US high court backs Merrill in class action test
By Kevin Drawbaugh
WASHINGTON (Reuters) – The U.S. Supreme Court on Tuesday
ruled unanimously in favor of investment bank Merrill Lynch in
a decision limiting shareholders’ ability to bring certain
class action cases in state courts.
The court found that a 1998 law prevents certain kinds of
shareholder lawsuits from being brought at the state level,
rather than the federal level.
“The magnitude of the federal interest in protecting the
integrity and efficient operation of the market for nationally
traded securities cannot be overstated,” said Justice John Paul
Stevens, writing the court’s opinion.
Most shareholder class actions involve allegations that an
investor was misled in being convinced to buy or sell stock.
But “holders” lawsuits allege fraud when an investor is
convinced not to sell stock already owned, or not to buy shares
that are not yet owned.
Corporations defending themselves from securities class
actions prefer to do so in federal courts, where pleading
standards are higher.
Merrill argued that “holder” actions — like buyer and
seller actions — should be limited by the Securities
Litigation Uniform Standards Act (SLUSA), a 1998 law that
sought to stem a shift of securities class actions to state
courts from federal courts. The high court agreed.
Stevens said that distinguishing between “holder” actions
and “buyer” or “seller” actions in cases like this is
“irrelevant.” Doing so “would give rise to wasteful,
duplicative litigation,” he wrote.
The case at issue concerned Shadi Dabit, a former Merrill
broker. Dabit sued Merrill and alleged that he, other Merrill
brokers and clients were convinced by misleading Merrill
research to buy and hold certain stocks too long, which caused
them to lose money after the stocks’ values declined.
Dabit pursued his case under Oklahoma state law, rather
than in the federal courts.
Merrill moved in July 2002 to dismiss Dabit’s complaint,
arguing it was covered by SLUSA and could not be brought at the
state level. After a court decision against him, Dabit changed
his case to a pure “holder” action and argued such actions are
not SLUSA-covered and can be brought at the state level.
“Meanwhile, dozens of other suits, based on allegations
similar to Dabit’s, had been filed against Merrill Lynch around
the country,” Justice Stevens wrote in the court’s opinion.
Lower court action failed to resolve the issue and
propelled the Dabit case to the Supreme Court.
A lawyer who represented Merrill in the case said the
ruling was important to all publicly traded companies.
“This decision impacts all public companies by closing an
enormous loophole created by plaintiffs which would have led to
an avalanche of state law securities fraud class actions
accompanying virtually every federal securities class action,”
said Jay Kasner of Arps Slate Meagher & Flom.