Supreme Court Decision Alert - February 26, 2014

Keywords:

On February 26, 2014 the Supreme Court issued one decision, described below, of interest to the business community.

Securities Litigation Uniform Standards Act—Misrepresentations "In Connection With" Securities Transactions

Chadbourne & Parke LLP v. Troice, No. 12-79; Willis of Colorado Inc. v. Troice, No. 12-86; and Proskauer Rose LLP v. Troice, No. 12-88 (previously discussed in the January 22, 2013, Docket Report)

The Securities Litigation Uniform Standards Act ("SLUSA") precludes the filing in either state or federal court of most class actions under state law that allege "a misrepresentation or omission of a material fact in connection with the purchase or sale of" securities covered by the statute. 15 U.S.C. § 78bb(f)(1)(A). The SLUSA defines "covered security" as any security "listed, or authorized for listing, on a national securities exchange." Id. § 77r(b)(1). Today, in a 7-2 decision, the Supreme Court held that a misrepresentation satisfies the "in connection with" test only if the misrepresentation "is material to a decision by one or more individuals (other than the fraudster) to buy or to sell a 'covered security.'" Slip op. 8.

The Court's opinion is of interest to businesses that purchase, sell, issue, or make representations concerning securities.

Respondents—plaintiffs in the district court—filed class actions relating to certificates of deposit that they purchased from Stanford International Bank, an entity controlled by R. Allen Stanford. Although the CDs themselves were not covered securities, respondents alleged that "their decision to purchase" the CDs was influenced by the Bank's misrepresentations that the CDs were backed by covered securities and other assets. Slip op. 18. The district court concluded that those alleged misrepresentations were made "in connection with" the Bank's supposed securities transactions. But the Fifth Circuit reversed, holding that "the falsehoods about the Bank's holdings in covered securities were too 'tangentially related' to the 'crux' of the fraud to" fall within the scope of the SLUSA. Slip op. 8 (quoting Roland v. Green, 675 F.3d 503, 521 (5th Cir. 2012)).

In an opinion by Justice Breyer, the Supreme Court affirmed. The Court held that a misrepresentation concerns a "'material fact in connection with the purchase or sale'" of a covered security only if it "makes a significant difference to [the] decision" of someone other than the entity making the misrepresentation "to...