435 F.Supp.3d 845
N.D. Ill.2020Background
- Plaintiffs traded cash‑settled VIX options/futures that Cboe priced using an SOQ settlement calculation derived from the VIX formula; SOQ relied on thin, out‑of‑the‑money SPX options and used a two‑zero‑bid rule and a narrow pre‑market settlement window.
- Plaintiffs allege anonymous traders manipulated SOQ (by "banging the close" and avoiding two consecutive zero bids), causing distorted settlements; an academic paper and whistleblower allegedly corroborated concentrated settlement‑window trading.
- Plaintiffs claim Cboe knew (or was reckless in not knowing) about the manipulation, profited from higher fees, and failed to enforce rules meant to prevent manipulation.
- Causes of action included securities fraud under §10(b)/Rule 10b‑5 and multiple Commodity Exchange Act (CEA) claims (failure to enforce, aiding/abetting, principal‑agent), plus negligence.
- The court addressed Cboe’s motion to dismiss the amended complaint and dismissed all claims against Cboe with prejudice, primarily finding plaintiffs failed to plead scienter and adequate loss/causation for their fraud and CEA claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Securities‑fraud scienter (§10(b)) | Cboe designed the VIX/SOQ, knew of vulnerabilities and red flags, had motive (fees/IPO), and thus acted recklessly or with intent. | Cboe lacked actual knowledge; design decisions and profit motive are insufficient; allegations amount to aiding‑and‑abetting which §10(b) does not permit. | Dismissed: plaintiffs failed to plead a "strong inference" of scienter; more plausible inference was negligence/profit motive, not intentional fraud. |
| Securities‑fraud loss causation | Manipulation at settlement dates caused named plaintiffs to pay more/receive less; lasting‑impact artificiality harmed traders even off settlement days. | Plaintiffs do not plead directionality or specific harm per transaction; cannot show manipulation caused their losses. | Dismissed: loss causation inadequately pleaded—no specific showing that manipulation operated to each plaintiff’s detriment. |
| CEA failure‑to‑enforce / bad faith (§25) | Cboe had nondiscretionary duties to prevent manipulation and negligently failed to enforce rules; observable patterns around SOQ were detectable. | Any enforcement alternatives are speculative; plaintiffs cannot plausibly link Cboe’s inaction to their actual losses. | Partial support on bad‑faith pleading standard (negligence suffices), but claim dismissed for lack of adequately pleaded actual damages and proximate causation. |
| CEA secondary liability (aiding/abetting, principal‑agent) | Cboe entities knowingly enabled manipulation or were agents of one another, so secondary liability follows. | Plaintiffs fail to allege knowledge + intent to further violations, any specific acts in furtherance, or a viable primary violation against a Cboe entity. | Dismissed: aiding/abetting and principal‑agent claims insufficiently pleaded. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading‑standard / factual plausibility)
- Bell Atl. v. Twombly, 550 U.S. 544 (pleading‑standard / plausibility)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (scienter: strong‑inference test)
- Central Bank of Denver v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (no private aiding‑and‑abetting liability under §10(b))
- City of Providence v. Bats Glob. Markets, Inc., 878 F.3d 36 (exchange can be primary violator where it co‑participates/profits from scheme)
- Dura Pharm. v. Broudo, 544 U.S. 336 (loss causation requirement in securities fraud)
- China Agritech, Inc. v. Resh, 138 S. Ct. 1800 (statute of repose concept)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (elements for market‑manipulation claims)
- Harry v. Total Gas & Power N. Am., Inc., 889 F.3d 104 (actual‑damages standard under CEA)
- In re Barclays Liquidity Cross & High Frequency Trading Litig., 390 F. Supp. 3d 432 (exchange liability where exchanges co‑developed/order types marketed to manipulators)
- Wigod v. Chi. Mercantile Exch., 981 F.2d 1510 (proximate causation and exchange liability analysis)