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Platinum Partners Value Arbitrage Fund v. Chicago Board Options Exchange

August 10, 2012

PLATINUM PARTNERS VALUE ARBITRAGE FUND,
LIMITED PARTNERSHIP,
PLAINTIFF-APPELLANT,
v.
CHICAGO BOARD OPTIONS EXCHANGE, OPTIONS CLEARING CORPORATION, AND JOHN
DOE DEFENDANTS 1 THROUGH 10, DEFENDANTS-APPELLEES.



Appeal from the Circuit Court of Cook County. 10 CH 54472 Honorable Mary Anne Mason, Judge Presiding.

The opinion of the court was delivered by: Presiding Justice Gordon

PRESIDING JUSTICE GORDON delivered the judgment of the court, with opinion. Justice Palmer concurred in the judgment and opinion.

Justice Lampkin dissented, with opinion.

OPINION

¶ 1 In this case, we must determine whether a self-regulating options organization has absolute immunity from suit when it is claimed that it wrongfully provided inside information to a select number of traders.

¶ 2 Plaintiff Platinum Partners Value Arbitrage Fund, L.P., sued defendants the Chicago Board Options Exchange (CBOE), the Options Clearing Corporation (OCC) and"John Doe" defendants, claiming violations of the Illinois Securities Law of 1953 (Illinois Securities Law), (815 ILCS 5/1 et seq. (West 2002)) and the Illinois Consumer Fraud and Deceptive Business Practices Act (the Consumer Fraud Act) (815 ILCS 505/1 et seq. (West 2002)) and common law fraud. The trial court granted defendants' motion to dismiss, finding that they were absolutely immune from suit. The trial court held that plaintiff's allegations of misconduct were based on defendants' conduct as self-regulatory organizations. For the following reasons, we reverse. Where defendants privately disclose information about the price adjustment of a stock option to selected market participants before that information is made publicly available, the doctrine of regulatory immunity does not apply.

¶ 3 BACKGROUND

¶ 4 On December 27, 2010, plaintiff filed the initial verified complaint, alleging that between December 17 and December 20, 2010, defendants CBOE and OCC decided to reduce the strike price on India Fund, Inc. (IFN), series options contracts by $3.78, effective December 29, 2010. IFN is a mutual fund traded at two different options exchanges, one being defendant CBOE. Defendant OCC is a clearing agency, which clears and settles options trades made by CBOE and other options exchanges, including options in IFN. Plaintiff alleges that an unnamed employee at either defendant CBOE or defendant OCC improperly disclosed to unnamed market participants, the John Doe defendants, that the strike price of IFN would be downwardly adjusted before that decision was publically announced. Plaintiff was injured when it purchased 50,000 IFN put options on December 20 from the John Doe defendants before defendants CBOE and OCC publicly disclosed the information about the reduction in IFN's strike price.

¶ 5 On December 27, 2010, plaintiff filed an emergency motion for a temporary restraining order and preliminary injunction in order to prevent the price adjustment from taking effect. On December 28, 2010, the trial court denied that motion. On February 25, 2011, defendants CBOE and OCC moved to dismiss the initial complaint, claiming that they were immune from suit for plaintiff's claims and that the complaint failed to state claims upon which relief could be granted. After plaintiff obtained new counsel, the parties stipulated to a new briefing schedule on the motion to dismiss to allow plaintiff's new counsel time to review the initial complaint and perform its own investigation of plaintiff's claims. Through that investigation, plaintiff discovered the names of additional potential defendants and other relevant information, which it incorporated into a proposed amended complaint.

¶ 6 On June 9, 2011, plaintiff filed a timely motion to file the proposed amended complaint. On August 31, 2011, after oral argument on defendants' motion to dismiss, the trial court granted the motion to dismiss, finding that defendants CBOE and OCC were absolutely immune from suit because plaintiff's allegations of misconduct were based on defendants CBOE's and OCC's conduct as self-regulatory organizations. Additionally, the trial court dismissed the initial complaint without leave to amend, stating that there was no set of facts that plaintiff could allege that would circumvent the doctrine of regulatory immunity. Thus, the trial court did not rule on plaintiff's motion to amend to add new parties. On September 21, 2011, the trial court entered final judgment in favor of defendants CBOE and OCC. That same day, plaintiff informed the trial court that it wished to withdraw, without prejudice to filing suit at another time, its motion for leave to amend to add additional defendants. The trial court allowed plaintiff to withdraw its motion to amend.

¶ 7 On September 30, 2010, plaintiff timely filed a notice of appeal, appealing the trial court's dismissal of its claims.

