CP Stone Fort Holdings, LLC v. Doe(s)

Northern District of Illinois, ilnd-1:2016-cv-04991

MOTION by Plaintiff CP Stone Fort Holdings, LLC for reconsideration Rule59(e)MtnAmendAlter

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Case: 1:16-cv-04991 Document #: 44 Filed: 04/20/17 Page 1 of 10 PageID #:332 IN THE UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS-EASTERN DIVISION CP STONE FORT HOLDINGS, LLC,)) Plaintiff,)) v.) No. 16 cv 04991) JOHN DOE(S),) Hon. Robert W. Gettleman) Magistrate Judge Flanagan Defendants.) PLAINTIFF'S RULE 59(e) MOTION TO ALTER OR AMEND THE JUDGMENT AND INCOPORATED MEMORANDUM OF LAW IN SUPPORT Plaintiff CP Stone Fort Holdings, LLC, respectfully requests that this Court reconsider its decision on March 23, 2017, dismissing Plaintiff's Amended Complaint and that this Court vacate the Judgment entered that same day. [Dkt. # 42-43.] In support thereof, Plaintiff states as follows: I. Procedural Posture Plaintiff filed a complaint alleging a scheme to manipulate the United States Treasury Markets in violation of Section 10(b) of the Exchange Act and Rule 10b5(a) and (c) promulgated thereunder. [Docket #1.] John Doe Defendant #1 moved to dismiss the complaint arguing that Plaintiff lacked standing; that the statute of repose barred the complaint; and that the complaint failed to sufficiently plead the elements of manipulation, scienter and loss causation. [Docket # 14.] On October 11, 2016, this Honorable Court granted John Doe Defendant #1's Motion to Dismiss pursuant to Fed R. Civ. P. 12(b)(6). [Docket #30.] The Court concluded that Plaintiff had standing and that the statute of repose did not bar Plaintiff's complaint. [Docket #30.] However, the Court concluded that Plaintiff's initial complaint did not sufficiently plead manipulation and an inference of scienter. [Docket #30.] The Memorandum Opinion and Order did not address the sufficiency of Plaintiff's loss causation allegations. Case: 1:16-cv-04991 Document #: 44 Filed: 04/20/17 Page 2 of 10 PageID #:333 On November 17, 2016, Plaintiff filed an Amended Complaint. Plaintiff's Amended Complaint corrected the deficiencies relating to manipulation and scienter. However, because the Court did not base its dismissal on any deficiency relating to loss causation, Plaintiff did not amend its allegations relating to loss causation. [Docket # 35.] Subsequently, John Doe Defendant #1 moved to dismiss the Amended Complaint, arguing again that Plaintiff failed to sufficiently plead manipulation, scienter and loss causation. [Docket # 37.] This time, the Court concluded that Plaintiff's Amended Compliant cured the deficiencies relating to its allegations of manipulation and scienter. Nonetheless, the Court granted Defendant's motion, concluding that Plaintiff failed to sufficiently plead loss causation. [Docket #42.] On March 23, 2017, this Court entered Judgment against Plaintiff, precluding Plaintiff from attempting to cure the deficiencies relating to its loss causation allegations. [Docket #43.] When given the opportunity, Plaintiff successfully cured the deficiencies relating to its allegations of timeliness, manipulation and scienter. Had the Court afforded Plaintiff the opportunity to address the deficiencies relating to its allegations of loss causation, it would have cured those deficiencies. Moreover, had the Court applied the In Re Initial Public Offering Sec. Litig. standard, it would have concluded that Plaintiff's Amended Complaint sufficiently plead loss causation. Plaintiff requests that this Court reconsider its application of the Dura standard or allow Plaintiff the opportunity to re-plead the allegations relating to loss causation to address this Court's concerns. II. Standard for Relief Under Rule 59(e) Motion Parties may use Rule 59(e) to request that a Court reconsider and set aside a judgment. See A.D. Weiss Lithograph Co., Inc. v. Illinois Adhesive Products Co., 705 F.2d 249, 250 (7th Cir. 1983). Rule 59(e) allows courts to correct manifest errors of law, consider newly- 2 Case: 1:16-cv-04991 Document #: 44 Filed: 04/20/17 Page 3 of 10 PageID #:334 discovered evidence, or where a party was not given an opportunity to present its side. See e.g. F/H Industries, Inc. v. National Union Fire Ins. Co., 116 F.R.D. 224, 226 (N.D. Il. 1987). Where a court has misapprehended the facts, a