Harrington Global Opportunity Fund, Limited v. BofA Securities, Inc.

Background

Harrington Global Opportunity Fund, Limited brought claims against U.S. and Canadian broker-dealers and unidentified entities. The complaint asserted claims under Section 10(b) of the Securities Exchange Act and Rule 10b-5, Section 9(a)(2) of the Exchange Act, unjust enrichment, common-law fraud, conspiracy to commit fraud, and aiding and abetting fraud.

The complaint alleged that the defendants manipulated the price of Concordia International Corporation shares during a period in 2016 when Harrington sold more than eight million shares. The alleged scheme involved two forms of conduct. First, the spoofing defendants allegedly placed large sell orders that they did not intend to execute, creating a misleading appearance of selling pressure, while placing smaller buy orders intended to execute at lower prices. Second, the short-selling defendants allegedly engaged in abusive naked short selling, meaning they sold shares without first borrowing them and allegedly failed to deliver shares to the buyers.

The defendants moved to dismiss for failure to state a claim under Rule 12(b)(6), which tests whether a complaint alleges enough facts to support a legally plausible claim. The Canadian defendants also moved to dismiss for lack of personal jurisdiction under Rule 12(b)(2), meaning they argued that the court lacked power over them.

Personal Jurisdiction

The court denied the Canadian defendants’ personal-jurisdiction argument at this stage. It found that the complaint made a sufficient initial showing of specific personal jurisdiction by alleging suit-related conduct in New York and conduct directed at the United States.

The complaint alleged that CIBC Canada, UBS Canada, and TD Canada traded Concordia shares on U.S. exchanges during the relevant period, and their declarations did not deny those allegations. More broadly, the complaint alleged that the Canadian defendants intended to manipulate Concordia’s share price on U.S. exchanges, including NASDAQ in New York. The court held that these allegations were sufficient to proceed under an effects-based theory of jurisdiction.

Spoofing Claims

The court held that the complaint adequately stated market-manipulation claims under Sections 10(b) and 9(a)(2) based on spoofing. It found that the complaint identified the alleged participants, described the algorithmic trading programs, and provided dates, times, and examples of allegedly manipulative orders and trades.

The court also found sufficient allegations of fraudulent intent, or scienter. The complaint alleged that baiting orders were placed and canceled within milliseconds, canceled after smaller legitimate orders executed, placed behind smaller orders from other traders, and substantially larger than the orders the defendants purchased. The complaint alleged approximately 100,000 spoofing events by the Canadian spoofing defendants and approximately 49,000 by the U.S. spoofing defendants, with coordinated activity on many trading days.

The court found the allegations of loss causation sufficient. Loss causation means the required connection between the alleged misconduct and the plaintiff’s financial loss. The complaint alleged that spoofing occurred frequently during the relevant period, that Harrington traded on some of those days, and that the alleged conduct had both immediate and cumulative effects on Concordia’s share price.

The court also found reliance adequately alleged. Harrington alleged that it sold Concordia shares while relying on the assumption that the market was efficient and free from manipulation. The court rejected the defendants’ argument that Harrington’s earlier concerns about Concordia’s price volatility eliminated that allegation.

The spoofing claims were timely under the two-year limitations period for the Exchange Act claims. The court credited the complaint’s allegations that Harrington conducted a lengthy investigation and obtained sufficient data to plead the claims in May 2020, after which it filed the action within two years. The court also held that the claims against the Canadian spoofing defendants fell within the territorial reach of the Exchange Act because the complaint alleged U.S. trading and an intent to affect prices on U.S. exchanges.

Short-Selling Claims

The court dismissed the claims based on abusive naked short selling. It explained that high-volume short selling, and even naked short selling, is not automatically manipulative. The complaint did not identify specific instances in which a defendant failed to deliver shares after a short sale. Its allegations that the defendants created “fictitious shares” were also conclusory and did not explain how such shares were created.

The court further held that the complaint did not plead scienter as to the short-selling defendants. High trading volume, a high percentage of short sales, and the alleged timing of short selling and spoofing did not establish fraudulent or reckless intent. The complaint also did not identify a specific violation of Regulation SHO or a specific failure to deliver shares. Accordingly, all claims against UBS US, UBS Canada, Merrill Pro, SocGén US, and SocGén Canada were dismissed, and the short-selling claims against Merrill US, Merrill Canada, John Doe U.S., and John Doe Canada were dismissed.

Common-Law Claims

The court dismissed the unjust-enrichment claim because Harrington did not respond to the defendants’ argument that the claim was untimely, which the court treated as abandonment of that claim.

The court dismissed the common-law fraud claim because it was based at least partly on the inadequately pleaded short-selling theory and because the complaint did not allege that the trading activity involved a material misrepresentation or omission under New York law. The conspiracy-to-commit-fraud and aiding-and-abetting-fraud claims were also dismissed because each required an underlying common-law fraud claim, which the complaint did not adequately plead.

Disposition

Judge Schofield’s order states that the defendants’ motion to dismiss was GRANTED IN PART and DENIED IN PART. The spoofing-related claims under Sections 9(a) and 10(b) survived against CIBC US, Merrill US, TD US, CIBC Canada, TD Canada, Merrill Canada, John Doe U.S., and John Doe Canada. The court directed the Clerk to close the motion at Docket No. 72 and terminate UBS US, UBS Canada, Merrill Pro, SocGén US, and SocGén Canada from the case.