The opinion of the court was delivered by: ROBERT SWEET, District Judge
Pursuant to Fed.R.Civ.P. 9 (b) and 12 (b) (6) and the
Private Securities Litigation Reform Act ("PSLRA"), defendants
LaBranche & Co. Inc. ("LaBranche & Co."), LaBranche & Co. LLC
("LaBranche LLC"), G. Michael LaBranche ("M. LaBranche"), William
J. Burke, III ("Burke"), James G. Gallagher ("Gallagher"), Alfred
O. Hayward, Jr. ("Hayward"), Robert M. Murphy ("Murphy"), S.
Lawrence Prendergast ("Prendergast"), George E. Robb, Jr.
("Robb"), and Harvey S. Traison ("Traison")*fn1
(collectively "the Defendants") have moved to dismiss the
Corrected Consolidated Class Action Complaint ("the Complaint")
filed by lead plaintiffs Anthony Johnson, Clyde Farmer, Edwin
Walthall, Donald Stahl, and the City of Harper Woods Retirement
System (the "Plaintiffs") individually and on behalf of all
others similarly situated. The Defendants have also moved for
reconsideration of this Court's Memorandum Opinion of August 27,
2004, In re LaBranche Sec. Litig., 333 F. Supp. 2d 178
(S.D.N.Y. 2004). The Plaintiffs have moved for an order
compelling discovery from the Defendants.
For the reasons set forth below, Defendants' motion to dismiss
the Complaint is granted in part and denied in part. Plaintiffs
are granted leave to replead within thirty (30) days of entry of
this Opinion. In light of the disposal of the Defendants' motion to dismiss the Complaint, Defendants' motion
for reconsideration of the August 27, 2004 memorandum opinion and
Plaintiffs' motion to compel discovery are both denied as moot.
This action was initiated on or about October 16, 2003.
Pursuant to an opinion of this Court dated March 22, 2004,
related actions were consolidated with the first-filed case, lead
plaintiff was appointed, and lead plaintiff's choice of lead
counsel was approved. See Sofran v. LaBranche & Co., Inc.,
220 F.R.D. 398 (S.D.N.Y. 2004). On July 12, 2004, Plaintiffs
filed the Corrected Consolidated Class Action Complaint ("the
Complaint"). Pursuant to a Memorandum Opinion dated August 27,
2004, the Court lifted the automatic stay on discovery imposed by
15 U.S.C. § 78u-4 (b) (3) (b). See In re LaBranche Sec.
Litig., 333 F. Supp. 2d at 184. On September 13, 2004,
Defendants moved for reconsideration of the August 27, 2004
Memorandum Opinion, and this motion was heard on October 13,
2004. On December 8, 2004, Defendants' motion to dismiss the
Complaint pursuant to Fed.R.Civ.P. 9 (b) and 12 (b) (6), which
had been filed on August 16, 2004, was heard and marked as fully
submitted. On May 4, 2005, the Plaintiffs motion to compel
discovery, which was filed March 17, 2005, was heard and marked
as fully submitted. The Parties
The Plaintiffs purchased the publicly traded common stock of
LaBranche & Co. between August 19, 1999 and October 15, 2003
("the Class Period").
LaBranche & Co. is a corporation organized and existing under
the laws of Delaware with its principal place of business at One
Exchange Plaza, New York, New York. LaBranche & Co. is a holding
company that is the sole member of LaBranche LLC.
LaBranche LLC is a limited liability company and is the
specialist subsidiary of LaBranche & Co. It has its principal
place of business at 14 Wall Street, New York, New York.
LaBranche LLC is the subsidiary through which LaBranche & Co.
conducts equity specialist operations on the New York Stock
Exchange ("NYSE") and the American Stock and Options Exchange
M. LaBranche has been Chief Executive Officer ("CEO"),
Chairman, and President of LaBranche & Co. since the company's
initial public offering ("IPO") in August 1999. M. LaBranche has
served as Chairman of the Management Committee of LaBranche LLC
since 1996, as a member of the Management Committee of LaBranche
LLC since 1988, and as a specialist with LaBranche LLC since
1977. During the Class Period, he also served as Governor of the
NYSE and as a member of the NYSE's Market Performance Committee. Murphy became a member of LaBranche & Co.'s Board of Directors
and CEO of LaBranche LLC on March 16, 2001. During the Class
Period, Murphy served as Vice Chairman and Director of the NYSE.
Hayward has been a Director and Executive Vice President of
LaBranche & Co. since the company's IPO. He has been a specialist
with LaBranche LLC since 1983, and he as served as a member of
the Management Committee of LaBranche LLC since 1994. He sits on
the NYSE Arbitration Board.