party's position, or the controlling law, a Rule 59(e) motion is appropriate. Servants of Paraclete v. Does, 204 F.3d 1005, 1012 (10th Cir. 2000). The motion should be granted to correct a clear error of fact or law and to prevent a manifest injustice. See e.g. Firestone v. Firestone, 76 F.3d 1205, 1208 (D.C. Cir. 1996); see also EEOC v. Lockeed Martin Corp., Aero & Naval Sys.,, 116 F.3d 110, 112 (4th Cir. 1997). Here, reconsideration is appropriate to correct errors of fact and law, and to prevent manifest injustice. Plaintiff was unaware of the deficiencies relating to its loss causation allegations because the Court did not address the issue of loss causation in its first Order dismissing Plaintiff's initial complaint. Accordingly, Plaintiff did not amend those allegations in its Amended Complaint. Had Plaintiff taken the opportunity to amend those allegations, it would have added facts to address this Court's concerns and demonstrate its ability to plead and prove loss causation. Moreover, Plaintiff's Amended Complaint pleads a cause of action for manipulation which is legally distinct from claims based on misstatements claims under Section 10(b). Consequently, this Court improperly relied upon the decision in Dura in determining the adequacy of Plaintiff's loss causation allegations. This Court also fails to consider Plaintiff's role in the market, which is similar to a market maker, quoting both sides of the market. Instead, the Court analyzed loss causation as if Plaintiff were an investor in a securities class action. Plaintiff is very different than an investor and Defendant's manipulation caused it damages. 3 Case: 1:16-cv-04991 Document #: 44 Filed: 04/20/17 Page 4 of 10 PageID #:335 Accordingly, this Court should reconsider its March 23, 2017, Memorandum Opinion and Order, vacate its Judgment, and allow Plaintiff an opportunity to file a Second Amended Complaint. III. Loss Causation in a Manipulation Case In a 10(b) claim alleging manipulation—unlike a 10(b) claim alleging misrepresentation—allegations of artificial price inflation or deflation are sufficient to plead loss causation. See In Re Initial Pub. Offering Sec. Litig. 297 F. Supp. 2d 668, 674 (S.D.N.Y. 2003). As the Court determined in In Re Initial Public Offering Securities Litig., a market manipulation case is different from a misstatement case for loss causation purposes. See In Re Initial Pub. Offering Sec. Litig. 297 F. Supp. 2d at 674. Courts have examined the differences between misrepresentation and manipulation cases, and the logic behind the differing pleading standards with respect to loss causation. In a misstatement case the price is exaggerated because of the misstatement, and remains constant unless or until the misstatement is corrected or an intervening market event causes a change in price. The loss to the investor is, therefore, more easily measured by the change in price and the cause by the occurrence or non-occurrence of an intervening market event. Accordingly, it is easy to dispose of frivolous securities fraud claims at the pleading stage: if a plaintiff purchasing or selling securities before a corrective disclosure occurs, the plaintiff cannot logically plead loss from the disclosure. See, In re Crude Oil Commodity Futures Litig., 913 F.Supp.2d 41, 60 (S.D.N.Y. 2012).1 Conversely, the dissipation of an artificially inflated or deflated price caused by manipulation is very different. There is no corrective statement to impact the price and create a 1 Although the court addresses a manipulation claim in the context of the Commodities Exchange Act, the underlying principles are the same. 4 Case: 1:16-cv-04991 Document #: 44 Filed: 04/20/17 Page 5 of 10 PageID #:336 bright line marking the end of the artificial price inflation or deflation. When the manipulation ends, the information available to the market is the same as the information that had been available to the market before the manipulation began. See In Re Initial Pub. Offering Sec. Litig. 