The opinion of the court was delivered by: ROBERT SWEET, District Judge
Defendants Van der Moolen Holding, N.V. ("VDM Holding"),
Friedrich M.J. Bottcher ("Bottcher"), Frank F. Dorjee ("Dorjee"),
James P. Cleaver ("Cleaver"), and Casper F. Rondeltap
("Rondeltap")*fn1 have moved pursuant to Rules 9(b) and
12(b) (6) to dismiss the amended consolidated class action
complaint ("the Complaint") filed by co-lead plaintiffs Elizabeth
Rick and Linda Greene (the "Plaintiffs"). Defendant Van der
Moolen Specialists USA, LLC ("VDM Specialists")*fn2 has
moved separately to dismiss the Complaint pursuant to Rules 9(b)
and 12(b) (6).
For the reasons set forth below, the motions of VDM Holding and
VDM Specialists are denied. The motions of the Individual
defendants are granted in part and denied in part. Plaintiffs are
granted leave to replead within thirty (30) days of entry of this
This action was commenced on October 20, 2003, with the filing
of a class action complaint against VDM Holding, VDM Specialists, Bottcher, Cleaver, Dorjee, and Rondeltap. By opinion
and order dated April 14, 2004, co-lead plaintiffs were appointed
and co-lead plaintiffs' requests with regard to the appointment
of counsel were granted. See Rozenboom v. Van Der Moolen
Holding, N.V., No. 03 Civ. 8284 (RWS), 2004 WL 816440, at *7
(S.D.N.Y. Apr. 14, 2004). The Complaint was filed on September
14, 2004. On November 22, 2004, VDM Holding, Bottcher, Dorjee,
Cleaver, and Rondeltap moved to dismiss the Complaint. Also on
November 22, 2004, VDM Specialists moved separately to dismiss
the Complaint. Both motions were heard and marked as fully
submitted on March 30, 2005.
Plaintiffs purchased publicly traded shares of VDM Holding ADRs
between October 18, 2001 and October 15, 2003 (the "Class
VDM Holding is a limited liability company organized and
existing under the laws of the Netherlands. Its principal place
of business in the United States is located at 45 Broadway, New
York, New York.
VDM Specialists, a limited liability company organized and
existing under the laws of the United States, is a majority-owned
subsidiary of VDM Holding. It was established on or about July
1999, when VDM Holding acquired majority interests in, and integrated the operations of, three previously separate NYSE
specialist firms. VDM Specialists is a broker-dealer registered
with the SEC pursuant to Section 15 (b) of the Exchange Act. As
of August 31, 2003, VDM Specialists acted as the registered
specialist for approximately 377 NYSE-listed securities, which
then accounted for approximately 11% of the dollar volume and 12%
of the share volume traded on the NYSE. According to VDM
Holding's 2002 Annual Report, which is referenced in the
complaint, VDM Specialists was at that time the fourth largest
specialist firm on the NYSE.
VDM Holding owns 75% of VDM Specialists. The other 25% of VDM
Specialists is owned by its senior managers, senior traders and
other individual members of VDM Specialists. These individual
members of VDM Specialists are all employees of VDM Holding.
Bottcher has been Chief Executive Officer ("CEO") and Chairman
of the Management Board ("Chairman") of VDM Holding since January
2000. He has been a member of the VDM Holding Management Board
(the "Board") since 1997. Bottcher is alleged to have signed
certain false and misleading statements published by VDM Holding
during the Class Period.
Dorjee has been the Chief Financial Officer ("CFO") of VDM
Holding since January 1, 2001. He has been a member of the VDM Board since April 11, 2001. Dorjee is alleged to have signed
certain false and misleading statements published by VDM Holding
during the Class Period.
