5th CirCuit Louisiana, Mississippi, Texas
Federal securities law doesn’t preclude
state law class actions
THE 5TH CIRCUI T RECEN TLY ADDRESSED
an issue of first impression concerning the
breadth of the preclusion provision of the
Securities Litigation Uniform Standards
Act (SLUSA), which prevents plaintiffs
from filing state law class action lawsuits
alleging fraud tied to nationally traded
securities. The court’s decision in Roland
v. Green deepened a split among the circuits, signaling possible future Supreme
Court review of the issue.
The case stems from when the
Securities and Exchange Commission
(SEC) accused financier R. Allen Stanford
of masterminding a $7 billion Ponzi
scheme for two decades in February 2009.
The agency claimed Stanford defrauded
30,000 investors in 113 countries by selling them high-yield certificates of deposit
(CDs) and promising high returns.
Six months after the SEC announced
its charges, Stanford’s investors filed a
class action—Roland v. Green—against
Stanford’s company and advisers for shirk-
ing securities laws. But in October 2011, a
district court dismissed the suit, saying
SLUSA preempted the plaintiffs’ state law
claims because nationally traded securities
backed the CDs allegedly tied to the fraud.
Two more investor lawsuits were consolidated with Roland v. Green before the
5th Circuit, which decided the case on
March 19, just two weeks after a federal
jury convicted Stanford on 13 of 14 counts
of fraud. He is scheduled to be sentenced
on June 14 and could face up to 230 years
In 1995, Congress passed the Private
Securities Litigation Reform Act
(PSLRA), which aimed to halt perceived
abuses of class actions involving nationally traded securities. “One of the core
concerns was a perception that plaintiffs
firms could file lawsuits against public
companies any time there was a stock
price drop based on pretty thin allegations
Bitter about Twitter
Financier r. allen StanFord waS indignant when a Federal jury
in March said he was guilty of running a massive $7 billion Ponzi scheme for
on March 20, the day after the verdict, Stanford’s lawyers filed a motion
for a new trial, saying journalists’ real-time twitter coverage of Stanford’s six-week trial unlawfully influenced jurors.
“this court failed to sequester the jury and permitted the news media to
occupy the courtroom during trial and permitted the media to ‘tweet’ throughout the trial,” Stanford’s attorneys argued.
But u.S. district judge david hittner was unsympathetic to the plea. on
March 22, he denied the motion for a new trial.
of fraud and then use the discovery process to try to find a valid claim, or use the
threat of costly discovery to try to coerce a
settlement because the discovery in these
types of cases can be voluminous,” says
Haynes and Boone Partner Daniel Gold.
The PSLRA made it more difficult for
plaintiffs to state a securities fraud claim
in federal court by imposing heightened
pleading requirements. In addition, it
limited certain types of recoverable damages and attorneys’ fees, added a safe
harbor for forward-looking statements
to make it more difficult for plaintiffs to
bring a claim based on growth projections or forecasts that ended up not being
realized, and authorized courts to stay a
case at the outset pending the resolution
of a motion to dismiss.
“An unintended consequence of [the
PSLRA] was that it prompted some
plaintiffs firms to just avoid the new law
altogether by filing their cases under state
law,” Gold says.
So in 1998, Congress passed SLUSA as
an attempt to stop plaintiffs from circumventing the PSLRA. SLUSA’s preclusion
provision stipulates that no state law class
action can be maintained in either state or
federal court by any private party alleging fraud in connection with the purchase
or sale of a covered security [empha-sis added]. SLUSA allows defendants to
attempt to remove such class actions to
federal court and then seek dismissal.
But courts have varied interpretations of the act’s language, particularly
the preclusion provisions “in connection
with” requirement, which the 5th Circuit