Chadbourne & Parke LLP v. Troice

I join the opinion of the Court on the understanding that the "misrepresentation[s] ... of ... material fact" alleged in this case are not properly considered "in connection with" transactions in covered securities. 15 U.S.C. § 78bb(f)(1)(A). We have said that the statutory phrase "in connection *398with" warrants a "broad interpretation," Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006), though not so broad as to reach any "common-law fraud that happens to involve securities," see SEC v. Zandford, 535 U.S. 813, 820, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002). Considered in isolation, however, that phrase "is essentially 'indeterminat[e]' because connections, like relations, 'stop nowhere.' " Maracich v. Spears, 570 U.S. ----, ----, 133 S.Ct. 2191, 2200, 186 L.Ed.2d 275 (2013) (some internal quotation marks omitted). The phrase thus "provides little guidance without a limiting principle consistent with the structure of the statute and its other provisions." Ibid. As I understand it, the opinion of the Court resolves this case by applying a limiting principle to the phrase "in connection with" that is "consistent with the statutory framework and design" of the Securities Litigation Uniform Standards Act of 1998, id., at ----, 133 S.Ct., at 2200, and also consistent with our precedents.

Justice KENNEDY, with whom Justice ALITO joins, dissenting.

A number of investors purchased certificates of deposit (CDs) in the Stanford International Bank (SIB). For purposes of this litigation all accept the premise that Allen Stanford and SIB induced the investors to purchase the CDs by fraudulent representations. In various state and federal courts the investors filed state-law suits against persons and entities, including attorneys, accountants, brokers, and investment advisers, alleging that they participated in or enabled the fraud. The defendants in the state-court suits removed the actions to federal court, where they were consolidated with the federal-court suits. The defendants contended that the state-law suits are precluded under the terms of the Securities Litigation Uniform Standards Act of 1998 (SLUSA or Act), 15 U.S.C. § 78bb(f)(1). As the investors prevailed in the Court of Appeals, they are the respondents here. The persons and entities who were defendants in the state-law actions are the petitioners. The investors *399contend the state-law suits are not precluded by SLUSA, and the petitioners contend the suits are precluded.

For purposes of determining SLUSA's reach, all can agree that the CD purchases would not have been, without more, transactions *1073regulated by that Act; for the CDs were not themselves covered securities. As a result, in determining whether the Act must be invoked, a further circumstance must be considered: The investors purchased the CDs based on the misrepresentations that the CDs were, or would be, backed by investments in, among other assets, covered securities.

What must be resolved, to determine whether the Act precludes the state-law suits at issue, is whether the misrepresentations regarding covered securities and the ensuing failure to invest in those securities were so related to the purchase of the CDs that the misrepresentations were "misrepresentation[s] or omission[s] of a material fact in connection with the purchase or sale of a covered security." 15 U.S.C. § 78bb(f)(1)(A).

The opinion for the Court, it seems fair to say, adopts this beginning framework, and it is quite correct to do so. The Court is further correct to view this litigation as involving a fraud of a type, scale, and perhaps sophistication that has not yet been addressed in its precedents with respect to the applicability of the federal securities laws.

It is the premise of this dissent that the more simple frauds addressed in this Court's precedents, where the Court did find fraud "in connection with the purchase or sale," are applicable here. In those cases, as here, the immediate cause of loss to the victim of the fraud was not simply a purchase or sale but rather a fraud that depended on the purchase or sale of securities or the promise to do so. It is submitted that this litigation should not come out differently simply because the fraud here was so widespread that many investors were misled by misrepresentations respecting investments, or promised investments, in regulated securities *400in the markets. And it is necessary to caution that, in holding otherwise, the Court adopts a new approach, an approach which departs from the rules established in the earlier, albeit simpler, cases. And, as a consequence, today's decision, to a serious degree, narrows and constricts essential protection for our national securities markets, protection vital for their strength and integrity. The result will be a lessened confidence in the market, a force for instability that should otherwise be countered by the proper interpretation of federal securities laws and regulations. Though the reasons supporting the Court's opinion are set forth with care and clarity, this respectful dissent submits that established principles do not support its holding.

I

It must be determined whether the misrepresentations to the investors-misrepresentations that led them to buy CDs in the belief they could rely on the expertise and sophistication of Stanford and SIB in the national securities markets-were "misrepresentation[s] or omission[s] of ... material fact[s] in connection with the purchase or sale of a covered security." 15 U.S.C. § 78bb(f)(1). This is the central provision of SLUSA for purposes of this litigation. The Court's precedents instruct that this language has broad application and must be construed flexibly in order to encompass new and ever more ingenious fraudulent schemes. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006) ; SEC v. Zandford, 535 U.S. 813, 819, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002). The Court has held that a material misrepresentation is made "in connection with the purchase or sale" of a security when the "fraud coincided with the sales [or purchases] themselves." Zandford, supra, at 820, 122 S.Ct. 1899.

