ORDER OF REMAND FOR LACK OF SUBJECT MATTER JURISDICTION
Before the Court are Plaintiffs’ Motion to Remand (docket no. 6), defendants’ response (docket no. 15), plaintiffs’ reply (docket no. 17), defendants’ surreply (docket no. 19), and the Brief of Amici Curiae (docket no. 22) filed by the American Institute of Certified Public Accountants and Securities Industry Association. After careful consideration of the motion, the response and replies, along with the amici brief, the pleadings on file and the entire record, the Court is of the opinion this matter should be remanded to state court for lack of subject matter jurisdiction. 1
BACKGROUND
Plaintiffs made investments in a variety of securities through the “InverWorld entities,” which сonsist of domestic and foreign corporations and trusts, including an investment advisor and brokerage firm. The InverWorld entities and high level officers, Jose Zollino and George Fahey, are involved in previously filed litigation brought by the Securities and Exchange .Commission on behalf of investors, see Securities & Exch. Comm’n v. InverWorld, Inc., Civil Action No. SA-99-CA-822-FB, and bankruptcy and receivership proceedings are ongoing in San Antonio, Texas, and the Grand Court of the Cayman Islands. Plaintiffs filed suit against Deloitte & Touche L.L.P., an accounting firm which, and several individual accountants who, performed audits of the InverWorld entities over a period of years. They allege the accounting malpractice between 1993 and 1997 under five causes of action pursuant to Texas law: common law fraud, statutory fraud under section 27.01 of the Texas Business and Commerce Code, negligent misrepresentation, aiding and abetting and participation in conversion, and aiding and abetting violations of the Texas Securities Act. Defendants removed the case to federal court basing federal subject matter jurisdiction upon the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. §§ 77p, 78bb(f)(2), *587 which governs nationally traded securities fraud actions. Plaintiffs move to remand contending the SLUSA is not applicable.
Plaintiffs specifically allege and use the term “accounting misfeasance.” Based on historical and substantive considerations, an argument can be made the SLUSA was not intended to cover an accounting misfeasance case. Historically, federal securities regulation occurred only when Congress perceived an abuse in the securities markets by exchange brokers or attorneys’ representing investors. See B. Scott Daugherty, Uncharted Waters: Securities Class Actions in Texas After the Securities Litigation Uniform Standards Act of 1998, 31 St. Mary’s L.J. 143, 152 (1999). Substantively, the SLUSA imposes registration and disclosure requirements on issuers which offer securities for sale to the public and prohibits fraud, manipulation and deception in connection with the sale of securities. See 15 U.S.C. §§ 77p, 78bb(f)(2). An essential element of a SLUSA cause of action, then, is proof that a security was sold by defendant to plaintiff. See 22 Am.Jur. Pof. 3D 485, § 24-26 (Supp.2000)(suggested deposition questions establishing proof investment sold by defendant to plaintiff was security). This is because SLUSA does not concern internal products, such as an accounting firm which performs audits, but external products, such as the sale of securities to investors. See id. (discussing whether proper balance exists between interests of issuers and interests of investors under SLUSA and its predecessor Act). Here, thе alleged loss is because of alleged accounting misfeasance. Subject matter jurisdiction under the SLUSA may therefore be lacking.
Presuming the SLUSA applies, the Court finds defendants have not met their procedural burden of establishing federal subject matter jurisdiction through the SLUSA. Plaintiffs carefully drafted their pleadings to avoid federal jurisdiction,
see Carpenter v. Wichita Falls Indep. Sch. Dist.,
STANDARD OF REVIEW
The plaintiffs are the master of their complaint and, as such, “[a] determination that a cause of action presents a federаl question depends upon the allegations of the plaintiffs’ well-pleaded complaint.”
Carpenter v. Wichita Falls Indep. Sch. Dist.,
The burden of establishing subject matter jurisdiction is placed upon the party seeking removal.
Willy v. Coastal Corp.,
[A]ny civil action brought in a State court of which the district courts of the United States have original jurisdiction, maybe removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending.
28 U.S.C. § 1441(a);
see also Finn v. American Fire & Cas. Co.,
DISCUSSION
The Securities Act of 1933 and the Securities Exchange Act of 1934 were written in response to investor mistrust of the securities markets occasioned by the collapse of the stock market in 1929.
