Amicus Curiae Brief — Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, 136 S. Ct. 1562 (2016) (No. 14-1132)

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Supreme Court US

FILCD

OCT 23 2015

OFFICE OF THE CLERK

No. 14-1132

3n the Supreme Court of the Hnited States

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.; KNIGHT

CAPITAL AMERICAS L.P, FORMERLY KNOWN AS KNIGHT

EQUITY MARKETS L.P; UBS SECURITIES LLC; E*TRADE

CAPITAL MARKETS LLC; NATIONAL FINANCIAL SERVICES

LLC; AND CITADEL DERIVATIVES GRouP LLC,

Petitioners,

Vv.

GREG MANNING; CLAES ARNRUP; POSILJONEN AB;

POSILJONEN AS; SVEABORG HANDEL AS; FLYGEXPO AB;

AND LONDRINA HOLDING LTD.,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals for the Third Circuit

BRIEF FOR RESPONDENTS

RADHA A. PATHAK PETER K. STRIS

Whittier Law School BRENDAN S. MAHER

3333 Harbor Blvd. Counsel of Record

Costa Mesa, CA 90026 DANIEL L. GEYSER

DANA BERKOWITZ

SHAUN P. MARTIN Victor O'CONNELL

University of San Diego MICHAEL N. JONES

School of Law Stris & Maher LLP

5998 Alcalé Park 725 S. Figueroa St., Ste. 1830

San Diego, CA 92110 Los Angeles, CA 90017

(213) 995-6800

Counsel for Respondents brendan. maher@ strismaher.com

(Additional counsel listed on signature page)

ee Se ee Tn Sn Se

QUESTION PRESENTED

Section 27 of the Securities Exchange Act of 1934

(Exchange Act) provides that federal courts “shall have

exclusive jurisdiction” over “violations of {the Exchange

Act] or the rules and regulations thereunder, and 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).

In this case, Respondents filed suit under state law in

New Jersey state court seeking to enforce liabilities and

duties created by New Jersey law, not the Exchange Act

or its regulations. It is undisputed that not a single claim

raised in this suit necessarily turns on federal law, but

Petitioners maintain that at least one claim might

possibly turn on an Exchange Act regulation, a

contention the court of appeals rejected and

Respondents dispute.

The question presented is:

Whether Section 27 of the Exchange Act strips away

traditional state-court jurisdiction over state-law claims

whenever there is a mere possibility that an issue

related to the Exchange Act might resolve one element

of a single claim.

‘i

RULE 29.6 STATEMENT

Posiljonen AB has no parent corporation, and no

publicly held corporation owns 10% or more of

Posiljonen AB’s stock.

Posiljonen AS has no parent corporation, and no

publicly held corporation owns 10% or more of

Posiljonen AS’s stock.

Sveaborg Handel AS has no parent corporation, and

no publicly held corporation owns 10% or more of

Sveaborg Handel AS’s stock.

Flygexpo AB has no parent corporation, and no

publicly held corporation owns 10% or more of Flygexpo

AB’s stock.

Londrina Holding Ltd. has no parent corporation,

and no publicly held corporation owns 10% or more of

Londrina Holding Ltd.’s stock.

TABLE OF CONTENTS

se i

5 Ee ED ii

ee Vv

a crentiriicsisisomiciesccenbciininnetcnsetcsiiecinevenieniahtenanion l

ETT LIS EN He SOT RR EEO 3

A. Statutory Backgrouna .............ccccceeesseeseeeeeees 3

ETE 8

SUMMARY OF ARGUMENT ......0.......cccccecceseeseeeeneeneeees 19

| ______,_ AEE RTT ET E ET NO eT OES 25

I. Section 27 of the Exchange Act Was Not

Intended to Strip State Courts of Jurisdiction

Over State-Law Claims That Might Turn on

GEREN ESS SIE SIRE VS OO 26

A. Petitioners Misread the Text of Section

AREA ENR OY A eee SERBS eee eee ne YET CI 27

B. Petitioners’ Reading of Section 27 Is

Irreconcilable With Identical Language

im the Securities Act .........cc.cccccscssecsessescessesseeees 35

C. Petitioners’ Reading of Section 27 Is

Irreconcilable With This Court’s Long-

standing Interpretation of the Precise

Statutory Phrase at Issue.................:..cccsceeseees 37

D. Petitioners’ Reading of Section 27 Does

Not Advance the “Purposes” of the

ND ectittestctnentesinninninennmnemmmannns 40

II. Petitioners’ “Federal Possibility” Rule Is a

Radical and Unwise Departure from One of

the Most Enduring Principles of Federal

IIR scncstceriteesinenesiettiianiiliadinsiptsistainseiiiaiiismaininaaes 45

A. It Is a Bedrock Presumption That,

Absent Complete Preemption, There Is

No Federal Jurisdiction Over State Law

Claims Unless They Necessarily Raise a

RESET ARIETICS ALEE = Were eno nO 46

B. The Federal Necessity Presumption Is

Easily Administrable and Strikes the

Appropriate Balance Between Federal

ne Ce ccnncrtineranmtiniinteentinnecienes 48

IY cenerrnstiniininsniniesnicnitinntmnents 53

TABLE OF AUTHORITIES

Cases Page(s)

Anderson v. Mikel Drilling Co.,

102 N.W.2d 293 (Minn. 1960)...............cccccssesseseseesereeees 5

Avenius v. Banc of America Securities LLC,

Civ. No. 06-4458, 2006 WL 4008711

ke GS Reena 1,9

Capece v. DTCC,

Civ. No. 05-80498, 2005 WL 4050118

a St ci teiabenitpirninniciiniidacsesieiasiotseenn 1,9

Christianson v. Colt Indus. Operating Corp.,

a es I ieninernneninsinnenevimimnnein 48, 52

Curtis v. State,

109 S.E.2d 868 (Ga. Ct. App. 1959)... eececeeeseeeeees 5

Fairfax Financial Holdings. Ltd. v. S.A.C.

Capital Management, LLC,

Civ. No. 06-4197, 2007 WL 1456204

Rs GIN WIE TE icccesccnecscotsnsncnictsiiesnsoutscovenesesetoene 1,9

Franchise Tax Bd. of Cal. v. Construction

Laborers Vacation Trust for S. Cal.,

I rence 46, 47, 49

Gieringer v. Silverman,

539 F. Supp. 498 (E.D. Wis. 1982),

aff'd, 731 F.2d 1272 (7th Cir. 1984)... ceceeseeeeeeees 7

Grable & Sons Metal Products, Inc. v. Darue

Engineering & Manufacturing,

a 48

Gully v. First National Bank,

Se a ecinieicidariiasietneniiinieninenemninteniasiniil 46, 47

Gunn v. Minton,

Be es i ED cictctoncncnctcesecenctnsnitetnnen 45, 48, 51, 52

Hall v. Geiger-Jones Co.,

I elie 3

Holmes Group, Inc. v. Vornado Air Circulation

Systems, Inc., 535 U.S. 826 (2002).................. 49, 51, 52

J.J. Case Co. v. Borak,

SP i eieineneeall 6

Kardon v. Nat'l Gypsum Co.,

Fs Fi 8 | | ee 6

King v. Burwell,

TT eR ee aL TT 35

Kircher v. Putnam Funds Trust,

gk ET a ES 8

Leroy v. Great W. United Corp.,

Ee ee 5

Lippitt v. Raymond James Financial Services,

Inc., 340 F.3d 1033 (9th Cir. 2003) ..............cccceeeeeeeees 18

Louisville & Nashville R.R. Co. v. Mottley,

SEEN IR ER ete 49

Matsushita Electric Industrial Co., Ltd. v.

Epstein,

i as ictteenenaintenil passim

Merrick v. Halsey & Co.,

EE er a ae OR 3

Merrill Lynch, Pierce, Fenner & Smith Inc.

v. Dabit,

ee icintsincnnnicisinisnmiienenteniepetnnioens 7, 8, 43

Morris Canal & Banking Co. v. Fisher,

DF. TI Gay ae TID erccnesncescsveczsezscseensevencenncensetes 11

vill

Norfolk S. Ry. Co. v. Sorrell,

as a intendcertirnniiacisinsctsiciisisiiiiinatnitinsateiiens 41, 44

Pan American Petroieum Corporation v.

Superior Court of Delaware for New Castle

County, 366 U.S. 656 (1961).............ccceeeceeeeee 22, 39, 47

Prudential Ins. Co. of Am. v. Bank of Am.,

Nat'l Ass’n,

14 F. Supp. 3d 591 (D.N.J. 2014) ..........c.scccsccscsescereosess ll

Radzanower v. Touche Ross & Co.,

I 37

Rodriguez v. United States,

RE ee 41

Shamrock Oil & Gas Corp. v. Sheets,

STE ET en ee 52

State v. Ball,

LE Cee ere a ll

Strawbridge v. Curtiss,

ETE a Sea Rte 52

Tucker v. Mariani,

655 So. 2d 22 (Fla. Dist. Ct. App. 1995)...............:ec000 7

United Sav. Assn. of Tex. v. Timbers of Inwood

Forest Associates, Ltd.,

nn II iciisiihecnetieinciseecebciticemianiniiacon 35

White v. Fin. Guarantee Corp.,

56 P2d 550 (Cal. Ct. App. 1936) ................cccescecceresesees 5

Will v. Calvert Fire Ins. Co.,

EE ce eS ae ar ee 37

vill

Federal Statutes

Securities Act of 1933,

LEI ae ene aOR 4

I iain ciineciemnciehinditaionentinsieasiin 5, 22, 36

Securities Exchange Act of 1934,

I a nccncnaititallaliaa deans 4

RNa III ili eiscccielechtiahan sethantes 5

NN echinciatincincdupinceieiannicennatsaiiaiiba passim

Ss Ta oscnerinertnnininshtiniaicetitiiisinatii 31, 32, 42

Ee aa eames 28

Rs I ates aetna 52

tas Tt UI cinlhcserstcreveenciesnadepthieniniiceniedadenteneummaipatinateds passim

STEN A Tess cincteiapiasieiendinetipnpeeidaaaanimeaniaimemiannateitd 49

State Statutes

Uniform Securities Law (1997), N.J. Rev. Stat.

I aca alcetiii iat alcamenitntans ll

New Jersey Code of Criminal Justice, N.J. Rev.

i STITT Tac scinsininticitienerihcineaeaediiiniiiaeipigiiieineiingsiiin 13

New Jersey Code of Criminal Justice, N.J. Rev.

ENTE i cinicicinidiseiiincosiipcbininaiiisimssiiansiniensesii 12, 13

Racketeering Influenced and Corrupt Organization

Act, N.J. Rev. Stat. § 20:41 et 8€9........cccccccccssseseseeeees 11

8 ne 1]

ee es IE chardcdeseinniiersennasnnionnmsmmtais 9

BN Ee ena OD 11

Rules & Regulations

17 C.F.R.:

BU CURIE PII ccrcccesesneccocecenevoncasssenccseonsune 6,15

TES ET a ae ae OS NR EOE 14

Titi iasasat hn talaaiersiiiianlapapieasiaalaicidtadaciats 14

Exchange Act Release No. 34-3230 (May 21,

SERRE REESE ROIS See CENA 6

“Naked” Short Selling Antifraud Rule, SEC

Release No. 34-58774, 73 Fed. Reg. 61,666

EEE CEASE Tam, 05 8 SA nn 14

Short Sales, SEC Release No. 34-50103, 69 Fed.

Reg. 48,008 (Aug. 6, 2004)................:ccccccssccsessessseeseees 6,7

Short Sales of Securities, SEC Release No. 34-

13091 (Dec. 21, 1976), 41 Fed. Reg. 56,530

IY ARR ea A Ne 7

Legislative History

H. R. Rep. No. 709, 75th Cong., Ist Sess., (1937) ........... 18

SLUSA, Pub. L. No. 105-353, §§ 2(2), (5), 112

RE A rene 7

H.R. Rep. No. 105-640 105th Cong., 2nd Sess.,

REAR RECS AAC ES 9 aes a ae 7

H.R. Conf. Rep. No. 104-369, 31 (1995), reprinted

pt ot eS | SEER 7

Hearings on S. Res. 84 (72d Cong.), 56, and 97

(73d Cong.) before the S. Comm. on Banking

and Currency, 73d Cong., lst Sess., 6577

Securities Act of 1933, Pub. L. No. 73-22,

ts Sele CIEE cssinccverhicnetendeinssscnassatinicectnnanenmensnee

Securities Exchange Act of 1934, Pub. L. No. 73-

ig Ns Ie GIT sacicitcesictcncsicnisecsecentanetiinnnnmmenscees

The Securities Litigation Uniform Standards

Act of 1997 — S. 1260: Hearing before the

Subcomm. on Sec. of the S. Comm. On

Banking, Hous. & Urban Affairs, 105th Cong.

