United States District Court, Southern District of California
September 7, 1999
AARON ABADA, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
CHARLES SCHWAB & CO., INC., A CALIFORNIA CORPORATION, AND DOES 1 THROUGH 10, DEFENDANT.
The opinion of the court was delivered by: Keep, District Judge.
ORDER DENYING MOTION TO
REMAND TO STATE
Plaintiff filed the present motion for remand to state court on July
23, 1999. An opposition was filed by Defendant on August 16, 1999. Both
parties are represented by counsel.
This action arises out of a dispute over public statements made by
Charles Schwab & Company, Inc. (hereafter, "Schwab") regarding Schwab's
on-line brokerage account services and its capacity to handle and execute
on-line trades. Plaintiff Aaron Abada asserts five causes of actions
against Schwab, individually and on behalf of all others similarly
situated, alleging violations of unfair trade practices under
California's Business & Professions Code, Section § 17200 et seq.,
violations of false and misleading advertising under California's
Business & Professions Code, Section § 17500 et seq., unjust
enrichment, negligent misrepresentation, and fraud and deceit.
Plaintiff alleges that he opened an online securities trading account
with Schwab in reliance on Schwab's representations at its internet site
"that Schwab would provide fast, high quality executions." Plaintiffs
Complaint, ¶ 9. Plaintiff further alleges that Schwab made
representations in its on-line brochure that "[m]arket orders entered
while the market is open are subject to immediate execution," and that
once a customer "confirm[s]" his or her order, it is "sent through Schwab
directly to the trading floor." Id. at ¶ 17. According to Plaintiff,
however, "in light of the large number of Schwab accounts and the rapid
rate at which it had been adding new accounts, Schwab knew or should have
known that its representations to customers regarding the manner in which
their accounts would be handled were false." Id. at ¶ 19.
On November 13, 1998, the internet company known as "theglobe.com"
(hereafter, "TGLO") was scheduled to begin secondary trading on the
NASDAQ after the initial public offering of TGLO stock the previous day.
See Defendant's Opposition, at p. 2, lines 10-12. On that day, Plaintiff
alleges that at approximately 9:20 a.m. E.S.T., shortly before the market
opened, he placed a market order to buy 500 shares of TGLO stock through
Schwab's web site and thereafter received an "Order Acknowledgment." See
Plaintiff's Complaint, ¶ 29. Plaintiff further alleges that
shortly after the market opened, when TGLO was trading at $50 1/8 a
share, Plaintiff decided to liquidate his recently-purchased TGLO
stocks. See id. at ¶ 30. However, according to Plaintiff, after
numerous failed attempts to access his Schwab account through the Schwab
web site, Plaintiff finally "was able to log onto his Schwab account,"
only to find that his "account did not reflect an order confirmation."
id. In fact, Plaintiff alleges his order confirmation was delayed over
three hours. See id. at ¶¶ 6, 31. In addition, Plaintiff states that
he later learned that "shares were purchased in his account at $86 1/2,
which was $36 more than the price" at which Plaintiff placed his
original' order on-line. Id. By the time Plaintiff was informed of his
purchase, Plaintiff alleges that the price had dropped to $70 a share. See
id. at ¶ 6. As a consequence of his inability to access his Schwab
account and the delay of his order of TGLO shares, Plaintiff alleges
"substantial losses within his accouAt." Id. at ¶ 6.
On April 5, 1999, Plaintiff filed this action against Schwab in the
Superior Court for the County of San Diego, purporting to represent:
all investors who had online accounts with Schab
on November 13, 1998, and: (A) who placed market
orders to purchase or sell TGLO; (B) whose market
orders were delayed by more than one minute and
executed at disadvantageous prices, or whose
market orders were not confirmed instantaneously,
and (C) who were damaged thereby. Id. at ¶ 7.
On May 6, 1999, Defendant filed a notice of removal of this action to
this court, pursuant to 28 U.S.C. § 1441 and 1446 and the Securities
Litigation Uniform Standards Act of 1998, Pub.L. No. 105-353, 112 Stat.
3227 (1998) (hereafter "the Uniform Standards Act").
