Broyles v. Cantor Fitzgerald & Co., 10-854-JJB-SCR, 2011 WL 4737197 (M.D. La. Oct. 5, 2011).

In this case, Louisiana federal court found that minimal diversity was established because the class definition and the allegations from the complaint indicated that a class likely consisted of members who were outside the state of Louisiana.

The plaintiff, Joseph Broyles, filed this action in the 19th Judicial District Court for the Parish of East Baton Rouge against Cantor Fitzgerald & Co., Commonwealth Advisors, Inc., and some individuals (collectively, “Commonwealth”). Broyles sought damages resulting from alleged wrongful investment transactions involving a collateralized debt obligation (“CDO”). 

Broyles alleged that in 2006, he retained Commonwealth to be his investment advisor for his diversified portfolio consisting of stocks, bonds mutual funds, asset-backed securities, and money markets. Based on Commonwealth’s representations, Broyles allowed Commonwealth to liquidate his individual investment assets and purchase interest in certain pooled-asset funds created and managed exclusively, which are collectively referred to as the CA Funds. Broyles alleged that CA Funds were comprised in part of subprime residential mortgage-backed securities. With the market downturn in 2007, Commonwealth implemented a plan to maintain and/or inflate the apparent value of the ownership interest in the CA Funds, which would be reflected on the investment statements. Broyles alleged that Commonwealth mismanaged his retirement funds, made misrepresentations of material fact, and violated Louisiana Blue Sky Law, LSA-R.S. 51:701, breached its contract, and breached its fiduciary duty among other things.

The defendant, Cantor Fitzgerald, removed this action under 28 U.S.C. § 1441(b), federal question, based on the Securities Litigation Uniform Standards Act, 15 U.S.C. § 78bb (“SLUSA”) arguing that this case was a covered class action involving a covered security and thus, removable under § 78bb (f)(2). The defendants alternatively argued that removal was proper based on diversity jurisdiction under CAFA. 

Broyles filed a motion to remand.

Broyles initially argued that the defendant’s notice of removal did not establish minimal diversity under CAFA because Cantor Fitzgerald failed to properly allege its citizenship as a partnership. Broyles asserted that Cantor Fitzgerald was required to show that it did not have a partner who was a Louisiana citizen. The Court noted that in this case, it was undisputed that Broyles was a Louisiana citizen and Cantor Fitzgerald was a New York citizen. These facts, the Court concluded, established the required minimal diversity under 28 U.S.C. § 1332(d)(10).

The defendants alternatively argued that minimal diversity could be established between a non-Louisiana putative class member and another defendant, Walter A. Morales, III, who was a Louisiana citizen. The Court found that the citizenship of the members did not determine the citizenship of the pension funds when jurisdiction was based on CAFA. While it was likely that those pension funds were organized under Texas law and had their principal place of business in Texas, the Court found that it was the defendants’ obligation to plead the jurisdiction facts with particularity. The Court observed that the defendants failed to do so here.

The defendants also argued that the minimal diversity exists based on Broyles’ class definition and other allegations in his petition. By definition, the proposed class was not limited to citizens of Louisiana; and Broyles alleged that it “is believed that at least 1/3 of them live[d] in Louisiana.” Broyles argued that this was not an affirmative statement that the proposed class included non-Louisiana citizens. Although, this might be correct linguistically, the Court remarked that the obvious and only reasonable inference from this allegation was that the remaining proposed class members lived in other states. Accordingly, the Court ruled that the defendants had shown that by reference to Broyles’ allegations in his petition, that there was minimal diversity of citizenship to support CAFA jurisdiction.

Because the Court found that minimal diversity existed, Broyles argued that local controversy or the security case exception applied here. The Court noted that under the securities case exception, certain securities-related class actions that solely involved a claim concerning a covered security as defined under § 16(f)(3) of the Securities Act of 1933, were excepted from CAFA. 

As to local controversy exception, Broyles supplied information to establish that the number of Louisiana investors in each of the CA Funds exceeded two-thirds of the total number of investors in those funds. Because the class definition included investors who suffered financial losses if they invested in any of the CA Funds in which the plaintiff was invested. Moreover, the class definition included persons who suffered financial losses – even if they did not invest in any Commonwealth-managed fund – so long as the financial loss was caused by the tortious actions of any defendant. Given the breath of his class definition, the Court concluded that Broyles had not established that more than two-thirds of the members of the proposed class were Louisiana citizens, hence, local controversy exception was not applicable.

As to securities exception, the Court found that Broyles failed to cite a statute or court decision, which persuasively supported the application of the exception of the case.

Accordingly, the Court found that the removal was appropriate under CAFA. The Court similarly found for SLUSA as well.