                              In the

United States Court of Appeals
               For the Seventh Circuit

No. 11-1785

C HRISTOPHER B ROWN, individually and
    on behalf of a class,
                                                  Plaintiff-Appellant,
                                  v.

JOHN P. C ALAMOS, S R., trustee of Calamos Convertible
   Opportunities and Income Fund, et al.,

                                               Defendants-Appellees.


             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
               No. 10 C 6558—Elaine E. Bucklo, Judge.



  A RGUED S EPTEMBER 22, 2011—D ECIDED N OVEMBER 10, 2011




  Before P OSNER, FLAUM, and SYKES, Circuit Judges.
  P OSNER, Circuit Judge. The Securities Litigation Uni-
form Standards Act of 1998 (SLUSA) prohibits secu-
rities class actions if the class has more than 50 members,
the suit is not exclusively derivative, relief is sought on
the basis of state law, and the class action suit is brought
by “any private party alleging a misrepresentation or
2                                                 No. 11-1785

omission of a material fact in connection with the pur-
chase or sale of a covered security.” 15 U.S.C. § 78bb(f)(1),
amending Securities Exchange Act of 1934; see also
§ 77p(b)(1), amending, in materially identical language,
the Securities Act of 1933. A “covered security” is a
security traded nationally and listed on a regulated
national exchange. 15 U.S.C. § 78bb(f)(5)(E).
   If such a suit is brought in a state court the defendant
can remove it to federal district court and move to
dismiss it. § 78bb(f)(2). And since “SLUSA is designed
to prevent plaintiffs from migrating to state court in
order to evade rules for federal securities litigation in
the Private Securities Litigation Reform Act of 1995,”
Kircher v. Putnam Funds Trust, 403 F.3d 478, 482 (7th Cir.
2005), vacated and remanded on other grounds, 547
U.S. 633 (2006); see also id. at 636; Merrill Lynch, Pierce,
Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 82 (2006); Gavin v.
AT&T Corp., 464 F.3d 634, 640 (7th Cir. 2006); Michael A.
Perino, “Fraud and Federalism: Preempting Private State
Securities Fraud Causes of Action,” 50 Stan. L. Rev. 273
(1998), the district judge must grant the motion.
§ 78bb(f)(2). The question presented by this appeal is
whether the judge was correct to find that the plain-
tiff’s complaint alleged the misrepresentation or omis-
sion of a material fact in connection with the purchase
or sale of a covered security and that therefore SLUSA
forbade the suit. The district judge, agreeing, dismissed
the suit, with prejudice, without first deciding whether to
certify the class. 777 F. Supp. 2d 1128, 1132 (N.D. Ill. 2011).
  The class consists of the owners of the common stock
of Calamos Convertible Opportunities and Income Fund,
No. 11-1785                                             3

a closed-end investment fund, which is to say a fund in
which the owners of the fund’s common stock are not
permitted to redeem their shares, unlike investors in
an open-ended fund, who can at any time cash out their
fractional share of the fund’s assets. The common share-
holders of a closed-end investment fund are thus
the owners of a corporation whose principal assets are
investments.
  Besides issuing common stock, the fund in this case
issued shares of preferred stock that specified an
interest rate (the interest on preferred stock is called a
“dividend,” but functionally it is interest rather than
an equity return) recomputed at short intervals (35 days
was the longest) through an auction process. The partici-
pants in such an auction bid for preferred stock. The
bidder who submits the highest bid, and therefore
accepts the lowest interest rate (because the yield of a
fixed-income security is inversely related to its price),
becomes the owner of the preferred stock. Such stock is
called “auction market preferred stock” (“AMPS”).
  The auctions give the owners of the preferred stock
liquidity; for they can sell the stock at the auctions,
which as we said are (or rather were) frequent. And
although preferred stock is actually a form of bond, like
common stock it does not have a maturity date, as almost
all bonds do, though there are such things as perpetual
bonds—most famously the consols issued by the British
government beginning in 1751 and still a component,
though nowadays a minor one, of the United Kingdom’s
public debt.
4                                             No. 11-1785

