From Roland v. Green, 2012 U.S. App. LEXIS 5672 (5th Cir. Mar. 19, 2012):

Since Dabit, six of our sister circuit courts have tried to give dimension to the "coincide" requirement announced in SEC v. Zandford and brought into the SLUSA scheme in Dabit. Romano v. Kazacos, 609 F.3d 512 (2d Cir. 2010); Segal v. Fifth Third Bank, N.A., 581 F.3d 305 (6th Cir. 2009); Madden v. Cowen & Co., 576 F.3d 957(9th Cir. 2009); Instituto de Prevision Militar v. Merrill Lynch, 546 F.3d 1340 (11th Cir. 2008); Siepel v. Bank of Am., N.A., 526 F.3d 1122 (8th Cir. 2008); Gavin v. AT&T Corp., 464 F.3d 634 (7th Cir. 2006). ***

In our consideration, we find most persuasive the decisions from the Second, Ninth, and Eleventh Circuits. ***

The Second, Ninth, and Eleventh Circuits have ... attempted to give dimension to what is sufficiently connected/coincidental to a transaction in covered securities to trigger SLUSA preclusion. The Eleventh Circuit in Instituto de Prevision Militar v. Merrill Lynch ("IPM") dealt with claims brought by a Guatemalan government agency that administered a pension fund for Guatemalan military veterans, which invested in Pension Fund of America ("PFA"), and other Latin American PFA investors against Merrill Lynch. 546 F.3d at 1342-43. According to their complaint, Merrill Lynch "actively promot[ed] PFA and vouch[ed] for the character of PFA's principals." Id. at 1343 (internal quotation marks omitted). After determining that the class met SLUSA's definition of a "covered class action," see 15 U.S.C. § 78bb(f)(5)(B), the Eleventh Circuit turned to the "coincide" requirement. IPM, 546 F.3d at 1345-48. It held that requirement met if either "fraud . . . induced [plaintiffs] to invest with [the defendant(s)]" or "a fraudulent scheme . . . coincided and depended upon the purchase or sale of [covered] securities." Id. at 1349. The court found that "IPM is complaining about fraud that induced it to invest with PFA, which means that its claims are 'in connection with the purchase or sale' of a security under SLUSA." Id.

The Ninth Circuit articulated its test for the "coincide" requirement slightly differently in its Madden v. Cowen & Co. opinion. That case involved shareholders of two medical care providers that were looking to merge with a larger company. 576 F.3d at 962. In attempting to merge these two medical care providers, the shareholders retained an investment bank, Cowen, "to look for prospective buyers, give advice regarding the structure of any potential sale, and render a fairness opinion regarding any proposed transaction." Id. (internal quotation marks omitted). Two suitors stepped up-one closely-held corporation and another publicly-traded company. Id. Cowen recommended to the shareholders that they accept the bid from the publicly-traded company. Id. After the merger was complete, the stock price of the publicly-traded company tumbled. Id. at 963. The shareholders then brought suit against Cowen for "negligent misrepresentation and professional negligence under California law." Id. Based on Dabit's statement that "in connection with" must be interpreted the same way under SLUSA as it is under Section 10(b), the Ninth Circuit looked to its prior precedent and held fraud is "'in connection with' the purchase or sale of securities if there is 'a relationship in which the fraud and the stock sale coincide or are more than tangentially related.'" Id. at 966 (quoting Falkowski v. Imation Corp., 309 F.3d 1123, 1131 (9th Cir. 2002)). Applying the "more than tangentially related" test, the court found that "the misrepresentations and omissions alleged in the complaint are more than tangentially related to [the shareholders'] purchase of the [publicly-traded company's] securities." Id. (internal quotation marks omitted).

The most recent circuit to consider the scope of the "coincide" requirement post-Dabit was the Second Circuit in Romano v. Kazacos. Romano dealt with two consolidated cases-one brought by Xerox retirees and one by Kodak retirees-alleging that Morgan Stanley "misrepresented that if appellants were to retire early, their investment savings would be sufficient to support them through retirement." 609 F.3d at 515. Based on these alleged misrepresentations, the retirees "deposited their retirement savings into Morgan Stanley IRA accounts, where covered securities were purchased on their behalf." Id. at 520. In discussing the "coincide" requirement, the Second Circuit stated that "SLUSA's 'in connection with' standard is met where plaintiff's claims turn on injuries caused by acting on misleading investment advice-that is, where plaintiff's claims necessarily allege, necessarily involve, or rest on the purchase or sale of securities. . . . [Additionally,] the more exacting induced standard satisfies § 10(b)'s 'in connection with' requirement." Id. at 522 (citations and internal quotation marks omitted).

