OPINION & ORDER
Pursuant to the transfer order from the United States Judicial Panel on Multidistrict Litigation (the “MDL Panel”), entered on October 4, 2012, 41 actions stemming from the May 18, 2012 initial public offering (“IPO”) of Facebook, Inc. (“Face-book”) are presently before this Court.
The instant motions relate to the class actions against the NASDAQ Stock Market LLC (the “Exchange”), its parent, the NASDAQ OMX Group, Inc. (“NASDAQ OMX,” and collectively with the Exchange, “NASDAQ”), Robert Greifeld, NASDAQ OMX’s Chief Executive Officer (“Greifeld”), and Anna M. Ewing, NASDAQ OMX’s highest-ranking technology officer (“Ewing”) (collectively, “Defendants”) alleging federal securities (the “NASDAQ Securities Actions”) and negligence claims (the “NASDAQ Negligence Actions”) (collectively, the “NASDAQ Actions
Plaintiffs move for an order partially lifting the discovery stay imposed under Section 21D(b)(3)(B) of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b)(3)(B) (the “PSLRA”), and for leave to amend the Consolidated Amended Class Action Complaint (“CAC”). Defendants, in turn, move to dismiss the CAC pursuant to F.R.C.P. 12(b)(6).
For the reasons set forth below, (1) Defendants’ motion to dismiss is granted in part and denied in part; (2) Plaintiffs’ motion to lift the stay is rendered moot;
Prior Proceedings
On September 20, 2012, the MDL Panel held a hearing to determine whether the pending 41 filed actions should be transferred to the Southern District of New York. On October 4, 2012, the MDL Panel issued a transfer order, finding that the “Southern District of New York is an appropriate transferee district for pretrial proceedings in this litigation,” reasoning that “[m]uch of the relevant discovery will be located in New York, including most discovery relating to alleged NASDAQ trading errors and discovery from the underwriter defendants, many of whom are located in New York.” In re Facebook, IPO Secs. & Derivative Litig.,
On October 10, 2012, this Court issued a Practice & Procedure Order Upon Transfer Pursuant to 28 U.S.C. § H07 (the “October 10 Order”), governing the practices and procedures for the 41 related actions filed against the Facebook Defendants, NASDAQ, and certain underwriter defendants, including the three lead underwriters of the IPO,. Morgan Stanley & Co. LLC (“Morgan Stanley”), J.P. Morgan Securities, LLC (“JP Morgan”), and Goldman, Sachs & Co. (“Goldman Sachs”) (collectively, the “Underwriter Defendants”).
The October 10 Order outlined the “Organization, Designation and Responsibilities of Counsel” and set forth the procedures to “designate lead counsel by October 31, 2012, subject to the approval of the Court.” (October 10 Order § VII(B).) The October 10 Order also outlined certain procedures “[i]n the event that counsel for each group of parties whose interests are similarly aligned cannot successfully designate lead counsel.” (Id. § VII(B)(ii).)
Several parties, representing various interests of class members, filed competing motions for appointment of lead plaintiff and designation of lead counsel. According to the parties, extensive discussions took place with the various lead plaintiff movants and substantial progress toward agreement upon designation was made. On August 3, 2012, the NASDAQ Securities Plaintiffs filed a motion seeking the (1) consolidation of all NASDAQ actions, (2) their appointment as lead plaintiff pursuant to the PSLRA and (3) the approval of Entwistle & Cappucci LLP (“Entwistle & Cappucei”) as lead counsel for the class. On November 5, 2012, the NASDAQ Negligence Parties filed a brief seeking the designation of Finkelstein Thompson LLP (“Finkelstein Thompson”) and Lovell Stewart Halebian Jacobson LLP (“Lovell Stewart”) as interim co-lead class counsel for the NASDAQ Negligence Action.
By order on December 4, 2012 (“the December 4 Order”), this court deter
On April 30, 2013, the NASDAQ Claimant Group filed the CAC, alleging damages in excess of $500 million. On May 29, 2013, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) issued the Cease-and-Desist Order (the “SEC Order
On June 25, 2013, the NASDAQ Claimant Group moved this Court to enter an order partially lifting the discovery stay imposed by the PSLRA to obtain limited discovery consisting of documents and testimony that NASDAQ, and any of their affiliates, parents, subsidiaries, agents and/or employees, provided to the SEC in connection with the SEC’s investigation into the May 18, 2012 initial public offering (“IPO”) 0f Facebook, and for leave to subsequently file a Second Consolidated Amended Class Action Complaint (“SCAC”) incorporating relevant facts adduced from the requested discovery materials or alternatively from the SEC Order. On July 2, 2013, Defendants filed a motion to dismiss Plaintiffs’ negligence and federal securities claims alleged in the CAC. These motions were heard and marked fully submitted on October 3, 2013.
Allegations of the CAC
Familiarity with the general background of this case is assumed. Certain allegations and facts are repeated in part as relevant to the issues presented by the instant motions and are assumed true as set forth in the CAC.
Facebook is a worldwide social networking company that: (i) builds tools that enable users to connect, share, discover, and communicate with each other; (ii) enables developers to build social applications of Facebook or to integrate their websites with Facebook; and (iii) offers products that enable advertisers and marketers to engage with its users. As of February 2, 2012, Facebook had 845 million monthly users and 443 million daily users.
On February 1, 2012, in preparation for its IPO, Facebook filed a Form S-l registration statement with the SEC. Facebook subsequently amended the registration statement several times, before filing their final Form S-l/A on May 16, 2012 (the “Registration Statement”). On May 18, 2012, Facebook also filed a Form 424(b)(4) Prospectus (the “Prospectus”) with respect to the IPO.
NASDAQ OMX is a global publicly-traded company whose wholly-owned subsidiaries operate securities exchanges around the world. (CAC ¶¶ 63-65.) One of those subsidiaries is the Exchange, or NASDAQ LLC, which operates the NASDAQ Stock Market in the U.S. (CAC ¶ 65.) NASDAQ OMX is not a self-regulated organization
The Exchange is an SRO and registered as a national securities exchange under Section 6 of the Exchange Act. See 15 U.S.C. §§ 78f & 78c(a)(26); Findings, Opinion, and Order of the Common, Exch. Act. Rel. No. 53, 128 (Jan. 13, 2006), 71 Fed.Reg. 3,550 (Jan. 23, 2006) (“Exchange Registration Approval Order”). Before it may permit the registration of an exchange as an SRO, the SEC must determine, among other things, that the exchange has a set of rules that are “consistent with the requirements” of the Exchange Act, 15 U.S.C. § 78s(b)(2), and thus that are designed,
to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest ....
15 U.S.C. § 78f(b)(5). In addition, the SEC enforces exchanges’ compliance with the Exchange Act, the SEC’s rules, and the exchanges’ own rules. Thus, the SEC may bring an action to enjoin any activity by an exchange that violates the Exchange Act or any rules promulgated thereunder. 15 U.S.C. § 78u(d). The SEC also may suspend or revoke the registration of an exchange, censure it, or restrict its activities, functions, and operations, see 15 U.S.C. § 78s(h)(l), and can remove from office or censure an officer or director of an exchange responsible for such failure. 15 U.S.C. § 78s(h)(4).
On May 18, 2012, Facebook offered 421 million shares of its common stock to the public at $38.00 per share on the NASDAQ stock exchange, thereby valuing the total size of the IPO at more than $16 billion. The IPO was initially set to open at 11:00 a.m. Eastern Standard Time under the NASDAQ ticker symbol “FB,” but was delayed. At the end of trading on the day of the initial IPO, Facebook stock closed at $31.00 per share, which was 18.42% below the IPO price.
Shortly thereafter, numerous plaintiffs filed lawsuits throughout the country raising claims about the adequacy of pre-IPO and Class Period disclosures under the federal securities laws, and federal and state claims against NASDAQ for failures relating to the Offering. All of the plaintiffs allege that they suffered some loss as a result of these events, although the causes of action they assert vary.
Claims asserted against NASDAQ were filed on behalf of retail investors who contend that their orders to purchase or sell Facebook stock were not properly executed or confirmed as a result of systems issues experienced by NASDAQ on the day of the Facebook IPO.
The following movants and their proposed counsel are bringing federal securities and negligence claims against NASDAQ:
• The Securities Plaintiffs, represented by Entwistle & Cappucci;
• The Negligence Parties, represented by Finkelstein Thompson and Lovell Steward.
The NASDAQ Securities Actions have alleged federal securities claims against NASDAQ on behalf of a class of purchasers and sellers of Facebook common stock made on NASDAQ on the day of the Face-book IPO, that NASDAQ made material misrepresentations and omissions concerning the capability of its technology and trading platform, which caused substantial damages to the NASDAQ Claimant Group, who collectively traded over 3 million shares at a total value in excess of $316 million on the day of Facebook’s IPO.
The NASDAQ Negligence Actions allege state law negligence claims for damages on behalf of retail investors who placed trade orders during Facebook’s IPO, based on NASDAQ’s flawed design and testing of its software, as well as NASDAQ’s decision not to halt trading or cancel impacted trades during the Offering.
A. NASDAQ’S Cross Process for Opening Trading after an IPO
NASDAQ’s process for commencing trading in an IPO for a security listed on its Exchange, known as the “IPO Cross,” was developed in consultation with market participants and is designed to identify a single price for the opening of trading in a security that is the subject of an IPO. The price is determined based on supply and demand as represented by orders submitted before the execution of the Cross. (CAC ¶ 134; see also NASDAQ Rules 4120 & 4753.
By rule, on the day of an IPO Cross, NASDAQ members may place buy and sell orders for execution in the Cross in advance of the opening of trading. (CAC f 136; Rule 4120(c)(7)(B).) The Exchange places those orders in a “holding bin” until the beginning of the “Display Only Period.” (See id.) During the Display Only Period, members can enter, modify, and cancel orders and “observe the evolution of the prospective auction price through NASDAQ’s dissemination of auction imbalance information, thereby enabling members (and their customers) to participate in IPO price discovery.” (CAC ¶ 135; see also id. ¶¶ 136-37.) The Display Only Period lasts at least 15 minutes, and may be extended in five-minute intervals. (CAC ¶¶ 136-37; see also NASDAQ Rules 4120(c)(7)(B) & (Q.) NASDAQ’s decision to expand the “pre-market order window” from 15 minutes to four hours, (see CAC ¶¶ 119-125), was implemented by amending Rule 4120 through the Exchange Act’s public rulemaking process before the Facebook IPO. See IPO Order Holding Bin Rule Filing, 77 Fed.Reg. 19,044. It applies to the opening of trading after the IPO of any security listed on NASDAQ, not just Facebook. See Rule 4120(c)(7)(B). It reflects NASDAQ’s regulatory judg
After the Display Only Period, the remaining steps in the Cross process typically take a small fraction of a second. (See CAC ¶ 249; see also SEC Order ¶ 7 (“The electronic calculation ... usually takes approximately one to two milliseconds to complete.”).) NASDAQ’s IPO Cross Application analyzes buy and sell interest and determines the price at which the largest number of shares will trade. (CAC ¶ 138; see also NASDAQ Rule 4753(b).) After performing this calculation, the system checks whether, in the very brief intervening moment, NASDAQ received any cancellations of orders that would be included in the Cross. (CAC 1142.) If this “validation check” fails, the system re-ealeulates the price and volume of the Cross, taking into account orders and order modifications received since the initial calculation. (See CAC ¶ 143.) If the validation check passes, NASDAQ sends the opening “bulk” trade to the consolidated tape, disseminates the opening price, and sends Cross transaction confirmation reports to its members. (CAC ¶ 138.)
