     14-3983,09-4414-cv
     Fezzani v. Bear, Stearns & Co., Inc.

                          UNITED STATES COURT OF APPEALS

                               FOR THE SECOND CIRCUIT

                                  April Term, 2011

                           (Decided: January 30, 2015)

                           Docket No. 14-3983, 09-4414

     - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

                             ON PETITION FOR REHEARING

     - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

 1   MOHAMMED FEZZANI, CIRENACA FOUNDATION, DR. VICTORIA BLANK, LESTER
 2   BLANK, JAMES BAILEY, JANE BAILEY, BAYDEL LTD., MARGARET BURGESS,
 3   PATRICK BURGESS, BOOTLESVILLE TRUST, AND ADAM CUNG,
 4
 5               Plaintiffs-Appellants,
 6
 7               v.
 8
 9   BEAR, STEARNS & CO. INC., BEAR STEARNS SECURITIES CORP., RICHARD
10   HARRITON, MORRIS WOLFSON, ARIELLE WOLFSON, ABRAHAM WOLFSON, TOVIE
11   WOLFSON, ANDERER ASSOCIATES, BOSTON PARTNERS, WOLFSON EQUITIES,
12   TURNER SCHARER, CHAN SASHA FOUNDATION, UNITED CONGREGATION
13   MESERAH, ISAAC DWECK, INDIVIDUALLY AND AS CUSTODIAN FOR NATHAN
14   DWECK, BARBARA DWECK, MORRIS I. DWECK, RALPH I. DWECK, JACK
15   DWECK, FAHNESTOCK & CO. INC., BARRY GESSER, MICHAEL REITER, AND
16   APOLLO EQUITIES,
17
18               Defendants-Appellees,
19
20   ARTHUR BRESSMAN, ANDREW BRESSMAN, RICHARD ACOSTA, GLENN O'HARE,
21   JOSEPH SCANNI, BRETT HIRSCH, GARVEY FOX, MATTHEW HIRSCH, RICHARD
22   SIMONE, CHARLES PLAIA, JOHN MCANDRIS, JACK WOLYNEZ, ROBERT
23   GILBERT, FIRST HANOVER SECURITIES, INC., BANQUE AUDI SUISSE
24   GENEVE, FOZIE FARKASH, RAWAI RAES, BASIL SHIBLAQ, IYAD SHIBLAQ,
25   KEN STOKES, MILLO DWECK, BEATRICE DWECK, RICHARD DWECK, ISAAC B.
26   DWECK, HANK DWECK, and DONALD & CO.,
27
28               Defendants.
29
30   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
31
 1   B e f o r e:   WINTER, CABRANES, and LOHIER, Circuit Judges.
 2
 3        Petition for panel rehearing or rehearing en banc of a

 4   portion of this panel’s opinion and summary order dated May 7,

 5   2013, which affirmed the district court’s dismissal of federal

 6   securities law fraud claims against a clearing broker and

 7   individual investors.    716 F.3d 18; 527 Fed. Appx. 89.   The

 8   petition for panel rehearing is denied.

 9        Judge Lohier concurs in part and dissents in part in a

10   separate opinion.

11
12                        Max Folkenflik, Folkenflik & McGerity, New
13                        York, New York, for Plaintiffs-Appellants.
14
15                        Kerry A. Dziubek and Michael D. Schissel,
16                        Arnold & Porter LLP, New York, New York, for
17                        Defendants-Appellees Bear, Stearns & Co. Inc.
18                        and Bear, Stearns Securities Corp. (Now J.P.
19                        Morgan Securities Inc. and J.P. Morgan
20                        Clearing Corp.).
21
22                        Howard Wilson and Scott A. Eggers, Proskauer
23                        Rose LLP, New York, New York, for
24                        Defendant-Appellee Richard Harriton.
25
26                        Anne K. Small, Michael A. Coley, Jacob H.
27                        Stillman, John W. Avery, and Jeffrey A.
28                        Berger, for amicus curiae The Securities and
29                        Exchange Commission, Washington, DC.
30
31   WINTER, Circuit Judge:
32
33        This opinion addresses petitions for rehearing by appellants

34   from the court’s summary order and from the opinion filed the

35   same day.   It also addresses an amicus brief filed by the

36   Securities and Exchange Commission in support of the Petition for


                                       2
 1   Rehearing from the panel opinion.      Familiarity with the summary

 2   order, the panel opinion, and the dissent from the panel opinion

 3   is assumed.    We deny appellants’ petitions.

