Supreme Court Ruling Makes “Holder” Class-Action Securities Claims Domain of Federal Courts

COLCHESTER, CT, Apr. 2006 -- On March 21, 2006, the United States Supreme Court handed down a significant ruling regarding the proper venue for “holder” securities fraud claims.  The case, Merrill Lynch v. Dabit, 395 F. 3d 25 (2006), presented the issue of whether an individual who is induced to hold, as opposed to purchase or sell, an artificially inflated security is required to bring a class-action securities fraud claim in federal court.  In this matter, the High Court was called upon to decide whether a former Merrill Lynch broker (“Dabit”) could file a class action in federal court against his former employer, claiming that Merrill had breached its fiduciary duty under Oklahoma state law.  Dabit claimed under Oklahoma state law that Merrill had breached its fiduciary duty to its brokers by disseminating misleading analyst research.  Dabit alleged that such a practice caused Merrill brokers to retain over-valued securities and lose commission fees when clients eventually took their business elsewhere.  Ultimately, the Supreme Court ruled that Merrill Lynch should be protected from the state-law claims but that “holders” of inflated securities may bring suit in federal court. 

Previously, the Court had held that only “purchasers” or “sellers” of securities had standing to assert securities fraud claims in federal court.  See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).  However, the recently decided Merrill Lynch v. Dabit case established: 1) “holders” of artificially inflated securities do have standing to bring securities fraud claims in federal court; and 2) a federal statute, the Securities Litigation Uniform Standards Act (SLUSA), pre-empts or takes precedence over any state law claims that a “holder” may assert. 

The Supreme Court’s ruling puts a federal stamp on all such class-action lawsuits, indicating that federal court is the sole venue and federal law is the governing body of law for determining such claims. 

The ruling in Dabit is significant, in part, because it resolves a dispute between two federal circuit courts, the Second Circuit (which had held that SLUSA only preempted state claims as to “purchasers” or “sellers”) and the Seventh Circuit (which had held that SLUSA’s pre-emption was not limited to “purchasers” or “sellers”).  Thus, the High Court’s recent ruling places “holders” in the same category as “purchasers” or “sellers,” reasoning that it is sufficient that the fraud alleged ‘coincide’ with a securities transaction, regardless of whether the individual is a purchaser, seller or holder.

Justice Stevens, who delivered the 8-0 opinion (Justice Alito did not participate because the case was brought to the Court before his addition), explained that the Court’s decision was based upon the premise that “federal law, not state law, has long been the principal vehicle for asserting class-action securities fraud claims.”  Justice Stephens added that, [federal regulations passed since 1929] have “anchored vital elements of our economy,” and that Congress presumably intended such broad interpretation of federal jurisdiction over these types of actions.  By its recent ruling in Dabit, the Supreme Court has clearly carved out a federal boundary surrounding securities fraud class actions and made them the exclusive domain of federal law and  federal courts.