- The Washington Times - Tuesday, March 21, 2006

The Supreme Court put new limits on securities lawsuits yesterday, ruling that a 1998 federal law bars large class-action cases by investors who say they were duped into holding onto stocks and bonds.

The high court ruled 8-0 that Merrill Lynch & Co. is protected from a class-action lawsuit brought by current and former brokers, who accused the company of manipulating stock prices and misleading investors.

With new Justice Samuel A. Alito Jr. abstaining because the case was argued before he was confirmed, the justices ruled that the federal law barred the suit, which was brought under an Oklahoma state law.

In unrelated action, the high court also heard oral arguments in a case involving legally sensitive questions about federal patent law — particularly in medical science.

In a case brought by the Laboratory Corp. of American Holdings, the justices listened to a dispute over a 1990 patent on a method for determining vitamin B deficiencies in people.

The Supreme Court appeared unlikely to delve into greater questions of what can and cannot be patented outside the realm of the vitamin B case when they rule on the dispute in the coming months.

But if the court does reach to that broader issue, lawyers said it could affect the claims made in tens of thousands of older patents on drugs, medical devices, computer software and other inventions. That makes the case a potential blockbuster.

In the Merrill Lynch case, meanwhile, the court delivered a broad-reaching opinion sure to block future class-action claims based on state law from being brought against firms that deal in the national securities market regulated by federal law.

“The magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities cannot be overstated,” Justice John Paul Stevens wrote for the court. “Federal law, not state law, has long been the principal vehicle for asserting class-action securities fraud claims.”

It was a major victory for Merrill Lynch, which faced lawsuits prompted partly by New York Attorney General Eliot Spitzer’s 2002 probe into the investment banking firm’s practices.

Mr. Spitzer uncovered records showing that Merrill Lynch analysts recommended that investors buy stocks that were described privately as a “disaster” or “dog.” Merrill Lynch agreed to a $100 million fine.

Jay Kasner, a New York attorney for Merrill Lynch, said the ruling means “public companies no longer have to fear the threat of securities class-actions in 50 different states under potentially 50 different sets of laws.”

“We are pleased that the Supreme Court ruled in our favor. The fact that the court was unanimous confirms what we said from the start: this case had no merit,” the company said.

Former Merrill Lynch broker Shadi Dabit sued the company in federal court on behalf of himself and all other former or current brokers, who bought stocks for themselves and clients while employed by the company.

Mr. Dabit sought to have the U.S. District Court for the Western District of Oklahoma invoke jurisdiction over his claim that Merrill Lynch violated state law by releasing misleading research to manipulate stock prices.

He argued the company misinformed brokers to issue overly optimistic appraisals of stock values to enhance prices of stocks held by clients.

The U.S. District Court dismissed the case, saying it improperly pre-empted the 1998 Securities Litigation Uniform Standards Act (SLUSA), which blocks class-action suits based on state law.

But the 2nd U.S. Circuit Court of Appeals reinstated the case, saying its basis was outside SLUSA’s because the law deals specifically with sale or purchase of stocks.

Mr. Dabit’s case, the appeals court said, centered on the claim that Merrill Lynch engaged in a misinformation to raise stock values, not stock sales or purchases.

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