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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

LAST ATLANTIS CAPITAL LLC, LOLA

LLC, LULU LLC, GOODBUDDY SOCIETY

LLC, FRIENDLY TRADING LLC, and

SPEED TRADING LLC, BRYAN RULE,

BRAD MARTIN, and RIVER NORTH

INVESTORS, LLC,

Plaintiffs,

v.

AGS SPECIALIST PARTNERS, AGS

SPECIALISTS LLC, BEAR HUNTER

STRUCTURED PRODUCTS LLC, BEAR

WAGNER SPECIALISTS LLC, BOTTA

CAPITAL MANAGEMENT LLC, COHEN,

DUFFY, MCGOWAN & CO. LLC, COHEN,

DUFFY, MCGOWAN LLC, D.A. DAVIDSON

& CO., INC., EQUITEC PROPRIETARY

MARKETS, LLC, EQUITEC STRUCTURED

PRODUCTS, LLC, EQUITEC TRADING

LLC, EQUITEC-PREMIER LLC, EQUITECBROWN LLC, EQUITEC-FELDMAN LLC,

EQUITEC-FURMAN LLC, EQUITECSCHWARTZ LLC, GENEVA DPM LLC,

GROUP ONE TRADING LP, KNIGHT

FINANCIAL PRODUCTS LLC n/k/a

CITIGROUP DERIVATIES MARKETS,

INC., KNIGHT TRADING GROUP, INC.,

MDNH TRADERS LLC, MDNH PARTNERS

LP, MORGAN STANLEY, MORGAN STANLEY

DW, INC., MORGAN STANLEY & CO.,

INC., SLK-HULL DERIVATIVES LLC,

GOLDMAN SACHS EXECUTION AND

CLEARING, LP f/k/a SPEAR, LEEDS &

KELLOGG LP, n/k/a GOLDMAN SACHS

EXECUTION AND CLEARING, LP

SPECIALISTS DPM LLC, SUSQUEHANNA

INT ERN ATI O N A L G R O U P LL P ,

SUSQUEHANNA INVESTMENT GROUP, TD

OPTIONS LLC, VAN DER MOOLEN

OPTIONS USA LLC, VAN DER MOOLEN

HOLDINGS NV, and WOLVERINE TRADING

LLC,

Defendants.

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MEMORANDUM OPINION AND ORDER

Plaintiffs Last Atlantis Capital LLC, Lola LLC, Lulu LLC,

Goodbuddy Society LLC, Friendly Trading LLC, Speed Trading LLC,

Bryan Rule, Brad Martin, and River North Investors, LLC allege

numerous violations of federal and state law by defendants.

Defendants include several securities brokers and/or dealers,

collectively, the “specialist defendants,” and six entities

alleged to own and/or control certain specialist defendants, the

“affiliates.” The amended consolidated complaint alleges that

the specialist defendants violated § 10b of the Exchange Act and

SEC Rule 10b-5 (a), (b) and (c) (Claim I); the affiliates

violated § 10b of the Exchange Act and SEC Rule 10b-5 (a), (b)

and (c) (Claim II); the specialist defendants are in breach of

contract (Claim III); all defendants have engaged in common law

fraud (Claim IV); the specialist defendants breached their

fiduciary duty to plaintiffs (Claim V); all defendants violated

the Illinois Consumer Fraud and Deceptive Practices Act, 815 Ill.

Comp. Stat. 505/2 (Claim VI); all defendants have engaged in

tortuous interference with the plaintiffs’ business relationships

(Claim VII); and all defendants have engaged in tortious

interference with contracts (Claim VIII).
Plaintiffs’ object to this motion as untimely. However, 1

they also rely heavily on recent Seventh Circuit precedent

interpreting the Tellabs decision in arguing against dismissal. 

I do not find defendants’ motion prejudices plaintiffs in light

of the significant change in the law as a result of Tellabs and

the recent (and, according to plaintiffs, arguably beneficial)

developments in Seventh Circuit law. See Bank of Waunakee v.

Rochester Cheese Sales, Inc., 906 F.2d 1185, 1191 (7th Cir.

