Third Amended Complaint PP99-100. First, these allegations fail the test of Rule 9(b). Plaintiffs have not stated what Rules were violated by the defendants, how defendants' acts were false and misleading, when the rules violations occurred and the manner in which defendants' actions violated the rules. Rather, plaintiffs repeatedly rely on the conclusory allegation that the defendants did not act "in accordance with the rules." These blanket allegations fail to put the defendants on notice of the conduct for which they are being sued, leaving them to defend this action by explaining all of their conduct during an indeterminate period of time. See O'Brien, supra, 936 F.2d at 676.
The claims arising from the ODD also fail to state a claim under Fed. R. Civ. P. 12(b)(6). To state a claim under Section 10(b), plaintiffs must establish that defendants acted with scienter at the time that they misrepresented material facts. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976); Healey v. Chelsea Resources, Ltd., 947 F.2d 611, 618 (2d Cir. 1991); Luce v. Edelstein, 802 F.2d 49, 55-56 (2d Cir. 1986). However, the Third Amended Complaint does not adequately plead that defendants acted with scienter at the time that the alleged misrepresentations in the ODD were made. Plaintiffs do not claim that OCC and CBOE intended to commit a fraud when the ODD was drafted and distributed in September 1986, but rather allege that the purported malfeasance occurred during the October 1987 market crash. Actions occurring in October 1987 simply cannot form the basis for an inference of scienter over a year earlier, in September 1986.
Moreover, the claims relating to the ODD suffer from a more fundamental defect. Careful examination of the ODD reveals that it was not rendered false or misleading by the alleged omissions.
Cf. Glazer v. Formica Corp., 964 F.2d 149 (2d Cir. 1992) (discussing materiality of omission in merger-acquisition context). First, plaintiffs have not shown that any of the statements in the ODD were misleading when made. Simply stated, plaintiffs' claims in this action relate to alleged improprieties by the defendants in reacting to the emergency situation created by the market crash during the week of October 19, and there has been no allegation that the ODD, as drafted and distributed in 1986, was false and misleading. Further, to the extent that OCC and CBOE may have acted in violation of their rules during the week of October 19, which the defendants strenuously dispute, and to the extent that these violations may have rendered the disclosure in the ODD materially false and misleading, defendants had thirty days to distribute supplemental materials to remedy the alleged falsehoods contained therein, see S.E.C. Rule 9b-1, 17 C.F.R. § 240.9b-1(b)(2)(i), and plaintiffs have not pleaded any facts that demonstrate that this 30 day requirement was violated.
Second, the alleged falsehoods about which plaintiffs complain were addressed in the ODD. For example, the ODD provides that "this booklet does not attempt to present a complete description of all of the technical provisions governing standardized options. . . . [or] the rules of options . . . that govern the structure and conduct of the options markets." ODD, at 2. Thus, the ODD clearly stated that it was not intended to present an exhaustive explanation of the options trading system. The ODD also included an extensive discussion of the risks of options trading, see ODD, at 16-25, including the statement that "the purchaser of an option runs the risk of losing his entire investment in a relatively short period of time." Id. Thus, the Court rejects plaintiffs' assertion that the ODD did not address the risks of options trading, and holds that the alleged omissions about which plaintiffs complain are not actionable under Section 10(b). See Kramer, supra, 937 F.2d at 775-78 (finding no failure to disclose risks); O'Brien, supra, 936 F.2d at 676-77 (same).
Turning to plaintiffs' mispricing theory of the Section 10(b) claim, the Court also finds these allegations to be insufficient. The mispricing theory of the case relies on the proposition that defendants' conduct during the week of October 19 created a logjam that interfered with plaintiffs' ability to execute securities transactions, and led to an inflated margin call and the improper seizure of their accounts by Bear Stearns, thereby causing them injury. In examining this claim, the Court first notes that plaintiffs do not explain how the alleged acts of mispricing were false, and which rules were violated in the course of this alleged scheme. Thus, defendants are left to defend this action by justifying all of their pricing mechanisms during the week of October 19, in violation of Fed. R. Civ. P. 9(b).
