Private Securities Litigation Reform Act

Chadbourne and Parke LLP v. Troice; Willis of Colorado Inc. v. Troice; Proskauer Rose LLP v. Troice

Issues

The Supreme Court has consolidated for oral argument three Fifth Circuit cases that deal with the Securities Litigation Uniform Standards Act (SLUSA). These cases address a circuit split as to the standard for determining when an alleged misrepresentation is "material" enough to the purchase or sale of a covered security to satisfy the "in connection with" requirement and thus trigger SLUSA’s preclusive effect.

Court below

United States Court of Appeals for the Fifth Circuit

The Securities Litigation Uniform Standards Act (“SLUSA”) precludes certain state-law class actions when a “misrepresentation” is made “in connection with the purchase or sale of a covered security.” The Supreme Court will address a circuit split over the scope and meaning of this standard; in particular, at what point an alleged misrepresentation is sufficiently related to the sale or purchase of a covered security to satisfy the "in connection with" requirement. The Court has consolidated for oral argument three state law securities class actions from the Fifth Circuit Court of Appeals. The district court, adopting the Eleventh Circuit’s test, found that SLUSA precluded the plaintiffs' claims because misrepresentations were made in connection with the sale of SLUSA-covered securities. The Fifth Circuit, adopting the Ninth Circuit’s test, reversed and reinstated the plaintiffs' state law class-actions. The Court’s ruling will implicate the scope and application of SLUSA, SLUSA's impact on state-law class actions, and SLUSA's effect on U.S. securities markets.

Questions as Framed for the Court by the Parties

Chadbourne & Parke LLP V. Troice

The Securities Litigation Uniform Standards Act ("SLUSA") precludes most state-law class actions involving "a misrepresentation" made "in connection with the purchase or sale of a covered security." 15 U.S.C. § 78bb(f)(1)(A). The circuits, however, are divided over the standard for determining whether an alleged misrepresentation is sufficiently related to the purchase or sale of a covered security to satisfy the "in connection with" requirement. The Fifth Circuit in this case adopted the Ninth Circuit standard and held that the complaint here was not precluded by SLUSA, expressly rejecting conflicting Second, Sixth, and Eleventh Circuit standards for construing the "in connection with" requirement, all of which would result in SLUSA preclusion here.

Additionally, and also in conflict with several other circuits, the Fifth Circuit held that SLUSA does not preclude actions alleging aiding and abetting of fraud in connection with SLUSA-covered security transactions when the aiders and abettors themselves did not make any representations concerning a SLUSA-covered security.

The questions presented are:

Whether SLUSA precludes a state-law class action alleging a scheme of fraud that involves misrepresentations about transactions In SLUSA-covered securities.
Whether SLUSA precludes class actions asserting that defendants aided and abetted SLUSA-covered securities fraud when the defendants themselves did not make misrepresentations about the purchase or sale of SLUSA-covered securities.

Willis of Colorado Inc. v. Troice

The Securities Litigation Uniform Standards Act of 1998 ("SLUSA") precludes state law class actions that allege a misrepresentation or omission "in connection with" the purchase or sale of a covered security. 15 U.S.C. § 78bb(f)(1). The complaints at issue in this case plainly included such alleged misrepresentations. The district court, applying Eleventh Circuit precedent, recognized as much and dismissed the complaints. However, the Fifth Circuit disagreed and, purporting to apply the Ninth Circuit's test, found the fact that the complaints included alleged misrepresentations in connection with a covered security insufficient to invoke SLUSA because the complaints also included other misrepresentations that were not made "in connection with" a covered securities transaction. In doing so, the Fifth Circuit acknowledged that it was departing from the holding of the Eleventh Circuit and several other circuits.

The question presented is whether a covered state law class action complaint that unquestionably alleges "a" misrepresentation "in connection with" the purchase or sale of a SLUSA-covered security nonetheless can escape the application of SLUSA by including other allegations that are farther removed from a covered securities transaction.

Proskauer Rose LLP v. Troice

Does the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. §§ 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?
Does SLUSA preclude a class action in which the defendant is sued for aiding and abetting fraud, but a non-party, rather than the defendant, made the only alleged misrepresentation in connection with a covered securities transaction?

In 1995, Congress enacted the Private Securities Litigation Reform Act (“PSLRA”) to curtail abusive class action litigation involving nationally traded securities. See Roland v.