Argued October 7, 2013
ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
[134 S.Ct. 1059] Syllabus [*]
The Securities Litigation Uniform Standards Act of 1998 (Litigation Act or Act) forbids the bringing of large securities class actions "based upon the statutory or common law of any State" in which the plaintiffs allege "a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security, " 15 U.S.C. §78bb(f)(l). The Act defines "covered security" to include, as relevant here, only securities traded on a national exchange. §§78bb(f)(5)(E), 77r(b)(1).
Four sets of plaintiffs, respondents here, filed civil class actions under state law, contending that the defendants, petitioners here, helped Allen Stanford and his companies perpetrate a Ponzi scheme by [134 S.Ct. 1060] falsely representing that uncovered securities (certificates of deposit in Stanford International Bank) that plaintiffs were purchasing were backed by covered securities. The District Court dismissed each case under the Litigation Act. Although the certificates of deposit were not covered securities, the court concluded, the Bank's misrepresentation that its holdings in covered securities made investments in its uncovered securities more secure provided the requisite "connection" (under the Litigation Act) between the plaintiffs' state-law actions and transactions in covered securities. The Fifth Circuit reversed, concluding that the falsehoods about the Bank's holdings in covered securities were too tangentially related to the fraud to trigger the Litigation Act.
The Litigation Act does not preclude the plaintiffs' state-law class actions. Pp.1065 - 1072, 188 L.Ed.2d, at 99-106.
(a) Several factors support the conclusion that the scope of §78bb(f)(1)(A)'s phrase "misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security" does not extend further than misrepresentations that are material to the decision by one or more individuals (other than the fraudster) to purchase or sell a covered security. First, this interpretation is consistent with the Act's basic focus on transactions in covered, not uncovered, securities. Second, the interpretation is supported by the Act's language. The phrase "material fact in connection with the purchase or sale" suggests a connection that matters. And a connection matters where the misrepresentation makes a significant difference to someone's decision to purchase or to sell a covered security, not an uncovered one, something about which the Act expresses no concern. See Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. __, __, 131 S.Ct. 1309, 1317-1319, 179 L.Ed.2d 398. Further, for the connection to matter, the "someone" making the decision to purchase or sell a covered security must be a party other than the fraudster. Third, the securities cases in which this Court has found a fraud to be "in connection with" a purchase or sale of a security, under both the Litigation Act and Section 10(b) of the Securities Exchange Act of 1934 (which also uses the "in connection with" phrase), have involved victims who took, who tried to take, who divested themselves of, who tried to divest themselves of, or who maintained an ownership interest in financial instruments that fall within the relevant statutory definition. See, e.g., Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 77, 126 S.Ct. 1503, 164 L.Ed.2d 179. Fourth, this Court reads the Litigation Act in light of and consistent with the language and purpose of the underlying regulatory statutes, the Securities Exchange Act of 1934 and the Securities Act of 1933, which refer to persons engaged in securities transactions that lead to the taking or dissolving of ownership positions, and which make it illegal to deceive a person when he or she is doing so. The basic purpose of the 1934 and 1933 regulatory statutes is to protect investor confidence in the securities markets. Nothing in those statutes, or in the Litigation Act, suggests their object is to protect persons whose connection with the statutorily defined securities is more remote than buying or selling. Fifth, a broader interpretation of the necessary statutory "connection" would interfere with state efforts to provide remedies for victims of ordinary state-law frauds, despite the fact that the Litigation Act purposefully seeks to avoid such results by maintaining States' legal authority [134 S.Ct. 1061] over matters that are primarily of state concern, see, e.g., §§78bb(f)(4). Pp. 1066 -1069, 188 L.Ed.2d, at 99-102.
(b) Respondents and the Government make two important, but unavailing, counterarguments. First, they point to this Court's suggestions that the phrase "in connection with" should be given a broad interpretation. But every case in which this Court interpreted the phrase to cover a fraud involved a false statement (or the like) that was "material" to another individual's decision to "purchase or s[ell]" a statutorily defined "security" or "covered security, " e.g., Dabit, supra, at 75-77, 126 S.Ct. 1503, 164 L.Ed.2d 179, and where the transaction was by or on behalf of someone other than the fraudster. Second, the Government warns that a narrow interpretation would curtail the Securities and Exchange Commission's enforcement powers under §10(b) of the Securities Exchange Act, which uses the same "in connection with the purchase or sale" phrase. To the contrary, this Court's interpretation is perfectly consistent with past SEC practice. The authority of the SEC and the Department of Justice extends to all "securities" under §10(b), not just to those traded on national exchanges. 15 U.S.C. §78c(a)(10). The SEC has accordingly brought successful enforcement actions against Stanford and his associates, based on the Bank's fraudulent sales of certificates of deposit-products that are "securities" even if not "covered securities." Neither the Government nor the dissent has pointed to an example of any prior SEC enforcement action that the instant holding would have prevented the SEC from bringing. Pp. 1069 -1071, 188 L.Ed.2d, at 102-104.
