Earlier this year, the Supreme Court of the United States ruled, in a unanimous opinion, that the Securities Exchange Act does not bar shareholders from bringing their claims in state court. The opinion, authored by Justice Elena Kagan, arose from a shareholder suit against a unit of Merill Lynch and other Wall Street firms that was filed in New Jersey state court. The suit alleged that the Defendants engaged in a deceptive short-selling campaign against the shareholders in violation of New Jersey’s stringent securities and racketeering laws, as well as common law claims.
The decision in Merrill Lynch v. Manning was before the Supreme Court on appeal from the Third Circuit. Merrill Lynch removed the case to federal court even though the claims arose under state law. The Third Circuit held that Merrill Lynch and others could not litigate the suit in federal court despite the complaint’s reference to Securities & Exchange Commission (SEC) rules concerning short-selling stocks. Upholding this decision, the United States Supreme Court ruled that the Securities Exchange Act does not prevent shareholders from bringing their claims in New Jersey state court under the state’s securities and anti-racketeering laws. In the unanimous opinion, Justice Kagan wrote:
We will not lightly read the statute to alter the usual constitutional balance, as it would by sending actions with all state-law claims to federal court just because a complaint references a federal duty.
Suggesting a narrow reading of Section 27 of the Securities Exchange Act, Merrill Lynch argued that Section 27 gives federal courts exclusive jurisdiction over all suits that seek to enforce any duty created by the act or its regulations, even if the suit is also brought to enforce state law.
The Supreme Court held that the jurisdictional test applied under Section 27 of the Securities Exchange Act, which grants federal jurisdiction over all cases “brought to enforce any liability or duty created by” the statute, is governed by the same test used to determine federal question jurisdiction under Section 1331 of the U.S. Code, which confers federal jurisdiction on “all civil actions arising under” federal law. Therefore, regardless of the potential differences between claims “arising under” federal law and claims “brought to enforce” the securities statute, the jurisdictional test is the same.
Essentially, the Supreme Court ruled that Plaintiffs’ references to SEC rules concerning short selling stocks were not sufficient to create federal jurisdiction pursuant to the general “arising under” standard and that Plaintiffs’ claims were not brought to enforce liabilities created by federal law. Justice Kagan added:
Applying a different test for jurisdiction of claims “brought to enforce” a statute versus those “arising under” federal law would “undermine important goals of interpreting jurisdictional statutes.
In the concurring opinion, joined by Justice Sotomayor, Justice Thomas agreed that federal jurisdiction was absent, but disagreed that Section 27 should have the same jurisdictional test, writing that the Exchange Act confers federal jurisdiction over any complaint that alleges claims “that necessarily depend on establishing a breach of an Exchange requirement.”
This unanimous Supreme Court decision resolves a split among the circuits regarding the jurisdictional reach of Section 27 of the Exchange Act and may encourage plaintiffs to file more state law claims in state court.
If you would like to know more about this decision, or if you have any security cases that you would like for lawyers at Beasley Allen to investigate, contact Ali Hawthorne, a lawyer in our Consumer Fraud and Commercial Litigation Section, at 800-898-2034 or by email at Alison.Hawthorne@beasleyallen.com.
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