Preemption under the Securities Litigation Uniform Standards Act: If It Looks Like a Securities Fraud Claim and Acts Like a Securities Fraud Claim, Is It a Securities Fraud Claim?

Comments

56 Alabama L. Rev. __ (forthcoming).

Abstract

This Article addresses the removal and preemption provisions of the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). In SLUSA, Congress preempted class actions alleging “an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security.” SLUSA clearly applies to preempt the typical state securities fraud action, forcing plaintiffs into federal court where they will be subject to the rigorous procedural requirements of the Private Securities Litigation Reform Act of 1995. Preemption of false corporate publicity cases was expected and, in fact, intended by SLUSA. However, many courts have also extended SLUSA to preempt very different types of claims, including breach of fiduciary duty claims, breach of contract claims, and claims based on state deceptive and unfair trade practices acts. Not surprisingly, plaintiffs have argued that Congress never intended to preempt these types of claims, while defendants have argued just as forcefully that plaintiffs should not be able to circumvent the strong federal policies set forth in SLUSA through artful pleading. There is an obvious policy clash: a concern for federalism versus the prevention of frivolous actions and strike suits.

In this Article, I try to clarify how courts should interpret SLUSA’s preemption provision. I also discuss the interrelationship between preemption and the removal of actions to federal court, paying particular attention to the well-pleaded complaint rule and complete preemption doctrine. I conclude that SLUSA is not limited to state securities fraud claims. Instead, the statute requires courts to examine the allegations actually made in the complaint to determine if SLUSA is triggered. If the complaint alleges a materially misleading statement in connection with the purchase or sale of a covered security, the class action should be preempted, regardless of the theory of liability chosen by the plaintiff. Because I argue that SLUSA is triggered by the allegations actually made in the complaint, I reject those cases that have looked beyond the complaint to determine if the case is preempted. In addition, I demonstrate that plaintiffs should be permitted to avoid preemption through careful pleading; thus, for example, a plaintiff should be able to avoid preemption if he alleges that the defendant’s fraud induced him to hold, rather than purchase or sell, his securities. Finally, I argue that SLUSA’s “in connection with” requirement should be narrowly construed. My recommendations are based on statutory interpretation, legislative history, and the goals of the federal securities laws, including SLUSA. They are also founded on an understanding of the important policies that have been implicated by SLUSA. In particular, I argue that the courts have failed to sufficiently consider federalism concerns in interpreting SLUSA, potentially leading to a dangerous expansion of SLUSA’s preemptive scope.

Disciplines

Business Organizations Law | Securities Law

Date of this Version

October 2004

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