On April 26, 2017, District Judge John F. Keenan of the United States District Court for the Southern District of New York granted in part and denied in part motions to dismiss brought by defendants Investment Technology Group, Inc. (“ITG” or “the company”), and three of its current and former executives. In re: Investment Technology Group Inc., Case No. 1:15-cv-06369 (S.D.N.Y. April 26, 2017). Plaintiff’s amended complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5. While the Court dismissed the claims against two individual defendants—ITG’s CFO and its General Counsel—on the ground that plaintiff failed to plead a strong inference of scienter as to those defendants, the Court allowed the plaintiff’s Section 10(b) claim against ITG and its former CEO to proceed, narrowing the claims to a five-month period in 2011 and holding that the alleged misstatements outside of the class period were not actionable.
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. Plaintiff, a German capital investment company, alleged that ITG and the individual defendants made dozens of materially false or misleading statements between 2010 and 2015, in light of the company’s failure to disclose a trading program that allegedly had improperly used or had access to confidential customer trading information and an ensuing Securities and Exchange Commission (“SEC”) investigation. After ITG disclosed a $20.3 million settlement in connection with the SEC investigation, its stock price dropped significantly. In particular, plaintiff identified allegedly misleading or false statements, including ITG’s characterization of itself as an “agency-only” brokerage that traded securities for clients’ benefit. According to plaintiff, ITG was actually using customer order information from its “dark pool” trading platform to trade against its clients. This proprietary trading platform, known as Project Omega, allegedly allowed ITG to trade on its own account using algorithmic high-frequency trading, and was approved by ITG’s board and former CEO in early 2010. Project Omega was operational from then on until July 2011, with a brief two-day suspension in mid-December 2010, when ITG’s compliance department reviewed its activities after senior executives learned of the use of customer order information. Plaintiff’s main allegations targeted statements made by ITG and its senior executives while Project Omega was in operation. For example, during a conference on December 9, 2010, the president allegedly stated that “[ITG was] not informed by your liquidity, by your order flow. We don’t have a proprietary trading operation that takes advantage of that.” Plaintiff further alleged that several of ITG’s statements in its SEC filings between 2013 and 2015 were false or misleading in light of the ongoing SEC investigation into ITG’s use of Project Omega, which took place during the same time period.
The Court held, pursuant to Second Circuit case law, that the allegedly false and misleading statements and omissions prior to the Class Period were not actionable. The statements or omissions made during the Class Period while Project Omega was in operation, however, were held to be actionable because the statements alleged by plaintiff amounted to more than “mere puffery.” The Court found that “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.” The Court determined that the statements at issue were “sufficiently definite” and also “related to the heart of ITG’s business.”
But the Court held that the statements in ITG’s SEC filings during the SEC investigation were not actionable, because “read completely and in context,” they were not false nor so incomplete as to mislead a reasonable investor. The Court analyzed the standard for liability set forth in the Second Circuit decision, Tongue v. Sanofi (2016), and the Supreme Court’s earlier decision, Omnicare, Inc. v. Laborers Dist. Council Cons. Indus. Pension Fund (2015), and reiterated that “the core inquiry is whether the omitted facts would conflict with what a reasonable investor would take from the statement itself.” (internal quotation marks omitted). While plaintiff argued that the opinion statements at issue were baseless because defendants were aware that another company had paid a “significant fine” for similar misconduct and because ITG was under investigation by the SEC, the Court noted that plaintiff did not allege that defendants “subjectively disbelieved” their own opinion, nor allege that they “embedded an untrue fact.” The Court further reiterated that an issuer’s statement of belief that its conduct is lawful “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.” (quoting Sanofi). In this regard, the Court determined that these statements suggested that regulatory investigations of ITG were “live and ongoing,” rather than hypothetical, and the company was not obliged to provide more detailed disclosures, “because a reasonable investor does not expect that every fact known to [a defendant] supports its opinion statement.” (quoting Omnicare).
Finally, the Court considered whether the complaint’s allegations were sufficient to support a strong inference of scienter. The Court held that while scienter had been sufficiently alleged as to the former CEO and ITG, it fell short for the other two individual defendants. Applying the standard in the Second Circuit that a strong inference of scienter may arise where plaintiff alleges that a defendant “knew facts or had access to information suggesting that [its] public statements were not accurate,” the Court noted that the complaint alleged that the CEO was aware that Project Omega had accessed and used confidential client information, but took no further steps to prevent this from recurring aside from reprimanding Project Omega’s manager. Therefore, plaintiff had plausibly alleged that the CEO knew facts or had access to information suggesting that ITG’s statements during the operation of Project Omega regarding its “independent agency status,” among other statements, were not accurate. The Court held that plaintiff had also plausibly alleged corporate scienter for ITG, as the CEO’s scienter was imputed to ITF with respect to the actionable statements. For the other two individual defendants, however, plaintiff’s allegations fell short of pleading scienter under both the “motive and opportunity prong” and the “conscious misbehavior or recklessness” prong.
Ultimately, the Court denied the motion to dismiss plaintiff’s claims under Section 10(b) and Rule 10b-5 against former CEO and ITG, as well as plaintiff’s claim under Section 20(a) as to the former CEO. The Court, however, granted plaintiff leave to amend upon a showing by motion that plaintiff could cure the deficiencies in its claims and that “justice requires granting leave to amend.” The motion to dismiss as to the other individual defendants was granted, in addition to the inactionable statements that the Court identified in its opinion.
Click here to view judgement.