2
See Ernst & Ernst v. Hochfelder,
In addition to the 1933 and 1934 Acts, states enacted statutes and made regulations applicable to protect investors from abuses in the securities market. See 69 Am. JuR.2d, Securities Regulation — Stаte §§ 1-10. These statutes and regulations may provide the investor with causes of action against issuers in addition to those provided by federal law, and are commonly known as “blue sky laws.” See id. As with the federal securities Acts, blue sky laws prohibit fraud in connection with an issuer’s sale of securities to an investor. See id.
While the original exchange Acts were established within the context of protecting the individual investor from predatory corporate insiders,.see
Ernst & Ernst,
Three yеars later, the SLUSA was enacted in response to a perceived “loophole” in the PSLRA which allowed investors alleging securities violations to avoid the PSLRA by bringing their claims against corporate issuers in state court. Eugene P. Caiola,
Retroactive Legislative History: Scienter Under the Uniform, Security Litigation Standards Act of 1998,
64 Ala. L.Rev. 309, 334 (2000);
see also
H. Rep. No. 105-640 (1998),
available at
The purpose of SLUSA was “[t]o protect the interest of shareholders and employees of public companies which [weré] the target of meritless ‘strike’ suits.” H.R. Conf. Rep. No. 105-803 (1998),
available at
[C]ompanies cannot control where their securities are traded after an initial public offering.... As a result, сompanies with publicly-traded securities cannot choose to avoid jurisdictions which present unreasonable litigation costs.
Id.
Plaintiffs would thus be prevented “from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State court rather than Federal court.”
Id.
The SLUSA, along with the PSLRA, was thus intended to set uniform standards for the filing of class action fraud lawsuits against companies issuing nationally-traded securities.
See
S. Rep. No. 105-182 (1998),
available at
Perhaps in reaction to investor opposition seeking to retain jurisdiction in more “plаintiff-friendly” state courts, John Bor-land,
House Passes Shareholder-Lawsuit Reform,
CMP TechWeb, July 22, 1998, at 1,
available at
In summary, the 1933 Securities Act and the 1934 Securities Exchange Act were passed to restore investor confidence in the securities markets. See
Ernst & Ernst,
Although germane to issues which exist contemporaneous to the adoption of the SLUSA, it could be concluded plaintiffs’ accounting misfeasance case is not responsive to issues which manifested themselves within the context of the passage of the securities regulation Acts. The crux of plaintiffs’ case is that defendants should have recognized the investors’ money was not used to buy investments for the accounts of the investors, but to pay for InverWorld transactions and loans to insiders, friends and other entities close to Jose Zollino. Alternatively, plaintiffs’ argue, if the funds were used to purchase legitimate securities for the investors, those securities were pledged without plaintiffs’ knowledge as collateral for In-verWorld’s or its principals’ own investments and debts. These are accounting misfeasance allegations as opposed to allegations which would affect the capital markets. The issue was in 1933 and through *591 the passage of the SLUSA continues to be: What would affect the capital market scheme?. As this issue is not related to accountants allegedly committing malрractice, the SLUSA is arguably not applicable.
Defendants challenge “plaintiffs’ mistaken understanding regarding the reach” of the SLUSA and their “erroneous claim that the Act was not intended to cover an accounting misfeasance case.” As defendants note: “Congress enacted the procedural safeguards in SLUSA and ... the PSLRA in part at the urging of accountants to provide them with protection from frivolous securities lawsuits and from being sued as a deep-pocket defendant for wrongs committed by others.” H.R. Conf. Rep. No. 104-369, at 31-32 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 730-31. While this may be true, the SLUSA savings clause which preserves certain actions in state сourt refers to “issuers” of securities. 15 U.S.C. § 78bb(f)(3)(A)(i). From the language of the statute, it is possible Congress intended the SLUSA to apply only to actions brought against issuers of publicly traded stock, not accounting firms which perform audits for the issuer or intermediaries of the issuer.
The savings clause of the SLUSA also provides certain actions are preserved in state court if they arise in connection with the purchase or sale of an equity security by “an affiliate of the issuer.” 15 U.S.C. § 78bb(f)(3)(A)(ii). The term “affiliate of the issuer” means “a person that directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common сontrol with, the issuer.” Id. § 78bb(f)(5)(A). There is no indication of the amount of control the InverWorld entities exercised over defendants and no indication the savings clause applies to plaintiffs’ claims. Nonetheless, an argument can be made Congress was strictly limiting SLUSA’s application to those entities involved in the external process of issuing stock.
The Court recognizes there is authority to the contrary,
Prager v. Knight/Trimark Group, Inc.,
(f) LIMITATIONS ON REMEDIES.—
(1) CLASS ACTION LIMITATIONS. — 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 an private party alleging—
(A) a misrepresentation or omission of a material fact in connection ivith the purchase or sale of a covered security; or
(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 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).