70 (1998) (statement of John F. Olson, Gibson,

te a i ceenmees

Hearings on S. Res. 84, S. Res. 56 & S. Res. 97

Before the S. Comm. on Banking and

Currency, 73d Cong. 6577 (1984) .e.cccsccccssssssseeeeseee

Pub. L. No. 105-353, §§ 2(2), (5), 112 Stat. 3227,

Se ee ecsctsnsiecnnninisesuissnentieeisinsninaneinineantiteianmntienicte

Other Authorities

1 Louis Loss & Joel Seligman, Securities

RE RL a

13D Charles A. Wright & Arthur R. Miller,

Federal Practice and Procedure: Jurisdiction

er SI eee ntncnnicseenncstniasenctimeenentenmnnensgies

Arthur R. Miller, Of Frankenstein Monsters and

Shining Knights: Myth, Reality, and the

“Class Action Problem”, 92 Harv. L. Rev. 664,

IE iivtemnsuivaphincantsiseccunininiesnicianinesuastonesisenee

In re Cady, Roberts & Co.,

Exchange Act Release No. 6668, [1961-1964

Transfer Binder] Fed. Sec. L. Rep. (CCH) 9

76,803, at 81,013 (Nov. 8, 1961) .........cccceceseeeeeeeeeeees

James Burk, Values in the Marketplace: The

American Stock Market Under Federal

SEL ER 3

James M. Landis, The Legislative History of the

Securities Act of 1933, 28 Geo. Wash. L. Rev.

ART Ve EG IES a 4

Joel Seligman, Remarks at University of

Washington Securities Law Conference

REE TE SILLS ae LS Se oe nee 5

Joel Seligman, The Transformation of Wall

EEE Sie ES na 3

John E. Floyd, RICO State by State: A Guide to

Litigation Under the State Racketeering

SIT crerionadenrepaieetdideiaiatenauecinalibdsienteatpuntnaisacanen 11

Jonathan R. Macey & Geoffrey P Miller, Origin

of the Blue Sky Laws, 70 Tex. L. Rev. 347

ERR tA Re NERS ete ae ec 3

Key Points about Regulation SHO, SEC Office of

Investor Education and Advocacy (April 8,

2015), http://www.sec.gov/investor/pubs/

REESE Ean E DS Saar st 9 ao 11

Larry D. Soderquist, Understanding the

Securities Laws (2d ed. 1990)............cccccescececessesseseeseees 4

Louis Loss & Edward M. Cowett, Blue Sky

en biinicccitasincinsiceanearesiapinnubaimpastionimayetniinininceecsenvenaenie 3

Michael A. Perino, Fraud and Federalism:

Preempting Private State Securities Fraud

Causes of Action, 50 Stan. L. Rev. 273 (1998)......4, 5, 6

Office of Investor Educ. and Advocacy, SEC, Key

Points About Regulation SHO,

http:/Awww.sec.gov/investor/pubs/regsho.htm.... 11, 14

Raymond Moley,

After Sawars Fear e (IGG P occ ccecevesseessccssineseessenicnionneensntins

INTRODUCTION

This dispute involves a classic case of market

manipulation. Respondents were investors in Escala

Group, Inc. (“Escala”). They sued Petitioners, a group of

major financial institutions, in New Jersey state court

asserting a series of New Jersey state-law claims. In

each of those state-law claims, Respondents alleged that

Petitioners caused their investment in Escala to decline

substantially through a pattern of manipulative “naked

short-selling.”

“Short-selling’ is the practice of borrowing shares of

stock, selling them and seeking to repurchase those

shares at a lower price, returning the lower-priced

shares to the lender and keeping the difference as

profit.” Fairfax Fin. Holdings. Ltd. v. S.A.C. Capital

Mgmt, LLC, Civ. No. 06-4197, 2007 WL 1456204, at *!

(D.N.J. May 15, 2007).

“Naked short-selling’ occurs when traders sell

shares they do not own or borrow, or ever intend to own,

and never deliver the ‘borrowed’ securities that they

sell.” Report and Recommendation, ECF No. 36, at 2-3

(citing Avenius v. Banc of Am. Sec. LLC, Civ. No. 06-

4458, 2006 WL 4008711, at *1 (N.D. Cal. Dec. 30, 2006);

Capece v. DTCC, Civ. No. 05-80498, 2005 WL 4050118, at

*3 (S.D. Fla. Oct. 11, 2005)).

Manipulative naked short-selling can artificially

depress a stock’s price at the expense of innocent

investors and the gain of abusive brokers and traders.

That is what Respondents allege occurred here—

Petitioners did not merely fail to follow the fine print of

some technical regulation; they engaged in pure and

simple manipulative and deceptive practices, exactly the

kind of behavior that has been long prohibited under

New Jersey common law and statutes.

New Jersey is not alone. The common and statutory

law of numerous states similarly forbids Petitioners’

conduct, and the Securities Exchange Act of 1934

(“Exchange Act”) and its implementing regulations

likewise target this financial misbehavior.

As is their right, Respondents chose to seek a

remedy for Petitioners’ misconduct exclusively under

New Jersey law. Every claim asserted by Respondents

is a New Jersey claim seeking to remedy violations of

New Jersey law. And as the court of appeals expressly

held, none turns in any way on federal law: “As we read

the Amended Complaint, no causes of action are

predicated at all on a violation of (federal law].” Pet.

App. 14a (emphasis in original). Were the entirety of the

Exchange Act and its regulations repealed tomorrow,

not a single claim in Respondents’ complaint would be

threatened.

Undaunted, Petitioners claim Section 27 of the

Exchange Act confers exclusive jurisdiction in these

circumstances, stripping New Jersey state courts of the

ability to determine whether Petitioners violated New

Jersey state law. Not so.

Petitioners misread the text of the Exchange Act to

suggest a radical jurisdictional theory that is

simultaneously unfaithful to Congressional intent, this

Court’s jurisdictional teachings, and common sense.

Affirmance is warranted.

STATEMENT

A. Statutory Background

1. States have long made it illegal to manipulate the

securities markets. See generally James Burk, Values in

the Marketplace: The American Stock Market Under

Federal Securities Law 169 (1988) (Table: C.2: Major

Actions by Various States to Regulate Securities

Business, 1852-1921) (describing state efforts); Jonathan

R. Macey & Geoffrey P Miller, Origin of the Blue Sky

Laws, 70 Tex. L. Rev. 347, 352-64 (1991) (discussing

impetus behind state “blue sky laws”); Louis Loss &

Edward M. Cowett, Blwe Sky Law 7-8 (1958) (asserting

that blue sky laws grew out of awareness of “the many

instances in which unsophisticated ... investors had

been bilked of their life savings by sellers of worthless or

fraudulent securities”).

By the time Congress passed the first federal

securities laws, every state but Nevada had enacted its

own. Joel Seligman, The Transformation of Wall Street

45 (rev. ed. 1995). Many of these state statutes had

prohibitions on fraud and misrepresentation.'’ And the

state regulatory infrastructures were generally well-

' See, e.g., Br. in Opp. 1 n.1 (collecting statutes). These statutes

survived numerous constitutional challenges because they were

deemed legitimate exercises of the states’ police power. As this

Court confirmed in upholding one statute:

[W]e think the statute under review is within the power of

the state. It burdens honest business, it is true, but

burdens it only that, under its forms, dishonest business

may not be done.

Merrick v. N.W. Halsey & Co., 242 U.S. 568, 587 (1917). See also

Hall v. Geiger-Jones Ca, 242 U.S. 539, 551 (1917) (“{[We shall not

pause to do more than state that the prevention of deception is

within the competency of government ... .”).

developed. See Larry D. Soderquist, Understanding the

Securities Laws 16 (2d ed. 1990) (noting exclusive

securities regulation by states until 1933).

2. It was against this backdrop of established state

regulation that Congress passed the Securities Act of

1933, 15 U.S.C. § 77a et seg. (“Securities Act”), and the

Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.

(“Exchange Act”). Drafters of the federal Acts relied

heavily on existing state statutes for guidance. See 1

Louis Loss & Joel Seligman, Securities Regulation 180

(1989) (antifraud provisions drawn from New York’s

Martin Act). In enacting federal legislation, they hoped

to make it more difficult for prospective fraudsters to

elude regulation through state loopholes or by crossing

state lines. See generally Michael A. Perino, Fraud and

Federalism: Preempting Private State Securities Fraud

Causes of Action, 50 Stan. L. Rev. 273, 280-82 (1998)

(explaining impetus to improve deterrence and

enforcement).

Both Acts largely preserved and supplemented

existing state authority over the securities markets.

They explicitly provided that “the rights and remedies

provided by this subchapter shall be in addition to any

and all other rights and remedies that may exist at law

or in equity.” Securities Act of 1933, Pub. L. No. 73-22,

ch. 38, § 16, 48 Stat. 74, 84 (1933); Securities Exchange

Act of 1934, Pub. L. No. 73-291, ch. 404, § 28, 48 Stat.

* See also Raymond Moley, After Seven Years 180 (1939)

(drafter Benjamin Cohen said to have “considerable experience in

the drafting of state [securities] laws”); James M. Landis, The

Legislative History of the Securities Act of 1988, 28 Geo. Wash. L.

Rev. 29, 33 (1959) (drafter James Landis had spent several years

studying state blue sky laws).

881, 903 (1934) (emphasis added). And the Securities Act

included a removal bar that permitted plaintiffs to

litigate their claims in state court regardless of the

defendants’ forum preference. 15 U.S.C. § 77v(a).

Indeed, the available legislative history makes clear

that Congress specifically intended an ongoing role for

the states in securities regulation. See Hearings on S.

Res. 84, S. Res. 56 & S. Res. 97 Before the S. Comm. on

Banking and Currency, 73d Cong. 6577 (1934)

(statement of Thomas Corcoran, principal Exchange Act

draftsman, regarding intention to leave states as much

leeway as possible to regulate securities transactions);

Leroy v. Great W. United Corp., 443 U.S. 178, 182 n.13

(1979) (legislative history of Exchange Act indicated

intent to leave states significant authority).’

The Exchange Act did not include an express private

right of action for defrauded purchasers or sellers of

securities.‘ After its passage, defrauded securities

investors continued to bring state lawsuits in state

courts. See, e.g., White v. Fin. Guarantee Corp., 56 P2d

550, 551 (Cal. Ct. App. 1936) (securities fraud under

California Corporate Securities Act); Anderson v. Mikel

Drilling Co., 102 N.W2d 293, 297 (Minn. 1960)

(securities fraud under Minnesota Securities Act);

* See also Perino, Fraud & Federalism, at 281-82 (explaining

that displacing state authority would have heightened already

significant constitutional questions); Joel Seligman, Remarks at

University of Washington Securities Law Conference (Mar. 1997)

(asserting that Speaker Rayburn insisted on preservation of state

securities regulation as condition of speedy passage).

‘ It did create a private right of action for market manipulation.

See 15 U.S.C. § 78i.

Curtis v. State, 109 S.E.2d 868, 871 (Ga. Ct. App. 1959)

(securities fraud under Georgia Securities Act).

3. Meaningful federal-securities litigation had to

await a number of watershed developments, including:

the Securities and Exchange Commission (SEC)

promulgation of Rule 10b-5 (1942);° judicial recognition

of a private right of action to enforce Rule 10b-5 (1946);*

SEC support for private federal securities law

enforcement (early 1960s);’ and the liberalization of Rule

23 of the Federal Rules of Civil Procedure (1966).*

Following the advent of the modern federal class

action device, the growing plaintiffs’ securities class

action bar largely ignored the state courts.’ It remained

> Exchange Act Release No. 34-3230 (May 21, 1942). Rule 10b-5

specifically prohibits fraud and misrepresentation in connection

with the purchase or sale of any security. See 17 C.FR.

§ 240.10b-5. It is the principal antifraud provision in the federal

securities regime.

® See Kardon v. Nat'l Gypsum Co., 69 F. Supp. 512, 514-15 (E.D.

Pa. 1946).

