Courtesy of
@hoffmann6383 on X
Oral Argument Update
$NWBO v.
@citsecurities , et al, Case No 1:22-cv-10185-GHW-GWG The Spoofing Lawsuit NWBO’s lawsuit alleges 2,849 episodes of spoofing
$NWBO's stock over a five year period by market makers Canaccord Genuity LLC, Citadel Securities LLC, G1 Execution Services LLC, GTS Securities LLC, Instinet LLC, Lime Trading Corp., and
@VirtuFinancial (collectively "Defendants").
Defendants' MTD NWBO's First Amended Complaint
See my prior posts for a summary of the legal briefings.
On 11-14-23 Magistrate Judge Stein heard oral arguments on Defendants' Motion to Dismiss (MTD)
$NWBO's First Amended Complaint. In this post I’ll give a quick summary of the 101 page transcript of the oral arguments.
Sorry for the length of this post, but the transcript was 101 pages and I did my best to summarize succinctly
Lead Defendants attorney: William Burck ("Defense Counsel")
https://quinnemanuel.com/attorneys/burck-william/
Lead Plaintiff attorney: Laura Posner ("Plaintiff Counsel")
https://cohenmilstein.com/professional/laura-h-posner
Magistrate Judge Honorable Gary Stein
https://nysd.uscourts.gov/hon-gary-stein
Defendants Opening Defense Counsel: “Before I go into the road map, just in a nutshell, from the defendants' perspective, your Honor, this is a case about the plaintiffs trying to turn regular market activity, normal behavior by market makers into wide scale, unbounded spoofing.”
NWBO's Opening
Plaintiff Counsel: “In their initial motion to dismiss, the defendants conceded that Harrington, Kessev Tov and CP Stone were on all fours with the fact pattern here; that they are a reason why this Court should dismiss this case. In the case of Harrington, they were referring to a discovery order, not the actual motion to dismiss decision. With regard to CP Stone, they were referring to the first of three decisions. And in Kessev Tov, they just ignored the second decision. But they conceded that the facts alleged in all those cases were nearly identical to our fact pattern alleged here, and that's why they wanted the Court to follow the rulings in those cases. When we brought to your Honor's attention the fact that there were subsequent decisions in that case or different decisions, addressing different aspects of the litigation in those cases, suddenly those cases are wholly different than what we allege in our complaint. I don't think that is credible. And quite frankly, they ignore the facts in most of those cases.”
“And they also try to claim that somehow their behavior is routine unlawful market-making activity. It certainly may very well be routine for these defendants. I think that's actually quite likely. What is unlikely is that it is lawful, and numerous courts have found it is not.” “We allege in specific detail how imbalanced their order books were. Defendants say nothing about that.”
“With regard to the high concentration of large cancellations after a small executing purchase, multiple courts…all find that that is indicia of market manipulation. Defendants literally say nothing about that.”
“They executed 2,000 shares in executing purchases while not executing any sell side orders. That was a fact that the court looked at in Lek. Defendants say nothing about that here.”
Defendants Attempt to Differentiate Harrington
Defense Counsel claims that the price in Harrington went down 90% in the alleged period whereas NWBO share price went up.
Private Securities Litigation Reform Act (PSLRA)
Judge Stein Interrupts Defense Counsel and states that PSLRA has a heighted pleading standard for scienter, but none of the other elements. Defense Counsel agrees.
Timeline of Spoofing Episodes
Defense Counsel claims every other spoofing case that survived a MTD dealt with spoofing episodes that lasted milliseconds but
$NWBO's spoofing episodes allegedly lasted minutes.
Judge Stein: “But in fact, they do allege that the trades were canceled in at least one specific incident beginning in milliseconds and in most of the other example episodes within less than five seconds. So it's not true when you say that they allege that the orders, it took two minutes to cancel, when you say they don't allege cancellations happened within seconds or even at least in one instance milliseconds.”
Plaintiff Counsel: “… case law does not suggest that the entire spoofing episode has to be within two minutes. The case law specifically addresses the short time between executing purchase and the cancellation, which is exactly what we allege in the complaint.”
Price Effect of Spoofing
Defense Counsel claimed that there is no understanding of what the spoofing effect was on the share price as required by law.
Defense Counsel stated that the spoofing theory was flawed because defendants weren’t trying to drive the price downwards, but instead the share price went up.
Judge Stein stated that the data Defendant Counsel is using to make this point is insufficient. Judge Stein further stated, “It sounds to me like there's a dispute over the interpretation of the data and what it means.”
Plaintiff Counsel: “What is required is that we allege that the conduct depressed the price below its natural price as a result of the spoofing activity.”
Order Cancellation
Defense Counsel claims spoofing requires you cancel the orders and NWBO never identified a single cancelled order.
