                            In the
 United States Court of Appeals
              For the Seventh Circuit
                        ____________

No. 04-3073
RICHARD DISHER, individually and
on behalf of all others similarly situated,
                                               Plaintiff-Appellee,
                               v.


CITIGROUP GLOBAL MARKETS
INCORPORATED,
                                            Defendant-Appellant.
                        ____________
           Appeal from the United States District Court
                for the Southern District of Illinois.
           No. 04 C 308—G. Patrick Murphy, Chief Judge.
                        ____________
     ARGUED MARCH 30, 2005—DECIDED AUGUST 17, 2005
                        ____________




  Before BAUER, RIPPLE and KANNE, Circuit Judges.
   RIPPLE, Circuit Judge. On March 22, 2004, Richard Disher
filed this action as a state-law putative class action against
Citigroup Global Markets Incorporated, formerly known as
Salomon Smith Barney (“SSB” or “Smith Barney”). SSB
timely removed the case to the district court on the basis of
federal question jurisdiction, see 28 U.S.C. § 1331; diversity
2                                                  No. 04-3073

of citizenship jurisdiction, see id. § 1332; jurisdiction related
to bankruptcy proceedings, see id. § 1334(b); and preemption
under the Securities Litigation Uniform Standards Act
(“SLUSA”), see 15 U.S.C. § 78bb(f). On Mr. Disher’s motion,
the district court remanded the case to state court. For the
reasons set forth in the following opinion, we now reverse
the judgment of the district court and remand the case for
further proceedings.


                               I
                      BACKGROUND
A. State-Law Suit
  Mr. Disher was a customer of SSB, which operated as a
full-service securities firm. He purchased shares of MCI
WorldCom Incorporated between April 16, 1998, and March
5, 1999. He also purchased shares of Rhythms
Netconnections Inc. on August 11, 1999. As part of its ser-
vices for its customers, SSB issued investment research
reports and ratings on a stock’s future performance. The
subject of Mr. Disher’s complaint included unspecified
stocks researched and rated by SSB’s Internet and Telecom-
munications research groups.
  SSB represented that its reports employed a five-point rat-
ing system: “buy,” “outperform,” “neutral,” “underper-
form” and “sell.” R.2 at 3. Mr. Disher’s complaint alleged
that “no later than March 2000,” SSB “secretly abandoned its
published five-point rating system and instead utilized a de
facto three-point system (‘buy,’ ‘outperform,’ and ‘neutral’).”
Id. at 5. Specifically, a neutral recommendation allegedly was
a coded message from SSB to certain institutional customers
to sell a security. Also, instead of assigning an
underperform or sell rating for a particular stock, SSB
No. 04-3073                                                  3

allegedly would stop covering that stock, with no public
announcement or explanation. Thus, the complaint alleged,
SSB’s research ratings did not reflect its actual beliefs
concerning the future performance of a stock.
  The gravamen of the complaint was that SSB’s misleading
ratings induced Mr. Disher and class members to continue
holding their securities in reliance on SSB’s positive ratings
when SSB’s analysts no longer believed that such ratings
were warranted. In addition, SSB also allegedly used its
research reports, ratings and recommendations of certain
stock to attract new, and to retain current, investment bank-
ing clients “by agreeing to issue a research rating for [those
clients’] stock more favorably than Smith Barney’s research
warranted.” Id. at 6.
  Mr. Disher defined the putative class to include himself
and “all customers of Smith Barney who held one or more
of the Internet or Telecom Stocks in their Smith Barney ac-
counts at times when those stocks were declining in value
and when Smith Barney was rating those stocks as ‘buy’
‘outperform’ or ‘neutral’ when such ratings were not war-
ranted by Smith Barney’s research.” Id. at 8. The complaint
specifically excluded “any claims based on Smith Barney’s
conduct in connection with Plaintiff’s or any Class mem-
ber’s purchases or sales of any of the Internet Stocks or
Telecom Stocks.” Id. (emphasis added).


B. District Court Proceedings
  SLUSA provides for the removal to federal court of certain
class actions based on state law in which the plaintiffs allege
“a misrepresentation or omission of a material fact in
connection with the purchase or sale of a covered security.” 15
U.S.C. § 78bb(f) (emphasis added). The district court ruled
that SLUSA did not apply in this case because the alleged
4                                                  No. 04-3073

misconduct was not connected sufficiently to any purchase
or sale of stock. Rather, the complaint alleged harm solely
from the retention of securities in reliance on SSB’s mislead-
ing research reports and ratings. The district court also
concluded that there was no basis for removal under the
general removal statute, 28 U.S.C. § 1441.