” See J.J. Case Co. v. Borak, 377 U.S. 426, 427 (1964); Jn re Cady,

Roberts & Co., Exchange Act Release No. 6668, [1961-1964 Transfer

Binder) Fed. Sec. L. Rep. (CCH) 9 76,803, at 81,013 (Nov. 8, 1961).

* See Arthur R. Miller, Of Frankenstein Monsters and Shining

Knights: Myth, Reality and the “Class Action Problem”, 92 Harv.

L. Rev. 664, 665-68 (1979) (analyzing effect of the 1966

amendments).

* As one prominent practitioner told Congress, “State court

class actions involving nationally traded securities were virtually

unknown ....” The Securities Litigation Uniform Standards Act of

1997 — S. 1260: Hearing before the Subcomm. on Sec. of the S.

Comm. On Banking, Hous. & Urban Affairs, 105th Cong. 70 (1998)

(statement of John F. Olson, Gibson, Dunn & Crutcher LLP). See

generally Perino, Fraud and Federalism, at 284-86 (explaining that

federal class action litigation under Rule 10b-5 offers advantages

uncontroversial, however, that a victim of securities

fraud or market manipulation could choose between

bringing suit in state court for state law violations,"° in

federal court for Exchange Act violations, or in federal

court for both state law and Exchange Act violations."

4. By the mid-1990s, there was broad legislative

consensus that federal securities class actions had

evolved into a practice rife with abuse. See Merrill

Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 US.

71, 81 (2006) (“Dabit”). Congress enacted the Private

Securities Litigation Reform Act of 1995 (“PSLRA”) to

curb these perceived abuses, in large part by imposing

significant new procedural hurdles. H.R. Conf. Rep. No.

104-369, 31 (1995), reprinted in 1995 U.S.C.C.A.N. 730,

730. But because these rules did not apply to state court

litigation, the PSLRA had the “unintended

consequence” of driving securities class actions to state

courts. Dabit, 547 U.S. at 81-82; see also H.R. Rep. No.

105-640, at 10 (1998).

In response, Congress passed the Securities

Litigation Uniform Standards Act of 1998 (“SLUSA”),

which effectively abolished state law class actions

concerning fraud or manipulation of the federally

regulated securities market. See SLUSA, Pub. L. No.

105-353, §§ 2(2), (5), 112 Stat. 3227, 3227 (1998) (goa) to

over state actions, including easier class certification and greater

potential damages from nationwide classes, and that many state

laws limit securities actions in important ways).

App. 1995) (securities fraud under Florida Statutes).

" See, e.g., Gieringer vu Silverman, 539 F. Supp. 498, 501 (E.D.

Wis. 1982), aff'd, 731 F.2d 1272 (7th Cir. 1984) (Exchange Act and

Wisconsin Securities Act claims).

“prevent certain State private securities class action

lawsuits alleging fraud from being used to frustrate the

objectives of the [PSLRA]”).

As this Court has explained, SLUSA did not

“preempt” state law, but rather made “some state-law

claims nonactionable through the class action device in

federal as well as state court.” Kircher v. Putnam Funds

Trust, 547 U.S. 633, 636 n.1 (2006). In other words,

Congress did not choose to preempt all state laws

prohibiting fraud or market manipulation in connection

with federally regulated securities, but only to preclude

class action lawsuits asserting those claims. Dabit, 547

U.S. at 87 (“The [Exchange] Act does not deny any

individual plaintiff, or indeed any group of fewer than 50

plaintiffs, the right to enforce any state-law cause of

action that may exist.”).

Consequently, the dual state-federal regulatory

regime contemplated by the Depression-era Congress

continues to this day.

B. Procedural History

Respondents are former sharehoiders of Escala, a

New Jersey-based company whose market capitalization

plummeted nearly $800 million in the short span of

eleven months. Pls.’ Reply, ECF’ No. 30, at 7 n.8; Pet.

App. 45a-46a (AC 99 7-13). Petitioners are several large

financial institutions who facilitated the manipulative

naked short-selling of Escala common stock. Pet. App.

46a-47a (AC 119 14-20).

“*Short-selling’ is the practice of borrowing shares of

stock, selling them and seeking to repurchase those

shares at a lower price, returning the lower-priced

shares to the lender and keeping the difference as

profit.” Fairfax Fin. Holdings. Ltd. v. S.A.C. Capital

Mgmt., LLC, Civ. No. 06-4197, 2007 WL 1456204, at *1

(D.N.J. May 15, 2007).

“Naked short-selling’ occurs when traders sell

shares they do not own or borrow, or ever intend to own,

and never deliver the ‘borrowed’ securities that they

sell.” Report and Recommendation, ECF No. 36, at 2-3

(citing Avenius v. Banc of Am. Sec. LLC, Civ. No. 06-

4458, 2006 WL 4008711, at *1 (N.D. Cal. Dec. 30, 2006);

Capece v. DTCC, Civ. No. 05-80498, 2005 WL 4050118, at

*3 (S.D. Fla. Oct. 11, 2005)). Naked short-selling can be a

tool for market manipulation. This case is about whether

Petitioners engaged in a pattern of manipulative naked

short-selling in violation of New Jersey laws.

1. On May 8, 2012, Respondents sued Petitioners in

the Superior Court of New Jersey, Law Division, Morris

County. Pet. App. 26a. Plaintiff Gregory Manning, the

owner of approximately 2.1 million shares of Escala

stock during the relevant period, lives in Morris County,

Pet. App. 45a (AC 1% 7), which neighbors Escala’s

principal place of business, Essex County, Pet. App. 48a

(AC 1 22). In an Amended Complaint, Respondents

alleged two kinds of wrongdoing under New Jersey

law:

Specifically, the Amended Complaint asserts ten specific

causes of action under New Jersey law: (1) violation of NJRICO

§ 2C:41-2(c), Pet. App. 82a-90a (AC 11 88-113); (2) violation of

NJRICO § 2C:41-2(a), Pet. App. 9la-93a (AC 99 114-22); (3) unjust

enrichment, Pet. App. 93a-94a (AC 9 123-27); (4) unlawful

interference with prospective economic advantage, Pet. App. 94a-

95a (AC 7% 128-33); (5) tortious interference with contractual!

relations, Pet. App. 95a-97a (AC 1% 134-40); (6) unlawful

interference with contractual relations, Pet. App. 97a-98a (AC 19

141-45); (7) third party beneficiary claims, Pet. App. 98a-99a (AC 99

First, they alleged that Petitioners—in their capacity

as securities brokers—intentionally gave false “locates”

to customers who wanted to short Escala stock. See, e.g.,

Pet. App. 58a (AC 9 41) (“Defendants were saying they

had Escala securities available to lend to facilitate

additional short selling at the same time they did not

have sufficient Escala securities to cover past sales.”)

(emphasis added); Pet. App. 58a (AC 1 42) (“Defendants

claimed to receive Locates from other Defendants (or

non-party banks) on dates when those other Defendants

(or non-party banks) did not have sufficient Escala

securities to cover the alleged Locates and accepted

Locates they knew were unreliable.”); Pet. App. 74a (AC

1 79a) (“[Defendants} created false documentation of

their . .. loaning and ownership in Escala shares.”).

According to the Amended Complaint, Defendants’

motive was simple: to reap massive commissions for

doing nothing. Pet. App. 88a (AC 1106) (“Defendants

charged short sellers fees for these sham ‘loans’ of

stock.”). By permitting their customers to short more

stock than actually existed in a small, thinly-traded

company, Defendants depressed Plaintiffs’ share value

to collect bogus commissions for themselves. Pet. App.

56a (AC 49 37a) (alleging harm through “creating and/or

using unauthorized counterfeit shares to increase the

pool of tradable common stock which operated to dilute

the shares owned by Plaintiffs”).

146-49); (8) breach of the covenant of good faith and fair dealing,

Pet. App. 99a-100a (AC 9% 150-54); (9) negligence, Pet. App. 100a-

Ola (AC 99 155-58); and (10) punitive and exemplary damages, Pet

App. 10la (AC 99 159-61).

'’ Because Escala is a thinly-traded company, naked short-

selling is much more likely to materially depress the price of its

stock. For large companies with many traded shares, the likelihood

These factual allegations support claims under two

different New Jersey statutes, each of which constitutes

a predicate act for purposes of the New Jersey

Racketeering Influenced and Corrupt Organization Act,

N.J. Rev. Stat. § 2C:41 et seg. (“NJRICO”); see Pet. App.

82a-93a (AC 99 88-122) (Counts One and Two).”

a. They constitute securities fraud under New

Jersey’s Uniform Securities Law, (1997) N.J. Rev. Stat.

§ 49:3-47 et seg. (“NJUSL’).”° Pet. App. 85a (AC 199)

that a short position will be quickly matched with a long position is

high, even if a specific long cannot be immediately located. For

companies with only a small amount of actively traded shares, the

odds are higher that shorts will not find corresponding longs, in

which case “counterfeit” shares that dilute the value of actual

shares are effectively created. See generally Key Points about

Regulation SHO, SEC Office of Investor Education and Advocacy

(April 8, 2015), http://www.sec.gov/investor/pubs/regsho.htm.

“ The New Jersey legislature enacted NJRICO in 1981 “to

provide that activity which is inimical to the general health, welfare

and prosperity of the State and its inhabitants be made subject to

strict civil and criminal sanctions.” N.J. Rev. Stat. § 2C:41-1.1. The

statute contains a liberal construction provision. N.J. Rev. Stat.

§ 2C:41-6. New Jersey courts have interpreted NJRICO consistent

with that intent. See, e.g., State v Ball, 661 A.2d 251, 258-59 (N.J.

1995). See generally John E. Floyd, RICO State by State: A Guide

to Litigation Under the State Racketeering Statutes 520 (1998).

’° For over 150 years, New Jersey investors have relied on state

common law for protection against manipulation of the securities

markets. See, e.g., Morris Canal & Banking Co. v. Fisher, 9 N.J.

Eq. 667 (N.J. 1855) (addressing negotiability of bonds allegedly

issued without stockholder authorization). Such is still the case

today. See, e.g., Prudential Ins. Co. of Am. u Bank of Am., Nat'l

Ass'n, 14 F. Supp. 3d 591 (D.N.J. 2014) (addressing allegations of

fraud and negligent misrepresentation regarding underwriting

guidelines for residential mortgage backed securities). To enhance

its common law protections for investors, New Jersey adopted and

later amended the NJUSL, a version of the Uniform Securities Act.

(alleging that Defendants violated NJUSL “by making

phantom loans of counterfeit Escala stock to facilitate

naked short sale transactions...”). See generally Pet.

App. 84a-87a (AC 99 96-101h).

b. They constitute theft by taking under the New

Jersey Code of Criminal Justice (“New Jersey Criminal

Code”), N.J. Rev. Stat. § 2C:20-4 (2013). Pet. App. 88a

(AC 9106) (“Defendants engaged in theft by taking by

purporting to loan short sellers Escala stock that

Defendants did not own nor had any intention of

obtaining and never did obtain ... .”). See generally Pet.

App. 87a-89a (AC 9 106).

Second, the Amended Complaint alleges that

Petitioners—in their capacity as proprietary traders—

engaged in a scheme to short Escala stock which they

knew or should have known they could not possibly

cover, and that they used their status as brokers to

conceal that scheme. See, e.g., Pet. App. 44a (AC 4 4)

(“Defendants implemented a sophisticated scheme to

conceal and cover-up their illegal conduct to avoid

detection.”); Pet. App. 74a (AC 179a) (“[T]o conceal

their unlawful naked short selling of Escala stock,

Defendants... created false documentation of their

trading ... in Escala shares.”); Pet. App. 74a (AC 9 79c)

(“[T]o conceal their unlawful naked short selling of

Escala stock, Defendants ... knowingly and

intentionally mis-marked order tickets ... and falsely

report{ed) counterfeit or phantom shares on brokerage

statements to investors, including the Plaintiffs in order

to mislead them.”).

According to the Amended Complaint, Petitioners’

motive was simple: to make money by driving down the

price of Escala stock. Pet. App. 73a (AC 9 78) (“The data

reflects that there was an illegal bear raid on Escala

securities, with massive volumes of non-existent

counterfeit stock used to manipulate pricing.”). By

shorting more stock in a small, thinly-traded company

than actually existed, Petitioners both financially gained

and diluted Respondents’ interest. Pet. App. 56a (AC

137a) (alleging harm through “creating and/or using

unauthorized counterfeit shares to increase the pool of

tradable common stock which operated to dilute the

shares owned by Plaintiffs”).

