Merrill Lynch v. Dabit
This case involves class action law suits seeking remedies under state law. The plaintiffs sued Merrill Lynch alleging that it issued biased research and investment recommendations. Dabit’s initial complaint against Merrill Lynch made multiple references to purchases and sales of stock, but Dabit later amended his complaint to refer only to the “holding and retention” of stock due to misrepresentation. Other plaintiffs made similar changes to their complaints, omitting all references to the sale or purchase of stocks. Merrill Lynch moved to dismiss the suits, claiming that the state laws were preempted by federal securities law.
The Securities Litigation Uniform Standards Act (SLUSA) preempts state class action lawsuits that allege a misrepresentation “in connection with the purchase or sale of a . . . security.” The federal district court, exerting diversity jurisdiction, dismissed all claims because they involved misrepresentations “in connection” with the purchase or sale of securities. Dabit and the other plaintiffs then appealed to the Second Circuit Court of Appeals, which held that SLUSA preempted all suits that alleged a misrepresentation in connection with the purchase or sale of securities, but does not preempt "holding claims or other nonpurchaser/ non-seller claims." The court affirmed the dismissal of most of the complaints, finding that they were artfully crafted to avoid preemption, but nevertheless alleged a misrepresentation “in connection” with the sale or purchase of securities. It reversed the dismissal of several complaints that legitimately involved holding and other nonpurchaser/ non-seller claims.
Question Presented:
Whether, as the Seventh Circuit held earlier this month and in direct conflict with the decision below, SLUSA preempts state law class action claims based
upon allegedly fraudulent statements or omissions brought solely on behalf of persons who were induced thereby to hold or retain (and not purchase or sell) securities?
