc., 398 F.3d 294, 298 n.2 (3d
Cir.\2005) (noting “a division among the courts of appeals
on an issue of appellate jurisdiction under SLUSA”). This
Court’s intervention is necessary to establish the proper
interpretation of SLUSA’s removal provision and the re-
viewability of remand orders under SLUSA.

B. The Seventh Circuit’s Exercise Of Appellate
Jurisdiction Is Inconsistent With This Court’s
Precedents And The Language Of SLUSA

Not only does the Seventh Circuit’s decision conflict
with the decisions of three other circuits, it is inconsistent
with this Court's precedents. In Things Remembered, Inc.
v. Petrarca, 516 U.S. 124 (1995), the Court stated that
§ 1447(d) bars appellate review of remands based on
grounds recognized in § 1447(c), such as lack of subject-
matter jurisdiction. See id. at 127-28. That prohibition
on appellate review extends not only to remand orders in
suits removed under the general removal statute, but also
to remand orders in cases removed under any other stat-
ute, even if the other statute contains an express remand
provision of its own. See id. at 128. Moreover, it is imma-
terial whether the district court’s decision that it lacked
subject-matter jurisdiction was correct: § 1447(d) pre-
cludes review even of jurisdictional decisions that are
clearly wrong. See Gravitt v. Southwestern Bell Tel. Co..,
430 U.S. 723, 723 (1977) (per curiam).

The district courts in these cases interpreted SLUSA’s
removal provision to confer removal jurisdiction only over
cases preempted by SLUSA, and therefore remanded
based on a perceived lack of subject-matter jurisdiction
once they determined that petitioners claims were not
preempted. See, e.g.. Pet. App. 24a, 26a-27a (Kircher)
(stating that “removal is appropriate only if the Court has
federal question jurisdiction over Plaintiffs’ claims” and

18

that “SLUSA does not permit removal of Plaintiffs’
claims”), 28a, 30a (Dudley) (stating that “[t]hese cases do
not belong in the federal district court” and that “they are
not removable under SLUSA”), 39a-40a (Parthasarathy),
44a-45a (Potter), 50a-5la (Vogeler), 56a-57a (Jackson),
60a-6la (Spurgeon). Contrary to the Seventh Circuit's
assertion, the district judges never held that “[r]emoval of
this suit was proper.” Kircher I, Pet. App. 14a. Even if
the district courts were mistaken in their interpretation of
SLUSA’s removal provision — for example, because the
Seventh Circuit is correct that SLUSA authorizes removal
of all “covered class actions,” not just preempted actions —
the district courts’ orders were still unreviewable under
Gravitt and Things Remembered. Kircher I’s assertion
that the district court had found removal to be proper is
contrary to the district judges’ explicit statements, and
the Seventh Circuit’s exercise of appellate jurisdiction
conflicts with this Court's decisions.

Moreover, the Seventh Circuit's interpretation of
SLUSA’s removal provision is incorrect and unsupported
by the statutory text. As the Second, Ninth, and Elev-
enth Circuits noted, SLUSA’s removal provision cross-
references SLUSA’s preemption provision. SILLUSA does
not permit removal of all covered class actions, but of
“lajny covered class action brought in any State court in-
volving a covered security. as set forth in subsection (b),”
15 U.S.C. § 77p(c) (emphasis added), with subsection (b)
being the preemption provision. The plain language of
the removal provision indicates that Congress intended to
authorize removal of those actions that met the require-
ments for preemption.

The Seventh Circuit's opinion utterly failed to address
this language or the three conflicting circuits’ interpreta-
tions of the removal provision. The Seventh Circuit sim-
ply chided the other circuits for being “mesmerized by the
word ‘jurisdiction,” Kircher J, Pet. App. 16a, instead of
recognizing that those courts quite naturally interpreted
SLUSA to render removal proper only when an action is

19

within the scope of § 77p(b). In addition, the { veeth Cir-
cult’s insistence (id. at 15a) that only federa: judges may
resolve the issue of SLUSA preemption is s@ anprece-
dented reading of the statute, unsupported by text or leg-
islative history, that conflicts with settled Supreme Court
law regarding the ability of state courts to address a pre-
emption defense. See. e.g., Chick Kam Choo v. Exxon
Corp., 486 U.S. 140, 149-50 (1988) (“[W]hen a state pro-
ceeding presents a federal issue, even a pre-emption issue,
the proper course is to seek resolution of that issue by the
state court.”).

Finally, the Seventh Circuit advanced a red herring in
stating that district courts lack subject-matter jurisdiction
“only when Congress has not authorized the federal judi-
ciary to resolve the sort of issue presented by the case,”
Kircher I, Pet. App. 13a (citing Kontrick v. Rvan, 124 S.
Ct. 906, 914-16 (2004), and Scarborough v. Principi, 124
S. Ct. 1856, 1864-65 (2004)). The Seventh Circuit noted
that § 77p(d)(4) provides that, “[iJn an action that has
been removed from a State court pursuant to subsection
(c) of this section, if the Federal court determines that the
action may be maintained in State court pursuant to this
subsection, the Federal court shall remand such action to
such State court.” 15 U.S.C. § 77p(d)(4). According to the
Seventh Circuit, that subsection, coupled with SLUSA’s
removal provision, authorizes federal courts to determine
whether an action is preempted by SLUSA. The court be-
low thus reasoned that a remand after a finding of no pre-
emption is not based on a lack of jurisdiction, because
Congress has authorized the federal judiciary to resolve
the issue of preemption.

That reasoning misses the point by ignoring the statu-
torv language fashioned by Congress. SLUSA specifically
confers removal jurisdiction only on preempted actions.
The fact that federal courts are “authorized” to resolve the
issue of preemption in ruling on a motion to remand
stems from the basic principle that federal courts have
jurisdiction to determine their own jurisdiction. Under

20

SLUSA, after a defendant removes a case, a federal court
must address the question of preemption to determine
whether it has federal-question jurisdiction. A court’s
remand order based on a finding of no preemption is, for
purposes of § 1447(d), no different from any other remand
order based on a lack of federal-question jurisdiction fol-
lowing a defendant’s removal of a case. The removals in
all of the instant cases were initiated by respondents and
were found improper by the district courts — not “proper,”
as Kircher I incorrectly asserted, Pet. App. 14a. Nothing
in Kontrick or Scarborough suggests that the district
courts’ authority to resolve the preemption issue in ruling
on motions to remand somehow meant that the courts’
remand orders were not based on a lack of jurisdiction.

On the contrary, Scarborough explained that the “label
subject-matter jurisdiction refers to statutory prescrip-
tions “‘delineating the classes of cases .. . falling within a
court’s adjudicatory authority.” Scarborough, 124 S. Ct.
at 1865 (quoting Kontrick, 124 S. Ct. at 915). By ignoring
the crucial clause in § 77p(c) — “as set forth in subsection
(b)” — the Seventh Circuit missed that, under SLUSA,
only that class of cases satisfying the requirements for
preemption falls within a federal court’s “adjudicatory au-
thority” or removal jurisdiction. The Seventh Circuit thus
incorrectly severed the jurisdictional issue from the sub-
stantive decision on preemption, when in fact the two “are
the opposite sides of the same coin.” Spielman, 332 F.3d
at 132 (Newman, J., concurring).

C. The Reviewability Of Remand Orders Under
SLUSA Is An Issue Of Great Importance War-
ranting This Court’s Resolution

The circuit split over the reviewability of remand orders
under SLUSA involves the core securities litigation cir-
cuits and is unlikely to be resolved without this Court's
intervention. The Seventh Circuit concluded that such
orders were reviewable in full awareness that two circuits
had held to the contrary. and there is no reason to think
that the court will alter its view. See Disher, 419 F.3d at

21

652 (declining to revisit the court’s decision in Kircher 1).
There is also no reason to think that the Second, Ninth, or
Eleventh Circuits will reach a different conclusion regard-
ing SLUSA remand orders based on the reasoning of the
Seventh Circuit. Indeed, the Eleventh Circuit determined
that such orders were not reviewable after the Seventh
Circuit had decided the opposite.

Kircher I pointed out that Spielman and Abada pre-
dated Scarborough and Kontrick. See Pet. App. 16a.
However, as explained ahove, there is no reason to expect
Scarborough or Kontrick to affect the analysis of the Sec-
ond and Ninth Circuits. Moreover, as Kircher I recog-
nized, see id., the Ninth Circuit has reaffirmed the hold-
ing of Abada after Kontrick. See United Investors, supra.

