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Last Atlantis Capital LLC v. AGS Specialists Partners

November 4, 2010


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


On March 26, 2010, I granted defendant Knight Financial Products, Inc.'s ("Knight") motion for summary judgment ("March 26, 2010 order"), and have subsequently issued two orders denying plaintiffs' motions for reconsideration of that order. Presently before me is a motion by AGS Specialists LLC ("AGS"), Susquehanna Investment Group, Susquehanna International Group LLC (together, "SIG"), Bear Wagner Specialists LLC ("Bear Wagner"),*fn1 TD Options LLC ("TD Options"), Goldman Sachs Execution & Clearing, L.P. ("Goldman Sachs"), and SLK-Hull Derivatives LLC ("SLK-Hull") (together, "Goldman Sachs") (collectively, "Certain Defendants" or "defendants")*fn2 for summary judgment on all claims. Defendants argue for dismissal of the Rule 10b-5 claims against them, and also argue that I should decline to exercise jurisdiction over any remaining state law claims. In addition, SLK-Hull and Goldman Sachs argue that, without a surviving Rule 10b-5 claim against them, plaintiffs' "control person" claims under Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a), also fail.

I. General Background and the March 26, 2010 Order

Plaintiffs, who are direct access customers, bring this suit against the defendant specialists, who 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. Plaintiffs allege that the defendant specialists engaged in improper trading practices, such as refusing to automatically, or promptly, execute the orders, delaying the execution of orders, refusing to honor requests to cancel orders, and conducting thousands of proprietary trades for the specialists' own accounts that were executed in advance of, or instead of, executing plaintiffs' orders. According to plaintiffs, these improper trading practices violated the defendants' duty of "best execution."

In defendant Knight's earlier motion for summary judgment, Knight argued that I should follow the reasoning of the Third Circuit in United States v. Finnerty, 533 F.3d 143 (2d Cir. 2008) ("Finnerty III"). Finnerty III rejected the application of the "shingle theory" to specialists, and concluded that a violation of Rule 10b-5 could only occur if a plaintiff showed that he relied on an express misrepresentation concerning "best execution," and that "best execution" was not provided. Under the "shingle theory," a "broker-dealer, by accepting an order . . . impliedly represents that the order will be executed in a manner consistent with the duty of best execution." Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269 (3rd Cir. 1998). Relying on Finnerty III, I concluded that defendants, as specialists, were different than other broker-dealers and did not fall under the "shingle theory," but rather must have made an express misrepresentation, upon which plaintiffs relied, to have violated Rule 10b-5. Ultimately, I concluded that plaintiffs failed to put forward any evidence that plaintiffs' expectations that Knight would provide "best execution" were based on statements made by Knight. I also concluded that plaintiffs failed to provide evidence from which a reasonable jury could conclude that Knight was a fiduciary.

The remaining defendants have now moved for summary judgment for all the reasons given in my March 26, 2010 order. According to defendants, "The same undisputed evidence that warranted summary judgment in favor of Knight also establishes that Plaintiffs did not have any direct communications with any of the specialists for Defendants, and that Plaintiffs cannot put forth any evidence of a single direct misrepresentation by any of the Defendants that would support their fraud claims." Defs' Mem. at 1 (emphasis in original). Like Knight, defendants' primary argument is that none of the defendants made any actionable misrepresentations concerning "best execution." Also like Knight, defendants argue that specialists are not fiduciaries. To be clear, the issue of whether or not plaintiffs have evidence that defendants did not provide "best execution" is not before the court (defendants do not raise this as a basis for summary judgment). For the reasons that follow, the motion for summary judgment is granted in part and denied in part.*fn3

II. Analysis

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).

A. 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 under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.

1. Subsections (a) and (c)

To prove a claim under Rule 10b-5(a) or (c), a plaintiff must show that the defendant (1) committed a deceptive or manipulative act, (2) with scienter, (3) that the act affected the market for securities or was otherwise in connection with their purchase or sale, and (4) that defendants' actions caused the plaintiffs' injuries. Last Atlantis Capital LLC v. Chicago Bd. Options Exch., Inc., 455 F. Supp. 2d 788, 793 (N.D. Ill. 2006) ("Last Atlantis II").

