Hidalgo-Velez v. San Juan Asset Management, Inc, 1st Cir. (2014)

7/26/2019 Hidalgo-Velez v. San Juan Asset Management, Inc, 1st Cir. (2014)

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United States Court of AppealsFor the First Circuit

No. 13- 1574

EDUARDO HI DALGO- VLEZ, ET AL. ,

Pl ai nt i f f s , Appel l ant s ,

v.

SAN J UAN ASSET MANAGEMENT, I NC. , ET AL. ,

Def endant s, Appel l ees.

APPEAL FROM THE UNI TED STATES DI STRI CT COURT

FOR THE DI STRI CT OF PUERTO RI CO

[ Hon. St even J . McAul i f f e, U. S. Di st r i ct J udge*][ Hon. Car men Consuel o Cer ezo, U. S. Di st r i ct J udge]

Bef or e

Thompson and Sel ya, Ci r cui t J udges,and McConnel l , Di st r i ct J udge. **

Lui s A. Avi l s, wi t h whom J or ge M. I zqui er do- San Mi guel andI zqui er do- San Mi guel Law Of f i ces, PSC wer e on br i ef , f orappel l ant s.

Er i c Prez- Ochoa, wi t h whom Adsuar Mui z Goyco Seda & Prez-Ochoa, P. S. C. was on br i ef , f or appel l ees San J uan AssetManagement , I nc. and Vi zcar r ondo- Ram r ez de Ar el l ano.

Mi chael S. Fl ynn, wi t h whomFranci sco G. Br uno- Rovi r a, Lesl i eYvet t e Fl or es- Rodr i guez, McConnel l Val des LLC, Al i ci a L. Chang, and

Davi s Pol k & War dwel l LLP wer e on br i ef , f or appel l eePr i cewaterhouseCoopers, LLP ( whose br i ef was adopt ed by appel l eesPuer t o Ri co & Gl obal I ncome Tar get Mat ur i t y Fund, I nc. , Lui sRi ver a, Ri ver a Casi ano, Lugo- Ri ver a, and Col n Ascar ) .

*Of t he Di st r i ct of New Hampshi r e, si t t i ng by desi gnat i on.

**Of t he Di st r i ct of Rhode I sl and, si t t i ng by desi gnat i on.


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J ul y 9, 2014


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SELYA, Circuit Judge. Thi s case r equi r es us t o t r ace t he

cont our s of t he " i n connect i on wi t h" el ement of t he Secur i t i es

Li t i gat i on Uni f or m St andar ds Act of 1998 ( SLUSA) , 15 U. S. C.

78bb( f ) , i n t he r ef l ect ed l i ght of t he Supr eme Cour t ' s r ecent

deci si on i n Chadbour ne & Par ke LLP v. Tr oi ce, 134 S. Ct . 1058

( 2014) . Gi vi ng f ul l voi ce t o Tr oi ce, we concl ude t hat t he di st r i ct

cour t i mper mi ssi bl y ext ended t he SLUSA' s reach. Accor di ngl y, we

vacat e t he j udgment bel ow, r ever se t he deni al of t he pl ai nt i f f s'

mot i on t o remand, and r emi t t he case t o t he di st r i ct cour t wi t h

di r ect i ons t o r et ur n i t t o t he Puer t o Ri co Cour t of Fi r st I nst ance.

I. BACKGROUND

We begi n at t he begi nni ng, r ehear si ng t he or i gi n and

t r avel of t he case. Because " t hi s appeal f ol l ows the gr ant i ng of

a mot i on t o di smi ss, we dr aw t he r el evant f act s f r om t he

pl ai nt i f f [ s' ] compl ai nt , " suppl ement ed by "document at i on

i ncor por ated by r ef er ence i n t he compl ai nt . " Ri ver a- D az v. Humana

I ns. of P. R. , I nc. , 748 F. 3d 387, 388 ( 1st Ci r . 2014) .

The pl ai nt i f f s ar e most l y i nvest or s i n t he Puer t o Ri co &

Gl obal I ncome Target Matur i t y Fund ( t he Fund) , 1 a non- di ver si f i ed

i nvest ment company l i censed under t he Puer t o Ri co I nvest ment

Compani es Act , see P. R. Laws Ann. t i t . 10, 661- 683. The Fund

sol i ci t ed i nvest or s t hr ough a pr ospect us, whi ch pr omi sed t hat t he

1 Al t hough not hi ng t ur ns on t he di st i nct i on, a f ew of t hepl ai nt i f f s sue der i vat i vel y as i nvest or s' conj ugal par t ner s andconj ugal par t ner shi ps. See P. R. Laws Ann. t i t . 31, 3621- 3701.

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i nvest ment advi sor , San J uan Asset Management ; i t s sal es agent ,

BBVA Secur i t i es of Puer t o Ri co; and i t s i ndependent audi t or ,

Pr i cewaterhouseCoopers ( PwC) . Al t hough t he compl ai nt i s not a

model of cl ar i t y, i t i s cl ear t hat i t s gr avamen i s t hat t he Fund

di d not compl y wi t h t he i nvest ment pol i ci es promi sed i n t he

pr ospect us and t hat t he st r at egy i t di d pur sue f l out ed Puer t o Ri co

l aw. 2

PwC, l at er j oi ned by ot her def endant s, r emoved t he act i on

t o t he f eder al di st r i ct cour t , asser t i ng t hat i t f el l wi t hi n t he

ambi t of t he SLUSA. See 15 U. S. C. 78bb( f ) ( 2) ; 28 U. S. C. 1446.

