## Facts

- A former Merrill Lynch broker sued on behalf of a putative class of Merrill Lynch brokers and their clients under Oklahoma state-law theories (including fiduciary-duty and related claims), invoking federal diversity jurisdiction.
- The complaint alleged Merrill Lynch disseminated materially misleading, biased research through its analysts to inflate the prices of covered, nationally traded securities and benefit investment-banking clients.
- The alleged misstatements were said to influence brokers and their clients to retain overvalued securities rather than sell.
- The alleged injuries included clients later selling at losses when the alleged inflation dissipated and brokers losing commissions and business when clients blamed them and moved their accounts.
- Merrill Lynch argued the action was barred by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which precludes certain state-law “covered class actions” alleging a material misrepresentation or omission “in connection with the purchase or sale” of a covered security.

## Issues

1. Whether SLUSA preempts a state-law covered class action alleging misrepresentations that induced investors and brokers to hold (rather than buy or sell) covered securities.
2. Whether SLUSA’s “in connection with the purchase or sale” requirement turns on the plaintiff class’s status as purchasers or sellers, or instead on whether the alleged fraud coincides with securities transactions in the market.

## Decision

- The Supreme Court unanimously reversed the Second Circuit (Justice Alito not participating).
- The Court held SLUSA preempts state-law “holder” class actions alleging misrepresentations connected to covered securities transactions.
- The Court concluded SLUSA’s “in connection with the purchase or sale” language should be read broadly, consistent with the established construction of the same phrase in § 10(b) and Rule 10b-5 cases.
- The Court ruled that the purchaser/seller limitation associated with private Rule 10b-5 actions does not restrict SLUSA’s preemptive scope.
- Because the complaint alleged a scheme of misleading research affecting market transactions and inducing retention of covered securities, the action could not be maintained under state law as a covered class action.

## Legal Principles

- SLUSA bars a private “covered class action” based on state law that alleges a misrepresentation or omission of material fact “in connection with the purchase or sale” of a covered security.
- “In connection with the purchase or sale” in SLUSA is construed broadly; it is satisfied where the alleged fraud coincides with securities transactions, even if the plaintiffs themselves did not buy or sell.
- The purchaser/seller standing limit for implied private Rule 10b-5 claims is not a statutory interpretation of “in connection with” and does not narrow SLUSA preemption.
- SLUSA can preempt state-law class claims even when a comparable private federal securities claim would not be available to the same plaintiffs.

## Conclusion

The Court held that SLUSA’s preemption reaches state-law securities fraud class actions brought on behalf of holders of covered securities when the alleged misrepresentations coincide with market transactions in those securities, thereby barring the asserted state-law “holder” class claims.


Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006)