Petition for Writ of Certiorari — BATS Global Markets, Inc., et al., Petitioners v. City of Providence, Rhode Island, et al.
Supreme Court briefAug 10, 2018
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No. 18-____
IN THE
Supreme Court of the United States
————
BATS GLOBAL MARKETS, INC., ET AL.,
Petitioners,
v.
CITY OF PROVIDENCE, ET AL.,
Respondents.
————
On Petition for a Writ of Certiorari
to the United States Court of Appeals
for the Second Circuit
————
PETITION FOR A WRIT OF CERTIORARI
————
DOUGLAS W. HENKIN
AARON M. STREETT
BAKER BOTTS L.L.P.
Counsel of Record
30 Rockefeller Plaza
J. MARK LITTLE
New York, NY 10012
BAKER BOTTS L.L.P.
(212) 408-2500
910 Louisiana Street
Houston, TX 77002
(713) 229-1234
aaron.streett@bakerbotts.com
VINCENT M. WAGNER
BAKER BOTTS L.L.P.
2001 Ross Avenue
Dallas, TX 75201
(214) 953-6500
Counsel for Petitioners New York Stock
Exchange LLC, NYSE Arca, Inc., and Chicago
Stock Exchange, Inc.
(additional counsel listed on inside cover)
WILSON-EPES PRINTING CO., INC. – (202) 789-0096 – WASHINGTON, D.C. 20002
PAUL E. GREENWALT III
SCHIFF HARDIN LLP
233 South Wacker Drive
Suite 6600
Chicago, IL 60606
(312) 258-5500
Counsel for Petitioners
Bats Global Markets,
Inc., n/k/a Cboe Bats,
LLC and Direct Edge
ECN, LLC
DOUGLAS R. COX
AMIR C. TAYRANI
ALEX GESCH
RAJIV MOHAN
GIBSON, DUNN & CRUTCHER
LLP
1050 Connecticut Avenue,
N.W.
Washington, DC 20036
(202) 955-8500
Counsel for Petitioners
NASDAQ OMX BX, Inc.,
n/k/a Nasdaq BX, Inc. and
The Nasdaq Stock Market
LLC
i
QUESTIONS PRESENTED
In Central Bank of Denver, N.A. v. First Interstate
Bank of Denver, N.A., 511 U.S. 164 (1994), this Court
held that the Securities Exchange Act does not authorize
private litigants to bring claims for aiding and abetting
securities fraud. And in Santa Fe Industries, Inc. v.
Green, 430 U.S. 462 (1977), the Court identified the types
of manipulative acts, such as “wash sales” and “rigged
prices,” that can meet the manipulative-act element of a
market-manipulation claim. Id. at 476. The Second Circuit contravened both of those precedents below. Plaintiffs attempted to plead a market-manipulation claim by
alleging that the defendant securities exchanges sold
products and services that high-frequency traders used
to gain a supposedly unfair advantage over other traders.
According to the court of appeals, plaintiffs evaded the
aiding-and-abetting bar by pleading that the exchanges
were “co-participants” in a fraudulent scheme who profited from that scheme and validly pleaded a manipulative
act despite making no allegation that defendants engaged
in any trading activity, much less the type of sham trades
that typify a market-manipulation claim.
The questions presented are:
1. Whether a private plaintiff states a valid securities-fraud claim by pleading that the defendant enabled a
third party to commit the acts that caused the allegedly
fraudulent harm, where the primary violator undisputedly exercised an independent choice to commit those acts.
2. Whether a plaintiff states a claim for market manipulation where it is undisputed that the defendant did
not engage in any trading activity.
ii
PARTIES TO THE PROCEEDINGS BELOW
Bats Global Markets, Inc., n/k/a Cboe Bats, LLC, Chicago Stock Exchange, Inc., Direct Edge ECN, LLC,
NYSE Arca, Inc., NASDAQ OMX BX, Inc., n/k/a Nasdaq
BX, Inc., New York Stock Exchange LLC, and The
Nasdaq Stock Market LLC were the defendants in the
district court and the appellees in the court of appeals.
City of Providence, Rhode Island, Employees’ Retirement System of the Government of the Virgin Islands, Plumbers and Pipefitters National Pension Fund,
and State-Boston Retirement System were the plaintiffs
in the district court and the appellants in the court of appeals.
iii
CORPORATE DISCLOSURE STATEMENT
Pursuant to this Court’s Rule 29.6, NASDAQ OMX
BX, Inc., n/k/a Nasdaq BX, Inc. and The Nasdaq Stock
Market LLC are wholly owned by Nasdaq, Inc., a publicly traded corporation. Borse Dubai Limited and Investor
AB each own 10% or more of the stock of Nasdaq, Inc.
NYSE Arca, Inc., New York Stock Exchange LLC, and
Chicago Stock Exchange, Inc. are indirect, wholly owned
subsidiaries of Intercontinental Exchange, Inc. Intercontinental Exchange, Inc. has no parent corporation, and as
of the date hereof, no publicly held company owns 10% or
more of its stock.
Cboe Bats, LLC is the successor (by merger) to Bats
Global Markets, Inc. Direct Edge ECN, LLC was dissolved on December 17, 2015, and Cboe Bats, LLC will
assume any liability of Direct Edge ECN, LLC in connection with this litigation. Cboe Bats, LLC is wholly
owned by Cboe Global Markets, Inc., a publicly traded
corporation. T. Rowe Price Associates, Inc. and The
Vanguard Group, Inc. each own 10% or more of the stock
of Cboe Global Markets, Inc.
iv
TABLE OF CONTENTS
Questions Presented ..................................................
Parties to the Proceedings Below.............................
Corporate Disclosure Statement ..............................
Opinions Below ...........................................................
Statement of Jurisdiction ..........................................
Statutory and Regulatory Provisions Involved ...........................................................................
Preliminary Statement ..............................................
Statement ....................................................................
I.
Background ...............................................
II.
Proceedings Below ...................................
A. Proceedings in the district court .......
B. The court of appeals’ decision............
Reasons for Granting the Petition............................
I.
The Circuits Are Now Divided Over
How To Enforce This Court’s Bar On
Private Aiding-And-Abetting Claims .....
A. This Court’s decisions prohibit
aiding-and-abetting liability in
private securities lawsuits .................
B. The circuits prohibit claims for
substantially participating in or
enabling a fraud ..................................
C. The Second Circuit’s creation of
“co-participant” liability directly
conflicts with this Court’s and
other circuits’ holdings.......................
Page
i
ii
iii
1
2
2
3
4
4
5
5
8
9
9
10
12
15
v
TABLE OF CONTENTS—Continued
Page
II.
The Second Circuit’s Decision Deepens Existing Disagreement On The
Manipulative-Act Element Of A Market-Manipulation Claim ........................... 20
A. The Third Circuit defines manipulation as the injection of inaccurate price information into the
market.................................................. 22
B. The D.C. Circuit imposes liability
when legitimate trading activity is
combined with improper intent......... 23
C. The Second Circuit’s approach
conflicts with those of both the
Third and D.C. Circuits ..................... 25
III. The Questions Presented Are Important And Arise In A Clean Vehicle ... 28
A. The questions presented are important ................................................. 28
B. The Second Circuit’s outsized influence on securities law heightens the need for review ...................... 30
C. This case presents a clean vehicle ..... 31
IV.
At A Minimum, The Court Should
Hold The Petition For The Decision
In Lorenzo v. SEC .................................... 33
Conclusion ................................................................... 34
Appendix A - Second Circuit Opinion (Dec.
19, 2017) .............................................................. 1a
Appendix B - Second Circuit Order Denying
Panel Rehearing and Rehearing En
Banc (Mar. 13, 2018) .......................................... 30a
vi
TABLE OF CONTENTS—Continued
Page
Appendix C - District Court Opinion and Order (Aug. 26, 2015) ............................................. 32a
Appendix D - Second Consolidated Amended
Complaint (Nov. 24, 2014)................................. 89a
vii
TABLE OF AUTHORITIES
Page
CASES
Affco Invs. 2001, L.L.C. v. Proskauer
Rose, L.L.P.,
625 F.3d 185 (5th Cir. 2010) ...................... 14, 19, 20
Amgen, Inc. v. Conn. Ret. Plans & Tr.
