Court Opinion

ID: 8413305
Source: CourtListenerOpinion
Date Created: 2022-11-02 20:16:11.825724+00
Date Added: 2024-06-11T16:48:02.486830
License: Public Domain

LOHIER, Circuit Judge,
concurring in part and dissenting in part:
The majority opinion today denies a petition for rehearing that I would have granted in part. I nevertheless commend my panel colleagues for clarifying that the initial majority opinion in this case did not hold that the Supreme Court’s decisions in Stoneridge and Janus1 require a plaintiff claiming market manipulation to allege that a defendant directly communicated false information to a victim. Majority Op. at 571-72. Because that opinion initially appeared to foreclose the plaintiffs’ market manipulation claim against Israel Dweck, even though plaintiffs alleged that he had engaged directly in a manipulation of securities, I dissented on the ground that the opinion conflated the elements of a misrepresentation claim and those of a manipulation claim. In particular, it appeared to ignore the well-established theory of reliance based on the fraud-on-the-market doctrine. See Fezzani v. Bear, Stearns & Co. Inc., 716 F.3d 18, 29 (2d Cir.2013) (Lohier, J., dissenting). As the Supreme Court recently reaffirmed, that doctrine remains alive and well. See Halliburton Co. v. Erica P. John Fund, Inc., — U.S. -, 134 S.Ct. 2398, 2409, 2413-15, 189 L.Ed.2d 339 (2014).
Prompted in part by the compelling arguments advanced by the. Securities and Exchange Commission as amicus curiae in support of the appellants’ petition for rehearing, the majority’s denial of the petition helpfully corrects the misimpressions left by the original majority opinion. For example, it recognizes that we have never required “that reliance by a victim on direct oral or written communications by a defendant must be shown in every manipulation case.”2 Majority Op. at 571-72. It also clarifies that “in a manipulation claim, a showing of reliance may be based on ‘market activity’ intended to mislead investors by sending ‘a false pricing signal to *575the market,’ upon which victims of the manipulation rely.” Id. at 571. Of course, I agree; as I explained in my prior dissent, to read our jurisprudence otherwise would be a mistake. See Fezzani, 716 F.3d at 28-29 (Lohier, J., dissenting).
Nevertheless, I continue to dissent from the majority’s ongoing refusal to let the plaintiffs’ claims against Dweck proceed. We should grant the petition for rehearing and vacate the District Court’s dismissal of those claims. The majority opinion’s denial of the petition is wrong because, in the process of correcting one apparent error in the original opinion, it falls prey to two others.
The opinion’s first error is to suggest that the claims against Dweck founder because they “lump together sales of [manipulated] securities that Dweck did not park with those of securities he did park,” even though the plaintiffs also allege that Dweck is responsible for losses in both categories of securities. Majority Op. at 573. This is not a reason to dismiss these claims. As an initial matter, the plaintiffs’ treatment of the parked and unparked securities together does not justify dismissing the complaint as to those securities that Dweck is alleged to have parked. More importantly, the opinion ignores the fact that the alleged manipulative scheme here, like most “pump and dump” stock manipulation schemes, involves a cluster of interdependent securities that the defendants — Dweck inclúded — manipulated in tandem by parking certain shares of those securities with knowing nominees while selling other shares to unwitting victims. As the complaint describes it, “[i]f one security propped up by the misconduct of defendants failed, all would fail.” J.A., Vol. II, at 255. In other words, Dweck’s parking of certain securities helped to sustain the defendants’ manipulation of all of the securities, and the allegations in the complaint as to Dweck’s role in the manipulation support a claim for losses associated with the overall market manipulation scheme.
The opinion makes a second, more serious set of errors. It misunderstands the relationship between parking transactions and the fraud-on-the-market doctrine, and it confuses the “signals” theory relating to parking transactions — a theory the opinion purports to embrace, see Majority Op. at 573 with the direct misrepresentation theory. In unraveling these errors, I think it useful to define “parking,” which, in the context of market manipulation, is no mere infraction; people go to prison for it. See, e.g., United States v. Russo, 74 F.3d 1383, 1386, 1393 (2d Cir.1996); United States v. Regan, 937 F.2d 823, 829-30 (2d Cir.1991), amended by 946 F.2d 188 (2d Cir.1991). We have described “parking” as follows: “[A]n artificial device to avoid depressing the market price [that] ... occurs when a broker, unable to keep securities in his trading account, ostensibly sells the same to another broker, with the understanding that the same securities will be purchased back by the ostensible seller before the settlement date. In this manner the shares are not sold into the [open] market.” United States v. Corr, 543 F.2d 1042, 1045 n. 5 (2d Cir.1976); see also United States v. Bilzerian, 926 F.2d 1285, 1290 (2d Cir.1991) (“ ‘Parking’ refers to a transaction in which a broker-dealer buys stock from a customer with the understanding that the customer will buy the stock back at a later date for the purchase price plus interest and commissions ... [with] no market risk to the broker-dealer who is the owner of the shares in name only.”). An illegal parking transaction keeps a significant number of shares in the hands of a “friendly” nominee who agrees not to sell the security and thereby avoids placing downward pressure on the share price, as might occur if the security were *576sold legitimately on the open market. In turn, keeping the parked shares out of the market supply enables the defendant to maintain better control over the tradeable shares and to manipulate the share price more easily.
So defined, parking indisputably reflects an illegal sham transaction, an artificial device designed to avoid depressing the market price of a security. We previously have recognized the tie between parking transactions and a fraud on the market. See Russo, 74 F.3d at 1393 (endorsing a theory pursuant to which a broker-dealer for whom defendants worked engaged in stock parking and thereby “perpetrated a fraud on the market by divorcing the financial risk of owning [the parked stock] from legal ownership of the stock”). Commentators have confirmed the connection. See, e.g., Lewis D. Lowenfels & Alan R. Bromberg, Securities Market Manipulations: An Examination and Analysis of Domination and Control, Frontrunning, and Parking, 55 Alb. L.Rev. 293, 339-41 (1991).
