Supreme Court To Decide Scope Of Preemption Of State-Law Securities Class Actions By SLUSA

Keywords: Chadbourne & Parke LLP v. Troice, Fifth Circuit, PLSRA, preemption, Proskauer Rose LLP v. Troice, Roland v. Green, securities, SLUSA, U.S. Supreme Court, Willis of Colorado v. Troice

On Friday, the Supreme Court granted review in three consolidated cases: Chadbourne & Parke LLP v. Troice, No. 12-79, Willis of Colorado v. Troice, No. 12-86, and Proskauer Rose LLP v. Troice, No. 12-88. The Court'starget=_blank decision will clarify when the federal Securities Litigation Uniform Standards Act ("SLUSA") preempts state-law securities class actions.

After Congress tightened the pleading and proof requirements for class actions under the federal securities laws in 1996 in the Private Securities Litigation Reform Act, plaintiffs fled to state court and started bringing securities class actions under state law. In response to this evasion, Congress enacted SLUSA, which precludes most state-law class action claims 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). In the three Troice cases, the Supreme Court will determine when a misrepresentation is "in connection with" a securities transaction.

All three cases arise out of the Ponzi scheme that R. Allen Stanford allegedly operated. The plaintiffs had bought certificates of deposit from entities controlled by Stanford. CDs are not "covered securities" for SLUSA purposes. But the defendants argued that SLUSA barred the plaintiffs' state-law claims because (1) plaintiffs had alleged that a representation that the CDs were backed by a diversified portfolio of marketable securities helped induce the CD purchases and (2) some buyers sold covered securities to fund their CD purchases.

The district court agreed with the defendants, but the Fifth Circuit reversed. Roland v. Green, 675 F.3d 503 (5th Cir. 2012). Adopting a Ninth Circuit test, the Fifth Circuit ruled that there had to be "a relationship in which the fraud and the stock sale coincide or are more than tangentially satisfied." Id. at 520. That test was not satisfied, the Fifth Circuit concluded, because the allegation that the CD issuer's portfolio was backed by covered securities was merely "tangentially related" to the...