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NEW Hampshire Bureau of Securities Regulation v. LPL Financial, LLC

United States District Court, D. New Hampshire

August 4, 2015

New Hampshire Bureau of Securities Regulation
LPL Financial, LLC Opinion No. 2015 DNH 152


JOSEPH A. DiCLERICO, Jr., District Judge.

The New Hampshire Bureau of Securities Regulation ("Bureau") initiated an adjudicative proceeding under the New Hampshire Securities Act, RSA chapter 421-B, with a "Notice of Order, " served on LPL Financial, LLC. LPL removed the action to this court under 28 U.S.C. § 1441(a) and § 1446, claiming diversity jurisdiction under 28 U.S.C. § 1332(a). The Bureau moved to remand, contending that the case was improperly removed and that this court lacks subject matter jurisdiction. In response, LPL objected to the motion to remand and also moved to be allowed to take discovery on the issue of whether the Bureau is a citizen for purposes of diversity jurisdiction under § 1332(a). The Bureau objects to the discovery motion.


The background information is taken from the Bureau's Notice of Order, dated April 6, 2015, that incorporates and attaches "Staff Petition for Relief in the Matter of: LPL Financial, LLC (CRD #6413)."

The Staff Petition states that LPL is an investment advisor and broker-dealer in Boston, Massachusetts, that has been licensed with the Securities and Exchange Commission and the Financial Industry Regulatory Authority ("FINRA") since 1973. LPL advisors sell products known as alternative investments, including real estate investment trusts ("REITs"). REITs that are not traded on a national securities exchange are called "nontraded REITs." Non-traded REITs have certain risks which include a limited market for resale and high fees.

Because of the risks, sales of alternative investments, including non-traded REITs, are subject to guidelines about the concentration of a client's net worth in those investments. For that purpose, an advisor who is selling alternative investments must complete a form titled "Alternative Investment Purchase Approved Public Direct Participation Program" that is known as an AI1 form.

An LPL client complained to the Bureau about a non-traded REIT sold to her by LPL in January of 2008. Because the client was more than seventy years old at the time of the sale, the maximum alternative investment concentration should have been 10%. The aggregate amount of the non-traded REIT investment sold to her exceeded 10% of her net worth.

The Bureau investigated her complaint and requested documents from LPL. After reviewing the information produced, the Bureau determined that "LPL had made numerous sales of nontraded REITs to New Hampshire investors that violated New Hampshire securities laws and LPL's guidelines on [alternative investment] Concentration." Additional information from LPL showed that LPL's guidelines and supervisory systems governing the sale of non-traded REITs "were systematically flawed resulting in hundreds of unlawful or unsuitable non-traded REIT sales to New Hampshire investors."

The Bureau filed a staff petition against LPL under RSA chapter 421-B, the New Hampshire Securities Act. The Act is administered by the director of the Bureau, who is appointed by the secretary of state. RSA 421-B:21, I; Elmo v. Callahan, 2012 WL 3669010, at *9 (D.N.H. Aug. 24, 2012); In re Basani, 149 N.H. 259, 262 (2003). The director has "exclusive authority and jurisdiction:... [t]o bring administrative actions to enforce the securities law" and "[t]o investigate and impose penalties for violations of the securities laws...."[1] RSA 421-B:21, Ia(d)&(e); see also Elmo, 2012 WL 3669010, at *9. Administrative penalties are provided by RSA 421-B:26.

The director of the Bureau initiated administrative adjudicative proceeding by issuing a "Notice of Order" to LPL pursuant to RSA 421-B:26-a. LPL was ordered "to immediately cease and desist from the [actions described in the staff petition] and from in any other way violating RSA 421-B." Among other things, LPL was ordered "to show cause why its securities license in New Hampshire should not be revoked" and to pay an administrative fine. The order also notified LPL of its right to request a hearing and the process for making that request. Before responding to the Notice of Order, LPL removed the case to this court on May 1, 2015, asserting that the adjudicatory proceeding was removable under § 1441(a) and § 1446 and that diversity jurisdiction under § 1332(a) existed.

I. Motion to Remand

The Bureau moves to remand on the grounds that that the administrative proceeding against LPL is not a civil action brought in state court as required by § 1441(a) and that jurisdiction is lacking under § 1332(a) because the Bureau is an arm or alter ego of the state, not a citizen of the state. LPL objects to remand on both grounds, and seeks discovery on the issue of the Bureau's status for purposes of diversity jurisdiction under § 1332(a).

A. Removal Under § 1441(a)

"Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or defendants, to the district court of the United States for the district and division embraced by the place where such action is pending." § 1441(a). The Bureau contends that the proceeding was not removable under § 1441(a) because it was administrative and was not a "civil action ...

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