The pl ai nt i f f s moved t o r emand. The di st r i ct cour t ( Cer ezo, J . )

deni ed t he pl ai nt i f f s' mot i on. See Hi dal go- Vl ez v. San J uan Asset

Mgmt . , I nc. ( Hi dal go- Vl ez I ) , No. 11- 2175, 2012 WL 4427077, at *3

( D. P. R. Sept . 24, 2012) .

At t hat poi nt , t he pl ai nt i f f s asked t he di str i ct cour t t o

cer t i f y t he j ur i sdi cti onal quest i on f or i nt er l ocut or y appeal . See

28 U. S. C. 1292( b) . The def endant s not onl y opposed t hi s r equest

but al so pr essed di smi ssal mot i ons premi sed on SLUSA pr ecl usi on.

See Fed. R. Ci v. P. 12( b) ( 6) . The di str i ct cour t ( McAul i f f e, J . )

r ef used t o cer t i f y t he quest i on and gr ant ed t he mot i ons t o di smi ss.

See Hi dal go- Vl ez v. San J uan Asset Mgmt . , I nc. , No. 11- 2175, 2013

2 Accor di ng t o t he compl ai nt , Puer t o Ri co l aw pr ohi bi t s a non-di ver si f i ed i nvest ment company ( l i ke t he Fund) f r omi nvest i ng mor et han 25% of i t s asset s i n t he secur i t i es of a si ngl e i ssuer . SeeP. R. Laws Ann. t i t . 10, 662( b) .

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WL 1089745, at *7 ( D. P. R. Mar . 15, 2013) . Thi s t i mel y appeal

ensued.

II. ANALYSIS

We r evi ew a di st r i ct cour t ' s di sposi t i on of a mot i on t o

di smi ss f or f ai l ur e t o st at e a cl ai mde novo. See Ar t uso v. Ver t ex

Phar m. , I nc. , 637 F. 3d 1, 5 ( 1st Ci r . 2011) . I n conduct i ng t hi s

r evi ew, "we accept as t r ue al l wel l - pl eaded f act s al l eged i n t he

compl ai nt and dr aw al l r easonabl e i nf er ences t her ef r om i n t he

pl eader ' s f avor . " But l er v. Bal ol i a, 736 F. 3d 609, 612 ( 1st Ci r .

2013) .

The def endant s i nvi t e us t o al t er t hi s st andar d of r evi ew

on t he gr ound t hat t he pl ai nt i f f s f ai l ed t o pr eser ve t hei r cent r al

ar gument . We decl i ne t hi s i nvi t at i on.

The def endant s i nsi st t hat t he pl ai nt i f f s' f ai l ure t o

oppose thei r mot i ons t o di smi ss const i t ut es a wai ver or , at l east ,

a f or f ei t ur e. See gener al l y Uni t ed St at es v. Ol ano, 507 U. S. 725,

733 ( 1993) ( l i mni ng di st i nct i on bet ween wai ver and f or f ei t ur e) .

But t hi s hyper t echni cal vi ew of t he r ecor d gi ves t oo l i t t l e wei ght

t o t he pl ai nt i f f s' consi st ent and vi gor ous opposi t i on t o t he

def endant s' cont ent i on t hat t he SLUSA pr et er mi t t ed t he pl ai nt i f f s'

cl ai ms. Common sense suggest s t hat i n cer t ai n si t uat i ons subst ance

ought t o pr evai l over f or m and i n t he pecul i ar ci r cumst ances of

t hi s case we bel i eve t hat t he f act t hat t he pl ai nt i f f s pr esent ed

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t hei r opposi t i on i n t hei r mot i on f or r emand r at her t han as par t of

f ormal obj ect i ons t o t he mot i ons t o di smi ss i s of no moment .

We br i ef l y expl ai n our r easoni ng. The SLUSA cont ai ns

bot h "a pr ecl usi on pr ovi si on and a r emoval pr ovi si on. " Ki r cher v.

Put nam Funds Trust , 547 U. S. 633, 636 ( 2006) ( f oot not es omi t t ed) .

These symbi ot i c provi si ons ar e mi r r or i mages of each ot her : any

act i on t hat i s pr oper l y r emovabl e under t he removal pr ovi si on i s

per se pr ecl uded under t he pr ecl usi on pr ovi si on and, conver sel y,

any act i on not so pr ecl uded i s not r emovabl e. See i d. at 643- 44;

Madden v. Cowen & Co. , 576 F. 3d 957, 965 ( 9t h Ci r . 2009) . Thus,

t he r ul i ng on t he pl ai nt i f f s' mot i on t o r emand woul d necessar i l y be

di sposi t i ve of t he def endant s' mot i ons t o di smi ss. Gi ven t hi s

j uxt aposi t i on, we hol d t hat t he pl ai nt i f f s' present at i on of t hei r

opposi t i on t o t he SLUSA' s appl i cabi l i t y i n t hei r r emand paper s

suf f i ced t o pr eser ve t hei r posi t i on f or pur poses of appeal . Thi s

hol di ng i s consi st ent , we t hi nk, wi t h t he Supr eme Cour t ' s

admoni t i on t hat " [ r ] ul es of pr act i ce and pr ocedur e ar e devi sed t o

pr omote t he ends of j ust i ce, not t o def eat t hem. " Hor mel v.

