Bernacchi v. Investment Technology Group, Inc. et al

Filing 66

OPINION & ORDER re: 46 MOTION to Dismiss filed by Steven R. Vigliotti, Investment Technology Group, Inc., Robert C. Gasser, 50 MOTION to Dismiss filed by Mats Goebels. For the reasons stated above, Defendants' motions to dismiss the Complaint are GRANTED IN PART and DENIED IN PART. The motion to dismiss Plaintiff's claims under § 10(b) and Rule 10b-5 as to defendants Gasser and ITG is DENIED. The motion to dismiss Plaintiff's claim under § 20(a) against Gasser is also DENIED. The motion to dismiss Plaintiff's § 10(b), Rule 10b-5, and § 20(a) claims are GRANTED as to defendants Goebels and Vigliotti, as well as to the extent the Complaint asserts inactionable sta tements, which the Court has identified above. If Plaintiff wishes to amend the Complaint, it shall move this Court to do so no later than 30 days from the date of this Opinion. Otherwise the Court will enter an order dismissing Plaintiff's c laims against Goebels and Vigliotti with prejudice, and Gasser and ITG shall file their answers to Plaintiff's remaining claims no later than 14 days from the date of that order. If Plaintiff moves to amend the Complaint, Gasser an d ITG's time to answer will be adjourned pending the Court's decision on Plaintiff's motion to amend. The Clerk of the Court is respectfully requested to terminate the motions docketed at ECF Nos. 46 and 50. (As further set forth in this Opinion & Order.) (Signed by Judge John F. Keenan on 4/26/2017) (mro)

Case 1:09-md-02013-PAC Document 57

Filed 09/30/10 Page 1 of 45
USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: 04/26/2017

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
UNITED STATES DISTRICT COURT
------------------------------ YORK
SOUTHERN DISTRICT OF NEW X
IN RE INVESTMENT TECHNOLOGY
:
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GROUP, In re FANNIE MAE 2008 SECURITIES
INC. SECURITIES
:
:
08 Civ. 7831 (PAC)
LITIGATION
:
LITIGATION
:
09 MD 2013 (PAC)
:
No. 15 Civ. 6369 (JFK)
:
OPINION & ORDER
:
:
OPINION & ORDER
:
-----------------------------------------------------------x
:
:
:
------------------------------ X
HONORABLE PAUL A. CROTTY, United States District Judge:
APPEARANCES

BACKGROUND1
FOR PLAINTIFF METZLER INVESTMENT GmbH:
William H. Narwold, Esq.
Matthew The early years of this decade saw a boom in home financing which was fueled, among
P. Jasinski, Esq.
Gregg S. Levin, Esq.
Lance V. Oliver,interest rates and lax credit conditions. New lending instruments, such as
other things, by low Esq.
William S. Norton, Esq.
MOTLEY RICE LLC (high credit risk loans) and Alt-A mortgages (low-documentation loans)
subprime mortgages
FOR DEFENDANTS INVESTMENT TECHNOLOGIES too; they took on unmanageable risks on the
kept the boom going. Borrowers played a role GROUP, INC. AND
STEVEN R. VIGLIOTTI:
George T. Conway III,would continue to rise and that refinancing options would always be
assumption that the market Esq.
WATCHTELL, LIPTON, ROSEN & KATZ
available in the future. Lending discipline was lacking in the system. Mortgage originators did
FOR DEFENDANT ROBERT C. GASSER:
John hold Baughman, Esq.
not F. these high-risk mortgage loans. Rather than carry the rising risk on their books, the
Julian N. Radzinschi, Esq.
PAUL, WEISS, RIFKIND, WHARTON & GARRISONmarket, often as securitized packages
originators sold their loans into the secondary mortgage LLP
FOR DEFENDANT MATS GOEBELS:
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
John N. Orsini, Esq.
Eric Seiler, Esq.
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
Jennifer A. Mustes, Esq.
FRIEDMAN KAPLAN SEILER & ADELMAN changing housing market, banks modified their
and home prices began to fall. In light of the LLP
JOHN F. KEENAN, United States District Judge:
lending practices and became unwilling to refinance home mortgages without refinancing.
This is a putative securities class action brought on
behalf of all persons and entities who purchased or acquired the
1

Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.

publicly traded common stock of Investment Technology Group,

1

1

Inc. (“ITG”) between February 28, 2011 and August 3, 2015 (the
“Class Period”).

The defendants are ITG and three current and

former executives who, according to the 122-page amended
complaint, allegedly made dozens of statements between 2010 and
2015 that were materially false or misleading in light of the
company’s failure to disclose Project Omega, a proprietary
trading program that improperly used or had access to
confidential customer trading information, and the Securities
and Exchange Commission (“SEC”) investigation that ensued.

As a

result of Project Omega’s violation of several securities
regulations, ITG ultimately agreed to pay a $20.3 million fine.
After disclosing Project Omega and its settlement with the SEC,
the company’s stock price dropped substantially.
The amended complaint alleges that the defendants are
liable under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5.

The defendants move to dismiss the

Section 10(b) and Rule 10b-5 claims on the grounds that the
amended complaint fails to plead any actionable material
misstatement or omission, or a strong inference of scienter.
The defendants also argue that the amended complaint fails to
establish control person liability under Section 20(a).

For the

reasons set forth below, the Court grants in part and denies in
part the defendants’ motions to dismiss the amended complaint.

2

BACKGROUND
The following facts, which are drawn from the amended
complaint (the “Complaint”) and documents incorporated by
reference, are accepted as true for the purposes of the motions
to dismiss filed by Robert Gasser, Steven Vigliotti, and Mats
Goebels (the “Individual Defendants”), and ITG (collectively,
the “Defendants”).
I. The Parties
Lead Plaintiff Metzler Investment GmbH (“Plaintiff”) is a
German capital investment company. (Am. Compl. ¶ 73 [hereinafter
Compl.].)

Plaintiff’s investment funds purchased approximately

100,000 shares of ITG stock during the Class Period. (Id.)

ITG

is incorporated in Delaware and maintains its principal
executive offices in New York City. (Id. ¶ 74.)

Gasser was the

company’s CEO and president from October 2006 until August 1,
2015. (Id. ¶ 75.)

Vigliotti was the company’s CFO throughout

the Class Period and still holds that position. (Id. ¶ 76.)
Gasser and Vigliotti both signed ITG’s Form 10-K filed annually
with the SEC from 2010 to 2014 and the company’s quarterly
report for the first quarter of 2015. (Id. ¶¶ 75-76.)

Goebels

joined ITG in 1998 and was the company’s General Counsel and a
managing director until August 1, 2015. (Id. ¶ 77.)

During the

Class Period, Goebels was responsible for all legal and

3

regulatory matters and signed the company’s Form ATS1 filed with
the SEC on December 13, 2013 and later published on the
company’s website. (Id.)
ITG acts primarily as an agency securities broker, matching
customer orders to buy (or sell) a security with orders to sell
(or buy) that security. (See, e.g., id. ¶¶ 10, 13, 17.)

The

company also provides investment research and analytics
products. (See, e.g., id. ¶ 60.)

The company’s flagship product

is an alternative trading system, or “dark pool,” known as
POSIT. (Id. ¶¶ 2, 12.)

When ITG launched POSIT in 1987, it was

one of the first dark pools in existence. (Id. ¶ 2.)

As of the

spring of 2015, POSIT was the ninth largest dark pool,
facilitating approximately $109 billion in trades per quarter.
(Id. ¶ 11.)
Dark pools allow customers to trade securities outside the
traditional exchanges making up the National Market System, such
as the New York Stock Exchange and NASDAQ. (Id. ¶ 13.)

Dark

pools provide anonymity, allowing investors to trade without
immediately revealing their identity or the size of the trade.
(Id.)

This prevents large trades from immediately moving the

stock price and provides liquidity that might not otherwise
exist. (Id.)

Form ATS is a confidential document filed with the SEC. (Compl.
Ex. A ¶ 9 n.3.) “ATS” refers to “alternative trading system.”
1

4

POSIT executes trades at or within the National Best Bid
and Offer (“NBBO”). (Id. ¶¶ 31-32.)

Under the NBBO, the “bid-

ask spread” is the difference between the highest bid price and
the lowest offer price. (Id. ¶ 31.)

In other words, it is the

difference between the highest price an investor is willing to
pay for a security and the lowest price at which a person
holding the security is willing to sell it.

The information

constituting the NBBO is supplied by a subscription program that
consolidates and sells data from all exchanges. (Id.)
Customers in POSIT have three possible “pegs” that are
linked to the NBBO:
(Id. ¶ 32.)

“passive,” “midpoint,” or “aggressive.”

A “passive” customer will only buy at the lowest

NBBO price or sell at the highest NBBO price. (Id.)

Conversely,

if a customer chooses to be “aggressive,” the customer is
willing to buy at the highest NBBO price or sell at the lowest
NBBO price. (Id.)

A midpoint customer is willing to buy or sell

in the middle of the spread. (Id. ¶ 33.)
Through POSIT, ITG built a brand as an independent agency
broker. (Id. ¶ 15.)

In other words, according to the Complaint,

the company was known for facilitating trades rather than making
trades for its own account.

ITG made several statements between

1999 and 2010 that Plaintiff contends highlighted this
reputation.

For example, ITG’s 1999 Form 10-K stated:

“We do

not act as a market-maker with respect to any securities or
5

otherwise act as a principal in any securities transactions; we
act only on an agency basis.

Therefore, we do not have exposure

to credit risks in the way that traditional broker-dealers have
such exposure.” (Id.)

The company also highlighted POSIT’s

confidentiality, stating in the same filing that POSIT allowed
clients “to trade single stocks and portfolios of equity
securities among themselves in a confidential environment,” and
explained that “[c]onfidential matching of buy and sell orders
eliminates market impact.” (Id. ¶ 14.)
II. Project Omega
In light of falling revenues during the economic crisis, in
2009, ITG’s senior managers recommended that the company explore
trading on its own account using algorithmic high frequency
trading. (Id. ¶ 20.)

Algorithmic trading uses computer programs

to generate and execute orders in markets with electronic
access. (Id.)

High frequency trading refers to algorithmic

trading executed at very high speeds. (Id.)
In or around early 2010, ITG’s board and Gasser approved
Project Omega, a limited scope proprietary trading desk. (Id. ¶
21.)

ITG ran Project Omega through AlterNet Securities, Inc., a

broker-dealer subsidiary. (Id.)

Gasser chose Hitesh Mittal—

ITG’s global head of liquidity management—to head Project Omega.
(Id. ¶¶ 24-25.)

6

After engaging in simulated trading in January 2010,
Project Omega started live trading for two weeks in April 2010
and then continued live trading again in June 2010. (Id. ¶ 27.)
At the beginning of both live trading sessions, ITG’s compliance
department informed Mittal of certain limits on Project Omega’s
scope and access to information. (Id. ¶ 28.)