  The money that the fund’s common shareholders had
paid the fund for their stock was pooled with the
money paid by the preferred shareholders for their
shares (the AMPS), and the pool of money was invested.
The earnings from the investments, minus the fund’s
expenses, including the interest expense paid to the
preferred shareholders, enured to the benefit of the com-
mon shareholders as the fund’s owners. The com-
plaint alleges that at first this was a good deal for the
common shareholders because interest rates on AMPS
were very low, so that the fund was borrowing on the
cheap and using the borrowed money to buy invest-
ments that generated a much higher return than the
AMPS interest rates. This was leverage in operation: If
you lend $100 of your own money at 5 percent, your
rate of return is 5 percent, but if you borrow another
$100 at 2 percent, and lend the $200 you now have at
5 percent, you increase your earnings from $5 to $8 ($200
x .05 = $10; $100 x .02 = $2; $10 – $2 = $8), and thus the
rate of return on your investment of $100 rises from
5 percent ($5/$100) to 8 percent ($8/$100). (For a lucid
description of the market for closed-end investment
funds’ AMPS and the market’s demise, see Investment
Company Institute, 2011 Investment Company Fact Book,
ch. 4, pp. 57-60 (51st ed. 2011).)
   The complaint alleges among other things that “the
Fund’s public statements indicated that the holders of
its common stock could realize, as one of the significant
benefits of this investment, leverage that would con-
tinue indefinitely, because . . . the term of the AMPS was
perpetual.” Although as we said preferred stock despite
No. 11-1785                                            5

the name is a form of debt, it is perpetual debt in the
sense of not having a maturity date, that is, a date on
which the lender is entitled to be repaid. But it isn’t
really “perpetual,” as we’re about to see.
  When the financial system fell into crisis in 2008, the
auction-market preferred-stock market failed; not enough
investors wanted to buy AMPS. This should not have
made a difference to the defendant fund’s common share-
holders. The preferred shareholders, the owners of the
AMPS, being unable to sell their AMPS were stuck with
the interest rate set at the last auction before the
auction market collapsed, and that interest rate was
low. But the owners were of course upset and the fund,
though it had no duty to do so, redeemed their
shares—and indeed at a price above market value.
The fund replaced the AMPS money, but with money that
was not only borrowed at higher interest rates but bor-
rowed short term, which increased the risk to the fund,
since it no longer had a secure capital base beyond what
the common shareholders had paid for their shares.
  The complaint alleges that the reason the fund
redeemed the AMPS, despite the untoward conse-
quences for the common shareholders, was that Calamos
Advisors—the fund’s parent and a codefendant—
wanted to curry favor with the investment banks and
brokerage houses that were facing lawsuits both from
regulatory agencies and from disappointed customers
who had purchased the AMPS thinking their invest-
ment would always be liquid. For example, the Swiss
banking giant UBS agreed to buy back many AMPS at par.
6                                              No. 11-1785

See In re UBS Auction Rate Securities Litigation, No. 08 CV
2967 (LMM), 2009 WL 860812 (S.D.N.Y. Mar. 30, 2009).
  Calamos Advisors managed multiple funds and relied
on the banks and brokers to market shares in its future
funds (because its funds were closed end, there was no
occasion to market shares in the current funds), and so
needed to maintain the good will of those entities. And so
the parent sold its child (actually one of its 20 chil-
dren)—the Calamos Convertible Opportunities and
Income Fund—down the river, in breach of its fiduciary
obligations to the fund’s common shareholders, in order
to placate banks and brokers. The suit names as addi-
tional defendants the members of the parent’s board of
trustees, whose job it was to make sure that the parent
dealt fairly with the investors in each and every fund.
   The plaintiff is emphatic that this is a suit for breach
of fiduciary obligation and not for securities fraud—and
in fact the complaint contains the following disclaimer:
“Plaintiff does not assert by this action any claim
arising from a misstatement or omission in connection
with the purchase or sale of a security, nor does plaintiff
allege that Defendants engaged in fraud in connection
with the purchase or sale of a security.” Nevertheless
the passage we quoted earlier from the complaint—“the
Fund’s public statements indicated that the holders of
its common stock could realize, as one of the significant
benefits of this investment, leverage that would continue
indefinitely, because . . . the term of the AMPS was per-
petual”—is interpreted most naturally as alleging a
misrepresentation: that the AMPS would never be re-
No. 11-1785                                                 7