Each of the circuits that has tried to contextualize the "coincide" requirement has come up with a slightly different articulation of the requisite connection between the fraud alleged and the purchase or sale of securities (or representations about the purchase or sale of securities): Segal, 581 F.3d at 310 (6th Cir.) ("depend on"); Siepel, 526 F.3d at 1127 (8th Cir.) ("related to"); Gavin, 464 F.3d at 639 (7th Cir.) ("involving," meaning more than "but for"); IPM, 546 F.3d at 1349-50 (11th Cir.) ("induced by" or "depended upon"); Madden, 576 F.3d at 966 (9th Cir.) ("more than tangentially related to"); Romano, 609 F.3d at 522 (2d Cir.) ("necessarily allege, necessarily involve, or rest on"). Beyond these various interpretations, we also think it useful before our standard to consider cases more factually analogous to ours than Dabit and much of its progeny. That is, cases where the fraud alleged was centered around the purchase or sale of an uncovered security, like the CDs at issue in this appeal.

C

The preclusion analysis under SLUSA is slightly more complex in cases where the fraudulent scheme alleged involves a multi-layered transaction, like the one at issue in our case. In these cases, the plaintiffs often are fraudulently induced into investing in some kind of uncovered security, like a CD or a share in a "feeder fund," which has some relationship either through the financial product's management company or through the financial product itself to transactions (real or purported) in covered securities, such as stocks. Some of the more analogous cases arise out of the slew of recent suits stemming from the Bernie Madoff Ponzi scheme, especially the so-called "feeder fund" cases. From our reading of these uncovered securities cases, we glean three approaches: (1) focus the analysis on whether the financial product purchased was a covered security (the "product approach"); (2) focus on the "separation" between the investment in the financial product and the subsequent transactions (real or purported) in covered securities (the "separation approach"); and (3) focus on the "purpose(s)" of the investment (the "purposes approach"). ***

1

Courts that take the product approach focus their analysis on the type of financial product upon which the alleged fraudulent scheme centers. In doing so, the crux of the analysis is not whether or not the "coincide" requirement of SLUSA is met, but rather whether the financial product qualifies as a "covered security" under 15 U.S.C. § 78bb(f)(5)(E). In Ring v. AXA Financial, Inc., the Second Circuit held that claims of fraud relating to the sale of an interest in a term life insurance policy, a Children's Term Rider ("CTR") (a "classic insurance product" and an uncovered security) were not SLUSA-precluded merely because the insurance company held covered securities in its portfolio, which in turn backed the plaintiffs' interest in the CTR. 483 F.3d 95, 96, 99 (2d Cir. 2007). It likewise found the fact that the CTR was attached to a variable life insurance policy, which is a covered security under SLUSA, was insufficient to preclude all claims relating to the CTR because "the CTR and the policy to which it is appended must be considered separately." Id. at 96. But see IPM, 546 F.3d at 1351 ("[H]ybrid securities . . . are 'covered securities.'" (citing Herndon v. Equitable Variable Life Ins. Co., 325 F.3d 1252 (11th Cir. 2003) (per curiam))). Similarly, in Brehm v. Capital Growth Financial, the district court held that "private placement securities or debentures" were not covered securities. No. 8:07CV315, 2008 WL 553238, at *2 (D. Neb. Feb. 25, 2008). Moreover, it found that allegations that the defendants were also going to invest in "securities and other intangible instruments that are traded in the public markets or issued privately" were insufficient to bring the case within SLUSA's preclusive ambit. Id. at *3 (internal quotation marks omitted).

