Hidalgo-Vélez v. San Juan Asset Management, Inc. , 758 F.3d 98 ( 2014 )

United States Court of Appeals
For the First Circuit
No. 13-1574
EDUARDO HIDALGO-VÉLEZ, ET AL.,
Plaintiffs, Appellants,
v.
SAN JUAN ASSET MANAGEMENT, INC., ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Steven J. McAuliffe, U.S. District Judge*]
[Hon. Carmen Consuelo Cerezo, U.S. District Judge]
Before
Thompson and Selya, Circuit Judges,
and McConnell, District Judge.**
Luis A. Avilés, with whom Jorge M. Izquierdo-San Miguel and
Izquierdo-San Miguel Law Offices, PSC were on brief, for
appellants.
Eric Pérez-Ochoa, with whom Adsuar Muñiz Goyco Seda & Pérez-
Ochoa, P.S.C. was on brief, for appellees San Juan Asset
Management, Inc. and Vizcarrondo-Ramírez de Arellano.
Michael S. Flynn, with whom Francisco G. Bruno-Rovira, Leslie
Yvette Flores-Rodriguez, McConnell Valdes LLC, Alicia L. Chang, and
Davis Polk & Wardwell LLP were on brief, for appellee
PricewaterhouseCoopers, LLP (whose brief was adopted by appellees
Puerto Rico & Global Income Target Maturity Fund, Inc., Luis
Rivera, Rivera Casiano, Lugo-Rivera, and Colón Ascar).
*
Of the District of New Hampshire, sitting by designation.
**
Of the District of Rhode Island, sitting by designation.
July 9, 2014
SELYA, Circuit Judge. This case requires us to trace the
contours of the "in connection with" element of the Securities
Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C.
§ 78bb(f), in the reflected light of the Supreme Court's recent
decision in Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058(2014). Giving full voice to Troice, we conclude that the district
court impermissibly extended the SLUSA's reach. Accordingly, we
vacate the judgment below, reverse the denial of the plaintiffs'
motion to remand, and remit the case to the district court with
directions to return it to the Puerto Rico Court of First Instance.
I. BACKGROUND
We begin at the beginning, rehearsing the origin and
travel of the case. Because "this appeal follows the granting of
a motion to dismiss, we draw the relevant facts from the
plaintiff[s'] complaint," supplemented by "documentation
incorporated by reference in the complaint." Rivera-Díaz v. Humana
Ins. of P.R., Inc., 748 F.3d 387, 388 (1st Cir. 2014).
The plaintiffs are mostly investors in the Puerto Rico &
Global Income Target Maturity Fund (the Fund),1 a non-diversified
investment company licensed under the Puerto Rico Investment
Companies Act, see P.R. Laws Ann. tit. 10, §§ 661-683. The Fund
solicited investors through a prospectus, which promised that the
1
Although nothing turns on the distinction, a few of the
plaintiffs sue derivatively as investors' conjugal partners and
conjugal partnerships. See P.R. Laws Ann. tit. 31, §§ 3621-3701.
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Fund would invest at least 75% of its assets in notes with an
"equally weighted exposure to both European and North American
investment grade corporate bond indices." Relatedly, the
prospectus promised that the Fund would invest no more than 25% of
its assets in securities issued by a single issuer. Consistent
with these two promises — the 75% promise and the 25% promise — the
complaint alleges that the primary purpose of the Fund was to
expose its investors to certain specialized notes issued by
"different international financial institutions such as Banco
Bilbao Vizcaya Argentaria, S.A."
In May of 2008, the Fund spurned these promises and
invested more than 75% of its assets in notes sold by a single
issuer, Lehman Brothers. The complaint alleges that this lop-sided
investment transgressed both the terms of the prospectus and Puerto
Rico law.
These transgressions had dire consequences. The Lehman
notes soon lost most of their value, and the Fund was forced to
adopt a plan of liquidation.
