In a victory for corporations and a defeat for securities class-action plaintiffs’ lawyers, the Supreme Court today severely limited the viability of shareholder lawsuits brought in state courts. The unanimous opinion written by Justice Stevens ruled that the purpose of the pre-emption provision of SLUSA — the 1995 federal securities litigation reform act — is to pre-empt certain types of state-law shareholder class actions.
Which types? The court ruled that lawsuits brought by “holders” of securities alleging fraud must, under SLUSA, bring their cases in federal court just like “buyers” or “sellers” of securties who allege fraud. Justice Stevens said the distinction between “holders,” on the one hand, and “buyers” or “sellers,” on the other, “is irrelevant” in civil securities lawsuits. Had the Court ruled in favor of the plaintiffs, argued the securities industry, it could have opened up the floodgates for state-law securities fraud claims brought by “holders” rather than buyers and sellers.
Shareholder class action suits–brought by such plaintiffs firms as Milberg Weiss and Bernstein Litowitz Berger & Grossman–have for years been the scourge of Wall Street. While Corporate America loathes any shareholder class action suit, it especially detests having to defend itself in state court, which typically brings relaxed pleading standards and the potential for substantial punitive damage awards.