The litigation arising out of the “research analyst” scandals (where major investment banks have been accused of disseminating overly optimistic research and investment recommendations to garner investment banking business) continues to raise interesting legal issues. Both the Second and Third Circuits, for example, have recently addressed whether the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) mandates the dismissal of class actions based upon state law seeking to recover various types of damages related to the allegedly biased research.
SLUSA preempts certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. In Dabit v. Merrill Lynch, 2005 WL 44434 (2d Cir. Jan. 11, 2005), the Second Circuit addressed two state class actions (brought on behalf of Merrill Lynch brokers and brokerage customers respectively) alleging losses based on biased research. In both cases, the plaintiffs generally did not dispute that the lawsuits were “covered class actions” and concerned “covered securities.” The issue was whether Merrill Lynch’s alleged misrepresentations were “in connection with the purchase or sale” of those securities. The court held that to be prohibited under SLUSA “an action must allege a purchase or sale of covered securities made by the plaintiff or members of the alleged class.” As for the brokers, the court found that the proposed class of brokers who were injured by holding the recommended stocks included purchasers and therefore, in part, satisfied the “in connection with requirement.” Because the court could not “distinguish any non-preempted subclass, SLUSA requires that the claim be dismissed.” A separate claim regarding commissions lost by the brokers when their customers left Merrill Lynch due to the scandal, however, was allowed to proceed in state court.
The brokerage customers also received a mixed decision. The Second Circuit followed a number of other