CP Stone Fort Holdings, LLC v. Doe(s)
MemorandumM Opinion and Order signed by the Honorable Robert W. Gettleman on 10/11/2016: Defendant Doe #1's motion to dismiss 14 is granted. Defendant Doe #1's motion to proceed anonymously 16 is denied as moot. Status hearing date of 10/18/2016 is stricken. Civil case terminated. Mailed notice (gds)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
CP STONE FORT HOLDINGS, LLC,
Case No. 16 C 4991
Judge Robert W. Gettleman
MEMORANDUM OPINION AND ORDER
Plaintiff CP Stone Fort Holdings, LLC has brought a one count complaint against certain
John Doe defendants alleging that defendants engaged in a scheme to manipulate the United
States Treasury Markets in violation of Section10(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”), 15 U.S.C. § 78j(b) and Rules 10b-5(a) and 10b-5(c) promulgated thereunder.
Defendant John Doe #1 has moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), arguing that:
(1) plaintiff lacks prudential standing to sue; (2) the claim is barred by the applicable statute of
repose; and (3) the complaint fails to allege scienter or manipulation, and fails to allege that
plaintiff relied on any particular “Deceptive Order.”1 For the reasons described below,
defendant’s motion to dismiss is granted.
Plaintiff does not yet know the names of the Doe defendants because trading in the
secondary U.S. Treasury Markets is anonymous. John Doe #1's motion to dismiss triggered the
Private Securities Litigation Reform Act’s (“PSLRA”) automatic stay of discovery. 15 U.S.C. §
78u-4(b)(3)(B). The court denied plaintiff’s request to lift the stay pending resolution of the
instant motion to dismiss.
According to the complaint, plaintiff is the “assignee of the claims at issue in this action.”
Caherciveen Partners, LLC assigned the claims to plaintiff in 2015. As assignee of Caherciveen,
plaintiff purports to bring the claims based on Caherciveen’s trading activity in Treasury Notes
with maturities of 2, 3, 5, 7 and 10 years, and 30-year Treasury bonds.
Defendants are persons or entities that trade electronically in the U.S. Treasury securities
markets. Participants that trade in these markets typically use one of two primary electronic
platforms: (1) BrokerTech (owned and operated by ICAP, plc); and (2) eSpeed (owned and
operated by Nasdaq, Inc.). Both platforms require participants to identify themselves by use of a
unique operator identification, and each platform assigns an identifier when orders are matched
with a counter-party.
Orders entered through each platform become part of their “order books,” which are
displayed electronically to market participants. The order books display the total quantities
available at the best prices on both the buy and sell side for each security. The highest available
price for buy orders is referred to as “top of the book bid.” The lowest available price for sell
orders is referred to as the “top of the book offer.” The order books also display the total
available order volume to all market participants. When buy and sell orders for a particular
security are pending at the same price, the platforms assign a queue priority to those orders based
on the time in which the orders were entered. The platforms then match buy orders with sell
The facts are taken from plaintiff’s complaint and are presumed true for purposes of
evaluating defendant’s motion to dismiss. Murphy v. Walker, 51 F.3d 714, 717 (7th Cir. 1995).
orders by time priority using the “first in, first out” method. The oldest ordered entered is
matched first for execution of a trade.
The complaint alleges that defendants manipulated the U.S. Treasury markets by
submitting orders to the platforms that defendants never intended to have executed. These
“Deceptive Orders” were intended to create the false appearance of market demand in a certain
direction (to either buy or sell) when in actuality the demand did not exist. The Deceptive
Orders “lured other market participants into entering sell orders below, or entering buy orders
above, or maintaining positions below or above, what would otherwise be the prevailing market
price based on what other market participants thought was a change in the supply and demand
balance in the product.” The defendants then “flashed” the market by cancelling the “Deceptive
Orders” and simultaneously entering “Aggressor Orders” in the opposite direction for the same
security at the same price. Those Aggressor Orders where then matched and executed with bids
or offers of other market participants that were made in response to the Deceptive Orders. By
doing this, plaintiff alleges that the defendants were able to sell U.S. Treasury notes and bonds at
artificially high prices, and buy U.S. Treasury notes and bonds at artificially low prices.
