Gurfein v. Ameritrade, Inc., 04 Civ. 9526(LLS).
| Decision Date | 26 January 2006 |
| Docket Number | No. 04 Civ. 9526(LLS).,04 Civ. 9526(LLS). |
| Parties | Hadassah GURFEIN, individually and on behalf of all others similarly situated, Plaintiff, v. AMERITRADE, INC., Ameritrade Online Holdings Corp., Knight Trading, Group, LLC, Knight Financial Products, LLC, Knight Execution Partners, LLC and American Stock Exchange, LLC, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Daniel Robert Lapinski, Olimpio Lee Squitieri, Squitieri & Fearon LLP, New York, NY, Frederick W. Gerkens, III, John Halebian, Lovell Stewart Halebian, LLP, New York, NY, for Plaintiff.
Richard John Morvillo, Mayer, Brown, Rowe & Maw, LLP, Washington, DC, John J. Calandra, McDermott, Will & Emery, LLP, New York, NY, H. Peter Haveles, Jr., Hoffman & Roth, LLP, New York, NY, Ivan O. Kline, Friedman, Wittenstein & Hochman, PC, New York, NY, for Defendants.
Richard A. Speirs, Zwerling, Schachter & Schwerling, New York, NY, for Movant.
In this class action alleging violations of federal law, state law, and SEC Rule 10b-5, defendants1 move to dismiss the amended complaint pursuant to Fed.R.Civ.P. 12(b)(6).
The allegations arise from activities related to options trading. The amended complaint alleges misrepresentations and manipulative acts, committed with the purpose of defrauding "direct access" on-line customers in the options market. The following allegations are taken from the amended complaint and are accepted as true on a motion to dismiss. See Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir.1993).
The American Stock Exchange ("AMEX") is registered as a national securities exchange and provides a market-place for trading option contracts. The AMEX assigns every option traded on its exchange to a broker-dealer, or options specialist, who is responsible for maintaining a "fair and orderly market" for the option and providing bid and ask quotations. Amended Cmplt. ¶¶ 57-58. These are published to investors through electronic transfer or display systems. Id. ¶ 59. Buy and sell offers are "either matched against one another by a specialist, or are matched with counterbalancing offers from the specialist itself, who is essentially required to act as a market maker of last resort." Id. ¶ 54.
Numerous order-handling rules govern the options market, including the Firm Quote Rule, which requires every responsible broker or dealer (including options specialists) to execute options transactions at prices at least as favorable as their published bids or offers at the time the orders are presented. SEC Exchange Act Rule 11Ac1-1; AMEX Rule 958A. The AMEX's regulatory duties include enforcing compliance by its member specialists with all of the order-handling rules, including the Firm Quote Rule. The SEC, in turn, monitors the AMEX's exercise of that regulatory authority.
Knight Financial Products, LLC ("Knight Financial") is an options specialist and registered broker-dealer operating on the AMEX. Ameritrade, Inc ("Ameritrade") is a broker-dealer who provides individual investors with direct online access to financial markets so they can trade securities from their personal computers. These investors are called "direct access" customers. Through Ameritrade, options quotations are displayed on a direct access customer's computer, and the customer can "click" on the price shown on the screen and thus buy or sell the listed option. The orders are then routed to the appropriate exchange. Options specialists like Knight Financial provide trade executions to services like Ameritrade. Knight Execution Partners, LLC ("Knight Execution") is the clearing house through which Knight Financial routes its orders.
In 2003, the SEC's Office of Compliance Inspections and Examinations and Office of Economic Analysis reviewed the AMEX's regulatory programs related to options order handling, and analyzed audit trail data of 10 options traded on the AMEX during the week of October 22, 2001. The staff then compiled a report2 (the "OCIE Report") stating their findings of deficiencies in the AMEX's detection and discipline of routine violations of the Firm Quote Rule by options specialists. The staff also found that the options specialists "may" have been routinely discriminating against direct access customers in "likely" violation of the Firm Quote Rule. OCIE Report, Exhibit A of Amended Cmplt. at 9.3 The OCIE report did not name the options specialists involved in the inspection, nor mention the Knight or Ameritrade defendants. The AMEX was the only named entity against whom concrete allegations of wrongdoing were made.
