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SUPREME COURT OF THE UNITED STATES
_________________
Nos. 12–79, 12–86, and
12–88
_________________
CHADBOURNE & PARKE LLP,
PETITIONER
12–79 v.
SAMUEL TROICE et al.
WILLIS OF COLORADO INCORPORATED, et al.,
PETITIONERS
12–86 v.
SAMUEL TROICE et al.
PROSKAUER ROSE LLP, PETITIONER
12–88 v.
SAMUEL TROICE et al.
on writs of certiorari to the united states
court of appeals for the fifth circuit
[February 26, 2014]
Justice Breyer
delivered the opinion of the Court.
The Securities
Litigation Uniform Standards Act of 1998 (which we shall refer to
as the “Litigation Act”) for-bids the bringing of large
securities class actions based upon violations of state law. It
says that plaintiffs may not maintain a class action “based
upon the statutory or common law of any State” in which the
plaintiffs allege “a misrepresentation or omission of a
material fact in con-nection with the purchase or sale of a covered
security.” 15 U. S. C. §78bb(f)(1) (emphasis
added). The Act defines “class actions” as those
involving more than 50 members. See §78bb(f )(5). It
defines “covered security” narrowly to include only
securities traded on a national exchange (or, here irrelevant,
those issued by investment companies).
§§78bb(f )(5)(E), 77r(b)(1)–(2).
The question before us
is whether the Litigation Act encompasses a class action in which
the plaintiffs allege (1) that they “purchase[d]”
uncovered securities (certificates of deposit that are not traded
on any national exchange), but (2) that the defendants falsely told
the victims that the uncovered securities were backed by covered
securities. We note that the plaintiffs do not allege that the
defendants’ misrepresentations led anyone to buy or to sell
(or to maintain positions in) covered securities. Under these
circumstances, we conclude the Act does not apply.
In light of the
dissent’s characterization of our holding, post, at
11–12 (opinion of Kennedy, j.)—which we believe is
incorrect—we specify at the outset that this holding does not
limit the Federal Government’s authority to prosecute
“frauds like the one here.” Post, at 11. The Federal
Government has in fact brought successful prosecutions against the
fraudsters at the heart of this litigation, see infra, at
5–6, and we fail to understand thedissent’s repeated
suggestions to the contrary, post, at 3, 4,11, 12, 17. Rather, as
we shall explain, we believe the basic consequence of our holding
is that, without limiting the Federal Government’s
prosecution power in any sig-nificant way, it will permit victims
of this (and similar) frauds to recover damages under state law.
See infra, at 15–17. Under the dissent’s approach, they
would have no such ability.
I
A
The relevant
statutory framework has four parts:
(1) Section 10(b) of
the underlying regulatory statute, the Securities Exchange Act of
1934. 48Stat. 891, as amended, 15 U. S. C. §78j
(2012 ed.). This well-known statutory provision forbids the
“use” or “employ[ment]” of “any
manipulative or deceptive device or contrivance” “in
connection with the purchase or sale of any security.”
§78j(b).
Securities and Exchange
Commission Rule 10b–5 similarly forbids the use of any
“device, scheme, or artifice to defraud” (including the
making of “any untrue statement of a material fact” or
any similar “omi[ssion]”) “in connection with the
purchase or sale of any security.” 17 CFR
§240.10b–5 (2013).
For purposes of these
provisions, the Securities Exchange Act defines
“security” broadly to include not just things traded on
national exchanges, but also “any note, stock, treasury
stock, security future, security-based swap, bond, debenture
. . . [or] certificate of deposit for a security.”
15 U. S. C. §78c(a)(10). See also
§§77b(a)(1), 80a–2(a)(36), 80b–2(a)(18)
(providing virtually identical defini-tions of
“security” for the Securities Act of 1933, the
Investment Company Act of 1940, and the InvestmentAdvisers Act of
1940).
(2) A statute-based
private right of action. The Court has read §10(b) and Rule
10b–5 as providing injured persons with a private right of
action to sue for damages suffered through those provisions’
violation. See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421
U. S. 723, 730 (1975) .
The scope of the
private right of action is more limited than the scope of the
statutes upon which it is based. See Stoneridge Investment
Partners, LLC v. Scientific-Atlanta, Inc., 552 U. S. 148, 153,
155, 166 (2008) (private right does not cover suits against
“secondary actors” who had no “role in preparing
or disseminating” a stock issuer’s fraudulent
“financial statements”); Central Bank of Denver, N. A.
v. First Interstate Bank of Denver, N. A., 511 U. S. 164
(1994) (private right does not extend to actions against
“aiders and abettors” of securities fraud); Blue Chip
Stamps, supra, at 737 (private right extends only to purchasers and
sellers, not to holders, of securities).
(3) The Private
Securities Litigation Reform Act of 1995 (PSLRA). 109Stat. 737, 15
U. S. C. §§77z–1, 78u–4. This law
imposes procedural and substantive limitations upon the scope of
the private right of action available under §10(b) and Rule
10b–5. It requires plaintiffs to meet heightened pleading
standards. It permits defendants to obtain automatic stays of
discovery. It limits recoverable damages and attorney’s fees.
And it creates a new “safe harbor” for forward-looking
statements. See §§78u–4, 78u–5.
(4) The Securities
Litigation Uniform Standards Act. 112Stat. 3227, 15 U. S. C.
§78bb(f )(1)(A). As we said at the outset, this 1998 law
forbids any
“covered class action based upon the
statutory or common law of any State . . . by any private
partyalleging—
“(A) a misrepresentation or omission of a
material fact in connection with the purchase or sale of a covered
security; or
“(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.”
§§78bb(f )(1)(A)–(B).
The law defines “covered security”
narrowly. It is 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.”