Specifically, the

compliance department instructed Mittal that Project Omega would
not have access to information regarding POSIT’s order flow and
that the project would be prohibited from coordinating trading
strategies or sharing execution information with non-Project
Omega employees. (Id.)
Despite these directives, from April 2010 to December 2010
Project Omega employed two principal trading strategies that
relied on ITG employees accessing confidential client trading
data in POSIT. (Id. ¶ 30.)

The two strategies—the “Facilitation

Strategy” and the “Heatmap Strategy”—both involved high
frequency buying and selling of stocks to make small profits
between the purchase price and sale price within very short time
frames. (Id.)
The Facilitation Strategy used a live feed of customer
trading data called the Aleri Feed, which notified Project Omega
of customer orders routed through POSIT. (Id. ¶ 35.)

The Aleri

Feed provided the Project Omega team with real-time data,
including a customer’s (1) client identifier; (2) symbol; (3)
7

side (i.e., buy side or sell side); (4) the quantity of shares
involved; (5) filled shares; (6) target price; (7) ITG algorithm
in which the order was located; and (8) the time parameters.
(Id. ¶ 36)

This information was not available to customers of

POSIT and was supposed to be confidential to counterparties in
the dark pool. (Id.)
Using the Aleri Feed, Project Omega would detect an open
customer order to buy certain securities in POSIT. (Id. ¶ 37.)
Project Omega would then buy the relevant security at a
favorable price in another market and sell it at a higher price
to the POSIT customer. (Id.)

For this process to work to

Project Omega’s advantage, the POSIT customer would have to be
pegged as “aggressive.” (Id. ¶ 39.)

For example, the Aleri Feed

would identify an order to buy certain securities where the best
buying price was $10.00 and the best selling price was $10.02
per share. (Id. ¶ 41.)

The Project Omega team would then

purchase the shares at $10.00 per share in another market. (Id.)
If the customer was pegged as “aggressive,” it would be willing
to buy from Project Omega for the higher price of $10.02 per
share. (Id.)

This would allow Project Omega to earn the full

bid-ask spread as profit. (Id.)
To make the Facilitation Strategy work, Project Omega had
access to the identities of POSIT subscribers and used this
information to determine which customers to trade with in POSIT.
8

(Id. ¶ 38.)

After trading, the Project Omega team could also

determine which customers had been the most profitable to
Project Omega. (Id.)

Based on this analysis, the Project Omega

team made decisions about whether to stop trading with certain
customers or continue trading with others. (Id.)
customers did not have this information. (Id.)

Typical POSIT
The Facilitation

Strategy also allowed Project Omega to manipulate the pegs of
POSIT customers without their knowledge. (Id. ¶ 39.)

Mittal

directed Project Omega software developers to coordinate with
members outside the team to ensure that all traders interacting
with Project Omega were pegged as aggressive or to change the
client’s peg to aggressive in order to facilitate a trade. (Id.)
From April 2010 to December 2010, Project Omega also used
the Heatmap Strategy. (Id. ¶ 43.)

This strategy involved

trading on markets other than POSIT based on a live feed (the
“Heatmap Feed”) of confidential information from trades by ITG
customers in external dark pools, not POSIT. (Id.)

If the

Heatmap Feed showed a number of trades in a given security at
midpoint or better in a non-POSIT dark pool, then Project Omega
would infer that someone would continue to transact at midpoint
or better in that dark pool. (Id. ¶ 46.)

So, for example, if

the best purchase price for a certain security was $10.00 and
the best selling price was $10.02, and the Heatmap Feed detected
trades in the middle at $10.01, Project Omega would buy shares
9

of the security for $10.00 and then sell the shares for $10.01
in the external dark pool, producing profits of $0.01 per share
for ITG. (Id.)
In early-to-mid December 2010, ITG’s compliance department
and senior management learned about Project Omega’s use of
customer order information through the Facilitation Strategy and
Heatmap Strategy and suspended the program’s trading. (Id. ¶
48.)

The project was shut down from about December 9, 2010 to

December 20, 2010, while ITG’s compliance department reviewed
Project Omega’s activities to make a report to senior
management. (Id. ¶ 49.)

On or about December 20, 2010, ITG’s

senior managers met with the compliance department and Gasser
reprimanded Mittal. (Id. ¶ 50.)
Following the meeting, ITG permitted Project Omega to
resume live trading. (Id.)

On December 21, 2010, Project Omega

resumed a modified version of the Facilitation Strategy that did
not involve access to the Aleri Feed. (Id. ¶ 51.)

On January

24, 2011, Project Omega restarted a modified Heatmap Strategy
without direct access to the Heatmap Feed. (Id.)

Mittal

continued to manage Project Omega and direct its trading
strategies while also managing POSIT and ITG’s trading
algorithms, which included access to confidential customer order
and trade information. (Id. ¶ 52.)

Despite the removal of the

direct feeds, Project Omega continued to have access to
10

information identifying POSIT subscribers. (Id. ¶ 53.)

The

Project Omega team also continued to coordinate with ITG’s POSIT
development team to identify the sell-side subscribers for
Project Omega to trade with and to ensure that those subscribers
were configured to trade “aggressively.” (Id.)

Project Omega

continued to trade until July 2011, when ITG shut it down for
good. (Id. ¶ 54.)

Mittal also left ITG in July 2011, ostensibly

as part of a “cost-cutting” measure. (Id. ¶ 55.)
III. Alleged False Statements
The 122-page Complaint sets forth dozens of allegedly false
or misleading statements.

For purposes of clarity and economy,

only a sample of these statements are quoted and described
immediately below.

The remaining allegedly false or misleading

statements are referenced and analyzed throughout the Court’s
Opinion.
A. Project Omega
Plaintiff alleges that ITG made numerous false or
misleading statements in its SEC filings, press releases, and
other public statements during the lifespan of Project Omega.
Several of these statements were made before the beginning of
the Class Period on February 28, 2011.

For example, during a

conference on December 9, 2010, Gasser stated that ITG is “an
agent, which is in and of itself differentiated.
informed by your liquidity, by your order flow.
11

We’re not
We don’t have a

proprietary trading operation that takes advantage of that.”
(Id. ¶ 86.)

Plaintiff contends that this statement was false or

misleading because, from June 2010 through December 2010,
Project Omega continued live proprietary trading using
strategies that were informed by customers’ order flow and
movement in securities. (Id. ¶ 87.)
On the first day of the Class Period, February 28, 2011,
ITG filed with the SEC its Form 10-K for 2010. (Id. ¶ 90.)

By

this time, ITG’s senior management, including Gasser, had
allegedly met to discuss Project Omega and were aware of
Mittal’s misconduct. (Id. ¶ 50.)

Project Omega no longer had

access to the Aleri Feed or Heatmap Feed, but the Project Omega
team allegedly continued to have access to information
identifying POSIT subscribers and continued to coordinate with
the POSIT development team to identify sell-side subscribers for
Project Omega to trade with and to ensure that those subscribers
were configured to trade “aggressively.” (Id. ¶¶ 51-54.)
In its Form 10-K for 2010, ITG stated that it was an
“independent agency research broker,” that asset managers relied
on the company’s “independence,” that POSIT provided “anonymous
matching,” and that POSIT incorporated technology “to help
ensure that clients are protected from gaming.” (Id. ¶¶ 90, 93.)
In the same filing, ITG disclosed that “[a] portion of our
revenues is derived from principal trading for our own account
12

where we incur risk,” but stated that “[a]ll such principal
trading activity is conducted in accordance with applicable
regulatory requirements, including those pertaining to the
maintenance of information barriers.” (Id. ¶ 95.)

Plaintiff

alleges that these statements were materially false and
misleading because ITG was not an independent, agency-only
broker, but instead was exploiting confidential client
information through Project Omega to trade on its own account,
and because ITG’s intentional accessing of customer information
violated SEC Regulation ATS, which requires, among other things,
that an ATS establish safeguards and procedures to protect
subscribers’ confidential trading information. (Id. ¶¶ 91, 94,
96.)
According to the Complaint, ITG continued to make false or
misleading statements in press releases and SEC filings covering
the time period in which Project Omega was in operation.

For

example, the company continued to describe itself as an
“independent agency research broker,” (id. ¶¶ 101, 106), and
described POSIT as “[c]rossing destinations that give buyers and
sellers opportunities to match equity orders with complete
confidentiality.” (Id. ¶ 100.)

Plaintiff alleges that these

statements were false or misleading in light of Project Omega’s
proprietary trading activities using customer information.

13

B. Pipeline Controversy and Settlement
On October 24, 2011, several months after Project Omega
ended, Pipeline Trading Systems LLC (“Pipeline”), an alternative
trading system and ITG competitor, settled with the SEC for
failing to disclose its proprietary trading. (Id. ¶ 62; see also
Press Release, SEC, Alternative Trading System Agrees to Settle
Charges That It Failed to Disclose Trading by an Affiliate,
available at https://www.sec.gov/news/press/2011/2011-220.htm.)
The next day, ITG sent a letter to its clients stating:

“We

strictly enforce the order handling and execution rules of
[POSIT], which are clearly set forth in Form ATS on file with
the Securities and Exchange Commission.” (Compl. ¶ 113.)

Soon

thereafter, Jamie Selway, a managing director of ITG, gave an
interview in which he stated that Pipeline “didn’t describe in
the Form ATS everything they were doing with their affiliate. .
. .

Moreover, they aggressively spoke about things that weren’t

true.” (Id. ¶ 62.)
said:

Summing up Pipeline’s transgressions, Selway

“Pipeline cheated.

We don’t cheat.” (Id. ¶¶ 62, 114.)

On a November 3, 2011 conference call to discuss ITG’s
financial performance for the third quarter of 2011, an analyst
asked Gasser about the recent disclosures regarding Pipeline.
(Id. ¶ 116.)

Gasser responded:

I think you’re being politically correct,
Rich in calling it a faux pas to begin
with. I would say that it’s surprising,
14

it’s shocking, I think for everyone
that’s engaged in this space, whether or
not you’re buy-side or sell-side firm.
We’ve been very clear about our business
model and how we execute our business.
We’ve communicated that broadly to
clients. As you know we’ve been talking
about various elements of our business
very publicly, particularly the sellside and the spread trading business back
to Q1 of ‘09, right and that is no way
analogous to what Pipeline was doing, but
certainly any nuance to our model we feel
absolutely compelled to communicate very
clearly and very transparently.
(Id.)
Plaintiff alleges that these statements were materially
false or misleading because they gave the false impression that
ITG had not engaged in similar misconduct as Pipeline and
omitted that ITG had exploited confidential customer information
and had violated Regulation ATS. (Id. ¶¶ 115, 117.)

According

to Plaintiff, Gasser’s statements on the November 3, 2011
conference call also gave the impression that ITG’s past
representations regarding its business had been complete and
transparent when, in fact, they had not. (Id. ¶ 117.)
C. ITG’s Business and Operations After Project Omega
The Complaint alleges that, after Project Omega, ITG
continued to make the same or similar representations about its
business practices as it had before and during the project.