Gallagher was a Director and Executive Vice President of
LaBranche & Co. from August 1999 until his retirement in January
2003. He was a member of the Management Committee of LaBranche
LLC from 1998 to January 2003.
Burke was Secretary of LaBranche & Co. during the Class Period.
He has been Director of Business Development of LaBranche LLC
since October 1999, and he was Director of Risk Management of
LaBranche LLC from August 1999 to January 2003.
Traison has been LaBranche & Co.'s Senior Vice President and
Chief Financial Officer ("CFO") since March 2000. Traison was a
Director of LaBranche & Co. from March 2000 until January 2003. Prendergast has been a Director of LaBranche & Co. and the
company's Executive Vice President of Finance since the company's
Robb became a Director of LaBranche & Co. on March 16, 2001.
The Complaint alleged that LaBranche & Co failed to disclose
and misrepresented the following adverse facts, among others
that: (1) LaBranche LLC specialists wrongfully engaged in the
illegal practice of "trading ahead" at the NYSE, which involved
wrongfully trading on nonpublic information in order to increase
the firm's proprietary trading revenue; (2) LaBranche LLC engaged
in illegal "interpositioning" by causing or allowing its traders
to put its own interest ahead of investors by ignoring one
investor order while in the process of interacting with another
investor, thereby creating illegal profits; (3) and LaBranche &
Co., throughout the Class Period, improperly recognized revenue
from its scheme in violation of Generally Accepted Accounting
Principles ("GAAP").*fn2 As a result of the failure to disclose these adverse facts,
LaBranche & Co. is alleged to have materially overstated and
artificially inflated its earnings, net income, and earnings per
share, thereby causing its common stock to trade at an
artificially inflated price. Count One of the Complaint alleges
that the LaBranche LLC, LaBranche & Co, and certain of the
Individual Defendants thereby violated Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"), see
15 U.S.C. § 78 et seq., and Rule 10b-5 promulgated thereunder.
See 17 C.F.R. § 240. 10b-5. Count Two of the Complaint alleges
that the Individual Defendants violated Section 20 (a) of the
Exchange Act by exercising control over LaBranche & Co. See
15 U.S.C. § 78t (a).
The following facts are drawn from the Complaint and do not
constitute findings of the Court.
The NYSE and the United States Securities and Exchange
Committee ("SEC") investigations that brought LaBranche LLC's
alleged improper trading practices to the attention of the
investing public are described in Subsection A. The alleged false
and misleading statements are described in Subsection B. Certain
allegations relating to scienter are described in Subsection C. A. The Alleged Improper Conduct By LaBranche Specialists and
On August 19, 1999, LaBranche & Co. went public with an IPO of
11,5000,000 shares of common stock priced at $14 per share.
On January 13, 2003, the NYSE notified LaBranche & Co. that its
Division of Market Surveillance ("DMS") had opened an
investigation of LaBranche LLC in connection with the activities
of individual specialists on the floor of the NYSE.
On April 16, 2003, LaBranche & Co's common stock closed at
$17.73 per share.
On April 17, 2003, The Wall Street Journal reported that
certain specialist firms were under investigation. See Kate
Kelly & Susan Craig, Big Board Is Probing Specialists For
Possible `Front-Running', Wall St. J., Apr. 17, 2003, at Al.
That same day, NYSE issued a one-paragraph statement disclosing
that it had begun an investigation of trading abuses by several
NYSE specialist firms. Also that day, LaBranche & Co. issued a
press release containing the following alleged misstatement:
Our specialists have always focused on putting the
customers first, as proved by the superior price
improvement that our specialists provide to our
customers on a daily basis. LaBranche has always been
committed to the regulatory framework of the NYSE and has responded promptly to any area of regulatory
The April 17, 2003 closing price of LaBranche & Co. common
stock was $16.49 per share.
On April 18, 2003, The Wall Street Journal reported that
LaBranche LLC and other specialist firms were the subject of an
investigation by the NYSE into whether they were providing
inferior stock-execution quality to certain customers. See Kate
Kelly & Susan Craig, NYSE Probe Reaches 5 of 7 Specialist Firms
`Front-Running' Investigation Involves Biggest Companies, Wall
St. J., Apr. 18, 2003, at C1. That day, Bloomberg News reported
that the SEC had begun an investigation of LaBranche and other
NYSE specialist firms. See Eleanor Wason, SEC Probing NYSE's
Surveillance of Trading Activities, WSJ Says, Bloomberg News,
Apr. 18, 2003.