First, as described more fully above and in the March 26, 2010 order, specialists, such as the defendants here, are not liable under Rule 10b-5 via the "shingle theory" for implied misrepresentations concerning "best execution." Last Atlantis Capital LLC, et al. v. AGS Specialist Partners, et al., Nos. 04 C 397, 05 C 5600, 05 C 5671, 2010 WL 1257765 (N.D. Ill. Mar. 26, 2010); Finnerty III, 533 F.3d at 143.

Turning then to the issue of express misrepresentations, I must first determine whether any of the remaining defendants made actionable misrepresentations concerning "best execution." A securities broker-dealer provides "best execution" when it seeks "the optimal combination of price, speed and liquidity for a securities trade[.]" Kurz v. Fidelity Manag. & Research Co., 556 F.3d 639, 640 (7th Cir. 2009). Put another way, "The duty of best execution, which predates the federal securities laws," requires "that a broker-dealer seek to obtain for its customer orders the most favorable terms reasonably available under the circumstances." Newton, 135 F.3d at 270. "Other terms in addition to price are also relevant to best execution. In determining how to execute a client's order, a broker-dealer must take into account order size, trading characteristics of the security, speed of execution, clearing costs, and the cost and difficulty of executing an order in a particular market." Id. at 270 n.2.

Before I discuss the actionable statements, if any, for the remaining defendants, I note that the statements identified by plaintiffs directly concern, or at least point to, the concept of "best execution." In describing these statements, plaintiffs continually assert that defendants promised to provide "best execution" and that they would otherwise follow all applicable rules. See, e.g., Pls.' Resp. at 14 (stating that the defendants made promises "to provide 'best execution' and comply with all applicable Order Handling Rules that were posted on defendants' internet websites"). Having reviewed the statements made by defendants, I cannot agree that a promise of "best execution" is equivalent to the much broader promise of following all applicable rules governing each particular defendant. I find that the actionable statements discussed for each defendant go to a promise of "best execution" and cannot be read to promise that each defendant would follow all applicable rules governing it.*fn4

a. Defendant AGS

1. Statements Directed to "Best Execution"

Plaintiffs have put forward evidence that AGS made the following statements on its website in 2005:

* In describing AGS specialists as facilitators, the website states, "The Specialist facilitates the execution of orders by brokers who represent public customers as well as all orders delivered electronically. He maintains the 'book' in a particular stock, which encompasses all the bids and offers in a particular stock and he provides the brokers with the information they need to execute public orders. He then assures that the trade is executed and reported to the ticker tape quickly and efficiently. The Specialist does this without interjecting himself into the trade." Friedman Ex. 1B (emphasis added).

* "AGS operates in an auction market environment with public order priority as the foundation of that marketplace. Public orders always precede professional orders at the same price, even if the professional order was received before the public order." Friedman Ex. 1D (emphasis added).

Thus, plaintiffs have put forward evidence showing that AGS stated publicly that: (1) its specialists would not interject themselves into a trade; and (2) its specialists would prioritize public orders over professionals' orders.

Of all the AGS statements pointed to by plaintiffs, only these two arguably invoke the specialists' duty of "best execution." Plaintiffs' theory is that defendants violated their duty of "best execution" when they failed to "seek the most favorable terms" for plaintiffs by improperly inserting themselves into a trade (or failing to execute promptly an order to buy, sell or cancel), rather than matching up existing orders to buy and sell. While these statements do not use the specific words "best execution," I conclude that a reasonable jury could conclude that AGS made these statements and that both invoke AGS' duty of "best execution."

