LEGAL
The case and resulting issueAt the beginning of December, the Supreme Court heard oral arguments in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Manning, a case with major securities law implications. The case, briefly discussed in a previous installment of Corporate Counsel Connect, involves a federal jurisdictional question pertaining to securities law violations. Despite the relatively academic-sounding subject matter, the case could have major implications for securities law plaintiffs going forward.
In the case, the plaintiff sued a number of equity trading firms essentially alleging securities fraud. The specifics of the alleged fraud aren't central to the case; instead, the Court will be resolving the question of whether it belongs in state or federal court.
Although Section 27 of the Securities Exchange Act gives federal courts "exclusive jurisdiction of violations of this title or the rules and regulations thereunder," the original complaint was based solely on violations of New Jersey state law. Regardless, the defendants are arguing that since the complaint alleges fraudulent acts which could be construed as violations of federal securities law, even though the complaint never explicitly mentioned federal law whatsoever, the case belongs in federal court.
The resolution of this question is important in securities litigation because federal courts are generally more hostile to plaintiffs than state courts, and, if the Court sides with the defendants in this case, state courts may find themselves unable to hear nearly any securities case ever again.
Fortunately for securities plaintiffs, the Court seemed skeptical of the defendants' claims during oral arguments. Right out of the gate, several justices questioned the wisdom of essentially requiring judges to, as Justice Scalia put it, "sift through the complaint and see if any of the claimed causes of action under State law mirror a cause of action that happens to exist under Federal law without even the hint that they mention the federal statute."
It's not hard to understand the justices' practical concerns with adopting Merrill Lynch's point of view, the legal obstacles to a decision favorable to the defendants may be even more persuasive.
Specifically, none of the justices seemed to be able to find anything in federal law, within Section 27 or otherwise, that required the case to be heard in federal court. According to some of the justices, states such as New Jersey are permitted to prohibit securities fraud without relying on federal law. Furthermore, the justices noted that, under the "arising under" test for determining whether a case belongs in federal court, a case "arises under" federal law if it is created by federal law. Here, the complaint is based solely on New Jersey law.
To support Merril Lynch's claims, the Court would have to expand or otherwise modify the current understanding of "arising under" jurisdiction to force Manning's lawsuit into federal court. And it's no easy task to ask the Court to impute meaning into a statute when the justices don't believe that the plain language doesn't support such a meaning – so it would be little surprise if the Court refuses to impute such meaning here.
Finally, and perhaps most tellingly, is the fact that the justices largely couldn't recognize any reason for the case to be heard in federal court besides the defendants simply wanting it there. True, many of the justices questioned Manning's attorney on whether the Securities Act was directly cited by or relied upon in the complaint, but there didn't seem to be any grounds for the case to be in federal court other than the defendants' argument that it is what Congress intended (a contention that failed to do much persuading among the justices).
Of course, the justices could easily change their minds or otherwise come to an entirely different conclusion behind closed doors, but from what we've seen during oral arguments, it appears that Manning will walk away from this case as the victor – which may further incentivize securities plaintiffs into state courts.
-->