These factual allegations support claims under three

different New Jersey statutes, each of which constitutes

a predicate act for the purposes of NJRICO.

a. They constitute securities fraud under NJUSL.

Pet. App. 85a (AC 198a) (alleging that Petitioners

violated NJUSL by “selling Escala stock short at times

when Defendants neither possessed nor intended to

obtain Escala stock to deliver by the Settlement Date”).

See generally Pet. App. 84a-87a (AC 19 96-101a).

b. They constitute theft by taking under the New

Jersey Criminal Code, N.J. Rev. Stat. §2C:20-4. Pet.

App. 87a (AC 9105) (“Defendants unlawfully took

property of Plaintiffs, with the intention of depriving

them of that property by . . . selling Escala stock short at

times when they neither possessed nor intended on

obtaining Escala stock to deliver by the Settlement Date

me |

c. They constitute theft by deception under the New

Jersey Criminal Code, N.J. Rev. Stat. § 2C:20-3. Pet.

App. 89a (AC 9 110) (“Defendants, by . . . promis[ing] to

borrow Escala stock that it did not borrow and had no

intention of borrowing, committed the crime of theft by

deception prohibited by NJS.A. 2C:20-4.”). See

generally Pet. App. 89a-113a (AC 99 108-113).

2. To be clear: the Amended Complaint explicitly

does not assert any federal causes of action. See Pet.

App. 82a-10la (AC 4% 88-161). Nor does it allege

violations of federal law or regulation as predicate acts

for violations of NJRICO alleged in Counts One and

‘Two. See Pet. App. 87a-93a (AC 99 88-122).

The Amended Complaint does, however, seek to

educate the reader about the history of clear SEC

guidance that manipulative naked short-selling is illegal

under federal law and many state laws, making

Petitioners’ conduct especially egregious. See, e.g., Pet.

App. 53a (AC 9 30) (“[T]he SEC, which regulates federal

securities laws that are substantially similar to New

Jersey’s Securities Act, has explicitly stated that selling

stock short and failing to deliver shares at the time of

settlement with the purpose of driving down the

security’s price constitutes a ‘manipulative » Uivity’ that

‘in general, would violate various securities laws ””).’°

'* In 2004, the SEC adopted Regulation SHO to clarify that

manipulative naked short-selling is illegal and to curb its spread.

See 17 C.F-R. § 242.200 et seq.; Short Sales, SEC Release No. 34-

50103, 69 Fed. Reg. 48,008 (Aug. 6, 2004) (codified at 17 C.F-R. pts.

240, 241 and 242) (“Regulation SHO Release”). As the SEC

explained, manipulative naked short-selling is fraudulent. See, e.g.,

“Naked” Short Selling Antifraud Rule, SEC Release No. 34-57511,

73 Fed. Reg. 61,666, 61,674 (Oct. 17, 2008) (codified at 17 C.F-R. pt.

240) (“[F Jails to deliver might be indicative of manipulative ‘naked’

short selling . . . .”); Office of Investor Educ. and Advocacy, SEC,

Key Points About Regulation SHO, http:/Avww.sec.gov/investor/pu

bs/regsho.htm (“Those who deceive about their intention or ability

to deliver securities in time for settlement are committing fraud .. .

when they fail to deliver securities by the settlement date.”); id

(“Selling stock short and failing to deliver shares at the time of

The Amended Complaint also explains that the “SEC

formally articulated the pernicious effects of naked short

selling on the securities markets” over a decade ago in

enacting Regulation SHO, Pet. App. 5la-53a (AC 99 28-

29); and that the SEC had since “reaffirmed its ‘. . . zero

tolerance for abusive naked short selling’ by

strengthening investor protection,” Pet. App. 53a-54a

(AC 730). And it describes Petitioners’ history of

repeated violations of Regulation SHO to explain

that Petitioners had a history of sanctions by the

Financial Industry Regulatory Authority and other

regulatory agencies and thus punitive damages would be

warranted. See Pet. App. 75a-82a (AC 1% 81-87)

(discussing history of sanctions by the FINRA and other

regulatory agencies).

3. Petitioner Merrill Lynch, Pierce, Fenner & Smith

(“Merrill”) filed a Notice of Removal. Pet. App. 26a.

Petitioners contended that removal was proper because

(1) the claims in the Amended Complaint “arise under”

federal law and therefore confer federal question

jurisdiction pursuant to 28 U.S.C. § 1331, and (2) the

federal district court was vested with exclusive

jurisdiction under Section 27 of the Exchange Act.

Respondents then moved to remand. Pet. App. 26a. As

Respondents explained, there was no “arising under”

jurisdiction under 28 U.S.C. § 1331 because they could

establish each of their state law claims without reference

to federal law. See, e.g., Motion to Remand, ECF No. 11-

2, at 16 (“Here, Plaintiffs can prevail .. . without relying

settlement with the purpose of driving down the security's price . . .

would violate various securities laws, including Rule 10b-5 under the

Exchange Act.”).

on or proving a violation of federal law by demonstrating

that Defendants engaged in deceptive conduct in never

intending to make delivery of the shorted Escala

stock.”); Pls.’ Reply, ECF No. 30, at 2 (“It is the intent

and effect of Defendant{s’] wrongful conduct that serves

as the measure of liability for Defendants’ violation of

state RICO and other common law claims, not the

violation of any federal] regulation or rule.”).

Respondents also explained that the exclusive

jurisdiction provision in Section 27 of the Exchange Act

does not apply because Respondents sought to vindicate

only their rights under New Jersey law:

Because Plaintiffs’ claims arise out of state law

rights and duties, Plaintiffs have state law rights

to be free from fraud, misrepresentation, and

material omissions in the sale of securities, state

law rights to be free from market manipulation

and state law rights to be free from deceit and

theft.... [New Jersey] provide[s] claims for

relief from abuses in the securities field

independent of and in addition to federal claims

for relief ....

Motion to Remand, ECF No. 11-2, at 16-17 (emphasis in

original).

4. Recognizing that none of Respondents’ claims is

predicated on an alleged violation of federal law, the

federal magistrate judge recommended remanding the

action. Pet. App. 9a (Third Circuit discussing Magistrate

Judge’s Report and Recommendation).

First, the magistrate rejected Petitioners’ argument

that there is “arising under” jurisdiction:

Plaintiffs correctly note that, because they may

succeed on their New Jersey RICO claims

(Counts 1-2) and state common law claims

(Counts 3-10) without establishing liability under

federal law, the Amended Complaint . . . does not

raise necessarily a substantial issue of federal

law.

Report and Recommendation, ECF No. 36, at 8.

Next, the magistrate rejected Petitioners’ alternative

argument that there is exclusive jurisdiction in federal

court pursuant to Section 27 of the Exchange Act. See

Report and Recommendation, ECF No. 36, at 10-12.

The magistrate found that the references to

violations of the Exchange Act in the Amended

Complaint “merely . . . support independent state causes

of action.” Report and Recommendation, ECF No. 36, at

10-11. See also Pls.’ Reply, ECF No. 30, at 2 (“The

gravamen underlying Plaintiffs’ Amended Complaint is

not that Defendants violated Reg. SHO or other federal

regulations, but that by manipulating the value of Escala

stock through unlawful naked short sales, Defendants

engaged in a pattern of racketeering activity in violation

of New Jersey law, resulting in Plaintiffs suffering

significant damages.) (cited in Report § and

Recommendation, ECF No. 36, at 10).

5. The district court rejected the magistrate’s

recommendation and denied the motion to remand. Pet.

App. 25a. The court began by stating the fundamental—

but mistaken—-premise of its decision:

Notably, Plaintiffs do not dispute that the alleged

unlawful conduct is predicated on a violation of

Regulation SHO, 17 C.F-R. § 242.204, promul-

gated by the Securities and Exchange

Commission (“SEC”).

Pet. App. 29a.

The district court did not square its finding with

multiple provisions of the Amended Complaint. As

Respondents explained and the magistrate understood,

Petitioners’ unlawful conduct was violating duties owed

to Respondents under New Jersey law, not federal law.

See, e.g., Pet. App. 43a (AC 9 2) (making clear that entire

complaint is based on violations of state law without

predication on any violation of Regulation SHO); Motion

to Remand, ECF No. 11-2, at 16-17 (same); Report and

Recommendation, ECF No. 36, at 10-11 (recognizing

same).

Resting entirely on its original premise, the district

court nevertheless found exclusive jurisdiction under

Section 27 of the Exchange Act, see Pet. App. 30a-32a, as

well as “arising under” jurisdiction, see Pet. App. 32a-

38a. See Pet. App. 32a (“As the case at bar is premised

upon and its resolution depends upon the alleged

violation of a regulation promulgated under the Act, this

Court has jurisdiction.”); Pet. App. 33a (“To prevail on

their various state law claims, . . . Plaintiffs must show

that the alleged naked short sales were illegal.”).

6. The Third Circuit reversed. Pet. App. 6a. First,

the Third Circuit rejected Petitioners’ argument that

there is “arising under” jurisdiction. Pet. App. 1la-18a.

It determined that Petitioners referred to violations of

federal law merely as atmospheric evidence that similar

New Jersey state law was violated. See Pet. App. 14a-15a

(citing Lippitt v. Raymond James Fin. Servs., Inc., 340

F3d 1033, 1037 (9th Cir. 2003) (no jurisdiction even

where the complaint “unnecessarily describes the

alleged conduct of the defendants in terms that track

almost verbatim the misdeeds proscribed by [federal

law].”) (alteration in original)).

In this case, the Third Circuit concluded, “no causes

of action are predicated at all on a violation of

Regulation SHO.” Pet. App. 14a (emphasis in original).

See also Pet. App. 13a (“Regulation SHO is not an

element of Plaintiffs’ claims.... The claims, therefore,

could be decided without reference to federal law.”).""

Second, the Third Circuit considered—for the sake

of argument—what result would obtain if Respondents’

claims “were partially predicated on federal law.” Pet.

App. 15a (emphasis omitted). The Third Circuit

determined that if a state law claim has a sufficient

“federal ingredient” to satisfy 28 U.S.C. § 1331, then

Section 27 of the Exchange Act makes that jurisdiction

“exclusive.” Pet. App. 20a, 22a. If the state law claim,

however, does not include a sufficient federal ingredient

to satisfy 28 U.S.C. § 1331, then Section 27 provides no

alternative means to confer jurisdiction. Pet. App. 20a,

22a.

SUMMARY OF ARGUMENT

Contrary to Petitioners’ contention, Section 27 of the

Exchange Act does not aggressively strip away

traditional state-court jurisdiction over ordinary state-

law claims simply because there is a mere possibility

that some issue related to the Exchange Act might

'T See also Pet. App. 18a (“Plaintiffs’ claims could rise or fall

entirely based on the construction of state law.”). And Petitioners’

arguments that federal law contradicted Respondents’ claims did

not authorize removal under the well-pleaded complaint rule. Pet.

App. 16a-18a.

prove relevant. Petitioners’ view of the law is

indefensible in multiple respects, and it should be

rejected.

I. Petitioners’ jurisdictional theory flunks every

modern mode of statutory analysis.

A. Petitioners misread Section 27’s plain text. There

is no basis for saying that Congress intended federal

courts to displace state courts whenever a plaintiff

happens to mention an Exchange Act “violation” in his

complaint. Even on Petitioners’ own admission,

Congress wanted certain suits in federal court so federal

courts could decide securities issues—not so federal

courts could resolve purely state-law claims whenever a

plaintiff mentions a federal “violation” in passing.

Congress created jurisdiction in federal courts because

the Act gave rise to direct criminal liability (and related

civil enforcement provisions); it needed to authorize

federal courts to hear those claims, not state-law suits,

under state law, that have no business directly punishing

or enforcing “violations” of the Act.

Nor are Petitioners correct that Respondents’ action

falls within Section 27 by somehow seeking to enforce

Regulation SHO. That theory is not even factually

presented, since Respondents’ complaint unequivocally

does not seek to enforce any component of federal law.

In form and substance, the complaint asserts state-law

claims seeking to invoke independent standards under

New Jersey’s civil jurisprudence. Regulation SHO has

nothing to do with Respondents’ ability to prevail on

these claims.

