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

No. 05-4398
LILA T. GAVIN, on behalf of herself and
    of all persons similarly situated,
                                                  Plaintiff-Appellant,
                                  v.


AT&T CORP. and GEORGESON SHAREHOLDER
  COMMUNICATIONS, INC.,
                                Defendants-Appellees.
                   ____________
             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
              No. 01 C 2721—John F. Grady, Chief Judge.
                          ____________
      ARGUED JUNE 6, 2006—DECIDED SEPTEMBER 6, 2006
                          ____________


  Before FLAUM, Chief Judge, and POSNER and KANNE, Circuit
Judges.
  POSNER, Circuit Judge. This appeal requires us to con-
sider the meaning of “in connection with the purchase or
sale of a covered security” in the Securities Litigation
Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. § 78u-4
et seq. The Act provides that a class action, though filed in
state court under state law, may be removed to federal
district court if the suit alleges “(1) an untrue statement or
2                                                 No. 05-4398

omission of a material fact in connection with the purchase
or sale of a covered security; or (2) that the defendant used
or employed any manipulative or deceptive device or
contrivance in connection with the purchase or sale of a
covered security.” 15 U.S.C. § 77p(b); see also § 78bb(f). A
“covered security,” defined in §§ 78bb(f)(5)(E), 77p(f)(3),
77r(b), is any security “traded nationally and listed on a
regulated national exchange.” Merrill Lynch, Pierce, Fenner &
Smith, Inc. v. Dabit, 126 S. Ct. 1503, 1512 (2006); see also
Green v. Ameritrade, Inc., 279 F.3d 590, 596 n. 4 (8th Cir.
2002). The Act further provides that a suit properly removed
under it must forthwith be dismissed by the federal court
because a suit based on fraud in the sale of securities
regulated under the federal securities laws cannot be
brought under state law. §§ 77p(b), 78bb(f)(1).
   The defendants, sued for fraud in an Illinois state court on
behalf of a class of shareholders of MediaOne Group, Inc.,
removed the case to federal district court under SLUSA. The
judge denied the plaintiff’s motion to remand the case to the
state court and dismissed the suit, whereupon the plaintiff
filed a complaint in the district court under Rule 10b-5,
which the district judge dismissed on the merits. The appeal
mainly challenges the removal; the plaintiff wants to be
back in state court, suing under state law. Only if we refuse
to order the case remanded to the state court does she want
us to proceed to the Rule 10b-5 issue and reverse the district
court on the merits. That would place us in conflict with the
Second Circuit, which in a similar case brought by other
MediaOne shareholders (but in federal court, so avoiding
SLUSA) held that there was no fraud. Starr v. Georgeson
Shareholder, Inc., 412 F.3d 103 (2d Cir. 2005).
  In June 2000, MediaOne merged with AT&T. The terms of
the merger entitled shareholders in MediaOne to obtain in
No. 05-4398                                                 3

exchange for each of their shares 0.95 shares of AT&T stock
plus $36.27 and any accrued but unpaid dividends. This
package was the “Standard Election.” But MediaOne
shareholders could if they preferred select other com-
binations of shares and cash that would be equal in value to
the “Standard Election” share-cash package.
  AT&T notified the MediaOne shareholders of their choices
on June 15 and explained that they could obtain the cash
and/or AT&T shares to which the choice they made entitled
them by mailing their MediaOne share certificates to
EquiServe Trust Company, AT&T’s exchange agent. There
was no charge for this service. The notice fixed a deadline of
July 14 for choosing any of the alternatives to the Standard
Election, but no deadline for the Standard Election itself.
  On August 1, AT&T sent a follow-up notice to those
MediaOne Group shareholders who had not responded
to the first notice. The letter explained that they could
still exercise the Standard Election (though not the other
options, the July 14 deadline having passed), again through
EquiServe and again without charge.
  Finally, on December 15, defendant Georgeson, hired
by AT&T to perform a postmerger “clean up” or “round
up,” mailed a notice on AT&T letterhead to those MediaOne
shareholders who still had not responded to either of the
previous notices. The letter urged them to exercise their
Standard Election rights by submitting their MediaOne
shares to Georgeson in exchange for either a combination of
cash and stock or an all-cash equivalent. The letter warned
that “eventually, if you continue to do nothing, your
[AT&T] stock and underlying assets will be turned over to
certain state authorities under the abandoned property
laws.” Remember that AT&T had set no deadline for the
Standard Election. Georgeson was reminding those
4                                                   No. 05-4398

