The Supreme Court heard arguments Tuesday in a case challenging whether investors can sue in state courts for securities violations.
The lawsuit, brought by Escala Group Inc. shareholders against Merrill Lynch Pierce Fenner & Smith, UBS Securities LLC, Citadel Derivatives Group and others alleges short-selling of Escala Group shares. It was originally filed in New Jersey state court; the financial institutions argued such cases fall solely within federal court jurisdiction.
At issue is Section 27 of the Securities Exchange Act of 1934, which provides that federal courts “shall have exclusive jurisdiction” over legal actions to enforce it. The 5th and 9th appellate circuit courts have ruled for federal jurisdiction, but the 3rd and 2nd circuits have ruled that Section 27 does not itself create federal jurisdiction over state-law claims.
Attorney Peter Stris, founding partner at law firm Stris & Maher, representing the investors, told the Supreme Court that “there is no indication that Congress clearly intended such an unprecedented intrusion on state court authority.” When asked by Justice Samuel Alito why it is important to be able to bring such claims in state court, Mr. Stris said, “It's not a surprise that a lot of securities plaintiffs want to be in state court. In some instances, they want to be there because the law is more robust.”
Jonathan Hacker, a partner at law firm O’Melveny & Myers who is representing the petitioners, argued that federal courts have exclusive jurisdiction “if the suit is brought to enforce (Securities) Exchange Act duties even if the suit is also brought to enforce state law duties.”
Several investor market groups, including Nasdaq, New York Stock Exchange and Securities Industry and Financial Markets Association, filed amicus briefs supporting the petition to handle such cases solely in federal courts.