The U.S. Supreme Court has issued a unanimous ruling allowing investors to sue Bank of America Corp’s Merrill Lynch (BAC) and other brokerage firms in New Jersey state court even though the lawsuit cites federal laws. The plaintiffs, who are Spectrum Group International Inc. investors, claim that they sustained investment losses because the brokers engaged in illegal short-selling. They are invoking NJ’s RICO statute in their case. RICO is the Racketeer Influenced and Corrupt Organizations Act. It is a federal law that allows for victims of organized crime to seek civil damages. It also provides provisions for other extended penalties. Bank of America Merrill Lynch claims that this naked short selling case is meritless.
The plaintiffs are accusing Merrill Lynch and other broker-dealers of playing a part in causing Spectrum’s market capitalization to drop by $800M in 11 months. The investors said that the firms did this by helping naked short sellers who bet against the company, causing its share price to plunge.
Naked Short Sales
A short sale involves the use of borrowed shares to bet that a security’s price with drop. The short sale is naked if the trader doesn’t borrow the shares required to make the transaction happen. Under Regulation SHO, naked short sales cannot be used to manipulate a security. Still, lawsuits over illegal naked short selling haven’t done too well in federal court.
With this latest ruling, plaintiff lawyers would have to file their lawsuits in jurisdictions where securities and anti-fraud laws would apply while avoiding federal statute conflicts. The decision could expose broker-dealers to more costly litigation as lawsuits about illegal short selling are more likely to proceed in a state court, upping the chances of a settlement or trial, as opposed to in federal court where it is easier to have a case dismissed for procedural cause.
Spectrum Group International, previously called Escala Group Inc., is a precious metals and collectibles dealer.
Our illegal short-selling fraud lawyers represent investors in recouping their securities losses. Contact The SSEK Partners Group today.
SCOTUS: Sure, You Can Sue BofA For Racketeering, DealBreaker, May 17, 2016
Wall Street Faces New Front for Lawsuits After Top Court Ruling, Washington Post/Bloomberg, May 18, 2016