The U.S. Supreme Court dealt a blow to financial services firms trying to fend off allegations that they facilitate illegal short selling, affirming the rights of investors to make their case in plaintiff-friendly state courts.
With the court’s ruling on Monday, plaintiffs may find that such suits have a greater chance of advancing in a state court, potentially exposing brokerages to more expensive litigation, said Sam Lieberman, a partner at Sadis & Goldberg LLP.
“It’s easier to have your case thrown out for procedural reasons in federal court,” Lieberman said. “In state courts, you’re more likely to get closer to trial, and get closer to trial means you’re more likely to get closer to settling.”
New Jersey and other states also have Racketeer Influenced and Corrupt Organizations Act statutes aimed at organized crime that could be applied broadly enough to cover the conduct of financial services firms, said David Zaring, a professor of legal studies and business at University of Pennsylvania’s Wharton School of Business.
“New Jersey’s RICO statute might look like an easier route to a jury,” he said.
Siding With Investors
In a unanimous ruling Monday, the Supreme Court sided with investors who sued Bank of America Corp.’s Merrill Lynch and other brokerage firms. At issue was whether the plaintiffs, who alleged they lost money because of the brokers’ involvement in illegal short selling, could use New Jersey state court to sue over their losses -- even if the litigation cited federal laws.
The ruling forces Merrill Lynch, Bank of America’s corporate and investment banking division, and other firms to mount a defense in New Jersey state court. The plaintiffs in the case are using the state’s RICO statute as part of their complaint.
While concerned with so-called naked short selling, the ruling could potentially be applied in other securities matters, said Gary Aguirre, a former SEC enforcement attorney with Aguirre Law APC in San Diego. Plaintiffs may get a fuller airing in such cases in state courts than they would in federal venues, other attorneys said.
‘Crack in the Door’