On July 23, 1999, Plaintiff filed this motion to remand the action to
state court. Defendant opposes, alleging that Plaintiff's claims,
notwithstanding Plaintiff's attempts at "creative pleading," are all
preempted by the Uniform Standards Act. See Defendant's Opposition, at p.
1, lines 13-20. Defendant alleges that pursuant to the Uniform Standards
Act, "every claim alleging fraud or misrepresentation in connection with
the purchase or sale of a security traded on a national exchange, like
Plaintiff's claims here, must be brought in federal court." Id., at p.
5, lines 12-15. In reply, Plaintiff asserts that Schwab has failed to
carry its burden of establishing that removal is proper under the artful
pleading doctrine. See Plaintiffs Memorandum in Support of Plaintiffs
Motion to Remand to State Court, at pp. 2-4 ("Plaintiffs Memorandum").
Moreover, Plaintiff asserts that Schwab's alleged misrepresentations are
not "in connection with the purchase or sale of a covered security"
within the meaning of 15 U.S.C. § 78bb(f)(1) of the Uniform Standards
Act and that the Uniform Standards Act was not meant to preempt
non-securities fraud claims like Plaintiffs claim, which is based on
state statutory or common law. See id., at p. 4-5. Therefore, Plaintiff
asserts that this action should be remanded to state court.
II. Legal Standard
Removal jurisdiction is governed by 28 U.S.C. § 1441, et seq.
Doubts as to removability are usually resolved in favor of remanding the
case to state court. See Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100,
61 S.Ct. 868, 85 L.Ed. 1214 (1941); See also Boggs v. Lewis, 863 F.2d 662,
663 (9th Cir. 1988). The defendant has the burden of establishing that
removal is proper. See Nishimoto v. Federman-Bachrach & Assocs.,
903 F.2d 709, 712 n. 3 (9th Cir. 1990).
Removal is only appropriate for cases that might have originally been
brought in federal court. See Caterpillar, Inc. v. Williams, 482 U.S. 386,
392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). Cases arise under federal law
only if the complaint establishes either that federal law creates the
cause of action or that the
plaintiff's right to relief necessarily depends on the resolution of
substantial questions of federal law. See Franchise Tax Board of Cal. v.
Construction Laborers Vacation Trust for Southern Cal., 463 U.S. 1, 10,
103 S.Ct. 2841, 77 L.Ed.2d 420 (1983). The plaintiff is the master of the
claim, and federal jurisdiction exists only when a federal question is
presented on the face of the properly pleaded complaint. See Caterpillar,
482 U.S. at 392, 107 S.Ct. 2425 (citing Gully v. First Nat'l Bank,
299 U.S. 109, 112-13, 57 S.Ct. 96, 81 L.Ed. 70 (1936)). "[I]t is well
settled law that a case may not be removed to federal court on the basis
of a federal defense, including the defense of preemption, even if the
defense is anticipated in the plaintiffs complaint, and even if both
parties concede that the federal defense is the only question truly at
issue." Id. at 393, 107 S.Ct. 2425 (italics in original) (citing
Franchise Tax Board of Cal. v. Construction Laborers Vacation Trust for
Southern Cal., 463 U.S. at 12, 103 S.Ct. 2841.)
However, there exists an "`independent corollary' to the well-pleaded
complaint rule" called the" "complete preemption' doctrine. Id. at 393,
107 S.Ct. 2425 (quoting Franchise Tax Board, 463 U.S. at 22, 103 S.Ct.
2841). Complete preemption occurs where the "preemptive force of a
statute" is so "extraordinary" as to convert state claims into federal
claims. Id. at 393, 103 S.Ct. 2841. "Once an area of state law has been
completely preempted, any claim purportedly based on that preempted state
law is considered, from its inception, a federal claim, and therefore
arises under federal law." Id. at 393, 103 S.Ct. 2841 (citing Franchise
Tax Board, 463 U.S. at 24, 103 S.Ct. 2841).