                               II
                        DISCUSSION
A. Standard of Review
  A district court’s decision regarding the propriety of
removal is a question of federal jurisdiction that we review
de novo. Boyd v. Phoenix Funding Corp., 366 F.3d 524, 529
(7th Cir. 2004). We also apply de novo review to the district
court’s interpretation of SLUSA. Merrill Lynch, Pierce, Fenner
& Smith, Inc. v. Lauer, 49 F.3d 323, 326 (7th Cir. 1995).


B. Removal and Preemption under SLUSA
  On appeal, SSB challenges the district court’s conclusion
that Mr. Disher’s action did not fall within SLUSA’s pre-
               1
emptive scope.




1
  Because, for the reasons we shall discuss in this opinion, we
hold that Mr. Disher’s cause of action is subject to removal and
preemption under SLUSA, we have no occasion to address
whether we have jurisdiction to review the district court’s re-
mand order, or to evaluate the merits of that order, with respect
to the absence or presence of federal jurisdiction on any basis
other than SLUSA.
No. 04-3073                                                    5

                               1.
  As a threshold matter, Mr. Disher contends that we lack
appellate jurisdiction over this matter because the district
court remanded the case for lack of subject matter jurisdic-
tion. See 28 U.S.C. § 1447(d). This court already has deter-
mined that a district court’s remand of a case to state court
based on SLUSA is appealable. See Kircher v. Putnam Funds
Trust (“Kircher I”), 373 F.3d 847 (7th Cir. 2004). The sub-
stance of Mr. Disher’s submissions in this case were ad-
dressed in Kircher I, and we decline to revisit this court’s
decision.


                               2.
  SLUSA is the most recent in a line of federal securities
statutes that originated with the enactment of the Securities
Act of 1933 (“1933 Act”), 15 U.S.C. § 77a et seq., and the
Securities Exchange Act of 1934 (“1934 Act”), 15 U.S.C. § 78a
et seq. See Riley v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
292 F.3d 1334, 1340 (11th Cir.), cert. denied, 537 U.S. 950
(2002). Section 10(b) of the 1934 Act made it “unlawful for
any person . . . [t]o use or employ, in connection with the
purchase or sale of any security registered on a national
securities exchange or any security not so registered, any
manipulative or deceptive device or contrivance in contra-
vention of such rules and regulations as the [Securities
Exchange Commission (‘SEC’)] may prescribe.” 15 U.S.C.
§ 78j(2)(b) (emphasis added). The SEC then promulgated
Rule 10b-5, which provides:
    It shall be unlawful for any person, directly or indi-
    rectly, by the use of any means or instrumentality of
    interstate commerce, or of the mails or of any facility of
    any national securities exchange,
6                                                 No. 04-3073

    (a) To employ any device, scheme or artifice to defraud,
    (b) To make any untrue statement of a material fact or
    to omit to state a material fact necessary in order to
    make the statements made, in the light of the circum-
    stances under which they were made, not misleading, or
    (c) To engage in any act, practice, or course of business
    which operates or would operate as a fraud or deceit
    upon any person, in connection with the purchase or sale of
    any security.
17 C.F.R. § 240.10b-5 (emphasis added). In 1995, Congress
enacted the Private Securities Litigation Reform Act
(“PSLRA”), 15 U.S.C. §§ 77z-1, 78u, to protect against merit-
less shareholder suits that were being initiated for the sole
purpose of obtaining large attorneys’ fees through private
settlements. See Spielman v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 332 F.3d 116, 122 (2d Cir. 2003). To achieve this
aim, the PSLRA imposed heightened pleading standards
and mandatory stays of discovery for securities fraud class
actions filed in federal court. Id.
  After the enactment of the PSLRA, plaintiffs increasingly
began to file suits in state courts under state securities law.
Id. at 123. Congress responded by enacting SLUSA. Kircher
v. Putnam Funds Trust (“Kircher II”), 403 F.3d 478, 482 (7th
Cir. 2005) (“SLUSA is designed to prevent plaintiffs from
migrating to state court in order to evade rules for federal
securities litigation in the [PSLRA].”). SLUSA attempts
to close this “ ‘federal flight’ loophole” by making federal
courts the exclusive forum for class actions alleging fraud in
the sale or purchase of covered securities and by mandating
that federal law governs such class actions. Spielman, 332
F.3d at 123. To that end, SLUSA contains the following
preemption and removal provisions:
    (1) Class action limitations
No. 04-3073                                                       7
                                     [2]
          No covered class action based upon the statutory
          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
              material fact in connection with the purchase or
                                          [3]
              sale of a covered security; or


