In a divided 2-1 ruling, the Illinois Appellate Court has decided that Platinum Partners Value Arbitrage Fund LP can sue the Chicago Board Options Exchange and the Options Clearing Corporation for allegedly telling certain traders about a downward adjustment made to the price of certain mutual fund options. The ruling reverses a lawyer court’s decision and concludes that the two SROs did not act in a regulatory capacity when they privately revealed this information to certain John Doe defendants before the news was made public.
Platinum Partners Value Arbitrage Fund, which is a hedge fund, contends that in late 2010, it bought 50,000 India Fund Inc. (IFN) options from the John Does. Soon after, Options Clearing Corporation and Chicago Board Options Exchange decided to downgrade the India Fund’s series option contracts strike price by $3.78. An employee at one of the SRO’s allegedly told certain market participants about this adjustment before the public was notified.
The hedge fund then proceeded to file a securities fraud lawsuit against Chicago Board Options Exchange and Options Clearing Corp. accusing them of Illinois statutory and common law violations, while contending that they caused it to suffer harm because it bought the IFN options right before the price adjustment was publicly disclosed. The two organizations countered that as SROs, they were immune from such lawsuits. The lower court agreed with their claim of immunity.
The appellate court, however, disagrees. In his majority opinion, Circuit Judge Robert E. Gordon stressed that SROs are not completely immune from lawsuits and that absolute immunity only stands when the alleged conduct in question is one that is a disciplinary, regulatory, or quasi-governmental prosecutorial function. The court noted that while the plaintiff acknowledged that the decision to change IFN’s strike price was a regulatory one, how the change was disclosed-early and in in private to the John Doe defendants-wasn’t and didn’t serve a purpose that was governmental or regulatory. Seeing as SROs, in addition to fulfilling quasi-governmental duties also have a for-profit business that is private, the court found that when the private disclosure was made to the John Doe defendants, Chicago Board Options Exchange and Options Clearing Corp. were behaving in a “private capacity and for their own corporate benefit.” As a result, the non-public notification to the John Doe defendants cannot be considered conduct under the 1934 Securities Exchange Act’s delegated authority and therefore “cannot be protected by the doctrine of regulatory immunity.”
Judge Gordon also determined that Platinum Partners did a sufficient job of stating a claim, under the Illinois Consumer Fraud Act, that disclosing the price adjustment in private was a “material omission and a deceptive act” by the two SROs. The hedge fund claimed that the two organizations meant for the rest of the market to depend on the fact that the information hadn’t been already privately disclosed to anyone. The judge said that the deception occurred during commerce and trade and was the proximate cause of damage to the plaintiff.
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Shepherd Smith Edwards and Kantas, LTD, LLP is a securities law firm that represents investors throughout the US, as well as clients abroad with claims against US-based financial firms and representatives.