In due course, the plaintiffs, suing on their own behalf
and on behalf of all other investors similarly situated, filed a
putative class action in a Puerto Rico court. Their complaint
asserted both direct claims on behalf of the investors and
shareholder derivative claims on behalf of the Fund. The named
defendants included the Fund; its officers and directors; its
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investment advisor, San Juan Asset Management; its sales agent,
BBVA Securities of Puerto Rico; and its independent auditor,
PricewaterhouseCoopers (PwC). Although the complaint is not a
model of clarity, it is clear that its gravamen is that the Fund
did not comply with the investment policies promised in the
prospectus and that the strategy it did pursue flouted Puerto Rico
law.2
PwC, later joined by other defendants, removed the action
to the federal district court, asserting that it fell within the
ambit of the SLUSA. See 15 U.S.C. § 78bb(f)(2); 28 U.S.C. § 1446.
The plaintiffs moved to remand. The district court (Cerezo, J.)
denied the plaintiffs' motion. See Hidalgo-Vélez v. San Juan Asset
Mgmt., Inc. (Hidalgo-Vélez I), No. 11-2175, 2012 WL 4427077, at *3
(D.P.R. Sept. 24, 2012).
At that point, the plaintiffs asked the district court to
certify the jurisdictional question for interlocutory appeal. See
28 U.S.C. § 1292(b). The defendants not only opposed this request
but also pressed dismissal motions premised on SLUSA preclusion.
See Fed. R. Civ. P. 12(b)(6). The district court (McAuliffe, J.)
refused to certify the question and granted the motions to dismiss.
See Hidalgo-Vélez v. San Juan Asset Mgmt., Inc., No. 11-2175, 2013
2
According to the complaint, Puerto Rico law prohibits a non-
diversified investment company (like the Fund) from investing more
than 25% of its assets in the securities of a single issuer. See
P.R. Laws Ann. tit. 10, § 662(b).
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WL 1089745, at *7 (D.P.R. Mar. 15, 2013). This timely appeal
ensued.
II. ANALYSIS
We review a district court's disposition of a motion to
dismiss for failure to state a claim de novo. See Artuso v. Vertex
Pharm., Inc., 637 F.3d 1, 5 (1st Cir. 2011). In conducting this
review, "we accept as true all well-pleaded facts alleged in the
complaint and draw all reasonable inferences therefrom in the
pleader's favor." Butler v. Balolia, 736 F.3d 609, 612 (1st Cir.
2013).
The defendants invite us to alter this standard of review
on the ground that the plaintiffs failed to preserve their central
argument. We decline this invitation.
The defendants insist that the plaintiffs' failure to
oppose their motions to dismiss constitutes a waiver or, at least,
a forfeiture. See generally United States v. Olano, 507 U.S. 725,
733 (1993) (limning distinction between waiver and forfeiture).
But this hypertechnical view of the record gives too little weight
to the plaintiffs' consistent and vigorous opposition to the
defendants' contention that the SLUSA pretermitted the plaintiffs'
claims. Common sense suggests that in certain situations substance
ought to prevail over form and — in the peculiar circumstances of
this case — we believe that the fact that the plaintiffs presented
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their opposition in their motion for remand rather than as part of
formal objections to the motions to dismiss is of no moment.
We briefly explain our reasoning. The SLUSA contains
both "a preclusion provision and a removal provision." Kircher v.
Putnam Funds Trust, 547 U.S. 633, 636 (2006) (footnotes omitted).
These symbiotic provisions are mirror images of each other: any
action that is properly removable under the removal provision is
per se precluded under the preclusion provision and, conversely,
any action not so precluded is not removable. See id. at 643-44;
Madden v. Cowen & Co., 576 F.3d 957, 965 (9th Cir. 2009). Thus,
the ruling on the plaintiffs' motion to remand would necessarily be
dispositive of the defendants' motions to dismiss. Given this
juxtaposition, we hold that the plaintiffs' presentation of their
opposition to the SLUSA's applicability in their remand papers
sufficed to preserve their position for purposes of appeal. This
holding is consistent, we think, with the Supreme Court's
admonition that "[r]ules of practice and procedure are devised to
promote the ends of justice, not to defeat them." Hormel v.
