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CP Stone Fort Holdings, LLC v. Does

United States District Court, N.D. Illinois, Eastern Division

October 11, 2016

JOHN DOES, Defendant.



         Plaintiff CP Stone Fort Holdings, LLC has brought a one count complaint against certain John Doe defendants alleging that defendants engaged in a scheme to manipulate the United States Treasury Markets in violation of Section10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b) and Rules 10b-5(a) and 10b-5(c) promulgated thereunder. Defendant John Doe #1 has moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), arguing that: (1) plaintiff lacks prudential standing to sue; (2) the claim is barred by the applicable statute of repose; and (3) the complaint fails to allege scienter or manipulation, and fails to allege that plaintiff relied on any particular “Deceptive Order.”[1] For the reasons described below, defendant's motion to dismiss is granted.


         According to the complaint, plaintiff is the “assignee of the claims at issue in this action.” Caherciveen Partners, LLC assigned the claims to plaintiff in 2015. As assignee of Caherciveen, plaintiff purports to bring the claims based on Caherciveen's trading activity in Treasury Notes with maturities of 2, 3, 5, 7 and 10 years, and 30-year Treasury bonds.

         Defendants are persons or entities that trade electronically in the U.S. Treasury securities markets. Participants that trade in these markets typically use one of two primary electronic platforms: (1) BrokerTech (owned and operated by ICAP, plc); and (2) eSpeed (owned and operated by Nasdaq, Inc.). Both platforms require participants to identify themselves by use of a unique operator identification, and each platform assigns an identifier when orders are matched with a counter-party.

         Orders entered through each platform become part of their “order books, ” which are displayed electronically to market participants. The order books display the total quantities available at the best prices on both the buy and sell side for each security. The highest available price for buy orders is referred to as “top of the book bid.” The lowest available price for sell orders is referred to as the “top of the book offer.” The order books also display the total available order volume to all market participants. When buy and sell orders for a particular security are pending at the same price, the platforms assign a queue priority to those orders based on the time in which the orders were entered. The platforms then match buy orders with sell orders by time priority using the “first in, first out” method. The oldest ordered entered is matched first for execution of a trade.

         The complaint alleges that defendants manipulated the U.S. Treasury markets by submitting orders to the platforms that defendants never intended to have executed. These “Deceptive Orders” were intended to create the false appearance of market demand in a certain direction (to either buy or sell) when in actuality the demand did not exist. The Deceptive Orders “lured other market participants into entering sell orders below, or entering buy orders above, or maintaining positions below or above, what would otherwise be the prevailing market price based on what other market participants thought was a change in the supply and demand balance in the product.” The defendants then “flashed” the market by cancelling the “Deceptive Orders” and simultaneously entering “Aggressor Orders” in the opposite direction for the same security at the same price. Those Aggressor Orders where then matched and executed with bids or offers of other market participants that were made in response to the Deceptive Orders. By doing this, plaintiff alleges that the defendants were able to sell U.S. Treasury notes and bonds at artificially high prices, and buy U.S. Treasury notes and bonds at artificially low prices.

         Plaintiff alleges that defendants' manipulation is characterized by a “well defined pattern.” First, defendants entered the Deceptive Orders. While these orders were on the order book (the “build-up phase”) they created a false appearance of market depth and momentum in one direction. The Deceptive Orders typically represented “a significant portion of the market” often consisting of more than 25% of the posted size of the best available price.” Defendants then cancelled the Deceptive Orders and “virtually simultaneous to the cancels, ” would enter one or more Aggressor Orders in the opposite direction but at the same price as the Deceptive Orders, thereby trading “against the remaining available securities at that price (the “flash phase”).”

         According to plaintiff, it is this well defined pattern, and the frequency, speed, and precision with which the build-up and flash progression took place, that “eliminates the possibility that this pattern was anything other than orchestrated.” Plaintiff alleges that the fact that the cancel orders and the “flash” orders occurred within milliseconds evidences a premeditated coordination, because defendants “could not have legitimately changed their mind as to the direction of the market so quickly, so often and with such precision.” Additionally, the fact that defendants typically cancelled Deceptive Orders across multiple markets of U.S. Treasury securities in multiple product markets including U.S. Treasury futures markets offered on the Chicago Board of Trade (“CBOT”) demonstrates defendants' intent to manipulate the market for U.S. Treasury securities.


         1. Standing

         Rule 10b-5 actions are tightly restricted to persons who are either purchasers or sellers of securities. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 740-47 (1975). This restriction is required because permitting plaintiffs that did not buy or sell securities to maintain actions would encourage nuisance litigation and promote vexatious litigation that could depend on uncorroborated, self-servicing testimony. Id.

         Defendant challenges plaintiffs' standing because the complaint does not allege that plaintiff purchased or sold any securities. Instead, plaintiff alleges that it is the assignee of Caherciveen's claims and brings the suit based on Caherciveen's trading activity. Defendant challenges that assignment as inoperable as a matter of law, and claims that the alleged assignment raises the same concerns that led to the Supreme Court's decision in Blue Chip. See Smith v. Ayers, 977 F.2d 946, 950 (1992). According to defendant, assignments for the purpose of bringing a 10b-5 claims are inherently problematic because they raise procedural issues that prejudice the defendants' ability to litigate the case, as well as the court's ability to adjudicate it. See In re: B.P. p.l.c. Sec. Litig., 2016 WL 29300, *5 (S.D. Tex. Jan. 4, 2016). Defendant argues that because of the assignment, it will have limited rights to obtain information from Caherciveen, which is not a party to the case. Id. It also argues that if plaintiff is just a litigation vehicle, it could simply “dissolve itself out of existence if the Court attempted to sanction it.” Id. at *6 n.43. Because assignment raises all the concerns that led the Blue Chip court to restrict 10b-5 claims to purchasers or sellers, defendant argues that courts permit express assignment of 10b-5 claims only in “extremely rare” circumstances. See Aviva Life And Annuity Co. v. Davis, 20 F.Supp.3d 694, 702 (S.D. Iowa 2014).

         Plaintiff counters that defendant's standing argument is a challenge to subject matter jurisdiction more properly brought under Fed.R.Civ.P. 12(b)(1), which allows the court to consider matters outside the four corners of the complaint. Therefore, plaintiff submits an affidavit explaining that in April 2015 Caherciveen had eleven members that collectively owned 100% of the company. By May 2016, all eleven decided to sell their collective membership interests to a third party. Those selling members wanted to retain their right to pursue the instant claims of illegal market manipulation, so they and the third party purchaser agreed that prior to the execution of the sale, the securities claims would be assigned to the selling members in a separate entity. The selling members formed plaintiff to receive assignment of the claims. Each of the selling members acquired the same ownership interest in plaintiff that they had in Caherciveen. Thus, the purpose of the assignment was to allow the original members of Caherciveen, the persons who were actually damaged by the alleged manipulation, to bring suit.

         Defendant responds that plaintiff “misunderstands” defendant's standing argument, the basis of which is that plaintiff lacks statutory or prudential standing to bring a 10b-5 claim, which does not raise a jurisdictional issue and is properly brought under Rule 12(b)(6). Defendant argues that plaintiff has failed to allege that it is among the “class of plaintiffs Congress has authorized to sue.” Defendant further argues that because the motion ...

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