The reviewability of remand orders under SLUSA is a
question of great importance for the administration of the
federal courts. That question is central not just in cases
involving “holder” claims or market timing, but in the
entire range of cases in which plaintiffs successfully con-
test the applicability of SLUSA’s preemption provision.
Whether remand orders in such cases are subject to im-
mediate appellate scrutiny has a significant impact not
only on the dockets of the federal courts of appeals, but
also on the ability of plaintiffs to obtain a timely adjudica-
tion of their viable state-law claims. Letting the Seventh
Circuit’s erroneous decision stand will undermine the
“strong congressional policy against review of remand or-
ders,” Things Remembered, 516 U.S. at 136 (Ginsburg &
Stevens, JJ., concurring) (internal quotation marks omit-
ted), unfairly delaying legitimate state-court suits. See
Spielman, 332 F.3d at 124. In his dissent in Thermtron
Products, Inc. v. Hermansdorfer, 423 U.S. 336 (1976),
then-Justice Rehnquist offered a cogent explanation of the
reasons for precluding appellate review of remand orders:

Congress’ purpose in barring review of all remand

orders has always been very clear — to prevent the

additional delay which a removing party may
achieve by seeking appellate reconsideration of an

22

order of remand. The removal jurisdiction extended
by Congress works a significant interference in the
conduct of litigation commenced in state court.
While Congress felt that making available a federal
forum in appropriate instances justifies some such
interruption and delay, it obviously thought it was
equally important that when removal to a federal
court is not warranted the case should be returned
to the state court as expeditiously as possible. If
this balanced concern is disregarded, federal re-
moval provisions may become a device affording liti-
gants a means of substantially delaying justice.

Id. at 354-55 (Rehnquist, J., dissenting).

This Court’s intervention is warranted to prevent de-
fendants from “substantially delaying justice” in class ac-
tions that SLUSA does not preempt and to resolve the
disagreement among the courts of appeals over the re-
viewability of SLUSA remand orders.'' Moreover, this
case is a particularly suitable vehicle. Practically, this

'"' The Class Action Fairness Act of 2005 (“CAFA”), which applies

to class action suits commenced on or after February 18, 2005, does
not diminish the importance of the jurisdictional question presented.
CAFA establishes federal jurisdiction over certain class actions despite
the absence of complete diversity of citizenship: permits removal of
such actions; and authorizes appellate review of remand orders in such
actions. See CAFA § 5(a), 119 Stat. 12 (to be codified at 28 U.S.C.
§ 1453(c)(1)) (notwithstanding section 1447(d), a court of appeals may
accept an appeal from an order of a district court granting or denying a
motion to remand a class action to the State court from which it was
removed”). CAFA’s provisions do not apply to “any class action that
sulely involves ... a claim ... concerning a covered security as defined
under section 16(f)(3) of the Securities Act of 1933 (15 U.S.C. 7&p(f)3))
and section 28(f)(5)(E) of the Securities Exchange Act of 1934 (15
U.S.C. 7&bb(Uf MS) E)).” Jd. § 4(a)(2), 119 Stat. 11 (to be codified at 28
U.S.C. § 1332(d)(9)(A)): accord id. § Sta), 119 Stat. 15 (to be codified at
2a ULS.C. § 1453(d)). CAFA thus specifically exempts securities class
actions: SLUSA continues to govern such actions. and questions about
the proper interpretation of SLUSA’s preemption and removal provi-
sions are no less important after passage of CAFA. In CAFA, Congress
chose not to disturb the balance struck in SLUSA between federal and
state prerogatives in securities litigation.

23

Court will only have the opportunity to determine
whether appellate jurisdiction exists over SLUSA remand
orders in a case arising from a circuit that answers that

question in the affirmative, and the only such circuit is
the Seventh.

The Court very recently granted certiorari in Dabit to
address whether SLUSA preempts claims brought by
holders of securities. The Court, however, need not wait
for a disposition of Dabit before determining whether to
grant certiorari in this case. Dabit does not involve the
jurisdictional question presented here. Moreover, the
Court’s decision on the merits in Dabit will not remedy
the conflict in the courts of appeals over whether SLUSA
remand orders are reviewable. Whether SLUSA pre-
empts holder claims is wholly independent of the question
whether a district court’s determination that a claim is
not preempted, erroneous or not, is subject to immediate
appellate review. Kircher is an ideal companion case to
Dabit. Granting certiorari in both cases will ensure the
Court the opportunity to resolve the procedural as well
as the substantive confusion regarding the operation of
SLUSA’s preemption, removal, and remand provisions, 15

U.S.C. § 77p(b), (c), and (d)(4).

Il. THIS COURT HAS GRANTED CERTIORARI
IN MERRILL LYNCH V. DABIT TO DECIDE
WHETHER SLUSA PREEMPTS' CLAIMS
BROUGHT BY HOLDERS OF SECURITIES

When the Seventh Circuit split with three other circuits
on whether SLUSA preempts holder claims, it deepened
an already-existing confusion throughout the federal judi-
ciary regarding SLUSA’s preemptive scope. As one com-
mentator has observed, “[t]he courts have struggled to in-
terpret SLUSA’s preemption provision, and the case law
is in disarray.” Jennifer O'Hare. Preemption under the
Securities Litigation Uniform Standards Act: If It Looks
Like a Securities Fraud Claim and Acts Like a Securities
Fraud Claim, Is It a Securities Fraud Claim?, 56 Ala.
L. Rev. 325. 326 (2004). This Court’s intervention is

24

required both to clarify the meaning of SLUSA’s preemp-
tion provision and to ensure that holders of securities who
have suffered damages from issuers’ unlawful conduct are
not stripped of their legitimate state-law claims.

A. The Seventh Circuit’s Decision That SLUSA
Preempts Holder Claims Squarely Conflicts
With The Decisions Of Three Other Circuits

Three circuits have held that state-law claims in con-
nection with the retention of securities fall outside of
SLUSA’s preemptive scope. The Seventh Circuit ac-
knowledged a clear conflict between its decision below and
those of the Second, Eighth, and Eleventh Circuits.

1. Second Civcuit - Dabit

In Dabit, the Second Circuit held that the meaning of
“in connection with” under SLUSA was “coterminous”
with the meaning of the nearly identical language of
§ 10(b) and Rule 10b-5, 395 F.3d at 28, and that the
purchaser-seller rule of Blue Chip Stamps applies as a
limit on SLUSA’s “in connection with” requirement such
that SLUSA does not preempt holding claims. The Sec-
ond Circuit began by observing that the phrase “in con-
nection with the purchase or sale of a covered security”
has been extensively interpreted by the Supreme Court
and lower federal courts in the context of § 10(b) and Rule
10b-5 litigation. The Second Circuit explained (id. at 36)
that application of § 10(b) jurisprudence to SLUSA’s lan-
guage comports with the Act's stated goal of closing the
“federal flight” loophole in the PSLRA:

If the “in connection with” phrase is read to reach
the same conduct under SLUSA as it does under
§ 10(b) and Rule 10b-5, then SLUSA will preempt
precisely those state class actions which could be
brought as federal actions subject to the heightened
requirements of the PSLRA. If it were otherwise,
actions might be preempted for meeting all of
SLUSA’s requirements, including the “in connection
with” term, but not be capable of being brought

25

under iederal law for failure to mest the parallel re-
quirement of Rule 10b-5, a result that the legislative
history does not suggest Congress intended to pro-
duce in enacting SLUSA.

Finally, the Second Circuit rejected the precise argu-
ment endorsed by the Seventh Circuit: that the Blue Chip
Stamps purchaser-seller rule is simply a judicially fash-
ioned standing rule, not a textually based and substantive
limit on the “in connection with purchase or sale” lan-
guage. The Second Circuit acknowledged that “[t]he limi-
tation on standing to bring private suit for damages for
fraud in connection with the purchase or sale of securities
is unquestionably a distinct concept from the general
statutory and regulatory prohibition on fraud in connec-
tion with the purchase or sale of securities.” /d. at 39.
The court, however, found that observation to have “little
persuasive force in this context, because SLUSA deals
with precisely the category of actions subject to the
purchaser-seller rule” (id.):

Once it is agreed that Congress deliberately bor-
rowed SLUSA’s “in connection with” language from
§ 10(b), the fact that the standing rule is analyti-
cally distinct from the underlying prohibition on
fraud does not compel the conclusion that SLUSA
preempts more than the purchaser/seller category of
private damages claims over which the “in connec-
tion with” source language operates. Because only
purchasers and sellers have a federal private dam-
ages remedy, it is far more natural to suppose that
Congress meant to import the settled standing rule
along with the “in connection with” phrase as a sub-
stantive standard. Nor are we moved by the obser-
vation that the standing rule is merely a judge-made
gloss on the statute and the Rule, because private
Rule 10b-5 damages actions are themselves a crea-
ture of judicial implication.
Id. at 39-40.

26

The Second Circuit concluded that SLUSA’s “wholesale
importation” of the language that gave rise to the “balanc-
ing judgment” of Blue Chip Stamps — namely, the judg-
ment that “the judicially-adopted bar on federal non-
purchaser and non-seller claims was counterbalanced by
the existence of remedies under state law” — must “be pre-
sumed to represent a ratification of that judgment.” 7d. at
40. In sum, the Second Circuit anticipated, thoroughly
analyzed, and squarely rejected the Seventh Circuit's rea-
soning regarding the applicability of SLUSA to holder
claims.

