Levitt v. J.P. Morgan Securities, Inc.
710 F.3d 454
2d Cir.2013Background
- Bear Stearns acted as clearing broker for Sterling Foster & Co., handling settlement and record-keeping while Sterling Foster handled customer contacts.
- Levitt Plaintiffs, former Sterling Foster customers, alleged Bear Stearns participated in Sterling Foster’s ML Direct IPO market manipulation in violation of § 10(b).
- District court certified a class under Rule 23(b)(3) for § 10(b) claims and denied certification for § 20(a).
- Bear Stearns argued it owed no fiduciary duty to Sterling Foster’s customers and that any participation did not create a duty to disclose triggering class-wide reliance.
- Court held Bear Stearns’ alleged participation did not create a disclosure duty or Affiliated Ute presumption; class certification under Rule 23(b)(3) was improper and was reversed.
- The decision discusses NYSE Rule 382 allocations, Regulation T, and the boundary between clearing function and primary liability for § 10(b).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did Bear Stearns owe a duty to disclose to Sterling Foster’s customers? | Levitt argues Bear Stearns participated sufficiently to trigger a duty to disclose. | Bear Stearns contends only clearing functions were involved; no fiduciary duty to disclose. | No duty to disclose established; no Affiliated Ute presumption. |
| Does Bear Stearns’ alleged conduct create primary liability or need for disclosure duties in § 10(b)? | Levitt contends Bear Stearns’ involvement amounts to more than clearing, creating a disclosure duty. | Bear Stearns asserts it did not direct or instigate the fraud; only clearing contributions. | Bear Stearns’ involvement insufficient for primary liability or disclosure duty. |
| Does the case meet Rule 23(b)(3) predominance given the duty to disclose issue? | Levitt claims a class-wide presumption of reliance via Affiliated Ute constitutes common questions predominating. | Bear Stearns argues no duty to disclose, so no common reliance basis exists. | Predominance not satisfied; class certification reversed. |
| Should the district court have certified the § 20(a) control-person claim? | Levitt likely relies on control theory for § 20(a). | Bear Stearns contends no evidence of control over Sterling Foster’s management. | Court did not address merits here; holding focuses on § 10(b) and predominance; § 20(a) affirmed non-certification. |
| What is the proper scope of a clearing broker’s liability under Rule 382 and related conduct? | Levitt argues that extraordinary involvement could trigger duties or liability. | Bear Stearns argues standard clearing responsibilities do not create duties beyond the norm. | Standard clearing functions do not create a disclosure duty unless there is more direct involvement. |
Key Cases Cited
- Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) (omission actionable only with a duty to disclose)
- Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 146 (U.S. 2008) (private right of action requires causation and deception elements)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (duty to disclose makes silence actionable)
- In re Initial Public Offering Sec. Litig., 241 F. Supp. 2d 281 (S.D.N.Y. 2003) (market manipulation may create disclosure duty)
- Berwecky v. Bear Stearns & Co., 197 F.R.D. 65 (S.D.N.Y. 2000) (control of introducing firm may support class certification)
- In re Blech Sec. Litig., 961 F. Supp. 569 (S.D.N.Y. 1997) (directing fraudulent trades can support primary liability)
- Cromer Fin. Ltd. v. Berger, 137 F. Supp. 2d 452 (S.D.N.Y. 2001) (clearing broker liability limited to ordinary clearing functions)