Funds,
568 U.S. 455 (2013) ................................................. 13
ATSI Commc’ns, Inc. v. Shaar Fund,
Ltd.,
493 F.3d 87 (2d Cir. 2007) ....................................... 4
Basic, Inc. v. Levinson,
485 U.S. 224 (1988) ................................................. 28
Blue Chip Stamps v. Manor Drug Stores,
421 U.S. 723 (1975) ................................................. 31
Cent. Bank of Denver, N.A. v. First
Interstate Bank of Denver, N.A.,
511 U.S. 164 (1994) ........................................ passim
Chadbourne & Parke LLP v. Troice,
134 S. Ct. 1058 (2014) ....................................... 10, 33
CP Stone Fort Holdings, LLC v. John,
No. 16 C 4991, 2016 WL 5934096 (N.D.
Ill. Oct. 11, 2016)..................................................... 29
Ernst & Ernst v. Hochfelder,
425 U.S. 185 (1976) ................................................. 21
Foss v. Bear, Stearns & Co.,
394 F.3d 540 (7th Cir. 2005) ...................... 15, 19, 20
GFL Advantage Fund, Ltd. v. Colkitt,
272 F.3d 189 (3d Cir.
2001) .................................... 21, 22, 23, 25, 26, 27, 32
In re DVI, Inc. Sec. Litig.,
639 F.3d 623 (3d Cir. 2011).................. 12, 13, 18, 20
viii
TABLE OF AUTHORITIES—Continued
Page
In re Galectin Therapeutics, Inc. Sec.
Litig.,
843 F.3d 1257 (11th Cir. 2016) .............................. 21
Janus Capital Grp., Inc. v. First
Derivative Traders,
564 U.S. 135 (2011) ................. 5, 9, 12, 17, 18, 28, 33
Koch v. SEC,
793 F.3d 147 (D.C. Cir. 2015) .................... 24, 25, 26
Lorenzo v. SEC,
872 F.3d 578 (D.C. Cir. 2017) .......................... 33, 34
Markowski v. SEC,
274 F.3d 525 (D.C. Cir. 2001) .............. 22, 23, 24, 26
Matrixx Initiatives, Inc. v. Siracusano,
563 U.S. 27 (2011) ....................................... 27, 28, 33
Morrison v. Nat’l Austl. Bank Ltd.,
561 U.S. 247 (2010) ................................................. 31
Regents of Univ. of Cal. v. Credit Suisse
First Boston (USA), Inc.,
482 F.3d 372 (5th Cir. 2007) ................ 14, 18, 19, 20
Santa Fe Indus., Inc. v. Green,
430 U.S. 462 (1977) ........................... 8, 21, 22, 26, 29
SEC v. Masri,
523 F. Supp. 2d 361 (S.D.N.Y. 2007) .................... 29
Stoneridge Inv. Partners, LLC v.
Scientific-Atlanta, Inc.,
552 U.S. 148 (2008) ......... 9, 10, 11, 12, 13, 17, 28, 33
Superintendent of Ins. of N.Y. v. Bankers
Life & Cas. Co.,
404 U.S. 6 (1971) ..................................................... 10
ix
TABLE OF AUTHORITIES—Continued
Page
Ziemba v. Cascade Int’l, Inc.,
256 F.3d 1194 (11th Cir. 2001) ............ 14, 15, 19, 20
Zoelsch v. Arthur Andersen & Co.,
824 F.2d 27 (D.C. Cir. 1987) .................................. 31
STATUTES AND REGULATION
15 U.S.C. § 78i ............................................................. 26
15 U.S.C. § 78j .................................................... passim
15 U.S.C. § 78t ......................................................... 5, 11
28 U.S.C. § 1254 ............................................................ 2
17 C.F.R. § 240.10b-5......................................... passim
MISCELLANEOUS
Breyer, The Court and the World (2015) ................. 31
Cornerstone Research, Securities Class
Action Filings: 2017 Year in Review
(2018) ....................................................................... 30
Fischel & Ross, Should the Law Prohibit
“Manipulation” in Financial
Markets?, 105 Harv. L. Rev. 503 (1991) .............. 29
Fox et al., Stock Market Manipulation
and Its Regulation, 35 Yale J. on Reg.
67 (2018) ...................................................... 21, 22, 29
S. Rep. No. 104-98 (1995) ........................................... 31
In THE
Supreme Court of the United States
————
BATS GLOBAL MARKETS, INC., ET AL.,
Petitioners,
v.
CITY OF PROVIDENCE, ET AL.,
Respondents.
————
On Petition for a Writ of Certiorari
to the United States Court of Appeals
for the Second Circuit
————
PETITION FOR A WRIT OF CERTIORARI
————
Petitioners Bats Global Markets, Inc., n/k/a Cboe Bats,
LLC, Chicago Stock Exchange Inc., Direct Edge ECN,
LLC, NYSE Arca, Inc., NASDAQ OMX BX, Inc., n/k/a
Nasdaq BX, Inc., New York Stock Exchange LLC, and
The Nasdaq Stock Market LLC (collectively “the Exchanges”) respectfully petition for a writ of certiorari to
review the judgment of the United States Court of Appeals for the Second Circuit.
OPINIONS BELOW
The court of appeals’ opinion (App., infra, 1a-29a) is
reported at 878 F.3d 36. The order denying panel rehearing and rehearing en banc (App., infra, 30a-31a) is
unreported. The district court’s opinion (App., infra,
32a-88a) is reported at 126 F. Supp. 3d 342.
2
STATEMENT OF JURISDICTION
The judgment of the court of appeals was filed on December 19, 2017. The court denied a timely petition for
rehearing or rehearing en banc on March 13, 2018. On
May 29, 2018, Justice Ginsburg extended the time to file
a petition for a writ of certiorari until August 10, 2018.
This Court has jurisdiction under 28 U.S.C. § 1254(1).
STATUTORY AND REGULATORY
PROVISIONS INVOLVED
Section 10(b) of the Securities Exchange Act of 1934
(the Exchange Act) provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality
of interstate commerce or of the mails, or of any facility of any national securities exchange * * * [t]o
use or employ, in connection with the purchase or
sale of any security registered on a national securities exchange or any security not so registered, or
any securities-based swap agreement any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate
in the public interest or for the protection of investors.
15 U.S.C. § 78j(b) (footnote omitted).
SEC Rule 10b-5 provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality
of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to
defraud,
(b) To make any untrue statement of a material
fact or to omit to state a material fact neces-
3
sary in order to make the statements made, in
the light of the circumstances under which
they were made, not misleading, or
(c) To engage in any act, practice, or course of
business which operates or would operate as a
fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
PRELIMINARY STATEMENT
The decision below creates one circuit split and deepens another, both concerning important issues of securities law.
This Court has long prohibited private securities-fraud
plaintiffs from asserting aiding-and-abetting claims. See
Cent. Bank of Denver, N.A. v. First Interstate Bank of
Denver, N.A., 511 U.S. 164, 177 (1994). At least four circuits have applied that prohibition to dismiss claims
against defendants that substantially participated in a
fraudulent scheme by enabling the primary violator to
commit acts that harmed plaintiffs. Those courts hold
that liability may not be imposed on a defendant where
another actor retained independent, ultimate authority to
commit the acts that harmed plaintiffs. In the decision
below, the Second Circuit created a theory of “coparticipant” liability that directly conflicts with these rulings. Under the Second Circuit’s unprecedented rule, an
actor that sells products or services that a third party uses to allegedly manipulate a market can be held liable for
violating Rule 10b-5, even when it was the third party’s
actions that directly and independently caused the alleged harm. The Second Circuit’s approach erases the
“clean line[s]” this Court has drawn between primary and
aiding-and-abetting claims, and impermissibly expands
the “narrow” implied cause of action under § 10(b).
4
The decision below also exacerbates an existing split
regarding the standard for pleading a manipulative act
under § 10(b). The Third Circuit defines manipulation as
the injection of inaccurate information into a market,
such as through sham trades. In contrast, the D.C. Circuit requires only legitimate trading activity combined
with manipulative intent. The Second Circuit split with
both these courts: It found the manipulative-act element
met based on non-trading conduct that did not inject any
information about any security into any market, much
less inaccurate information. No circuit has adopted so
capacious a definition of “market manipulation.”
The need for certiorari is especially urgent because of
the Second Circuit’s outsized influence in securities law.
The Court should grant review and restore certainty and
stability regarding these critical securities-law issues.
