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Securities Regulation Keyed to Coffee
Merrill Lynch, Pierce, Fenner& Smith Inc. v. Dabit
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To further his state-law claims that Merrill Lynch, Pierce, Fenner& Smith (Merrill Lynch), Dabit’s previous employer, illegally manipulated stock prices, which caused him, other brokers and their clients to retain their overvalued securitiesDabit filed a private securities fraud class action in federal court, invoking diversity jurisdiction. Merrill Lynch breaching the fiduciary duty and covenant of good faith and fair dealing owed its brokers by promulgating deceiving research via its research analysts (which the brokers rely on) thus manipulating stock prices was the central part of the complaint along with Merrill Lynch using its deceived brokers to increase the cost of its investment banking clients’ stocks. Had the brokers and clients been cognizant of the reality, they would have sold their stocks instead of retaining them and allegedly suffered injuries as a result. The brokers were purportedly injured as a result of their clients learning they made poor investments and so taking their business away, and so consequently, lost their commission fees. This amended complaint was dismissed by the district court, finding his claims obstructed by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which offers "covered class action" based on state law and purporting "a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security" "may be maintained in any state or federal court by any private party." 15 U.S.C. § 78bb(f)(l )(A).The court of appeals vacated the judgment and concluded that, regarding the complaint claiming that brokers were illegally induced to delay or retain selling stock, it is not covered by SLUSA’s obstructive scope due to the court finding that the allegations stated by holders failed to claim fraud "in connectionwith the purchase or sale" of securities under SLUSA. Certiorari was granted by the Supreme Court.
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