                               In the

United States Court of Appeals
                  For the Seventh Circuit

No. 08-2733

D AVID K URZ and R AYMOND H EINZL, on behalf of a class,

                                                Plaintiffs-Appellants,
                                   v.


FIDELITY M ANAGEMENT & R ESEARCH C O . and FMR C O ., INC.,

                                               Defendants-Appellees.


               Appeal from the United States District Court
                   for the Southern District of Illinois.
                No. 07-cv-709-JPG—J. Phil Gilbert, Judge.


      A RGUED JANUARY 20, 2009—D ECIDED F EBRUARY 23, 2009




  Before E ASTERBROOK, Chief Judge, SYKES, Circuit Judge,
and K ENDALL, District Judge.
  E ASTERBROOK, Chief Judge. David Kurz and Raymond
Heinzl are former investors in portfolios managed by
Fidelity Management & Research Co. and FMR Co., Inc.
(We refer to the plaintiffs, and the class they represent, as



    Of the Northern District of Illinois, sitting by designation.
2                                               No. 08-2733

Kurz and the defendants as Fidelity.) Kurz filed suit in
state court, invoking state law and asserting that Fidelity
broke a contract when some of its employees placed
trades through Jeffries & Co. According to the complaint,
Jeffries bribed the employees to send business its way.
Trading through a broker that paid under the table vio-
lated the duty of “best execution” stated in rules of the
National Association of Securities Dealers (now known
just as its acronym NASD), according to the complaint.
  “Best execution”—getting the optimal combination of
price, speed, and liquidity for a securities trade, see
Jonathan R. Macey & Maureen O’Hara, The Law and
Economics of Best Execution, 6 J. Financial Intermediation
188 (1997)—affects the net price that investors pay or
receive for securities and is accordingly widely under-
stood as a subject of regulation under the Securities and
Exchange Act of 1934 and related laws, such as the In-
vestment Advisers Act of 1940 and the Investment Com-
pany Act of 1940. See, e.g., Newton v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 135 F.3d 266 (3d Cir. 1998) (en banc).
The Securities and Exchange Commission initiated a
proceeding under the Investment Company Act and the
Investment Advisers Act against Fidelity, which entered
into a consent order that governs how future trades will
be placed and executed. See In re Fidelity Management &
Research Co. & FMR Co., Inc., SEC Release No. IA-2713
(Mar. 5, 2008), available at http://www.sec.gov/litigation/
admin/2008/ia-2713.pdf.
  Like the SEC, Fidelity took the position that the miscon-
duct of its employees (more precisely, its failure to dis-
close that misconduct to investors) is a securities-law
No. 08-2733                                                3

issue and removed the proceeding to federal court
under the Securities Litigation Uniform Standards Act of
1998. The relevant part of this statute, 15 U.S.C. §78bb(f),
provides:
    (1) No covered class action based upon the statu-
    tory or common law of any State or subdivision
    thereof may be maintained in any State or Federal
    court by any private party alleging—
        (A) a misrepresentation or omission of a mate-
        rial fact in connection with the purchase or
        sale of a covered security; or
        (B) that the defendant used or employed any
        manipulative or deceptive device or contriv-
        ance in connection with the purchase or sale
        of a covered security.
    (2) Any covered class action brought in any State
    court involving a covered security, as set forth in
    paragraph (1), shall be removable to the Federal
    district court for the district in which the action
    is pending, and shall be subject to paragraph (1).
See also Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit,
547 U.S. 71 (2006) (discussing scope of 1998 Act); Kircher v.
Putnam Funds Trust, 403 F.3d 478 (7th Cir. 2005) (same),
vacated for lack of appellate jurisdiction, 547 U.S. 633
(2006). Fidelity maintained that, at least by plaintiffs’
lights, it had either misrepresented that best execution
would be achieved, or failed to disclose that best execu-
tion was not being achieved; either way, the wrong took
place “in connection with the purchase or sale” of covered
4                                               No. 08-2733