 4                                     I.

 5        The petition for rehearing relating to the summary order

 6   argues that this court’s decision in Levitt v. J.P. Morgan, 710

 7   F.3d 454 (2d Cir. 2013), filed just before the summary order, is

 8   inconsistent with that summary order with respect to the

 9   complaint’s allegations of Bear Stearns’ liability as the

10   clearing broker for Baron’s fraud.     We disagree.

11        We begin by noting that the issue in Levitt was whether the

12   common issues with regard to the liability of clearing brokers

13   for the fraud or manipulation of introducing brokers so

14   predominated over individual issues as to justify certification

15   of a class.    See Fed. R. Civ. P. 23(b)(3).    That issue

16   necessarily caused a discussion of the caselaw governing such

17   liability.    That discussion stated in part:

18                III.  Duty of a Clearing Broker (Generally)
19                     We have previously said that “a clearing
20                ‘agent [ ]’ is generally under no fiduciary
21                duty to the owners of the securities that
22                pass through its hands” . . . .
23
24                     [D]istrict courts in this Circuit have
25                distinguished two categories of cases.
26                First, in cases where a clearing broker was
27                simply providing normal clearing services,
28                district courts have declined to “impose [ ]
29                liability on the clearing broker for the
30                transgressions of the introducing broker.”
31                Fezzani v. Bear, Stearns & Co., 592 F.Supp.2d

                                        3
 1   410, 425-26 (S.D.N.Y. 2008). The district
 2   courts have so held even if the clearing
 3   broker was alleged to have known that the
 4   introducing broker was committing fraud,
 5   Fezzani, 592 F.Supp.2d at 425; even if the
 6   clearing broker was alleged to have been
 7   clearing sham trades for the introducing
 8   broker . . . and even if the clearing broker
 9   was alleged to have failed to enforce margin
10   requirements against the introducing broker
11   -- thereby allowing the introducing broker’s
12   fraud to continue -- in violation of Federal
13   Reserve and NYSE rules.
14
15        In the second, much more limited
16   category of cases, district courts have found
17   plaintiffs’ allegations to be adequate -- and
18   so have permitted claims to proceed -- where
19   a clearing broker is alleged effectively to
20   have shed its role as clearing broker and
21   assumed direct control of the introducing
22   firm’s operations and its manipulative
23   scheme. Thus, in Berwecky v. Bear, Stearns &
24   Co., 197 F.R.D. 65 (S.D.N.Y. 2000), the
25   district court granted class certification in
26   a suit brought by investors against clearing
27   broker Bear, Stearns for its role in the
28   introducing firm A.R. Baron & Company’s
29   (“Baron”) scheme to defraud investors. The
30   Berwecky plaintiffs allege that Bear Stearns
31   “asserted control over Baron’s trading
32   operations by, inter alia, placing Bear,
33   Stearns’ employees at Baron’s offices to
34   observe Baron’s trading activities, approving
35   or declining to execute certain trades,
36   imposing restrictions on Baron’s inventory,
37   and loaning funds to Baron.” Id. at 67. The
38   plaintiffs alleged that Bear Stearns asserted
39   control over Baron’s activities “in order to
40   keep A.R. Baron a viable concern while Bear,
41   Stearns . . . continued to reap the large
42   profits they received from their activities
43   with A.R. Baron.” Id. The district court
44   found the allegations that Bear Stearns
45   “control[led]” the implementation of the
46   scheme to manipulate the price of securities
47   sold by Baron sufficient to satisfy Rule
48   23(b)(3)’s predominance requirement. Id. at

                           4
 1              68-69.
 2
 3   Levitt, 710 F.3d at 465-67 (some internal citations omitted).