For

example, the company’s quarterly SEC filings in 2012 described

15

ITG as an “independent execution and research broker.” (Id. ¶
127.)

Likewise, on an August 9, 2012 conference call, Gasser

stated:

“ITG has a robust set of risk controls across our

platform to prevent major trading errors.
our business model.

Among the controls is

We act as an agent, not a principal, in the

vast majority of our trading globally.” (Id. ¶ 137.)

On

December 18, 2012, Gasser made similar statements while
testifying before the U.S. Senate Subcommittee on Securities,
Insurance, and Investment Committee on Banking, Housing and
Urban Affairs. (Id. ¶ 146.)

“ITG is not a market maker, and we

do not take on proprietary positions,” he said. (Id.)

“In other

words, we do not have skin in the game when it comes to the
debates around broker internalization, as our system provides
meaningful price improvement to buyside investors, as described
in Reg NMS.” (Id.)

The Complaint cites dozens of similar

statements regarding ITG’s business between 2012 and 2015. (See,
e.g., id. ¶¶ 111, 120, 137, 146, 158, 162).

Although these

statements were made after Project Omega was shut down,
Plaintiff contends that they were materially false or misleading
because they gave the false impression that, throughout its
existence, including during Project Omega, ITG had maintained
the same unconflicted business model, protected client
information, and complied with applicable regulations.

16

D. SEC Investigation
The SEC allegedly began investigating Project Omega by the
fall of 2013, and by May 2015 had informed ITG that it intended
to bring charges. (Id. ¶¶ 64, 171.)

Plaintiff alleges that ITG

made several statements in its SEC filings between 2013 and 2015
that were false or misleading in light of the ongoing SEC
investigation.

For example, ITG’s Forms 10-Q and 10-K from the

third quarter of 2013 to the end of 2014 included the following
statements regarding the company’s involvement in regulatory
proceedings and investigations:
We are not a party to any pending legal
proceedings other than claims and lawsuits
arising in the ordinary course of business. In
addition, our broker-dealers are regularly
involved in reviews, inquiries, examinations,
investigations and proceedings by government
agencies and self-regulatory organizations
regarding our business, which may result in
judgments, settlements, fines, penalties,
injunctions or other relief. Although there
can be no assurances, at this time, the
Company
believes,
based
on
information
currently available, that the outcome of any
such proceeding, review, inquiry, examination
and investigation will not have a material
adverse effect on our consolidated financial
position or results of operations.2
(Id. ¶¶ 175, 196, 210, 231.)

A variation on this statement appeared in the company’s Form
10-Q for the first quarter of 2015. (Compl. ¶ 238.) That
statement is reproduced below with the Court’s analysis of ITG’s
statements about regulatory proceedings.
2

17

Plaintiff contends that this statement was materially false
or misleading each time it was made because, among other
reasons, there was “a reasonable probability that ITG would be
forced to admit wrongdoing and/or otherwise incur material
financial penalties or reputational harm as a result of
impending fines and penalties related to the SEC Investigation
or other proceedings concerning Project Omega.” (See, e.g., id.
¶ 176.)
IV. Disclosure of Project Omega and SEC Investigation
On August 12, 2015, the SEC announced a settlement with ITG
and released an order instituting administrative and cease-anddesist proceedings against ITG and AlterNet. (Id. ¶ 66.)

The

order included a detailed admission of wrongdoing by ITG and
AlterNet and an acknowledgement that their conduct violated
federal securities laws. (See generally id. Ex. A [hereinafter
the “SEC Order”].)

Specifically, the order stated that ITG and

AlterNet had violated §§ 17(a)(2) and 17(a)(3) of the Securities
Act by making untrue statements of material fact and material
omissions to investors, and also stated that ITG had violated
Regulation ATS. (SEC Order ¶¶ 79-80.)

In connection with the

settlement, ITG agreed to pay approximately $20.3 million in
fines and disgorgement of profits, the largest monetary penalty
ever imposed against a dark pool. (Compl. ¶¶ 7, 68.)

Following

the news of the settlement, ITG’s stock price dropped 24
18

percent, from $24.00 per share on July 29, 2015, to $18.36 per
share on July 30, 2015. (Id. ¶ 245.)

As a result, ITG

shareholders are alleged to have suffered millions of dollars in
damages.
Plaintiff brings two causes of action in this suit.

First,

Plaintiff alleges that Defendants violated § 10(b) of the
Securities Exchange Act and Rule 10b-5. (Compl. ¶¶ 362-368.)
Plaintiff also asserts that the Individual Defendants violated §
20(a) of the Securities Exchange Act. (Id. ¶¶ 369-376.)
Defendants have filed motions to dismiss the Complaint for
failure to state a claim.
LEGAL STANDARD
In deciding a motion to dismiss pursuant to Rule 12(b)(6),
the factual allegations in the complaint are accepted as true,
and all reasonable inferences must be drawn in the plaintiff’s
favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d
Cir. 2007).

A complaint should not be dismissed if the

plaintiff has alleged “enough facts to state a claim to relief
that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007).

“A claim has facial plausibility when the

plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the
misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009).

While factual allegations should be construed in the
19

light most favorable to the plaintiff, “the tenet that a court
must accept as true all of the allegations contained in a
complaint is inapplicable to legal conclusions.” Id.
A claim under § 10(b) of the Securities Exchange Act must
meet the pleading requirements of both Rule 9(b) of the Federal
Rules of Civil Procedure and the Private Securities Litigation
Reform Act (“PSLRA”), 15 U.S.C. § 78u–4(b). See In re Sanofi
Sec. Litig., 155 F. Supp. 3d 386, 397-98 (S.D.N.Y. 2016).

Rule

9(b) requires that the complaint “(1) specify the statements
that the plaintiff contends were fraudulent, (2) identify the
speaker, (3) state where and when the statements were made, and
(4) explain why the statements were fraudulent.” ATSI Commc’ns,
Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007).

The

PSLRA similarly requires that the complaint “specify each
statement alleged to have been misleading [and] the reason or
reasons why the statement is misleading,” and adds the
requirement that “if an allegation regarding the statement or
omission is made on information and belief, the complaint shall
state with particularity all facts on which that belief is
formed.” 15 U.S.C. § 78u–4(b)(1); ATSI Commc’ns, 493 F.3d at 99.
When presented with a motion to dismiss pursuant to Rule
12(b)(6), the Court may consider “the complaint, documents
attached to the complaint as exhibits, and documents
incorporated by reference in the complaint.
20

Where a document is

not incorporated by reference, the court may nevertheless
consider it where the complaint ‘relies heavily upon its terms
and effect,’ thereby rendering the document ‘integral’ to the
complaint.” DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d
Cir. 2010) (citation omitted) (quoting Mangiafico v. Blumenthal,
471 F.3d 391, 398 (2d Cir. 2006)).

The Court can take judicial

notice of public disclosure documents that must be filed with
the SEC and documents that both “bear on the adequacy” of SEC
disclosures and are “public disclosure documents required by
law.” Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir.
1991).
DISCUSSION
I. Violation of § 10(b) of the Securities Exchange Act and Rule
10b-5
To state a claim for securities fraud under § 10(b) of the
Securities Exchange Act and Rule 10b-5 promulgated thereunder, a
plaintiff must allege that “in connection with the purchase or
sale of securities, the defendant, acting with scienter, made a
false material representation or omitted to disclose material
information and that plaintiff’s reliance on defendant’s action
caused plaintiff injury.” Fragin v. Mezei, No. 09 Civ.
10287(AJN), 2012 WL 3613813, at *7 (S.D.N.Y. Aug. 22, 2012)
(quoting Rothman v. Gregor, 220 F.3d 81, 89 (2d Cir. 2000)).
other words, a plaintiff must establish:

21

“(1) a material

In

misrepresentation or omission by the defendant; (2) scienter;
(3) a connection between the misrepresentation or omission and
the purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6) loss
causation.” Stoneridge Inv. Partners, LLC v. Scientific-Atlanta,
Inc., 552 U.S. 148, 157 (2008).
Defendants move to dismiss the Complaint for failure to
adequately plead a material misrepresentation or omission and
failure to plead a strong inference of scienter.
A. False or Misleading Statements and Omissions
Rule 10b-5 makes it unlawful to “make any untrue statement
of a material fact” or “to 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.” 17
C.F.R. § 240.10b–5(b).

“A statement is misleading if a

reasonable investor would have received a false impression from
the statement.” Freudenberg v. E*Trade Fin. Corp., 712 F. Supp.
2d 171, 180 (S.D.N.Y. 2010).

Such a determination is generally

a question reserved for the trier of fact. See In re Par Pharm.,
Inc. Sec. Litig., 733 F. Supp. 668, 677 (S.D.N.Y. 1990). “Thus,
the matter must go to a jury unless the Court, drawing all
reasonable inferences in favor of the plaintiff, determines that
reasonable minds could not differ on the question of whether the

22

statements alleged in the complaint were misleading in light of
the circumstances under which they were made.” Id.
With respect to omissions, the Supreme Court has instructed
that “[s]ilence, absent a duty to disclose, is not misleading
under Rule 10b-5.” Stratte-McClure v. Morgan Stanley, 776 F.3d
94, 101 (2d Cir. 2015) (quoting Basic, Inc. v. Levinson, 485
U.S. 224, 239 n.17 (1988)).

Thus, generally, “an omission is

actionable under the securities laws only when the corporation
is subject to a duty to disclose the omitted facts.” Id.
(quoting In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d
Cir. 1993)).

A duty to disclose under Rule 10b–5 may arise

“when there is ‘a corporate insider trad[ing] on confidential
information,’ a ‘statute or regulation requiring disclosure,’ or
a corporate statement that would otherwise be ‘inaccurate,
incomplete, or misleading.’” Id. (quoting Glazer v. Formica
Corp., 964 F.2d 149, 157 (2d Cir. 1992)); see also In re
Lululemon Sec. Litig., 14 F. Supp. 3d 553, 572 (S.D.N.Y. 2014).
Even in the absence of an independent duty to disclose
information, once a company speaks on an issue, it has a duty to
be accurate and complete. See Meyer v. JinkoSolar Holdings Co.,
Ltd., 761 F.3d 245, 250 (2d Cir. 2014).
Regarding materiality, “[a] misrepresentation or omission
is material when a reasonable investor would attach importance
to it in making an investment decision.” Freudenberg, 712 F.
23

Supp. 2d at 181; see also Basic, 485 U.S. at 240.

However, like

the question of whether a reasonable investor would find a
particular statement “misleading,” the question of whether a
reasonable investor would find a particular misrepresentation or
omission “material” to an investment decision is usually a
matter reserved for the trier of fact. See In re Initial Pub.
Offering Sec. Litig., 241 F. Supp. 2d 281, 379 (S.D.N.Y. 2003)
(“The question of materiality is rarely amenable to disposition
as a matter of law.”).