1990).

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Presently before me is defendants’ motion to reconsider my

March 22, 2007 order, allowing plaintiffs to file the amended

consolidated complaint (“ACC” or “the complaint”), in light of

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499

(2007). Defendants have previously filed multiple Rule 12(b)(6) 1

motions and therefore general familiarity with the facts, as

alleged in the complaint, is presumed. See Last Atlantis Capital

LLC v. Chicago Bd. Options Exchange, Inc., 455 F. Supp. 2d 788

(N.D. Ill. 2006) (“Last Atlantis II”); Last Atlantis Capital LLC

v. Chicago Bd. Options Exchange, Inc., No. 04 C 397, 2005 WL

3763262 (N.D. Ill. Mar. 30, 2005) (“Last Atlantis I”).

I.

In assessing defendants’ motion to dismiss under FED. R. CIV.

P. 12(b)(6), I must accept all well-pleaded facts in the

complaint as true. Tellabs, 127 S. Ct. at 2509. However,

“[f]actual allegations must be enough to raise a right to relief

above the speculative level.” Bell Atl. Corp. v. Twombly, 550
4

U.S. - -, 127 S. Ct. 1955, 1965 (May 21, 2007); E.E.O.C. v.

Concentra Health Servs., Inc., 496 F.3d 773, 776-77 (7th Cir.

2007).

Plaintiffs must also comply with the pleading requirements

of the Private Securities Litigation Reform Act (“PSLRA”), which

requires that the complaint specify each allegedly misleading

statement and the reasons why it is misleading. 15 U.S.C. § 78u4(b)(1). The PSLRA also requires that plaintiffs, “with respect

to each act or omission alleged, state with particularity facts

giving rise to a strong inference that the defendant acted with

[scienter]” for claims brought under any section of 10b-5. 15

U.S.C. § 78u-4(b)(2). Scienter is “an intent to deceive,

demonstrated by knowledge of the statement’s falsity or reckless

disregard of a substantial risk that the statement is false.”

Higginbotham v. Baxter Int’l Inc., 495 F.3d 753, 756 (7th Cir.

2007); see also Makor Issues & Rights, Ltd. v. Tellabs Inc., - -

F.3d - -, 2008 WL 151180, at *1 (7th Cir. Jan. 17, 2008) (“Makor

II”). In Tellabs, the Supreme Court held that a “strong

inference” of scienter is one which “must be more than merely

plausible or reasonable — it must be cogent and at least as

compelling as any opposing inference of nonfraudulent intent.”

127 S. Ct. at 2504-05; see also Makor, 2008 WL 151180, at *2.
The 11 defendants are: AGS Specialists LLC (“AGS”), Bear 2

Hunter Structured Products LLC (“Bear Hunter”), Cohen Duffy &

McGowan LLC (“CDM”), Speer Leads and Kellogg LLP, known as

Goldman Sachs Execution and Clearing LLP (“GS”), Group One

Trading, LP (“Group One”), SLK-Hull Derivatives LLC (“SLK-Hull”),

Susquehanna Investment Group (“SIG”), TD Options LLC (“TDO”),

Wolverine Trading LLC (“Wolverine,”), and Knight Financial

Products LLC (“Knight Financial”). Collectively these defendants

are referred to herein as “sanctioned specialists.”

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The allegations in the complaint must be considered collectively.

Tellabs, 127 S. Ct. 2509. 

II.

Defendants contend that plaintiffs’ allegations fail to give

rise to a strong inference of scienter as set forth in Tellabs.

Plaintiffs’ allegations can be generally categorized as follows:

1) defendants’ general motive and opportunity; 2) the American

Stock Exchange LLC (“AMEX”) consent orders implicating 11

specific specialist defendants; 3) allegations that “it was 2

common practice for [d]efendant SIG and all [s]pecialists charged

with maintaining orderly markets in [o]ptions traded on [the]

CBOE as [designated market makers (“DPMs”)] . . . to regularly

identify the [c]learing [f]irms from which [o]rders were sent,

and then disengage the Auto-ex [s]ystem in order to discriminate

against [o]rders sent from [f]irms used by [p]laintiffs and other

[direct access customers (‘DACs’)],” (ACC at ¶21); 4) allegations

that plaintiffs’ receipt of automatic, or prompt manual,
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executions on marketable limit orders was statistically lower

than the rates of executions provided to non direct access

customers; and 5) allegations of actual trades mishandled by

specific defendants during periods identified in the 2006 AMEX

sanctions orders, the SEC Staff Report, and the Battalio Study.

