See Amended Consolidated Complaint (Docket #286). 1

 CDMI initially filed a motion to dismiss, but that motion was 2

converted into a summary judgment motion on June 16, 2008.

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, SPEED TRADING

LLC, BRYAN RULE, BRAD MARTIN, AND

RIVER NORTH INVESTORS LLC,

Plaintiffs,

v.

AGS SPECIALISTS LLC, BEAR HUNTER

STRUCTURED PRODUCTS LLC, BEAR WAGNER

SPECIALISTS LLC, GROUP ONE TRADING

LP, KNIGHT FINANCIAL PRODUCTS LLC,

CITIGROUP DERIVATIVES MARKETS, INC.,

SLK-HULL DERIVATIVES LLC, GOLDMAN

SACHS EXECUTION AND CLEARING LP

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

SUSQUEHANNA INVESTMENT GROUP, TD

OPTIONS LLC, AND WOLVERINE TRADING

LLC, 

Defendants.

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MEMORANDUM OPINION AND ORDER

This case involves alleged violations of federal and state law

based on improper securities trading practices by defendants. Now 1

before me is defendant Citigroup Derivatives Markets, Inc.’s

(“CDMI”) motion for summary judgment. For the following reasons, 2
2

CDMI’s motion is granted.

I.

Summary judgment is appropriate where the record shows that

“there is no genuine issue as to any material fact and that the

moving party is entitled to judgment as a matter of law.” FED. R.

CIV. P. 56(c). A genuine issue for trial exists “if the evidence

is such that a reasonable jury could return a verdict for the

nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The movant initially

bears the burden of “identifying those portions of ‘the pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any,’ which it believes

demonstrate the absence of a genuine issue of material fact.”

Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91

L.Ed.2d 265 (1986). Once the movant has met this burden, the

non-movant “may not rest upon the mere allegations or denials of

the adverse party's pleading,” but rather “must set forth specific

facts showing that there is a genuine issue for trial.”

FED.R.CIV.P. 56(e). I must construe all facts in the light most

favorable to the non-movant and draw all justifiable inferences in

favor of that party. See Anderson, 477 U.S. at 255, 106 S.Ct.

2505. 
 Neither party provides information as to how the $225 million 3

dollars was divided among the sellers. Citigroup is not a party to

this action.

 On December 17, 2007, plaintiffs moved to join CDMI as a 4

defendant in this action on a successor liability theory, pursuant

to Federal Rule of Civil Procedure (“FRCP”) 25(c). Plaintiffs’

motion for joinder was granted on February 7, 2007. CDMI did not

oppose joinder at that time, but reserved the right to file the

present motion to dismiss and to challenge FRCP 25(c) joinder. 

3

II.

Defendant Knight Financial Products, LLC (“KFP”) operated as

a securities broker/dealer through December 9, 2004, when it sold

its “specialist business” to Citigroup Financial Products, Inc.

(“Citigroup”) for $225 million dollars. The purchased assets were 3

subsequently assigned by Citigroup to defendant Citigroup

Derivatives Markets Inc. (“CDMI”). Citigroup and CDMI are 4

distinct corporate entities, with no relation to KFP or the other

parties to the asset purchase agreement. It is unclear what KFP’s

current business is, if anything. However, it is undisputed that

although KFP ceased its “specialist business” when the asset sale

closed, it remains to date an active, distinct corporate entity and

a defendant in this action. 

CDMI now moves for summary judgment, arguing that it did not

assume liability for defendant KFP’s pre-asset sale alleged

wrongdoing and that plaintiffs have not alleged any post-asset sale
 Because defendant CDMI references my previous orders and 5

various parties’ prior filings, a general familiarity with the

facts, as alleged in the complaint, is presumed. See Last Atlantis

Capital LLC v. Chicago Bd. Options Exchange, Inc., 533 F.Supp.2d

828 (N.D.Ill.2008); Last Atlantis Capital LLC v. Chicago Bd.

Options Exchange, Inc., 455 F.Supp.2d 788 (N.D.Ill.2006); Last

Atlantis Capital LLC v. Chicago Bd. Options Exchange, Inc., No. 04

C 397, 2005 WL 3763262 (N.D.Ill. Mar. 30, 2005).

 Plaintiffs’ opposition brief also included arguments that 6

documents submitted by CDMI should not be considered on a motion to

dismiss. CDMI’s motion to dismiss was converted to a motion for

summary judgment on June 16, 2008. Accordingly, plaintiffs’

arguments on this issue are moot. 