2. Eighth Circuit - Green

Like the Second Circuit, the Eighth Circuit in Green
turned to cases construing the identical language in
§ 10(b) and Rule 10b-5 to interpret the “in connection with
the purchase or sale” language in SLUSA. The Eighth
Circuit observed that, in Blue Chip Stamps, the Court re-
fused to read that language broadly, limiting standing
under § 10(b) and Rule 10b-5 to purchasers and sellers of
securities. The Eighth Circuit concluded that “nonsellers
and nonpurchasers of securities are not covered by
SLUSA’s preemption provision,” because Congress en-
acted SLUSA in full awareness of the judicial gloss on
§ 10(b), “which acknowledged that causes of actions for
the ‘nonpurchase’ or ‘nonsale’ of securities were not cov-
ered by the 1934 Act, and that state law would fill those
gaps. 279 F.3d at 598 (internal quotation marks omit-
ted). Like the Second Circuit's Dabit decision, the Eighth
Circuit's decision squarely conflicts with Kircher I.

3. Eleventh Circuit — Riley

In Rilev, the Eleventh Circuit concluded, based on the
same analysis as the Second and Eighth Circuits, that
SLUSA does not preempt claims dealing with the reten-
tion of securities, rather than with purchase or sale. See
292 F.3d at 1345. The Eleventh Circuit stated that the
“in connection with the purchase or sale” language of
SLUSA incorporates the meaning of the same phrase in
§ 10(b) and Rule 10b-5. The Eleventh Circuit further

27

noted that “[a]nalogizing to § 10b-5 is particularly appro-
priate because SLUSA was specifically enacted as an
amendment to the 1933 and 1934 Acts.” /d. at 1342.

There is a clear division between the Second, Eighth,
and Eleventh Circuits on the one hand, and the Seventh
Circuit on the other hand, regarding the applicability of
SLUSA’s preemption provision to holder claims. Only last
month, the Seventh Circuit reaffirmed that, while three
other circuits had held that “claims related solely to the
retention of securities, as opposed to a purchase or sale,
... are not prempted by SLUSA,” it was bound by the de-
cision in Kircher lI to conclude that such holder claims
were preempted by SLUSA. Disher, 419 F.3d at 655 (ac-
knowledging conflict with the Second, Eighth, and Elev-
enth Circuits). oaar

B. The Seventh Circuit’s Interpretation Of
SLUSA’s Preemptive Scope Is Contrary To
This Court’s Blue Chip Stamps Decision And
Congressional Intent

The Seventh Circuit's decision is contrary to Supreme
Court precedent. In Blue Chip Stamps. the Court inter-
preted § 10(b) and Rule 10b-5 to permit private lawsuits
only by purchasers or sellers of securities. The Court
made clear that the purchaser-seller rule, far from being
untethered to the “in connection with the purchase or
sale” language of § 10(b), was an interpretation of that
language in the context of private securities litigation.
For example, the Court stated that “the wording of
§ 10(b), making fraud in connection with the purchase or
sale of a security a violation of the Act, is surely badly
strained when construed to provide a cause of action, not
to purchasers and sellers of securities, but to the world at
large.” 421 U.S. at 733 n.d.

Referring to Birnbaum v. Newport Steel Corp., 198 F.2d
461 (2d Cir. 1952) — the Second Circuit opinion that origi-
nated the purchaser-seller rule — the Court observed that
longstanding acceptance of “Birnbaum’s reasonable in-
terpretation of the wording of § 10(b). wording which is

28

directed toward injury suffered ‘in connection with the
purchase or sale’ of securities, argues significantly in fa-
vor of acceptance of the Birnbaum rule by this Court.”
421 W.S. at 733 (footnote omitted). The Court added that
“[t}he wording of § 10(b) directed at fraud ‘in connection
with the purchase or sale’ of securities stands in contrast
with the parallel antifraud provision of the 1933 Act. ...
When Congress wished to provide a remedy to those who
neither purchase nor sell securities, it had little trouble in
doing so expressly.” Id. at 733-34.

The Court’s reliance on policy concerns in Blue Chip
Stamps “to flesh out the portions of the law with respect
to which neither the congressional enactment nor the ad-
ministrative regulations offer conclusive guidance,” id. at
737, does not mean that the purchaser-seller rule is not
an interpretation of the “in connection with” phrase, al-
beit one guided by policy as well as text. SLUSA deals
with private securities litigation and should be construed
consistently with this Court’s interpretation of the “in
connection with the purchase or sale” language in such
litigation. The Seventh Circuit was wrong simply to dis-
regard Blue Chip Stamps after recognizing that the “in
connection with” language of SLUSA “has the same scope
as its antecedent in Rule 10b-5.” Kircher I], Pet. App. 5a.

The Seventh Circuit’s ruling also runs afoul of this
Court’s presumption against preemption. “‘[Blecause the
States are independent sovereigns in our federal system,
we have long presumed that Congress does not cavalierly
pre-empt state-law causes of action.” Bates v. Dow Agro-
Sciences LLC, 125 S. Ct. 1788, 1807 (2005) (quoting Med-
tronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996)). The pre-
sumption against preemption applies not only to the ques-
tion whether Congress intended any preemption at all,
but also to questions about the scope of an express pre-
emption statute. See Medtronic, supra.

As this Court made clear in Blue Chip Stamps, claims
based on the retention of securities have traditionally
been “available to nonpurchasers and nonsellers under

29

state law.” 421 U.S. at 739 n.9. Nothing in the text or
background of SLUSA manifests a clear intent to preempt
the state-law holding claims that Blue Chip Stamps ac-
knowledged would be preserved. Indeed, the legislative
history does not mention holding claims. See Dabit, 395
F.3d at 41-42 (discussing historical materials). SLUSA’s
language, the conference report, and the statements of
SLUSA’s proponents all indicate that SLUSA aimed to
prevent circumvention of the PSLRA and therefore pre-
empted only those claims that could be brought in federal
court. The Seventh Circuit’s decision to the contrary is
inconsistent with Blue Chip Stamps, as well as with this
Court’s preemption jurisprudence.

C. Whether SLUSA Preempts Holder Claims Is

An Issue Of Great Importance

As a result of the practice of market timing, tens of mil-
lions of investors have suffered a dilution of their securi-
ties holdings that is estimated at $5 to $10 billion per
year.'” Under the Seventh Circuit’s ruling, even though
these investors were injured by unlawful conduct on the
part of mutual funds and fund managers, they have no
viable claims under either federal or state law. “If Con-
gress had intended to deprive injured parties of a long
available form of compensation, it surely would have ex-
pressed that intent more clearly.” Bates, 125 S. Ct. at
1801 (citing Silkwood v. Kerr-McGee Corp., 464 U.S. 238,
251 (1984)). Only holders of securities can seek redress
for market-timing activity; as explained above, see supra
p. 9. purchasers and sellers are not injured by market
timing. The Seventh Circuit was wrong to suggest that

2 See. eg.. Jennifer Barrett, “Inexcusable.” MSNBC.com, Nov. 11,
2003 (interview with John Bogle, founder and former CEO of the Van-
guard Group, estimating market-timing dilution to cost Investors 35 to
$10 billion per vear), available at http://www.msnbe.com/1d/3403565/
site/newsweek. See also Ene Zitzewitz, Who Cares About Sharehold-
ers’ Arbitrage-Proofing Mutual Funds, 19 J... Econ. & Org. 245. 260
(2003) (total annualized dilution in the first three quarters of 2001 can
be estimated at $4.9 billion per vear’).

30

petitioners could simply redefine the plaintiff classes to
include purchasers and sellers, and could then bring their
market-timing claims in federal court. See Kircher I], Pet.
App. 9a. Contrary to the Seventh Circuit's statements,
see id., petitioners claims do not depend on any state-
ments made or omitted in connection with their purchases
of the funds’ securities. Petitioners do not allege that re-
spondents misled them by failing to disclose the existence
of market timing; rather, they allege negligence and reck-
lessness on the part of respondents in failing to protect
their investments from market timing. Permitting the
Seventh Circuit’s ruling to stand would deprive the vic-
tims of market timing of any avenue of recourse in the
state or federal courts.

Approxi.sately 200 market-timing suits have been filed
against mutual funds in the last two years. See Kircher
I1, Pet. App. 9a. This Court’s intervention is necessary to
ensure that those lawsuits, involving numerous plaintiffs
and billions of dollars in damages, are resolved correctly
and consistently. Just two days ago, the Court recognized
the importance of the questions presented in this case by
granting certiorari in Dabit to address whether, “as the
Seventh Circuit held earlier this month and in direct con-
flict with the decision below, SLUSA preempts state law
class action claims based upon allegedly fraudulent state-
ments or omissions brought solely on behalf of persons
who were induced thereby to hold or retain (and not pur-
chase or sell) securities.” Dabit Pet. at i, No. 04-1371. If
the Court does not grant this petition to address the ju-
risdictional question presented — which is not at issue in
Dabit — it should at the very least hold the petition pend-
ing resolution of Dabit, and then grant certiorari on Ques-
tion 1.

