42 F.4th 619
7th Cir.2022Background
- Plaintiffs (traders) alleged that unidentified "Doe" traders manipulated the VIX on settlement days by trading thinly traded options, and that Cboe knew or should have known the VIX-design and failed to prevent manipulation.
- VIX is an index Cboe computed from option prices; Cboe expanded inputs in 2003 and later listed VIX futures (2004) and options (2006), which plaintiffs say increased manipulation risk.
- Plaintiffs sued Cboe under §10(b)/Rule 10b‑5 (securities fraud) and under the Commodity Exchange Act (CEA) §25 for failing to enforce rules against trading manipulable contracts; they relied in part on academic evidence of suspicious trading patterns.
- The district court dismissed the amended complaint with prejudice; plaintiffs appealed; the Doe defendants remain unidentified and separate claims against them are not before the court.
- The court held plaintiffs failed to plead the necessary scienter for a securities fraud claim and failed to plead "bad faith" (required by CEA §25(b)(4)) to sustain a private enforcement claim against a contract market. The judgment was affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs pleaded scienter for a §10(b)/Rule 10b‑5 claim | Cboe should have known expansion of inputs made VIX susceptible; Cboe profited and its enforcement was inadequate, so intent can be inferred | Plaintiffs allege at most negligence; market growth and Cboe enforcement make intent implausible; Tellabs requires strong showing of intent | Dismissed — scienter inadequately pleaded under Tellabs; securities aiding‑and‑abetting unavailable against Cboe (no primary violation by Cboe) |
| Whether plaintiffs may assert secondary/aiding‑and‑abetting liability under securities law | Cboe’s omission allowed manipulators to profit at traders’ expense | Aiding‑and‑abetting claims against non‑wrongdoing intermediaries are barred (Central Bank, Stoneridge) | Dismissed — plaintiffs’ theory amounts to forbidden secondary‑liability pleading |
| Proper meaning of "bad faith" in CEA §25(b)(4) (standard for private suit against contract market) | Bosco suggests "bad faith" equals negligence; plaintiffs primarily advance negligence theory | "Bad faith" ordinarily means more than negligence; statute and legislative history limit liability to more culpable conduct | Court rejects Bosco dictum equating negligence with bad faith; adopts ordinary/Second Circuit approach requiring knowledge/ulterior motive |
| Whether plaintiffs pleaded bad faith and causation under §25(b) | Plaintiffs say Cboe "should have known" and failed to act; reliance on suspicious‑trade studies suffices | §25(b) requires bad faith (not mere negligence) and causation connecting specific transactions to enforcement failure | Dismissed — plaintiffs alleged negligence, not the requisite bad faith or identified transactions showing causation; remedies lie with regulators, not private suit |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (pleading scienter in securities fraud requires that inference of intent be at least as compelling as any opposing inference)
- Stoneridge Inv. Partners, LLC v. Scientific‑Atlanta, Inc., 552 U.S. 148 (2008) (private securities suits cannot be based on aiding‑and‑abetting theory against non‑wrongdoing defendants)
- Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) (private aiding‑and‑abetting liability in securities cases is barred)
- Bosco v. Serhant, 836 F.2d 271 (7th Cir. 1987) (discussed but treated as dictum regarding §25(b)(4); court declines to follow Bosco’s negligence reading of "bad faith")
- Sam Wong & Son, Inc. v. New York Mercantile Exchange, 735 F.2d 653 (2d Cir. 1984) (interprets §25(b)(4) "bad faith" to require knowledge and an ulterior motive or dominant improper purpose)
- Ryder Energy Distribution Corp. v. Merrill Lynch Commodities Inc., 748 F.2d 774 (2d Cir. 1984) (supports Sam Wong’s formulation that bad faith requires knowledge plus ulterior motive)
- Heckler v. Chaney, 470 U.S. 821 (1985) (agencies have prosecutorial discretion and are generally immune from suit over non‑enforcement decisions)
- Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353 (1982) (addressed implied private rights under the CEA; §25 was enacted to limit judicially created remedies)
- Damato v. Hermanson, 153 F.3d 464 (7th Cir. 1998) (discusses aiding‑and‑abetting and secondary‑liability concepts in securities context)