Former Merrill Lynch broker Gregory Dabit brought a putative class action under state law alleging that Merrill Lynch published biased and misleading research reports to inflate stock prices and curry favor with investment banking clients. According to the complaint, these misrepresentations led investors (including the putative class members and/or their clients) to retain overvalued securities they otherwise would have sold, causing losses when the market corrected; Dabit also alleged related harms to brokers such as lost commissions and clients. The securities at issue traded on national exchanges (i.e., were "covered securities" under SLUSA). Merrill Lynch removed the case to federal court and moved to dismiss, arguing that SLUSA requires dismissal of covered class actions alleging misrepresentations "in connection with the purchase or sale" of covered securities. The district court largely dismissed. The Second Circuit reversed in part, holding SLUSA did not reach pure holder claims because Blue Chip Stamps limits § 10(b) private actions to purchasers and sellers. The Supreme Court granted certiorari.
Does SLUSA preclude state-law class actions brought on behalf of securities holders (rather than purchasers or sellers) that allege fraud "in connection with the purchase or sale" of covered securities?
SLUSA precludes any covered class action based on state law alleging a misrepresentation or omission of a material fact, or the use of any manipulative or deceptive device or contrivance, in connection with the purchase or sale of a covered security. The phrase "in connection with" is to be construed broadly, consistent with § 10(b) jurisprudence, and encompasses conduct that coincides with, is material to, or otherwise touches a securities transaction, even if the plaintiff class consists of holders rather than purchasers or sellers.
Yes. SLUSA precludes state-law holder class actions; the statute's "in connection with the purchase or sale" requirement is satisfied where the alleged fraud is material to someone's decision to buy or sell a covered security, not only to the named plaintiffs' transactions.
Text and alignment with § 10(b): Congress used the same "in connection with the purchase or sale" language in SLUSA that appears in § 10(b). The Court has long read that phrase broadly to cover schemes that coincide with, are material to, or otherwise touch securities transactions (e.g., SEC v. Zandford; United States v. O'Hagan). That reading captures market-wide misrepresentations disseminated through analyst reports that influence investment decisions. Because SLUSA was enacted against this background, courts should construe its identical phrase similarly and broadly. Blue Chip Stamps distinguished: The Second Circuit relied on Blue Chip Stamps v. Manor Drug Stores, which restricts the implied private right of action under § 10(b) to actual purchasers and sellers. The Supreme Court explained that Blue Chip's purchaser–seller rule is a judicially crafted standing limitation designed to curb vexatious litigation; it does not define the substantive reach of § 10(b) or the scope of the "in connection with" language. Therefore, Blue Chip does not limit SLUSA's preclusive effect. Holder status does not insulate a state-law class action from SLUSA when the underlying wrongdoing is connected to securities transactions. Statutory purpose and structure: SLUSA was enacted to prevent plaintiffs from circumventing PSLRA's federal reforms by repackaging federal-securities-style class actions under state law. A narrow interpretation excluding holder claims would frustrate that purpose and invite the very forum-shopping and pleading strategies Congress sought to eliminate. The Court emphasized that SLUSA's definition of "covered class action" (targeting aggregate suits of more than 50 persons or equivalent mass/consolidated actions) and "covered security" (nationally traded or issued by registered investment companies) reflect Congress's desire to channel large, market-impacting suits into a uniform federal framework or prevent them altogether if they rely on state law. Federalism and limits: The Court acknowledged federalism concerns but noted that Congress expressly authorized removal and dismissal of these claims, and securities regulation is an area where federal interests are strong. Importantly, SLUSA does not foreclose all claims: individual state-law actions (not brought as covered class actions) and federal enforcement actions remain available. Thus, while broad, SLUSA's preclusion is targeted at aggregate state-law litigation that undermines national uniformity.
Dabit solidifies a broad construction of SLUSA, making clear that plaintiffs cannot avoid federal reforms by styling claims as holder-based state-law class actions. After Dabit, courts look to the substance of the allegations—market-affecting misstatements tied to nationally traded securities will generally trigger SLUSA preclusion regardless of how plaintiffs define the class. For law students, the case illustrates how statutory interpretation operates in a highly regulated field: the Court harmonizes language across related statutes, distinguishes between substantive scope and private standing limits (Blue Chip), and reads text in light of congressional purpose to maintain uniform national standards for securities class actions.
Merrill Lynch v. Dabit is a pivotal interpretation of SLUSA that closes a significant loophole in securities class-action practice. By aligning SLUSA's "in connection with" language with the broadly construed § 10(b) standard, the Court ensured that large-scale, market-related fraud claims cannot escape federal oversight and reform by being recast as state-law holder class actions.