Many lower courts have given the Securities Litigation Uniform Standards Act of 1998 a wide preemptive scope. In those courts, a black-hole-like SLUSA devours all cases that come within a light year of its omnivorous gullet. If a lawsuit said pretty much anything about buying or selling an interest in a company -- BAM! Into the back hole it went.
All that changed today. The U.S. Supreme Court held that a "covered security" means one that trades on a public market -- your NYSEs and your Nasdaqs, to name the two biggest ones. Because SLUSA applies only to "covered" securities, a complaint that alleges fraud in a purely private purchase or sale of a stock, bond, note, or other security falls beyond the reach SLUSA's inhalations. Chadbourne & Parke v. Troice, No. 12-79 (U.S. Feb. 26, 2014).
The Court thus agreed with an unusually cautious Fifth Circuit that a class of people who bought certificates of deposit from the bank that Texan Allen Stanford set up in Antigua could bring state-law claims against Stanford and his helpers. SLUSA did not preempt such claims, the panel held in reversing dismissal of cases that originated in federal court and order remand of cases that began in state court.
Justice Breyer wrote for the 7-2 Court. Chief Justice Roberts and Justices Scalia, Thomas, Ginsburg, Sotomayor, and Kagan joined in the opinion. Justice Kennedy dissented, as did Justice Alito, who signed onto the Kennedy dissent.
What does the decision portend, if anything, for the blockbuster case that the Court may use to weaken or even sweep away the "fraud-on-the-market" theory in securities class actions? The Court will hear that appeal, in Halliburton Co. v. Erica P. John Fund, No. 13-317 (U.S.), on March 5, 2014. The case presents two questions:
1. Whether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, 485 U.S. 224 (1988), to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory.
2. Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.
The fact that the plaintiffs in Chadbourne & Parke live to fight another day provides a Ray of Hope for their brethren and sisteren in the Halliburton case.
But what about the Kennedy dissent? He says that federal law alone should apply to just about any securities transaction and that the availability of state-law claims somehow weakens federal-law protections of investors. Having more grounds for relief is bad for investors, according to the dissent.
Does that imply a hostility to expansive private remedies for securities investors? Justice Kennedy (and Justice Scalia) sat on the Court that handed down Basic, Inc. v. Levinson but did not participate in the decision. During the argument in the Amgen case from last Term, Justice Kennedy said "24 years of economic scholarship -- I think that's how long it's been since Basic was decided -- has shown that the -- the efficient market theory is -- is really -- really an overgeneralization. It could be much more subtle than that". Which suggests skepticism.
What do you think?