 4        The petition argues that Levitt held that the allegations in

 5   Berwecky were sufficient to state a claim for relief under Rule

 6   12(b)(6) against a clearing broker.    The petition further notes,

 7   correctly, that the allegations in Berwecky that “[Bear Stearns]

 8   asserted control over Baron’s trading operations by, inter alia,

 9   placing Bear, Stearns’ employees at Baron’s offices to observe

10   Baron’s trading activities, approving or declining to execute

11   certain trades, imposing restrictions on Baron’s inventory and

12   loaning funds to Baron,” Berwecky, 197 F.R.D. at 67, are

13   substantially identical to those in the present case.   The

14   complaint here alleges that “Bear Stearns assumed control over

15   and sent Bear employees to Baron to ‘enforce that control’” and

16   required that every trade ticket be checked and “reviewed every

17   order at this discretion [to] determine whether to execute the

18   trade.”   Thus, because the pertinent factual allegations in the

19   present case and Berwecky are substantially identical, the

20   petition concludes that our affirmance by summary order resolved

21   the merits of the claim incorrectly.

22        However, Levitt also cited the district court opinion in

23   Fezzani twice favorably, the very decision that our summary order

24   affirmed, and any seeming inconsistency evaporates once it is

25   recognized that Levitt’s discussion quoted above was entirely in


                                      5
 1   the context of determining only whether a class was properly

 2   certified under Fed. R. Civ. P. 23(b)(3) and not whether the

3    factual allegations were sufficient under Rule 12(b)(6).    Levitt,

 4   710 F.3d at 465.   Indeed, Berwecky was itself a district court

 5   decision under Rule 23(b), and the issues regarding the legal

 6   sufficiency of the allegations were never finally determined.

 7   Berwecky, 197 F.R.D. at 68-69.

 8        The issues regarding the sufficiency of the pleadings under

 9   Rule 12(b)(6) are quite different from those regarding

10   certification of a class pursuant to Rule 23(b)(3).   Whereas the

11   Rule 12(b)(6) inquiry goes to the merits, the Rule 23(b)(3) issue

12   is whether “law or fact questions common to the class predominate

13   over questions affecting individual members.”   In re Initial Pub.

14   Offerings Sec. Litig., 471 F.3d 24, 32 (2d Cir. 2006).     As the

15   Supreme Court noted in Amgen Inc. v. Connecticut Ret. Plans &

16   Trust Funds, although

17             a court’s class-certification analysis must
18             be “rigorous” and may “entail some overlap
19             with the merits of the plaintiff’s underlying
20             claim,” Wal-Mart Stores, Inc. v. Dukes, 564
21             U.S. 131 S. Ct. 2541, 2551 (2011), Rule 23
22             grants courts no license to engage in free-
23             ranging merits inquiries at the certification
24             stage. Merits questions may be considered to
25             the extent -- but only to the extent -- that
26             they are relevant to determining whether the
27             Rule 23 prerequisites for class certification
28             are satisfied.
29
30   133 S. Ct. 1184, 1194-95 (2013).

31        Therefore, Levitt’s comment on Berwecky at most held that

                                        6
 1   Bear Stearns’ alleged “control” of Baron was “sufficient to

 2   satisfy Rule 23(b)(3)’s predominance requirement.”    Levitt, 710

 3   F.3d at 467 (citing Berwecky, 197 F.R.D. at 68-69).

 4        Because Levitt is not in conflict with our summary order in

 5   Fezzani, the present panel did not overlook or misapprehend the

 6   law as is required for rehearing by F.R.A.P. 40(a)(2).    We,

 7   therefore, reaffirm our holding that Bear Stearns’ conduct as

 8   alleged in the Amended Complaint is not sufficient to state a

 9   claim for relief under Section 10(b) and Rule 10(b)(5).    While

10   the Amended Complaint alleges in conclusory fashion that Bear

11   Stearns asserted “control” over Baron’s trading activity, it

12   fails to allege facts showing how this “control” related to

13   fabricating “market” prices of particular securities and

14   communicating them to customers or to manipulating prices with

15   regard to any particular securities.   Appellants allege that Bear

16   Stearns was aware of the manipulations, knew that these

17   manipulations were leading to a crisis, but continued to clear

18   trades that did not involve unnecessary exposure to itself.

