In a case of first impression, the United States District Court for the Southern District of California recently held that a class action brought in state court alleging state law claims against a brokerage firm was preempted by the Securities Litigation Uniform Standards Act of 1998 (the "Uniform Standards Act") because the claims alleged misconduct "in connection with the purchase or sale of a security traded on a national exchange."
Plaintiff claimed that Charles Schwab & Company ("Schwab") misrepresented its online brokerage service's ability to "immediately execute" trades on behalf of its customers. Specifically, plaintiff alleged that shares he had purchased online when the market opened were not actually purchased by Schwab until several hours later, by which time the price of the stock had already risen $36 per share. By the time plaintiff was informed of the delay, the stock price had dropped $16 per share. Plaintiff filed a class action suit against Schwab in state court asserting state law claims for false advertising, unjust enrichment, negligent misrepresentation and fraud.
Schwab filed a notice to remove the action to federal court on the ground that plaintiff's state law claims were preempted by the Uniform Standards Act, since they alleged fraud and misrepresentations "in connection with" the purchase or sale of securities traded on a national exchange. Plaintiff then moved to remand the action to state court, maintaining that his claims did not fall within the scope of the Uniform Standards Act since (i) they did not allege securities fraud claims against Schwab or claims relating to the trading of a particular security, (ii) the alleged misrepresentations did not affect the value of a security but merely involved "the relationship between Schwab and its customers" and (iii) the Uniform Standards Act only governs claims involving the purchase or sale of securities by the issuers and its agents, of which Schwab was neither.
In rejecting plaintiff's motion to remand, the district court first considered the legislative history and preemptive effect of the Uniform Standards Act. The court noted that by passing the Uniform Standards Act, Congress sought "to establish federal courts as 'the exclusive venue for most securities class action lawsuits' involving nationally traded securities," including those based on state statutory or common law that alleged fraud, misrepresentation and deceit in connection with the purchase or sale of a covered security. The purpose of the Act, the court observed, 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." "[A]ny civil complaint raising this select group of claims is necessarily federal in character," the court noted, and the "preemptive force" of the Uniform Standards Act "essentially works to convert Plaintiff's alleged state claims into federal claims."
The court then addressed whether the misconduct plaintiff alleged was "in connection with the purchase or sale of a security" within the meaning of the Uniform Standards Act. Because no published opinion interpreting the Uniform Standards Act's "in connection with" language exists, the court looked to judicial interpretations of the identical language found in Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-S promulgated thereunder for guidance. The court found that Section 10(b)'s "in connection with" requirement was a flexible standard that was to be read broadly. In particular, the court focused on Section 10(b) cases where statements regarding the risks involved in completing a securities transaction were held to have been "in connection with" the purchase or sale of securities they induced. The court found this to be analogous to Schwab's alleged misrepresentations relating to the risks involved in trading through Schwab's online system. For this reason, the court found that "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 then rejected plaintiff's contention that the Uniform Standards Act did not apply to his claims because they did not relate to misrepresentations by Schwab with respect to any specific security, and there were no allegations that Schwab had any intent to manipulate the price of any stock. The court noted that plaintiff's assertions lacked legal authority, and were contrary to the language of the Uniform Standards Act, which requires only that the misrepresentation or omission be "in connection with" a covered security, "not that the representation itself be related to a specific security or its value or price."
Finally, the court found untenable plaintiff's contention that the Uniform Standard Act did not apply because Schwab was not the issuer or an affiliate of the issuer of the securities that were purchased or sold. The court noted that to limit the Act as plaintiff asserted "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 and issuer or affiliate of an issuer" The court thus held that plaintiff's claims were preempted under the Uniform Standards Act, and consequently denied plaintiff's motion to remand to state court. *
Abada v. Charles Schwab & Co., Inc., 68 F. Supp. 2d 1160 (S.D. Cal. 1999).