Merrill Lynch, Pierce, Fenner & Smith, Inc.v. Dabit
Issues
Whether, as the seventh circuit held earlier this month and in direct conflict with the decision below, SLUSA preempts state law class action claims based upon allegedly fraudulent statements or omissions brought solely on behalf of persons who were induced thereby to hold or retain (and not purchase or sell) securities?
The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) preempts state law class action suits that allege misrepresentation “in connection with the purchase or sale” of securities. In a state class action suit against Merrill Lynch for issuing biased recommendations of certain stocks, Respondent Dabit attempted to escape the preemption of SLUSA by filing a holder suit — alleging that he held and refrained from selling stocks based on Merrill Lynch’s misrepresentations, expressly avoiding any references to purchases or sales of stocks. The court must resolve a conflict between the Second Circuit’s decision in this case, holding that such holder claims are not preempted by SLUSA and can be brought in state courts, and a recent seventh circuit decision that held otherwise. This case will be closely watched by the corporate community, as allowing holder suits in state court would allow a new class of plaintiffs to sue corporations and also expose corporations to litigation in the more unpredictable and less experienced (with respect to securities class actions) state courts.
Questions as Framed for the Court by the Parties
Whether, as the seventh circuit held earlier this month and in direct conflict with the decision below, SLUSA preempts state law class action claims based upon allegedly fraudulent statements or omissions brought solely on behalf of persons who were induced thereby to hold or retain (and not purchase or sell) securities?
In 2000, New York Attorney General Eliot Spitzer (“Spitzer”) investigated Merrill Lynch, a global financial services firm, for allegedly issuing biased investment recommendations and illegitimately hyping up stocks to obtain business. Dabit v. Merrill Lynch, 395 F.3d 25, 28 (2d cir. 2005), cert. Granted, 126 S.Ct.
Additional Resources
- Wex, securities