Davis et a l . v . Kozlowski et a l . CV-04-1338-B 03/17/05

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Scott Davis, et a l . MDL No. 02-1335-PB v. Civil No. 04-1338-PB Opinion No.

Dennis Kozlowski, et. a l .

MEMORANDUM AND ORDER

In December 2003, Scott Davis filed a class action lawsuit

in Cook County, Illinois alleging state law claims for negligent

misrepresentation, common law fraud, breach of fiduciary duty,

and aiding and abetting breach of fiduciary duty. Asserting that

these claims fall within the purview of the Securities Litigation

Uniform Standards Act (“SLUSA” or the “Act”), defendants1 removed

the action from state to federal court. 15 U.S.C. §§ 77p(b),

(c). Davis has filed a motion to remand. (Doc. N o . 2 5 3 ) .

1 The named defendants are Dennis Kozlowski, Mark H . Swartz, Mark A . Belnick, Frank E . Walsh, Jr., Michael A . Ashcroft, Tyco International, Ltd. (“Tyco”), PricewaterhouseCoopers, L.L.P., Phua K. Young, and Merrill Pierce, Fenner and Smith (“Merrill Lynch”). Defendants oppose this motion and have filed cross-motions to

dismiss. (Doc. Nos. 2 6 7 , 2 7 1 , 2 7 5 ) . In what follows, I explain

why I grant Davis’s motion to remand and deny defendants’ motions

to dismiss.

I. BACKGROUND

A. Plaintiff’s Claims

Davis, a resident of Cook County Illinois, alleges that he

purchased stock in Tyco International, Ltd. on or before December

1 3 , 1999, and that he retained this stock through June 3 , 2002.

He argues that defendants knowingly and recklessly made or

permitted others to make misrepresentations and omissions of

material fact about Tyco’s operations, financial position, and

performance during this period. He asserts that these

misrepresentations and omissions were made to artificially

inflate the value of the company’s stock so that investors, like

him, would retain their stake in the company. The purported

class Davis seeks to represent are shareholders who “acquired

securities of Tyco prior to December 1 3 , 1999 and held them

through June 3 , 2002 inclusive (the “Class Period”).” Purchasers

-2- of Tyco’s stock during this period are expressly excluded from

the class.

B. SLUSA’s Removal and Dismissal Provisions

SLUSA provides in pertinent part:

(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) a misrepresentation or omission of material fact in connection with the purchase or sale of a covered security; or

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

(c) Removal of covered class actions

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

15 U.S.C. §§ 77p(b), ( c ) .

Believing the Act to apply in this case, defendants removed

the suit to federal court.

-3- II. DISCUSSION

To establish that Davis’s claims fall within the scope of

SLUSA, defendants must demonstrate: (1) that this action is a

covered class action; (2) purporting to be based on state law;

and (3) that the action alleges a misrepresentation or omission

of material fact (4) in connection with the purchase or sale of a

covered security. See Pl.’s Mot. to Remand at 4 (Doc. N o . 253)

(citing Gordon v . Buntrock,

at *2 (N.D. Ill., Apr.

2 8 , 2000)); Tyco’s Opp. to Mot. to Remand at 7 (Doc. N o . 2 7 7 ) .

Davis concedes that he has brought a “covered class action”

“based on state law” involving a “covered security” within the

meaning of the Act. Whether SLUSA applies thus turns on one

question: was the alleged misconduct committed “in connection

with the purchase or sale of a security?”

A. Recent Rulings by Federal Courts Interpreting SLUSA

All of the circuit courts that have ruled on this issue,

including panels of the Second, Eighth, Ninth and Eleventh

Circuit Courts of Appeals, have concluded that misconduct is

committed “in connection with the purchase or sale of a

security,” only if a defendant’s malfeasance has induced a class

-4- of plaintiffs to actually purchase or sell securities. See

Dabit,

5 , 43 (2d Cir. 2005) (noting that its holding

“aligns [it] with every circuit court that has considered the

question thus far”); Green v . Ameritrade, Inc.,

9 0 ,

597-99 (8th Cir. 2002); Falkowski v . Imation Corp.,

(9th Cir. 2002); Riley v . Merrill Lynch, Pierce,

Fenner & Smith,

(11th Cir. 2002); Atencio

v . Smith Barney, Citigroup, Inc.,

, *4 (S.D.N.Y.,

Feb. 2 , 2005); Grabow v . PriceWaterhouseCoopers LLP,

(N.D. Okla. 2004); Feitelberg v . Credit Suisse

First Boston, LLC,

, *4-*5 (N.D. Cal., Oct. 2 4 ,

2003); Gutierrez v . Deloitte & Touche, L.L.P.,

(W.D. Tex 2001); Chinn v . Belfer,

, *5

(D. Or., June 1 9 , 2002). Claims by “holders” of securities,

these courts have held, do not qualify.