¶ 8 ANALYSIS

¶ 9 In this appeal, plaintiff claims that defendants CBOE and OCC's non-public dissemination of information concerning the adjustment of the strike price did not pertain to their regulatory duties. Plaintiff asks us to reverse the dismissal and final judgment entered in favor of defendants CBOE and OCC and to remand the case with directions to reinstate all counts of the complaint for trial on the merits. In the alternative, plaintiff asks us to reverse the dismissal and final judgment entered in favor of defendants CBOE and OCC and to remand the case with directions to grant plaintiff leave to amend its complaint against defendants CBOE and OCC.

¶ 10 The issues presented for review in this case are: (1) whether the trial court properly found that regulatory immunity barred plaintiff's claims, (2) whether the trial court erred in granting defendants CBOE and OCC's motion to dismiss, and (3) whether the trial court erred in granting defendants' motion to dismiss without permitting plaintiff leave to amend.

¶ 11 I. Standard of Review

¶ 12 A motion to dismiss under section 2-615 of the Illinois Code of Civil Procedure challenges the legal sufficiency of the complaint by alleging defects on its face. 735 ILCS 5/2-615 (West 2010); City of Chicago v. Beretta U.S.A. Corp., 213 Ill. 2d 351, 364 (2004). In other words, the motion claims that the plaintiff failed to allege a valid cause of action. Therefore, the standard of review of a trial court's grant to dismiss under section 2-615 is de novo. Lozman v. Putnam, 379 Ill. App. 3d 807, 820 (2008). Under the de novo standard of review, the reviewing court does not need to defer to the trial court's judgment or reasoning. People v. Vincent, 226 Ill. 2d 1, 14 (2007). De novo review is completely independent of the trial court's decision. United States Steel Corp. v. Illinois Pollution Control Board, 384 Ill. App. 3d 457, 461 (2008). In reviewing a section 2-615 challenge to the legal sufficiency of a complaint, a court regards all well-pled facts as true and draws all reasonable inferences in favor of the plaintiff. Lozman, 379 Ill. App. 3d at 821; Iseberg v. Gross, 366 Ill. App. 3d 857, 860 (2006). The court should "construe the complaint liberally and dismiss only when it appears that the plaintiffs could not recover under any set of facts." Lozman, 379 Ill. App. 3d at 821.

¶ 13 The question of whether to grant or deny leave to amend a complaint is within the trial court's discretion, and the trial court's decision will not be reversed absent an abuse of that discretion. Leave to amend should generally be granted unless it is apparent that, even after the amendment, no cause of action can be stated. Weidner v. Midcon Corp., 328 Ill. App. 3d 1056, 1059 (2002). "The test to be applied in determining whether the trial court's discretion was properly exercised is whether the allowance of the amendment would further the ends of justice." Weidner, 328 Ill. App. 3d at 1059. Abuse of discretion will be found where no reasonable man could agree with the position of the lower court. Matthews v. Avalon Petroleum Co., 375 Ill. App. 3d 1, 9 (2007).

¶ 14 II. Doctrine of Regulatory Immunity

¶ 15 Defendants CBOE and OCC are self-regulatory organizations (SROs). 15 U.S.C. § 78c(a)(26) (2006) (defining SROs as including national securities exchanges and clearing agencies). "[A]n SRO and its officers are entitled to absolute immunity when they are, in effect, 'acting under the aegis' of their regulatory duties." DL Capital Group, LLC v. NASDAQ Stock Market, Inc., 409 F.3d 93, 97 (2d Cir. 2005) (quoting Sparta Surgical Corp. v. National Association of Securities Dealers, Inc., 159 F.3d 1209, 1214 (9th Cir. 1998)). The doctrine of regulatory immunity allows SROs the ability to exercise their powers without fear that their discretionary decisions will lead to litigation. In re NYSE Specialists Securities Litigation, 503 F.3d 89, 97 (2d Cir. 2007). However, SROs do not have complete immunity from lawsuits. Weissman v. National Ass'n of Securities Dealers, Inc., 500 F.3d 1293, 1297 (11th Cir. 2007). Absolute immunity is improper unless the conduct at issue is a delegated quasi-governmental prosecutorial, regulatory, or disciplinary function. "[E]ntities that enjoy absolute immunity when performing governmental functions cannot claim that immunity when they perform non-governmental functions." Weissman, 500 F.3d at 1296. When these entities perform duties that pertain to the exercise of " 'private franchises, powers, and privileges which belong to them for their ...


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