In the April 18, 2003 edition of The Washington Post,
defendant M. LaBranche was quoted as saying "We work diligently
to make sure our customers are getting the best prices
available. . . . It is our duty to make sure their interests are
protected." Philip Boroff (Bloomberg News), Specialist Firms
Scrutinized By NYSE, Wash. Post, Apr. 18, 2003, at E2.s
The April 21, 2003 closing price of LaBranche & Co. common
stock was $16.29. On April 22, 2003, The Wall Street Journal reported that
compliance officers of six of the seven NYSE specialist firms,
including LaBranche LLC, had met on March 20, 2003 to discuss
concerns about front-running. See John Hechinger, et al.,
NYSE Probe Involves Dozens Of Stock Issues Disclosure Of March
Meeting Of Big Board Specialty Firms Reveals Scope of
Investigation, Wall St. J., Apr. 22, 2003, at C1. According to
the article, "A number of firms attending the meeting had been
asked to give testimony at the NYSE in the inquiry." Id.
On July 25, 2003, LaBranche & Co. disclosed that the NYSE
Division of Enforcement had served LaBranche LLC with a charge
memorandum due to its failure to produce email sent and/or
received by LaBranche LLC employees (including specialists) in
On August 27, 2003, LaBranche & Co. disclosed that an NYSE
hearing panel had determined that LaBranche LLC had failed to
cooperate with the ongoing NYSE investigation, and LaBranche LLC
was ordered to turn over the January 2002 email.
On September 22, 2003, The Wall Street Journal reported that
the SEC had intensified its inquiry into LaBranche and other NYSE
specialist firms. See Kate Kelly, Susanne Craig & Deborah
Solomon, SEC Intensifies Inquiry at NYSE Of Trading Firms Move
Comes as Big Board Names Reed Interim Chief; Regulatory Role Questioned, Wall St. J., September 22, 2003, at A1. The article
stated that the SEC investigation, which had initially focused on
whether specialist traders had engaged in front-running, had been
expanded to examine whether specialist traders had engaged in a
second form of improper conduct, which the article characterizes
as "trading ahead." Id. That day, LaBranche & Co. common stock
closed at $16.05.
On October 1, 2003, LaBranche & Co. issued a press release
stating, in pertinent part, that:
[r]ecent media reports indicate that there is
confusion about the scale of the investigation. After
conferring with the NYSE, LaBranche estimates the
activity under review would amount to a very small
fraction of its trading revenues, substantially less
than one percent. LaBranche said that it believes
this would be the case for any period being reviewed
to date by the NYSE and covers trading in all
LaBranche Specialist stocks. While LaBranche takes
every transaction seriously, it believes that the
activity under review is statistically insignificant
relative to its trading volumes. LaBranche also
believes that the distraction caused by the
investigation is disproportionate to its scope and
looks forward to its resolution.
(Press Release, LaBranche & Co. Inc. Investor Relations,
"LaBranche & Co. Provides Anticipated Third Quarter Results;
Comments on NYSE Investigation," (Oct. 1, 2003) (available at
http://www.labranche.com/newsinfo.html)). It is alleged that this
statement was materially false and misleading. On October 16, 2003, the NYSE issued a press release stating,
in pertinent part, that:
The New York Stock Exchange Enforcement Division has
informed five specialist firms that it has determined
to bring disciplinary action against them. The
actions will allege failure to comply with
fundamental Exchange auction market rules and
policies and applicable securities regulations during
a three-year period from Jan. 1, 2000 through Dec.
31, 2002. The Exchange will also seek substantial
fines and improvements in the self-monitoring and
compliance practices of specialist firms, as well as
reimbursement of potential investor losses.
Additionally, the Exchange announced that it is
implementing systems software at the point-of-sale to
deter similar conduct in the future and to further
enhance the Exchange's market surveillance efforts.
(Press Release, NYSE, "NYSE Informs Specialist Firms of Planned
Disciplinary Action Systems Software Being Implemented to Deter
Improper Trading" (Oct. 16, 2003) (available at
http://www.nyse.com/audience/media.html)). The above-described
press release identified the following two forms of alleged
misconduct by the specialist traders:
In some situations the specialist had customer buy
and sell orders on the electronic order book that
should have been crossed and executed with or against
each other, but instead the specialist traded for the
firm account with each order to the disadvantage of
the customers.*fn3 In other situations, the
electronic order book contained a customer order that could have been
executed against a second order, but instead the
specialist traded for the firm account with the
second order, to the disadvantage of the customer
order already on the book.*fn4
(Id. (footnotes added)). That day, LaBranche & Co. common stock
closed at $11.26 per share.