Helvering, 312 U.S. 552, 557 (1941).
We are equally unimpressed with the defendants' more
general importuning that the plaintiffs failed to develop their
central argument sufficiently to preserve it on appeal. While the
plaintiffs certainly could have developed their argument more
fully, they did enough to put the dispositive issue in play before
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the district court. In view of the fact that the Supreme Court
did not decide Troice until this case was pending on appeal,
treating the plaintiffs' argument as abandoned would require an
overly strict application of waiver principles.
We turn now to the meat of this appeal. The SLUSA is a
spare but sweeping statute, which for present purposes may be
viewed as the third in a trilogy of statutory enactments. We find
it helpful, therefore, to trace its lineage.
In the aftermath of the 1929 stock market crash, Congress
passed the Securities Exchange Act of 1934 (the Exchange Act), ch.
404, 48 Stat. 881. See Merrill Lynch, Pierce, Fenner & Smith Inc.
v. Dabit, 547 U.S. 71, 78 (2006). As amended, that statute forbids
the use of any manipulative or deceptive devices or contrivances
"in connection with the purchase or sale of any security registered
on a national securities exchange or any security not so
registered, or any securities-based swap agreement." 15 U.S.C.
§ 78j(b). Exercising regulatory authority granted by the Exchange
Act, the Securities and Exchange Commission (SEC) promulgated Rule
10b-5, which likewise prohibits fraud in connection with the
purchase or sale of securities. See 17 C.F.R. § 240.10b-5. The
Supreme Court has read a private right of action into these
provisions. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S.
723, 730 (1975); Sup't of Ins. of N.Y. v. Bankers Life & Cas. Co.,
404 U.S. 6, 13 & n.9 (1971). Moreover, the Court has forged a link
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between, on the one hand, the "in connection with" provisions of
the Exchange Act and Rule 10b-5 and, on the other hand, the SLUSA's
parallel "in connection with" terminology. See Dabit, 547 U.S. at
85-86.
More than sixty years after the passage of the Exchange
Act, Congress enacted the second statute in the trilogy: the
Private Securities Litigation Reform Act of 1995 (PSLRA), Pub. L.
No. 104-67, 109 Stat. 737. Congress fashioned the PSLRA as a means
of combating unfounded strike suits against issuers of securities.
See Dabit, 547 U.S. at 81. Consistent with this congressional
intent, the PSLRA imposed "heightened pleading requirements in
actions brought pursuant to § 10(b) and Rule 10b-5" and contained
a gallimaufry of provisions targeting abusive securities-fraud
litigation. Id.
Congress soon discovered that the PSLRA had not sounded
the death knell for abusive securities-fraud litigation; plaintiffs
simply started using state law as a vehicle for their claims. In
an effort to close this loophole, Congress passed the third statute
in the trilogy in 1998: the SLUSA, Pub. L. No. 105-353, 112 Stat.
3227. See Kircher, 547 U.S. at 636; see also H.R. Conf. Rep. No.
105-803, at 13.
Pertinently, the SLUSA provides:
[n]o 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
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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).3 Four requirements must be satisfied in
order for the SLUSA to attach. There must be (i) a covered class
action, (ii) based on state law, (iii) alleging fraud or
misrepresentation in connection with the purchase or sale of, (iv)
a covered security. See Romano v. Kazacos, 609 F.3d 512, 518 (2d
Cir. 2010). Although the courts of appeals have made this same
point in ways that differ slightly from circuit to circuit, see,
e.g., Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 615
(7th Cir. 2012); Madden, 576 F.3d at 965; LaSala v. Bordier et Cie,
519 F.3d 121, 128 (3d Cir. 2008), all of them agree with the
essence of this formulation.