19   Knowledge alone, however, is not enough to attach liability to a

20   clearing broker under Section 10(b).   ATSI Commc’ns, Inc. v.

21   Shaar Fund, Ltd., 493 F.3d 87, 102 (2d Cir. 2007).    Moreover,

22   there are legitimate reasons for clearing brokers to monitor the

23   trading activities of some introducing brokers.   A clearing

24   broker guarantees the performance of buyers and sellers of the


                                     7
1    securities being traded and often extends credit to clearing

2    brokers.    Indeed, the complaint states that Baron was in deep

3    debt to Bear Stearns, reason enough to monitor Baron’s

4    activities.

5          The facts alleged in the Amended Complaint, if proven, would

6    not show that Bear Stearns directed the fraud or instructed Baron

 7   or Dweck1 to set up sham transactions.         There is a real danger of

 8   harm to the financial industry in allowing such allegations to

 9   suffice to subject clearing brokers to the cost of discovery and

10   perhaps a trial even though there is no evidence of participation

11   by the brokers in the fraud or manipulation.           The potential of

12   such litigation would deter clearing brokers from engaging in

13   normal business activities -- guaranteeing performance, extending

14   credit, and therefore often monitoring the financial condition of

15   introducing brokers -- and drive up costs of trading generally.

16   See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S.

17   148, 163-64 (2008) (“extensive discovery and the potential for

18   uncertainty and disruption in a lawsuit allow plaintiffs with

19   weak claims to extort settlements from innocent companies,” and

20   because “contracting parties might find it necessary to protect

21   against these threats, [this may] rais[e] the costs of doing



           1
             Isaac R. Dweck is sued individually and as a custodian for Nathan
     Dweck, Barbara Dweck, Morris I. Dweck, Ralph I. Dweck, and Jack Dweck.
     Although appellants refer broadly to “the Dwecks,” their allegations regarding
     the Dwecks seem to involve only Isaac R. Dweck.

                                           8
 1   business” and “[o]verseas firms . . . could be deterred from

 2   doing business” in United States security markets.).            The

 3   complaint similarly alleges that Bear Stearns lent Baron money

 4   and propped it up, but this activity is integral to the ordinary

 5   clearing function of a clearing broker.2         Finally, appellants

 6   fail to claim that Bear Stearns’ alleged “control” was sufficient

 7   to render it a Section 20(a) control person with respect to

 8   Baron.    The petition for panel rehearing with respect to Bear

 9   Stearns is, therefore, denied.

10                                        II.

11         We also address arguments, echoed in appellants’ petition

12   for rehearing, made in an amicus brief filed by the SEC.              The SEC


           2
            Appellants additionally argue that (1) they relied on Bear Stearns’s
     confirmation statements in future purchases of stock; (2) the confirmations
     and monthly statements were themselves manipulative acts directed at
     plaintiffs; and (3) the panel overlooked binding state court precedent as to
     aiding and abetting liability. None of these arguments warrant rehearing.

           Arguments (1) and (2) may be rejected because appellants have still
     failed to sufficiently allege conduct not involving the ordinary functions of
     a clearing broker, as discussed above.