2
    SLUSA defines the term “covered class action” as
      (i) any single lawsuit in which—
            (I) damages are sought on behalf of more than 50
          persons or prospective class members, and questions of
          law or fact common to those persons or members of the
          prospective class, without reference to issues of indi-
          vidualized reliance on an alleged misstatement or omis-
          sion, predominate over any questions affecting only
          individual persons or members; or
             (II) one or more named parties seek to recover dam-
          ages on a representative basis on behalf of themselves
          and other unnamed parties similarly situated, and ques-
          tions of law or fact common to those persons or members
          of the prospective class predominate over any questions
          affecting only individual persons or members; or
      (ii) any group of lawsuits filed in or pending in the same
      court and involving common questions of law or fact, in
      which—
          (I) damages are sought on behalf of more than 50
          persons; and
          (II) the lawsuits are joined, consolidated, or otherwise
          proceed as a single action for any purpose.
15 U.S.C. § 78bb(f)(5)(B).
3
    SLUSA defines the term “covered security” as
      a security that satisfies the standards for a covered security
                                                     (continued...)
8                                                      No. 04-3073

                (B) that the defendant used or employed any
              manipulative or deceptive device or contrivance
              in connection with the purchase or sale of a
              covered security.
    (2) Removal of covered class actions
         Any covered class action brought in any State court
         involving a covered security, as set forth in para-
         graph (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).
                              4
15 U.S.C. § 78bb(f)(1)-(2).


                                  3.
  A defendant may remove a case to federal court only if
the federal district court would have original subject matter
jurisdiction over the action. 28 U.S.C. § 1441; Caterpillar Inc.



(...continued)
    specified in paragraph (1) or (2) of section 18(b) of the
    Securities Act of 1933 [15 U.S.C. § 77r(b)], at the time during
    which it is alleged that the misrepresentation, omission, or
    manipulative or deceptive conduct occurred . . . .
15 U.S.C. § 78bb(f)(5)(E). Section 77r(b)(2), in turn, states:
    A security is a covered security if such security is a security
    issued by an investment company that is registered, or that
    has filed a registration statement, under the Investment
    Company Act of 1940.
15 U.S.C. § 77r(b)(2).
4
  SLUSA amended both the 1933 Act, see 15 U.S.C. § 77p, and the
1934 Act, see id. § 78bb(f). The amendments are functionally
identical; for ease of reference, we shall cite only the 1934 Act
codification.
No. 04-3073                                                   9

v. Williams, 482 U.S. 386, 392 (1987). The party seeking
removal has the burden of establishing federal jurisdiction.
Boyd, 366 F.3d at 529. As a general rule, the plaintiff is the
master of his own complaint and can avoid federal question
jurisdiction by pleading exclusively state-law claims. Bastien
v. AT&T Wireless Servs., Inc., 205 F.3d 983, 986 (7th Cir. 2000)
(citing Franchise Tax Bd. v. Constr. Laborers Vacation Trust for
S. Cal., 463 U.S. 1, 10 (1983)). Ordinarily, when a claim arises
under state law, the assertion of federal preemption as a
defense will not create federal jurisdiction. Id.
  “Congress has, however, created certain exceptions to” the
well-pleaded complaint rule. Beneficial Nat’l Bank v. Ander-
son, 539 U.S. 1, 6 (2003). The Supreme Court has declared
that “a state claim may be removed to federal court in only
two circumstances—when Congress expressly so
provides . . . or when a federal statute wholly displaces the
state-law cause of action through complete pre-emption.” Id.
at 8. SLUSA expressly provides for the removal to federal
court of covered fraud claims that are “in connection with
the purchase or sale of a covered security.” 15 U.S.C.
§ 78bb(f)(2).
  SLUSA does not, however, preclude all securities fraud
actions based on state law. To invoke SLUSA, the removing
party must show: (1) that the action is a “covered class
action” for purposes of SLUSA; (2) that the action purports
to be based on state law; (3) that the defendant is alleged to
have misrepresented or omitted a material fact (or to have
employed a manipulative device or contrivance); and (4)
that the defendant’s alleged conduct was “in connection
with the purchase or sale of a covered security.” 15 U.S.C.
§ 78bb(f)(1)-(2); Green v. Ameritrade, Inc., 279 F.3d 590, 596
(8th Cir. 2002). The primary issue in this case concerns
whether or not Mr. Disher’s state-law class action complaint
alleged misrepresentations that were “in connection with
10                                                No. 04-3073

