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Last Atlantis Capital LLC v. Martin

February 7, 2008

LAST ATLANTIS CAPITAL LLC, LOLA LLC, LULU LLC, GOODBUDDY SOCIETY LLC, FRIENDLY TRADING LLC, AND SPEED TRADING LLC, BRYAN RULE, PLAINTIFFS,
v.
BRAD MARTIN, AND RIVER NORTH INVESTORS, LLC, AGS SPECIALIST PARTNERS, AGS SPECIALISTS LLC, BEAR HUNTER STRUCTURED PRODUCTS LLC, BEAR WAGNER SPECIALISTS LLC, BOTTA CAPITAL MANAGEMENT LLC, COHEN, DUFFY, MCGOWAN & CO. LLC, COHEN, DUFFY, MCGOWAN LLC, D.A. DAVIDSON & CO., INC., EQUITEC PROPRIETARY MARKETS, LLC, EQUITEC STRUCTURED PRODUCTS, LLC, EQUITEC TRADING LLC, EQUITEC-PREMIER LLC, EQUITEC- BROWN LLC, EQUITEC-FELDMAN LLC, EQUITEC-FURMAN LLC, EQUITEC-SCHWARTZ LLC, GENEVA DPM LLC, GROUP ONE TRADING LP, KNIGHT FINANCIAL PRODUCTS LLC N/K/A CITIGROUP DERIVATIES MARKETS, INC., KNIGHT TRADING GROUP, INC., MDNH TRADERS LLC, MDNH PARTNERS LP, MORGAN STANLEY, MORGAN STANLEY DW, INC., MORGAN STANLEY & CO., INC., SLK-HULL DERIVATIVES LLC, GOLDMAN SACHS EXECUTION AND CLEARING, LP F/K/A SPEAR, LEEDS & KELLOGG LP, N/K/A GOLDMAN SACHS EXECUTION AND CLEARING, LP SPECIALISTS DPM LLC, SUSQUEHANNA INTERNATIONAL GROUP LLP, SUSQUEHANNA INVESTMENT GROUP, TD OPTIONS LLC, VAN DER MOOLEN OPTIONS USA LLC, VAN DER MOOLEN HOLDINGS NV, AND WOLVERINE TRADING LLC, DEFENDANTS.



The opinion of the court was delivered by: Elaine E. Bucklo United States District Judge

MEMORANDUM OPINION AND ORDER

Plaintiffs Last Atlantis Capital LLC, Lola LLC, Lulu LLC, Goodbuddy Society LLC, Friendly Trading LLC, Speed Trading LLC, Bryan Rule, Brad Martin, and River North Investors, LLC allege numerous violations of federal and state law by defendants. Defendants include several securities brokers and/or dealers, collectively, the "specialist defendants," and six entities alleged to own and/or control certain specialist defendants, the "affiliates." The amended consolidated complaint alleges that the specialist defendants violated § 10b of the Exchange Act and SEC Rule 10b-5 (a), (b) and (c) (Claim I); the affiliates violated § 10b of the Exchange Act and SEC Rule 10b-5 (a), (b) and (c) (Claim II); the specialist defendants are in breach of contract (Claim III); all defendants have engaged in common law fraud (Claim IV); the specialist defendants breached their fiduciary duty to plaintiffs (Claim V); all defendants violated the Illinois Consumer Fraud and Deceptive Practices Act, 815 Ill. Comp. Stat. 505/2 (Claim VI); all defendants have engaged in tortuous interference with the plaintiffs' business relationships (Claim VII); and all defendants have engaged in tortious interference with contracts (Claim VIII).

Presently before me is defendants' motion to reconsider my March 22, 2007 order, allowing plaintiffs to file the amended consolidated complaint ("ACC" or "the complaint"), in light of Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007).*fn1 Defendants have previously filed multiple Rule 12(b)(6) motions and therefore general familiarity with the facts, as alleged in the complaint, is presumed. See Last Atlantis Capital LLC v. Chicago Bd. Options Exchange, Inc., 455 F. Supp. 2d 788 (N.D. Ill. 2006) ("Last Atlantis II"); Last Atlantis Capital LLC v. Chicago Bd. Options Exchange, Inc., No. 04 C 397, 2005 WL 3763262 (N.D. Ill. Mar. 30, 2005) ("Last Atlantis I").

I.

In assessing defendants' motion to dismiss under FED. R. CIV. P. 12(b)(6), I must accept all well-pleaded facts in the complaint as true. Tellabs, 127 S.Ct. at 2509. However, "[f]actual allegations must be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. - -, 127 S.Ct. 1955, 1965 (May 21, 2007); E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d 773, 776-77 (7th Cir. 2007).

