Last Atlantis Capital, LLC v. AGS Specialist Partners

292 F.R.D. 568, 2013 WL 791422, 2013 U.S. Dist. LEXIS 29618
CourtDistrict Court, N.D. Illinois
DecidedMarch 4, 2013
DocketNos. 04 C 0397, 05 C 5600, 05 C 5671
StatusPublished

This text of 292 F.R.D. 568 (Last Atlantis Capital, LLC v. AGS Specialist Partners) is published on Counsel Stack Legal Research, covering District Court, N.D. Illinois primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Last Atlantis Capital, LLC v. AGS Specialist Partners, 292 F.R.D. 568, 2013 WL 791422, 2013 U.S. Dist. LEXIS 29618 (N.D. Ill. 2013).

Opinion

MEMORANDUM OPINION AND ORDER

ARLANDER KEYS, United States Magistrate Judge.

Plaintiffs Last Atlantis, Lola, Lulu, Good-buddy, Friendly, Speed Trading, Bryan Rule, Brad Martin, and River North filed this action, alleging violations of § 10b of the Exchange Act and SEC Rule 10b-5 (a), (b) and (c), as well as state law claims, including breach of contract, common law fraud, breach of fiduciary duty, tortuous interference, and violations of the Illinois Consumer Fraud and Deceptive Practices Act.

From the outset of this ease, the Plaintiffs have claimed that the Specialist Defendants intentionally discriminated against them, as direct access customers. The Court previously summarized the claims as follows:

At the heart of Plaintiffs’ claim is an inherent tension between direct access customers and specialists, stemming from their competing efforts to profit from market anomalies. The Specialist Defendants are dealer/brokers charged with establishing the bid and offer prices for every option in a designated option class; this price is known as “the quote.” Specialists fill orders by matching buyers’ orders to purchase options with contra-side customer orders to sell options at the same price. In the event that there are no existing contra-side customer orders, specialists execute orders by buying or selling the designated option from their own proprietary account.

Direct access customers, like Plaintiffs, utilize arbitrage trading strategies in an attempt to take advantage of price discrepan-eies in the options markets. For example, if a specialist’s buy bid on one exchange is $5.00 and a specialist’s sell bid on a different exchange for that same option is $4.90 on another exchange, Plaintiffs attempt to execute simultaneous orders to sell on the first exchange and buy on the second exchange to achieve a 10 cent profit per option, while incurring minimal risk.

Plaintiffs claim that, like the direct access customers, specialists also profit from capitalizing on market anomalies. Specialists are able to realize significant profits from such “spreads,” if and when they are able to fill orders from their own proprietary accounts. However, because direct access customers purportedly have access to better information and technology than typical customers, they have cut substantially into the specialists’ profits. Plaintiffs claim that Defendants intentionally discriminated against orders placed by direct access customers since April 1, 2001, in favor of more lucrative orders placed by less sophisticated customers. Specifically, Plaintiffs charge that the Specialist Defendants have:

[Ijdentified the origin, and then knowingly mishandled the execution of thousands of orders to buy and sell options that were sent to defendants by engaging in various illegal trading practices such as refusing to automatically, or promptly, execute the orders or send confirmations upon the execution of orders, changing (or “fading”) the quoted prices after receiving the orders, delaying the execution of orders, refusing to honor requests to cancel orders, and unilaterally terminating or adjusting the prices on orders that were previously executed and confirmed, and conducting thousands of proprietary trades for the Specialists’ own accounts that were executed in advance of, or instead of, executing Plaintiffs’ marketable limit orders (i.e. orders to purchase or sell a set amount of options at a specific price equal to the bid or offer price actually disseminated by a Specialist on a particular exchange).

