Petition for Writ of Certiorari — Disher v. Citigroup Global Markets Inc.

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In addition to turning the plain language of the statute

on its head, the Seventh Circuit's decision also conflicts

with the decisions of three other circuits and countless

district courts that have interpreted SLUSA. As a result,

the holdings of Kircher II and Disher combined eradicate

a category of claims that have been traditionally left to

state law, claims that were not Congresses focus when it

enacted SLUSA and claims that, in fact, are not even so

much as mentioned anywhere in SLUSA or its legislative

history. The result of the Seventh Circuit’s holdings is

that shareholders like petitioner, whe on the one hand

have no federal remedy because their claims are not “in

connection with” the purchase or sale of a security within

the meaning of § 10(b), are now simultaneously denied a

cause of action under state law because their claims are

deemed to be “in connection with the purchase or sale” of

a security within the meaning of SLUSA. According to

the Seventh Circuit, Congress has stripped such investors

— without ever bothering to mention them — of any direct

private cause of action, concluding that their “‘claims

must be left to public enforcement.” Pet. App. 10a (quot-

ing Kircher I], 403 F.3d at 483-84).

OPINIONS BELOW

The district court’s order granting plaintiff’s motion to

remand (Pet. App. 13a-14a) is unreported. The court of

appeals’ opinion finding appellate jurisdiction and revers-

ing and remanding the district court’s judgment with in-

structions to undo the remand order and to dismiss plain-

tiff’s state-law claims (id. at la-lla) is reported at 419

F.3d 649.

JURISDICTION

The court of appeals entered its judgment on August 17,

2005. On November 9, 2005, Justice Stevens extended

the time for filing a petition for a writ of certiorari to and

including December 15, 2005. Pet. App. 75a. 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

iorth at Pet. App. 50a-74a.

STATEMENT OF THE CASE

A. The Statutory I ramework

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-

ingly brought suit against issuers in state court alleging

securities fraud under state statutory or common law.

To prevent private plaintiffs from engaging in these al-

leged circumventions 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. 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 omissi0o.: 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.

~ 6

15 U.S.C. § 77p(b); accord id. § 78bb(f)(1).' SLUSA also

authorizes these 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). Under the Act, a

“covered classaction” includes a “lawsuit in which dam-

ages are sought on behalf of more than 50 persons or

prospective class members,” id. § 77p(f)(2)(A); accord id.

§ 78bb(f)(5)(B), and a “covered security” is a security that

is either listed on a national securities exchange or issued

by an investment company, see id. §§ 77p(f)(3), 77r(b)(1)-

(2), 78bb(f)(5)(E).

B. Petitioners’ Common-Law Claims

Petitioner is one of thousands of Citigroup customers

who relied on Citigroup’s investment reports and ratings

in making the decision to continue holding certain stocks

they already owned. Citigroup employs a five-point sys-

tem to assess securities, rating securities as “buy,” “out-

perform,” “neutral,” “underperform,” or “sell” based on the

current and anticipated performance of the security.

Some time in 2000, Citigroup secretly ceased using its

lowest two ratings — “underperform” or “sell” — for certain

securities researched and rated by its Internet and Tele-

communications Groups. Instead, it began rating those

securities only as “buy,” “outperform,” or “neutral,” even

when the securities warranted a negative rating. Citi-

group communicated to certain institutional customers

” 664

' The preemption provision quoted in the text comes from SLUSA’s

amendment to the 1933 Act. ‘The preemption provision added by

‘SLUSA to the 1934 Act, 15 U.S.C. § 78bb(f), is “functionally identical”

to the 1933 Act amendment. Kircher l/, 403 F.3d at 481. For ease of

reference, the remainder of this brief refers only to the 1933 Act pre-

emption provision.

that a rating of “neutral” indicated that they should sell

the stock. Citigroup issued these misleading reports in an

effort to secure additional investment banking business.*

In 1998 and 1999, petitioner acquired shares of MCI

WorldCom Inc. and Rhythms Netconnections Inc. Relying

on Citigroup’s artificially inflated ratings of these stocks,

petitioner retained these securities, which plummeted in

value.

Petitioner filed a class action in Illinois state court, al-

leging that Citigroup breached its customer contracts and

its fiduciary duty to its customers and acted negligently

by failing to supervise its researchers and by issuing inac-

curate, nonobjective investment reports, and that Citi-

bank was unjustly enriched by not adequately performing

services purchased by petitioner. See Pet. App. 25a-31a,

34a-37a (9 51-76, 83-94). Petitioner also alleged that

Citigroup defrauded its customers by issuing misleading

investment reports. See id. at 3la-33a (%§] 77-82). The

complaint sought damages not to exceed $75,000 per class

member.

Petitioner defined the class to include holders of the

relevant securities — specifically, “all customers of [Citi-

group] who held one or more of the Internet Stocks or.

Telecom Stocks in their [Citigroup] accounts at times

when those stocks were declining in value and when

[Citigroup] was rating those stocks as ‘buy’ ‘outperform’ or

‘neutral’ when such ratings were not warranted by [Citi-

group’s] research.” Jd. at 22a ({ 39). The complaint ex-

plicitly excludes any claims based on Citigroup’s “conduct

in connection with [the] purchases or sales” of securities.

Id. (4| 41).

2 See, e.g., Conal Walsh, Joe Public takes on giants of Wall Street,

The Observer (Apr. 14, 2002) (relating allegations that Jack Grubman,

the “superstar” analyst for Salomon Smith Barney, issued misleading

analyses of several companies in order to secure additional banking

business), at http://observer.co.uk/business/story/0,,683827,00.html.

C. Proceedings Below

Citigroup removed to federal district court, arguing,

inter alia, that the case fell within the district court's re-

moval jurisdiction under SLUSA, see 15 U.S.C. § 77p(c),

and that petitioner’s claims were preempted by that Act,

see id. § 77p(b). Petitioner moved to remand the case to

state court for lack of subject-matter jurisdiction. The dis-

trict court agreed with petitioner that it lacked jurisdic-

tion.

The district court concluded that petitioner's common-

law claims were outside the scope of SLUSA’s removal

provision because the claims were brought by holders of

securities, not purchasers or sellers. See Pet. App. 39a-

40a, 46a-47a. Because petitioner’s claims were not “in

connection with the purchase or sale of a covered secu-

rity,” the court explained, they were not cognizable under

§ 10(b) of the 1934 Act and therefore were not removable

under SLUSA. The court accordingly remanded the case

to state court for lack of subject-matter jurisdiction. See

id. at 13a-14a.

The Seventh Circuit reversed and remanded with in-

structions to dismiss the case. The court first concluded

that it had jurisdiction to review the district court’s re-

mand order, relying on its recent decision in Kircher I.

See id. at 4a. In Kircher I, the Seventh Circuit acknow]l-

edged that, under 28 U.S.C. § 1447(d), a remand for lack

of subject-matter jurisdiction is unappealable, but it held

that a remand order under SLUSA is not based on a lack

of subject-matter jurisdiction.

To reach that conclusion, the Kircher J court had opined

that SLUSA permits 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 preempts only “covered class actions” that

meet the further requirement of alleging an untrue state-

ment or omission, or use of a manipulative or deceptive

device, “in connection with the purchase or sale of a cov-

ered security,” id. § 77p(b). The court did not address

plaintiff’s argument that the statutory language “as set

forth in subsection (b)” makes clear that only those ac-

tions preempted by SLUSA are subject to removal.

Rather, the court held that removal is proper even though

a lawsuit is outside SLUSA’s preemptive scope so long as

the lawsuit is a “covered class action.” The court thus rea-

soned that a SLUSA remand order of any class action in-

volving more than 50 investors (i.e., a “covered class ac-

tion”) is not one for lack of subject-matter jurisdiction.

Such a remand order, the court then concluded, is one

that may be reviewed on appeal.

The Kircher I court further explained 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.”

373 F.3d at 850. Under SLUSA, the court reasoned, 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.” Id.

Having determined that it could exercise appellate ju-

risdiction over the district court’s remand order, the court

in this case held that SLUSA preempted all of petitioner’s

state-law claims. The court observed that SLUSA was

designed to prevent Rule 10b-5 private plaintiffs from mi-

grating to state court to avoid the PSLRA. The court went

on to note that, in Blue Chip Stamps, this Court had held

that investors who neither purchase nor sell securities

have no cause of action under § 10(b) and Rule 10b-5 as a

result of those provisions’ requirement that the unlawful

conduct be “in connection with the purchase or sale” of

securities. The court recognized that petitioner’s com-

plaint defined a class of non-trading shareholders who

could not bring a private action under Rule 10b-5. See

Pet. App. 6a, 10a-lla. The court nevertheless concluded

that such non-traders’ claims were “in corinection with the

purchase or sale” of securities and were thus preempted

by SLUSA, and that petitioner’s complaint defined a class

of non-trading shareholders who could not bring a private

action under Rule 10b-5. See id. at 5a-6a, 9a, 10a. The

court nevertheless concluded that petitioner’s claims were

“in connection with the purchase or sale” of securities and

were preempted by SLUSA.

The court read Blue Chip Stamps’ holding not as an in-

terpretation of the “in connection with the purchase or

sale” language in the 1934 Act, but rather as a mere

policy-based, judicial limitation on the standing of private

litigants to enforce § 10(b) and Rule 10b-5 that is not

grounded in the text of § 10(b). See id. at 10a. 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. (quoting Kircher II, 403 F.3d at 483-84). In reaching

that conclusion, the court acknowledged that its decision -

conflicted with decisions of the Second, Eighth, and Elev-

enth Circuits. See id. at 9a-10a.

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

The Seventh Circuit’s holding that it has jurisdiction to

review a remand order based on a district court’s finding

that a plaintiff’s claims are not preempted by SLUSA

squarely conflicts with decisions of the Second, Ninth, and

Eleventh Circuits. Those circuits hold that SLUSA’s pre-

emption and removal provisions are co-extensive -- that is,

that a state-law action that falls outside of SLUSA’s pre-

emptive scope is not removable under SLUSA. In their

view, 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).

By contrast, in Kircher I, the decision on which the

court of appeals rested in this case, the Seventh Circuit

insisted that SLUSA authorizes removal of class actions

involving more than 50 investors and held that remands

based on the conclusion that the claims are not preempted

‘are not remands for lack of subject-matter jurisdiction.

The division between the circuits is clear and stems from

two opposing interpretations of SLUSA’s removal provi-

sion: one (the Seventh Circu’t’s) that regards the provi-

sion as authorizing removal of all “covered class actions,”

and another (the Second, Ninth, and Eleventh Circuits’)

that regards it as authorizing removal only of those

covered class actions described 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 thé 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 class action preempted by [SLUSA’s pre-

emption provision].” 332 F.3d at 123. In the Second Cir-

cuit’s view, SLUSA completely preempts those class ac-

tions, but “only converts into federal claims those state

claims that fall within its clear preemptive scope, thereby

confining federal question jurisdiction under this statu-

tory regime to a subset of securities fraud cases.” Id. 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”: “If a district court determines the

action is not a ‘preempted class action’ and, therefore, re-

moval was improper, the district court lacks subject mat-

ter jurisdiction to further entertain the action.” Jd. at

124-25. 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 of jurisdiction and consequently was not reviewable

under § 1447(d).

The Second Circuit’s decision squarely conflicts with

Kircher I (and consequently the decision in -this case),

which held that a remand order that followed a finding of

no preemption was not based on a lack of jurisdiction and —

was reviewable under § 1447(a). As Judge Newman suc-

cinctly explained in his Spielman concurrence, the issues

“of complete preemption and the existence of subject mat-

ter jurisdiction ... are the opposite sides of the same

coin.” 332 F.3d at 132.

2. Ninth Circuit - Abada

In Abada, the Ninth Circuit reached a similar conclu-

sion to that of the Second Cir it. The district court in

Abada had found that the plaintiffs’ clai.. : were not pre-

empted 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.

Observing that SLUSA’s removal provision “provides for

the removal of ‘any covered class action’ ‘based upon the

statutory or common law of any State’ ‘alleging a misrep-

resentation 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 Ninth

Circuit held that, “[i]n order to decide whether it had sub-

ject 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.” Id.; see also United Investors, supra

(reaffirming the rule of Abada).

3 Eleventh Circuit — Williams

In Williams, decided after Kircher I but before the Sev-

enth Circuit’s decision in this case, the Eleventh Circuit

addressed whether it could review a district court order

remanding a lawsuit that had been removed under

SLUSA, but that asserted claims only under federal law.

The lawsuit in Williams was a “covered class action” in-

volving a “covered security” as those terms are defined by

SLUSA. 389 F.3d at 1186. But the district court re-

manded the case after it 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 concluded that the remand was

not reviewable under § 1447(d). It explained that, even

though the district court never explicitly mentioned

subject-matter jurisdiction, its remand order was based on

a lack of removal jurisdiction. See id. at 1190 (“We there-

fore hold that the district court’s remand order based on

lack of removal jurisdiction, entered in response to a

timely motion to remand, is not reviewable under

§ 1447(d).”).2 Williams thus squarely conflicts with the

Seventh Circuit’s position that a remand order based on a

finding that a lawsuit is not preempted by SLUSA is re-

viewable.

* In Riley, the Eleventh Circuit had stated that, “in order to remove

an 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.

A clear conflict exists, therefore, between the Seventh

Circuit and the Second, Ninth, and Eleventh Circuits —

and that conflict is openly acknowledged by the courts of

appeals. 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”). It is clear that the Seventh Circuit has

no intention of rethinking its position in light of the views

of the other circuits. See Pet. App. 4a (“declin[ing] to re-

visit” Kircher I). This Court’s intervention therefore is

necessary to establish the proper interpretation of

SLUSA’s removal provision and the reviewability of re-

mand 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 position conflict

with the decisions of three other circuits, but it also is

inconsistent with this Court’s precedents. In Things

Remembered, Inc. v. Petrarca, 516 U.S. 124 (1995), this

Court stated that § 1447(d) bars appellate review of re-

mands based on grounds recognized in § 1447(c), such as

lack of subject-matter jurisdiction. See id. at 127-28. The

Court held that this prohibition on appellate review ex-

tends not only to remand orders in suits removed under

the general removal statute, but also to remand orders in

cases removed under any other statute, even if the other

statute contains an express remand provision of its own.

See id. at 128. Moreover, this Court made clear in Gravitt

v. Southwestern Bell Telephone Co., 430 U.S. 723, 723

(1977) (per curiam), that it is immaterial whether the dis-

trict court’s decision that it lacked subject-matter jurisdic-

tion was correct: § 1447(d) precludes review even of juris-

dictional decisions that are clearly wrong.

The district court in this case interpreted SLUSA to au-

thorize removal jurisdiction only over cases falling within

SLUSA’s preemption provision, and therefore remanded

based on a perceived lack of subject-matter jurisdiction

once it determined that petitioner’s claims were not pre-

empted. See, e.g., Pet. App. 46a-47a. Even if the district

court was mistaken in its interpretation of SLUSA’s re-

moval provision — for example, because the Seventh Cir-

cuit is correct that SLUSA authorizes removal of all “cov-

ered class actions,” not just preempted actions — the dis-

trict court’s order was still unreviewable under Gravitt

and Things Remembered. The Seventh Circuit’s exercise

of appellate jurisdiction therefore conflicts with this

Court’s decisions.

