U.S. Supreme Court ruling lets securities fraud class-action suits

Daily Record and the Kansas City Daily News-Press, Apr 25, 2006 by Heather Cole

A recent U.S. Supreme Court ruling gives defense attorneys involved in class-action securities fraud cases the opportunity to bounce their cases from state to federal court. The decision also means two Missouri companies - Edward Jones Inc. and A.G. Edwards & Sons Inc. - could get what is perceived as friendlier judges and juries in three securities fraud class-action cases filed against the brokerages. Defense lawyers in two Edward Jones cases and an A.G. Edwards case removed them to federal courts from state courts following the Supreme Court decision. Federal courts generally are viewed as more defendant-leaning than state courts. The March 21 U.S. Supreme Court ruling in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit closed a loophole that had allowed securities class- action cases involving holders, but not sellers or purchasers, of stocks to be heard in state courts instead of federal courts. Attorneys in corporate defense practice said the decision would force plaintiffs' attorneys to rethink strategy in securities fraud class-action suits. What [the Merrill Lynch ruling] has done is made it very very difficult to bring any kind of securities case based on state law in a class-action case, said Charles Weiss, partner in Bryan Cave's commercial litigation practice. Other attorneys downplayed the ruling's effects. I don't view this case as much of a change at all, said Don Downing, principal concentrating on commercial litigation for plaintiffs' firm Gray Ritter & Graham. It's a very rare class action where the only plaintiffs are people who would have merely held the stock.

Quick Action By April 3, Greensfelder Hemker & Gale attorneys representing Edward Jones removed two cases filed against the brokerage to federal courts: Enriquez v. Edward D. Jones & Co., which went to the U.S. District Court for the Eastern District of Missouri from the City of St. Louis Circuit Court; and Edward Jones Holders Litigation, which was moved from Superior Court of California in Los Angeles County to U.S. District Court, Central District of California. Based on the Supreme Court's ruling in Dabit, it is now clear that this action is properly removable to federal court and should be dismissed immediately, Greensfelder attorneys David Harris, James Ferrick III and David Neimeier wrote in the notice of removal for the Enriquez case. Harris declined to be interviewed about the cases. A spokeswoman for Edward Jones also declined comment, citing the firm's policy against speaking about pending litigation. A.G. Edwards' attorneys removed the Bachman case to federal court April 19, also citing Dabit in its notice of removal. The action followed a day after the company issued a statement saying the company absolutely agreed with the Supreme Court decision and was evaluating what it meant for the case. The removal apparently was intended to help defense attorneys cover their bases; A.G. Edwards' attorneys already had filed an appeal of an earlier remand to state court with the 8th U.S. Circuit Court of Appeals. That appeal left the case in the somewhat unique situation of pending before both the appeals court and St. Louis City Circuit Court at the same time. A.G. Edwards is being represented locally by Blackwell Sanders attorneys Jeffrey Kalinowski and Richard Kuhlman. Kuhlman declined to comment on the case. Plaintiffs' attorneys for the two cases in St. Louis, including Robert Blitz and Chris Bauman at Blitz Bardgett & Deutsch in St. Louis, and Jerome Congress with New York-based Milberg Weiss Bershad & Schulman did not return phones calls seeking comment. Defendants may move a case to federal court; plaintiffs are given 30 days to file a motion to remand, after which a judge will rule on the move. In all three lawsuits, defense attorneys had filed earlier removals that proved unsuccessful, with the cases remanded to circuit courts within a few months. The lawsuits against Edward Jones allege secret kickbacks from mutual fund companies to the brokerage caused a conflict of interest, which resulted in the company advising clients to hold onto investments in certain mutual fund families. The clients subsequently lost money on some of those investments, according to the lawsuits. The lawsuits were filed after Edward Jones paid $75 million in penalties in 2004 after the Securities and Exchange Commission, New York Stock Exchange and National Association of Securities Dealers investigated its revenue-sharing arrangements with seven preferred mutual fund families. Similar allegations were made in the A.G. Edwards lawsuit, which was filed after A.G. Edwards said in a May 2004 annual report filed with the SEC that both the SEC and NASD had asked for information on the brokerage's revenue sharing arrangements with mutual funds.