The defendants have consistently denied discriminating against orders placed by direct access customers in general, and against those placed by the Plaintiffs in particular. [572]*572Defendants have acknowledged that a higher-than-average percentage of direct access customers’ orders go unexecuted, but have offered non-discriminatory reasons to explain the phenomenon.1

In January of 2006, Defendants moved to dismiss the consolidated complaints, arguing, largely, that Plaintiffs failed to plead fraud and scienter with sufficient particularity. See Defs.’ 1/6/06 Mot. To Dismiss. On September 13, 2006, Judge Bueklo granted the Defendants’ Motion, dismissing all of Plaintiffs’ federal claims, and declining to exercise jurisdiction over Plaintiffs’ state law claims. Judge Bueklo concluded that the Plaintiffs had failed to plead facts giving rise to an inference of scienter against the specialist defendants, and failed to plead facts giving rise to an inference of scienter and justifiable reliance with respect to the Exchange Defendants. Last Atlantis, et al. v. Chicago Board of Options Exchange, 455 F.Supp.2d 788 (N.D.111.2006).

Ten days after the district court dismissed the case, the AMEX and Defendants disclosed that certain specialists, including some of the named Specialist Defendants, had agreed to the entry of orders imposing disciplinary sanctions and fines against them for having mishandled thousands of Orders to trade options between June 1, 2002 and January 31, 2005 (the “AMEX Consent Order”). Plaintiffs filed a Motion for Reconsideration, which the district court ultimately granted, permitting Plaintiffs to file an amended consolidated complaint, and directing the parties to submit proposed discovery schedules. See, e.g., Memorandum Opinion and Order of 3/22/2007. On July 6, 2007, Judge Bueklo entered an Initial Discovery Order, directing Plaintiffs to identify and explain the orders that they claim were fraudulently mishandled.

Just prior to the Court’s issuance of its Initial Discovery Order, the United States Supreme Court issued its decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), wherein the Court reviewed the Seventh Circuit’s holding that a plaintiff could satisfy the heightened standards for pleading scienter under the federal securities laws by alleging facts that permitted a merely plausible inference of scienter. The Supreme Court rejected the Seventh Circuit’s “merely plausible” standard, and instead determined that, in order to survive a motion to dismiss, a federal securities law plaintiff must plead facts that are both cogent and at least as compelling as any competing inferences that a reasonable person could draw from the facts alleged.

The Defendants again moved to dismiss2 the Amended Complaint, relying heavily upon the more stringent pleading standard adopted in Tellabs. On February 7, 2008, Judge Bueklo granted the Motion with respect to the Exchange Defendants, finding that Plaintiffs had not made the requisite scienter showing. She determined, however, that evidence that some of the Specialist Defendants were sanctioned in the AMEX Consent Order for conduct similar to that alleged in the Amended Complaint rendered Plaintiffs’ proposed inference of fraud and scienter at least as compelling as any innocent explanation, with regard to the Special[573]*573ist Defendants identified in the Consent Order. Accordingly, the district court denied the Motion with respect to Defendants AGS Specialist Partners (“AGS”), Bear Hunter, CDM, Goldman Sachs Execution and Clearing LLP (“GSEC”), SLK-Hull Derivatives Specialists (“SLK-Hull”), Susquehanna International Group (“SIG”), TD Options, LCC (“TDO”), Wolverine, and Knight Financial Products (“Knight”).

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Related

Tellabs, Inc. v. Makor Issues & Rights, Ltd.
551 U.S. 308 (Supreme Court, 2007)
Bond v. Utreras
585 F.3d 1061 (Seventh Circuit, 2009)
Rubin v. Islamic Republic of Iran
349 F. Supp. 2d 1108 (N.D. Illinois, 2004)
Meyer v. Southern Pacific Lines
199 F.R.D. 610 (N.D. Illinois, 2001)

Cite This Page — Counsel Stack

Bluebook (online)
292 F.R.D. 568, 2013 WL 791422, 2013 U.S. Dist. LEXIS 29618, Counsel Stack Legal Research, https://law.counselstack.com/opinion/last-atlantis-capital-llc-v-ags-specialist-partners-ilnd-2013.