Judge Stein stated, "They very specifically allege in the example episodes that beginning at a certain moment in time the baiting orders were canceled… It seems like at this stage, on the motion to dismiss, that is something I need to accept as true.”
Plaintiff Counsel: “I think we're very specific in the complaint down to milliseconds of when orders were placed and canceled and/or modified.”
Defendants Trading for Themselves and/or on Behalf of Clients
Defense Counsel starts to talk about market makers trading for themselves and/or on behalf of clients and Judge Stein interrupts and ask if this is the same situation as Harrington II. Defense Counsel agrees. Judge Stein cuts him off and ask “Are you suggesting I should disagree with Judge Schofield on that issue?” Defense Counsel says no, but he can distinguish Harrington II. Judge Stein asks, on the particular issue of whether trading was done on behalf of clients, can you differentiate. Defense Counsel alleges Harrington identified the clients and NWBO did not.
Judge Stein asked where in Harrington did the plaintiffs identify the specific clients. Judge Stein questions whether at this stage of the litigation NWBO needs to differentiate whether the trading was on behalf of defendants, their clients or both.
Plaintiff Counsel: "Not only have courts held, including in Harrington, twice, that the fact that you are trading on behalf of a client somehow exculpates you from liability is simply incorrect.”
Motive
Defense Counsel: “The way they make money is on fees and commissions off of trading. Trading up, down. Doesn't matter to them. They make it off of the fees, commissions for trades. There's no allegation, your Honor, at all that they had any motive to favor spoofers over nonspoofers in the market. They didn't make any more money from helping somebody spoof.”
Judge Stein asked Defense Counsel to differentiate from Harrington.
Defense Counsel stated Harrington is different b/c in
$NWBO's case there is no explanation of how “seven defendants coordinated to go after this same very low-profile stock, exact same scheme, exact same stock, exact same time period.”
Defense Counsel stated that Defendants only profited from the scheme by $94,458.68 in total. A profit of $94,000 divided by 7 market makers is not going to meet the standard required to show motive under the PSLRA.
In the discussion about profits and how they were calculated the Judge Stein stated, “It seems like apples and oranges.”
Plaintiff Counsel on Defendants' claim they only profited a collective $94k: “…is that it doesn't reflect the amount they then profited from either those purchases and/or short positions that they otherwise had in the security when they then sold…”
Plaintiff Counsel stated this is a question for the experts at a later stage of the trial.
Plaintiff Counsel also stated, “we're specifically here talking about the client trades and that they had a financial incentive to spoof the shares in order to execute client trades at artificially favorable prices and, therefore, gain or retain the trading business of brokerage clients.”
Defendant's Sale of Shares During Spoofing Episodes
Defense Counsel stated that the Defendants did sell shares during the alleged periods of spoofing which shows it wasn’t in fact spoofing.
Judge Stein: “Also, in Harrington, it seemed to me that there was similarly an allegation or a concession -- again, they had discovery in that case, so I guess they knew more facts -- that sometimes there were sales during the spoofing period, but that didn't seem to dissuade Judge Schofield from upholding the complaint.”
Parking
Defense Counsel stated that there was no parking. The parked prices were actually the best prices, thus no spoofing.
Plaintiff Counsel on parking: “The case law actually is quite clear that you don't have to allege parking in order to successfully plead a market manipulation case. And the same allegations of parking that we allege in our complaint are the same types of allegations of parking that have been sustained by numerous courts, Harrington, CP Stone, Oystacher, Mohan…But what I think defendants' presentation missed is that there is no obligation that the parking transaction be the worst offer in the numerous orders that you saw in those charts.”
NWBO’s Price Decline Formula
Defense Counsel stated that
$NWBO's price decline formula was inaccurate.
Judge Stein seemed to think the formula was fine and it supported
$NWBO's position to get past the pleading stage.
Plaintiff Counsel stated that they used a few formulas and ways to calculate price decline as a result of spoofing. Plaintiff Counsel claimed that Defense Counsel was not performing these calculations correctly. Plaintiff Counsel specifically pointed to an incorrect number used on the Defendants' slides.
Reliance and Whether the OTC is an Efficient Market
Defense Counsel: “…no court has actually said that the OTC market on its own is an efficient market.”
Judge Stein: “There usually isn't evidence at the complaint stage.”
Plaintiff Counsel: “We allege the specific Cammer factors…I've been doing this for 20 years. I don't remember ever having to plead in more detail the specific allegations of reliance. It's a question for expert testimony post-discovery, and we would be unable, absent an expert report, to put together specific, detailed allegations about the efficiency of this specific OTC market with regard to Northwest Bio.”
