Harrington Global Opportunity Fund, Ltd. v. CIBC World Markets Corp.

• Citation: 585 F.Supp.3d 405
• Decision Date: 09 February 2022
• Docket Number: 21 Civ. 761 (LGS)
• Parties: HARRINGTON GLOBAL OPPORTUNITY FUND, LIMITED, Plaintiff, v. CIBC WORLD MARKETS CORP., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

585 F.Supp.3d 405

HARRINGTON GLOBAL OPPORTUNITY FUND, LIMITED, Plaintiff,

v.CIBC WORLD MARKETS CORP., et al., Defendants.

21 Civ. 761 (LGS)

United States District Court, S.D. New York.

Signed February 9, 2022

Ardalan Attar, Christian Smith & Jewell, James W. Christian, Christian Levine Law Group, LLC, Houston, TX, Felicia Sue Ennis, Leron Thumim, Alan Marshall Pollack, Warshaw Burstein LLP, New York, NY, for Plaintiff.

Sandra Denise Hauser, Dentons US LLP, New York, NY, Stephen J. Senderowitz, Dentons US LLP, William Walsh, Murphy & McGonigle, P.C., Chicago, IL, for Defendants CIBC World Markets Corp., CIBC World Markets Inc.

Abby Faith Rudzin, Brad Michael Elias, William Joseph Martin, O'Melveny & Myers LLP, New York, NY, for Defendants Merrill Lynch Canada Inc., Merrill Lynch Professional Clearing Corp.

David Sapir Lesser, King & Spalding LLP, Jamie Stephen Dycus, Jenny Ross Aquines Pelaez, Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, for Defendants TD Securities, Inc., TD Securities (USA) LLC.

Laura Rose Zimmerman, Aleesha Fowler, Baker & McKenzie LLP, New York, NY, Perrie M. Weiner, Ben Turner, Michael D. Hidalgo, Baker & McKenzie LLP, Los Angeles, CA, for Defendants UBS Financial Services, Inc., UBS Securities Canada, Inc.

Todd Steven Fishman, Alexander Kaim Bussey, Allen & Overy, LLP, New York, NY, for Defendants Societe Generale Capitale Canada, Inc., SG Americas Securities, LLC.

Abby Faith Rudzin, William Joseph Martin, O'Melveny & Myers LLP, New York, NY, for Defendant BofA Securities, Inc.

OPINION AND ORDER

LORNA G. SCHOFIELD, District Judge:

Plaintiff Harrington Global Opportunity Fund, Limited, brings this action alleging (1) violation of § 10(b) of the Exchange Act and Rule 10b-5, (2) violation of § 9(a)(2) of the Exchange Act, (3) unjust enrichment, (4) common law fraud, (5) conspiracy to commit fraud and (6) aiding and abetting fraud. Defendants are five broker-dealers, their Canadian affiliates and unidentified John Does.¹ Defendants move to dismiss the Amended Complaint (the "Complaint") for failure to state a claim pursuant to Rule 12(b)(6). The Canadian Defendants also move to dismiss the Complaint for lack of personal jurisdiction pursuant to Rule 12(b)(2). For the reasons stated below, the motion to dismiss is denied in part and granted in part. The spoofing claims survive, and the short selling and common law claims are dismissed.

I. BACKGROUND

The following facts are taken from the Complaint and are assumed to be true for purposes of this motion. See R.M. Bacon, LLC v. Saint-Gobain Performance Plastics Corp. , 959 F.3d 509, 512 (2d Cir. 2020).

Plaintiff is a hedge fund based in Bermuda. Defendants are U.S. and Canadian broker-dealers that execute securities transactions for their own accounts and for their customers. The Canadian Defendants are headquartered in Canada. The U.S. Defendants maintain their principal place of business in New York. Defendants John Doe Canada and John Doe U.S. are entities comprised of Defendants’ customers, market makers, subsidiaries, affiliates and sister companies of Defendants.

Plaintiff owned shares of Non-Party Concordia International Corporation's stock and sold over eight million Concordia shares between January 27, 2016, and November 15, 2016 (the "Relevant Period"). During the Relevant Period, Concordia's share price declined from $28.03 to $3.13. Concordia is a healthcare company "focused on legacy pharmaceutical products and orphan drugs." Concordia was incorporated in 2005 under the laws of Ontario, Canada. Since 2015, Concordia's shares have been registered and traded as interlisted securities on NASDAQ in the United States and the TSX in Canada. A share of Concordia stock traded in the United States is the same as a share traded in Canada. Purchasers and sellers of Concordia stock, unless they request otherwise, have no control of whether their orders are routed to the United States or Canada. Because trading is seamless between the two countries, trades in one country affect trading in the other country.

During the Relevant Period, Defendants engaged in a market manipulation scheme involving spoofing and abusive short selling. Each U.S. Defendant conspired with its affiliated Canadian Defendant to manipulate the price of Concordia's shares. Each U.S. Defendant is alleged to have conspired with its Canadian affiliate in separate conspiracies. Three pairs of Defendants are alleged to have engaged in the illegal scheme of spoofing. Three pairs of Defendants are alleged to have engaged in illegal short selling.

