Lead Opinion
ON PETITION FOR REHEARING
This opinion addresses petitions for rehearing by appellants from the court’s summary order and from the opinion filed the same day. It also addresses an cmicus brief filed by the Securities and Exchange Commission in support of the Petition for Rehearing from the panel opinion. Familiarity with the summary order, the panel opinion, and the dissent from the panel opinion is assumed. We deny appellants’ petitions.
I
The petition for rehearing relating to the summary order argues that this court’s decision in Levitt v. J.P. Morgan,
We begin by noting that the issue in Levitt was whether the common issues with regard to the liability of clearing brokers for the fraud or manipulation of introducing brokers so predominated oyer individual issues as to justify certification of a class. See Fed.R.Civ.P. 23(b)(3). That issue necessarily caused a discussion of the caselaw governing such liability. That discussion stated in part:
We begin by noting that the issue in Levitt was whether the common issues with regard to the liability of clearing brokers for the fraud or manipulation of introducing brokers so predominated over individual issues as to justify certification of a class. See Fed.R.Civ.P. 23(b)(3). That issue necessarily caused a discussion of the caselaw governing such liability. That discussion stated in part:
III. Duty of a Clearing Broker (Generally)
We have previously said that “a clearing ‘agent [ ]’ is generally under no fiduciary duty to the owners of the securities that pass through its hands”....
[District courts in this Circuit have distinguished two categories of cases. First, in cases where a clearing broker was simply providing normal clearing services, district courts have declined to “impose [ ] liability on the clearing broker for the transgressions of the introducing broker.” Fezzani v. Bear, Stearns & Co.,592 F.Supp.2d 410 , 425-26 (S.D.N.Y.2008). The district courts have so held even if the clearing broker was alleged to have known that the introducing broker was committing fraud, Fezzani,592 F.Supp.2d at 425 ; even if the clearing broker was alleged to have been clearing sham trades for the introducing broker ... and even if the clearing broker was alleged to have failed to enforce margin requirements against the introducing broker — thereby allowing the introducing broker’s fraud to continue — in violation of Federal Reserve and NYSE rules.
In the second, much more limited category of cases, district courts have found plaintiffs’ allegations to be adequate— and so have permitted claims to proceed — where a clearing broker is alleged effectively to have shed its role as clearing broker and assumed direct control of the introducing firm’s operations and its*569 manipulative scheme. Thus, in Berwecky v. Bear, Stearns & Co.,197 F.R.D. 65 (S.D.N.Y.2000), the district court granted class certification in a suit brought by investors against clearing broker Bear, Stearns for its role in the introducing firm A.R. Baron & Company’s (“Baron”) scheme to defraud investors. The Berwecky plaintiffs allege that Bear Stearns “asserted control over Baron’s trading operations by, inter alia, placing Bear, Stearns’ employees at Baron’s offices to observe Baron’s trading activities, approving or declining to execute certain trades, imposing restrictions on Baron’s inventory, and loaning funds to Baron.” Id. at 67. The plaintiffs alleged that Bear Stearns asserted control over Baron’s activities “in order to keep A.R. Baron a viable concern while Bear, Stearns ... continued to reap the large profits they received from their activities with A.R. Baron.” Id. The district court found the allegations that Bear Stearns “controlled]” the implementation of the scheme to manipulate the price of securities sold by Baron sufficient to satisfy Rule 23(b)(3)’s predominance requirement. Id. at 68-69.
