Secondary Actors In Securities Transactions Beware: The Supreme Court May Have Aided And Abetted The Prospect Of Increased State Court Litigation

Secondary actors in securities transactions, such as lawyers, accountants, investment advisers and brokers, should be on alert in the wake of the Supreme Court's recent decision in Chadbourne & Parke v. Troice, 134 S. Ct. 1058 (2014), which limits the application of (and protections provided by) the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. § 78bb(f)(1). Historically, SLUSA precluded most state-law securities fraud class actions, reflecting the Congressional intention to centralize such litigation in federal court. In Chadbourne the U.S. Supreme Court narrowed SLUSA's scope, holding that it does not preempt certain state-law class action litigation against secondary actors. In so doing, the Court allowed the state-law claims to proceed against two insurance brokers and two law firms.

Following this precedent, there could now be an increase in state-law litigation against such secondary actors. For example, just this month, in light of the Chadbourne decision, a group of investors with claims related to the Madoff Ponzi scheme was given the opportunity to reassert state-law claims that were previously dismissed pursuant to SLUSA and the court raised the possibility that a major accounting firm could be reinstated as a defendant. See In re Tremont Securities Law, State Law and Insurance Litigation, No. 1:08-cv-11117 (S.D.N.Y. April 14, 2014) (TPG). Compounding the problem, under state law, defendants cannot take advantage of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), including its heightened pleading standards and caps on damages and attorneys' fees. Nor can they rely on Supreme Court precedent eliminating aiding and abetting liability under the federal securities laws.

The Chadbourne Decision

Chadbourne arose from Allen Stanford's multibillion Ponzi scheme where investors purchased certificates of deposit ("CDs") in the Stanford Investment Bank ("SIB"), believing they would be used to purchase lucrative assets, such as "highly marketable securities issued by stable governments [and] strong multinational companies." Id. at 1065. In other words, although the CDs were not themselves "covered securities," plaintiffs expected that they were backed by or would be used to purchase SLUSA covered securities. Id. at 1073. Instead, the proceeds from the CDs were used in a Ponzi scheme to repay earlier investors, to finance speculative investments, and to fund the fraudsters' elaborate lifestyles. Id...