On May 16, 2016, the U.S. Supreme Court held pleadings that exclusively allege a violation of state securities laws are allowed to proceed in state court so long as they do not “arise under” the Securities and Exchange Act of 1934, even where the complaint explicitly references federal securities regulations. Merrill Lynch, et al. v. Manning et al., 578 U.S. ____ (2016)
The Merrill Lynch case stems out of allegations by an Escala Group, Inc., stockholder that Merrill Lynch devalued Escala stock by executing “naked short sales”—a type of short sale prohibited under Regulation SHO of the Exchange Act. Plaintiff Greg Manning sued Merrill Lynch, alleging that its naked short sales of Escala stock violated certain New Jersey state laws, and seeking damages for his stock losses. Although Mr. Manning did not allege any federal securities violations, he did make reference to Regulation SHO—and Merrill Lynch’s history of noncompliance with it—in his complaint. Merrill Lynch removed the case to federal court under Section 27 of the Exchange Act, 15 U.S.C. § 78aa(a). Manning moved to remand. The district court denied Manning’s motion, and the Third Circuit reversed.