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(Article from Securities Law Alert, December 2014)

For more information, please visit the Securities Law Alert Resource Center.

The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) precludes certain state law-based class actions alleging “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)(A). For SLUSA purposes, a “covered security” is a security that is listed, or authorized for listing, on a national exchange or issued by a federally registered investment company. 15 U.S.C. § 78bb(f)(5)(E); 15 U.S.C. § 77r(b).

On February 26, 2014, the Supreme Court considered “the scope” of SLUSA’s “in connection with” requirement. Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014) (Breyer, J.). In a majority opinion authored by Justice Breyer, the Court held 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 [or on behalf of] one or more individuals (other than the fraudster) to buy or to sell a ‘covered security.’” The Court emphasized that SLUSA “focuses upon transactions in covered securities, not upon transactions in uncovered securities.” Moreover, the Court explained that SLUSA’s “in connection with” requirement “suggests a connection that matters.” “[F]or 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.”

In a dissenting opinion, Justice Kennedy, joined by Justice Alito, took issue with what he described as “[t]he Court’s narrow reading of the statute.” Instead of the test adopted by the majority, the dissent posited that “[t]he key question” for SLUSA preclusion purposes should be “whether the misrepresentation coincides with the purchase or sale of a covered security or the purchase or sale of the securities is what enables the fraud.”  


For more information please visit the Securities Law Alert Resource Center.