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Casey IRACs are produced by an AI that analyzes the opinion’s content to construct its analysis. While we strive for accuracy, the output may not be flawless. For a complete and precise understanding, please refer to the linked opinions above.

Keywords

plaintiffdefendantlitigationappealclass action
plaintiffdefendantlitigationclass actionrespondent

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Chadbourne & Parke LLP v. Troice, 571 U.S. 377, 134 S.Ct. 1058, 188 L.Ed.2d 88, Blue Sky L. Rep. P 75,066, 82 USLW 4127, Fed. Sec. L. Rep. P 97,832, 14 Cal. Daily Op. Serv. 1986, 2014 Daily Journal D.A.R. 2332, 24 Fla. L. Weekly Fed. S 564

Facts

The plaintiffs in this case were investors who purchased certificates of deposit from Stanford International Bank, which were falsely represented as being backed by covered securities. The plaintiffs alleged that various defendants, including investment advisers and law firms, helped perpetrate the fraud by misrepresenting the security of these investments. The actions were initially filed in Louisiana state court but were removed to federal court and consolidated in the Northern District of Texas. The district court dismissed the cases under the Securities Litigation Uniform Standards Act, leading to an appeal.

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.

Issue

Whether the plaintiffs' state-law class actions alleging misrepresentations or omissions of material fact in connection with the purchase or sale of uncovered securities are precluded by the Securities Litigation Uniform Standards Act.

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.

Rule

A fraudulent misrepresentation or omission is not made 'in connection with' a purchase or sale of a covered security unless it is material to a decision to buy or sell a covered security.

A fraudulent misrepresentation or omission is not made 'in connection with' such a 'purchase or sale of a covered security' unless it is material to a decision by one or more individuals (other than the fraudster) to buy or to sell a 'covered security.'

Analysis

The Supreme Court analyzed the language of the Securities Litigation Uniform Standards Act and determined that the misrepresentations made by the defendants were not material to the decision to purchase or sell covered securities. The Court emphasized that the Act's focus is on transactions involving covered securities and that the plaintiffs did not allege that the misrepresentations led anyone to buy or sell covered securities. Therefore, the Court concluded that the plaintiffs' claims fell outside the scope of the Act.

To put the matter more specifically: A fraudulent misrepresentation or omission is not made 'in connection with' such a 'purchase or sale of a covered security' unless it is material to a decision by one or more individuals (other than the fraudster) to buy or to sell a 'covered security.'

Conclusion

The Supreme Court affirmed the Fifth Circuit's ruling, allowing the plaintiffs to maintain their state-law class actions. The Court held that the Litigation Act does not preclude these actions because the alleged misrepresentations were not connected to the purchase or sale of covered securities.

The Litigation Act does not preclude the plaintiffs' state-law class actions.

Who won?

The plaintiffs prevailed in this case because the Supreme Court found that their claims were not precluded by the Securities Litigation Uniform Standards Act, allowing them to pursue their state-law class actions.

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.

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