Interim Appeal Queued Up in Short-Selling Suit

(CN) - The 3rd Circuit can weigh jurisdiction in an attempt to hold brokerages liable for the alleged "naked short-selling" of shares in a memorabilia company, a federal judge ruled.

In a 2012 complaint, Greg Manning and others sued Merrill Lynch, Pierce, Fenner & Smith Inc.; Knight Capital Americas LP; UBS Securities LLC; E-Trade Capital Markets LLC; and National Financial Services LLC, alleging that they engaged in illegal "naked short selling" of millions of shares in his former company - Fortune 500 collectibles dealer, Escala Group, which is now known as Spectrum Group International.

Manning said the defendants sold shares they did not own, borrow or ever intend to own, which created and circulated unauthorized or counterfeit Escala Group shares, diluting and artificially depressing their value. They allegedly did so to repurchase the shares at a lower price, return them to the lender and profit on the difference.

During May and December 2006, the investment firms allegedly entered millions of proprietary and customer short sale transactions without having reasonable grounds to believe that the securities could be borrowed and available for delivery.

The defendant firms later removed the action to New Jersey federal court. U.S. District Judge Jose Linares refused to remand the case to Morris County Superior Court or award attorneys' fees on March 18.

Last week, Linares gave the plaintiffs leave to appeal the jurisdiction question to the 3rd Circuit.

"There is little doubt that an immediate appeal may ultimately advance the termination of the litigation," he wrote. "If the Court of Appeals determines that this court lacks jurisdiction, the case will be remanded to the Superior Court of New Jersey and the federal litigation will be terminated. On the other hand, denial of the instant motion could result in a needless waste of time and resources on the part of the court as well as the parties if this court lacks subject matter jurisdiction."

It is too late, however, for the plaintiffs to seek reconsideration, according to the ruling.

"Plaintiffs do not satisfy the high burden which would warrant reconsideration," Linares wrote. "Plaintiffs do not point to an intervening change in controlling law or the availability of new evidence. Accordingly, the only possible remaining ground upon which the court could reconsider its previous opinion is the need to correct a clear error of law or prevent manifest injustice."

Linares also denied that he "did not fully examine the facts of the case in the context of on-point cases previously cited from [the] District Court of New Jersey, as well as several out of district cases."

"As explained by the 3rd Circuit, 'it is clear that there is no such thing as 'the law of the district,'" he wrote. "Even where the facts of a prior district court case are, for all practical purposes, the same as those presented to a different district court in the same district, the prior resolution of those claims does not bar reconsideration by this court of similar contentions. The doctrine of stare decisis does not compel one district court judge to follow the decision of another.' Therefore, plaintiffs fail to satisfy their burden to demonstrate that reconsideration is appropriate here."

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit