Chadbourne & Parke LLP v. Troice

The Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. 78bb(f)(1), forbids large securities class actions “based upon the statutory or common law of any State” in which plaintiffs allege “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security,” and defines “covered security” to include only securities traded on a national exchange. Plaintiffs filed civil class actions under state law, contending that defendants helped Stanford and his companies perpetrate a Ponzi scheme by falsely representing that uncovered securities (certificates of deposit in Stanford Bank) were backed by covered securities. The district court dismissed, reasoning that, for purposes of the Act, the Bank’s misrepresentation that its holdings in covered securities made investments in its uncovered securities more secure provided the requisite “connection” between the state-law actions and transactions in covered securities. The Fifth Circuit reversed. The Supreme Court affirmed, holding that the Act does not preclude the state-law class action. The Court noted the Act’s basic focus on transactions in covered, not uncovered, securities, and that use of the phrase “material fact in connection with the purchase or sale” suggests a connection that matters. A connection matters where the misrepresentation makes a significant difference to someone’s decision to purchase or to sell a covered security, not an uncovered one; the “someone” making that decision must be a party other than the fraudster. The Act and the underlying Securities Exchange Act of 1934 and the Securities Act of 1933, are intended to protect investor confidence in the securities markets, not to protect persons whose connection with the statutorily defined securities is more remote than buying or selling. A broader interpretation of “connection” would interfere with state efforts to provide remedies for ordinary state-law frauds. This interpretation does not curtail the Securities and Exchange Commission’s enforcement powers under 15 U S.C. 78c(a)(10). The SEC brought successful actions against Stanford and his associates, based on the Bank’s fraudulent sales of certificates of deposit. View "Chadbourne & Parke LLP v. Troice" on Justia Law