I will examine these allegations and their respective competing

inferences. 

First, as I have already found, plaintiffs’ general

allegations concerning defendants’ financial motive and

opportunity to mishandle plaintiffs’ trades — alone — are not

enough to establish a strong showing of scienter. Plaintiffs’

general allegations describe a situation in which every

specialist has the motive and opportunity to mishandle every

single trade in which a direct access customer has presented a

more competitive bid than their own. Plaintiffs have made

additional allegations, however. 

Second, with respect to the AMEX consent orders, these

specifically implicate only eleven of the defendants. With

respect to these eleven defendants, the complaint sets forth that

they consented to the entry of written findings that they had

individually violated certain SEC Rules and AMEX Exchange Rules

and articles of the AMEX Constitution by improperly handling

orders to buy and sell options on hundreds of occasions during
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specific periods between June 1, 2002 through January 31, 2005.

Plaintiffs argue that although the AMEX sanction orders do not

find that each of the sanctioned defendants acted recklessly or

intentionally, they nonetheless provide a basis for inferring

scienter because if these defendants “truly believed that there

were innocent explanations for each of the thousands of instances

of misconduct cited in the [s]anction [o]rders, they surely would

not have stipulated to contrary findings, nor would they have

paid tens of thousands of dollars in fines.” (Pl. Br. at 15.)

As a preliminary matter, plaintiffs’ explanation in support of

their proposed inference of scienter is not particularly sound.

As conceded by plaintiffs, the violations in question are not

scienter-based but the result of negotiated settlements in

regulatory proceedings. There are additional available

explanations for the violations and settlement which do not

necessarily rise to the level of intentional fraud, such as

system problems or negligence. Defendants also correctly set

forth that the absence of a scienter-based charge lends, at a

minimum, an equally strong inference against scienter. That

said, plaintiffs’ proposed inference of scienter against the

eleven sanctioned specialists, based on the nature of the

specific conduct identified, is “at least as compelling” and

cogent as the competing inferences. 
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Regardless of the strength of the inference of scienter with

respect to the eleven sanctioned specialist, I cannot find “at

least as compelling” the inference that the remaining

unsanctioned defendants had the requisite scienter based solely

on the AMEX orders. Based on the absence of specific regulatory

findings against the remaining defendants, the inference that

they did not engage in this sort of conduct during the identified

period, or at least not significantly, is slightly more

compelling than plaintiffs’ proposed inference: that their mere

presence on the different exchanges and co-existence with the

sanctioned specialists suggest the remaining defendants

necessarily engaged in the same conduct with respect to the

plaintiffs. Therefore, I must take into consideration additional

allegations before concluding there is a strong inference of

scienter against the remaining defendants. 

Third, plaintiffs’ allegations that “it was common practice

of [d]efendant SIG and all [s]pecialists charged with maintaining

orderly markets in [o]ptions traded on the CBOE as [designated

market makers (‘DPMs’)] . . . to regularly identify the

[c]learing [f]irms from which [o]rders were sent, and then

disengage the Auto-ex System in order to discriminate against

Orders sent from Firms used by Plaintiffs and other [direct

access customers],” (ACC at ¶21) is based on a specific
Moreover, although plaintiffs argue Zangrilli is one of 3

their sources in their briefs, they fail to address the absence

of any specific reference to him by name in the complaint. 

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declaration by Anthony Zangrilli, which plaintiffs’ failed to

attach to the complaint, and other unidentified sources. (Id.)

Defendants argue that these allegations should be discounted

because 1) the Zangrilli declaration was not attached to the

complaint and 2) the remaining sources are completely

unidentified. 