           Argument (3) -- regarding plaintiffs’ state law claim of aiding and
     abetting fraud -- may also be easily dismissed. The District Court here
     dismissed that claim on the basis that “[a]s a matter of law, clearing brokers
     are not responsible or liable for the fraudulent sales practices of the
     introducing broker.” Fezzani v. Bear, Stearns & Co., 592 F. Supp. 2d 410, 426
     (S.D.N.Y. 2008) (citing Greenberg v. Bear, Stearns & Co., 220 F.3d 22, 29 (2d
     Cir. 2000)). Although Judge Crotty relied on federal rather than state
     precedent, the Greenberg case’s holding on this point is expressly as to New
     York state aiding and abetting liability. New York state law is not to the
     contrary, and we have recently reaffirmed exactly this principle. See In re
     Amaranth Natural Gas Commodities Litig., 730 F.3d 170, 185 (2d Cir. 2013)
     (“[T]he mere performance of routine clearing services cannot constitute the
     aiding and abetting of fraud under New York law.” (emphasis added)); Levitt,
     710 F.3d at 466 (“Not does the ‘simple providing of normal clearing services
     to a primary broker who is acting in violation of the law . . . make out a
     case of aiding and abetting against the clearing broker.’” (quoting Greenberg,
     220 F.3d at 29)).

                                           9
 1   incorrectly reads our opinion as holding that, in any and all

 2   manipulation cases, liability attaches only to persons who

 3   communicate a misrepresentation to a victim.     The SEC argues that

 4   “[t]he essence of manipulation is not a misrepresentation, but

 5   market activity -- the buying and selling of shares -- that

 6   itself creates a ‘false pricing signal.’      A manipulative

 7   transaction, such as parking, is an ‘intentional interference

8    with the free forces of supply and demand’” (quoting ATSI, 493

 9   F.3d at 100; In re Pagel, Inc., 33 S.E.C. 1003, 1985 WL 548387,

10   *3 (1985), aff’d, 803 F.2d 942 (8th Cir. 1986)).      Arguing that

11   our opinion conflated manipulative conduct with

12   misrepresentations, the brief further states:

13                This Court has similarly recognized that
14                engaging in manipulative acts -- practices
15                ‘that are intended to mislead investors by
16                artificially affecting market activity’ --
17                are violations distinct from making
18                ‘misrepresentations.’ Ganino v. Citizens
19                Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000).
20                Emphasizing that distinction is this Court’s
21                ruling that a manipulation claim requires
22                ‘market activity aimed at deceiving investors
23                as to how other market participants have
24                valued a security.’ ATSI, 493 F.3d at 99-
25                100, 105 (emphasis added).
26
27   [Pet. Panel Rehear. 4]

28           We write only to state the obvious:   our opinion did not

29   require that reliance by a victim on direct oral or written

30   communications by a defendant must be shown in every manipulation

31   case.    Indeed, we agree with the propositions of law asserted by


                                       10
1    the SEC that, in a manipulation claim, a showing of reliance may

2    be based on “market activity” intended to mislead investors by

3    sending “a false pricing signal to the market,” upon which

4    victims of the manipulation rely.    ATSI, 493 F.3d at 100.

5         However, the discussion in ATSI of “false pricing signal[s]

6    to the market” is derived from the Supreme Court’s use of the

7    efficient market hypothesis to establish a rebuttable presumption

8    of reliance based on the effect of misrepresentations on the

9    market price of securities.   Basic Inc. v. Levinson, 485 U.S.

10   224, 241-45 (1988).   ATSI extended a variation of that theory to

11   market prices affected by manipulation.    In the present case,

12   however, there is no claim that there existed a market in any

13   sense of the word for the shares Baron sold to appellants.    The

14   shares in question are not alleged to have been traded in any

15   structure reasonably viewed as an independent   market with

16   publicly reported prices purportedly representing arms-length

17   transactions based on supply and demand.   See ATSI, 493 F.3d at

18   100-01 & n.4.   Therefore, there is not a claim that the inflated

19   prices paid by appellants were based on “false pricing signal[s]

20   to the market.”   The allegations in the present complaint state

21   only that Baron sold shares to appellants at prices that were

22   manufactured by Baron salespeople but were represented as set by

23   trading in a market that was falsely represented to exist.