STATEMENT
I. BACKGROUND
Section 10(b) of the Exchange Act prohibits employing
“any manipulative or deceptive device or contrivance” “in
connection with the purchase or sale of any security.” 15
U.S.C. § 78j(b). SEC Rule 10b-5 further specifies that it
is unlawful both “[t]o employ any device, scheme, or artifice to defraud” and “[t]o engage in any act, practice, or
course of business which operates or would operate as a
fraud or deceit upon any person.” 17 C.F.R. § 240.10b5(a), (c). To state a market-manipulation claim under
§ 10(b), a plaintiff must plead “(1) manipulative acts; (2)
damage; (3) caused by reliance on an assumption of an
efficient market free of manipulation; (4) scienter; (5) in
connection with the purchase or sale of securities; (6) furthered by the defendant’s use of the mails or any facility
of a national securities exchange.” ATSI Commc’ns, Inc.
v. Shaar Fund, Ltd., 493 F.3d 87, 101 (2d Cir. 2007).
This Court has permitted private lawsuits under
5
§ 10(b) against only “primary violators”—i.e., “the person[s] or entit[ies] with ultimate authority over a statement” or manipulative act, Janus Capital Group, Inc. v.
First Derivative Traders, 564 U.S. 135, 143 n.6 (2011)—
and has barred such claims against “aider[s] and abettor[s].” Cent. Bank, 511 U.S. at 191. However, the SEC
may pursue aiders and abettors under 15 U.S.C. § 78t(e).
II. PROCEEDINGS BELOW
A. Proceedings in the district court
1. In 2014, respondent investors filed this putative
class action of unprecedented scope—covering all purchasers and sellers of any stock since 2009 on any of the
major U.S. stock exchanges—against high-frequency
trading (HFT) firms and the petitioner Exchanges. Respondents allege that “the Exchanges violated [§ 10(b)]
by engaging in a manipulative scheme in which they enabled HFT firms to exploit ordinary investors trading on
the Exchanges.” App., infra, 44a.1
Specifically, respondents allege that “the exchanges
created three products and services for ‘favored’ HFT
firms—proprietary data feeds, co-location services, and
complex order types—to provide these firms with more
data at a faster rate than the investing public.” Id. at 7a.
Although there is no allegation that the Exchanges engaged in any trading activity, HFT firms’ use of these
products and services allegedly “greatly disadvantaged”
respondents and “resulted in their bids and orders not
being filled at the best available prices.” Id. at 8a, 22a;
Although originally named as defendants, the HFT firms were voluntarily dismissed by respondents and are no longer parties to this
lawsuit. Compare C.A. App. at 24-25 (listing the defendants in the
original complaint), with id. at 40 (listing the defendants in the
amended complaint).
1
6
see also id. at 96a (alleging that the Exchanges “enable[d]” the HFT firms’ market manipulation).
“As regulated entities, [the Exchanges] are subject to
SEC oversight and must comply with the securities laws
as well as the [E]xchanges’ own rules.” Id. at 5a. That
oversight covers the products and services that underpin
the manipulation allegations. Id. at 7a-11a. The Exchanges’ offering of each of those products and services
is subject to SEC approval. Ibid.
Proprietary data feeds “include more detailed information regarding trading activity” than is found in consolidated data feeds. Id. at 7a-8a. Although anyone can
purchase proprietary feeds, respondents allege that they
are “cost prohibitive for ordinary investors” and thus
have the effect that “HFT firms [that purchase proprietary feeds] receive more information at a faster rate and
so are able [to] trade on information earlier.” Id. at 8a.
Co-location services entail the Exchanges’ “rent[ing]
space to investors to allow them to place their computer
servers in close physical proximity to the exchanges’ systems.” Id. at 9a. This reduces “the amount of time that
elapses between when a signal is sent to trade a stock
and a trading venue’s receipt of that signal.” Ibid. Respondents allege that co-location services “are costprohibitive for most ordinary investors.” Ibid. Respondents also claim that because HFT firms’ business models
“involve[] frequent buying and selling in short periods of
time,” co-location is “especially attractive to [them].”
Ibid.
Respondents’ allegations also focus on the way that
the Exchanges operate the markets in which securities
trades take place by facilitating the interactions of orders
between market participants. For example, a simple order type is an order to a broker to buy a stock at the prevailing market price. Id. at 41a. A complex order type,
7
by contrast, may cause different scenarios to occur after
the order is submitted. Ibid. One complex order type,
for instance, allegedly “allows traders to place orders
that remain hidden from the ordinary bid-and-offer listings on an individual exchange until a stock reaches a
particular price, at which point the hidden orders emerge
and jump the queue ahead of other investors’ orders.” Id.
at 10a. Respondents allege that such complex order
types “benefit HFT firms at the[ir] expense.” Ibid.
2. The district court granted the Exchanges’ motion
to dismiss, holding that respondents’ “Section 10(b)
claims fail as a matter of law for at least two reasons.” Id.
at 59a.
One independent ground for dismissal was based on
this Court’s prohibition against aiding-and-abetting liability in private securities-fraud lawsuits. The district
court noted the black-letter law that “Section 10(b)’s
‘proscription does not include giving aid to a person who
commits a manipulative or deceptive act.’” Id. at 61a
(quoting Cent. Bank, 511 U.S. at 177). It then analyzed
respondents’ allegations, concluding that they consisted
of claims that “the Exchange[s’] actions merely enabled
an HFT firm to execute a transaction, and it was the
transaction itself that caused the allegedly artificial effect
on the market.” Ibid. (emphasis added). Thus, “the most
that the Complaint[] can be said to allege is that the Exchanges aided and abetted the HFT firms’ manipulation
of the market price.” Ibid. Because such claims are prohibited under Central Bank, the district court dismissed
the complaint. Ibid.
The district court’s other independent ground for dismissal concerned the manipulative-act element of a
§ 10(b) market-manipulation claim. Respondents could
not satisfy that element because they “fail[ed] to allege
any manipulative acts on the part of the Exchanges.” Id.
8
at 59a. Manipulation, the court explained, “refers generally to practices, such as wash sales, matched orders, or
rigged prices, that are intended to mislead investors by
artificially affecting market activity.” Ibid. (quoting Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977)). Accordingly, “[a] manipulative act is * * * any act—as opposed to a statement—that has such an ‘artificial’ effect
on the price of a security.” Id. at 60a. Respondents’ allegations did not meet that standard because they “fail[ed]
to explain how merely enabling a party to react more
quickly to information can constitute a manipulative act,
at least where the services at issue are publicly known
and available to any customer willing to pay.” Id. at 61a.
B. The court of appeals’ decision
The Second Circuit vacated the dismissal and remanded for further proceedings. Id. at 4a. On the aiding-andabetting issue, the court acknowledged that the Exchanges’ conduct consisted of “s[elling] products and services” and that “[i]t is true that if the HFT firms had not
used these products and services, [respondents] could not
have suffered their alleged harm.” Id. at 26a-27a. But
the court nevertheless concluded that the prohibition on
aiding-and-abetting claims did not apply because “the
exchanges were co-participants with HFT firms in the
manipulative scheme and profited by that scheme”
through “payments for those products and services and
* * * fees generated by the HFT firms’ substantially increased trading volume on their exchange.” Id. at 27a.
The court also held that respondents pleaded the manipulative-act element. Again, the court acknowledged
that the Exchanges’ conduct consisted of “creat[ing]
products and services.” Id. at 22a. But, in its view, those
actions constituted manipulation because respondents
alleged that HFT firms used those products and services
“to access market data at a faster rate, obtain non-public
9
information, and take priority over ordinary investors’
trades.” Ibid. The court also faulted the Exchanges for
“fail[ing] to disclose the full impact that such products
and services would have on market activity.” Ibid. In
other words, although “the [E]xchanges may have told
ordinary investors about the existence of proprietary data feeds and co-location services, * * * the exchanges did
not publicly disclose the full range or cumulative effect
that such services would have on the market.” Id. at 24a
(second emphasis added).2 Ultimately, the Second Circuit held that respondents “have sufficiently pled that the
exchanges misled investors by artificially affecting market activity.” Id. at 25a.3
REASONS FOR GRANTING THE PETITION
The decision below implicates two circuit splits on important issues of securities law. The Court should grant
review to restore the aiding-and-abetting prohibition and
resolve the festering split on market-manipulation claims.
I. THE CIRCUITS ARE NOW DIVIDED OVER HOW TO
ENFORCE THIS COURT’S BAR ON PRIVATE AIDINGAND-ABETTING CLAIMS
This Court has long recognized that private plaintiffs
cannot assert claims for aiding-and-abetting violations of
§ 10(b). It announced that rule over 24 years ago and has
reinforced it at every opportunity. See Janus Capital
Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 141148 (2011); Stoneridge Inv. Partners, LLC v. ScientificAtlanta, Inc., 552 U.S. 148, 152-167 (2008); Cent. Bank,
Respondents did not attempt to plead a misstatement claim against
the Exchanges. Rather, they attempted to use the alleged failures to
disclose to support their market-manipulation claim.
