In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA), claiming that the class action device was being used to injure "the entire U.S. economy" through nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and "manipulation by class action lawyers of the clients whom they purportedly represent.
"[1] The PSLRA accordingly imposed new restrictions that included a heightened pleading standard for securities class actions, damage caps, and mandatory sanctions for frivolous litigation.
The consequence was that many securities fraud plaintiffs sought to escape the new strictures under the PSLRA by avoiding federal court altogether.
In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006), the U.S. Supreme Court ruled that SLUSA operated to preempt state law "holder" claims, which alleged injury based on the prolonged retention of stock due to fraud, as well as claims arising from the fraud-induced purchase or sale of securities.
SLUSA exempts from its preemption coverage certain class actions that are based on the law of the state in which the issuer of the security is incorporated.