MediaOne shareholders who had not yet made an election,
and now were confined to the Standard Election because the
deadline for the alternatives had passed, that state abandon-
ment law set a deadline.
   Abandoned property escheats to the state after a specified
period, Uniform Disposition of Unclaimed Property Act
(1966), codified in Illinois as 765 ILCS 1025/0.05 et seq., and
shares of stock that are not claimed by the beneficial owner
are deemed abandoned. 765 ILCS 1025/2a. Either that Act
or the superseding Uniform Unclaimed Property Act (1995)
have been adopted in 29 states plus the District of Colum-
bia, and most, perhaps all, other states have similar laws.
E.g., N.Y. Personal Property Law §§ 251-258 (McKinney
1992). In the state court, the plaintiff requested certification
of a nationwide class and in the alternative a statewide
(Illinois) class consisting of “all residents, or persons or legal
entities, who [are MediaOne shareholders and] may prop-
erly avail themselves of the Illinois Consumer Fraud Act.”
No class was ever certified.
  Georgeson’s letter specified a fee of $7 per MediaOne
share for the exchange service offered in the letter and did
not mention that the recipients of the letter could still obtain
the Standard Election package at no charge through
EquiServe. The failure to mention that option is the fraud
charged in the complaint.
  We do not think the alleged fraud can be said to be “in
connection with the purchase or sale of a covered security,”
namely stock in MediaOne. When the merger was con-
summated in June of 2000, MediaOne’s shareholders
became the beneficial owners of AT&T stock. Those share-
holders whose MediaOne shares had been held by their
brokerage firms were immediately credited with the receipt
of AT&T stock plus cash. Those shareholders (the plaintiff
No. 05-4398                                                 5

and the members of her class) who possessed share certifi-
cates might not get their new cash/stocks right away, but
they had a firm entitlement to their proportionate share of
the cash and stock that AT&T had set aside to fund the
acquisition of MediaOne. The alleged fraud—the omission
in Georgeson’s letter of December 15 of any mention of the
free option—happened afterwards and had nothing more to
do with federal securities law than if Georgeson had asked
the MediaOne shareholders “do you want your AT&T
shares sent to you by regular mail or by courier?” and had
charged an inflated fee for the courier service. Or if AT&T
had said “if you don’t want your spouse to learn about your
good fortune, we’ll send you your shares in a brown paper
envelope”; and later the spouse failed to claim the shares in
her divorce proceeding and sued AT&T and her husband
for fraud.
  AT&T didn’t want the shareholders of the firm it had
just bought to wake up one day and find that their part of
the sale price had gone not to themselves but to a state.
Hence the three notices—though why the last one neglected
to remind the shareholders that they could still protect their
stock from being escheated without having to pay $7 a share
to another company is a puzzle, as well as the foundation of
the fraud claim (about the merits of which we express no
opinion). Presumably Georgeson showed AT&T the letter
before mailing it; it was, after all, on AT&T’s stationery.
  This would be a different case from the standpoint of
SLUSA had the MediaOne shareholders been induced by
fraudulent representations by AT&T to vote for the merger
and as a result ended up with AT&T stock worth less than
the MediaOne stock that they had exchanged. E.g., Dasho v.
Susquehanna Corp., 380 F.2d 262 (7th Cir. 1967); Dennis F.
Dunne, “Stock Repurchase Agreements in Bankruptcy: A
6                                                 No. 05-4398

Tale of State Law Rights Discarded,” 12 Bank. Dev. J. 355,
386 (1996). It is true that one option offered in the December
15 letter was that Georgeson would sell the recipient’s
shares and send him the cash if he preferred that to stock
plus cash. But it’s not as if Georgeson was trying to buy the
shares on the cheap. The $7 fee it was charging for its
service was its entire consideration and was the same
whether the recipient wanted cash or shares. Georgeson
acquired no investment interest. Shareholders would take
up Georgeson’s offer of the cash alternative only if they
didn’t want to own AT&T shares; it was their choice
entirely.
  One could speculate—though the plaintiff does not—that
someone who had planned to sell the AT&T stock to which
he was entitled as a result of the merger, but to do so later
on rather than immediately, might accelerate his decision
when he learned that it would cost him $7 per share to
obtain the stock; he might do this in order to avoid a
future brokerage fee on top of the $7. But that is no different
from what would happen if a bank charged an exorbitant
fee for a safe deposit box in which to keep one’s shares of
stock: some people would decide to sell their stock rather
than pay the fee. One would hardly say that a class action
against the bank in such a case would be an action “involv-
ing nationally traded securities,” Merrill Lynch, Pierce, Fenner
& Smith, Inc. v. Dabit, supra, 126 S. Ct. at 1514 (emphasis
added), which is the Supreme Court’s characterization of
SLUSA’s scope.
  The defendants argue that since Georgeson’s service
charge was calculated on a per-share basis, the effect was to
reduce by $7 the value of each of the AT&T shares that the
MediaOne shareholders who accepted Georgeson’s offer
received. But that is like saying that if the shareholders had
received their AT&T shares and later sold them, the value
No. 05-4398                                                  7