In this case, the heart of the dispute between the parties is the
determinative question of whether the state law claims alleged in
Plaintiff's complaint are completely preempted because they fall within
scope of the Uniform Standards Act's limitations on class actions
pursuant to subsections (f)(1) and (2) of 15 U.S.C. § 78bb. Because
the court finds that the Uniform Standards Act completely preempts
Plaintiff's state law claims, federal subject matter jurisdiction
exists, and removal is therefore proper.
Plaintiff asserts five claims against Schwab: (1) violation of
California's Business & Professions Code, Section § 17200 et seq.;
(2) violation of California's Business & Professions Code, Section §
17500 et seq.; (3) unjust enrichment; (4) negligent misrepresentation;
and (5) fraud and deceit. Plaintiff argues that his claims are not
preempted by the Uniform Standards Act because his claims against
Defendant are not matter connected with the purchase of securities.*fn1
See Plaintiff's Reply Memorandum, at p. 4, lines 11-13. Plaintiffs
arguments, however, fail chiefly for three reasons: (1) His
interpretation of the phrase "in connection with the purchase or sale of
a covered security" is contrary to the plain language of the Uniform
Standards Act; (2) His interpretation of the "in connection with"
language found in federal securities laws contravenes the great weight of
authority broadly construing the language; and (3) The result of
remanding Plaintiff's state law claims to state court would frustrate the
federal legislative objectives of the Uniform Standards Act.
As indicated above, where Congress intends to completely occupy a field
so as to supplant state laws, "any civil
complaint raising this select group of claims is necessarily federal in
character." See Toumajian v. Frailey, 135 F.3d 648, 653 (9th Cir. 1998).
Even if the only claim in a complaint is a state law claim and no federal
claim is alleged, if that only claim in the complaint is one that is
completely preempted by federal law, federal subject matter jurisdiction
exists, and removal is therefore proper. See id.
The court finds that Plaintiff's claims are preempted by the Uniform
Standards Act. An exercise of jurisdiction by the court is therefore
A. Securities Litigation Uniform Standards Act of 1998
The Securities Litigation Uniform Standards Act of 1998 was enacted
into law on November 3, 1998. The Uniform Standards Act amended the
Securities Exchange Act of 1934 to preclude a private party from bringing
a "covered class action" in federal or state court based on the statutory
or common law of any state alleging a "misrepresentation or omission of a
material fact" or the use of "any manipulative device or contrivance" "in
connection with the purchase or sale of a covered security."
15 U.S.C. § 78bb(f)(1). As a generality, covered class actions are
those class actions involving common questions of law or fact brought on
behalf of more than 50 persons or those actions brought on behalf of one
or more unnamed parties. See 15 U.S.C. § 78bb(f)(5)(B). A "covered
security" is a "security that satisfies the standards for a covered
security specified in paragraph (1) or (2) of section 77r(b)" of Title 15
of the United States Code "at the - time during which it is alleged that
the misrepresentation, omission, or deceptive conduct occurred."
15 U.S.C. § 78bb(f)(5)(E). Generally speaking, a security is a
covered security under 15 U.S.C. § 77r(b) if it is listed, or
authorized for listing, on the New York Stock Exchange, the American
Stock Exchange, or on the Nasdaq Stock Market, or if it 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. See
15 U.S.C. § 77r(b). The relevant portion of the Uniform Standards Act
No covered class action based upon the statutory
or common law of any State or subdivision thereof
may be maintained in any State or Federal court by
any private party alleging -
(A) a misrepresentation or omission of a material
fact in connection with the purchase or sale of a
covered security; or
(B) that the defendant used or employed any
manipulative or deceptive device or contrivance in
connection with the purchase or sale of a covered
security. 15 U.S.C. § 78bb(f)(1).
This limitation on securities fraud class actions is quite sweeping-it
governs all "covered class actions" "based upon the statutory or common
law of any State" with a few, limited exceptions for "preserved actions."
See 15 U.S.C. § 78bb(f)(1). The Uniform Standards Act further
provides for the removal of covered class actions, as set forth in
subsection (f)(1), from state court to federal district court:
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 in the district the action
is pending, and shall be subject to paragraph
(1). 15 U.S.C. § 78bb(f)(2).
