Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning

• Decision Date: 16 May 2016
• Docket Number: 14–1132.
• Parties: MERRILL LYNCH, PIERCE, FENNER & SMITH INC., et al., petitioners v. Greg MANNING, et al.
• Court: U.S. Supreme Court

578 U.S. 374

136 S.Ct. 1562

194 L.Ed.2d 671

MERRILL LYNCH, PIERCE, FENNER & SMITH INC., et al., petitioners

v.Greg MANNING, et al.

No. 14–1132.

Supreme Court of the United States

Argued Dec. 1, 2015.

Decided May 16, 2016.

Jonathan D. Hacker, Washington, DC, for the petitioners.

Peter K. Stris, Los Angeles, CA, for respondents.

Andrew J. Frackman, Abby F. Rudzin, Anton Metlitsky, Brad M. Elias, O'Melveny & Myers LLP, New York, NY, Walter Dellinger, Jonathan D. Hacker, Deanna M. Rice, O'Melveny & Myers LLP, Washington, DC, Thomas R. Curtin, Graham Curtin, PA, Morristown, NJ, for Merrill Lynch, Pierce, Fenner & Smith, Incorporated.

David G. Cabrales, Calli Turner, Gardere Wynne Sewell LLP, Dallas, TX, W. Scott Hastings, Locke Lord LLP, Dallas, TX, for Knight Capital Americas, L.P.

Stephen J. Senderowitz, Steven L. Merouse, Dentons US LLP, Chicago, IL, Jonathan S. Jemison, Dentons US LLP, Short Hills, NJ, for Citadel Derivatives Group LLC, n/k/a Citadel Securities LLC.

Kurt A. Kappes, Greenberg Traurig LLP, Sacramento, CA, David E. Sellinger, Greenberg Traurig LLP, Florham Park, NJ, for E*Trade Capital Markets LLC.

Michael G. Shannon, Thompson Hine LLP, New York, NY, for National Financial Services LLC.

Andrew B. Clubok, Susan E. Engel, Beth A. Williams, Jeffrey M. Gould, Kirkland & Ellis LLP, Washington, DC, William H. Trousdale, Brian M. English, Tompkins, McGuire, Wachenfeld & Barry LLP, Newark, NJ, for UBS Securities LLC.

Radha A. Pathak, Whittier Law School, Costa Mesa, CA, Shaun P. Martin, University of San Diego School of Law, San Diego, CA, Neal H. Flaster, Law Offices of Neal H. Flaster, LLC, Florham Park, NJ, Peter K. Stris, Brendan S. Maher, Daniel L. Geyser, Dana Berkowitz, Victor O'Connell, Michael N. Jones, Stris & Maher LLP, Los Angeles, CA, John A. Schepisi, Gregory M. Dexter, Schepisi & McLaughlin, P.A., Englewood Cliffs, NJ, for respondents.

Justice KAGAN delivered the opinion of the Court.

Section 27 of the Securities Exchange Act of 1934 (Exchange Act), 48 Stat. 992, as amended, 15 U.S.C. § 78a, et seq., grants federal district courts exclusive jurisdiction "of all suits in equity and actions at law brought to enforce any liability or duty created by [the Exchange Act] or the rules or regulations thereunder." § 78aa(a). We hold today that the jurisdictional test established by that provision is the same as the one used to decide if a case "arises under" a federal law. See 28 U.S.C. § 1331.

I

Respondent Greg Manning held more than two million shares of stock in Escala Group, Inc., a company traded on the NASDAQ. Between 2006 and 2007, Escala's share price plummeted and Manning lost most of his investment. Manning blames petitioners, Merrill Lynch and several other financial institutions (collectively, Merrill Lynch), for devaluing Escala during that period through "naked short sales" of its stock.

A typical short sale of a security is one made by a borrower, rather than an owner, of stock. In such a transaction, a person borrows stock from a broker, sells it to a buyer on the open market, and later purchases the same number of shares to return to the broker. The short seller's hope is that the stock price will decline between the time he sells the borrowed shares and the time he buys replacements to pay back his loan. If that happens, the seller gets to pocket the difference (minus associated transaction costs).

In a "naked" short sale, by contrast, the seller has not borrowed (or otherwise obtained) the stock he puts on the market, and so never delivers the promised shares to the buyer. See " Naked" Short Selling Antifraud Rule, Securities Exchange Commission (SEC) Release No. 34–58774, 73 Fed.Reg. 61667 (2008). That practice (beyond its effect on individual purchasers) can serve "as a tool to drive down a company's stock price"—which, of course, injures shareholders like Manning. Id., at 61670. The SEC regulates such short sales at the federal level: The Commission's Regulation SHO, issued under the Exchange Act, prohibits short sellers from intentionally failing to deliver securities and thereby curbs market manipulation. See 17 CFR §§ 242.203 – 242.204 (2015).

