Source: https://supreme.justia.com/cases/federal/us/547/71/opinion.html
Timestamp: 2017-11-21 01:03:24
Document Index: 67991351

Matched Legal Cases: ['§240', '§10', '§78', '§10', '§78', '§78', '§10', '§78', '§240', '§78', '§78', '§78', '§77', '§10']

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, (Opinion by Justice Stevens) :: 547 U.S. 71 (2006) :: Justia US Supreme Court Center
Justia › US Law › US Case Law › US Supreme Court › Volume 547 › Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit › Opinion
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit,
Petitioner Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch), is an investment banking firm that offers research and brokerage services to investors. Suspicious that the firm’s loyalties to its investment banking clients had produced biased investment advice, the New York attorney general in 2002 instituted a formal investigation into Merrill Lynch’s practices. The investigation sparked a number of private securities fraud actions, this one among them.[Footnote 1]
The Court of Appeals for the Second Circuit, however, vacated the judgment and remanded for further proceedings. 395 F. 3d, at 51. It concluded that the claims asserted by holders did not allege fraud “in connection with the purchase or sale” of securities under SLUSA. Although the court agreed with Merrill Lynch that that phrase, as used in other federal securities laws, has been defined broadly by this Court, it held that Congress nonetheless intended a narrower meaning here—one that incorporates the “standing” limitation on private federal securities actions adopted in Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723 (1975). Under the Second Circuit’s analysis, fraud is only “in connection with the purchase or sale” of securities, as used in SLUSA, if it is alleged by a purchaser or seller of securities. Thus, to the extent that the complaint in this action alleged that brokers were fraudulently induced, not to sell or purchase, but to retain or delay selling their securities, it fell outside SLUSA’s pre-emptive scope.[Footnote 3]
Securities and Exchange Commission (SEC) Rule 10b–5, 17 CFR §240.10b–5 (2005), promulgated in 1942 pursuant to §10(b) of the 1934 Act, 15 U. S. C. §78j(b), is an important part of that regulatory scheme. The Rule, like §10(b) itself,[Footnote 4] broadly prohibits deception, misrepresentation, and fraud “in connection with the purchase or sale of any security.”[Footnote 5] The SEC has express statutory authority to enforce the Rule. See 15 U. S. C. §78u (2000 ed. and Supp. III). Although no such authority is expressly granted to private individuals injured by securities fraud, in 1946 Judge Kirkpatrick of the United States District Court for the Eastern District of Pennsylvania, relying on “the general purpose” of the Rule, recognized an implied right of action thereunder. Kardon v. National Gypsum Co., 69 F. Supp. 512, 514. His holding was adopted by an “overwhelming consensus of the District Courts and Courts of Appeals,” Blue Chip Stamps, 421 U. S., at 730, and endorsed by this Court in Superintendent of Ins. of N. Y. v. Bankers Life & Casualty Co., 404 U. S. 6 (1971).
The core provision of SLUSA reads as follows:[Footnote 6]
“(B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.” Id., at 3230 (codified as amended at 15 U. S. C. §78bb(f)(1)).[Footnote 7]
Moreover, when this Court has sought to give meaning to the phrase in the context of §10(b) and Rule 10b–5, it has espoused a broad interpretation. A narrow construction would not, as a matter of first impression, have been unreasonable; one might have concluded that an alleged fraud is “in connection with” a purchase or sale of securities only when the plaintiff himself was defrauded into purchasing or selling particular securities. After all, that was the interpretation adopted by the panel in the Birnbaum case. See 193 F. 2d, at 464. But this Court, in early cases like Superintendent of Ins. of N. Y. v. Bankers Life & Casualty Co., 404 U. S. 6 (1971), and most recently in SEC v. Zandford, 535 U. S. 813, 820, 822 (2002), has rejected that view. Under our precedents, it is enough that the fraud alleged “coincide” with a securities transaction—whether by the plaintiff or by someone else. See O’Hagan, 521 U. S., at 651. The requisite showing, in other words, is “deception ‘in connection with the purchase or sale of any security,’ not deception of an identifiable purchaser or seller.” Id., at 658. Notably, this broader interpretation of the statutory language comports with the longstanding views of the SEC. See Zandford, 535 U. S., at 819–820.[Footnote 10]
Finally, federal law, not state law, has long been the principal vehicle for asserting class-action securities fraud claims. See, e.g., H. R. Conf. Rep. No. 105–803, p. 14 (1998) (“Prior to the passage of the Reform Act, there was essentially no significant securities class action litigation brought in State court”).[Footnote 13] More importantly, while state-law holder claims were theoretically available both before and after the decision in Blue Chip Stamps, the actual assertion of such claims by way of class action was virtually unheard of before SLUSA was enacted; respondent and his amici have identified only one pre-SLUSA case involving a state-law class action asserting holder claims.[Footnote 14] This is hardly a situation, then, in which a federal statute has eliminated a historically entrenched state-law remedy. Cf. Bates v. Dow Agrosciences LLC, 544 U. S. 431, 449 (2005) (observing that a “long history” of state-law tort remedy “add[ed] force” to the presumption against pre-emption).