The most-cited case using this approach is Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC, 750 F. Supp. 2d 450 (S.D.N.Y. 2010). That case was an "action to recover losses stemming from the liquidation of two British Virgin Islands based hedge funds . . . in which [the plaintiffs] held shares." Id. at 451. The Montreal Pension court held, "Because plaintiffs purchased shares in hedge funds, rather than covered securities, SLUSA does not preempt plaintiffs' state-law claims." Id. at 453-54.***

2

The separation approach considers the degree of separation between the fraud inducing the plaintiffs to buy the uncovered securities and the downstream transactions in covered securities. This focus is somewhat like Montreal Pension's concern about what is at the "heart" of the case. The most cited case using the separation approach is Anwar v. Fairfield Greenwich Ltd. (Anwar II). Anwar II dealt with a feeder fund to invest in Madoff's funds. 728 F. Supp. 2d 372, 387 (S.D.N.Y. 2010). The district court in Anwar II, however, found distinct differences in how the funds at issue in that case operated and the usual way Madoff feeder funds operated. *** [T]he court found that the "coincide" requirement was not met because "[t]he allegations in [that] case present[ed] multiple layers of separation between whatever phantom securities Madoff purported to be purchasing and the financial interests [p]laintiffs actually purchased." ***

3

The third and most widely adopted approach is the purpose approach, which primarily concerns itself with what the purpose of the investment was. The clearest articulation of this approach asks whether the uncovered securities (feeder funds) "were created for the purpose of investing in [covered] securities." Newman v Family Mgmt. Corp., 748 F. Supp. 2d 299, 312 (S.D.N.Y. 2010); see also In re Beacon Assocs. Litig., 745 F. Supp. 2d 386, 430 (S.D.N.Y. 2010) ***In ascertaining the purpose of the investment, these courts have considered what the fraud "at the heart of the case" was. In re Kingate Mgmt., Ltd. Litig., No. 09 Civ. 5386, 2011 WL 1362106, at *9 (S.D.N.Y. Mar. 30, 2011); see also Montreal Pension, 750 F. Supp. 2d at 455; Backus v. Conn. Cmty. Bank, N.A., No. 3:09-CV-1256, 2009 WL 5184360, at *5 (D. Conn. Dec. 23, 2009). They have also looked to the centrality of transactions in covered securities to the fraud. See Barron v. Igolnikov, No. 09 Civ. 4471, 2010 WL 882890, at *5 (S.D.N.Y. Mar. 10, 2010); Backus, 2009 WL 5184360, at *8. Finally, some courts have considered the "nature of the parties' relationship, and whether it necessarily involved the purchase or sale of securities." Levinson I, 2009 WL 5184363, at *11 (citing Rowinski v. Salomon Smith Barney, Inc., 398 F.3d 294, 302 (3d Cir. 2005)); see also Backus, 2009 WL 5184360, at *8 ("[T]he very purpose of the relationship . . . was to trade in securities.").

D

Given the Supreme Court's express reliance on "policy considerations" in its determination of the scope of the "in connection with" language in Section 10(b), Blue Chip Stamps, 421 U.S. at 737, and SLUSA, Dabit, 547 U.S. at 81, we find it useful to consider such arguments in our formulation of the standard. Specifically, we find persuasive Congress's explicit concern about the distinction between national, covered securities and other, uncovered securities. As we have stated previously, "SLUSA advances 'the congressional preference for national standards for securities class action lawsuits involving nationally traded securities.'" In re Enron, 535 F.3d at 338 (quoting Dabit, 547 U.S. at 87) (emphasis added). ***

IV

***The Eleventh Circuit's test from IPM, employed by the district court, is a good starting point because it identifies the two different perspectives from which to approach the question of connectivity. IPM held that the "coincide" requirement is met if either "fraud . . . induced [plaintiffs] to invest with [the defendant(s)]" or "a fraudulent scheme . . . coincided and depended upon the purchase or sale of [covered] securities." IPM, 546 F.3d at 1349 (emphasis added). The "induced" prong examines the allegations from the plaintiffs' perspective by asking essentially whether the plaintiffs thought they were investing in covered securities or investing because of (representations about) transactions in covered securities. The "depended upon" prong views the allegations from the opposite perspective, the defendants', essentially asking whether the defendants' fraudulent scheme would have been successful without the (representations about) transactions in covered securities. ***

Viewing the allegations from the plaintiffs' perspective, however, asks the wrong question. By tying the "coincide" requirement to "inducement," it unnecessarily imports causation into a test whose language ("coincide") specifically disclaims it. The defendant-oriented perspective, like IPM's "depends upon" prong, is more faithful to the Court's statement that "[t]he requisite showing . . . is deception in connection with the purchase or sale of any security, not deception of an identifiable purchaser or seller." Dabit, 547 U.S. at 85 (emphasis added) (internal quotation marks omitted). Dabit's formulation focuses the analysis on the relationship between the defendants' fraud and the covered securities transaction without regard to the fraud's effect on the plaintiffs. Additionally, IPM's "depended upon" prong appears very similar to the Second Circuit's test from Romano, which found SLUSA preclusion is appropriate where "plaintiff's claims 'necessarily allege,' 'necessarily involve,' or 'rest on' the purchase or sale of securities." Romano, 609 F.3d at 522.