§78bb(f )(5)(E). And the relevant paragraphs of
§18(b) of the 1933 Act define a “covered security”
as “[a security] listed, or authorized for listing, on a
national securities exchange,” §77r(b)(1) (or, though
not relevant here, as a security issued by an “investment
company,” §77r(b)(2)). The Litigation Act also specifies
that a “covered security” must be listed or authorized
for listing on a national exchange “at the time during which
it is alleged that the misrepresentation, omission, or manipulative
or deceptive conduct occurred.”
§78bb(f )(5)(E).
The Litigation Act sets
forth exceptions. It does not apply to class actions with fewer
than 51 “persons or prospective class members.”
§78bb(f )(5)(B). It does not apply to actions brought on
behalf of a State itself. §78bb(f )(3)(B)(i). It does not
apply to class actions based on the law “of the State in
which the issuer is incorporated.”
§78bb(f )(3)(A)(i). And it reserves the authority of
state securities commissions “to investigate and bring
enforcement actions.” §78bb(f )(4).
We are here primarily
interested in the Litigation Act’s phrase
“misrepresentation or omission of a material factin
connection with the purchase or sale of a covered secu-rity.”
§78bb(f )(1)(A). Unless this phrase applies to the class
actions before us, the plaintiffs may maintain their
state-law-based class actions, and they may do so either in federal
or state court. Otherwise, their class actions are precluded
altogether. See §78bb(f )(2) (providing for the removal
from state to federal court of class actions that meet the
specifications of paragraph 1, and for the dismissal of such suits
by the district court).
B
1
The plaintiffs in
these actions (respondents here) say that Allen Stanford and
several of his companies ran a multibillion dollar Ponzi scheme.
Essentially, Stanford and his companies sold the plaintiffs
certificates of deposit in Stanford International Bank. Those
certificates “were debt assets that promised a fixed rate of
return.” Roland v. Green, 675 F. 3d 503, 522 (CA5 2012). The
plaintiffs expected that Stanford International Bank would use the
money it received to buy highly lucrative assets. But instead,
Stanford and his associates used the money provided by new
investors to repay old investors, to finance an elaborate
lifestyle, and to finance speculative real estate ventures.
The Department of
Justice brought related criminal charges against Allen Stanford. A
jury convicted Stanford of mail fraud, wire fraud, conspiracy to
commit money laundering, and obstruction of a Securities and
Exchange Commission investigation. Stanford was sentenced to prison
and required to forfeit $6 billion. The SEC, noting that the Bank
certificates of deposit fell within the 1934 Securities Exchange
Act’s broad definition of “security,” filed a
§10(b) civil case against Allen Stanford, the Stanford
International Bank, and related Stanford companies and associates.
The SEC won the civil action, and the court imposed a civil penalty
of $6 billion.
2
The plaintiffs in
each of the four civil class actions are private investors who
bought the Bank’s certificates of deposit. Two groups of
plaintiffs filed their actions in Louisiana state court against
firms and individuals who helped sell the Bank’s certificates
by working as “investment advisers” affiliated with
Stanford, or who provided Stanford-related companies with trust,
insurance, accounting, or reporting services. (The defendants
included a respondent here, SEI Investments Company.) The
plaintiffs claimed that the defendants helped the Bank perpetrate
the fraud, thereby violating Louisiana state law.
Two other groups of
plaintiffs filed their actions in federal court for the Northern
District of Texas. One group sued Willis of Colorado (and related
Willis companies) and Bowen, Miclette & Britt, two insurance
brokers; the other group sued Proskauer Rose and Chadbourne &
Parke, two law firms. Both groups claimed that the defendants
helped the Bank (and Allen Stanford) perpetrate the fraud or
conceal it from regulators, thereby violating Texas securities
law.
The Louisiana
state-court defendants removed their cases to federal court, and
the Judicial Panel on Multi-District Litigation moved the Louisiana
cases to the Northern District of Texas. A single federal judge
heard all four class actions.
The defendants in each
of the cases moved to dismiss the complaints. The District Court
concluded that the Litigation Act required dismissal. The court
recognized that the certificates of deposit themselves were not
“covered securities” under the Litigation Act, for they
were not “ ‘traded nationally [or] listed on a
regulated national exchange.’ ” App. to Pet. for
Cert. in No. 12–86, p. 62.But each complaint in one way or
another alleged thatthe fraud included misrepresentations that the
Bank maintained significant holdings in “ ‘highly
marketable se-curities issued by stable governments [and] strong
mul-tinational companies,’ ” and that the
Bank’s ownership of these “covered” securities
made investments in the uncovered certificates more secure. Id., at
66. The court concluded that this circumstance provided the
requisite statutory “connection” between (1) the
plaintiffs’ state-law fraud claims, and (2)
“transactions in covered securities.” Id., at 64,
66–67. Hence, the court dismissed the class actions under the
Litigation Act. Id., at 75. See also 675 F. 3d,at 511.
All four sets of
plaintiffs appealed. The Fifth Circuit reversed. It agreed with the
District Court that the complaints described misrepresentations
about the Bank’s investments in nationally traded securities.
Still, the “heart, crux, and gravamen of” the
“allegedly fraudulent scheme was representing . . .
that the [uncovered] CDs were a ‘safe and secure’
investment that was preferable to other investments for many
reasons.” Id., at 522. The court held that the falsehoods
about the Bank’s holdings in covered securities were too
“ ‘tangentially related’ ” to the
“crux” of the fraud to trigger the Litigation Act. Id.,
at 520, 522 (quoting Madden v. Cowen & Co., 576 F. 3d 957,
965–966 (CA9 2009)). “That the CDs were marketed with
some vague references to [the Bank’s] portfolio containing
instruments that might be [covered by the Litigation Act] seems
tangential to the schemes,” to the point where the complaints
fall outside the scope of that Act. 675 F. 3d,at 522.
Defendants in the four
class actions sought certiorari. We granted their petitions.
II
The question before
us concerns the scope of the Litigation Act’s phrase
“misrepresentation or omission of a material fact in
connection with the purchase or sale ofa covered security.”
§78bb(f )(1)(A). How broad is that scope? Does it extend
further than misrepresentations that are material to the purchase
or sale of a covered security?
