More On SLUSA Preemption

The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) preempts certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. The defendants are permitted to remove the case to federal district court for a determination on whether the case is preempted by the statute. If so, the district court must dismiss the case; if not, the district court must remand the case back to state court.

Earlier this year, the U.S. Court of Appeals for the Seventh Circuit held in the Putnam Funds cases that the “in connection with” language in SLUSA merely “ensures that the fraud occurs in securities transactions rather than some other activity.” Accordingly, plaintiffs could not avoid SLUSA by limiting their proposed class to investors in the funds who merely held their shares, rather than purchased or sold them, during the class period.

The Seventh Circuit has now confirmed that holding under slightly different factual circumstances. In Disher v. Citigroup Global Markets Inc., 2005 WL 1962942 (7th Cir. Aug. 17, 2005), the court found that a class action suit brought in state court on behalf of customers of Salomon Smith Barney alleging that they were mislead by false stock ratings was subject to preemption. The proposed class definition “of all SSB customers who retained certain securities in reliance on SSB’s misrepresentations is no more narrowly drawn than the class definitions discussed in [the Putnam Funds decision].” Accordingly, the court ordered that the case be dismissed.

Holding: Reversed and remanded with instructions to vacate the remand order and dismiss the claims.

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