Merrill Lynch v. Dabit

By:  Cydney Posner

As you have probably already seen, in Merrill Lynch v. Dabit, the Supreme Court unanimously held that the Securities Litigation Uniform Standards Act of 1998 bars private class actions under state law by "holders" of securities. The plaintiffs in this case did not claim that they were induced to buy or sell securities, but rather that the defendant's fraud induced them to hold onto stock that later fell in value. The result should effectively preclude "holder" class actions, which some states, including California, had permitted. This case eliminates perhaps the last group of securities fraud class actions that could be brought under state law, although those pesky derivative cases will still be around.

Plaintiffs were former Merrill Lynch brokers who claimed that Merrill disseminated overly optimistic and misleading analyst research to its brokers to manipulate stock prices; as a result, the brokers held onto overvalued securities and lost commission fees when their disappointed clients took their business to other brokers. To avoid the rigorous pleading and procedural hurdles of the Private Securities Litigation Reform Act, the plaintiffs pursued exclusively state law claims. SLUSA bars state law class actions for misrepresentation or omission "in connection with the purchase or sale" of securities. The plaintiffs contended that they were not preempted by SLUSA because, having dropped their claims relating to the original "purchase" of the securities, they now advanced only those claims related to "holding" of the securities. SLUSA, they argued, preempted only fraud in connection with a "purchase and sale."

In rejecting plaintiffs' claims, the Court reaffirmed the explicit role of policy considerations in shaping the parameters of the private right of action under Rule 10b-5, since the right is one that was judicially created. In resounding language, the Court once again expressed its concern over the uniquely harmful impact of frivolous securities litigation on companies and on the economy as a whole.

Interestingly, in reaching its conclusion, the Court looked back at its holding in Blue Chip Stamps, where it had interpreted the "in connection with a purchase or sale" language narrowly to fashion the "purchaser-seller" requirement, which limited standing to sue. The plaintiffs here cleverly argued that the use of the narrow "purchase or sale" language in SLUSA meant that only claims by purchasers and sellers were pre-empted, and the Second Circuit agreed. The Court, however, reasoned that Congress, aware of judicial precedents and concerned by the proliferation of state law claims, intended in SLUSA to have broad preclusive effect. Thus, the "purchase or sale" language was interpreted as allowing Congress to preclude any state law claims that "coincide with" a securities transaction.

This is a welcome result for our clients because it signals the Supreme Court's continuing (and unanimous) concern about the potential for abuse in the securities class action arena.

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