This case does not demand an archaeological dig into
these four requirements. For present purposes, it is enough to
emphasize a few points that are beyond cavil. First, "[a] covered
class action is a lawsuit in which damages are sought on behalf of
more than 50 people." Dabit, 547 U.S. at 83 (internal quotation
marks and footnote omitted). Second, the most common type of
3
The SLUSA amended both the Securities Act of 1933, ch. 38,
48 Stat. 74, and the Exchange Act "in substantially identical
ways." Dabit, 547 U.S. at 82 n.6. We adopt the convention of both
the Troice and Dabit Courts and refer to the statutory
codifications of the amendments to the Exchange Act.
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"covered security is one traded nationally and listed on a
regulated national exchange." Id. (internal quotation marks and
footnote omitted). Another standard type of covered security is
one issued by an investment company registered under the Investment
Company Act of 1940, 15 U.S.C. §§ 80a-1 to 80a-64. See Troice, 134
S. Ct. at 1064.
For SLUSA purposes, Puerto Rico is the functional
equivalent of a state, see 15 U.S.C. § 78c(a)(16); and in this
instance, it is undisputed that the plaintiffs' suit is a covered
class action alleging fraud or misrepresentation in violation of
Puerto Rico law. The critical question is whether the alleged
misrepresentations on which the suit is founded were made "in
connection with" a transaction in covered securities.
The early appellate cases construing the SLUSA's "in
connection with" requirement primarily concerned representations
about or the marketing of covered securities, often in the context
of investment services. See, e.g., Gray v. Seaboard Sec., Inc.,
126 F. App'x 14, 16-17 (2d Cir. 2005); Rowinski v. Salomon Smith
Barney Inc., 398 F.3d 294, 302-03 (3d Cir. 2005); Prof'l Mgmt.
Assocs., Inc. Emps.' Profit Sharing Plan v. KPMG LLP, 335 F.3d 800,
802-03 (8th Cir. 2003); Behlen v. Merrill Lynch, 311 F.3d 1087,
1094 (11th Cir. 2002); Dudek v. Prudential Sec., Inc., 295 F.3d
875, 878-79 (8th Cir. 2002); Green v. Ameritrade, Inc., 279 F.3d
590, 598-99 (8th Cir. 2002). For the most part, the dispute in
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those cases did not involve whether the misrepresentations were
connected to covered securities but, rather, whether they were
sufficiently intertwined with a purchase or sale. See, e.g.,
Rowinski, 398 F.3d at 302-03; Prof'l Mgmt. Assocs., 335 F.3d at
802-03; Behlen, 311 F.3d at 1094.
The tectonic plates shifted when the Dabit Court
authoritatively delineated the scope of the SLUSA's "purchase or
sale" language. See 547 U.S. at 84-86. The Court held that the
SLUSA should be construed to preclude so-called "holder" actions
(that is, actions in which the plaintiffs alleged injury from
merely holding covered securities) in addition to actions directly
involving purchases and/or sales of covered securities. See id. at
87-89. Three important lessons emerged from the Dabit Court's
opinion.
To begin, the Court made pellucid that the SLUSA's "in
connection with" requirement should be construed broadly. See id.
at 85. Next, the Court declared that "it is enough that the fraud
alleged 'coincide' with a securities transaction." Id. Finally,
the Court indicated that the focus of an "in connection with"
inquiry under the SLUSA should be on the defendant's actions, not
on the plaintiff's actions. As the Court explained, "[t]he
requisite showing . . . is deception in connection with the
purchase or sale of any security, not deception of an identifiable
purchaser or seller." Id. (internal quotation marks omitted).
