Quote:Other defendants in the suit include E-Trade Capital Markets LLC, National Financial Services LLC and Citadel Derivatives Group LLC.
Merrill Lynch Blasted For High Court Bid In Short-Selling Suit
By Ben Conarck
Law360, New York (June 12, 2015, 8:27 PM ET) -- Shareholders accusing Merrill Lynch, Knight Capital Americas LP and UBS Securities LLC of illegal naked short-selling have told the U.S. Supreme Court that the financial giants were “grossly misleading” in their bid to overturn the Third Circuit's remand of the case to state court.
In a June 5 opposition, Escala Group Inc. investors fought back against the framing of the certiorari petition as a question of whether Section 27 of the Securities Exchange Act of 1934 provides federal jurisdiction over state-law claims establishing liability based on violations of the federal law, calling the premise that their claims were masked as state-law claims but dependent on the U.S. Securities and Exchange Commission's Regulation SHO “demonstrably false.”
The fact that the causes of action were not predicated upon a violation of Regulation SHO was noted by the Third Circuit, the respondents argued, saying that the case then presents the “antecedent fact question” of whether the appellate court erred in reading their amended complaint in that way.
Therefore, the Supreme Court cannot consider the petition question of whether the Third Circuit erred in holding that Section 27 of the Exchange Act is “coextensive” with U.S. code establishing subject-matter jurisdiction until it resolves the antecedent question, and reverses the Third Circuit decision, the investors argued.
“And as evidenced by the petitioner’s attempted sleight of hand, the antecedent fact question is not fairly subsumed in the petition question,” the objection said. “To the contrary, its resolution by the Third Circuit is an independent rationale for the judgment below. And because the petition ignores — or, more accurately, attempts to hide — this adequate alternative basis for affirmance, it should be denied.”
The objection contested the brokers' argument that the case is the "ideal vehicle" to resolve a circuit split over the proper interpretation of Section 27. In that framing, the brokers argued that the Third Circuit in November sided with the Second Circuit by holding that Section 27 does not create federal jurisdiction over actions within its scope unless there is some other, independent basis for federal jurisdiction.”
The Fifth and Ninth circuits have held that the section confers jurisdiction only on federal courts, according to the petitioners.
In remanding the case, the Third Circuit said that although 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 state law can be answered without referring to Regulation SHO.
The investors said that the brokers’ insistence that the Third Circuit decision is irreconcilable with the Exchange Act is off the mark, arguing that Section 27 of the Exchange Act can only add to federal jurisdiction if the phrasing in the section is more far-reaching than the “arising under” language in U.S. code.
“The petition concludes it is, and without any analysis or explanation, boldly asserts that ‘ he language of Section 27 could not be clearer,’” the objection said. “That is ironic because, according to the Second Circuit, the language of Section 27 echoes [U.S. Code] and ‘plainly refers to claims created by the act or rules promulgated thereunder, but not to claims created by state law.’”
The Escala shareholders allege that the financial giants engaged in illegal and manipulative naked short-selling, in which they sold shares of Escala that they did not own or borrow, or ever intended to own, to reap enormous profits.
Other defendants in the suit include E-Trade Capital Markets LLC, National Financial Services LLC and Citadel Derivatives Group LLC.
The investors are represented by Peter K. Stris, Brendan S. Maher, Radha Pathak, Dana Berkowitz and Victor O’Connell of Stris & Maher LLP.
Merrill Lynch Pierce Fenner & Smith Inc. is represented by Thomas R. Curtin of Graham Curtin PA and Brad M. Elias, Andrew J. Frackman, Abby F. Rudzin, Walter Dellinger and Jonathan D. Hacker of O'Melveny & Myers LLP. Knight Capital Americas LP is represented by James H. Bilton, David G. Cabrales, Edwin R. DeYoung and W. Scott Hastings of Locke Lord LLP. UBS Securities LLC is represented by Andrew B. Clubok and Beth A. Williams of Kirkland & Ellis LLP and William H. Trousdale and Brian M. English of Tompkins McGuire Wachenfeld & Barry LLP. National Financial Services LLC is represented by Michael G. Shannon of Thompson Hine LLP. Citadel Derivatives Group LLC is represented by Stephen J. Senderowitz, Steven L. Merouse and Jonathan S. Jemison of Dentons. E-Trade Capital Markets is represented by Kurt A. Kappes and David E. Sellinger of Greenberg Traurig LLP.
The case is Merrill Lynch Pierce Fenner & Smith Inc. et al. v. Manning et al., case number 14-1132, before the Supreme Court of the United States.
--Additional reporting by Stephanie Russell-Kraft. Editing by Edrienne Su.
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https://www.bloomberg.com/opinion/articles/20...ify%20wall
https://www.scotusblog.com/case-files/cases/m...v-manning/
