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 â€œholderâ€ 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.Â
Issue. 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?
Held. (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 Â§ 10(b) of the 1934 Act and similar to Â§ 10(b), bans misstatements, deception and fraud â€œin 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 â€œpolicy considerationsâ€ and the vast recognition that suits by nonsellers and nonpurchasers pose a special hazard of exasperating discovery requests that could â€œfrustrate of delay normal business activity.â€ 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.Â 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 â€œcoveredâ€ under SLUSA’s definition, and the complaint claims omissions of material facts and misstatements. Whether the purported offense was â€œin connection with the purchase and saleâ€ 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 â€œpolicy considerationsâ€ 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 â€œcoincideâ€ with a securities transaction when it wanted to provide meaning to that phrase in Â§ 10(b) and Rule 10b-5 context, an constructionÂ 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 Â§ 10(b)’s and Rule 10b-5’s words but utilizing them in the same statute as Â§ 10(b), but a different provision, is a good application of the aforementioned presumption.Â The presumption that Congress imagined a broad interpretation follows the specific concerns that concluded in the passing of SLUSA (preventing state private securities classÂ 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 actionâ€ 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.
Discussion. 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).