In addition, 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. SLUSA does

not permit removal of all covered class actions, but rather

of “[aJny covered class action brought in any State court

involving a covered security, as set forth in subsection (b),”

15 U.S.C. § 77p(c) (emphasis added). Subsection (b) is the

preemption provision. The plain language of the removal

provision thus clearly indicates that Congress intended to

authorize removal only of those “covered class actions”

that also meet the requirements for preemption.

The Seventh Circuit’s Kircher I opinion utterly failed to

address that language or the conflicting circuits’ interpre-

tations of the removal provision. The Seventh Circuit

simply chided the other circuits for being “mesmerized by

the word ‘jurisdiction,’” 373 F.3¢ 851, instead of recogniz-

ing that those courts quite naturally interpreted SLUSA

to render removal proper only when an action is within

the scope of § 77p(b). In addition, the Seventh Circuit's

insistence (id. at 850) that only federal judges may resolve

the issue cf SLUSA preemption is an unprecedented read-

ing of the statute, unsupported by text or legislative his-

tory, that conflicts with settled Supreme Court law re-

garding the ability of state courts to address a preemption

defense. See, e.g., Chick Kam Choo v. Exxon Corp., 486

U.S. 140, 149-50 (1988) (“[W]hen a state proceeding pre-

—=T6

sents 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 in Kircher I advanced a red

herring in stating that district courts lack subject-matter

jurisdiction “only when Congress has not authorized the

federal judiciary to resolve the sort of issue presented by

the case,” 373 F.3d at 849 (citing Kontrick v. Ryan, 540

U.S. 443, 452-56 (2004), and Scar»orough v. Principi, 541

U.S. 401, 413-14 (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 ac-

tion 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 statutory language fashioned by Congress.

SLUSA specifically confers removal jurisdiction only on

preempted actions. The fact that federal courts are “au-

thorized” to resolve the issue of preemption in ruling on a

motion to remand stems from the basic principle that fed-

eral courts have jurisdiction to determine their own juris-

diction. See United States v. Ruiz, 536 U.S. 622, 628

(2002).

Under SLUSA, after a defendant removes a case, a fed-

era] court must address the question of preemption to de-

termine 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 jurisdic-

tion following a defendant’s removal of a case. The re-

moval in the instant case was initiated by respondent and

was found improper by the district court. Nothing in

Kontrick or Scarborough suggests that the district court’s

authority to resolve the preemption issue in ruling on mo-

tions to remand somehow meant that the court’s remand

order was not based on a lack of jurisdiction.

To the contrary, Scarborough explains that the “label”

subject-matter jurisdiction refers to statutory prescrip-

tions “‘delineating the classes of cases .. . falling within a

court’s adjudicatory authority.” 541 U.S. at 413-14 (quot-

ing Kontrick, 540 U.S. at 454-55). By ignoring the crucial

clause in § 77p(c) — “as set forth in subsection (b)” — the

Seventh Circuit misunderstood that, under SLUSA, only

that class of cases satisfying the requirements for pre-

emption 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-

cults and is unlikely to be resolved without this Court’s

intervention. The Seventh Circuit concluded in Kircher I

that such orders were reviewable in full awareness that

two circuits had held to the contrary, and there is no rea-

son to think that the court will alter its view. See Pet.

App. 4a (“declin[{ing] to revisit” Kircher J). There is also

no reason to think that the Second, Ninth, or Eleventh

Circuits will reach a different conclusion regarding

SLUSA remand orders based on the reasnning of the Sev-

enth Circuit. Indeed, the Eleventh Circuit determined

that such orders were not reviewable after the Seventh

Circuit '\ad decided the opposite in Kircher I.

Kircher I pointed cut that the Second Circuit’s decision

in Spielman and the Ninth Circuit’s decision in Abada

predated Scarborough and Kontrick. See 373 F.3d at 856-

51. But, as explained above, 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 issue is central not just in cases in-

volving “holder” claims, but in the entire range of cases im

which plaintiffs successfully contest the applicability of

SLUSA’s preemption provision. Whether remand orders

in such cases are subject to immediate appellate scrutiny

has a significant impact not only on the dockets of the

federal courts of appeals, but also on the ability of plain-

tiffs to obtain a timely adjudication of their viable state-

law claims. Letting the Seventh Circuit’s erroneous deci-

sion stand will undermine the “strong congressional policy

against review of remand orders,” Things Remembered,

516 U.S. at 136 (Ginsburg & Stevens, JJ., concurring) (in-

ternal quotation marks omitted), unfairly delaying legiti-

mate 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 co-

gent 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

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 dis-

agreement among the courts of appeals over the review-

ability of SLUSA remand orders.‘ Moreover, this case is a

particularly suitable vehicle. Practically, this Court will

have the opportunity to determine whether appellate ju-

risdiction exists over SLUSA remand orders only in a case

* 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

solely involves ... a claim ... concerning a covered security as defined

under section 16(f)(3) of the Securities Act of 1933 (15 U.S.C. 78p(f)(3))

and section 28(f)(5)(E) of the Securities Exchange Act of 1934 (15

U.S.C. 78bb(f)(5)(E)).” Jd. § 4(a)(2), 119 Stat. 11 (to be codified at 28

U.S.C. § 1332/4)(9)(A)); accord id. § 5(a), 119 Stat. 13 (to be codified at

28 U.S.C. § 1 453(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.

arising from a circuit that answers that question in the

affirmative, and the only such circuit is the Seventh.°

The Court need not wait for a disposition of Dabit, in

which the Court granted certiorari on September 27,

2005, before determining whether to grant certiorari in

this case. Dabit does not involve the jurisdictional ques-

tion presented here; the Court granted certiorari in Dabit

to address whether SLUSA preempts claims brought by

holders of securities. Moreover, the Court’s decision on

the merits in Dabit will not resolve the conflict in the cir-

cuits over whether SLUSA remand orders are reviewable.

Whether SLUSA preempts holder claims is wholly inde-

pendent of the question whether a district court’s deter-

mination that a claim is not preempted, erroneous or not,

is subject to immediate appellate review. Disher and

Kircher are ideal companion cases to Dabit. Granting cer-

tiorari in those cases, as well as in Dabit, will ensure that

the Court has the opportunity to resolve the procedural

and 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 VY. DABIT TO DECIDE

WHETHER SLUSA PREEMPTS'- CLAIMS

BROUGHT BY HOLDERS OF SECURITIES

The division between the Seventh Circuit and the Sec-

ond, Eighth, and Eleventh Circuits over whether SLUSA

preempts holder claims reflects a deep confusion through-

out the federal judiciary about SLUSA’s preemptive scope.

As one commentator has observed, “{t]he courts have

struggled to interpret 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

_ >On September 29, 2005, a petition for a writ of certiorari was filed

in Kircher (No. 05-409). Kircher raises the same jurisdictional question

as the one presented in this case.

Securities Fraud Claim, Is It a Securities Fraud Claim?,

56 Ala. L. Rev. 325, 326 (2004). This Court’s intervention

is required both to clarify the meaning of SLUSA’s pre-

emption provision and to ensure that holders of securities

who have suffered damages from investment advisors’

unlawful conduct are not deprived 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

As the Seventh Circuit acknowledged in its opinion, its

decision squarely conflicts with those of the Second,

Eighth, and Eleventh Circuits. Those circuits have held

that state-law claims in connection with the retention of

securities fall outside of SLUSA’s preemptive scope. The

Seventh Circuit has gone even further because it has now

eliminated claims where there were no purchases or sales

by anyone, even though SLUSA’s plain language preempts

only claims “in connection with the purchase or sale of a

covered security.”

4. Second Circuit - 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, 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. 395 F.3d at 28. The Second Cir-

cuit began by observing that the phrase “in connection

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 liti-

gation. The Second Circuit explained that application of

§ 10(b) jurisprudence to SLUSA’s language 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 capabie of being brought

under federal law for failure to meet 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.

Id. at 36.

The Second Circuit rejected the precise argument en-

dorsed by the Seventh Circuit: that the Blue Chip Stamps

purchaser-seller rule is simply a judicially fashioned

standing rule, not a textually based and substantive limit

on the “in connection with the purchase or sale” language.

The Second Circuit acknowledged that “[{t]he limitation on

standing to bring private suit for damages for fraud in

connection with the purchase or sale of securities is un-

Guestionably a distinct concept from the general statutory

and regulatory prohibition on fraud in connection with the

purchase or sale of securities.” Jd. at 39. But the court

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”:

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.

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 zatification of that judgment.” Id. 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, this Court

refused 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 the Seventh Cir-

cuit’s decision in this case.

3. Eleventh Circuit — Riley

In Riley, the Eleventh Circuit concluded, based on the

same analysis used by the Second and Eighth Circuits,

that SLUSA does not preempt claims dealing with the re-

tention 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 is the same phrase in § 10(b) and Rule 10b-5, and

it accordingly incorporates the judicial interpretations of

that phrase. See id. at 1342-44. The Eleventh Circuit fur-

ther noted that “[a]nalogizing to § 10b-5 is particularly

appropriate because SLUSA was specifically enacted as

~an amendment to the 1933 and 1934 Acts.” Id. at 1342.

As the Seventh Circuit acknowledged, its holding in this

case that holder claims are preempted by SLUSA is in di-

rect conflict with the decisions of the Second, Eighth, and

Eleventh Circuits.

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 also contrary to Su-

preme Court precedent. In Blue Chip Stamps, the Court

interpreted § 10(b) and Rule 10b-5 to permit private law-

suits only by purchasers or sellers of securities. The

Court made clear that the purchaser-seliler 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.5.

Referring to Birnbaum v. Newport Steel Corp., 193 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 inter-

pretation of the wording of § 10(b), wording which is di-

rected toward injury suffered ‘in connection with the pur-

chase or sale’ of securities, argues significantly in favor of

acceptance of the Birnbaum rule by this Court.” 421 U.S.

at 733 (footnote omitted). The Court added that “[tjhe

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,” which

reaches fraud “‘in the offer or sale’” of securities, and

that, “[w]hen Congress wished to provide a remedy to

those who neither purchase nor sell securities, it had little

trouble in doing so expressly.” Jd. at 733-34 (quoting 15

U.S.C. § 77q).

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 con-

necticn with the purchase or sale” language in such litiga-

tion. The Seventh Circuit was wrong simply to disregard

Blue Chip Stamps after recognizing that the “in connec-

tion with” language of SLUSA is identical to and has the

same scope as that in Rule 10b-5. See Pet. App. 9a-10a.

The Seventh Circuit’s ruling also runs afoul of this

Court’s presumption against preemption. “‘[B]ecause 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 recognized in Blue Chip Stamps, claims

based on the retention of securities have traditionally

been “available to nonpurchasers and nonsellers under

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 recommending the bill,

and the statements of SLUSA’s proponents all indicate

that the aim of SLUSA was to prevent circumvention of

the PSLRA and therefore preempted only those claims

that could be brought in federal court. See id. The Sev-

enth Circuit’s decision to the contrary is inconsistent with

Blue Chip Stamps, as well as with this Court’s preemp-

tion jurisprudence.

C. The Seventh Circuit Erred In Concluding

That SLUSA Preempts Claims When There

Has Been No Purchase Or Sale

The Seventh Circuit’s implicit but unmistakable conclu-

sion that SLUSA does not require an actual purchase or

sale is remarkable given that the statute’s explicit lan-

guage requires the defendant’s misconduct to be “in con-

nection with a purchase or sale.” Although in Kircher IT

the court went to great lengths to explain that the plain-

tiffs’ market-timing claims included the claims of pur-

chasers and sellers (while igncring the fact that a market-

timing injury is one that only a holder can sustain by

definition), the court at least understood that SLUSA re-

quires a purchase or sale. In Disher, however, all pre-

tense is gone. The court itself recognized that the claim

was brought on behalf of holders only. Citigroup therefore

did not mislead or otherwise trick petitioner or any poten-

tial class member into purchasing or selling a stock.

Rather, Citigroup misled petitioner and other holders into

retaining the stocks they already owned. This judicial re-

vision of SLUSA thus goes well beyond even what the

Kircher IT court had done, and the conclusions of both

courts are in square conflict with the decisions of every

other circuit and numerous district courts to have ad-

dressed the issue.

D. Whether SLUSA Preempts Holder Claims Is

An Issue Of Great Importance

As a result of Citigroup’s misleading investment re-

ports, thousands of investors have suffered substantial

financial losses by retaining securities that have since

bottomed out. In the Seventh Circuit’s view, shareholders

who have no federal remedy because their claims are not

“in connection with the purchase or sale” of securities

within the meaning of § 10(b) are now precluded by

SLUSA from pursuing the traditional state-law remedies

that have been open to them historically because their

claims are “in connection with the purchase or sale” of se-

curities within the meaning of SLUSA. But there is no

mention anywhere in SLUSA or its legislative history of

holder claims. “If Congress had intended to deprive in- -

jured parties of a long available form of compensation, it

surely would have expressed that intent more clearly.”

Bates, 125 S. Ct. at 1801 (citing Silkwood v. Kerr-McGee

Corp., 464 U.S. 238, 251 (1984)). The Seventh Circuit’s

ruling leaves holders with no recourse — state or federal —

against investment advisors who wrongfully induce them

to retain poor investments. _

Citigroup’s misconduct is not unique. A number of in-

vestment advisors have been accused of issuing mislead-

ing research reports in an effort to secure additional in-

vestment banking business.° This Court’s intervention is

* See, e.g., Conal Walsh. supra note 2 (relating allegations that Henry

Blodget, the “star analyst” for Merrill Lynch, issued misleading analy-

ses of several companies in order to secure additional banking busi-

ness); Rebecca Byrne, Of Bubble Triumvirate, Only Meeker Remains,

TheStreet.com (Aug. 20, 2002) (noting allegations that Mary Meeker,

one of Morgan Stanley's stock analysts, recommended “a plethora of

necessary to ensure that lawsuits arising from these

events, involving numerous plaintiffs and billions of dol-

lars in damages, are resolved correctly and consistently.

On September 27, 2005, this Court granted certiorari in

Dabit to address whether, “as the Seventh Circuit held

earlier this month and in direct conflict with the decision

below, SLUSA preempts state law class action claims

based upon allegedly fraudulent statements or omissions

brought solely on behalf of persons who were induced

thereby to hold or retain (and not purchase or sell) securi-

ties.” Cert. Pet. at i, No. 04-1371. If the Court determines

in Dabit that SLUSA does not preempt holder claims

based upon allegedly fraudulent statements or omissions,

its decision will very likely be dispositive of this case. On

the other hand, if the Court concludes that SLUSA pre-

empts such claims, that decision would not resolve the

question whether SLUSA preempts Disher’s claims that

are not based upon allegedly fraudulent statements or

omissions, such as his breach of contract and breach of

fiduciary duty claims. If the Court does not grant this pe-

tition to address the jurisdictional question presented —

which is not at issue in Dabit — it should hold the petition

in this case pending resolution of Dabit, and then grant

certiorari with respect to Question 2, if necessary.

questionable Internet stocks even as they fell to pennies a share”

because her stock research was “biased” by “a desire to win banking

business from those companies”), at http://www.thestreet.com/_tscs/

markets/rebeccabyrne/10038386.html. See also SEC Litigation Release

No. 18117 (Apr. 28, 2003), at http://sec.gov/litigation/litreleases/

Ir18117.htm (announcing details of SEC settlement with Morgan

Stanley for the alleged provision of biased investment advice to

clients); SEC Litigation Release No. 18116 (Apr. 28, 2003), at

http://sec.gov/litigation/litreleases/Ir18116.htm (same, for Lehman

Brothers); SEC Litigation Release No. 18115 (Apr. 28, 2003), at

http://sec.gov/litigation/litreleases/Ir18115.htm (same, for Merrill

Lynch and Henry Blodget).