deemed. The quoted passage doesn’t say this in so
many words, but a reasonable jury might find that
the passage insinuated that a significant benefit of in-
vesting in the fund was that the investor would ob-
tain leverage indefinitely because the AMPS had no
maturity date.
  A misleading omission is also alleged, at least
implicitly: the omission to state that the fund might at
any time redeem AMPS on terms unfavorable to the
common shareholders because motivated by the broader
concerns of the entire family of 20 Calamos mutual
funds—in other words an allegation of failure to
disclose a conflict of interest that if disclosed would
have given pause to potential investors.
  Should we stop here and affirm because the com-
plaint can be interpreted as “alleging a misrepresenta-
tion or [in fact, and] omission of a material fact in con-
nection with the purchase or sale of a covered security”?
That is the approach—call it the literalist approach to
SLUSA—taken by the Sixth Circuit in Atkinson v. Morgan
Asset Management, Inc., No. 09-6265, 2011 WL 3926376, at *4
(6th Cir. Sept. 8, 2011), and Segal v. Fifth Third Bank, N.A.,
581 F.3d 305, 311 (6th Cir. 2009). The plaintiff urges the
contrary approach taken by the Third Circuit in LaSala
v. Bordier et Cie, 519 F.3d 121, 141 (3d Cir. 2008)—that if
proof of a misrepresentation or of a material omission
is inessential to the plaintiff’s success, the allegation is
no bar to the suit. LaSala, following the Third Circuit’s
earlier decision in Rowinski v. Salomon Smith Barney Inc.,
398 F.3d 294, 300 (3d Cir. 2005), distinguishes, however,
8                                                 No. 11-1785

between an inessential factual allegation (“an extraneous
detail”—“complaints are often filled with more informa-
tion than is necessary . . . [;] the inclusion of such extrane-
ous allegations does not operate to require that
the complaint must be dismissed under SLUSA”) and a
factual allegation that while not a necessary element of
the plaintiff’s cause of action could be critical to his
success in the particular case. The former type of factual
allegation does not doom the suit, but the latter does.
Were it not for this qualification, which limits “inessen-
tial,” a plaintiff could evade SLUSA by making a claim
that did not require a misrepresentation in every case,
such as a claim of breach of contract, but did in the par-
ticular case. (We thus disagree with the statement in
Segal, 581 F.3d at 311, that LaSala contradicts Rowinski.)
This may be such a case, as we’ll see.
  An intermediate approach, adopted by the Ninth
Circuit in Stoody-Broser v. Bank of America, No. 09-17112,
2011 WL 2181364, at *1 (9th Cir. June 6, 2011), takes off
from the literalist approach of Atkinson and Segal
but allows the removed suit to be dismissed without
prejudice, thus permitting the plaintiff to file an
amended complaint that contains no allegation of a
misrepresentation or misleading omission and so cannot
be removed under SLUSA. We are doubtful about this
approach. No longer in American law do complaints
strictly control the scope of litigation; a plaintiff might
be allowed by a state court to reinsert fraud allegations
in the course of a litigation initiated by a fresh state-
court complaint after dismissal of the removed suit, and
No. 11-1785                                                9