In our view, the scope
of this language does not extend further. To put the matter more
specifically: A fraudulent misrepresentation or omission is not
made “in connection with” such a “purchase or
sale of a covered security” unless it is material to a
decision by one or more individuals (other than the fraudster) to
buy or to sell a “covered security.” We add that in
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U. S.
71 (2006) , we held that the Litigation Act precluded a suit where
the plaintiffs alleged a “fraudulent manipulation of stock
prices” that was material to and
“ ‘concide[d]’ with” third-party
securities transactions, while also inducing the plaintiffs to
“hold their stocks long beyond the point when, had the truth
been known, they would have sold.” Id., at 75, 85, 89 (citing
United States v. O’Hagan, 521 U. S. 642, 651 (1997) ).
We do not here modify Dabit.
A
We reach this
interpretation of the Litigation Act for several reasons. First,
the Act focuses upon transactions in covered securities, not upon
transactions in uncovered securities. An interpretation that
insists upon a material connection with a transaction in a covered
security is consistent with the Act’s basic focus.
Second, a natural
reading of the Act’s language supports our interpretation.
The language requires the dismissal of a state-law-based class
action where a private party alleges a “misrepresentation or
omission of a material fact” (or engages in other forms of
deception, not relevant here) “in connection with the
purchase or sale of a covered secu-rity.” §78bb(f)(1).
The phrase “material fact in connection with the purchase or
sale” suggests a connection that matters. And for present
purposes, a connection matters where the misrepresentation makes a
significant difference to someone’s decision to purchase or
to sell a covered security, not to purchase or to sell an uncovered
security, something about which the Act expresses no concern. See
generally Matrixx Initiatives, Inc. v. Siracusano, 563 U. S.
___, ___ (2011) (slip op., at 9–12) (a misrepresentation or
omission is “material” if a reasonable investor would
have considered the information significant when contemplating a
statutorily relevant investment decision). Further, the
“someone” making that decision to purchase or sell must
be a party other than the fraudster. If the only party who decides
to buy or sell a covered security as a result of a lie is the liar,
that is not a “connection” that matters.
Third, prior case law
supports our interpretation. As far as we are aware, every
securities case in which this Court has found a fraud to be
“in connection with” a purchase or sale of a security
has 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., Dabit, supra, at 77
(Litigation Act: victims were “holders” of covered
securities that the defendant’s fraud caused to become
overvalued); SEC v. Zandford, 535 U. S. 813, 822 (2002)
(§10(b): victims were “duped into believing” that
the defendant would “ ‘invest’ their assets
in the stock market”); Wharf (Holdings) Ltd. v. United
Int’l Holdings, Inc., 532 U. S. 588, 592 (2001)
(§10(b): victim purchased an oral option to buy 10% of a
company’s stock); O’Hagan, supra, at 655–656
(§10(b): victims were “members of the investing
public” harmed by the defendant’s “gain[ing of
an] advantageous market position” through insider trading);
Superintendent of Ins. of N. Y. v. Bankers Life & Casualty Co.,
404 U. S. 6, 10 (1971) (§10(b): victim was “injured as
an investor” when the fraud deprived it of
“compensation for the sale of its valuable block of
securities”). We have found no Court case involving a fraud
“in connection with” the purchase or sale of a
statutorily defined security in which the victims did not fit one
of these descriptions. And the dissent apparently has not
either.
Although the dissent
characterizes our approach as “new,” post, at 3, and
tries to describe several of our prior cases, such as Zanford or
Dabit, in a different way, post, at 14–15, it cannot escape
the fact that every case it cites involved a victim who took, tried
to take, or maintained an ownership position in the statutorily
relevant securities through “purchases” or
“sales” induced by the fraud. E.g., Zandford, supra, at
815, 820 (fraudster told customershe would “
‘conservatively invest’ their money” in the stock
market and made sales of “his customer’s
securities,”but pocketed the proceeds (emphasis added));
Dabit, supra, at 76, 85, 89 (the “misrepresentations and
manipulative tactics caused [the plaintiffs] to hold onto
overvalued securities” while also inducing third parties to
trade them); In re Orlando Joseph Jett, 82 S. E. C.
Docket 1211, 1236–1237 (2004) (trader’s scheme
“greatly inflated the reporting trading profits” that
his firm “used to determine . . . the amount of capital he
was permitted to commit on the firm’s behalf” (emphasis
added)).
Fourth, we read the
Litigation Act in light of and consistent with the underlying
regulatory statutes, the Securities Exchange Act of 1934 and the
Securities Act of 1933. The regulatory statutes refer to persons
engaged in securities transactions that lead to the taking or
dissolving of ownership positions. And they make it illegal to
deceive a person when he or she is doing so. Section 5 of the 1933
Act, for example, makes it unlawful to “offer to sell or
offer to buy . . . any security, unless a registration
statement has been filed as to such security.” 15 U. S. C.
§77e(c). Section 17 of the 1933 Act makes it unlawful
“in the offer or sale of any securities . . . to
employ any device, scheme, or artifice to defraud, or to obtain
money or propertyby means of any untrue statement of a material
fact.” §§77q(a)(1)–(2). And §10(b) of
the 1934 Act makes it unlawful to “use or employ, in
connection with the purchase or sale of any security
. . . any manipulative or de-ceptive device or
contrivance.” §78j(b).
Not only language but
also purpose suggests a statutory focus upon transactions involving
the statutorily relevant securities. The basic purpose of the 1934
and 1933 regulatory statutes is “to insure honest securities
markets and thereby promote investor confidence.” See
O’Hagan, su-pra, at 658. Nothing in the regulatory statutes
suggests their object is to protect persons whose connection with
the statutorily defined securities is more remote than words such
as “buy,” “sell,” and the like, indicate.
Nor does anything in the Litigation Act provide us with reasons for
interpreting its similar language more broadly.