CONCLUSION

The petition for a writ of certiorari should be granted.
In the alternative, the Court should hold the petition
pending resolution of Dabit.

ROBERT L. KING

701 Market Street

Suite 350

St. Louis, Missouri 63101
(314) 241-4844

September 29, 2005

Respectfully submitted,

DAVID C. FREDERICK
Counsel of Record

PRIYA R. AIYAR

KELLOGG, HUBER, HANSEN,
TODD, EVANS & FIGEL,
P.L.L.C.

1615 M Street, N.W.

Suite 400

Washington, D.C. 20036

(202) 326-7900

APPENDIX |

i
TABLE OF CONTENTS
Opinion of the United States Court of Appeals for

the Seventh Circuit, Kircher, et al. v. Putnam
Funds Trust, et al., Nos. 04-1495, et al. (Apr. 5,

2005) ....... scsebsesbniidihanniiapiaticsdapesiontaiidiantianiauenadiyiniiehpipes iio:

Opinion of the United States Court of Appeals for
the Seventh Circuit, Kircher, et al. v. Putnam

Funds Trust, et al., No. 04-1495 (June 29, 2004) ......

Order of the United States Court of Appeals for
the Seventh Circuit, Dudley, et al. v. Putnam
International Equity Fund, et al., Nos. 04-1496 &

Re nD Fy chet citicatnicctiniscievevindsanasindnodtoteis

Order of the United States Court of Appeals for
the Seventh Circuit, Parthasarathy, et al. v. Arti-
san Funds, Inc., et al., No. 04-1628 (June 30,

Order of the United States Court of Appeals for
the Seventh Circuit, Luettinger, et al. v. Scudder
International Fund, Inc., et al., Nos. 04-1650 &

DG BEE GOD BA Te costcrisitsccisvinsnisacéntnpesedcsctiionnies

Order of the United States Court of Appeals for
the Seventh Circuit, Vogeler v. Columbia Wanger
Asset Management, et al., Nos. 04-1660 & 04-

RE CII rs PR cra cnecttincansnbinccnsintiipnveidintntniintstoininins

Order of the United States Court of Appeals for
the Seventh Circuit, Jackson v. Van Kampen
Series Fund, Inc., et al., No. 04-2162 (June 30,

NED cnnstosanspininvesiancavivacnsersnindngsineiapeniaigidennintiédipiabetnipeninns

Page

oe 2la

il

Memorandum and Order of the United States
District Court for the Southern District of Illi-
nois, Kircher, et al. v. Putnam Funds-frust, et al.,

No. 03-CV-0691-DRH (Jan. 27, 2004) ...0.... cece eee

Memorandum and Order of the United States
District Court for the Southern District of Ih-
nois, Dudley, et al. v. Putnam International
Equity Fund, et al., Civil Nos. 03-852-GPM &

03-853-GPM (Jan. 27, 2004) 00.0.0... eceeecceeeeeeeeneeeeeeeees

Memorandum and Order of the United States
District Court for the Southern District of I]h-
nois, Parthasarthy, et al. v. T. Rowe Price Inter-
national Funds, Inc., et al., No. 03-CV-00673-

I

Memorandum and Order of the United States
District Court for the Southern District of I[]li-
nois, Potter, et al. v. Janus Investment Fund, et

al., No. 03-CV-0692-DRH (Feb. 9, 2004)... eee

Memorandum and Order of the United States
District Court for the Southern District of I[lli-
nois, Vogeler v. Columbia Acorn Trust, et al., No.

03-CV-0843-DRH (Feb. 12, 2004) ......... cece

Memorandum and Order of the United States
District Court for the Southern District of Llhi-
nois, Jackson v. Van Kampen Series Fund, Inc.,

et al., No. 04-CV-00056-DRH (Apr. 1, 2004)...............

Memorandum and Order of the United States
District Court for the Southern District of [li-
nois, Spurgeon v. Pacific Life Ins. Co., et al., Case

No. 04-CV-0355-MJR (June 24, 2004)........0000....0.0.

soe OLA

sooo O28

il

Order of the United States Court of Appeals for
the Seventh Circuit Denying Rehearing, Kircher,
et al. v. Putnam Funds Trust, et al., Nos. 04-

SARS, GF GE. GH Di Be csciecsscettsniceicecsinitetiiticciiibetnaniniins

Complaint, Kircher, et al. v. Putnam Funds
Trust, et al., Cause No. 03-L-1255 (3d Jud. Cir.
Ct., Madison Cty., Ill. filed Sept. 16, 2003)

SED n0svcsntncecpeciicenbescctapsnnpeicianctnabinabieatedandiiaiidias

Complaint, Potter, et al. v. Janus Investment
Fund, et al., Cause No. 03-L-1254 (3d Jud. Cir.
Ct., Madison Cty., Ill. filed Sept. 16, 2003)

CIID vinsciincsqeenidctissceinbcitindicthintebeamiiddaunddaubidemaiuateeni

Complaint, Parthasarthy, et al. v. T. Rowe Price
International Funds, Inc., et al., Cause No. 03-L-
1253 (3d Jud. Cir. Ct., Madison Cty., Ill. filed

UG, BD, Fe IE i scnccesxtapinntisnieniptieraboiintiininitiniiediss

Complaint, Dudley, et al. v. Putnam Interna-
tional Equity Fund, et al., Cause No. 03-L-1559
(3d Jud. Cir. Ct., Madison Cty., Ill. filed Nov. 10,

TE CIID vaniciccvnntich ctasinisttatieblectsieinttaaiinamninale

Complaint, Vogeler v. Columbia Acorn Trust, et
al., Cause No. 03-L-1550 (3d Jud. Cir. Ct., Madi-

son Cty.. Ill. filed Nov. 13, 2003) (excerpt)..................

Complaint, Jackson v. Van Kampen Series Fund,
Inc., et al., Cause No. 03-L-2036 (3d Jud. Cir. Ct.,

Madison Cty., lll. filed Nov. 13, 2003) (excerpt).........

Complaint, Spurgeon v. Pacific Life Ins. Co.,
Cause No. 04-L-241 (3d Jud. Cir. Ct., Madison

Cov... BED. Tiledd Bar. 000, BIDS) cccncvcniecscvccosccsscnsescsensovecves

.... 98a

.... 98a

iv
Statutory and Regulatory Provisions Involved:

TES SRE SIE IESE ea RR
EE ae aa
ES aS
NR,
Sit aS
GT ET
I
ES
SS

Letter from Supreme Court Clerk regarding
extension request for filing a petition for a writ of
III I, SIE osc cscasnencnntumeddnsedansvedesoncocss

Letter from Supreme Court Clerk regarding
further extension request for filing a petition for
a writ of certiorari (Aug. 26, 2005) .............00000ccecceceeeeeees

ia

UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

Nos. 04-1495, 04-1496, 04-1608, 04-1628, 04-1650,
04-1651, 04-1660, 04-1661, 04-2162, 04-2687

CARL KIRCHER AND ROBERT BROCKWAY,
INDIVIDUALLY AND ON BEHALF OF A CLASS, ET AL.,
Plaintiffs-Appellees,
v.

PUTNAM FUNDS TRUST AND
PUTNAM INVESTMENT MANAGEMENT, LLC, ET AL.,
Defendants-Appellants.

Appeals from the United States District Court
for the Southern District of Illinois

{Argued Jan. 7, 2005]
[Decided Apr. 5, 2005]

Before: EASTERBROOK, RIPPLE. and WOOD, Circuit
Judges.

EASTERBROOK, Circuit Judge.

Complaints filed in the circuit court of Madison County,
Illinois, charge several mutual funds with setting prices in
a way that arbitrageurs can exploit. The funds removed
the suits to federal court and asked the district judges to
dismiss them under the Securities Litigation Uniform
Standards Act of 1998 (SLUSA). Instead the federal
judges remanded each suit. Last year we held that these
remands are appealable. See Kircher v. Putnam Funds
Trust, 373 F.3d 847 (7th Cir.2004). Now we must decide
whether SLUSA blocks litigation in state court. (Plaintiffs

2a

have asked us to overrule our decision about appellate ju-
risdiction, but their arguments are unpersuasive.)

Mutual funds must set prices at which they sell and re-
deem their own shares once a day, and must do so at the
net asset value of the funds’ holdings. (All of the defen-
dants, which operate in interstate and international com-
merce, are regulated under the Investment Company Act
of 1940; we call them “mutual funds” for convenience.)
Each defendant sets that price at 4 p.m. Eastern time,
shortly after the New York Stock Exchange closes. Orders
placed before the close of business that day are executed at
this price.

When the funds hold assets that trade in competitive
markets, they must value the assets at their market price.
15 U.S.C. § 80a-2(a)(41)(B)Gi), 17 C.F.R. § 270.2a-4(a). De-
fendants implement this requirement by valuing securities
at the closing price of the principal exchange or market in
which the securities are traded. For domestic securities
this yields a current price: for securities of foreign issuers,
however, it may produce a price that is as much as 15
hours old. (European markets close 5 or 6 hours ahead of
New York; Asian markets close 12 to 15 hours before New
York.)