Hel ver i ng, 312 U. S. 552, 557 (1941) .

We ar e equal l y uni mpr essed wi t h t he def endant s' more

gener al i mpor t uni ng t hat t he pl ai nt i f f s f ai l ed t o devel op t hei r

cent r al ar gument suf f i ci ent l y t o pr eser ve i t on appeal . Whi l e t he

pl ai nt i f f s cer t ai nl y coul d have devel oped t hei r ar gument mor e

f ul l y, t hey di d enough t o put t he di sposi t i ve i ssue i n pl ay bef or e

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t he di str i ct cour t . I n vi ew of t he f act t hat t he Supr eme Cour t

di d not deci de Tr oi ce unt i l t hi s case was pendi ng on appeal ,

t r eat i ng the pl ai nt i f f s' ar gument as abandoned woul d requi r e an

over l y st r i ct appl i cat i on of wai ver pr i nci pl es.

We t ur n now t o t he meat of t hi s appeal . The SLUSA i s a

spar e but sweepi ng st atut e, whi ch f or pr esent pur poses may be

vi ewed as t he t hi r d i n a t r i l ogy of st at ut or y enact ment s. We f i nd

i t hel pf ul , t her ef or e, t o t r ace i t s l i neage.

I n t he af t ermath of t he 1929 st ock market cr ash, Congr ess

passed t he Secur i t i es Exchange Act of 1934 ( t he Exchange Act ) , ch.

404, 48 St at . 881. See Mer r i l l Lynch, Pi er ce, Fenner & Smi t h I nc.

v. Dabi t , 547 U. S. 71, 78 ( 2006) . As amended, t hat st at ut e f or bi ds

t he use of any mani pul at i ve or decept i ve devi ces or cont r i vances

" i n connect i on wi t h t he pur chase or sal e of any secur i t y r egi st er ed

on a nat i onal secur i t i es exchange or any secur i t y not so

r egi st er ed, or any secur i t i es- based swap agr eement . " 15 U. S. C.

78j ( b) . Exer ci si ng r egul at or y aut hor i t y gr ant ed by t he Exchange

Act , t he Secur i t i es and Exchange Commi ss i on ( SEC) pr omul gat ed Rul e

10b- 5, whi ch l i kewi se pr ohi bi t s f r aud i n connect i on wi t h t he

pur chase or sal e of secur i t i es. See 17 C. F. R. 240. 10b- 5. The

Supr eme Cour t has r ead a pr i vat e r i ght of act i on i nt o t hese

pr ovi si ons. See Bl ue Chi p St amps v. Manor Dr ug St ores, 421 U. S.

723, 730 ( 1975) ; Sup' t of I ns. of N. Y. v. Banker s Li f e & Cas. Co. ,

404 U. S. 6, 13 & n. 9 ( 1971) . Mor eover , t he Cour t has f or ged a l i nk

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bet ween, on t he one hand, t he "i n connect i on wi t h" pr ovi si ons of

t he Exchange Act and Rul e 10b- 5 and, on t he ot her hand, t he SLUSA' s

par al l el "i n connect i on wi t h" t er mi nol ogy. See Dabi t , 547 U. S. at

85- 86.

More than si xt y years af t er t he passage of t he Exchange

Act , Congr ess enact ed t he second st at ut e i n t he t r i l ogy: t he

Pr i vat e Secur i t i es Li t i gat i on Ref or m Act of 1995 ( PSLRA) , Pub. L.

No. 104- 67, 109 Stat . 737. Congress f ashi oned t he PSLRA as a means

of combat i ng unf ounded st r i ke sui t s agai nst i ssuer s of secur i t i es.

See Dabi t , 547 U. S. at 81. Consi st ent wi t h t hi s congr essi onal

i nt ent , t he PSLRA i mposed "hei ght ened pl eadi ng r equi r ement s i n

act i ons brought pur suant t o 10( b) and Rul e 10b- 5" and cont ai ned

a gal l i mauf r y of pr ovi si ons t ar get i ng abusi ve secur i t i es- f r aud

l i t i gat i on. I d.

Congress soon di scovered t hat t he PSLRA had not sounded

t he deat h knel l f or abusi ve secur i t i es- f r aud l i t i gat i on; pl ai nt i f f s

si mpl y st ar t ed usi ng st at e l aw as a vehi cl e f or t hei r cl ai ms. I n

an ef f or t t o cl ose t hi s l oophol e, Congr ess passed t he t hi r d st at ut e

i n t he t r i l ogy i n 1998: t he SLUSA, Pub. L. No. 105- 353, 112 St at .

3227. See Ki r cher , 547 U. S. at 636; see al so H. R. Conf . Rep. No.

105- 803, at 13.

Per t i nent l y, t he SLUSA pr ovi des:

[ n] o covered cl ass act i on based upon t hest at ut ory or common l aw of any St at e orsubdi vi si on t hereof may be mai nt ai ned i n anySt at e or Feder al cour t by any pr i vat e par t y

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al l egi ng( A) a mi sr epr esent at i on or omi ssi onof a mat er i al f act i n connect i on wi t h t hepur chase or sal e of a cover ed secur i t y; or ( B)t hat t he def endant used or empl oyed anymani pul at i ve or decept i ve devi ce orcont r i vance i n connect i on wi t h t he pur chase or

sal e of a cover ed secur i t y.