*1074This significant language must apply here in order to implement two of Congress' purposes in passing SLUSA. First, SLUSA seeks to preclude a broad range of state-law securities claims in order to protect those who advise, counsel, and otherwise assist investors from abusive and multiplicitous *401class actions designed to extract settlements from defendants vulnerable to litigation costs. This, in turn, protects the integrity of the markets. Second, even as the Act cuts back on the availability of state-law securities claims, a fair interpretation of its language ensures robust federal regulation of the national securities markets. That is because, in designing SLUSA, Congress "imported the key phrase" from § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5, which provide a private cause of action, as well as SEC enforcement authority, for securities fraud. Dabit, 547 U.S., at 79, 85, 126 S.Ct. 1503. As a result, that language must be " 'presumed to have the same meaning' " in SLUSA as it does in those contexts. Id., at 86, 126 S.Ct. 1503.

The Court's narrow interpretation of the Act's language will inhibit the SEC and litigants from using federal law to police frauds and abuses that undermine confidence in the national securities markets. Throughout the country, then, it will subject many persons and entities whose profession it is to give advice, counsel, and assistance in investing in the securities markets to complex and costly state-law litigation based on allegations of aiding or participating in transactions that are in fact regulated by the federal securities laws.

A

Congress enacted SLUSA and its predecessor, the Private Securities Litigation Reform Act of 1995, to reform "perceived abuses of the class-action vehicle in litigation involving nationally traded securities." Dabit, 547 U.S., at 81, 126 S.Ct. 1503. Congress found that these abuses were being used "to injure 'the entire U.S. economy.' " Ibid. The Act and its predecessor together addressed these problems by limiting damages, imposing heightened pleading standards, and, as most relevant here, precluding state-law claims involving nationally traded securities. 112 Stat. 3227; see S.Rep. No. 104-98, pp. 19-20 (1995) ; H.R.Rep. No. 105-640, p. 10 (1998) ; S.Rep. No. 105-182, pp. 3-4 (1998).

*402In light of the Act's objectives, the Act must be given a "broad construction," because a "narrow reading of the statute would undercut the effectiveness" of Congress' reforms. Dabit, supra, at 86, 126 S.Ct. 1503. Today's decision does not heed that principle. The Court's narrow reading of the statute will permit proliferation of state-law class actions, forcing defendants to defend against multiple suits in various state fora. This state-law litigation will drive up legal costs for market participants and the secondary actors, such as lawyers, accountants, brokers, and advisers, who seek to rely on the stability that results from a national securities market regulated by federal law. See Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 189, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994). This is a serious burden to put on attorneys, accountants, brokers, and investment advisers nationwide; and that burden itself will make the national securities markets more costly and difficult to enter. The purpose of the Act is to preclude just these suits. By permitting the very state-law claims Congress intended to prohibit, the Court will undermine the primacy of federal law in policing abuses in the securities markets.

*1075The Court casts its rule as allowing victims to recover against secondary actors under state law when they would not be able to recover under federal law due to Central Bank . Ante, at 1078, 1081. But in Dabit a unanimous Court rejected that conception of SLUSA. A federal-law claim was not available to the plaintiffs in Dabit because Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), limited the Rule 10b-5 private right of action to purchasers and sellers, not holders. "[T]he Second Circuit held that SLUSA only pre-empts state-law class action claims brought by plaintiffs who have a private remedy under federal law." 547 U.S., at 74, 126 S.Ct. 1503. The Court held the opposite, "concluding that SLUSA pre-empts state-law holder class-action claims." Id., at 87, 126 S.Ct. 1503."It would be odd, to say the least," the Court reasoned, "if SLUSA exempted that particularly troublesome subset of class actions from its pre-emptive sweep."

*403Id., at 86, 126 S.Ct. 1503. The Court in Dabit also noted that SLUSA preclusion does not leave victims with "no" ability to "recover damages under state law." Ante, at 1072 - 1073. Rather, "[i]t simply denies plaintiffs the right to use the class-action device to vindicate certain claims." 547 U.S., at 87, 126 S.Ct. 1503. The Court in Dabit precluded the suit at issue in order to effect the purpose of Blue Chip . By following the opposite course today, the Court revisits Dabit 's logic and undermines Central Bank .

B

Congress intended to make "federal law, not state law, ... the principal vehicle for asserting class-action securities fraud claims." Dabit, supra, at 88, 126 S.Ct. 1503. And a broad construction of the "in connection with" language found in both SLUSA and Rule 10b-5 ensures an efficient and effective federal regulatory regime, one equal to the task of deterring and punishing fraud and providing compensation for victims.

In undertaking regulation of the national markets during the Great Depression, Congress sought to eliminate the "abuses which were found to have contributed to the stock market crash of 1929 and the depression of the 1930's." SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). " 'It requires but little appreciation ... of what happened in this country during the 1920's and 1930's to realize how essential it is that the highest ethical standards prevail' in every facet of the securities industry." Id., at 186-187, 84 S.Ct. 275 (quoting Silver v. New York Stock Exchange, 373 U.S. 341, 366, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1963) ). In the Securities Exchange Act, Congress sought " 'to achieve a high standard of business ethics in the securities industry' " by " 'substitut[ing] a philosophy of full disclosure for the philosophy of caveat emptor .' " Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). To that end, Congress enacted § 10(b) "to insure honest securities markets and thereby promote investor confidence." United States v. O'Hagan, 521 U.S. 642, 658, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997).

*404Investor confidence indicates fair dealing and integrity in the markets. See Dabit, supra, at 78, 126 S.Ct. 1503; O'Hagan, supra, at 658, 117 S.Ct. 2199; see also Central Bank, supra, at 188, 114 S.Ct. 1439. It also is critical to achieving an efficient market. The corollary to the principle that insider trading and other frauds have an " inhibiting impact on market participation" is that investor confidence in strong federal regulation to prevent these abuses inspires participation in the market. See *1076O'Hagan, supra, at 659, 117 S.Ct. 2199. Widespread market participation in turn facilitates efficient allocation of capital to the Nation's companies. See also Central Bank, supra, at 188, 114 S.Ct. 1439.

C

Mindful of the ends of both SLUSA and Rule 10b-5, the Court's precedents interpret the key phrase in both laws to mean that a "misrepresentation or omission of a material fact" is made "in connection with the purchase or sale" of a security when the "fraud coincided with the sales [or purchases] themselves." Zandford, 535 U.S., at 820, 122 S.Ct. 1899; see also Dabit, supra, at 85, 126 S.Ct. 1503.

This litigation is very similar to Zandford and satisfies the coincides test it sets forth, and for similar reasons. In Zandford, the SEC brought a civil action against a broker, who, over a period of time, gained control of an investment account, sold its securities, and then pocketed the proceeds. 535 U.S., at 815-816, 122 S.Ct. 1899. The broker argued that "the sales themselves were perfectly lawful and that the subsequent misappropriation of the proceeds, though fraudulent, is not properly viewed as having the requisite connection with the sales." Id., at 820, 122 S.Ct. 1899. The Court rejected that argument. Although the transactions were lawful and separate from the misappropriations, the two were "not independent events." Ibid. Rather, the fraud "coincided with the sales," in part because the sales "further[ed]" the fraud. Ibid.

The Court likened the broker's fraud to that in Superintendent of Ins. of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6, 10, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), where the fraud victims were misled to *405believe that they "would receive the proceeds of the sale" of securities. Zandford, 535 U.S., at 821, 122 S.Ct. 1899. Like the victims in Bankers Life, the victims in Zandford "were injured as investors through [the broker]'s deceptions" because "[t]hey were duped into believing that [the broker] would 'conservatively invest' their assets in the stock market and that any transactions made on their behalf would be for their benefit." Id., at 822, 122 S.Ct. 1899. Both suffered losses because they were victims of dishonest intermediaries or fiduciaries. See also In re Richard J. Line, 62 S.E.C. Docket 2879 (1996) (broker who induced parents to transfer funds to him to invest in securities so as to temporarily hide them during the college financial aid application process, but then failed to return the money, violated Rule 10b-5).

Here, just as in Zandford, the victims parted with their money based on a fraudster's promise to invest it on their behalf by purchases and sales in the securities markets. The investors had-or were led to believe they could have-the advantages of Stanford's and SIB's expertise in investments in the national market. So here, as in Zandford, the success of the fraud turned on the promise to trade in regulated securities. According to the complaints, SIB represented that it would " 're-inves[t]' " the plaintiffs' money on their behalf in "a well-diversified portfolio of highly marketable securities issued by stable national governments, strong multinational companies, and major international banks" to ensure a "safe, liquid," and above-market return. See App. 244, 249, 250, 253, 336, 342, 345, 444, 470, 480, 628. The misrepresentation was about nationally traded securities and lent credence to SIB's promise that the CDs were a liquid investment that "could be redeemed with just a few days' notice." See id., at 253, 345, 445, 628. The CDs, SIB explained, would be backed by nationally traded securities. As a result, according to the complaints, the misrepresentation was "material."

*1077Id., at 244-245, 336-338, 480, 715. The fraud could not have succeeded without the misrepresentation *406: The investors gave SIB money because they expected it to be invested in the national securities markets. The connection between the promised purchases and the misrepresentation is more direct than in Zandford, because the misrepresentation was essential to the fraud.

Here, an