CONCLUSION

The petition for a writ of certiorari should be held pend-

ing the resolution of Merrill Lynch, Pierce, Fenner &

Smith, Inc. v. Dabit, No. 04-1371, and the disposition of

Kircher v. Putnam Funds Trust, No. 05-409, if the Court

grants certiorari in Kircher before this petition is consid-

ered. In the alternative, the Court should grant the peti-

tion for a writ of certiorari.

Respectfully submitted,

ROBERT L. KING DAVID C. FREDERICK

701 Market Street Counsel of Record

Suite 350 F. ANDREW HESSICK III

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

December 15, 2005 (202) 326-7900

Couns«i for Petitioner

TABLE OF CONTENTS

Page

Opinion of the United States Court of Appeals for

-the Seventh Circuit, Disher v. Citigroup Global

Markets Inc., No. 04-3073 (Aug. 17, 2005)...............c000000e la

Order of the United States District Court for the

Southern District of Illinois, Disher v. Citigroup

Global Markets Inc., Civil No. 04-308-GPM (Oct.

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Memorandum and Order of the United States —

District Court for the Southern District of

Illinois, Disher v. Citigroup Global Markets Inc.,

Civil No. 04-308-GPM (Aug. 10, 2004)... ceeeececeeeees 13a

Complaint, Disher v. Citigroup Global Markets

Inc., Civil No. 04-L-265 (3d Jud. Cir. Ct., Madi-

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Hearing Transcript for Motion To Remand,

Disher v. Citigroup Global Markets Inc., Civil No.

04-308-GPM (S.D. Ill. Aug. 9, 2004) (excerpt) ................ 39a

Statutory and Regulatory Provisions Involved:

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UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

No. 04-3073

RICHARD DISHER, INDIVIDUALLY AND ON BEHALF OF

ALL OTHERS SIMILARLY SITUATED,

Plaintiff-Appellee,

CITIGROUP GLOBAL MARKETS INC.,

Defendant-Appellant.

Appeal from the United States District Court

for the Southern District of Illinois

{Argued Mar. 30, 2005]

[Decided Aug. 17, 2005]

Before BAUER, RIPPLE and KANNE, Circuit Judges.

RIPPLE, Circuit Judge.

On March 22, 2004, Richard Disher filed this action as a

state-law putative class action against Citigroup Global

Markets Incorporated, formerly known as Salomon Smith

Barney (“SSB” or “Smith Barney”). SSB timely removed

the case to the district court on the basis of federal ques-

tion jurisdiction, see 28 U.S.C. § 1331; diversity of citizen-

\ship jurisdiction, see id. § 1332; jurisdiction related to

bankruptcy proceedings, see id. § 1334(b); and preemption

under the Securities Litigation Uniform Standards Act

(“SLUSA”), see 15 U.S.C. § 78bb(f). On Mr. Disher’s mo-

tion, the district court remanded the case to state court.

for the reasons set forth in the following opinion, we now

reverse the judgment of the district-court and remand the

case for further proceedings.

BACKGROUND

A. State-Law Suit

Mr. Disher was a customer of SSB, which operated as a

full-service securities firm. He purchased shares of MCI

WorldCom Incorporated between April 16, 1998, and

March 5, 1999. He also purchased shares of Rhythms

Netconnections Inc. on August 11, 1999. As part of its

services for its customers, SSB issued investment research

reports and ratings on a stock’s future performance. The

subject of Mr. Disher’s complaint included unspecified

stocks researched and rated by SSB’s Internet and Tele-

communications research groups.

SSB represented that its reports employed a five-point

rating system: “buy,” “outperform,” “neutral,” “underper-

form” and “sell.” R.2 at 3. Mr. Disher’s complaint alleged

that “no later than March 2000,” SSB “secretly abandoned

its published five-point rating system and instead utilized

a de facto three-point system (‘buy,’ ‘outperform,’ and ‘neu-

tral’).” Id. at 5. Specifically, a neutral recommendation

allegedly was a coded message from SSB to certain institu-

tional customers to sell a security. Also, instead of assign-

ing an underperform or sell rating for a particular «tock,

SSB allegedly would stop covering that stock, with no pub-

lic announcement or explanation. Thus, the complaint al-

leged, SSB’s research ratings did not reflect its actual be-

liefs concerning the future performance of a stock.

The gravamen of the complaint was that SSB’s mislead-

ing ratings induced Mr. Disher and class members to con-

tinue holding their securities in reliance on SSB’s positive

ratings when SSB’s analysts no longer believed that such

ratings were warranted. In addition, SSB also allegedly

used its research reports, ratings and recommendations of

certain stock to attract new, and to retain current, invest-

ment banking clients “by agreeing to issue a research rat-

ing for [those clients’] stock more favorably than Smith

Barney’s research warranted.” /d. at 6.

Mr. Disher defined the putative class to include himself

and “all customers of Smith Barney who held one or more

of the Internet or Telecom Stocks in their Smith Barney

accounts at times when those stocks were declining in

value and when Smith Barney was rating those stocks as

‘ouy’ ‘outperform’ or ‘neutral’ when such ratings were not

warranted by Smith Barney’s research.” Jd. at 8. The

complaint specifically excluded “any claims based on

Smith Barney’s conduct in connection with Plaintiff’s or

any Class member’s purchases or sales of any of the Inter-

net Stocks or Telecom Stocks.” Jd. (emphasis added).

B. District Court Proceedings

SLUSA provides for the removal to federal court of cer-

tain class actions based on state law in which the plaintiffs

allege “a misrepresentation or omission of a material fact

in connection with the purchase or sale of a covered secu-

rity.” 15 U.S.C. § 78bb(f) (emphasis added). The district

court ruled that SLUSA did not apply in this case because

the alleged misconduct was not connected sufficiently to

any purchase or sale of stock. Rather, the complaint al-

leged harm solely from the retention of securities in reli-

ance on SSB’s misleading research reports and ratings.

The district court also concluded that there was no basis

for removal under the general removal statute, 28 U.S.C.

§ 1441.

- DISCUSSION

A. Standard of Review

A district court’s decision regarding the propriety of re-

moval is a question of federal jurisdiction that we review

de novo. Boyd v. Phoenix Funding Corp., 366 F.3d 524,

529 (7th Cir.2004). We also apply de novo review to the

district court’s interpretation of SLUSA. Merrill Lynch,

Pierce, Fenner & Smith, Inc. v. Lauer, 49 F.3d 323, 326

(7th Cir.1995).

B. Removal and Preemption under SLUSA

On appeal, SSB challenges the district court’s conclusion

that Mr. Disher’s action did not fall within SLUSA’s pre-

emptive scope.’

As a threshold matter, Mr. Disher contends that we lack

appellate jurisdiction over this matter because the district

court remanded the case for lack of subject matter juris-

diction. See 28 U.S.C. § 1447(d). This court already has

determined that a district court’s remand of a case to state

court based on SLUSA is appealable. See Kircher v. Put-

nam Funds Trust (“Kircher I”), 373 F.3d 847 (7th Cir.

2004). The substance of Mr. Disher’s submissions in this

case were addressed in Kircher I, and we decline to revisit

this court’s decision.

SLUSA is the most recent in a line of federal securities

statutes that originated with the enactment of the Securi-

ties Act of 1933 (“1933 Act”), 15 U.S.C. § 77a et seq., and

the Securities Exchange Act of 1934 (“1934 Act”), 15

U.S.C. § 78a et seq. See Riley v. Merrill Lynch, Pierce,

Fenner & Smith, Inc., 292 F.3d 1334, 1340 (11th Cir.), cert.

denied, 537 U.S. 950, 123 S.Ct. 395, 154 L.Ed.2d 296

(2002). Section 10(b) of the 1934 Act made it “unlawful for

any person ... [t]o use or employ, in connection with the

purchase or sale of any security registered on a national

securities exchange or any security not so registered, any

manipulative or deceptive device or contrivance in contra-

vention of such rules and regulations as the [Securities

Exchange Commission (‘SEC’) ] may prescribe.” 15 U.S.C.

' Because, for the reasons we shall discuss in this opinion, we hold

that Mr. Disher’s cause of action is subject to removal and preemption

under SLUSA, we have no occasion to address whether we have juris-

diction to review the district court’s remand order, or to evaluate the

merits of that order, with respect to the absence or presence of federal

jurisdiction on any basis other than SLUSA.

§ 78)(2)(b) (emphasis added). The SEC then promulgated

Rule 10b-5, which provides:

It shall be unlawful for any person, directly or indi-

rectly, by the use of any means or instrumentality of

interstate commerce, or of the mails or of any facil-

ity of any national securities exchange,

(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 mater.al fact necessary in order

to make the statements made, in the light of the cir-

cumstances under which they were made, not mis-

leading, or

ness which operates or would operate as a fraud or

deceit upon any person, in connection with the pur-

chase or sale of any security.

17 C.F.R. § 240.10b-5 (emphasis added). In 1995, Con-

gress enacted the Private Securities Litigation Reform Act

(“PSLRA”), 15 U.S.C. §§ 77z-1, 78u, to protect against

merit-less shareholder suits that were being initiated for

the sole purpose of obtaining large attorneys’ fees through

private settlements. See Spielman v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., 332 F.3d 116, 122 (2d Cir.

2003). To achieve this aim, the PSLRA imposed height-

ened pleading standards and mandatory stays of discovery

for securities fraud class actions filed in federal court. Jd.

After the enactment of the PSLRA, plaintiffs increas-

ingly began to file suits in state courts under state securi-

ties law. Jd. at 123. Congress responded by enacting

SLUSA. Kircher v. Putnam Funds Trust (“Kircher II”),

403 F.3d 478, 482 (7th Cir.2005) (“SLUSA is designed to

prevent plaintiffs from migrating to state court in order to

evade rules for federal securities litigation in the

[PSLRA].”). SLUSA attempts to close this “‘federal flight’

loophole” by making federal courts the exclusive forum for

class actions alleging fraud in the sale or purchase of cov-

ered securities and by mandating that federal law governs

such class actions. Spielman, 332 F.3d at 123. To that

end, SLUSA contains the following preemption and re-

moval provisions:

(1) Class action limitations

No covered class action*® based upon the statutory

or common law of any State or subdivision thereof

may be maintained in any State or Federal court

by any private party alleging —

(A) a misrepresentation or omission of a material

fact in connection with the purchase or sale of a

covered security;° or

2 SLUSA defines the term “covered class action” as

(i) any single lawsuit in which —

(I) damages are sought on behalf of more than 50 persons or pro-

spective class members, and questions of law or fact common to

those persons or members of the prospective class, without refer-

ence to issues of individualized reliance on an alleged misstatement

or omission, predominate over any questions affecting only individ-

ual persons or members; or

(II) one or more named parties seek to recover damages on a rep-

resentative basis on behalf of themselves and other unnamed par-

ties similarly situated, and questions of law or fact common to

those persons or members of the prospective class predominate over

any questions affecting only individual persons or members; or

(11) any group of lawsuits filed in or pending in the same court and

involving common questions of law or fact, in which —

(1) damages are sought on behalf of more than 50 persons; and

(IJ) the lawsuits are joined, consolidated, or otherwise proceed as

a single action for any purpose.

15 U.S.C. § 78bb(f)(5)(B).

* SLUSA defines the term “covered security” as

a security that satisfies the standards for a covered security spect-

fied in paragraph (1) or (2) of section 18(b) of the Securities Act of

1933 [15 U.S.C. § 77r(b)), at the time during which it is alleged that

the misrepresentation, omission, or manipulative or deceptive con-

duct occurred

15 U.S.C. § 78bb(f)(5)(E). Section 77r(b)(2), in turn, states:

(B) that the defendant used or employed any

manipulative or deceptive device or contrivance in

connection with the purchase or sale of a covered

security.

(2) Removal of covered class actions

Any covered class action brought in any State

court involving a covered security, as set forth in

paragraph (1), shall be removable to the Federal

district court for the district in which the action is

pending, and shall be subject to paragraph (1).

15 U.S.C. § 78bb(f)(1)-(2).*

A defendant may remove a case to federal] court only if

the federal district court would have original subject mat-

ter jurisdiction over the action. 28 U.S.C. § 1441; Caterpil-

lar Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96

L.Ed.2d 318 (1987). The party seeking removal has the

burden of establishing federal jurisdiction. Boyd, 366 F.3d

at 529. As a general rule, the plaintiff is the master of

his own complaint and can avoid federal question jurisdic-

tion by pleading exclusively state-law claims. Bastien v.

AT & T Wireless Servs., Inc., 205 F.3d 983, 986 (7th Cir.

2000) (citing Franchise Tax Bd. v. Constr. Laborers Vaca-

tion Trust for S. Cal., 463 U.S. 1, 10, 103 S.Ct. 2841, 77

L.Ed.2d 420 (1983)). Ordinarily, when a claim arises un-

der state law, the assertion of federal preemption as a de-

fense will not create federal jurisdiction. Jd.

“Congress has, however, created certain exceptions to”

the well-pleaded complaint rule. Beneficial Nat’ Bank v.

A security is a covered security if such security is a security issued

by an investment company that is registered, or that has filed a

registration statement, under the Investment Company Act of

1940.

15 U.S.C. § 77r(b)(2).

* SLUSA amended both the 1933 Act, see 15 U.S.C. § 77p, and the

1934 Act, see id. § 78bb(f). The amendments are functionally identical;

for ease of reference, we shall cite only the 1934 Act codification.

Anderson, 539 U.S. 1, 6, 123 S.Ct. 2058, 156 L.Ed.2d 1

(2003). The Supreme Court has declared that “a state

claim may be removed to federal court in only two circum-

stances — when Congress expressly so provides . . . or when

a federal statute wholly displaces the state-law cause of

action through complete pre-emption.” Jd. at 8, 103 S.Ct.

2841. SLUSA expressly provides for the removal to fed-

eral court of covered fraud claims that are “in connection

with the purchase or sale of a covered security.” 15 U.S.C.

§ 78bb(f)(2).

SLUSA does not, however, preclude all securities fraud

actions based on state law. To invoke SLUSA, the remov-

ing party must show: (1) that the action is a “covered class

action” for purposes of SLUSA; (2) that the action purports

to be based on state law; (3) that the defendant is alleged

to have misrepresented or omitted a material fact (or to

have employed a manipulative device or contrivance); and

(4) that the defendant’s alleged conduct was “in connection

with the purchase or sale of a covered security.” 15 U.S.C.

§ 78bb(f)(1)-(2); Green v. Ameritrade, Inc., 279 F.3d 590,

596 (8th Cir.2002). The primary issue in this case con-

cerns whether or not Mr. Disher’s state-law class action

complaint alleged misrepresentations that were “in con-

nection with the purchase or sale” of securities. Mr.

Disher contends that this action falls outside the scope of -

SLUSA because the complaint alleges that SSB’s misrep-

resentations caused him and other class members to hold

securities, not to purchase or sell them. Moreover, the

complaint specifically disavows any claim related to the

purchase or sale of stock.