The legislative history shows that Congress sought to establish federal
courts as "the exclusive venue for most securities class action lawsuits"
involving nationally traded securities. H.R.Conf.Rep. No. 803, 105th
Cong., 2d Sess. at 13 (1998) ("House Report") (emphasis added). According
to the House Report, the purpose of the Uniform Standards Act was to
"prevent plaintiffs from seeking to evade the protections that Federal law
provides against abusive litigation by filing suit in State, rather than
Federal, court." Id. The House report noted that one year after the
passage of the Private Securities Litigation Reform
Act of 1995 in which procedural and substantive protections against
abusive and meritless "strike" suits in federal courts were implemented,
the Securities and Exchange Commission reported a significant shift of
securities fraud cases from federal to state court. See id. at 14. The
purpose of these strike suits, according to the House Report, is to
"extract a sizable settlement from companies that are forced to settle,
regardless of the lack of merits of the suit, simply to avoid the
potentially bankrupting expense of litigating." Id. at 13. Thus, "in order
to prevent certain State private securities class action lawsuits
alleging fraud from being used to frustrate" federal objectives, Congress
found it "appropriate to enact national standards for securities class
action lawsuits involving nationally traded securities." Id. at 2. It
appears that Congress's intention, then with the exception of certain
was to completely preempt state securities class
actions alleging fraud or manipulation relating to covered securities
when it enacted the Uniform Standards Act. See id. at 13.
The essence of the dispute between the two parties is whether
Plaintiff's claims are preempted (and therefore removable to federal
district court) by the Uniform Standards Act. Plaintiff asserts three
main arguments in their Memorandum in support of their motion: (1) Since
Plaintiff has not alleged any securities fraud claims against Schwab and
Schwab's conduct had nothing to do with the trading of any particular
security, Plaintiff has not frustrated any legislative intent to
eliminate the shifting of securities fraud actions to state courts in
order to avoid the higher federal pleading standards. (2) Schwab's
alleged misrepresentations were not "in connection with the purchase or
sale of a covered security" under 15 U.S.C. § 78bb(f)(1) since the
misrepresentations did not affect the value of the security but merely
"involve[d] the relationship between Schwab and its customers." (3) The
Uniform Standards Act intended to govern only cases involving the
purchase or sale of securities by the issuer or an affiliate of the
issuer, and since Schwab is not an issuer of securities, the Uniform
Standards Act does not govern Schwab's alleged misrepresentations in this
case. See Plaintiff's Memorandum, at pp. 5-7. Plaintiffs arguments are
either unsupported by authority, or they run counter to established
authority. Therefore, the Court does not find Plaintiff's arguments to be
persuasive; each shall be addressed in turn.
1. Non-Pleading of Securities
In essence, Plaintiff is arguing that since he has not alleged any
securities fraud claims against Schwab, his claims are not governed by
the Uniform Standards Act regarding the limitation on securities fraud
class actions. Plaintiff misconstrues the complete preemption doctrine.
The fact that he has not asserted a federal claim in his complaint is
irrelevant. As stated above in Section II, Congress may have chosen to
"so completely preempt a particular area that any civil complaint raising
this select group of claims is necessarily federal in character."
Toumajian v. Frailey, 135 F.3d at 653. Thus, the "preemptive force" of
the Uniform Standards Act, the statute at issue, essentially works to
convert Plaintiff's alleged state claims into federal claims. See
Caterpillar, 482 U.S. at 393, 107 S.Ct. 2425.
Moreover, Plaintiff's assertion that Defendant "has failed to carry its
burden of establishing the artful pleading doctrine" is irrelevant. See
Plaintiff's Memorandum, at p. 2, line 19. First, Defendant did not allege
that Plaintiff had engaged in "artful pleading." Second, Plaintiff's
characterization of his claims are not at issue. The
issue, rather, is the substance of the claims contained in the
complaint, not the particular semblance in which it is cloaked.
