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Robbins Geller Wins Appeal in Second Circuit for High Frequency Trading Investors

December 19, 2017

On December 19, 2017, the United States Court of Appeals for the Second Circuit ruled in plaintiffs’ favor in the so-called “High Frequency Trading” securities fraud case, reversing the district court’s prior dismissal of the action and vacating the judgment that the lower court had entered in defendants’ favor.

The underlying case charges assorted national securities exchange defendants with violating §10(b) of the Securities Exchange Act of 1934, alleging that they engaged in a scheme and wrongful course of business that was designed to, and did, manipulate the U.S. securities markets and the trading of equities on those markets. In a nutshell, the complaint alleges that the exchanges engaged in manipulative conduct by creating high-priced products and services specifically designed for their favored high-frequency trading customers; the manipulative conduct diverted billions of dollars annually from ordinary investors who bought and sold securities on the defendants’ securities exchanges. City of Providence, Rhode Island and Plumbers and Pipefitters National Pension Fund are serving as lead plaintiffs, along with other institutional investors, in the action. 

Following appellate briefing and oral argument in summer 2016, the Second Circuit on August 25, 2016 requested that the Securities and Exchange Commission (“SEC”) file an amicus curiae brief setting forth that federal agency’s views on (i) “whether the district court had subject-matter jurisdiction over the case,” and (ii) “whether defendants-appellees have absolute immunity from suit arising from the challenged conduct.” At the SEC’s request, Robbins Geller attorneys together with co-counsel traveled to Washington, D.C. and presented arguments to the agency urging it to support plaintiffs’ case; defendants were invited to argue their side as well. Following those presentations by both sides, the SEC filed its amicus curiae brief on November 28, 2016, answering both of the above questions in plaintiffs’ favor. With regard to the first question, the SEC believed that “the securities laws do not divest the district court of subject matter jurisdiction over this case.” With regard to the second question, the SEC told the court that the defendant exchanges “are not entitled to absolute immunity from suit for the challenged conduct.” 

Agreeing with both the plaintiffs and the SEC, a three-judge Second Circuit panel reversed the dismissal earlier today in a unanimous, published decision spanning 35 pages. Writing for the court, Circuit Judge John M. Walker, Jr. stated, “We conclude that we have subject matter jurisdiction over this action and that the defendants are not immune from suit. We further conclude that the district court erred in dismissing plaintiffs’ complaint for failure to state a claim.” The appellate panel further stated that plaintiffs had sufficiently alleged that the defendant exchanges had engaged in manipulative or deceptive conduct forbidden by the Exchange Act, and that the lower court had erred in holding that the exchanges’ conduct rose, at best, to mere aiding-and-abetting. Instead, held the panel, plaintiffs had sufficiently pleaded that “the exchanges created a fraudulent scheme that benefited [high-frequency trading] firms and the exchanges” themselves, while “fail[ing] to fully disclose to the investing public how those products and services could be used on their trading platforms.”

The Second Circuit then vacated the district court’s entry of judgment for the defendants, and remanded the case to the district court for further proceedings.

Robbins Geller appellate partner Joseph D. Daley, who briefed and argued the appeal, applauded the Second Circuit’s ruling: “The win for our pension fund clients and other ordinary investors is especially gratifying because our team was able to convince not only the Second Circuit, but also the SEC, that our position was the correct one.”

In addition to Daley, Robbins Geller attorneys Samuel H. Rudman, Patrick J. Coughlin, David W. Mitchell, Brian O. O’Mara, Randi D. Bandman, Mary K. Blasy, Vincent M. Serra and Lonnie A. Browne, along with co-counsel, obtained this result for investors.

City of Providence, Rhode Island v. BATS Global Markets, Inc., No. 15-3057-cv, Opinion (2d Cir. Dec. 19, 2017).

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