*592 15 U.S.C. § 78bb(f)(l)(A), (B) & (2).(em-phasis added). It is undisputed plaintiffs’ first amended petition is, at least in part, a “covered class action” and involves a “covered security” within the meaning of the Act. It is also undisputed the first amended petition alleges misrepresentations and omission of material facts. The only question is whether the first amended petition alleges misrepresentations or omissions of material facts “in connection with” or “involving” the “purchase or sale” of those covered securities. If the alleged misrepresentations are alleged to have been “in connection with the purchase or sale” of a covered security, then the case was properly removed and the motion to remand should be denied. If the alleged misrepresentations -are not alleged to have been “in connection with the purchase or sale” of a covered security, then the removal was improper and the motion to remand should be granted.
Plaintiffs’ first amended petition alleges misrepresentations based upon the following three subclass categories of persons and entities:
i. All persons or entities that purchased or held IGS or IWG Internal Products, as that terms is defined herein, from 1993 to present and did not sell or otherwise dispose of said products prior to June 1999;
ii. All persons or entities that purchased or held any “uncovered security” as that term is defined in the Private Securities Litigation Reform Act;
iii. All persons or entities that held any “covered security” as that term is defined in the Private Securities Litigation Reform Act of 1995 at all relevant times through 199S through present and did not sell or otherwise dispose of said products prior to June 1999; ....
(Emphasis added). Regarding subclass category (i), plaintiffs in the first amended petition define “Internal Products” sold by InverWorld to its investors as “IGS or IWG created issuances, including without limitation money-market deposits, memorandum or promissory notes and other instruments in which IGS or IWG was the direct obligor to the investor.” None of the Internal Products which were sold by IGS or IWG were “covered securities” because they were sold directly to investors by those entities. As these Internal Products were not sold on any of the United States securities exchanges, there is no dispute plaintiffs’ subclass category (i) claims for misrepresentation in purchasing and holding Internal Products do not fall within the SLUSA. As to subclass category (ii), it is also undisputed the purchase of “uncovered” securities does not fall within the SLUSA. By definition, the Act applies solely to “covered” securities listed on United States securities exchanges. Because these subclass category (ii) claims do not fall within the statute, it is also undisputed investors who purchased or held uncovered securities are not within the purview of the SLUSA.
The remaining subclass, category (iii), is the SLUSA lynchpin upon which defendants base their notice of removal. Defendants argue plaintiffs’ subclass category (iii) investors who “held” covered securities does not exclude persons who “purchased” securities during the class period. Plaintiffs respond category (iii) is explicitly limited to damages caused by the holding of covered securities and the loss of value which resulted from such holding. They argue they are not seeking purchaser or seller damages arising out of any alleged misrepresentation which may or may not have occurred when they purchased the covered stock. Rather, plaintiffs seek damages for being fraudulently induced to *593 continue to hold stock after they and the category (iii) putative class members had pm-chased the securities. Plaintiffs maintain they are not asserting a claim “in conneсtion with the sale or purchase” of a covered security and thus their claims are not subject to mandatory removal under the SLUSA.
The Court recognizes a narrow reading of plaintiffs’ subclass category (iii) definition could encompass misrepresentations in connection with the putative class members’ purchase of covered securities. In and of itself, plaintiffs’ description of this subclass could be read to include investors who purchased securities at any time before or during, and held to the end of, the class period because they would also have “held” the securities during the class period. It is alsо true the petition does not specifically disclaim reliance by members of the category (iii) subclass on misrepresentations made before they purchased their covered securities. However, plaintiffs have “gone to great lengths” to stress that their first amended petition alleges misrepresentations only in the holding of covered securities. The crux of plaintiffs’ complaint is that defendants affirmatively misrepresented to three categories of investors in defendants’ 1993 to 1997 audits of financial statements that the Inver-World entities were solvent, when, in fact, InverWorld was becoming insolvent. Subclass catеgory (i) includes purchasers and holders of Internal Products; subclass category (ii) includes purchasers and holders of uncovered securities; and subclass category (iii) includes holders of covered securities. Subclass categories (i) and (ii) are not governed by the SLUSA because the Act does not apply to the types of securities purchased or held. Specifically, the SLUSA is not applicable to Internal Products and uncovered securities. Although the stocks purchased by subclass category (iii) claimants are covered securities for purposes of the Act, the first amended petition allеges misrepresentations only in the holding of these covered securities and nowhere do plaintiffs allege subclass category (iii) includes purchasers. Rather, as plaintiffs argue, they have “expressly carved out and excluded [purchasers] when they elected to allege only claims for holding covered securities, not the purchase or sale of covered securities.” (Emphasis in original).