On October 21, 2003, LaBranche & Co. announced that in the
third quarter of 2003, it had generated $70.9 million in revenue.
(See 10/21/03 Form 8-K, Ex. 99.1, at 1). In the third quarter
of 2002, LaBranche & Co. had generated $118.3 million in revenue.
(See id.). LaBranche & Co. also announced that it had
suspended its dividend.
On January 23, 2004, LaBranche issued a press release
it has received a "Wells Notice" from the staff of
the Securities and Exchange Commission notifying
LaBranche that the staff is considering recommending
that the Commission bring a civil enforcement action
against LaBranche and its NYSE Specialist subsidiary,
LaBranche & Co. LLC, for possible violations of
securities laws and NYSE rules in the course of its
Specialist trading activity.
(Press Release, LaBranche & Co. Inc. Investor Relations,
"LaBranche & Co. Receives `Wells Notice' From the SEC" (Jan. 23,
2004) (available at http://www.labranche.com/newsinfo.html)). LaBranche & Co. also announced that it had received a similar
notice from the NYSE.
On January 28, 2004, LaBranche & Co. announced its 2003
financial results. The company stated:
For the year ended December 31, 2003, revenue was
$306.0 million compared to $452.8 million for the
year ended December 31, 2002. Net loss available to
common stockholders was $139.6 million, or $2.34 per
diluted share, for the year ended December 31, 2003
compared to net income available to common
stockholders of $80.3 million, or $1.34 per diluted
share, for the year ended December 31, 2002.
(Press Release, LaBranche & Co. Inc. Investor Relations,
"LaBranche & Co. Reports Fourth Quarter and Full Year 2003
Results" (Jan. 28, 2004) (available at
On March 30, 2004, the SEC filed an order making findings and
imposing remedial sanctions and a cease-and-desist order pursuant
to Sections 15(b) (4) and 21C of the Securities Act of 1934.
See Order Instituting Administrative And Cease-And-Desist
Proceedings, Exchange Act Release No. 49,500, 82 SEC Docket 1903,
2004 WL 626573 (Mar. 30, 2004) (the "SEC Order"). The SEC Order
provided a useful summary of a specialist's responsibilities and
4. In the NYSE's continuous two-way agency auction
market, specialist firms are responsible for the quality of the markets in the securities in which
individual specialists are registered. A specialist
is expected to maintain, insofar as reasonably
practicable, a "fair" and "orderly" market. A "fair"
market is free from manipulative and deceptive
practices, and affords no undue advantage to any
participant. An "orderly" market is characterized by
regular, reliable operations, with price continuity
and depth, in which price movements are accompanied
by appropriate volume, and unreasonable price
variations between sales are avoided.
5. Specialists have two primary duties: performing
their "negative obligation" to execute customer
orders at the most advantageous price with minimal
dealer intervention, and fulfilling their
"affirmative obligation" to offset imbalances in
supply and demand. Specialists participate as both
broker (or agent), absenting themselves from the
market to pair executable customer orders against
each other, and as dealer (or principal), trading for
the specialists' dealer or proprietary accounts when
needed to facilitate price continuity and fill
customer orders when there are no available contra
parties to those orders.
6. Whether acting as brokers or dealers, specialists
are required to hold the public's interest above
their own and, as such, are prohibited from trading
for their dealers' accounts ahead of pre-existing
customer buy or sell orders that are executable
against each other. When matchable customer buy and
sell orders arrive at specialist's trading posts
generally either through the NYSE's Super Designated
Order Turnaround System ("DOT")*fn5 to an
electronic display book (the "Display Book")*fn6
or by floor brokers gathered in front of the specialist's trading posts
("the crowd") specialists are required to act as
agent and cross or pair off those orders and to
abstain from participating as principal or dealer.
(SEC Order ¶¶ 4-6, 2004 WL 626573, at *2).
The SEC Order also provided a useful summary of the alleged
conduct that gave rise to this action:
7. During the period January 1999 through 2003,
LaBranche breached its duty to refrain from dealing
for its own account while in possession of executable
buy and sell customer orders. Instead, LaBranche
effected improper proprietary trades at the expense
of customer orders.