15 U. S. C. 78bb( f ) ( 1) . 3 Four r equi r ement s must be sat i sf i ed i n

or der f or t he SLUSA t o at t ach. Ther e must be ( i ) a cover ed cl ass

act i on, ( i i ) based on st at e l aw, ( i i i ) al l egi ng f r aud or

mi sr epr esent at i on i n connect i on wi t h t he pur chase or sal e of , ( i v)

a cover ed secur i t y. See Romano v. Kazacos, 609 F. 3d 512, 518 ( 2d

Ci r . 2010) . Al t hough t he cour t s of appeal s have made t hi s same

poi nt i n ways that di f f er s l i ght l y f r om ci r cui t t o ci r cui t , see,

e. g. , Apper t v. Mor gan St anl ey Dean Wi t t er , I nc. , 673 F. 3d 609, 615

( 7t h Ci r . 2012) ; Madden, 576 F. 3d at 965; LaSal a v. Bor di er et Ci e,

519 F. 3d 121, 128 ( 3d Ci r . 2008) , al l of t hem agr ee wi t h t he

essence of t hi s f or mul at i on.

Thi s case does not demand an ar chaeol ogi cal di g i nt o

t hese f our r equi r ement s. For present pur poses, i t i s enough t o

emphasi ze a f ew poi nt s that ar e beyond cavi l . Fi r st , " [ a] cover ed

cl ass act i on i s a l awsui t i n whi ch damages ar e sought on behal f of

mor e t han 50 peopl e. " Dabi t , 547 U. S. at 83 ( i nt er nal quot at i on

marks and f oot not e omi t t ed) . Second, t he most common t ype of

3 The SLUSA amended bot h t he Secur i t i es Act of 1933, ch. 38,48 St at . 74, and t he Exchange Act " i n subst ant i al l y i dent i calways. " Dabi t , 547 U. S. at 82 n. 6. We adopt t he convent i on of bot ht he Tr oi ce and Dabi t Cour t s and r ef er t o t he st at ut or ycodi f i cat i ons of t he amendment s t o t he Exchange Act .

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"cover ed secur i t y i s one t r aded nat i onal l y and l i st ed on a

r egul at ed nat i onal exchange. " I d. ( i nt er nal quot at i on mar ks and

f oot not e omi t t ed) . Anot her st andar d t ype of cover ed secur i t y i s

one i ssued by an i nvest ment company r egi st er ed under t he I nvest ment

Company Act of 1940, 15 U. S. C. 80a- 1 t o 80a- 64. See Troi ce, 134

S. Ct . at 1064.

For SLUSA pur poses, Puer t o Ri co i s t he f unct i onal

equi val ent of a st at e, see 15 U. S. C. 78c( a) ( 16) ; and i n t hi s

i nstance, i t i s undi sput ed t hat t he pl ai nt i f f s ' sui t i s a cover ed

cl ass act i on al l egi ng f r aud or mi sr epr esent at i on i n vi ol at i on of

Puer t o Ri co l aw. The cr i t i cal quest i on i s whet her t he al l eged

mi sr epr esent at i ons on whi ch t he sui t i s f ounded were made " i n

connect i on wi t h" a t r ansact i on i n cover ed secur i t i es.

The ear l y appel l at e cases const r ui ng t he SLUSA' s " i n

connect i on wi t h" r equi r ement pr i mar i l y concer ned r epr esent at i ons

about or t he mar ket i ng of cover ed secur i t i es, of t en i n t he cont ext

of i nvest ment ser vi ces. See, e. g. , Gr ay v. Seaboar d Sec. , I nc. ,

126 F. App' x 14, 16- 17 ( 2d Ci r . 2005) ; Rowi nski v. Sal omon Smi t h

Bar ney I nc. , 398 F. 3d 294, 302- 03 ( 3d Ci r . 2005) ; Prof ' l Mgmt .

Assocs. , I nc. Emps. ' Prof i t Shar i ng Pl an v. KPMG LLP, 335 F. 3d 800,

802- 03 ( 8t h Ci r . 2003) ; Behl en v. Mer r i l l Lynch, 311 F. 3d 1087,

1094 ( 11t h Ci r . 2002) ; Dudek v. Pr udent i al Sec. , I nc. , 295 F. 3d

875, 878- 79 ( 8t h Ci r . 2002) ; Gr een v. Amer i t r ade, I nc. , 279 F. 3d

590, 598- 99 ( 8t h Ci r . 2002) . For t he most par t , t he di sput e i n

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t hose cases di d not i nvol ve whet her t he mi sr epr esent at i ons wer e

connect ed t o cover ed secur i t i es but , r ather , whet her t hey wer e

suf f i ci ent l y i nt er t wi ned wi t h a pur chase or sal e. See, e. g. ,

Rowi nski , 398 F. 3d at 302- 03; Prof ' l Mgmt . Assocs. , 335 F. 3d at

802- 03; Behl en, 311 F. 3d at 1094.