Many securities trade on multiple markets or over the
counter. Stock of a Japanese firm that closes in Tokyo at
¥10,000 might trade in Frankfurt at € 75.22 (equivalent to
¥ 10,500) between the close in Tokyo and the close in New
York — but the mutual fund nonetheless would value each
share at ¥10,000, because that was its most recent price in
the issuer's home market. If foreign stocks move predomi-
nantly up during this interval (or if one foreign security
moves substantially higher), the mutual fund as a whole
would carry a 4 p.m. price below what would be justified
by the latest available information, and an arbitrageur
could purchase shares before 4 p.m. with a plan to sell the
next day at a profit. Likewise arbitrageurs could gain if
the foreign stock falls after the close in its home market,
and the arbitrageur knows that the U.S. mutual fund will

3a

be overpriced at 4 p.m. relative to the price it is likely to
have the next trading day when new information from
abroad finally is reflected in the fund’s valuation. See
Richard L. Levine, Yvonne Cristovici & Richard A.
Jacobsen, Mutual Fund Market Timing, Federal Lawyer
28 (Jan. 2005).

A short-swing-trading strategy would not be attractive
unless the foreign securities’ prices had moved enough to
cover the transactions costs of matched purchases and
sales of the mutual fund shares, but for no-load funds that
have substantial investments in foreign markets this con-
dition sometimes is satisfied. Arbitrageurs then make
profits with slight risk to themselves, diverting gains from
the mutual funds’ long-term investors while imposing
higher administrative costs on the funds (whose operating
expenses rise with each purchase and redemption). Plain-
tiffs contend that the mutual funds acted recklessly in
failing to block arbitrageurs from reaping these profits.
Available means might include levving fees on short-swing
transactions, adopting to a front-end-load charge, reducing
the number of trades any investor can execute (or defer-
ring each trade by one day), and valuing the securities of
foreign issuers at the most current price in any competi-
tive market (organized or over the counter), and not just
the closing price on the issuers’ home stock exchanges.
Some mutual funds have begun to take steps to curtail
arbitrage, while disclosing residual vulnerabilities more
prominently. but the litigation targets those funds that
have not done so (or targets the period before a given fund
acted).

SLUSA added to the Securities Act of 1933 and the Se-
curities Exchange Act of 1934 parallel provisions curtail-
ing certain class actions under state law. As in last vear's
jurisdictional opinion, we limit attention to § 16 of the
1933 Act, 15 U.S.C. § 77p. because the additions to the
1934 Act are functionally identical. See 15 U.S.C. § 78bb.
As amended by SLUSA, § 77p(b) reads:

4a

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 purchase or sale of a covered
security; or

(2) that the defendant used or employed any manipu-
lative or deceptive device or contrivance in connection
with the purchase or sale of a covered security.

Investments in mutual funds are “covered securities,” see
§ 77p(f)(3), and all of these suits are “covered class ac-
tions,” see § 77p(f)(2), because plaintiffs seek to represent
more than 50 investors and each action is direct rather
than derivative. (Derivative proceedings are not “covered
class actions”. See § 77p(f)(2)(B). See also Burks v.
Lasker, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404
(1979), and Kamen v. Kemper Financial Services, Inc., 500
U.S. 90, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991), which
note that state-law derivative claims may proceed against
federally regulated mutual funds.) Section 77p(d) contains
a number of additional exceptions, but plaintiffs do not
contend that any of them applies to these actions. Thus
everything turns on subsection (b), which forecloses a suit
based on state law in which a private class alleges “(1) an
untrue statement or omission of a material fact in connec-
tion with the purchase or sale of a covered security; or (2)
that the defendant used or employed any manipulative or
deceptive device or contrivance in connection with the pur-
chase or sale of a covered security.”

That familiar language comes from Rule 10b-5, 17
C.F.R. § 240.10b-5, which is based on § 10(b) of the 1934
Act, 15 U.S.C. § 78)(b). Rule 10b-5 reads:

It shall be unlawful for any person, directly or indi-
rectly, by the use of any means or instrumentality of in-
terstate commerce, or of the mails or of any facility of
any national securities exchange,

5a

(a) To employ any device, scheme, or artifice to de-
fraud,

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

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

Every court of appeals to encounter SLUSA has held that
its language has the same scope as its antecedent in Rule
10b-5. Dabit v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 395 F.3d 25, 34-36 (2d Cir.2005); Rowinski v. Salo-
mon Smith Barney Inc., 398 F.3d 294, 299 (3d Cir.2005);
Green v. Ameritrade, Inc., 279 F.3d 590, 596-97 (8th
Cir.2002); Falkowski v. Imation Corp., 309 F.3d 1123, 1131
(9th Cir.2002), amended, 320 F.3d 905 (2003); Riley v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 292 F.3d
1334, 1342-43 (11th Cir.2002). We agree with this conclu-
sion. SLUSA is designed to prevent plaintiffs from migrat-
ing to state court in order to evade rules for federal securi-
ties litigation in the Private Securities Litigation Reform
Act of 1995. See Spielman v. Merrill Lynch, Pierce, Fenner
& Smith, Inc., 332 F.3d 116, 122-24 (2d Cir.2003) (discuss-

ing how PSLRA and SLUSA work). SLUSA can do its job
~ only if subsection (b) covers those claims that engage Rule
10b-5 (and thus come within the 1995 statute) if presented
directly under federal law: this is why SLUSA borrows the
Rule’s language. Unfortunately, however, the other cir-
cuits do not agree among themselves (or with the SEC)
what Rule 10b-5 itself means. The phrase “in connection
with the purchase or sale” of a security is the sticking
point.

The Supreme Court held in Blue Chip Stamps v. Manor
Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d
539 (1975), that investors who neither purchase nor sell

6a

securities may not collect damages in private litigation
under § 10(b) and Rule 10b-5, even if failure to purchase or
sell was the result of fraud. Assuming that SLUSA’s “in
connection with” language means “able to pursue a private
right of action after Blue Chip Stamps,” plaintiffs at-
tempted to frame complaints that avoid any allegations of
purchase or sale. All but one of the classes is defined as
investors who held shares of a given mutual fund between
two specified dates. As an effort to evade SLUSA, this
class definition is a flop: some of the investors who held
shares during the class period must have purchased their
interest (or increased it) during that time; others, who
owned shares at the beginning of the period, undoubtedly
sold some or all of their investment during the window.
Each of the funds has substantial daily turnover, so the
class of “all holders” during even a single day contains
many purchasers and sellers. All of these class actions
therefore must be dismissed. (Plaintiffs do not contend
that any other part of SLUSA is pertinent; in particular,
they did not argue in their briefs — and did not maintain at
oral argument despite the court's invitation — that their
suits allege mismanagement rather than deceit or manipu-
lation. See Santa Fe Industries, Inc. v. Green, 430 U.S.
462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977). Counsel for the
plaintiffs declined to explain how state law would support
a direct action that did not rely on deceit or manipulation.
A claim based on mismanagement likely would need to be
cast as a derivative action, which none of these suits pur-
ports to be. Nor does any of the suits assert that a mutual
fund broke a promise, so that state contract law would
supply a remedy.)

The complaint in Spurgeon v. Pacific Life Insurance Co.
avoids this pitfall. It defines the class as all investors who
held the fund's securities during a defined period and nei-
ther purchased nor sold shares during that period. Blue
Chip Stamps would prevent such a private action from
proceeding under Rule 10b-5. Plaintiffs insist that any
private action that is untenable after Blue Chip Stamps

7a

also is unaffected by SLUSA. The district judge, agreeing
with this perspective, remanded Spurgeon to state court.

An equation between SLUSA's coverage and the scope of
private damages 2 °— 3 under Rule 10b-5 has the support
of the second ci (Dabit), the eighth circuit (Green),
and the eleventh circuit (Riley). The ninth circuit
(Falkowski), by contrast, has written that coverage of
SLUSA tracks the coverage of § 10(b) and Rule 10b-5 when
enforced by public plaintiffs (the SEC or a criminal prose-
cutor). The third circuit (Rowinski) has reserved decision
on this issue. The Securities and Exchange Commission
filed a brief in Dabit as amicus curiae supporting the view
that SLUSA tracks the full scope of § 10(b) and Rule 10b-
5, not just their enforcement in private actions. The way
the Spurgeon class has been defined prevents us from fol-
lowing the third circuit’s path: we must answer the ques-
tion rather than postpone its resolution.

To say that SLUSA uses the same language as § 10(b)
and Rule 10b-5 is pretty much to resolve the point. Sec-
tion 10(b) defines a federal crime, and it also permits
the SEC to enforce the prohibition through administrative
proceedings. Invocation of this anti-fraud rule does not
depend on proof that the agency or United States pur-
chased or sold securities; instead the “in connection with”
language ensures that the fraud occurs in securities
transactions rather than some other activity. See SEC v.
Zandford, 535 U.S. 813, 821-22, 122 S.Ct. 1899, 153
L.Ed.2d 1 (2002): Superintendent of Insurance v. Bankers
Life & Casualty Co., 404 U.S. 6, 12, 92 S.Ct. 165, 30
L.Ed.2d 128 (1971).