of their shares would have been diminished by the broker-
age fee on the later transaction. What happens to shares
after they are sold is not “in connection with” the sale. The
merger was the sale. That the beneficial owners who
responded to the December 15 offer paid money to make
sure that they got the shares rather than the state was no
different from their paying a bank to keep the share certifi-
cates in a safe-deposit box.
  The defendants have confused a transaction with its
sequelae. After you buy a car and drive away with your
new possession, much can happen to affect the value of
your purchase. If what happens is traceable to something
that occurred before the sale was complete, such as a
defective engine block, you may be able to undo the sale
on the basis that that something happened “in connection
with” the sale. But if something happens after the transac-
tion is complete to make it less worthwhile to you, such as
the dealer’s replacing a tire that has worn out with one that
is the wrong size, it is a separate wrong, not anything
connected with the original sale unless the wrong is a
breach of warranty.
  Of course there is a literal sense in which anything that
happens that would not have happened but for some
prior event is connected to that event. In that sense the fraud
of which the plaintiff complains is connected to the merger,
without which there would not have been such a fraud
against the plaintiff and her class. But in the same sense the
fraud is connected to the Big Bang, without which there
would never have been a MediaOne or even an AT&T.
   Gurwara v. LyphoMed, Inc., 937 F.2d 380 (7th Cir. 1991),
illustrates the limitations of “in connection with.” It held
that an employer’s refusal to sell an employee stock to
which he was entitled by his employment contract was
8                                                   No. 05-4398

not an act “in connection with the purchase or sale of
securities.” The alleged “misrepresentation went only to [the
plaintiff’s] opportunity to purchase the stock at the de-
scribed price. It in no way related to the value of that
stock . . . . . [It] did not go to the value of the stock at issue
or the value of the consideration in return for it ” Id. at 382-
83; see also Green v. Ameritrade, Inc., 279 F.3d 590, 598-99
(8th Cir. 2002).
   Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930 (2d
Cir. 1984), makes the general point that the cases just
cited illustrate: a mere “but for” cause linking a securi-
ties transaction (here, the merger of MediaOne into AT&T)
to a subsequent injury (concealment of the option to re-
ceive the Standard Election without paying any fee) does
not make the injury one suffered “in connection with the
purchase or sale of securities.” Otherwise SLUSA would
apply to a class action by shareholders who suffered
paper cuts when they opened the letters informing them
of their rights under the merger.
  Ketchum v. Green, 557 F.2d 1022 (3d Cir. 1977), nails down
the point: two directors alleged that they had been fraud-
ulently induced to cast a vote that ultimately enabled
other directors to fire them, which triggered a provision
of their retirement plan that required terminated employees
to resell their stock to the corporation at a discount. The
fraud, they argued, was thus “in connection with the
purchase or sale of securities.” The court disagreed. It was a
classic but-for case: the loss on the sale would not have
occurred had it not been for the fraud, but the fraud had
nothing (else) to do with that loss. As we said in Frymire-
Brinati v. KPMG Peat Marwick, 2 F.3d 183, 189 (7th Cir. 1993),
“the ‘connection’ requirement must be taken seriously.” Cf.
Bellah v. First Nat’l Bank, 495 F.2d 1109, 1114 (5th Cir. 1974).
No. 05-4398                                                   9

  If any doubt remains that the alleged fraud should not
be deemed in connection with the purchase or sale of
MediaOne stock, consider the issues that are germane to
whether the Georgeson letter was indeed fraudulent. They
have nothing to do with efforts to manipulate the prices
of securities, with failure to make full disclosure of all
facts known to the seller or issuer that might be material to a
purchaser, with the regulation of stock exchanges, or with
any other concern of federal securities law. They are garden-
variety issues of state-law consumer fraud, such as whether
a statement in the December 15 letter inviting the recipient
to call Georgeson if he had any questions, in conjunction
with the references to the free EquiServe option in the two
previous letters, gave the class members enough informa-
tion that they should blame themselves for accepting
Georgeson’s offer. It would be the same kind of case had the
letter invited the recipient to pay $7 for Linux software that
he could download for free from the Internet.
  The purpose of SLUSA was to prevent plaintiffs from
making an end run around the restrictions on suits for
federal securities fraud suits introduced by the Private
Securities Litigation Reform Act of 1995, Pub. L. No. 104-67,
109 Stat. 737, 15 U.S.C. §§ 77z-1, 78u-4, by filing the
suits in state courts under state law. Merrill Lynch, Pierce,
Fenner & Smith, Inc. v. Dabit, supra, 126 S. Ct. at 1510-11; see
Michael A. Perino, “Fraud and Federalism: Preempting
Private State Securities Fraud Causes of Action,” 50 Stan. L.
Rev. 273 (1998). The terms of a statute can carry beyond its
purpose, to prevent the opening of loopholes. But we do not
see how an interpretation that would allow removal in this
case could do that. The plaintiffs are not trying to litigate a
securities fraud case, but instead a consumer fraud case
against companies that have made no effort to influence the
purchase or sale of a covered security. “Congress, in
10                                                No. 05-4398