The t ect oni c pl at es shi f t ed when t he Dabi t Cour t

aut hor i t at i vel y del i neat ed the scope of t he SLUSA' s " pur chase or

sal e" l anguage. See 547 U. S. at 84- 86. The Cour t hel d t hat t he

SLUSA shoul d be const r ued t o pr ecl ude so- cal l ed "hol der " act i ons

( t hat i s , act i ons i n whi ch t he pl ai nt i f f s al l eged i nj ur y f r om

mer el y hol di ng cover ed secur i t i es) i n addi t i on t o act i ons di r ect l y

i nvol vi ng pur chases and/ or sal es of cover ed secur i t i es. See i d. at

87- 89. Thr ee i mpor t ant l essons emer ged f r om t he Dabi t Cour t ' s

opi ni on.

To begi n, t he Cour t made pel l uci d t hat t he SLUSA' s " i n

connect i on wi t h" r equi r ement shoul d be const r ued br oadl y. See i d.

at 85. Next , t he Cour t decl ar ed t hat "i t i s enough t hat t he f r aud

al l eged ' coi nci de' wi t h a secur i t i es t r ansact i on. " I d. Fi nal l y,

t he Cour t i ndi cat ed t hat t he f ocus of an " i n connect i on wi t h"

i nqui r y under t he SLUSA shoul d be on t he def endant ' s act i ons, not

on t he pl ai nt i f f ' s acti ons. As t he Cour t expl ai ned, "[ t ] he

r equi si t e showi ng . . . i s decept i on i n connect i on wi t h t he

pur chase or sal e of any secur i t y, not decept i on of an i dent i f i abl e

pur chaser or sel l er . " I d. ( i nt er nal quot at i on mar ks omi t t ed) .

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Some el abor at i on i s i n or der wi t h r espect t o t he second

of t hese l essons. The Dabi t Cour t i mpor t ed t hi s l esson f r om i t s

Exchange Act and Rul e 10b- 5 j ur i spr udence. See SEC v. Zandf ord,

535 U. S. 813, 825 ( 2002) ; Uni t ed St ates v. O' Hagan, 521 U. S. 642,

655- 56 ( 1997) . I n t he wake of Dabi t , t he cour t s of appeal s

i nt er pr et ed t hi s " coi nci de" l anguage expansi vel y, t hough not

uni f or ml y. See Rol and v. Gr een, 675 F. 3d 503, 512- 14 ( 5t h Ci r .

2012) ( sur veyi ng di f f er i ng appr oaches) . I n Tr oi ce, t he Supr eme

Cour t r evi ewed t he Fi f t h Ci r cui t ' s deci si on i n Rol and and shed new

l i ght on t he subj ect . See 134 S. Ct . at 1066.

Tr oi ce i nvol ved an act i on brought by vi ct i ms of an

al l eged Ponzi scheme. The f r audst er sol d t he pl ai nt i f f s

cer t i f i cat es of deposi t ( CDs) i n a bank t hat he cont r ol l ed. See

i d. at 1064. The CDs were uncover ed "debt asset s t hat pr omi sed a

f i xed r at e of r et ur n, " not cover ed secur i t i es. I d. The def endant s

( par t i es accused of abet t i ng t he f r aud) ar gued t hat t he SLUSA

appl i ed because, even t hough t he CDs t hemsel ves were not covered

secur i t i es, t hey wer e sol d on t he basi s t hat t hey woul d be backed

by cover ed secur i t i es. The Cour t f ound t hi s ar gument unconvi nci ng

and r ul ed t hat t he SLUSA di d not appl y. See i d. at 1071- 72.

The Tr oi ce Cour t was car ef ul t o preser ve Dabi t ' s cor e

hol di ng. See i d. at 1066; see al so Cal der n Ser r a v. Banco

Sant ander P. R. , 747 F. 3d 1, 6 ( 1st Ci r . 2014) . Never t hel ess,

J ust i ce Br eyer ' s opi ni on f or t he Cour t broke new ground i n

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i l l umi nat i ng t he cont our s of t he "i n connect i on wi t h" r equi r ement .

I t hel d t hat "[ a] f r audul ent mi sr epr esent at i on or omi ssi on i s not

made ' i n connect i on wi t h' . . . a ' pur chase or sal e of a cover ed

secur i t y' unl ess i t i s mat er i al t o a deci si on by one or mor e

i ndi vi dual s ( ot her t han t he f r audst er ) t o buy or t o sel l a ' cover ed

secur i t y. ' " Tr oi ce, 134 S. Ct . at 1066. I n ot her wor ds, t he "i n

connect i on wi t h" r equi r ement i s sat i sf i ed onl y "wher e t he

mi sr epr esent at i on makes a si gni f i cant di f f er ence t o someone' s

deci si on t o pur chase or t o sel l a cover ed secur i t y. " I d. I n an

ef f or t t o put t he mat t er i nt o per spect i ve, J ust i ce Br eyer went on

t o expl ai n t hat t he " i n connect i on wi t h" r equi r ement r eached onl y

t hose cases i nvol vi ng "vi ct i ms who t ook, who t r i ed t o t ake, who

di vest ed t hemsel ves of , who t r i ed t o di vest t hemsel ves of , or who

mai nt ai ned an owner shi p i nt er est i n f i nanci al i nst r ument s t hat f al l

wi t hi n t he r el evant st at ut or y def i ni t i on. " I d. ( emphasi s i n

or i gi nal ) .