Plaintiffs must also comply with the pleading requirements of the Private Securities Litigation Reform Act ("PSLRA"), which requires that the complaint specify each allegedly misleading statement and the reasons why it is misleading. 15 U.S.C. § 78u-4(b)(1). The PSLRA also requires that plaintiffs, "with respect to each act or omission alleged, state with particularity facts giving rise to a strong inference that the defendant acted with [scienter]" for claims brought under any section of 10b-5. 15 U.S.C. § 78u-4(b)(2). Scienter is "an intent to deceive, demonstrated by knowledge of the statement's falsity or reckless disregard of a substantial risk that the statement is false." Higginbotham v. Baxter Int'l Inc., 495 F.3d 753, 756 (7th Cir. 2007); see also Makor Issues & Rights, Ltd. v. Tellabs Inc., - -F.3d - -, 2008 WL 151180, at *1 (7th Cir. Jan. 17, 2008) ("Makor II"). In Tellabs, the Supreme Court held that a "strong inference" of scienter is one which "must be more than merely plausible or reasonable - it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." 127 S.Ct. at 2504-05; see also Makor, 2008 WL 151180, at *2.

The allegations in the complaint must be considered collectively. Tellabs, 127 S.Ct. 2509.

II.

Defendants contend that plaintiffs' allegations fail to give rise to a strong inference of scienter as set forth in Tellabs. Plaintiffs' allegations can be generally categorized as follows:

1) defendants' general motive and opportunity; 2) the American Stock Exchange LLC ("AMEX") consent orders implicating 11 specific specialist defendants;*fn2 3) allegations that "it was common practice for [d]efendant SIG and all [s]pecialists charged with maintaining orderly markets in [o]ptions traded on [the] CBOE as [designated market makers ("DPMs")] . . . to regularly identify the [c]learing [f]irms from which [o]rders were sent, and then disengage the Auto-ex [s]ystem in order to discriminate against [o]rders sent from [f]irms used by [p]laintiffs and other [direct access customers ('DACs')]," (ACC at ¶21); 4) allegations that plaintiffs' receipt of automatic, or prompt manual, executions on marketable limit orders was statistically lower than the rates of executions provided to non direct access customers; and 5) allegations of actual trades mishandled by specific defendants during periods identified in the 2006 AMEX sanctions orders, the SEC Staff Report, and the Battalio Study. I will examine these allegations and their respective competing inferences.

First, as I have already found, plaintiffs' general allegations concerning defendants' financial motive and opportunity to mishandle plaintiffs' trades - alone - are not enough to establish a strong showing of scienter. Plaintiffs' general allegations describe a situation in which every specialist has the motive and opportunity to mishandle every single trade in which a direct access customer has presented a more competitive bid than their own. Plaintiffs have made additional allegations, however.

Second, with respect to the AMEX consent orders, these specifically implicate only eleven of the defendants. With respect to these eleven defendants, the complaint sets forth that they consented to the entry of written findings that they had individually violated certain SEC Rules and AMEX Exchange Rules and articles of the AMEX Constitution by improperly handling orders to buy and sell options on hundreds of occasions during specific periods between June 1, 2002 through January 31, 2005. Plaintiffs argue that although the AMEX sanction orders do not find that each of the sanctioned defendants acted recklessly or intentionally, they nonetheless provide a basis for inferring scienter because if these defendants "truly believed that there were innocent explanations for each of the thousands of instances of misconduct cited in the [s]anction [o]rders, they surely would not have stipulated to contrary findings, nor would they have paid tens of thousands of dollars in fines." (Pl. Br. at 15.) As a preliminary matter, plaintiffs' explanation in support of their proposed inference of scienter is not particularly sound. As conceded by plaintiffs, the violations in question are not scienter-based but the result of negotiated settlements in regulatory proceedings. There are additional available explanations for the violations and settlement which do not necessarily rise to the level of intentional fraud, such as system problems or negligence. Defendants also correctly set forth that the absence of a scienter-based charge lends, at a minimum, an equally strong inference against scienter. That said, plaintiffs' proposed inference of scienter against the eleven sanctioned specialists, based on the nature of the specific conduct identified, is "at least as compelling" and cogent as the competing inferences.

Regardless of the strength of the inference of scienter with respect to the eleven sanctioned specialist, I cannot find "at least as compelling" the inference that the remaining unsanctioned defendants had the requisite scienter based solely on the AMEX orders. Based on the absence of specific regulatory findings against the remaining defendants, the inference that they did not engage in this sort of conduct during the identified period, or at least not significantly, is slightly more compelling than plaintiffs' proposed inference: that their mere presence on the different exchanges and co-existence with the sanctioned specialists suggest the remaining defendants necessarily engaged in the same conduct with respect to the plaintiffs. Therefore, I must take into consideration additional allegations before concluding there is a strong inference of scienter against the remaining defendants.

Third, plaintiffs' allegations that "it was common practice of [d]efendant SIG and all [s]pecialists charged with maintaining orderly markets in [o]ptions traded on the CBOE as [designated market makers ('DPMs')] . . . to regularly identify the [c]learing [f]irms from which [o]rders were sent, and then disengage the Auto-ex System in order to discriminate against Orders sent from Firms used by Plaintiffs and other [direct access customers]," (ACC at ΒΆ21) is based on a specific declaration by Anthony Zangrilli, which plaintiffs' failed to attach to the complaint, and other unidentified sources. (Id.) Defendants argue that these ...


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