NASDAQ designed the validation check to protect the integrity of the IPO process. “NASDAQ’s IPO Cross system is designed to ensure that cancellations submitted while the Cross is calculating, and up until the last moment before the Cross is completed, are accounted for in the Cross.” (CAC f 142); see also Proposed Rule Change to Amend Rule 1626 — Limitation of Liability, Exch. Act Rel. No. 67,507 (July 26, 2012), 77 Fed.Reg. 45,706, 45,709 (Aug. 1, 2012) (“Accommodation Proposal”); id. at 45,708 (“[T]he benefits of the Cross include optimizing an opening price and allowing investors to cancel their orders at the last possible moment.”). Prior to the IPO, NASDAQ had not tested a backup system should the validation check fail.
B. NASDAQ’s Actions Taken to Secure the Facebook IPO
NASDAQ OMX competed aggressively with the NYSE for the Facebook IPO. (Id. ¶¶ 104-110.) The Facebook IPO was important to Defendants as the offering was expected to be, and in fact became, the largest IPO in NASDAQ’s history. (Id. ¶ 112.) To secure the IPO, Defendants shortened from two years to three months the “seasoning” period usually required for inclusion in the NASDAQ-100 Index. (Id. ¶¶ 113-18.) News reports observed that “[inclusion in the NASDQ-100 Index may have spurred Facebook toward NASDQ,” because it could “create $2 billion to $3 billion of systematic demand for the stock.” (M U 114.)
Defendants also made numerous statements prior to and after securing the Facebook IPO regarding the capability and reliability of NASDAQ’s technology and trading platforms (CAC 11168-69) in the months leading up to the Offering, including that:
• NASDAQ is “always committed to working with regulators, exchanges and market participants to ensure transparent trading and a fair and orderly market for the benefit of investors.” (CAC ¶ 172 (citing 2011 Form 10-K));
• “[NASDAQ] provides technology to customers with the speed, scale and reliability required to meet the specific needs of their markets.” (Id. at ¶ 169 (citing 2011 Form 10-K));
• “[0]ur platforms are highly scalable with current capacity at ten times the average daily volume allowing significantly higher transaction volume to be handled at low incremental cost.” (Id.)
• “Our platform continues to stand out as a reliable, flexible, and high capacity system delivering high levels of execution quality and speed under even extremely demanding market conditions.” (Id. at ¶ 173 (citing 2011 Form 10 — K));
• NASDAQ’s “continued investment in technology to meet customers’ demands for speed, capacity, and reliability as markets adapt to a global financial industry, as increasing numbers of new companies are created, and as emerging countries show ongoing interest in developing their financial markets.” (Id. at ¶ 180 (citing First Quarter 2012 Form 10 — Q));
• “No trading platform on the planet is faster or more scalable.” (Id. at ¶ 186 (citing May 11, 2012 Investor Day Conference));
• “Our technology can help trade and clear any and every financial instrument on the planet.” (Id.);
• “We have unique capabilities unmatched by any exchange in the world.” (Id.);
• “[NASDAQ] delivers innovative products and services that provide transparency to institutional, retail and individual investors.” (Id.);
• “[Wle’re well known for our technology, no trading platform in the world can operate faster or at the scale that we operate.... [0]ur technology can trade and clear really any instrument on the planet.” (Id. at ¶ 188 (citing May 11, 2012 Investor Day Conference)); and
• “We process billions of transactions in a day at sub-microsecond speeds to millions of customers. And as much as that’s table stakes, that’s hard work just to make sure you have that reliability and capability.” (Id.)
These statements contributed to NASDAQ securing the Facebook IPO, and its subsequent promotion of the Offering.
C. Defendants’ Testing in the Pre-IPO Period Revealed Systems issues Regarding the Facebook IPO
Prior to the Facebook IPO, Defendants undertook a series of tests on NASDAQ’s systems. (CAC ¶¶ 119-125, 225-27, 230-33.) The CAC alleges that Defendants’ testing revealed system limitations, including design deficiencies in the IPO Cross system that threatened the reliability of NASDAQ’s trading platforms to properly execute the Offering. (Id.) Despite this “knowledge that NASDAQ’s trading systems were susceptible to failure,” NASDSAQ continued to publicize its technology and proceed with the IPO. (Id. ¶ 121, 122 (“Defendants had knowledge of potentially significant problems with NASDAQ’s IPO software in the days leading up to the Facebook IPO, but chose to move ahead with the Facebook IPO before these problems were thoroughly investigated and competently resolved”); see also SEC Order ¶ 18-20, 23 (NASDAQ’s prior testing revealed that the asymmetric design of the procedure for re-calculating the cross caused the computer to take into account only one cancellation, the first cancellation, that had occurred before the recalculation was made).)
Plaintiffs allege that NASDAQ’s IPO systems issues were at least in part the result of NASDAQ’s failure to design for or adequately test a high volume of quote
Additionally, the CAC alleges that the “stress tests” Defendants conducted on NASDAQ’s systems accounted for only a small fraction of the anticipated total trading volume for the IPO. NASDAQ’s testing simulated trading volumes of 6 to 53 million shares and simulated 40,000 pre-market orders. (CAC ¶¶ 120-22, 225-28; see also SEC Order ¶ 12.) In the Facebook IPO, more than 80 million shares traded in the first thirty seconds of trading with a total trading volume of 567 million shares and over 496,000 orders were entered into the Cross. (CAC ¶¶ 120-22, 225-28; see also SEC Order ¶ 12.) Because of this discrepancy, Plaintiffs allege that Defendants failed to verify whether NASDAQ’s systems could properly execute the IPO. (CAC ¶¶ 124, 223-25.) Further, Defendants expanded the pre-market window for investors to place orders for an IPO from 15 minutes to 4 hours. (CAC ¶¶ 119-125.) This contributed to the systems errors that occurred.
Greifeld has acknowledged that NASDAQ’s systems constituted a “poor design for the Facebook opening cross IPO,” and that the testing before the IPO “didn’t account for the increasing volume at which cancellations can come in.” (CAC ¶¶ 9, 232.) As a result, NASDAQ “was unprepared for the increasing numbers of can-celled orders in the hours leading up to Facebook’s debut.” (Id.) The “higher the number of orders (and cancellations or changes to those orders), the more income is generated for NASDAQ.” (Id. ¶ 119.)
D. Systems Issues Affecting the Facebook IPO Cross
On May 18, 2012, NASDAQ began accepting orders for the Facebook IPO Cross into its trading system’s holding bin at 7:00 a.m., and announced that the Display Only Period for the Cross would commence at 10:45 a.m., such that secondary trading would begin at 11:00 a.m. (CAC ¶¶ 136, 140.) At 10:58 a.m„ NASDAQ extended the Display Only Period by five minutes at the request of Facebook’s lead underwriter. (CAC ¶ 140; see also SEC Order ¶ 14.)
At 11:05 a.m., NASDAQ attempted to execute the Facebook IPO Cross, print the opening trade to the tape, and initiate secondary trading, but the Cross process did not operate as expected. (CAC ¶¶ 141-43.) During that calculation, NASDAQ received a cancellation of an order that would have been included in the Cross. Accordingly, the validation check triggered a re-calculation. (CAC ¶ 143.) During the few milliseconds of the recalculation, NASDAQ received additional cancellations, which triggered additional re-calculations. (Id.) This pattern continued, “creating a loop preventing the Cross from calculating a final opening price” and commencing secondary trading at the scheduled time. (Id.; see also SEC Order ¶¶ 18-20 (the “loop,” revealed during prior testing, caused a delay because the recalculation of the cross price had to be made repeatedly to catch up with and capture previous cancellations, but each time it could only recalculate one cancellation).)
Immediately thereafter, executives of NASDAQ OMX decided to complete the Cross despite the problems created by the “loop.” (CAC ¶¶ 198, 200; see also SEC Order ¶¶ 23-25 (certain executives of NASDAQ OMX, including Greifeld, held a
NASDAQ LLC’s Rule 4120(a) provides the Exchange with the authority to halt trading under certain circumstances, including when NASDAQ LLC determines that there is “extraordinary market activity” which is likely to have a “material effect on the market for security” and “[i]n circumstances in which [NASDAQ] deems it necessary to protect investors and the public interest.” Rule 4120(a). NASDAQ OMX executives determined that no such condition existed and did not halt trading. (CAC ¶¶ 230-231.) At this point, NASDAQ OMX again disseminated two messages to market participants, stating that NASDAQ was “investigating an issue in delivering trade execution messages” for the Facebook IPO Cross and that it was “working to deliver” such confirmations. (CAC ¶¶ 202-06.) NASDAQ did not acknowledge details concerning the delayed confirmations, the inaccurate price data feeds or the failure to execute certain eligible, pre-market orders.
At 1:50 p.m., NASDAQ delivered premarket order confirmations. (CAC ¶ 207; see also SEC Order ¶ 36.) By this time, the system failures had caused more than 30,000 Cross-eligible orders entered between 11:11 a.m. and 11:30:09 a.m. to remain “stuck” and unexecuted. (CAC SI 209; see also SEC Order ¶ 38.) Approximately 13,000 “stuck” orders were released into the secondary market at 1:49:49 p.m., causing a “93-cent decrease in Facebook’s share price between 1:50 p.m. and 1:15 p.m.” (Id.) NASDAQ issued two messages to market participants stating that NASDAQ expected to “deliver all executions from the [Facebook IPO Cross]” at 1:50 p.m. and, later, that such confirmations had “been electronically disseminated.” (CAC ¶¶ 207-08.) However, Plaintiffs were unable to close positions until trading began the following Monday at inferior prices. (CAC ¶ 216 (“The offline matching process for orders entered in Facebook between 11:11 and 11:30 AM resulted in nothing done.... ”).)
The initial failure of the design which created the “loop,” NASDAQ’s determination to switch to the untested failover system, and NASDAQ’s decision to proceed with the modified Cross at 11:30 a.m. proximately caused damages to various subclasses of Plaintiffs. (CAC ¶¶ 201-208.)