Wi t h the l egal l andscape set i n pl ace, we now move f r om

t he gener al t o t he speci f i c. The cour t bel ow, r ul i ng wi t hout t he

benef i t of Tr oi ce, hel d t hat t he SLUSA pr ecl uded t he pl ai nt i f f s'

cl ai ms. 4

4 Al ong t he way, t he di st r i ct cour t concl uded t hat , i ndetermi ni ng whether t he SLUSA appl i ed t o t he compl ai nt , t heanal ysi s shoul d not pr oceed cl ai mby cl ai mbut , r at her , i n t er ms oft he compl ai nt as a whol e. See Hi dal go- Vl ez I , 2012 WL 4427077, at*3. Thi s concl usi on i s f r ei ght ed wi t h uncer t ai nt y, compar e, e. g. ,Pr oct or v. Vi shay I nt er t ech. I nc. , 584 F. 3d 1208, 1228- 29 ( 9t h Ci r .2009) ( hol di ng t hat r evi ew shoul d pr oceed cl ai mby cl ai m) and I n r e

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At t he out set , t he di st r i ct cour t acknowl edged t hat t he

secur i t i es act ual l y hel d by t he pl ai nt i f f s ( t he shar es i n t he Fund)

wer e not t hemsel ves cover ed secur i t i es. See Hi dal go- Vl ez I , 2012

WL 4427077, at *2. The cour t concl uded, however , t hat t hi s

ci r cumst ance al one di d not pl ace t he pl ai nt i f f s' cl ai ms beyond t he

SLUSA' s r each: si nce "t he Fund' s ant i ci pat ed i nvest ment s i ncl uded

var i ous cover ed secur i t i es, " t he SLUSA' s "i n connect i on wi t h"

r equi r ement was sat i sf i ed. I d.

We agr ee wi t h t he di st r i ct cour t ' s gener al appr oach, and

Tr oi ce conf i r ms t hat appr oach. See Tr oi ce, 134 S. Ct . at 1071- 72.

But as we expl ai n bel ow, we di sagr ee wi t h t he di st r i ct cour t ' s

par t i cul ar i zed concl usi on.

For pur poses of a mot i on t o remand, we must cr edi t t he

pl ai nt i f f s' t hesi s t hat t he def endant s' mi sr epr esent at i ons i nduced

t he pl ai nt i f f s t o pur chase uncover ed secur i t i es. By t he same

t oken, i t i s undi sput ed t hat t he onl y secur i t i es i nvol ved i n any

t r ansact i ons car r i ed out by t he pl ai nt i f f s wer e uncover ed

secur i t i es. Tr oi ce t eaches t hat a mi sr epr esent at i on i n connect i on

wi t h t he pur chase of an uncover ed secur i t y, by i t sel f , i s

i nsuf f i ci ent t o br i ng a cl ai m wi t hi n t he SLUSA' s gr asp: "a

connect i on mat t ers where t he mi sr epr esent at i on makes a si gni f i cant

Lor d Abbet t Mut . Funds Fee Li t i g. , 553 F. 3d 248, 255- 56 ( 3d Ci r .2009) ( same) , wi t h, e. g. , Super i or Par t ner s v. Chang, 471 F. Supp.2d 750, 757 (S. D. Tex. 2007) ( hol di ng t hat under t he SLUSA a cour tshoul d "exami ne a l awsui t i n i t s ent i r et y") , and t hi s case does notr equi r e us t o r esol ve t he quest i on.

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di f f er ence t o someone' s deci si on t o pur chase or t o sel l a cover ed

secur i t y, not t o pur chase or t o sel l an uncover ed secur i t y. " I d.

at 1066; cf . Cal der n Ser r a, 747 F. 3d at 6 ( hol di ng Rul e 10b- 5' s

" i n connect i on wi t h" r equi r ement sat i sf i ed when t her e was " no

di sput e as t o whet her t he pl ai nt i f f s act ual l y bought secur i t i es

cover ed by t he Exchange Act " ) .

To be sur e, t he anal ysi s does not i nvar i abl y end t here.

I n cer t ai n cases, t he pr i mar y i nt ent or ef f ect of pur chasi ng an

uncover ed secur i t y i s t o t ake an owner shi p i nt er est i n a cover ed

secur i t y. The def endant s st r i ve t o convi nce us t hat t hi s i s such

a case.

I n advanci ng t hi s pr oposi t i on, t he def endant s r el y

heavi l y on t he so- cal l ed " f eeder f und" cases. Those ar e cases

wher e t he pl ai nt i f f s i nvest ed i n f unds t hat , di r ect l y or

i ndi r ect l y, acqui r ed or pur por t ed t o acqui r e cover ed secur i t i es.