Defendants CIBC US, Merrill US and TD US ("U.S. Spoofing Defendants") conspired with their Canadian affiliates, respectively, CIBC Canada, TD Canada and Merrill Canada (the "Canadian Spoofing Defendants" and with U.S. Spoofing Defendants, "Spoofing Defendants") to place thousands of "[b]aiting [o]rders" -- i.e., orders on U.S. and Canadian exchanges that were not intended to be executed and had no legitimate economic purpose. Each set of baiting orders had a "small negative impact" on the price of Concordia's shares that eventually drove the price from $28.03 to $3.13. During the Relevant Period, there were approximately 100,000 spoofing events on the U.S. and Canadian exchanges.

While the aforementioned Defendants perpetuated their spoofing scheme, Defendants UBS US, UBS Canada, Merrill US, Merrill Canada, Merrill Pro, SocGén US and SocGén Canada ("Short Selling Defendants") engaged in excessive and abusive short selling. The abusive short selling involved abusive naked short selling, wherein a short seller does not borrow shares prior to the short sale and fails to deliver any shares on the settlement date to the purchaser. Naked short selling drives the price of shares downward.

Operating in concert, spoofing drove the price of Concordia shares downward, sending a market signal that triggered naked short selling, further driving the price downward by creating an illusion of increased supply. This complementary market manipulation drove the price of Concordia shares down when Plaintiff sold its Concordia shares. The naked short sellers engaged in shorting, and following spoofing events, they purchased the shares necessary to deliver on their naked short sales at reduced prices.

II. STANDARD

To survive a motion to dismiss pursuant to Rule 12(b)(2), "a plaintiff must make a prima facie showing that jurisdiction exists." Chufen Chen v. Dunkin’ Brands, Inc. , 954 F.3d 492, 497 (2d Cir. 2020) (internal quotation marks omitted). "A prima facie showing suffices, notwithstanding any controverting presentation by the moving party , to defeat the motion." Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A. , 722 F.3d 81, 86 (2d Cir. 2013) (quoting Marine Midland Bank, N.A. v. Miller , 664 F.2d 899, 904 (2d Cir. 1981) ); accord Cunningham v. Gen. Motors LLC , No. 20 Civ. 3097, 2021 WL 827124, at *1 (S.D.N.Y. Mar. 4, 2021). To make out a prima facie case of personal jurisdiction, whether based on general or specific personal jurisdiction, plaintiffs must establish "a statutory basis for personal jurisdiction" and that "the exercise of personal jurisdiction [ ] comport[s] with constitutional due process principles." Waldman v. Palestine Liberation Org. , 835 F.3d 317, 327 (2d Cir. 2016) (internal quotation marks omitted); accord United States ex rel. TZAC, Inc. v. Christian Aid , No. 17 Civ. 4135, 2021 WL 2354985, at *2 (S.D.N.Y. June 9, 2021). "Courts typically require that the plaintiff show some sort of causal relationship between a defendant's U.S. contacts and the episode in suit, and the plaintiff's claim must in some way arise from the defendants’ purposeful contacts with the forum." Charles Schwab Corp. v. Bank of Am. Corp. , 883 F.3d 68, 84 (2d Cir. 2018) (internal quotation marks omitted). In evaluating whether Plaintiff has made out a prima facie case of personal jurisdiction, a court must "construe the pleadings and affidavits in the light most favorable to plaintiffs, resolving all doubts in their favor." Dorchester , 722 F.3d at 85 ; accord Cunningham , 2021 WL 827124, at *1.

On a motion to dismiss, a court accepts as true all well-pleaded factual allegations and draws all reasonable inferences in favor of the non-moving party but does not consider "conclusory allegations or legal conclusions couched as factual allegations." Dixon v. von Blanckensee , 994 F.3d 95, 101 (2d Cir. 2021) (internal quotation marks omitted). To withstand a motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Kaplan v. Lebanese Canadian Bank, SAL , 999 F.3d 842, 854 (2d Cir. 2021) (quoting Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009)) (internal quotation marks omitted). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 ; accord Dane v. UnitedHealthcare Ins. Co. , 974 F.3d 183, 189 (2d Cir. 2020). It is not enough for a plaintiff to allege facts that are consistent with liability; the complaint must "nudge[ ] [ ] claims across the line from conceivable to plausible." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; accord Bensch v. Est. of Umar , 2 F.4th 70, 80 (2d Cir. 2021). To survive dismissal, plaintiffs "must provide the grounds upon which [their] claim rests through factual allegations sufficient to raise a right to relief above the speculative level." Rich v. Fox News Network, LLC , 939 F.3d 112, 121 (2d Cir. 2019) (alteration in original).

"A complaint alleging securities fraud must also satisfy heightened pleading requirements set forth in Federal Rule of Civil Procedure 9(b) and the [PSLRA]." Set Cap. LLC v. Credit Suisse Grp. AG , 996 F.3d 64, 75 (2d Cir. 2021). The heightened pleading standard of Rule 9(b) requires: "In alleging fraud or mistake, a party must state with particularity the circumstances constituting...