The Second Circuit’s recent decision in Dabit provides the

most detailed analysis of the issue. After addressing each of

the arguments that the defendants make in this case, the Dabit

court concluded that a plaintiff who is injured only in his

capacity as a holder of covered securities does not have a claim

-5- that is subject to removal and preemption under SLUSA. Id. at

43-44. I agree with this conclusion.

B. Does SLUSA Apply to Davis’s Claims?

The question that remains is whether SLUSA applies to

Davis’s claims. Defendants argue that it does. First,

defendants assert that SLUSA applies because Davis “alleged” that

he purchased stock during the class period. Next defendants

argue that SLUSA applies because Davis included in his complaint

a description of facts that occurred prior to the beginning of

the class period. These facts, defendants argue, occurred before

some members of the class purchased Tyco stock. Defendants thus

maintain that their inclusion provides the “connection” with

security purchases necessary to bring the case under SLUSA’s

provisions. I treat each argument in turn.

1. Allegations of Purchases During the Class Period

As to the defendants’ first argument, they are correct that

the mere allegation of a purchase or sale of stock during the

class period would be enough to bring Davis’s case under SLUSA’s

provisions. In Dabit, the court held that

a plaintiff who alleges the purchase and retention of

-6- securities. . .but who forswears damages from the purchase and seeks only “holding damages” has still run afoul of SLUSA, which by its plain terms preempts claims “alleging” fraud in connection with the purchase or sale, and not merely claims seeking damages.

395 F.3d at 4 5 . Such suits, the court held, “sweep in the claims

of [plaintiffs] who purchased the stock during the class period,”

id. at 4 6 , and must therefore be dismissed without prejudice.

See id. at 4 7 . I agree with the court’s reasoning on this point.

The rule does not apply, however, where the “lead plaintiff”

has expressly excluded from the class claimants who purchased

securities in connection with the alleged fraud. Id. at 4 6 .

Here, Davis has done exactly that. Not only does his complaint

explicitly seek to represent only plaintiffs who were induced to

retain Tyco securities, Compl. ¶ 3 , it expressly excludes

purchasers from the class definition. Compl. ¶ 413. Unlike the

plaintiffs in Dabit, then, Davis has not swept stock purchases

into the complaint.

2. Allegations of Purchases Prior to the Class Period

As to defendants’ second argument, in the context of SLUSA

actions, facts included in the complaint that occurred prior to

the beginning of the class period have been treated as

-7- “background facts,” and have therefore been deemed irrelevant in

determining whether SLUSA applies. See, e.g., Gordon, 2000 WL at

*3. The distinction that courts have drawn between “background

facts” and “ultimate facts” is a useful one. The first category

of facts merely adds context. The second category provides the

actual factual basis upon which the claims are based. Courts

have been particularly willing to distinguish between the two

where a plaintiff has gone “to great lengths to stress that his

complaint alleges misrepresentations only in the holding of

securities and expressly disavows any injury resulting from the

purchase or sale of securities.” Id. ; see also, Gutierrez,

8 4 , 594-95 (treating thirty-nine pages describing

how plaintiff was duped into purchasing stock as “background

facts” that did not bring the plaintiff’s case under SLUSA’s

provisions). As noted above, Davis has gone to great lengths to

do so here. I therefore conclude that the facts alleged by Davis

describing defendants’ pre-class period conduct merely provide

background information. Defendants’ argument that the presence

of these facts brings plaintiffs claims under SLUSA must thus be

rejected.

-8- III. CONCLUSION

Davis otherwise alleges only that he retained stock as a

result of defendants’ alleged malfeasance. As explained, this

action falls outside of SLUSA’s purview. No other federal

question is raised. I therefore lack subject matter jurisdiction

over the suit, and am required to remand the removed action to

Cook County. Plaintiff’s motion to remand (Doc. N o . 253) is thus

granted and defendants’ motions to dismiss (Doc. Nos. 2 6 7 , 2 7 1 ,

275) are denied. All other pending motions between the parties

are mooted (Doc. Nos. 271-73, 2 8 1 ) . The clerk is instructed to

enter judgment accordingly.

SO ORDERED.

Paul Barbadoro United States District Judge

March 1 7 , 2005

cc: Counsel of Record

-9-