3
The Second Circuit also addressed jurisdictional and immunity issues, but those matters are not raised in this petition. App., infra,
12a-20a.
2
10
511 U.S. at 177, 191. Until now, the courts of appeals
have uniformly applied that rule to bar private securitiesfraud claims for a wide variety of aiding-and-abetting
conduct, including various forms of assisting or substantially participating in fraudulent schemes.
The decision below shatters this consensus. The Second Circuit adopted a theory of “co-participant” liability
that permits private securities-fraud claims against actors whose alleged misdeeds were merely to enable and
profit from a primary violator’s fraudulent acts. App.,
infra, 26a-28a. That directly conflicts with this Court’s
and other circuits’ holdings, which consistently disallow
liability where the defendant enabled, substantially participated in, and profited from a fraudulent scheme.
A. This Court’s decisions prohibit aiding-andabetting liability in private securities lawsuits
Although § 10(b) does not explicitly create a private
right of action, this Court has implied one from its text.
See Superintendent of Ins. of N.Y. v. Bankers Life &
Cas. Co., 404 U.S. 6, 13 n.9 (1971). The Court has, however, vigilantly policed the boundaries of that private action, emphasizing the “narrow dimensions [the Court]
must give to a right of action Congress did not authorize
when it first enacted the statute and did not expand when
it revisited the law.” Stoneridge, 552 U.S. at 167.
In Central Bank, the Court held that § 10(b) imposes
liability only on “primary violators” but does not reach
“aider[s] and abettor[s].” 511 U.S. at 191. Since Central
Bank, the law has been clear that “a private plaintiff may
not maintain an aiding and abetting suit under § 10(b).”
Ibid.; see Chadbourne & Parke LLP v. Troice, 134 S. Ct.
1058, 1071 (2014) (“Section 10(b) does not create a private right of action for investors vis-à-vis ‘secondary actors’ or ‘aiders and abettors’ of securities fraud.” (quoting
Stoneridge, 552 U.S. at 152, 155)). Although Congress
11
later “amended the securities laws to provide for limited
coverage of aiders and abettors,” it “authorized [such
claims only] in actions brought by the SEC” and left intact this Court’s prohibition against private aiding-andabetting claims. Stoneridge, 552 U.S. at 162 (citing 15
U.S.C. § 78t(e)).
Time and again, the Court has refused “to extend [private § 10(b)] liability beyond the scope of conduct prohibited by the statutory text,” each time illustrating the
scope of secondary conduct that falls outside of § 10(b)’s
limited private right of action. Cent. Bank, 511 U.S. at
177. In Stoneridge, the Court confronted whether “an
injured investor may rely upon § 10(b) to recover from a
party that neither makes a public misstatement nor violates a duty to disclose but does participate in a scheme
to violate § 10(b).” 552 U.S. at 156. Investors in a cable
company had sued the company’s suppliers for engaging
in sham transactions with the company so that it could
“fool its auditor into approving a financial statement
showing it met projected revenue and operating cashflow
numbers.” Id. at 154. Although the Court acknowledged
that the company’s choice to commit fraud may have
been “a natural and expected consequence of [the suppliers’] deceptive acts,” it recognized that ultimately “[i]t
was [the cable company], not [the suppliers], that misled
its auditor and filed fraudulent financial statements;
nothing [the suppliers] did made it necessary or inevitable for [the cable company] to record the transactions as
it did.” Id. at 160-161. That principle exposed the defect
in the investors’ “scheme” theory of primary liability: It
would impermissibly “revive in substance the implied
cause of action against all aiders and abettors” because it
would extend to all actors who—like the suppliers—
“commit[] a deceptive act in the process of providing assistance” to a fraudfeasor. Id. at 162-163. The Court
therefore reinforced Central Bank’s strict bar on aiding-
12
and-abetting claims, declaring that the Ҥ 10(b) private
right should not be extended beyond its present boundaries.” Id. at 165.
The Court maintained that bright-line prohibition in
Janus. The Court held that Rule 10b-5 liability for misleading statements in prospectuses could not extend to a
mutual fund’s investment adviser that had “significantly”
“participat[ed] in the writing and dissemination of the
prospectuses.” Janus, 564 U.S. at 141, 148. “Although
[the investment adviser], like a speechwriter, may have
assisted [the mutual fund] with crafting * * * the prospectuses,” the mutual fund maintained “ultimate control” over their contents. Id. at 148. Thus, as in Stoneridge, the adviser’s actions did not make it “necessary or
inevitable” that any falsehood will be contained in the
statement. Id. at 144 (quoting Stoneridge, 552 U.S. at
161). Emphasizing the “narrow scope that we must give
the implied private right of action,” the Court refused to
“expand liability beyond the person or entity that ultimately has authority over a false statement.” Ibid. After
all, “[i]f persons or entities without control over the content of a statement could be considered primary violators
who ‘made’ the statement, then aiders and abettors
would be almost nonexistent.” Id. at 143.
B. The circuits prohibit claims for substantially
participating in or enabling a fraud
Central Bank, Stoneridge, and Janus delivered a clear
message to the circuit courts. The Third, Fifth, Seventh,
and Eleventh Circuits have all faithfully applied this
Court’s prohibition on private aiding-and-abetting lawsuits to bar claims against a variety of actors that substantially participated in schemes to enable primary actors to commit securities fraud.
1. The Third Circuit followed this Court’s lead in In
re DVI, Inc. Securities Litigation, 639 F.3d 623 (3d Cir.
13
2011), partially abrogated on other grounds by Amgen,
Inc. v. Connecticut Retirement Plans & Trust Funds,
568 U.S. 455, 465 (2013). The issue was “whether a law
firm can be held primarily liable for participating in a
scheme to defraud even though its role in the scheme was
not publicly disclosed.” Id. at 647 n.32. The scheme was
“designed to artificially inflate the price of [a company’s]
securities” by “concealing cash shortages by overstating
revenues, assets, and earnings, and understating liabilities and expenses.” Id. at 628. The law firm “assisted
[the company] in its scheme by drafting fraudulent financial reports[,] * * * conspiring with other defendants to
hide material information about the company’s financial
condition, and deflecting inquiries from the SEC.” Id. at
628-629. The investor plaintiffs argued that the law
firm’s “involvement in the alleged scheme was substantial enough to create primary liability.” Id. at 643.
The Third Circuit disagreed, explaining that it made
no difference that the law firm may have been “more involved in the preparation of financial statements than
the” suppliers in Stoneridge. Id. at 647. The dispositive
point remained, as in Stoneridge, that it was the company’s—not the law firm’s—independent choice to commit
the fraud:
[N]o alleged act by [the law firm] made it necessary
for [the company] to file the misleading 10-Q. Even
assuming [the law firm] developed the workaround
to avoid disclosure of [the company]’s material
weaknesses, and [the company] would have issued a
truthful 10-Q if the law firm did not present this alternative, it was still [the company], not [the law
firm], that filed it.
Ibid. The Third Circuit thus rejected the plaintiffs’ attempt to impose Rule 10b-5 liability based on substantial
participation that enabled a primary actor’s fraudulent
14
scheme.
2. In Regents of University of California v. Credit
Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir.
2007), the Fifth Circuit reached the same conclusion.
There, plaintiffs alleged that investment banks “entered
into partnerships and transactions that allowed [a company] to take liabilities off of its books temporarily and to
book revenue from the transactions when it was actually
incurring debt.” Id. at 377. “[T]hese transactions [thus]
* * * allowed [the company] to misstate its financial condition.” Ibid. The court agreed that “[the company]
committed fraud by misstating its accounts.” Id. at 386.
But it reasoned that the “banks only aided and abetted
that fraud by engaging in transactions to make it more
plausible.” Ibid. Recognizing that under Central Bank,
“[s]ection 10(b) does not give rise to aiding and abetting
liability,” the court concluded that “[t]he banks’ participation in the transactions, regardless of the purpose or
effect of those transactions, did not give rise to primary
liability under § 10(b).” Id. at 386, 390; see also Affco
Invs. 2001, L.L.C. v. Proskauer Rose, L.L.P., 625 F.3d
185, 195 (5th Cir. 2010) (despite a law firm’s “intimate involvement in the [fraudulent] tax scheme,” it was nonetheless a secondary actor providing support services for
the primary violator).