SLUSA does not define “in connection with the purchase

or sale of a covered security.” The Supreme Court has not

yet had occasion to consider this phrase in the context of

SLUSA. For guidance, then, this court and other courts of

appeals have relied on Supreme Court case law construing

the identical phrase in the context of section 10(b) of the

1934 Act and Rule 10b-5. See Kircher II, 403 F.3d at 482-

84 (collecting cases). The analogy to section 10(b) and

Rule 10b-5 is appropriate because, in enacting SLUSA,

Congress “was using language that, at the time of

SLUSA’s enactment, had acquired settled, and widely-

acknowledged, meaning in the field of securities law,

through years of judicial construction in the context of

§ 10b-5 lawsuits.” Riley, 292 F.3d at 1342-43. Analogizing

to the case law interpreting section 10(b) also makes

sense, in terms of our obligation to interpret the statute so

as to give effect to the intent of Congress, because “SLUSA

can do its job only if subsection (b) covers those claims that

engage Rule 10b-5 (and thus come within the 1995 stat-

ute) if presented directly under federal law.” Kircher II,

403 F.3d at 482.

The Supreme Court has limited the universe of investors

who may bring private securities fraud actions under the

statute. In Blue Chip Stamps v. Manor Drug Stores, 421

U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), the Court

held that investors who neither purchase nor sell securi-

ties have no standing to maintain private litigation to re-

cover damages under section 10(b) and Rule 10b-5, even if

the failure to purchase or sell was the result of fraud. Mr.

Disher submits that, under Blue Chip Stamps, because

claims related solely to the retention of securities, as op-

posed to a purchase or sale, are not cognizable under sec-

tion 10(b), such claims also are not preempted by SLUSA.

This position has the support of some of our sister courts

of appeals. See Dabit v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 395 F.3d 25, 43 (2d Cir.2005) (“{I]n enacting

SLUSA Congress sought only to ensure that class actions

brought by plaintiffs who satisfy the Blue Chip purchaser-

seller rule are subject to the federal securities laws.”);

Green, 279 F.3d at 598; Riley, 292 F.3d at 1345.

However, this court recently has concluded that

SLUSA’s “in connection with the purchase or sale of a cov-

ered security” requirement does not incorporate the Blue

Chip Stamps standing rule. See Kircher II, 403 F.3d at

483-84. Our opinion in Kircher II was issued after the dis-

trict court’s decision in this case and, indeed, after briefing

10a

and oral arguments on appeal. In Kircher II, one of the

plaintiffs’ classes was defined as all investors who held the

defendant mutual fund’s securities during a defined period

and did not purchase or sell shares during that period.

See id. at 483. We held that the claims were “connected to

their own purchase of securities” and thus were blocked by

SLUSA. We explained:

Decisions since Blue Chip Stamps reiterate that it

_ deals with private actions alone and does not re-

strict 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); United States v. Naftalin, 441 U.S. 768, 774

n. 6, 99 S.Ct. 2077, 60 L.Ed.2d 624 (1979). By de-

picting 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 little strange if the Su-

preme Court’s decision to block private litigation by

non-traders became the opening by which that very

litigation could be pursued under state law, despite

the judgment of Congress (reflected in SLUSA) that

securities class actions must proceed under federal

securities law or not at all. Blue Chip Stamps com-

bined with SLUSA may mean that claims of the sort

plaintiffs want to pursue must be litigated as de-

rivative actions or committed to public prosecutors,

but this is not a good reason to undercut the statu-

tory language.

Kircher II, 403 F.3d at 483-84. Mr. Disher’s class defini-

tion of all SSB customers who retained certain securities

in reliance on SSB’s misrepresentations is no more nar-

rowly drawn than the class definitions discussed in

Kircher lI. Thus, we must conclude that the present

claims are connected sufficiently to the purchase and sale

lla

of a covered security for the purposes of SLUSA preemp-

tion and removal. .

Conclusion

Accordingly, we reverse the judgment of the district

court and remand with instructions to vacate the remand

order and to dismiss Mr. Disher’s claims. SSB may re-

cover its costs on this appeal.

REVERSED AND REMANDED

12a

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF ILLINOIS

Civil No. 04-308-GPM

RICHARD DISHER, INDIVIDUALLY AND ON BEHALF OF

ALL OTHERS SIMILARLY SITUATED,

Plaintiff,

CITIGROUP GLOBAL MARKETS INC., D/B/A SMITH BARNEY,

Defendant.

[Filed Oct. 25, 2005]

ORDER

MURPHY, Chief District Judge:

On August 10, 2004, this Court remanded this action to

state court for lack of subject matter jurisdiction. Defen-

dant appealed that order, and the Seventh Circuit Court of

Appeals held that this action was properly removed under

the Securities Litigation Uniform Standards Act (SLUSA),

15 U.S.C. § 78bb(f), and SLUSA blocks Plaintiff’s state

law claims. Disher v. Citigroup Global Mkts., Inc., 419

F.3d 649 (7th Cir. 2005). The Court of Appeals issued its

opinion on August 17, 2005, and the mandate was entered

on this Court’s docket on September 13th.

In accordance with the Court of Appeals’ mandate, this

Court’s August 10, 2004, order of remand (Doc. 36) is

VACATED, and Plaintiff’s claims are DISMISSED with

prejudice. The Clerk of Court is DIRECTED to enter

judgment accordingly.

IT IS SO ORDERED.

DATED: 10/25/05

/s/ G. PATRICK MURPHY

G. PATRICK MURPHY

Chief United States District Judge

l3a

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF ILLINOIS

Civil No. 04-308-GPM

RICHARD DISHER, INDIVIDUALLY AND ON BEHALF OF

ALL OTHERS SIMILARLY SITUATED,

Plaintiff,

Vv.

CITIGROUP GLOBAL MARKETS INC., D/B/A SMITH BARNEY,

Defendant.

[Filed Aug. 10, 2004}

MEMORANDUM AND ORDER

MURPHY, Chief District Judge:

Citigroup Global Markets, Inc. (““CGMI”) removed this

action on May 6, 2004, asserting federal subject matter

jurisdiction on the basis of a federal question, diversity of

citizenship, and bankruptcy. Insofar as those three theo-

ries of removal, for the reasons set forth on the record at

the August 9, 2004, hearing, the Court lacks federal sub-

ject matter jurisdiction.

If that were the end of the issue, the Court would re-

mand the action to state court pursuant to 28 U.S.C.

§ 1447(c). But in addition to the foregoing theories, CGMI

also asserts that removal is proper by virtue of the Securi-

ties Litigation Uniform Standards Act of 1998 (“SLUSA’”).

To establish that Disher’s claims fall within SLUSA’s pre-

emptive scope, CGMI must show, among other things, that

Disher alleges that CGMI engaged in fraudulent conduct

“in connection with the purchase or sale of a covered secu-

rity.” 15 U.S.C. §§ 77p(b), 78bb(f)(1)(-2). See also Green v.

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

Removal was proper in the first instance as SLUSA con-

templates that the district court is the proper judicial au-

thority to determine whether this case is covered by the

l4a

statute. But the Court has determined, for the reasons set

forth on the record, that this case does not involve misrep-

resentation or omissions of material fact “in connection

with the purchase or sale of a covered security” as alleged

by CGMI. Accordingly, insofar as SLUSA removal is con-

cerned, the action is remanded to state court for further

proceedings under state law.

Plaintiff's motion to remand is GRANTED, and this

action is REMANDED to the Circuit Court for the Third

Judicial Circuit, Madison County, Illinois. Defendant’s

oral motion for a stay is DENIED. The statute does not

authorize the district court to issue a stay; it is only au-

thorized to remand the case if the case does not fall under

SLUSA preemptive scope.

IT IS SO ORDERED.

DATED: 8/9/04

/s/ G. PATRICK MURPHY

G. PATRICK MURPHY

Chief United States District Judge

ld5a

IN THE CIRCUIT COURT

FOR THE THIRD JUDICIAL CIRCUIT

MADISON COUNTY, ILLINOIS

Cause No. 04-L-265

RICHARD DISHER, INDIVIDUALLY AND ON BEHALF OF

ALL OTHERS SIMILARLY SITUATED,

Plaintiff,

CITIGROUP GLOBAL MARKETS INC., D/B/A SMITH BARNEY,

Defendant.

[Filed Mar. 22, 2004]

COMPLAINT

NOW COMES Plaintiff Richard Disher, on his own be-

half and on behalf of all others similarly situated, by and

through his undersigned attorneys, and for his Complaint

against Defendant Citigroup Global Markets, Inc., d/b/a

Smith Barney, states:

THE PARTIES JURISDICTION AND VENUE

1. At all times relevant to this Complaint, Citigroup

Global Markets Inc., and its predecessor firms, engaged in

a full service securities business, including retail and in-

stitutional sales, investment banking services, trading,

and it published company research reports, ratings and

recommendations on stocks.

3. Citigroup Global Markets Inc., formerly known as

Salomon Smith Barney, now does business as Smith

Barney. Hereinafter throughout this Complaint, Citigroup

Global Markets Inc. and its predecessor firms shall be re-

16a

ferred to interchangeably as either “Citigroup Global Mar-

kets Inc.” or “Smith Barney.”

3. Smith Barney maintains offices throughout IIli-

nois and specifically solicits business from residents of

Madison County, Illinois.

4. Plaintiff Richard Disher is, and at all relevant

times was, a resident of Alton, Illinois.

5. Plaintiff was at all relevant times a customer of

Smith Barney or its predecessors in interest.

6. Plaintiff purchased shares of MCI Worldcom, Inc.,

between April 16, 1998, and March 5, 1999, and continued

to hold those stocks during times relevant to this Com-

plaint.

7. Plaintiff purchased shares of Rhythms Netconnec-

tions Inc., on August 11, 1999, and continued to hold those

stocks during times relevant to this Complaint.

8. At times relevant to this Complaint, Plaintiff, as a

customer of Smith Barney, received information concern-

ing his account at his residence in Madison County

through various means including telephone calls from

Smith Barney's brokers and mailings in the form of

monthly statements, confirmations and other correspon-

dence. Venue is therefore proper in this Court.

GENERAL ALLEGATIONS

9. The volume and complexity of financial informa-

tion and raw data which is available to investors — includ-

ing, issuer disclosure statements, economic and employ-

ment statistics from governments, and marketing and

purchasing trend reports from private sources — can often

be overwhelming and confusing to investors. Research

analysts play an important role in the relationship be-

tween companies and investors because of their expertise

in assessing the available information.

10 During the relevant period Smith Barney engaged

in a full-service securities business, including retail and

institutional sales, investment banking services, trading

and research. With respect to equity research, Smith

l7a

Barney divided its research analysts into groups that cov-

ered separate industry sectors. These groups published

written research reports on selected companies with each

sector.

11. Smith Barney provided its research as part of a

package of services for its customers.

12. Each research report included an investment rat-

ing which Smith Barney used to make recommendations to

its customers regarding the purchase and sale of stock in

publicly traded companies.

13. During the relevant period, Smith Barney publicly

represented that it used the following five-point rating

system:

“1” Buy

“2” Outperform

“3” Neutral

“4” Underperform

“5” Sell

14. Smith Barney published its investment ratings

knowing that the electronic and print media would report

Smith Barney's rating to the investing public.

15. Smith Barney represented to the public and its

customers that its analysts evaluated a company's “fun-

damentals,” including its technology, products, services,

financial performance, business plan, competition and

other relevant information necessary to make a profes-

sional evaiuation of a company’s, and thus a stock’s, future

performance.

16. Smith Barney held out itself and its analysts as

highly-skilled financial experts, possessing the special

knowledge and expertise needed to analyze and evaluate a

companys “fundamentals” and to predict the future per-

formance of a company’s stock.

i7. Smith Barney represented such research reports.

ratings and recommendations to reflect its analysts’ objec-

18a

tive and unbiased opinions regarding a stock’s future per-

formance.

18. Smith Barney intended for the investing public,

and for its own customers in particular, to rely on Smith

Barney’s research, ratings and recommendations, as dem-

onstrated by the fact that Smith Barney publicly touted

the expertise of its research analysts, their research re-

ports and Smith Barney’s ratings and recommendations

based on that research.

19. One group of Smith Barney research analysts

(hereinafter referred to as the “Internet Group”) re-

searched certain Internet and similar technology compa-

nies and rated those companies’ stocks (hereinafter re-

ferred to as the “Internet Stocks”).

20. Another group of Smith Barney research analysts

(hereinafter referred to as the “Telecommunications

Group”) researched telecommunications and similar tech-

nology companies and rated those companies’ stocks (here-

inafter referred to as the “Telecom Stocks’).

21. The Internet Stocks and Telecom Stocks are the

securities which are the subject of this Complaint. Plain-

tiff does not know all of the specific stocks research by the

Internet and Telecommunications Groups, but such infor-

mation is known to Smith Barney. However, the Rhythms

Netconnections Inc. and the MCI Worldcom, Inc., stock

Plaintiff held were among the stocks researched by the

Telecommunications Group.

22. Smith Barney knew that when it issued “buy,”

“outperform” and “neutral” ratings for a stock (including

Internet Stocks and Telecom Stocks), its customers were

less likely to eliminate that stock from their investment

portfolios, even in the face of adverse price movements of

these securities.

23. Smith Barney knew that when it issued “sell” and

“underperform” ratings for a stock (including Internet

Stocks and Telecom Stocks), its customers were more

19a

likely to eliminate that stock from their investment portfo-

lios.

24. Thus, Smith Barney knew or should have known

that investors its customers relied on its internet Group’s

and Telecommunications Group’s research reports and

specifically on their 5-point rating system.

25. At a time or times known more specifically to

Smith Barney, but beginning no later than March 2000,

Smith Barney began misusing its rating system and ad-

vance knowledge of the contents of its research reports,

ratings and recommendations In various ways.

26. At a time known more specifically to Smith

Barney, but beginning no later than March 2000, Smith

Barney secretly abandoned its published five-point rating

system and instead utilized a de facto three-point system

(“buy,” “outperform” and “neutral”) for the Internet Stocks,

although Smith Barney’s published rating system contin-

ued to provide for “underperform” (“4”) ratings “sell” (“5”)

ratings. Perhaps at the same time, but also during 2000

and at a time known more specifically to Smith Barney,

Smith Barney secretly abandoned the five-point rating

system in favor of the de facto three-point system for the

Telecom Stocks as well.

27. Smith Barney’s issuance of a “neutral” recom-

mendation for an Internet or Telecom stock was a coded

message to certain institutional customers to sell their se-

curities.

28. In lieu of assigning “underperform” or “sell” rec-

ommendations for Internet Stocks and Telecom Stocks.

Smith Barney instead quietly stopped covering the stock,

without any announcement or meaningful explanation to

the public or retail investors.

29. After discarding the five-point rating system in

practice, neither the Internet Group nor the Telecommuni-

cations Group rarely again used a “4” (“underperform”)

and never used the “5” (“sell”) rating for the Internet

20a

Stocks or Telecom Stocks during the period relevant to

this Complaint.

30. Thus, Smith Barney’s research ratings for both

the Internet Group and the Telecommunications Group

did not actually reflect either a “1” out of five, or “2” out of

five, or “3” out of five status.

31. Asa result, Smith Barney’s research ratings did

not reflect Smith Barney’s actual beliefs concerning the

future performance of the Internet Stocks or Telecom

Stocks.

