In a lengthy opinion issued yesterday, Justice Kathleen M. Banke explains naked short selling, describes the mechanics of executing and clearing stock trades, provides a run down on the SEC’s Regulation SHO, and recounts the SEC’s enforcement of Regulation SHO.  Overstock.com v. Goldman Sachs & Co. (Cal. Ct. App. Case No. A135682, Nov. 13, 2014). Along the way she also holds:

• The word “effect” in California’ anti-manipulation statute, Corporations Code Section 25400(b), includes more than the activity of beneficial sellers and buyers and can include execution, clearing and settlement activities by brokerage and clearing firms.

• To qualify as a primary violator a clearing firm must “shed its role as clearing broker” and engage in conduct akin to “directing” the client’s manipulative trading, or “deciding with” the client how to engage in the unlawful trading, or intentionally providing a specialized tool for the client to engage in unlawful trading, or “initiating, instigating, and orchestrating” the client’s unlawful scheme,” or having “intimate” “hands-on involvement” and participating in “key decisions” about the “details” of the client’s unlawful trading, or assuming “direct control of” the client’s “operations and its manipulative scheme.”

• Corporations Code Section 25008 defining when “[a]n offer or sale of a security is made in this state” and when “[a]n offer to buy or a purchase of a security is made in this state” does not address where a series of transactions are “effected” for purposes of Section 25400(b).

• State laws against purposeful market manipulation in no way conflict with the regime of the Securities Exchange Act of 1934, including implementation of Regulation SHO.

Although the Court of Appeal affirmed the dismissal of claims against four of the defendants, it reversed as to Merrill Lynch Professional Clearing Corporation, finding that the evidence, though slight, raised a triable issue of fact as to whether transactions were effected in California.