8. Through the Display Book, the specialist reports
trade executions electronically, and can view all the
incoming DOT market and limit orders on both sides of
the market. Executable buy and sell customer orders
can appear on the Display Book at the same time. In
such instances, specialists should simply "pair off"
or cross the buy and sell orders. In numerous
instances, however, LaBranche specialists improperly
chose not to "pair off" or cross these buy and sell
orders with each other. Sometimes, LaBranche
specialists effected proprietary trades with orders
that arrived electronically through the DOT system to
the Display Book. At other times, LaBranche
specialists effected improper proprietary trades with
orders that came in from the crowd. In either case,
the disadvantaged order was a DOT order visible on
the Display Book that the LaBranche specialist should
have paired with the other order, instead of filling
that other order through a proprietary trade. (Id. at *3 (footnote omitted)).
More specifically, the SEC Order determined that LaBranche
engaged in the following three categories of improper trading
With respect to interpositioning, the SEC Order stated that
"[a]t times from January 1999 through 2003, certain LaBranche
specialists bought stock for the firm dealer account from the
customer sell order, and then filled the customer buy order by
selling from the dealer account at a higher price thus
realizing a profit for the firm dealer account." (Id. at *3).
The SEC Order found that between 1999 and 2003, interpositioning
by LaBranche LLC disadvantaged customers in the amount of
$8,689,574. (See id.).
In particular, the SEC order focused on interpositioning by LaBranche LLC in a small number of stocks.
The SEC order stated:
13. LaBranche's improper interpositioning
transactions, in particular, were heavily
concentrated in a few stocks traded by a small number
of specialists. Specifically, from 1999 through 2003,
40.69% of LaBranche's customer disadvantage from
interpositioning occurred in just six stocks Nokia,
Lucent Technologies Inc., Morgan Stanley, Tyco
International Ltd., Compaq Computer Corp., and Merck
& Co. Inc.
14. The interpositioning violations with respect to
certain transactions in the six stocks listed above
were done by certain LaBranche specialists with
scienter. In such instances, certain LaBranche
specialists disadvantaged a market buy order (i.e., a
purchaser) and/or a sell order (i.e., a seller)
because the specialist sold to the purchaser at one
price and then bought from the seller at a lower
price (or, alternatively, the specialist bought from
the seller at one price and then sold to the
purchaser at a higher price) instead of matching the
purchaser and seller at a better market price for
15. Certain senior executives at LaBranche knew about
the illicit trading because certain of the LaBranche
specialists who were engaged in such interpositioning
in these six stocks were senior executives at
LaBranche, including managing directors, post
managers, and a floor captain, some of whom had
supervisory responsibility for LaBranche's trading
activities on the NYSE floor.
(Id. at *5).
With respect to trading ahead, the SEC Order stated that:
LaBranche specialists sometimes filled one agency
order through a proprietary trade for the firm's account and thereby improperly "traded ahead" of
the other agency order. As a consequence, the
customer order that was traded ahead of was
disadvantaged by being executed at a price that was
inferior to the price received by the dealer account.
Unlike "interpositioning," the "trading ahead"
violations did not necessarily involve a second
specialist proprietary trade into the opposite,
disadvantaged agency order. From January 1999 through
2003, trading ahead by certain LaBranche specialists
resulted in customer disadvantage of $30,969,236.
(Id. at *4).
3. Unexecuted Limit Orders
With respect to unexecuted trade orders, the SEC Order stated
LaBranche specialists traded ahead of executable
limit orders i.e., they improperly effected
proprietary trades with customer orders that they
should have paired with marketable limit orders.
Unlike the "trading ahead" violations described just
above, in these instances the disadvantaged limit
orders were never executed, but rather were cancelled
by the customer before receiving an execution.
Between 1999 and 2003, trading ahead of unexecuted
limit orders by LaBranche caused $1,987,630 in
customer disadvantage. This measurement is determined
based on the difference between the price at which
the order should have been executed and the price at
the time of cancellation.
(Id. at *5).
The SEC Order determined that from 1999 through 2003, the
above-described categories of conduct i.e., interpositioning,
trading ahead, and unexecuted trade orders resulted in customer disadvantage of $41,646,440. (See id. at
*3). LaBranche LLC consented to the SEC Order without admitting
or denying the findings contained therein. (See id. at *1).
Pursuant to the SEC Order, LaBranche LLC agreed to pay a civil
penalty in the amount of $21,872,320 and to disgorge $41,646,440.
(See id. at *11).
In addition to the conduct identified in the SEC Order, the
Plaintiffs allege that LaBranche LLC specialists would
periodically freeze the Display Book orders, thereby preventing
DOT orders from reaching the floor and being executed. While the
Display Book was frozen, LaBranche LLC specialists would complete
their own proprietary trades by either trading ahead or
interpositioning and then restart the Display Book and complete
the public investors' orders.