A more fundamental defect in the Third Amended Complaint is plaintiffs' failure to allege that the mispricing purportedly committed by CBOE and OCC was integral to the purchase or sale of securities by the plaintiffs. As the Second Circuit has stressed, a successful claim under Section 10(b) "requires proof that the defendant's alleged fraud was 'integral to the purchase and sale of the security in question.' . . . Section 10(b) is not violated by a fraudulent scheme that, some time after a purchase of securities, divests the purchaser of ownership. Rather, the fraud must have been integral to the plaintiff's purchase or sale of the security." Flickinger, supra, 947 F.2d at 598 (quoting Pross v. Katz, 784 F.2d 455, 459 (2d Cir. 1986)) (citations omitted); accord Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843, 847 (2d Cir.) ("To fall within Section 10(b), misrepresentations must have some direct pertinence to a securities transaction."), cert. denied, 479 U.S. 987, 93 L. Ed. 2d 582, 107 S. Ct. 579 (1986); see also Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731-749, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975) (requiring seller or purchaser status to maintain suit under Section 10(b)).
The purportedly inflated margin call and the seizure of plaintiffs' accounts by Bear Stearns were not purchases or sales of securities by plaintiffs. Rather, plaintiffs' options transactions occurred before the allegedly fraudulent mispricing scheme, and any subsequent fraud that may have caused the divestiture of plaintiffs' ownership rights is not actionable under Section 10(b). See Flickinger, supra, 947 F.2d at 598. Thus, plaintiffs' assertion that "whether plaintiff [sic] made any securities transactions after the mispricing took place is simply irrelevant," Plaintiffs' Response, at 95, is incorrect as a matter of law. Moreover, the fact that plaintiffs were prohibited from purchasing or selling securities during the week of October 19 demonstrates that they are not among the class of plaintiffs intended to be benefitted by Section 10(b). See Blue Chip Stamps, supra, 421 U.S. at 737-39. The Court therefore dismisses the Section 10(b) claims stated by the plaintiffs in the Third Amended Complaint under Rules 9(b) and 12(b)(6).
2. Securities Act Sections 12(1) and 12(2)
Plaintiffs also raise claims against the defendants under Sections 12(1) and 12(2) of the Securities Act, 15 U.S.C. § 771, which provides that
Any person who (1) offers or sells a security in violation of section 5 [ 15 U.S.C. § 77e], or (2) offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission) . . . shall be liable to the person purchasing such security from him.
Third Amended Complaint PP171-195. Although the litigants have submitted extensive arguments concerning the sufficiency of these claims, see, e.g., Plaintiffs' Response, at 28-73,
plaintiffs' allegations fail to meet the threshold requirements for actions under Sections 12(1) and 12(2), and these claims must be dismissed.
The purpose of Section 12 is to impose civil liability on those who sell or offer securities by means of disclosure documents containing untrue statements or misleading omissions, and on those who sell or offer securities without complying with applicable statutory registration and prospectus requirements. See Pinter v. Dahl, 486 U.S. 622, 641-42, 100 L. Ed. 2d 658, 108 S. Ct. 2063 (1988); Finkel, supra, 962 F.2d 169. Only those who purchase securities from sellers can recover under Section 12. See Pinter, supra, 486 U.S. at 643-45; Cortec, supra, 949 F.2d at 49. The definition of a seller for the purposes of Section 12 was addressed by the Supreme Court in Pinter. Rejecting a rigid construction of "seller," the Court held that liability under Section 12 extends beyond the party who formally "passes title, or other interest in the security, to the buyer for value." 486 U.S. at 642. Thus, because "solicitation of a buyer is perhaps the most critical stage of the selling transaction. . . . [and] is the stage at which an investor is most likely to be injured, that is, by being persuaded to purchase securities without full and fair information," liability under Section 12 extends to those who actively solicit offers to buy securities. 486 U.S. at 646-47; accord Cortec, supra, 949 F.2d at 49.
However, it also is clear that the definition of seller under Section 12 is not unlimited. The Supreme Court in Pinter specifically rejected extending the definition of "sellers" to include those with "substantial participation in the sales transaction,. . . . [as determined by] the defendant's degree of involvement in the securities transaction and its surrounding circumstances." 486 U.S. at 651; accord Cortec, supra, 949 F.2d at 49 (imposing liability "on only the buyer's immediate seller ; remote purchasers are precluded from bringing actions against remote sellers" (emphasis in original)); Royal American Managers, Inc. v. IRC Holding Corp., 885 F.2d 1011, 1017 (2d Cir. 1989) (declining to extend liability under Section 12 to accountants and attorneys). In fact, plaintiffs' focus on the "economic realities" of the transaction, Plaintiffs' Response, at 34, closely resembles the "substantial participation" test rejected in Pinter, and would extend liability beyond those "immediate sellers" who actively solicit offers to purchase securities.