Accordingly, the Second Circuit has held

that “a complaint may not properly be dismissed . . . on the
ground that the alleged misstatements or omissions are not
material unless they are so obviously unimportant to a
reasonable investor that reasonable minds could not differ on
the question of their importance.” Ganino v. Citizens Utils.
Co., 228 F.3d 154, 162 (2d Cir. 2000) (quoting Goldman v.
Belden, 754 F.2d 1059, 1067 (2d Cir. 1985)).
1. Class Period Statements Before Project Omega
According to the Complaint, Defendants made materially
false or misleading statements and omissions prior to the Class
Period, i.e., before February 28, 2011. (Compl. ¶¶ 78-87.)

The

Complaint, however, fails to state a claim based on these
representations because, in the Second Circuit, a defendant is
liable “only for those statements made during the class period.”
In re IBM Corp. Sec. Litig., 163 F.3d 102, 107 (2d Cir. 1998);
24

see also In re Lions Gate Entm’t Corp. Sec. Litig., 165 F. Supp.
3d 1, 17 (S.D.N.Y. 2016) (noting the “general rule that preClass Period statements are not actionable”).

Accordingly, the

pre-Class Period statements here are not actionable.
Moreover, Defendants had no duty to correct pre-Class
Period misstatements.

The Second Circuit has held that “the

duty to correct previous misstatements does not apply where the
defendants made the original statements before the Class Period
and became aware of the errors in those statements before the
Class Period.” Lions Gate, 164. F. Supp. 3d at 17 (citing
Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 154 (2d Cir.
2007)).

Here, the duty to correct pre-Class Period statements,

if such a duty existed, arose in December 2010, when Defendants
allegedly learned about misconduct at Project Omega. (Compl. ¶¶
48-50.)

Because, as Plaintiff alleges, these statements and

Defendants’ awareness of errors in them took place prior to the
Class Period, the duty to correct does not apply.
Accordingly, the statements set forth in paragraphs 78 to
87 of the Complaint are not actionable.
2. Class Period Statements During Project Omega’s Operation
The Court finds that Plaintiff has alleged actionable
statements or omissions while Project Omega was operating during
the Class Period. (Id. ¶¶ 90-109.)

First, Plaintiff alleges

that, from February 28, 2011 to July 2011, Defendants touted
25

ITG’s “independence” and “independent agency research” model
when, in fact, ITG was running Project Omega, a proprietary
trading operation to benefit its own account. (Id. ¶¶ 90, 98,
101, 106.)

Second, Plaintiff alleges that Defendants

highlighted POSIT as a product that preserved clients’ anonymity
and protected their confidential information when, in fact, ITG
used or otherwise had improper access to confidential client
information for Project Omega. (Id. ¶¶ 92-93, 100.)

Third,

Plaintiff alleges that Defendants emphasized ITG’s compliance
with applicable regulatory requirements—including Regulation
ATS—when, in fact, ITG was in violation of a provision of
Regulation ATS requiring safeguards to protect subscribers’
confidential trading information. (Id. ¶¶ 95-96.)
Defendants argue that ITG’s statements during this period
were literally true and not misleading,3 and that, in any event,
they constitute inactionable puffery.

At this stage, however,

these statements amount to more than mere puffery.

Puffery

encompasses “statements [that] are too general to cause a

Defendants also contend that Project Omega was a limited and
minor “experiment,” and, thus, neither it nor the failure to
disclose it was material. (Defs.’ Mem. at 13, 16.) Accepting
Plaintiff’s allegations as true, as the Court must on a motion
to dismiss, the Court cannot say that the Class Period
representations that ITG employed an independent agency model,
protected confidential client information, and was in compliance
with Regulation ATS during the operation of Project Omega were
“so obviously unimportant to a reasonable investor” as to be
immaterial as a matter of law. See Goldman, 754 F.2d at 1067.
3

26

reasonable investor to rely upon them,” and, thus, is not
misleading. In re Vivendi, S.A. Sec. Litig., 838 F.3d 223, 245
(2d Cir. 2016) (quoting ECA, Local 134 IBEW Joint Pension Trust
of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 206 (2d Cir.
2009)); see also In re Moody’s Corp. Sec. Litig., 599 F. Supp.
2d 493, 509 (S.D.N.Y. 2009) (“[C]ourts have identified
declaration of intention, hope, or projections of future
earnings as the hallmarks of inactionable puffery.”).

However,

more definite statements about a company’s business practices
may invoke reasonable reliance by investors, particularly if the
statements relate to aspects of a company’s brand or reputation
that are touted as sources of its success. See Moody’s, 599 F.
Supp. 2d at 509 (S.D.N.Y. 2009) (finding actionable defendants’
representations about independence being a cornerstone of
company’s business where statements were “not couch[ed] . . . in
the language of optimism or hope” but were, instead,
“‘watchwords by which stakeholders’ judged it”); Lapin v.
Goldman Sachs Grp., Inc., 506 F. Supp. 2d 221, 240 (S.D.N.Y.
2006) (finding actionable statements about defendants’ integrity
being “‘at the heart’” of its business and a point of
distinction from competitors).
The statements at issue here are sufficiently definite and,
moreover, related to “the heart” of ITG’s business to qualify as
actionable.

A reasonable investor could find that ITG’s
27

“independent agency status” described a significant aspect of
its business model that, according to the company, distinguished
it from competitors. (See, e.g., Compl. ¶¶ 98 (“Our broad
product set and independent agency status make ITG a trusted
partner for many of the world’s largest and most sophisticated
institutional investors.”), 90, 101.)

Likewise, the Complaint

plausibly alleges that ITG touted specific advantages of POSIT,
its leading product, despite the fact that Project Omega’s
ongoing operations undermined its claims that POSIT allowed
customers to remain “anonymous” and provided them with “complete
confidentiality.” (Id. ¶ 100.)

These are not the type of vague

or aspirational representations that warrant dismissal as
puffery at this stage.
The disclosure in ITG’s 2010 Form 10-K that “[a] portion of
our revenues is derived from principal trading for our own
account where we incur risk” does not cure the alleged
misstatements as a matter of law. (Id. ¶ 95; Defs.’ Mem. at 1213.)

Based on the Complaint, the key fact omitted from ITG’s

statements about its business practices is Project Omega’s
ongoing misconduct related to customer information, not that ITG
operated a proprietary trading program.

While Project Omega’s

live feeds of customer information ended in December 2010, the
Project Omega team allegedly continued to have access to
information identifying POSIT customers. (Compl. ¶¶ 51-53.)
28

Moreover, the Project Omega team allegedly continued to
coordinate with ITG’s POSIT development team to identify the
sell-side customers for Project Omega to trade with and to
ensure that those customers were configured to trade
“aggressively.” (Id. ¶ 53.)

A reasonable investor could find

that ITG’s failure to disclose this conduct made its
representations during Project Omega misleading.
Defendants’ argument that they had no duty to disclose any
information about Project Omega presupposes that none of their
Class Period statements were misleading. (Defs.’ Mem. at 12.)
For the reasons stated above, however, Plaintiff has plausibly
alleged that Defendants made Class Period statements while
Project Omega was operating that were “inaccurate, incomplete,
or misleading.” Stratte-McClure, 776 F.3d at 101 (quoting
Glazer, 964 F.2d at 157).

“Having chosen to speak” about

specific features of its business model and the advantages it
offered, ITG “had an obligation to ensure its statements were
both accurate and complete, even if it lacked an independent
duty to discuss the information in the first place.” In re
BioScrip, Inc. Sec. Litig., 95 F. Supp. 3d 711, 727 (S.D.N.Y.
2015) (internal quotation marks omitted) (citing Meyer, 761 F.3d
at 250).
Defendants do not dispute Plaintiff’s allegation that they
misrepresented ITG’s compliance with Regulation ATS in the Form
29

10-K for 2010. (Compl. ¶¶ 95-96.)

Instead, they argue that

Regulation ATS does not, on its own, impose a duty of public
disclosure. (Defs.’ Mem. at 12.)
point.

This argument misses the

It is not Regulation ATS itself that gives rise to a

duty of disclosure, but rather Plaintiff’s allegation that ITG
made an “inaccurate, incomplete, or misleading” representation
of compliance with that regulation that imposed such a duty. See
Stratte-McClure, 776 F.3d at 101 (quoting Glazer, 964 F.2d at
157).

Plaintiff has adequately pleaded that the representation

about compliance with Regulation ATS was false or misleading.
Accordingly, the statements set forth in paragraphs 90 to
104 and 106 to 109 are actionable.

However, for the reasons

stated later in this Opinion, the statement set forth in
paragraph 105 is not actionable.
3. Class Period Statements After Project Omega Ended
A significant portion of the Complaint consists of
allegedly false or misleading statements that describe or relate
to ITG’s business practices and operations after Project Omega
was shut down for good in July 2011. (Compl. ¶¶ 110-241.)

The

Court finds that Plaintiff has plausibly alleged misleading
statements by ITG regarding the Pipeline controversy and
settlement. (Id. ¶¶ 113-117.)

However, Plaintiff’s claim that

Defendants’ post-Project Omega statements are misleading as to
ITG’s past practices must be dismissed because neither the
30

present-tense terms of those statements nor the circumstances
surrounding them support the inference that they describe ITG’s
past behavior.
a. Statements Regarding the Pipeline Controversy and Settlement
Plaintiff has plausibly alleged actionable statements based
on comments by Gasser and Selway following Pipeline’s settlement
with the SEC.

Specifically, Plaintiff alleges that these

statements were false or misleading because they suggest that
ITG, in contrast to Pipeline, complied with applicable laws and
did not face any regulatory risk.

Moreover, these statements

directly responded to questions and concerns about the Pipeline
controversy. (Id. ¶¶ 62, 113 (Gasser stating in letter to ITG
clients:

“We strictly enforce the order handling and execution

rules of [POSIT], which are clearly set forth in Form ATS on
file with the Securities and Exchange Commission.”), 114 (Selway
stating in interview:

“Pipeline Cheated.

We don’t cheat.”),

116 (Gasser responding to question from analyst that ITG’s
business “is [in] no way analogous to what Pipeline was
doing”)).

Indeed, in Gasser’s own words, Pipeline’s misconduct

was “shocking.” (Id. ¶ 116.)

According to the Complaint,

however, ITG, like Pipeline, had “cheated” by engaging in
misconduct that exposed the company to the risk of regulatory
action.

The Court concludes that these statements, considered

in their context, could have given a reasonable investor a false
31

impression about ITG’s historical business operations and
potential regulatory exposure.
Plaintiff has also plausibly alleged that Gasser falsely
conveyed the impression that ITG’s approach to communication
about its business model was transparent and accurate, both in
November 2011, when the statements were made, and previously.
(Id. (“We’ve been very clear about our business model and how we
execute our business.
clients. . . .

We’ve communicated that broadly to

[C]ertainly any nuance to our model we feel

absolutely compelled to communicate very clearly and very
transparently.”).)

Gasser’s statements regarding ITG’s

“transparent” approach belied the reality that ITG did not
disclose details about Project Omega or the misconduct
associated with it.