See Rol and, 675 F. 3d at 514- 17 ( canvassi ng cases) . Typi cal i s I n

r e Her al d, 730 F. 3d 112 ( 2d Ci r . 2013) , i n whi ch t he cour t

addr essed " f eeder f unds" i n t he cont ext of t he i nf amous Ponzi

scheme i ni t i at ed by Ber ni e Madof f . Ther e, i nvest or s i n Madof f -

af f i l i at ed f eeder f unds sued Madof f ' s banker s f or f aci l i t at i ng t he

f r aud. The Second Ci r cui t hel d t hat t hei r cl ai ms wer e SLUSA-

pr ecl uded because the cl ai ms wer e " i nt egr al l y t i ed t o t he

under l yi ng f r aud commi t t ed by Madof f , " whi ch " i ndi sput abl y"

i nvol ved "pur por t ed i nvest ment s i n cover ed secur i t i es. " I d. at

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119. I t di d not mat t er , t he cour t sai d, t hat Madof f never act ual l y

car r i ed out t r ansact i ons i n cover ed secur i t i es; i t was enough t hat

hi s " pur por t ed t r adi ng st r at egy ut i l i zed i ndi sput abl y cover ed

secur i t i es. " I d. at 118; see Gr i ppo v. Per azzo, 357 F. 3d 1218,

1223- 24 ( 11t h Ci r . 2004) ( hol di ng t hat pl ai nt i f f coul d mai nt ai n a

sect i on 10( b) act i on even t hough "no pr oof exi st [ ed] t hat a

secur i t y was act ual l y bought or sol d" ) .

Her al d i s r eadi l y di st i ngui shabl e. The Madof f f unds wer e

mar ket ed pr i mar i l y as vehi cl es f or exposur e t o cover ed secur i t i es.

See I n r e Heral d, Pr i meo, & Thema Sec. Li t i g. , No. 09- 289, 2011 WL

5928952, at *1 ( S. D. N. Y. Nov. 29, 2011) ( st at i ng t hat Madof f " t ol d

i nvest or s t hat he was buyi ng and sel l i ng St andar d and Poor ' s 100

st ocks and opt i ons f or t hei r account s") . Thus, on a pet i t i on f or

r ehear i ng f ol l owi ng t he Tr oi ce deci si on, t he Second Ci r cui t

concl uded wi t h l i t t l e appar ent di f f i cul t y that t he vi cti ms of t he

f r aud had i nt ended t o t ake an owner shi p i nt er est i n cover ed

secur i t i es. See I n r e Her al d, ___ F. 3d ___, ___ ( 2d Ci r . 2014)

[ Nos. 12- 156, 12- 162, May 28, 2014, sl i p op. at 8] ( per cur i am) .

What i s more, t he f r aud depended heavi l y on mi sr epr esent at i ons

about t r ansact i ons i n cover ed secur i t i es. Gi ven t hat

i nt er r el at i onshi p, t he case f i t s comf or t abl y wi t hi n t he conf i nes of

t he " i n connect i on wi t h" r equi r ement . See, e. g. , Zandf or d, 535

U. S. at 822 ( hol di ng SLUSA pr ecl uded cl ai ms when pl ai nt i f f s wer e

"duped i nt o bel i evi ng [ t he def endant ] woul d ' conser vat i vel y i nvest '

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t hei r asset s i n t he st ock mar ket ") ; I nst i t ut o de Pr evi si on Mi l i t ar

v. Mer r i l l Lynch, 546 F. 3d 1340, 1352 ( 11t h Ci r . 2008) ( expl ai ni ng

t hat because t he al l eged f r audst er "mar ket ed ' cover ed secur i t i es'

. . . , any mi sr epr esent at i ons and omi ssi ons [ t hat t he f r audst er ]

made were ' i n connect i on wi t h t he pur chase or sal e of a cover ed

secur i t y' " ) .

The case at hand i s at a consi derabl e r emove f r omHer al d.

Al t hough t he pr ospect us suggest ed t hat some ( r el at i vel y smal l ) par t

of t he Fund' s por t f ol i o mi ght i ncl ude cover ed secur i t i es, any such

hol di ngs wer e i nci dent al t o t he pr i mar y pur pose of t he Fund: t he

mai n al l ocat i ve st i pul at i on cont ai ned i n t he pr ospect us was t hat at

l east 75% of t he Fund' s asset s woul d be i nvest ed i n cer t ai n

speci al i zed notes of f er i ng exposur e t o Nort h Amer i can and Eur opean

bond i ndi ces. The def endant s have not asser t ed t hat these

par t i cul ar i nvest ment s wer e cover ed secur i t i es. I n t hese

ci r cumst ances, t he l i nk bet ween t he al l eged mi sr epr esent at i ons and

t he cover ed secur i t i es i n t he Fund' s por t f ol i o i s t oo at t enuat ed t o

br i ng the compl ai nt wi t hi n the maw of t he SLUSA.

Thi s assessment i s conf i r med by t he i nt r i nsi c nat ure of

t he mi sr epr esent at i ons al l eged. Those mi sr epr esent at i ons i n

st ar k cont r ast t o t he mi sr epr esent at i ons i n Her al d compr i sed

mai nl y f al se pr omi ses t o pur chase uncover ed secur i t i es. As

pl eaded, t he pl ai nt i f f s' case depends on aver ment s t hat , i n

subst ance, t he def endant s made mi sr epr esent at i ons about uncover ed

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secur i t i es ( namel y, t hose i nvest ment s t hat wer e supposed to sat i sf y

t he 75% pr omi se) ; t hat t he pl ai nt i f f s pur chased uncover ed

secur i t i es ( shar es i n t he Fund) based on those mi sr epr esent at i ons;

and that t hei r pr i mary pur pose i n doi ng so was t o acqui r e an

owner shi p i nt er est i n uncover ed secur i t i es. Seen i n t hi s l i ght ,

t he connect i on between the mi sr epr esent at i ons al l eged and any

cover ed secur i t i es i n t he Fund' s por t f ol i o i s t oo t angent i al t o

j ust i f y br i ngi ng t he SLUSA i nt o pl ay.

