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Last Atlantis Capital LLC v. AGS Specialist Partners

March 26, 2010


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


Presently before me is a motion by Knight Financial Products, LLC ("Knight") for summary judgment. In that motion, Knight argues for dismissal of the Rule 10b-5 claim against it, and also argues that I should decline to exercise jurisdiction over any remaining state law claims. Both Knight and plaintiffs have inundated this court with filings related to Knight's motion for summary judgment. In addition to filing a response to Knight's motion, plaintiffs have also filed a Rule 56(f) affidavit, in which plaintiffs' counsel avers both that plaintiffs' response is adequate to defeat Knight's motion and that plaintiffs require additional discovery to adequately respond to Knight's motion. I have reviewed these submissions, and conclude that summary judgment is warranted here. Thus, Knight's motion for summary judgment is granted. In addition, I reject plaintiffs' request that they should be entitled to take more discovery before responding to Knight's motion.

I. Factual Background

I borrow from Magistrate Judge Keys's apt summation of the key dispute in this case:

At the heart of plaintiffs' claim is an inherent tension between direct access customers and specialists, stemming from their competing efforts to profit from market anomalies. The Specialist Defendants are dealer/brokers charged with establishing the bid and offer prices for every option in a designated option class; this price is known as "the quote." Specialists fill orders by matching buyers' orders to purchase options with contra-side customer orders to sell options at the same price. In the event that there are no existing contra-side customer orders, specialists execute orders by buying or selling the designated option from their own proprietary account. Direct access customers, like Plaintiffs, utilize arbitrage trading strategies in an attempt to take advantage of price discrepancies in the options markets. For example, if a specialist's buy bid on one exchange is $5.00 and a specialist's sell bid on a different exchange for that same option is $4.90 on another exchange, Plaintiffs attempt to execute simultaneous orders to sell on the first exchange and buy on the second exchange to achieve a 10 percent profit per option, while incurring minimal risk.

Plaintiffs claim that, like the direct access customers, specialists also profit from capitalizing on market anomalies. Specialists are able to realize significant profits from such "spreads," if and when they are able to fill orders from their own proprietary accounts. However, because direct access customers purportedly have access to better information and technology than typical customers, they have cut substantially into the specialists' profits. Plaintiffs claim Defendants intentionally discriminated against orders placed by direct access customers since April 1, 2001, in favor of more lucrative orders placed by less sophisticated customers. Specifically, Plaintiffs charge that the Specialist Defendants have: "[I]dentified the origin, and then knowingly mishandled the execution of thousands of orders to buy and sell options that were sent to defendants by engaging in various illegal trading practices such as refusing to automatically, or promptly, execute the orders or send confirmations upon the execution of orders, changing (or "fading") the quoted prices after receiving the orders, delaying the execution of orders, refusing to honor requests to cancel orders, and unilaterally terminating or adjusting the prices on orders that were previously executed and confirmed, and conducting thousands of proprietary trades for the Specialists' own accounts that were executed in advance of, or instead of, executing Plaintiffs' marketable limit orders (i.e. order to purchase or sell a set amount of options at a specific price equal to the bid or offer price actually disseminated by a Specialist on a particular exchange)."

Defendants have consistently denied discriminating against orders placed by direct access customers in general, and Plaintiffs in particular. Defendants acknowledge that a higher-than-average percentage of direct access customers' orders go unexecuted, but explain that this is a result of the proliferation of the software used by direct access customers; because these customers rely upon the same kind of computer program to identify market anomalies, and because these computer programs instruct direct access customers to place virtually identical orders at the same time, direct access customers flood specialists with multiple orders for the same options, making it impossible to fill them all. 11/23/09 Report and Recommendation, Docket # 725 at 3-5.

II. Analysis

A. Summary Judgment Standard

Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Once the moving party shows that there is no genuine issue of material fact, the burden of proof shifts to the nonmoving party to designate specific facts showing that there is a genuine issue for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).

B. Rule 10b-5

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), prohibits the use "in connection with the purchase or sale of any security... [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." Pursuant to this section, the SEC promulgated Rule 10b-5, which provides in pertinent part:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) 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 the light of the circumstances ...

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