Plaintiffs allege that the above-described conduct violated the
following NYSE rules governing the conduct of specialists: Rule
92 ("Limitations on Members' Trading Because of Customers'
Orders"), Rule 104 ("Dealings by Specialists"), Rule 123B
("Exchange Automated Order Routing Systems"), Rule 342 ("Offices
Approval, Supervision and Control"), Rule 401 ("Business
Conduct"), Rule 476 (a) (6) ("conduct or proceeding inconsistent
with just and equitable principles of trade"), and Rule 476 (a)
(7) ("acts detrimental to the interest or welfare of the
Exchange"). C. Allegations Relating To Scienter
The Plaintiffs allege scienter on the part of the Individual
Defendants based on the fact that many of them had overlapping
responsibilities with LaBranche LLC and LaBranche & Co. during
the Class Period. Furthermore, M. LaBranche, Murphy, and Hayward
also held leadership positions with the NYSE. The following table
summarizes the positions that each Individual Defendant is
alleged to have held during the Class Period.
Defendant LaBranche LLC LaBranche & Co. NYSE Duties
M. LaBranche Chairman of CEO, Chairman, Governor
Management President (since
Committee (since August 1999) Member of NYSE
Murphy CEO (03/16/01 to Director Vice Chairman
11/03) (03/16/01 to
11/03) Director Hayward Member of Director (since Member of NYSE
Management August 1999) Arbitration Panel
1994) Executive Vice Trustee of
President (since Buttonwood
Specialist (since August 1999) Association
Trustee of NYSE
Former NYSE Floor
Gallagher Member of the Director (08/99
Management to 01/03)
to January 2003) Executive Vice
Burke Director of Secretary
Director of Risk
Traison Senior Vice
to 01/03) Prendergast Director (since
Robb Director (since
March 16, 2001)
The Plaintiffs also allege scienter on the part of the
Individual Defendants based on the fact that they owned shares of
LaBranche & Co. during the Class Period. LaBranche & Co's Proxy
Statements offer the following useful snapshot of ownership of
common stock by the Individual Defendants:
2002 2003 2004
(as of 3/22/02) (as of 3/21/03) (as of 3/19/04)
NAME # OF % # OF % # OF %
SHARES SHARES SHARES
M. LaBranche 3,834,327 6.5 4,001,094 6.7 4,067,761 6.7
Gallagher 2,368,767 4.0 0 * * *
Robb 2,256,141 3.8 * * * *
Hayward 1,974,734 3.4 1,956,468 3.3 1,966,468 3.3 Murphy 1,505,000 2.5 1,515,000 2.5 * *
Burke **fn8 * * * 700,800 1.2%
Prendergast 207,000 *fn9 207,000 207.000
Traison 39,333 72,666 106,000
All 12,188,392 20.7 8,457,892 13.9 7,063,034 11.6%
(04/15/02 Proxy Statement, at 2; 04/16/03 Proxy Statement, at 3;
04/12/04 Proxy Statement, at 3). Furthermore, the Plaintiffs
allege that M. LaBranche, Hayward, and Gallagher had the power to
vote 52.9% of LaBranche & Co.'s common stock. As stated in the
April 16, 2003 Proxy Statement:
Each of our managing directors at the time of our
initial public offering in August 1999 entered into a stockholders' agreement pursuant to which he or she
agreed to vote his or her shares as determined by a
majority of Messrs. LaBranche, Hayward and James G.
Gallagher, a former director and executive officer of
the Company who retired in January 2003. Messrs.
LaBranche, Hayward and Gallagher beneficially own an
aggregate of 8,037,662 shares of common stock,
constituting approximately 13.2% of the outstanding
shares of our common stock. As a result of the
stockholders' agreement, Messrs. LaBranche, Hayward
and Gallagher, acting together as a group, may be
deemed to beneficially own an aggregate of 32,235,551
shares of common stock (including the 8,037,662
shares beneficially owned by them individually),
constituting approximately 52.9% of the outstanding
shares of our common stock. Each of Messrs.
LaBranche, Hayward and Gallagher disclaims beneficial
ownership of any and all shares of common stock held
by any person or entity other than him.
(04/16/03 Proxy Statement, at 3 n. 1).
The Complaint alleges that LaBranche & Co.'s senior executives
e.g., Burke, Gallagher, Hayward, M. LaBranche, Murphy, and
Prendergast received incentive-based cash and equity bonus
compensation that was directly linked to the Company's overall
performance, profit margins, and earnings per share, and that the
Company derived 82 percent of its annual revenue from specialist
trading for LaBranche & Co.'s own accounts.