2. "In Connection With" Language
The relevant inquiry in assessing preemption in this case is whether
Defendant's "alleged misrepresentations were in connection with the
purchase or sale of securities" within the meaning of subsection (f)(1) of
the Uniform Standards Act. 15 U.S.C. § 78bb(f)(1). Defendant contends
that the Uniform Standards Act's "in corinection with" language should be
read broadly, "in accord with the U.S. Supreme Court and Ninth Circuit
authority mandating a broad and flexible construction of the language as
it appears in Section 10(b) and Rule 10b-5." See Defendant's Opposition,
at p. 12, lines 4-6. The court agrees.
Since the Umform Standards Act's enactment in November 1998, there has
been no published opinion on the construction of the Act's "in connection
with" language for purposes of determining the preemption of states
securities claims. The Uniform Standards Act's "in connection with"
language is is a paraphrase of the second clause of Rule 10b-5 and of
Section 10(b) of the Exchange Act, the major anti-securities fraud
provisions. See 3 Sec. & Fed. Corp. Law § 16.75. In the absence of
case law construing the Uniform Standards Act's pertinent language, the
court will look to federal cases construing Section 10(b) and Rule 10b-5
as instructive in interpreting the scope of the "in connection with"
language. See 15 U.S.C.A. § 78J(b) (Securities Exchange Act of 1934
§ 10(b)) and 17 - C.F.R. § 240.10b-5 (Securities and Exchange
Commission Rule 10b-5 promulgated pursuant to Section 10(b)).
In Superintendent of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6,
12, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), the Supreme Court stated that
"Section 10(b) must be read flexibly, not technically and restrictively."
Id. Similarly, in Arrington v. Merrill Lynch, 651 F.2d 615, 619 (1981),
the Ninth Circuit reiterated the Supreme Court's flexible standard and
stated that when "there is a sale of a security and fraud "touches' the
sale, there is redress under section 10(b)," regardless of the fact that
"the fraud is not of the "garden variety' associated with securities
sales." In Arrington the court held that a misrepresentation as to the
risks of buying securities on margin in a declining market is fraud "in
connection with" the purchase of securities since it "induce[d]" the
plaintiff to "engage in commission-producing securities purchases" through
Merrill Lynch. Id.
Arrington is consistent with cases from other jurisdictions which have
held that a broker's misrepresentations regarding the risk of a
particular investment or investment system or method were "in connection
with the purchase or sale" of securities under Section 10(b) and Rule
10(b)-5. For example, in Angelastro v. Prudential-Bache Securities,
Inc., 764 F.2d 939 (3d Cir. 1985), cert. denied, 474 U.S. 935, 106 S.Ct.
267, 88 L.Ed.2d 274 (1985), the court held that the nondisclosure and
misrepresentations regarding credit terms of margin accounts were
sufficiently causally connected to the plaintiffs loss to be "in
connection with the purchase or sale" of securities. In Alvord v.
Shearson Hayden Stone, Inc., 485 F. Supp. 848 (D.Conn. 1980), the court
held that where a stockbroker's agent made misrepresentations that his
investment system was "risk-free" in order to convince the plaintiff to
invest in a stock option trading account, these statements were "in
connection with" the plaintiffs investments, which were securities.
Likewise, in the present case, all the misrepresentations Plaintiff
alleges that Defendant Schwab made were regarding the "characteristics
and capabilities of Schwab trading systems," particularly the risks
involved in such a trading system. See Complaint, ¶ 61. Thus, these
alleged misrepresentations were inherently "in connection with" the
purchase or sale of securities since the chief purpose of an online
trading account is to facilitate the purchase or sale of securities.
The court in In re Financial Corp. of America Shareholder Litigation,
796 F.2d 1126, 1130 (9th Cir. 1986) stated that in determining whether
the "in connection with" requirement has been met, the court must
consider whether a causal connection between the fraud and the
transaction has been shown. The court quoted with approval Second Circuit
authority that the allegations of actual causation in fact must be in the
form of "loss causation" and "transaction causation." Id. The In re
Financial Corp court defined "loss causation" as fraud causing economic
harm and "transaction causation" as fraud causing the plaintiff to engage
in the transaction. See id. In the present case, both "loss causation"
and "transaction causation" are present. First, these misrepresentations
were causally connected to Plaintiff's loss since Plaintiff himself
admits in his complaint that he "suffered substantial losses within his
account" because Schwab "knowingly and/or recklessly delayed market
orders on behalf of Schwab customers . . . and executed the orders at
consistently disadvantageous prices." See Complaint, ¶ 6. Second,
there was "transaction causation" since Plaintiff alleged that he opened
his Schwab account on inducement by and "in reliance on Schwab's claims
on its World Wide Web site." Id. at ¶ 9.