Plaintiff alleges that defendants’ manipulation is characterized by a “well defined
pattern.” First, defendants entered the Deceptive Orders. While these orders were on the order
book (the “build-up phase”) they created a false appearance of market depth and momentum in
one direction. The Deceptive Orders typically represented “a significant portion of the market”
often consisting of more than 25% of the posted size of the best available price.” Defendants
then cancelled the Deceptive Orders and “virtually simultaneous to the cancels,” would enter one
or more Aggressor Orders in the opposite direction but at the same price as the Deceptive
Orders, thereby trading “against the remaining available securities at that price (the “flash
According to plaintiff, it is this well defined pattern, and the frequency, speed, and
precision with which the build-up and flash progression took place, that “eliminates the
possibility that this pattern was anything other than orchestrated.” Plaintiff alleges that the fact
that the cancel orders and the “flash” orders occurred within milliseconds evidences a
premeditated coordination, because defendants “could not have legitimately changed their mind
as to the direction of the market so quickly, so often and with such precision.” Additionally, the
fact that defendants typically cancelled Deceptive Orders across multiple markets of U.S.
Treasury securities in multiple product markets including U.S. Treasury futures markets offered
on the Chicago Board of Trade (“CBOT”) demonstrates defendants’ intent to manipulate the
market for U.S. Treasury securities.
Rule 10b-5 actions are tightly restricted to persons who are either purchasers or sellers of
securities. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 740-47 (1975). This
restriction is required because permitting plaintiffs that did not buy or sell securities to maintain
actions would encourage nuisance litigation and promote vexatious litigation that could depend
on uncorroborated, self-servicing testimony. Id.
Defendant challenges plaintiffs’ standing because the complaint does not allege that
plaintiff purchased or sold any securities. Instead, plaintiff alleges that it is the assignee of
Caherciveen’s claims and brings the suit based on Caherciveen’s trading activity. Defendant
challenges that assignment as inoperable as a matter of law, and claims that the alleged
assignment raises the same concerns that led to the Supreme Court’s decision in Blue Chip. See
Smith v. Ayers, 977 F.2d 946, 950 (1992). According to defendant, assignments for the purpose
of bringing a 10b-5 claims are inherently problematic because they raise procedural issues that
prejudice the defendants’ ability to litigate the case, as well as the court’s ability to adjudicate it.
See In re: B.P. p.l.c. Sec. Litig., 2016 WL 29300, *5 (S.D. Tex. Jan. 4, 2016). Defendant argues
that because of the assignment, it will have limited rights to obtain information from
Caherciveen, which is not a party to the case. Id. It also argues that if plaintiff is just a litigation
vehicle, it could simply “dissolve itself out of existence if the Court attempted to sanction it.” Id.
at *6 n.43. Because assignment raises all the concerns that led the Blue Chip court to restrict
10b-5 claims to purchasers or sellers, defendant argues that courts permit express assignment of
10b-5 claims only in “extremely rare” circumstances. See Aviva Life And Annuity Co. v. Davis,
20 F.Supp.3d 694, 702 (S.D. Iowa 2014).
Plaintiff counters that defendant’s standing argument is a challenge to subject matter
jurisdiction more properly brought under Fed. R. Civ. P. 12(b)(1), which allows the court to
consider matters outside the four corners of the complaint. Therefore, plaintiff submits an
affidavit explaining that in April 2015 Caherciveen had eleven members that collectively owned
100% of the company. By May 2016, all eleven decided to sell their collective membership
interests to a third party. Those selling members wanted to retain their right to pursue the instant
claims of illegal market manipulation, so they and the third party purchaser agreed that prior to
the execution of the sale, the securities claims would be assigned to the selling members in a
separate entity. The selling members formed plaintiff to receive assignment of the claims. Each
of the selling members acquired the same ownership interest in plaintiff that they had in
Caherciveen. Thus, the purpose of the assignment was to allow the original members of
Caherciveen, the persons who were actually damaged by the alleged manipulation, to bring suit.
Defendant responds that plaintiff “misunderstands” defendant’s standing argument, the
basis of which is that plaintiff lacks statutory or prudential standing to bring a 10b-5 claim,
which does not raise a jurisdictional issue and is properly brought under Rule 12(b)(6).