Plaintiffs allege that the Defendants were motivated to inflate
the value of LaBranche's common stock by a desire to acquire
other specialists firms during the Class Period using as few
shares as possible in order to avoid undue dilution of company stock. It is alleged that during the Class Period,
LaBranche & Co. acquired ten other specialist firms and used its
stock to fund many of these acquisitions. It is alleged that
these acquisitions had the effect of doubling LaBranche & Co.'s
share of the specialist industry, as measured by NYSE trade
volume. In 1998, LaBranche LLC acted as specialist for
approximately 14.2% of the dollar volume traded on the NYSE. By
2002, LaBranche LLC acted as specialist for some 27.2% of the
dollar volume traded on the NYSE. These acquisitions occurred at
time of industry-wide consolidation. It is alleged that during
the Class Period, the total number of NYSE specialists firms
dropped from 25 in 1999 to seven in 2003.
It is alleged that Burke, Gallagher, and Hayward sold
significant holdings of LaBranche common stock during the Class
Period. Gallagher allegedly sold 130,000 shares, generating
proceeds of $3,016,767. Hayward allegedly sold 51,600 shares,
generating proceeds of $1,554,634. Furthermore, it is alleged
that Burke sold 101,420 shares and Hayward sold 312,429 shares
pursuant to a 2002 forward contract with a Delaware trust.
Finally, the SEC Order contains allegations that in January
2000, the NYSE fined LaBranche LLC $1,000 for some eighteen
instances of trading ahead; that in 2001, the NYSE issued an
examination report which noted instances in which a LaBranche specialist traded ahead in two stocks; that between
August 2002 and July 2003, the NYSE fined four LaBranche
specialists $1,000 each for trading ahead; and that in February
2003, the NYSE issued LaBranche an admonition letter for
excessively freezing the Display Book.
Plaintiffs have alleged that Defendants' conduct gives rise to
liability pursuant to Sections 10(b) and 20 (a) of the Exchange
Defendants have moved for dismissal of the Complaint pursuant
to Fed.R.Civ.P. 12 (b) (6), 9 (b), and the PSLRA. In
considering a motion to dismiss pursuant to Rule 12 (b) (6), the
Court construes the complaint liberally, "accepting all factual
allegations in the complaint as true, and drawing all reasonable
inferences in the plaintiff's favor." Chambers v. Time Warner,
Inc., 282 F.3d 147, 152 (2d Cir. 2002) (citing Gregory v.
Daly, 243 F.3d 687, 691 (2d Cir. 2001)).
However, "mere conclusions of law or unwarranted deductions"
need not be accepted. First Nationwide Bank v. Gelt Funding
Corp., 27 F.3d 763
, 771 (2d Cir. 1994). Furthermore, the truth of factual allegations that are contradicted by
documents properly considered on a motion to dismiss need not be
accepted. See e.g., Rapoport v. Asia Elecs. Holding Co.,
88 F. Supp. 2d 179
, 184 (S.D.N.Y. 2000). The following materials may
be considered on a Rule 12 (b) (6) motion:
(1) facts alleged in the complaint and documents
attached to it or incorporated in it by reference,
(2) documents "integral" to the complaint and relied
upon in it, even if not attached or incorporated by
reference, (3) documents or information contained in
defendant's motion papers if plaintiff has knowledge
or possession of the material and relied on it in
framing the complaint, (4) public disclosure
documents required by law to be, and that have been,
filed with the Securities and Exchange Commission,
and (5) facts of which judicial notice may properly
be taken under Rule 201 of the Federal Rules of
In re Merrill Lynch & Co., Inc., 273 F. Supp. 2d 351
(S.D.N.Y. 2003) (footnotes omitted).
"The issue is not whether a plaintiff will ultimately prevail
but whether the claimant is entitled to offer evidence to support
the claims." Villager Pond, Inc. v. Town of Darien,
56 F.3d 375, 378 (2d Cir. 1995) (quoting Scheuer v. Rhodes,
416 U.S. 232, 236 (1974)). In other words, "`the office of a motion to
dismiss is merely to assess the legal feasibility of the
complaint, not to assay the weight of the evidence which might be
offered in support thereof." Eternity Global Master Fund Ltd. v.
Morgan Guar. Trust Co. of New York, 375 F.3d 168, 176 (2d Cir. 2004) (quoting Geisler v. Petrocelli, 616 F.2d 636,
639 (2d Cir. 1980)). Dismissal is only appropriate when "it
appears beyond doubt that the plaintiff can prove no set of facts
which would entitle him or her to relief." Sweet v. Sheahan,
235 F.3d 80, 83 (2d Cir. 2000); accord Eternity Global Master
Fund, 375 F.3d at 176-77.
