On 26 February 2014, the US Supreme Court ruled that the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") does not preclude class action lawsuits asserting state law claims unless the alleged misrepresentations or omissions were material to a person's decision to buy or sell a security covered by SLUSA.
In the years before SLUSA was enacted, there was concern that a flood of securities cases would be brought under state law to avoid the strictures of the recently enacted Private Securities Litigation Reform Act of 1995, which, in an effort to curb abuses, created a number of hurdles for securities plaintiffs. SLUSA was enacted to prevent class action plaintiffs' lawyers from filing state causes of action in state courts as a substitute for filing federal causes of action in federal courts. SLUSA, therefore, prohibits securities class actions "based upon the statutory or common law of any State" when plaintiffs allege "a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security." In relevant part, "covered" securities are those traded on a national exchange.
In Troice, plaintiffs alleged that defendants induced them into purchasing certificates of deposit (which are not covered by SLUSA) by misrepresenting that the certificates were backed by less speculative, covered securities. The Court ruled that SLUSA did not preempt plaintiffs' state law claims. SLUSA preempts state law claims only when the alleged misrepresentation or omission was material to the decision of a person (other than the alleged perpetrator of the fraud) to buy or sell a covered security. Because in Troice the alleged misrepresentation – that uncovered certificates of deposit were backed by covered securities – merely related to covered securities, but did not result in any covered securities changing hands, SLUSA did not preempt plaintiffs' state law claims.
This ruling is consistent with the underlying purpose of the federal securities statutes, which seek to protect investor confidence in national securities markets, while allowing states to regulate frauds that are traditionally of state concern. Plaintiffs are likely to use Troice in future cases to support arguments against dismissal pursuant to SLUSA on the grounds that the misrepresentation or omission that they are alleging is not sufficiently related to the purchase or sale of a covered security.
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