Supreme Court Grants Review Of Case On Limits Of SLUSA Preemption

Securities Regulation Law Report. October 3, 2005

EXCERPT: In advance of the opening of its 2005-2006 term, the U.S. Supreme Court Sept. 27 agreed to review a controversial federal appeals court decision that limited the reach of the 1998 Securities Litigation Uniform Standards Act by allowing "holders" of securities to pursue their claim that they would have sold their stock were it not for inflated analyst reports issued by Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, U.S. No. 04-1371, 9/27/05). In its decision, the U.S. Court of Appeals for the Second Circuit concluded that SLUSA did not preempt the investors' suit. There can be no preemption, the court concluded, without a purchase or sale of a security (37 SRLR 129, 1/24/05). SLUSA was enacted to close a loophole in the 1995 Private Securities Litigation Reform Act that allowed plaintiffs suing in state courts to avoid PSLRA's tougher securities fraud pleading requirements. SLUSA provides for federal preemption--removal, followed by dismissal--of state law class actions alleging "misrepresentations ... in connection with the purchase or sale of a covered security." The appeals court rejected the view of the Securities and Exchange Commission (36 SRLR 1206 7/5/04 ) and petitioner Merrill Lynch, and disagreed that the purchaser/seller standing rule of Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), is irrelevant to whether a claim is preempted by SLUSA. The Second Circuit noted that SLUSA does not define the phrase "in connection with the purchase or sale of a covered security."