Rabin v. NASDAQ OMX PHLX LLC
712 F. App'x 188
| 3rd Cir. | 2017Background
- Plaintiff I. Stephen Rabin sued NASDAQ OMX PHLX (the Exchange Defendants) and multiple market‑maker firms (Member Defendants), alleging an options "dividend play" scheme that captured dividends by exercising long options and covering short positions before ex‑dividend dates.
- The strategy exploited OCC processing sequencing (long positions processed before short obligations) and exchange fee/rebate structures that made high‑volume trading profitable. OCC later changed processing to curb the practice.
- Rabin alleged the scheme increased short call open interest the day before ex‑dividend, deprived ordinary option holders of dividends, and amounted to market manipulation in violation of § 10(b) and Rule 10b‑5(a), (c).
- The District Court dismissed the amended complaint for multiple defects, including failure to allege reliance, material misrepresentation or false impression of supply/demand, and scienter; it also held Exchange Defendants immune as SROs. Rabin appealed.
- The Third Circuit affirmed dismissal, holding Rabin failed to plead actual or presumptive reliance and thus could not maintain a § 10(b) manipulation claim; the court did not resolve other arguments (e.g., SRO immunity or time‑bar) because the pleading was incurably deficient.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Rabin adequately pleaded reliance | Rabin relied on an assumption of an honest, manipulation‑free market and the OCC’s reliance on a fair open‑interest pool; seeks a presumption of reliance | Defendants: no actual reliance alleged; presumptions (Affiliated Ute or fraud‑on‑the‑market) do not apply | Held: No actual reliance pleaded; neither Affiliated Ute nor fraud‑on‑the‑market presumption applies; reliance element not met |
| Whether conduct alleged constitutes § 10(b)/Rule 10b‑5 manipulation (false impression or market‑affecting deception) | The dividend play artificially captured dividends and distorted the options market, depriving investors like Rabin | Defendants: trading involved legitimate transactions; no false information or deceptive misrepresentation creating price artificiality | Held: Plaintiff did not allege deceptive conduct that created a false impression of supply/demand or price artificiality sufficient for manipulation claim (failure intertwined with reliance defect) |
| Whether Affiliated Ute omission presumption applies | Rabin contends nondisclosure of manipulation supports an omissions‑based presumption of reliance | Defendants: no duty to disclose such trading; allowing Affiliated Ute would convert all manipulation claims into omissions cases | Held: Affiliated Ute inapplicable — no duty to disclose and adopting it would improperly expand § 10(b) liability |
| Pleading particularity and scienter; other defenses (SRO immunity, timeliness) | Rabin alleges a coordinated scheme and intent by market makers to capture dividends | Defendants: complaint lacks particularized facts on intent and scienter; Exchange Defendants immune; claims time‑barred | Held: Court did not reach immunity/timeliness because pleading failure on reliance (and related manipulation elements) dispositive; scienter/particularity not resolved on the merits |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (legal‑sufficiency standard for pleadings)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for dismissal)
- Malack v. BDO Seidman, LLP, 617 F.3d 743 (3d Cir.) (rejecting "fraud‑created‑the‑market" reliance theory)
- Basic Inc. v. Levinson, 485 U.S. 224 (fraud‑on‑the‑market presumption explained)
- Affiliated Ute Citizens v. United States, 406 U.S. 128 (omissions‑based reliance presumption)
- Stoneridge Inv. Partners v. Scientific‑Atlanta, Inc., 552 U.S. 148 (limits on extending § 10(b) liability and duty‑to‑disclose analysis)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (definition of manipulative conduct requiring intent)
- Santa Fe Industries v. Green, 430 U.S. 462 (characterizing manipulation as deceptive practices)
- McCabe v. Ernst & Young, LLP, 494 F.3d 418 (3d Cir.) (elements of a manipulation claim)