press them at trial. If the new complaint alleged fraud, the
case could again be removed, and this time presumably
would be dismissed with prejudice. But fraud might
have been injected into the new state-court suit long
after the complaint in that suit had been filed; and to
allow removal of a complex commercial case after, maybe
long after, the pleadings stage had been concluded would
increase the length and cost of litigation unreasonably.
  There is no merit to the suggestion that dismissal of a
removed suit on the ground that the suit is barred by
SLUSA is jurisdictional and therefore without prejudice,
despite a word in the Supreme Court’s decision in
Kircher v. Putnam Funds Trust, supra, 547 U.S. at 644, that
might seem to point in that direction: “If the action is
precluded, neither the district court nor the state court
may entertain it, and the proper course is to dismiss. If
the action is not precluded, the federal court likewise has
no jurisdiction to touch the case on the merits, and the
proper course is to remand to the state court that can
deal with it.” The word is “likewise.” If SLUSA is not a
bar to the suit, the federal court lacks jurisdiction
(unless there is a basis for federal removal jurisdic-
tion other than SLUSA) except to determine that it has no
jurisdiction. Id. But when SLUSA is a bar, it operates as
an affirmative defense, which is a defense on the merits,
not a jurisdictional defense. See Fed. R. Civ. P. 8(c); Turek
v. General Mills, Inc., No. 10-3267, 2011 WL 4905732, at *1
(7th Cir. Oct. 17, 2011). We think that what the Court
must have meant in Kircher when it used the word “like-
wise” is that the district court has no authority to con-
sider whether the removed suit has merit—whether for
10                                              No. 11-1785

example there was a breach of the duty of loyalty in
this case. Once it decides that SLUSA either is or is not
a bar to the suit, the court has finished; either way it has
no further business with the case.
  A critic of the Sixth Circuit’s literalist approach might
point to an ambiguity in the statutory word “alleging.”
Everything in a complaint (except the request for relief)
is an allegation in the sense that it is an assertion that
has not been verified by the litigation process. Yet many
of these assertions are not allegations in the sense of
charges of misconduct for which the plaintiff is seeking
relief. If an allegation of fraud is included as background
and unlikely to become an issue in the litigation, why
should it doom the suit? What if the complaint in this case
had alleged irrelevantly that the Calamos management
had defrauded the underwriter of the common stock that
the fund had issued of the underwriter’s agreed-upon fee?
  But as we just explained in criticizing the cases that
allow dismissal of a case barred by SLUSA without preju-
dice, once the case shorn of its fraud allegations resumes
in the state court, the plaintiff—who must have thought
the allegations added something to his case, as why else
had he made them?—may be sorely tempted to rein-
troduce them, and maybe the state court will allow him
to do so. And then SLUSA’s goal of preventing state-
court end runs around limitations that the Private Securi-
ties Litigation Reform Act had placed on federal suits
for securities fraud would be thwarted.
  Against this it can be argued that dismissal with preju-
dice is too severe a sanction for what might be an irrele-
vancy added to the complaint out of an anxious desire to
No. 11-1785                                             11

leave no stone unturned—a desire that had induced
momentary forgetfulness of SLUSA. But a lawyer who
files a securities suit should know about SLUSA and
ought to be able to control the impulse to embellish his
securities suit with a charge of fraud. A further concern
with the literal approach, however, is that it could lead
to inconclusive haggling over whether an implication
of fraud could be extracted from allegations in the com-
plaint that did not charge fraud directly.
  The plaintiff in the present case must lose even under
a looser approach than the Sixth Circuit’s (not the Ninth
Circuit’s approach, however, but one close to the Third
Circuit’s), whereby suit is barred by SLUSA only if the
allegations of the complaint make it likely that an
issue of fraud will arise in the course of the litiga-
tion—as in this case. The allegation of fraud would be
difficult and maybe impossible to disentangle from the
charge of breach of the duty of loyalty that the defendants
owed their investors. This is not because a suit for breach
of that duty would have been hopeless had the defendants
at the outset made full and accurate disclosure—had told
the purchasers of common stock that the AMPS, though
they had no maturity date, could be redeemed at any
time without the authorization of the common share-
holders; that redemption might be motivated by con-
cern with maintaining good business relations with
investment banks and brokerage houses; and that in the
event of redemption the capital that the fund would
substitute for the redeemed AMPS might provide less
leverage (because of higher interest rates) and riskier
leverage (because of short maturity), and thus depress
12                                              No. 11-1785