First, the back-up IPO Cross Application fell behind incoming orders such that orders entered between 11:11 a.m. and 11:30 a.m. were not included in the Cross. Some were cancelled by members before the Cross; some were correctly entered into the market at 11:30 a.m.; and the
Second, NASDAQ’s system did not immediately disseminate confirmation reports for orders executed in the IPO Cross. (CAC ¶¶ 7, 37, 145, 151.) Without confirmation, these persons were deprived of the ability to sell at high prices in a rapidly falling market because they had no confirmation that they had purchased. (CAC ¶ 123.)
Finally, accurate quoting data was not delivered to NASDAQ’s proprietary feed, causing a stale cross quote for a bid price higher than the ask price. (See CAC ¶ 31). In furtherance of the Congressional mandate to link all securities markets “through communication and data processing facilities,” 15 U.S.C. § 78k-l(a)(l)(D), the SEC, through Regulation NMS, requires all national securities exchanges to send to the Securities Information Processor (“SIP”): (i) the exchanges’ “top of book” (i.e., best bids and offers (“BBOs”)); and (ii) reports of executed trades. The SIP consolidates and makes the data available to the public. See 17 C.F.R. §§ 242.601, 602 & 603. After the Facebook IPO Cross, trading occurred on NASDAQ and other markets. (See CAC 1121 (more than 80 million shares of Facebook traded in the first 30 seconds of trading and approximately 567 million shares traded on May 18).) NASDAQ accurately and timely reported Its executed Facebook trades to the SIP (Plaintiffs do not allege otherwise), but temporarily did not deliver accurate Face-book quoting data to the SIP or to NASDAQ’s proprietary data feeds. (CAC ¶¶ 164-65; see also SEC Order ¶ 31.) Persons in the market trading subclass were harmed by these data malfunctions, which prevented accurate quoting data from being delivered to NASDAQ’s proprietary feed and instead the feed showed incorrect quote prices. (CAC 1161; see also SEC Order ¶ 31.)
E. The SEC’s Investigation Into and Enforcement Proceeding Against NASDAQ’s Handling of the Face-book IPO
After the Facebook IPO, the SEC began an investigation into the failings of the Offering. The focus in the SEC investigation “was on the design limitation in NASDAQ’s system and the Exchange’s decision-making after that limitation came to light,” both prior to and during the IPO. (Affidavit of Vincent R. Cappueci on August 28, 2013; (“Cappueci Aff.”), Exhibit B; SEC Press Release, dated May 29, 2013, at 1 (“SEC Release”).) The SEC noted that “[t]oo often in today’s markets, systems disruptions are written off as mere technical ‘glitches’ when it is the design of the systems and the response of the exchange officials that cause us the most concern.” (SEC Release at 1.)
“When initiating an IPO, an exchange has an obligation to ensure that its systems, processes and contingency planning are robust and adequate to manage the IPO without disruption to the market.” (SEC Order ¶ 2.) Based on the SEC’s detailed findings covering NASDAQ’s system design, NASDAQ’s preparedness for the IPO, and the events of May 18, the SEC concluded that NASDAQ failed to meet this obligation due to both a “design limitation in NASDAQ’s IPO Cross system” and as a result of “[t]he decisions made by NASDAQ in response to trading disruptions from the design limitation [that] led to further downstream systems issues and caused NASDAQ to violate a fundamental rule governing order priority as well as several other Commission and NASDAQ rules.” (SEC Order ¶3.) The SEC also found that NASDAQ violated “Rule 4757(a)(1) when it failed to execute equally priced or better priced trading interest in Facebook in price/time priority” in connection with the orders were not executed in the IPO Cross. Id. ¶ 58(a); see also Id. ¶¶ 58(c)-(d), 63-64.
In light of the technical violations, the SEC imposed a civil monetary penalty, censured the Exchange, ordered the Exchange to cease and desist from committing violations of the Exchange Act and
F. The Accommodation Plan for Facebook IPO Losses
NASDAQ Rule 4626(a) provides that “[e]xcept as provided for in paragraph (b) below, NASDAQ and its affiliates shall not be liable for any losses, damages, or other claims arising out of the NASDAQ Market Center or its use.... [Such losses] shall be absorbed by the member....” Prior to the Facebook IPO, paragraph (b) of Rule 4626 permitted NASDAQ to compensate members up to a maximum aggregate of $500,000 per month for losses sustained in that month by members related to their use of the Exchange. See NASDAQ Rule 4626(b)(1).
On July 23, 2012, NASDAQ filed with the SEC its Accommodation Proposal to amend NASDAQ Rule 4626 to permit NASDAQ to pay its members up to $62 million for losses relating directly to the systems issues experienced by NASDAQ in the Facebook IPO. (CAC ¶¶ 10, 299-306; Accommodation Proposal, 77 Fed.Reg. 45,-706.) After considering public comments, including three comment letters submitted by counsel for Plaintiffs (CAC ¶¶ 299-306), the SEC approved the Accommodation Proposal on March 22, 2013 as consistent with the requirements of the Exchange Act and “in the public interest.”
The SEC noted that it was not deciding whether “regulatory immunity should apply to NASDAQ in connection with its actions related to the Facebook IPO” or “whether NASDAQ or any other person may have violated the federal securities laws or any other laws” in connection with the Facebook IPO. (Accommodation Approval Order at 24-25.)
I. SRO Immunity Applies in Part and is Inapplicable in Part to Plaintiffs ’ Allegations
As a threshold matter, Defendants contend that all of Plaintiffs’ claims arise out of actions taken (or not taken) by NASDAQ within the scope of its regulatory responsibilities and accordingly are precluded under SRO immunity, requiring dismissal of the claims and rendering any amendments to the CAC or any requests to lift the discovery stay futile. SRO immunity provides protection not only from liability, but also from the burdens of litigation, including discovery, and should be “resolved at the earliest possible stage in litigation.” Hunter v. Bryant,
Because Defendants are correct that an entitlement to immunity would require dismissal and preclude granting further discovery or amendments to the CAC, an initial examination as to whether Plaintiffs’ claims are subject to SRO immunity is appropriate.
A. The Applicable Standard
“There is no question that an SRO and its officers are entitled to absolute immunity from private damages suits in connection with the discharge of their regulatory responsibilities.” Standard Inv. Chartered, Inc. v. Nat’l Ass’n of Sec. Dealers, Inc.,
The party asserting immunity bears the burden of demonstrating its entitlement. D’Alessio,
The doctrine is “of a rare and exceptional character.” Barrett v. United States,
Absolute immunity inheres in SROs whenever they exercise “quasi-governmental powers [] consistent with the structure of the securities market as constructed by Congress, ... [but] when conducting private business, [an SRO] remains subject to liability.” Sparta Surgical Corp. v. Nat’l Ass’n of Sec. Dealers, Inc.,
Officers and affiliates of SROs are similarly shielded by SRO immunity depending on “the nature of the function performed, not the identity of the actor who performed it.” Forrester,
B. SRO Protects in Part and is Inapplicable in Part to Plaintiffs’ Negligence Claims
The negligence allegations are separated between first, the design, testing and touting of NASDAQ’s software, (the “technology negligence claims”), all executed prior to trading, and second, the decision not to halt trading or cancel the impacted trades (the “halting trade negligence claims”), determined during the IPO.
1. The Inadequate Design, Testing and Touting of NASDAQ’s Software Are Not Regulatory Actions Protected by SRO Immunity
The technology negligence claims in the CAC arise out of the failure of NASDAQ’s trading platforms during the IPO, which Plaintiffs contend was the foreseeable result of the inadequate testing of and design for a high volume of cancellations “in the face of projected demand.”
Defendants mischaracterize the technology negligence claims, stating that the “negligence claims arise from the commencement of trading in Facebook” or from “NASDAQ’s decisions to proceed with and not to halt trading in Facebook,” (MTD Br. at 22-23.)
None of the CAC’s allegations concerning the technology negligence claims arise from NASDAQ’s commencement of trading in Facebook, or NASDAQ’s statements and actions concerning its decision to proceed with and not halt trading during the IPO. {See CAC ¶¶ 249-269.) Rather, the technology negligence claims focus solely on the design, promotion and inadequate testing of NASDAQ’s technology software prior to the Offering.
Precedent has established that actions such as these, undertaken to “increase trading volume!,] are non-regulatory.” Id. (quoting Weissman,
Securities markets have changed dramatically since the 1930s. Exchanges, like NASDAQ, have converted from non-profit mutual associations owned by their members to for-profit publicly traded corporations owned by shareholders. (See SIF-MA letter to Mary Jo White, Chair, SEC, Re: Self-Regulatory Structure of the Securities Markets (July 31, 20130), Cappucci Aff. Ex. F (“[T]he interests, incentives and
This dual-nature of SROs, “as private companies that carry out governmental functions,” renders the distinction between actions taken in a governmental capacity, which are immune, and actions taken “for corporate benefit,” which cannot be, all the more critical. Opulent Fund,
Given that the technology negligence allegations involve actions taken in NASDAQ’s own interest as a private entity to increase trading on its Exchange, absolute
2. The Decision Not to Halt Trading is Protected by SRO Immunity
In addition to the testing and design of NASDAQ’s software, Plaintiffs allege that NASDAQ’s decision not to halt trading during the IPO or cancel impacted trades was not a regulatory function and subjects NASDAQ to damages for negligence.
NASDAQ, during the Faeebook IPO shortly after trading commenced and the technology errors began, “decided that extraordinary market activity was not occurring, and the EVP/Transactions concluded that NASDAQ therefore did not have the authority to halt trading” under Rule 4120
The capacity to suspend trading, irrespective of the identity of the decision-maker or the presence of an official SEC rule, is a quintessentially regulatory function. See, e.g., DL Capital,
C. SRO Immunity Protects in Part and is Inapplicable in Part to Plaintiffs’ Securities Act Claims
Plaintiffs’ contend that Defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 based on Defendants’ pre-Class Period and Class Period allegedly false and misleading statements of material fact. These statements can be divided into two categories: (1) failure to update pre-Class Period statements touting the reliability and capability of NASDAQ’s technology and trading platforms (“pre-Class Period Statements”); and (2) failure to speak completely and accurately in connection with disseminating “Market System Status” messages to market participants during the Class Period (“Class Period Statements”).