32. One reason Smith Barney secretly abandoned the

five-point rating system for the Internet Stocks and Tele-

com Stocks was so Smith Barney could continue to rate

stocks as “buy,” “outperform” or “neutral,” even after

Smith Barney’s analysts no longer believed that such rat-

ings were warranted for particular Internet Stocks and

Telecom Stocks under the five-point rating system.

33. By eontinuing to rate the Internet Stocks and

Telecom Stocks “buy,” “outperform” or “neutral” under the

secret three-point rating system, Smith Barney induced its

customers to continue holding those securities, even after

Smith Barney’s analysts no longer believed that the “buy,”

“outperform” or “neutral” ratings were warranted.

34. Smith Barney also used the Internet Group's and

Telecommunication Group's research reports, ratings and

recommendations to attract new investment banking cll-

ents and to retain current investment banking clients by

agreeing to issue a research rating for an investment

banking client’s stock more favorably than Smith Barney's

research warranted.

35. Also, Smith Barney’s Internet Group and Telecom

Group research analysts were subjected to improper con-

flicts of interests because Smith Barney did not maintain

proper separation between its research division and in-

vestment banking division.

36. Smith Barney allowed its investment banking di-

vision to exercise undue influence over the Internet

2la

Group's and Telecommunications Group’s analysts, includ-

ing:

37.

allowing the investment banking division to influ-

ence analysts’ decisions regarding whether to pro-

vide research for a particular stock and how to rate

that stock;

allowing the investment banking division to dis-

courage the analysts from making statements or

publishing research reports that could jeopardize

existing or potential investment banking client re-

lationships;

encouraging analysts to participate regularly in in-

vestment banking marketing activities prior to the

publication of related research;

allowing investment banking clients to review draft

research reports and ratings prior to publication;

and/or

influencing analysts through a compensation sys-

tem based in part upon analysts’ contributions to

investment banking revenue.

As a result of the undue influence of the invest-

ment banking division, the Internet Group and Telecom-

munications Group analysts:

38.

refrained from issuing negative reports for compa-

nies with whom Smith Barney had, or was seeking,

an investment banking relationship;

published research reports, ratings and recommen-

dations more favorable than the research war-

ranted; and/or

ceased issuing research altogether on such compa-

nies in order to avoid issuing a negative report.

Thus, contrary to Smith Barney’s public represen-

tations that its research was independent and objective.

the Internet Group and Telecommunications Group re-

search was neither independent nor objective.

22a

LEGATIONS

39. Plaintiff brings this class action against Smith

Barney for himself individually and on behalf of all cus-

tomers of Smith Barney who held one or more of the In-

ternet Stocks or Telecom Stocks in their Smith Barney ac-

counts at times when those stocks were declining in value

and when Smith Barney was rating those stocks as “buy”

“outperform” or “neutral” when such ratings were not war-

ranted by Smith Barney’s research, times which are

known more specifically to Smith Barney.

40. Excluded from the Class are Smith Barney, and

any parent, subsidiary, affiliate, or controlled person of

Smith Barney, as well as any of their officers, directors,

agents, servants or employees, and the immediate family

members of any such person. Also excluded is any judge

who may preside over this case and all persons who have

claims in excess of $75,000.

41. Excluded from this Complaint are any claims

based upon Smith Barney’s conduct in connection with

Plaintiff's or any Class member's purchases or sales of any

of the Internet Stocks or Telecom Stocks.

42. In addition to the Rhythms Netconnections Inc.

stock and MCI Worldcom, Inc. stock which Plaintiff

owned, Plaintiff may also have held additional securities

which are the subject of this Complaint. Whether Plaintiff

in fact owned such additional securities cannot be ascer-

tained by Plaintiff prior to discovery.

43. Plaintiff is a member of the Class and will fairly

and adequately assert and protect the interests of the

Class.

44. Plaintiff's interests are coincident with, and not

antagonistic to, those of other members of the Class.

45. Plaintiff has retained attorneys who are experi-

enced in class action litigation.

46. Members of the Class are so numerous and geo-

graphically dispersed that joinder of all Class members is

impracticable. While the exact number and identity of

23a

Class members cannot be ascertained by Plaintiff prior to

discovery, Plaintiff believes that there are thousands of

Class members and that their identity can be ascertained

from Smith Barney’s books and records.

47.

There are questions of law or fact common to the

Class, which common questions predominate over any

questions affecting only individual members of the Class.

Common questions include, but are not limited to, the fol-

lowing:

ul.

nil.

iV.

v1.

Vil.

whether Smith Barney employed a de facto three-

point rating system for the Internet Stocks and

Telecom Stocks during the Class period;

whether Smith Barney’s de facto three-point rating

system accurately reflected Smith Barney’s ana-

lysts opinions regarding the Internet Stocks and

Telecom Stocks;

whether Smith Barney concealed its use of a de

facto three-point rating system from Plaintiff and

Class members;

whether Smith Barney promised potential invest-

ment banking clients a “buy” or “outperform” rating

in exchange for such investment banking business

when the potential client's securities did not war-

rant a “buy” or “outperform” rating as determined

under the five-point rating system;

whether Smith Barney promised not to downgrade

existing investment banking clients’ securities with

a “underperform” or “sell” rating in exchange for

such clients’ continued business;

whether Smith Barney gave Internet Stocks and

Telecom Stocks more favorable ratings than were

warranted as determined under the five-point rat-

ing system;

whether Smith Barney’s conduct which is the sub-

ject of this Complaint violated the constitution,

rules, regulations, customs and usages of the New

vill.

1x.

xl.

Xl.

xiii.

XIV.

48.

24a

York Stock Exchange rules or of the National Asso-

ciation of Securities Dealers;

whether Smith Barney breached its contracts with

Plaintiff and Class members;

whether Smith Barney owed a fiduciary duty to

Plaintiff and Class members;

whether Smith Barney violated its fiduciary duty to

Plaintiff and Class members;

whether as a result of its misconduct, Smith

Barney was unjustly enriched at the expense of

Plaintiff and Class members;

whether Smith Barney’s conduct which is the sub-

ject of this Complaint was negligent;

whether Smith Barney's conduct caused Plaintiff

and Class members to sustain damages; and/or

the extent of any such damages.

The prosecution of separate actions by individual

members of the Class would create a risk of:

49.

inconsistent or varying adjudications with respect

to individual members of the Class; and/or

adjudication with the respect to individual mem-

bers of the Class, which would, as a practical mat-

ter, be dispositive of the interests of other members

not parties te the adjudication or substantially im-

pair or impede their ability to protest their interest.

The class action method is appropriate for the fair

and efficient prosecution of this action.

50.

Individual! litigation of all claims, which might be

brought by all Class members, would produce a multiplic-

ity of cases so that the judicial system would be congested

for years. Class treatment. by contrast, provides manage-

able judicial treatment calculated to bring a rapid conclu-

sion to all litigation of all claims arising from the conduct

of the Defendant.

25a

COUNT I

(Breach of Contract)

51. Plaintiff realleges paragraphs 1 through 50 above,

as though each were fully set forth in this Count.

52. Plaintiff and Class members became Smith

Barney’s customers by entering into contracts with Smith

Barney.

53. Those standardized contracts provided in relevant

part that “all transactions entered into under this Agree-

ment shall be subject to any applicable constitution, rules,

regulations, customs and usages of the exchange or mar-

ket and its clearinghouse, if any, where such transactions

are executed by you SBS or its agents your agents, sub-

sidiaries and affiliates.”

54. Thus, at all times relevant to this Complaint,

transactions for Smith Barney’s customers were subject to

the rules of both the New York Stock Exchange (“NYSE”)

and the National Association of Securities Dealers

(“NASD”).

55. These contracts also provided in relevant part

that “[t]his Agreement, all the terms herein, and all con-

troversies described in Paragraph 6 shall be governed and

construed in accordance with the laws of the State of New

York ....” The controversies described in Paragraph 6 of

the Agreement are

all claims or controversies ... between me and SBS

{Smith Barney Shearson] and/or any of its present or

former officers, directors, or employees concerning or

arising from (I) any account maintained by me with

SBS individually or jointly with others in any capacity;

(Il) any transaction involving SBS or any predecessor

firms by merger, acquisition or other business combina-

tion and me, whether or not such transaction occurred

in such account or accounts; or (III) the construction,

performance or breach of this or any other agreement

between us, any duty arising from the business of SBS

or otherwise ....

26a

56. NASD Conduct Rule 2110 requires members to

observe high standards of commercial honor and just and

equitable principles of trade.

57. NASD Conduct Rule 2210(d)(1)(A) states: “All

member communications with the public shall be based on

principles of fair dealing and good faith and should provide

a sound basis for evaluating the facts in regard to any par-

ticular security or securities or type of security, industry

discussed, or service offered. No material fact or qualifica-

tion may be omitted if the omission, in the light of the con-

text of the material presented, would cause the communi-

cations to be misleading.”

58. NASD Conduct Rule 2210(d)(1)(B) prohibits

members from making “[e]xaggerated, unwarranted or

misleading statements or claims” in all public communica-

tions and states that “no member shall directly or indi-

rectly, publish, circulate or distribute any public commu-

nication that the member knows or has reason to know

contains any untrue statement of a material or is other-

wise false or misleading.”

59. NASD Conduct Rule 2210(d)(2)(C) prohibits

members from making, “promises of specific results, exag-

gerated or unwarranted claims or unwarranted superla-

tives, opinions for which there is no reasonable basis or

forecasts of future events which are unwarranted” in

communications with the public.

60. NASD Conduct Rule 3010(a) requires members, to

“establish and maintain a system to supervise the activi-

ties of each registered representative and associated per-

son that is reasonably designed to achieve compliance with

applicable securities laws and regulations, and with”

NASD’s own rules.

61. NYSE Rule 401 requires that member organiza-

tions adhere at all times to the principles of good business

practice in the conduct of their business affairs.

27a

62. NYSE Rule 476(a)(6) prohibits members from en-

gaging in conduct or proceeding in a manner inconsistent

with just and equitable principles of trade.

63. NYSE Rule 472 provides, that: “[n]o member or

member organization shall utilize any communication

which contains (i) any untrue statement or omission or a

material fact or is otherwise false or misleading; or (ii)

promises of specific results, exaggerated or unwarranted

claims; or (iii) opinions for which there is no reasonable

basis; or (iv) projections or forecasts of future events which

are not clearly labeled as forecasts.”

64. NYSE Rule 342(a) requires members, to maintain

“appropriate supervisory control” over all business activi-

ties to ensure compliance with securities laws and regula-

tions, including establishing “a separate system of follow-

up and review to determine that the delegated authority

and responsibility is properly exercised.”

65. Smith Barney violated one or more of the forego-

ing NYSE and NASD rules, regulations, customs or usages

by secretly abandoning the five-point rating system and

secretly adopting the de facto three-point rating system as

alleged above.

66. Smith Barney also violated one or more of the

foregoing NYSE and NASD rules, regulations, customs or

usages by permitting its investment banking division to

unduly influence the Internet Group and Telecommunica-

tion Group analysts to issue or maintain non-objective re-

search ratings for the Internet Stocks and the Telecom

Stocks as alleged above.

67. By violating one or more of the NYSE and NASD

rules, regulations, customs or usages, Smith Barney

breached its contracts with Plaintiff and Class members.

68. Smith Barney’s breaches of its contracts with

Plaintiff and Class members were material.

69. As a direct and proximate result of Smith

Barney's material breaches of its contracts with Plaintiff

and Class members, Plaintiff and Class members have suf-

28a

fered damages in an amount to be proven at trial but less

than $75,000 per plaintiff or Class member.

WHEREFORE, Plaintiff requests that the Court certify

an appropriate class in this case; enter judgment against

Citigroup Globa! Markets Inc. and in favor of Plaintiff and

the Class, with the total award not in excess of $75,000

per plaintiff or Class member; award to Plaintiff and the

Class all damages resulting from Citigroup Global Mar-

kets Inc.’s unlawful conduct, and pre- and post-judgment

interest and costs of suit; and grant such further relief as

is appropriate under the circumstances.

COUNT II

(Breach of Fiduciary Duty)

70. Plaintiff realleges Paragraphs 1 through 50, 52

through 66 above, as though each were fully set forth in

this Count.

71. At all times relevant to this Complaint, a special

relationship of confidence, trust, or superior knowledge or

control existed between Smith Barney and Plaintiff and

each member of the Class as a result of the following:

a. Smith Barney encouraged Plaintiff and each mem-

ber of the Class to place their utmost trust and con-

fidence in Smith Barney's research report and its

rating system;

b. Smith Barney assumed a position of trust and con-

fidence by servicing and managing Plaintiff's and

Class members’ investments in Internet Stocks and

Telecom Stocks;

c. Smith Barney held itself out to Plaintiff and Class

members as a professional stock consultant firm,

above and beyond its role as stock broker, advising

Plaintiff and Class members which stocks they

should buy or sell;

d. Smith Barney possessed exclusive control over its

employees, including its Internet Group and Tele-

communications Group analysts, and over their

29a

compliance with NYSE and NASD rules. regula-

tions, customs or usages;

e. Smith Barney possessed exclusive control over its

research reports, ratings and recommendations;

f. Smith Barney possessed exclusive control over its

use of its research reports, ratings and recommen-

dations;

g. Smith Barney held out itself and its Internet Group

and Telecommunications Group analysts as highly-

skilled financial experts, possessing the special

knowledge and expertise needed to analyze and

evaluate a company’s “fundamentals” and to predict

the future performance era company’s stock; and/or

h. Smith Barney is an investment firm characterized

by elements of public interest which subject it to

more stringent standards of conduct than those

normally arising out of contract.

72. Asa result of the foregoing, a fiduciary relation-

ship existed between Smith Barney and Plaintiff and

Class members.

73. Because of its fiduciary relationship, Smith

Barney owed to Plaintiff and Class members a fiduciary

duty which included:

a. a duty to act for or to give advice for the benefit of

Plaintiff and each member of the Class with respect

to matters within the scope of the relationship,

which includes but is not limited to Smith Barney's

- research, ratings and recommendations with re-

spect to the Internet Stocks and Telecom Stocks;

b. a duty to disclose all material facts to Plaintiff and

each member of the Class with respect to matters

within the scope of the relationship; and/or

c. a duty to adhere faithfully to the rules, regulations,

customs and usages of the NYSE and NASD.

30a

74. Smith Barney breached its fiduciary duty to

Plaintiff and Class members in one or more of the follow-

ing ways:

a. failing to disclose that one criterion Smith Barney

used to select which Internet and Telecom Stocks it

would research and rate was the existence of an in-

vestment banking or potential investment banking

relationship with the company;

b. failing to disclose that the issuance of a “neutral”

recommendation for an Internet or Telecom stock

was a coded message to certain institutional cus-

tomers to sel] their securities;

c. failing to disclose the reason Smith Barney ceased

researching and rating a previously covered Inter-

net or Telecom Stock was to avoid the issuance of a

negative research report, rating or recommendation

for that company;

d. failing to disclose the improper influence it permit-

ted its investment banking division to exercise over

the Internet and Telecom Group analysts;

e. failing to disclose that its Internet and Telecom

Group analysts were subject to the conflicts of in-

terest alleged above;

f. failing to disclose that the 5-point rating system

had become a de facto 3-point system-designed to

encourage Plaintiff and Class members to continue

to hold the Internet and Telecom Stocks;

g. violating one or more of the foregoing NYSE and

NASD rules, regulations, customs or usages by se-

cretly abandoning the five-point rating system and

secretly adopting the de facto three-point rating

system as alleged above; and/or

h. violating one or more of the foregoing NYSE and

NASD rules, regulations, customs or usages by

permitting of its investment banking division to

unduly influence the Internet Group and Telecom-

munication Group analysts to issue or maintain

3la

non-objective research ratings for the Internet

Stocks and the Telecom Stocks as alleged above.