The complaint alleged, for example, that the prices of the subject stocks were “artificially inflated as a result of the manipulative efforts” of Merrill Lynch, and that Merrill Lynch, “acting as a central nerve center in the manipulation of various stocks … , perpetrated this stock manipulation through a variety of deceptive devices, artifices, and tactics that are the hallmarks of stock manipulation.” App. 28a–29a.
The Court of Appeals also concluded that Dabit’s lost commission claims escaped pre-emption under SLUSA because they did not “allege fraud that ‘coincide[s]’ with the sale or purchase of a security.” 395 F. 3d, at 47 (quoting SEC v. Zandford, 535 U. S. 813, 825 (2002)). That determination is not before this Court for review.
“(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U. S. C. §78j(b).
“in connection with the purchase or sale of any security.” 17 CFR §240.10b–5 (2005).
Another key provision of the statute makes all “covered class actions” filed in state court removable to federal court. 112 Stat. 3230 (codified at 15 U. S. C. §78bb(f)(2)).
“The term ‘covered class action’ means—
“(II) the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose.” 112 Stat. 3232 (codified at 15 U. S. C. §78bb(f)(5)(B)).
“The term ‘covered security’ means a security that satisfies the standards for a covered security specified in paragraph (1) or (2) of section 18(b) of the Securities Act of 1933, at the time during which it is alleged that the misrepresentation, omission, or manipulative or deceptive conduct occurred… .” 112 Stat. 3232 (codified at 15 U. S. C. §78bb(f)(5)(E)). Section 18(b) of the 1933 Act in turn defines “covered security” to include securities traded on a national exchange. §77r(b).
In Zandford, we observed that the SEC has consistently “maintained that a broker who accepts payment for securities that he never intends to deliver, or who sells customer securities with intent to misappropriate the proceeds, violates §10(b) and Rule 10b–5.” 535 U. S., at 819. Here, too, the SEC supports a broad reading of the “in connection with” language.
See 2003 WL 1872820, *1 (SDNY, Apr. 10, 2003) (observing that Dabit’s holder claims rested “on the very same alleged series of transactions and occurrences asserted in the federal securities actions” filed against Merrill Lynch).
See H. R. Rep. No. 105–640, p. 10 (1998) (the “solution” to circumvention of the Reform Act “is to make Federal court the exclusive venue for securities fraud class action litigation”); S. Rep. No. 105–182, p. 3 (1998) (identifying “the danger of maintaining differing federal and state standards of liability for nationally-traded securities”).
Respondent points out that the Court in Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723 (1975), identified as a factor mitigating any unfairness caused by adoption of the purchaser-seller requirement that “remedies are available to nonpurchasers and nonsellers under state law.” Id., at 738, n. 9. He argues that this supports a narrow construction of SLUSA’s pre-emption provision. But we do not here revisit the Blue Chip Stamps Court’s understanding of the equities involved in limiting the availability of private remedies under federal law; we are concerned instead with Congress’ intent in adopting a pre-emption provision, the evident purpose of which is to limit the availability of remedies under state law.
See Brief for Respondent 5 (citing Weinberger v. Kendrick, 698 F. 2d 61, 78 (CA2 1982) (approving a settlement that included holder claims brought pursuant to New York law)); see also Tr. of Oral Arg. 34–35.