1. Defendants’ Omissions Relating to the pre-Class Period Statements Concerning the Capabilities of NASDAQ’s Exchange Systems are not Subject to SRO Immunity
The CAC alleges that Defendants made material omissions in neglecting to correct false and misleading statements of material fact leading up to the IPO (1) in NASDAQ’s 2011 Form 10-K; (2) in NASDAQ’s First Quarter 2012 Financial Results; (3) on NASDAQ’s website; and (4) during NASDAQ’s May 10, 2012 Investor Day Conference. These statements touted and detailed the purported reliability and speed of NASDAQ’s technology and trading platform capabilities. (See, e.g., CAC ¶ 169 (“[0]ur platforms are highly scalable with current capacity at ten times the average daily volume”); ¶ 170 (“At NASDAQ OMX, we are committed to innovation through technology to ensure our position as a driving force in the exchange industry and to provide the best possible trading experience for our customers and investors”); ¶ 182 (“Our proven delivery methodology ensures delivery on-time, on-target and ready-to-launch.”).) During the Investor Day Conference on May 10, 2012, one week prior to Facebook’s IPO, NASDAQ continued to proclaim its “technological] excellence” without correction, even though prior testing had revealed significant systems limitations. (See CAC ¶ 188 (“no trading platform in the world can operate faster or at the scale that we operate.”).)
None of NASDAQ’s omissions regarding these advertisements relate to its statutorily delegated responsibility to “prevent fraudulent and manipulative ... practices,” “promote just and equitable principles of trade,” “remove impediments to and perfect” the free market, or “protect investors and the public interest.” 15 U.S.C. § 78o(3)(b)(6). The advertisements
Servicing NASDAQ’s “own business, not the governments” serves to increase trading and is non-governmental conduct “unprotected by absolute immunity.” Id.; see also Opulent Fund,
DL Capital, cited by Defendants, is not to the contrary.
Because NASDAQ’s conduct is non-regulatory “when it engages in advertising activity unsuited to a government actor like the Securities and Exchange Commission,” NASDAQ’s omissions relating to its pre-Class Period statements are not immune. Id.
2. Class Period Statements were Incidental to NASDAQ’s Regulatory Functions and are Subject to SRQ Immunity
During the Facebook IPO, Plaintiffs contend that Defendants concealed the known technological errors NASDAQ was experiencing in its Market System Status Messages, including encouraging members to proceed with submission of pre-market orders despite knowledge of a breakdown in the system and failing to disclose the magnitude of the problems NASDAQ was experiencing despite knowledge that orders were getting “stuck.”
The Class Period statements involve real time announcements of NASDAQ’s decisions regarding its regulatory decisions to suspend, resume or cancel trading. In DL Capital, the plaintiffs claimed that
Because NASDAQ’s statements during the IPO generated profit and advanced its business interest, Plaintiffs maintain that they cannot be protected as regulatory functions. However, as Opulent Fund explains, whether or not a statement made by an SRO is used to derive profit is not the determinative inquiry, the underlying nature of the conduct is.
Plaintiffs’ allegations as to the impropriety of these statements, though essential for pleading securities fraud, are equally irrelevant to the immunity inquiry. Plaintiffs’ cited precedent involves cases holding defendants responsible for failing to speak truthfully and completely, or for neglecting a duty to disclose material information, but in none of these cases was the defendant protected by SRO immunity for the statements at issue. (See, e.g., Mem. at 42-43.) “Immunity depends only on whether specific acts and forbearances were incident to the exercise of regulatory power, and not on the propriety of those actions or inactions.” NYSE Specialists,
“The results of any immunity rule may be harsh,” but Congress nevertheless saw fit to delegate to SROs certain regulatory powers for which they “enjoy freedom from civil liability when they act[ ] in their regulatory capacity,” even where the SROs “act[ ] in a capricious, even tartuffian manner which cause[s] ... enormous damage.” Sparta Surgical,
II. Defendants’ Motion to Dismiss is Granted in Part and Denied in Part
A. The Applicable Standard
In considering a motion to dismiss pursuant to Rule 12(b)(6), the Court construes the complaint liberally, accepting all factual allegations as true and drawing all reasonable inferences in the plaintiffs favor. Mills v. Polar Molecular Corp.,
To survive dismissal, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal,
B. Defendants’ Motion to Dismiss Plaintiffs’ Negligence Claims is Granted in Part and Denied in Part
In Counts III through X of the Complaint, Plaintiffs allege claims against NASDAQ for “ordinary negligence” and “negligence: res ipsa loquitur” on behalf of each of four classes or subclasses of Facebook investors who claim to have suffered economic harm as a result of the systems issues experienced by NASDAQ in the Facebook IPO. As found above, these claims can be separated between the negligence technology claims, and NASDAQ’s decision not to halt trading during the IPO.
1. The Applicable Standard
Under New York law, to sustain a claim for negligence, a plaintiff must show that the defendant owed the plaintiff a
Though members of the Exchange have an established duty of care based on their status, non-members must plead a recognized duty of care owed by Defendants to establish negligence. See, e.g., Hamilton v. Beretta U.S.A. Corp.,
2. Defendants’ Motion to Dismiss Plaintiffs’ Negligence Claims Pertaining to the Design, Testing and Touting of NASDAQ’s Systems is Denied
In the exercise of reasonable care, Plaintiffs contend that NASDAQ, given its statements touting its capability and reliability, should have designed and tested its systems to ensure that they would be able to handle the predicted trading volume on Facebook’s opening day, including the ability of the systems to execute and confirm the large number of trade orders and cancellations anticipated for execution in the Cross, (CAC ¶¶ 249-53.) NASDAQ’s failure in fulfilling this duty proximately caused the injuries alleged by the various subclasses of negligence Plaintiffs.
Defendants do not dispute this causation, but instead assert that Plaintiffs’ claims are barred by the economic loss doctrine, under which a plaintiff cannot recover in tort for purely economic losses caused by the negligence of a defendant with whom the plaintiff had no contractual privity. See Schiavone Constr. Co. v. Elgood Mayo Corp.,
Though New York courts have not specifically addressed the applicability of the economic loss doctrine in the context of negligence claims asserted against a securities exchange by members of the investing public, the Court of Appeals has instituted a “duty analysis” to determine whether a “plaintiffs negligence claims based on economic loss alone fall beyond the scope of the duty owed them by defendants.” Finlandia,
Plaintiffs’ allegations satisfy this focused duty standard for recovery. NASDAQ had a “duty to protect” Plaintiffs against economic losses for orders entered into NASDAQ’s systems, which NASDAQ improperly processed. King Cnty.,
In addition, courts have “reasoned that the extent of liability and the degree of foreseeability stand in direct proportion to one another: the more particular the foreseeability that economic loss would be suffered as a result of the defendant’s negligence, the more just that liability be imposed and recovery permitted.” 532 Madison,
Based on this precedent and the relationships involved, as well as the definite and foreseeable nature of Plaintiffs’ losses by NASDAQ, the economic loss doctrine is not applicable and Defendants’ motion to dismiss the technology negligence claims is denied.
3. Motion to Dismiss Plaintiffs’ Negligence Claims Pertaining to NASDAQ’s Decision not to Halt Trading is Granted
Though Plaintiffs’ negligence claims are not barred by the economic loss doctrine, the underlying actions by Defendants to not halt trading or cancel impacted trades are protected by SRO immunity as discussed above. These claims are therefore dismissed on grounds of immunity, and no other arguments are reached. See Standard Inv. Chartered, Inc. v. Natl Ass’n of Sec. Dealers, Inc.,
C. Defendants’ Motion to Dismiss Plaintiffs’ Securities Act Claims is Granted in Part and Denied in Part
In Counts I and II of the CAC, Plaintiffs allege that they were defrauded into purchasing shares of Facebook in reliance upon allegedly misleading material statements and omissions made by NASDAQ about the qualities and status of NASDAQ’s systems. These material statements or omissions, as described above, can be divided into two categories: (1) the pre-Class Period statements; and (2) the Class Period statements.
1. The Applicable Standard
“The ‘fundamental purpose’ of the securities laws is ‘to substitute a philosophy of full disclosure for the philosophy of caveat emptor[.]’ ” In re Initial Pub. Offering Sec. Litig. (IPO),
Whether a statement or omission is material turns on whether “there is a substantial likelihood” that: (i) “a reasonable shareholder would consider it im
2. Defendants’ Motion to Dismiss Plaintiffs’ Allegations Based on Material Omissions Surrounding the PreClass Period Statements is Denied
Plaintiffs allege that Defendants’ failure to update pre-Class Period statements touting the reliability and capability of NASDAQ’s technology and trading platforms violated Section 10(b)-5 of the Exchange Act. To sustain such a claim, Plaintiffs must prove that Defendants (1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs’ reliance was the proximate cause of their injury. See In re Time Warner Inc. Secs. Litig.,
First, Plaintiffs allege that Defendants’ failure to update the following statements by the time of the Facebook IPO was a material omission of fact in light of NASDAQ’s direct evidence or reckless indifference to the contrary:
• NASDAQ is “always committed to working with regulators, exchanges and market participants to ensure transparent trading and a fair and orderly market for the benefit of investors.” (CAC at SI 172 (citing 2011 Form 10-K));
• “[NASDAQ] provides technology to customers with the speed, scale and reliability required to meet the specific needs of their markets” (Id. at ¶ 169 (citing 2011 Form 10-K));
• “[0]ur platforms are highly scalable with current capacity at ten times the average daily volume allowing significantly higher transaction volume to be handled at low incremental cost.” (Id.)
• “Our platform continues to stand out as a reliable, flexible, and high capacity system delivering high levels of execution quality and speed under even extremely demanding market conditions.” (Id. at ¶ 173 (citing 2011 Form 10-K));
• NASDAQ’s “continued investment in technology to meet customers’ demands for speed, capacity, and reliability as markets adapt to a global financial industry, as increasing numbers of new companies are created, and as emerging countries show ongoing interest in developing their financial markets.” (Id. at ¶ 180 (citing First Quarter 2012 Form 10 — Q));
• “No trading platform on the planet is faster or more scalable.” (Id. at SI 186 (citing May 11, 2012 Investor Day Conference)); “Our technology can help trade and clear any and every financial instrument on the planet. (Id.);
• “We have unique capabilities unmatched by any exchange in the world.” (Id.); “[NASDAQ] delivers innovative products and services retail and individual investors” (Id.); “[W]e’re well known for our technology, no trading platform in the world can operate faster or at the scale that we operate. ... [0]ur technology can trade and clear really any instrument on the planet.” (Id. at ¶ 188 (citing May 11, 2012 Investor Day Conference));
• “We process billions of transactions in a day at sub-microsecond speeds to millions of customers. And as much as that’s table stakes, that’s hard work just to make sure you have that reliability and capability.” (Id.)
• “Our proven delivery methodology ensures delivery on-time, on-target and ready-to-launeh.” (Id. at ¶ 183.)
