Publications

(Article from Securities Law Alert, May/June 2019) 

For more information, please visit the Securities Law Alert Resource Center

On May 28, 2019, the Southern District of New York held that plaintiffs asserting market manipulation claims were entitled to the presumption of reliance for omissions established in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), because plaintiffs’ claims primarily involved the alleged failure of stock exchanges (the “Exchanges”) to disclose certain services they provided to high-frequency trading (“HFT”) firms. In re Barclays Liquidity Cross and High Frequency Trading Litig., 2019 WL 2269929 (S.D.N.Y. 2019) (Furman, J.).

Defendants relied on the Ninth Circuit’s decision in Desai v. Deutsche Bank Securities, 573 F.3d 931 (9th Cir. 2009), to argue that the Affiliated Ute presumption does not reach market manipulation claims. In Desai, the Ninth Circuit found that “manipulative conduct has always been distinct from actionable omissions.” The Ninth Circuit reasoned that if “nondisclosure of a defendant’s fraud was an actionable omission, then every manipulative conduct case would become an omissions case.” The Ninth Circuit held that “the Affiliated Ute presumption of reliance does not apply” if plaintiffs allege only manipulative conduct.

The Barclays court “decline[d] to follow” the Ninth Circuit’s decision in Desai. 2019 WL 2269929. The court noted that two other courts in the Southern District of New York have held that the Affiliated Ute presumption applies to market manipulation claims.[1] The court stated that “what is important in this context is . . . the rationale for” the Affiliated Ute presumption, which was designed for cases in which “no positive statements exist” and “reliance as a practical matter is impossible to prove.” The court explained that when deciding whether the Affiliated Ute presumption applies, courts must “engage in a context-specific inquiry” by “analyzing the complaint to determine whether the offenses it alleges can be characterized primarily as omissions or misrepresentations.”[2]

The Barclays court found this analysis “straightforward” in the case before it, “as the Second Circuit has already held that [p]laintiffs’ claim is premised on the Exchanges’ failure to fully disclose how HFT firms could use certain products and services on the Exchanges’ trading platforms.” Id. (quoting City of Providence, Rhode Island v. Bats Global Mkts, 878 F.3d 36 (2d Cir. 2017)). The court determined that the Second Circuit had therefore “resolved the question [of] whether this case involves primarily omissions in the affirmative.” The Barclays court concluded that plaintiffs’ market manipulation claims fell “within the category of cases to which the Affiliated Ute presumption may apply at this stage of the litigation.”