*Federal courts have jurisdiction over private suits alleging that securities exchanges violated §10(b) of the Securities Exchange Act. **Stock exchanges enjoy absolute immunity with respect to their conduct as regulators, but not with respect to the sale of products and services to investors.
City of Providence vs. BATS Global Markets, Inc., No. 15-3057-cv (2nd Cir., 12/19/17).
A Rigged System?
Plaintiffs commenced this putative class action against a number of national securities exchanges on which they trade, including the New York Stock Exchange and the NASDAQ exchange, alleging that the Defendants engaged in manipulative or deceptive conduct in violation of §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. They assert that Defendants misled them about certain securities-related products and services that Defendants sold only to so-called high-frequency trading firms, creating an unfair and deceptive two-tiered securities trading system favoring these high-frequency investors.
As Plaintiffs’ suit explains, the Defendants created three products or services priced specifically for high-frequency trading firms: proprietary data feeds containing more detailed information about trading activity than is available for other investors; co-location privileges, allowing these high-frequency trading firms to base their operations in close physical proximity to the Defendant-Exchange systems; and complex order programs, permitting high-frequency trading firms to utilize pre-programmed electronic commands enabling faster responses to share price movements. Not only do Plaintiffs assert that these products and services were priced so as to preclude Plaintiffs’ ability to purchase them, but that Defendants did not properly disclose the full range or cumulative effect that such services would have on the prices of securities traded on each exchange. The federal district court ruled that it did have subject matter jurisdiction to hear this dispute, but that Defendants had absolute immunity insofar as at least one of the products and services was concerned, and that the Plaintiffs failed to state a claim for which relief could be granted.
Reversed on Appeal
The Appellate Court now reviews each of these rulings. First, it affirms the lower court’s finding of subject matter jurisdiction. Defendants continue to assert that, because they are entities regulated by the SEC, the courts lack jurisdiction to hear these claims until the SEC itself determines whether Defendants’ sale of these products and services is appropriate. Yet the Court finds that Congress, while granting the SEC authority to regulate securities exchanges, did not intend that private causes of action such as this one, alleging fraud under §10(b), should also be adjudicated by the SEC. Rather, Plaintiffs’ suit for securities fraud belongs to the ordinary set of lawsuits over which the courts have jurisdiction.
Next, the Court concludes that Defendant Exchanges enjoy no absolute immunity from suit for the products and services that they offered to high-frequency trading firms. The Court carefully delineates the immunity that the exchanges do possess for activities undertaken in their role as regulators themselves – for example, upon an exchange taking disciplinary action against a member firm. Here, though, they were acting merely as regulated entities when they sold certain products or services to selected investors, for which they are not immune.
Finally, the Court reverses the lower court’s dismissal of the lawsuit for failure to state a claim pursuant to FRCP 12(b)(6). Here, the complaint sufficiently alleges conduct that can be fairly viewed as manipulating market activity by deceiving other investors into believing that the prices at which they purchased or sold securities were determined by the natural interplay of supply and demand, and not “rigged by manipulators.”
(SOLA Ref. No. 2018-02-05)
NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.
Like what you see here?
Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.