The dissent correctly
points out that the federal securities laws have another purpose,
beyond protecting investors. Namely, they also seek to protect
securities issuers, as well as the investment advisers,
accountants, and brokers who help them sell financial products,
from abusive class-action lawsuits. Post, at 5. Both the PSLRA and
the Litigation Act were enacted in service of that goal. By
imposing heightened pleading standards, limiting damages, and
pre-empting state-law suits where the claims pertained to covered
securities, Congress sought to reduce frivolous suits and mitigate
legal costs for firms and investment professionals that participate
in the market for nationally traded securities.
We fail to see,
however, how our decision today undermines that objective. The
dissent worries our approach 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.” Post, at 4. To the contrary,
the only issuers, investment advisers, or accountants that
today’s decision will continue to subject to state-law
liability are those who do not sell or participate in selling
securities traded on U. S. national exchanges. We concede that
this means a bank, chartered in Antigua and whose sole product is a
fixed-rate debt instrument not traded on a U. S. exchange,
will not be able to claim the benefit of preclusion under the
Litigation Act. But it is difficult to see why the federal
securities laws would be—or should be—concerned with
shielding such entities from lawsuits.
Fifth, to interpret the
necessary statutory “connection” more broadly than we
do here would interfere with state efforts to provide remedies for
victims of ordinary state-law frauds. A broader interpretation
would allow the Litigation Act to cover, and thereby to prohibit, a
lawsuit brought by creditors of a small business that falsely
represented it was creditworthy, in part because it owns or intends
to own exchange-traded stock. It could prohibit a lawsuit brought
by homeowners against a mortgage broker for lying about the
interest rates on their mortgages—if, say, the broker (not
the homeowners) later sold the mortgages to a bank which then
securitized them in a pool and sold off pieces as “covered
securities.” Brief for Sixteen Law Professors as Amici Curiae
24.
The dissent all but
admits this. Its proposed rule is that whenever “the purchase
or sale of the securities [including by the fraudster] is what
enables the fraud,” the Litigation Act pre-empts the suit.
Post, at 12. In other words, any time one person convinces another
to loan him money, by pretending he owns nationally traded
securities or will acquire them for himself in the future, the
action constitutes federal securities fraud, is subject to federal
enforcement, and is also precluded by the Litigation Act if it
qualifies as a “covered class action” under
§78bb(f )(5)(B) (e.g., involves more than 50 members).
Leaving aside whether this would work a significant expansion of
the scope of liability under the federal securities laws, it
unquestionably would limit the scope of protection under state laws
that seek to provide remedies to victims of garden-variety
fraud.
The text of the
Litigation Act reflects congressional care to avoid such results.
Under numerous provisions, it purposefully maintains state legal
authority, especially over matters that are primarily of state
concern. See §§78bb(f )(1)(A)–(B) (limiting
preclusion to lawsuits in-volving “covered,” i.e.,
nationally traded, securities); §78bb(f )(4) (providing
that the “securities commission . . . of any State
shall retain jurisdiction under the laws of such State to
investigate and bring enforcement actions”);
§78bb(f )(3)(B) (preserving States’ authority to
bring suits of the kind forbidden to private class-action
plaintiffs). See also 112Stat. 3227 (“Congress finds that
. . . it is appropriate to enact national standards for
securities class action lawsuits involving nationally traded
securities, while preserving the appropriate enforcement powers of
State securities regulators”). A broad interpretation of the
Litigation Act works at cross-purposes with this state-oriented
concern. Cf. Zandford, 535 U. S., at 820 (warning against
“constru[ing]” the phrase “in connection
with” “so broadly as to convert any common-law fraud
that happens to involve securities into a violation of
§10(b)”); Wharf (Holdings) Ltd., 532 U. S., at 596
(recognizing that “ordinary state breach-of-contract
claims” are “actions that lie outside the [Securities
Exchange] Act’s basic objectives”).
B
Respondents and the
Government make two important counterarguments. Respondents point
to statements we have made suggesting we should give the phrase
“in connection with” a broad interpretation. In Dabit,
for example, we said that the Court has consistently
“espoused a broad interpretation” of “in
connection with” in the context of §10(b) and Rule
10b–5, and we added that the Litigation Act language
similarly warranted a “broad construction.” 547
U. S., at 85–86. In Bankers Life, we said that, if a
deceptive practice “touch[es]” a securities
transaction, it meets §10(b)’s “in connection
with” requirement, 404 U. S., at 12, and in
O’Hagan, we said the fraud and the purchase or sale of a
security must simply “coincide.” 521 U. S., at 656. The
idea, we explained in Zandford, is that the phrase “should be
‘construed not technically and restrictively, but flexibly to
effectuate its remedial purposes.’ ” 535
U. S., at 819 (quoting Affiliated Ute Citizens ofUtah v.
United States, 406 U. S. 128, 151 (1972) ).
Every one of these
cases, however, concerned 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.” Dabit,
supra, at 75–77; Zandford, supra, at 822; Wharf (Holdings)
Ltd., supra, at 590–592; O’Hagan, supra, at
655–657; Bankers Life, supra, at 10. And the relevant
statements or omissions were material to a transaction in the
relevant securities by or on behalf of someone other than the
fraudster.
Second, the Government
points out that §10(b) of the Securities Exchange Act also
uses the phrase “in connection with the purchase or sale of
any security.” 15 U. S. C. §78j(b). And the
Government warns that a narrow interpretation of “in
connection with” here threatens a simi-larly narrow
interpretation there, which could limit the SEC’s enforcement
capabilities. See Brief for United States as Amicus Curiae 28.
We do not understand,
however, how our interpretation could significantly curtail the
SEC’s enforcement powers. As far as the Government has
explained the matter, our interpretation seems perfectly consistent
with past SEC practice. For one thing, we have cast no doubt on the
SEC’s ability to bring enforcement actions against Stanford
and Stanford International Bank. The SEC has already done so
successfully. As we have repeatedly pointed out, the term
“security” under §10(b) covers a wide range of
financial products beyond those traded on national exchanges,
apparently including the Bank’s certificatesof deposit at
issue in these cases. No one here denies that, for §10(b)
purposes, the “material” misrepresentations by Stanford
and his associates were made “in connection with” the
“purchases” of those certificates.
