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Merrill Lynch, Pierce, Fenner& Smith Inc. v. Dabit

Citation. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 126 S. Ct. 1503, 164 L. Ed. 2d 179, 74 U.S.L.W. 4167, Fed. Sec. L. Rep. (CCH) P93,723, 19 Fla. L. Weekly Fed. S 131 (U.S. Mar. 21, 2006)
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Brief Fact Summary.

Dabit (Plaintiff) argued that his state-law holder class-action securities fraud action against his old employer, Merrill Lynch, Pierce, Fenner& Smith (Defendant), the investment banking firm, was not obstructed by the Securities Litigation Uniform Standard Act of 1998, seeing as application of that Act was warranted only “in connection with the purchase or sale of a security” and he was bringing suit as a “holder†of securities, not in his capacity as a buyer or seller of securities.

Synopsis of Rule of Law.

State-law holder class-action securities fraud claims which federal law offers no private remedy for are obstructed by the Securities Litigation Uniform Standard Actof 1998. 


To further his state-law claims that Merrill Lynch, Pierce, Fenner& Smith (Merrill Lynch), Dabit’s previous employer, illegally manipulated stock prices, which caused him, other brokers and their clients to retain their overvalued securitiesDabit filed a private securities fraud class action in federal court, invoking diversity jurisdiction.  Merrill Lynch breaching the fiduciary duty and covenant of good faith and fair dealing owed its brokers by promulgating deceiving research via its research analysts (which the brokers rely on) thus manipulating stock prices was the central part of the complaint along with Merrill Lynch using its deceived brokers to increase the cost of its investment banking clients’ stocks. Had the brokers and clients been cognizant of the reality, they would have sold their stocks instead of retaining them and allegedly suffered injuries as a result. The brokers were purportedly injured as a result of their clients learning they made poor investments and so taking their business away, and so consequently, lost their commission fees.  This amended complaint was dismissed by the district court, finding his claims obstructed by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which offers “covered class action” based on state law and purporting “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security” “may be maintained in any state or federal court by any private party.” 15 U.S.C. § 78bb(f)(l )(A).
The court of appeals vacated the judgment and concluded that, regarding the complaint claiming that brokers were illegally induced to delay or retain selling stock, it is not covered by SLUSA’s obstructive scope due to the court finding that the allegations stated by holders failed to claim fraud  “in connectionwith the purchase or sale” of securities under SLUSA. Certiorari was granted by the Supreme Court.


Are state-law holder class-action securities fraud claims which federal law offers no private remedy for obstructed by the Securities Litigation Uniform Standard Act of 1998?


(Stevens, J.) Yes. State-law holder class-action securities fraud claims which federal law offers no private remedy for are obstructed by the Securities Litigation Uniform Standard Act of 1998. The extent of the federal interest in defending the efficiency and integrity of the national securities market cannot be exaggerated. Both the Securities Act of 1933 and the Securities Exchange Act of 1934 (1934 Act) anchor federal regulation of essential components of the U.S. economy. A significant component of that regulatory plan is Securities and Exchange Commission (SEC) Rule 10b-5, which was promulgated pursuant to § 10(b) of the 1934 Act and similar to § 10(b), bans misstatements, deception and fraud “in connection with the purchase or sale” of a security. In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), this court, restricted the Rule 10b-5 private right of action to plaintiffs who purchased or sold securities themselves, relying on “policy considerations†and the vast recognition that suits by nonsellers and nonpurchasers pose a special hazard of exasperating discovery requests that could “frustrate of delay normal business activity.†Congress was prompted by comparable policy considerations to adopt the Private Securities Litigation Reform Act (Reform Act) which focused on apparent abuses of class actions, such as; exasperating discovery requests and nuisance filings, but this endeavor action provoked some members of the plaintiff’s bar to circumvent the federal forum completely.  Congress passed SLUSA to stop the class actions switch from federal to state courts, with the class (50+ people) and the securities (traded on a regulated national exchange) in this case are “covered†under SLUSA’s definition, and the complaint claims omissions of material facts and misstatements. Whether the purported offense was “in connection with the purchase and sale†of securities is the sole disputed issue. Only those actions where a Blue Chip Stamps’ purchaser-seller requirement is met would be obstructed by Dabit’s narrow reading, to such an extent as that contention assumes that the Blue Chip Stamp rule comes from Rule 10b-5, it must be denied, because in adopting that restriction the Court relied upon “policy considerations†and it did not alleged to define”in connection with the purchase or sale but instead, the scope of a private right of action under Rule 10b-5. The Court broadly required that purported fraud “coincide†with a securities transaction when it wanted to provide meaning to that phrase in § 10(b) and Rule 10b-5 context, an construction  that comports with the age-old opinions of the SEC. When Congress imported the phrase to SLUSA, it’s highly unlikely it was not aware of that broad interpretation. Where judicial constructions have established a statutory provision’s importance, using similar language demonstrates the intent to involve the judicial constructions too. Congress not only utilizing § 10(b)’s and Rule 10b-5’s words but utilizing them in the same statute as § 10(b), but a different provision, is a good application of the aforementioned presumption.  The presumption that Congress imagined a broad interpretation follows the specific concerns that concluded in the passing of SLUSA (preventing state private securities class­ action suits from frustrating the Reform Act’s objectives.) Also giving rise to duplicative, wasteful litigation in federal and state courts are narrow interpretations, with the presumption that “Congress does not cavalierly preempt state-law causes of action†has less power in this case because no cause of action is preempted by SLUSA. Furthermore, custom-made exceptions to SLUSA’s preemptive command such as, state agency enforcement proceedings prove that Congress failed to cavalierly. Lastly, federal law, instead of state, has been the main medium for asserting class-action securities fraud claims for a long time. A regular Rule 10b-5 class action is differentiated from Dabits holder class action in that it is brought by holders as opposed to sellers and purchasers, but is not relevant for SLUSA preemption purposes. Illegal manipulation of stock prices, the purported misconduct in this case, without question meets the requirements as a fraud “in connection with the purchase or sale” of securities. Vacated and remanded.


Many considerable exemptions exist in SLUSA, such as; securities fraud class actions brought by state or local governments or their pension funds and also for state-law class actions involving traditional corporate governance issues. Furthermore, the dismissal of an entire action where some of the plaintiff’s allegations are preempted as per SLUSA is not required by SLUSA has been held by some courts. See In re Lord AbbettMut. Funds Fee Litig. (White v. Lord Abbett& Co. LLC) , 553 F.3d 248 (3d Cir. 2009).

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