A claim under section 10 (b) sounds in fraud and must therefore
meet the pleading requirements of Rule 9 (b), Fed.R.Civ.P.
See, e.g., In re Scholastic Corp. Sec. Litig., 252 F.3d 63,
69-70 (2d Cir. 2001). Such a claim must also satisfy certain
requirements of the PSLRA. See 15 U.S.C. §§ 78u-4 (b) (1) &
78u-4 (b) (2); see generally Novak v. Kasaks, 216 F.3d 300,
306-07 (2d Cir. 2000) (setting forth the heightened pleading
standards of the PSLRA that must be met by a plaintiff who
alleges securities fraud under Section 10 (b) and Rule 10b-5);
Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir.
1994) (stating that "[s]ecurities fraud allegations under § 10
(b) and Rule 10b-5 are subject to the pleading requirements of
Rule 9 (b)").
Rule 9 (b) provides that "[i]n all averments of fraud or
mistake, the circumstances constituting fraud or mistake shall be
stated with particularity. Malice, intent, knowledge, and other
condition of mind of a person may be averred generally." Fed.R.Civ.P. 9 (b). The Second Circuit "has read
Rule 9 (b) to require that a complaint [alleging fraud] `(1)
specify the statements that the plaintiff contends were
fraudulent, (2) identify the speaker, (3) state where and when
the statements were made, and (4) explain why the statements were
fraudulent.'" Rombach v. Chang, 355 F.3d 164, 170 (2d Cir.
2004) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170,
1175 (2d Cir. 1993)).
In particular, the plaintiff must allege facts that "give rise
to a strong inference of fraudulent intent." Novak,
216 F.3d 300
, 307 (2d Cir. 2000). The Second Circuit has stated that this
scienter requirement can be satisfied:
"`either (a) by alleging facts to show that
defendants had both motive and opportunity to commit
fraud, or (b) by alleging facts that constitute
strong circumstantial evidence of conscious
misbehavior or recklessness.'"
Acito v. IMCERA Group, Inc., 47 F.3d 47
, 52 (2d Cir. 1995)
(quoting Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124
(2d Cir. 1994)).
Rule 8's general pleading requirement and Rule 9 (b)'s
particularity requirement must be read together. See Ouaknine
v. MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990) (stating that
"Rule 9 (b) . . . must be read together with Rule 8 (a) which requires only a `short and plain statement' of the claims for
relief"); Credit & Fin. Corp. v. Warner & Swasey Co.,
638 F.2d 563, 566 (2d Cir. 1981) (same); In re Initial Pub. Offering Sec.
Litig. ("IPO"), 241 F. Supp. 2d 281, 327 (S.D.N.Y. 2003). These
two rules have been read together to mean that a plaintiff need
not plead evidentiary details. See, e.g., id. The Second
Circuit has stated that it does "not require the pleading of
detailed evidentiary matter in securities litigation."
Scholastic, 252 F.3d 63, 72.*fn10 Courts of this district
have stated that "the application of Rule 9 (b) . . . must not
abrogate the concept of notice pleading." IPO,
241 F. Supp.2d at 327 n. 46.
I. Plaintiffs' Section 10 (b) Claim
Count One of the Complaint asserts that LaBranche & Co.,
LaBranche LLC, Burke, Gallagher, Hayward, M. LaBranche, Murphy,
and Traison violated Section 10 (b) of the Exchange Act and Rule
10b-5. Section 10 (b) provides in pertinent part as follows: It shall be unlawful for any person, directly or
indirectly, by the use of any means or
instrumentality of interstate commerce or of the
mails, or of any facility of any national securities
(b) To use or employ, in connection with the purchase
or sale of any security registered on a national
securities exchange or any security not so
registered, or any securities-based swap agreement
(as defined in section 206B of the Gramm-Leach-Bliley
Act), any manipulative or deceptive device or
contrivance in contravention of such rules and
regulations as the Commission may prescribe as
necessary or appropriate in the public interest or
for the protection of investors.
15 U.S.C. § 78j.
Rule 10b-5 provides in pertinent part as follows:
It shall be unlawful for any person, directly or
indirectly, by the use of any means or
instrumentality of interstate commerce, or of the
mails or of any facility of any national securities
(a) To employ any device, scheme, or artifice to
(b) To make any untrue statement of a material fact
or to omit to state a material fact necessary in
order to make the statements made, in the light of
the circumstances under which they were made, not
(c) To engage in any act, practice, or course of
business which ...