While their first amended petition does not expressly disavow injury resulting from the purchase of covered securities, neither do plaintiffs specifically claim any damages resulting from the purchase of covered securities. Plaintiffs maintain their “class allegations do not include any claims based upon the purchase of covered securities, nor do they seek any relief based upon the purchase of covered securities.” Plaintiffs stress their “class allegations specifically set forth three — and only three — subclasses upon which relief is sought from defendants” and emphasize an intent to absent from their amended petition a class allegation based upon the purchase of a covered security. As such, plaintiffs’ amended petition states that only those misrepresentations which occurred аfter subclass category (iii) investors purchased their covered stock resulted in these class members being deceived into holding their stock.
The Court also recognizes a broad reading of plaintiffs’ factual description of their case contained within the first amended petition could encompass misrepresentations in connection with the purchase of covered securities. Plaintiffs’ petition contains thirty-nine pages of background facts and a statement of the nature of the case which include references to investors being “duped into investing their savings” with the InverWorld entities. However, plаintiffs emphasize their petition alleges class *594 claims for misrepresentation “based exclusively upon the purchase of non-covered securities, or the ‘holding’ of securities,” neither of which invoke the SLUSA. Plaintiffs explain factual allegations related to the purchase of securities are intended to apply to plaintiffs and purported class members included in subclass categories (i) and (ii), not category (iii). As such, no SLUSA jurisdiction arises from factual allegations which encompass the purchase of covered securities because no class allegations are based upon thеm.
Pursuant to these limitations, plaintiffs’ amended petition alleges only that the alleged misrepresentations resulted in class members being deceived into holding their covered securities, not in connection with the purchase of covered securities from InverWorld. Given plaintiffs’ characterization of the first amended petition, and the fact they do not expressly state a cause of action for misrepresentation made to purchasers of covered securities, this Court declines to conclude plaintiffs’ petition states a cause of action for misrepresentations made in connection with purchases of covered securities. Because plaintiffs have not alleged defendants’ misconduct occurred in connection with the purchase (or sale) of covered securities, the first amended petition was not properly removed under the SLUSA and this matter must be. remanded for lack of subject matter jurisdiction to state court.
Defendants argue this Court should disagree with decisions which dismissed or remanded cases to state court where plaintiffs’ claims related to holding covered securities, not the purchase or sale of covered securities as required by the SLUSA.
See Gordon v. Buntrock,
No. 00 CV 303,
The Court in
Blue Chip Stamps
held that claims brought on behalf of persons who claimed they were defrauded into not purchasing a stock were not covered under section 10b of the Securities Exchange Act of 1934.
See id.
at 725, 755,
Regarding district court authorities, the undersigned declines to disagree with decisions rendering the SLUSA inapplicable to a complaint seeking damages for being
*595
fraudulently induced to hold stock. This Court is bound by the plain language of the statute,
see Immigration & Naturalization Serv. v. Hector,
IT IS THEREFORE ORDERED that Plaintiffs’ Motion to Remand (docket no. 6) is GRANTED such that the above-styled and numbered cause is REMANDED to the 224th Judicial District Court, Bexar County, Texas, for lack of subject matter jurisdiction;
IT IS FURTHER ORDERED that the District Clerk is Directed to send a certified copy of this Order of Remand for Lack of Subject Matter Jurisdiction to the Clerk of the State Court.
It is so ORDERED.
Notes
. The Court is aware of defendants’ letter request for oral argument. Given the 700 to 800 felony defendants on this Court’s criminal docket, and considering the extensive briefing done in this case, the Court does not believe oral argument is necessary for disposition of plaintiffs' motion to remand.
. "Although stocks, bonds and other types of securities have been publicly traded since the American Revolution, there was no serious effort to regulate the process until 1933. The speculative fury of the stock markets in the 1920s ended abruptly with the 1929 crash and the Great Depression. Millions of small investors saw the value of their investments wiped out as the Dow Jones Industrial Average, the most widely followed indicator of stock prices, fell from its high of 381.2 in 1929 to a low of 41.2 in 1932, a decline of nearly ninety percent. The public demanded reform.” 22 Am.Jur. Pof. 3D 485, § 1 (Supp. 2000).