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In a decision that could encourage attempts to litigate private securities cases before state judges, the Ninth Circuit U.S. Court of Appeals on Monday kicked an unfair competition suit out of federal court. The California case was filed against numerous investment banks over the marketing of callable certificates of deposits, which are regulated by the New York Stock Exchange. Though the case was removed to the Northern District, a unanimous panel agreed that the suit — brought under Business and Professions Code § 17200 — alleged state violations sufficiently enough to avoid federal jurisdiction. “That the specific goal of protecting California customers from dishonest business practices, whether by brokers or otherwise, may comport with the broader regulatory goals of Exchange Act and certain NYSE rules and regulations is not enough to sweep” the case into federal court, Senior Judge Alfred Goodwin wrote. He was joined by Chief Judge Mary Schroeder and Judge Richard Clifton. Only federal courts have jurisdiction over violations of federal securities law. But those same laws do not necessarily pre-empt state law. More and more, plaintiffs are trying to avoid federal court by alleging violations of state law for the same underlying conduct. “The reason why this is important is because many of the defendants in these cases have been trying to remove to federal court,” said Corte Madera lawyer George Trevor. Trevor represents John Lippitt, who filed the case as a private attorney general under 17200. Lippitt had good reason to fight the suit — federal law does not recognize private actions like Lippitt’s, and if it had stayed in federal court, the case would have disappeared. In a minor victory for the defense, the panel said that should not be a factor when determining where the case should be litigated. U.S. District Judge Vaughn Walker decided it was a federal case. Goodwin, though calling Walker “able and experienced” and deriding parts of the complaint as one that “may shock environmentalists keen on saving trees,” nevertheless ruled that the complaint alleged state laws sufficiently to stay in state court, even if the conduct was also regulated by federal market watchers. Cases related to the nation’s securities laws can be automatically removed to federal court. Once there, a federal judge decides whether the complaint alleges legitimate state law claims. It is common for defendants to remove cases to federal court. “There’s been a move afoot in Congress to take away power from the states,” said Trevor, of Trevor & Weixel. “Defendants want to federalize the whole bunch” of state claims. One concern of the defense bar is that suits attacking regulatory schemes will create a state-by-state patchwork of rules for the nation’s financial institutions to track. “They’ve [the NYSE and the National Association of Securities Dealers] addressed it. They’ve laid down the rules for everybody to follow nationwide. It’s not a good idea for individual states to be jumping into the fray,” said Orrick, Herrington & Sutcliffe partner William Alderman, who represented Salomon Smith Barney Inc., one of the sued brokers. As to whether plaintiffs attorneys would use the case to bring cases beyond those covered by regulatory decisions, Alderman said he’d have to wait and see. “We think this one went too far,” Alderman said. “And we’ll just have to see about the next one.” The case is Lippitt v. James Financial Services, 03 C.D.O.S. 7669.

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