Shadi Dabit, formerly a stockbroker at Merrill Lynch, brought a class action suit against his former employer alleging that the company had defrauded brokers by deceptively inflating stock prices, causing the brokers to hold onto stocks they would otherwise have sold. Dabit's class action was filed in the U.S. District Court based on federal diversity jurisdiction, but was based on Oklahoma state law.

In response to perceived abuses of the class-action vehicle in securities litigation, Congress had passed the Private Securities Litigation Reform Act of 1995, which placed restrictions on federal securities fraud class actions. When plaintiffs began avoiding the law by bringing the suits in state courts instead of federal courts, Congress passed the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which pre-empts federal class action securities fraud claims brought under state law that allege misrepresentation "in connection with the purchase or sale of a covered security."

Merrill Lynch argued that Dabit's suit was pre-empted by SLUSA and therefore could not be brought under state law. Dabit countered that the suit alleged misrepresentation concerning only the holding of stocks, and therefore was beyond the scope of SLUSA. The District Court for the Southern District of New York ruled for Merrill Lynch, finding the language of SLUSA broad enough to include suits such as Dabit's. The Second Circuit Court of Appeals reversed, holding that suits by holders of stocks are distinct from suits by sellers and purchasers and that SLUSA was meant to pre-empt only the latter.

Question:

Are class action securities fraud suits brought under state law pre-empted by the Securities Litigation Uniform Standards Act of 1998 if the suits allege that misleading statements or omissions induced brokers to hold, not sell or purchase, securities?

Conclusion:

Yes. In an 8-0 decision (Justice Alito not participating), the Court held that "holder" class actions such as Dabit's are "in connection with the purchase or sale" of a security and therefore are pre-empted by SLUSA. The opinion by Justice John Paul Stevens reasoned that Congress must have been aware of the broad interpretation the Court had given that phrase when it passed SLUSA, and that a broad interpretation of SLUSA is more consistent with the law's stated purpose. "For purposes of SLUSA pre-emption, that distinction [between sellers/purchasers and holders] is irrelevant," Justice Stevens wrote.

Decisions

Decision: 8 votes for Merrill Lynch, 0 vote(s) against
Legal provision: 15 U.S.C. 78

Sort by Ideology