the purchase or sale” of securities. Mr. Disher contends that
this action falls outside the scope of SLUSA because the
complaint alleges that SSB’s misrepresentations caused him
and other class members to hold securities, not to purchase
or sell them. Moreover, the complaint specifically disavows
any claim related to the purchase or sale of stock.
   SLUSA does not define “in connection with the purchase
or sale of a covered security.” The Supreme Court has not
yet had occasion to consider this phrase in the context of
SLUSA. For guidance, then, this court and other courts of
appeals have relied on Supreme Court case law construing
the identical phrase in the context of section 10(b) of the
1934 Act and Rule 10b-5. See Kircher II, 403 F.3d at 482-84
(collecting cases). The analogy to section 10(b) and Rule 10b-
5 is appropriate because, in enacting SLUSA, Congress “was
using language that, at the time of SLUSA’s enactment, had
acquired settled, and widely-acknowledged, meaning in the
field of securities law, through years of judicial construction
in the context of § 10b-5 lawsuits.” Riley, 292 F.3d at 1342-43.
Analogizing to the case law interpreting section 10(b) also
makes sense, in terms of our obligation to interpret the
statute so as to give effect to the intent of Congress, because
“SLUSA can do its job only if subsection (b) covers those
claims that engage Rule 10b-5 (and thus come within the
1995 statute) if presented directly under federal law.”
Kircher II, 403 F.3d at 482.
  The Supreme Court has limited the universe of investors
who may bring private securities fraud actions under the
statute. In Blue Chip Stamps v. Manor Drug Stores, 421 U.S.
723 (1975), the Court held that investors who neither
purchase nor sell securities have no standing to maintain
private litigation to recover damages under section 10(b)
and Rule 10b-5, even if the failure to purchase or sell was the
result of fraud. Mr. Disher submits that, under Blue Chip
No. 04-3073                                                   11

Stamps, because claims related solely to the retention of se-
curities, as opposed to a purchase or sale, are not cognizable
under section 10(b), such claims also are not preempted by
SLUSA. This position has the support of some of our sister
courts of appeals. See Dabit v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 395 F.3d 25, 43 (2d Cir. 2005) (“[I]n enacting
SLUSA Congress sought only to ensure that class actions
brought by plaintiffs who satisfy the Blue Chip purchaser-
seller rule are subject to the federal securities laws.”); Green,
279 F.3d at 598; Riley, 292 F.3d at 1345.
  However, this court recently has concluded that SLUSA’s
“in connection with the purchase or sale of a covered
security” requirement does not incorporate the Blue Chip
Stamps standing rule. See Kircher II, 403 F. 3d at 483-84. Our
opinion in Kircher II was issued after the district court’s
decision in this case and, indeed, after briefing and oral
arguments on appeal. In Kircher II, one of the plaintiffs’
classes was defined as all investors who held the defendant
mutual fund’s securities during a defined period and did
not purchase or sell shares during that period. See id. at 483.
We held that the claims were “connected to their own
purchase of securities” and thus were blocked by SLUSA.
We explained:
    Decisions since Blue Chip Stamps reiterate that it deals
    with private actions alone and does not restrict coverage
    of the statute and regulation. See United States v.
    O’Hagan, 521 U.S. 642, 664, 117 S. Ct. 2199, 138 L.Ed.2d
    724 (1997); Holmes v. SIPC, 503 U.S. 258, 284, 112 S. Ct.
    1311, 117 L.Ed.2d 532 (1992); United States v. Naftalin,
    441 U.S. 768, 774 n.6, 99 S. Ct. 2077, 60 L.Ed.2d 624
    (1979). By depicting their classes as containing entirely
    non-traders, plaintiffs do not take their claims outside
    § 10(b) and Rule 10b-5; instead they demonstrate only
    that the claims must be left to public enforcement. It
12                                                 No. 04-3073

     would be more than a little strange if the Supreme
     Court’s decision to block private litigation by non-
     traders became the opening by which that very litiga-
     tion could be pursued under state law, despite the
     judgment of Congress (reflected in SLUSA) that securi-
     ties class actions must proceed under federal securities
     law or not at all. Blue Chip Stamps combined with
     SLUSA may mean that claims of the sort plaintiffs want
     to pursue must be litigated as derivative actions or
     committed to public prosecutors, but this is not a good
     reason to undercut the statutory language.
Kircher II, 403 F.3d at 483-84. Mr. Disher’s class definition of
all SSB customers who retained certain securities in reliance
on SSB’s misrepresentations is no more narrowly drawn
than the class definitions discussed in Kircher II. Thus, we
must conclude that the present claims are connected
sufficiently to the purchase and sale of a covered security
for the purposes of SLUSA preemption and removal.


                         Conclusion
  Accordingly, we reverse the judgment of the district court
and remand with instructions to vacate the remand order
and to dismiss Mr. Disher’s claims. SSB may recover its
costs on this appeal.
                                   REVERSED and REMANDED
No. 04-3073                                            13

A true Copy:
       Teste:

                      _____________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit




                USCA-02-C-0072—8-17-05