3. The Seventh and Eleventh Circuits have rejected
similar attempts to circumvent the aiding-and-abetting
bar. In Ziemba v. Cascade International, Inc., 256 F.3d
1194 (11th Cir. 2001), the underlying fraud occurred
when a company “materially misrepresented its assets,
profits, and revenues and had issued millions of unauthorized shares of stock.” Id. at 1198. Investors sued a
law firm that played a “significant role in drafting, creating, reviewing or editing allegedly fraudulent letters or
press releases” and an accounting firm that “‘substantially participated’ in the [company’s] fraud by allowing [it]
15
to omit [a subsidiary’s] poor financial results from its
own.” Id. at 1205, 1207. The Eleventh Circuit rejected
those claims as mere aiding and abetting, holding that
“[i]n light of Central Bank,” allegations of “substantial
participation” in the fraud are “not enough to state a
claim under § 10(b).” Id. at 1207.
In Foss v. Bear, Stearns & Co., 394 F.3d 540 (7th Cir.
2005), the administrator of an estate committed securities
fraud when he discovered “some securities [the decedent
kept] in safe deposit boxes” and then engaged in a
scheme to secretly transfer those securities to himself.
Id. at 541. After the fraud was revealed, the new administrator sued a bank executive who had “helped [the previous administrator] bilk the court, heirs, and revenue
officials” by enabling the transfer. Ibid. The court rejected § 10(b) liability, reasoning that “[the bank executive] was at worst [the administrator]’s henchman, and
there is no securities-law liability in private litigation for
aiding and abetting.” Id. at 542.
C. The Second Circuit’s creation of “coparticipant” liability directly conflicts with
this Court’s and other circuits’ holdings
1. In the decision below, the Second Circuit flouted
the holdings of this Court and broke with its sister circuits by holding that plaintiffs may evade the bar on aiding-and-abetting liability by pleading that a defendant
acted as a “co-participant” in the primary violator’s
fraud. This holding directly conflicts with the circuit
opinions discussed above, which uniformly hold that even
substantial participation in a fraud is insufficient where
the primary violator made an independent choice to
commit fraud.
The Second Circuit began by noting the prohibition
against private claims “for aiding and abetting under
§ 10(b).” App., infra, 26a. It next acknowledged that it
16
was the HFT firms’ use of the products and services the
Exchanges offered—rather than offering the products
and services themselves—that caused the alleged fraudulent harm: “It is true that if the HFT firms had not used
these products and services, the plaintiffs could not have
suffered their alleged harm.” Ibid. But the Second Circuit did not follow those premises to the conclusion mandated by this Court’s precedents. Rather than rejecting
liability against the Exchanges as mere aiders and abettors that allegedly “enable[d]” the HFT firms’ independent choice to manipulate the markets, id. at 96a, the court
created a novel form of primary liability.
It did so by labeling the Exchanges as “coparticipants” in the HFT firms’ scheme. Id. at 27a. Then
the court defended that designation by pointing out that
the Exchanges made a profit in selling products and services to the HFT firms: “The exchanges sold products
and services during the class period that favored HFT
firms and, in return, the exchanges received hundreds of
millions of dollars in payments for those products and
services and in fees generated by the HFT firms’ substantially increased trading volume on their exchanges.”
Ibid. That economic gain, in the Second Circuit’s view,
rendered the Exchanges liable as “co-participants” with
the HFT firms in the manipulative scheme. Ibid.; see also id. at 28a (“We think that such allegations sufficiently
plead that the exchanges committed manipulative acts
and participated in a fraudulent scheme in violation of the
Exchange Act and Rule 10b-5.”).
2. The Second Circuit’s holding—that “coparticipa[tion]” combined with economic gain overcomes
the aiding-and-abetting bar—flagrantly contravenes this
Court’s precedent. The Court has squarely held that
even substantial participation in a fraudulent scheme
constitutes non-actionable aiding and abetting where a
primary violator exercises ultimate authority to commit
17
the fraudulent act that causes harm. This Court declined
to impose liability in Stoneridge for precisely that reason,
noting that although the fraud may have been “a natural
and expected consequence of [the suppliers’] deceptive
acts,” “[i]t was [the cable company], not [the suppliers],
that misled its auditor and filed fraudulent financial
statements; * * * nothing [the suppliers] did made it
necessary or inevitable for [the cable company] to record
the transactions as it did.” 552 U.S. 160-161. Janus reinforced this point: “Although [the investment adviser], like
a speechwriter, may have assisted [the mutual fund] with
crafting * * * the [fraudulent] prospectuses,” “ultimate
control” over their contents resided with the mutual fund.
564 U.S. at 148. That reasoning compels the same noliability result here because, as the Second Circuit
acknowledged, it was the HFT firms’ independent decision to use the Exchanges’ products and services as they
did that allegedly caused the fraudulent harm. App., infra, 26a (“It is true that if the HFT firms had not used
these products and services, the plaintiffs could not have
suffered their alleged harm.”). Yet the Second Circuit
impermissibly extended the “narrow scope” of § 10(b)
liability, Janus, 564 U.S. at 144, by stretching primary
liability far beyond where this Court and other circuits
have been willing to go—exceeding the strictly circumscribed bounds of this implied cause of action.
Moreover, the Exchanges allegedly “co-participa[ted]”
to a lesser degree than the aiders and abettors in Stoneridge and Janus. The Exchanges’ alleged conduct falls
within the core of classic aiding and abetting—selling
primary violators the products and services that they
used to cause allegedly fraudulent harm. App., infra,
26a-28a. Contrast that with the suppliers in Stoneridge
that fabricated sham transactions, complete with false
documentation, 552 U.S. at 154, or the investment adviser
in Janus that was “significantly involved” in crafting the
18
fraudulent prospectuses, 564 U.S. at 148. The secondary
actors in those cases are analogous to trusted accomplices who help a burglar plan and execute a heist, whereas
the Exchanges more closely resemble the store that sold
him the crowbar he used. If the former is not sufficient
to overcome the aiding-and-abetting prohibition, then the
latter surely cannot be. Indeed, by adopting a test based
on “co-participation” rather than “substantial participation,” the Second Circuit arguably created potential liability even broader than the aiding-and-abetting claims
this Court rejected decades ago.
Finally, this Court has never suggested that a plaintiff
may circumvent the aiding-and-abetting prohibition
merely by pleading that the secondary actor profited
from his acts. In fact, this Court first recognized the
prohibition in the context of an aider and abettor who
was acting as a paid indenture trustee for a series of bond
issues. See Central Bank, 511 U.S. at 167.
3. The decision below also directly conflicts with the
circuit cases discussed above. The Exchanges’ “coparticipa[tion]” would not convert their alleged aiding
and abetting into primary liability in the Third, Fifth,
Seventh, and Eleventh Circuits. The Second Circuit’s coparticipant theory is irreconcilable with sister-circuit
holdings that even substantial participation in a scheme
does not convert aiding and abetting into actionable securities fraud:
The Third Circuit rejected liability against the
law firm in DVI that “draft[ed] fraudulent financial reports * * * [and] conspir[ed] with
other defendants to hide material information
about the company’s financial condition.” 639
F.3d at 628-629.
The Fifth Circuit rejected liability against the
banks in Credit Suisse that “entered into part-
19
nerships and transactions that allowed” a company to misstate its financials and create an “illusion of revenue.” 482 F.3d at 377.
The Fifth Circuit rejected liability against the
law firm in Affco that worked “to promote, sell,
and support the [fraudulent] tax strategies.”
625 F.3d at 195.
The Eleventh Circuit rejected liability against
the accounting firm in Ziemba that enabled a
company’s fraud “by allowing [it] to omit [a
subsidiary’s] poor financial results from its
own,” and the law firm that played “a significant role in drafting, creating, reviewing or editing allegedly fraudulent letters or press releases.” 256 F.3d at 1202-1203, 1207.
The Seventh Circuit rejected liability against
the bank executive in Foss who served as the
administrator’s “henchman” and “helped [him]
bilk the court, heirs, and revenue officials.” 394
F.3d at 542.