We find it surprising
that the dissent worries that our decision will “narro[w] and
constric[t] essential protection for our national securities
market,” post, at 3, and put “frauds like the one here
. . . not within the reach of fed-eral regulation,”
post, at 11. That would be news to Allen Stanford, who was
sentenced to 110 years in federal prison after a successful federal
prosecution, and to Stanford International Bank, which was ordered
to pay billions in federal fines, after the same. Frauds like the
one here—including this fraud itself—will continue to
be within the reach of federal regulation because the authority of
the SEC and Department of Justice extends to all
“securities,” not just to those traded on national
exchanges. 15 U. S. C. §78c(a)(10); accord, §77b(a)(1),
§80a–2(a)(36), §80b–2(a)(18). When the
fraudster peddles an uncovered secu-rity like the CDs here, the
Federal Government will have the full scope of its usual powers to
act. The only difference between our approach and that of the
dissent, is that we also preserve the ability for investors to
obtain relief under state laws when the fraud bears so remote a
connection to the national securities market that no person
actually believed he was taking an ownership position in that
market.
Thus, despite the
Government’s and the dissent’s hand wringing, neither
has been able to point to an example of any prior SEC enforcement
action brought during the past 80 years that our holding today
would have prevented the SEC from bringing. At oral argument, the
Government referred to an administrative proceeding, In re
Richard Line, 62 S. E. C. Docket 2879 (1996), as its best
example. Our examination of the report of that case, however,
indicates that the defendant was a fraudster to whom the
fraud’s victims had loaned money, expecting that he would
purchase securities on their behalf. Id., at 2880 (“Line
represented to investors that he would invest their non-admitted
assets in various securities, including U. S. Treasury notes,
mutual fund shares, and collateralized debt obligations”);
ibid. (“[He] fabricated account statements which falsely
recited that securities had beenpurchased on behalf of certain
investors”).
The Government’s
brief refers to two other proceedings as demonstrating the
SEC’s broad §10(b) enforcement powers. Each, however,
involved defrauded investors who had tried to take an ownership
interest in the relevant securities. Jett, 82 S. E. C.
Docket, at 1251 (involving a §10(b) action where a defrauded
trading firm’s “decision to purchase or
‘invest’ in strips or bonds . . . stemmed
directly from the activity that constituted the fraud”); In
re D. S. Waddy & Co., 30 S. E. C. 367, 368 (1949) (involving a
§10(b) action where a broker “appropriated to his own
use money paid to him by customers for securities
purchases”). We have examined SEC records without finding any
further examples.
For these reasons, the
dissent’s warning that our de-cision will
“inhibit” “litigants from using federal law to
police frauds” and will “undermine the primacy of
federal law in policing abuses in the securities markets”
rings hollow. Post, at 4, 5. The dissent cannot point to one
example of a federal securities action—public or
private—that would have been permissible in the past but that
our approach will disallow in the future. And the irony of the
dissent’s position is that federal law would have precluded
private recovery in these very suits, because §10(b) does not
create a private right of action for investors vis-à-vis
“secondary actors” or “aiders and abettors”
of securities fraud. Stoneridge Investment Partners, 552 U. S., at
152, 155; Central Bank of Denver, 511 U. S., at 180; accord,
Brief for Petitioners in No. 12–86, p. 46 (“Any federal
securities action against Petitioners would clearly run afoul of
Central Bank and Stoneridge”); Brief for Respon-dents 48
(same); Brief for United States as Amicus Curiae 28 (same).
III
Respondents’
complaints specify that their claims rest upon their purchases of
uncovered, not of covered, securities. Our search for allegations
that might bring their allegations within the scope of the
Litigation Act reveals the following:
(1) The first set of
Texas plaintiffs alleged that they bought certificates of deposit
from Stanford International Bank because they were told “the
CDs issued by SIBwere safer even than U. S. bank-issued
CDs” and “could be redeemed at any time,” given
that the Bank “only invested the money [i.e., the
Bank’s money obtained from its certificate sale proceeds] in
safe, secure, and liquid assets.” App. 433. They claimed
Stanford “touted the high quality of SIB’s investment
portfolio,” and such falsehoods were material to their
decision to purchase the uncovered certificates. Id., at 444.
(2) The second set of
Texas plaintiffs contended that they, too, purchased the
Bank’s certificates on the belief “that their money was
being invested in safe, liquid investments.” Id., at 715.
They alleged that the Bank’s marketing materials stated it
devoted “the greater part of its assets” to
“first grade investment bonds (AAA, AA+, AA) and shares of
stock (of great reputation, liquidity, and credibility).”
Id., at 744 (emphasis deleted).
(3) Both groups of
Louisiana plaintiffs alleged that they were induced to purchase the
certificates based on misrepresentations that the Bank’s
assets were “ ‘invested in a well-diversified
portfolio of highly marketable securities issued by stable
governments, strong multinational companies and major international
banks.’ ” Id., at 253, 345. And they claimed the
“ ‘liquidity/marketability of SIB’s invested
assets’ ” was “the most important factor to
provide security to SIB clients.” Id., at 254.
These statements do not
allege, for Litigation Act purposes, misrepresentations or
omissions of material fact “in connection with” the
“purchase or sale of a covered secu-rity.” At most, the
complaints allege misrepresentations about the Bank’s
ownership of covered securities—fraudulent assurances that
the Bank owned, would own, or would use the victims’ money to
buy for itself shares of covered securities. But the Bank is an
entity that made the misrepresentations. The Bank is the fraudster,
not the fraudster’s victim. Nor is the Bank some other person
transacting (or refraining from transacting, see Dabit, 547
U. S., at 75–77) in covered securities. And
consequently, there is not the necessary “connection”
between the materiality of the misstatements and the statutorily
required “purchase or sale of a covered security.” See
supra, at 8.
