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Supreme Court Grants Cert in Cases Involving SLUSA and Law Firms

January 18, 2013. The Supreme Court granted certiorari in Chadbourne & Parke v. Troice, Willis of Colorado v. Troice, and Proskauer Rose v. Troice, consolidated cases involving the Securities Litigation Uniform Standards Act (SLUSA) and state class actions against the law firms that represent persons and entities alleged to have defrauded investors. See, January 18 Orders List [PDF].

These are petitions for writ of certiorari to the U.S. Court of Appeals (5thCir), which issued its opinion on March 19, 2012. It is reported at 675 F.3d 503.

These cases are related to Allen Sanford, who is now serving time in prison. See, Department of Justice (DOJ) web page regarding criminal proceedings against Sanford and others.

While Sanford's name is often associated with terms such as "securities fraud" and "ponzi scheme", he was convicted, not of securities fraud, but rather on numerous charges related to wire fraud, mail fraud, money laundering, and obstructing Securities and Exchange Commission (SEC) investigations.

Various plaintiffs' class action lawyers, representing defrauded investors, filed complaints in state courts, alleging violations of state laws, seeking to impose liability on numerous deep pocket defendants, including the law firms of Chadbourne & Parke and Proskauer Rose.

Proskauer represented Stanford International Bank (SIB), which was controlled by Allen Sanford. SIB issued certificates of deposit, which Sanford falsely represented where backed by safe liquid investments. The government alleged that this was part of a ponzi scheme.

These class action lawyers allege that Proskauer engaged in civil conspiracy, and that it aided and abetted the primary violations. However, they did not allege that Proskauer made any misrepresentations directly to the class plaintiffs.

The relevant language of the SLUSA, at 15 U.S.C. § 78bb, provides in part, at subsection (f), that "No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging ... a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security ..."

The actions were removed to federal court, and consolidated in the U.S. District Court (NDTex). It held that the SLUSA precluded the class action claims against the law firms. The Court of Appeals reversed. The issue will now be decided by the Supreme Court.

Petitioners argued that the Court of Appeals misconstrued the SLUSA.

Chadbourne also argued that "the Fifth Circuit's decision will lead to absurd results. It will preclude state-law class claims against defendants directly involved in SLUSA-covered securities fraud, but allow such class actions against remote actors. That result is completely backwards, and utterly without basis in the scheme Congress established."

Also, other circuits have ruled in similar cases. Petitioners argued that there is a deep circuit split over the meaning of the SLUSA.

The Office of the Solicitor General (OSG) filed an amicus curiae brief on December 14, 2012 urging the Supreme Court to deny certiorari. While the Supreme Court often follows the recommendation of the OSG, it did not do so in this case.

It might be noted that President Obama's election campaigns have benefited from generous contributions from the plaintiffs bar, and the Attorney General and Solicitor General are appointed by the President.

Supreme Court Order Granting Certiorari. The order states that "The petition for a writ of certiorari in No. 12-79 is granted limited to Question 1 presented by the petition. The petition for a writ of certiorari in No. 12-86 is granted. The petition for a writ of certiorari in No. 12-88 is granted limited to Question 1 presented by the petition."

Sup. Ct. No. 12-79 is Chadbourne & Parke v. Troice. Question 1 in that petition is "Whether SLUSA precludes a state-law class action alleging a scheme of fraud that involves misrepresentations about transactions in SLUSA-covered securities."

Sup. Ct. No. 12-86 is Willis of Colorado v. Troice. That petition presents only one question: "The question presented is whether a covered state law class action complaint that unquestionably alleges ``a´´ misrepresentation ``in connection with´´ the purchase or sale of a SLUSA-covered security nonetheless can escape the application of SLUSA by including other allegations that are farther removed from a covered securities transaction."

Sup. Ct. No. 12-88 is Proskauer Rose v. Troice. Question 1 in that petition is "Does the Securities Litigation Uniform Standards Act of 1998 (``SLUSA´´), 15 U.S.C. §§ 77p(b), 78bb(f)(1), prohibit private class actions based on state law only where the alleged purchase or sale of a covered security is ``more than tangentially related´´ to the ``heart, crux or gravamen´´ of the alleged fraud?".

History. There has been a history of frivolous and/or abusive private securities litigation in the US. In response, in 1995, the Congress enacted the Private Securities Litigation Reform Act (PSLRA). It was directed at securities fraud actions brought in the U.S. District Courts under Section 10b5 of the Securities Exchange Act of 1934. Among other things, the PSLRA created heightened pleading requirements, and the "safe harbor" for forward looking statements made by publicly traded companies.

However, plaintiffs' securities lawyers reacted by shifting to state courts to evade the provisions of the PSLRA. The Congress came back by passing the SLUSA, which is at issue in the present matter. The SLUSA established uniform national standards for class action lawsuits involving nationally traded securities, and made federal courts the exclusive venue for large scale securities fraud lawsuits.

The SLUSA was S 1260 in the 105th Congress. President Clinton signed it on November 3, 1998. It is Public Law No. 105-353.

During debates over passage of the PSLRA and SLUSA, one of the major concerns was frivolous strike suits directed at technology companies.

See, TLJ story titled "Securities Litigation Reform Bill Passes Congress", October 14, 1998. See also, TLJ web page on the SLUSA.

For more on Congressional enactment of the SLUSA, see earlier TLJ stories:

This case is Chadbourne & Parke LLC v. Samuel Troice, et al., Willis of Colorado, et al. v. Samuel Troice, et al, and Proskauer Rose v. Samuel Troice, et al., Supreme Court of the U.S., Sup. Ct. Nos. 12-79, 12-86, and 12-88, petitions for writ of certiorari to the U.S. Court of Appeals for the 5th Circuit, App. Ct. Nos. 11-10932, 11-11031 and 11-11048. Judge Edward Prado wrote the opinion of the Court of Appeals, in which Judges Thomas Reavley and Eugene Davis joined. The Court of Appeals heard an appeal from the U.S. District Court for the Northern District of Texas, Judge David Godbey presiding.

(Published in TLJ Daily E-Mail Alert No. 2,511, January 18, 2012.)