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Some elaboration is in order with respect to the second
of these lessons. The Dabit Court imported this lesson from its
Exchange Act and Rule 10b-5 jurisprudence. See SEC v. Zandford,
535 U.S. 813, 825 (2002); United States v. O'Hagan, 521 U.S. 642,
655-56 (1997). In the wake of Dabit, the courts of appeals
interpreted this "coincide" language expansively, though not
uniformly. See Roland v. Green, 675 F.3d 503, 512-14 (5th Cir.
2012) (surveying differing approaches). In Troice, the Supreme
Court reviewed the Fifth Circuit's decision in Roland and shed new
light on the subject. See 134 S. Ct. at 1066.
Troice involved an action brought by victims of an
alleged Ponzi scheme. The fraudster sold the plaintiffs
certificates of deposit (CDs) in a bank that he controlled. See
id. at 1064. The CDs were uncovered "debt assets that promised a
fixed rate of return," not covered securities. Id. The defendants
(parties accused of abetting the fraud) argued that the SLUSA
applied because, even though the CDs themselves were not covered
securities, they were sold on the basis that they would be backed
by covered securities. The Court found this argument unconvincing
and ruled that the SLUSA did not apply. See id. at 1071-72.
The Troice Court was careful to preserve Dabit's core
holding. See id. at 1066; see also Calderón Serra v. Banco
Santander P.R., 747 F.3d 1, 6 (1st Cir. 2014). Nevertheless,
Justice Breyer's opinion for the Court broke new ground in
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illuminating the contours of the "in connection with" requirement.
It held that "[a] fraudulent misrepresentation or omission is not
made 'in connection with' . . . a 'purchase or sale of a covered
security' unless it is material to a decision by one or more
individuals (other than the fraudster) to buy or to sell a 'covered
security.'" Troice, 134 S. Ct. at 1066. In other words, the "in
connection with" requirement is satisfied only "where the
misrepresentation makes a significant difference to someone's
decision to purchase or to sell a covered security." Id. In an
effort to put the matter into perspective, Justice Breyer went on
to explain that the "in connection with" requirement reached only
those cases involving "victims who took, who tried to take, who
divested themselves of, who tried to divest themselves of, or who
maintained an ownership interest in financial instruments that fall
within the relevant statutory definition." Id. (emphasis in
original).
With the legal landscape set in place, we now move from
the general to the specific. The court below, ruling without the
benefit of Troice, held that the SLUSA precluded the plaintiffs'
claims.4
4
Along the way, the district court concluded that, in
determining whether the SLUSA applied to the complaint, the
analysis should not proceed claim by claim but, rather, in terms of
the complaint as a whole. See Hidalgo-Vélez I, 2012 WL 4427077, at
*3. This conclusion is freighted with uncertainty, compare, e.g.,
Proctor v. Vishay Intertech. Inc., 584 F.3d 1208, 1228-29 (9th Cir.
2009) (holding that review should proceed claim by claim) and In re
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At the outset, the district court acknowledged that the
securities actually held by the plaintiffs (the shares in the Fund)
were not themselves covered securities. See Hidalgo-Vélez I, 2012
WL 4427077, at *2. The court concluded, however, that this
circumstance alone did not place the plaintiffs' claims beyond the
SLUSA's reach: since "the Fund's anticipated investments included
various covered securities," the SLUSA's "in connection with"
requirement was satisfied. Id.We agree with the district court's general approach, and
Troice confirms that approach. See Troice, 134 S. Ct. at 1071-72.
But as we explain below, we disagree with the district court's
particularized conclusion.
For purposes of a motion to remand, we must credit the
plaintiffs' thesis that the defendants' misrepresentations induced
the plaintiffs to purchase uncovered securities. By the same
token, it is undisputed that the only securities involved in any
transactions carried out by the plaintiffs were uncovered
securities. Troice teaches that a misrepresentation in connection
with the purchase of an uncovered security, by itself, is
insufficient to bring a claim within the SLUSA's grasp: "a
connection matters where the misrepresentation makes a significant
Lord Abbett Mut. Funds Fee Litig., 553 F.3d 248, 255-56 (3d Cir.
