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

Background

Respondent Greg Manning owned millions of shares in a small public company and sued Merrill Lynch and other financial firms in New Jersey state court. He alleged that the firms engaged in "naked" short selling and brought a bundle of state-law claims (including state RICO, state securities law, negligence, and interference claims). The complaint mentioned the federal Regulation SHO but did not assert federal claims. Merrill Lynch removed the case to federal court, citing both the general federal-question statute and Section 27 of the Securities Exchange Act, which grants federal courts exclusive jurisdiction of suits "brought to enforce" duties under the Act.

Reasoning

The Court held that Section 27’s phrase "brought to enforce" is coterminous with the federal "arising under" test used in federal-question jurisdiction. Relying on the statute’s language and prior precedent, the Court explained that only suits that must necessarily turn on federal securities law satisfy Section 27. The Court emphasized respecting state courts’ traditional role and the advantages of applying a familiar, administrable test. Because the Third Circuit had already found Manning’s claims were purely state-law in character and did not necessarily raise a federal issue, the suit does not belong in federal court.

Real world impact

The decision sends Manning’s case back to state court and limits when securities-related lawsuits can be removed to federal court. Plaintiffs who bring state-law securities claims that merely reference federal rules will generally remain in state court unless their claims necessarily require enforcing federal duties. This ruling is procedural; it does not decide whether the alleged conduct violated any law.

Dissents or concurrances

Justice Thomas, joined by Justice Sotomayor, concurred in the judgment but proposed a different text-focused test for Section 27, stressing whether a claim necessarily depends on an Exchange Act breach.