4

bad acts by CDMI itself. Plaintiffs contend that CDMI is liable 5

for KFP’s alleged bad acts (both pre- and post-asset purchase)

under a successor liability theory, and in the alternative, that

“there is an independent factual basis from which it can be

strongly inferred that CDMI acted with the requisite scienter with

respect to the thousands of [o]rders alleged to have been

mishandled by CDMI’s exchange specialists between December 10, 2004

and April 2007.” (See Pls.’ Supp. Resp. 2.) 6

The assets subject to the purchase agreement, now owned by

CDMI, include: 1) substantially all the assets of KFP; 2) KFP’s

business of acting as a market maker and specialist in the listed

options; 3) leases for KFP’s offices; 4) the business contracts of

KFP; and 5) appointments on exchanges to trade all the option

classes traded by KFP as of the closing date. CDMI also assumed a

number of KFP’s business-related liabilities, but it did not retain

liability resulting from the present action, if any, or liability
 The parties agree that New York successor liability law 7

applies.

5

for “any other [p]roceedings initiated or filed (i) making claims

based on the same set of facts or circumstances that are the

specific basis of [the present action] and (ii) that relate solely

to events, facts or circumstances arising prior to [December 10,

2004].” (See Freidman Decl. Ex. E.) 

III.

Under New York law, a corporation that acquires the assets of 7

another corporation is not liable for the torts of its predecessor

unless one of the following applies: (1) the successor corporation

expressly or impliedly assumed liability; (2) there was a

consolidation or merger of the two corporations; (3) the successor

corporation is a “mere continuation” of the predecessor; or (4) the

transaction was entered into fraudulently to escape liability.

Schumacher v. Richards Shear Co., 451 N.E.2d 195, 198 (N.Y. 1983).

CDMI argues that none of these exceptions apply because 1) there is

no evidence of fraud, 2) the purchase agreement expressly states

that KFP retains all liabilities resulting from the present action

and all related claims based on events occurring prior to closing,

and 3) the de facto merger and “mere continuation” exceptions are

not applicable because the asset sale was an arms-length

transaction between companies with no continuity of ownership and

significantly different senior management. CDMI is right. Even
 Plaintiffs suggest that correspondence from KFP to CDMI in 8

which KFP requests CDMI indemnify it for a lawsuit related to the

present action is relevant to one of the exceptions. I presume

this correspondence was provided to show an implied assumption of

liability for the consolidated case, although plaintiffs do not

clearly state this. Regardless, the correspondence shows CDMI

expressly rejected KFP’s request for indemnification pursuant to

the excluded liabilities clause in the purchase agreement and the

lawsuit at issue in the correspondence was subsequently dismissed.

KFP’s rejected request for indemnification for a dismissed case

does not provide a genuine issue for trial on successor liability.

 

6

viewing the facts in a light most favorable to plaintiffs, none of

the exceptions apply here. 

With respect to the first and fourth exceptions, plaintiffs

simply offer a general statement that at trial they may be able to

prove these exceptions. They present no evidence indicating that

the asset sale was a fraudulent transaction entered into for the

purpose of sheltering KFP from liability, that the asset sale was

something other than an arms-length transaction, or that $225

million dollars was not an appropriate value for the assets sold.

Further, the purchase agreement clearly states that this lawsuit,

along with any action based on the same set of underlying facts and

events, is specifically excluded from the liabilities transferred

to CDMI as a result of the asset sale – KFP expressly retained all

such liability. Therefore, because CDMI did not assume liability

for this action and there is no evidence that the asset sale was 8

a fraudulent transaction, the first and fourth exceptions do not

apply.
7

The same is true for the “mere continuation” and de facto

merger exceptions. While the facts show CDMI operated a specialist

business and used the assets it acquired from KFP, including

personnel and offices, for that business, continuation of a

company’s business alone does not trigger the de facto merger or

“mere continuation” exceptions. A “mere continuation” is a

continuation of the corporate entity itself – not just a

continuation of the transferred business. Ladjevardian v.

Laidlaw-Coggeshall, Inc., 431 F.Supp. 834, 839 (S.D.N.Y. 1977).