(c) Respondents' complaints do not allege, for Litigation Act purposes, misrepresentations or omissions of material fact "in connection with" the "purchase or sale of a covered security." At most, they allege misrepresentations about the Bank's ownership of covered securities. But the Bank is the fraudster, not the fraudster's victim; nor is it some other person transacting in covered securities. Thus, there is not the necessary "connection" between the materiality of the misstatements and the statutorily required "purchase or sale of a covered security." In addition, while the District Court found that one plaintiff acquired Bank certificates with proceeds from the sale of covered securities, the plaintiffs did not allege that the sale of these covered securities constituted any part of the fraudulent scheme or that Stanford or his associates were interested in how the plaintiffs obtained the funds to purchase the certificates. Thus, those sales were only incidental to the fraud. Pp. 1070 -1072, 188 L.Ed.2d, at 104-106.
675 F.3d 503, affirmed.
BREYER, J., delivered the opinion of the Court, in which ROBERTS, C. J., and SCALIA, THOMAS, GINSBURG, SOTOMAYOR, and KAGAN, JJ., joined. THOMAS, J., filed a concurring opinion. KENNEDY, J., filed a dissenting opinion, in which ALITO, J., joined.
Paul D. Clement, Washington, DC, for Petitioners.
Elaine J. Goldenberg, for the United States, as amicus curiae, by special leave of the Court, supporting the Petitioners.
Thomas C. Goldstein, Washington, DC, for Respondents.
Daniel J. Beller, Daniel J. Leffell, William B. Michael, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, Walter Dellinger, Jonathan D. Hacker, O'Melveny & Myers LLP, Washington, DC, Anton Metlitsky, Leah Godesky, O'Melveny & Myers LLP, New York, NY, for Petitioner.
[134 S.Ct. 1062] Thomas C. Goldstein, Counsel of Record, Tejinder Singh, Goldstein & Russell, P.C., Washington, DC, Phillip W. Preis, Charles M. Gordon, Jr., Preis Gordon, APLC, Baton Rouge, LA, Edward F. Valdespino, Judith R. Blakeway, Strasburger & Price, LLP, Edward C. Snyder, Jesse R. Castillo, Castillo Snyder, P.C., San Antonio, TX, P. Michael Jung, David N. Kitner, Strasburger & Price, LLP, Douglas J. Buncher, Patrick J. Neligan, Jr., Nicholas A. Foley, Neligan Foley, LLP, Dallas, TX, for Respondents.
Adam L. Rosman, Willis Group, New York, NY, Robert M. Lapinsky, Willis North America Inc., Nashville, TN, Paul D. Clement, Counsel of Record, Jeffrey M. Harris, Bancroft PLLC, Washington, DC, Jonathan I). Polkes, Weil, Gotshal & Manges LLP, New York, NY, J. Gordon Cooney, Jr., Morgan, Lewis & Bockius LLP, Philadelphia, PA, Allyson N. Ho, Morgan, Lewis & Bockius LLP, Houston, TX, Bradley W. Foster, Andrews Kurth LLP, Dallas, TX, for Petitioners.
James P. Rouhandeh, Counsel of Record, Daniel J. Schwartz, Jonathan K. Chang, Richard A. Cooper, Davis Polk & Wardwell LLP, New York, NY, for Petitioner.
The Securities Litigation Uniform Standards Act of 1998 (which we shall refer to as the "Litigation Act") forbids the bringing of large securities class actions based upon violations of state law. It says that plaintiffs may not maintain a class action "based upon the statutory or common law of any State" in which the plaintiffs allege "a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security." 15 U.S.C. §78bb(f)(l) (emphasis added). The Act defines "class actions" as those involving more than 50 members. See §78bb(f)(5). It defines "covered security" narrowly to include only securities traded on a national exchange (or, here irrelevant, those issued by investment companies). §§78bb(f)(5)(E), 77r(b)(l)-(2).
The question before us is whether the Litigation Act encompasses a class action in which the plaintiffs allege (1) that they "purchase [d]" uncovered securities (certificates of deposit that are not traded on any national exchange), but (2) that the defendants falsely told the victims that the uncovered securities were backed by covered securities. We note that the plaintiffs do not allege that the defendants' misrepresentations led anyone to buy or to sell (or to maintain positions in) covered securities. Under these circumstances, we conclude the Act does not apply.