297 F. Supp. 2d at 674. The effect of the manipulation inevitably dissipates and that causes the loss. See Id. at 675; see also, In re Crude Oil Commodity Futures Litigation, 913 F.Supp.2d 41, 60-61 (S.D.N.Y. 2012)(finding plaintiffs plead loss causation where manipulation increased and decreased prices at different times, and the artificiality lasted for months after the alleged misconduct ended…because it is inevitable that the artificial price will dissipate). It is the inevitability of the dissipation that is critical to the analysis, not its speed. Id., citing to In re Initial Pub. Offering Sec. Litig., at 674-675. Because of this, courts have found it permissible to infer loss caused by manipulation. See In re Initial Pub. Offering Sec. Litig., 297 F. Supp. 2d at 674-675; In re Crude Oil Commodity Futures Litigation, 913 F.Supp.2d 41, 60-61 (S.D.N.Y. 2012); In re Platinum and Palladium Comm. Litig., 828 F.Supp.2d 588, 601 (S.D.N.Y. 2011); Anschutz Corp. v. Merrill Lynch and Co., Inc., 785 F.Supp.2d 799, 817 (N.D. Cal. 2011) (finding allegations that defendant artificially manipulated the market, and that plaintiff purchased securities at inflated prices, sufficiently alleged loss causation in a 10(b) market manipulation case.) 2 Here, in holding that the reasoning in In Re Initial Public Offering Securities is "questionable given that it predates Dura" this Court seemed to imply that the two decisions conflict with each other, and that the holding in Dura should control because it is more recent. However, Dura and In re Initial Pub. Offering Sec. Litig. do not conflict with each other. Dura involved allegations of misrepresentation under 10(b), and the Dura Court did not address loss 2 The SEC considers market participants "victims" of spoofing. It must, therefore, consider them to have suffered loss. See e.g. In the Matter of Dehruz Sfshar, et al. Order Instituting Proceedings, Administrative Proceeding File No. 3-16978, p. 15 ("4. Victims of Spoofing Scheme.") 5 Case: 1:16-cv-04991 Document #: 44 Filed: 04/20/17 Page 6 of 10 PageID #:337 causation in the context of a market manipulation case. Conversely, In re Initial Pub. Offering Sec. Litig., involved allegations of manipulation under 10(b). The Court's reasoning in Dura, therefore, should not be interpreted as conflicting with In re Initial Pub. Offering Sec. Litig. Dura's loss causation analysis simply does not apply to market manipulation cases. In re Platinum and Palladium Comm. Litig., 828 F.Supp.2d 588, 601 (S.D.N.Y. 2011) ("Dura's loss causation principles do not apply to the type of manipulative conduct alleged here"). Here, Plaintiff's allegations that it purchased securities at artificially inflated and deflated prices are sufficient to plead loss causation. See In Re Initial Pub. Offering Sec. Litig. 297 F. Supp. 2d at 674. Accordingly, Plaintiff asks the Court to reconsider its application of Dura to this case, and instead find that Plaintiff's allegations of loss causation are sufficiently pled under the standards set forth in In Re Initial Pub. Offering Sec. Litig. For this Court not to vacate the judgment, and not allow Plaintiff to amend its complaint would result in an error of law. IV. The Deficiency Related to Plaintiff's Loss Causation Allegations Is Curable Even assuming the Court determines that Dura sets forth the appropriate standard for pleading loss causation in a manipulation case, Plaintiff can, and will if given the opportunity, sufficiently plead loss causation. First, Plaintiff will further plead the details of its role acting essentially as a market maker providing liquidity to the market by quoting both sides of the market. Efficient markets require market makers who, through buying and selling, provide the market with liquidity and facilitate efficient trading in the market. In a Second Amended Complaint, Plaintiff will make the following allegation: Plaintiff is not a typical, retail investor. Rather, Plaintiff provides liquidity to the market, trading similar to a market maker. Plaintiff quotes (enters 6 Case: 1:16-cv-04991 Document #: 44 Filed: 04/20/17 Page 7 of 10 PageID #:338 orders) on both sides of the market, standing ready to buy at the bid price or sell at the ask price to collect the spread between the bid and ask. These transactions occur within seconds and milliseconds. In this role, Plaintiff does not hold securities. Rather, Plaintiff immediately sells out of, or hedges, a losing position. Plaintiff does not hold positions over night, and rather is typically flat at the end of each trading day. This difference between Plaintiff and a typical retail investor in a securities class action like Dura is significant. Defendant's