Delaware Court Declines To Create Market Manipulation Cause of Action
In RGC International Investors, LDC v. Greka Energy Corp., 2001 Del. Ch. LEXIS 30, 2001 WL 312454 (Del. Ch. Mar. 7, 2001), the Delaware Court of Chancery held that there is no equitable cause of action under Delaware law for market manipulation by means of short selling that decreases the stock price of an issuer's security. The court held that "[t]he judicial invention of such a cause of action would intrude on the authority of appropriate federal and state legislative bodies to regulate the securities markets, and be an exercise in judicial legislation."
The court reasoned as follows:
Short selling is in itself a perfectly respectable trading practice. . . . Therefore, as a practical matter, the decision to evaluate whether RGC's trading practices support an unjust enrichment claim or an unclean hands defense will require the judicial articulation of a new equitable cause of action for market manipulation. The court respectfully refuses Greka's invitation for the court to create an equitable cause of action that would prohibit behavior that is regulated by federal and state securities laws. Short-selling that violates the federal Securities Exchange Act of 1934 may be remedied by an action under § 10(b) of the Act and SEC Rule 10b-5; that is, by an action which is within the exclusive jurisdiction of the federal courts.
An exercise in judicial legislation of this sort would be disrespectful of the pre-eminent role played by the federal government in the regulation of the nation's securities markets. While Delaware courts have recognized equitable causes of action addressing certain activities also regulated by federal law, those causes of action regulate the fiduciary conduct of corporate directors, an area of traditional state concern recognized by the federal government. Outside of that narrow area, the Delaware courts have consistently refused to regulate the securities markets through the judicial recognition of new equitable claims, especially when those claims (as here) would mirror statutory claims falling within the exclusive jurisdiction of the federal courts.
In this case, Greka seeks to have the court recognize the right of an issuer of securities (Old Saba) to assert a so-called "equitable" claim of market manipulation against a holder. Such an equitable claim does not address an area of traditional state regulation. In fact, the creation of such an equitable claim would grant issuers a cause of action that they do not possess under federal law. As things stand, a claim of the nature Greka makes against RGC for alleged market manipulation may only be asserted under federal law by a purchaser or seller of securities.
While Greka contends that the lack of an issuer's cause of action under federal law means that there would be no conflict with federal law were this court to recognize such a cause of action as a matter of state common law, I perceive things much differently. To my mind, the judicial creation of a state law issuer's cause of action in these circumstances would flout the well-reasoned judgment of Congress regarding the appropriate reach of the federal securities laws. It also involves a judicial extension of state law that the General Assembly has not seen fit to take under the State's own statutory securities laws. When such an extension has no relationship to this State's traditional concern with enforcing the fiduciary duties of Delaware directors, by what authority of Delaware law has the right to make such a policy decision been invested in this court? [footnotes omitted].
The court specifically noted that "[h]aving been the recent beneficiary of the so-called 'Delaware carve outs' in the federal Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, § 16(d), 112 Stat. 3227 (1998), it is prudent for this State to be quite cautious about creating new forms of securities regulation by judicial fiat."
The decision was written by Vice Chancellor Leo E. Strine Jr. |
