Ruling Limits Investors' Legal Options
High Court Decides Against Large State Class-Action Suits

By Brooke A. Masters
Washington Post Staff Writer
Wednesday, March 22, 2006

Investors who believe they were duped into holding onto stocks and bonds may not file large class-action lawsuits in state courts, the U.S. Supreme Court ruled yesterday in a suit filed by a former Merrill Lynch & Co. broker.

The unanimous opinion puts sharp limits on legal options for investors who were left holding the bag after the 1990s technology bubble burst, as well as shareholders who believe they were deceived into hanging onto sinking investments.

The 1998 Securities Litigation Uniform Standards Act allows only federal courts to hear class-action lawsuits involving more than 50 plaintiffs by people who allege they were tricked into buying or selling securities.

The law also bars federal claims by investors who already owned stocks and claim they missed an opportunity to sell because of misleading research or other misdirection about what was going on with the company.

Now the court has held that the 1998 law also preempts state claims based on holding securities. An exception "would give rise to wasteful duplicative litigation," Justice John Paul Stevens wrote for the court

The 8 to 0 opinion reversed a ruling by the U.S. Court of Appeals for the 2nd Circuit in a case filed by Shadi Dabit, who alleged that he was misled into holding stocks in his personal account by rosy research reports from Merrill's stock analysts.

"Had it gone the other way, it would have opened a gaping and unexpected loophole" in the 1998 law, which was specifically designed to weed out weak securities class-action lawsuits, said Stanford University law professor Joseph Grundfest. This decision "maintains the status quo."

Investors may still file arbitration claims, lawsuits involving fewer than 50 plaintiffs, or federal class-action lawsuits based on buying and selling securities, noted Jay Kasner, the attorney who represented Merrill Lynch. "This does have tremendous practical applications. What the court has done is prevent an avalanche of these cases," Kasner said.

The court's newest member, Samuel A. Alito Jr., did not participate in the decision in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit .

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