enacting the securities laws, did not intend to provide a
broad federal remedy for all fraud.” Marine Bank v. Weaver,
455 U.S. 551, 556 (1982).
  There is one more point to note about this case. The
defendants want to be in federal court. And the complaint
that the plaintiff filed in state court actually alleges the
essential facts that demonstrate the presence of federal
diversity jurisdiction, which would enable removal because
the defendants are not citizens of the state (Illinois) of which
the plaintiff is a citizen. (AT&T is a citizen of New York and
Georgeson a citizen of New York and Delaware.) Yet the
removal petition does not mention diversity; nor has either
defendant asked us to retain jurisdiction on the basis of
diversity. Georgeson’s lawyer told us that the defendants
had not sought removal on the alternative ground of
diversity because they were certain there was jurisdiction
under SLUSA. That was a mistake, but he added that he
doubted that the plaintiff’s complaint satisfied the require-
ment that the amount in controversy exceed $75,000. That
was another mistake.
   The complaint alleges compensatory damages of $1,645
(the 235 MediaOne shares that the plaintiff exchanged
through Georgeson times the $7 fee) plus punitive damages
in an unspecified amount. When the award of compensatory
damages is large, a punitive-damages multiple in excess of
single digits is presumptively unconstitutional. State Farm
Mutual Automobile Ins. Co. v. Campbell, 538 U.S. 408, 425
(2003). But a higher multiple is permissible when the
expected award of compensatory damages is so small that
it would be unlikely to induce a suit even of compelling
legal merit, especially if there are multiple victims and an
indication that the tortfeasor has been eluding liability
successfully. Mathias v. Accor Economy Lodging, Inc., 347 F.3d
No. 05-4398                                                   11

672 (7th Cir. 2003). For these are further indications that
without a hefty award of punitive damages the wrongful
conduct will not be deterred.
  In Mathias each plaintiff had received an award of $5,000
in compensatory damages, and we upheld a further award
to each of $186,000 in punitive damages—a ratio of 37.2 to
1. In this case, an award of $73,355 in punitive damages
would be necessary to get the plaintiff to the $75,000
threshold that one must cross to satisfy the amount-in-
controversy requirement. That would be a higher ratio than
in Mathias. But since the compensatory damages sought
in this case are little more than a third as great as those in
that case, one could not say as a matter of law that the
plaintiff would be unable to cross the threshold; and there-
fore this case really is within the diversity jurisdiction.
   Some cases, it is true, appear to make the permissible ratio
of punitive to compensatory damages depend less on the
factors we have stressed than on how egregious the defen-
dant’s wrongdoing was—the more egregious, the higher the
permissible ratio. E.g., Planned Parenthood of Columbia/
Willamette Inc. v. American Coalition of Life Activists, 422 F.3d
949, 962 (9th Cir. 2005). Egregiousness is of course highly
relevant to the appropriateness of awarding punitive
damages at all, and sometimes to the amount. But it is
relevant to the ratio of punitive to compensatory damages
only insofar as the greater the punitive damages are, the
higher the ratio of punitive to compensatory damages is
likely to be. The proper focus of analysis of the ratio itself is
the adequacy of the combined award of compensatory and
punitive damages to motivate the prosecution of a meritori-
ous claim. If compensatory damages are slight, a single-digit
ratio is likely to be insufficient. And that appears to be the
case here.
12                                                 No. 05-4398

  We assume that the defendants would prefer to litigate
the plaintiff’s Illinois tort claim in federal court. But as they
have never suggested diversity as a basis for citizenship,
insisting instead on placing all their jurisdictional eggs
in the SLUSA basket, there we shall leave them.
  The judgment of the district court is reversed with
instructions to vacate all previous rulings in the litigation
and remand the case to the court from which it was re-
moved.

A true Copy:
        Teste:

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




                      USCA-02-C-0072—9-6-06
