Chadbourne & Parke LLP v. Troice
571 U.S. ___ (2014)

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Justia Opinion Summary
The Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. 78bb(f)(1), forbids large securities class actions “based upon the statutory or common law of any State” in which plaintiffs allege “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security,” and defines “covered security” to include only securities traded on a national exchange. Plaintiffs filed civil class actions under state law, contending that defendants helped Stanford and his companies perpetrate a Ponzi scheme by falsely representing that uncovered securities (certificates of deposit in Stanford Bank) were backed by covered securities. The district court dismissed, reasoning that, for purposes of the Act, the Bank’s misrepresentation that its holdings in covered securities made investments in its uncovered securities more secure provided the requisite “connection” between the state-law actions and transactions in covered securities. The Fifth Circuit reversed. The Supreme Court affirmed, holding that the Act does not preclude the state-law class action. The Court noted the Act’s basic focus on transactions in covered, not uncovered, securities, and that use of 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 to sell a covered security, not an uncovered one; the “someone” making that decision must be a party other than the fraudster. The Act and the underlying Securities Exchange Act of 1934 and the Securities Act of 1933, are intended to protect investor confidence in the securities markets, not to protect persons whose connection with the statutorily defined securities is more remote than buying or selling. A broader interpretation of “connection” would interfere with state efforts to provide remedies for ordinary state-law frauds. This interpretation does not curtail the Securities and Exchange Commission’s enforcement powers under 15 U S.C. 78c(a)(10). The SEC brought successful actions against Stanford and his associates, based on the Bank’s fraudulent sales of certificates of deposit.

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued.The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader.See United States v. Detroit Timber & Lumber Co., 200 U. S. 321 .

SUPREME COURT OF THE UNITED STATES

Syllabus

CHADBOURNE & PARKE LLP v. TROICE et al.

certiorari to the united states court of appeals for the fifth circuit

No. 12–79. Argued October 7, 2013—Decided February 26, 2014[1]

The Securities Litigation Uniform Standards Act of 1998 (Litigation Act or Act) forbids the bringing of large securities class actions “based upon the statutory or common law of any State” in which the plaintiffs allege “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security,” 15 U. S. C. §78bb(f)(1). The Act defines “covered security” to include, as relevant here, only securities traded on a national exchange. §§78bb(f)(5)(E), 77r(b)(1).

          Four sets of plaintiffs, respondents here, filed civil class actions under state law, contending that the defendants, petitioners here, helped Allen Stanford and his companies perpetrate a Ponzi scheme by falsely representing that uncovered securities (certificates of deposit in Stanford International Bank) that plaintiffs were purchasing were backed by covered securities. The District Court dismissed each case under the Litigation Act. Although the certificates of deposit were not covered securities, the court concluded, the Bank’s misrepresentation that its holdings in covered securities made investments in its uncovered securities more secure provided the requisite “connection” (under the Litigation Act) between the plaintiffs’ state-law actions and transactions in covered securities. The Fifth Circuit reversed, concluding that the falsehoods about the Bank’s holdings in covered securities were too tangentially related to the fraud to trigger the Litigation Act.

Held: The Litigation Act does not preclude the plaintiffs’ state-law class actions. Pp. 8–19.

