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The Supreme Court held 3/21/06 that a state-law class action may be pre-empted by the Securities Litigation Uniform Standards Act of 1998 (SLUSA) regardless of whether the plaintiff has a private remedy under federal law. The SLUSA expressly preempts “covered class action[s] based upon [state law] … by any private party alleging … a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” The Court previously had held that federal law provides a private remedy only for plaintiffs who were induced by the fraud to purchase or sell securities; others, including those who were induced to hold their securities, have no private right of action under federal law. Notwithstanding this limitation on a private right of action, the Court and the Securities and Exchange Commission previously had given a broad interpretation to “in connection with” language found in Section 10(b) of the 1934 Securities Exchange Act and in the SEC’s Rule 10b-5. The Court reasoned that Congress, in importing the “in connection with” language into the SLUSA’s core pre-emption provision, must have been aware of this broad interpretation. Thus, the misconduct alleged in a state-law class action may be fraud “in connection with the purchase or sale of a covered security,” and thus pre-empted by SLUSA, regardless of the identity of the plaintiffs. This decision is important to any business that may be involved in securities fraud litigation.

Decision Below: 395 F.3d 25 (2d Cir. 2005)