Blue Chip Stamps came out as it did not because § 10(b)
and Rule 10b-5 are limited to situations in which the
plaintiff itself traded securities, but because a_ private
right of action to enforce these provisions is a judicial crea-
tion and the Court wanted to confine these actions to
situations where litigation is apt to do more good than
harm. The Justices observed that anyone can say that a
failure to trade bore some relation to what the issuer did

8a

(or didn’t) disclose, but that judges and juries would have
an exceedingly hard time knowing whether a given coun-
terfactual claim (“I would have traded, if only ...”) was
honest. The Court thought it best to limit private actions
to harms arising out of actual trading, which narrows the
affected class and simplifies proof, while leaving other se-
curities offenses to public prosecutors.

Decisions since Blue Chip Stamps reiterate that it deals
with private actions alone and does not restrict coverage of
the statute and regulation. See United States v. O'Hagan,
521 U.S. 642, 664, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997);
Holmes v. SIPC, 503 U.S. 258, 284, 112 S.Ct. 1311, 117
L.Ed.2d 532 (1992); 1 ated States v. Naftalin, 441 U.S.
768, 774 n. 6, 99 S.Ct. 2077, 60 L.Ed.2d 624 (1979). By
depicting their classes as containing entirely non-traders,
plaintiffs do not take their claims outside § 10(b) and Rule
10b-5; instead they demonstrate only that the claims must
be left to public enforcement. It would be more than a lit-
tle strange if the Supreme Court's decision to block private
litigation by non-traders became the opening by which
that very litigation could be pursued under state law, de-
spite the judgment of Congress (reflected in SLUSA) that
securities class actions must proceed under federal securi-
ties law or not at all. Blue Chip Stamps combined with
SLUSA may mean that claims of the sort plaintiffs want to
pursue must be litigated as derivative actions or commit-
ted to public prosecutors, but this is not a good reason to
undercut the statutory language.

Could the SEC maintain an action under § 10(b) and
Rule 10b-5 against mutual funds that fraudulently or
manipulatively increased investors’ exposure to arbitrage?
Suppose the funds stated in their prospectuses that thev
took actions to prevent arbitrageurs from exploiting the
fact that each fund’s net asset value is calculated only
once a day. That statement, if false (and known to be so),
could support enforcement action, for the deceit would
have occurred in connection with investors’ purchases of
the funds’ securities. Similarly, if these funds had stated

Ya

bluntly in their prospectuses (or otherwise disclosed to in-
vestors) that daily valuation left no-load funds exposed to
short-swing trading strategies, that revelation would have
squelched litigation of this kind.

These observations show that plaintiffs’ claims depend
on statements made or omitted in connection with their
own purchases of the funds’ securities. They could have
brought them directly under Rule 10b-4 in federal court (to
the extent that the purchases occurred within the period of
limitations). Indeed, most of the approximately 200 suits
filed against mutual funds in the last two years alleging
that the home-exchange-valuation rule can be exploited by
arbitrageurs have been filed in federal court under Rule
10b-5. Our plaintiffs’ effort to define non-purchaser-non-
seller classes is designed to evade PSLRA in order to liti-
gate a securities class action in state court in the hope that
a local judge or jury may produce an idiosyncratic award.
It is the very sort of maneuver that SLUSA is designed to
prevent.

We hold that SLUSA is as broad as § 10(b) itself and
that limitations on private rights of action to enforce
§ 10(b) and Rule 10b-5 do not open the door to litigation
about securities transactions under state law. Plaintiffs’
claims are connected to their own purchases of securities
and thus are blocked by SLUSA, whose preemptive effect
is not confined to knocking out state-law claims by inves-
tors who have winning federal claims, as plaintiffs sup-
pose. It covers both good and bad securities claims — espe-
cially bad ones. The judgments of the district courts are
reversed, and the cases are remanded with instructions to
undo the remand orders and dismiss plaintiffs’ state-law
claims.

c

10a

UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

No. 04-1495

CARL KIRCHER AND ROBERT BROCKWAY,
INDIVIDUALLY AND ON BEHALF OF A CLASS,
Plaintiffs-Appellees,
v.

PUTNAM FUNDS TRUST AND
PUTNAM INVESTMENT MANAGEMENT, LLC,
Defendants-Appellants.

Appeal! from the United States District Court
for the Southern District of Illinois

[Submitted May 26, 2004]
[Decided June 29, 2004]

Before: EASTERBROOK, EVANS, and WILLIAMS, Cir-
cult Judges.

EASTERBROOK, Circuit Judge.

Plaintiffs own shares in Putnam Funds Trust, a mutual
fund regulated by the Securities and Exchange Commis-
sion under statutes such as the Securities Act of 1933, the
Securities Exchange Act of 1934, and the Investment
Company Act of 1940. Contending that the fund and its
investment adviser (Putnam Investment Management)
had engaged in misconduct that reduced the value of their
shares, plaintiffs filed suit in state court, invoking state
law alone. They propose to represent a class of the Fund’s
investors. By forswearing reliance on federal law plain-
tiffs hope to avoid the strictures of federal statutes such
as the Private Securities Litigation Reform Act of 1995.

lla

Similar maneuvers by other investors in the wake of the
1995 statute led Congress to enact the Securities Litiga-
tion Uniform Standards Act of 1998. This statute, usually
known by its ungainly acronym SLUSA, blocks many class
actions based on state law when the issuers are covered by
the federal securities laws. Preemption normally is an af-
firmative defense, to be evaluated by the court in which
the plaintiff elects to sue. See, e.g., Franchise Tax Board
of California v. Construction Laborers Vacation Trust, 463
U.S. 1, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983). SLUSA de-
parts from the norm by permitting defendants to remove
so that a federal court may evaluate the defense in ad-
vance of any step in the state litigation. See 15 U.S.C.
§§ 77p(c), 78bb(f)(2). If the federal court determines that
the claim is preempted, it dismisses the suit; otherwise it
remands for proceedings under state law. 15 U.S.C.

§§ 77p(b), (d)(4), 78bb(f)(1), (3)(D).

Defendants removed this suit under § 77p(c). (From
here on, we mention only § 77p; provisions in § 78bb are
functionally identical.) They asked the district judge to
find the action foreclosed by § 77p(b), which provides:

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 purchase or sale of a covered
security; or
(2) that the defendant used or employed any manipu-
lative or deceptive device or contrivance in connection
with the purchase or sale of a covered security.

The district court concluded that the proceeding is a “cov-
ered class action” because plaintiffs seek damages on be-
half of more than 50 investors. (Section 77p(f)(2)(A) pro-
vides the full definition of “covered class action.”) But the
judge concluded that the suit is not affected by § 77p(b)
because plaintiffs do not allege loss “in connection with the
purchase or sale” of securities: they have held throughout

12a

the class period and claim to be injured by events that di-
minished the value realized by all investors. The court’s
conclusion that § 77p(b) does not thwart plaintiffs’ claims
required a remand under the terms of § 77p(d)(4):

In an action that has been removed from a State court
pursuant to subsection (c), if the Federal court deter-
mines that the action may be maintained in State court
pursuant to this subsection, the Federal court shall re-
mand such action to such State court.
In the opinion’s final paragraph, the district judge added:
“Because the Court lacks subject matter jurisdiction, the
Court REMANDS this action to the Madison County, Illi-
nois Circuit Court.” (Capitalization and boldface in origi-
nal.) This sentence had led to the dispute that requires
our resolution.

Because it ends the litigation in federal court, a remand
is a “final decision” that may be appealed under 28 U.S.C.
§ 1291. See Quackenbush v. Allstate Insurance Co., 517
U.S. 706, 711-15, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996).
Defendants filed a timely notice of appeal from the district
court’s remand. But we must reckon with 28 U.S.C.
§ 1447(d), which says that “|a]n order remanding a case to
the State court from which it was removed is not review-
able on appeal or otherwise.” In Thermtron Products, Inc.
vu. Hermansdorfer, 423 U.S. 336, 96 S.Ct. 584, 46 L.Ed.2d
542 (1976), the Court held that § 1447(¢) is not as sweep-
ing as its language suggests; instead, the Justices con-
cluded, it blocks review only when the district court acts
under the authority granted by § 1447(c) or an equivalent
statute. See Things Remembered, Inc. v. Petrarca, 516
U.S. 124, 116 S.Ct. 494, 133 L.Ed.2d 461 (1995), which re-
capitulates the Court's views on § 1447(d).