     (a) Several factors support the conclusion that the scope of §78bb(f)(1)(A)’s phrase “misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security” does not extend further than misrepresentations that are material to the decision by one or more individuals (other than the fraudster) to purchase or sell a covered security. First, this interpretation is consistent with the Act’s basic focus on transactions in covered, not uncovered, securities. Second, the interpretation is supported by the Act’s language. The phrase “material fact in connection with the purchase or sale” suggests a connection that matters. And a connection matters where the misrepresentation makes a significant difference to someone’s decision to purchase or to sell a covered security, not an uncovered one, something about which the Act expresses no concern. See Matrixx Initiatives, Inc. v. Siracusano, 563 U. S. ___, ___. Further, for the connection to matter, the “someone” making the decision to purchase or sell a covered security must be a party other than the fraudster. Third, the securities cases in which this Court has found a fraud to be “in connection with” a purchase or sale of a security, under both the Litigation Act and Section 10(b) of the Securities Exchange Act of 1934 (which also uses the “in connection with” phrase), have involved victims who took, who tried to take, who divested themselves of, who tried to divest themselves of, or who maintained an ownership interest in financial instruments that fall within the relevant statutory definition. See, e.g., Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U. S. 71 . Fourth, this Court reads the Litigation Act in light of and consistent with the language and purpose of the underlying regulatory statutes, the Securities Exchange Act of 1934 and the Securities Act of 1933, which refer to persons engaged in securities transactions that lead to the taking or dissolving of ownership positions, and which make it illegal to deceive a person when he or she is doing so. The basic purpose of the 1934 and 1933 regulatory statutes is to protect investor confidence in the securities markets. Nothing in those statutes, or in the Litigation Act, suggests their object is to protect persons whose connection with the statutorily defined securities is more remote than buying or selling. Fifth, a broader interpretation of the necessary statutory “connection” would interfere with state efforts to provide remedies for victims of ordinary state-law frauds, despite the fact that the Litigation Act purposefully seeks to avoid such results by maintaining States’ legal authority over matters that are primarily of state concern, see, e.g., §§78bb(f)(4). Pp. 9–14.

     (b) Respondents and the Government make two important, but unavailing, counterarguments. First, they point to this Court’s suggestions that the phrase “in connection with” should be given a broad interpretation. But every case in which this Court interpreted the phrase to cover a fraud involved a false statement (or the like) that was “material” to another individual’s decision to “purchase or s[ell]” a statutorily defined “security” or “covered security,” e.g., Dabit, supra, at 75–77, and where the transaction was by or on behalf of someone other than the fraudster. Second, the Government warns that a narrow interpretation would curtail the Securities and Exchange Commission’s enforcement powers under §10(b) of the Securities Exchange Act, which uses the same “in connection with the purchase or sale” phrase. To the contrary, this Court’s interpretation is perfectly consistent with past SEC practice. The authority of the SEC and the Department of Justice extends to all “securities” under §10(b), not just to those traded on national exchanges. 15 U. S. C. §78c(a)(10). The SEC has accordingly brought successful enforcement actions against Stanford and his associates, based on the Bank’s fraudulent sales of certificates of deposit—products that are “securities” even if not “covered securities.” Neither the Government nor the dissent has pointed to an example of any prior SEC enforcement action that the instant holding would have prevented the SEC from bringing. Pp. 14–17.

     (c) Respondents’ complaints do not allege, for Litigation Act purposes, misrepresentations or omissions of material fact “in connection with” the “purchase or sale of a covered security.” At most, they allege misrepresentations about the Bank’s ownership of covered securities. But the Bank is the fraudster, not the fraudster’s victim; nor is it some other person transacting in covered securities. Thus, there is not the necessary “connection” between the materiality of the misstatements and the statutorily required “purchase or sale of a covered security.” In addition, while the District Court found that one plaintiff acquired Bank certificates with proceeds from the sale of covered securities, the plaintiffs did not allege that the sale of these covered securities constituted any part of the fraudulent scheme or that Stanford or his associates were interested in how the plaintiffs obtained the funds to purchase the certificates. Thus, those sales were only incidental to the fraud. Pp. 17–19.

675 F. 3d 503, affirmed.

     Breyer, J., delivered the opinion of the Court, in which Roberts, C. J., and Scalia, Thomas, Ginsburg, Sotomayor, and Kagan, JJ., joined. Thomas, J., filed a concurring opinion. Kennedy, J., filed a dissenting opinion, in which Alito, J., joined.

Notes

1  Together with No. 12–86, v. and No. 12–88, v. also on certiorari to the same court.

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