July 25, 2015 Practice Points

Supreme Court to Consider Scope of Federal Jurisdiction Over Securities Claims

On June 30, 2015, the U.S. Supreme Court granted a petition for a writ of certiorari filed by Merrill Lynch and other financial institutions seeking to appeal a Third Circuit decision that held a shareholder lawsuit asserting state-law claims regarding alleged short selling should be remanded to state court.

By Mollie Kornreich

On June 30, 2015, the U.S. Supreme Court granted a petition for a writ of certiorari filed by Merrill Lynch and other financial institutions seeking to appeal a Third Circuit decision that held a shareholder lawsuit asserting state-law claims regarding alleged short selling should be remanded to state court.

The question presented by the certiorari petition is whether section 27 of the Securities and Exchange Act of 1934, which grants federal courts "exclusive jurisdiction' over violations of the Act or its regulations and all suits "brought to enforce any liability or duty created by" the Act or its regulations, "provides federal jurisdiction over state-law claims seeking to establish liability based on violations of the Act or its regulations or seeking to enforce duties created by the Act or its regulations."  The petition highlighted a split between the Fifth and Ninth Circuits, which have held that section 27 creates such jurisdiction, and the Second and Third Circuits, which have held that section 27 merely strips state courts of jurisdiction where there is an independent basis for federal jurisdiction.

The case was brought by shareholders of Escala Group, Inc. who allege that defendants engaged in short selling of Escala stock in violation of SEC Regulation SHO, which governs short sales of equity securities.  Plaintiffs assert various state law causes of action, including common law claims and claims under New Jersey's RICO statute based on predicate acts of state law securities fraud and theft.  The case was filed in New Jersey Superior Court, but was removed to the District of New Jersey.  The district court denied plaintiffs’ motion to remand and certified the question of whether remand was appropriate to the Third Circuit.

The Third Circuit was squarely presented with the question of whether section 27 provided an independent basis for federal question jurisdiction because it first held that plaintiffs' claims did not fall under section 1331, which gives district courts original jurisdiction over disputes "arising under" federal law. Recognizing that other circuits had reached disparate conclusions, the Third Circuit reversed the district court and held that "§ 27 is coextensive with § 1331 for purposes of establishing subject-matter jurisdiction."

Mollie Kornreich, Skadden Arps, New York, NY


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Mollie Kornreich – July 25, 2015