The Supreme Court Narrows SLUSA’s Reach And Expands The Pool Of Potential Defendants Subject To State Securities Law Class Actions

On February 26, 2014, the United States Supreme Court limited the reach of the Securities Litigation Uniform Standards Act of 1998 (SLUSA), thereby increasing the number of individuals and entities that may be surprised to find themselves defendants in state securities law class actions. Specifically, in Chadbourne & Parke LLP v. Troice et al., 571 U.S. ___, Nos. 12-79, 12-86 and 12-88 (2014), the United States Supreme Court held that SLUSA does not preclude class actions brought under state securities laws based on purchases or sales of uncovered securities, even if the transaction or investment - at some level — may involve covered securities. This means that managers, investment advisers, and professional advisors for funds selling uncovered securities (i.e., any security that is not sold on a national securities exchange or issued by an investment company) are potentially not covered by SLUSA's protection, even if those funds invest in covered securities. The Court was able to reach its result through an application of the "in connection with" clause that the dissent argued was inconsistent with the previously expansive interpretation given that clause. Please click on the link below for a more detailed discussion of Chadbourne and its potential impact.

SLUSA limits a plaintiff's ability to bring a state-law-based class action lawsuit alleging a misrepresentation, material omission or deceptive practice "in connection with the purchase or sale of a covered security." 15 U.S.C. §§ 78bb(f)(1)(A) & (B). Under SLUSA, as under the Securities Act of 1933, a "covered security" is "[a security] listed, or authorized for listing, in a national securities exchange" or a security issued by an "investment company." 15 U.S.C. §§ 77r(b)(1)- (2) & 78bb(f)(5)(e).

In Chadbourne, a case stemming from Allen Stanford's multibillion-dollar Ponzi scheme, investors allegedly purchased an uncovered security, bank certificates of deposit ("CDs"), based on misrepresentations that the CDs were, or would be, backed by investments in, among other assets, covered securities. The Court noted that the law "defines 'covered security' narrowly." In a 7-2 opinion authored by Justice Breyer and joined by Chief Justice Roberts and Justices Scalia, Thomas, Ginsburg, Sotomayor and Kagan, the Court concluded that SLUSA does not preclude state-law-based actions filed against those who allegedly assisted in some of the fraudulent sales of Stanford International Bank CDs. Thus...