Chadbourne & Parke LLP v. Troice

• Citation: 134 S.Ct. 1058,571 U.S. 377,188 L.Ed.2d 88
• Decision Date: 26 February 2014
• Docket Number: 12–86,Nos. 12–79,12–88.,s. 12–79
• Parties: CHADBOURNE & PARKE LLP, Petitioner v. Samuel TROICE et al. Willis of Colorado Incorporated, et al., Petitioners v. Samuel Troice et al. Proskauer Rose LLP, Petitioner v. Samuel Troice et al.
• Court: United States Supreme Court

571 U.S. 377

134 S.Ct. 1058

188 L.Ed.2d 88

CHADBOURNE & PARKE LLP, Petitioner

v.Samuel TROICE et al.

Willis of Colorado Incorporated, et al., Petitioners

v.Samuel Troice et al.

Proskauer Rose LLP, Petitioner

v.Samuel Troice et al.

Nos. 12–79

12–86

12–88.

Supreme Court of the United States

Argued Oct. 7, 2013.

Decided Feb. 26, 2014.^*

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.

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 D. 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.

Justice BREYER delivered the opinion of the Court.

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)(1) (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)(1)–(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 (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. The Federal Government has in fact brought successful prosecutions against the fraudsters at the heart of this litigation, see infra, at 1074 – 1075, and we fail to understand the dissent's repeated suggestions to the contrary, post, at 1073, 1073 – 1074, 1077 – 1078, 1078, 1081. Rather, as we shall explain, we believe the basic consequence of our holding is that, 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. Under the dissent's approach, they would have no such ability.

I

A

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)(1), 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 (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–1, 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—"(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)(1) (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 that the misrepresentation, omission, or manipulative or deceptive conduct occurred." § 78bb(f)(5)(E).

The Litigation Act sets forth exceptions. It does not apply to class actions with fewer than 51 "persons or prospective class members." § 78bb(f)(5)(B). It does not apply to actions brought on behalf of a State itself. § 78bb(f)(3)(B)(i). It does not apply to class actions based on the law "of the State in which the issuer is incorporated." § 78bb(f)(3)(A)(i). And it reserves the authority of state securities commissions "to investigate and bring enforcement actions." § 78bb(f)(4).

We are here primarily interested in the Litigation Act's phrase "misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security." § 78bb(f)(1)(A). Unless this phrase applies to the class actions before us, the plaintiffs may maintain their state-law-based class actions, and they may do so either in federal or state court. Otherwise, their class actions are precluded altogether. See § 78bb(f)(2) (providing for the removal from state to federal court of class actions that meet the specifications of paragraph 1, and for the dismissal of such suits by the district court).

B

The plaintiffs in these actions (respondents here) say that Allen Stanford and several of his companies ran a multibillion dollar Ponzi scheme. Essentially, Stanford and his companies sold the plaintiffs certificates of deposit in Stanford International Bank. Those certificates "were debt assets that promised a fixed rate of return." Roland v. Green, 675 F.3d 503, 522 (C.A.5 2012). The plaintiffs expected that Stanford International Bank would use the money it received to buy highly lucrative...