Defendants contend that these statements are inactionable as pre-Class Period statements, or alternatively as mere “puffery” incapable of “objective verification” imposing liability. In re Tower Automotive Sec. Litig.,
Defendants are correct that the Second Circuit has found pre-Class Period statements to be inactionable. See In re Refco, Inc. Sec. Litig.,
Because NASDAQ’s statements were material, Defendants had a duty to correct and update them once they were found to be untrue. Defendants “knew or should have known [that] their statements became misleading” well before the Facebook IPO: As alleged, NASDAQ was aware through testing of its systems of potential deficiencies in the system; NASDAQ did not test how to correct these deficiencies, and its “stress tests” accounted for only a small fraction of the anticipated total trading volume for the IPO. (CAC ¶¶ 119-125, 225-27, 230-33; see also SEC Order ¶¶ 12, 20, 23.); see, e.g., In re Quintel Entm’t Inc. Sec. Litig.,
The PSLRA requires that to support scienter a complaint must plead facts sufficient to show a strong inference that a defendant acted with an intent to “deceive, manipulate, or defraud.” Tel-labs, Inc. v. Makor Issues & Rights, Ltd.,
Plaintiffs can establish an inference of scienter by alleging facts showing either (a) Defendants’ “motive and opportunity” to commit the alleged fraud, or (b) strong circumstantial evidence of conscious misbehavior or recklessness. ATSI Communications, Inc. v. Shaar Fund, Ltd.,
As alleged in the CAC (See CAC ¶¶ 23-24; 121-24; 219-33.), NASDAQ began testing the design of its systems in the days and weeks leading up to the Face-book IPO, which revealed unresolved technical issues undermining the reliability of NASDAQ in executing the anticipated trade volume for the Offering and which were not corrected before the IPO commenced. (CAC ¶¶ 119, 225; see also CAC ¶ 224 (Business Insider interviewed hedge fund manager who described how NASDAQ “knew its systems were broken before the Facebook IPO”.).) These allegations (CAC ¶¶ 119, 224-25), which include purported knowledge of an insider individual (see CAC ¶ 224), adequately demonstrate that Defendants knew or should have known of contemporaneous conditions making their omission to correct prior statements touting NASDAQ’s software systems materially misleading.
In addition, courts “have found allegations of recklessness to be sufficient where plaintiffs alleged facts demonstrating that defendants failed to review or check information that they had a duty to monitor, or ignored obvious signs of fraud.” Goldman v. Belden,
As such, the allegations in Plaintiffs’ CAC are sufficient to support a strong inference of scienter at this stage. See, e.g., Goldman,
Third, Plaintiffs allege that a presumption of reliance is appropriate.
Reliance is presumed in securities actions “involving primarily a failure to disclose,” see Affiliated Ute Citizens of Utah v. United States,
Finally, Plaintiffs allege that their damages were foreseeable and directly caused by the materialization of the concealed risks by Defendants; namely, NASDAQ’s technical limitations, including the breakdown of its IPO Cross system, and Defendants’ failure to properly test or announce these concerns with NASDAQ’s systems prior to the IPO. (CAC ¶238.)
Loss causation is governed by the Rule 8 notice pleading standard, and can be pled by alleging “the materialization of a concealed risk that causes a stock price to decline.” In re Am. Int’l Grp., Inc. 2008 Sec. Litig.,
The CAC adequately details that the Defendants’ material omissions concealed NASDAQ’s technology and trading platform risks, and that the materialization of these risks occurred during the IPO and directly caused their losses by: (i) causing erroneous and failed trade executions; (ii) blinding Class Members for as to their then-current positions in Facebook stock due to late and/or missing trade confirmations; (iii) preventing Class Members from executing orders at the National Best Bid/Offer (“NBBO”) prices for Facebook stock as required by SEC Reg. NMS; and (iv) exposing Class Members to related failures of the NASDAQ trading platform, resulting in, among other things, an artificial downward pressure on the price of Facebook’s stock. (See CAC ¶¶ 237; 238; 139-59 (materialization of the risks resulted in (1) failure to properly execute Class Members’ buy and sell orders and (2) untimely delivery confirmations of pre-market orders).) Plaintiffs’ damages, caused by their inability to trade on a fair and functioning system, were therefore within the “zone of risk concealed” by Defendants. See Lentell,
Defendants contend that the CAC fails to plead causation because Plaintiffs have not specifically linked any decline in the Facebook stock price shares with a particular misstatement or omission. Plaintiffs’ alleged loss is not in the value of the Facebook stock, but rather in Plaintiffs’ ability to trade on NASDAQ’s flawed technology, which prevented Plaintiffs from properly executing and selling their stock. Pleading loss causation does not equate with proving total damages; the latter requires a fact-intensive analysis after discovery, inappropriate for adjudication at the motion to dismiss stage. In re Clearly Canadian Secs. Litig.,
Accordingly, for the reasons set forth above, the CAC sufficiently alleges all elements of Plaintiffs’ pre-Class Period securities act claims and Defendants’ motion to dismiss these claims is denied.
3. Plaintiffs’ Class Period Material Statements under 10ib-5 are Dismissed on Grounds of Immunity
Whether or not Plaintiffs’ Class Period statements relating to trading give rise to a securities claim is irrelevant given that the statements themselves are protected by SRO immunity. These claims are therefore dismissed on grounds of immunity, and no other arguments are reached. See Standard Inv. Chartered, Inc.,
III. Plaintiffs’ Motion to Partially Lift the PSLRA Discovery Stay is Rendered Moot
A. The Applicable Standard
Statute 15 U.S.C. § 78u-4(b)(3)(B) allows the Court to lift a PSLRA discovery stay under appropriate circumstances including;
In any private action arising under this chapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.
15 U.S.C. § 78u-4(b)(3)(B) (emphasis added). In re Bank of Am. Corp. Sec., Derivative, and Emp’t Ret. Income Sec. Act (ERISA) Litig., No. 09 MDL 2058(DC),
B. Plaintiffs’ Motion to Partially Lift the PSLRA Discover Stay is Rendered Moot by the Motion to Dismiss
The SEC Order published on May 29, 2013, is based in large part on internal documents and reports that NASDAQ produced to the SEC in connection with the SEC’s investigation of the Facebook IPO. Though the SEC Order is public, these underlying documents are not. Plaintiffs request that the PSLRA discovery stay be partially lifted to require NASDAQ to produce these underlying documents. In the event that discovery not be granted, Plaintiffs request 30 days after the denial of this application to file their Second Consolidated Amended Class Action Complaint (“SCAC”) based on the new information contained in the SEC Order, which was only released one month after the filing of Plaintiffs’ CAC.
To prevent discovery until a court has deemed a securities fraud complaint sufficient, the PSLRA imposes a stay of all discovery “during the pendency of any motion to dismiss.” 15 U.S.C. § 78u-4(b)(3)(B). This stay operates against all parties, including both plaintiffs and defendants. ' 15 U.S.C. § 78u-4(b)(3)(D). Because this Court has determined that Plaintiffs’ complaint sufficiently alleges a claim for securities fraud, Plaintiffs’ request to lift the PSLRA is no longer relevant. As such, discovery may proceed within the confines of this Court’s ruling on Defendants’ motion to dismiss.
IV. Plaintiff’s Request for Leave to Amend the CAC is Granted in Part and Denied in Part A. The Applicable Standard
Rule 15 of the Federal Rules of Civil Procedure governs the right to amend pleadings, and states that “leave shall be freely given when justice so requires.” Fed.R.Civ.P. 15(a)(2). The Supreme Court has stated that absent undue delay, bad faith, undue prejudice, or futility, the “mandate” under Rule 15(a)(2) to freely grant leave to amend “is to be heeded.” Foman v. Davis,
B. Plaintiffs May Amend The CAC with Respect to Only Those Claims Not Protected by SRO Immunity
Plaintiffs request an amendment of the CAC to include the findings of the SEC, and the documents based upon those findings, in their operative pleading. (Stay Mem. at 20.) The SEC Order contains new factual findings, released one month after Plaintiffs filed their CAC,
Instead, Defendants maintain that an amendment would be futile because no newly pled facts overcome Defendants’ threshold legal defenses, namely, SRO immunity, the economic loss doctrine, Rule 4626 and Plaintiffs’ failure to plead the necessary elements of their 10b-5 claims. As determined above, Plaintiffs have sufficiently alleged their technology negligence and securities claims with respect to the pre-Class Period omissions. As such, Plaintiffs may amend the CAC to include the findings in the SEC Order and further discovery with respect to these allegations. See, e.g., Phillips v. Kidder, Peabody & Co., No. 87 Civ. 4936(DLC),
Plaintiffs’ remaining claims, namely the negligence claims relating to NASDAQ’s decision not to halt trading and the security claims relating to the Class Period statements during the IPO, are protected by and dismissed on grounds of immunity. Any amendment of Plaintiffs’ CAC with respect to these claims would not change the underlying regulatory nature of Defendants’ actions, which entitles them to immunity. Plaintiffs’ request to amend these claims is therefore denied as futile, see Billhofer v. Flamel Tech., S.A., No. 07-9920,
Conclusion
Based upon the conclusions set forth above, (1) Defendants’ motion to dismiss is denied in part and granted in part; (2) Plaintiffs’ request to lift the PSLRA discovery stay is rendered moot; and (3) Plaintiffs motion to amend is granted in part and denied in part.
The parties will meet and confer upon the schedule for further proceedings which will be the subject of a pretrial conference at 10 a.m. February 3, 2014, or at such other time as determined by counsel and the Court.
It is so ordered.
OPINION & ORDER
Pursuant to the transfer order from the United States Judicial Panel on Multidistrict Litigation (the “MDL Panel”), en
The instant motion relates to the class actions against the NASDAQ Stock Market LLC (the “Exchange”), its parent, the NASDAQ OMX Group, Inc. (“NASDAQ OMX,” and collectively with the Exchange, “NASDAQ”), Robert Greifeld, NASDAQ OMX’s Chief Executive Officer (“Greifeld”), and Anna M. Ewing, NASDAQ OMX’s highest-ranking technology officer (“Ewing”) (collectively, “Defendants”). Defendants move the Court to alter or amend the Opinion and Order entered on December 16, 2013 (the “December 16 Opinion”), which denied in part Defendant’ motion to dismiss the complaint, to include a certification for interlocutory appeal under 28 U.S.C. § 1292(b).
For the reasons set forth below, Defendants’ motion is denied.
Prior Proceedings & Facts
Familiarity with the general background of this case and prior litigation between the parties is assumed and set forth in the December 16 Opinion.
On June 25, 2013, the NASDAQ Claimant Group moved this Court for an order partially lifting the discovery stay imposed under Section 21D(b)(3)(B) of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b)(3)(B) (the “PSLRA”), to obtain limited discovery consisting of documents and testimony that NASDAQ, and any of their affiliates, parents, subsidiaries, agents and/or employees, provided to the SEC in connection with the SEC’s investigation into the May 18, 2012 initial public offering (“IPO”) of Facebook, and for leave to amend the Consolidated Amended Class Action Complaint (“CAC”), incorporating relevant facts adduced from the requested discovery materials or alternatively from the SEC Order.