Levitt,
The petition argues that Levitt held that the allegations in Berwecky were sufficient to state a claim for relief under Rule 12(b)(6) against a clearing broker. The petition further notes, correctly, that the allegations in Berwecky that “[Bear Stearns] asserted control over Baron’s trading operations by, inter alia, placing Bear, Stearns’ employees at Baron’s offices to observe Baron’s trading activities, approving or declining to execute certain trades, imposing restrictions on Baron’s inventory and loaning funds to Baron,” Berwecky,
However, Levitt also cited the district court opinion in Fezzani twice favorably, the very decision that our summary order affirmed, and any seeming inconsistency evaporates once it is recognized that Levitt’s discussion quoted above was entirely in the context of determining only whether a, class was properly certified under Fed.R.Civ.P. 23(b)(3) and not whether the factual allegations were sufficient under Rule 12(b)(6). Levitt,
The issues regarding the sufficiency of the pleadings under Rule 12(b)(6) are quite different from those regarding certification of a class pursuant to Rule 23(b)(3). Whereas the Rule 12(b)(6) inquiry goes to the merits, the Rule 23(b)(3) issue is whether “law or fact questions common to the class predominate over questions affecting individual members.” In re Initial Pub. Offerings Sec. Litig.,
a court’s class-certification analysis must be “rigorous” and may “entail some overlap with the merits of the plaintiffs underlying claim,” Wal-Mart Stores,*570 Inc. v. Dukes, 564 U.S. -,131 S.Ct. 2541 , 2551,180 L.Ed.2d 374 (2011), Rule 23 grants courts no license to engage in free — ranging merits inquiries at the certification stage. Merits questions may be considered to the extent — but only to the extent — that they are relevant to determining whether the Rule 23 prerequisites for class certification are satisfied.
— U.S.-,
Therefore, Levitt’s comment on Berwecky at most held that Bear Stearns’ alleged “control” of Baron was “sufficient to satisfy Rule 23(b)(3)’s predominance requirement.” Levitt,
Because Levitt is not in conflict with our summary order in Fezzani, the present panel did not overlook or misapprehend the law as is required for rehearing by F.R.A.P. 40(a)(2). We, therefore, reaffirm our holding that Bear Stearns’ conduct as alleged in the Amended Complaint is not sufficient to state a claim for relief under Section 10(b) and Rule 10(b)(5). While the Amended Complaint alleges in conclusory fashion that Bear Stearns asserted “control” over Baron’s trading activity, it fails to allege facts showing how this “control” related to fabricating “market” prices of particular securities and communicating them to customers or to manipulating prices with regard to any particular securities. Appellants allege that Bear Stearns was aware of the manipulations, knew that these manipulations were leading to a crisis, but continued to clear trades that did not involve unnecessary exposure to itself. Knowledge alone, however, is not enough to attach liability to a clearing broker under Section 10(b). ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,
The facts alleged in the Amended Complaint, if proven, would not show that Bear Stearns directed the fraud or instructed Baron or Dweck
II.
We also address arguments, echoed in appellants’ petition for rehearing, made in an amicus brief filed by the SEC. The SEC incorrectly reads our opinion as holding that, in any and all manipulation cases, liability attaches only to persons who communicate a misrepresentation to a victim. The SEC argues that “[t]he essence of manipulation is not a misrepresentation, but market activity — the buying and selling of shares — that itself creates a ‘false pricing signal.’ A manipulative transaction, such as parking, is an ‘intentional interference with the free forces of supply and demand’ ” (quoting ATSI,
This Court has similarly recognized that engaging in manipulative acts — practices ‘that are intended to mislead investors by artificially affecting market activity’ — are violations distinct from making ‘misrepresentations.’ Ganino v. Citizens Utils. Co.,228 F.3d 154 , 161 (2d Cir.2000). Emphasizing that distinction is this Court’s ruling that a manipulation claim requires ‘market activity aimed at deceiving investors as to how other market participants have valued a security.’ ATSI,493 F.3d at 99-100, 105 (emphasis added).
