U.S Supreme Court Allows State Securities Fraud Case To Proceed

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Today in a unanimous 8-0 ruling issued, the Supreme Court permitted a securities fraud action to remain in state court. The case is the latest round in a multi-decade battle fought by corporations seeking to reduce their legal liabilities by transferring state actions to federal courts. Both in Congress and the courts, they have won many of these battles. This time, however, the Court sided with the injured investors.

The ruling in Merrill Lynch v. Manning originated from a sharp price drop in 2006-07 of the Escala Group (now known as Spectrum Group International), a network of companies specializing in stamps and other collectibles. The plaintiffs in the case accused Merrill Lynch and other financial institutions of causing the price to plunge through “naked short sales” of Escala’s stock.

Justice Elena Kagan’s majority decision didn’t rule on the merits of the case. Instead, it relied on statutory interpretations to allow the case to proceed in New Jersey’s state courts rather than moving the case to the federal courts, where corporations have long sought to litigate securities cases and class actions.

For many years, corporations have complained that state courts are unfairly friendly to plaintiffs. Plaintiffs did tend to do better in these forums, leading to a tenfold increase in class actions filings in state courts from 1988 to 1998. As a result of this growth in state cases, the transfer of cases – particularly class actions – to federal courts has long been a goal of the nation’s leading companies.

Their first major legislative success came in 1995 through the Private Securities Litigation Reform Act. The statute placed limitations on plaintiffs’ lawyers, making it harder to form a class in securities-related cases.

Urged on by the U.S. Chamber of Commerce and other corporate lobbyists, Congress enacted the Class Action Fairness Act ten years later. The statute placed barriers in bringing class actions in state courts, forcing many of these lawsuits to the federal judiciary.