manipulative scheme depended on traders such as Plaintiff, exiting quickly, as much as it depended on the false size buildup and the order cancelations. Defendant's manipulation takes advantage of Plaintiff's role in the market. Nonetheless, Plaintiff can plead and prove that as a result of the manipulation, Plaintiff purchased or sold a Treasury security at an artificial, manipulated price, and then exited that position at a loss. For example, if given the opportunity, Plaintiff would plead: On January 15, 2014, as shown on lines 1553 through 1554 of the CP BrokerTec tab of Exhibit 1, Plaintiff purchased $2 million notional 7 Year Treasuries at the manipulated price of 100-7.5. One minute and 13 seconds later, Plaintiff sold $2 million notional 7 Year Treasuries at a price of 100-8.5 for a loss of $625. On January 17, 2014, as shown on line 1658 through 1659 of the CP BrokerTec tab of Exhibit 1, Plaintiff sold $2 million notional 5 Year Treasuries at the manipulated price of 99-11. 133 milliseconds later, Plaintiff bought $4 million notional 5 Year Treasuries at a price of 99- 11.25 for a loss of $312.50. On February 21, 2014, as shown on line 2501 of the CP BrokerTec tab of Exhibit 1, Plaintiff purchased $2 million notional 10 Year Treasuries at the manipulated price of 99-28. 90 milliseconds later, Plaintiff sold $2 million notional 10 Year Treasuries at a price of 99-27.5 for a loss of $312.50. On February 25, 2014, as shown on lines 2572 through 2574 of the CP BrokerTec tab of Exhibit 1, Plaintiff sold $6 million notional 5 Year Treasuries at the manipulated price of 99-30. 457 milliseconds later, Plaintiff bought $6 million notional 5 Year Treasuries at a price of 99- 30.25 for a loss of $468.75. 7 Case: 1:16-cv-04991 Document #: 44 Filed: 04/20/17 Page 8 of 10 PageID #:339 On May 29, 2014, as shown on lines 3590 through 2681 of the CP BrokerTec tab of Exhibit 1, Plaintiff sold $3 million notional 10 Year Treasuries at the manipulated price of 100-16. 83 milliseconds later, Plaintiff bought $3 million notional 10 Year Treasuries at a price of 100- 16.5 for a loss of $468.75. Given adequate time to re-plead, Plaintiff can add the exits and loss amounts to each line of the spreadsheet. In those instances where Plaintiff hedged the position it entered into as a result of the manipulation, (as opposed to directly exiting the treasury security purchased or sold at the manipulated price) Plaintiff is prepared to prove the net loss of the combined transactions. Moreover, Plaintiff can and will plead that there appear to have been no, and it is unlikely there could have been, intervening market events that caused the Plaintiff's loss. Plaintiff would plead "that the average time from purchase or sale of a manipulated treasury to exit is less than one minute, and the majority of instances the time is fractions of a second." Consequently, the dissipation of the manipulation resulting in the market returning to non-manipulated prices, caused Plaintiff's loss. Accordingly, unless this Court vacates the judgment, and allows Plaintiff to amend its complaint, manifest injustice will result because facts exist to sufficiently plead loss causation. 8 Case: 1:16-cv-04991 Document #: 44 Filed: 04/20/17 Page 9 of 10 PageID #:340 V. Conclusion For the foregoing reasons, this Honorable Court should vacate the Judgment entered March 23, 2017; grant Plaintiff leave to file a Second Amended Complaint; and grant such other and further relief as it deems fair and just. Dated: April 20, 2017 Respectfully submitted, CP Stone Fort Holdings, LLC /s/ James L. Kopecky James L. Kopecky (6225359) Daryl M. Schumacher (6244815) Martin Doyle (6198322) Kopecky Schumacher Rosenburg PC 120 N. LaSalle St. Suite 2000 Chicago, IL 60602 Phone: (312) 380-6631 Fax: (312) 268-6493 www.ksrpc.com 9 Case: 1:16-cv-04991 Document #: 44 Filed: 04/20/17 Page 10 of 10 PageID #:341 Certificate of Service The undersigned attorney hereby certifies that, on April 20, 2017, he caused true and correct copies of the foregoing document to be served upon all counsel of record via the Court's CM/ECF System. /s/ James L. Kopecky James L. Kopecky (6225359) Daryl M. Schumacher (6244815) Martin Doyle (6198322) Kopecky Schumacher Rosenburg PC 120 N. LaSalle St. Suite 2000 Chicago, IL 60602 Phone: (312) 380-6631 Fax: (312) 268-6493 www.ksrpc.com 10