Defendant argues that plaintiff has failed to allege that it is among the “class of plaintiffs
Congress has authorized to sue.” Defendant further argues that because the motion is properly
brought under Rule 12(b)(6), the court should strike and ignore the affidavit submitted with
Like plaintiff, the court viewed defendant’s standing motion, considering its citation to
Sprint Communications Co. L.P. v. APCC Servs., Inc. 554 U.S. 269, (2008), as raising both
constitutional and prudential concerns, allowing plaintiff to offer evidentiary support for its
position. But even if the court were to agree with defendant and grant its motion based solely on
lack of statutory standing, it would allow plaintiff to replead the information contained in the
affidavit. Therefore, the court considers the affidavit and in doing so concludes that the
assignment was for a legitimate purpose and does not raise the concerns expressed in Blue Chip.
As noted recently by Judge Scheindlin of the Southern District of New York, “the
Supreme Court has explicitly approved the practice of assigning claims for litigation purposes on
both Article III and prudential grounds, recognizing the historical tradition of suits by
assignees.” B.G. Litig. Recovery I, LLC v. Barrick Gold Corp., __ F.Supp.3d __, 2016 WL
1587247, *9 (April 18, 2016)(quoting Sprint Comm., 554 U.S. at 285). Defendant has raised
nothing to suggest that the assignment is a sham designed to allow plaintiff and/or Caherciveen
to avoid their litigation obligations under the Federal Rules of Civil Procedure or otherwise.
And, even if the assignment presents certain discovery problems, “courts are not helpless in the
face of such problems. For example, a district court can, if appropriate, compel a party to collect
and produce whatever discovery-related information is necessary.” Sprint Comm., 554 U.S. at
Consequently, the court rejects defendant’s argument that the assignment is inoperable as
a matter of law and that plaintiff lacks standing.
Statute of Repose
A federal securities law claim must be brought “not later than the earlier of – (1) 2 years
after discovery of the facts constituting the violation; or (2) 5 years after such violation.” The
two year period begins to run once the plaintiff discovers, or could have discovered with
reasonable diligence, the facts underlying the violation. Merck & Co., Inc. v. Reynolds, 559
U.S. 633, 646-48 (2010).
A statute of limitations or repose is an affirmative defense that ordinarily must be pleaded
and proved by the defendant. Fed. R. Civ. P. 8(c)(1); Jay E. Hayden Foundation v. First
Neighbor Bank, N.A., 610 F.3d 382, 383 (7th Cir. 2010). “Complaints need not anticipate
defenses and attempt to defeat them.” Richards v. Mitcheff, 696 F.3d 635, 637 (7th Cir. 2012).
As a result, the Seventh Circuit has often held that Rule 12(b)(6) is not designed for motions
under Rule 8(c)(1). Id. (and cases cited therein). Nonetheless, “if it is plain from the complaint
that the [statute of limitations] defense is indeed a bar to the suit dismissal is proper without
further pleading.” Jay E. Hayden, 610 F.3d at 383. The dismissal should be on the pleadings
under Rule 12(c), but that amounts “to the same thing as a dismissal under Rule 12(b)(6).”
Richards, 696 F.3d at 637. Unless, however, “the complaint alleges facts that create an ironclad
defense, a limitations argument must await factual development.” Foss v. Bear, Sterns & Co.,
Inc., 394 F.3d 540, 542 (7th Cir. 2005).
In the instant case, defendant argues that the complaint alleges a “well defined pattern” of
trading activity throughout 2013 and 2014, and that “the vast majority of the trades underlying
[plaintiff’s] claim – which Caherciveen knew of when they occurred and through public market
data – occurred over two years before the complaint was filed” on May 5, 2016. Defendant
points out that 80% of the trades made through BrokerTech, 85% made through eSpeed, and
79% of the trades made on the Chicago Mercantile Exchange occurred before May 5, 2014.
Thus, defendant argues that Caherciveen, the counter-party for each trade, knew or should have
known, of the purported scheme and “well defined pattern,” no later than the end of 2013.
Plaintiff responds that under Merck, a plaintiff must uncover facts, or through the
exercise of reasonable due diligence, should have uncovered facts, sufficient to plead each of the
elements of the claim before the statute begins to run. To plead a fraud claim, a plaintiff must
“state with particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind” demonstrating that “it is at least as likely as not that the defendant acted
with the relevant knowledge and intent.” Merck & Co., 559 U.S. at 649.