securities because it affected trades in those securities
(and potentially the net price obtained). The district
court agreed and denied Kurz’s motion to remand. 2007
U.S. Dist. L EXIS 80127 (S.D. Ill. Oct. 30, 2007). The court
later entered judgment for Fidelity, 2008 U.S. Dist. L EXIS
45332 (S.D. Ill. June 10, 2008), because Kurz filed suit
after the federal statute of limitations had run and also
was unable to show injury. (A report prepared at the
behest of Fidelity’s independent trustees was unable
to detect statistically significant effects on the costs of
execution. See ¶¶ 86 and 87 of SEC Release IA-2713; a
redacted version of the report is available on the SEC’s
web site.)
   Section 78bb(f)(3) excludes some actions from the scope
of removal and preemption. For example, a derivative
action against an issuer, under the law of the
issuer’s state of incorporation, is excluded by subsection
(f)(3)(A)(i). Kurz has not pursued a derivative claim—not
only because he did not invest in Fidelity itself but also
because he no longer holds a portfolio under Fidelity’s
management. (That Fidelity fired the misbehaving em-
ployees, none of whom was in senior management, and
cooperated with the SEC to reduce the risk of recurrence,
also would prevent resort to derivative litigation.) Kurz
does not invoke any of the 1998 Act’s other exceptions.
He contends instead that the suit rests on contract law
rather than “a misrepresentation or omission of a
material fact” and therefore does not come within the
1998 Act in the first place. He also contends that the duty
of best execution is not “in connection with the purchase
or sale” of securities. That argument is frivolous, given
No. 08-2733                                                   5

Dabit, 547 U.S. at 85–86, and SEC v. Zandford, 535 U.S. 813,
820–22 (2002). See also United States v. O’Hagan, 521
U.S. 642 (1997); United States v. Naftalin, 441 U.S. 768 (1979).
  Our opinion in Kircher observed that a genuine
contract action would be outside the scope of the 1998
Act. See 403 F.3d at 482–83. But where’s the contract? Kurz
does not contend that Fidelity broke a promise to him;
instead he depicts himself as the third-party beneficiary
of a contract between Fidelity and Jeffries, in which they
promised to obey all of NASD’s rules. When asked for
a copy of that contract, Kurz’s lawyer said that he did
not have one—and for all we know none exists. Member-
ship in NASD means being bound by its rules, but there
may be no separate contract to that effect between mem-
bers and NASD, or between one member (Fidelity) and
another (Jeffries).
  NASD’s rules themselves are part of the apparatus of
federal securities regulation. NASD is a “self-regulatory
organization”; its requirements are adopted by notice-and-
comment rulemaking (not by the mechanism of contract,
which requires consent by all affected persons) and are
subject to review and change by the SEC. See 15 U.S.C.
§78o, §78s. Some of these rules are the source of legal
duties, and not revealing to investors a failure to
comply with one’s duties about transactions in their
securities can lead to liability under the securities acts.
See O’Hagan and, e.g., Basic Inc. v. Levinson, 485 U.S. 224
(1988); Dirks v. SEC, 463 U.S. 646 (1983). This is the reason-
ing that led the SEC to think that Fidelity had violated
the Investment Company Act and the Investment
6                                                No. 08-2733

Advisers Act; it is some distance from a state-law contract
action.
  Fidelity did not break a promise to Kurz. The promise—if
there was any independent of the NASD’s rules—was
made by Fidelity’s employees to Fidelity itself. The em-
ployees promised to supply their honest services, and
didn’t. Kurz needs a way to turn the employees’ miscon-
duct into a legal claim in investors’ favor. Contract law
does not do the trick: if some of IBM’s employees take
bribes and this leads to higher prices for computers, IBM’s
customers could not sue IBM on a contract theory.
  What does produce a claim is securities law. How
Fidelity discharges its duties toward investors is a
subject requiring disclosure under federal law. And
although Fidelity itself (which is to say its top managers
and board) did not know about the defalcations
among members of the staff, and thus did not act with
the scienter required for federal securities liability, see
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), the em-
ployees who were on the take acted with eyes open.
Failure to keep one’s promises about the handling of
securities can violate federal securities law. See, e.g.,
O’Hagan (partner in a law firm violated securities law by
breaking a promise his firm made to a customer to keep
information secret and not trade); Wharf (Holdings) Ltd. v.
United Int’l Holdings, Inc., 532 U.S. 588 (2001) (making a
promise about securities with intent not to keep it is
securities fraud). Cf. Carpenter v. United States, 484 U.S. 19
(1987) (a reporter’s failure to keep a promise to his newspa-
per about dealing in securities may be punished as mail
No. 08-2733                                                 7

fraud). If any of its employees violated securities law,
Fidelity is derivatively liable under the control-person
clauses, 15 U.S.C. §78t (1934 Act), §80a–64 (Investment
Company Act), because it had the right to control the
way in which its staff executed trades.
  The district court thus was right: Kurz had a federal
securities claim, or he had nothing. And it is a bad securi-
ties claim, given the expiration of the federal statute of
limitations and the class’s inability to show loss causation.
See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).
Failure to show materiality may be another problem; we
need not decide. The judgment of the district court is
                                                   AFFIRMED .




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