Lack of subject-matter jurisdiction is a ground on which
remand is authorized (indeed, required) by § 1447(c), and
accordingly a district judge’s conclusion that jurisdiction is
lacking is not subject to appellate review. See, e.g.,
Gravitt v. Southwestern Bell Telephone Co., 430 U.S. 723,
97 S.Ct. 1439, 52 L.Ed.2d 1 (1977): Rubel v. Pfizer Inc.,

l3a

361 F.3d 1016 (7th Cir.2004); Adkins v. Illinois Central
R.R., 326 F.3d 828 (7th Cir.2003); Phoenix Container, L.P.
v. Sokoloff, 235 F.3d 352 (7th Cir.2000). Section 77p(d)(4),
by contrast, is not within § 1447(c) or equivalent to it, for a
remand under § 77p(d)(4) comes at the end rather than the
outset of federal adjudication. The Supreme Court has
itself reviewed remand decisions that fall outside the
scope of § 1447(c). Quackenbush and Thermtron are two;
Carnegie-Mellon University v. Cohill, 484 U.S. 343, 108
S.Ct. 614, 98 L.Ed.2d 720 (1988), is another. We must de-
cide how this situation fits.

One possibility is that the district judge’s use of the
word “jurisdiction” is conclusive. We held in Rubel and
Phoenix Container that a court may not look behind a ju-
risdictional remand to examine the reasons why the dis-
trict judge thought jurisdiction lacking; plaintiffs say that
the same principle applies here. Yet defendants do not
want us to pierce an ultimate conclusion in order to get at
the intermediate steps in the syllogism. Their point,
rather, is that “jurisdiction” is a word of many shadings,
and that judges sometimes use the word “jurisdiction” or
the phrase “subject-matter jurisdiction” when they mean
something else. Twice in the past few months the Su-
preme Court has observed that a court lacks “subject-
matter jurisdiction” only when Congress has not author-
ized the federal judiciary to resolve the sort of issue pre-
sented by the case (or the Constitution forbids adjudica-
tion). See Kontrick v. Ryan, 540 U.S. 443, ---- - ---- . 124
S.Ct. 906, 914-16, 157 L.Ed.2d 867 (2004); Scarborough v.
Principi, 541 U.S. 401, ---- - ---- , 124 S.Ct. 1856, 1864-65.
158 L.Ed.2d 674, ---- - ---- (2004). There may be many
other reasons why a court should not resolve a dispute, but
these differ from the lack of subject-matter jurisdiction.

In Gravitt, Rubel, Adkins, and Phoenix Container the
district judges held that removal was improper: the litiga-
tion never should have come to federal court. That is not,
however, what the district judge found here. Because
plaintiffs represent more than 50 investors, this is a

l4a

“covered class action” and a federal judge is not only au-
thorized but also required to decide whether any court
may entertain the litigation. A conclusion that a suit is
not a “covered class action” (say, because just 40 investors
stand to recover damages) would imply that removal had
been improper, and such a decision would come within
§ 1447(d).

Removal of this suit was proper, the district judge held;
that is why the court proceeded to the question how
§ 77p(b) affects the litigation. Only after making the sub-
stantive decision that Congress authorized it to make did
the district court remand. After making the decision re-
quired by § 77p(b), the district court had nothing else to
do: dismissal and remand are the only options. Perhaps
one could say that jurisdiction evaporated at that juncture,
but that would be tautological. Once a court does all that
the statute authorizes, there is no adjudicatory compe-
tence to do more. That is not the “lack of subject-matter
jurisdiction” that authorizes a remand. Otherwise every
federal suit, having been decided on the merits, would be
dismissed “for lack of jurisdiction” because the court's job
was finished. Cf. Bell v. Hood, 327 U.S. 678, 66 S.Ct. 773,
90 L.Ed. 939 (1946).

We must distinguish between a decision that “this court
lacks adjudicatory competence” and a decision that “the
court has been authorized to do X and having done so
should bow out.” The former implies lack of subject-
matter jurisdiction, as Kontrick and Scarborough explain:
the latter implies the presence of jurisdiction. A good ex-
ample of the second category is a suit under federal law
with a state-law claim supported by the supplemental
jurisdiction. 28 U.S.C. § 1367. District courts should
relinquish supplemental jurisdiction under certain circum-
stances, remanding to state court if the suit originated
there. 28 U.S.C. §§ 1367(c), 1441(c). We know from
Carnegic-Mellon that § 1447(d) does not foreclose review of
such a remand. In both Carnegie-Mellon and Quacken-
bush the district judge found the removal proper but

l5a

concluded that the state court should handle some issues.
In Carnegie-Mellon the remand reflected limits to the sup-
plemental jurisdiction, and in Quackenbush the district
judge concluded that abstention was appropriate so that
the state judiciary could resolve points of state law. In
both cases the Supreme Court reviewed the decision on the
merits, treating a remand as unaffected by § 1447(d) when
the propriety of the removal was not in doubt.

This suit was properly removed. The district judge
made a substantive decision under authority granted by a
federal statute. It follows that the remand is unaffected
by § 1447(d). This makes practical sense too. The goal of
that statute is that a contest about what forum should re-
solve the dispute be wrapped up quickly, so that the litiga-
tion can get under way. Appellate consideration of what
amounts to a venue dispute slows tiu‘ngs down to little
good end, for the state court is competent to address the
merits. SLUSA means, however, that one specific sub-
stantive decision in securities litigation must be made by
the federal rather than the state judiciary. Appellate re-
view of decisions under § 77p(b) will promote accurate and
consistent implementation of that statute, at little cost in
delay beyond what the authorized removal itself creates.
Yet if the remand is deemed non-appealable, then a major
substantive issue in the case will escape review — for
SLUSA ensures that only the federal judiciary makes the
§ 77p(b) decision. Normal remands, for which § 1447(d) is
designed, leave all substantive issues open to plenary reso-
lution in the state court (and, if necessary, the Supreme
Court of the United States). That's not how SLUSA
works; it is now or never for appellate review of the ques-
tion whether an action under state law is preempted. In
the unusual securities class action where expedition is vi-
tal, we can accelerate the appeal’s disposition. See Abney
v. United States, 431 U.S. 651, 662 & n. 8, 97 S.Ct. 2034,
52 L.Ed.2d 651 (1977).

We recognize that two courts of appeals have held that
disputes about the application of § 77p and § 78&bb cannot

16a

be resolved by federal appellate judges. See Spielman v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116
(2d Cir.2003); United Investors Life Insurance Co. v.
Waddell & Reed, Inc., 360 F.3d 960 (9th Cir.2004); Abada
v. Charles Schwab & Co., 300 F.3d 1112 (9th Cir.2002).
All of these decisions precede Scarborough, and although
United Investors came a month after Kontrick the court
did not discuss it. Both the second and the ninth circuits
were mesmerized by the word “jurisdiction” and did not
see the difference between a case that never should have
been removed and a case properly removed and remanded
only when the federal job is done.

Suits that the district court itself finds to have been
properly removed are unaffected by § 1447(d). That’s the
upshot of Carnegie-Mellon and Quackenbush. “(W]e un-
derstand Carnegie-Mellon to permit review when the dis-
trict court believes that removal was proper and that later
developments authorize remand.” Jn re Amoco Petroleum
Additives Co., 964 F.2d 706, 708-09 (7th Cir.1992). Adkins
qualifies this statement with the observation that if the
“later development” is one that demonstrates the impro-
priety of removal in the first place, then § 1447(d) applies.
326 F.3d at 832-34. Here, however, later developments
did not undercut the propriety of the removal; the only
pertinent development is that the district court completed
its appointed task. Thus the principle of Amoco Petroleum
Additives covers our situation. Adkins observes that this
principle enjoys the support of the fourth, fifth, and elev-
enth circuits too.

Technically this opinion creates a conflict among the cir-
cuits about appellate review of decisions under SLUSA, so
we have circulated it before release to all active judges un-
der Circuit Rule 40(e). But our disposition reflects nothing
more than application of settled circuit law to a different
substantive statute. We could not follow the second and
ninth circuits without overruling Amoco Petroleum Addi-
tives and later decisions in this circuit. Because Amoco
Petroleum Additives has the support of at least three other

17a

circuits — not to mention Things Remembered and Quack-
enbush — overruling would be inappropriate. On the Rule

40(e) poll, none of the active judges favored a hearing en
bance.

The appeal is within our appellate jurisdiction and will
proceed to briefing and decision on the merits.

18a

UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

Nos. 04-1496 & 04-1608

STEVE DUDLEY AND BETH DUDLEY,
INDIVIDUALLY AND ON BEHALF OF ALL OTHERS
SIMILARLY SITUATED,
Plaintiffs-Appellees,

Vv.

PUTNAM INTERNATIONAL EQUITY FUND,
PUTNAM INVESTMENT MANAGEMENT, LLC,
AND PUTNAM INVESTMENT FUNDS,
Defendants-Appellants.

Appeals from the United States District Court
for the Southern District of Illinois
No. 03 C 852
G. Patrick Murphy, Chief Judge

[Decided June 30, 2004]

ORDER

Before: EASTERBROOK, EVANS, and WILLIAMS, Cir-
cuit Judges.

This consolidated appeal is within our appellate juris-
diction and will proceed to briefing and merits. See
Kircher v. Putnam Funds Trust, No. 04-1495, slip op. (7th
Cir. June 29, 2004).

