Justices Take Up Merrill Lynch’s Venue Issue

     WASHINGTON (CN) – The Supreme Court will decide whether a memorabilia company’s “naked short selling” claims will play out, the justices said Tuesday.
     Greg Manning and others sued Merrill Lynch, as well as Pierce, Fenner & Smith Inc., Knight Capital Americas LP, UBS Securities LLC, E-Trade Capital Markets LLC and National Financial Services LLC, three years ago in New Jersey.
     Manning says the defendants 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.
     The brokerages allegedly created and circulated unauthorized or counterfeit Escala Group shares by selling shares they did not own, borrow or ever intend to own. This in turn diluted and artificially depressed the shares’ value so that the defendants could repurchase them for cheap, return them to the lender, and profit on the difference, Manning claims.
     Manning says the investment firms entered millions of proprietary and customer short-sale transactions in May and December 2006 without reason to believe that the securities could be borrowed and made available for delivery.
     Though U.S. District Judge Jose Linares refused to remand the case to Morris County Superior Court in 2013, the Third Circuit reversed last year, finding that federal courts lacked jurisdiction over the state-law claims.
     “There is no question that plaintiffs assert in their amended complaint, both expressly and by implication, that defendants repeatedly violated federal law,” Judge D. Brooks Smith wrote for a three-judge panel, noting that Manning’s complaint only involved state-law claims.
     Smith wrote: “As we read the amended complaint, no causes of action are predicated at all on a violation of Regulation SHO,” short for the Securities and Exchange Commission’s rule on short sales (emphasis in original).
     “For example, plaintiffs do not plead a violation of Regulation SHO as a predicate violation for purposes of New Jersey RICO,” Smith added. “Nor, for the reasons above, do we think plaintiffs’ causes of action necessarily need to be predicated on a violation of Regulation SHO for plaintiffs to have a chance at recovering under state law.”
     Smith continued: “But even if plaintiffs’ claims were partially predicated on federal law, federal law would still not be necessarily raised. Where ‘plaintiffs’ state-law RICO claims allege both federal and state predicate acts,’ no federal question is necessarily raised because a plaintiff could ‘prevail upon their New Jersey RICO claims or any of their other state-law claims without any need to prove or establish a violation of federal law.'” (Emphasis in original.)
     Merrill Lynch petitioned the U.S. Supreme Court for a writ of certiorari, and the justices delivered Tuesday.
     Per their custom, none issued any comment about taking up the case.

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