The Supreme Court agreed to hear another securities law
case. The case arises out of the litigation surrounding the Allen Stanford
Ponzi scheme and involves the application of the Securities Litigation Uniform
Standards Act or SLUSA. That Act generally precludes securities class action
plaintiffs from circumventing the stringent pleading requirements of the
Private Securities Litigation Reform Act of 1995 or the PSLRA. The issue the
Court will consider focuses on whether SLUSA applies when the plaintiffs
purchased securities not covered by the Act in reliance on misrepresentations
that those securities were backed by investments securities that are covered by
the statute. The Court did not agree to hear a second question regarding
whether SLUSA applies to claims of aiding and abetting. Chadbourne &
Parke LLP v. Willis of Colorado Incorporated, Nos. 12-79, 12-86 and 12-88.
SLUSA amended both the Securities Act and the Exchange
Act to preclude certain securities class actions based on state law which
sought to circumvent the PSLRA. The Act specifies that a class action on behalf
of more that 50 people - defined as a "covered" class action - cannot be
maintained in either federal or state court based on statutory or common law
claims alleging the misrepresentation or omission of a material fact in
connection with the purchase or sale of a covered security, defined as one listed
on a national securities exchange. To permit these claims to be based on state
law rather than the securities laws would defeat the PSLRA.
The "in connection with" requirement of SLUSA must be
read broadly, according to the High Court in Merrill Lynch, Pierce, Fenner
& Smith Inc. v. Dabit, 547 U.S. 71 (2006). There the Court held
that SLUSA precluded a claim where the plaintiffs were holders of securities
but did not have an Exchange Act Section 10(b) claim because they had not
purchased or sold a security. This was because the in connection with
requirement is met if the fraud "coincides" with a securities transaction by
the plaintiff or someone else. The issue in Chadbourne turns on the
application of the statute's "in connection" requirement and Dabit's "coincides"
approach to it.
The case began as three separate class actions built on
the same core nucleus of facts regarding Allen Stanford's Ponzi scheme.
Generally, the Stanford entities sold certificates of deposit issued by
Stanford International Bank, an Antique based entity. Investors were promised
above market returns. They were assured that the CDs were safe and backed by
liquid marketable securities sold on national exchanges. In fact they were not.
The investment proceeds were used in the Ponzi scheme.
Although three suits were brought none named a Stanford
entity as a defendant. On was brought in state court by a group of Louisiana
investors known as the Roland plaintiffs against SEI Investment Company, the
administrator of the Stanford Trust. A second was brought in federal court by a
group of Latin American investors known as the Troice plaintiffs against
Stanford International Bank's insurance brokers - the Willis Defendants. A
third was also by the Troice plaintiffs, this time against the attorneys for
the Stanford entities, alleging aiding and abetting.
The district court dismissed the actions, concluding that
a covered security is involved. After noting that the "in connection with"
requirement was subject to different tests in the various circuits, the court
applied the teachings of the Eleventh Circuit. Under that approach the issue
focused on if the fraudulent scheme coincided and depended on the purchase or
sale of the securities. Here the court concluded that Stanford lead the plaintiffs
to believe that the CDs were backed at least in part by covered securities.
Finding this sufficient the court noted that its ruling was consistent with
similar decisions in the Madoff feeder fund actions. In addition, the scheme
coincided and depended on the purchase or sale of securities.
The Fifth Circuit reversed. The Circuit court, following
the reasoning of the Ninth Circuit, held that the in connection with
requirement is met if there is a relationship in which the fraud and the stock
sale coincide or are more than tangentially related. Here this standard was not
met because the claim about "marketable securities" was just one among the many
used to further the Ponzi scheme.
In seeking certiorari Petitioners argued that the Fifth
Circuit misconstrued the in connection with requirement. They also pointed to
different formulations of the in connection with requirement among the circuits
claiming: The Second, Sixth and Eleventh Circuits use a "coincides with" or
"depends upon" test while the Fifth and Ninth use a "more than tangentially
The SEC opposed granting the writ. While the Commission
viewed the Fifth Circuit's determination as error, the agency argued that there
is no real split among the circuits and that the fact pattern here is unusual,
making the case a poor vehicle for considering the issues. The case is in
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