In any event, Section 27 is textually limited to suits

brought to enforce liabilities and duties created by the

Act, not liabilities and duties created by state law. A

state-law cause of action is brought to enforce a liability

“created” under state law. It makes no difference that a

state standard may mirror the federal standard. The

content of state law is still determined by the State’s

political branches. It is the State’s decision to shape its

own duties and liabilities however it wishes, even if that

means replicating federal law. Congress expressly

preserved the States’ role in regulating securities by

authorizing state-created “rights and remedies” “in

addition” to those under the Act. Litigants are entitled

to pursue those rights, rather than federal rights, in

seeking relief for unlawful conduct. And suits seeking

those state-created rights are indisputably not brought

to enforce anything created by the Act itself. If Congress

were unhappy with that result, it would not have limited

Section 27's jurisdictional sweep to matters created by

the Act while simultaneously authorizing matters not

created by the Act.

This Court has further confirmed that Section 27’s

language means what it plainly says. In Matsushita

Electric Industrial Co. v. Epstein, 516 U.S. 367 (1996),

this Court examined a state-law claim, acknowledged

that it turned on an embedded Exchange Act issue, and

still refused to dislodge state-court jurisdiction—all

because the state-court action “was not ‘brought to

enforce’ any rights or obligations under the Act.” /d. at

381-82, 382 n.7. Actions under state law seek to enforce

duties and liabilities under state law. Petitioners offer

no reason this Court should flatly depart from its

holding in Matsushita.

B. Nor can Petitioners square their expansive

reading of Section 27 with its critical surrounding

provisions. The Securities Act’s anti-removal

provision used the same jurisdictional language as the

Exchange Act—“all suits in equity and actions at law

brought to enforce any liability or duty created by thle

Act].” But it also prohibited parties from “remov[ing]”

cases “brought in any State court of competent

jurisdiction” that “aris[e] under th[e Act].” 15 U.S.C.

§ 77v. The language defining each category is technically

different, but it is inconceivable that Congress intended

any daylight between actions to “enforce” the Act and

actions “arising under” the Act. Yet according to

Petitioners, cases that merely “enforce” a federal right

(without arising under federal law) form the exclusive

subset that can be removed to federal court. This leaves

federal claims in state court and state claims in federal

court—exactly the opposite of any _ sensible

interpretation.

C. Petitioners’ understanding of Section 27 directly

conflicts with this Court’s consistent characterization of

Section 27 itself and analogous statutes. In a long line of

cases, this Court has invoked Section 27 and described it

(in passing) as covering cases “arising under” the Act.

This Court chooses its words carefully, and it is well

accustomed to reading jurisdictional provisions. If

Section 27 textually embraced the extraordinary sweep

that Petitioners urge, surely the Court would have

noticed before now. Casual readings are often natural

readings, and this Court’s language in those cases

confirms Section 27’s plain and ordinary meaning.

Moreover, this Court has twice construed this key

language in cases where it actually mattered. It

construed the language in Matsushita in a manner

impossible to square with Petitioners’ reading. And it

construed materially indistinguishable language in Pan

American Petroleum Corporation v. Superior Court of

Delaware for New Castle County, 366 U.S. 656 (1961),

and again reached the same conclusion: Section 27 was

not intended as a sharp departure from the jurisdictional

norm, but rather codified the usual jurisdictional

principles that respect the proper relationship between

federal and state courts.

D. Contrary to Petitioners’ contention, an

unprecedented exclusion of state judicial authority is

unnecessary to advance Congress’s statutory objectives.

Uniformity was assuredly important to Congress, but it

did not pursue that goal at all costs. Quite the contrary,

the Exchange Act reflects Congress’s careful balancing

of federal and state interests. Congress directly

authorized states to regulate in the area, and it

indisputably tolerated state courts reviewing federal

claims (as defenses and counterclaims), just as Congress

tolerates similar incursions to “uniformity” in virtually

every other “exclusive jurisdiction” setting. Petitioners’

flawed views would upset the concurrent roles Congress

preserved for state law and state courts. And this is no

minor deal: it is simply breathtaking to presume that

Congress would rather uproot a broad swath of state-

law claims from state courts just to avoid the possibility

that state courts might occasionally resolve a matter of

federal law. Congress does not endorse such remarkable

intrusions on the federal-state relationship in such

subtle (and counter-textual) ways.

II. Petitioners’ “federal possibility” theory invites a

radical and unsound departure from one of the most

enduring and fundamental principles of federal

jurisdiction.

A. There is no principle of law or logic that permits

exclusive federal jurisdiction to turn on the mere

possibility that a claim might rely on a federal violation.

Congress is well aware how to eliminate al] state-court

control over certain federal issues—it is called complete

preemption. Yet Congress refused to include anything

approaching that high standard in Section 27. As with all

other statutes, Congress drafts jurisdictional statutes

against the backdrop of settled and accepted principles.

In this area, there are few principles more settled or

accepted than the notion that mere “possibilities” are

not enough: federal jurisdiction requires that the federal

ingredient be a necessary component of a state-law

claim. Petitioners admit they cannot meet that bedrock

standard here, and they are wrong to suggest Congress

threw it out the door without so much as a hint it was

embracing such a drastic shift.

B. Unlike Petitioners’ theory, a more traditional view

of Section 27 is sound in principle and workable in

practice. Adhering to traditional concepts (those that

have served the courts well for centuries) ensures that

courts and litigants can operate under a known,

predictable, administrable standard. In many cases, it

will be highly difficult to determine whether a state-law

claim is actually “enforcing” some unspecified federal

law. It avoids messy disputes over efforts to read federal

issues between the lines of purely state-law claims (as

here), and it prevents eliminating state-court jurisdiction

only so federal courts can entertain countless state-court

actions that are ultimately resolved without any remote

airing of any federal issue. Congress does not divest an

entire category of state judicial authority in such a

haphazard fashion. Petitioners’ theory is fundamentally

unsound, and it should be rejected.

ARGUMENT

Petitioners are correct that the “jurisdictional test”

established by Section 27 is “clear and simple.” Pet. Br.

2. But they have gotten that simple test wrong.

These facts are undisputed: Respondents alleged ten

claims below, and not a single one necessarily turns on

federal law. Each and every claim was a product of New

Jersey law, and premised on duties and liabilities created

by New Jersey, not Congress. Each and every claim has

at least some means of prevailing without uttering a

single syllable on the Exchange Act or its regulations.

In fact, putting aside Section 27, none of these claims

would even conceivably belong in federal court by

themselves. Under any existing, ordinary jurisdictional

analysis, the states would retain their authority to

adjudicate matters of state law in their own state courts.

In other words, there is not a jurisdictional test that

exists today, in any other area or form, that would even

permit these claims to enter federal court, much less to

eliminate state judicial authority in the process.

Petitioners, however, do not advance any ordinary or

existing jurisdictional theory. On the contrary,

Petitioners have introduced a new concept of federal

jurisdiction, one based on the mere possibility that a

federal issue might arise in the case. According to

Petitioners, the fact that a single claim might possibly

turn on a federal regulation is sufficient to eviscerate

state-court jurisdiction and remove the entire dispute to

federal court—even if the case never ultimately raises a

single federal ingredient.

As explained below, Petitioners are wrong. There is

no such thing as “federal possibility” jurisdiction.

Section 27 nowhere hints of such a radical intrusion on

traditional state authority, or such a stark departure

from the most fundamental and enduring principles of

federal jurisdiction. Congress crafted Section 27 to

usher true federal claims to federal court; it did not

intend or allow the complete displacement of the state

judiciary whenever a state-law complaint mentions

federal law.

The decision below should be affirmed."

I. Section 27 of the Exchange Act Was Not Intended

to Strip State Courts of Jurisdiction Over State-

Law Claims That Might Turn on Federal Law.

Petitioners cannot prevail without establishing that

Section 27 embraces exclusive jurisdiction whenever

there is a mere possibility that a federal issue under the

Exchange Act will arise. Petitioners’ theory is at odds

with Section 27's plain text, incompatible with its

surrounding provisions, out of step with this Court’s

Petitioners devote several pages of their brief ascribing error

to the court of appeal for “[holding) that § 27 does not grant

jurisdiction at all, but instead merely deprives state courts of

jurisdiction when federal jurisdiction would exist under another

provision, such as § 1331.” Pet Br. at 28-32. With all due respect to

Petitioners, they have misconstrued the decision below. In

rejecting the position urged by Petitioners, the Third Circuit

concluded the jurisdictional scope of Section 27 is no broader than

Section 1331, and therefore simply meant to say that Section 27

could not supply an independent conceptual basis for awarding

jurisdiction. Accordingly, while the Third Circuit’s decision

admittedly relies on jurisdictional concepts embodied in 1331

(something the Petitioners believe, incorrectly, is error), it did not

formally hold, as Petitioners claim, that Section 27 could “not grant

jurisdiction at all” were 28 U.S.C. § 1331 repealed. In any event,

that debate is academic because, whether Section 27 of the

Exchange Act is a “standalone” grant of jurisdiction or not—it

simply does not reach claims like those of Respondents.

cases, and inconsistent with legislative intent. Congress

does not typically abandon centuries of jurisdictional

practice by saying so little and meaning the opposite of

what it said. Petitioners’ theory must be rejected.

A. Petitioners Misread the Text of Section 27.

In Section 27 of the Exchange Act, Congress

specifically granted’ district courts “exclusive

jurisdiction” over “violations of this chapter or the rules

and regulations thereunder, and of all suits in equity and

actions at law brought to enforce any liability or duty

created by this chapter or the rules and regulations

thereunder.” 15 U.S.C. § 78aa(a). In arguing that

“section 27 confers exclusive federal jurisdiction over

respondents’ complaint,” Pet. Br. 19 (capitalization

removed), Petitioners advance two textual arguments.

Neither is correct.

1. In passing, but repeatedly, Petitioners maintain

that there is exclusive federal jurisdiction over this case

simply because the Amended Complaint asserts that

Petitioners violated Regulation SHO, irrespective of any

connection to an actual claim. See, e.g., Pet. Br. 2 (“The

jurisdictional test established by thie] language [of

Section 27] is clear and simple: if the complaint on its

face alleges a violation of the Act or its regulations .. .

then federal courts have exclusive jurisdiction.”).'”

® Petitioners repeat this assertion throughout their opening

brief. See Pet. Br. 17 (“federal courts have exclusive jurisdiction

when a complaint alleges ‘violations of’ the Exchange Act or its

regulations”); id at 23 (“if the complaint on its face asserts a

violation of the Act or its regulations . . . the complaint is subject to

the exclusive jurisdiction of the federal courts”); id. at 34 (“The rule

established by § 27's plain text could hardly be clearer: whether the

complaint on its face asserts a violation of the Act or its regulations

or seeks to enforce a duty thereunder.”).

This reading of Section 27 is untenable. Consider a

garden-variety state law breach-of-contract action in

which plaintiff alleges, for atmospherics, that defendant

is a bad actor who recently violated the Exchange Act.

Under Petitioners’ theory, Section 27 would divest the

state court of jurisdiction—despite the contract claim

having nothing whatsoever to do with the background

allegation. There is no reason to believe that Congress

intended such an absurd result.

Of course, there is a far simpler and more sensible

reading of the phrase vesting “exclusive jurisdiction of

violations of thfe Act].” 15 U.S.C. § 78aa(a). And that

reading is made clear from the very next two sentences

of Section 27—which describe venue for criminal

proceedings and civil-enforcement actions asserting

“violations” of the Act. See id. (“Any criminal proceeding

may be brought in the district wherein any act or

transaction constituting the violation occurred. Any suit

or action . . . to enjoin any violation of such chapter or

rules and regulations, may be brought in any such

district or in the district wherein the defendant is

found .. . .”) (emphases added).

Put simply, Congress referred to _ exclusive

jurisdiction of “violations of this chapter” as distinct

from “all suits in equity and actions at law brought to

enforce any liability or duty created by this chapter”

because the former phrase was needed to confer

jurisdiction over lawsuits to criminally punish or civilly

enjoin violations of the Exchange Act.”

” Of course, “violations of this chapter” will often subject the

violator to “liability.” See, e.g., 15 U.S.C. § T8ff(c)(1)(A) (“Any issuer

that violates subsection (a) or (g) of section 78dd-1 of this title shall

be fined not more than $2,000,000.”) If a lawsuit is actually

2. Alternatively, Petitioners argue that Section 27

eliminates state court jurisdiction over Respondents’

suit because Respondents’ state law claims indirectly

seek to enforce “duties” imposed by a federal regulation:

The complaint .. . seeks “to enforce dutfies]

created by [the Act] or the rules and regulations

thereunder,” id., because respondents’ complaint

seeks to hold petitioners liable for violating the

“locate” and “close-out” duties of Regulation

SHO. The fact that respondents seek to enforce

those duties though state-law causes of action

does not matter, because the statute applies

broadly to “all suits in equity and actions at law

brought to enforce” duties created by the

Exchange Act or its regulations.”

