Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit

547 U.S. 71 (2006)

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Nature of the Case

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Facts

D is an investment banking firm that offers research and brokerage services to investors. The New York attorney general in 2002 instituted a formal investigation into D's practices. The investigation sparked a number of private securities fraud actions. P is a former Merrill Lynch broker. He filed this class action in Oklahoma on behalf of himself and all other former or current brokers who, while employed by D, purchased (for themselves and for their clients) certain stocks between December 1, 1999, and December 31, 2000. P invoked the District Court's diversity jurisdiction and advanced his claims under Oklahoma state law. P alleges that D breached the fiduciary duty and covenant of good faith and fair dealing it owed its brokers by disseminating misleading research and thereby manipulating stock prices. D used its misinformed brokers to enhance the prices of its investment banking clients' stocks. The research analysts, under D's direction, allegedly issued overly optimistic appraisals of the stocks' value and the brokers allegedly relied on the analysts' reports in advising their investor clients and in deciding whether or not to sell their own holdings. The complaint further alleged that when the truth was actually revealed (around the time the New York attorney general instituted his investigation), the stocks' prices plummeted. P alleges that the misrepresentations and manipulative tactics caused Ps to hold onto overvalued securities, and the brokers lost commission fees when their clients, now aware that they had made poor investments, took their business elsewhere. D moved to dismiss Dabit's complaint. It argued, that SLUSA pre-empted the action and, second, that the claims alleged were not cognizable under Oklahoma law. The District Court agreed that the federal statute pre-empted at least some of P's claims. It held that while the 'holding' claims might not be pre-empted, the 'purchasing' claims certainly were. The court dismissed the complaint with leave to amend. With dozens of other suits, based on allegations similar to P's the Judicial Panel on Multidistrict Litigation transferred all of the cases to New York for consolidated pretrial proceedings. D filed its second motion to dismiss P's complaint. The court granted the motion on the ground that the claims alleged fell 'squarely within SLUSA's ambit.' The Court of Appeals vacated the judgment and remanded for further proceedings. It held that the holders did not allege fraud 'in connection with the purchase or sale' of securities under SLUSA. It held that Congress nonetheless a narrower meaning here--one that incorporates the 'standing' limitation on private federal securities actions adopted in Blue Chip Stamps v. Manor Drug Stores. It held that the fraud is only 'in connection with the purchase or sale' of securities, as used in SLUSA if it is alleged by a purchaser or seller of securities. Fraud used to con people to retain or delay selling their securities fell outside SLUSA's pre-emptive scope. D appealed.