19a

UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

No. 04-1628

T.K. PARTHASARATHY, EDMUND WOODBURY, AND
STUART A. SMITH, INDIVIDUALLY AND ON BEHALF OF ALL
OTHERS SIMILARLY SITUATED,

Plaintiffs-Appellees,
v.

ARTISAN FUNDS, INC., A CORPORATION, AND
ARTISAN PARTN ERS LIMITED PARTNERSHIP,
Defendants-Appellants.

Appeal from the United States District Court
for the Southern District of Illinois
No. 03 C 673
David R. Herndon, Judge

[Decided June 30, 2004|

ORDER

Before: EASTERBROOK, EVANS, and WILLIAMS, Cir-
cuit Judges.

This consolidated appeal is within our appellate juris-
diction and will proceed to briefing and merits. See
Kircher v. Putnam Funds Trust, No. 04-1495, slip op. (7th
Cir. June 29, 2004).

20a

UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

Nos. 04-1650 & 04-1651

DOROTHY LUETTINGER AND ROBERT POTTER,
INDIVIDUALLY AND ON BEHALF OF ALL OTHERS
SIMILARLY SITUATED,
Plaintiffs-Appellees,
Vv.

SCUDDER INTERNATIONAL FUND, INC., A CORPORATION, AND
DEUTSCHE INVESTMENT MANAGEMENT AMERICAS, INC.,
JANUS INVESTMENT FUND, A BUSINESS TRUST, AND
JANUS CAPITAL MANAGEMENT LLC,

Defendants-Appellants.

Appeals from the United States District Court
for the Southern District of Illinois
No. 03 C 692
David R. Herndon, Judge

[Decided June 30, 2004}

ORDER

Before: EASTERBROOK, EVANS, and WILLIAMS, Cir-
cuit Judges.

This consolidated appeal is within our appellate juris-
diction and will proceed to briefing and merits. See
Kircher v. Putnam Funds Trust, No. 04-1495, slip op. (7th
Cir. June 29, 2004).

2la

UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

Nos. 04-1660 & 04-1661

GARY VOGELER, INDIVIDUALLY AND ON BEHALF OF
ALL OTHERS SIMILARLY SITUATED,
Plaintiff-Appellee,

Vv.

COLUMBIA WANGER ASSET MANAGEMENT L.P.
AND COLUMBIA ACORN TRUST,
Defendants-Appellants.

Appeals from the United States District Court
for the Southern District of [llinois
No. 03 C 843
David R. Herndon, Judge

[Decided June 30, 2004]

ORDER

Before: EASTERBROOK, EVANS, and WILLIAMS, Cir-
cuit Judges.

This consolidated appeal is within our appellate juris-
diction and will proceed to briefing and merits. See
Kircher v. Putnam Funds Trust, No. 04-1495, slip op. (7th
Cir. June 29, 2004).

22a

UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

No. 04-2162

AVERY JACKSON,

Plaintiff-Appellee,
v.

VAN KAMPEN SERIES FUND, INC. AND
VAN KAMPEN INVESTMENT ADVISORY CORPORATION,
Defendants-Appellants.

Appeal from the United States District Court
for the Southern District of Illinois
No. 04 C 56
David R. Herndon, Judge

[Decided June 30, 2004]

ORDER

Before: EASTERBROOK, EVANS, and WILLLAMS, Cir-
cuit Judges.

This consolidated appeal is within our appellate juris-
diction and will proceed to briefing and merits. See
Kircher v. Putnam Funds Trust, No. 04-1495, slip op. (7th
Cir. June 29, 2004).

23a

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS

No. 08-CV-0691-DRH

CARL KIRCHER AND ROBERT BROCKWAY,
INDIVIDUALLY AND ON BEHALF OF ALL OTHERS
SIMILARLY SITUATED,
if si Plaintiffs,
Vv.

PUTNAM FUNDS TRUST, A BUSINESS TRUST,
PUTNAM INVESTMENT MANAGEMENT, LLC,
EVERGREEN INTERNATIONAL TRUST, A BUSINESS TRUST. AND
EVERGREEN INVESTMENT MANAGEMENT COMPANY, LLC,

Defendants.

[Filed Jan. 27, 2004]

MEMORANDUM AND ORDER

HERNDON, District Judge:

I. Introduction and Background
This matter comes before the Court on Plaintiff's motion
to remand and corrected motion to remand (Docs. 19 &
26). Because this Court lacks subject matter jurisdiction
over Plaintiff's claims, the Court remands this matter to
the Madison County, Illinois Circuit Court.

On September 16, 2003, Carl Kircher and _ Robert
Brockway filed this purported class action in the Madison
County. Illinois Circuit Court against Putnam Funds
Trust, Putnam Investment Management, LLC, Evergreen
International Trust, a business trust, and Evergreen

24a

Investment Management Company, LLC (Doc. 2).' Plain-
tiffs are long-term mutual fund investors who claim that
the value of their shares were diluted by Defendants’ cer-
tain practices. Plaintiffs’ complaint contains four-counts
alleging alternate theories based on state law claims of
breach of fiduciary duty.

On October 23, 2003, Defendants removed the case to
this Court based on federal question jurisdiction, 28
U.S.C. § 1331. Specifically, Defendants maintain that
Plaintiffs’ claims are preempted by the Securities Litiga-
tion Uniform Standards Act of 1998, 15 U.S.C. § 77 et seq.
(“SLUSA”) and that the complaint presents a substantial
federal question. Thereafter, Plaintiffs flied a motion to
remand.

II. Analysis

Defendants may remove this case to this court only if
the federal district courts would have original jurisdiction
over the action. See 28 U.S.C. § 1441; Caterpillar Inc.
v. Williams, 482 U.S. 386, 392 (1987). “|T)|he burden of
establishing federal jurisdiction falls on the party seeking
removal.” Doe v. Allied Signal, Inc., 985 F.2d 908, 911
(7th Cir. 1993). Defendants do not contend that diversity
jurisdiction exists. Thus, removal is appropriate only if
the Court has federal question jurisdiction over Plaintiffs’
claims.

The general rule is that a plaintiff is the master of his
own complaint and can avoid federal question jurisdiction
by pleading exclusively state law claims. See Caterpil-
lar, 482 U.S. at 392; Franchise Tax Bd. v. Construc-
tion Laborers Vacation Trust for S. Cal., 463 U.S. 1,

' Plaintiffs seek to represent the following class: “All persons in the
United States who held shares in the Putnam International Growth &
Income Fund or Evergreen International Growth Fund for a period of
more than fourteen days before redeeming or exchanging them during
the period beginning from five years prior to and through the date of
the filing of this complaint.” (Doc. 2, 4 41). To date, no motion to cer-
tifv the class has been filed. Thus, as of this date, this suit is not pro-
ceeding as a class action.

25a

10 103 (1983); Bastien v. AT&T Wireless Services,
Inc., 205 F.3d 983, 986 (7th Cir. 2000). If the plaintiff's
claim arises under state law, the mere assertion of federal
preemption as a defensive argument — sometimes called
“conflict preemption” — will not confer federal question ju-
risdiction. Metropolitan Life Ins. Co. v. Taylor, 48.
U.S. at 63-64 (1987); Franchise Tax Bd. of Cal., 463
U.S. at 9-12. “Complete preemption,” on the other hand,
is the doctrine which recognizes that federal law may
sometimes so completely preempt a particular area that
any civil complaint raising this select group of claims is

necessarily federal in character. Metropolitan Life, 481
US. at 63-64.

First, Defendants maintain that the allegations in
Plaintiffs’ complaint satisfy SLUSA’s “in connection with”
requirement. The Court rejects this argument.

SLUSA provides for the removal to federal court of cer-
tain class actions based on state law. 15 U.S.C. § 78bb(f).
Accord Professional Mgt Associates, Inc. Employees’
Profit Sharing Plan v. KPMG, LLP, 335 F.3d 800, 802
(8th Cir. 2003). SLUSA was enacted to prevent plaintiffs
from seeking to evade the protections that federal law pro-
vides against abusive litigation by filing suit in state court.
Newby v. Enron Corp., 338 F.3d 467, 471 (5th Cir.
2003). The primary way SLUSA accomplishes this objec-
tive is by preempting certain securities fraud class actions
brought under state law. Id. The Eighth Circuit Court of
Appeals stated:

With some exceptions, SLUSA made the federal
courts the exclusive fora for most class actions in-
volving the purchase and sale of securities. Primar-
ily, SLUSA mandates that any class action based on
an allegation that a “covered security” was sold for
purchased] through misrepresentation, manipula-
tion, or deception shall be removable to federal
court.

Green v. Ameritrade, Inc., 279 F.3d 590, 595-596 (8th
Cir. 2002).

26a

However, not all securities claims are preempted by
SLUSA. A party claiming SLUSA preemption must dem-
onstrate that the claim satisfies the following:

(1) the action is a “covered class action” under
SLUSA, (2) the action purports to be based on state
law, (3) the defendant is alleged to have misrepre-
sented or omitted a material fact (or to have used or

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0221%3A02. Public record. Not legal advice.