Tuesday, March 28, 2006

SCOTUS Holds SLUSA Preempts Class Action Fraud Suits Brought by Investors Who Merely Held Securities

BNA’s Class Action Litigation (Volume 07 Number 06, Fri., Mar. 24, 2006, Page 194, ISSN 1529-8000) is reporting on Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, --- S. Ct. ---, 2006 WL 694137 (Mar. 21, 2006):

The 1998 Securities Litigation Uniform Standards Act preempts class securities fraud suits not only by purchasers and sellers, but by investors who held on to covered securities, the U.S. Supreme Court concluded . . .. the high court vacated a contrary ruling by the U.S. Court of Appeals for the Second Circuit.

Here's an excerpt from the Syllabus:

(c) Both the class and the securities here are “covered” within SLUSA’s meaning, and the complaint alleges misrepresentations and omissions of material facts. The only disputed issue is whether the alleged wrongdoing was “in connection with the purchase or sale” of securities. Dabit’s narrow reading would pre-empt only those actions in which Blue Chip Stamps’ purchaser-seller requirement is met. Insofar as that argument assumes that the Blue Chip Stamps rule stems from Rule 10b–5’s text, it must be rejected, for the Court relied on “policy considerations” in adopting that limitation, and it purported to define the scope of a private right of action under Rule 10b–5, not to define “in connection with the purchase or sale.” When this Court has sought to give meaning to that phrase in the §10(b) and Rule 10b–5 context, it has broadly required that the alleged fraud “coincide” with a securities transaction, an interpretation that comports with the SEC’s longstanding views. Congress can hardly have been unaware of this broad construction when it imported the phrase into SLUSA. Where judicial interpretations have settled a statutory provision’s meaning, repeating the same language in a new statute indicates the intent to incorporate the judicial interpretations as well. That presumption is particularly apt here, because Congress not only used §10(b)’s and Rule 10b–5’s words, but used them in another provision appearing in the same statute as §10(b). The presumption that Congress envisioned a broad construction also follows from the particular concerns that culminated in SLUSA’s enactment, viz., preventing state private securities class-action suits from frustrating the Reform Act’s objectives. A narrow construction also would give rise to wasteful, duplicative litigation in state and federal courts. The presumption that “Congress does not cavalierly pre-empt state-law causes of action,” Medtronic, Inc. v. Lohr, 518 U. S. 470 , has less force here because SLUSA does not pre-empt any cause of action. It simply denies the use of the class-action device to vindicate certain claims. Moreover, tailored exceptions to SLUSA’s pre-emptive command—for, e.g., state agency enforcement proceedings—demonstrate that Congress did not act cavalierly. Finally, federal, not state, law has long been the principal vehicle for asserting class-action securities fraud claims. Pp. 10–16.

(d) Dabit’s holder class action is distinguishable from a typical Rule 10b–5 class action only in that it is brought by holders rather than sellers or purchasers. That distinction is irrelevant for SLUSA pre-emption purposes. The plaintiffs’ identity does not determine whether the complaint alleges the requisite fraud, and the alleged misconduct here—fraudulent manipulation of stock prices—unquestionably qualifies as a fraud “in connection with the purchase or sale” of securities as the phrase is defined in SEC v. Zandford, 535 U. S. 813 , and United States v. O’Hagan, 521 U. S. 642 . Pp. 16–17.

The full discussion is available to BNA subscribers by clicking here.


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