126 F. Supp. 3d 342
S.D.N.Y.2015Background
- After Michael Lewis’s Flash Boys, investors sued stock exchanges (BATS, NYSE, NASDAQ, et al.) and Barclays (operator of dark pool "Barclays LX") alleging schemes that advantaged high-frequency traders (HFTs) and harmed ordinary investors. Several related cases were centralized in an MDL.
- Plaintiffs alleged exchanges provided proprietary data feeds, co-location services, and complex order types (e.g., hide-and-light) that enabled HFTs to trade ahead of others; Barclays allegedly marketed its dark pool as safe while recruiting and favoring HFTs and weakening protective features (e.g., Liquidity Profiling).
- SDNY Plaintiffs asserted federal claims under Section 10(b)/Rule 10b-5 and Section 6(b) of the Exchange Act against exchanges and Barclays. Great Pacific asserted California claims (concealment, FAL, UCL) against Barclays.
- Defendants moved to dismiss under Rules 12(b)(1) and 12(b)(6). Key legal thresholds: Twombly/Iqbal pleading standards; Rule 9(b) for fraud-based claims; Section 10(b) requires primary liability and reliance; Section 6(b) historically lacks a private right post-1975 amendments.
- The Court parsed jurisdiction/exhaustion arguments, addressed SRO absolute-immunity doctrine, and evaluated whether alleged conduct constituted a manipulative act or mere aiding of HFTs.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Subject-matter jurisdiction over Exchange Act claims | Plaintiffs: district court may hear Exchange Act claims; not precluded | Exchanges: claims must go first to SEC; jurisdiction vested in courts of appeals for SEC matters | Court: jurisdiction exists; exhaustion/primary-jurisdiction are merits/threshold issues, not jurisdictional |
| Absolute immunity for SROs (exchanges) | Plaintiffs: some exchange acts (proprietary feeds, co-location, order types) were commercial or non-regulatory, thus not immune | Exchanges: SROs have absolute immunity for actions within quasi‑governmental powers delegated by Exchange Act/SEC | Court: exchanges are immune for creating complex order types and for proprietary data feeds; not immune re: co-location services |
| Section 10(b)/Rule 10b-5 manipulative-scheme claims against exchanges and Barclays | Plaintiffs: exchanges/Barclays enabled/manufactured an unfair market that manipulated prices and harmed investors | Defendants: alleged conduct (selling speed services, feeds, order types, dark-pool features) at most aided HFTs; manipulation requires primary acts that artificially affect price; plaintiffs fail to plead primary manipulative acts and reliance | Court: dismissed Section 10(b) claims — plaintiffs pleaded at most aiding/abetting (not primary liability) and failed to plead manipulative acts or reasonable reliance |
| Section 6(b) private right of action against exchanges | Plaintiffs: statutory duties of exchanges under Section 6(b) provide private remedies | Exchanges: 1975 amendments removed private right; enforcement is SEC-centric | Court: Section 6(b) does not provide a private right post-1975; Section 6(b) claims dismissed |
| Barclays — reliance and presumption arguments (dark pool) | Plaintiffs: relied on Barclays’ representations that its dark pool was safe; seek presumption(s) of reliance (fraud-on-the-market, Affiliated Ute, or a novel market-integrity presumption) | Barclays: no actionable misrepresentations or manipulative acts; reliance presumptions unavailable; plaintiffs primarily allege omissions or background market conditions | Court: no presumption applies; plaintiffs failed to plead actual, reasonable reliance and failed to plead manipulative acts; federal claims against Barclays dismissed |
| Great Pacific California claims (concealment, FAL, UCL) | Great Pacific: Barclays concealed material facts (level of aggressive trading, courting HFTs, Liquidity Profiling limits), causing economic injury | Barclays: statements not shown false/misleading; reliance not plausibly alleged; Tobacco II presumption inapplicable | Court: state-law claims dismissed for failure to plead material misrepresentation/omission and reasonable actual reliance; leave to amend granted to Great Pacific only |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard: distinguish facts from legal conclusions; plausibility required)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard governs dismissal under Rule 12(b)(6))
- Stoneridge Inv. Partners v. Scientific-Atlanta, 552 U.S. 148 (2008) (no private liability for aiding and abetting under Section 10(b); primary violation required)
- Cent. Bank of Denver N.A. v. First Interstate Bank of Denver N.A., 511 U.S. 164 (1994) (no private aiding-and-abetting liability under Section 10(b))
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (elements for manipulative-scheme claim and reliance on efficient-market assumption)
- Fezzani v. Bear, Stearns & Co., Inc., 716 F.3d 18 (2d Cir. 2013) (Section 10(b) manipulation analysis; scienter and primary liability principles)
- DL Capital Group, LLC v. Nasdaq Stock Mkt., Inc., 409 F.3d 93 (2d Cir. 2005) (SRO immunity framework; exhaustion/agency-relationship context)
- In re NYSE Specialists Sec. Litig., 503 F.3d 89 (2d Cir. 2007) (scope of SRO absolute immunity; consider regulatory nature of conduct)
- Santa Fe Indus. v. Green, 430 U.S. 462 (1977) (definition of market manipulation; nondisclosure usually essential to manipulation)
- Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972) (reliance presumption applies to omissions where duty to disclose exists)