The aiders and abettors in those cases were “intimate[ly] involve[d]” with allegedly fraudulent conduct,
Affco, 625 F.3d at 195, played “significant role[s],” and
provided “substantial assistance,” Ziemba, 256 F.3d at
1202-1203, 1205. The Exchanges, in contrast, merely engaged in arms-length transactions to sell products and
services to buyers, including (but not limited to) unaffiliated HFT firms who allegedly used them to manipulate
the markets. See App., infra, 26a-28a. If the aiding-andabetting prohibition bars liability for the much more extensive conduct in the other circuit cases, then it would
also defeat claims premised on the Exchanges’ lesser involvement. Conversely, all of the claims rejected by the
other circuits would be viable under the Second Circuit’s
“co-participant” approach.
20
The fact that an aider and abettor profited from its
conduct would make no difference in the other circuits.
The banks in Credit Suisse “profit[ed] by helping [a company] maintain th[e] illusion [of revenue].” 482 F.3d at
377. The law firms, accounting firm, and bank executive
in DVI, Affco, Ziemba, and Foss presumably were paid
for the services that facilitated the frauds. That is unsurprising because the prospect of economic gain is the
typical motivation for aiding-and-abetting conduct.
As under this Court’s cases, the HFT firms’ independent decisions to commit the allegedly manipulative acts
would have defeated the claims against the Exchanges in
the other circuits. The Third Circuit’s opinion in DVI, for
example, is irreconcilable with the Second Circuit’s approach. As in DVI, “no alleged act by [the Exchanges]
made it necessary for [the HFT firms] to [engage in the
manipulative transactions]. * * * Even assuming * * *
[that the HFT firms] would [not have manipulated the
market] if [the Exchanges] did not [offer the products
and services], it was still [the HFT firms], not [the Exchanges], that [made the manipulative trades].” 639 F.3d
at 647; see also Credit Suisse, 482 F.3d at 386 (explaining
that it was “[the company that] committed fraud by misstating its accounts,” while “banks only * * * ma[de] [the
fraud] more plausible”). The decision below departed
from that consensus, exposing the Exchanges to liability
for publicly offering products and services despite acknowledging that “[i]t is true that if the HFT firms had
not used these products and services, [respondents] could
not have suffered their alleged harm.” App., infra, 26a.
II. THE SECOND CIRCUIT’S DECISION DEEPENS EXISTING DISAGREEMENT ON THE MANIPULATIVE-ACT
ELEMENT OF A MARKET-MANIPULATION CLAIM
The decision below warrants review for a second, independent reason. It deepens an acknowledged circuit
21
split on what is necessary to satisfy the manipulative-act
element of a market-manipulation claim. This Court has
long recognized that “manipulative” is “virtually a term
of art when used in connection with securities markets.”
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976). It
refers to “intentional or willful conduct designed to deceive or defraud investors by controlling or artificially
affecting the price of securities.” Ibid. Manipulative
practices are those “such as wash sales, matched orders,
or rigged prices”—all of which give only the illusion of
free-market buying and selling by actual market participants. Santa Fe, 430 U.S. at 476. Such practices “are
intended to mislead investors by artificially affecting
market activity.” Ibid.
A “sharp circuit split” emerged over the conduct required to allege “manipulation,” and it has remained unresolved for over 15 years. See Fox et al., Stock Market
Manipulation and Its Regulation, 35 Yale J. on Reg. 67,
118 (2018) (hereinafter, “Fox”). The split centers on
whether, under Santa Fe, “open market manipulation,
without an additional act that is unlawful by itself, is ever
prohibited under Section 10(b).” Ibid.
The Eleventh Circuit has summarized in dicta one side
of the split: “[E]ngag[ing] in any kind of simulated market activity or transactions designed to ‘create an unnatural and unwarranted appearance of market activity’
* * * is required to constitute market manipulation.” In
re Galectin Therapeutics, Inc. Sec. Litig., 843 F.3d 1257,
1273 (11th Cir. 2016)) (quoting Santa Fe, 430 U.S. at 476477)). The Third Circuit agrees with this approach, holding that manipulation requires the “inject[ion] [of] inaccurate information into the marketplace.” GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 204 (3d Cir.
2001). Under this view, real “trading behavior on its
own cannot constitute a manipulation; some additional
unlawful act is necessary as well,” such as the variety of
22
sham trades listed in Santa Fe. Fox at 119.
The D.C. Circuit “h[as] come to the opposite conclusion,” holding that the manipulative-act element can be
satisfied by legitimate trading activity “‘solely because of
the actor’s purpose’ when that purpose was improper,
without necessitating any further unlawful act.” Id. at
119, 122 (quoting Markowski v. SEC, 274 F.3d 525, 529
(D.C. Cir. 2001)).
The decision below departed from both tests established by other circuits. Indeed, it expanded liability beyond even the D.C. Circuit’s more liberal approach, permitting a manipulation claim to proceed despite recognizing that the Exchanges engaged in no trading activity
whatsoever.
A. The Third Circuit defines manipulation as the
injection of inaccurate price information into
the market
The Third Circuit holds that only the injection of inaccurate price information constitutes manipulation. In
Colkitt, the Third Circuit rejected attempts to satisfy the
manipulative-act element by combining legitimate market activity with an intent to manipulate. There, a lender
loaned money to an investor under two notes that gave
the lender the option to demand part of the repayment in
shares of the investor’s stock in two companies. Colkitt,
272 F.3d at 195. The lender then began “short selling
[the two companies’] stock.” Ibid. The investor claimed
that this constituted manipulation under § 10(b) because
the lender sold “shares short in an effort to depress the
prices of the stocks * * * so that [the investor] would be
forced to exchange more shares to retire the same
amount of debt.” Id. at 197, 202-203.
The court framed the key question as “whether [a
plaintiff] must demonstrate that [a defendant] injected
inaccurate information into the marketplace or created a
23
false impression of market activity” in order to satisfy
the manipulative-act element of a market-manipulation
claim. Id. at 204. The investor argued that “he is not required to present evidence that ‘[the lender] injected affirmative misinformation into the market,’ but only needs
to demonstrate that ‘[the lender’s] short trades were
made for the undisclosed purpose of artificially depressing share prices.’” Ibid. (first emphasis added).
The Third Circuit disagreed. It ruled that regardless
of the alleged manipulator’s intent, a plaintiff must “establish that the alleged manipulator injected ‘inaccurate
information’ into the market or created a false impression of market activity” “by purposely making false
statements or by employing illegitimate, deceptive trading techniques.” Id. at 204-205. Applying that rule, the
Third Circuit held that because “short selling is lawful,”
the investor had to show that the lender “engaged in
some other type of deceptive behavior in conjunction with
its short selling that either injected inaccurate information into the marketplace or created artificial demand
for the securities.” Id. at 211. Because he did not do so,
the court concluded that his “claim of market manipulation must fail.” Id. at 212.
B. The D.C. Circuit imposes liability when legitimate trading activity is combined with improper intent
The D.C. Circuit rejects the Third Circuit’s rule that a
defendant must engage in illegitimate market activity
that “either inject[s] inaccurate information into the
marketplace or create[s] artificial demand for the securities.” Id. at 211. It instead allows manipulation claims
based on legitimate market activity coupled with an intent to manipulate.
The D.C. Circuit so held in Markowski v. SEC, 274
F.3d 525 (D.C. Cir. 2001). Defendants were the CEO of a
24
securities dealer and its trader. Id. at 527. The dealer
underwrote an initial public offering and then supported
the price of the securities by “maintain[ing] high bid
prices” and “absorb[ing] all unwanted securities into inventory.” Ibid. The CEO and the trader argued that because all the “bids and trades in th[at] case were ‘real’—
they involved real customers, real transactions, and real
money—the trades [could] not be classified as an unlawful manipulation.” Id. at 528.
The court recognized that this case was different from
“classic schemes using fraudulent devices such as ‘wash
sales’ * * * to give a false appearance of sales and market
interest.” Ibid. And it acknowledged that if “[l]egality
* * * depend[s] entirely on whether the investor’s intent
was an investment purpose or solely to affect the price of
[the] security,” then “[i]t may be hard to separate a manipulative investor from one who is simply * * * a true
believer” because “[b]oth may amass huge inventories
and place high bids” despite “scant objective [supporting]
data.” Ibid. (internal quotation marks omitted).
Despite these “practical concerns,” the D.C. Circuit
held that lawful market activity that injects no inaccurate
price information “can be illegal solely because of the actor’s purpose.” Id. at 529. Accordingly, although the defendants’ conduct did not “give a false appearance of
sales and market interest,” it constituted a manipulative
act because their intent was “solely to affect the price of
[the] security.” Id. at 528.
Time has only hardened the D.C. Circuit’s views. It
went even further in Koch v. SEC, 793 F.3d 147 (D.C.