Pet. Br. 21. Again, Petitioners are mistaken.

a. As an initial matter, Petitioners’ theory is based

on a factual premise that was expressly rejected by the

Third Circuit—ce., that at least one of Respondents’

causes of action might somehow require a judicial

determination that Regulation SHO had been violated.

“brought to enforce [that] liability,” it would surely be subject to

exclusive federal jurisdiction. But whether Respondents’ lawsuit

was “brought to enforce any liability” resulting from an Exchange

Act violation is the very disputed issue in this case. Petitioners

cannot obtain reversal by merely accusing Respondents of

“allegiing} a violation of the act or its regulation.” Such an

accusation begs the relevant question—ce., whether Petitioners’

lawsuit is actually “brought to enforce any liability” resulting from

the alleged Exchange Act violation. Indeed, Petitioners’ own amici

concede as much. See, e.g., Sec. Indus. and Fin. Mkt. Assoc. Br. at 7

(“By its terms, the first clause of Section 27—the violations ciuuse—

extends to suits that, whether or not pleaded under the Exchange

Act, are predicated on alleged violations of the Act.”) (emphasis

added).

See Pet. App. 14a (“As we read the Amended Complaint,

no causes of action are predicated at all on a violation of

Regulation SHO.”) (emphasis in original). The court of

appeals was correct.

There is no mention of Regulation SHO (or any

federal law) in any of the 73 paragraphs of the Amended

Complaint setting forth Respondents’ claims against

Petitioners. See Pet. App. 82a-93a (AC 9988-122). Put

simply, Respondents do not need to prove anything

about Regulation SHO to establish their state law

claims. And their state law RICO claim turns entirely on

state law predicates, none of which invokes Regulation

SHO or even mirrors its terms. Indeed, the only

conceivable role Regulation SHO will have in this case is

as a defense—should Petitioners argue that New Jersey

law is conflict preempted because of Regulation SHO. A

federal issue arising as a defense is categorically

irrelevant for purposes of “exclusive jurisdiction” under

Section 27.

Nor does it make one whit of difference that the fact

section of Respondents’ Amended Complaint references

Regulation SHO and explains that Petitioners have

violated it in the past. These references did not seek “a

judicial determination that .. . Regulation SHO . . . was

violated.” Pet. Br. 3. To the contrary, those references

simply illustrated that Petitioners had a history of

sanctions by the Financial Industry Regulatory

Authority and other regulatory agencies and thus

punitive damages would be warranted against them. See

Pet. App. 75a-82a (discussing history of sanctions by the

Financial Industry Regulatory Authority and other

regulatory agencies). Indeed, the bulk of these

particular references involved other parties and other

events, “violations” that obviously have nothing to do

with proving the underlying merits of any claim in this

case.”

b. In any event, Petitioners misread Section 27's

plain terms. On its face, Section 27 is textually limited to

suits brought to enforce liabilities and duties “created by

[the Exchange Act],” not liabilities and duties created by

state law. A suit asserting claims under state law,

invoking state-created rights and remedies, is not a suit

brought to enforce federal law.

This is the most natural reading of the text. A state

lawsuit is by definition brought to enforce a liability

“created” under state law; the liability would not exist

but for the state’s decision to create the cause of action,

and any “liability” is authorized by the state itself, not

federal law. When a court enters judgment on a state law

claim, it is awarding relief based on the “liability and

duty” created by state law. If the state repealed those

rights and remedies, the action would fail—even if the

same rights and remedies were found independently in

the Exchange Act.

Nor does it matter if state law is modeled after

federal standards. State regulation is still state

regulation. When a party invokes state law, it is invoking

“any and all other rights and remedies that may exist,”

Le., those of the state, 15 U.S.C. § 78bb(a)(2), and those

rights and remedies are created by the state. The fact

that the state elected to mirror federal law (if that is

“| A fair reading of the complaint, as confirmed by the court of

appeals, confirms that the factual predicate for Petitioners’ theory

simply does not exist. This is a complaint with claims based

exclusively on state law—in every respect. Because the question

presented is not actually presented on these facts, the Court should

consider dismissing the petition as improvidently granted.

what it did) is irrelevant to the source of the rights

invoked in state court. The operative question under

Section 27’s text is which body of law “created” the

liabilities and duties at issue. There is no basis in law or

logic for saying that a right created by state law (in

every sense of the word) is actually a right created by

federal law just because one resembles the other.”

Petitioners’ contrary position misunderstands the

nature of state regulation. States, as independent

sovereigns, may prohibit in their own law (and make

actionable in their own courts) whatever conduct they

choose. Congress did not “create” any state laws, and

the SEC did not promulgate any New Jersey

regulations pursuant to the Exchange Act. These are

New Jersey rights created by its legislature, and their

content is dictated by New Jersey law. They survive

independently of any federal law or regulations.

Indeed, Congress expressly preserved the States’

independent regulation in this area, 15 U.S.C.

§ 78bb(a)(2), including the power to authorize additional

rights and remedies. If Congress wanted those rights

and remedies adjudicated exclusively in federal court, it

would have said so. It instead limited Section 27's

jurisdictional provision to liabilities and duties created

by the Act—at the same time it explicitly contemplated

# If Federal Law A bars Misconduct X, and New Jersey Law A

bars Misconduct X, then only claims relying on the former can be

said to have brought to enforce duties “created by” Federal Law A.

For example, if New York also enacted laws that barred Misconduct

X, a New Jersey suit entirely invoking New Jersey law seeking to

remedy Misconduct X could not be said to be enforcing duties

created by New York law, even though New York law would be

consonant with the result.

additional rights not created by the Act. Petitioners’

theory is simply incompatible with the statutory text.

ec. For the same reasons, certain amici are also

wrong that Petitioners can dodge Section 27’s textual

requirements by focusing on the source of the claim:

“(njeither prong of Section 27 turns on whether the

Exchange Act itself creates the claim that is being

asserted, and thus it is irrelevant whether the asserted

claims purport to arise under state law.” NASDAQ et al.

Br. 7 (emphasis in original).

Section 27 expressly requires the suit to enforce a

duty or liability “created by [the Exchange Act].” A suit

to enforce liabilities or duties under state law is not a

suit to enforce liabilities or duties created by the Act—

and that holds true even if the state’s substantive law

tracks some federal standards.

Again, the content of a state’s substantive law is

reserved to the state’s political branches. States may

decide to mirror federal law or deviate from federal law,

just as New Jersey is alleged to depart from federal law

here. A suit enforcing those policy determinations is one

enforcing a state rule or regulation, not a federal rule or

regulation. So even if the Exchange Act need not “create

the claim that is being asserted,” the claim still must be

brought to enforce the Exchange Act’s provisions—not

state law standards that voluntarily (and unremarkably)

overlap (or are entirely coterminous) with federal law.

3. This Court has already construed this language

to mean exactly what it says. In Matsushita Electric

Industrial Co. v. Epstein, 516 U.S. 367 (1996), the Court

confronted a state law claim alleging corporate waste by

“exposing the corporation to liability under the

[Exchange Act],” and the Court still held that the state

court retained jurisdiction: it made no difference that

“the plaintiff class premised one of its claims of fiduciary

breach” on a federal allegation because “the cause

pleaded was nonetheless a state common-law action for

breach of fiduciary duty.” /d. at 382 n.7. The Court thus

specifically held that “(t]he Delaware court asserted

judicial power over a complaint asserting purely state-

law causes of action,” and thus “the Delaware action was

not ‘brought to enforce’ any rights or obligations under

the Act.” Jd. at 381-82.

Petitioners’ reading of Section 27 is impossible to

square with Matsushita. A suit seeking relief on state-

created “rights or obligations” is not seeking to enforce

any “rights or obligations” under the Act, even if aspects

of the claim are premised on federal law. It is still the

state, not the federal government, that elected to make

federal law relevant, and it is still a state-created

“liability or duty” that will be the ultimate source of any

judgment.

Petitioners attempt to brush aside Matsushita as

holding only that state courts can review and approve

proposed settlements of federal claims. Pet. Br. 24.

Matsushita indeed did hold exactly that, but it was not

all that Matsushita held. See 516 U.S. at 380-86, 389 n.7.

The predicate question was whether the state court was

properly exercising jurisdiction in the first place. Jd. at

375. Were it the rule that any incorporation of federal

law into a state-created right defeated state jurisdiction,

Matsushita would have come out exactly the other way.

Petitioners’ view is directly at odds with Matsushita’s

holding and its plain-text reading of Section 27's

unambiguous language. Petitioners are thus right that

“(jjurisdiction is not always so simple, but that is no

reason to complicate things when it is.” Pet. Br. 2. Both

Section 27 and Matsushita mean what they say, and

Petitioners lose for exactly those reasons.

B. Petitioners’ Reading of Section 27 Is

Irreconcilable With Identical Language in the

Securities Act.

At best, the meaning of Section 27 in this context is

ambiguous, requiring an examination of the Act’s

“broader structure”:

[W]e must turn to the broader structure of the

Act to determine the meaning of [the provision].

“A provision that may seem ambiguous in

isolation is often clarified by the remainder of the

statutory scheme . . . because only one of the

permissible meanings produces a substantive

effect that is compatible with the rest of the

law.” United Sav. Assn. of Tex. v. Timbers of

Inwood Forest Associates, Ltd., 484 U.S. 365,

371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988).

King v. Burwell, 135 S. Ct. 2480, 2492 (2015) (quoting

United Sav. Assn. of Tex. v. Timbers of Inwood Forest

Associates, Ltd, 484 U.S. 365, 371 (1988)). But

Petitioners urge this Court to do precisely the opposite:

to read an ambiguous provision in a way that would

render a related provision absurd.

The Securities Act uses the terms “created by” and

“arising under” to refer to the same universe of claims.

Although certain amendments have altered the statute’s

functional reach, the law authorizes federal jurisdiction

over certain claims while simultaneously prohibiting

removal of those same claims:

The district courts of the United States .. . shall

have jurisdiction . . . with respect to .. . all suits

in equity and actions at law brought to enforce

any liability or duty created by this

subchapter. ... | Yet] no case arising under this

subchapter and brought in any State court of

competent jurisdiction shall be removed to any

court of the United States.

15 U.S.C.A. § 77v. This provision, admittedly, is one

designed to preserve concurrent jurisdiction. But the

way the provision uses “created by” and “arising under”

to preserve concurrent jurisdiction is telling. For this

provision to make sense, Congress must have considered

the set of suits enforcing duties “created by” the

Securities Act to be no more expansive than the set of

suits “arising under” the Securities Act.

This provision alone shows the impossibility of

Petitioners’ reading of Section 27. Petitioners have

argued that “created by” has a broader jurisdictional

reach than “arising under,” with “created by” reaching

state law claims that might possibly turn on federal law,

and “arising under” only reaching claims that, among

other things, necessarily turn on federal law. If

Petitioners are right about the meaning of “created by,”

then here is how the above provision reads:

The district courts of the United States . . . shall

have jurisdiction . . . with respect to. . . all suits

that might turn on federal law.... [Yet] no

case that necessarily turns on federal law

brought in any State court of competent

jurisdiction shall be removed to any court of the

United States.

That Congress would want to bar removal with respect

to claims that actually turned on federa! law but permit

removal for claims that might turn on federal law is,

respectfully, absurd.

C. Petitioners’ Reading of Section 27 Is

Irreconcilable With This Court’s Long-

standing Interpretation of the Precise

Statutory Phrase at Issue.

Petitioners cannot square their novel and sweeping

view of Section 27’s language with this Court’s

consistent interpretation of exactly the same language in

Section 27 itself and analogous statutes.

1. For decades, this Court has described Section 27

as a traditional “arising under” jurisdictional grant. See,

e.g., Radzanower v. Touche Ross & Co., 426 U.S. 148, 159

(1976) (Stevens, J., dissenting) (Section 27 addresses

cases “arising under” the Exchange Act); Will v. Calvert

Fire Ins. Co., 4837 U.S. 655, 670 (1978) (Brennan, J.,

dissenting) (“Section 27 of the 1934 Act .. . gives the

federal courts exclusive jurisdiction over claims arising

under the Act.”) (emphasis omitted).