A final point: The
District Court found that one of the plaintiffs acquired Bank
certificates “with the proceeds of selling” covered
securities contained in his IRA portfolio. App. to Pet. for Cert.
in No. 12–86, p. 70. The plaintiffs, however, did not allege
that the sale of these covered securities (which were used to
finance the purchase of the certificates) constituted any part of
the fraudulent scheme. Nor did the complaints allege that Stanford
or his associates were at all interested in how the plaintiffs
obtained the funds they needed to purchase the certificates. Thus,
we agree with the Court of Appeals that “[u]nlike Bankers
Life and Zandford, where the entirety of the fraud depended upon
the tortfeasor convincing the victims of those fraudulent schemes
to sell their covered securities in order for the fraud to be
accomplished, the allegations here are not so tied with the sale of
covered securities.” 675 F. 3d, at 523. In our view,
like that of the Court of Appeals, these sales constituted no
relevant part of the fraud but were rather incidental to it.
For these reasons the
Court of Appeals’ judgment is affirmed.
It is so ordered.
SUPREME COURT OF THE UNITED STATES
_________________
Nos. 12–79, 12–86, and
12–88
_________________
CHADBOURNE & PARKE LLP,
PETITIONER
12–79 v.
SAMUEL TROICE et al.
WILLIS OF COLORADO INCORPORATED, et al.,
PETITIONERS
12–86 v.
SAMUEL TROICE et al.
PROSKAUER ROSE LLP, PETITIONER
12–88 v.
SAMUEL TROICE et al.
on writs of certiorari to the united states
court of appeals for the fifth circuit
[February 26, 2014]
Justice Kennedy, with
whom Justice Alito joins, dissenting.
A number of investors
purchased certificates of deposit (CDs) in the Stanford
International Bank (SIB). For pur-poses 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 contend 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 regulated
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 in-volving a fraud of a type, scale, and perhaps
sophistica-tion 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
todo 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 in
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 in-tegrity. 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 (2006) ; SEC v. Zandford, 535 U. S. 813, 819 (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.
This 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 class 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.
As a result, that language must be “ ‘presumed to
have the same meaning’ ” in SLUSA as it does in
those contexts. Id., at 86.
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. 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.
112Stat. 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).
In light of the
Act’s objectives, the Act must be givena “broad
construction,” because a “narrow reading of the statute
would undercut the effectiveness” of Congress’ reforms.
Dabit, supra, at 86. 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 (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.
The 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 12, 17. 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 (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. The
Court held the opposite, “concluding that SLUSA pre-empts
state-law holder class-action claims.” Id., at 87. “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.” Id., at 86. The
Court in Dabit also noted that SLUSA preclusion does not leave
victims with “no” ability to “recover damages
under state law.” Ante, at 2. Rather, “[i]t simply
denies plaintiffs the right to use the class-action device to
vindicate certain claims.” 547 U. S., at 87. 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. 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 (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 (quoting Silver
v. New York Stock Exchange, 373 U. S. 341, 366 (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 (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 (1997) .
Investor confidence
indicates fair dealing and integrity in the markets. See Dabit,
supra, at 78; O’Hagan, supra, at 658; see also Central Bank,
supra, at 188. 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 O’Hagan, supra, at 659. Widespread market
participation in turn facilitates efficient allocation of capital
to the Nation’s companies. See also Central Bank, supra, at
188.
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; see also
Dabit, supra, at 85.
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. The broker argued
that “the sales themselves were perfectly lawful and that the
sub-equent misappropriation of the proceeds, though fraud-lent, is
not properly viewed as having the requisiteconnection with the
sales.” Id., at 820. 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 (1971) , where the
fraud victims were misled to believe that they “would receive
the proceeds of thesale” of securities. Zandford, 535 U. S.,
at 821. 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. Both
suffered losses because they were victims of dishonest
intermediaries or fiduciaries. See also In re Richard J. Line,
62S.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 expertisein 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.” Id.,
at 244–245, 336–338, 480, 715. The fraud could not have
succeeded without the misrepresentation: 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, and again just as
in Zandford, the fraud was not complete until the representation
about securities transactions became untrue, just as Stanford
intended all along. Instead of purchasing covered securities, SIB
purchased some but fewer covered securities than it
promised—only 10% of its portfolio, according to an affidavit
attached to a complaint—and primarily speculated in Caribbean
real estate. Brief for Respondents 37; App. 594; but see Tr. of
Oral Arg. 43–44 (suggesting SIB did not purchase securities).
It was not until SIB rendered the CDs illiquid by failing to make
substantial investments in the nationally traded securities it
promised that the fraud was consummated. At that point, SIB blocked
the plaintiffs’ access to the market. The fraud and
SIB’s failure to purchase all that it promised were not
independent events. Rather, the false promises to invest in covered
securities enabled and furthered the CD fraud. Without the false
promise, there would have been no money to purchase the covered
securities. On these facts, this Court’s controlling
precedents instruct that these misrepresentations were made
“in con-ection with the purchase or sale” of regulated
securi-ties; and, as a result, state-law claims concerning them
should be precluded.
Dabit provides further
support for this conclusion. There, the Court held that an
investment bank that deceived brokers into advising their clients
to hold covered securities made misrepresentations “in
connection with the purchase or sale of a covered security.”
“Under our precedents,” the Court explained, “it
is enough that the fraud alleged ‘coincide’ with a
securities transaction—whether by the plaintiff or by someone
else.” 547 U. S., at 85. It did not matter that the
plaintiffs did not purchase or sell securities, because they were
participants in the national markets: “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.’ ” Ibid. (quoting O’Hagan, 521 U.
S., at 658). Here, for like reasons, it does not matter that the
fraud victims, as opposed to Stanford and SIB, were not the ones to
fail to invest in the market. The very essence of the fraud was to
induce purchase of the CDs on the (false) promise that investors
should rely on SIB’s special skills and expertise in making
market investments in covered securities on their behalf. If
promises related to covered securities are integral to the fraud in
this direct way, federal regula-tion is necessary if confidence in
the market is to bemaintained.