I agree with defendants that plaintiff’s failure to attach

the Zangrilli declaration, or even identify him by name in the

complaint, after they had submitted his declaration in support of

plaintiffs’ previous motion for reconsideration and seeking leave

to file the amended consolidated complaint, is problematic. The 3

Seventh Circuit has stated that “[i]t is hard to see how

information from anonymous sources could be deemed ‘compelling’

or how we could take account of plausible opposing inferences.

Perhaps these confidential sources have axes to grind. Perhaps

they are lying. Perhaps they don’t even exist.” Higginbotham,

495 F.3d at 757. Unlike in Makor II, 2008 WL 151180 at *8, the

only description of a single confidential source (arguably

Zangrilli) consists simply of the following: “a former market

maker who traded Options of underlying securities of Microsoft as
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a member of the trading crowd on CBOE in which SIG was the

appointed DPM.” (ACC at ¶ 21-22.) This information does not

disclose “numerous” sources, is vague about the source’s basis of

personal knowledge, and is not “corroborated by multiple

sources.” Id. (noting “the information that the [numerous]

confidential informants are reported to have obtained is set

forth in convincing detail . . . [and] corroborated by multiple

sources”); see also Higginbotham, 495 F.3d at 757 (“anonymity

conceals information that is essential to the sort of comparative

evaluation required by Tellabs.”). The allegation that this

source “was a member of the trading crowd on CBOE” is not

indicative of the extent or type of contact this source had with

defendants, in particular defendants other than SIG, or of the

source’s insight into the alleged actions taken by defendants,

particularly outside the CBOE. And while the complaint also

alleges that the AMEX MM Letter corroborates these particular

allegations, the text of this letter is very general, does not

identify defendants, and only vaguely references anecdotal

evidence that specialists on the CBOE were still in possession of

technology which identified the origin of public customer limit

orders. Therefore, I will discount (but not ignore) these

allegations. See Higginbotham, 495 F.3d at 757.
Although plaintiffs attempt to incorporate by reference the 4

SEC Staff Report “a copy of which was filed as an exhibit to the

original complaint filed in this [a]ction,” (ACC ¶ 24), this is

inaccurate. No such report is attached to the original

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Defendants also dispute that plaintiffs’ allegations

concerning the Auto-ex system against the remaining defendants do

not compel an inference of scienter in light of the fact that

these systems are designed to shut down when the markets are

crossed or locked per exchange rules. Plaintiffs do not appear

to dispute this, instead arguing that all defendants failed to

promptly execute their marketable limit orders at the quoted bid

or offer price manually on the trading floor after the Auto-ex

system was disengaged. Accordingly, the former allegation is not

indicative of scienter.

Fourth, plaintiffs point to allegations that plaintiffs’

receipt of automatic, or prompt manual, executions on marketable

limit orders was statistically lower than the rates of executions

provided to non-direct access customers (“public retail

customers”). Specifically, 20-30% of plaintiffs’ marketable

limit orders were promptly executed by defendants, whereas over

90% of the marketable limit orders sent by public retail

customers who were not DACs were promptly executed at the quoted

prices. (ACC at ¶ 38.) In support, plaintiffs refer to, but

fail to attach, 1) trading data examined by the SEC Staff Report 4
complaint. (See Doc. Entry # 1.) 

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for the studied week of trading on AMEX starting October 22,

2001; 2) trading data for the month of January 2002 on all four

exchanges that was examined as part of an academic study which

was set forth in an article in the Journal of Finance (plaintiffs

do not specify when) (“the Battalio study”); and 3) actual

trading data of orders sent by plaintiff Last Atlantis in the

months of May, July, and September for each year from 2001-2006

and “estimated fill rates of between 25%-30% for most of the

other [p]laintiffs.” (ACC at ¶ 39.) With respect to the SEC

Staff Report, the complaint identifies four specialists who made

markets as designated specialists on AMEX in one or more of the

nine studied options during the studied week: SLK-Hull, SIG, TDO,

and CDM. These are also the specialists identified with respect

to the specific orders sent by plaintiff Last Atlantis. As I

already set forth in my September 13, 2006 Memorandum Opinion and

Order, the SEC Staff Report dealt solely with the AMEX and

therefore leaves unaddressed any transactions that occurred on

other exchanges. 