On July 2, 2013, Defendants filed a motion to dismiss Plaintiffs’ negligence and federal securities claims alleged in the CAC. These motions were heard and marked fully submitted on October 3, 2013.
In the December 16 Opinion, Defendants’ motion to dismiss was denied in part and granted in part; Plaintiffs’ request to lift the PSLRA discovery stay was rendered moot by the Opinion; and Plaintiffs’ motion to amend was granted in part and denied in part.
On December 30, 2013, Defendants advised the Court of their intention to appeal the Court’s Order entered December 16, 2013, pursuant to 28 U.S.C. § 1291, insofar as that Order addressed NASDAQ’s immunity from the claims asserted by Plaintiffs. As noted in the December 16 Opinion, the immunity rulings are appealable as of right under the collateral order doctrine and divest the Court of jurisdiction while the appeal is pending. See, e.g., Mitchell v. Forsyth,
Defendants filed their 28 U.S.C. § 1292(b) motion on December 30, 2013.
I. The Applicable Standard
Section 1292(b) provides for certification of an order for interlocutory appeal when the court determines: “(1) that such order involves a controlling question of law (2) as to which there is a substantial ground for difference of opinion and (3) that an immediate appeal from [that] order may materially advance the ultimate termination of the litigation.” 28 U.S.C. § 1292(b). “These three prerequisites create a significant hurdle to certification, and the barrier is only elevated by the mandate that section 1292(b) be ‘strictly limited’ because ‘only exception circumstances [will] justify a departure from the basic policy of postponing appellate review until after the entry of a final judgment.’ ” McNeil v. Aguilos,
The Second Circuit has held that “interlocutory appeals are strongly disfavored in federal practice,” and movants cannot invoke the appellate process “as a vehicle to provide early review [even] of difficult rulings in hard cases,” In re Adelphia Commc’ns Corp.,
II. Defendants’ Fail to Satisfy the High Threshold Required for Certification of an Order for Interlocutory Appeal
Defendants maintain that a certification for interlocutory appeal is appropriate with respect to two issues in the December 16 Opinion: (1) whether the economic loss doctrine bars Plaintiffs’ common law negligence claims; and (2) whether Plaintiffs’ federal securities claim is entitled to the presumption of reliance established in Affiliated Ute Citizens of Utah v. United States,
As an initial matter, this is not an “exceptional” case. The Second Circuit regularly denies interlocutory appeals at such preliminary stages where, as here, the appeal “at most could lead only to a remand for repleading, with possibilities of further interlocutory appeals thereafter.’ ” In re Manhattan Inv. Fund Ltd., 288 B.R.
A. Defendants Fail to Present “Exceptional Circumstances” Necessary to Grant Interlocutory Appeal or Show that an Immediate Appeal Would Materially Advance the Ultimate Termination of the Litigation
Although advancement of the litigation is the third of the statutory criteria, “[c]ourts place particular weight on ... whether immediate appeal will materially advance the ultimate termination of the litigation.” Transp. Workers,
Defendants contend that “there can be no serious doubt that resolution of the questions presented here may materially advance the ultimate termination of the litigation” because if both claims were dismissed on appeal the litigation would end, and because their § 1291 immunity appeal as of right means that the § 1292(b) appeal will not cause any additional delays. (Def. Br. at 8.)
As an initial matter, Defendants are incorrect that a dismissal on appeal on both issues would end the multidistrict litigation. Plaintiffs have made their intention and been granted leave to amend the CAC to reflect the findings of the SEC opinion and the underlying evidence supporting those findings. Defendants’ § 1292(b) motion could, at most, “lead only to a remand for repleading, with possibilities of further interlocutory appeals thereafter.’ ” In re Manhattan Inv. Fund Ltd.,
In any event, obtaining reversal of an opinion denying a motion to dismiss would almost always result in dismissal. If this were sufficient to justify interlocutory review, then such orders would be commonplace. Instead, as noted, such review is strictly reserved for exceptional cases, and is especially rare in preliminary stages of the litigation. This is particularly true for interlocutory review of a motion to dismiss in a securities class action; the Second Circuit has routinely denied § 1292(b) motions at the preliminary stages of a litigation and only four times in the last thirteen years entertained a Section 1292(b) appeal from an order denying a motion to dismiss in a federal securities class action
Further, in this case, because both the negligence and federal securities claims allege similar facts and arise out of the same underlying factual event, discovery will significantly overlap. Thus, if either of the two claims is not fully dismissed on appeal, the litigation will continue to advance in substantially the same manner as if the interlocutory appeal had never occurred and will not be affected in either complexity or scope. See Westwood Phamns. v. Nat’l Fuel Gas Distrib.,
Defendants’ second contention, that because their § 1291 motion stays the litigation interlocutory appeal would not delay the proceedings, similarly misconstrues the statute’s third prong. It is not sufficient that an interlocutory appeal will not impede the litigation, “[a]n immediate appeal is considered to advance the ultimate termination of the litigation if that ‘appeal promises to advance the time for trial or to shorten the time required for trial.’ ” Trans. Workers,
In sum, a piecemeal appeal on issues that could later be corrected via amendment serves to impede judicial efficiency, rather than advance it, and runs counter to the underlying purpose of Section 1292(b). Consol. Edison, Inc. v. Ne. Util.,
As § 1292(b) requires that each of the three criteria be satisfied, denial of the motion would be appropriate even if the second and third criteria were not met. See German v. Federal Home Loan Mortg. Corp.,
B. The December 16 Order does not Involve Controlling Questions of Law
Under § 1292(b)’s first criterion, an issue is “ ‘controlling’ if reversal of the district court’s order would terminate the action,”, or if the certified issue has precedential value for a large number of cases. Klinghoffer v. S.N.C. Achille Lauro,
First, reversal even on both issues would not terminate the action. “Although technically the' question of whether there is a controlling issue of law is distinct from the question of whether certification would materially advance the ultimate termination of the litigation, in practice the two questions are closely connected.” SEC v. Credit Bancorp, Ltd.,
Second, Defendants maintain that both issues have significant precedential value, given the abundance of securities class actions and the importance to defendants of the protection of the economic loss doctrine and the narrowness of the presumption of reliance. See, e.g., 532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr., Inc.,
Precedential value is not “per se sufficient to meet the ‘controlling issue of law1 standard.” SEC v. Credit Bancorp, Ltd.,
Here, even considering Defendants’ assertions, the allegation that “millions of investors” who “suffer losses daily” would likely add exchanges as defendants based on the December 16 Opinion is unsupported. (Defendant Memorandum of Law, “Def. Br.”; at 3-4.) “[Assuming arguendo that [Defendants’] characterization of this Court’s ruling were correct, it is rather speculative to say that the ruling has precedential value for a large number of cases when those cases have yet to be brought.” Primavera Familienstifung v. Askin,
Independently, relating to the economic loss doctrine, Section 1292(b)’s first criterion requires a “pure question of law that the reviewing court could decide quickly and cleanly without having to study the record.” In re WorldCom, Inc.,
The determination that the economic loss doctrine does not bar Plaintiffs’ negligence claims involves questions of fact inappropriate for interlocutory appeal. As the New York Court of Appeals explains, “[a]lthough the existence of a duty is an issue of law for the courts ... once the nature of the duty has been determined as a matter of law, whether a particular defendant owes a duty to a particular plaintiff is a question of fact.” Kimmell v. Schaefer,
As such, Defendants fail to establish the existence of a controlling question of law.
C. The December 16 Opinion’s Application of the Economic Loss Doctrine and the Affiliated Ute Presumption Presents no “Substantial Grounds for a Difference of Opinion”
To adequately plead the second prong of Section 1292(b), the existence of substantial grounds for a difference of opinion, a party seeking certification bears the burden of showing “genuine doubt as to the correct applicable legal standard.” In re WorldCom, Inc.,
With respect to the economic loss doctrine, Defendants contend that the second criterion is met because (1) there are substantial grounds for disagreeing with the Court’s conclusion that the economic loss doctrine does not apply here, and (2) the issue is one of first impression. (Def. Br. at 6.)
First, Defendants assert that the December 16 Opinion incorrectly created a duty to Plaintiffs, despite contradicting New York law holding the need to “limit the legal consequences of wrongs to a controllable degree,” see 532 Madison Ave. Gourmet Foods,
Defendants misconstrue the Court’s holding, as well as the applicable law.
Under New York law, a plaintiff may recover economic damages in tort where: (1) a focused duty flows to a definable and manageable class comprised of individuals with a relationship so close as to approach that of privity, see London v. Kroll Lab. Specialists, Inc. (London I)
Applying this established law, the December 16 Opinion held that because NASDAQ’s relationship with Class Members was “so close as to approach that of privity,” Defendants possessed a “focused duty” to protect Plaintiffs and the Class from the foreseeable “catastrophic consequences” of NASDAQ’s system failures. (December 16 Opinion at 460-62.)
Creating a duty without a direct relationship or contractual obligation is not, as Defendants seem to suggest, unusual or exceptional
Further, far from creating a “limitless” class “with no direct relationship”, or reasoning that “NASDAQ’s potential liability is not indeterminate because it can ascertain, after-the-fact, the identity of harmed investors,” (Def. Br. at 5), the December 16 Opinion carefully identified a definable group of investors who entered orders with NASDAQ for Facebook stock on the day of the IPO and who suffered specific economic harm as a consequence of NASDQ’s system failure in connection with the IPO. (December 16 Opinion at 461-62.) Though Defendants maintain that the “catastrophic consequences” anal
Similarly, Defendants’ contention that reliance on Sommer is inappropriate because subsequent cases have limited Sommer, and exceptions to the economic loss doctrine more generally, to physical harm is inapposite. The Second Circuit has relied upon Sommer in upholding negligence claims against financial entities and other parties in circumstances not involving physical damage, see Banco Multiple Santa Cruz, S.A. v. Moreno,
Second, Defendants cite the December 16 Opinion’s holding that “New York courts have not specifically addressed the applicability of the economic loss doctrine in the context of negligence claims asserted against a securities exchange by members of the investing public,” to demonstrate that the issue is one of first impression. (December 16 Opinion at 460.) As discussed, that established law has not been applied to a unique set of facts does not create an issue of first impression; if it did, virtually any case might qualify. Though the economic loss doctrine has not been applied in this specific context, the law is clear: As the December 16
Even if the instance were one of first impression, Second Circuit precedent shows “that the fact that an issue presents a question of first impression is insufficient to render the issue grounds for substantial difference of opinion.” Sussman,
Ultimately, Defendants do not establish or even contend that New York law is unsettled on this issue. Instead, repeating their same arguments from the motion to dismiss, Defendants assert that the December 16 Opinion incorrectly applied the law to the specified facts creating an instance of “first impression” necessary for review. See Sussman,
Defendants also maintain that there is a substantial basis for a difference of opinion regarding the December 16 Opinion’s application of the Affiliated Ute presumption of reliance to the remaining securities claim. (Def. Br. at 7.) In Affiliated Ute, the Supreme Court held that proof of reliance is not required under Rule 10b-5 where the claim is based on “primarily a failure to disclose.”