This exception “envisions a common identity of directors,

stockholders and the existence of only one corporation at the

completion of the transfer...something in the nature of a corporate

reorganization, rather than a mere sale.” Id.; see also

Schumacher, 451 N.E.2d at 198; Cargo Partner AG v. Albatrans, Inc.,

352 F.3d 41, 46 (2d Cir. 2003). In this case, it is undisputed

that four years after execution of the purchase agreement, KFP is

still in existence as a distinct corporate entity and defendant in

this action. While CDMI has absolutely continued the former

business of KFP, there is no evidence showing that KFP and CDMI

have a common identity of directors or shareholders, or that CDMI

is merely a corporate reorganization of KFP. Accordingly, CDMI is

not a “mere continuation” of KFP. 

Similarly, a de facto merger occurs when there is a

transaction that is in substance a consolidation or a merger of two
8

companies, one being the successor to the other, where the

transaction is not technically in the form of a merger or

consolidation. See Schumacher, 451 N.E.2d at 198; Cargo Partner,

352 F.3d at 45. In determining whether a de facto merger has

occurred, courts consider the following: 1) continuity of

ownership; 2) cessation of predecessor’s ordinary business and

dissolution of the predecessor as soon as practical after the

transaction; 3) assumption by the successor of liability necessary

for the uninterrupted continuation of the predecessor's business;

and 4) continuity of management, personnel, assets, physical

location and general business operation. In re New York City

Asbestos Litig., 789 N.Y.S.2d 484, 486 (N.Y. App. Div. 2005). New

York courts consider continuity of ownership “a necessary element

of any de facto merger finding.” Id. at 487. This element “exists

where the shareholders of the predecessor corporation become direct

or indirect shareholders of the successor corporation as the result

of the successor's purchase of the predecessor's assets.” Id. at

486-87. 

Here, plaintiffs provide no evidence of continuity of

ownership. In other words, there is no evidence showing KFP or any

of the sellers are related in any way to Citigroup or CDMI, that

the asset sale was financed with Citigroup or CDMI stock, or that

KFP (or the other sellers) continued to profit from CDMI’s business

operations after the asset sale in any way. Lack of continuity of
9

ownership alone makes the de facto merger exception inapplicable.

New York v. Nat’l Serv. Indus., Inc., 460 F.3d 201, 215 (2d Cir.

2006)(finding no successor liability under the de facto merger

exception where there was no evidence of continuity of ownership);

NYC Asbestos Litig., 789 N.Y.S.2d at 484 (same); Cargo Partner, 352

F.3d at 46 (stating “we are confident that the doctrine of de facto

merger in New York does not make a corporation that purchases

assets liable for the seller's contract debts absent continuity of

ownership.”). As a matter of law, none of the exceptions to New

York’s general rule against successor liability apply to CDMI.

Accordingly, CDMI cannot be held accountable for KFP’s pre- or

post-asset sale actions under a successor liability theory. 

Plaintiffs allege in the alternative that even if successor

liability does not apply, CDMI is independently liable for its own

post-closing wrongdoings. In support of this argument, plaintiffs

rely on CDMI’s knowledge that KFP was undergoing an AMEX

investigation and numerous other regulatory inquires at the time of

the asset sale. But the AMEX investigation and other inquiries

only concerned actions by KFP prior to the asset sale for which

CDMI is not liable. Further, KFP stopped acting as a specialist on

the AMEX in January of 2004 (almost a year prior to the asset

sale), CDMI itself never acted as a specialist on the AMEX, and

CDMI was not a party to the AMEX settlement. Therefore, KFP’s AMEX

activities cannot be imputed to KFP and CDMI cannot be liable for
 Plaintiffs do reference a settlement agreement between CDMI 9

and the Chicago Board Options Exchange, Inc. (“CBOE”) where CDMI

admits that it “failed to continuously display quotes” on various

trade dates from December 2004 through July 2005. (See Pls.’ Opp.

Mem., Ex. B.) The substance of this settlement agreement does not

appear to support the same type of wrongdoing alleged in the

consolidated complaint. Accordingly, the CBOE settlement does not

support plaintiffs’ allegations of scienter as to CDMI with respect

to the claims at issue in this action. 

10

its own wrongdoing on an exchange on which it never acted as a

specialist. Further, there are no allegations that any of the

other regulatory inquiries KFP disclosed to CDMI in the purchase

agreement extended to post-asset sale acts by CDMI. CDMI’s

knowledge of pre-asset sale investigations and inquiries into KFP’s

actions is not enough to support independent allegations against

CDMI for post-asset sale actions by CDMI. 

9

IV.

For the reasons stated above, defendant CDMI’s motion for

summary judgment is granted. 

ENTER ORDER:

____________________________

 Elaine E. Bucklo

United States District Judge

Dated: March 10, 2009