Defendants contend the discrepancy in fill rates is the

result of plaintiffs’ arbitrage trading strategies, for

plaintiffs must necessarily compete with each other and other
These four defendants are already part of the eleven 5

sanctioned specialists. 

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DACs with whom they claim a common trading strategy in the race

to buy and sell the limited number of options contracts quoted in

locked and crossed markets whereby the “winner’s” order is filled

and the others’ are not. Defendants also cite to exchange rules

as requiring specialists to execute a customer’s order to buy or

sell options at a quoted price if another customer has already

purchased or sold the set of amount of options that are quoted

and available at that price. While a legitimate competing

inference, the inference of scienter is equally compelling based

on the allegations contained in the four corners of the complaint

with respect to defendants SLK-Hull, SIG, TDO, and CDM.5

Plaintiffs do allege engaging in arbitrage trading, but also

allege that their fill rates were lower than “similar market

orders and marketable limit orders submitted for other public

customers to buy or sell the same [o]ptions during similar market

conditions.” (ACC at ¶ 24.) When this is taken as true, the

inference of scienter is “at least as compelling” and cogent as

defendants’ competing inference as the disparity among the fill

rates is certainly not insignificant. 

This inference of scienter is limited to the defendants who

are identified as having used the relevant clearing firms in the
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AMEX. Again, without more, plaintiffs’ allegations against the

remaining defendants do not give rise to a strong inference of

scienter because the complaint is silent with respect to whether

the market orders and marketable limit orders submitted for other

public customers on the other exchanges, or with other clearing

firms, were similar. Furthermore, the complaint is also silent

as to whether the market conditions were similar with respect to

transactions which occurred in unspecified time periods or

outside of the time period identified in the SEC Staff Report.

Finally, there are a number of reasons why a transaction may fail

that are unrelated to a specialist’s intentional or reckless

mishandling; for example, the exchange rules allow trades to go

unexecuted or quotes to be adjusted under certain circumstances.

Moreover, trades may go unexecuted or be adjusted due to

unintentional error. 

In sum, the allegations in the complaint, when viewed

collectively and taken as true, give rise to a strong inference

of scienter as set forth in Tellabs with respect to the eleven

sanctioned specialists. These defendants are specifically

identified in the regulatory findings and as having used the

clearing firms identified in the SEC Staff Report. With respect

to the remaining defendants, plaintiffs allege facts obtained

from a single and vague confidential source and provide limited,
In their response to the motion to reconsider plaintiffs 6

also seek leave to file yet another amended complaint. The

motion is denied based on the length of the litigation (four

years), the number of previously filed complaints (five) and

numerous rounds of motions to dismiss or for reconsideration that

have already been filed and fully briefed by the parties and

resolved by this court. At some point, there must be some

endpoint to this time-consuming and expensive cycle which results

in undue prejudice to defendants. U.S. ex. Rel. Fowler v.

Caremark RX, LLC, 496 F.3d 730, 740 (7th Cir. 2007) (citing Emery

v. Am. Gen. Fin., Inc., 134 F.3d 1321, 1322-23 (7th Cir. 1998))

(“Despite the fact that the deficiencies could [potentially] be

cured through an appropriate pleading, [dismissal was

appropriate] when the plaintiff continually fails to provide a

valid pleading in compliance with the federal rules.”).

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isolated data concerning patterns of activity, but which are not

specific with respect to the conditions in the markets and

similarity among orders which would allow for at least an equally

compelling inference of scienter. Accordingly, the complaint

fails to state a claim against the remaining defendants. 

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III.

For the foregoing reasons, the motion for reconsideration is

granted in part and denied in part. The motion is denied with

respect to the following defendants: AGS, Bear Hunter, CDM, GS,

Group One, SLK-Hull, SIG, TDO, Wolverine, and Knight Financial.

The remaining defendants are dismissed. 
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ENTER ORDER:

________________________________

 Elaine E. Bucklo

United States District Judge

DATED: February 7, 2008