The opinion of the court was delivered by: J. Phil Gilbert District Judge
This matter is before the Court on the responses of the parties to the Court's Order to Show Causewhy this action should not be dismissed. For the following reasons, the Court DISMISSES this action as precluded by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Pub. L. 105-353, 112 Stat. 3227 (codified at 15 U.S.C. § 77p(b)-(f) and 15 U.S.C. § 78bb(f)).
This action is the successor to Kurz v. Fidelity Management & Research Co., Civil No. 07-592-JPG (S.D. Ill. filed Aug. 17, 2007), in which Kurz alleged federal subject matter jurisdiction on the basis of 28 U.S.C. § 1332, as amended by the Class Action Fairness Act of 2005 ("CAFA"), Pub. L. No. 109-2, 119 Stat. 4 (codified in scattered sections of 28 U.S.C.). See Kurz v. Fidelity Mgmt. & Research Co., No. 07-cv-592-JPG, 2007 WL 2746612, at *2 (S.D. Ill. Sept. 18, 2007); Kurz v. Fidelity Mgmt. & Research Co., No. 07-cv-592-JPG, 2007 WL 2746612, at *1 (S.D. Ill. Sept. 18, 2007). Thereafter, the Court ordered Kurz to show cause why this action should not be dismissed for lack of federal subject matter jurisdiction pursuant to 28 U.S.C. § 1332(d)(9)(A) and (C), the so-called "securities exception" to federal diversity jurisdiction under CAFA. See Kurz, 2007 WL 2746612, at **2-4; see also Davis v. Chase Bank U.S.A., N.A., 453 F. Supp. 2d 1205, 1207-08 (C.D. Cal. 2006). The Court further directed Kurz to show cause whether, if federal subject matter jurisdiction did not exist in Case No. 07-592 under CAFA, such jurisdiction nonetheless was proper pursuant to SLUSA. See Kurz, 2007 WL 2746612, at *4. Kurz then voluntarily dismissed Case No. 07-592 by notice pursuant to Rule 41(a)(1)(i) of the Federal Rules of Civil Procedure. See Kurz v. Fidelity Mgmt. & Research Co., No. 07-CV-592-JPG, 2007 WL 2908918 (S.D. Ill. Oct. 4, 2007).
Following the voluntary dismissal of Case No. 07-592, Kurz refiled his claims in the Circuit Court of the Twentieth Judicial Circuit, St. Clair County, Illinois, joining Heinzl as a party plaintiff. The case was timely removed from state court to this Court, with federal subject matter jurisdiction asserted on the basis of 28 U.S.C. § 1331, including SLUSA. After removal, this case was assigned initially to United States District Judge G. Patrick Murphy. However, in conformity with the Court's policy that related cases -- in this instance, Case No. 07-592 and this case -- should be concentrated before the same judge, see Vogel v. Merck & Co., 476 F. Supp. 2d 996, 998 (S.D. Ill. 2007), the case subsequently was reassigned to the undersigned United States District Judge for all further proceedings.
As the Court's Show Cause Order explained in full, the jurisdiction of the Court is contingent upon SLUSA's preemption of Plaintiffs's state law claim. If SLUSA does not apply, then this case must be remanded to state court. However, because SLUSA precludes a plaintiff from maintaining a securities fraud class action based on state law, and because the only count in the Complaint is based on state law, if SLUSA does apply, this case must be dismissed.
The Complaint alleges the following facts. Kurz and Heinzl are former investors in investment portfolios managed by Fidelity and FMR, registered investment advisers or affiliated persons of such advisers. FMR and Fidelity contracted, via confirmation agreements, with securities brokers who would purchase and sell securities for the investment portfolios managed by Fidelity and FMR. An implied term of these agreements were the rules of the National Association of Securities Dealers ("NASD") and the New York Stock Exchange ("NYSE"). NASD and NYSE rules require investment advisers to choose securities brokers based on which brokers will obtain the "best execution" for the advisors's customers when executing portfolio transactions for those customers.
This best execution term "required Fidelity and FMR to choose execution brokers on the basis of the most favorable practicable execution costs, taking into consideration the size of each transaction, the number of transactions per year, the market impact of the transaction, brokerage commissions, services provided by the broker, and other considerations." Kurz and Heinzl allege that they, as Defendants's customers, were the intended third-party beneficiaries of this contractual duty of best execution.
Between 2002 and 2004, Fidelity and FMR retained Jeffries & Co. ("Jeffries") to execute portfolio transactions for their customers in return for lavish gifts, rather than on the basis of best execution. According to the complaint, as redress for this bribery scheme, the chairman of Fidelity's board of trustees E.C. Johnson, III, agreed to pay $42 million plus interest to Fidelity's family of mutual funds.
Kurz and Heinzl brought this one-count complaint against Fidelity and FMR alleging that Defendants breached the best execution provisions contained in the confirmation agreements. Plaintiffs seek to represent a class of persons who were clients of Fidelity and FMR from May 1, 2002, until October 31, 2004, and who liquidated their investments and/or terminated their management agreements with the defendants before December 21, 2006, and whose investment portfolios included at least one transaction in which Defendants used Jeffries as the executing broker.
Congress passed the Private Securities Litigation Reform Act of 1995 (PSLRA), Pub.L. No. 104-67, 109 Stat. 743 (1995) (codified at 15 U.S.C. §§ 77z-1, 77z-2, 78u-4, 78u-5) to provide procedures to ensure that district courts could quickly and efficiently dismiss meritless or abusive class actions alleging fraud related to the purchase and sale of securities. Merrill Lynch, Pierce Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81-2 (2006) (Dabit II); see also, H.R. Conf. Rep. No. 104-369 (1995). However, passage of the PLSRA had the unintended consequence of shifting securities class actions from a federal to a state forum. Dabit II, 547 U.S. at 82; see also, H.R. Conf. Rep. No. 105-803 (1998). In response, Congress passed SLUSA "in order to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the Private Securities ...