24        The appellants’ and the SEC’s concerns that our opinion


                                     11
 1   disregarded ATSI are, therefore, wholly unfounded.    Not only did

 2   our opinion cite ATSI repeatedly and quote extensively from it,

 3   but it read ATSI in a way favorable to manipulation claims.      Our

 4   opinion stated the “market” “signaled” by manipulative conduct

 5   need not be fully efficient -- a highly efficient market is an

 6   unlikely site for manipulation, see Fezzani v. Bear, Stearns &

 7   Co. Inc., 716 F.3d 18, 21 n.2 (2d Cir. 2013) -- and suggested

 8   that a future court might create a rebuttable presumption of

 9   reliance in a less-than-efficient market context.    See id.   What

10   we did not, and could not, say was that ATSI’s holding and

11   rationale applies where no actual ongoing market for the

12   securities in question exists.

13        Our point is illustrated by the claims against Dweck.     There

14   is no allegation that Dweck’s parking transactions, and their

15   purported prices, were ever reported in a market.    Indeed, there

16   is no allegation that the “prices” used in the parking

17   transactions -- or in sham transactions by others coordinated

18   with the parking -- were ever made known to the buyers of the

19   securities in question or that the securities were sold to

20   appellants at prices “signaled” by the prices used in the parking

21   or coordinated transactions.   There are, in short, no factual

22   allegations that Dweck’s parking transactions sent “a signal” to

23   any identified market or that any buyer or seller relied upon the

24   parking prices.   In the entire 116-page complaint, appellants


                                      12
 1   have not specifically pleaded a causal link between any single

 2   stock purchase or sale and a corresponding parking by Dweck or

 3   coordinated transactions by others.   See ATSI, 493 F.3d at 106-

 4   07.

 5         Even though each of the individual plaintiffs must show

 6   reliance on a misrepresentation for which the particular

 7   defendant is responsible, there is no factual    allegation by any

 8   of the eleven individual plaintiffs as to how the various

 9   “signals,” “appearances,” or “illusions” emphasized in the

10   dissent as created by Dweck’s parking moved the price they paid

11   for particular shares.   Much of the dissent turns on an attempt

12   to confine the purposes of “parking” to avoiding downward

13   pressure on a security’s market price.   But parking, a tactic

14   that we agree can be a serious violation, can have many purposes.

15   To establish this, we need look no further than the SEC’s own

16   description of Baron’s frauds.   Having found the lack of an

17   independent market for the securities fraudulently sold by Baron,

18   the SEC stated that “[w]hile persons may park stock for a variety

19   of reasons[,] Baron parked stock to maintain the appearance of

20   compliance with the commission’s net capital rules.”    In re Bear,

21   Sterns Secs. Corp., 705 S.E.C. 537, 1999 WL 569554, *3 n.6

22   (1999).

23         We do not reject the “signals” theory.    Far from it.   We

24   simply recognize that it is a red herring given the nature of


                                      13
 1   appellants’ claims.      The pleading gaps described above are hardly

 2   unintentional.     The complaint seeks damages from all defendants

 3   for all losses of all plaintiffs whether or not a particular

 4   defendant is alleged to have engaged in a sham transaction in a

 5   security purchased by a particular plaintiff.           For example,

 6   appellants’ claims against Dweck lump together sales of

 7   securities that Dweck did not park with those of securities he

 8   did park.    Appellants claim that Dweck is liable for all of the

 9   losses of all of the plaintiffs whether or not the securities

10   they bought were the subject of Dweck’s parking transactions.3

11   Clearly, ATSI’s reference to false pricing signals to a market

12   necessarily has to involve -- in private actions for damages --

13   allegations of:     (i) particular securities (ii) manipulated by

14   particular defendants (iii) causing the losses to the particular

15   buyers.   See ATSI, 493 F.3d at 101-02.         Appellant claims fail to

16   meet that requirement.