One of the arguments made by defendants is that plaintiffs need to point to "direct communications" from defendants to these particular plaintiffs. Although defendants cite to depositions in which the plaintiffs stated that no defendants made misrepresentations directly to them, they have provided no support for their argument that direct communication is necessary. Finnerty III did not impose a requirement that the statements at issue be specifically directed to these particular plaintiffs. Rather, it is reasonable for members of the public who trade in options to rely on statements made by options specialists on their public websites, just as it is reasonable for companies maintaining websites to anticipate that current or potential investors might read and rely on website statements. Other courts have analyzed companies' statements on public websites as potentially fraudulent, and defendants have provided no authority that such analysis was improper. See, e.g., In re AIG Advisor Group Sec. Litig., 309 Fed. Appx. 495 (2d Cir. 2009) (analyzing fraud claim in light of disclosures made on defendant's website); Desai v. General Growth Prop., Inc., 654 F. Supp. 2d 836, 858-59 (N.D. Ill. 2009) (analyzing whether a code of conduct published on company's website could be read as a promise by company to follow the code of conduct); SEC v. Enterprises Solutions, Inc., 142 F. Supp. 2d 561, 577 (S.D.N.Y. 2001) (concluding that two statements made on company's website were false and misleading).

Finally, I conclude this these statements are not merely puffery and are specific enough to be actionable. "Courts have held immaterial as a matter of law 'loosely optimistic statements that are so vague, so lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable investor could find them important to the total mix of information available.'" In re Midway Games, Inc. Sec. Litig., 332 F. Supp. 2d 1152, 1164 (N.D. Ill. 2004) (quoting Shaw v. Digital Equipment Corp., et al., 82 F.3d 1194, 1217 (1st Cir. 1996)). Unlike the terms "orderly," "efficient" and "liquid," which I have already concluded are merely puffery and are too vague to be material, the promise of "best execution" is a defined, specific concept in the securities context. Whether or not "best execution" has actually been provided by a defendant can be ascertained. Finally, such a promise is material because it would be viewed by a "reasonable investor as significantly altering the total mix of available information." In re Newell Rubbermaid Inc. Sec. Litig., No. 99 C 6853, 2000 WL 1705279, at *7 (N.D. Ill. Nov. 14, 2000) (citing Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)). Certainly, a reasonable investor would view the promise of "best execution," in which a specialist promises to seek the best combination of price, liquidity, and speed, as important.

2. Puffery and Other Non-Actionable Statements

While plaintiffs point to other examples of supposed misrepresentations by AGS, I conclude that only the two listed above are actionable. The statement in Exhibit 1A that "Our efforts are always directed toward market efficiency and price discovery" is puffery and too generalized and vague to be actionable. Exhibit 1B's statement that "The Specialist . . . acts in the public interest" is also puffery. Likewise, the statement in Exhibit 1B that "The Specialist also acts as a 'broker's broker' by taking limit orders into his care and executing them on behalf of the broker and customer" is also vague puffery. Nothing in the final statement in Exhibit 1B that "the Specialist acts as a 'principal to stabilize the market' under certain circumstances" is actionable. The statement in Exhibit 1C that a specialist has an obligation to maintain "a fair and orderly market in the securities he trades" is non-actionable puffery.

In Exhibit 1D, plaintiffs point to two paragraphs in which AGS describes its "business philosophy" and the fact that all orders are entitled to the benefits it offers as a specialist. No statements in the two paragraphs on page 5 of Friedman's affidavit reference "best execution" or are otherwise actionable. Exhibit 1E are copies of a series of webpages from AGS's website. Having reviewed these pages, I see nothing actionable. Likewise, I see nothing actionable in Exhibit 1F, a copy of a 2004 letter from AGS to the SEC.

In addition, the following AGS statements are not actionable because it is not clear that they would apply to specialists:

(1) "Public orders always have priority over orders placed by professional market makers at the same time." Friedman Ex. 1A; and

(2) "We believe that the auction market is more efficient because the public investor has total, unimpeded access to the market through their individual brokers -- and in the auction market, public orders always have priority over orders placed by professional market makers at the same price." Friedman Ex. 1E. Both of these statements specifically reference "professional market makers," and not specialists. Plaintiffs have provided no argument to explain why such statements should be understood to refer to specialists. It is not the court's job to craft plaintiffs' arguments for them. Therefore, any argument plaintiffs could have raised ...

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