Second Circuit Clarifies That Allegations Of Direct Fraudulent Representations Are Not Necessary For Market Manipulation Claims Under Section 10(b) And Rule 10b-5

In Fezzani v. Bear, Stearns & Co., Inc., No. 14-3983, 2015 WL 400547 (2d Cir. Jan. 30, 2015) ("Fezzani II"), the United States Court of Appeals for the Second Circuit clarified its opinion in Fezzani v. Bear, Stearns & Co., Inc., 716 F.3d 18 (2d Cir. 2013) ("Fezzani I"), ruling that its earlier decision did not require a plaintiff alleging market manipulation in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, to plead that a defendant directly communicated false information to a victim. The Second Circuit's decision in Fezzani II provides much-needed clarity on the standard for liability in market manipulation cases.

Background

The Fezzani decisions (see blog article on Fezzani I here) arise out of a "pump and dump" scheme executed by now-defunct broker-dealer A.R. Baron ("Baron"). Defendant Issac R. Dweck, one of Baron's principal investors, furthered the scheme by allowing Baron to "park" penny stock in his accounts in exchange for Baron's promise to repurchase the securities at a higher price. These fraudulent transactions created the illusion that the parked securities were part of an active, rising market when, in reality, the "market" was nothing but a series of artificial trades arranged by Baron to generate the façade of a market.

Plaintiffs, a group of individual investors, sued Dweck and others for market manipulation in violation of Section 10(b) and Rule 10b-5. Plaintiffs sought to impose liability on Dweck for all of Baron's deceptive activities, not just for damages caused by the fraudulent transactions.

District Court Dismisses Market Manipulation Claim Against Dweck

The United States District Court for the Southern District of New York dismissed the market manipulation claim against Dweck, see Fezzani v. Bear, Stearns & Co. Inc., 592 F. Supp. 2d 410 (S.D.N.Y. 2008) (Crotty, J.), holding that plaintiffs failed to state a claim under Section 10(b) and Rule 10b-5 because their allegations that Dweck substantially participated in the fraudulent transactions did not show how plaintiffs relied on misrepresentations or omissions by Dweck, as required by the United States Supreme Court's decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) (see blog article here). Plaintiffs appealed.

Fezzani I: Second Circuit Affirms Dismissal of Market Manipulation Claim...