As noted in my previous column, Review: Recent Class-Action Trends and Issues, controversy arose over whether plaintiffs' class-action counsel can continue circumventing the stringent pleading and discovery provisions of the Private Securities Litigation Reform Act (PSLRA) by bringing state law class actions for persons who merely hold the securities, on the theory that this does not involve a purchase or sale.

In coming to this conclusion in Merrill Lynch v. Dabit, the Court stated that the real purpose behind the purchaser-seller requirement was to limit suits under §10b and Rule 10b-5. Blue Chip Stamps v. Manner Drug Stores, 421 U.S. 723 (1975). Limiting Rule 10b-5 suits was a policy decision, because "litigation under Rule 10b-5 presents a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general". Id. at 739. The Court in Dabit held that policy considerations similar to those supporting its decision in Blue Chip Stamps prompted Congress in 1995 to adopt SLUSA in order to prevent perceived abuses in class action litigations, especially plaintiffs' class action attorneys filing suits in state courts and thus circumventing the strict pleading requirements and discovery cut-off imposed by PSLRA in the federal courts.

Although the language in §10b-5, Rule 10b-5 and the SLUSA provision requiring certain suits to be filed in the federal courts specifically states that the suit must be "in connection with" the purchase or sale of a security, the Supreme Court in Dabit felt that the policy considerations underlying Blue Chip Stamps override the strict interpretation of the "in connection with" language enunciated in Birnbaum v. Newport Steel Corp., 193 F2d. 461 (2nd Cir. 1952), which some federal circuit courts relied on in excluding holders class action suits from SLUSA.

In the context of a "holders" suit, the Supreme Court said that this strict interpretation is inconsistent with the purpose of enacting SLUSA. The underlying rationale is that Rule 10b-5 must be subject to a different interpretation when focusing on the limitations on standing to bring a private suit for damages for fraud, compared with the general statutory and regulatory prohibition on fraud in connection with the purchase or sale of securities. Therefore, the narrow meaning of "in connection with" as adopted in Birnbaum was consistent as a policy matter with limiting those who could bring private causes of action for violations Rule 10b-5, as well as with a broad interpretation of SLUSA.

According to the Supreme Court, although both "constructions" are entirely different, they can be reconciled because both are consistent with the Congressional intent to require securities fraud class actions to be litigated in federal courts, and thus preventing so-called holders class-action suits from circumventing the pleading and discovery provisions of PSLRA by filing suit in state court.  The second major reason given by the Supreme Court for its holding was that a contrary interpretation would encourage parallel suits in federal courts by true purchasers and sellers, and in state courts by holders for the same alleged wrongful conduct.