Securities litigation continues to be a hot topic at the U.S. Supreme Court. Since 2006, the Roberts Court has issued no fewer than eight opinions on important securities litigation issues. These decisions have altered the landscape of federal securities litigation, and securities class actions in particular. In the last few years, the Court has addressed the territorial reach of the federal securities laws, the statutory limits on claims against secondary actors, the requisite pleading standards for materiality and scienter, class certification standards, loss causation, and the statute of limitations.1
Two additional securities cases are pending in the current term. The first is Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, in which the Supreme Court will consider the proof required at the class certification stage.2 Amgen was argued in November, and an opinion will be forthcoming before the end of the term in June. And last month, the Court added another case to its docket.
On January 18, 2013, the Supreme Court granted a writ of certiorari to address the scope of the Securities Litigation Uniform Standards Act (“SLUSA”), which preempts certain securities class actions arising under state law. The Court will consider three related cases arising from the alleged Ponzi scheme of Allen Stanford. The cases are Chadbourne & Park LLP v. Troice, 12-79; Willis of Colorado Inc. v. Troice, 12-86; and Proskauer Rose LLP v. Troice, 12-88. (Disclosure: Mr. Foster is counsel for one of the petitioners at the Supreme Court.)
SLUSA prohibits state-law class actions alleging fraud “in connection with” the purchase or sale of “covered” securities (i.e., securities that are traded on a national exchange such as the NYSE). SLUSA was enacted in 1997 to prevent plaintiffs from circumventing the restrictions imposed under the federal securities laws by filing alternative claims in state court.
In the Stanford cases, the plaintiffs allege that they were misled into purchasing fraudulent CDs based, at least in part, on the representation that the CDs were backed by a portfolio of securities traded on major exchanges. Stanford is insolvent, and therefore the plaintiffs have targeted various third-party professionals—including Stanford’s banks, clearing brokers, law firms, and insurers—accusing them of facilitating the alleged fraud.
Under federal law, private litigants are not permitted to bring “aiding and abetting” claims against third parties. The Stanford plaintiffs have sought to avoid this limitation by asserting claims under state law rather than federal law. The issue on appeal is whether such claims are preempted by SLUSA.
The Supreme Court petitioners are law firms and insurance brokers that performed professional services for Stanford. The petitioners moved to dismiss the plaintiffs’ state-law claims at the district court on the grounds that they were preempted by SLUSA. The defendants acknowledged that the Stanford CDs themselves were not “covered securities” within the meaning of SLUSA, but argued that plaintiffs’ claims were nevertheless precluded because of Stanford’s misrepresentations that the CDs were backed by SLUSA-covered securities.
The district court recognized a split in authority over meaning of SLUSA’s “in connection with” requirement, and it chose to follow the Eleventh Circuit test. Under that standard, a state-law class action is precluded if the plaintiffs’ allegations “depend upon” the purchase or sale of SLUSA-covered securities, or if the plaintiffs were “induced” to invest through misrepresentations regarding covered securities.The Stanford cases clearly satisfied this test, and the district court granted the defendants’ motions to dismiss.
The Fifth Circuit reversed, holding that SLUSA did not apply because the plaintiffs’ complaints also contained other alleged misrepresentations that did not relate to Stanford’s alleged portfolio of covered securities. The Fifth Circuit acknowledged that “the CDs’ promotional material touted that [Stanford’s] portfolio of assets was invested in ‘highly marketable securities issued by stable governments, strong multinational companies, and major international banks,’” but nonetheless found that this was “but one of a host of (mis)representations” made by Stanford. The court ultimately concluded that Stanford’s misrepresentations about its securities portfolio were only “tangentially related” to the heart of its alleged fraud.
The petitioners contend that the Fifth Circuit’s decision is contrary to the plain language of SLUSA. The statute provides that a state-law class action is precluded if the complaint alleges “a” misrepresentation in connection with the purchase or sale of a covered security. Therefore, a single misrepresentation is all that is required. The statute does not contemplate a balancing of various allegations to determine whether the SLUSA-implicating misrepresentations are important enough to warrant consideration.
Before the Supreme Court granted the petition for writ of certiorari, it invited the U.S. Solicitor General to submit an amicus brief. The Solicitor General argued that the Court should refuse the case due to the complexity and unusual nature of the Stanford Ponzi scheme, but expressly recognized that “the Fifth Circuit erred in its application of SLUSA’s preclusion provision.”
The Supreme Court will consider the following question: “whether a covered state law class action complaint that unquestionably alleges ‘a’ misrepresentation ‘in connection with’ the purchase or sale of a SLUSA-covered security nonetheless can escape the application of SLUSA by including other allegations that are farther removed from a covered securities transaction.”
Oral argument has not yet been scheduled.
1. Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2006) (addressing standards for proof of loss causation); Tellabs Inc. v. Makor Issues & Rights, 551 U.S. 308 (2007) (addressing standards for pleading scienter); Stoneridge Investment Partners v. Scientific-Atlanta, 552 U.S. 148 (2008) (addressing liability of secondary actors); Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010) (addressing extraterritorial jurisdiction); Merck & Co., Inc. v. Reynolds, 130 S. Ct. 1784 (2010) (addressing statute of limitations); Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011) (addressing standards of materiality); Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) (addressing limitations on primary liability); Erica P. John Fund, Inc. v. Halliburton Co.,131 S. Ct. 2179 (2011) (addressing loss causation and class certification).