The Court next turns to determine whether the Third Amended Complaint has pleaded adequate facts to impose seller liability on the defendants under Section 12. Careful examination of the pleadings reveals that the plaintiffs do not allege that OCC or CBOE sold the options at issue in this case. See Third Amended Complaint PP173, 176, 180, 191, 194. The only specific defendant that is alleged to have been a seller is "Bear Stearns, [which] purportedly sold to Pompano put options that, if sold by OCC on the CBOE, would have offset Pompano's options positions that had been purchased on the CBOE." Third Amended Complaint P173. Moreover, defendants' participation in the preparation of the ODD, see Third Amended Complaint PP188-89, is not a sufficient basis for an inference that defendants "actively solicited " plaintiffs' purported options purchases. Thus, because plaintiffs' pleading does not allege that CBOE and/or OCC sold options, the claims under Section 12 must be dismissed.
Although "it is axiomatic that the Complaint cannot be amended by the briefs in opposition to a motion to dismiss," O'Brien v. National Property Analysts Partners, 719 F. Supp. 222, 229 (S.D.N.Y. 1989), the Court also pauses to consider whether the allegations in Plaintiffs' Response are sufficient to impose seller liability under Section 12. According to Plaintiffs' Response, "defendants marketed the options contract as a financial product which could be sold to investors like plaintiffs [and] Bear Stearns actively solicited plaintiffs' business. . . . Also, because of the manner in which defendants structured the options markets, they have made large profits from traders like plaintiffs." Plaintiffs' Response, at 34. In light of these claims, it is clear that plaintiffs have not alleged that OCC or CBOE were immediate sellers who actively solicited their purchases of options. See also id. at 48 ("Plaintiffs alleged that the options sold to Pompano on that day were issued and sold by Bear Stearns").
Moreover, because plaintiffs were not purchasers of securities, they do not have standing to bring suit under Section 12. See, e.g., Cortec, supra, 949 F.2d at 49. Rather, plaintiffs were option sellers, whose business was writing, or selling, and trading options on the floor of the CBOE. OCC's role in this process was only to issue the option to the clearing house member representing the option purchaser, after the sale had been made by the plaintiffs and the purchase had cleared on the CBOE. See Reply Memorandum of Chicago Board Options Exchange, Inc. and the Options Clearing Corporation in Support of their Motions to Dismiss Plaintiffs' Third Amended Complaint ("Defendants' Reply"), at 28. As explained by Judge Brieant,
A CBOE option is issued by [OCC] only after a buyer and a seller, acting through or for a member firm, have agreed on the floor of the CBOE to the price. . . . The option is issued . . . on the following business day if the full premium has been paid. . . . For every outstanding option issued by the [OCC], there will be a writer who has agreed (by selling the option through his broker on the floor of the CBOE) to perform the [OCC's] obligation to deliver the underlying stock upon payment of the specified exercise price."
Piemonte v. Chicago Board Options Exchange, Inc., 405 F. Supp. 711, 712 (S.D.N.Y. 1975).
In fact, the caselaw is consistent in holding that "a seller of options, like plaintiff, is not a purchaser." Panek v. Bogucz, 718 F. Supp. 1228, 1231 (D.N.J. 1989); accord Gutter v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 644 F.2d 1194, 1196 (6th Cir. 1981), cert. denied, 455 U.S. 909, 71 L. Ed. 2d 447, 102 S. Ct. 1256 (1982); Prudential-Bache Securities, Inc. v. Cullather, 678 F. Supp. 601, 605-06 (E.D. Va. 1987); cf. Mix v. E.F. Hutton & Co., 720 F. Supp. 8, 12 (D.D.C. 1989) ("options trading is only awkwardly accommodated, if at all, under Section 12(2)"). Thus, an examination of both the pleadings and the reality of the relationship between plaintiffs and defendants reveals that CBOE and OCC were not sellers of options, and plaintiffs were not purchasers of options. Accordingly, the claims under Section 12 must be dismissed.
3. Securities Act Section 11
Plaintiffs' eighteenth cause of action alleges a violation of Section 11 of the Securities Act, 15 U.S.C. § 77k, which "states that any signer, officer of the issuer, or underwriter may be held liable for a registration statement containing 'an untrue statement of material fact or omitting to state a material fact . . . necessary to make the statements therein not misleading.'" I. Meyer Pincus & Associates, P.C. v. Oppenheimer & Co., 936 F.2d 759, 761 (2d Cir. 1991) (quoting 15 U.S.C. § 77k(a)); accord Finkel, supra, 962 F.2d 169 (Section 11 "creates civil liability for false and misleading statements made in registration statements"); Greenapple v. Detroit Edison Co., 618 F.2d 198, 205 (2d Cir. 1980). Section 11 imposes strict liability on the class of defendants listed therein in favor of those who purchase securities pursuant to registration statements containing material misstatements or omissions. See Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82, 74 L. Ed. 2d 548, 103 S. Ct. 683 (1983).