Cir. 2015), holding that trading activity need not actually
affect the price of a security to constitute manipulation:
“[S]uccessful market manipulation is not equivalent to
intent to manipulate the market. And intent—not success—is all that must accompany manipulative conduct to
25
prove a violation of the Exchange Act and its implementing regulations.” Id. at 153-154 (citation omitted). The
D.C. Circuit has thus firmly rejected the Third Circuit’s
rule that a manipulative act requires the “inject[ion] [of]
inaccurate information into the marketplace or creat[ion]
[of] artificial demand for the securities.” Colkitt, 272
F.3d at 211.
C. The Second Circuit’s approach conflicts with
those of both the Third and D.C. Circuits
1. In the decision below, the Second Circuit split
with both the Third and D.C. Circuits. The court
acknowledged that the Exchanges merely “created products and services”; it did not assert that any Exchange
directly manipulated stock prices or even engaged in any
trading activity. Instead, the court observed that the
HFT firms used the Exchanges’ products and services
“to access market data at a faster rate, obtain non-public
information, and take priority over ordinary investors’
trades.” App., infra, 22a. It also faulted the Exchanges
for “fail[ing] to disclose the full impact that such products
and services would have on market activity.” Ibid. In
other words, although “the [E]xchanges may have told
ordinary investors about the existence of proprietary data feeds and co-location services, * * * the exchanges did
not publicly disclose the full range or cumulative effect
that such services would have on the market.” Id. at 24a
(second emphasis added). These components comprised
the reasoning supporting the Second Circuit’s conclusion
that “the plaintiffs have sufficiently pled that the exchanges misled investors by artificially affecting market
activity.” Id. at 25a.
Consider, in contrast, how this case would have proceeded under the Third Circuit’s rule. The Exchanges’
conduct—“creat[ing] products and services,” id. at 22a—
would not meet the Third Circuit’s manipulation test for
26
two separate reasons. First, the Exchanges’ creation and
offering of products and services, taken alone, did not inject any price information, much less “inject inaccurate
information into the marketplace.” Colkitt, 272 F.3d at
211 (emphasis added). It was “the use of” those products
and services by HFT firms that allegedly affected prices.
App., infra, 22a-23a. Second, even the HFT firms’ “use
of” those products and services did not “inject inaccurate
information into the marketplace.” Colkitt, 272 F.3d at
211. Respondents do not allege that HFT firms engaged
in wash sales or other “fictitious transactions”; instead,
the HFT firms’ trades involved “real customers, real
transactions, and real money.” Markowski, 274 F.3d at
528.
The difference between the two approaches is plain.
The Third Circuit requires the “inject[ion] [of] inaccurate
information into the marketplace” through sham transactions or other direct manipulation of the stock prices.
Colkitt, 272 F.3d at 211. The Second Circuit, along with
the D.C. Circuit, does not.
The Second Circuit then went even further than the
D.C. Circuit and disregarded the Exchange Act and this
Court’s precedents, all of which require that the defendant at least engaged in some form of trading activity. See
15 U.S.C. § 78i(a) (proscribing various categories of trading activity and “false or misleading” statements made
“for the purpose of inducing” trading activity); Santa Fe,
430 U.S. at 476 (Manipulation “refers generally to practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially
affecting market activity.”). The Second Circuit found
that respondents properly pleaded the manipulative-act
element despite no allegation that any Exchange made
any trade in any security. Even the D.C. Circuit recognizes that pleading a manipulative act requires some allegation of trading activity. See Koch, 793 F.3d at 156
27
(drawing a clear line between “those who make statements” and “those who employ manipulative practices”).
2. The Second Circuit supported its conclusion that
respondents properly pleaded the manipulative-act element with the statement that the Exchanges failed to
disclose the “full impact” and “cumulative effect” of their
products and services. App., infra, 22a, 24a. But that
does not reconcile its approach with that of the Third
Circuit. It only highlights the far-reaching nature of the
Second Circuit’s holding. Even assuming such disclosures were required, the Exchanges’ alleged omissions
did not inject any price information into any market—
and thus would not qualify as manipulative conduct under
the Third Circuit’s rule. Indeed, the Third Circuit rejected the similar argument that legitimate trades “made
for the undisclosed purpose of artificially depressing
share prices” qualified as manipulation. Colkitt, 272 F.3d
at 204 (first emphasis added).
Moreover, the Exchanges’ disclosure duties plainly do
not require predictions about the “full impact” and “cumulative effect” of the ways in which third parties might
use, or misuse, the Exchanges’ products. That would set
up an absurd system of virtually boundless disclosure obligations, whereby each Exchange must formulate and
then disclose predictions regarding the potential effects
of every new product or service it offers, a requirement
found nowhere in the Exchange Act. Indeed, no court
has ever suggested that failing to disclose the potential
effects of disclosed products or services could satisfy the
manipulative-act element of a § 10(b) claim.
To the contrary, even when considering misrepresentation or omission claims, this Court has held that
Ҥ 10(b) and Rule 10b-5(b) do not create an affirmative
duty to disclose any and all material information.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44
28
(2011). “Disclosure is required under these provisions
only when necessary ‘to make * * * statements made, in
the light of the circumstances under which they were
made, not misleading.’” Id. at 44-45 (quoting 17 C.F.R.
§ 240.10b-5(b)). “Silence, absent a duty to disclose, is not
misleading under Rule 10b-5.” Basic, Inc. v. Levinson,
485 U.S. 224, 239 n.17 (1988). The Second Circuit did not
attempt to square its new disclosure obligations with
these rules or identify any other source for them. Thus,
the Second Circuit’s acceptance of a sweeping nondisclosure theory as a means to prove market manipulation goes further than both the Third and D.C. Circuits.
III. THE QUESTIONS PRESENTED ARE IMPORTANT AND
ARISE IN A CLEAN VEHICLE
A. The questions presented are important
1. If allowed to stand, the Second Circuit’s new category of “co-participant” liability will provide a ready
roadmap for circumventing this Court’s decisions prohibiting private aiding-and-abetting liability under § 10(b).
Plaintiffs will need only to characterize conduct as “coparticipat[ion]” to avoid the aiding-and-abetting bar.
Such semantics will expose a wide range of secondary actors such as law firms, accounting firms, and investment
banks to expansive § 10(b) liability for allegedly enabling
other actors to commit securities fraud. This Court has
recognized the importance of “draw[ing] a clean line between” “those who are primarily liable (and thus may be
pursued in private suits) and those who are secondarily
liable (and thus may not be pursued in private suits).”
Janus, 564 U.S. at 143 n.6. The Second Circuit’s approach erased that line. The Court has granted certiorari three times—in Central Bank, Stoneridge, and Janus—to clarify these boundaries and reinforce the strict
limits on this judicially created cause of action. It should
do so again here.
29
2. The market-manipulation issue is important as
well. The academic literature has long noted that “manipulative trades are extremely difficult, perhaps impossible, to identify.” Fischel & Ross, Should the Law Prohibit “Manipulation” in Financial Markets?, 105 Harv.
L. Rev. 503, 519 (1991). Yet this Court has largely left
that task to the lower courts; its last major discussion regarding the definition of manipulation came more than 40
years ago. See Santa Fe, 430 U.S. at 476. Operating
without this Court’s guidance, lower courts have developed “a legal framework that lacks precision, cogency,
and consistency of application.” Fox at 71. “The associated confusion as to what constitutes illegal manipulation
produces unpredictable and disparate outcomes for cases
with similar facts.” Ibid.; see id. at 118-122 (discussing
examples of such outcomes). Indeed, district courts on
the front lines of these cases have bemoaned the chaotic
landscape surrounding what constitutes a manipulative
act. See, e.g., CP Stone Fort Holdings, LLC v. John, No.
16 C 4991, 2016 WL 5934096, at *4-6 (N.D. Ill. Oct. 11,
2016) (remarking that “[t]he propriety of maintaining a
manipulation claim” in cases where the market “activity
is not expressly prohibited[] is not fully settled”); SEC v.
Masri, 523 F. Supp. 2d 361, 366-372 (S.D.N.Y. 2007) (surveying circuit split on definition of manipulation).
