Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, January 20, 2013

Supreme Court Accepts Cert in Stanford Class Actions to Explore Scope of SLUSA Preclusion

The U.S. Supreme Court granted certiorari to decide another case involving the extent to which the Securities Litigation Uniform Standards Act (SLUSA) precludes investors from bringing class actions under state law.  Chadbourne & Parke LLP v. Troice (No. 12-79) (consolidated with two other cases Willis of Colorado Inc. v. Troice (No. 12-86) and Proskauer Rose LLP v. Troice (No. 12-88)).  The case comes from the Fifth Circuit, Roland v. Green, 675 F.3d 503 (5th Cir. 2012)

The plaintiffs in these cases are groups of investors who purchased the CDs offered in the alleged Ponzi scheme masterminded by R. Allen Stanford.  The class actions assert a variety of claims under state law against a number of entities and individuals that were involved in Stanford's offering.  Defendants assert that the class actions are precluded under SLUSA, which provides that "[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security" (emphasis added). Considerable post-Dabit litigation has focused on the necessary connection between the alleged fraud and a "covered security," and the Circuits have divided on the appropriate standard.

The Fifth Circuit reviewed the tests applied in other Circuits and held that the class actions were not precluded because the purchase or sale of securities (or representations about the purchase of sale of securities) was not more than "tangentially related" to the alleged fraudulent scheme.  In its analysis the court followed the approach of the Ninth Circuit.  The court also specifically distinguished the Stanford CDs from the  Madoff "feeder funds," because the Stanford CDs were offered based on their own investment characteristics (debt instruments, fixed rate of return, safety), unlike the feeder funds, which existed for the purpose of funneling money into Madoff's investments.  

The Question Presented is stated as follows:

Does the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. ยงยง
77p(b), 78bb(f)(1), prohibit private class actions based on state law only where the alleged purchase or sale of a covered security is "more than tangentially related" to the "heart, crux or gravamen" of the alleged fraud?

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