Supreme Court Narrows The Scope Of SLUSA Preemption, Green-Lighting State Law Class Action Claims Alleging Ponzi Scheme

by Orrick - Securities Litigation and Regulatory Enforcement Group
Contact February 26, 2014, the U. S. Supreme Court (“the Court”) held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) did not preclude Stanford Ponzi scheme plaintiffs’ state-law class action claims because the claims did not involve covered securities.  The 7-2 majority opinion in Chadbourne & Parke, LLC v. Troice was written by Justice Breyer, joined by Justices Kagan, Sotomayor, Ginsburg, Scalia and Chief Justice Roberts.  Justice Thomas concurred, and Justices Kennedy and Alito dissented.

The Court’s decision is significant because it resolves a long-standing circuit split over the interpretation of the “in connection with” requirement in SLUSA.  As a result of the decision, plaintiffs may increasingly bring state law claims based on investment vehicles that are not covered securities themselves but whose performance implicates or is backed by covered securities.  Investment managers and entities that market such investments, as well as lawyers and accountants, may face an increased risk of liability as a result of this decision.

SLUSA was enacted in 1998 to curb the increase in securities class actions filed in state court by plaintiffs seeking to avoid the stricter requirements of the Private Securities Litigation Reform Act of 1995 (“PSLRA”).  SLUSA precludes any “covered class action” based on state law that alleges a misrepresentation or omission of material fact “in connection with” the purchase or sale of a “covered security.”  SLUSA defines “covered security” to include only securities traded on a national exchange (or, not relevant to a case, a security issued by an investment company).  Prior to the Supreme Court’s decision in Troice, the federal circuit courts had split in their interpretation of the “in connection with” requirement in this provision.

In Troice, four sets of plaintiffs filed civil class actions under state law, alleging that defendants helped Allen Stanford and his companies perpetrate a Ponzi scheme by falsely representing that uncovered securities plaintiffs purchased were backed by covered securities.  The question facing the Court was whether claims alleging plaintiffs purchased uncovered securities (CDs not traded on a national exchange), buoyed by false allegations they were backed by covered securities, were precluded in state court under SLUSA. The federal district court granted defendants’ motions to dismiss holding that SLUSA barred the claims.  The Fifth Circuit reversed, and the Supreme Court affirmed the Fifth Circuit’s decision holding that SLUSA preclusion did not apply.  The Court reasoned, among other things, that a fraudulent misrepresentation or omission is not made “in connection with” a purchase or sale of a covered security unless it is material to a decision by one or more individuals (other than the perpetrator(s) of the fraud) to buy or sell a “covered security.”

The Court gave five reasons for its holding.  First, the Court noted SLUSA’s basic focus is on transactions in covered securities, not uncovered securities.  Second, the Court stated that its interpretation is supported by SLUSA’s language, because the phrase “material fact in connection with the purchase or sale” suggests “a connection that matters.”  A connection matters where the misrepresentation makes a significant difference to someone’s decision to purchase or sell a covered security, not to purchase or sell an uncovered security. Third, the prior securities cases in which the Court found a fraud covered by SLUSA and Section 10(b) of the 1934 Exchange Act all involved victims who took, maintained or divested themselves of an ownership interest in a financial instrument that fell within the statutory definition.  Fourth, the Court held that its interpretation is consistent with the language and purpose of the underlying regulatory statutes, the 1934 Exchange Act and the 1933 Securities Act.  And fifth, the Court stated that a broader preemption would interfere with state efforts to provide remedies for victims of ordinary state-law fraud claims, thereby allowing SLUSA to preclude lawsuits applicable to garden-variety fraud.

The majority opinion also addressed the argument advanced by plaintiffs, and endorsed by the dissenting Justices, that the narrower approach to preemption taken by the Court in Troice could undermine the SEC’s enforcement capabilities, and may subject persons and entities whose profession it is to offer advice and counsel for investing in the securities markets to complex and costly state-law litigation.  Justice Breyer, however, wrote that the Troice decision has no bearing on the scope of the government’s enforcement capabilities (as shown by the government’s successful prosecution of Stanford in the fraud at issue in the case), and only preserved the additional ability of investors to obtain relief under state laws when the fraud was sufficiently remote such that it was clear that the investor was not taking an ownership interest in a security traded on a U.S. exchange.  Similarly, the only issuers and advisors who would continue to be subject to state law under Troice are those who do not sell or participate in selling securities traded on U.S. exchanges.

Finally, it is important to acknowledge that the nuances of SLUSA sometimes make it difficult to predict whether the next decision will expand or contract the operation of preemption in the securities context, as well as the availability of state courts to bring state law securities-related claims.  Some may argue that Troice clearly opens up a new avenue for plaintiffs to bring class actions in state court that touch upon securities fraud, while others may note that the nature of the claims the Supreme Court explicitly green-lighted in Troice is not surprising and is what the statute intended all along.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Orrick - Securities Litigation and Regulatory Enforcement Group | Attorney Advertising

Written by:

Orrick - Securities Litigation and Regulatory Enforcement Group

Orrick - Securities Litigation and Regulatory Enforcement Group on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.