Narrative Opinion Summary
In this case, a corporation and its shareholders brought a lawsuit against several registered clearing agencies, alleging that their facilitation of naked short selling under Nevada state law led to a depreciation in the corporation's stock value. The district court dismissed the claims, citing preemption by federal securities law. On appeal, the Ninth Circuit affirmed the lower court's decision, ruling that while the claims were not preempted by field preemption, they were preempted by conflict preemption under the Securities Exchange Act of 1934. The appellate court found that the statutory framework, particularly Section 17A, aims to establish a uniform national system for securities clearance and settlement, which would be disrupted by state-law claims. The court highlighted that the Stock Borrow Program, part of the regulatory framework approved by the Securities and Exchange Commission, was central to this case. Challenges to the operation and characterization of this program were found to conflict with federal objectives, necessitating preemption of state laws. Consequently, the appellate court upheld the dismissal of all claims, confirming that the federal regulation of securities transactions precludes state interference.
Legal Issues Addressed
Conflict Preemption Analysissubscribe to see similar legal issues
Application: The court found that compliance with both federal and state laws was impossible because Whistler's state-law claims would obstruct the federal objectives of establishing a national system for securities clearance and settlement.
Reasoning: Conflict preemption analysis requires examining if compliance with both federal and state laws is impossible or if state law obstructs federal objectives. The purpose of Section 17A is to facilitate a national system for the clearance and settlement of securities transactions, which includes regulating clearing agencies.
Implied Preemption under Section 17Asubscribe to see similar legal issues
Application: The court held that Section 17A of the Exchange Act, which regulates clearing agencies, implicitly preempts state laws that conflict with the SEC-approved rules, as such laws interfere with the federal regulatory objectives.
Reasoning: Whistler's complaint includes twenty-two claims, categorized into misrepresentation and non-misrepresentation claims... This challenge is federally preempted due to its conflict with Commission-approved rules.
Preemption under the Securities Exchange Act of 1934subscribe to see similar legal issues
Application: The Ninth Circuit held that Whistler's state-law claims were not preempted by field preemption but were preempted by conflict preemption, as the claims interfered with the federal statutory framework for securities transactions.
Reasoning: The court determined that while the claims were not barred by field preemption, they were indeed barred by conflict preemption because the statutory framework established by the Act aims to create a uniform system for the clearance and settlement of securities transactions.
Role of Clearing Agencies and Stock Borrow Programsubscribe to see similar legal issues
Application: The court upheld that the NSCC's Stock Borrow Program, approved by the SEC, operated within the frameworks of federal securities laws, and any state-law claims challenging its operation were preempted.
Reasoning: Whistler alleges that prolonged fail-to-deliver instances result in an excess of electronic shares compared to the physical certificates held by DTC, thus lowering Whistler stock's value. Whistler claims that this flaw in the Stock Borrow Program constitutes grounds for state law liability against the defendants.