I n ar r i vi ng at t hi s concl usi on, we r ead Tr oi ce f or al l

t hat i t i s wor t h. When cour t s ar e conf r ont ed wi t h pl ai nt i f f s who

al l ege that a mi sr epr esent at i on has i nduced t hem t o pur chase

uncover ed secur i t i es, t he SLUSA pr ecl udes t he cl ai m onl y i f t he

ci r cumst ances of t he pur chase evi nce an i nt ent t o t ake an ownershi p

i nt er est i n cover ed secur i t i es. Tr oi ce i t sel f r epr esent s one end

of t hi s cont i nuum. When a pl ai nt i f f pur chases a f i xed- r at e debt

asset , t he SLUSA does not appl y even t hough t hat debt may be backed

i n part by covered secur i t i es. Such a debt ar r angement does not

evi nce an i nt ent t o t ake an owner shi p posi t i on i n t he under l yi ng

( cover ed) secur i t i es. Her al d r epr esent s t he opposi t e end of t he

cont i nuum. When t he pr i mar y pur pose of a pl ai nt i f f ' s pur chase of

an uncover ed secur i t y i s t o r eap t he benef i t of t r adi ng i n cover ed

secur i t i es, t he SLUSA does appl y.

I n cases, l i ke t hi s one, t hat f al l bet ween t hese t wo

pol es, cour t s must car ef ul l y consi der whet her and t o what ext ent

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t he pl ai nt i f f s sought t o t ake an owner shi p i nt er est i n cover ed

secur i t i es. The r el evant quest i ons i ncl ude ( but ar e not l i mi t ed

t o) what t he f und r epr esent s i t s pr i mar y pur pose t o be i n

sol i ci t i ng i nvest or s and whet her cover ed secur i t i es pr edomi nat e i n

t he pr omi sed mi x of i nvest ment s. Of cour se, an i nqui r i ng cour t

shoul d al so l ook at t he nat ur e, subj ect , and scope of t he al l eged

mi sr epr esent at i on.

I n conduct i ng t hi s appr ai sal , t he cour t shoul d bear i n

mi nd t he Tr oi ce Cour t ' s admoni t i on t hat "onl y . . . t hose who do

not sel l or par t i ci pat e i n sel l i ng secur i t i es t r aded on U. S.

nat i onal exchanges" shoul d be exempt ed f r omt he SLUSA and subj ect ed

t o st at e- l aw cl ass act i ons. 134 S. Ct . at 1068 ( emphasi s i n

or i gi nal ) . As appl i ed her e, t hi s admoni t i on cut s agai nst

pr ecl usi on. Af t er al l , t he Fund was char t er ed under a par t i cul ar

Puer t o Ri co st at ut or y f r amewor k and mar ket ed t o r esi dent s of Puer t o

Ri co pr i nci pal l y as a vehi cl e f or exposur e t o uncover ed

secur i t i es . 5

I n t he ci r cumst ances of t hi s case, t he r el evant mi x of

f act or s l eads t o a det er mi nat i on t hat t he di st r i ct cour t ' s

5 For t he sake of compl eteness, we not e t hat t he anal ysi s

mi ght be di f f er ent i n cases "wher e t he ent i r et y of t he f r auddepended upon t he [ f r audst er ] convi nci ng t he vi ct i ms . . . t o sel lt hei r cover ed secur i t i es i n or der f or t he f r aud t o beaccompl i shed. " Tr oi ce, 134 S. Ct . at 1072 ( quot i ng Rol and, 675F. 3d at 523) . Her e, however , t he al l egat i ons of t he compl ai nt "ar enot so t i ed wi t h t he sal e of cover ed secur i t i es. " I d. ( quot i ngRol and, 675 F. 3d at 523) .

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pr ecl usi on r ul i ng f el l on t he wr ong si de of what i s admi t t edl y a

f i ne l i ne. The l i nk bet ween t he mi sr epr esent at i ons al l eged and t he

cover ed secur i t i es i n t he Fund' s por t f ol i o i s si mpl y too f r agi l e t o

suppor t a f i ndi ng of SLUSA pr ecl usi on under Tr oi ce.

III. CONCLUSION

The SLUSA i s st r ong medi ci ne and shoul d be di spensed onl y

i n compl i ance wi t h Congr ess' s st at ut or y pr escr i pt i on. Gi ven t he

nat ur e of t he mi sr epr esent at i ons asser t ed and t he ci r cumst ances of

t hi s case, we do not t hi nk t hat Congr ess' s pr escr i pt i on appl i es

her e. I t f ol l ows t hat t he di st r i ct cour t was wi t hout j ur i sdi cti on

t o gr ant t he def endant s' mot i ons f or di smi ssal but , i nst ead, shoul d

have gr ant ed t he pl ai nt i f f s' mot i on t o r emand.

We need go no f ur t her . We vacat e t he j udgment of

di smi ssal , r ever se t he or der denyi ng r emand, and r emi t t he case t o

t he di st r i ct cour t wi t h i nst r ucti ons t o r et ur n i t t o t he Puer t o

Ri co Cour t of Fi r st I nst ance. Cost s shal l be t axed i n f avor of t he

pl ai nt i f f s.

So Ordered.

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Hidalgo-Velez v. San Juan Asset Management, Inc, 1st Cir. (2014)

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