Judge Stein: "Well, the best I can tell, there seems to be a split in authority, frankly…shouldn't you have to allege something more than the Cammer factors, you know, the boilerplate factors themselves without any supporting facts? You don't allege any, I don't believe, supporting facts in paragraph 297, or whatever…Maybe typically all you do is allege the boilerplate Cammer factors. My question is should I require more at the pleading stage because this is an OTC case?”
Plaintiff Counsel: “I do want to point out, though, that in paragraph 297(a) through (f), we do specifically plead some of these facts.”
Manipulative Conduct
Plaintiff Counsel: “What the courts require is that the court look at all of these allegations in total, and where they all seem to be indicating, I don't think there can be any real dispute that the vast bulk of the indicia that we allege in the complaint are all moving in only one direction.” OTC Link Only Showing One Order at a Time
Plaintiff Counsel: “…what matters is what the market sees and what the market thinks is happening. Right? They see the orders flashing as they come, which is encouraging the market to move in a specific direction.”
Loss Causation
Plaintiff Counsel states that you can plead it one of two ways, "Either the sales happened so close in time to the spoofing episodes that the court may reasonably infer price artificiality affecting the trading, or two, information that shows that the effect of the defendants' spoofing was persistent. We do both in the complaint.”
Plaintiff Counsel further stated that “…in Harrington the window of time between the sales by the company and the spoofing was 15 minutes, and Harrington said that that was sufficient.”
Plaintiff Counsel cited to a nobel prize winning economist for the proposition that, "In addition to those kind of temporal, close temporal connections that we plead in the complaint, we also plead the second way that Gamma suggests you could plead loss causation, which is that there was a persistent, long-term impact from defendants.”
Magistrate Judge Stein
Comment near end of hearing on Page 94/101.
Judge Stein: “You don't, but if you have a gazillion, and I'm not being literal, canceled orders and a gross imbalance in the sell side versus the buy side on the book and some of the other factors that plaintiff has talked about, it seems like you could infer that there was an intent to drag down the price.”
Interesting Comments:
Plaintiff Counsel: “So, what's interesting in this case, typically in spoofing cases you see the price being spoofed up and down. Not always but a lot of the times. Here, all of the spoofing is one direction, and it's down.”
Plaintiff Counsel: “We don't know the short positions…Because we have no way to have access to that information absent discovery.”
Plaintiff Counsel: “But the expectation -- right -- this is a company that has successfully passed a phase III trial for a personalized cancer vaccine that has demonstrated that it significantly, and statistically significantly, can extend life for patients with glioblastoma. They believe that that same technology can be used for all cancers. The idea that somehow the stock price in this company would not reflect positively to that type of information coming out into the market but basically be stymied or flat or, you know, little bumps and go back down almost immediately thereafter is not reflective of a market that is truly reacting to positive news.”
My Thoughts
First, as to our new judge. It's always concerning when getting a new judge on a case. Especially after seeing your last judge slap Defendants hands a few times for inappropriate behavior. With a new judge you're likely wiping the slate clean on Defendants' past behavior. All that being said, I thought our new judge did great work at the oral argument. He obviously read and studied the briefings, even correcting both sides on misstatements as to what was in their own filings. The judge asked pointed questions to both sides. You could tell the judge was knowledgeable in this area. This is exactly what you want for this type of complex case.
As to the oral argument itself, I believe it went very well for NWBO. Defendant Counsel was constantly interrupted and his points were often dismissed or countered by Judge Stein. The Defense Counsel often times lacked cites to relevant authorities for his points. Defense Counsel was cut off before he could finish his slides at one hour and fifteen minutes.
On the other hand, Plaintiff Counsel's points were often, if not always, supported by relevant authority. She was brief and to the point. There was only one exchange with Plaintiff Counsel that gave me concern. The exchange can be found under the above sectioned titled, "Reliance and Whether the OTC is an Efficient Market". The Court asked Plaintiff Counsel if they should require NWBO to plead supporting facts under the Cammer factors. If the Court required this then NWBO would have to amend the complaint and we would be looking at a 6-12 month delay. Yet, Judge Stein answered his own question earlier in the hearing when he stated “There usually isn't evidence at the complaint stage.” Thus, stating the boilerplate allegations would be sufficient at this pleading stage.
I believe the MTD will ultimately be denied, allowing NWBO to proceed to discovery, but with all litigation, results are uncertain and can never be guaranteed.
Where do we go from here? Judge Stein's opinion will appear on Pacer anytime between today and 8 months from now. The last Harrington MTD took 4 months for the judge to issue an opinion. I expect our decision to be quicker than that. I'd guess 1-4 months for a ruling. If the MTD is denied then we will have a scheduling conference to set the discovery dates.
Disclaimer: Not legal advice!