Sonia Sotomayor and Securities Litigation

26 05 2009

Today President Obama nominated Sonia Sotomayor for the Supreme Court of the United States vacancy left by Justice David Souter.  It is interesting to note that Judge Sotomayor has had four of her rulings overturned by the very court she is now nominated to sit.   One of these cases dealt with in an interpretation of law dealing with Securities Litigation Uniform Standards Act .

The case, Merrill Lynch, Pierce, Fenner and Smith, Inc., v. Dabit, 547 U.S. 71 (2006) arose out of an investigation of Merrill Lynch by then New York State Attorney General, Eliot Spitzer.  The public investigation alleged that a breach of fiduciary duty ocurred because Merrill Lynch was giving investment advice based on their loyalty to certain large investment banking clients, rather than the best financial interests of individual investors.  Though the public investigation was settled out of court, it spurred a number of private law class action lawsuits against Merrill Lynch.  The suit eventually goes 2nd Circuit, where Sonia Sotomayor is sitting as judge.

So in other words, Merrill Lynch was allegedly in bed with a series of investment bankers, which manipulated the price of stocks.  When the stock prices fell, many investors (Including plaintiff, Dabit) lost the value of their stocks, and the brokers lost their commissions when investors look elsewhere.

Sounds like Merrill Lynch has breached their duty to the people who use them to invest, right?  Can they sue?  Short answer, yes, with a “but”.  The “but” is that in 1998, congress passed the Securities Litigation Uniform Standards Acts.  The effect of the law was to preempt certain class actions alleged under state law from being filed in either state or federal court if the cause of action was “in connection with the purchase or sale” of securities. The main purpose of the law suit was to prevent people from filing frivolous lawsuits against large companies with “deep pockets”, which would have the effect of tying up the judicial system.

When the case came to her, Judge Sotomayor took the opinion that the law did not bar standing for all lawsuits in connection with the sale or purchase of securities, even though the act specifically said it did bar standing.  Citing a 30 year-old case, written long before the Securities Litigation Uniform Standards act,  she opined that the law still allowed for class action law suits to be filled by those who suffered direct loss due to the purchase or sale of securities.  Blue Chip Stamps v Manor Drug Stores, 421 US 723 (1975).

In other words, she took an activist position in favor of an interpretation that would have allowed the suit to go forward, in spite of specific language in the law that would have barred it.

Her ruling was overturned unanimously with the Supreme Courts opinion being authored by one of the most liberal Justices on the Supreme Court, John Paul Stevens.




2 responses

27 05 2009
30 05 2009
Others Weigh In on Sotomayor « Lots, Stocks, and Gavel

[…] News Service has also weighed in on Merrill Lynch v. Dabit, a case covered in a previous post on Lots Stocks and Gavel. In an interview after the conference, Resident Fellow Theodore Frank of the conservative think […]

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