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Scottrade, Inc v. Broco Investments

March 31, 2011

SCOTTRADE, INC., PLAINTIFF,
v.
BROCO INVESTMENTS, INC. AND VALERYMALTSEV, DEFENDANTS, AND GENESIS INVESTMENTS, LLC, DEFENDANT/GARNISHEE.



The opinion of the court was delivered by: Richard J. Holwell, District Judge:

MEMORANDUM OPINION AND ORDER

This action presents a surprising question of first impression. Does a securities broker, whose customers have been defrauded, and who reimburses his customers-but to whom the customers have not assigned their claims, and who other than the reimbursements alleges no damages whatsoever-have standing to sue the alleged fraudsters for violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), Exchange Act Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Exchange Act Section 9(a), 15 U.S.C. § 78i(a)? For the reasons discussed more fully below, and specifically because the Court concludes that the broker, Scottrade, Inc. ("Scottrade"), was not an "actual purchaser or seller of securities," the Court holds that the broker lacks standing to pursue those claims. The Court thus dismisses the claims for violations of Section 10(b), Rule 10b-5, and Section 9(a). Scottrade's claim for rescission pursuant to Exchange Act Section 29(b), 15 U.S.C. § 78cc, is dismissed because Scottrade neither formed nor was in privity with a party to a contract in violation of the securities laws. Scottrade's claim for violations of the Computer Fraud and Abuse Act ("CFAA"), 18 U.S.C. § 1030, is dismissed because defendant, Genesis Securities, LLC ("Genesis"), never accessed Scottrade's computers without authorization. Accordingly Genesis's motion to dismiss is GRANTED in its entirety, and Scottrade's motion for leave to amend its complaint is DENIED in its entirety.*fn1

I. FACTUAL SETTING

The following facts are taken as true for the purposes of the present motions.

A. Background

Plaintiff Scottrade, an Arizona corporation with its principal place of business in Missouri, is a securities broker-dealer registered with the United States Securities and Exchange Commission ("SEC"). (Proposed First Am. Compl. (hereinafter "FAC") ¶ 5.) As relevant to this action, Scottrade operates a website on which customers maintain accounts of securities and through which customers place orders to buy and sell securities. (Id. ¶ 6.) Defendant Genesis,*fn2 a New York limited liability company with its principal place of business in New York, is also a securities broker-dealer registered with the SEC. (Id. ¶ 8.) Defendant BroCo Investments, Inc. ("BroCo") is a corporation organized under the laws of Mauritius. (Id. ¶ 7.) Defendant Valery Maltsev is BroCo's president. (Id.) BroCo is not licensed to operate as a broker in the United States, but appears to offer investment and/or brokerage services to its foreign customers. (Id. ¶ 11.) BroCo also maintained an investment account with Genesis (the "BroCo/Genesis Account), over which BroCo was the sole legal owner. (Id. ¶¶ 11, 13.) BroCo pooled its customers' funds in the BroCo/Genesis Account, and assigned its customers "user names" and trading limits with which the customers could order trades by contacting Genesis directly. (Id. ¶¶ 12, 13, 15.) BroCo, however, and not its customers, took formal responsibility for the trades in the account. (Id. ¶ 14.) Genesis would "regularly" generate reports of trading activity in the BroCo/Genesis Account and transmit those reports to BroCo. (Id. ¶ 15.)

Between August 2009 and March 2010, Valery Vitalievich Ksendzov-not a defendant in this action-allegedly carried out an elaborate "hack, pump, and dump" scheme by which he made upwards of $650,000 dollars. (Id. ¶ 19.) Ksendzov, a BroCo customer, would first purchase large blocks of thinly-traded domestic securities through the BroCo/Genesis Account. (Id. ¶ 17.) Ksendzov then hacked*fn3 into the online brokerage accounts of Scottrade's customers and entered huge numbers of buy orders in those Scottrade customer accounts for the thinly-traded securities held under his "user name" in the BroCo/Genesis Account. (Id. ¶¶ 17-19.) After the phony purchase orders drove up the price of the thinly traded securities, Ksendzov would liquidate his positions for returns on investment as high as 32,000 percent. (Id. ¶ 19.) The Scottrade customeraccounts were thereby presumably left with large amounts of worthless illiquid stock that had been purchased at prices far above its value.

Scottrade alleges that Ksendzov's "trading activit[y] so consistently resulted in levels of profitability that are unattainable in the absence of some form of fraud . . . [that defendants] Maltsev, BroCo and Genesis must have known, absent intentional disregard . . . that Ksendzov's trading involved some form of illegal market manipulation." (Id. ¶ 20.) Scottrade also alleges that BroCo and Genesis must have been aware of the fraud because Genesis would generate records of the trading activity in the BroCo/Genesis Account and forward those records to BroCo. (Id. ¶ 22.)

After learning of the fraud, Scottrade "restored the customers' accounts to the state they would have been in, but for the unauthorized transactions." (Id. ¶ 29.) The actual character of that restoration, however, is not clear from the FAC. Scottrade alleges it "incurred" $1,464,690 in "losses" in the process. (Id.)

B. Procedural History

On March 15, 2010, the SEC brought suit against Maltsev and BroCo, but not against Genesis, seeking a preliminary injunction and related relief. (Compl. at 1, 9-11, United States Securities and Exchange Commission v. BroCo Investments, Inc. and Valery Maltsev (hereinafter "SEC Action"), (S.D.N.Y. Mar. 15, 2010) (No. 10 Civ. 2217).) Then on April 28, 2010, Scottrade filed its original complaint in this action asserting claims for violations of Sections 10(b), 9(a), and 29(b) of the Exchange Act, for violations of Rule 10b-5 promulgated thereunder, and for violations of the CFAA. On June 17, 2010, the Court granted the SEC a preliminary injunction in the SEC action.

(Tr. of Hr'g of June 17, 2010 (hereinafter "Oral Arg. Tr.") at 38.) The injunction both froze BroCo and Maltsev's assets and prohibited future violations of the securities laws. (Id. at 47.)

Genesis moved to dismiss the complaint in this action on June 28, 2010. After several extensions of the briefing schedule on that motion, but before Scottrade had filed any opposition papers, Genesis and Scottrade agreed to stay proceedings on the motion to dismiss pending judgment or dismissal of the SEC Action, or an order from the Court lifting the stay. (Order of Sept. 28, 2010 at 1-2.) On December 13, 2010, the SEC Action settled, and the Court lifted the stay and reinstated a briefing schedule the next day. (Order of Dec. 14, 2010 at 1.) Finally on January 11, 2011, Scottrade moved for leave to file an amended complaint based on new evidence revealed during the SEC action. Genesis's opposition essentially tracks the same arguments as its motion to dismiss; and this opinion disposes of both motions.

II. DISCUSSION

A. Standard for Rule 12(b)(6)

To survive a Rule 12(b)(6) motion to dismiss, a complaint must allege "enough facts to state a claim to relief that is plausible on its face." Starr v. Sony BMG Music Entertainment, 592 F.3d 314, 321 (2d Cir. 2010) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). If the factual averments permit no reasonable inference stronger than the "mere possibility of misconduct," the complaint should be dismissed. Starr, 592 F.3d at 321 (quoting Iqbal, 129 S. Ct. at 1950). Thus, "[w]here a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of 'entitlement to relief.'" Iqbal, 129 S. Ct. at 1949 (quoting ...


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