Defendants maintain that the Court incorrectly applied Affiliated Ute because Plaintiffs “plead specific statements that they allege were (or became) false in light of NASDAQ’s alleged system problems,” and that these statements were plead “in order to demonstrate that Defendants had a duty to correct or update.” (Def. Br. at 7.) According to Defendants, Affiliated Ute is therefore inappropriate because Wilson v. Comtech Telecomm. Corp.,
Wilson creates no such limitation on the Affiliated Ute presumption, and does not establish any distinction between different types of omissions cases based upon how a defendant’s duty arose. To the contrary, Wilson explicates the various contexts in which Affiliated Ute may be applied;
To characterize this, for purposes of establishing reliance, as either an omission or a misrepresentation case is to beg the question. In many instances, an omission to state a material fact relates back to an earlier statement, and if it is reasonable to think that that prior statement still stands, then the omission may also be termed a misrepresentation. The labels by themselves, therefore, are of little help. What is important is to understand the rationale for a presumption of causation in fact in cases like Affiliated Ute, in which no positive statements exist: reliance as a practical matter is impossible to prove.
Wilson,
Such facts are distinguishable where, as here, Plaintiffs’ securities claims are grounded primarily in material omissions, and not on the former positive statements. Further, though the record is undeveloped, Plaintiffs specifically allege in their CAC reliance on “the integrity of NASDAQ’s technology and trading platforms, including its IPO Cross system, as represented by Defendants in NASDAQ’s SEC filings, press conference, analyst conference calls and conferences, press releases, public statements, and other publications disseminated by and/or concerning NASDAQ.” (CAC ¶¶ 189, 337.)
Defendants acknowledge that, aside from Wilson, courts in this district have held that the Affiliated Ute presumption of reliance is appropriate where, as here, a defendant’s material omission arose from a duty to update and/or correct prior representations. See In re Beacon Assocs. Litig.,
[Defendants overstate the limitations of the applicability of the Affiliated Ute presumption. While it is not available where the omissions served only to “exacerbate[ ] the misleading nature of the affirmative statements,” it does apply where the alleged omissions played an independent, or at least interdependent, role in the alleged fraud. See, e.g., Fogarazzo v. Lehman Bros., Inc.,232 F.R.D. 176 , 186-87 & nn. 85, 87 (S.D.N.Y.2005); WorldCom,219 F.R.D. 267 , 298 (S.D.N.Y.2003) (“While the omissions and misrepresentations are alleged to be interdependent in their significance and effect, it remains true that the description of the relationship at issue here was omitted from the analyst reports, that the description of World-Corn’s financial condition was not a description of the relationship, and that reliance on material omissions is presumed.”).
Id.
Applying these established principles, because the CAC specifies that the “federal securities allegations are based not on Defendants’ pre-Class Period statements, ... but on the material omissions concerning NASDAQ’s known system problems,” and that the “affirmative statements are identified [independently] in order to demonstrate that Defendants had a duty to correct,” the December 16 Opinion determined that the federal securities claim involved “primarily a failure to disclose,” and reliance could be presumed under the Affiliated Ute doctrine. (December 16 Opinion at 469 (citing Wilson,
Aside from their incorrect application of Wilson, Defendants offer no other basis or cited precedent for why the Court’s application was incorrect, or why any doubt exists as to the appropriate legal standard. What is left are intellectually challenging issues arising in a difficult and complex litigation, but not a situation warranting certification of an interlocutory appeal under § 1292(b). See German,
Because Defendants fail to show any unsettled or inconsistent application of law with respect to either challenged issue, Defendants’ disagreement with the Court’s application of established precedent to the facts presented is insufficient to show any substantial basis for a difference of opinion or to justify § 1292(b) relief. See Wausau Bus. Ins. Co. v. Turner Constr. Co.,
. Conclusion
Based upon the conclusions set forth above, Defendants’ motion for interlocutory appeal is denied.
It is so ordered.
Notes
. The NASDAQ Actions include: First New York Securities, LLC, et al. v. NASDAQ OMX Group, Inc. et at, No. 12-cv-5630 (filed 7/23/12); Goldberg v. NASDAQ OMX Group, Inc., et at, No. 12-CV-4054 (filed 5/22/12); Yan v. NASDAQ OMX Group, Inc., et at, No. 12-cv-420Q (filed 5/25/12); Alfonso v. The NASDAQ Stock Market LLC, et al., No. 12-cv-4201 (filed 5/25/12); Levy v. The NASDAQ Stock Marker LLC, et at, No. 12-cv-4315 (filed 6/1/12); Amin v. The NASDAQ Stock Market LLC, et at, No. 12-cv-4403 (filed 6/5/12); Steinman v. NASDAQ OMX Group, et at, No. 12-cv-4600 (filed 6/12/12); Roderick v. NASDAQ OMX Group, et al., No. 12-cv-4716 (filed 6/15/12); McGinty v. NASDAQ OMX Group, Inc., et at, No. 12-cv-5549 (filed 6/19/12); and Eagan v. NASDAQ OMX Group, Inc., et at, No. 12-cv-6882 (filed 9/11/12), and the NASDAQ Negligence Parties consist of all plaintiffs in those actions.
. The Underwriter Defendants include Morgan Stanley & Co., LLC; J.P. Morgan Securities LLC; Goldman, Sachs & Co.; Merrill Lynch; Pierce, Fenner & Smith Inc.; Bar-clays Capital Inc.; Allen & Company LLC; Citigroup Global Markets Inc.; Credit Suisse Securities (USA); Deutsche Bank Securities Inc.; RBC Capital Markets, LLC; Wells Fargo Securities, LLC; Blaylock Robert Van LLC; BMO Capital Markets Corp.; C.L. King & Associates, Inc.; Cabrera Capital Markets, LLC; CastleOak Securities, L.P.; Cowen and Company, LLC; E*TRADE Securities LLC; Itau BBA USA Securities, Inc.; Lazard Capital Markets LLC; Lebenthal & Co., LLC; Loop Capital Markets LLC; M.R. Beal & Company; Macquarie Capital (USA) Inc.; Muriel Siebert & Co., Inc.; Oppenheimer & Co. Inc.; Pacific Crest Securities LLC; Piper Jaffray & Co.; Raymond James & Associates, Inc.; Samuel A. Ramirez & Co., Inc.; Stifel, Nicolaus & Co., Inc.; The Williams Capital Group, L.P.; and William Blair & Company, LLC.
. See The NASDAQ Stock Mkt, LLC & NASDAQ Execution Servs., LLC, Rel. No. 69,655,
. All of NASDAQ’s current rules are available at http://nasdaq.cchwallstreet.com. Copies of Rules 4120 and 4753 are attached as Exhibits A and C to the Declaration of Paul Lantieri III, July 7, 2013 ("Lantieri Decl.”).
. More specifically, the SEC determined that: (i) NASDAQ violated Rule 4120(c)(7) insofar as NASDAQ: did not "immediately initiate trading in Facebook at the conclusion of the [Display Only Period]”; (ii) NASDAQ violated Rule 4120(c)(7) by agreeing to extend the Display Only Period at the request of Face-book’s lead underwriter consistent with longstanding and publicly disclosed practice, id. ¶ 14, but in the absence of explicit authority for granting such a request; (iii) in connection with the error position in Facebook stock that NASDAQ incurred in the Facebook IPO, NASDAQ and a NASDAQ affiliate violated NASDAQ’s rules and the Exchange Act’s net capital requirements, respectively; (iv) NASDAQ violated its price/time priority rule in connection with a halt cross for another stock that was impacted by NASDAQ’s systems issues with the Facebook IPO; and (v) in separate incidents wholly unrelated to the Face-book IPO in October 2011 and August 2012, NASDAQ committed technical violations of the SEC's Regulation SHO (concerning short sales) and Regulation NMS (concerning "trade throughs”) arising from human errors with respect to NASDAQ's systems for enforcing compliance with those regulations. Id. ¶¶ 46-55, 58-62.
. Rule 4626(b)(3) provides a specific procedure for claims related to the systems issues NASDAQ experienced with the Facebook IPO. Claims must be submitted to and verified by another SRO, the Financial Industry Regulatory Authority, under criteria specified in the Accommodation Proposal. Rule 4626(b)(3). The Rule identifies the specific types of Face-book IPO orders eligible for accommodation and the formula for calculating members’ eligible losses, along with procedures for the submission, consideration, and payment of claims. Id. The criteria create a framework that seeks to replicate what the expected execution prices of orders would have been had NASDAQ not experienced systems issues, on the assumption that members would exercise reasonable diligence to mitigate losses once made aware that their Cross orders had not executed, or had executed at unexpected prices. See id.; see also Accommodation Proposal, 77 Fed.Reg. at 45,710-11. Among other things, the Rule makes payment contingent on members’ submission of an attestation detailing the amount of compensation they have provided to their customers, and prioritizes payments to members who compensate their customers. Rules 4626(b)(3)(F)(i) & 4626(b)(3)(G).
. NASDAQ OMX and its officers are "deemed to be” officers of the SRO when their activities are related to the Exchange’s regulatory duties;
To the extent they are related to the activities of a Self-Regulatory Subsidiary [including the Exchange], the books, records, premises, officers, Directors and employees of [NASDAQ OMX] shall be deemed to be the books, records, premises, officers, directors, and employees of such Self-Regulatory Subsidiary for the purposes or and subject to oversight pursuant to the [Exchange] Act.
NASDAQ OMX By-Law Article XII, § 12.1(c). Accordingly, NASDAQ OMX and its officer are liable or protected to the same extent as NASDAQ itself.
. As alleged, Defendants' prior testing revealed systems limitations, including design deficiencies in the IPO Cross system that threatened the reliability of the trading platforms by creating a "loop” preventing the market from opening, (CAC ¶¶ 119-125, 225-27, 230-33), and Defendants' subsequent stress tests accounted for only a small fraction of the anticipated total trading volume for the IPO. (CAC ¶¶ 120-22, 225-28.)
