The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. § 77p, generally provides that securities class actions by private parties cannot proceed in state or federal court on the basis of state law—and are removable to federal court—if the complaint alleges either “an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security” or that “the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.” 15 U.S.C. § 77p(b)(1)- (2).
In follow-up to our January 2006 report on this issue, the Supreme Court and Eighth Circuit Court of Appeals have issued significant SLUSA preemption decisions. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 126 S.Ct. 1503 (2006); Sofonia v. Principal Life Ins. Co., 465 F.3d 873 (8th Cir. 2006).
In Merrill Lynch, a broker filed suit against an investment firm. The Second Circuit decided that the broker’s state law claims were not preempted by SLUSA, on the grounds that the broker only “held” and did not “purchase” securities. Merrill Lynch, 126 S.Ct. at 1508. The Supreme Court, however, reversed the Second Circuit and decided that the distinction between holding and purchasing securities was irrelevant for SLUSA preemption purposes. Id. at 1515. In Sofonia, a plaintiff policyholder asserted state law claims for fraud, breach of fiduciary duty, and unjust enrichment against a life insurance company, in connection with its demutualization. Sofonia, 465 F.3d 875-76. The Eighth Circuit affirmed the district court’s decision holding that SLUSA preempted the plaintiff’s claims because (i) the exchange of membership interest shares for common stock that occurred constituted a “purchase” of covered securities under SLUSA; (ii) the crux of the complaint was that defendants had made false statements; (iii) the McCarran- Ferguson Act did not prevent application of SLUSA, as none of the claims implicated a state statute regulating the business of insurance; and (iv) the application of SLUSA did not interfere with Iowa’s regulation of insurance company demutualizations. Id. at 879-80.