Though the defendant-oriented perspective is the proper point of view from which to consider the allegations, the problem we see with the test from that perspective as articulated by the Second and Eleventh Circuits is that it is too stringent a standard. Specifically, a reading of the opinions of the Sixth and Eighth Circuits on SLUSA preclusion suggests that those courts would find the "depended upon" standard to be too high a bar. The Sixth Circuit in Segal seemed to suggest that while a claim that "depended on" a securities transaction was sufficient, there were other connections that would also meet the "coincide" requirement. Segal, 581 F.3d at 310 ("Segal's allegations do not merely 'coincide' with securities transactions; they depend on them. Under these circumstances, the district court properly concluded that SLUSA requires the dismissal of this complaint." (citations omitted)); compare id. with IPM, 546 F.3d at 1349 (The "coincide" requirement is met if "a fraudulent scheme . . . coincided and depended upon the purchase or sale of [covered] securities."). In Siepel, the Eighth Circuit found that the "coincide" requirement is less stringent than a standard requiring the fraud "relate to" transactions in covered securities. Siepel, 526 F.3d at 1127; compare id. with Romano, 609 F.3d at 522 (SLUSA preclusion is appropriate where "plaintiff's claims . . . 'rest on' the purchase or sale of securities.").

In light of this, we find Ninth Circuit's test from Madden, which is that "a misrepresentation is 'in connection with' the purchase or sale of securities if there is a relationship in which the fraud and the stock sale coincide or are more than tangentially related," to be the best articulation of the "coincide" requirement. Madden, 576 F.3d at 965-66 (emphasis added and internal quotation marks omitted). This articulation nicely deals with the Court-expressed tension in Zanford that the requirement "must not be construed so broadly as to [encompass] every common-law fraud that happens to involve [covered] securities." Zandford, 535 U.S. at 820. It also heeds the Seventh Circuit's advice that "'the "connection" requirement must be taken seriously.'" Gavin, 464 F.3d at 640 (Posner, J.) (quoting Frymire-Brinati v. KPMG Peat Marwick, 2 F.3d 183, 189 (7th Cir. 1993) (Easterbrook, J.)). Lastly, it incorporates the significant policy and legislative intent considerations, all of which militate against an overbroad formulation. ***

V

***"The plaintiff is 'the master of her complaint,' and, as such, a determination that a cause of action presents a federal question depends upon the allegations of the plaintiff's well-pleaded complaint." Medina v. Ramsey Steel Co., 238 F.3d 674, 680 (5th Cir. 2001) (internal quotation marks omitted). The artful pleading doctrine is an independent corollary to the well-pleaded complaint rule: "[u]nder this principle, even though the plaintiff has artfully avoided any suggestion of a federal issue, removal is not defeated by the plaintiff's pleading skills in hiding [a] federal question." Bernhard v. Whitney Nat'l Bank, 523 F.3d 546, 551 (5th Cir. 2008). We have stated previously that the artful pleading doctrine "applies only where state law is subject to complete preemption." ***However, as the Second Circuit has noted, there is another situation where the artful pleading doctrine applies: "when Congress has . . . expressly provided for the removal of particular actions asserting state law claims in state court." Romano, 609 F.3d at 519 (citing Beneficial Nat'l Bank v. Anderson, 539 U.S. 1, 6 (2003)).

Application of the first prong is a bit tricky because SLUSA is a statute of preclusion, rather than preemption. But its effect is the same: where plaintiffs proceed as a class of fifty or more, state law securities claims are no longer available to them and federal law, which compels the dismissal of those claims, controls. Application of the second prong is straightforward. Since SLUSA expressly provides for the removal of covered class actions, it falls under the "removal" exception to the well-pleaded complaint rule. Consequently, we are free to look beyond the face of the amended complaints to determine whether they allege securities fraud in connection with the purchase or sale of covered securities.

Id. (citations and footnotes omitted); see also Segal, 581 F.3d at 310)....