Merrill Lynch, Et Al. v. Manning, Greg, Et Al.

Whether Section 27 of the Securities Exchange Act provides federal jurisdiction over state law claims based on potential violations of the Act.

Petitioners are financial institutions that are a part of equity trading. Respondents are shareholders of Escala Group, Inc. and alleged that the Petitioners participated in “naked” short selling of Escala stock. Naked short sales are when the seller does not borrow securities in time to deliver to the buyer in the three-day settlement period and therefore fail to deliver. Sometimes, naked short sales are part of a plan to change the price of a security or avoid borrowing costs. Even though they are not necessarily illegal, they could be against federal antifraud laws.

The Third Circuit Court of Appeals held there is no federal jurisdiction over the state law claims and those claims must have an independent basis for federal jurisdiction.

Petitioners' argument is there is a conflict between circuits on the question of federal jurisdiction over state law claims associated with violations of federal securities laws . As well, Petitioners argue the plain language of Section 27 of the Securities Exchange Act gives federal courts exclusive jurisdiction to deal with any potential violations of the Act, and to allow state law claims to fall under the authority of the Act would create jurisdiction where it does not exist.