Southern District of New York dismisses securities short-selling claims against brokers, allowing spoofing claims to continue

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 impersonation. identity 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 Brokers, their Canadian affiliates and unidentified U.S. and Canadian entities, including market makers, subsidiaries, affiliates, sister companies and customers of the named defendants (collectively, the “Defendants”). Harrington Global Opportunity Fund v. CIBC World Markets Corp., 21-CV-761 (LGS) (SDNY 9 February 2022). The plaintiff alleged that the defendants engaged in impersonation and short selling that caused shares of a health care company, which the plaintiff owned, to plummet by nearly 90% over a period nine months. The Court denied dismissal of plaintiff’s impersonation claims against certain defendants and granted dismissal of plaintiff’s short sale claims against other defendants.

The complaint alleged that certain defendants, consisting of pairs of brokers based in the United States and Canada, engaged in a “market manipulation scheme” in which they “place[d] thousands of bait orders,” each of which would have 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 approximately 100,000 impersonation events, other defendants “[o]perate[ed] in concert” with those who allegedly engaged in spoofing by “purchasing[ing] the actions necessary to deliver their discounted naked short sales” after a spoofing event.

The Court initially rejected the Canadian Defendants’ arguments regarding lack of personal jurisdiction, holding that the complaint correctly alleged that “the conduct of the Canadian Defendants on Canadian stock exchanges was intended to manipulate the price of [the company] shares listed and traded on the NASDAQ,” which the Court found “sufficient to establish a prima facie case of specific personal jurisdiction over the Canadian defendants under the theory of effects.” The Court also separately found that the claims against the Canadian-based defendants who allegedly participated in the impersonation were “under the Exchange Act” under the Supreme Court’s ruling. Morisson decision (and the decision of the Second Circuit Central Park decision) because, according to the Court, the plaintiff has sufficiently alleged that these defendants “engaged in at least some conduct in the United States in their alleged effort to manipulate [the healthcare company’s] shares on US stock exchanges.

The court found that the complaint’s acknowledgment that the defendants traded for both their own proprietary and client accounts did not “undermine” the “numerous allegations that [d]the defendants designed and operated the algorithms that impersonated [the healthcare company’s] Stock.” The Court also held that the complaint adequately alleges scienter, stating that it alleged “specific facts constituting circumstantial evidence of knowing misconduct”. As to the defendants’ argument that the complaint no does not adequately allege causation of the losses because “each usurpation event lasted only fifteen minutes”, the Court said it would be inappropriate to infer, at the motion to dismiss stage, ” that individual spoofing events cannot have a long-term cumulative effect on the price of a share. The Court also held that the complaint sufficiently alleged that the plaintiff “relyed on the assumption that the market for [the healthcare company’s] actions were effective and free from manipulation. Finally, the Court held that the plaintiff’s claim was proper under the Foreign Exchange Act.

Moving on to the short sale claims, the Court found that the complaint did not adequately allege manipulation, finding that it contained “conclusive allegations that [the short selling defendants] did not deliver stock without citing specific examples. The Court noted that neither “high volumes” of short selling nor “naked short selling” are, in and of themselves, “manipulative.” The Court also found that the complaint did not make a sufficient scientific case with respect to the short-selling allegations, rejecting the plaintiff’s argument that a “high turnover rate” and a “high percentage of short sales” sufficed. , because “short selling, even some naked short selling, is legal.”

About the author