Judge Paul Gardephe

Reserve Management Co. Inc. (RMCI) was investment advisor for the Reserve Primary Fund a money market fund that held $62.5 billion in assets before Sept. 2008. From 2002 through Sept. 2008 law firm Willkie Farr and Gallagher (WFG) advised RMCI and the Fund on the Investment Company Act of 1940. Lehman Brothers’ 2008 bankruptcy announcement led to a run on the Fund. RCMI’s legal malpractice suit—removed from state court—alleged that at the time of Lehman’s bankruptcy WFG provided incompetent advice to RCMI that subjected it to an SEC enforcement action. RCMI also alleged that WFG was conflicted because of undisclosed simultaneous representation of it and the Fund. District court denied remand. To prove causation RMCI must prove it did not violate federal securities law. If it violated the Exchange or Adviser acts—as alleged by the SEC—it would not be entitled to indemnification from the Fund, even if it had a contractual right to indemnifications. RMCI’s incompetent advice claim also requires a showing that it did not violate federal securities laws. Thus RMCI’s legal malpractice claims raised ” a stated federal issue, actually disputed and substantial” under Grable & Sons Metal Prods. Inc. v. Darue Eng’g & Mfg.