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Merrill Lynch v. Dabit Class Action Defense Case

SLUSA (Securities Litigation Uniform Standards Act) and Pre-emption

SLUSA (Securities Litigation Uniform Standards Act) was enacted by Congress in 1998 to affect sweeping changes to federal securities laws class actions. SLUSA addresses numerous federal securities laws class actions issues including pleading, class representation, discovery, liability, attorney fee awards, expenses and more. SLUSA also sought to pre-empt state law securities class action litigation, but the Circuit Courts disagreed on the breadth of that pre-emption.

In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, __ U.S. ___, 126 S.Ct. 1503 (2006), the United States Supreme Court issued its opinion. This opinion addresses whether the Securities Litigation Uniform Standards Act (SLUSA) “only pre-empts state-law class-action claims brought by plaintiffs who have a private remedy under federal law,” as the Second Circuit held in Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2005), or whether SLUSA “also pre-empts state-law class-action claims for which federal law provides no private remedy,” as the Seventh Circuit held in Kircher v. Putnam Funds Trust, 403 F.3d 478 (7th Cir. 2005). The Supreme Court agreed with the Seventh Circuit, holding that SLUSA’s pre-emption provision was intended to be read broadly, and pre-empted state-law class-action claims brought not only by purchasers and sellers of securities, but also by holders of securities. As so read, SLUSA pre-empted state-law claims alleging the fraudulent manipulation of stock prices.

Dabit had argued, and the Second Circuit had agreed, that SLUSA affected preempted only “purchaser-seller” transactions, and that such a conclusion was compelled by the Supreme Court’s decision in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). In rejecting this argument, the U.S. Supreme Court explained that “Blue Chip Stamps relied chiefly, and candidly, on ‘policy considerations,’” and “purported to define the scope of a private right of action under Rule 10b-5-not to define the words ‘in connection with the purchase or sale.’” Merrill Lynch v. Dabit, at 1512 (citations omitted).

The Supreme Court candidly admitted that a narrow statutory construction of Rule 10b-5 “would not, as a matter of first impression, have been unreasonable,” but such a narrow reading was not given by the Court. Rather,

Under our precedents, it is enough that the fraud alleged “coincide” with a securities transaction-whether by the plaintiff or by someone else. . . . The requisite showing, in other words, is “deception ‘in connection with the purchase or sale of any security,’ not deception of an identifiable purchaser or seller.” . . . Notably, this broader interpretation of the statutory language comports with the longstanding views of the SEC. . . .

Merrill Lynch v. Dabit, at 1513 (citations omitted). From there, the Supreme Court opined that Congress was aware of the “broad construction” adopted by the Supreme Court in Rule 10b-5 cases, and presumably intended to graft a similarly broad construction onto SLUSA. Id.

The High Court found support for its construction in the purpose of SLUSA, as well:

A narrow reading of the statute would undercut the effectiveness of the 1995 Reform Act and thus run contrary to SLUSA’s stated purpose, viz., “to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives” of the 1995 Act. SLUSA § 2(5), 112 Stat. 3227. As the Blue Chip Stamps Court observed, class actions brought by holders pose a special risk of vexatious litigation. . . . It would be odd, to say the least, if SLUSA exempted that particularly troublesome subset of class actions from its pre-emptive sweep. . . .

126 S.Ct. at 1513-14 (italics added) (citations omitted).

This recent opinion by the United States Supreme Court should prove useful to class action defendants, and will hopefully assist in stemming the tide of abusive lawsuits.

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