390 F. Supp. 3d 916
E.D. Ill.2019Background
- Cboe created the VIX index and marketed VIX-related cash-settled products (VIX futures, VIX options, and related ETFs/ETNs); VIX settlement values were calculated from certain SPX option prices via a morning SOQ auction and a two-zero-bid rule.
- Plaintiffs (traders in VIX products) allege anonymous Doe traders repeatedly manipulated the thin, out‑of‑the‑money SPX option market at settlement windows to distort VIX settlement values, causing investor losses.
- Plaintiffs claim Cboe knew or recklessly ignored the manipulation, violated its own exchange rules (e.g., Rules 601, 603, 8.7), and promoted VIX products despite the vulnerability.
- Suits brought under the Securities Exchange Act (market-manipulation claim against Cboe Exchange/Global), the Commodities Exchange Act (7 U.S.C. § 25(b)) against Cboe Futures and related aiding-and-abetting/agency theories, and state-law negligence (limited to VIX futures).
- Cboe moved to dismiss arguing immunity/preclusion, failure to plead loss causation and scienter, inadequate specificity and damages under the CEA, failure to plead aiding-and-abetting, and preemption of negligence by the CEA.
- The court dismissed all claims: negligence with prejudice (CEA preemption) and other claims without prejudice (plaintiffs may amend), principally for failure to plead securities scienter and loss/actual damages under securities/commodities law; immunity and agency/secondary‑liability theories were rejected or found inadequately pleaded in part.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Article III standing | Plaintiffs lost money from manipulation of VIX products, so injuries are concrete and redressable | Cboe did not contest standing | Standing exists; plaintiffs plead injury in fact traceable to defendants |
| Securities Act claim — immunity / non‑immune conduct | Cboe designed and promoted VIX products (private acts) and thus is not immune for those acts | As an SRO, Cboe is immune for regulatory/disciplinary functions | SRO immunity does not bar claims based on Cboe’s non‑delegated, private actions (design/marketing/listing) |
| Securities Act claim — preclusion by SEC approvals | SEC approval of VIX rules and procedures forecloses private manipulation suits | SEC approvals do not automatically preclude private claims; statutes can complement | No preclusion: SEC oversight and private suits are complementary; preclusion not warranted here |
| Securities Act claim — loss causation & reliance & scienter | Plaintiffs relied on an efficient, manipulation‑free market and suffered losses from SOQ manipulation | Plaintiffs fail to identify specific losing transactions (loss causation); scienter not adequately pleaded | Reliance (fraud‑on‑the‑market) pleaded; loss causation insufficient (no specific transactions showing loss); scienter insufficient (no strong inference of intent/recklessness) |
| Commodities Exchange Act — rule‑enforcement, bad faith, damages | Cboe failed to enforce CEA/core rules (601, 603), acted in bad faith, causing actual damages | Allegations are vague; enforcement decisions discretionary; plaintiffs fail to plead actual damages and bad faith | Plaintiffs adequately allege failure to enforce and bad faith theory; but fail to plead actual damages (no specific losing transactions); aiding/abetting and secondary liability not plausibly pleaded |
| State negligence (VIX futures) — preemption | Negligence claim addresses Cboe’s non‑regulatory design and ought not be preempted | CEA preempts state law claims that would affect the operation of futures markets | CEA preempts the negligence claim as it would affect futures‑market operations; negligence dismissed with prejudice |
Key Cases Cited
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (plaintiff must plead loss causation for securities fraud)
- Ashcroft v. Iqbal, 556 U.S. 662 (plausibility standard for pleadings)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (Twombly pleading standard)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (scienter must give rise to a cogent, compelling inference)
- Lujan v. Defenders of Wildlife, 504 U.S. 555 (Article III standing requirements)
- POM Wonderful LLC v. Coca‑Cola Co., 573 U.S. 102 (statutory schemes may be complementary; regulatory approval does not always preclude private claims)
- Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (no private aider‑and‑abetter liability under the Securities Exchange Act)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (elements of market‑manipulation claim; relaxed pleading considerations where facts are within defendant’s control)