Plaintiff Hadassah Gurfein is a private investor who maintained an account with Ameritrade. On December 6, 2002 Gurfein attempted to sell Forest Labs options contracts through Ameritrade. At 8:53:34 A.M. (CST) Gurfein placed an order to sell 50 Forest Labs December 100 put contracts at $7.70. The "bid" price displayed on Gurfein's monitor at the time she prepared to place her order was $7.70, but increased to $7.80 as she placed her sell order. By 8:56:21 A.M. the order had not been executed, and Gurfein cancelled it. She attempted several more times to sell her puts, each time offering a price at or below the electronically displayed bid, and each time the order was not executed instantaneously and was cancelled by Gurfein. In order to "salvage a rapidly decreasing unrealized gain," Gurfein exercised her 50 Forest Labs December 100 put contracts by purchasing 5,000 common shares of Forest Labs, which she then immediately sold for an overall profit of approximately $20,500. Amended Cmplt. ¶ 110. Gurfein alleges that she suffered a loss of approximately $13,500, the difference between the profit she would have realized if her first trade had been executed at $7.70 ($34,000) and the $20,500 profit she actually obtained.
The same day, Gurfein tried to sell 100 Forest Labs February 85 puts through Ameritrade. She submitted an order to sell all 100 contracts at $4.50, a price below the electronically displayed bid. Only 25 of the contracts were sold, and at a price of only $3.00. The remaining 75 contracts were subject to a 2-for-1 split in January 2003 and ultimately sold at a price of $.20 each, for a total of $3,000. Gurfein alleges a total loss of $34,500 on this transaction, reflecting the difference between what she would have made if all 100 options had been sold at $4.50 ($45,000) and the $10,500 she actually made. Gurfein attributed the quotations on her computer throughout her December 6th trading activity to both "defendant Knight"4 and Ameritrade.
Gurfein claims that those transactions, coupled with the findings in the OCIE Report, show repeated misrepresentations and a scheme by defendants to defraud the options market through illegal trading. She alleges that defendants materially misrepresented both bid and ask quotations, and that orders placed by direct access customers would be executed instantaneously. As part of the scheme (1) Ameritrade intentionally routed its customers' orders to Knight, and defendants (2) refused to execute direct access orders at the quoted prices, (3) discriminated against direct access customers by not executing their orders, or executing them at less favorable prices than those given to preferred customers, (4) changed or "faded" options quotations after plaintiff clicked on them, and (5) the AMEX ignored the violations and allowed the scheme to continue. As a result, defendants reaped profits, while plaintiff lost profits and suffered losses. Amended Cmplt. ¶¶ 112 and 123.c.
On a motion to dismiss a complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief may be granted, a court must accept the factual allegations of the complaint as true, and draw all inferences in favor of the plaintiff. Mills, 12 F.3d at 1174. The court may consider exhibits annexed to the complaint or incorporated in it by reference. Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir.1993). The complaint may be dismissed only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957).
The AMEX moves to dismiss counts I (for a fraudulent scheme and material misrepresentations in violation of section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5), II (for control-person liability under section 20(a) of the Securities Exchange Act of 1934), and VII (for violation of New York General Business Law § 349) on the grounds that it is entitled to absolute immunity.
The claims against the AMEX stem from two separate courses of conduct: (1) the AMEX's failure to regulate its options specialists' behavior and (2) statements made by the AMEX about its implementation of the Firm Quote Rule.
The AMEX is registered with the Securities and Exchange Commission as a national securities exchange pursuant to section 6 of the Securities Exchange Act of 1934, 15 U.S.C. § 78f, and is a self-regulatory organization ("SRO") as defined in 15 U.S.C. § 78c(a)(26). As an SRO, the AMEX has a duty to "promulgate and enforce rules governing the conduct of its members" and "conducts disciplinary proceedings when a member, or a person associated with a member, is suspected of violating federal securities laws or internal Exchange rules or regulations." Barbara v. New York Stock Exchange, Inc., 99 F.3d 49, 51 (2d Cir.1996). See 15 U.S.C. §§ 78f(b), 78s(g), and 78f(d). The SEC has broad authority to oversee the AMEX's activities and to impose sanctions if it fails to carry out its responsibilities as an SRO. 15 U.S.C. §§ 78f(b), 78s(h)(1).
The AMEX argues that the doctrine of absolute immunity bars plaintiff's claims because they involve the AMEX's exercise of, or failure to exercise, its regulatory...
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