Ruling Upheld, Letting Out-of-State Investors Sue for Market Manipulation

The Supreme Court on Monday let stand a ruling that expanded the reach of a California law by allowing out-of-state investors to sue in state court for market manipulation.

The high court rejected an appeal by Diamond Multimedia Systems Inc. of San Jose, a maker of computer multimedia products. It argued that the law imposes securities fraud liability on persons who make or disseminate statements in California, and should apply only when the stock transaction takes place within the state’s borders.

The company argued that the law unconstitutionally burdens interstate commerce and was preempted by a federal securities litigation reform law Congress adopted in 1995.

A number of groups, including the Securities Industry Assn., supported Diamond’s appeal.

But the Supreme Court denied the appeal without any comment or dissent.

The law allows for civil lawsuits to be brought by buyers and sellers of stock whose price has been affected by market manipulation.

The California Supreme Court ruled that the law applies to out-of-state purchasers who bought or sold a stock affected by market manipulation, even if the transaction took place outside of California.

The ruling stemmed from a class-action lawsuit against Diamond by investors who bought stock between Oct. 26, 1995, and June 20, 1996.