However, plaintiffs' claims under Section 11 must fail. First, the Court already has held that plaintiffs were options sellers, rather than purchasers. The plaintiffs in the instant action simply do not have standing to maintain a suit under Section 11: in fact, the only potential litigants with standing to maintain a suit under Section 11 are the parties who purchased options from plaintiffs. Moreover, there has been no showing of the "material misstatement or omission [in the registration statement that is necessary] to establish [a] prima facie case." 459 U.S. at 382.
The options at issue in the instant case were issued by OCC and traded on the CBOE in conjunction with a registration statement on Form S-20. See Exhibits to Plaintiffs' Memorandum in Opposition to Defendants' Motions to Dismiss the Third Amended Complaint, tab 6.
However, rather than relying on misstatements in the S-20, the Third Amended Complaint only alleges that the ODD was false. See, e.g., Third Amended Complaint P97. Plaintiffs' claim that the purported falsehoods in the ODD can form the basis for liability under Section 11 is based on Rule 9b-1, 17 C.F.R. § 240.9b-1(b)(1), which provides that the "the use of an [ODD] shall not be permitted unless the options class to which such statement relates is the subject of an effective registration statement on Form S-20." Thus, plaintiffs contend that the ODD was incorporated by reference into the S-20, and can be considered as the basis for an action under Section 11.
However, the fact that the ODD is part of the regulatory scheme with respect to options does not demonstrate that it was incorporated by reference into the S-20 for the purposes of Section 11. In fact, although 17 C.F.R. § 230.411(d) provides that "an express statement that the specified matter is incorporated by reference at the particular place in the registration statement where the information is required," there is no explicit incorporation by reference in the S-20. But see Spicer, supra, slip op. at 35. Moreover, even if the ODD were incorporated into the S-20 by reference, the Court already has held that the ODD does not contain false and misleading statements. Accordingly, the claims under Section 11 must be dismissed.
4. Exchange Act Sections 6, 17A and 19
In the twelfth, thirteenth and fourteenth causes of action, plaintiffs allege that OCC and CBOE did not follow their internal rules of operation during the October 1987 market crash, in violation of Sections 6, 17A and 19 of the Exchange Act, 15 U.S.C. §§ 78f(b), 78q-1(b)(3) and 78s(g)(1), which set forth threshold requirements for the organization of and rules governing securities exchanges. Specifically, plaintiffs allege that CBOE "kept the OEX market open when the markets for the underlying securities were in chaos and did not permit orderly market operation. . . . [and] reopened the market as soon as possible despite a requirement not to resume trading unless the 'interests of a fair and orderly market are best served by a resumption of trading.'" Third Amended Complaint PP157-58. Further, plaintiffs allege that "OCC imposed margin requirements on the basis of arbitrary and misleading prices in violation of its rules." Id. P160. According to plaintiffs, these actions were taken "in order to maintain volume and excessive reserves which would have been lost if the markets were closed and fair prices were used. They did this to promote their own financial interests at the expense of the plaintiffs and other market participants." Id. P161.
Defendants move to dismiss these claims on five grounds. See Memorandum of Chicago Board Options Exchange, Inc. and the Options Clearing Corporation in Support of their Motions to Dismiss Plaintiffs' Third Amended Complaint ("Defendants' Motion"), at 35-56. The majority of defendants' arguments on these claims relate to the claim that no private right of action exists under Sections 6, 17A and 19, an issue that explicitly has been left open by the Second Circuit. See Brawer v. Options Clearing Corp., 807 F.2d 297, 299 n.2 (2d Cir. 1986), cert. denied, 484 U.S. 819, 98 L. Ed. 2d 39, 108 S. Ct. 76 (1987); see also Kakar v. Chicago Board Options Exchange, Inc., 681 F. Supp. 1039, 1041-43 (S.D.N.Y. 1988) (finding no private right of action under Exchange Act Section 6). However, because examination of the face of the Third Amended Complaint reveals that plaintiffs have not alleged that defendants acted with the requisite state of mind to impose liability under these sections, the Court disposes of these claims without reaching the difficult question whether a private right of action should be implied. See Cort v. Ash, 422 U.S. 66, 45 L. Ed. 2d 26, 95 S. Ct. 2080 (1985); see also Thompson v. Thompson, 484 U.S. 174, 188-91, 98 L. Ed. 2d 512, 108 S. Ct. 513 (1988) (Scalia, J., concurring) (arguing that Cort has been overruled).
