Thursday, June 16, 2016

Supreme Court Rules that State Securities Fraud Case Can Proceed

Why did the Supreme Court allow Merrill Lynch v Manning to remain in state court?

Recently, the Supreme Court ruled unanimously that the Merrill Lynch v Manning case can remain in state court. For several decades corporations have been trying to reduce their liabilities by moving their state actions to federal courts, and, in a great many cases, have been successful, both in the courts and in Congress. In this particular case, however, the Court turned against the corporation and sided with the investors.

The case involved a precipitous drop in price in 2006-07 of the Escala Group (now Spectrum Group International), a group of companies specializing in collectibles, including stamps. The plaintiffs accused Merrill Lynch and other financial institutions of being responsible for the price plunge through naked short sales of their stock.

The majority decision of the Supreme Court, presented by Justice Elena Kagan, focused not on the facts of this particular case, but rather on the statutory interpretations. The Court  took the position that the case could proceed in New Jersey's state courts rather than moving to the federal courts.

For a number of years, corporations have complained that state courts have been biased toward plaintiffs and have therefore sought to litigate securities cases and class actions in federal courts. In fact, plaintiffs did have a pretty good track record in state courts. Class action suits in state courts increased ten times in the decade between 1988 and 1998. This resulted in an even stronger push by some of the nation's largest companies to transfer cases to federal courts.

A few successes finally went to the corporations. First, in 1995, they had a legislative win with the passing of the Private Securities Litigation Reform Act. This action put restrictions on plaintiffs’ lawyers, making it more difficult to form a class in securities-related cases. Then, 10 years later, under the urging of the U.S. Chamber of Commerce and other corporate lobbyists, the Class Action Fairness Act was enacted by Congress. This Act put up obstacles to bringing class action suits in state courts, resulting in many of these lawsuits being moved to the federal judiciary.

Though the Supreme Court has blocked corporations' efforts in the past, the passage of these laws gave plaintiff attorneys encouragement to try to maneuver to find ways to keep the cases in state courts. This time, however, the Court’s interpretation of federal law resulted in a decision to side with the plaintiffs by keeping the case in New Jersey's courts. According to Justice Kagan, the Supreme Court felt it necessary to "keep state-law actions… in state court, and thus to help maintain the constitutional balance between state and federal judiciaries.”

While the Supreme Court is presently evenly divided between liberal and conservative justices who often are at odds, this particular case resulted in unanimity. This was because the conservative jurists remained true to their usual stance of favoring a traditional position on states' rights, and the liberal jurists voted true to form in attempting  to strengthen private securities rather than large corporations. In this case, the differing goals of the liberals and conservatives brought them both to the same conclusion.

If your company on Long Island or in the greater New York metropolitan area has issues regarding securities fraud, you need a team of talented securities and corporate attorneys at your side to help you vigorously defend your rights and protect your interests.

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