the risk-adjusted earnings of the common shareholders.
These disclosures would be ineffectual against a claim of
breach of the duty of loyalty because that duty is not
dissolved by disclosure (“we are disloyal—caveat emptor!”).
Schock v. Nash, 732 A.2d 217, 225 n. 21 (Del. 1999); Suther-
land v. Sutherland, No. 2399-VCL, 2009 WL 857468, at *3-4
(Del. Ch. Mar. 23, 2009); Edward P. Welch & Robert S.
Saunders, “Freedom and Its Limits in the Delaware
General Corporation Law,” 33 Del. Corp. L.J. 845, 859-60
(2008); cf. Sample v. Morgan, 914 A.2d 647, 663-64 (Del. Ch.
2007). Investors often will knowingly and intelligently
waive legal protections if compensated, but no sane
investor would knowingly put himself at the mercy of
a disloyal investment manager (or so at least the
Delaware courts believe).
  So it might seem that had the fund said nothing about
the leverage advantages conferred by the absence of a
maturity date for the AMPS, this would be a straight-
forward suit for a breach of the duty of loyalty, the
breach consisting of redemptions harmful to the fund
but helpful to future affiliated funds and thus to the
Calamos enterprise as a whole and possibly to the mem-
bers of the board of trustees as well—they would
have more funds to supervise and so might be paid more.
Such a suit would not be barred by SLUSA, though it
would have to be brought as a derivative suit, Tooley v.
Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1034,
1039 (Del. 2004); Kircher v. Putnam Funds Trust, supra,
403 F.3d at 483, because the theory would be that the
executives had hurt the fund itself by reducing its profit-
ability in order to shore up the profitability of other
No. 11-1785                                                13

funds in which they had interests. Thus the present case
would have to be dismissed in any event, but it could be
refiled as a derivative suit, rather than being forever
barred, which would be the effect of our affirming the
district court’s judgment.
  We don’t know why the suit was not filed as a
derivative suit, but one possibility is that the plaintiffs’
counsel feared losing control over it. Counsel would be
required to demand that the corporation’s board
authorize suit, Del. Ch. Ct. R. 23.1(a); Kamen v. Kemper
Financial Services, Inc., 500 U.S. 90, 101 (1991); Brehm v.
Eisner, 746 A.2d 244, 254-55 (Del. 2000), and the board
might—in all likelihood would—form a special litiga-
tion committee that after considering the question
would decide that a suit was not in the corporation’s
best interest. Kahn v. Kohlberg Kravis Roberts & Co., L.P., 23
A.3d 831, 834-35, 841 (Del. 2011); Zapata Corp. v. Maldonado,
430 A.2d 779, 785 (Del. 1981). The fact that the same
persons served on multiple boards of trustees (corre-
sponding to a board of directors) of the same fund
complex would not constitute a conflict of interest that
would permit the requirement of demand to be waived,
provided the board was independent, In re Mutual
Funds Investment Litigation, 384 F. Supp. 2d 873, 878-79
(D. Md. 2005)—an issue to which we turn.
  The Investment Company Act of 1940 establishes a dual
governance structure under which an advisor (defendant
Calamos Advisors) makes the investment decisions and
a board of trustees monitors the advisor’s management
of the fund. At least 40 percent of the trustees must be
14                                              No. 11-1785

“independent,” 15 U.S.C. §§ 80a-2(a)(3), (a)(19), and the Act
contains a list of prohibited affiliations with the mutual
fund’s advisor or underwriter. 15 U.S.C. § 80a-2. Like most
advisors Calamos Advisors runs multiple funds, and it
uses the same six-member board of trustees, five of whom
are “independent” within the meaning of the Act, to
oversee all the funds; this is what is called a “unitary”
board. See Business Roundtable v. SEC, 647 F.3d 1144, 1154
(D.C. Cir. 2011); Investment Company Institute, Report of
the Advisory Group on Best Practices for Fund Directors:
Enhancing a Culture of Independence and Effectiveness 27-29
(June 24, 1999). It is not improper for a mutual fund
complex to have a unitary board rather than boards with
different members for each fund. (A couple of the Calamos
boards have a seventh member, but we can ignore that
detail.) Most mutual fund complexes have unitary
boards, as noted in Business Roundtable v. SEC, supra.
  Calamos Advisors had of course a pecuniary interest in
protecting the entire Calamos family of funds. But the
existence of such an interest is not a breach of loyalty.
The Calamos board of trustees, which has (in fact ex-
ceeds) the requisite percentage of independent directors,
12 Del. Code § 3801(d); Beam v. Stewart, 845 A.2d 1040,
1048-49 (Del. 2004); In re Mutual Fund Investment Litigation,
supra, 384 F. Supp. 2d at 878-79; Strougo v. Scudder, Stevens
& Clark, Inc., 964 F. Supp. 783, 802 (S.D.N.Y. 1997), is, as
a unitary board, responsible to the entire family of
funds, including future funds because the present value
of an enterprise is the discounted value of its future
earnings. This responsibility may require the board to
make tradeoffs to the disadvantage of investors in one of
No. 11-1785                                                   15