75. Smith Barney wrongfully profited from its forego-

ing breaches of fiduciary duties to Plaintiff and Class

members by collecting investment banking fees in return

for not accurately rating the Internet Stocks and Telecom

Stocks.

76. In addition, and as a direct and proximate result

of Smith Barney's materia] breaches of fiduciary duty to

Plaintiff and Class members, Plaintiff and Class members

have suffered damages in an amount to be proven at trial

but less than $75,000 per plaintiff or Class member.

WHEREFORE, Plaintiff requests that the Court certify

an appropriate class in this case; enter judgment against

Citigroup Global Markets Inc. and in favor of Plaintiff and

the Class, with the total award not in excess of $75,000

per plaintiff or Class member; award to Plaintiff and the

Class all damages resulting from Citigroup Global Mar.

kets Inc.'s unlawful conduct, and pre- and post-judgment

interest and costs of suit, and punitive damages; require

Citigroup Global Markets Inc. to disgorge all monies it ob-

tained as a result of its unlawful conduct; and grant such

further relief as is appropriate under the circumstances.

COUNT Il

(Fraud)

Plaintiff realleges Paragraphs 1 through 50, 52

through 66 above, as though each were fully set forth in

this Count.

Conlon

éé.

78. Asa result of Smith Barney's representations to

Plaintiff and Class members as alleged above, Smith

Barney assumed a duty to disclose to Plaintiff and Class

members

a material changes in Smith Barney's evaluatrons,

recommendations and ratings of the Internet

Stocks and Telecom Stocks with respect to which it

had previously issued reports, recommendations

and ratings; and/or

79.

32a

material changes in Smith Barney’s research, rec-

ommendation and ratings practices.

Smith Barney made one or more of the following

false and fraudulent representations to Plaintiff and Class

members:

80.

Smith Barney used a five-point rating system for

rating Internet Stocks and Telecom Stocks;

Smith Barney's ratings of certain of the Internet

Stocks and Telecom Stocks were based upon its

analysts’ objective evaluations of the concerned

company’s “fundamentals,” including its technol-

ogy, products, services, financial performance,

business plan, competition and other relevant in-

formation necessary to make a professional evalua-

tion of a company’s and thus a stock's future per-

formance; and/or

Smith Barney’s ratings of certain Internet Stocks

and Telecom Stocks warranted a “buy,” “outper-

form” or “neutral” rating when, in fact, Smith

Barney's internal research and evaluation of those

companies warranted a “underperform” or “sell”

rating.

Smith Barney also fraudulently concealed from

Plaintiff and Class members one or more of the following

facts:

Smart Barney used a de facto three-point rating

system for rating Internet Stocks and Telecom

Stocks:

Smith Barney's ratings of certain of the Interact

Stocks and Telecom Stocks were issued to attract or

maintain certain investment banking clients and

were not based upon Smith Barney's analysts’ ob-

jective evaluations of the concerned company’s

“fundamentals,” including its technology, products,

services, financial performance, business plan,

competition and other relevant information neces-

81.

33a

sary to make a professional evaluation of a com-

pany’s and thus a stock’s future performance;

Smith Barney’s Internet Group and Telecommuni-

cations Group analysts were compensated based in

part upon the success of Smith Barney’s investment

banking division, and the analysts’ compensation

was directly correlated to the analysts’ favorable

research reports, ratings and recommendations for

Smith Barney’s existing or prospective investment

banking clients;

All or more than a de minimis portion of Smith

Barney's investment banking business involving

the Internet Stocks and Telecommunications

Stocks was dependent on Smith Barney’s issuance

of favorable research reports, ratings and recom-

mendations for those securities;

The Internet Group's and Telecom Group’s analysts

were issuing their reports, ratings and recommen-

dations despite their conflicts of interest as alleged

above, and these conflicts of interest materially in-

fluenced Smith Barney’s research reports, ratings

or recommendations of certain Internet Stocks and

Telecom Stocks; and/or

The research reports, ratings and recommendations

of the Internet Group and the Telecommunications

Group did not accurately reflect those analysts’

true opinions of certain Internet Stocks and Tele-

communications Stocks.

The foregoing misrepresentations were material,

and the foregoing facts which Smith Barney concealed

were material.

82.

As a direct and proximate result of Smith

Barney's fraud as alleged above, Plaintiff and Class mem-

bers have suffered damages in an amount to be proven at

trial but less than $75,000 per plaintiff or Class member.

WHEREFORE, Plaintiff requests that the Court certify

an appropriate class in this case; enter judgment against

34a

Citigroup Global Markets Inc. and in favor of Plaintiff and

the Class, with the total award not in excess of $75,000

per plaintiff or Class member; award to Plaintiff and the

Class all damages resulting from Citigroup Global Mar-

kets Inc.’s unlawful conduct, pre- and post-judgment inter-

est and costs of suit, and punitive damages; require Citi-

group Global Markets Inc. to disgorge all monies it ob-

tained as a result of its unlawful conduct; and grant such

further relief as is appropriate under the circumstances.

COUNT IV

(Unjust Enrichment)

83. Plaintiff realleges Paragraphs 1 through 50 above,

as though each were fully set forth in this Count.

84. Smith Barney was at all relevant times a member

of the NYSE and NASD.

85. Plaintiff realleges Paragraphs 54 and 56 through

66 above, as though each were fully set forth in this Count.

86. As a direct and proximate result of Smith

Barney's foregoing acts and omissions, Smith Barney was

enriched at the expense of Plaintiff and the Class by col-

lecting investment banking fees in return for not accu-

rately rating the Internet Stocks and Telecom Stocks.

87. Smith Barney’s retention of the benefits it re-

ceived would be unjust such that equity and good con-

science require that Smith Barney be required to disgorge

the benefits it has unjustly received.

WHEREFORE, Plaintiff requests that the Court certify

an appropriate class in this case; enter judgment against

Citigroup Global Markets Inc. and in favor of Plaintiff and

the Class, with the total award not in excess of $75,000

per plaintiff or Class member; require Citigroup Global

Markets Inc. to disgorge all monies it obtained as a result

of its unlawful conduct, and pre- and post-judgment inter-

est and costs of suit; and grant such further relief as is ap-

propriate under the circumstances.

35a

COUNT V

(Negligence)

88. Plaintiff realleges Paragraphs 1 through 50 above,

as though each were fully set forth in this Count.

89. Smith Barney was at all relevant times a member

of the NYSE and NASD.

90. Plaintiff realleges Paragraphs 54 and 56 through

66 above, as though each were fully set forth in this Count.

91. Smith Barney held itself out as a skilled specialist

in the field of investment research, possessing the special-

ized knowledge, skill and care ordinarily used by reasona-

bly well-qualified members of the investment research and

consultant professions.

92. It thereby became Smith Barney's duty to exercise

that degree of knowledge, skill and care ordinarily used, or

which should be used, by reasonably well-qualified mem-

bers of the investment research profession, including but

not limited to the duties:

a. to issue research reports, ratings and recommenda-

tions that accurately reflect the independent and

objective opinions of its research analysts;

b. to establish and enforce adequate policies and pro-

cedures to maintain the independence of its re-

search analysts;

c. to establish and enforce adequate policies and pro-

eedures to prevent conflicts of interests of its re-

search analysts;

d. to disclose any conflicts of interests of its research

analysts;

e. to establish and enforce adequate policies and pro-

cedures to ensure that its research reports, ratings

and recommendations were not influenced by exist-

ing or potential investment banking client relation.

ships;

f. to adhere to the rules, regulations, customs and us-

ages of the NYSE and NASD;

93.

36a

to use the rating system it represented it was us-

ing; and/or

to advise its customers of any material changes in

its rating system.

Smith Barney was negligent in one or more of the

following ways:

failing to establish and enforce adequate policies

and procedures to maintain the independence of re-

search analysts in of the Internet Group and the

Telecommunications Group from Smith Barney's

investment banking function sufficient to ensure

objective and uncompromised research;

permitting its Internet Group and Telecommunica-

tions Group research analysts to be unduly influ-

enced by and subjected to conflicts of interest from

the investment banl-ing function of Smith Barney;

failing to establish and enforce adequate policies

and procedures to ensure objective and uncompro-

mised research of its Internet Group and Telecom-

munications Group research analysts;

failing to establish and enforce adequate policies

and procedures to ensure Smith Barney's adher-

ence to NYSE and NASD rules, regulations, cus-

toms or usages;

failing to adhere to NYSE and NASD rules, regula-

tions, customs or usages;

issuing research reports, »atings and recommenda-

tions that did not accurately reflect the independ-

ent and objective opinions of its research analysts;

failing to disclose its Internet Group and Telecom-

munications Group analysts’ conflicts of interest as

alleged above;

failing to adhere to the rules, regulations, customs

and usages of the NYSE and NASD;

failing to use the 5-point rating system it repre-

sented it was using; and/or

37a

). failing to advise its customers of the abandonment

of the 5-point rating system in favor of the de facto

3-point system.

94. As a result of Smith Barney’s foregoing negli-

gence, Plaintiff and Class members have suffered damages

in an amount to be proven at trial but less than $75,000

per plaintiff or Class member.

WHEREFORE, Plaintiff requests that the Court certify

an appropriate class in this ease; enter judgment against

Citigroup Global Markets Inc. and in favor of Plaintiff and

the Class, with the total award not in excess of $75,000

per plaintiff or Class member; award to Plaintiff and the

Class all damages resulting from Citigroup Global Mar-

kets Inc.'s unlawful conduct, and pre- and post-judgment

interest and costs of suit; and grant such further relief as

is appropriate under the circumstances.

KOREIN TILLERY

/s/ Stephen M. Tillery

STEPHEN M. TILLERY #2834995

701 Market Street, Suite 300

St. Louis, Missouri 63101

Voice: (314) 241-4844

Fax: (314) 241-35251854

SWEDLOW & KING LLC

STEPHEN A. SWEDLOW #6234550

ROBERT L. KING #6209033

Three First National Plaza

70 West Madison Street, Suite 660

Chicago, Illinois 60602

Voice: (312) 899-5063

Fax: (312) 641-9555

38a

THE SIMMONS FIRM LLC

ROSALIND M. ROBERTSON, #6278330

DEREK Y. BRANDT, #6228895

CHRISTOPHER N. MESSINA, #6243490

JEFFREY S. COOPER, #6229060

707 Berkshire Blvd

East Alton, IL 62024

Voice: (618) 259-2222

Fax: (618) 259-2251

ATTORNEYS FOR PLAINTIFF

39a

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF ILLINOIS

Civil No. 04-308-GPM

PICHARD DISHER, INDIVIDUALLY AND ON BEHALF OF

ALL OTHERS SIMILARLY SITUATED,

Plaintiff,

V-

CITIGROUP GLOBAL MARKETS INC., D/B/A SMITH BARNEY,

Defendant.

[Aug. 9, 2004]

MOTION TO REMAND

~*~ eee

{3} COURTROOM DEPUTY: Richard Disher versus Citi-

group Global Markets, Inc, Case No. 03-308-GPM, motion

to remand. Will the parties please identify themselves for

the record.

MR. TILLERY: For the plaintiff, your Honor, it is Steve

Tillery and Steve Barash.

THE COURT: Mr. Tillery.

MS. HUANG: Joyce Huang.

MR. WHYTE: Joe Whyte with Heyl, Royster.

eee

[18]

eee

THE COURT: It seems to me the rest of these — I under-

stand your arguments. I| don’t marginalize them. I just

don't think they make it. But I'm interested in your SLRA

argument

MS. HUANG: I think the crux of this SLUSA issue is that

in this case the key fact ts the investment decisions that

40a

are the subject of this action. Plaintiffs’ decision to hold

these stocks —

THE COURT: Right.

MS. HUANG: —- were made in connection with CGMI

brokage [sic] accounts, every single one of them. The pu-

tative class is defined as those persons who have broker-

age accounts at CGMI and it is in connection with their

reliance on CGMI research reports that they obtained —

THE COURT: They held them.

MS. HUANG: But they obtained because they had these

accounts, but they held them based on those research re-

ports. And it was based on those research reports that

they made those investment decisions in their accounts.

The relevant authority is the SEC brief. The SEC has

taken the position in the briefs submitted in Gray and

Dabit, which were submitted to this court for considera-

tion, that in [19] those circumstances where the invest-

ment decisions were taken in connection with a brokage

[sic] account the whole purpose of which is to purchase and

sell securities. In those circumstances those investment

decisions satisfied the in-connection-with-a-purchase-or-

sale requirement of SLUSA. And the SEC has a very im-

portant institutional enforcement issue at stake which is

why it is trying to enforce and set forth its position on this

matter. Which is, the SEC points out very clearly in the

Dabit amicus brief that was submitted to the court that

there are actually two components to the in-connection-

with-a-purchase-of-sale of a security in a 10(b) case. Ina

10(b) case there is a requirement that any -

THE COURT: But this is not a 10(b) case.

MS. HUANG: It is not a 10(b) case. But all the parties

agree and the cases all agree that the question of how to

interpret that language in SLUSA is that you should 1n-

terpret it exactly as it is interpreted in 10(b). And so in

10(b) there is two components which I think that plaintiff

has conflated that are separate. There is a requirement of

Section 10(b) that any misrepresenting be made in connec-

4la

tion with the purchase or sale of a securities that is a very

flexible requirement. There is the separate requirement of

standing under the Blue Chip Stamps case that says in

order for a plaintiff to have standing to assert a 10(b) case

in a private right of action that plaintiff actually must

have [20] purchased or sold the securities.

THE COURT: Right.

MS. HUANG: That is a different and separate require:

ment from the 10(b) requirement of in connection with a

purchase or sale. In. fact, and the reason this is important

is, as the SEC points out, when the SEC brings a 10(b)

case the SEC does not have to comply with the Blue Chips

Stamp requirement that the SEC has purchased or saled

|sic] or show that anybody purchased or saled [sic].

THE COURT: It has statutory standing is the magic

word.

MS. HUANG: Correct. And all the SEC has to prove is

what 10(b) requires, which is in connection with the pur-

chase or sale of securities. Because of the in-connection

language the courts have interpreted that language only to

require that the person making the statement have done

so with a — in a way that was reasonably calculated to in-

fluence the investing public. There is no requirement in

10(b) itself that any actual person have purchased or sold

the security at issue. It is only the Blue Chips Stamp

standing requirement that implements that requirement.

And again the reason the SEC thinks this is important

is the SEC says if you begin to interpret the in-connection-

with-purchase-or-sale-of-securities language in 10(b) as

itself requiring that persons have purchased or sold [21]

the securated [sic] issue then the SEC will be hampered in

its enforcement efforts because that requirement will ap-

ply to the private — to the actions that the SEC brings on

enforcements behalf.

THE COURT: Let me stop you there.

MS. HUANG: Of course.

42a

THE COURT: Of course when the SEC brings a 10(b) ac-

tion we don’t have to worry about jurisdiction, do we? The

case may be good or the case may be bad, but the court's

subject matter jurisdiction is a given.