These statements could have given a

reasonable investor a false impression about the completeness of
ITG’s disclosures and the scope of their business operations.
Accordingly, the statements set forth in paragraphs 113 to
117 are actionable.
b. Statements Regarding ITG’s Post-Project Omega Business
Operations and Practices
The remaining allegations of false or misleading statements
after Project Omega ended in July 2011, however, are not
actionable.

From July 2011 through the first half of 2015,

Plaintiff alleges various misrepresentations that generally can

32

be sorted into five categories:

(1) statements touting ITG’s

independence in press releases and SEC filings, (id. ¶¶ 111,
118, 127, 134-135, 154, 162, 184-185, 186, 203, 212, 218-219,
221, 233, 240); (2) statements touting the advantages of POSIT
and ITG’s other services in SEC filings and conference calls
with analysts, (id. ¶¶ 120, 124, 129, 131, 144, 156, 164, 166,
188, 201, 205, 207, 214, 216, 223, 225, 235); (3) statements
emphasizing ITG’s agency model in press releases and conference
calls with analysts, (id. ¶¶ 137-138, 140, 142, 152, 169); (4)
Gasser’s testimony before the U.S. Senate concerning ITG’s
business operations, (id. ¶¶ 146, 148, 150); and (5) ITG’s
compliance with Regulation ATS and controls to protect
confidential client data, (id. ¶¶ 158, 190, 192, 227).
As an initial matter, these alleged post-Project Omega
misrepresentations are generally worded in the present tense.
(See, e.g., id. ¶¶ 118 (“ITG is an independent agency research
broker that partners with asset managers globally . . . .”), 140
(“ITG’s unconflicted business model is at the heart of what we
do . . . .”), 150 (“[W]e safeguard our data using a combination
of up-to-date technological measures, strictly enforced
information barriers, and robust policies and procedures
concerning information security and protection of client
confidential information.”), 156 (“POSIT operates as an [ATS],
providing anonymous continuous and scheduled crossing of non33

displayed . . . equity orders . . . .”), 227 (“We continue to
review and monitor POSIT’s systems and procedures to ensure
compliance with Regulation ATS.”).)

These statements, on their

face, purport to describe only ITG’s then-present state, not its
past business operations or behavior.

The Complaint does not

contain allegations showing that the content of these statements
was false or misleading as applied to ITG’s conduct after
Project Omega ended in July 2011.
Plaintiff nevertheless asserts that these present-tense
statements were misleading because they gave false impressions
about ITG’s past conduct. (See, e.g., id. ¶¶ 130 (“[The
statement] created the false impression that the Company had
always traded in the best interests of its clients . . . [when]
in fact the Company had knowingly and unlawfully accessed and
exploited confidential customer information to trade against its
own customers . . . .”), 217 (“[The statement] created the false
impression that ITG was and always had been an independent
research and execution broker and had always helped investors
source quality liquidity . . . .”).)

Plaintiff is correct that

a statement, although literally true, can become misleading
“through [its] context and manner of presentation.” McMahan &
Co. v. Wherehouse Entm’t, Inc., 900 F.2d 576, 579 (2d Cir.
1990).

However, the Complaint fails to allege contextual

features that make Defendants’ post-Project Omega, present-tense
34

statements misleading.

These statements, unlike those made in

response to the Pipeline controversy and settlement, were
phrased in an unambiguous tense and did not respond to a
specific topic on which investors sought reassurance.

Absent

circumstances suggesting that these statements conveyed
information about ITG’s historical business practices, Plaintiff
has not adequately pleaded that the statements were false or
misleading.4
Accordingly, paragraphs 110 to 112 and paragraphs 118 to
241 of the Complaint do not plead actionable statements.
4.

Statements Concerning Regulatory Investigations

The SEC allegedly began investigating Project Omega by the
fall of 2013 and, by May 2015, had informed ITG that it
“intended to bring serious charges.” (Compl. ¶¶ 64, 171.)
Plaintiff argues that the failure to disclose the SEC
investigation made certain representations that appeared in
ITG’s public filings between 2013 and 2015 misleading.
Plaintiff alleges two different types of misleading statement:
(1) statements of fact about regulatory investigations and legal
proceedings, and (2) statements of opinion about the likely
impact of those regulatory investigations and legal proceedings.

The same logic applies with respect to the statements contained
in the Form ATS Amendment, signed by Goebels, that ITG filed
with the SEC in December 2013 and posted online in May 2014.
(Compl. ¶¶ 177-183.)
4

35

a. Statements of Fact
“[S]tatements of fact are actionable if they are materially
misleading.” Menaldi v. Och-Ziff Capital Mgmt. Grp. LLC, 164 F.
Supp. 3d 568, 583 (S.D.N.Y. 2016).

Plaintiff alleges that, in

light of the SEC’s investigation, certain statements of fact
that appeared in ITG’s quarterly and annual public filings
between 2013 and 2015 were misleading.

The first allegedly

misleading statement (the “Regularly Involved Statement”)
appeared in ITG’s Form 10-Q for the third quarter of 2013:
We are not a party to any pending legal
proceedings other than claims and lawsuits
arising in the ordinary course of business. In
addition, our broker-dealers are regularly
involved in reviews, inquiries, examinations,
investigations and proceedings by government
agencies and self-regulatory organizations
regarding our business, which may result in
judgments, settlements, fines, penalties,
injunctions or other relief. Although there
can be no assurances, at this time the Company
believes, based on information currently
available, that the outcome of any such
proceeding, review, inquiry, examination and
investigation will not have a material adverse
effect on our consolidated financial position
or results of operations.
(Compl. ¶ 175.)

ITG repeated this statement in its Form 10-Q

for the first, second, and third quarters of 2014, as well as
its Form 10-K for 2013 and 2014. (Id. ¶¶ 196, 210, 231.)
A similar statement that appeared in ITG’s Form 10-Q for
the first quarter of 2015 contained several new features:

36

The Company is not a party to any pending legal
proceedings other than claims and lawsuits
arising in the ordinary course of business.
The Company’s broker-dealer subsidiaries are
involved in ongoing investigations and other
proceedings by government agencies and selfregulatory
organizations
regarding
its
business, which may result in judgments,
settlements, fines, penalties, injunctions or
other relief. The Company is unable to provide
a reasonable estimate of any potential
liability given the stage of such proceedings.
However, the Company believes, based on the
information currently available, that the
outcome of such proceedings, individually or
in the aggregate, will not likely have a
material adverse effect on its consolidated
financial position. In light of the inherent
uncertainties of such proceedings, however, an
adverse outcome of such proceedings may have
a material impact on the results of operations
for any particular period.
(Id. ¶ 238.)
The second allegedly misleading statement (the
“Periodically Involved Statement”) appeared in ITG’s Form 10-K
for 2013:
The Company is periodically involved in
litigation and various legal matters that
arise in the normal course of business,
including proceedings relating to regulatory
matters. Such matters are subject to many
uncertainties and outcomes that are not
predictable. At the current time, the Company
does not believe that any of these matters
will have a material adverse effect on its
financial position or future results of
operations.5

The Court analyzes the last respective sentence of the
Regularly Involved Statement and the Periodically Involved
Statement, which constitute statements of opinion, below.
5

37

(Id. ¶ 196.)

ITG repeated this statement in its Form 10-K for

2014. (Id. ¶ 231.)
Plaintiff contends that these statements misled investors
by disclosing that ITG was “regularly involved” in
“investigations and proceedings by government agencies” and
“periodically involved” in “proceedings relating to regulatory
matters,” but omitting that the SEC was investigating Project
Omega. (Pl.’s Mem. in Opp. at 23-24.)

Defendants accurately

note that “a government investigation, without more, does not
trigger a generalized duty to disclose.” Lions Gate, 165 F.
Supp. 3d at 12.

However, “the question here is not whether

[Defendants] had an independent duty” to announce the SEC
investigation. Menaldi, 164 F. Supp. 3d at 584.

Rather, the

question “is whether, in light of that [i]nvestigation, the
statements [Defendants] chose to make were materially
misleading.” Id.
A trio of recent cases from this district bears on the
question of when a company’s statements about government
investigations may plausibly mislead a reasonable investor. See
Lions Gate, 165 F. Supp. 3d at 10-16; BioScrip, 95 F. Supp. 3d
at 725-28; see also Menaldi, 164 F. Supp. 3d at 582-85.

In

Menaldi, the plaintiffs plausibly alleged materially misleading
statements when the defendants received subpoenas from the SEC
and requests for information from the Department of Justice in
38

2011 and, in subsequent public filings, mischaracterized the
threat the company faced, especially in light of a more detailed
disclosure in a restated Form 10-K.6 164 F. Supp. 3d at 583-84.
The result was similar in BioScrip, where the plaintiffs
plausibly alleged materially misleading statements when the
defendants received a civil investigative demand from the
federal government in 2012 and, in subsequent public filings,
made statements “that a reasonable investor could have read . .
. to mean that BioScrip was not already in receipt of just such
a request for information.”7 95 F. Supp. 3d at 727.

In contrast,

in Lions Gate, the plaintiffs failed to allege a materially
misleading statement when the SEC issued subpoenas to the
company and certain individual defendants in 2011 and, in
subsequent public filings, the company stated that “[f]rom time
to time, the Company is involved in certain claims and legal

In Menaldi, the statements at issue included: “Like other
businesses in our industry, we are subject to scrutiny by
regulatory agencies”; “From time to time, the Company is
involved in litigation and claims incidental to the conduct of
the Company’s business”; and “This [scrutiny] has resulted or
may in the future result in regulatory agency investigations,
litigation, and subpoenas.” 164 F. Supp. 3d at 583.
6

In BioScrip, the statements at issue included: “[f]rom time to
time, the Company responds to subpoenas and requests for
information from Governmental agencies,” and “[t]here can be no
assurance that we will not receive subpoenas or be requested to
produce documents in pending investigations or litigation from
time to time.” 95 F. Supp. 3d at 726-27.
7

39

proceedings arising in the normal course of business.”8 165 F.
Supp. 3d at 15.

The analysis in these cases is necessarily

fact-specific, however, the distinction among them appears to
turn closely on whether the disclosure language at issue is
phrased in terms that appear hypothetical or speculative, as in
Menaldi and BioScrip, or in terms that convey current
investigative activity, as in Lions Gate.
Here, the Court concludes that the Regularly Involved
Statement and the Periodically Involved Statement, read
completely and in context, are neither false nor so incomplete
as to mislead a reasonable investor.

The initiation and ongoing

nature of the SEC investigation did not make ITG’s statements
that it was “regularly” or “periodically” involved in regulatory
investigations and matters factually inaccurate.

Nor could

those statements have given a reasonable investor the impression
that ITG was not actively involved in investigations.

