Phunware, Inc. v. UBS Securities LLC

Background

Phunware, Inc. asserted claims under Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 and under New York common law against UBS Securities LLC, which the opinion describes as a broker-dealer. Phunware alleged that UBS engaged in “spoofing,” a form of market manipulation involving large false orders intended to move a security’s price, followed by transactions at the affected price and cancellation of the false orders.

According to the complaint, between January 5, 2021, and March 15, 2023, UBS placed large sell orders for Phunware stock, bought smaller quantities at allegedly depressed prices, and then canceled the sell orders. The complaint described six examples. It also alleged that UBS’s order-to-purchase ratio, cancellation rate, order duration, and trading after the purchases differed from other market participants and from the conduct expected of a legitimate market maker. Phunware alleged that UBS purchased 647,119 shares at prices depressed by its activity and that Phunware sold more than 34 million shares at depressed prices.

UBS moved to dismiss the complaint. On a motion to dismiss, the court generally accepts well-pleaded factual allegations as true, but a securities-fraud complaint must satisfy heightened requirements for describing the alleged fraud and supporting a strong inference that the defendant acted with the required state of mind.

Court’s Analysis

The court held that the complaint adequately pleaded a manipulative act. It identified the alleged spoofing conduct, UBS’s role, the timing of the conduct, and its alleged effect on Phunware’s stock price. The six detailed episodes, together with allegations about unusual order volumes, cancellations, and UBS’s trading behavior after its purchases, were sufficient at this stage. The court rejected UBS’s arguments that the complaint improperly combined trades involving different actors or relied only on canceled orders.

The court also held that the complaint adequately pleaded scienter, meaning the required state of mind for securities fraud. The alleged large imbalance between UBS’s sell orders and its actual sales and purchases, rapid cancellation of sell orders after purchases, unusually high cancellation rates, and departures from ordinary market-making behavior created a strong inference of conscious or reckless misconduct. The court did not need to decide whether the complaint also adequately alleged motive and opportunity.

The court ruled, however, that the complaint did not adequately plead loss causation—the required connection between the alleged misconduct and Phunware’s economic loss. Phunware alleged that it sold stock shortly after some spoofing activity, but its transaction table did not show sales on two of the dates it identified. On another date, the alleged purchases occurred about two hours before Phunware’s sales, and the complaint did not provide enough facts to show that the spoofing’s immediate price effect lasted that long. The court also rejected Phunware’s separate theory that the spoofing had a persistent, long-term effect on the stock price because that theory relied on conclusory statements and was not adequately supported by the cited expert report or other allegations.

Because loss causation was required for each claim, the failure to plead it adequately required dismissal of the federal securities claims and the New York common-law fraud claim. The court did not decide whether Rule 9(b)’s heightened pleading standard applied to loss causation because the complaint failed even under the more forgiving general pleading standard.

Disposition

Judge Dale E. Ho granted UBS’s motion to dismiss. The court stated that Phunware may seek leave to amend if it has a good-faith basis for adequately pleading loss causation. By April 17, 2024, Phunware could file a letter motion of no more than five pages, attaching a proposed amended complaint showing changes in redline and explaining how the changes would cure the identified deficiencies. If Phunware did not file such a letter, the case would be terminated. The court directed the clerk to close UBS’s motion.