RESPONDENT: Samuel Troice et al.
LOCATION: United States District Court for the Northern District of Texas
DOCKET NO.: 12-79
DECIDED BY: Roberts Court (2010-2016)
CITATION: 571 US (2014)
GRANTED: Jan 18, 2013
ARGUED: Oct 07, 2013
DECIDED: Feb 26, 2014
Elaine J. Goldenberg - Assistant to the Solicitor General, Department of Justice, for the United States, as amicus curiae, supporting the petitioners
Paul D. Clement - for the petitioners
Thomas C. Goldstein - for the respondents
Facts of the case
In 1995, Congress enacted the Private Securities Litigation Reform Act (PSLRA), which was meant to combat issues such as nuisance filings, targeting of specific clients, and client manipulation in class action suits. To prevent plaintiffs from filing class action suits in state courts in order to get around the restrictions of PSLRA, Congress enacted the Securities Litigation Uniform Standards Act (SLUSA), which provided for the dismissal or removal of a class action suit brought by more than 50 plaintiffs in connection with a "covered security." The term "covered security" was limited to a subset of securities that were traded on a national exchange or issued by a federally registered investment company.
In 2009, the Securities and Exchange Commission (SEC) sued the Stanford Group Company and other holdings of R. Allen Stanford for allegedly perpetrating a massive Ponzi scheme. Two groups of Louisiana investors also sued Stanford holdings for their roles in the Ponzi scheme and for violations of the Louisiana Securities Act. These cases were consolidated with two others against Stanford holdings and moved to the district court for the Northern District of Texas. The defendants moved to dismiss the complaints under SLUSA and argued that the court should adopt an expansive interpretation of "covered securities." The district court held that the funds were not covered securities, but it granted the dismissal because the funds were represented as covered securities and because it was likely that at least one of the plaintiffs liquidated a retirement account, which a covered security, in order to purchase the funds in question. The U.S. Court of Appeals for the Fifth Circuit reversed and held that there was not a sufficient connection between the misrepresentation and the stock sale to consider them connected and for the securities to function as "covered" for the purposes of a SLUSA dismissal.
Does the Securities Litigation Uniform Standards Act (SLUSA) preclude a class action under state securities law that alleges fraud and misrepresentations of securities as SLUSA-covered securities?
Media for Chadbourne and Parke LLP v. TroiceAudio Transcription for Oral Argument - October 07, 2013 in Chadbourne and Parke LLP v. Troice
Audio Transcription for Opinion Announcement - February 26, 2014 in Chadbourne and Parke LLP v. Troice
Justice Breyer has our opinion this morning in case 12-79, Chadbourne & Parke v. Troice and the consolidated cases.
The Securities Litigation Uniform Standards Act of 1998 preempts, that means it forbids the brining of a securities fraud, class action if one, the action claims a violation of state law and two, the action involves a misrepresentation of a material fact, i.e.fraud, “in connection with the purchase or sale of a covered security.”
Now those words “covered security” are important here because “covered” is defined quite narrowly to mean a security that's trade on a U.S. national exchange.
So it has -- the fraud has to have a connection with a security that's traded on a national exchange like the New York Stock Exchange.
Now the suit before us is a securities fraud, class action, state laws, what its brought under, the fraudulent scheme was a Ponzi scheme that was run by Allen Stanford and others, and they induced the victims to buy -- like the plaintiffs here, to buy certificates of deposit in Stanford International Bank, which is a bank chartered in Antigua, and they the certificates of deposit are not sold on a national exchange so they're not covered securities.
So you might thing the Act wouldn't apply.
But there is more, the fraudsters induced the victims to buy these certificates of deposit, the uncovered securities by falsely telling them among many other things that the fraudsters would use the proceeds of the sale to buy other lucrative assets for themselves, including among other things securities that are sold on a national exchange, i.e. covered securities.
So this is latter fact bring the lawsuit into action, I mean bring the statute into action and forbid the brining of the class action.
We conclude that this circumstance about what the fraudsters will do with the proceeds of the sale of uncovered security is not enough without more to bring the lawsuit within the tax terms.
In particular, it is not enough to satisfy the Act's requirement that the misstatements, the fraud, have to be made in connection with the purchase or sale of a covered security.
But again, simply, we hold a fraudulent misrepresentation is not made in connection with the purchase or sale of the covered security unless it is material to a decision by one or more individuals other than fraudster -- to buy or to sell -- themselves to buy or to sell a covered security.
We reach this interpretation for several reasons the Litigation Act focuses on transactions in covered securities not uncovered ones.
The text of the Act suggest they're talking about a connection that matters and it matters here, that connection, if it has something to do with leading to the sale of the covered security, not the uncovered one, and the interpretation, we think, is consistent with prior case law and -- because every -- every case we could find use this word “in connection with” under this clause or under a similar section can be of the Securities Act that the victims there -- the victims took, try to take, divested themselves of, who try to divest themselves of, or continue to maintain an ownership interest in financial instruments that fell within the relevant statutory definitions.
Things like that are explained more fully in the opinion.
This interpretation is consistent with the underlying regulatory statutes and finally, and perhaps most importantly, we believe this interpretation is -- oh no.
This interpretation is consistent with Litigations Act goals of maintaining state legal authority over matters that are primarily of state concern.
And to interpret that connection more broadly would interfere with state efforts to provide remedies for victims of ordinary fraud.
Now this is what, I think, is most important.
We believe our interpretation will not curtail the SEC's enforcement powers even though we recognize the Solicitor General has warned us of the contrary and the dissent takes the contrary view.
But we don't think it will because the Federal Government's authority extends to all financial instruments that federal law more broadly defines these securities.
Federal law defines securities far more than covered security.
And that broader definition is not limited to nationally traded or covered security, indeed the Department of Justice has already brought criminal charges against Stanford and a jury convicted him.
He was sentenced to 110 years.
The Securities and Exchange Commission has brought a civil case against Stanford, it won.
The Court imposed a civil penalty of $6 billion.
These actions involved different statutes.
Neither the Government nor anyone else has pointed out to us anyway cases either these or some others that are an example of prior enforcement -- SEC enforcement action that our decision today would foreclose.
The (Inaudible) we believe is that the Federal Government will be able as before to proceed against fraudsters who sell uncovered securities like the certificates at issue here, in addition where the relation between the fraud and the covered security is remote as it is here, he frauded investors will, here possibly, be able to obtain damages under state law.
The judgment of the Court of Appeals is affirmed.
Justice Thomas has filed the concurring opinion.