MS. HUANG: That's correct. But the issue here is not the

question of whether there is subject matter jurisdiction in

those cases, but how to interpret the language in-

connection-with-the-purchase-or-sale.

THE COURT: Well, yes. But see, as I see it in that case

we're talking about the statutory construction to be placed

on what is admittedly a remedial statute and the extent of

it. Now here we're talking about the court’s subject matter

jurisdiction and all the intendments and presumptions run

against your argument, not for it. In other words, here it

is a narrow construction that the district court is never to

expand jurisdiction. Isn’t that the distinction here?

MS. HUANG: I don't think there is an expansion of juris-

diction. In fact, if we can get down to brass tacks. I think

what plaintiffs’ are alleging is we have a holder claim.

[22] Holder claims are not cognizable under 10(b).

THE COURT: Exactly. .

MS. HUANG: However, what the Supreme Court says in

the Dabit brief, and this is the argument the SEC making

in these analysis cases that are being brought acrose the

country, the — with respect to the purchase or sale re-

quirement. In Blue Chip Stamps the court recognized that

holders — a holder claim is a violation of 10(b). In Blue

Chip Stamps the United States Supreme Court says: A

person who decides to hold a security based on a misrepre-

sentation is someone who is experiencing a violation of

10(b).

THE COURT: Right.

MS. HUANG: The court said in Blue Chips we are not go-

ing to allow that holder to sue under 10(b). We're going to

implement a standing requirement which is separate from

the in-connection-with-a-purchase-or-sale requirement be-

cause these holder ciaims are too hard to prove. It’s just

43a

too hard to prove that someone held rather than pur-

chased or sold and we are going to sacrifice those claims in

order to have clarity mn 10(b).

So in other words, what the Supreme Court - what the

SEC says in the Dabit brief says: The Supreme Court has

recognized that under 10(b) the requirement of in connec-

tion with a purchase of [sic] sale of securities is satisfied

where someone holds in reliance on alleged misrepresenta-

tion. It is [23] just that the Supreme Court had a separate

standing requirement in Blue Chip Stamps that is differ-

ent from the in connection with purchase or sale.

THE COURT: How does that help you here?

MS. HUANG: That helps me here is because what the

SEC is saying is here in SLUSA we are only talking about

the in-connection-with-a-purchase-or-sale requirement.

There is-no need and it would be inappropriate to import

into SLUSA the Blue Chips Stamp separate holding — the

separate standard requirement that the person actually

have purchased or sold. What the SEC says in the Dabit

amicus brief is where a holder says that they held in con-

nection with decisions with alleged misrepresentations

that holding is in connection with a purchase or sale of a

security. Now it is true that that holding doesn’t satisfy

the Blue Chips standard requirement but that’s not a re-

quirement —

THE COURT: What you are saying is, though, you like

the argument that the SEC is making.

MS. HUANG: Yes.

THE COURT: But, I mean, that’s just what it is. It is just

an argument. It’s whether the court would be more im-

pressed with the SEC’s argument than it would be with

Mr. Whyte’s argument is at best —

MS. HUANG: Well, two things. First, I think the SEC’s

position on this issue is entitled to deference because [24]

this is a decision the SEC is making in furtherance of its

ability to enforce.

44a

THE COURT: You think the Chevron standard applies in

this case?

MS. HUANG: Not the Chevron standard but the SEC is

entitled to — what it is trying to do -

THE COURT: What other kind of deference is there?

MS. HUANG: I think what's important is when the court

— because, as you know, under the Kircher case these deci-

sions al] will new be appealed immediately.

THE COURT: Right.

MS. HUANG: The crucial issue that the SEC is going

around to these circuit courts and submitting this amicus

brief the reason the SEC thinks it is a crucial issue and

thinks it is important for the courts of appeals to come out

the right way is, if there's a different interpretation of in-

connection-with-a-purchase-or-sale the SEC will be ham-

pered in its ability to enforce these cases. The SEC will

there — this importation of the standard requirement of

Blue Chip Stamps into the _ in-connection-with-the-

purchase-or-sale-of-securities language in the 10(b), the

SEC says in the Dabit brief, will require it to meet a

higher standard any time it wants to shows a 10(b) viola-

tion.

THE COURT: I see what you are saying. They’re [25]

worried how it would affect —

MS. HUANG: The interpretation of 10(b). Because

SLUSA and 10(b) —

THE COURT: But you are not making the argument that

this is an administrative decision entitled to deference un-

der Chevron. You are saying it is a good argument and we

ought to pay attention to it.

MS. HUANG: Correct.

THE COURT: All right. Now I understand your position.

What do you want to say? What I want to hear about is

the —

MR. TILLERY: SLUSA.

THE COURT: I don't need, you know.

45a

MR. TILLERY: Let's talk just for a moment about the

SEC brief if we can. And | think you've nailed the one

point that I wanted to make to this court, and that is that

when they come in making an argument, a legal argu-

ment, and they're not relying upon their administrative

judgment or decision making they're entitled to no more

deference than anybody else who makes you a legal argu-

ment.

Here’s the problem though, the cases that have inter-

preted the 34 Act in the in-connection-with language all of

that has been now - let's see how many years, 30 years or

so — there’s been a body of law developed regarding the in-

connection-with language. SLUSA comes along and Con-

gress [26] adopts precisely the same language. There is

yet another body of law, at least a discussion that appears

throughout cases, that when Congress knows the interpre-

tation of specific statutory language and decides to use

that precise language in related legislation that they don't

mean some other distinct meaning for that legislation.

That in-connection-with would be interpreted the same

way. There is nothing. You scour through SLUSA, look

through any of these acts, you will find no basis to con-

clude that Congress meant the interpretation that the

SEC is now trying to apply. That in-connection-with

should be interpreted differently.

And here a holder status is clearly outside the scope of

SLUSA. It should — it clearly are not within the scope of

that act and the case should be remanded. | think there's

no difference here in the analysis, your Honor, related to

what the cases that you've seen and the analysis that’s

been undertaxen in other related cases over the last six or

seven months.

THE COURT: Anything you want to add?

MS. HUANG: I would just say, far from the SEC suggest-

ing that the SLUSA language should be interpreted differ-

ently from the 10(b) language, | think the SEC’s argument

is precisely that it should be interpreted exactly as it is in

the 10(b) language. And the only thing that’s important is

46a

that the plaintiff has suggested that the 10(b) language

[27] in-comnection-with is the Blue Chips language. But

Blue Chips is a completely separate standard argument

which has nothing to do how to appropriately interpret the

in-connection-with language and the SEC says interpret it

exactly as it is interpreted in 10(b).

That interpretation tells you as long as somebody held

in reliance on research reports in connection with its

brokage [sic] account that is sufficiently reasonably calcu-

lated to affect in the vesting public that that qualifies un-

der the in-connection language. That is the SEC argu-

ment: Follow the law of 10(b).

THE COURT: I disagree. I remand. Here’s my thinking:

The bankruptcy in-connection-with issue is fairly easy and

doesn’t require much comment. What we have here is an

inchoate claim which would never be sufficient for federal

court jurisdiction.

The diversity issue, the amount in controversy argu-

ment, is well made. When I say “well made” I don’t mean

that it’s valid. I mean that it’s just the best argument that

can be made. The attorneys’ fees issue is out under

Gardynski. And in so far as the common-fund theory is

concerned there’s no imaginable circumstances that the

court could ever take this fund and attribute to any one

plaintiff. It just couldn’t happen. So you do get back to

the argument here of federal question jurisdiction.

Well, our court in the Seventh Circuit has followed [28]

Merreli Dow consistently. So just a substantial federal

question will never get you federal jurisdiction except in

those instances where the federal statute or federal regu-

lation that is a necessary part of the claim also provides

for a remedy, and we don't have that there. So we get to

the reform act.

Now the plaintiff in this case went to great pains to say:

I'm a holder. In the end it comes down to a question of

statutory interpretation in this instance. Now in this in-

stance where the question is: Is there federal subject mat-

ter jurisdiction? I construe the statute narrowly. I have -

47a

no literary license at all. And the statute talks about in

connection with a sale or purchase. I would have to say

that the statute here in the Securities Reform Act —

SLUSA I guess is the way you say it — doesn’t really say

what Congress meant it to say, and I'm not at liberty to do

that. The court jealously guards its subject matter juris-

diction.

There is not subject matter jurisdiction here. I will enter

just a short order for the reasons I’ve stated here on the

, record remanding the case for lack of subject matter juris-

diction. I say no more than that. Thank you for your ar-

guments.

MS. HUANG: Your Honor, may I make a motion?

THE COURT: What motion do you wish to make?

MS. HUANG: I would like to make a motion for the stay

[29] of effectiveness of the court’s remand order pending

appeal pursuant to the 1291 because as you know under

Kircher an appeal is available because this is a final deci-

sion under the court’s Seventh Circuit recent precedent.

THE COURT: - Now Judge Herndon’s case. Do you want to

talk about that, the one that’s up there now?

MS. HUANG: Kircher which is still on appeal before the

Seventh Circuit.

THE COURT: But in that case as I understand it Judge

Easterbrook’s opinion he said the judge didn’t just remand

the case for want of subject matter jurisdiction, he did

more. Isn't that right?

MR. TILLERY: That's correct.

THE COURT: I'm not — I'm specifically saying I'm not get-

ting to the merits of anything. }

MS. HUANG: With apologies, your Honor. it is my un-

derstanding that the finding of the court in the Kircher

case that by its nature SLUSA provides for removal and

there is subject matter jurisdiction for the court then to

deteFmine whether or not remand is appropriate under

SLUSA, which I believe is the «*fect of this court’s order. I

48a

would also refer the court to the recent Woodbury decision

order issued by Judge Reagan, | believe it is, issued a cou-

ple of weeks ago granting a stay in that case for an appeal

pending — for a stay of those proceedings pending the reso-

lution of the Kircher [30] appeal.

THE COURT: I will read Kircher, but — do you want to -

MR. TILLERY: First of all, I would like an opportunity to

respond rather than an oral motion for stay. I don’t know

that it is even appropriate, first of all.

THE COURT: The first thing. What I wiil do is I will read

the opinion again in Kircher, all right. Now if 1 — if I’m

right on this — and | want to read Kircher again it’s been

about a week or so and these cases tend to dance around —

I don’t have — you can’t stay a case over which you don’t

have jurisdiction.

MR. TILLERY: That's correct.

THE COURT: On the other hand, if you're right and there

is an exception here I will consider it. I'll get to you

shortly.

MR. TILLERY: The only thing I want to point out is - |

think you just hit it — how does this court enter a stay if

it’s decided —

THE COURT: I can't. But I want to read Kircher again. |

will read it.

MS. HUANG: We will be happy to submit in writing —

THE COURT: I'll read it.

MS. HUANG: - a one-page letter. We promise we won't go

over that.

i31] THE COURT: I'll tell what, you need to get to it me

before noon today. So if you can get dwer there and start —

if Mr. Whyte’s office has computers and you can send me

one I'll read it, but I’m going to read the opinion and do it.

But I mean, that’s all I'm going to do is read the opinion.

MR. TILLERY: Well, | mean, fundamentally it comes

down to if they believe they have appeal rights your deci-

49a

sion of no jurisdiction in this matter that somehow doesn’t

reinvest within this court the authority to grant a stay.

THE COURT: | agree with you.

MR. TILLERY: All right.

THE COURT: Court’s in recess. I'll get something out to-

day.

(End of requested transcript)

[Reporter's Certificate Omitted]

50a

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

15 U.S.C. § 77p provides:

§ 77p. Additional remedies; limitation on remedies

(a) Remedies additional

Except as provided in subsection (b) of this section, the

rights and remedies provided by this subchapter shal] be

in addition to any and all other rights and remedies that

may exist at law or in equity.

(b) Class action limitations

No covered class action based upon the statutory or

common law of any State or subdivision thereof may be

maintained in any State or Federal court by any private

party alleging -

(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.

Any covered class action brought in any State court in-

volving 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 subsection (b) of this section.

5la

(d) Preservation of certain actions

(1) Actions under State law of State of incorpora-

tion

(A) Actions preserved

Notwithstasding subsection (b) or (c) of this sec-

tion, a covered class action described in subparagraph

(B) of this paragraph that is based upon the statutory

or common law of the State in which the issuer is in-

corporated (in the case of a corporation) or organized

(in the case of any other entity) may be maintained in

a State or Federal court by a private party.

(B) Permissible actions

A covered class action is described in this subpara-

graph if it involves —

(i) the purchase or sale of securities by the is-

suer or an affiliate of the issuer exclusively from or

to holders of equity securities of the issuer; or

(ii) any recommendation, position, or other

communication with respect to the sale of securi-

ties of the issuer that —

(I) is made by or on behalf of the issuer or an

affiliate of the issuer to holders of equity securi-

ties of the issuer; and

(II) concerns decisions of those equity holders

with respect to voting their securities, acting in

response to a tender or exchange offer, or exer-

cising dissenters’ or appraisal rights.

(2) State actions

(A) In general

Notwithstanding any other provision of this sec-

tion, nothing in this section may be construed to pre-

clude a State or political subdivision thereof or a

State pension plan from bringing an action involving

52a

a covered security on :ts own behalf, or as a member

of a class comprised solely of other States, political

subdivisions, or State pension plans that are named

plaintiffs, and that have authorized participation, in

such action.

(B) “State pension plan” defined

For purposes of this paragraph, the term “State

pension plan” means a pension plan established and

maintained for its employees by the government of

the State or political subdivision thereof, or by any

agency or instrumentality thereof.

(3) Actions under contractual agreements be-

tween issuers and indenture trustees

Notwithstanding subsection (b) or (c) of this section,

a covered class action that seeks to enforce a contrac-

tual agreement between an issuer and an indenture

trustee may be maintained in a State or Federal court

by a party to the agreement or a successor to such

party.

(4) Remand of removed actions

In 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 main-

tained in State court pursuant to this subsection, the

Federal court shall remand such action to such State

court.

(e) Preservation of State jurisdiction

The securities commission (or any agency or office per-

forming like functions) of any State shall retain jurisdic-

tion under the laws of such State to investigate and bring

enforcement actions.

(f) Definitions

For purposes of this section, the follewing definitions

shall apply:

53a

(1) Affiliate of the issuer

The term “affiliate of the issuer” means a person that

directly or indirectly, through one or more intermediar-

ies, controls or is controlled by or is under common con-

trol with, the issuer.

(2) Covered class action

(A) In general

The term “covered class action” means —

(i) ar-y single lawsuit in which -

(I) damages are sought on behalf of more

than 50 persons or prospective class members,

and questions of law or fact common to those

persons or members of the prospective class,

without reference to issues of individualized re-

lance on an alleged misstatement or omission,

predominate over any questions affecting only

individual persons or members; or

(Il) one or more named parties seek to re-

cover damages on a representative basis on be-

half of themselves and other unnamed parties

similarly situated, and questions of law or fact

common to those persons or members of the

prospective class predominate over any ques-

tions affecting only individual persons or mem-

bers; or

(ii) any group of lawsuits filed in or pending in

the same court and involving common questions of

law or fact, in which —

(I) damages are sought on behalf of more

than 50 persons; and

(II) the lawsuits are joined, consolidated, or

otherwise proceed as a single action for any

purpose.

