Willis of Colorado Inc. v. Troice

Whether state law class actions suits are precluded under the Securities Litigation Uniform Standards Act (SLUSA) because a misrepresentation is “made in connection with the purchase or sale of a covered security” where the representation asserts that an uncovered security is backed by safe, liquid, covered securities.

The case arises out of a consolidated appeal. Respondents alleged that R. Allen Stanford perpetrated a multi-billion dollar Ponzi scheme through various corporate entities (“Entities.”) According to the Securities and Exchange Commission, the Entities’ core objective was to sell certificates of deposit (“CDs”) issued by one of the Entities, and that the Entities falsely assured investors that the CDs were backed by safe, liquid investments.

Respondents initially filed multiple separate law suits in both state and federal courts on state law grounds. Petitioners removed the state court suits to federal court on the grounds that the Securities Litigation Uniform Standards Act (“SLUSA”) precluded the state law suits. The Multi-District Litigation panel consolidated the cases. The District Court applied the Eleventh Circuit Court of Appeals’ test for “in connection with” and held that SLUSA did indeed preclude the suits. The Court of Appeals for the Fifth Circuit reversed and remanded the cases back to their original United States District Courts or state courts for further proceedings.

To reach its conclusion, the Fifth Circuit found that the CDs themselves were not “covered securities” under SLUSA. It further found that references that the CDs were backed by “covered securities” were “merely tangentially related to the ‘heart,’ ‘crux,’ or ‘gravamen’ of the defendants’ fraud,” and thus were not covered by SLUSA’s prohibition against state law class actions for misrepresentations “made in connection with the purchase or sale of a covered security.” Rather, the gravamen of the complaint was that the Petitioners represented that the CDs were a “safe and secure” investment. This outcome was not changed by the fact that some plaintiffs sold SLUSA-covered securities in order to acquire the uncovered CDs.