In this lawsuit, Manning (joined by six other former Escala shareholders) alleges that Merrill Lynch facilitated and engaged in naked short sales of Escala stock, in violation of New Jersey law. His complaint asserts that Merrill Lynch participated in "short sales at times when [it] neither possessed, nor had any intention of obtaining[,] sufficient stock" to deliver to buyers. App. to Pet. for Cert. 57a, Amended Complaint ¶ 39. That conduct, Manning charges, contravened provisions of the New Jersey Racketeer Influenced and Corrupt Organizations Act (RICO), New Jersey Criminal Code, and New Jersey Uniform Securities Law; it also, he adds, ran afoul of the New Jersey common law of negligence, unjust enrichment, and interference with contractual relations. See id., at 82a–101a, ¶¶ 88–161. Manning chose not to bring any claims under federal securities laws or rules. His complaint, however, referred explicitly to Regulation SHO, both describing the purposes of that rule and cataloguing past accusations against Merrill Lynch for flouting its requirements. See id., at 51a–54a, ¶¶ 28–30; 75a–82a, ¶¶ 81–87. And the complaint couched its description of the short selling at issue here in terms suggesting that Merrill Lynch had again violated that regulation, in addition to infringing New Jersey law. See id., at 57a–59a, ¶¶ 39–43.

Manning brought his complaint in New Jersey state court, but Merrill Lynch removed the case to Federal District Court. See 28 U.S.C. § 1441 (allowing removal of any civil action of which federal district courts have original jurisdiction). Merrill Lynch asserted federal jurisdiction on two grounds. First, it invoked the general federal question statute, § 1331, which grants district courts jurisdiction of "all civil actions arising under" federal law. Second, it maintained that the suit belonged in federal court by virtue of § 27 of the Exchange Act. That provision, in relevant part, grants district courts exclusive jurisdiction of "all suits in equity and actions at law brought to enforce any liability or duty created by [the Exchange Act] or the rules and regulations thereunder." 15 U.S.C. § 78aa(a). Manning moved to remand the case to state court, arguing that neither statute gave the federal court authority to adjudicate his collection of state-law claims. The District Court denied his motion. See No. 12–4466 (D NJ, Mar. 18, 2013), App. to Pet. for Cert. 24a–38a.

The Court of Appeals for the Third Circuit reversed, ordering a remand of the case to state court. See 772 F.3d 158 (2014). The Third Circuit first decided that the federal question statute, 28 U.S.C. § 1331, did not confer jurisdiction of the suit, because all Manning's claims were "brought under state law" and none "necessarily raised" a federal issue. 772 F.3d, at 161, 163. Nor, the court held, did § 27 of the Exchange Act make the district court the appropriate forum. Relying on this Court's construction of a nearly identical jurisdictional provision, the Court of Appeals found that § 27 covers only those cases involving the Exchange Act that would satisfy the "arising under" test of the federal question statute. See id., at 166–167 (citing Pan American Petroleum Corp. v. Superior Court of Del. for New Castle Cty., 366 U.S. 656, 81 S.Ct. 1303, 6 L.Ed.2d 584 (1961) ). Because the District Court lacked jurisdiction of Manning's suit under § 1331, so too it was not the exclusive forum under § 27.

Merrill Lynch sought this Court's review solely as to whether § 27 commits Manning's case to federal court. See Pet. for Cert. i. Because of a Circuit split about that provision's meaning,¹ we granted certiorari. 576 U.S. ––––, 135 S.Ct. 2938, 192 L.Ed.2d 975 (2015). We now affirm.

II

Like the Third Circuit, we read § 27 as conferring exclusive federal jurisdiction of the same suits as "aris[e] under" the Exchange Act pursuant to the general federal question statute. See 28 U.S.C. § 1331. The text of § 27 more readily supports that meaning than it does either of the parties' two alternatives. This Court's precedents interpreting identical statutory language positively compel that conclusion. And the construction fits with our practice of reading jurisdictional laws, so long as consistent with their language, to respect the traditional role of state courts in our federal system and to establish clear and administrable rules.

A

Section 27, as noted earlier, provides federal district courts with exclusive jurisdiction "of all suits in equity and actions at law brought to enforce any liability or duty created by [the Exchange Act] or the rules and regulations thereunder." 15 U.S.C. § 78aa(a) ; see supra, at 1567.² Much the same wording appears in nine other federal jurisdictional provisions—mostly enacted, like § 27, as part of New Deal-era regulatory statutes.³

Merrill Lynch argues that the "plain, unambiguous language" of § 27 requires an expansive understanding of its scope. Brief for Petitioners 23. Whenever (says Merrill Lynch) a plaintiff's complaint either explicitly or implicitly "assert[s]" that "the defendant breached an Exchange Act duty," then the suit is "brought to enforce" that duty and a federal court has exclusive jurisdiction. Id., at 22; Reply Brief 10–11; see Tr. of Oral Arg. 7–8 (confirming that such allegations need not be express). That is so, Merrill Lynch contends, even if the plaintiff, as in this case, brings only state-law claims in his complaint—that is, seeks relief solely under state law. See Reply Brief 3–6. And it is so, Merrill Lynch continues, even if the plaintiff can prevail on those claims without proving that the alleged breach of an Exchange Act duty—here, the violation of Regulation SHO—actually occurred. See id., at 7–13; Tr. of Oral Arg. 3 ("[T]he words ‘brought to enforce’ [do not focus] on what the court would necessarily have to decide")...