the funds for the sake of the welfare of the family as a
whole. See Seidl v. American Century Cos., 713 F. Supp. 2d
249, 259, 261 (S.D.N.Y. 2010); Restatement (Third) of
Trusts § 78(1) and comment c(8) (2007); Vanguard
Group, SEC Release No. IC-11645, 1981 WL 36522, at *4-5
(Feb. 25, 1981). The complaint alleges that the trustees
will benefit financially from the creation of new funds
that will come under the supervision of the unitary
board. But the fact that management profits from an
increase in the size of its enterprise is not a breach of
its duty of loyalty to shareholders.
   So without the allegation that the Calamos Convertible
Opportunities and Income Fund misrepresented the
characteristics of its capital structure, a charge of breach
of loyalty might not be plausible. See Ashcroft v. Iqbal, 129
S. Ct. 1937, 1949 (2009); Atkins v. City of Chicago, 631 F.3d
823, 831-32 (7th Cir. 2011). The fraud allegations may be
central to the case. Cf. United States v. O’Hagan, 521 U.S.
642, 651-52 (1997); Ryan v. Gifford, 935 A.2d 258, 271 (Del.
Ch. 2007); LaSala v. Bordier et Cie, supra, 519 F.3d at 126, 129-
30. The suit is therefore barred by SLUSA under any
reasonable standard. The fact that the complaint
disclaims any claim of fraud cannot save it. The
disclaimer just signifies a commitment not to seek relief
under the fraud provisions of state securities law.
Though the suit is for breach of fiduciary obligations,
the breach appears to rest on an allegation of fraud, as
is often the case.
  Nor can the suit be saved by amending the com-
plaint to delete the passage that injected fraud into the
16                                                 No. 11-1785

case. Some courts think this proper, U.S. Mortgage, Inc. v.
Saxton, 494 F.3d 833, 842-43 (9th Cir. 2007); Behlen v. Merrill
Lynch, 311 F.3d 1087, 1095-96 (11th Cir. 2002), but it is
contrary to the “forum manipulation” rule recognized
in Rockwell Int’l Corp. v. United States, 549 U.S. 457, 474 n. 6
(2007); see also Townsquare Media, Inc. v. Brill, 652 F.3d
767, 773 (7th Cir. 2011); In re Burlington Northern Santa
Fe Ry., 606 F.3d 379, 380-81 (7th Cir. 2010) (per curiam).
For then it is a case not just of the plaintiff’s abandoning
his federal claims but of his seeking to prevent the de-
fendant from defending in the court that obtained juris-
diction of the case on his initiative. That is called pulling
the rug out from under your adversary’s feet. Anyway
deletion of the fraud allegation would not be credible, if
we are correct that the allegation may well be central to
the plaintiff’s case despite his disclaimer. The likeli-
hood that he would do everything he could to sneak the
allegation back into the case, if the complaint were
amended and remand to the state court followed, would
be so great as to make it imprudent to allow the com-
plaint to be amended to delete the allegation. The
district judge would therefore not have been required to
allow such an amendment even if the forum-manipula-
tion rule were not a bar as well.
  The suit was properly dismissed on the merits.
                                                    A FFIRMED.




                            11-10-11