Cleaver has been a member of the VDM Holding Board since April
10, 2002. He has been Chairman of the VDM Specialists Board since
1998. Prior to joining VDM Specialists, Cleaver was the managing
partner of an NYSE specialist firm acquired by VDM Holding in
1998. Cleaver is alleged to have signed certain false and
misleading statements published by VDM Holding during the Class
Rondeltap has been a member of the VDM Specialists management
committee since 2000, and he serves as VDM Specialists'
spokesman. Rondeltap has been a member of VDM Holding's Board
since April 9, 2003. Rondeltap is alleged to have signed certain
false and misleading statements published by VDM Holding during
the Class Period.
This action is brought on behalf of all persons who purchased
American Depository Receipt shares ("ADRs")*fn3 in VDM Holding during the Class Period and who were damaged thereby. VDM
Holding ADRS are alleged to have been traded actively on the NYSE
throughout the proposed class period. VDM Holding, through one of
its four operational segments known as VDM Specialists, acts as a
Specialist firm on the New York Stock Exchange ("NYSE").
Specialist firms are responsible for maintaining a fair and
orderly market in one or more specific securities and must adhere
to NYSE rules that require specialist firms to refrain from
trading on the specialist firm's own account when enough public
investor orders exist to pair up naturally, without undue
It is alleged that during the Class Period, VDM Holding
materially overstated and artificially inflated its earnings, net
income, and earnings per. The Complaint alleges that VDM Holding
failed to disclose that throughout the Class Period, VDM
Specialists derived a substantial share of its revenue from
illegal trading practices and that subsequent declines in VDM
Holding's revenue were attributable to the apparent cessation of such practices.
Count One of the Complaint asserts that the Defendants violated
Section 10(b) of the Securities Exchange Act of 1934 ("the
Exchange Act") and Rule 10b-5 promulgated thereunder. Count Two
asserts that VDM Holding and the Individual Defendants violated
Section 20(a) of the Exchange Act.
The following facts are drawn from the Complaint and do not
constitute findings of the Court.
It should be noted that the Complaint's allegations concerning
the general duties and obligations of a specialist, the improper
trading allegedly engaged in by members of VDM Specialists and
others, and the NYSE and SEC investigations into such trading
practices are substantially similar to those contained in the
Consolidated Complaint filed in In re NYSE Specialists
Securities Litigation, No. 03 Civ. 8264 (RWS). Those allegations
are described in significant detail in a companion opinion issued
today in connection with the In re NYSE Specialists action.
See In re NYSE Specialists Securities Litigation, No. 03 Civ.
8264 (RWS), slip op. at 11-29 (S.D.N.Y. Nov. 9, 2005).
Familiarity with this companion opinion is assumed. VDM Holding principally engages in the trading of securities on
exchanges in the United States and Europe. Its NYSE specialist
operations are conducted exclusively through VDM Specialists.
VDM Specialists' revenue is derived from two categories of
activities: (1) executing trades as an agent, thereby earning a
share of the commission on each trade that it facilitates, and
(2) buying and selling stock shares on its own account, thereby
capturing any profits that these trades generate. During the
Class Period, VDM Holding derived a substantial majority of its
revenue from VDM Specialists. For example, in 2000, 63.4% of VDM
Holding's revenue was generated by VDM Specialists, and in the
first six months of 2001, 72% of VDM Holding's revenue was so
generated. During the Class Period, VDM Holding stated: "We
depend heavily on our New York Stock Exchange specialist
activities, and if they fail to grow as anticipated, it would
hamper our revenue growth." (Compl. ¶¶ 42, 43.)
It is alleged that from the start of the Class Period until at
least January 2003, VDM Specialists breached its obligations and
duties as an NYSE specialist by: (1) causing and allowing its
traders to trade ahead of its customers; (2) interpositioning
itself between matching public buy and sell orders; (3) failing
to properly execute limit orders; and (4) freezing the Display
Book (which reflects incoming orders to the NYSE) so that VDM Specialists could complete proprietary trades
before completing orders entered by public investors.