While the Court has often invoked those

characterizations in passing, they still underscore a

fundamental point: Section 27’s plain text is most

naturally read—as one does in passing—-to mean exactly

what this Court has repeatedly said: it applies to cases

arising under the Act. Petitioners’ contrary view

requires a_ startling departure from longstanding

practice. If Section 27 were most naturally read to mean

what Petitioners contend, the Court would likely have

noticed something amiss in its past cases; there is no

reason to believe that Congress would have legislated

such a novel change in such a subtle fashion.”

*% Petitioners, both at the petition stage and in their merits

brief, repeatedly cite dicta from prior decisions of this Court for the

proposition that Section 27 of the Exchange Act confers jurisdiction.

Oddly, however, they fail to acknowledge that the very same dicta

In any event, not all of the Court’s past language on

this point has been in passing. Indeed, as noted above,

Matsushita confronted this question and read Section 27

exactly the way Respondents do. Jurisdiction is simply

not triggered when a party brings suit to enforce state

law liabilities and duties created by state law claims—

even if aspects of those claims turn on federal law:

While § 27 prohibits state courts from

adjudicating claims arising under the Exchange

Act, it does not prohibit state courts from

approving the release of Exchange Act claims in

the settlement of suits over which they have

properly exercised jurisdiction, ie., suits arising

under state law or under federal law for which

there is concurrent jurisdiction. /n this case, for

example, the Delaware action was not “brought

to enforce” any rights or obligations under the

Act.

516 U.S. at 381-82 (emphasis added). And the Court

reached this conclusion despite acknowledging,

explicitly, that the class plaintiffs “alleg[ed]” that the

defendant violated state law by “exposing the

corporation to liability under [the Exchange Act].” /d. at

382 n.7. If Petitioners were correct, it is hard to

understand how that “state common-law action for

breach of fiduciary duty” was “not ‘brought to enforce’

rights or obligations under the Act.” Jd. at 381, 82 n.7.

makes clear that the jurisdiction conferred by Section 27 is no

broader than the familiar “arising under” language of Section 1331.

And they further fail to acknowledge the critical passages, noted

above, where the Court again squarely confronted the issue in a

context where its language mattered. Petitioners have no obvious

answer for the Court’s deliberate choice of words in this setting.

2. This Court has also had an opportunity to

consider the meaning of “created by” language nearly

identical to that in Section 27 in a different substantive

setting. In Pan American Petroleum Corporation v.

Superior Court of Delaware for New Castle County, 366

U.S. 656 (1961), this Court considered the meaning of

the Natural Gas Act (NGA)’s jurisdictional provision.

The relevant NGA provision provided that federal courts

“shall have exclusive jurisdiction of violations of [the

NGA] or the rules, regulations, and orders thereunder,

and of all... actions at law brought to enforce any

liability or duty created” by the NGA. /d. at 662. This

Court concluded that, based on both’ general

jurisdictional principles and the legislative history of the

act, the meaning of “brought to enforce any liability or

duty created” was no broader than the meaning of

“arising under” in 28 U.S.C. § 1331. Jd. at 665 n.2.

According to Petitioners, however, Pan American

was all about the well-pleaded complaint rule; it did not

purport to equate 28 U.S.C. § 1331 and the NGA. It

simply held that a federal issue arising as a defense

could not satisfy the terms of the NGA’s “exclusive”

jurisdiction provision.

Petitioners, again, are hAalf-right. But their view

simply refuses to acknowledge the Court’s critical

footnote, which presumably meant (again) exactly what

the Court said: the “exclusive” jurisdiction language was

coterminous with the traditional “arising under”

standard, and there was no reason to think Congress

intended to depart from that settled standard. /d.

Petitioners’ only effort to acknowledge this

declaration is brushing aside the Court’s direct

statement as rooted exclusively in legislative history.

Pet. Br. 38-39. To be sure, that legislative history—a

single snippet reproduced in the opinion—presumably

did bolster the Court’s conclusion, but the Court’s

predominant consideration was the same one that

applies here: Congress legislates against the backdrop of

traditional jurisdictional principles, and it presumably

intends to invoke those traditional principles unless it

affirmatively says otherwise. As in Pan American,

Congress did not say otherwise here.

Petitioners accordingly err in attempting to shoehorn

this discussion into the well-pleaded complaint rule.

Their position is out of step with Pan American, and

they offer no compelling basis for construing the

identical language in each Act to mean two very

different things. Their argument should be rejected.

D. Petitioners’ Reading of Section 27 Does Not

Advance the “Purposes” of the Exchange Act.

According to Petitioners, “uniformity” was the

driving concern underlying Section 78aa. Pet. Br. 24. It

was essential, Petitioners tell us, to preserve federal

control over all features of the Exchange Act: only

expert federal judges could construe and apply its

provisions in a uniform, fair, and predictable manner. /d.

at 25-27. This policy concern, Petitioners argue,

warrants construing Section 27 to its ower limit: “[s]tate

courts, of course, are considered competent to decide

most questions of federal law,” but here “Congress has

concluded that state courts are not well-equipped to

conduct the careful application of the sensitive federal

interests.” /d. at 27. Thus, according to Petitioners, any

reading that permits state courts to resolve federal

questions undermines the statutory purpose. See, e.g.,

id. at 25 n.8.

Petitioners are mistaken. It is assuredly true that

Congress was concerned about preserving some degree

of federal uniformity. But “no legislation pursues its

purposes at all costs.” Rodriquez v. United States, 480

U.S. 522, 525-26 (1987) (per curiam). Petitioners cannot

simply invoke “uniformity” and assume that anything

promoting that value to its outer bounds is automatically

correct. “{I]t frustrates rather than effectuates

legislative intent simplistically to assume that whatever

furthers the statute’s primary objective must be the

law.” Id. at 526; see also Norfolk S. Ry. Co. v. Sorrell, 549

U.S. 158, 171 (2007).

The right question is not whether Congress felt that

federal courts should retain more control than usual, but

whether Congress indicated an obvious intent to

advance that interest to the exclusion of everything else.

Congress expressed no such intention here. Petitioners’

novel theory would frustrate the careful balance

Congress struck between federal and state authority,

and Petitioners’ reading of Section 27 is unnecessary to

promote uniformity in this area. Their argument should

be rejected.”

1. Petitioners’ sweeping theory is at odds with

Congress’s scheme. Congress intended to preserve

concurrent roles for state law and state courts in

regulating securities, and Petitioners cannot seriously

suggest otherwise. By its plain language, Section 27

directly contemplates that States will retain their

traditional role in securities regulation, authorizing

* The United States’ failure to support Petitioners in this case

speaks volumes about whether or not it believes claims like those

made by Respondents threaten the uniformity or efficacy of federal

securities regulation.

independent “rights and remedies” in addition to those

found in the Act. 15 U.S.C. § 78bb(a)(2). If Congress felt

that the states’ participation threatened the “uniform”

enforcement of the federal securities laws, it would not

have expressly permitted those laws to coexist with the

federal scheme.

It makes little sense to suggest that Congress

permitted states to pass laws in this area, but refused to

permit states to enforce those laws in their own courts

whenever the subject matter overlaps too closely with

federal regulation. Matsushita, 516 U.S. at 383

(“Congress plainly contemplated the possibility of dual

litigation in state and federal courts relating to securities

transactions.”) (citing 15 U.S.C. § 7T8bb(a)).

Nor are Petitioners correct that Congress refused

state courts any role in resolving federal issues under

the Exchange Act. Congress indisputably accepted that

some federal issues—even pure federal issues—would

remain in state court. Under the well-pleaded complaint

rule, for example, all federal defenses will be resolved in

state actions, even those requiring courts to construe

and apply federal law. One cannot determine the scope of

federal conflict preemption, for example, without

construing and applying federal law—even though that

leaves state court judges to “say definitively what the

Exchange Act means and enforce legal liabilities and

duties thereunder.” Pet. Br. 24 (quoting Matsushita, 516

U.S. at 383). And Congress was surely aware that

federal counter-clarms would remain in state court for

adjudication—a counter-claim is not a “suit” even if it

“enforces” federal issues.

If Congress wanted to avoid this result, it assuredly

knew how to: it could have adopted language more like

SLUSA, which provides an easy model for removing all

matters involving federal securities to federal court. See,

e.g., Merrill Lynch, Pierce, Fenner & Smith Inc. v

Dabit, 547 U.S. 71, 74, 82-83 (2006) (permitting removal

and dismissal of all class claims alleging wrongdoing “in

connection with” a covered security).

Instead, however, Congress carefully limited Section

27's “exclusive” jurisdiction to those suits particularly

enforcing rights “created by” the Act itself. This may

leave open the possibility of state courts adjudicating

federal questions, but it also respects the natural

balance that Congress struck between the state and

federal systems. Just as in other common settings,

Congress has refused to strip away all state jurisdiction

in order to achieve perfect uniformity.

2. In any event, Petitioners’ theory is unnecessary

to accomplish Congress’s objectives. Petitioners first

overstate the problem: by ushering all true federal

claims to federal court, Congress ensures that the

federal judiciary will develop a sufficient body of law on

these questions that can inform state judges when they

happen to encounter federal issues. That promotes

“uniformity” without disturbing the proper role

Congress preserved for state courts.

And Pan American itself squarely refutes

Petitioners’ view that any state court adjudication is too

much state court adjudication. See 366 U.S. at 665

(rejecting contention that “permit{ting] the state courts

to entertain the [state-law] suits . . . will jeopardize the

uniform system of regulation that Congress established

through the Natural Gas Act”). As this Court explained,

it can always ensure uniformity by reviewing cases from

state courts that decide any important federal question.

Id. at 665-66. If the Court felt that its supervisory role

accommodated “uniformity” concerns under the Natural

Gas Act, it is unclear why Petitioners believe this Court's

supervisory role is inadequate to accommodate the same

concerns under the Exchange Act.

. + >

It is worth pausing to consider what Petitioners ask

this Court to do. Petitioners ask this Court to presume

that Congress was so concerned about “uniformity” that

it was willing to forbid state court jurisdiction not only

over federal claims, but also over any state law claim

that just might possibly turn on federal law. Any

directive forbidding state courts from determining

federal claims is already unusual. But it is simply

extraordinary to presume that Congress, without saying

so directly, intended to intrude on the states’ power in

their own courts to review claims created by their own

legislature, despite possibly never implicating a single

federal issue. If that were truly Congress’s intent, one

would expect to find language far clearer than this.

In the end, Petitioners cannot use a general sense of

legislative purpose to rewrite the actual text. See, e.g.,

Norfolk S. Ry. Co. v. Sorrell, 549 U.S. 158, 171 (2007)

(“the statute’s remedial purpose cannot compensate for

the lack of a statutory basis”). And in any event,

Petitioners’ general sense of legislative purpose is

wrong. Congress wrote a measured jurisdictional statute

that respects traditional jurisdictional principles and

preserves the states’ traditional role in this area—all

while increasing uniformity by ushering the vast

majority of federal issues to federal courts (in exactly

the same fashion, with exactly the same exceptions, that

Congress embraced in parallel contexts). The fact that

Congress authorized “exclusive” jurisdiction—even to

promote uniformity—does not mean that Congress

stripped away state jurisdiction over common state-law

claims simply to avoid the possibility of any federal issue

being resolved in a state tribunal. Cf Gunn v. Minton,

133 S. Ct. 1059 (2013).

II. Petitioners’ “Federal Possibility” Rule Is a

Radical and Unwise Departure from One of the

Most Enduring Principles of Federal Jurisdiction.

According to Petitioners, Congress intended Section

27 to confer jurisdiction over any cause of action that

might rely on a violation of the Exchange Act. As

Petitioner puts it:

To be clear, nothing in § 27's language states or

suggests that jurisdiction attaches only if the

Regulation SHO violations and duties alleged in

the complaint are necessary elements of

respondents’ claims. The language instead

provides that when a violation or duty of the Act

or its regulations is asserted, a federal court is

the only court that can decide whether the alleged

violation occurred or the duty was breached. It is

accordingly irrelevant that other grounds also

may provide a basis for liability—§ 27’s text bars

a state court from even considering whether the

asserted violation occurred or the asserted duty

was breached, because those matters are subject

to the exclusive jurisdiction of the federal court.

The presence of those allegations in a state-court

complaint justifies removal, even if the complaint

also asserts other possible bases for liability.