That interest is at
stake here. Because confidence in the ability to act as an investor
without diversion of funds by intermediaries and insiders is
critical, it does not matter if the victim of a fraud does not
purchase or sell a security, Dabit, supra, at 85; or if the sale or
purchase does not occur at the same time as the deception, Bankers
Life, 404 U. S., at 12–13; or if no party to the actual
transaction is deceived by the fraud, O’Hagan, supra, at 656;
or if the misrepresentation has nothing to do with the value of a
covered security, Zandford, 535 U. S., at 820. An investor’s
confidence in the market, and willingness to participate in it, may
be severely undermined if frauds like the one here are not within
the reach of federal regulation. Frauds like this one undermine
investor confidence in attorneys, accountants, brokers, and
investment advisers, the intermediaries on whom investors depend to
gain access to the market. And when frauds are as widespread as
this one, the market as a whole is weakened because investors,
including sophisticated ones, are misled as to the amount of funds
committed to the market and its consequent stability and
resilience.
The rule that SLUSA
applies when a misrepresentation about the market is coincident to
the fraud is, then, essential to the framework of the Act and to
federal securities regulation. Fraudulent practices
“ ‘constantly vary,’ ” and
“ ‘practices legitimate for some purposes may be
turned to illegitimate and fraudulent means.’ ”
Bankers Life, supra, at 12. That is why the key language
“should be construed not technically and restrictively, but
flexibly to effectuate its remedial purposes.” Zandford,
supra, at 819 (internal quotation marks omitted); see Affiliated
Ute, 406 U. S., at 151. The language merits a “broad
interpretation” because it is part of a residuary provision
that must be able to accommodate evolving methods of fraud by
intermediaries and insiders in ever more complicated securities
markets. Central Bank, 511 U. S., at 174. Its interpretation should
not privilege fraudsters who devise ever more devious methods of
committing fraud involving covered securities.
At the same time, the
submitted interpretation is not so broad as to “convert every
common-law fraud that happens to involve securities into a
violation of §10(b)” or preclude all state tort claims
that involve securities in a tangential way. Zandford, supra, at
820. So, for example, the statutory language does not extend to
cover a thief who steals money from a store to buy securities or to
a fraudster who defrauds a bank for a loan that he uses to buy
securities. See O’Hagan, supra, at 656. The victims in those
cases are not concerned about their ability to act as investors but
rather about their duties as a store clerk or a loan officer. Those
frauds involve securities transactions only as happenstance. As a
result, the interpretation submitted in this dissent strikes the
balance that Congress intended between forbidding frauds by
intermediaries in the market without reaching frauds that touch the
markets in only tangential ways.
The key question is
whether the misrepresentation coincides with the purchase or sale
of a covered securityor the purchase or sale of the securities is
what enables the fraud. Stanford’s misrepresentation did so.
Stanford promised to purchase covered securities for investors,
using his special expertise, thus allowing investors to rely on his
skill to participate in the national securities markets. The entire
scheme rested on investors falling for the trick. When covered
securities are so integral to the fraud, the false promise is
incident to the purchase or sale of regulated securities because it
coincides with it, and the misrepresentation respecting national
securities enabled the fraud.
D
The Court interprets
the phrase “misrepresentation or omission of a material fact
in connection with the purchase or sale of a covered
security”—the key phrase in SLUSA and Rule
10b–5—in a different manner. The result, it is
submitted, is inconsistent with the statutory scheme Congress
enacted and casts doubt on the applicability of federal securities
law to cases of serious securities fraud.
The Court construes the
text of SLUSA and Rule 10b–5 to require a misrepresentation
that “is material to a decision by one or more individuals
(other than the fraudster) to buy or sell a ‘covered
security.’ ” Ante, at 8. The Act simply does not
say that the purchase or sale—or the promise to make a
purchase or sale—must be by one other than the fraudster.
Rather the Act states that there must be “a misrepresentation
or omission of a material fact in connection with the purchase or
sale of a covered secu-rity.” 15 U. S. C.
§78bb(f)(1)(A). See 17 CFR §240.10b–5 (2013)
(requiring an “untrue statement of a material fact”
“in connection with the purchase or sale of any
security”). The Court narrows the statute Congress wrote in
two ways. It excises the important “in connection with”
language, resulting in a confined reading inconsistent with the
Act’s purpose, structure, and operation. And, by requiring
the purchase or sale be made by someone “other than the
fraudster,” the Court inserts a limiting phrase that nowhere
appears in the language of the provisions. In litigation like this,
this new rule has it upside down. When the violation that adversely
affects the securities market is done by the fraudster himself,
that is all the more reason for applying federal law. This is not a
case where Congress has limited its coverage to a certain subset of
purchasers. Congress enacted such a limit two subsections later in
SLUSA when detailing which ac-tions are not precluded. See 15
U. S. C. §78bb(f)(3)(A)(ii)(I) (“the purchase
or sale of securities by the issuer or an affiliate of the issuer
exclusively from or to holders of equity securities of the
issuer”). But it did not do so in the provision at issue.
The Court’s
reconstruction of the language of the provisions also casts doubt
on the applicability of federal securities law to three established
instances of federal securities fraud and one instance of
preclusion under the Act as adjudged by the Court and the SEC in
earlier cases.
First, the
Court’s interpretation necessarily suggests that Zandford is
incorrect and that dishonest brokers need not fear Rule 10b–5
liability. The deceit in Zandford was that the broker would act as
the victim’s fiduciary when in fact he planned on selling
(and did sell) the investor’s securities for his own benefit.
535 U. S., at 820; see also Line, 62 S.E.C. Docket 2879
(broker’s deceit was false promise to buy). The Court’s
rule that liability must rest on a finding that someone other than
the fraudster purchased or sold securities is inconsistent with
Zandford, where the recipient of the misrepresentation did not buy
or sell. The Court’s opinion disregards the hazards to the
market when the fraudster is the one acting in the market and
frustrates the investment objectives of his victims.