VDM Holdings made statements during the Class Period concerning
its revenue and the financial performance of VDM Specialists,
which are alleged to be false and misleading because they failed
to disclose that VDM Specialists was engaged in illegal forms of
proprietary trading. These alleged misstatements fall into two
categories: (1) risk disclosures by VDM Holdings that implied
that the Defendants were in compliance with NYSE rules, and (2)
financial reports that failed to disclose that the revenue
figures for VDM Specialists and VDM Holding were materially
inflated as a result of VDM Specialists' reliance on illegal
trading strategies. A description of all such statements is
provided in the appendix to this opinion. Those statements
relating to the revenue of VDM Specialists and VDM Holding are
Quarter VDM VDM VDM VDM Holding
Specialists Specialists Specialists Total Revenue
Total Net Gain on Participation (Millions of
Revenue Principal Rate*fn4 (%) Euros)
(Millions of Dollars)
Q1 `01 65.4 53.4 31.5 100.7 Q2 `01 51.7 41.6 32.1 81.2
Q3 `01 57.6 48.0 31.4 73.9
Q4 `01 61.8 51.6 30.7 89.3
Q1 `02 56.9 47.7 34.9 77.9
Q2 `02 66.4 55.8 34.5 86.3
Q3 `02 69.1 58.1 34.7 86.0
Q4 `02 59.7 49.1 34.4 77.2
(Improper trading alleged to have been curtailed by VDM
Specialists in January 2003.)
Q1 `03 40.7 31.6 31.7 48.4
Q2 `03 39.6 28.9 27.7 47.5
Q3 `03 37.3 27.4 27.7 43.3
It is alleged that VDM Holding's financial statements during
the Class Period violated SEC regulations and Generally Accepted
Accounting Principles ("GAAP") in that they failed to: (1)
disclose facts necessary to present a fair and truthful
representation of VDM Specialists' trading activities; (2)
provide required disclosures; and (3) identify and address those
variables that were necessary for an overall understanding and
evaluation of the company.
On or about January 13, 2003, the NYSE notified VDM Holding
that its Division of Market Surveillance had opened an
investigation of VDM Specialists' conduct in connection with
individual specialists' activities on the floor of the NYSE. As
summarized in the chart below, it is alleged that once VDM Specialists learned of the NYSE investigation into its specialist
trading activities (in or around January 2003), it was forced to
curtail its illegal trading practices, which had a material
adverse effect on VDM Specialists' revenue and participation
rates and also on VDM Holding's revenue. However, it is alleged
that instead of informing investors about the NYSE investigation
on its profitability, VDM Holding told investors that the decline
in income from VDM Specialists was the result of a challenging
trading environment and modest increases in trading volume.
On March 20, 2003, compliance officers of six of the seven NYSE
specialists first met to discuss concerns about improper trading
that had been raised in the NYSE's then-confidential
On March 31, 2003, NYSE investigators began taking depositions
in connection with the specialist investigation. VDM Holding did
not disclose this information to its investors.
On April 16, 2003, VDM Holding ADRs dropped 3.5% from $11.10
per share to close at $10.71 per share.
On April 17, 2003, an article on the front page of The Wall
Street Journal. stated that the NYSE was probing "whether at
least two of [its] largest [specialist] firms may have engaged in
"front-running," or trading ahead of clients. . . ." See Kate Kelly & Susanne Craig, Big Board Is Probing Specialists For
Possible `Front-Running', Wall St. J., Apr. 17, 2003, at A1.
That same day, the NYSE issued a one paragraph statement in which
it disclosed that it had begun an investigation of several NYSE
specialist firms for trading abuses. The closing price for VDM
Holding ADRs on April 17, 2003 was $10.19 per share.
On April 18, 2003, The Wall Street Journal identified VDM
Specialists as a target of the NYSE investigation, indicated that
the investigation was focused on allegations that specialists had
intentionally provided inferior stock-execution prices to certain
of their customers, and stated that the SEC had launched an
investigation of trading practices at VDM Specialists and other
specialist firms. See Kate Kelly & Susanne Craig, NYSE Probe
Reaches 5 of 7 Specialist Firms `Front-Running' Investigation
Involves Biggest Companies, Wall St. J., Apr. 18, 2003, at C1.
The following trading day, April 21, 2003, VDM Holding ADRs
closed at $9.71 per share.