Brawer, which involved a plaintiff's allegations of irregularities in the trading of OCC options on the American Stock Exchange, addressed the mental state that must be pleaded and proved to prevail on an action which claims that a self-regulatory organization violated its internal, discretionary rules. As explained by the Second Circuit, "courts have consistently held that 'absent allegations of bad faith [an exchange and its officials] may not be held for discretionary actions taken in the discharge of their duties pursuant to rules and regulations of the exchange.'" Brawer, supra, 807 F.2d at 302 (quoting P.J. Taggares Co. v. New York Mercantile Exchange, 476 F. Supp. 72, 76 (S.D.N.Y. 1979)). The bad faith standard also applies in cases "alleging violations of discretionary rules by the security exchanges." Id. The rationale for this standard is to further "the Congressional scheme of exchange self-regulation." Id.
In the Third Amended Complaint, plaintiffs have failed to delineate which CBOE and OCC rules were violated. However, the Court believes that plaintiffs allege a violation of CBOE Rule 24.7, which provides that "trading shall . . . be halted whenever the Exchange deems such action appropriate in the interests of a fair and orderly market and to protect investors [and] may resume if the Exchange determines that the conditions which led to the halt or suspension are no longer present and that the interests of a fair and orderly market are best served by a resumption of trading." Further, it appears that OCC is alleged to have violated OCC Rule 602A(b)(4), which provides that "the [OCC] may fix premium margin . . . at such amount as it deems necessary or appropriate in the circumstances to protect the respective interests of Clearing Members, the Corporation, and the public." Because these rules clearly are discretionary, plaintiffs must allege that CBOE and OCC acted in bad faith to prevail on their claims under Sections 6, 17A and 19.
However, the Third Amended Complaint falls far short of alleging bad faith conduct. According to the plaintiffs, the challenged actions were taken "to maintain volume and excessive reserves . . . [and] to promote [defendants'] financial interests at the expense of the plaintiffs." These averments are almost identical to the allegations found to be insufficient in Brawer, where the plaintiff claimed that defendants sought to "generate increased trading volumes and revenues." Brawer, supra, 807 F.2d at 303. As stated by the Second Circuit, such a "claim of bad faith [is] too remote and speculative. 'If such a degree of self-interest were allowed to demonstrate bad faith, then exchange board members . . . would inevitably be subject to bad-faith charges, and the concept of exchange self-regulation would be undermined.'" Id. (quoting Sam Wong & Son, Inc. v. New York Mercantile Exchange, 735 F.2d 653, 672 (2d Cir. 1984) (Friendly, J.) (citation omitted)). Thus, because the plaintiffs have failed to plead facts sufficient to give rise to an inference of bad faith, the twelfth, thirteenth and fourteenth causes of action must be dismissed.
5. Exchange Act Section 29(b)
In addition to stating claims for substantive violations of the Securities Act and Exchange Act, plaintiffs' first, second and third causes of action seek to void certain contracts pursuant to Section 29(b) of the Exchange Act, 15 U.S.C. § 78cc. Section 29(b) provides that
Every contract made in violation of any provisions of this title or of any rule or regulation thereunder, and every contract (including any contract for listing a security on an exchange) . . . the performance of which involves the violation of, or the continuance of any practice in violation of, or the continuance of any relationship or practice in violation of, any provision of this title or any rules or regulations thereunder, shall be void.
To establish a violation of Section 29(b), the plaintiffs must "show that (1) the contract involved a 'prohibited transaction,' (2) he is in contractual privity with the defendant, and (3) he 'is in the class of persons the Act was designed to protect.'" Regional Properties, Inc. v. Financial and Real Estate Consulting Co., 678 F.2d 552, 559 (5th Cir. 1982); accord Pearlstein v. Scudder & German, 429 F.2d 1136, 1149 (2d Cir. 1970) (Friendly, J., dissenting), cert. denied, 401 U.S. 1013, 28 L. Ed. 2d 550, 91 S. Ct. 1250 (1971); In re Gas Reclamation, Inc. Securities Litigation, 733 F. Supp. 713, 733 (S.D.N.Y. 1990). However, there are certain limits to the reach of Section 29(b). For example, "under § 29(b) of the Exchange Act, only unlawful contracts may be rescinded, not unlawful transactions made pursuant to lawful contracts." Zerman v. Jacobs, 510 F. Supp. 132, 135 (S.D.N.Y.) (Weinfeld, J.), aff'd, 672 F.2d 901 (1981). Further, rescission of a contract pursuant to Section 29(b) is not available without an underlying violation of the substantive provisions of the securities laws. See National Union Fire Insurance Co. v. Turtur, 892 F.2d 199, 206 n.4 (2d Cir. 1989).