Plaintiff, however, disputes that a causal connection existed because
"Schwab has not made any representation as to any specific security,"
including TGLO. Additionally, Plaintiff argues Schwab has not shown any
intent to manipulate the price of any stock. See Plaintiff's Memorandum,
at p. 5, lines 17-19 (emphasis added). The court find these arguments
unpersuasive. First, Plaintiff has cited no authority for the
propositions he assert. Second, Plaintiff's interpretation is contrary to
the plain language of the Uniform Standards Act and Section 10(b) which
require that the misrepresentation or omission be in "connection with the
purchase or sale of a covered security," not that the representation
itself be related to a specific security or its value or price. In fact,
the Ninth Circuit has rejected the argument that fraud must affect the
value of the securities in Lanning v. Serwold, 474 F.2d 716, 718 (9th
Plaintiff appears to rely on Levitin v. PaineWebber, Inc.,
933 F. Supp. 325 (S.D.N.Y. 1996) for the proposition that a plaintiffs
securities fraud claims fails if a plaintiff does not allege that a
defendant's "[fraudulent] . . . practices related in any way to the value
of the securities sold to her." Plaintiffs Memorandum, at p. 6, lines
14-15. Levitin is inapposite because in the present case, Plaintiff has
already alleged that Schwab's fraudulent acts and misrepresentations have
affected the value of specific securities purchased by Plaintiff. See
Complaint, ¶¶ 3-6.
Plaintiff also relies on Levitin for the proposition that there is no
"connection with the purchase or sale of" securities where the fraud
"merely [concerns] a term of the arrangement between the broker and its
customer under which the broker conducts . . . [transactions] for the
customer." Plaintiffs Memorandum, at p. 6, lines 16-19. Thus, according
to Plaintiff, since the fraud at issue here merely "involves the
relationship between Schwab and its customers," it cannot be construed as
relating to the "purchase or sale" of a covered security under subsection
(f)(1). Id. at p. 6, lines 4-7. Not only does Plaintiff misconstrue
Levitin, Levitin is also inapposite for the proposition Plaintiff cites.
Levitin concerned the alleged misappropriation of collateral supplied to
brokers by customers in connection with a customer's short sale
activity; the defendant Paine Webber's misappropriation in Levitin was
not "in connection with the purchase or sale" of securities since Paine
Webber's nondisclosure of interest on the collateral had no effect on any
actual or intended "purchase or sale of' securities. The defendant merely
used the misappropriated interest to maintain its own interests and to
pay for its own company expenses. More importantly, Levitin does not stand
for the proposition that no causal connection exists under the Uniform
Act, Section 10(b), or Rule 10b-5 merely because fraudulent
misrepresentations like the ones alleged' by Plaintiff against Schwab
"involve the relationship" between a broker and its customers and not
the "sale or purchase of" securities. The Supreme Court warned in Bankers
Life that the "disregard of trust relationships" by fiduciaries are often
an entangled web with manipulation, fraud, investor ignorance, and the
like. Bankers Life & Cas. Co., 404 U.S. at 12, 92 S.Ct. 165. Thus, terms
affecting the arrangement between a broker and its customers are directly
related to fraudulent practices perpetrated "in connection with the
purchase or sale of' securities.
In sum, in light of the broad construction by the Supreme Court and the
Ninth Circuit of the phrase "in connection with the sale or purchase" of
securities, or the plain meaning of the language, the court finds that
Defendant's alleged misrepresentations were "in connection with the
purchase or sale of securities" within the "reach of subsection (f)(1) of
the Uniform Standards Act. The court's finding is consistent with the
public policy concerns reflected in the passage of the Act and discussed
supra in section IIIA. As the legislative record states in the House
Report, "[u]nder the [Uniform Standards Act], class actions relating to a
"covered security' (sic) alleging fraud or manipulation must be
maintained pursuant to the provisions of Federal securities law, in
Federal court." H.R.Conf.Rep. No. 803, 105th Cong., 2d Sess. at 13
(emphasis added). Therefore, Plaintiff's claims are preempted and removal
is proper under 15 U.S.C. § 78bb(f)(2).