Indeed,

when read in conjunction with the portions of the disclosures
that refer to ITG’s opinions based on the “information currently
available” and “at the current time,” the Regularly Involved

The remainder of the Lions Gate disclosure read: “While the
resolution of these matters cannot be predicted with certainty,
the Company does not believe, based on current knowledge, that
the outcome of any currently pending claims or legal proceedings
in which the Company is currently involved will have a material
adverse effect on the Company’s financial statements.” 165 F.
Supp. 3d at 15.
8

40

Statement and the Periodically Involved Statement suggest that
regulatory investigations were live and ongoing, rather than
merely hypothetical or speculative possibilities. Cf. Menaldi,
164 F. Supp. 3d at 583 (“This [scrutiny] has resulted or may in
the future result in regulatory agency investigations . . . .”);
BioScrip, 95 F. Supp. 3d at 727 (“There can be no assurance that
we will not receive subpoenas or be requested to produce
documents . . . .”).

Here, as in Lions Gate, Plaintiff “at most

pleads that the defendants disclosed an investigation was
ongoing, but refused to provide details.” 165 F. Supp. 3d at 16.
Accordingly, these statements are not actionable.
Plaintiff’s argument that the Regularly Involved Statement
and the Periodically Involved Statement were “boilerplate” and
“insufficiently generic” is unavailing.

So long as their

statements were not misleading, Defendants were not required to
provide more detailed disclosures. See Lions Gate, 165 F. Supp.
3d at 16 (“A corporation, however, ‘only [has to reveal] such
[facts], if any, that are needed so that what was revealed would
not be so incomplete as to mislead.’” (quoting In re Bristol
Myers Squibb Co. Sec. Litig., 586 F. Supp. 2d 148, 160 (S.D.N.Y.
2008))).

Furthermore, the other factual statements that appear

in the Regularly Involved Statement and the Periodically
Involved Statement are not actionable.

The Complaint contains

scarce details about the SEC investigation between the fall of
41

2013 and May 2015, and, thus, fails to establish anything untrue
about ITG’s statements that the legal and regulatory matters in
which it was involved were “subject to many uncertainties and
outcomes that are not predictable.” (Compl. ¶¶ 196, 231.)
Finally, Plaintiff alleges that ITG made a third allegedly
misleading statement (the “No Significant Change Statement”) in
its Form 10-Q for every quarter throughout the Class Period:
“There has been no significant change to the risks or
uncertainties that may affect our results of operations since
[the end of the period covered by the preceding Form 10-K].”
(Id. ¶¶ 105, 122, 133, 168, 173, 209, 237.)

The No Significant

Change Statement is followed by a sentence referring to “Item
1A” in the immediately preceding Form 10-K for more information.
See, e.g., Inv. Tech. Grp., Inc., Quarterly Report (Form 10-Q)
(Aug. 9, 2011) (“There has been no significant change to the
risks or uncertainties that may affect our results of operations
since December 31, 2010.

Please see Item 1A in our Annual

Report on Form 10-K for the year ended December 31, 2010.”).
Item 1A in ITG’s Form 10-Ks provides an extensive list of risk
factors, described at a fairly high level of generality, faced
by the company. See, e.g., Inv. Tech. Grp., Inc., Annual Report
(Form 10-K) (Feb. 28, 2012).
The Court concludes that these statements are not
actionably misleading.

Plaintiff argues that the No Significant
42

Change Statement was misleading throughout the Class Period
because Defendants allegedly knew about misconduct at Project
Omega and, later, that the SEC was investigating. (Pl.’s Opp. at
24.)

As an initial matter, “the federal securities laws do not

require a company to accuse itself of wrongdoing.” In re
Citigroup, Inc. Sec. Litig., 330 F. Supp. 2d 367, 377 (S.D.N.Y.
2004).

Moreover, Plaintiff does not explain how the risks or

uncertainties described in ITG’s annual Form 10-K—which
contemplate business concerns faced by the company and industry
at large, were updated and published on a yearly basis, and do
not address discrete instances of litigation or regulatory
action—underwent a “significant change” at any point.

Rather,

the broadly outlined risks identified in ITG’s annual Form 10-K
remained fairly constant from year to year.
Accordingly, paragraphs 105, 122, 133, 168, 173, 175, 196,
209, 210, 231, 237, and 238 of the Complaint do not plead
actionable statements.
b. Statements of Opinion
Plaintiff further alleges that, in light of the SEC
investigation, certain statements of opinion that appeared in
ITG’s quarterly and annual SEC filings between 2013 and 2015
were misleading.

The allegedly misleading statements of opinion

appear in the final sentence of the Regularly Involved
Disclosure and Periodically Involved Disclosure, respectively.
43

The first statement reads:

“Although there can be no

assurances, at this time the Company believes, based on
information currently available, that the outcome of any such
proceeding, review, inquiry, examination and investigation will
not have a material adverse effect on our consolidated financial
position or results of operation.” (Compl. ¶¶ 175, 196, 210,
231; see also id. ¶ 238.)

The second statement reads:

“At the

current time, the Company does not believe that any of these
[various legal] matters will have a material adverse effect on
its financial position or future results of operations.” (Id. ¶¶
196, 231.)
Under Second Circuit authority, liability for a statement
of opinion lies “to the extent that the statement was both
objectively false and disbelieved by the defendant at the time
it was expressed.” Fait v. Regions Fin. Corp., 655 F.3d 105, 110
(2d. Cir. 2011).

The Supreme Court recently weighed in on this

standard, holding that liability for making a false statement of
opinion may lie if:

(1) “the speaker did not hold the belief

she professed”; (2) “the supporting fact [the speaker] supplied
were untrue”; or (3) “the speaker omits information whose
omission makes the statement misleading to a reasonable
investor.”9 Tongue v. Sanofi, 816 F.3d 199, 209-10 (2d Cir. 2016)

As another court in this district recently observed, the Second
Circuit “has not directly held that Omnicare applies” to § 10(b)
9

44

(citing Omnicare, Inc., v. Laborers Dist. Council Cons. Indus.
Pension Fund, 135 S. Ct. 1318, 1326-27, 1332 (2015)).

In

determining whether a statement of opinion is misleading based
on a failure to disclose facts underlying the opinion, “[t]he
core inquiry is whether the omitted facts would ‘conflict with
what a reasonable investor would take from the statement
itself.’” Id. (quoting Omnicare, 135 S. Ct. at 1329).

To make

this showing, a plaintiff must
identify particular (and material) facts
going to the basis for the [defendant’s]
opinion—facts about the inquiry the
[defendant] did or did not conduct or the
knowledge it did or did not have—whose
omission makes the opinion statement at
issue misleading to a reasonable person
reading the statement fairly and in context.
Omnicare, 135 S. Ct. at 1332.
Plaintiff argues that the opinion statements at issue here
were “without a basis in fact” because Defendants were aware
that Pipeline had paid a “significant fine” for similar
misconduct and that ITG was under investigation by the SEC.
(Pl.’s Mem. in Opp. at 25 (quoting In re Oxford Health Plans,
Inc., Sec. Litig., 187 F.R.D. 133, 141 (S.D.N.Y. 1999)).)

or Rule 10b–5 claims. SEC v. Thompson, 14-cv-9126 (KBF), 2017 WL
874973, at *17 n.13 (S.D.N.Y. Mar. 2, 2017). “However, several
recent cases suggest that Omnicare would apply to all antifraud
provisions of the securities laws.” Id. (collecting cases); see
also Tongue, 816 F.3d at 209-14 (analyzing claims arising under
various securities fraud provisions, including § 10(b) and Rule
10b–5, without distinguishing among those provisions).
45

Plaintiff, however, does not allege that Defendants subjectively
disbelieved their own opinion, nor does it allege that they
embedded an untrue fact. See Omnicare, 135 S. Ct. at 1326-27.
The statements of opinion, then, are only actionably misleading
under Omnicare if they omitted to state facts that would
“conflict with what a reasonable investor would take from the
statement itself.” Id. at 1329.
As to this inquiry, the Second Circuit has noted that the
Supreme Court’s example of an issuer’s statement of belief that
its conduct is lawful is “particularly instructive.” Tongue, 816
F.3d at 214.

“Such a statement does not imply that the issuer’s

conduct is, in fact, lawful, but only that the issuer has
conducted a meaningful inquiry and has a reasonable basis upon
which to make such an assertion.” Id.; see also Omnicare, 135 S.
Ct. at 1328-29 (a reasonable investor does not understand
statements of opinion as “guarantees,” but rather expects that
assertions “rest on some meaningful . . . inquiry” and that an
issuer’s opinion “fairly aligns with the information in [its]
possession at the time”).
Plaintiff does not allege that Defendants, in issuing the
statements of opinion, failed to conduct a meaningful inquiry or
were without an adequate basis for their assertions.

To be

sure, Plaintiff disagrees with the opinions at issue,
specifically the conclusion that no legal or regulatory matter
46

was expected to have a “material adverse effect.” (Pl.’s Mem. in
Opp. at 24.)

However, an opinion statement “is not necessarily

misleading when” a defendant “knows, but fails to disclose, some
fact cutting the other way,” because a “reasonable investor does
not expect that every fact known to [a defendant] supports its
opinion statement.” Omnicare, 135 S. Ct. at 1329 (emphasis in
original).

Thus, Plaintiff may disagree with Defendants’

opinion, but “so long as Defendants conducted a ‘meaningful’
inquiry and in fact held [the stated] view, the statements did
not mislead in a manner that is actionable.” Tongue, 816 F.3d at
214.
Additionally, Plaintiff fails to allege particular facts
regarding the knowledge Defendants did (or did not) possess at
the time the opinion statements were made, whose omission made
those statements misleading.

The Complaint states generally

that the SEC investigation began in late 2013. (See, e.g.,
Compl. ¶¶ 64 (“By the fall of 2013, the SEC commenced an
investigation into Project Omega.”), 171 (“According to
published news reports, the SEC Investigation began no later
than the fall of 2013.”).)

However, the Complaint fails to

allege facts connecting the timing of the SEC investigation with
Defendants’ knowledge of the investigation, stating, in
conclusory fashion, only that “Defendants were put on notice of
the SEC investigation” at the same time as it allegedly
47

commenced. (Id. ¶ 285.)

Other courts in this district,

analyzing similar opinion statements regarding legal matters and
expected consequences, have found statements actionable where
the plaintiff concretely alleged that the defendants, before
making the opinion statement at issue, knew facts whose omission
made the opinion statement misleading. See, e.g., Menaldi, 164
F. Supp. 3d at 574-75, 583-84 (complaint alleged that defendant
company received subpoenas from the SEC and requests for
information from Department of Justice prior to making
actionable statements); BioScrip, 95 F. Supp. 3d at 729-32
(complaint alleged that United States served defendant company
with a civil investigative demand prior to company’s actionable
opinion statements).

Here, in contrast, Plaintiff fails to

“identify particular . . . facts . . . whose omission makes the
opinion statement at issue misleading.” See Omnicare, 135 S. Ct.
at 1332.
Accordingly, paragraphs 175, 196, 210, 231, and 238 of the
Complaint do not plead actionable statements of opinion.
B. Scienter
Defendants also move to dismiss the Complaint on the ground
that Plaintiff has failed to allege a strong inference of
scienter.

