US high court backs Merrill in class action test

WASHINGTON, Mar 22 (Reuters) The U.S. Supreme Court on Tuesday ruled unanimously in favour of investment bank Merrill Lynch in a decision limiting shareholders' ability to bring certain class action cases in state courts.

The court found that a 1998 law prevents certain kinds of shareholder lawsuits from being brought at the state level, rather than the federal level.

''The magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities cannot be overstated,'' said Justice John Paul Stevens, writing the court's opinion.

Most shareholder class actions involve allegations that an investor was misled in being convinced to buy or sell stock.

But ''holders'' lawsuits allege fraud when an investor is convinced not to sell stock already owned, or not to buy shares that are not yet owned.

Corporations defending themselves from securities class actions prefer to do so in federal courts, where pleading standards are higher.

Merrill argued that ''holder'' actions -- like buyer and seller actions -- should be limited by the Securities Litigation Uniform Standards Act (SLUSA), a 1998 law that sought to stem a shift of securities class actions to state courts from federal courts. The high court agreed.

Stevens said that distinguishing between ''holder'' actions and ''buyer'' or ''seller'' actions in cases like this is ''irrelevant.'' Doing so ''would give rise to wasteful, duplicative litigation,'' he wrote.

The case at issue concerned Shadi Dabit, a former Merrill broker. Dabit sued Merrill and alleged that he, other Merrill brokers and clients were convinced by misleading Merrill research to buy and hold certain stocks too long, which caused them to lose money after the stocks' values declined.

Dabit pursued his case under Oklahoma state law, rather than in the federal courts.

Merrill moved in July 2002 to dismiss Dabit's complaint, arguing it was covered by SLUSA and could not be brought at the state level. After a court decision against him, Dabit changed his case to a pure ''holder'' action and argued such actions are not SLUSA-covered and can be brought at the state level.

''Meanwhile, dozens of other suits, based on allegations similar to Dabit's, had been filed against Merrill Lynch around the country,'' Justice Stevens wrote in the court's opinion.

Lower court action failed to resolve the issue and propelled the Dabit case to the Supreme Court.

A lawyer who represented Merrill in the case said the ruling was important to all publicly traded companies.

''This decision impacts all public companies by closing an enormous loophole created by plaintiffs which would have led to an avalanche of state law securities fraud class actions accompanying virtually every federal securities class action,'' said Jay Kasner of Arps Slate Meagher&Flom.

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