Plaintiff argues that none of the factual allegations in the complaint, and specifically the
allegation that the pattern began in 2013, demonstrates that plaintiff knew that defendant was
purposely engaging in manipulation. Thus, according to plaintiff, although Caherciveen had
access to the raw data, nothing in the complaint suggests that it had discovered, or could have or
should have discovered through the exercise of reasonable diligence, the facts constituting the
Although this is a close question, the court agrees with plaintiff that the complaint does
not allege facts that create an “ironclad” defense. At most, the complaint alleges that
Caherciveen was aware in 2013 that it was incurring losses, but nothing in the complaint
demonstrates that it was or could have been aware that those losses were the result of market
manipulation. Consequently, the court concludes that it is not plain from the complaint that the
statute of repose is a bar to the suit, and denies defendant’s motion to dismiss on this ground.
Failure to State a Claim
Defendant next argues that the complaint fails to plead facts sufficient to state a claim for
a Rule 10b-5 violation. A motion to dismiss under Rule 12 (b)(6) challenges the sufficiency of
the complaint, not its merits. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990).
The court accepts as true all well-pleaded factual allegations and draws all reasonable inferences
in the plaintiff’s favor. Sprint Spectrum L.P. v. City of Carmel, Ind., 361 F.3d 998, 1001 (7th
Cir. 2004). The complaint must allege sufficient facts that, if true, would raise a right to relief
above the speculative level, showing that the claim is plausible on its face. Bell Atlantic Corp. v.
Twombly, 550 U.S. 549, 555 (2007). To be plausible on its face, the complaint must plead facts
sufficient for the court to draw the reasonable inference that the defendant is liable for the
alleged misconduct. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Because plaintiff’s Section 10(b) claim sounds in fraud, it is also subject to the
heightened pleading requirements of Fed. R. Civ. P. 9(b), which provides that in “alleging fraud
or mistake, a party must state with particularity the circumstances constituting fraud or mistake.”
The complaint must provide “the who, what, when, where and how” of the alleged fraud.
DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990).
In addition to Rule 9(b), to check against pleading abuses in private securities fraud suits,
the PSLRA has further heightened the pleading requirements. Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 314-15 (2007). In particular, the PSLRA imposes a substantially
higher standard of pleading scienter. The complaint must “with respect to each act or omission
. . . state with particularity facts giving rise to a strong inferences that the defendant acted with
the required state of mind.” 15 U.S.C. § 78u-4(b)(3)j. The required state of mind is an “intent to
deceive, manipulate or defraud.” Higginbotham v. Baxter Int’l. Inc., 495 F.3d 753, 756 (7th Cir.
2007). For an inference to be “strong,” it must be “cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324.
Plaintiff first attacks the complaint’s sufficiency as to the allegations of scienter and
manipulation. Because plaintiff claims that the allegations of manipulative activity create the
strong inference of scienter, the court first analyzes the sufficiency of plaintiff’s allegations of
Section 10(b) makes it unlawful to “use or employ, in connection with the purchase or
sale of any security . . . any manipulative or deceptive device or contrivance in contravention of
such rules and regulations as the Commission may prescribe . . ..” 15 U.S.C. § 78j(b). Rule 10b5 clarifies that it is unlawful, in connection with the purchase or sale of any security:
(a) to employ any device, scheme or artifice to defraud;
(b) to make any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made in 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.
According to the Supreme Court, the word “manipulative” connotes “intentional or
willful conduct designed to deceive or defraud investors by controlling or artificially affecting
the price of securities.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976). “The term
refers generally to practices as wash sales, match sales, or rigged prices, that are intended to
mislead investors by artificially affecting market activity.” Santa Fe Indus. v. Green, 430 U.S.
462, 476 (1977).3 Such conduct closely resembles fraud and is patently manipulative, serving no
other purpose than to transmit false information to the market and thereby artificially affecting
price. Manipulative intent can be inferred from the conduct itself. Masri, 523 F.Supp.3d at 367.
Defendant’s alleged activity does not fall into those categories of patently manipulative
conduct because, as plaintiff must admit, there is nothing improper or illegitimate about placing
passive orders in the order book and then reversing position. Market manipulation can be
accomplished through otherwise legal means, however, such as short sales, and large or carefully
timed purchases or sales of securities. Id. The propriety of maintaining a manipulation claim in
such “open market” cases where, as here, the activity is not expressly prohibited, is not fully
settled. See id. That is because it involves the question whether “manipulative intent alone is
enough to make open-market transactions manipulative and in violation of the securities laws.”