The majority opinion does not quibble with the fact that the complaint alleges a parking transaction more or less as defined above. Instead, it derides the complaint for not alleging that the specific prices used in Dweck’s parking transactions “were ever reported in a market” or that the “ ‘prices’ used in the parking transactions ... were ever made known to the buyers of the securities in question or that the securities were sold to appellants at prices ‘signaled’ by the prices used in the parking ... transactions.” Majority Op. at 572. But this misunderstands one of the primary functions of parking schemes such as the one alleged here: to conceal rather than transmit real price information. Here, the relevant “signals” are not false pricing signals about the specific “prices used in the parking transactions,” but rather include: (1) creating the false appearance of trading volume or activity in the parked security, (2) making it appear that Dweck (and others) rather than the broker-dealer was the beneficial owner of the security who bore the financial risk of ownership, when, in fact, Dweck’s financial risk as a nominal holder of the securities was divorced from his legal ownership, (3) masking the number of shares of the manipulated securities that the broker-dealer actually controlled, and (4) creating the illusion that the parked securities were trading on the open, liquid market, when in fact they were not. In my view, several paragraphs in the complaint plausibly allege that these signals, among others, were transmitted to the market. For example:
10. Defendant! ] Isaac R. Dweck ... also engaged in parking transactions with the purpose and effect of creating a false appearance of an active trading market with the intent of inflating the trading price of the Manipulated Securities and causing investors, such as plaintiffs to purchase the Manipulated Securities.
131. Parking mislfed] regulators and customers about the amount of Baron Stocks in Baron’s own inventory, and fictitiously improved Baron’s net capital.... The placement of such stock also artificially maintained the price of the Manipulated Stocks. The “parking” was done with the purpose and had the effect of creating a false impression in the minds of Baron customers of the value and liquidity of the “parked” securities and induced Baron customers, including plaintiffs, to make investments based on Baron’s illusion of trading activity.
221.... [Plaintiffs] were unaware that the market for Baron stocks was entirely a fictional mirage. Month after month, they had received confirmations *577and monthly statements from Bear Stearns which indicated that the Baron stocks were trading in -a bona fide market. Publicly available information on these stocks further confirmed an active market where large numbers of shares traded freely.... [None of the] plaintiffs[ ] knew that Bear Stearns, the Dweek Defendants, ... and all other defendants knew that Baron simply cr[e]ated the illusion of an active market through parking, wash sales, unauthorized purchases and fraud.
319.... Defendants’ fraudulent and manipulative activities as described herein created the appearance that the price at which the Manipulated Securities traded reflected bona fide supply and demand in a freely functioning market. The increasing prices of the Manipulated Securities appeared to indicate increasing value, placed by the market, on the businesses underlying the securities. Thus, ... the appearance of an active, rising market induced plaintiffs to purchase those securities in reliance upon the “wisdom of the marketplace.” Instead, the values placed by the market on the Manipulated Securities were fictitious and solely a result of defendants’ manipulative practices.
J.A., Vol. II, at 243, 281, 310, 340.
The majority opinion summarizes its reasons for denying the petition by suggesting that the plaintiffs did not rely on the signals conveyed by Dweck’s parking transactions, but relied instead on “misrepresentations to the victims by Baron sales people as to how the price they were charging for particular securities was arrived at.” Majority Op. at 573. The opinion concludes that “Dweck’s role in parking certain securities was unknown to, and not relied upon by, those who purchased” the securities. Id. at 573. On the one hand, to the extent that the majority opinion can be understood to conclude that the plaintiffs failed to allege reliance on Dweck’s role, it misses the point of the manipulative scheme, which was to conceal rather than disclose Dweck’s role as a confederate who parked securities. On the other hand, to the extent that the opinion suggests that the plaintiffs inadequately alleged reliance on the effect of Dweck’s parking, as well as other components of the manipulative scheme, that suggestion is contradicted by the allegations quoted above. I can’t help but to end by noting that the majority opinion trots out Stoneridge yet again to reject the claims against Dweek, this time on the ground that the plaintiffs did not allege “reliance upon the parking transactions.” Majority Op. at 574. I have previously explained and will not repeat why Stoneridge does not apply to claims of market manipulation such as the one alleged here, or why plaintiffs were not obliged to allege reliance on the parking transactions themselves.
I respectfully dissent from the denial of the petition for rehearing as to the claims against Dweek.3

. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008); Janus Capital Grp., Inc. v. First Derivative Traders, - U.S. -, 131 S.Ct. 2296, 180 L.Ed.2d 166 (2011).

. Here, I would replace the phrase "every manipulation case” with "any manipulation case.”

. The appellants' arguments in their petition for rehearing relating to Bear Stearns and the summary order in this case are not without force. Nevertheless, I agree with my panel colleagues that the appellants’ nearly exclusive reliance on Levitt v. J.P. Morgan Securities, Inc., 710 F.3d 454 (2d Cir.2013), is misplaced. Levitt is not necessarily inconsistent with the summary order and, as a technical matter, fails to provide a basis for rehearing under Rule 40(a) of the Federal Rules of Appellate Procedure. I therefore concur in the *578result as to Bear Steams. I do not necessarily join the majority’s other reasons for rejecting the petition for rehearing as to Bear Stearns. See, e.g., Majority Op. at 570 ("There is a real danger of harm to the financial industry in allowing such allegations to suffice to subject clearing brokers to the cost of discovery and perhaps a trial even though there is no evidence of participation by the brokers in the fraud or manipulation.”).