54a

(B) Exception for derivative actions

Notwithstanding subparagraph (A), the term “cov-

ered class action” does not include an exclusively de-

rivative action brought by one or more shareholders

on behalf of a corporation.

For purposes of this paragraph, a corporation, in-

vestment company, pension plan, partnership, or

other entity, shall be treated as one person or pro-

spective class member, but only if the entity is not es-

tablished for the purpose of participating in the ac-

tion.

(D) Rule of construction

Nothing in this paragraph shall be construed to af-

fect the discretion of a State court in determining

whether actions filed in such court should be joined,

consolidated, or otherwise allowed to proceed as a

single action.

—.

(3) Covered security

The term “covered security” means a security that

satisfies the standards for a covered security specified

in paragraph (1) or (2) of section 77r(b) of this title at

the time during which it is alleged that the misrepre-

sentation, omission, or manipulative or deceptive con-

duct occurred, except that such term: shall not include

any debt security that is exempt from registration un-

der this subchapter pursuant to rules issued by the

Commission under section 77d(2) of this title.

55a

15 U.S.C. § 78) provides:

§ 78}. Manipulative and deceptive devices

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 —

(a)(1) To effect a short sale, or to use or employ any

stop-loss order in connection with the purchase or sale,

of any security registered on a national securities ex-

change, in contravention of such rules and regulations

as the Commission may prescribe as necessary or ap-

propriate in the public interest or for the protection of

investors.

(2) Paragraph (1) of this subsection shall not apply to

security futures products.

(b) To use or employ, in connection with the purchase

or sale of any security registered on a national securi-

ties exchange or any security not so registered, or any

securities-based swap agreement (as defined in section

206B of the Gramm-Leach-Bliley Act), any manipulat-

ive or deceptive device or contrivance in contravention

of such rules and regulations as the Commission may

prescribe as necessary or appropriate in the public in-

terest or for the protection of investors.

Rules promulgated under subsection (b) of this section

that prohibit fraud, manipulation, or insider trading (but

not rules imposir~ or specifying reporting or recordkeep-

ing requiremen .. . svcedures, or standards as prophylac-

tic measures ag .st fraud, manipulation, or insider trad-

ing), and judicia) precedents decided under subsection (b)

of this section and rules promulgated thereunder that

prohibit fraud, manipulation, or insider trading, shall ap-

ply to security-based swap agreements (as defined in sec-

tion 206B of the Gramm-Leach-Bliley Act) to the same

extent as they apply to securities. Judicial precedents

decided under section 77q(a) of this title and sections 78i,

56a :

780, 78p, 78t, and 78u-1 of this title, and judicial prece-

dents decided under applicable rules promulgated under

such sections, shall apply to security-based swap agree-

ments (as defined in section 206B of the Gramm-Leach-

Bliley Act) to the same extent as they apply to securities.

57a

15 U.S.C. § 78bb provides:

§ 78bb. Effect on existing law

(a) Addition of rights and remedies; recovery of

actual damages; State securities commissions

Except as provided in subsection (f) of this section, the

rights and remedies provided by this chapter shall be in

addition to any and all other nghts and remedies that

may exist at law or in equity; but no person permitted to

maintain a suit for damages under the provisions of this

chapter shall recover, through satisfaction of judgment in

one or more actions, a total amount in excess of his actual

damages on account of the act complained of. Except as

otherwise specifically provided in this chapter, nothing in

this chapter shall affect the jurisdiction of the securities

commission (or any agency or officer performing like func-

tions) of any State over any security or any person insofar

as it does not conflict with the provisions of this chapter

or the rules and regulations thereunder. No State law

which prohibits or regulates the making or promoting of

wagering or gaminy; contracts, or the operation of “bucket

shops” or other similar or related activities, shall invalli-

date any put, call, straddle, option, privilege, er other se-

curity subject to this chapter, or apply to any activity

which is incidental or related to the offer, purchase, sale,

exercise, settlement, or closeout of any such security. No

provision of State law regarding the offer, sale, or distri-

bution of securities shall apply to any transaction in a se-

curity futures product, except that this sentence shall not

be construed as limiting any State ?atifraud law of gen-

eral applicability.

(b) Modification of disciplinary procedures

Nothing in this chapter shall be construed to modify ex-

isting law with regard to the binding effect (1) on any

member of or participant in any self-reguiatory organiza-

tion of any action taken by the authorities of such organi-

zation to settle disputes between its members or partici-

58a

pants, (2) on any municipal securities dealer or municipal

securities broker of any action taken pursuant to a proce-

dure established by the Municipal Securities Rulemaking

Board to settle disputes between municipal securities

dealers and municipal securities brokers, or (3) of any ac-

tion described in paragraph (1) or (2) on any person who

has agreed to be bound thereby.

The stay, setting aside, or modification pursuant to sec-

tion 78s(e) of this title of any disciplinary sanction im-

posed by a self-regulatory organization on a member

thereof, person associated with a member, or participant

therein, shall not affect the validity or force of any action

taken as a result of such sanction by the self-regulatory

organization prior to such stay, setting aside, or modifica-

tion: Provided, That such action is not inconsistent with

the provisions of this chapter or the rules or regulations

thereunder. The rights of any person acting in good faith

which arise out of any such action shall not be affected in

any way by such stay, setting asia, or modification.

(d) Physical location of facilities of registered clear-

ing agencies or registered transfer agents not to

subject changes in beneficial or record owner-

ship of securities to State or local taxes

No State or political subdivision thereof shall impose

any tax on any change in beneficial or record ownership of

securities effected through the facilities of a registered

clearing agency or registered transfer agent or any nomi-

nee thereof or custodian therefor or upon the delivery or

transfer of securities to or through or receipt from such

agency or agent or any nominee thereof or custodian

therefor, unless such change in beneficial or record own-

ership or such transfer or delivery or receipt would other-

wise be taxable by such State or political subdivision if

the facilities of such registered clearing agency, registered

transfer agent, or any nominee thereof or custodian there-

for were not physically located in the taxing State or

59a

political subdivision. No State or political subdivision

thereof shall impose any tax on securities which are de-

posited in or retained by a registered clearing agency, reg-

istered transfer agent, or any nominee thereof or custo-

dian therefor, unless such securities would otherwise be

taxable by such State or political subdivision if the facili-

ties of such registered clearing agency, registered transfer

agent, or any nominee thereof or custodian therefor were

not physically located in the taxing State or political sub-

division.

(e) Exchange, broker, and dealer commissions;

brokerage and research services

(1) No person using the mails, or any means or instru-

mentality of interstate commerce, in the exercise of in-

vestment discretion with respect to an account shall be

deemed to have acted unlawfully or to have breached a

fiduciary duty under State or Federal law unless ex-

pressly provided to the contrary by a law enacted by the

Congress or any State subsequent to June 4, 1975, solely

by reason of his having caused the account to pay a mem-

ber of an exchange, broker, or dealer an amount of com-

mission for effecting a securities transaction in excess of

the amount of commission another member of an ex-

change, broker, or dealer would have charged for effecting

that transaction, if such person determined in good faith

that such amount of commission was reasonable in rela-

tion to the value of the brokerage and research services

provided by such member, broker, or dealer, viewed in

terms of either that particular transaction or his overall

responsibilities with respect to the accounts as to which

he exercises investment discretion. T'his-subsection is ex-

clusive and plenary insofar as conduct is covered by the

foregoing, unless otherwise expressly provided by con-

tract: Provided, however, That nothing in this subsection

shall be construed to impair or limit the power of the

Commission under any other provision of this chapter or

otherwise.

60a

(2) A person exercising investment discretion with re-

spect to an account shall make such disclosure of his

policies and practices with respect to commissions that

will be paid for effecting securities transactions, at such

times and in such manner, as the appropriate regulatory

agency, by rule, may prescribe as necessary or appropri-

ate in the public interest or for the protection of investors.

(3) For purposes of this subsection a person provides

brokerage and research services insofar as he —

(A) furnishes advice, either directly or through publi-

cations or writings, as to the value of securities, the ad-

visability of investing in, purchasing, or selling securi-

ties, and the availability of securities or purchasers or

sellers of securities;

(B) furnishes analyses and reports concerning issuers,

industries, securities, economic factors and trends, port-

folio strategy, and the performance of accounts; or

tions incidental thereto (such as clearance, settlement,

and custody) or required in connection therewith by

rules of the Commission or a self-regulatory organiza-

tion of which such person is a member vr person associ-

ated with a member or in which such person is a par-

ticipant.

(4) The provisions of this subsection shall not apply

with regard to securities that are security futures prod-

ucts.

(f) Limitations on remedies

(1) Class action limitations

No covered class action based upon the statutory or

common law of any State or subdivision thereof may be

maintained in any State or Federal court by any private

party alleging —

6la

(A) a misrepresentation or omission of a material fact in

connection with the purchase or sale of a covered security;

(B) that the defendant used or employed any manipulat-

ive or deceptive device or cor ‘vance in connection with

the purchase or sale of a covered security.

(2) Removal of covered class actions

Any covered class action brought in any State court

involving a covered security, as set forth in paragraph

(1), shall be removable to the Federal district court for

the district in which the action is pending, and shall be

subject to paragraph (1).

(3) Preservation of certain actions

(A) Actions under State law of State of incorpo-

ration

(i) Actions preserved

Notwithstanding paragraph (1) or (2), a covered

class action described in clause (ii) of this sub-

paragraph that is based upon the statutory or

common law of the State in which the issuer is

incorporated (in the case of a corporation) or or-

ganized (in the case of any other entity) may be

maintained in a State or Federal court by a pri-

vate party.

(ii) Permissible actions

A covered class action is described in this

clause if it involves —

(1) the purchase or sale of securities by the

issuer or an affiliate of the issuer exclusively

from or to holders of equity securities of the is-

suer; or ,

(il) any recommendation, position, or other

communication with respect to the sale of secu-

rities of an issuer that —

62a

(aa) is made by or on behalf of the issuer or

an affiliate of the issuer to holders of equity

securities of the issuer; and

(bb) concerns decisions of such equity hold-

ers with respect to voting their securities,

acting in response to a tender or exchange

offer, or exercising dissenters’ or appraisal

rights.

(B) State actions

(i) In general ’

Notwithstanding any other provision of this

subsection, nothing in this subsection may be

construed to preclude a State or political subdivi-

sion thereof or a State pension plan from bringing

an action involving a covered security on its own

behalf, or as a member of a class comprised solely

of other States, political subdivisions, or State

pension plans that are named plaintiffs, and that

have authorized participation, in such action.

(ii) State pension plan defined

. For purposes of this subparagraph, the term

“State pension plan” means a pension plan estab-

lished and maintained for its employees by the

government of a State or political subdivision

thereof, or by any agency or instrumentality

thereof.

tween issuers and indenture trustees

Notwithstanding paragraph (1) or (2), a covered

class action that seeks to enforce a contractual

agreement between an issuer and an indenture trus-

tee may be maintained in a State or Federal court by

a party to the agreement or a successor to such party.

63a

(D) Remand of removed actions

In an action that has been removed from a State

court pursuant to paragraph (2), 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.

(4) Preservation of State jurisdiction

The securities commission (or any agency or office

performing like functions) of any State shall retain ju-

risdiction under the laws of such State to investigate

and bring enforcement actions.

(5) Definitions

For purposes of this subsection, the following defini-

tions shall apply:

(A) Affiliate of the issuer

The term “affiliate of the issuer” means a person

that directly or indirectly, through one or more in-

termediaries, controls or is controlled by or is under

common control with, the issuer.

(B) Covered class action

The term “covered class action” means —

(i) any single lawsuit in which —

(I) damages are sought on behalf of more

than 50 persons or prospective class members,

and questions of law or fact common to those

persons or members of the prospective class,

without reference to issues of individualized re-

liance on an alleged misstatement or omission,

predominate over any questions affecting only

individual persons or members; or

(JI) one or more named parties seek to re-

cover damages on a representative basis on be-

half of themselves and other unnamed parties

64a

similarly situated, and questions of law or fact

common to those persons or members of the

prospective class predominate over any ques-

tions affecting only individual persons or mem-

bers; or

(ii) any group of lawsuits filed in or pending in

the same court and involving common questions of

law or fact, in which —

(I) damages are sought on behalf of more

than 50 persons; and

(II) the lawsuits are joined, consolidated, or

otherwise proceed as a single action for any

purpose.

Notwithstanding subparagraph (B), the term “cov-

ered class action” does not include an exclusively de-

rivative action brought by one or more shareholders

on behalf of a corporation.

(D) Counting of certain class members

For purposes of this paragraph, a corporation,

investment company, pension plan, partnership, or

other entity, shall be treated as one person or pro-

spective class member, but only if the entity is not

established for the purpose of participating in the

action.

(E) Covered security

The term “covered security” means a security that

satisfies the standards for a covered security specified

in paragraph (1) or (2) of section 18(b) of the Secur-

ties Act of 1933 [15 U.S.C. 77r(b)], at the time during

which it is alleged that the misrepresentation, omis-

sion, or manipulative or deceptive conduct occurred,

except that such term shall not include any debt secu-

rity that is exempt from registration under the Secu-

rities Act of 1933 [15 U.S.C. 77a et seq.} pursuant to

65a

rules issued by the Commission under section 4(2) of

that Act [15 U.S.C. 77d(2)]. .

(F) Rule of construction

Nothing in this paragraph shall be construed to af-

fect the discretion of a State court in determining

whether actions filed in such court should be joined,

consolidated, or otherwise allowed to proceed as a

single action.

66a

28 U.S.C. § 1291 provides:

§ 1291. Final decisions of district courts

The courts of appeals (other than the United States

Court of Appeals for the Federal Circuit) shall have juris-

diction of appeals from all final decisions of the district

courts of the United States, the United States District

Court for the District of the Canal Zone, the District

Court of Guam, and the District Court of the Virgin Is-

lands, except where a direct review may be had in the Su-

preme Court. The jurisdiction of the United States Court

of Appeals for the Federal Circuit shall be limited to the

jurisdiction described in sections 1292(c) and (d) and 1295

of this title.

67a

28 U.S.C. § 1331 provides:

§ 1331. Federal question

The district courts shall have original jurisdiction of all

civil actions arising under the Constitution, laws, or trea-

ties of the United States.

68a

28 U.S.C. § 1332 provides:

§ 1332. Diversity of citizenship; amount in contro-

versy; costs

(a) The district courts shall have original jurisdiction of

all civil actions where the matter in controversy exceeds

the sum or value of $75,000, exclusive of interest and

costs, and is between —

(1) citizens of different States;

(2) citizens of a State and citizens or subjects of a for-

eign state;

(3) citizens of different States and in which citizens or

subjects of a foreign state are additional parties; and

(4) a foreign state, defined in section 1603(a) of this

title, as plaintiff and citizens of a State or of different

States.

For the purposes of this section, section 1335, and section

1441, an alien admitted to the United States for perma-

nent residence shall be deemed a citizen of the State in

which such alien is domiciled.

(b) Except when express provision therefor is otherwise

made in a statute of the United States, where the plaintiff

~ who files the case originally in the Federal courts is fi-

nally adjudged to be entitled to recover less than the sum

or value of $75,000, computed without regard to any setoff

or counterclaim to which the defendant may be adjudged

to be entitled, and exclusive of interest and costs, the dis-

trict court may deny.costs to the plaintiff and, in addition,

may impose costs on the plaintiff.

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