Lynch analysts had produced misleadingly positive assessments of stocks so that the investment banking arm of Merrill Lynch could secure fees from selling stock and advising on mergers. The New York Attorney General pointed to Merrill Lynch email messages that referred to the same stocks subject to rosy assessments as "piece[s] of junk" and "powder keg[s] as evidence to support his accusations."3 At the time of the announcement, Wall Street observers hinted that conflicts of interest and biased recommendations permeated the entire industry.4 Indeed, approximately one month later Spitzer announced that he had expanded the scope of his investigation to include Switzerland's UBS AG and Credit Suisse Group.5 Merrill Lynch quickly negotiated a $100 million settlement with Spitzer that outlined a series of reforms designed to eliminate the alleged conflicts of interest.6 Other Wall Street investment banks mimicked the reforms outlined in the settlement, including Credit Suisse First Boston.

The damage, however, was already done. Shadi Dabit, a former Merrill Lynch broker, filed a class action suit against his former employer alleging breach of fiduciary duty and the covenant of fair dealing on behalf of current and former Merrill Lynch brokers.7 Dabit pointed to Merrill Lynch's misleading analyst reports as the cause for his and his clients' decision to hold their securities beyond the point when they would have sold had they known the truth.8 Rather than relying on federal securities law, Dabit anchored his claim on Oklahoma state law which, according to Dabit's interpretation, recognized a securities fraud holding claim.

Dabit's choice was shrewd given the changing legal landscape of private securities fraud class action suits. Compared to state regulation, federal securities law imposes strict jurisprudential standing requirements and heightened pleading standards.9

Conversely, state securities regulation is less stringent given that some states recognize securities fraud holding claims,10 which are grounded in tort theories of fraudulent inducement.11

Nevertheless, the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") stands as a formidable obstacle to the viability of state securities fraud claims. If a court determines that the plaintiffs' state law holding claim falls within SLUSA's preemptive scope, the statute functions to invalidate the plaintiffs' state law claim.12 Once the action is removed to federal court, the plaintiffs' cause of action is dismissed altogether since federal securities law does not recognize analogous holding claims.

These Things Give Me Pause

1. The Court observes that "respondent and his amici have identified only one pre-SLUSA case involving a state-law class action asserting holder claims." But I have some vague recollection of the notion that litigation classes should have common issues of law and fact. If we are trying to chase securities fraud using a class action, isn't it going to be easier to just use a common federal statute (ala Section 10(b)) as opposed to using the parallel state law (which we then need to justify under our class certification rules)) which also fits within some state's (not sure whose) choice-of-law paradigm? My sense is that the Supreme Court's observation of what respondent did not find in terms of state law class actions is more related to the fact that it is easier to certify a class and litigate for a class on a common federal statute (ala Section 10(b)) as opposed to a state law claim. Perhaps my procedure brethren will tell me if I am missing something or if Justice Stevens is the one missing something with the above language that he penned.

2. With one fell swoop, the Supreme Court wipes out the practical value of many state blue sky laws and general consumer fraud laws and such. I understand and agree with the "occupying the field" argument in principle, but, geesh, today is a very different consumer fraud litigation day than was yesterday! If I am understanding correctly, the Supreme Court is now telling me that if the state of Nowicki wanted to adopt a Lying to Retail Customers' Faces En Masse Act that penalized any retail salesperson (which would include brokers) who blatantly lied, face to face, to a class of retail customers (about an age-spot eradication cream, for example, ala the Carter-Wallace case) by (a) forbidding them from working in retail sales for two years and (b) making them pay treble damages to the victims, the state legislature of Nowicki could not adopt a class-action provision within that act.

3. The Supreme Court tells us that SLUSA "does not deny any individual plaintiff, or indeed any group of fewer than 50 plaintiffs, the right to enforce any state-law cause of action that may exist." Slip op. at 15. I see that as an invitation for the smart plaintiffs' lawyers to pull 10 or so of the "best" plaintiffs into one state-law-based suit in order to stay outside of SLUSA's class action reach. Phrased differently, is there going to be an end-run around this opinion by plaintiffs' lawyers taking the 10 biggest claims they can find and mashing them into one non-class action? If so, it seems to me that the small investor - with the $22,000 claim as opposed to the $400,000 claim - is going to get left out in the cold. . . unless the federal district courts recognize that class action holder claims can be brought under Section 10(b) because Blue Chip Stamps technically does not preclude them. . . . And this is where things get fuzzy. . .