CHICAGO (CN) – An Illinois appeals court revived a hedge fund’s claim that the Chicago Board Options Exchange wrongly leaked its plan to lower the price of an option to favored investors before the news was publicly announced.
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On December 20, 2010, Platinum Partners Value Arbitrage Fund purchased 50,000 India Fund options from John Does.
One week later, the Chicago Board Options Exchange (CBOE) and the Options Clearing Corporation (OCC) announced it planned to reduce the price of India Fund options by $3.78, effective December 29.
However, before the public announcement, an unknown employee of either the Exchange or Options Clearing allegedly told the Does that India Fund options would soon be downgraded, leading them to sell their options to Platinum Partners before the price dropped.
Platinum Partners sued the two organizations for fraud, but the district court dismissed the fund’s complaint, ruling that the Exchange and Options Clearing Corp. were immune from suit as self-regulatory organizations.
In a 2-1 decision, the appellate court reversed the lower court’s decision, finding that “while the price adjustment itself may have been a regulatory decision, the manner in which it was disclosed – privately and prematurely – to the John Doe defendants was not.”
Writing the majority opinion, Circuit Judge Robert E. Gordon said, “The doctrine of regulatory immunity allows SROs [self-regulatory organizations] the ability to exercise their powers without fear that their discretionary decisions will lead to litigation. However, SROs do not have complete immunity from lawsuits.”
He continued: “In addition to its quasi-governmental functions, defendants CBOE and OCC have a private, for-profit business, and in the private disclosure of the price-adjustment decision to the John Doe defendants, they were acting in their private capacity and for their own corporate benefit. Therefore, this non-public announcement cannot be construed as conduct under the delegated authority of the Securities Exchange Act of 1934 and thus cannot be protected by the doctrine of regulatory immunity.”
Gordon also found that Platinum Partners sufficiently stated a claim under the Illinois Consumer Fraud Act. “(T)he private disclosure of the price adjustment information would be a material omission and a deceptive act by defendants CBOE and OCC. Plaintiff claims that defendants intended for the rest of the market to rely on the fact that no such information had been privately disclosed. The deception occurred in the course of trade or commerce, and it proximately caused actual damage to plaintiff,” Gordon said.But in a dissent, Circuit Judge Bertina Lampkin wrote, “When a court determines whether conduct is regulatory, the court must not inquire into the methods or motives behind the act; immunity is not dependent upon the propriety of the SRO’s specific acts incident to the exercise of a regulatory power. Accordingly, plaintiff’s allegations of impropriety concerning defendants’ announcement – i.e., that the announcement was tainted by fraud or was not sufficiently public because defendants were motivated to generate profits – are irrelevant.”