390 F. Supp. 3d 432
S.D. Ill.2019Background
- Plaintiffs (various investors) sued seven stock exchanges alleging that the exchanges sold services to high-frequency trading (HFT) firms—proprietary direct data feeds, co-location, and complex order types—that enabled manipulative trading harming ordinary investors, and failed to disclose material information about those services.
- The district court originally dismissed all claims (2015) on multiple grounds including quasi-governmental immunity and failure to plead manipulative acts; plaintiffs appealed only the Section 10(b) claims against the exchanges.
- The Second Circuit vacated and remanded, holding exchanges were not absolutely immune and that plaintiffs had plausibly alleged manipulative acts and a primary Section 10(b) violation; it left other defenses for the district court to consider on remand.
- On remand the exchanges moved again to dismiss raising Article III standing, statutory scope of the private cause of action, reliance, loss causation, scienter, particularity, and preclusion by the SEC regulatory regime.
- The district court (Furman, J.) denied the renewed motion to dismiss: it found plaintiffs have Article III standing (following John v. Whole Foods), are entitled to an Affiliated Ute presumption of reliance (omission-based claim), and adequately pled loss causation, scienter under the PSLRA/Tellabs standard, and Rule 9(b) particularity (with relaxed pleading because facts lie largely within defendants’ control). The court declined to resolve preclusion at this stage.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Article III standing (injury-in-fact) | Frequent trading + systemic price distortions make past injury plausible | Plaintiffs plead no specific trades or prices; injury too generalized | Plaintiffs plead plausible likelihood of past injury; standing satisfied (John standard) |
| Scope of private right (who may sue under §10(b)) | Investors who purchased/sold on exchanges are the protected class | Exchanges argue narrower limits might bar suit | Plaintiffs fall within purchaser/seller class; may sue under §10(b) |
| Reliance (actual or presumptive) | Omissions about services justify presumption of reliance (Affiliated Ute) | Affiliated Ute inapplicable to manipulation claims; plaintiffs must plead direct reliance | Court applies Affiliated Ute presumption because claim is omission-based per Second Circuit; reliance presumed at pleading stage |
| Loss causation & proximate cause | Concealed risks from services foreseeably led to trading losses | Exchanges argue intervening HFT conduct breaks causation | Plaintiffs plausibly plead loss causation; exchanges’ conduct within zone of risk |
| Particularity (Rule 9(b)) | Relaxed specificity appropriate because facts are within exchanges’ control | Plaintiffs insufficiently particularize manipulative acts | Pleading adequate under ATSI standard (nature, purpose, effect, roles described) |
| Scienter (PSLRA/Tellabs) | Allegations show conscious misbehavior/recklessness (designing services for HFT, selective disclosure, profit alignment) | Alternate innocent inference: profit motive and product design | Taken collectively allegations give a strong, cogent inference of scienter under Tellabs; survives dismissal |
| Preclusion / regulatory conflict | Plaintiffs’ private suit can proceed | Exchanges: SEC regulatory scheme precludes private claims or creates conflict | Court declines to dismiss on preclusion grounds at this stage; fact-intensive and premature |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standard for pleading scienter under PSLRA)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for Rule 12(b)(6))
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard and reasonable inferences)
- City of Providence v. BATS Global Mkts., Inc., 878 F.3d 36 (2d Cir. 2017) (Second Circuit vacating dismissal; exchanges not immune and manipulative-acts allegation plausible)
- ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (Rule 9(b) particularity for manipulation claims; relaxed pleading where facts within defendants’ control)
- Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) (private §10(b) action extends to defrauded purchaser or seller)
- Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972) (presumption of reliance for omission-based securities claims)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) (loss causation requires causal connection; pleading must give defendant indication of claimed loss and causal theory)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) (loss causation as proximate cause; zone-of-risk test)
- Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017) (discussing Affiliated Ute and reliance presumption in exchange-manipulation context)