The Securities Litigation Uniform Standards Act of 1998 (SLUSA) bars certain securities class actions based on state law claims of fraud "in connection with" the sale or purchase of "covered securities." On February 26, 2014, in Chadbourne & Parke LLP v. Troice, the US Supreme Court narrowly construed the statute and found that it did not preclude state law claims of fraud involving the purchase of certificates of deposit (CDs) (which are not covered securities), even though plaintiffs alleged that they were fraudulently induced to buy the CDs based on the defendants' representations that their ownership of covered securities made the CDs more secure (Nos. 12–79, 12–86, 12–88, (Feb. 26, 2014)).

The private investor plaintiffs bought CDs in Stanford International Bank (Stanford). They alleged that Stanford ran a Ponzi scheme. Instead of using the deposited funds to buy safe, lucrative assets, Stanford used the funds to repay old investors and finance speculative real estate ventures. The plaintiffs filed four securities fraud class actions under state securities laws against the firms and individuals who helped Stanford sell the CDs and conceal the alleged fraud. Two cases were filed in Louisiana state court and two in the United States District Court for the Northern District of Texas, where they were all eventually consolidated. The defendants moved to dismiss the complaints as barred by SLUSA.

The district court granted the motion. Under SLUSA, a "covered security" is a security that is listed or authorized to be listed on a regulated national exchange. While the court recognized that the CDs themselves were not covered securities, the complaints alleged that Stanford represented that it invested in securities issued by governments and large corporations that would be covered under SLUSA. The fraud was the misrepresentation that the CDs were secure because of the safe investments in the covered securities that Stanford was supposedly holding. The allegations were therefore "in connection with" the purchase and sale of covered securities and barred under SLUSA. The plaintiffs appealed.

The US Court of Appeals for the Fifth Circuit reversed. The court found the relationship between the covered and uncovered securities too tangential to trigger SLUSA's provision barring suits under state securities laws. The defendants sought certiorari and the Supreme Court granted their petition.

The Supreme Court affirmed. It interpreted SLUSA's state securities claim bar narrowly, limiting it to situations where fraud is material to a person's decision to buy or sell a covered security. The purpose of SLUSA is to regulate transactions in covered securities, not uncovered ones. According to the Court, the plain meaning of "in connection with" requires that the fraud makes a significant difference as to whether a covered security is bought or sold, and that decision must be made by someone other than the perpetrator of the fraud. Here, Stanford allegedly made the misrepresentation and owned the covered securities, not the plaintiffs. This reading is consistent with prior case law. Every time the Court has found a fraud to be "in connection with" a purchase or sale of a financial instrument, it was the victims themselves who were buying, selling or holding on to the security.

This narrow reading of SLUSA will likely result in more state court securities fraud class actions.