A US federal court in Chicago dismissed a lawsuit against anonymous “John Doe” defendants that claimed the defendants engaged in spoofing-type trading activities of US Treasury markets that constituted manipulation under the anti-fraud provisions of applicable securities laws and relevant regulations promulgated by the Securities and Exchange Commission. (Clickhere to access Section 10(b) of the Securities Exchange Act of 1934, 15 USC §78j(b) and here to access SEC rules 10b-5(a) and (c).) According to a lawsuit filed by CP Stone Fort Holdings, LLC, the defendants manipulated the US Treasury markets by submitting orders to various trading platforms (i.e., BrokerTech and eSpeed) that they never intended to be executed. The complaint alleged defendants placed orders on one side of the market “to create the false appearance of market demand,” then pulled the order, and placed orders on the opposite side of the market to achieve execution. However, the court held that plaintiff’s complaint was deficient as it failed to state, with respect to each alleged act or omission by defendants, particular facts “giving rise to a strong inference[e]” that the defendants acted with an intent to deceive, manipulate or defraud. Such statement is required for a complaint to go forward under the relevant anti-fraud provisions said the court. All the plaintiff pleaded, noted the court, was that defendants placed orders that they later cancelled and, “as plaintiff must admit, there is nothing improper or illegitimate about placing passive orders in the order book and then reversing position.” Among other things, the complaint failed to allege "how many orders were executed, how long the ultimately cancelled orders had remained resting and available for execution prior to cancellation, or whether the platform rules required the orders to be exposed further." The court observed that plaintiff’s complaint was “devoid of any allegation” that the defendants refused to execute any submitted order. As a result, concluded the court, because the plaintiff failed to allege illegal manipulation it also failed to allege the “strong inference” of scienter necessary to sustain its complaint.
Legal Weeds: The key phrase of Section 10(b) of the Securities Exchange Act of 1934 “manipulative or deceptive device or contrivance” is also at the heart of the relatively new parallel provision of the Commodities Exchange Act, Section 6(c)(1) enacted after the 2008/2009 financial crisis (click here to access this provision, 7 US Code § 9(1)). Pursuant to this CEA authority, the CFTC adopted Rule 180.1 (click here to access), and has used this law and rule in a wide-ranging host of enforcement actions, from its proceeding against JP Morgan in the so-called “London Whale” incident, to allegations of illegal off-exchange metals transactions, insider trading, claims of more traditional manipulation and attempted manipulation (without endeavoring to show an artificial price) and allegations of spoofing. In adopting Rule 180.1, the CFTC indicated that it would be guided “but not controlled” by the substantial body of judicial precedent applying the comparable language of SEC Rule 10b-5. (Click here to access CFTC insight on its Rule 180.1.; click here for a discussion of the CFTC’s use of its Rule 180.1 in the article, “Ex-Airline Employee Sued by CFTC for Insider Trading of Futures Based on Misappropriated Information” in the October 2, 2016 edition of Bridging the Week.)