In light of the dissent's characterization of our holding, post, at 1077 - 1078, 188 L.Ed.2d, at 112-113 (opinion of KENNEDY, J.)-which we believe is incorrect-we specify at the outset that this holding does not limit the Federal Government's authority to prosecute "frauds like the one here." Post, at. 1077 -1078, 188 L.Ed.2d, at 112. The Federal Government has in fact brought successful prosecutions against the fraudsters at the heart of this litigation, see infra, at 1074-1075, 188 L.Ed.2d, at 97-98, and we fail to understand the dissent's repeated suggestions to the contrary, post at 1073, 1073-1074, 1077-1078, 1078, 1081, 188 L.Ed.2d, at 107, 108, 112, 113, 116. Rather, as we shall explain, we believe the basic consequence of our holding is that, [134 S.Ct. 1063] without limiting the Federal Government's prosecution power in any significant way, it will permit victims of this (and similar) frauds to recover damages under state law. See infra, at 1079 -1081, 188 L.Ed.2d, at 103-104. Under the dissent's approach, they would have no such ability.
The relevant statutory framework has four parts:
(1) Section 10(b) of the underlying regulatory statute, the Securities Exchange Act of 1934.
48 Stat. 891, as amended, 15 U.S.C. §78j (2012 ed.). This well-known statutory provision forbids the "use" or "employ[ment]" of "any manipulative or deceptive device or contrivance" "in connection with the purchase or sale of any security." §78j(b).
Securities and Exchange Commission Rule 10b-5 similarly forbids the use of any "device, scheme, or artifice to defraud" (including the making of "any untrue statement of a material fact" or any similar "omi[ssion]") "in connection with the purchase or sale of any security." 17 C.F.R. §240.10b-5 (2013).
For purposes of these provisions, the Securities Exchange Act defines "security" broadly to include not just things traded on national exchanges, but also "any note, stock, treasury stock, security future, security-based swap, bond, debenture . . . [or] certificate of deposit for a security." 15 U.S.C. §78c(a)(10). See also §§77b(a)(l), 80a-2(a) (36), 80b-2(a)(18) (providing virtually identical definitions of "security" for the Securities Act of 1933, the Investment Company Act of 1940, and the Investment Advisers Act of 1940).
(2) A statute-based private right of action.
The Court has read § 10(b) and Rule 10b-5 as providing injured persons with a private right of action to sue for damages suffered through those provisions' violation.
See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975).
The scope of the private right of action is more limited than the scope of the statutes upon which it is based. See Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 153, 155, 166, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008) (private right does not cover suits against "secondary actors" who had no "role in preparing or disseminating" a stock issuer's fraudulent "financial statements"); Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U.S. 164, 179, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994) (private right does not extend to actions against "aiders and abettors" of securities fraud); Blue Chip Stamps, supra, at 737, 95 S.Ct. 1917, 44 L.Ed.2d 539 (private right extends only to purchasers and sellers, not to holders, of securities).
(3) The Private Securities Litigation Reform Act of 1995 (PSLRA).
109 Stat. 737, 15 U.S.C. §§77z-l, 78u-4. This law imposes procedural and substantive limitations upon the scope of the private right of action available under § 10(b) and Rule 10b-5. It requires plaintiffs to meet heightened pleading standards. It permits defendants to obtain automatic stays of discovery. It limits recoverable damages and attorney's fees. And it creates a new "safe harbor" for forward-looking statements. See §§78u-4, 78u-5.
(4) The Securities Litigation Uniform Standards Act.
112 Stat. 3227, 15 U.S.C. §78bb(f)(1)(A). As we said at the outset, this 1998 law forbids any
"covered class action based upon the statutory or common law of any State .. by any private party alleging-
[134 S.Ct. 1064] "(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or
"(B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security." §§78bb(f)(1)(A)-(B).
The law defines "covered security" narrowly. It is a security that "satisfies the standards for a covered security specified in paragraph (1) or (2) of section 18(b) of the Securities Act of 1933." §78bb(f)(5)(E). And the relevant paragraphs of § 18(b) of the 1933 Act define a "covered security" as "[a security] listed, or authorized for listing, on a national securities exchange, " §77r(b)(l) (or, though not relevant here, as a security issued by an "investment company, " §77r(b)(2)). The Litigation Act also specifies that a "covered security" must be listed or authorized for listing on a national exchange "at the time during which it is alleged ...