Naked Shorts Suit Gives High Court Chance To Curb States
By Ed Beeson
June 30, 2015
But what may have caught the Supreme Court’s ear was Merrill Lynch’s argument that the Third Circuit, like the Second Circuit before it, ruled in a manner that directly conflicted with holdings of the Fifth and Ninth circuits.
The split is over whether Section 27 of the Exchange Act creates federal jurisdiction over state-based claims. In remanding the shareholder suit back to state court, the federal appeals court said it does not, unless there is another, independent basis for federal jurisdiction.
On the other hand, the Fifth and Ninth circuits have held the section confers jurisdiction only on federal courts over all actions that seek to establish liability based on the violations of the Exchange Act, the appellants told the Supreme Court.
Resolving such interpretative differences is the bread-and-butter business of the highest court, said Ron Colombo, a law professor at Hofstra University.
“It’s a naked circuit split over a very fundamental question: the federal courts’ jurisdiction,” he said.
But should the court find that Section 27 does, in fact, preempt certain state-based securities claims more broadly than previously realized, practitioners may find the impact goes much further than naked short selling.
“There’s no reason to limit this to Reg SHO or short selling. It would apply to any situation where there is a federal securities question to a state claim,” Colombo said. If the court rules in favor of the appellants, it “takes a tool out of the plaintiffs’ toolbox.”