Pet. Br. at 22 (emphasis in original).

As Petitioners would have it, the mere possibility of a

federal issue is enough for jurisdiction. As explained

below, Petitioners’ view is radical, unwise, and contrary

to this Court’s sensible jurisdictional modesty. Indeed,

just two years after the passage of the Exchange Act, no

less a jurist than Justice Cardozo rejected the kind of

“federal possibility jurisdiction” put forth by Petitioners.

See Gully v. First National Bank, 299 U.S. 109, 117, 118

(1936) (“[A] dispute so doubtful and conjectural” is not

sufficient to divest a state court of jurisdiction; “(t]he

most one can say is that a question of federal law is

lurking in the background.”) (emphasis added).

Also telling is that, although Section 27 has been law

for over eight decades, absent from Petitioners’ brief is

even a single citation to a judicial decision that has

adopted Petitioners’ position. If Congress had intended

for federal possibility jurisdiction, it seems unlikely that

this particular innovation would have escaped notice for

81 years. More likely is that Petitioners are alone in

their error. It should remain that way.

A. It Is a Bedrock Presumption That, Absent

Complete Preemption, There Is No Federal

Jurisdiction Over State Law Claims Unless

They Necessarily Raise a Federal Issue.

Petitioners’ view is a monumental departure from the

traditional rules of federal jurisdiction. It is a bedrock

presumption that state-law claims must (at a minimum)

necessarily raise a federal issue to create jurisdiction:

“{A] right or immunity created by the Constitution or

laws of the United States must be an element, and an

essential one, of the plaintiff's cause of action.”

Franchise Tax Bd. of Cal. v. Construction Laborers

Vacation Trust for S. Cal, 463 U.S. 1, 10-11 (1983)

(quoting Gully v. First Natl Bank in Meridian, 299

U.S. 109, 112 (1936)) (emphasis added).

Petitioners concede, as they must, that none of

Respondents’ claims necessarily turns on federal! law.

But, according to Petitioners, that is irrelevant because

“nothing in §27’s language states or suggests that

jurisdiction attaches only if the Regulation SHO

violations and duties alleged in the complaint are

necessary elements of respondents’ claims.” Pet. Br. 22.

This is twice wrong. First, it flips the relevant

standard on its head. The presumption is that traditional

jurisdictional principles apply, not the other way around.

The question is thus not whether “§ 27’s language states

or suggests” that the traditional rules apply, but whether

Petitioners have identified any reason to think

otherwise. See, e.g., Pan American, 366 U.S. at 665 n.2

(refusing to set aside traditional limits on jurisdiction

simply because the Natural Gas Act did not explicitly

invoke those traditional “limitations”). Petitioners have

wholly failed in that regard.

Second, in any event, Petitioners again misread

Section 27’s text. The traditional rule recognizes that

suits do not truly arise under federa] law—or enforce

any rights under federal law—when they assert

independent state-law theories sufficient to resolve the

dispute. Any claim that does not have an essential

federal ingredient is not necessarily brought to enforce

federal law. It is possibly brought to enforce federal law,

and there is no such thing as “federal possibility”

jurisdiction. The fairest reading of Section 27 is that

claims are “brought” to enforce a duty when they

necessarily present the question.

This Court has taken pains to be clear about what it

means by “necessary.” The jurisdiction triggering issue

must be unavoidable; alternate theories that could

invoke the issue are an insufficient basis for jurisdiction.

Cf Christianson v. Colt Indus. Operating Corp., 486

U.S. 800, 809-10 (1988) (“{A] claim supported by

alternative theories in the complaint may not form the

basis for § 1338(a) jurisdiction unless patent law is

essential to each of those theories.”). In Christianson,

after examining both patent law and _ generally

applicable principles of jurisdiction, the Court declared

that jurisdiction turns on “claims, not theories.” Jd. at

811.

A Congressional provision of exclusive jurisdiction is

not a_ sufficient reason to relax the _ necessity

requirement. Even in that context, this Court has

insisted that only state-law claims that, inter alia,

“necessarily raise a stated federal issue” can be heard in

federal court. Gunn v. Minton, 133 S. Ct. 1059, 1065

(2013) (quoting Grable & Sons Metal Products, Inc. v.

Darue Engineering & Mfg., 545 U.S. 308, 314 (2005)).

B. The Federal Necessity Presumption Is Easily

Administrable and Strikes the Appropriate

Balance Between Federal and State Interests.

1. Making jurisdiction dependent on the federal

issue being a necessary one is a condition consonant with

this Court’s institutional reluctance to expand federal

jurisdiction absent pellucid Congressional command.

The requirement that the federal issue be essential to

the state claim avoids unnecessarily divesting state

courts of authority. (whether systematically if federal

jurisdiction is exclusive, or in only certain cases via

removal if federal jurisdiction is concurrent) over state

law disputes, and federalism presumptively respects a

state’s prerogative to enact laws that promote the

welfare of its citizens and to resolve disputes over those

laws, without federal interference.

Indeed, absent that solicitude, the well-pleaded

complaint rule would make little sense. That long-settled

rule denies general federal question jurisdiction, as well

as other more specific types of federal question

jurisdiction, to any case that does not present a federal

issue on the face of the well-pleaded complaint, even if a

federal issue is certain to appear as a defense or in a

counterclaim. Holmes Group, Inc. v. Vornado Air

Circulation Systems, Inc., 535 U.S. 826, 831-32 (2002);

Franchise Tax Bd. v. Constr. Laborers Vacation Trust,

463 U.S. 1, 9-10 (1983), superseded by 28 U.S.C.

§ 1441(e); Louisville & Nashville R.R. Co. v. Mottley,

211 U.S. 149 (1908).

The well-pleaded complaint rule thus guarantees

that issues of federal law raised in defenses and

counterclaims are routinely decided by state courts in

the context of state law claims. That has not troubled

this Court, even in areas of exclusive federal jurisdiction

where the Congressional interest in uniformity is

heightened. See, e.g., Holmes Group, 535 U.S. at 831-32

(rejecting federal jurisdiction in cases involving a patent-

law counterclaim); Cf 13D Charles A. Wright & Arthur

R. Miller, Federal Practice and Procedure: Jurisdiction

§ 3584 (3d ed. 2002) (explaining that “an affirmative

defense based upon federal law, including the Exchange

Act, may be adjudicated by a state court”). State law

decisions on federal law are not binding outside the

State, and even within the State, the appellate process

(aided by SEC intervention where appropriate) is likely

to correct an erroneous reading of federal law. Should

that fail, review by this Court can address the problem.

2. Petitioners fail to acknowledge a very real harm

of their “federal possibility” rule: it guarantees state

courts will be divested of jurisdiction in cases in which no

actual federal issue is ultimately reached. Litigants (or

aggressive judges) would only need identify a potential

federal issue relevant to the claims asserted to unlock

the doors of federal court; whether that issue was ever

reached (or even likely to be reached) would not matter.

If possibility rather than necessity is sufficient to trigger

jurisdiction, federal courts would routinely decide purely

state-law claims. Necessity imposes a meaningful limit

on the divestment of state court jurisdiction; possibility

does not.”

3. Nor is Petitioners’ rule practical. Necessity as a

jurisdictional minimum makes sense because it is

workable. When federal necessity is the test, a judge

reading a state law complaint need only confirm a

proffered state law theory could legitimately vindicate

the state law claims; if so, states retain jurisdiction. In

contrast, under Petitioners’ approach, judges would be

obligated to examine the factual allegations of all

complaints to determine whether those allegations

corresponded to an Exchange Act violation that would

aid the prosecution of a state law claim; only after such a

searching review, and a rejection of that possibility, could

the case proceed in state court. Petitioners will

presumably protest that, here, Respondents mentioned

Regulation SHO in the complaint, and therefore their

test is easy to apply. But rules transcend cases. As a

hypothetical plaintiff would not need to name the Act to

plead facts that would (1) constitute a violation or breach

of duty under the Act and (2) therefore might serve as a

potential ingredient in a plaintiff’s state law claim,

* And given that state courts, under the well-pleaded complaint

rule, already decide Exchange Act claims or issues that arise in the

context of counterclaims or defenses, the incremental benefit of a

“federal possibility” rule—limiting state courts from weighing in on

federal questions embedded in state law claims—seems modest.

Petitioners’ rationale would reach, and _ require

examination of, unlabeled factual allegations.

4. Ultimately, Petitioners know that under

traditional jurisdictional principles and assumptions—

that state-law claims should not be heard in federal

court absent a necessary federal ingredient; that states

are presumed competent arbiters of federal law; and

that conflict preemption can protect federal substantive

interests—Petitioners lose (as they did below). They

therefore must insist here that such principles, and

jurisdictional restraint generally, are specific to Section

1331 and play no meaningful role in Section 27. Pet. Br.

34-35 (arguing that this Court’s narrow interpretation of

“arising under” is attributable to policy reasons specific

to Section 1331).

Petitioners credit the rooster for the sunrise.

Professions of jurisdictional caution draw vitality from

this Court’s commitment to federalism, not something

peculiar about Section 1331. Section 1331 is admittedly

the context in which this Court most frequently has the

opportunity to express restraint, but a reluctance to

interfere with state laws and tribunals does not vanish

merely because Section 1331 is not at issue. Cf Gunn v.

Minton, 133 S. Ct. 1059, 1064 (2013) (holding that

28 U.S.C. § 1338 cannot reach state law claims that fail

to “necessarily raise a stated federal issue”); Holmes

Group, Inc. v. Vornado Air Circulation Sys., Inc., 535

U.S. 826 (2002), superseded by 28 U.S.C. § 1295(a)(1)

(applying well-pleaded complaint rule to patent claims);

Matsushita Electric Industrial Co., Ltd. v. Epstein, 516

U.S. 367 (1996) (explaining that a state law derivative

claim that might turn on an Exchange Act violation is

still properly before a state court); Christianson v. Colt

Indus. Operating Corp., 486 U.S. 800, 809-10 (1988)

(denying Section 1338 jurisdiction unless patent law is

essential to each theory of a claim); Shamrock Oil & Gas

Corp. v. Sheets, 313 U.S. 100, 109 (1941) (articulating, in

a diversity setting, this Court’s “|d]ue regard for the

rightful independence of _ state governments”);

Strawbridge v. Curtiss, 7 U.S. 267 (1806) (adopting

complete diversity rule). Honest federalism requires

jurisdictional restraint, across contexts, and that is a

truth this Court has never failed to recognize.

Given the above, one would therefore expect

unmistakable language from Congress were it to invent

a heretofore unprecedented “federal possibility”

jurisdictional paradigm that would throw open federal

court to anyone capable of identifying, from the vast

universe of federal regulations promulgated under the

Act, a single regulation potentially at issue.” To the

contrary, all the relevant contextual evidence is that

Congress meant nothing of the sort. If Congress

intended so stinging a rebuke to state courts as

Petitioners’ federal possibility jurisdiction, it would have

done so plainly.

** Congressional desire for uniformity cannot be enough, as the

Court has not jettisoned traditional jurisdictional principles in those

settings. See, e.g., Gunn vu Minton, 133 S. Ct. 1059 (2013); Holmes

Group, Inc. v Vornado Air Circulation Systems, Inc., 535 U.S. 826

(2002); Christianson v. Colt Indus. Operating Corp., 486 U.S. 800

(1988).

CONCLUSION

For the reasons set forth above, the judgment of the

Third Circuit should be affirmed.

RADHA A. PATHAK

Whittier Law School

3333 Harbor Blvd.

Costa Mesa, CA 90026

SHAUN P MARTIN

University of San Diego

School of Law

5998 Alcala Park

San Diego, CA 92110

NEAL H. FLASTER

Law Offices of

Neal H. Flaster, LLC

30A Vreeland Rd.,

Ste. 230

Florham Park, NJ 07932

Respectfully submitted,

PETER K. STRIS

BRENDAN S. MAHER

Counsel of Record

DANIEL L. GEYSER

DANA BERKOWITZ

VICTOR O’CONNELL

MICHAEL N. JONES

Stris & Maher LLP

725 S. Figueroa St., Ste. 1830

Los Angeles, CA 90017

(213) 995-6800

brendan. maher@strismaher.com

JOHN A. SCHEPISI

GREGORY M. DEXTER

Schepisi & McLaughlin, PA.

473 Sylvan Avenue

Englewood Cliffs, N.J 07632

Counsel for Respondents

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