The Securities Litigation Uniform Standards Act of 1998 bans large securities class actions "based upon the statutory or common law of any state" in which the plaintiffs claim "a misrepresentation or
omission of a material fact in connection with the purchase or sale of a covered security."
The act defines "covered security" to include only securities traded on a national exchange.
Four groups of plaintiffs filed civil class actions under state law, contending that the defendants "helped Allen Stanford and his companies perpetrate a Ponzi scheme by falsely representing that uncovered securities (certificates of deposit in Stanford International Bank) that the plaintiffs were buying were backed by covered securities," court records said.
A federal judge dismissed each of the suits, citing the federal securities law. Though the certificates of deposit were not covered securities, the judge said, the banks "misrepresentation that its holdings in covered securities made investments in its uncovered securities more secure provided the requisite 'connection' (under the Litigation Act) between the plaintiffs' state-law actions and transactions in covered securities."
A federal appeals court headquartered in New Orleans reversed, saying that the falsehood about the bank's holdings in covered securities "were too tangentially related to the fraud to trigger the Litigation Act."
The U.S. Supreme Court agreed with the appeals court.
"We note that the plaintiffs do not allege that the defendants' misrepresentations led anyone to buy or to
sell (or to maintain positions in) covered securities," Justice Stephen Breyer wrote in the majority opinion. "Under these circumstances, we conclude the act does not apply."