2009) (same), with, e.g., Superior Partners v. Chang, 471 F. Supp.
2d 750, 757 (S.D. Tex. 2007) (holding that under the SLUSA a court
should "examine a lawsuit in its entirety"), and this case does not
require us to resolve the question.
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difference to someone's decision to purchase or to sell a covered
security, not to purchase or to sell an uncovered security." Id.
at 1066; cf. Calderón Serra, 747 F.3d at 6 (holding Rule 10b-5's
"in connection with" requirement satisfied when there was "no
dispute as to whether the plaintiffs actually bought securities
covered by the Exchange Act").
To be sure, the analysis does not invariably end there.
In certain cases, the primary intent or effect of purchasing an
uncovered security is to take an ownership interest in a covered
security. The defendants strive to convince us that this is such
a case.
In advancing this proposition, the defendants rely
heavily on the so-called "feeder fund" cases. Those are cases
where the plaintiffs invested in funds that, directly or
indirectly, acquired or purported to acquire covered securities.
See Roland, 675 F.3d at 514-17 (canvassing cases). Typical is In
re Herald, 730 F.3d 112 (2d Cir. 2013), in which the court
addressed "feeder funds" in the context of the infamous Ponzi
scheme initiated by Bernie Madoff. There, investors in Madoff-
affiliated feeder funds sued Madoff's bankers for facilitating the
fraud. The Second Circuit held that their claims were SLUSA-
precluded because the claims were "integrally tied to the
underlying fraud committed by Madoff," which "indisputably"
involved "purported investments in covered securities." Id. at
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119. It did not matter, the court said, that Madoff never actually
carried out transactions in covered securities; it was enough that
his "purported trading strategy utilized indisputably covered
securities." Id. at 118; see Grippo v. Perazzo, 357 F.3d 1218,
1223-24 (11th Cir. 2004) (holding that plaintiff could maintain a
section 10(b) action even though "no proof exist[ed] that a
security was actually bought or sold").
Herald is readily distinguishable. The Madoff funds were
marketed primarily as vehicles for exposure to covered securities.
See In re Herald, Primeo, & Thema Sec. Litig., No. 09-289, 2011 WL
5928952, at *1 (S.D.N.Y. Nov. 29, 2011) (stating that Madoff "told
investors that he was buying and selling Standard and Poor's 100
stocks and options for their accounts"). Thus, on a petition for
rehearing following the Troice decision, the Second Circuit
concluded with little apparent difficulty that the victims of the
fraud had intended to take an ownership interest in covered
securities. See In re Herald, ___ F.3d ___, ___ (2d Cir. 2014)
[Nos. 12-156, 12-162, May 28, 2014, slip op. at 8] (per curiam).
What is more, the fraud depended heavily on misrepresentations
about transactions in covered securities. Given that
interrelationship, the case fits comfortably within the confines of
the "in connection with" requirement. See, e.g., Zandford, 535
U.S. at 822 (holding SLUSA precluded claims when plaintiffs were
"duped into believing [the defendant] would 'conservatively invest'
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their assets in the stock market"); Instituto de Prevision Militar
v. Merrill Lynch, 546 F.3d 1340, 1352 (11th Cir. 2008) (explaining
that because the alleged fraudster "marketed 'covered securities'
. . ., any misrepresentations and omissions [that the fraudster]
made were 'in connection with the purchase or sale of a covered
security'").
The case at hand is at a considerable remove from Herald.
Although the prospectus suggested that some (relatively small) part
of the Fund's portfolio might include covered securities, any such
holdings were incidental to the primary purpose of the Fund: the
main allocative stipulation contained in the prospectus was that at
least 75% of the Fund's assets would be invested in certain
specialized notes offering exposure to North American and European
bond indices. The defendants have not asserted that these
particular investments were covered securities. In these
circumstances, the link between the alleged misrepresentations and
the covered securities in the Fund's portfolio is too attenuated to
bring the complaint within the maw of the SLUSA.