3. The Purchase or Sale of Securities
by the Issuer or An Affiliate of
Plaintiffs last argument in their Memorandum in Support of their Motion
to Remand is that since the Uniform Standards Act intended to govern'
only cases involving the purchase or sale of securities by the issuer or
an affiliate of the issuer, and Schwab is not an issuer of securities,
the Uniform Standards Act does not govern Schwab's alleged
misrepresentations in this case. The court rejects this argument. First,
there is no support for Plaintiff's assertion that the Uniform Standards
Act "makes clear that the type of cases covered by the USA [Uniform
Standards Act] involve the Purchase or sale of securities by the issue or
an affiliate of the issuer." Plaintiffs Memorandum, at p. 7, lines 8-10.
Furthermore, as stated in Section IIIA above; Congress' clear intent in
the passage of the Uniform Standards Act was to enact uniform, national
rules and to preclude "all covered class action[s] based on the statutory
or common law of any State" from being maintained in any state or federal
court based on claims of fraud, deceit; or misrepresentation "in
connection with the purchase or sale of a covered security." See
H.R.Conf.Rep. No. 803, 105th Cong., 2d Sess. at 2, 13.
Limiting the governance of the Uniform Standards Act in the manner that
Plaintiff asserts would thwart clear legislative intent to make federal
courts the "exclusive venue" for securities class actions, for it would
"preserve" all state law securities claims alleging fraud "in connection
with the purchase or sale of a covered security" by brokers, dealers,
clearinghouses, etc.- anyone not an issuer or affiliate of an issuer. See
id. at 13-15. There is simply no indication that Congress had an
intention to so limit the Uniform Standards Act. In fact, Congress
provided for an explicit "preservation" provision in
15 U.S.C. § 78bb(f)(3) for exceptions for certain types of actions.
This preservation clause, or carve-out, exempts certain claims from the
wide-sweeping limitation in subsection (f)(1) of the Uniform Standards
Act. 15 U.S.C. § 78bb(f)(3) preserves state jurisdiction over (1)
certain actions that are based upon the law of the state in which the
issuer of the security in question is incorporated and that involve
equity holders voting responsibilities or actions by the issuer or an
affiliate of the issuer; (2) actions brought by state and
political subdivisions and state pension plans; (3) actions based on
indenture trustee agreements; and (4) shareholder derivative actions.
See 15 U.S.C. § 78bb(f)(3).
Plaintiffs claims do not fall within any of these explicit exceptions
provided for by Congress, nor does Plaintiff maintain that his claims are
"preserved." See Plaintiff's Memorandum, at p. 7, lines 12-15. Rather,
Plaintiff argues that his claims are nonsecurities fraud claims which
fall outside the scope of regulation of the Uniform Standards Act. For
the reasons discussed above, however, this court holds that Plaintiff's
claims fall within the proscription of 15 U.S.C. § 78bb(f)(1), which
intended to preempt all state securities fraud claims, notwithstanding
the manner-or the court-in which the claims are pled. To permit Plaintiff
to maintain his claims involving Defendant Schwab's misrepresentations in
connection with the purchase or sale of' securities in state court would
thwart Congress' intent in the passage of the Uniform Standards Act to
make the federal court the "exclusive venue" for class actions of covered
In sum, a finding of preemption is appropriate given the broad
construction of the phrase "in connection with the sale or purchase" of
securities, the plain meaning of the language, and the legislative
history of the Uniform Standards Act. Therefore, the court finds that an
exercise of jurisdiction by the court is proper.
Based on the foregoing analysis, the court DENIES Plaintiff's Motion to
remand this case to the Superior Court of the State of California for the
County of San Diego.
IT IS SO ORDERED.