Shearman & Sterling LLP | Securities Litigation Blog | <p >Eastern District Of Pennsylvania Rules That State Law Claims Were Not Preempted By SLUSA<br >  </p >
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  • Eastern District Of Pennsylvania Rules That State Law Claims Were Not Preempted By SLUSA


    On May 26, 2017, Judge Cynthia Rufe of the United States District Court for the Eastern District of Pennsylvania ruled that the plaintiffs’ state law claims against Vanguard Group, Inc. (“Vanguard”) were not preempted by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”).  Taskir v. Vanguard Group, Inc., No. 16-5713 (E.D. Pa. May 26, 2017).  In reaching its decision, the Court ruled that SLUSA did not preempt the plaintiffs’ state law claims because Vanguard’s alleged misrepresentations and omissions did not make a significant difference in the plaintiffs’ decision to purchase or to sell their securities.

    Plaintiffs are investors who, because of the amount of assets they hold with Vanguard, qualify for the Voyager Select Program, which provides reduced commissions on securities transactions.  Plaintiffs alleged that, under the terms posted on Vanguard’s website, they should have been charged a $2.00 commission on all securities transactions, but they were instead charged a $7.00 commission on some securities transactions.  Plaintiffs asserted claims for breach of contract and violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.  Vanguard moved to dismiss primarily on the basis that the state law claims were preempted by SLUSA.  In support of its motion, Vanguard relied on a 2006 United States Supreme Court decision—Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006)—in which the Supreme Court ruled that SLUSA’s “in connection with the purchase or sale of a covered security” requirement was satisfied if the defendant’s alleged misrepresentations “coincided” with a securities transaction.

    The Court rejected Vanguard’s argument and stated that Dabit must be read in conjunction with a subsequent Supreme Court decision in Chadbourne & Park LLP v. Troice, 134 S. Ct. 1058 (2014), which, according to the Court, requires the “fraudulent or deceptive conduct” to be “‘material’—meaning that it makes a significant difference—to an individual’s decision to purchase or sell a covered security to satisfy SLUSA’s ‘in connection with’ requirement.” The Court ruled that “Plaintiffs’ claims do not satisfy this requirement because Plaintiffs do not allege that Defendant’s misrepresentation that its brokerage commissions were $2.00, rather than $7.00, made a significant difference to their decision to purchase” securities.

    The Court’s interpretation of the “in connection with” requirement is an example of lower courts looking at the relationship between the subject of the alleged misrepresentation and investors’ decisions to purchase, sell, or hold securities in deciding whether SLUSA preemption applies.