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DL CAPITAL GROUP LLC v. NASDAQ STOCK MARKET INC.

May 3, 2004.

DL CAPITAL GROUP LLC, Plaintiff, -against- NASDAQ STOCK MARKET INC. and, ROBERT GREIFELD, 90054 Defendants


The opinion of the court was delivered by: CHARLES HAIGHT, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff DL Capital Group LLC ("DL Capital") is an institutional investor which brought this purported class action against Nasdaq Stock Market, Inc. ("Nasdaq") and its President, Robert Greifeld, for monetary losses as a result of defendants' allegedly fraudulent conduct. Nasdaq is a subsidiary of the National Association of Securities Dealers, Inc. ("NASD"). Plaintiff claims that Nasdaq committed fraud in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 778j(b), 78t(a) ("Exchange Act") and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission ("SEC"). Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, defendants move this Court to dismiss the complaint with prejudice for failure to state a claim upon which relief can be granted.

The captioned action is one of three similar purported class suits before this Court challenging Nasdaq's regulatory actions in the suspension of trading and the cancellation of certain trades in the shares of Corinthian Colleges, Inc. ("COCO") on December 5, 2003. See also Krishnaiah v. Nasdaq Stock Market, Inc., No. 03 Civ. 10008; Fulkerson v. Nasdaq Stock Market, Inc., No. 03 Civ. 10168. Each of the three plaintiffs purports to sue on behalf of all persons or entities who traded the common stock of COCO on the Nasdaq market "between 10:46 a.m. on December 5, 2003 and the time Nasdaq announced the cancellation of all trades in COCO between 10:46 a.m. and 10:58:08 a.m., which was approximately 12:30 p.m., on December 5, 2003, inclusive (the `Class Period') . . ." Complaint in the captioned action, at ¶ 1.

  The three plaintiffs each filed separate motions to consolidate the actions and to be appointed as lead plaintiffs. However, plaintiff Krishnaiah, No. 03 Civ. 10008, has subsequently withdrawn his motion for appointment as lead plaintiff. The motions filed by DL Capital and Fulkerson remain pending. No class has as yet been certified.

  I. BACKGROUND

  For purposes of this motion, Plaintiff's well-pleaded allegations of fact will be taken as true, in accordance with the standard of review for a motion to dismiss. See Papasan v. Allain, 478 U.S. 265, 283 (1986).

  A. NASDAQ

  Nasdaq is a subsidiary of the NASD, a self-regulatory organization ("SRO") registered with the SEC as a national securities association, pursuant to the Maloney Act, 15 U.S.C. § 780-3 et seq., in which Congress delegated power to SROs, such as the NASD, to enforce compliance by members of its industry of "the legal requirements laid down in the Exchange Act and the ethical standards going beyond those requirements." Austin Mun. Sec., Inc. v. National Ass'n of Sec. Dealers, Inc., 757 F.2d 676, 680 (5th Cir. 1985) (citations omitted). However, Congress also granted the SEC broad supervisory responsibilities over SROs, such that they are subject to extensive oversight, supervision and control by the SEC on an ongoing basis. 15 U.S.C. § 78s(a)(3)(B). Every SRO, as well as its members and persons associated with its members, must comply with the multitude provisions of the Exchange Act, as well as its own rules, and the rules of both the SEC and Municipal Securities Rulemaking Board (MSRB). 15 U.S.C. § 78s(g)(1), (h). Should an SRO fail to comply, the SEC has the authority to suspend or revoke the registration of the SRO, or censure or restrict the activities, functions, and operations of the organization, as well as execute further sanctions. Austin, 757 F.2d at 680. The SEC may also initiate judicial proceedings to enjoin any activity that would violate the Exchange Act or the NASD's rules and may seek civil penalties against violators. 15 U.S.C. § 78u(d)(1), (d)(3)(a).

  The NASD has delegated to Nasdaq regulatory responsibilities for developing, operating, and maintaining systems and services for the Nasdaq Stock Market, an electronic, screen-based market system. The NASD has also delegated to Nasdaq responsibility for forming regulatory policies and listing criteria for the stock market, subject to its and the SEC's approval. Pursuant to its delegated authority, Nasdaq oversees the trading of thousands of shares of stock each day on Nasdaq systems.

 
B. Plaintiff's trades in Corinthian Colleges, Inc.
  COCO is a company that operates 79 for-profit colleges throughout the United States. Its common stock is traded on the Nasdaq Stock Market.

  Beginning on 10:46 a.m. on December 5, 2003, the market price of COCO's shares unexpectedly fell from $57.45 per share to a low of $38.97 per share in a matter of 12 minutes. At 10:55 a.m. Nasdaq received word that the price decline was due to a computer malfunction in a NASD member's order routing system which caused thousands of sell orders to be erroneously flooded into the market. By 10:58 a.m. Nasdaq halted trading in COCO, stating that the price drop was due to the "misuse or malfunction" of an electronic trading system.

  After receiving assurances from NASD members that the problem would not arise again, at 11:50 a.m. Nasdaq disseminated a "pop-up message" to appear on all Nasdaq subscriber screens that read, "NASDAQ IS CURRENTLY REVIEWING ALL TRANSACTIONS IN SYMBOL COCO FROM APPROXIMATELY 10:46 TO 10:58." Five minutes later, at 11:55 a.m., Nasdaq officially resumed trading in COCO. By that point, the price of the COCO stock had recovered from its lows between 10:46 and 10:58 a.m.

  At 11:57 a.m., after trading had resumed, Nasdaq issued a system status message that stated, "TRADING IN COCO RESUMED FOR QUOTES AT 11:50, TRADES AT 11:55. NASDAQ IS CURRENTLY REVIEWING ALL TRANSACTIONS IN COCO FROM APPROXIMATELY 10:46 TO 10:58:08."*fn1 By 12:03 p.m., Nasdaq made the decision to cancel all trades made between 10:46 and 10:58:08 a.m. At this point, however, the decision had not been announced to traders.

  At 12:27 p.m., Nasdaq issued another system status message announcing the cancellation of COCO trades. The message read, in part, as follows:
Nasdaq, on its own motion, has determined that all trades reported to Nasdaq in COCO (Corinthian Colleges Inc.) that were executed today, 12/5/03, from 10:46:00 Eastern Time to 10:58:08 will be canceled, pursuant to UPC Rule 11890.
  Plaintiff alleges that between 11:55 a.m., when Nasdaq resumed trading of COCO shares to 12:27 p.m., when Nasdaq announced its decision to cancel certain COCO trades, plaintiff made trading decisions that resulted in losses. Plaintiff further alleges that Nasdaq's delay in notifying its traders ...

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