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U.S. Supreme Court to Hear Merrill Lynch/UBS Appeal on Short Selling Case

U.S. Supreme Court to Hear Merrill Lynch/UBS Appeal on Short Selling Case

Yesterday, the U.S. Supreme Court an appeal from Merrill Lynch, UBS and several other financial institutions over a shareholder suit alleging the giant brokerage firms engaged in illegal and manipulative “naked” short selling.

In a short order, the high court granted the banks’ petition for a writ of certiorari, which was filed over a Third Circuit decision to remand the shareholder suit to state court. The court also granted the Securities Industry and Financial Markets Association (SIFMA), the brokerage industry defense bar, leave to file an amicus brief in the matter.

The suit was brought by shareholders of Escala Group Inc. and alleged the firm, which also included the former Knight Capital Americas LP and E-Trade Capital Markets LLC, engaged in the manipulative practice of short selling shares of Escala the firms did not own or borrow, in a bid to reap profits by driving down the share price.

The suit, which was filed in NJ state court in 2012, asserted claims for violations of New Jersey’s Racketeer Influenced and Corrupt Organizations Act (RICO) and Uniform Securities Law, but the brokerages argued that the causes of action come under federal securities laws. The case was subsequently removed to federal court.

A Third Circuit panel disagreed and last November and sent it back to New Jersey state court. The appeals court ruled that although stock short sales are subject to federal regulation under Regulation SHO, and New Jersey lacks an analogous provision, the question of whether the naked short-selling at issue in the case violates states law can be answered without referring to Regulation SHO.

The firms petitioned the Supreme Court in March, arguing the case was the “ideal vehicle” for resolving a split over the proper interpretation of Section 27 of the Securities Exchange Act. Section 27 holds that federal courts “shall have exclusive jurisdiction of violations” of the law and “of all suits in equity and actions at law brought to enforce any liability or duty created by” it.

In its remand to the state court, the Third Circuit sided with the Second Circuit by holding that Section 27 does not create federal jurisdiction over actions within its scope unless there is another independent basis for federal jurisdiction.
Escala shareholders blasted the petition earlier this month, calling defendants’ arguments “demonstrably false.” Now the
SCOTUS will have the last word.

With over eight decades of combined experience, the stock fraud attorneys at Colling Gilbert Wright & Carter know how to spot churning and how to protect victims from serious losses. Please contact us online or call our Orlando, Florida office at (407) 712-7300 to schedule your free case review today.