[Pet. Panel Rehear. 4]
We write only to state the obvious: our opinion did not require that reliance by a victim on direct oral or written communications by a defendant must be shown in every manipulation case. Indeed, we agree with the propositions of law asserted by the SEC that, in a manipulation claim, a showing of reliance may be based on “mar
However, the discussion in ATSI of “false pricing signal[s] to the market” is derived from the Supreme Court’s use of the efficient market hypothesis to establish a rebuttable presumption of reliance based on the effect of misrepresentations on the market price of securities. Basic Inc. v. Levinson,
Our point is illustrated by the claims against Dweck. There is no allegation that Dweck’s parking transactions, and their purported prices, were ever reported in a market. Indeed, there is no allegation that the “prices” used in the parking transactions — or in sham transactions by others coordinated with the parking — were ever made known to the buyers of the securities in question or that the securities were sold to appellants at prices “signaled” by the prices used in the parking or coordinated transactions. There are, in short, no factual allegations that Dweck’s parking transactions sent “a signal” to any identified market or that any buyer or seller relied upon the parking prices. In the entire 116-page complaint, appellants have not specifically pleaded a causal link between any single stock purchase or sale and a corresponding parking by Dweck or coordinated transactions by others. See ATSI,
Even though each of the individual plaintiffs must show reliance on a misrepresentation for which the particular defendant is responsible, there is no factual allegation by any of the eleven individual plaintiffs as to how the various “signals,” “appearances,” or “illusions” emphasized in the dissent as created by Dweck’s parking moved the price they paid for particular shares. Much of the dissent turns on an attempt to confine the purposes of “parking” to avoiding downward pressure on a security’s market price. But parking, a tactic that we agree can be a serious violation, can have many purposes. To establish this, we need look no further
We do not reject the “signals” theory. Far from it. We simply recognize that it is a red herring given the nature of appellants’ claims. The pleading gaps described above are hardly unintentional. The complaint seeks damages from all defendants for all losses of all plaintiffs whether or not a particular defendant is alleged to have engaged in a sham transaction in a security purchased by a particular plaintiff. For example, appellants’ claims against Dweck lump together sales of securities that Dweck did not park with those of securities he did park. Appellants claim that Dweck is liable for all of the losses of all of the plaintiffs whether or not the securities they bought were the subject of Dweck’s parking transactions.
To sum up, the facts alleged in this complaint do not involve any ongoing market affected by false pricing signals by Dweck. What they involve are misrepresentations to the victims by Baron salespeople as to how the price they were charging for particular securities was arrived at. Dweck’s role in parking certain securities was unknown to, and not relied upon by, those who purchased identical securities, much less by those who purchased securities not parked by Dweck. Although the complaint occasionally references an “inflated” market or “price movements,” there is no allegation that customers relied on publicly reported prices
Given these facts, Stoneridge clearly applies to the claims against Dweck. There is no presumption of reliance based on any identifiable market, and — given the lack of an allegation that any plaintiff knew of the stock parking or prices used therein — no allegation of reliance upon the parking transactions. See Stoneridge,
Finally, as we noted in our opinion, although claiming that defendants are liable for all losses of all investors caused by Baron, whether or not the losses involved sham transactions by a particular defendant, appellants have never offered either a theory of vicarious liability under state law or of controlling-person liability under federal law. The SEC’s amicus brief'fails even to purport to fill this gap.
Notes
. Isaac R. Dweck is sued individually and as a custodian for Nathan Dweck, Barbara Dweck, Morris I. Dweck, Ralph I. Dweck, and Jack Dweck. Although appellants refer broadly to “the Dwecks,” their allegations regarding the Dwecks seem to involve only Isaac R. Dweck.
. Appellants additionally argue that (1) they relied on Bear Stearns’s confirmation statements in future purchases of stock; (2) the confirmations and monthly statements were themselves manipulative acts directed at plaintiffs; and (3) the panel overlooked binding state court precedent as to aiding and abetting liability. None of these arguments warrant rehearing.
Arguments (1) and (2) may be rejected because appellants have still failed to sufficiently allege conduct not involving the ordinary functions of a clearing broker, as discussed above.
Argument (3) — regarding plaintiffs’ state law claim of aiding and abetting fraud — may also be easily dismissed. The District Court here dismissed that claim on the basis that "[a]s a matter of law, clearing brokers are not responsible or liable for the fraudulent sales practices of the introducing broker.” Fezzani v. Bear, Steams & Co.,
. The complaint alleges on page 107 that Dweck is liable for losses in the "Manipulated Securities.” Page 3 of the complaint defines "Manipulated Securities” to include several companies whose stock Dweck is not alleged to have parked or manipulated.
