Supreme Court Settles Circuit Split re Whether SLUSA Preempts State Class-Action Fraud Suits by Mere Holders of Securities

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

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 . . . .

Settling a circuit split, the court rejected the view of the Second Circuit that there can be no preemption without a purchase or sale of a security.

Here's an excerpt from the opinion for the Court by Justice Stevens:

Title I of the Securities Litigation Uniform Standards Act of 1998 (SLUSA) provides that "[n]o covered class action" based on state law and alleging "a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security" "may be maintained in any State or Federal court by any private party." § 101(b), 112 Stat. 3227 (codified at 15 U.S.C. § 78bb(f)(1)(A)). In this case the Second Circuit held that SLUSA only pre-empts state-law class-action claims brought by plaintiffs who have a private remedy under federal law. 395 F.3d 25 (2005). A few months later, the Seventh Circuit ruled to the contrary, holding that the statute also pre-empts state-law class-action claims for which federal law provides no private remedy. Kircher v. Putnam Funds Trust, 403 F.3d 478 (C.A.7 2005). The background, the text, and the purpose of SLUSA's pre-emption provision all support the broader interpretation adopted by the Seventh Circuit.

. . .

The holder class action that respondent tried to plead, and that the Second Circuit envisioned, is distinguishable from a typical Rule 10b-5 class action in only one respect: It is brought by holders instead of purchasers or sellers. For purposes of SLUSA pre-emption, that distinction is irrelevant; the identity of the plaintiffs does not determine whether the complaint alleges fraud "in connection with the purchase or sale" of securities. The misconduct of which respondent complains here--fraudulent manipulation of stock prices--unquestionably qualifies as fraud "in connection with the purchase or sale" of securities as the phrase is defined in Zandford, 535 U.S., at 820, 822, 122 S.Ct. 1899, and O'Hagan, 521 U.S., at 651, 117 S.Ct. 2199.


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