By Rodney F. Tonkovic, J.D.
The Supreme Court has denied certiorari for a petition asking it to rule on a circuit split over the assertion by private plaintiffs of aiding and abetting claims under Exchange Act Section 10(b). The petition asserted that the Second Circuit created a "co-participant" theory of liability that is at odds with the Court's bright-line prohibition against private aiding and abetting claims.
The petitioners in Bats Global Markets, Inc. v. City of Providence (18-210) were a group of national securities exchanges alleged by the respondents to have sold products and services to high frequency trading firms in a way that advantaged them over other, ordinary traders. The district court dismissed the suit, concluding that exchanges were absolutely immune from suit for much of the conduct at issue. Even if the exchanges were not absolutely immune, the plaintiffs failed to state a fraud claim under the Exchange Act based on a manipulative scheme. At best, the court said, the exchanges merely enabled the HFT firms to execute the transactions that harmed the plaintiffs. Since aiding and abetting claims are prohibited, the court dismissed the complaint.
Manipulation. The Second Circuit vacated and remanded the district court's judgment, finding (as the SEC argued in an amicus brief) that the exchanges were not entitled to absolute immunity because they were not acting as regulators in providing the challenged products and services. The panel went on to find that the exchanges mislead investors by artificially affecting market activity. And, the exchanges went beyond simply giving the HFT firms the means to commit market manipulation, and were co-participants in the manipulative scheme.
Aiding and abetting bar. At issue, the petition argued, was the long-standing bar on private securities fraud plaintiffs asserting aiding-and-abetting claims. Since Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. (1994), at least four circuits (the Third, Fifth, Seventh, and Eleventh) have applied the prohibition to hold that liability may not be imposed on a defendant where a third party had independent, ultimate authority to commit the act that harmed the plaintiff. The Second Circuit, the petition argued, created a theory of "co-participant" liability that permits private securities fraud claims in direct conflict with these rulings and that is at odds with the general rule that even substantial participation in a fraud is insufficient where the primary violator made the independent choice to commit fraud..
Manipulation. The petition also asked whether a plaintiff states a claim for market manipulation where it is undisputed that the defendant did not engage in any trading activity. Here, the petitioners note that the Third Circuit defines manipulation as injecting inaccurate information into the market, while the D.C. Circuit requires only manipulative intent combined with legitimate trading activity. The Second Circuit, the petition said, deepened this split by taking a third path and finding manipulation where non-trading conduct did not inject any price information into the market.
The response to the petition for a writ of certiorari was due on September 17, 2018. The respondents, however, filed a waiver of their right to respond on September 6. Justice Breyer took no part in the consideration or decision of this petition.
First Solar. The Court also invited the Solicitor General to file a brief in First Solar, Inc. v. Mineworkers' Pension Scheme, (18-164). At issue in this case is what the petitioner describes as a three-way split in how the appellate courts require a plaintiff to show the market's reaction to information revealing the fraudulent nature of the defendant's conduct. The petition argues that the Ninth Circuit has adopted a "dramatically less demanding" proximate cause standard for proving loss causation that is inconsistent with the Court's precedent.
Read the docket. This case, and others pending before the Court, can be referenced in the latest version of the Supreme Court Docket, a regular feature of Securities Regulation Daily. Cases are listed separately, along with a brief summary of the questions raised and the status of the appeal
The petition is No. 18-210.