. The SEC's amicus brief states, in a footnote, that "the Commission previously found, and as judicially noticeable material confirms (i.e., news items, trading records, and public filings) the relevant securities traded 'in over-the-counter markets' (i.e., NASDAQ) and on AMEX. In re Bear, Stearns Secs. Corp., 54 S.E.C. 224, 228 (1999).” The citation has not led us to any SEC decision, much less one "finding” public trading of the securities in question. What the footnote may be referencing is a 1999 SEC decision, see In re Bear, Stearns Secs. Corp.,
Concurrence in Part
concurring in part and dissenting in part:
The majority opinion today denies a petition for rehearing that I would have granted in part. I nevertheless commend my panel colleagues for clarifying that the initial majority opinion in this case did not hold that the Supreme Court’s decisions in Stoneridge and Janus
Prompted in part by the compelling arguments advanced by the. Securities and Exchange Commission as amicus curiae in support of the appellants’ petition for rehearing, the majority’s denial of the petition helpfully corrects the misimpressions left by the original majority opinion. For example, it recognizes that we have never required “that reliance by a victim on direct oral or written communications by a defendant must be shown in every manipulation case.”
Nevertheless, I continue to dissent from the majority’s ongoing refusal to let the plaintiffs’ claims against Dweck proceed. We should grant the petition for rehearing and vacate the District Court’s dismissal of those claims. The majority opinion’s denial of the petition is wrong because, in the process of correcting one apparent error in the original opinion, it falls prey to two others.
The opinion’s first error is to suggest that the claims against Dweck founder because they “lump together sales of [manipulated] securities that Dweck did not park with those of securities he did park,” even though the plaintiffs also allege that Dweck is responsible for losses in both categories of securities. Majority Op. at 573. This is not a reason to dismiss these claims. As an initial matter, the plaintiffs’ treatment of the parked and unparked securities together does not justify dismissing the complaint as to those securities that Dweck is alleged to have parked. More importantly, the opinion ignores the fact that the alleged manipulative scheme here, like most “pump and dump” stock manipulation schemes, involves a cluster of interdependent securities that the defendants — Dweck inclúded — manipulated in tandem by parking certain shares of those securities with knowing nominees while selling other shares to unwitting victims. As the complaint describes it, “[i]f one security propped up by the misconduct of defendants failed, all would fail.” J.A., Vol. II, at 255. In other words, Dweck’s parking of certain securities helped to sustain the defendants’ manipulation of all of the securities, and the allegations in the complaint as to Dweck’s role in the manipulation support a claim for losses associated with the overall market manipulation scheme.
The opinion makes a second, more serious set of errors. It misunderstands the relationship between parking transactions and the fraud-on-the-market doctrine, and it confuses the “signals” theory relating to parking transactions — a theory the opinion purports to embrace, see Majority Op. at 573 with the direct misrepresentation theory. In unraveling these errors, I think it useful to define “parking,” which, in the context of market manipulation, is no mere infraction; people go to prison for it. See, e.g., United States v. Russo,
So defined, parking indisputably reflects an illegal sham transaction, an artificial device designed to avoid depressing the market price of a security. We previously have recognized the tie between parking transactions and a fraud on the market. See Russo, 74 F.3d at 1393 (endorsing a theory pursuant to which a broker-dealer for whom defendants worked engaged in stock parking and thereby “perpetrated a fraud on the market by divorcing the financial risk of owning [the parked stock] from legal ownership of the stock”). Commentators have confirmed the connection. See, e.g., Lewis D. Lowenfels & Alan R. Bromberg, Securities Market Manipulations: An Examination and Analysis of Domination and Control, Frontrunning, and Parking, 55 Alb. L.Rev. 293, 339-41 (1991).
