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The basic principles for successfully asserting federal preemption as an affirmative defense on summary judgment are sufficiently clear: it is first incumbent on the party moving for summary judgment to demonstrate that federal preemption potentially applies to the facts and circumstances of the suit, and, if so, the movants must adduce sufficient evidence, interpreted in a light most favorable to the non-moving party, to prove that there is no genuine issue of material fact contradicting the claim that the case at bar actually and unquestionably qualifies for federal preemption. The first step presents a purely legal determination, but the second raises a mixed question. Should the movants fail to meet their burden with respect to the latter step, such as if a genuine issue of material fact exists regarding the claim's actual qualification for federal preemption, the matter must be determined by the factfinder.
The financial advisor approved plaintiff investor and told him that he had non-public information that a large public company was about to acquire a smaller company and that he should buy stock in the smaller company. The promised acquisition turned out to be an entirely fictitious creation of the president of the smaller company. The advisor also bought the stock and lost large sums of money. The investor sued defendants, the financial advisor and financial company, alleging violations of the state's blue sky law and securities fraud under § 10b of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), 17 C.F.R. § 240.10-5 (Rule 10b-5), and Ky. Rev. Stat. 292.320(1). The district court granted summary judgment in favor of defendants, holding that the state blue sky law was preempted by the National Securities Markets Improvement Act of 1996 (NSMIA), Pub. L. No. 104-290, 110 Stat. 3416, and the investor failed to prove scienter and loss causation. The investor appealed.
Was the grant of summary judgment in favor of the defendants proper under the circumstances?
The appellate court found that a genuine issue of fact existed as to whether the shares sold to the investor were "covered securities" that warranted NSMIA preemption. The investor's admission that the offering was private had no bearing on the state claim. The investor sufficiently alleged scienter because the advisor was fully cognizant of the prohibitions against trading on non-public insider information. The fact that the advisor was also a victim of the scheme did not relieve him from liability. However, the financial company could not be held secondarily liable.