Participants in the securities industry need to be able
to distinguish between legitimate trading activity and unlawful manipulation. The Third Circuit’s rule permits
such assessments by focusing on objective conduct and
limiting manipulation to the injection of inaccurate information into the market. By rejecting that bright-line
rule in favor of a looser standard that focuses on malleable factors, the Second and D.C. Circuits have introduced
unpredictability into the securities industry. Whereas
under the Third Circuit’s rule an actor engaging in real
trading activity can be confident its conduct will not later
30
be deemed manipulation, the Second and D.C. Circuits’
approaches offer no such certainty because even legitimate trading activity (and, in the Second Circuit’s case,
no trading activity at all) can be deemed manipulative
when paired after the fact with allegations of alleged
wrongful intent. And if failing to make and disclose predictions about how third parties may act constitutes manipulation—as the Second Circuit now holds—then the
only confident prediction is one of expansive liability for
market manipulation. Because this state of affairs risks
chilling legitimate market activity, the Court should
grant review and bring clarity to this important aspect of
the securities laws.
B. The Second Circuit’s outsized influence on securities law heightens the need for review
The decision below is far more significant than a typical case in which a court of appeals disregards this
Court’s precedents and breaks with its sister circuits.
This is the Second Circuit speaking about securities law.
The Second Circuit dwarfs all others in the sheer volume
of securities class actions filed in its district courts. Cornerstone Research, Securities Class Action Filings: 2017
Year in Review, at 34 (2018).4 Last year, it accounted for
over a third of such filings nationwide. Ibid. Moreover, a
disproportionate number of the Nation’s leading securities exchanges, investment banks, law firms, and accounting firms—among the entities most vulnerable to a
weakened aiding-and-abetting bar—are headquartered
within its jurisdiction. For those likely targets of the
coming wave of § 10(b) claims for aiding-and-abetting
conduct in the Second Circuit, the decision below will be
the law of the land for all practical purposes. This Court
must intervene if it wishes its robust and longstanding
https://www.cornerstone.com/Publications/Reports/Securities-Class
-Action-Filings-2017-YIR.
4
31
aiding-and-abetting prohibition and manipulative-act
standard to remain the norm, rather than the exception,
in securities-fraud cases.
Moreover, it is unlikely that other circuits will ignore a
significant Second Circuit decision on securities law.
“[T]he legal community has long thought that the Second
Circuit * * * understood securities law and securities
markets especially well.” Breyer, The Court and the
World 115 (2015); see also Morrison v. Nat’l Austl. Bank
Ltd., 561 U.S. 247, 276 (2010) (Stevens, J., concurring in
judgment) (referring to the Second Circuit as “the Mother Court of securities law”) (quoting Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 762 (1975) (Blackmun,
J., dissenting)). Congress likewise has recognized the
Second Circuit as “the leading circuit in th[e] area” of securities litigation. S. Rep. No. 104-98, at 7 (1995). This
reputation, as the Court has noted, causes other circuits
to “defer[] to the Second Circuit because of its ‘preeminence in the field of securities law,’” even when they
might otherwise be “tempted to” disagree. Morrison,
561 U.S. at 260 (quoting Zoelsch v. Arthur Andersen &
Co., 824 F.2d 27, 32 (D.C. Cir. 1987) (Bork, J.)).
Many circuits may be “tempted to” disagree with the
Second Circuit’s rollback of the aiding-and-abetting bar
and weakening of the manipulative-act element. Ibid.
But in the face of silence from this Court, they may “defer[] to the Second Circuit” as the generally recognized
expert in securities law. Ibid. Only by granting review
can this Court prevent the pernicious consequences of
the decision below from spreading to other circuits.
C. This case presents a clean vehicle
This case is a clean vehicle for resolving the questions
presented. Each presents an independent basis for reversal.
The first question presents a choice between two dis-
32
tinct visions of the prohibition on aiding-and-abetting liability. Under the Second Circuit’s approach, the Exchanges are subject to primary liability for offering
products and services that HFT firms allegedly used to
harm investors. Under the law that prevailed before the
decision below, the Exchanges would fall within the core
of the prohibition against aiding-and-abetting liability in
private securities-fraud lawsuits. A return to that legal
regime would thus mandate reversal of the Second Circuit’s ruling and affirmance of the district court’s dismissal.
The second question offers a similarly stark choice. If
the Third Circuit is correct that the manipulative-act element of a § 10(b) market-manipulation claim requires
allegations that the alleged manipulator “inject[ed] inaccurate information into the marketplace,” then the decision below must be reversed. Colkitt, 272 F.3d at 211.
Reversal would also be required under the D.C. Circuit’s
approach to market manipulation, because that approach
requires trading activity. Only if the Second Circuit correctly held that neither the injection of inaccurate information nor trading activity is required could its holding
on this point survive review. If, however, the Second
Circuit’s manipulative-act holding is erroneous, then reversal is required.
Nor would further proceedings better enable the
Court to resolve these issues. Because the questions
presented turn on the legal sufficiency of respondents’
allegations, they are properly addressed in a challenge to
the complaint. The purpose of a motion to dismiss is to
halt proceedings at the earliest possible stage when the
complaint is deficient. Further proceedings can generate
nothing that might lead to a better understanding of the
adequacy of the complaint’s allegations. This Court has
frequently granted certiorari at the motion-to-dismiss
stage to establish pleading standards in securities ac-
33
tions. See, e.g., Chadbourne & Parke LLP, 134 S. Ct.
1058; Janus, 564 U.S. 135; Matrixx Initiatives, Inc., 563
U.S. 27; Stoneridge, 552 U.S. 148. It should do so again
here.
IV. AT A MINIMUM, THE COURT SHOULD HOLD THE
PETITION FOR THE DECISION IN LORENZO V. SEC
This Court recently granted certiorari in Lorenzo v.
SEC, No. 17-1077.
The question presented there
is: “whether a misstatement claim that does not meet the
elements set forth in Janus can be repackaged and pursued as a fraudulent scheme claim.” Pet. at i, Lorenzo v.
SEC, No. 17-1077. Lorenzo does not directly present either question presented in this petition, nor does this petition directly present a question regarding the repackaging of a misstatement claim as a scheme-liability
claim. Certiorari is warranted here because this petition
affords the Court the unique opportunity to directly confront the line between primary and secondary liability
and the elements of a claim for market manipulation.
Although the questions presented in Lorenzo and this
case do not facially overlap, both the Lorenzo petition
and the D.C. Circuit opinions in that case prominently
discuss the distinction between primary and secondary
liability, and that principle might feature in this Court’s
decision. See Pet. at 5, 25-28, 31-32, Lorenzo v. SEC, No.
17-1077; Lorenzo v. SEC, 872 F.3d 578, 594-595 (D.C. Cir.
2017); id. at 600-602 (Kavanaugh, J., dissenting). Thus,
review of this case alongside Lorenzo would allow the
Court to comprehensively resolve the confusion surrounding primary and secondary liability.
To the extent the Court declines to immediately grant
review of this petition, petitioners request that it be held
pending the decision in Lorenzo. At that time, the
Court’s Lorenzo ruling may warrant granting the petition, vacating the judgment below, and remanding for the
34
court of appeals to reconsider its decision in light of Lorenzo. Or the Court’s Lorenzo decision may not address
the issues presented here, thus clarifying the need for
review.
CONCLUSION
The Court should grant the petition for a writ of certiorari, or in the alternative, hold it for Lorenzo.
35
Respectfully submitted.
DOUGLAS W. HENKIN
BAKER BOTTS L.L.P.
30 Rockefeller Plaza
New York, NY 10012
(212) 408-2500
AARON M. STREETT
Counsel of Record
J. MARK LITTLE
BAKER BOTTS L.L.P.
910 Louisiana Street
Houston, TX 77002
(713) 229-1234
aaron.streett@bakerbotts.com
VINCENT M. WAGNER
BAKER BOTTS L.L.P.
2001 Ross Avenue
Dallas, TX 75201
(214) 953-6500
Counsel for Petitioners New York Stock
Exchange LLC, NYSE Arca, Inc., and Chicago
Stock Exchange, Inc.
PAUL E. GREENWALT III
SCHIFF HARDIN LLP
233 South Wacker Drive
Suite 6600
Chicago, IL 60606
(312) 258-5500
Counsel for Petitioners
Bats Global Markets, Inc.,
n/k/a Cboe Bats, LLC and
Direct Edge ECN, LLC
DOUGLAS R. COX
AMIR C. TAYRANI
ALEX GESCH
RAJIV MOHAN
GIBSON, DUNN & CRUTCHER LLP
1050 Connecticut Avenue,
N.W.
Washington, DC 20036
(202) 955-8500
Counsel for Petitioners
NASDAQ OMX BX, Inc.,
n/k/a Nasdaq BX, Inc. and
The Nasdaq Stock Market
LLC
August 2018
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.