Securities class action lawyers are an indestructible breed. Whether you think of them as elephantine warriors who can't be felled by a few congressional spear wounds or cockroaches who have managed to survive repeated applications of legislative insecticide, you have to credit their resilience. They find a way. When, for instance, Congress passed sweeping changes to the securities laws in 1995, with the specific intent of making it more difficult to prosecute securities fraud class actions in federal court, the shareholder bar began filing class actions in state court, where the heightened standards didn't apply. That phenomenon led, in turn, to a 1998 law called the Securities Litigation Uniform Standards Act, which was designed to preclude shareholders from using state securities laws to get around the 1995 reforms. Specifically, SLUSA said that "No covered class action based upon the statutory or common law of any state ... may be maintained in any state or federal court by any private party alleging a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security."

Characteristically, plaintiffs' lawyers found some wiggle room not only in the phrase "covered security" -- which encompassed securities addressed by federal securities laws -- but also in SLUSA's "in connection with" language. Stocks and bonds are clearly covered securities, but what about hedge fund investments or sophisticated insurance policies? Similarly, SLUSA obviously applies to claims based on a defendant's supposed lies to induce someone to buy or sell stocks and bonds. But its application to, say, claims that an investment advisor negligently recommended one potential merger partner over another or that a retirement plan advisor misrepresented the track record of individual retirement accounts is much murkier.

In 2006, the U.S. Supreme Court tried to clarify SLUSA's reach in a case called Merrill Lynch v. Dabit, which involved allegations that Merrill fraudulently induced brokers, through misleading analyst reports, to delay selling overvalued stocks. The court held that because Congress imported language from the securities fraud provisions of the Securities Exchange Act of 1934 into SLUSA, it must have intended SLUSA to have the same scope as the Exchange Act's fraud provision. The justices held that their broad interpretation of securities fraud, which requires only that the alleged fraud "coincide" with a securities transaction, defines SLUSA's "in connection with" requirement. The Dabit ruling seemed to foretell the SLUSA preclusion of a broad swath of cases, even if they didn't directly involve covered stocks and bonds.

In that regard, the Dabit case is part of a distinct trend in recent Supreme Court jurisprudence, in which the court has time and again agreed to hear securities cases in order to clarify just what Congress intended. As I've previously discussed in the context of the Amgen case -- a securities class certification case the justices heard earlier this term -- the most significant of the court's securities rulings over the last decade have gone against class action plaintiffs, though shareholders have succeeded in cases involving the statute of limitations for fraud claims and the standard for materiality.

And now we've got another case to add to the Supreme Court's securities docket. In a follow-up to Dabit, which didn't go as far as the court must have expected in clearing up precisely which state-court securities class actions are precluded by SLUSA, the justices agreed Friday to review a ruling by the 5th Circuit Court of Appeals that investors in Allen Stanford's Ponzi scheme may proceed with state-court claims against law firms and other advisers that supposedly enabled his fraud. The appeals court said that Stanford investors bought certificates of deposit that aren't covered securities, and even though those CDs were supposed to have been backed by a portfolio of stocks and bonds, "the heart, crux, and gravamen of (the) allegedly fraudulent scheme" was lies about the CDs. Transactions in covered securities, the appeals court said, were "not more than tangentially related" to the alleged fraud, so SLUSA preclusion isn't triggered.

The 5th Circuit opinion, which overturned a district court ruling that three Stanford investor cases are precluded under the Dabit standard, noted a split among the federal circuits that have interpreted what the Supreme Court meant in its directive that SLUSA precludes claims involving securities transactions that coincide with the supposed fraud. "Each of the circuits that has tried to contextualize the 'coincide' requirement has come up with a slightly different articulation of the requisite connection between the fraud alleged and the purchase or sale of securities (or representations about the purchase or sale of securities)," the appeals court noted.

The U.S. solicitor general recommended against Supreme Court review of the 5th Circuit ruling. Even though the Justice Department believed the appeals court had erred in finding the Stanford fraud wasn't connected to underlying transactions in stocks and bonds, it said the 5th Circuit had addressed an unusual fact pattern, so any ruling by the Supreme Court wouldn't offer much guidance. But the defendants in the Stanford cases -- including the law firms Proskauer and Chadbourne & Parke and the insurer Willis Group -- argued that if the 5th Circuit ruling were permitted to stand, securities plaintiffs would have a way to "easily evade important restrictions on the scope of class or mass action securities fraud claims," as Willis's Supreme Court lawyers at Bancroft wrote in the insurer's cert petition. Proskauer, which is accused only of abetting fraud, also argued in a cert petition by lawyers at Davis Polk & Wardwell that the 5th Circuit decision means that investors whose federal claims against accused abetters are blocked by Supreme Court precedent can go ahead with state law claims. (Chadbourne is represented at the Supreme Court by O'Melveny & Myers, which filed this cert petition.)

The Stanford investors asserted in separate briefs by Preis Gordon and Strasburger & Price that the Supreme Court doesn't have jurisdiction to hear cases remanded to state court and that regardless of minor differences in the language used by different federal circuits to define "coincident" securities transactions, SLUSA wouldn't preclude the Stanford cases under any standard. It will be interesting to see if the investors stick with the lawyers who have litigated the case so far or, like the Amgen shareholders, decide to bring in a Supreme Court specialist.

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