The U.S. Supreme Court has unanimously ruled that certain securities fraud class actions involving nationally traded securities may not be brought under state securities law. The decision affirms the Supreme Court’s view that federal, not state, law should be the principal vehicle for asserting class action securities fraud claims.
In Merrill Lynch v. Dabit, the plaintiffs were brokers who sued Merrill Lynch under Oklahoma law, alleging that fraudulent analyst reports induced them to continue to hold securities in their personal and client accounts longer than they otherwise would have. Under the Securities Litigation Uniform Standards Act of 1998 (SLUSA), federal law preempts state law fraud claims "in connection with the purchase or sale" of securities. Dabit argued that his claim was not preempted because he neither purchased nor sold securities, but instead held onto them. The Supreme Court ruled that so-called holders’ cases are preempted by federal law just like class actions brought by purchasers and sellers.
Federal law preemption is significant because federal class actions must satisfy the procedural requirements and pleading standards of the Private Securities Litigation Reform Act of 1995, which was intended to reduce the number of strike suits and vexatious litigation tactics. After this legislation was passed, class action plaintiffs began suing under state law. To stem the shift to state law, Congress passed SLUSA. The phrase "in connection with the purchase or sale of securities" was, however, a loophole in SLUSA that allowed holders’ class actions to proceed under state law.
The Dabit decision should effectively put an end to holders’ class actions. The preemption rule means that they cannot proceed under state law; yet under federal law only purchasers and sellers are granted standing to sue for securities fraud. The federal standing rule is the same as that under Ontario's civil liability regime, whereby only purchasers and sellers may sue for a continuous disclosure violation.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
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