March 21, 2006

The Private Securities Litigation Reform Act created stricter standards for bringing securities litigation claims; plaintiffs' attorneys attempted to evade the restrictions by bringing cases in state courts, and Congress passed the Securities Litigation Uniform Standards Act of 1998 in response. Never underestimate the creativity of the plaintiffs' bar; hundreds of class actions were filed with a gerrymandered complaint that purported to avoid SLUSA. In Kircher v. Putnam Funds Trust, 403 F.3d 478 (2005), Judge Easterbrook struck down one such suit (filed in Madison County no less): "Our plaintiffs’ effort to define non-purchaser-non-seller classes is designed to evade PSLRA in order to litigate a securities class action in state court in the hope that a local judge or jury may produce an idiosyncratic award. It is the very sort of maneuver that SLUSA is designed to prevent."

The Second and Third Circuits disagreed, and permitted plaintiff-created exceptions to SLUSA. Today, the Supreme Court reversed in an 8-0 decision, Merrill Lynch v. Dabit. The Court reaffirmed the principle that because "[e]ven weak cases brought under the Rule may have substantial settlement value... because '[t]he very pendency of the lawsuit may frustrate or delay normal business activity,'" private litigation should be "cabined" to minimize such adverse effects.