. All of NASDAQ’s citations to the CAC in this regard either fall outside Section VII {see MTD Br. at 4, 23 (quoting CAC ¶¶ 1, 5)) or are limited to allegations concerning NASDAQ's Cross system design, testing and implementation. {See MTD Br. at 22-23, 23 n. 15 (quoting CAC ¶¶ 248, 355).) Plaintiffs do allege in Section VII that "Defendants should have followed the recent precedent and protected the integrity of the market by halting the Face-book IPO,” but do so in describing the IPO Cross process. Whether NASDAQ concluded that the limited circumstances in which it could halt trading under its regulatory power as delineated in Rule 4120 were not present on May 18 is irrelevant to the independent negligence prior to the cross. That the "orderly initiation of secondary market trading after an IPO is one of the most fundamental functions” of an Exchange and is regulatory in nature, far from "dispositive,” is likewise irrelevant to the claim of technology negligence. {See Defendant’s Opposition to Plaintiff's Motion for Discovery and to Amend ("Def. Mem.”); at 24.)
. The root causes of the injuries alleged by the technology negligence claims also lie in these design and inadequate testing failures, and are independent of NASDAQ’s regulatory decisions made during the IPO: The claims of the Cross Buyer and Cross Seller Classes are limited to persons who placed orders that were executed or eligible for execution directly in the pre-opening period, not involving the subsequent secondary market trading or NASDAQ’s messages regarding and decision to continue trading; the claims of the Market Trading Class arise from a mispricing error traceable to the pre-opening system failures; and the "stuck” orders Class were prevented from selling due to the design error, which did not generate trade confirmations (CAC ¶¶ 151-52), and led to the dissemination of inaccurate price quotes {id. ¶¶ 160-61; see also SEC Order ¶ 10 (the "design” of NASDAQ's system "created the risk that if orders continued to be cancelled during each recalculation, a repeated cycle of validation checks and re-calculations — known as a 'loop' — would occur, preventing” normal secondary market trading).)
. That the SEC approved this proposed technology "does not automatically convert NASDAQ’s conduct into an immunized regulatory function.” Opulent Fund v. Nasdaq Stock Market, Inc.,
. The Negligence Plaintiffs do not allege that the NASDAQ representations, in contrast to NASDAQ’s statements issued during the IPO, were false or misleading or that the Negligence Plaintiffs have any cause of action based on these representations. NASDAQ’s statements leading up to the IPO are alleged in the context of negligence solely to establish NASDAQ's duty, in the exercise of reasonable care, to verify and substantiate the veracity of these statements to investors, who were reasonably likely to rely on these statements and be injured by NASDAQ's failures. {See CAC ¶¶ 166-189, 225 (NASDAQ allegedly "should have designed and tested its systems to ensure they would be able to handle the potentially
. That NASDAQ happens to profit from these activities is not critical. The immunity inquiry turns on the nature of the challenged conduct, not its profitability: "if the action is taken under the ‘aegis of the Exchanges Act's delegated authority,’ the [SRO] is protected by absolute immunity from money damages.” P’ship Exchange Sec. Co. v. Nat'l Ass'n of Sec. Dealers, Inc.,
. NASDAQ LLC’s accommodation plan pays only limited compensation for only limited types of claims, and only to NASDAQ LLC members, not retail investors. This limitation of liability implies a lack of overall immunity as to NASDAQ's actions, and likewise prevents Plaintiffs from recovery if immunity were all encompassing.
. Defendants contend that state law claims, such as negligence, against self-regulatory organizations are preempted by the Exchange Act. (Def. Mem. at 20.); see also DGM Invs. v. N.Y. Futures Exch., Inc.,
. Rule 4120 is a limited delegation of authority to halt trading only in certain enumerated cases, including when "extraordinary market activity in the security is occurring,” such as the execution of a series of transactions for a significant dollar value at prices substantially unrelated to the current market. (SEC Order ¶ 32, quoting NASDAQ LLC Rule 4120(a).)
. Nor is Std. Inv. Chartered, Inc.,
. NASDAQ’s Market System Status Messages included the following: (1) "NASDAQ is experiencing a delay in delivering the opening print in Facebook, Inc. (FB). NASDAQ will advise.” (CAC ¶¶ 196-197 (statement between 11:13:50 a.m. and 11:30:09 a.m.)); (2) "The first print in FB will open at approximately 11:30 ET. Trading will commence at that time” (CAC ¶ 199 (statement made at 11:28:50 a.m.)); (3) "NASDAQ is investigating an issue in delivering trade execution messages from the IPO Cross in symbol F3, NASDAQ is working to deliver these executions back to customers as soon as possible. NASDAQ will advise” (CAC 1203 (statement at 11:59:39 a.m.)); (4) “NASDAQ is working to deliver pending trade execution status messages from the Facebook, Inc. (FB) IPO Cross. NASDAQ anticipates providing a manual report to participants containing this information shortly. To be later followed with the electronic message summary. NASDAQ will provide additional information when available” (CAC ¶ 204 (statement at 1:05:30 p.m.)); “NASDAQ expects to electronically deliver all executions from the Facebook, Inc. (FB) IPO Cross at approximately 13:50 ET. NASDAQ Will advise when this is complete” (CAC ¶ 207 (statement at 1:47:16 p.m.)); “Trade execution messages for the Facebook Inc. (FB) IPO cross have been electronically disseminated. All NASDAQ systems are operating normally.” (CAC 1208 (statement at 1:57:57 p.m.)); “For firms that entered orders in Facebook between 11:11 and 11:30 AM and have questions regarding their executions, you must call NASDAQ ... by 5:00 pm with order information if you would like to be included in the resolution of any questions. Our intention is to reach resolution of those trades today through an offline matching process____” (CAC ¶ 213 (statement at 4:23:51 p.m.)).
. Plaintiffs maintain that First New York only brings securities claims, and Rule 4626 is inapplicable to those claims arising out of material omissions concerning NASDAQ's known system failures, and not out of the use of the NASDAQ Market Center. For the sake of clarity, First New York is barred from asserting negligence claims against NASDAQ.
. The Accommodation Order, instituted by NASDAQ, confirms the ability to calculate these losses. The criteria in the order create a framework that seeks to replicate what the expected execution prices of orders would have been had NASDAQ not experienced systems issues, on the assumption that members would exercise reasonable diligence to mitigate losses once made aware that their Cross orders had not executed, or had executed at unexpected prices. See id.; see also Accommodation Proposal, 77 Fed.Reg. at 45, 710-11.
. NASDAQ does not dispute that Plaintiffs adequately allege the remaining elements of the negligence claims, including that NASDAQ breached its purported duty and this breach proximately caused damages. (See generally MTD Br.) As such, these elements are accepted as adequately pled for the purposes of the instant motion.
. Defendants contend that optimistic statements not capable of objective verification are non-actionable "puffery.” (MID Br. at 48-49.) The CAC alleges that Defendants did, in fact, objectively verify that NASDAQ's systems were experiencing significant issues in the days leading up to the Facebook IPO. (CAC ¶¶ 1, 17, 22-26, 122-24, 184-85, 333.) Regardless, disputes over the materiality of allegedly false or misleading statements are generally reserved for the trier of fact. See Basic,
. NASDAQ’s general disclaimers of "unanticipated disruptions in service” or that "markets have experienced occasional system failures” (NASDAQ OMX Annual Report (Form 10-K) at 25-26) in its annual report does not remove its liability when it statements directly touted the reliability and capability of handling trade volume as fast as possible in light of the upcoming IPO. despite knowledge of its inadequacies. (See MTD Br. at 28.)
. Defendants cited precedent is inapposite. In Campo v. Sears Holdings Corp.,
. In any event, the system errors may have some impact on the stock price. The Cross is designed to identify a single price for the opening of trading in a security that is the subject of an IPO. The price is determined based on supply and demand as represented by orders submitted before the execution of the Cross. (CAC ¶ 134; see also NASDAQ Rules 4120 & 4753.) If certain orders are "stuck” or not canceled or executed as appropriate, this flaw can reasonably affect the stock price or cause an artificial downward pressure on the stock. And while Defendants suggest that the decline in Facebook’s stock price is attributable to factors other than the materialization of the NASDAQ systems issues, "the existence of intervening events that break the chain of causation, such as a general fall in the price of stocks in a certain sector, is a matter of proof at trial and not to be decided on a Rule 12(b)(6) motion to dismiss.”
. The four times the Second Circuit has granted review, it has almost exclusively been limited to threshold issues such as jurisdiction, standing and statutes of limitations: W.R. Huff Asset Mgmt. Co. v. Deloitte & Touche, LLP,
. Defendants do not cite a single case where a district court certified other dispositive matters under Section 1292(b) when faced with a concurrent appeal of an immunity determination.
. Defendants maintain that reliance on London I is misplaced, because there the court "held only that the plaintiff's allegation of negligent drug testing could proceed where his claimed injuries were loss of his freedom and resulting emotional and psychological
"A tort obligation is a duty imposed by law to avoid causing injury to others” New York Univ. v. Continental Ins. Co., 87 N.Y.2d [308] at 3.16,639 N.Y.S.2d 283 ,662 N.E.2d 763 [ (1995) ], Accordingly, "the liability to make reparation for an injury rests not upon the consideration of any reciprocal obligation, but upon an original moral duty enjoined upon every person so to conduct himself [or herself], or exercise his [or her] own rights as not to injure another.” Rich v. New York Cent. & Hudson Riv. R.R. Co.,87 N.Y. 382 , 398 (1882); see New York Univ. v. Continental Ins. Co.,87 N.Y.2d at 316 ,639 N.Y.S.2d 283 ,662 N.E.2d 763 ; Havas v. Victory Paper Stock Co.,49 N.Y.2d 381 , 386,426 N.Y.S.2d 233 ,402 N.E.2d 1136 [(1980)]; see also Heaven v. Pender, 11 QBD 503, 509 (1883). Landon I at 83,934 N.Y.S.2d 183 , That the court in Landon I applied the standard to a different set of facts does not make reliance on the standard articulated "misplaced”.
. That NASDAQ requires its broker-dealers to be members of the exchange, with a contractual membership, does not negate the ability for NASDAQ to ever acquire a duty to members outside of the exchange. See Exchange Act Section 6(b), 15 U.S.C. § 78f(b) (2006). To hold as such would go against the basic tenets of tort law. See Rich v. New York Cent., & Hudson Riv. R.R. Co.,
. Defendants contend that Hydro Investors, Inc. v. Trafalgar Power Inc.,
While we recognize that some cases have applied the economic loss rule to bar recovery where the only loss claimed is economic in nature, see County of Suffolk v. Long Island Lighting Co.,728 F.2d 52 , 62 (2d Cir.1984), and still others have applied that rule to professional malpractice cases, see Joseph v. David M. Schwarz/Architectural Servs., P.C.,957 F.Supp. 1334 , 1339-40 (S.D.N.Y.1997), the better course is to recognize that the rule allows such recovery in the limited class of cases involving liability for the violation of a professional duty. To hold otherwise would in effect bar recovery in many types of malpractice actions.
Hydro Investors, Inc.,
. Defendants maintain that Levitt v. J.P. Morgan Securities, Inc.,
. Nor does Defendants’ cited Fifth Circuit precedent, Abell v. Potomac Ins. Co.,