The majority opinion does not quibble with the fact that the complaint alleges a parking transaction more or less as defined above. Instead, it derides the complaint for not alleging that the specific prices used in Dweck’s parking transactions “were ever reported in a market” or that the “ ‘prices’ used in the parking transactions ... were ever made known to the buyers of the securities in question or that the securities were sold to appellants at prices ‘signaled’ by the prices used in the parking ... transactions.” Majority Op. at 572. But this misunderstands one of the primary functions of parking schemes such as the one alleged here: to conceal rather than transmit real price information. Here, the relevant “signals” are not false pricing signals about the specific “prices used in the parking transactions,” but rather include: (1) creating the false appearance of trading volume or activity in the parked security, (2) making it appear that Dweck (and others) rather than the broker-dealer was the beneficial owner of the security who bore the financial risk of ownership, when, in fact, Dweck’s financial risk as a nominal holder of the securities was divorced from his legal ownership, (3) masking the number of shares of the manipulated securities that the broker-dealer actually controlled, and (4) creating the illusion that the parked securities were trading on the open, liquid market, when in fact they were not. In my view, several paragraphs in the complaint plausibly allege that these signals, among others, were transmitted to the market. For example:
10. Defendant! ] Isaac R. Dweck ... also engaged in parking transactions with the purpose and effect of creating a false appearance of an active trading market with the intent of inflating the trading price of the Manipulated Securities and causing investors, such as plaintiffs to purchase the Manipulated Securities.
131. Parking mislfed] regulators and customers about the amount of Baron Stocks in Baron’s own inventory, and fictitiously improved Baron’s net capital.... The placement of such stock also artificially maintained the price of the Manipulated Stocks. The “parking” was done with the purpose and had the effect of creating a false impression in the minds of Baron customers of the value and liquidity of the “parked” securities and induced Baron customers, including plaintiffs, to make investments based on Baron’s illusion of trading activity.
221.... [Plaintiffs] were unaware that the market for Baron stocks was entirely a fictional mirage. Month after month, they had received confirmations*577 and monthly statements from Bear Stearns which indicated that the Baron stocks were trading in -a bona fide market. Publicly available information on these stocks further confirmed an active market where large numbers of shares traded freely.... [None of the] plaintiffs[ ] knew that Bear Stearns, the Dweek Defendants, ... and all other defendants knew that Baron simply cr[e]ated the illusion of an active market through parking, wash sales, unauthorized purchases and fraud.
319.... Defendants’ fraudulent and manipulative activities as described herein created the appearance that the price at which the Manipulated Securities traded reflected bona fide supply and demand in a freely functioning market. The increasing prices of the Manipulated Securities appeared to indicate increasing value, placed by the market, on the businesses underlying the securities. Thus, ... the appearance of an active, rising market induced plaintiffs to purchase those securities in reliance upon the “wisdom of the marketplace.” Instead, the values placed by the market on the Manipulated Securities were fictitious and solely a result of defendants’ manipulative practices.
J.A., Vol. II, at 243, 281, 310, 340.
The majority opinion summarizes its reasons for denying the petition by suggesting that the plaintiffs did not rely on the signals conveyed by Dweck’s parking transactions, but relied instead on “misrepresentations to the victims by Baron sales people as to how the price they were charging for particular securities was arrived at.” Majority Op. at 573. The opinion concludes that “Dweck’s role in parking certain securities was unknown to, and not relied upon by, those who purchased” the securities. Id. at 573. On the one hand, to the extent that the majority opinion can be understood to conclude that the plaintiffs failed to allege reliance on Dweck’s role, it misses the point of the manipulative scheme, which was to conceal rather than disclose Dweck’s role as a confederate who parked securities. On the other hand, to the extent that the opinion suggests that the plaintiffs inadequately alleged reliance on the effect of Dweck’s parking, as well as other components of the manipulative scheme, that suggestion is contradicted by the allegations quoted above. I can’t help but to end by noting that the majority opinion trots out Stoneridge yet again to reject the claims against Dweek, this time on the ground that the plaintiffs did not allege “reliance upon the parking transactions.” Majority Op. at 574. I have previously explained and will not repeat why Stoneridge does not apply to claims of market manipulation such as the one alleged here, or why plaintiffs were not obliged to allege reliance on the parking transactions themselves.
I respectfully dissent from the denial of the petition for rehearing as to the claims against Dweek.
. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc.,
. Here, I would replace the phrase "every manipulation case” with "any manipulation case.”
. The appellants' arguments in their petition for rehearing relating to Bear Stearns and the summary order in this case are not without force. Nevertheless, I agree with my panel colleagues that the appellants’ nearly exclusive reliance on Levitt v. J.P. Morgan Securities, Inc.,