In reviewing the claims under Section 29(b), the Court first notes that it is handicapped by plaintiffs' failure to delineate which contracts allegedly violated the securities laws. Although the Third Amended Complaint refers to the standardized options contracts issued by OCC, and to the fact that options are managed by OCC and traded on the CBOE, see, e.g., Third Amended Complaint P30, the first, second and third causes of action do not aver when these contracts were executed, which of the litigants were parties to the contracts, and what terms and provisions of the contracts violated the securities laws. In fact, all of the claims in the first three causes of action directly relate to the seizure and liquidation of plaintiffs' accounts, which allegedly violated contracts between Pompano, East Wind and Bear Stearns. In the absence of allegations that OCC or CBOE executed or performed pursuant to specific voidable contracts, it is difficult for the Court even to review plaintiffs' claims.
Moreover, in contrast to plaintiffs' contention that "the contracts at issue here (standardized options contracts) were entered into in violation of numerous provisions of the Federal Securities Laws," Plaintiffs' Response, at 115, the Court already has determined that the allegations in the Third Amended Complaint do not state a violation of the securities laws by OCC and CBOE. Thus, for example, plaintiffs' allegations do not support claims under Section 10(b), because they fail to plead fraud with particularity, do not allege that the defendants knowingly made false statements or failed to correct any information that became false in light of subsequent events and do not allege that the fraud occurred in connection with the purchase or sale of securities. Further, the claims under Sections 12(1) and 12(2) were dismissed because plaintiffs were not purchasers of securities, which is the class of plaintiffs that these provisions were intended to protect. Similarly, the claims under Section 11 were rejected because there was adequate and complete disclosure in the statutorily mandated registration documents. Thus, in the absence of a viable claim that the securities laws were violated, plaintiffs' claims under Section 29 must be dismissed.
6. State Law Claims
The Court next turns to consider defendants' motion to dismiss the fourth, tenth and eleventh causes of action, which arise under state common law principles of fraud, breach of contract and breach of fiduciary duty. The motions to dismiss these claims rest on two primary bases. First, defendants assert that the state law causes of action are preempted by the federal securities laws. Second, defendants contend that plaintiffs have failed to plead a claim under state law upon which relief can be granted.
In determining whether state law is preempted by a federal statute, the Court is guided by Congressional intent. See Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S. Ct. 478, 482, 112 L. Ed. 2d 474 (1990).
Congress may pre-empt state law in several ways: "First, in enacting the federal law, Congress may explicitly define the extent to which it intends to preempt state law. Second, even in the absence of express pre-emptive language, Congress may indicate an intent to occupy an entire field of regulation, in which case the States must leave all regulatory activity in that area to the Federal Government. Finally, if Congress has not displaced state regulation entirely, it may nonetheless pre-empt state law to the extent that the state law actually conflicts with federal law."
Rogers v. Consolidated Rail Corp., 948 F.2d 858, 859 (2d Cir. 1991) (quoting Michigan Canners & Freezers Association, Inc. v. Agricultural Marketing & Bargaining Board, 467 U.S. 461, 469, 81 L. Ed. 2d 399, 104 S. Ct. 2518 (1984)).
The Second Circuit has not addressed the issue whether the federal securities laws that govern options trading preempt state law. However, in Golden Nugget, Inc. v. American Stock Exchange, Inc., 828 F.2d 586, 589 (9th Cir. 1987), the Ninth Circuit reversed the district court's holding that state law was preempted by the securities laws, finding that "Congress probably did not intend that the SEC occupy the entire field of options regulation." Moreover, Section 28(a) of the Exchange Act, 15 U.S.C. § 78bb(a), provides that
the rights and remedies provided by this title shall be in addition to any and all other rights and remedies that may exist at law or in equity. . . . Nothing in this title shall affect the jurisdiction . . . of any state over any security or any person insofar as it does not conflict with the provisions of this title or the rules and regulations thereunder.