On February 9, 2022, Judge Lorna G. Schofield of the Southern
District of New York denied in part and granted in part a motion to
dismiss a securities fraud action asserting claims related to
alleged spoofing and short selling under Sections 10(b) and 9(a)(2)
of the Securities Exchange Act of 1934 (the "Exchange
Act"), and Rule 10b-5 thereunder, against broker-dealers,
their Canadian affiliates, and unidentified U.S. and Canadian
entities, including market makers, subsidiaries, affiliates, sister
companies, and customers of the named defendants (collectively,
"defendants"). Harrington Global Opportunity
Fund v. CIBC World Markets Corp., 21-CV-761 (LGS) (S.D.N.Y.
Feb. 9, 2022). Plaintiff alleged that defendants engaged in
spoofing and short selling that caused a healthcare company's
stock, which plaintiff owned, to drop almost 90% over a nine-month
period. The Court denied dismissal of plaintiff's
spoofing claims against certain defendants and granted dismissal of
plaintiff's short selling claims against other
defendants.
The complaint alleged that certain defendants, comprised of pairs
of U.S. and Canadian-based broker-dealers, engaged in a
"market manipulation scheme" in which they "place[d]
thousands of baiting orders," each of which allegedly had a
"small negative impact" on the healthcare company's
stock over time. The complaint further alleged that, during
the scheme in which there were roughly 100,000 spoofing events,
other defendants "[o]perat[ed] in concert" with those
allegedly engaged in spoofing by "purchas[ing] the shares
necessary to deliver on their naked short sales at reduced
prices" after a spoofing event.
The Court first rejected the Canadian defendants' arguments
about lack of personal jurisdiction, holding that the complaint
adequately alleged that "the conduct of the Canadian
defendants on Canadian exchanges was intended to manipulate the
price of [the company] shares which were listed and traded on the
NASDAQ," which the Court held was "sufficient to make out
a prima facie case of specific personal jurisdiction over the
Canadian Defendants under the effects theory." The Court
also separately held that the claims against the Canadian-based
defendants alleged to have engaged in spoofing were "within
the reach of the Exchange Act" under the Supreme Court's
Morrison decision (and the Second Circuit's
Parkcentral decision) because, the Court found, plaintiff
sufficiently alleged that those defendants "engaged in at
least some conduct in the United States in their purported effort
to manipulate [the healthcare company's] stock on U.S.
exchanges."
The Court held that the complaint's acknowledgement that
defendants traded both for their own proprietary accounts and their
customer accounts did not "undercut" the "numerous
allegations that [d]efendants designed and operated the algorithms
that spoofed [the healthcare company's] stock." The
Court also held that the complaint adequately alleged scienter,
stating that it alleged "particularized facts constituting
circumstantial evidence of conscious misbehavior." As to
defendants' argument that the complaint failed to adequately
allege loss causation because "each spoofing event lasted only
fifteen minutes," the Court stated that it would be improper
to infer, at the motion to dismiss stage, "that individual
spoofing events cannot have a long-term cumulative effect on the
price of a stock." The Court also held that the
complaint sufficiently alleged that plaintiff "relied on an
assumption that the market for [the healthcare company's]
shares was efficient and free of manipulation." Lastly,
the Court held that plaintiff's claim was timely under the
Exchange Act.
Turning next to the short selling claims, the Court held that the
complaint did not adequately allege a manipulative act, finding
that it contained "conclusory allegations that [the short
selling defendants] failed to deliver stock without pointing to any
specific examples." The Court noted that neither
"high volumes" of short selling and "naked short
selling" are, by themselves, "manipulative."
The Court also held that the complaint did not sufficiently plead
scienter in connection with the short selling allegations,
rejecting plaintiff's argument that a "high turnover
rate" and "high percentage of short sales" sufficed,
because "short selling, even some naked short selling, is
legal."
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