On September 22, 2003, The Wall Street Journal reported that
the SEC investigation had been expanded to examine whether
specialist firms, including VDM Specialists, had traded ahead of
customer orders. 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., Sep. 22, 2003, at A1. That day, VDM
Holding ADRs closed at $13.35 per share. The prior trading day, September 19,
2003, VDM Holding ADRs closed at $13.97 per share.
On October 16, 2003, NYSE issued a press release stating that
it was bringing disciplinary action and seeking fines from five
specialist firms that had allegedly engaged in improper trading
practices. That day, VDM Holding ADRs closed at $9.05. The day
before, VDM Holding ADRs had closed at $10.61 per share.
On March 30, 2004, VDM Specialists entered into a consent
decree with the SEC and a substantially similar stipulation with
the NYSE. These settlements state that between 1999 and 2003,
VDMS Specialists engaged in interpositioning,*fn5 trading
ahead, and failing to execute marketable limit orders. The
settlements state that this conduct, which is estimated to have
resulted in approximately $34.9 million of customer disadvantage
between 1999 and 2003, violated VDM Specialists' duty to serve
public customer orders over its own proprietary interests. Under
the terms of these settlements, VDM Specialists neither admitted
or denied these findings. Nonetheless, it agreed to pay $34.9
million in restitution and $22.7 million in civil fines to a fund
benefitting customers allegedly disadvantaged from 1999 to 2003.
On the day that the SEC and NYSE settlements were executed, VDM
Holding ADRs closed at $9.29 per share. The previous day VDM
Holding ADRs had closed at $8.91 per share.
Based on the SEC and NYSE orders, Plaintiffs allege that
Cleaver and Rondeltap (who were each members of VDM Specialists'
management committee during some portion of the Class Period) and
the other defendants had knowledge of the illegal trading
practices engaged in by certain of VDM Specialists' traders. The
SEC order stated, in pertinent part, that:
[c]ertain members of [VDM Specialists'] management
committee engaged in interpositioning in one or more
of the six stocks listed above [(i.e., Nortel
Networks Corporation, PFE, Hewlett-Packard Company,
Time Warner Inc., The Walt Disney Company, and Eli
Lilly & Co.)], and these members of the management
committee had the supervisory responsibility for [VDM
Specialists'] trading operations on the NYSE floor,
including supervising a floor captain who himself
engaged in such interpositioning in one or more of
the six stocks.
The NYSE provided VDMS with an examination report,
dated December 26, 2001, showing that the firm had
traded ahead and disadvantaged fourteen orders,
including ten orders in Nortel Networks. The NYSE
also provided VDMS with an examination report, dated
December 30, 2002, which identified nineteen
instances of trading ahead violations in
Hewlett-Packard. Senior management at VDMS received
these reports and reviewed them with NYSE staff.
See In the Matter of Van der Moolen Specialists USA, LLC,
Corrected Order Instituting Administrative And Cease-And-Desist
Proceedings (the "SEC Order"), Exchange Act Release No. 49,502, 83 SEC Docket
2366, 2004 WL 2093996, at ¶¶ 15-16 (Mar. 30, 2004).
In April 2005, a grand jury in this district handed down
criminal indictments against certain current and former
individual specialists at the NYSE alleging violations of
15 U.S.C. §§ 78j (b) and 78ff and 17 C.F.R. § 240.10b-5. Since the
information contained in these indictments can be judicially
noticed by this Court, see Ives Labs., Inc. v. Darby Drug
Co., 638 F.2d 538, 544 n. 8 (2d Cir. 1981), these materials will
be considered in connection with this motion. See Kramer v.
Time Warner Inc., 937 F.2d 767, 773 (2d Cir. 1991).
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 Private Securities Litigation Reform Act of
1995 ("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
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.*fn6 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 Have Stated A Section 10(b) Claim As To VDM
Specialists, VDM Holding, And The Individual Defendants
Count I of the Complaint asserts that VDM Holding, VDM
Specialists, and the Individual Defendants 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