Thursday, November 7, 2013

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

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

Respondent securities broker sued petitioner investment firm, alleging in a putative state-law class action that the firm fraudulently manipulated stock prices which caused the broker to hold overvalued securities. Upon the grant of a writ of certiorari, the firm appealed the judgment of the U.S. Court of Appeals for the Second Circuit which held that the action was not preempted by the Securities Litigation Uniform Standards Act of 1998 (SLUSA).

SLUSA prohibited class action lawsuits under state law which alleged fraudulent misrepresentations or omissions in connection with the purchase or sale of a security. The broker contended that, with regard to the firm's alleged fraud, he did not purchase or sell securities but only held securities too long based on the fraud, and thus SLUSA did not apply because the fraud was not in connection with the purchase or sale of securities.

  • The U.S. Supreme Court held, however, that for purposes of preemption under SLUSA the distinction between holders and purchasers or sellers was irrelevant, since the status of the broker as a holder did not determine whether the broker alleged fraud in connection with the purchase or sale of securities. 
  • The phrase "in connection with the purchase or sale of securities" as used in prior related legislation was broadly construed to require only that the fraud coincide with a securities transaction, and the same policy considerations supported the same construction with regard to SLUSA. 
  • Further, the broad construction of SLUSA was consistent with congressional intent to curb vexatious class action litigation alleging securities fraud.


The judgment holding that the Broker's action was not preempted by SLUSA was vacated, and the case was remanded for further proceedings.

Suggested Study Aids For Securities Regulation Law
Securities Regulation in a Nutshell, 10th (Nutshell Series)
Securities Regulation: Examples & Explanations, 5th Edition
Securities Regulations: The Essentials

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