Second, the
Court’s interpretation is difficult to reconcile with
liability for insider trading. In O’Hagan, the Court held
that the “in connection with” element “is
satisfied because the fiduciary’s fraud is consummated, not
when the fiduciary gains the confidential information, but when,
without disclosure to his principal, he uses the information to
purchase or sell securities,” “even though the person
or entity defrauded is not the other party to the trade.” 521
U. S., at 656. The Court’s requirement that someone other
than the fraudster purchase or sell a security is hard to square
with O’Hagan.
Third, the
Court’s interpretation is difficult to square with the
SEC’s position in In re Orlando Joseph Jett, 82 S.E.C. Docket
1211 (2004). There, the SEC held liable a trader who fabricated
complex trades to supplement the returns of his real trades, so as
to increase his standingin his company. The SEC likened Jett to
“garden-variety securities fraud cases in which a
broker-dealer or investment adviser engages in unsuccessful
securities trades for a client and then hides the losses or
inflates the profits by sending out false account
statements.” Id., at 1253. The decision of the Court today
would require that Jett’s misrepresentation led to the
purchase or sale of securities by someone other than Jett. But the
SEC found Jett’s own purchases and sales to be sufficient to
come within the securities laws.
Finally, the
Court’s analysis is inconsistent with the unanimous opinion
in Dabit, which interpreted the same statutory language at issue in
this litigation. Dabit squarely rejected the view 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.” 547 U. S.,
at 85. Instead,it approved the SEC’s interpretation that a
broker who “ ‘sells customer securities with
intent to misappropriate the proceeds’ ” satisfies
the “in connection with the purchase or sale”
requirement. Ibid., n. 10. Dabit cannot be reconciled with
today’s decision to require someone other than the fraudster
buy or sell a security.
It is correct that
there is no case precisely standing for the proposition that a
victim does not have to take an ownership position. However,
O’Hagan supports that view. O’Hagan clearly states that
in insider trading cases “the person or entity defrauded is
not the other party to the trade.” 521 U. S., at 656. And in
Zandford a fraudster told customers he would invest “their
money” in securities and then sold those securities. 535
U. S., at 815. Here the fraudster told plaintiffs that he
would “re-invest” “their” money in
securities and then bought different securities. App. 250, 470,
715. The only difference is that there the fraudster sold and here
he bought. Federal regulation should not turn on whether a
fraudster arrives before or after an investor makes his first
purchase.
II
The Court’s
interpretation also introduces confusion into securities law by not
defining what it means for someone “other than the fraudster
to buy or sell” a security, a rule that it derives from its
view that the precedents all involve victims who had an ownership
interest in securities. Ante, at 8–10. The precedents the
Court cites involve what the parties have called direct ownership,
where the victim buys or sells an entire equity. By using the term
ownership interest instead of ownership, the Court also appears to
accept the respondents’ concession that indirect ownership,
where the victim buys or sells shares in a defendant fund that
itself owns equities, is sufficient in certain circumstances, such
as when a victim has “some interest in the defendant’s
supposed portfolio.” Brief for Respondents 16.
An ownership rule
distinguishing between different types of indirect ownership is
unworkable. Indirect ownership is a common type of investment. See
M. Fink, The Rise of Mutual Funds 1 (2008) (U. S. mutual funds
have over 88 million American shareholders and over $11 trillion in
assets). Yet whether indirect ownership involves an interest in the
underlying equities is a complex question of corporation, LLC, or
partnership law. See In re Bernard L. Madoff Inv. Securities LLC,
708 F. 3d 422, 427 (CA2 2013). Congress likely did not intend
preclusion of state-law suits to depend on the complexities of the
Delaware Code.
The Court’s
ownership approach also casts doubt on the scope of Rule
10b–5. Under the Court’s interpretation, §10(b)
applies to fraudulent mutual or hedge funds not because those funds
invest in securities but because investments in the funds are
securities. But not all such investments are securities. 2 L.
Ribstein & R. Keatinge, Limited Liability Companies §14:2
(2010) (discussing test for a security from SEC v. W. J. Howey Co.,
328 U. S. 293 (1946) ); 1 H. Bloomenthal & S. Wolff, Securities
Law Handbook §§2:3 to 2:4 (2010). For those that are not,
the Court seems to envision liability only when the investment
confers an ownership interest in the fund’s securities. And
the general rule for investments in funds organized as LLPs and
LLCs is that they do not convey such claims. 1 Ribstein &
Keatinge, supra, §7:11; see In re Herald, 730 F. 3d 112 (CA2
2013). As a result, in important instances Rule 10b–5 may not
extend to mutual and hedge funds under the Court’s
interpretation.
It is true that the SEC
pursued the fraudster with success here. But that is because the
CDs are securities. See Order Denying Motion to Dismiss in SEC v.
Stanford International Bank, No.
3–09–CV–0298–N (ND Tex., Nov. 30, 2011),
pp. 5–10. This aspect of Stanford’s fraud is not a
necessary feature of all frauds involving funds similarto SIB.
III
The fraudster in this
litigation misrepresented that he would purchase nationally traded
securities. That misrepresentation was made “in connection
with the purchase or sale” of the promised securities because
it coincided with them. The fraud turned on the misrepresentation.
The Court’s contrary interpretation excises the phrase
“in connection with” from the Act, a phrase that the
Court in earlier cases held to require a broad and flexible
meaning. At the same time, by holding that the purchase or sale of
securities be made by someone other than the fraudster, the Court
engrafts a limitation that does not appear in the text. The result
is to constrict the application of federal securities regulation in
instances where dishonest brokers, insider traders, and lying
employees purchase or sell securities, or promise to do so, as part
of the fraud. Today’s decision introduces confusion in the
enforcement of securities laws.
For these reasons, it
is submitted that the judgment of the Court of Appeals should be
reversed.