You Gotta Know When to Hold ‘Em

Yesterday, a Panel of the Seventh Circuit issued a SLUSA-based opinion reversing Chief Judge G. Patrick Murphy’s (S.D. IL) remand of a state law securities class action brought against
Citigroup Global Markets (formerly known as Salomon Smith Barney ("SSB")). The key issue under SLUSA boiled down to whether or not Plaintiffs alleged misrepresentations "were in connection with the purchase or sale of securities." If so connected, Plaintiffs lose. If not, they head back to state court in southern Illinois, and Citigroup had best get its checkbook ready.

Since the U.S. Supreme Court has never decided what is or isn't "connected" in the SLUSA context, the Panel (with Judge Kenneth F. Ripple as lead author, and Judges William J. Bauer and Michael S. Kanne in standard 0ne-by-two cross-cover formation) had to settle for the next best thing, and that’s Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), in which "the Court held that investors who neither purchase nor sell securities have no standing to maintain private litigation to recover damages under section 10(b) and Rule 10b-5, even if the failure to purchase or sell was the result of fraud." Having anticipated this definition, Plaintiff’s pointed out that his complaint says "SSB's misrepresentations caused him and other class members to hold securities, not to purchase or sell them."

But this didn’t work, as the Panel concluded "that the present claims are connected sufficiently to the purchase and sale of a covered security for the purposes of SLUSA preemption and removal" because "by depicting their classes as containing entirely non-traders, plaintiffs do not take their claims outside § 10(b) and Rule 10b-5; instead they demonstrate only that the claims must be left to public enforcement. It would be more than a little strange if the Supreme Court's decision to block private litigation by non-traders became the opening by which that very litigation could be pursued under state law, despite the judgment of Congress (reflected in SLUSA) that securities class actions must proceed under federal securities law or not at all."

Result? Remand vacated and Plaintiff's claims tossed.

You can listen to the oral argument here.

Plus, you can read Disher v. CitiGroup, issued August 17, 2005, here or at at 2005 U.S. App. LEXIS 17334.

Nugget: "Blue Chip Stamps combined with SLUSA may mean that claims of the sort plaintiffs want to pursue must be litigated as derivative actions or committed to public prosecutors, but this is not a good reason to undercut the statutory language."