Broker-Dealer Litigation - Greenberg Traurig LLP

G. Liabilities Involving Clearing Brokers
G.
Katz v. Pershing, LLC, 2011 U.S. Dist. LEXIS 94107 (D. Mass. Aug. 23, 2011).
Plaintiff investor, on behalf of herself and those similarly situated, brought suit against
defendant clearing broker alleging its use of a proprietary software program made investor’s
non-public personal information (NPPI) vulnerable to unauthorized access by third parties.
Plaintiff alleged violations of Massachusetts Unfair and Deceptive Trade Practices Act, Mass.
Gen. Laws ch. 93A; various other state unfair trade practices statutes, including Chapter 93H;
breach of express and implied contract; negligent breach of contract; and unjust enrichment. The
court found that plaintiff failed to establish statutory standing under Massachusetts Unfair and
Deceptive Trade Practices Act, as she alleged only potential, not actual misappropriation of
NPPI and thus failed to show any injury-in-fact. This divested the court of subject matter
jurisdiction. The court also found that Chapter 93H does not include a private right of action and
may be enforced only by the State Attorney General. Plaintiff did not have standing as a thirdparty
beneficiary of the contract between the introducing firm and defendant clearing broker, as
the contract expressly stated that it was not intended to confer any benefits on third parties,
including customers. Plaintiff’s implied-in-fact contract claims also failed, as defendant was
already required to safeguard NPPI pursuant to its contract with the introducing broker, and any
alleged promise to plaintiff to do the same was thus not valid consideration. Finding no express
or implied contract existed, the court dismissed plaintiff’s negligent breach of contract claim.
Finally, plaintiff’s unjust enrichment claim was dismissed because she failed to allege that
defendant requested, or that plaintiff conferred, any benefit on the defendant. Defendant’s
motions for lack of subject matter jurisdiction and failure to state a claim were thus granted.
Alki Partners, L.P. v. Vatas Holdings GmbH, 769 F. Supp. 2d 478 (S.D.N.Y. 2011).
Plaintiffs, hedge funds, brought suit against various defendants alleging defendants
created and carried out a market-manipulation scheme to inflate the price of a stock. The stock
was traded on the over-the-counter bulletin board (“OTCBB”). The stock collapsed, causing
plaintiffs to sustain large losses. Plaintiffs alleged that one defendant, a limited liability
company, purposely avoided acquiring shares of the stock on the open market by instructing
others to purchase large blocks of shares of the stock with the understanding that the company,
through institutions in Europe, including a co-defendant investment bank, would thereafter
repurchase the shares in an off-market transaction on a delivery-versus-payment (“DVP”) basis.
To conduct a DVP trade, plaintiffs had their clearing broker deliver the shares to the investment
bank which would pay the clearing broker for the shares upon their receipt. Defendants brought
motions to dismiss for failure to state a claim. The court found that plaintiffs could not claim
their damages were caused by reliance on the assumption of an efficient market, as OTCBB had
never been held as such. The court held that the complaint failed to sufficiently allege scienter
with regard to the investment bank and its broker since the only profit these defendants received
were the normal transaction costs, which courts have held insufficient to establish motive. The
court found plaintiffs’ failure to allege scienter also caused their Section 10(b) claim, under the
Securities Exchange Act of 1934, based on misstatement or omission, to fail. The court also held
G.
230