In light of the Court’s analysis above regarding

actionable statements, the Court need only consider the
sufficiency of the scienter allegations with respect to two
48

categories of statements:

(1) Class Period statements during

Project Omega’s operation, and (2) statements regarding the
Pipeline controversy and settlement.
The Supreme Court has defined scienter as “a mental state
embracing intent to deceive, manipulate, or defraud.” Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)
(quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12
(1976)).

To state a claim under § 10(b) and Rule 10b-5, a

plaintiff must “state with particularity facts giving rise to a
strong inference that the defendant acted with the required
state of mind.” 15 U.S.C. § 78u-4(b)(2).

To qualify as a

“strong inference,” the inference of scienter must be “cogent
and at least as compelling as any opposing inference of
nonfraudulent intent.” ECA, 553 F.3d at 198 (quoting Tellabs,
551 U.S. at 314).

In the case of a corporate defendant, a

plaintiff need only plead facts that “create a strong inference
that someone whose intent could be imputed to the corporation
acted with the requisite scienter.” Teamsters Local 445 Freight
Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d
Cir. 2008).
In the Second Circuit, a plaintiff may establish scienter
in either of two ways:

by “alleging facts (1) showing that the

defendants had both motive and opportunity to commit the fraud
or (2) constituting strong circumstantial evidence of conscious
49

misbehavior or recklessness.” Stratte-McClure, 776 F.3d at 106
(quoting ATSI Commc’ns, 493 F.3d at 99).

As to the second

method of establishing scienter, “courts have approved of claims
when plaintiffs ‘have specifically alleged defendants’ knowledge
of facts or access to information contradicting their public
statements.

Under such circumstances, defendants knew or, more

importantly, should have known that they were misrepresenting
material facts related to the corporation.’” Pirnik v. Fiat
Chrysler Autos., N.V., 15-CV-7199 (JMF), 2016 WL 5818590, at *6
(S.D.N.Y. Oct. 5, 2016) (quoting Novak v. Kasaks, 216 F.3d 300,
308 (2d Cir. 2000)).
As explained below, the Complaint contains adequate
allegations to support a strong inference of scienter as to
Gasser and ITG.

However, it fails to plead a strong inference

of scienter as to Goebels or Vigliotti.
1. Gasser
Plaintiff has adequately pleaded Gasser’s scienter with
respect to the actionable Class Period statements.

A strong

inference of scienter may arise where a complaint sufficiently
alleges that a defendant “knew facts or had access to
information suggesting that [its] public statements were not
accurate.” ECA, 553 F.3d at 199 (quoting Novak, 216 F.3d at
311).

To establish that defendants “knew facts or had access to

information contradicting their public statements,” a plaintiff
50

“must identify specific contradictory information that was
available to the . . . [d]efendants at the time they made their
misleading statements.” Pa. Pub. Sch. Emps.’ Ret. Sys. v. Bank
of Am. Corp., 874 F. Supp. 2d 341, 358 (S.D.N.Y. 2012).

Here,

the Complaint alleges that, by December 2010 at the latest,
Gasser was aware that Project Omega had accessed and used
confidential client information to benefit ITG’s proprietary
trading account. (Compl. ¶ 50.)

Gasser reprimanded Project

Omega’s manager, but took no further action to ensure that
Project Omega was barred from accessing confidential client
information. (Id. ¶¶ 50, 53.)

Then, after Project Omega resumed

operation in late 2010, it continued to have access to
confidential client information until it was permanently
discontinued in July 2011. (Id. ¶¶ 52-54.)

Thus, Plaintiff

plausibly alleges that Gasser “knew facts or had access to
information suggesting that” ITG’s statements between February
and July 2011 regarding its “independent agency status,”
safeguarding of client confidentiality and anonymity, and
compliance with Regulation ATS were “not accurate.”10 (Id. ¶¶ 90-

Indeed, Defendants do not really dispute that Gasser had
knowledge that ITG engaged in proprietary trading or that
Project Omega improperly used and had access to confidential
client information. Rather, as noted previously, Defendants
argue that the allegedly false or misleading Class Period
statements during Project Omega’s operation were literally true
or mere puffery. (Defs.’ Mem. at 15-16.)
10

51

109.)

These “allegations alone are enough to satisfy the

pleading requirement for scienter.” Freudenberg, 712 F. Supp. 2d
at 197 (quoting Heller v. Goldin Restructuring Fund, L.P., 590
F. Supp. 2d 603, 622 (S.D.N.Y. 2008)); see also Pirnik, 2016 WL
5818590, at *7 (“[I]t is enough at this stage for Plaintiffs to
allege that Defendants were aware of nonpublic facts
contradicting their public representations . . . .”).
Several additional considerations support the Court’s
conclusion that a reasonable person would deem the inference of
Gasser’s scienter “cogent and at least as compelling as any
opposing inference” one could draw from the facts alleged. See
Tellabs, 551 U.S. at 314.

For example, Gasser made pre-Class

Period statements denying that ITG conducted any proprietary
trading, even though he participated in the initial decision to
approve Project Omega and even when it was currently operating.11
(Compl. ¶¶ 21-22, 78-87.)

Additionally, Gasser made statements

in November 2011—after Project Omega ended—attempting to
distinguish Pipeline’s “shocking” and in “no way analogous”
misconduct and reassure the public that ITG had always
communicated transparently about its business model. (Id. ¶

While pre-Class Period statements “cannot themselves give rise
to liability,” they “can be relevant for showing whether
defendants had knowledge that their later statements were
false.” In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611, 643
(S.D.N.Y. 2007).
11

52

116.)

Considering “all of the facts alleged, taken

collectively,” including Gasser’s statements before, during, and
after Project Omega’s operation, the Court concludes that the
Complaint gives rise to a strong inference that Gasser acted
with the required state of mind. See S. Cherry Street, LLC v.
Hennessee Grp. LLC, 573 F.3d 98, 111 (2d Cir. 2009) (emphasis in
original) (quoting Tellabs, 551 U.S. at 323).
For similar reasons, Plaintiff has also sufficiently
pleaded Gasser’s scienter with respect to the actionable
November 2011 statements concerning the Pipeline controversy and
settlement. (Compl. ¶¶ 113-117.)

Gasser’s awareness of

Pipeline’s misconduct and October 2011 SEC settlement can be
readily inferred from his contemporaneous statements, which cast
Pipeline’s behavior in stark contrast to ITG’s. (Id. ¶¶ 113 (“We
strictly enforce the order handling and execution rules of
[POSIT.]”), 116 (ITG’s business “is [in] no way analogous to
what Pipeline was doing”).)

As noted above, Gasser, by this

time, allegedly knew that ITG had piloted a proprietary trading
program (i.e., Project Omega) and was aware of undisclosed
misconduct associated with that program related to protecting
confidential client information.

Gasser, thus, “knew facts or

had access to information suggesting that” his public statements
comparing ITG and Pipeline “were not accurate.” See ECA, 553
F.3d at 199 (quoting Novak, 216 F.3d at 311).
53

At this stage,

these allegations are sufficient to survive Defendants’
arguments for dismissal.
2. Goebels and Vigliotti
The situation is different, however, with respect to
Goebels and Vigliotti.

The Court concludes that, with respect

to them, Plaintiff fails to allege the cogent and compelling
inference of scienter that is required. See Tellabs, 551 U.S. at
314.

Rather, the allegations set out in the Complaint are

insufficient to establish a strong inference of scienter as to
Goebels or Vigliotti under either the “motive and opportunity”
prong or the “conscious misbehavior or recklessness” prong. See
Stratte-McClure, 776 F.3d at 106.
Plaintiff contends that Class Period sales of ITG stock by
Goebels demonstrate his motive and opportunity to commit fraud
in connection with the allegedly misleading or false statements.
(Pl.’s Mem. in Opp. at 35-37.)

“To plead a strong inference of

scienter through ‘motive and opportunity to commit fraud,’ a
plaintiff must allege that a defendant ‘benefitted in some
concrete and personal way from the purported fraud.’” Sanofi,
155 F. Supp. 3d at 405 (quoting ECA, 553 F.3d at 198).
Typically, motive is shown by alleging that corporate insiders
made a misrepresentation in order to sell their own shares at a
profit. See ECA, 553 F.3d at 198.

To show motive based on

trading by insiders, a plaintiff must establish that trading was
54

unusual or suspicious. See Glaser v. The9, Ltd., 772 F. Supp. 2d
573, 587 (S.D.N.Y. 2011).

Courts consider a variety of factors

in evaluating whether trading is unusual or suspicious. See,
e.g., In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 74-75 (2d
Cir. 2001); Glaser, 772 F. Supp. 2d at 587.
Here, Plaintiff alleges that Goebels sold 65,161 shares
during the Class Period, generating total proceeds of $971,910.12
(Compl. ¶ 292.)

Plaintiff contends that the timing of a portion

of these stock sales was suspicious, given the proximity of the
sales to the fall of 2013, i.e., when the SEC allegedly began
its investigation. (Id. ¶¶ 290-291; Pl.’s Mem. in Opp. at 35).
However, several considerations cut against a finding of motive.
First, as noted above, the only actionable statements occurred
during the Class Period operation of Project Omega (i.e., from
February 28, 2011 to July 2011) and in the fall of 2011
(regarding the Pipeline controversy and settlement).

The bulk

of Goebels’ Class Period stock sales took place on August 27,
2012 or after. (Compl. ¶ 292.)

The fact that most of Goebels’

Class Period stock sales took place more than one year after
Project Omega ended does not give rise to a strong inference of
Goebels’ scienter as to the actionable statements during Project

Plaintiff also alleges that Gasser sold 106,000 shares during
the Class Period, generating total proceeds of $1,931,516.
(Compl. ¶ 287.) The Court has already considered the issue of
Gasser’s scienter, above.
12

55

Omega’s operation.

Second, Plaintiff’s allegations concern the

total proceeds garnered by Goebels’ stock sales, not the net
profits. (Id.)

A number of courts in this district have found

that allegations do not support a finding of “motive and
opportunity” when net profits are not pleaded. See In re eSpeed,
Inc. Sec. Litig., 457 F. Supp. 2d 266, 290 (S.D.N.Y. 2006); see
also Glaser, 772 F. Supp. 2d at 587; In re Regeneron Pharm.,
Inc. Sec. Litig., No. 03 Civ. 3111 RWS, 2005 WL 225288, at *22
(S.D.N.Y. Feb. 1, 2005).

Third, the absence of allegations

regarding Vigliotti’s trading during the Class Period undercuts
the inference of scienter both as to him as well as his codefendants. See In re Gildan Activewear, Inc. Sec. Litig., 636
F. Supp. 2d 261, 271-72 (S.D.N.Y. 2009); see also Scholastic,
252 F.3d at 75.

