## Facts

- Investors purchased certificates of deposit (CDs) issued by Stanford International Bank in an alleged Ponzi scheme.
- The CDs were not listed on a national securities exchange and therefore were not “covered securities” under the Securities Litigation Uniform Standards Act of 1998 (SLUSA).
- The CDs were marketed as safe based on representations that the bank’s assets included a diversified portfolio of liquid, high-quality securities, including securities traded on U.S. national exchanges.
- Investors filed state-law class actions against law firms and insurance-broker entities, alleging they assisted the scheme by misrepresenting that the CDs were backed by such securities.
- The federal district court dismissed the suits as precluded by SLUSA; the Fifth Circuit reversed, concluding the alleged fraud centered on purchases of uncovered CDs.
- The Supreme Court granted review in consolidated cases involving the same theory of liability.

## Issues

1. Whether SLUSA precludes state-law class actions alleging misrepresentations that induced purchases of uncovered securities by referencing or falsely describing holdings of covered securities.
2. Whether a misrepresentation is “in connection with the purchase or sale of a covered security” when plaintiffs themselves bought only uncovered securities and no non-fraudster’s decision to trade covered securities is alleged to be affected.

## Decision

- The Supreme Court affirmed the Fifth Circuit, holding (7–2) that SLUSA did not preclude the state-law class actions.
- The Court ruled the alleged misrepresentations were not made “in connection with” the purchase or sale of a covered security as SLUSA uses that phrase.
- The Court allowed the state-law class actions against the professional and brokerage defendants to proceed.

## Legal Principles

- SLUSA bars certain state-law class actions only when they allege a material misrepresentation or omission “in connection with” the purchase or sale of a covered security.
- SLUSA’s focus is transactions in covered securities; references to covered securities are insufficient if the claims rest on purchases of uncovered securities.
- A misrepresentation has the required connection when it is material to a decision by someone other than the fraudster to buy or sell a covered security.
- Misrepresentations that merely claim the fraudster holds, trades, or will use covered securities to back an uncovered investment do not satisfy SLUSA’s “in connection with” requirement absent a non-fraudster’s covered-security transaction decision.
- A narrower reading of SLUSA avoids displacing state-law remedies for ordinary frauds that do not genuinely involve covered-security trading by victims.

## Conclusion

SLUSA did not preclude the investors’ state-law class actions because the alleged misrepresentations induced purchases of uncovered CDs and were not material to any non-fraudster’s decision to purchase or sell a covered security.


Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014)