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Krishnaiah, No. 03 Civ. 10008, has subsequently withdrawn his motion for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.
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
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,
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
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 ...