On May 7, 2018, the Seventh Circuit Court of Appeals in Chicago Board Options Exchange, Inc., et al., v. Securities and Exchange Commission, et al. affirmed the SEC’s dismissal of a petition seeking damages from various securities exchanges for improper fees on jurisdictional grounds, holding that such dismissal was not in contravention of the Seventh Circuit’s prior ruling directing the parties to exhaust their administrative remedies before the SEC. Back in 2013, Citadel Securities, LLC and three other market makers filed suit against the Chicago Board Options Exchange and Nasdaq, seeking damages for allegedly improper broker fees charged by the exchanges. The U.S. District Court for the Northern District of Illinois held that the plaintiffs had not exhausted their administrative remedies with the SEC and dismissed that complaint, and that dismissal was affirmed by the Seventh Circuit in Citadel I. Thereafter, the market maker firms filed a petition with the SEC, and the SEC subsequently ruled that it lacked jurisdiction over the dispute between two private parties as to proper fees. The market makers then appealed to the Seventh Circuit, and the Court agreed with the SEC’s determination that the Securities Exchange Act of 1934 did not grant the SEC the authority to conduct enforcement proceedings against securities exchanges on behalf of private parties. Specifically, the Seventh Circuit held that Section 19(d) of the 1934 Act– which authorizes review of allegations that an exchange denied or limited access to its services–was inapplicable, as the market maker firms had made no such allegations, and that Section 19(h)(1) of the 1934 Act (granting the SEC authority to pursue an exchange whose actions contravene securities laws or investors’ interests) did not grant the SEC jurisdiction over lawsuits initiated by and between private parties. The Seventh Circuit also clarified that its prior ruling in Citadel I was limited to the holding that it was up to the SEC to determine whether it had jurisdiction to resolve the dispute over the alleged rules violations. Meanwhile, the market maker firms refiled their suit against CBOE and Nasdaq in 2016, and that lawsuit remains pending in the Northern District of Illinois. The Seventh Circuit’s decision will likely influence how that refiled lawsuit proceeds, bolstering the plaintiffs’ contention that administrative proceedings before the SEC are futile in disputes with exchanges over improper fees.
Second Circuit Clarifies Difference Between Constitutional Standing and Injury Pleading Standard for Commodity Exchange Act Claims
On May 4, 2018, the Second Circuit Court of Appeals in Harry, et al., v. Total Gas & Power North America, Inc., et al., upheld the dismissal of a putative class action brought by commodity traders who relied on FERC and CFTC investigations to assert damages resulting from the alleged manipulation of natural gas trading by Total S.A. and related entities at four regional hubs in the western United States. The plaintiffs, who traded in derivatives with prices indexed to a different regional hub in Louisiana, alleged that prices at United States gas trading hubs are so interconnected that manipulation at any of the hubs amounts to a manipulation of all hubs. In the district court, Judge John G. Koeltl held that the plaintiffs had no standing due to their failure to successfully plead an injury from Total S.A.’s alleged misconduct in unrelated trading hubs. The Second Circuit affirmed the district court’s ruling that the plaintiffs did not plausibly plead injury, but reversed on the issue of standing, holding that the plaintiffs’ allegations, while not plausible, were “conceivable” and “within the realm of plausibility” and therefore sufficient for the purposes of Article III standing. The decision stands in contrast to other district court decisions holding that commodity traders lacked standing to bring claims where their prices did not derive from the affected hub. The Second Circuit’s ruling could pave the way for commodity trader plaintiffs nationwide to revise allegations of injury in their pleadings.
Eighth Circuit Affirms District Court’s Dismissal of State Law Claims Under SLUSA
On May 10, 2018, the Eighth Circuit Court of Appeals in Zola, et al., v. TD Ameritrade, Inc., et al., affirmed a decision of the U.S. District Court for the District of Nebraska, dismissing three proposed class actions against TD Ameritrade under the Securities Litigation Uniform Standards Act of 1998. The lawsuits alleged state law claims related to TD Ameritrade’s purported funneling of client orders to trading venues willing to pay a premium for TD Ameritrade’s order flow. The plaintiffs alleged that TD Ameritrade failed to consider other factors besides high rebate, including which trading venue offered the best price, the fastest speed of execution, and the highest likelihood that the trade would be executed. The plaintiffs further alleged breach of the client agreement, fraud, negligent misrepresentation, and breach of fiduciary duty, as well as violations of state consumer protection laws. The district court dismissed the claims as precluded under SLUSA, which bars plaintiffs from bringing class action lawsuits based upon the statutory or common law of any state, where the allegations concern either a misrepresentation or omission of material fact or manipulative or deceptive conduct in connection with the purchase or sale of a covered security listed on a national stock exchange. SLUSA makes such actions removable to federal court, where they are then subject to dismissal. The plaintiffs attempted to circumvent SLUSA and the Eighth Circuit’s January 2018 decision in Lewis v. Scottrade, Inc., arguing that TD Ameritrade’s misconduct in directing trades to the highest bidder did not affect the plaintiffs’ decision to buy or sell securities. The Eighth Circuit rejected those arguments and affirmed the district court’s ruling, holding that plaintiffs’ claims were still grounded in TD Ameritrade’s failure to disclose that it was allegedly selling its order flow to the highest bidder, citing Lewis for the proposition that such an omission was material to every trade in the covered securities. The decision underscores the continued vitality of SLUSA in limiting plaintiffs’ attempts to use creative pleading to circumvent securities class action rules.
Tenth Circuit Rejects Expansive View of Material Misrepresentations and Omissions Under Section 10(b)
On May 11, 2018, the Tenth Circuit Court of Appeals in Employees’ Retirement System of the State of Rhode Island, et al., v. The Williams Companies, et al., affirmed the U.S. District Court for the District of Oklahoma’s dismissal of a putative investor’s securities fraud class action. The case arose out of the merger of energy firms The Williams Companies, Inc. and Energy Transfers Equity LP. The plaintiff, on behalf of itself and other outside investors in a Williams Companies affiliate, Williams Partners LP (“WPZ”), alleged that Williams executives made a material misrepresentation in characterizing a proposal to buy up the outside shares in WPZ as “no risk”, and a material omission by failing to disclose merger discussions with Energy Transfers Equity LP. The investors purchased shares of WPZ following the announcement of the buy-up proposal, a deal that ultimately never came to fruition due to the merger with Energy Transfers Equity. The plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, seeking to recover losses that they claimed to have incurred by purchasing WPZ shares in reliance on a statement by Williams executives that there was “no risk” to the WPZ buy-up deal. The district court dismissed the misrepresentation and omission claims, and the Tenth Circuit affirmed. In particular, the Tenth Circuit held that the “no risk” statement by executives referred to the fact that there was no risk that a shareholder vote for the buy-up deal would not be approved, as Williams owned a majority of WPZ shares, not that there was “no risk” that the transaction would not be consummated. The Tenth Circuit also held that the plaintiffs failed to allege a 10b-5 material omission stemming from the executives’ failure to mention merger discussions with Energy Transfers Equity LP, as the early merger talks were not material information that would “alter the meaning” of any of the statements made about the WPZ buy-up deal, and the plaintiffs had not shown any intent to defraud. In so ruling, the Tenth Circuit limits the ability of plaintiffs to prevail in an omission claim under Section 10(b), where the alleged omission is not directly related to the subject matter of the underlying conduct at issue.