Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit

Supreme Court of the United States · 2006 · Corporations

547 U.S. 71 (2006)

Updated August 22, 2026

CorporationsSecurities litigationFederal preemptionClass actionsSLUSASecurities Litigation Uniform Standards Actpreemptioncovered class action

Facts

Merrill Lynch provided research and brokerage services, and after a 2002 investigation by the New York attorney general into allegedly biased research, private securities suits followed. Dabit, a former Merrill Lynch broker, sued on behalf of current and former brokers under Oklahoma law, alleging Merrill Lynch disseminated misleading research and manipulated stock prices to benefit its investment banking clients. According to the complaint, brokers and their clients continued holding overvalued stocks because of the misleading research and suffered losses when the truth emerged and prices fell. After the district court indicated that purchase-related claims were preempted, Dabit amended the complaint to focus on brokers who owned and continued to own the securities, thereby pleading holder claims.

Issue

Does SLUSA preempt a state-law covered class action alleging fraudulent manipulation and misrepresentations that caused plaintiffs to hold, rather than buy or sell, covered securities? More specifically, does SLUSA's phrase "in connection with the purchase or sale of a covered security" incorporate the purchaser-seller limitation on private federal damages actions from Blue Chip Stamps?

Rule

SLUSA's phrase "in connection with the purchase or sale of a covered security" is to be read broadly, consistent with this Court's Section 10(b) and Rule 10b-5 precedents, and is not limited by Blue Chip Stamps' purchaser-seller standing rule for implied private federal damages actions. A state-law covered class action is preempted when the alleged fraud coincides with a securities transaction, whether by the plaintiff or by someone else.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Chicago, 300 investors file a state-law class action against North Harbor Brokerage, alleging its analysts knowingly issued false bullish reports about several NYSE-listed companies. The complaint says the investors already owned the stocks, held them because of the reports, and lost money when the truth emerged.

Is the action most likely barred under SLUSA?

Explanation. SLUSA bars covered class actions based on state law alleging a misrepresentation or deceptive conduct in connection with the purchase or sale of a covered security. The majority held that this phrase is read broadly and is not limited by the purchaser-seller rule governing the implied private federal remedy. Holder status therefore does not avoid preemption where the alleged fraud coincides with securities transactions in covered securities. (Derived from Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit (2006).)