“A wash sale is a sale of securities made at or about the same time as a purchase of the
same securities . . . resulting in no change of beneficial ownership. A matched order is an order
to buy and sell the same security, at about the same time, in about the same quantity, and at
about the same price.” S.E.C. v. Masri, 523 F.Supp.2d 361, 367 n.8, 9 (S.D.N.Y. 2007).
The Third Circuit has held that such intent is not alone sufficient to support a
manipulation claim when the activity in question was otherwise legal. GFL Advantage Fund,
Ltd. v. Colkitt, 272 F.3d 189, 204-05 (3d Cir. 2001). The GFL court concluded that to maintain
a manipulation claim the plaintiff had to establish “that the alleged manipulator injected
inaccurate information into the market or created a false impression of market activity. Id. at
205. “Such a construction permits courts to differentiate between legitimate trading activities
that permissibly may influence prices, such as short sales, and `ingenious devices that might be
used to manipulate securities prices’ such as washed sales and matched orders.” Id. (internal
In contrast, the D.C. Circuit took the opposite position, concluding that simply because
the activity was legal did not mean that it was not illegally manipulative. “[M]anipulation can be
illegal solely because of the actor’s purpose.” Markowski v. S.E.C., 274 F.3d 525, 529 (D.C.
Circuit 2001)(relying on §9(a)(2) of the Exchange Act, which declared it unlawful to affect a
series of transactions in any security creating actual or apparent active trading in such security or
raising or depressing the price of such security, for the purpose of inducing the purchase or sale
of such security by others.).
The Seventh Circuit has not directly addressed this issue. Its decision in Sullivan &
Long, Inc. v. Scattered Corp., 47 F.3d 857 (7th Cir. 1995), concluding that a market maker was
not guilty of manipulation by selling short even though he had sold short more shares than were
outstanding, suggests that it might side with GFL. As the court noted in Sullivan & Long, 47
F.3d at 864 (internal citations omitted):
As the plaintiffs themselves point out, the essence of the offense is creating a false
impression of supply and demand, for example through wash sales, where parties
fictitiously trade the same shares back and forth at higher and higher prices to fool
the market into thinking that there is a lot of buying interest in the stock. There
was nothing like that here. On the other side of all of Scattered’s transactions
were real buyers betting against Scattered, however foolishly, that the price of
LTV stock would rise.
In the instant case, plaintiff argues that by placing the “Deceptive Orders” defendant has
injected inaccurate information into the market place by creating the false appearance of: (a) a
change in the supply and demand for the securities; (b) market depth; and (c) momentum in one
direction or the other. As defendant argues, however, just calling an order deceptive does not
make it so. According to the complaint, all of the so-called “Deceptive Orders” were passive, or
resting orders, meaning they remained on the order book until they were either matched up with
a counter-party offer, or cancelled. The way the platforms work, if a market participant enters an
order to buy at the lowest offer, or to sell at the highest bid, that order will be matched with
orders that were resting in the open book, starting with the oldest order. Thus, if the market
contains orders to buy at 9 and offers to sell at 10, a prospective buyer can either join the other
bidders at 9 by placing a passive order and wait to be matched, or it can buy immediately by
placing an aggressive order to buy at 10.
In this sense, all of the offers or bids were legitimate and could have been matched at any
time by a willing participant placing an aggressive order. And, had they been so matched, the
market reaction would have been legitimate. Indeed, the complaint is devoid of any allegation
that defendant refused to execute on any matched orders. Nor is there any allegation of how
many orders were executed, how long the ultimately cancelled orders had remained resting and
available for execution prior to cancellation, or whether the platform rules required the orders to
be exposed further. Defendant is correct that plaintiff’s theory boils down to an allegation that
“if a subset of orders was ultimately cancelled, those orders, in hindsight, must never have been
intended to be executed.”
Considering the heightened pleading requirements for security fraud cases, the court
concludes that the complaint fails to allege anything more than legitimate trading activity that
permissibly influences price. Because the complaint fails to allege illegal manipulation, it also
fails to allege a strong inference of scienter. Consequently, the complaint fails to state a claim
for a Rule 10b-5 violation and is dismissed.
For the reasons stated above, defendant Doe #1's motion to dismiss (Doc. 14) is granted.
Defendant Doe #1's motion to proceed anonymously (Doc. 16) is denied as moot.
October 11, 2016
Robert W. Gettleman
United States District Judge
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