Not a Lexis+ subscriber? Try it out for free.


Supreme Court to Hear Appeal of Third Circuit ‘Naked’ Short Selling Securities Suit

 WASHINGTON, D.C. — (Mealey’s) The U.S. Supreme Court today agreed to hear an appeal of a Third Circuit U.S. Court of Appeals ruling remanding a securities class action lawsuit over the alleged illegal “naked” short selling of a company’s stock back to state court Merrill Lynch, Pierce, Fenner & Smith Inc., et al. v. Greg Manning, et al., No. 14-1132, U.S. Sup.; See related story in this issue) [ subscribers may access Supreme Court briefs for this case].

The Supreme Court also granted a motion filed by the Securities Industry and Financial Markets Association for leave to file a brief as amici curiae.

Several shareholders of Escala Group Inc. common stock sued several financial institutions, including Merrill Lynch, Pierce, Fenner & Smith Inc.; Knight Capital Americas LP; UBS Securities LLC; E*Trade Capital Markets LLC; and National Financial Services LLC in the Morris County, N.J., Superior Court, Law Division.

Phantom Shares

The shareholders alleged that the defendants engaged in illegal “naked” short selling of Escala stock, causing the pool of tradable shares of Escala stock to increase by “electronically manufacturing fictitious and unauthorized phantom shares.”  This, the shareholders contended, diluted the shareholders’ voting rights and caused their shares to decline in value.

The shareholders stated claims for violation of the New Jersey Racketeer Influenced and Corrupt Organization Act, unjust enrichment, unlawful interference with prospective economic advantage, tortious interference with contractual relations, unlawful interference with contractual relations, third-party beneficiary claims, breach of the covenant of good faith and fair dealing and punitive and exemplary damages.

The defendants removed the action to the U.S. District Court for the District of New Jersey, and the shareholders moved to remand to the state court.

Substantial Federal Issue

On March 20, 2013, the District Court denied the shareholders’ motion, ruling that “federal courts have found that the existence of ‘counterfeit shares’ raises a substantial federal issue” and that “entertaining the issue would not disturb the congressionally approved balance of federal and state judicial responsibilities.”

The Third Circuit granted the shareholders’ petition for interlocutory appeal, reversed the District Court’s order and directed the District Court to remand the action to the state court.

The defendants then filed a petition for rehearing en banc; in denying the motion, the panel held that “[t]he petition for rehearing filed by appellees in the above-entitled case having been submitted to the judges who participated in the decision of this Court and to all the other available circuit judges in regular active service, and no judge who concurred in the decision having asked for rehearing, and a majority of the circuit judges of the circuit in regular service not having voted for rehearing, the petition for rehearing by the panel and the Court en banc, is denied.”

Petition Filed

The defendants filed a petition for writ of certiorari in the U.S. Supreme Court on March 17, 2015, and the shareholders filed an opposition brief on June 5. The defendants then filed a reply brief on June 10.

The question presented is:  “Whether § 27 of the Securities Exchange Act of 1934 provides federal jurisdiction over state-law claims seeking to establish liability based on violations of the Act or its regulations or seeking to enforce duties created by the Act or its regulations.”

The shareholders are represented by Neal H. Flaster and Kathleen B. Riordan of Florham Park, N.J.

Merrill Lynch is represented by Andrew J. Frackman, Abby F. Rudzin and Brad M. Elias of O’Melveny & Myers in New York and Thomas R. Curtin of Graham Curtain in Morristown, N.J. UBS Securities is represented by Andrew B. Clubok and Beth A. Williams of Kirkland & Ellis in Washington, D.C., and William H. Trousdale and Brian M. English of Tomkins, McGuire, Wachenfeld & Barry in Newark, N.J. Defendant Citadel Derivatives Group LLC is represented by James S. Richter and Melissa Steedle Bogad of Winston & Strawn in Newark and Stephen J. Senderowitz of Winston & Strawn in Chicago. Knight Capital is represented by Edwin R. DeYoung, David G. Cabrales, W. Scott Hastings and James H. Bilton Locke Lord in Dallas. National Financial Services is represented by Rebecca Brazzano and Michael G. Shannon of Thompson Hine in New York and Jennifer S. Roach of Thompson Hine in Cleveland. E*Trade is represented by David E. Sellinger of Greenber Traurig in Florham Park, N.J., and Kurt A. Kappes of Greenberg Traurig in Sacramento, Calif.

For all of your legal news needs, please visit subscribers may search all Mealey Publications.

Non-subscribers may search for Mealey Publications stories and documents at or visit

Mealey's is now available in eBook format!

For more information about LexisNexis products and solutions, please connect with us through our corporate site.