Accordingly, Plaintiff has failed to plead a

strong inference of scienter under the “motive and opportunity”
prong.
Plaintiff’s allegations with respect to Goebels and
Vigliotti are also insufficient under the “conscious misbehavior
or recklessness” prong.

As an initial matter, Plaintiff does

not show with particularity that Goebels or Vigliotti knew facts
or had access to information suggesting the inaccuracy of the
actionable statements. See ECA, 553 F.3d at 199.

Rather,

Plaintiff attempts to show that they had knowledge that the
actionable statements were not accurate by virtue of their
56

positions (as General Counsel and CFO, respectively) and because
both were managing directors. (Compl. ¶¶ 76-77.)

For example,

Plaintiff alleges that “senior managers” participated in the
decision to approve Project Omega. (Id. ¶¶ 20, 242, 262, 327.)
Plaintiff also alleges that ITG’s “compliance department” and
“senior management” learned about misconduct at Project Omega in
December 2010. (Id. ¶¶ 48-50, 58, 262, 327.)

Based on this

chain of inference, Plaintiff asserts that Goebels and Vigliotti
knew facts suggesting that the actionable statements were not
accurate. (Pl.’s Mem. in Opp. at 28.)

“Scienter, however,

‘cannot be inferred solely from the fact that, due to the
defendants’ board membership or executive managerial position,
they had access to the company’s internal documentation as well
as any adverse information.’” Sanofi, 155 F. Supp. 3d at 407
(quoting Foley v. Transocean, Ltd., 861 F. Supp. 2d 197, 212
(S.D.N.Y. 2012)).
Plaintiff argues that Goebels’ resignation from ITG in
August 2015 constitutes supplemental evidence of his scienter.
(Pl.’s Mem. in Opp. at 33-34.)

According to an article

published in the Wall Street Journal in August 2015, Goebels
“left the firm in a move related to the dark pool case.” (Compl.
¶¶ 249, 272.)

The stated source for this information was

“people familiar with the matter.” Bradley Hope & Sarah Krouse,
ITG Ousts CEO Gasser After Probe, WALL ST. J., Aug. 3, 2015,
57

available at https://www.wsj.com/articles/itg-ousts-ceo-gasserafter-probe-1438647154.

Another court in this district has

found, under nearly identical circumstances, that such a “vague
description of the source provides no basis for the Court to
evaluate its reliability.” City of Brockton Ret. Sys. v. Avon
Prods., Inc., No. 11 Civ. 4665(PGG), 2014 WL 4832321, at *23
(S.D.N.Y. Sept. 29, 2014); cf. Novak, 216 F.3d at 313-14
(holding that a plaintiff may rely on confidential sources
“provided they are described in the complaint with sufficient
particularity to support the probability that a person in the
position occupied by the source would possess the information
alleged”).

Given the similarly “vague” description of the

source here—as well as the unexplained connection drawn by the
article between Goebels’ resignation and “the dark pool case”—
the Court does not accord much weight to the fact of Goebels’
resignation in evaluating his scienter.
Additionally, Plaintiff argues that application of the
“core operations” theory bolsters the inference of scienter as
to Goebels and Vigliotti. (Pl.’s Mem. in Opp. at 29-30.)

The

theory “permits an inference that a company and its senior
executives have knowledge of information concerning the ‘core
operations’ of a business.” In re Hi-Crush Partners L.P. Sec.
Litig., No. 12 Civ. 8557(CM), 2013 WL 6233561, at *26 (S.D.N.Y.
Dec. 2, 2013).

The continued viability of the core operations
58

theory, however, is uncertain. See Frederick v. Mechel OAO, 475
F. App’x 353, 356 (2d Cir. 2012) (“[W]e have not yet expressly
addressed whether, and in what form, the ‘core operations’
doctrine survives [the enactment of the PSLRA] as a viable
theory of scienter.”).

Even assuming the theory remains viable,

recent case law within this Circuit indicates that reliance on a
“core operations” inference may provide “supplemental support”
for establishing scienter, but is not independently sufficient.
See New Orleans Emps. Ret. Sys. v. Celestica, Inc., 455 F. App’x
10, 14 n.3 (2d Cir. 2011); see also Lipow v. Net1 UEPS Techs.,
Inc., 131 F. Supp. 3d 144, 163 (S.D.N.Y. 2015) (collecting
cases).

Where, as here, Plaintiff’s other scienter allegations

with respect to Goebels and Vigliotti are not persuasive, the
Court declines to find that Plaintiff’s reliance on the core
operations theory yields the cogent and compelling inference
required.
Accordingly, as to Goebels and Vigliotti, Plaintiff has
failed to plead scienter under the “conscious misbehavior or
recklessness” prong as well.
3. ITG’s Corporate Scienter
Gasser’s adequately pleaded scienter may be imputed to ITG.
“Courts routinely impute to the corporation the intent of
officers and directors acting within the scope of their
authority.” In re Ambac Fin. Grp., Inc. Sec. Litig., 693 F.
59

Supp. 2d 241, 265 (S.D.N.Y. 2010); see also Sanofi, 155 F. Supp.
3d at 409 (stating that “courts have readily attributed the
scienter of management-level employees to corporate defendants”
and collecting cases).

Gasser was ITG’s CEO and president from

October 2006 until August 2015 and acted in that capacity when
the allegedly false or misleading statements were made. (Compl.
¶ 75.)

Accordingly, the Court concludes that Gasser’s scienter

may be imputed to ITG with respect to the actionable Class
Period statements during Project Omega’s operation and regarding
the Pipeline controversy and settlement.
II. Control Person Liability Under Section 20(a) of the
Securities Exchange Act
In addition, Plaintiff alleges that the Individual
Defendants violated § 20(a) of the Securities Exchange Act.

To

state a claim under § 20(a), a plaintiff must allege facts
showing:

“(1) a primary violation by the controlled person, (2)

control of the primary violator by the defendant, and (3) that
the defendant was, in some meaningful sense, a culpable
participant in the controlled person’s fraud.” ATSI Commc’ns,
493 F.3d at 108.

Plaintiff argues that Gasser, Goebels, and

Vigliotti are controlling persons. (Compl. ¶ 372.)

As explained

above, Plaintiff has sufficiently alleged a primary violation of
Rule 10b-5 and § 10(b) by a controlled person, namely ITG. See

60

BioScrip, 95 F. Supp. 3d at 740.

Thus, Plaintiff has pleaded

the first element of control person liability.
As to the second element, “[w]hether a person is a
‘controlling person’ is a fact-intensive inquiry, and generally
should not be resolved on a motion to dismiss.” In re Tronox,
Inc., Sec. Litig., 769 F. Supp. 2d 202, 208 (S.D.N.Y. 2011)
(quoting CompuDyne Corp. v. Shane, 453 F. Supp. 2d 807, 829
(S.D.N.Y. 2006)).

Nevertheless, courts have held that an

officer’s control as to financial statements, for example, is
sufficiently pleaded if the officer has signed financial
statements containing materially false or misleading statements.
See In re Virtus Inv. Partners, Inc. Sec. Litig., 195 F. Supp.
3d 528, 542 (S.D.N.Y. 2016).

Here, Gasser, as CEO, allegedly

spoke on ITG’s behalf and signed relevant SEC filings. (See,
e.g., Compl. ¶¶ 90, 101, 113, 116.)

These allegations are

sufficient at the pleading stage to show that Gasser exercised
control over ITG. See Virtus Inv. Partners, 195 F. Supp. 3d at
543.

Accordingly, Plaintiff has pleaded the second element of

control person liability as to Gasser.
As to the third element, a plaintiff “must plead at a
minimum particularized facts establishing a controlling person’s
conscious misbehavior or recklessness in the sense required by
Section 10(b).” Cohen v. Stevanovich, 722 F. Supp. 2d 416, 435
(S.D.N.Y. 2010); see also In re ShengdaTech, Inc. Sec. Litig.,
61

No. 11 Civ.1918(LGS), 2014 WL 3928606, at *10 (S.D.N.Y. Aug. 12,
2014) (stating that “culpable participation is a scienter
requirement” and collecting cases).

As explained above,

Plaintiff adequately alleges that Gasser acted with knowledge
that the actionable statements were not accurate, thereby
satisfying the culpable participation element. See Virtus Inv.
Partners, 195 F. Supp. 3d at 542.

However, given that the

Complaint fails to adequately show a cogent and compelling
inference of scienter as to Goebels and Vigliotti in the § 10(b)
context, it also fails to show their culpable participation in
the § 20(a) context. See Shengdatech, 2014 WL 3928606, at *11.
Accordingly, Plaintiff states a viable control person claim
under § 20(a) against Gasser, but not as to Goebels or
Vigliotti.
III. Leave to Amend
Defendants seek dismissal of Plaintiff’s claims with
prejudice.

In a footnote in its opposition, Plaintiff requests

leave to amend if all or part of the Complaint is dismissed.
(Pl.’s Mem. in Opp. at 39 n.11.)

Rule 15 of the Federal Rules

of Civil Procedure instructs a court to “freely give leave” to
amend “when justice so requires.” FED. R. CIV. P. 15(a)(2).
However, amendment “is not warranted absent some indication as
to what [a plaintiff] might add to [its] complaint in order to
make it viable.” Shemian v. Research In Motion Ltd., 570 F.
62

App’x 32, 37 (2d Cir. 2014) (quoting Horoshko v. Citibank, N.A.,
373 F.3d 248, 249 (2d Cir. 2004)).

Accordingly, should

Plaintiff wish to amend its Complaint, its motion must
demonstrate how it will cure the deficiencies in its claims and
that justice requires granting leave to amend, and the motion
shall be filed within 30 days of the date of this Opinion.
CONCLUSION
For the reasons stated above, Defendants’ motions to
dismiss the Complaint are GRANTED IN PART and DENIED IN PART.
The motion to dismiss Plaintiff’s claims under § 10(b) and Rule
10b-5 as to defendants Gasser and ITG is DENIED.

The motion to

dismiss Plaintiff’s claim under § 20(a) against Gasser is also
DENIED.

The motion to dismiss Plaintiff’s § 10(b), Rule 10b-5,

and § 20(a) claims are GRANTED as to defendants Goebels and
Vigliotti, as well as to the extent the Complaint asserts
inactionable statements, which the Court has identified above.
If Plaintiff wishes to amend the Complaint, it shall move
this Court to do so no later than 30 days from the date of this
Opinion.

Otherwise the Court will enter an order dismissing

Plaintiff’s claims against Goebels and Vigliotti with prejudice,
and Gasser and ITG shall file their answers to Plaintiff’s
remaining claims no later than 14 days from the date of that
order.

63

If Plaintiff moves to amend the Complaint, Gasser and ITG's
time to answer will be adjourned pending the Court's decision on
Plaintiff's motion to amend.
The Clerk of the Court is respectfully requested to
terminate the motions docketed at ECF Nos. 46 and 50.
SO ORDERED.

Dated:

New York, New York
April"J..,f,, 2017

~:/:~~

John F. Keenan
United States District Judge

64