This assessment is confirmed by the intrinsic nature of
the misrepresentations alleged. Those misrepresentations — in
stark contrast to the misrepresentations in Herald — comprised
mainly false promises to purchase uncovered securities. As
pleaded, the plaintiffs' case depends on averments that, in
substance, the defendants made misrepresentations about uncovered
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securities (namely, those investments that were supposed to satisfy
the 75% promise); that the plaintiffs purchased uncovered
securities (shares in the Fund) based on those misrepresentations;
and that their primary purpose in doing so was to acquire an
ownership interest in uncovered securities. Seen in this light,
the connection between the misrepresentations alleged and any
covered securities in the Fund's portfolio is too tangential to
justify bringing the SLUSA into play.
In arriving at this conclusion, we read Troice for all
that it is worth. When courts are confronted with plaintiffs who
allege that a misrepresentation has induced them to purchase
uncovered securities, the SLUSA precludes the claim only if the
circumstances of the purchase evince an intent to take an ownership
interest in covered securities. Troice itself represents one end
of this continuum. When a plaintiff purchases a fixed-rate debt
asset, the SLUSA does not apply even though that debt may be backed
in part by covered securities. Such a debt arrangement does not
evince an intent to take an ownership position in the underlying
(covered) securities. Herald represents the opposite end of the
continuum. When the primary purpose of a plaintiff's purchase of
an uncovered security is to reap the benefit of trading in covered
securities, the SLUSA does apply.
In cases, like this one, that fall between these two
poles, courts must carefully consider whether and to what extent
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the plaintiffs sought to take an ownership interest in covered
securities. The relevant questions include (but are not limited
to) what the fund represents its primary purpose to be in
soliciting investors and whether covered securities predominate in
the promised mix of investments. Of course, an inquiring court
should also look at the nature, subject, and scope of the alleged
misrepresentation.
In conducting this appraisal, the court should bear in
mind the Troice Court's admonition that "only . . . those who do
not sell or participate in selling securities traded on U.S.
national exchanges" should be exempted from the SLUSA and subjected
to state-law class actions. 134 S. Ct. at 1068 (emphasis in
original). As applied here, this admonition cuts against
preclusion. After all, the Fund was chartered under a particular
Puerto Rico statutory framework and marketed to residents of Puerto
Rico principally as a vehicle for exposure to uncovered
securities.5
In the circumstances of this case, the relevant mix of
factors leads to a determination that the district court's
5
For the sake of completeness, we note that the analysis
might be different in cases "where the entirety of the fraud
depended upon the [fraudster] convincing the victims . . . to sell
their covered securities in order for the fraud to be
accomplished." Troice, 134 S. Ct. at 1072 (quoting Roland, 675
F.3d at 523). Here, however, the allegations of the complaint "are
not so tied with the sale of covered securities." Id. (quoting
Roland, 675 F.3d at 523).
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preclusion ruling fell on the wrong side of what is admittedly a
fine line. The link between the misrepresentations alleged and the
covered securities in the Fund's portfolio is simply too fragile to
support a finding of SLUSA preclusion under Troice.
III. CONCLUSION
The SLUSA is strong medicine and should be dispensed only
in compliance with Congress's statutory prescription. Given the
nature of the misrepresentations asserted and the circumstances of
this case, we do not think that Congress's prescription applies
here. It follows that the district court was without jurisdiction
to grant the defendants' motions for dismissal but, instead, should
have granted the plaintiffs' motion to remand.
We need go no further. We vacate the judgment of
dismissal, reverse the order denying remand, and remit the case to
the district court with instructions to return it to the Puerto
Rico Court of First Instance. Costs shall be taxed in favor of the
plaintiffs.
So Ordered.
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