17         To sum up, the facts alleged in this complaint do not

18   involve any ongoing market affected by false pricing signals by

19   Dweck.    What they involve are misrepresentations to the victims

20   by Baron salespeople as to how the price they were charging for

21   particular securities was arrived at.         Dweck’s role in parking


           3
            The complaint alleges on page 107 that Dweck is liable for losses in
     the “Manipulated Securities.” Page 3 of the complaint defines “Manipulated
     Securities” to include several companies whose stock Dweck is not alleged to
     have parked or manipulated.



                                           14
 1   certain securities was unknown to, and not relied upon by, those

 2   who purchased identical securities, much less by those who

 3   purchased securities not parked by Dweck.          Although the complaint

 4   occasionally references an “inflated” market or “price

 5   movements,” there is no allegation that customers relied on

 6   publicly reported prices4 or anything other than the fraudulent

 7   representations of Baron salespeople. For all that appears in the

 8   complaint, the stock parking may have been intended to deceive

 9   regulators, as actually found by the SEC, 70 S.E.C. 537, 1999 WL

10   569554, *3-4, and perhaps Bear Stearns, but is not alleged to

11   have caused particular transactions.         Our dissenting colleagues’

12   discussion of market manipulation, while indisputable in the

13   abstract, is used to create a theory of manipulation in the



           4
             The SEC’s amicus brief states, in a footnote, that “the Commission
     previously found, and as judicially noticeable material confirms (i.e., news
     items, trading records, and public filings) the relevant securities traded ‘in
     over-the-counter markets’ (i.e., NASDAQ) and on AMEX. In re Bear, Stearns
     Secs. Corp., 54 S.E.C. 224, 228 (1999).” The citation has not led us to any
     SEC decision, much less one “finding” public trading of the securities in
     question. What the footnote may be referencing is a 1999 SEC decision, see In
     re Bear, Stearns Secs. Corp., 70 S.E.C. 537, 1999 WL 569554, *2 (1999), that
     includes a cursory description of Baron’s intended activities when it was
     founded in 1992: “Bressman and others established Baron in 1992 to underwrite
     the issuance of securities of small issuers trading in the over-the-counter
     markets, and to carry on market-making and retail sales of such securities.”
     This description hardly suffices to remedy the lack of any allegations in the
     complaint that transactions in the relevant securities and their pricing were
     publicly available or that the prices communicated by Baron salespeople were
     in any way related to publicly reported prices. Finally, and dispositively,
     even if publicly reported transactions with a connection to sales by Baron
     were alleged, they would not support the claims asserted in the complaint,
     which seeks to hold all defendants liable for all of the plaintiffs’ losses.
     The suggestion that we take judicial notice of various unidentified documents
     that may or may not show public trades seems rather anomalous in light of the
     failure of the 116-page complaint to mention them and of the amicus brief’s
     failure to provide detail. In any event, even if we discovered some public
     trading, that would not remedy the other problems described above.

                                           15
 1   absence of a market.

 2        Given these facts, Stoneridge clearly applies to the claims

 3   against Dweck.   There is no presumption of reliance based on any

 4   identifiable market, and -- given the lack of an allegation that

 5   any plaintiff knew of the stock parking or prices used therein --

 6   no allegation of reliance upon the parking transactions.   See

 7   Stoneridge, 552 U.S. at 159-60.

 8        Finally, as we noted in our opinion, although claiming that

 9   defendants are liable for all losses of all investors caused by

10   Baron, whether or not the losses involved sham transactions by a

11   particular defendant, appellants have never offered either a

12   theory of vicarious liability under state law or of controlling-

13   person liability under federal law.    The SEC’s amicus brief fails

14   even to purport to fill this gap.

15




                                       16
1    LOHIER, Circuit Judge, concurring in part and dissenting in part:

 2         The majority opinion today denies a petition for rehearing that I would

 3   have granted in part.  I nevertheless commend my panel colleagues for clarifying

 4   that the initial majority opinion in this case did not hold that the Supreme Court’s

 5   decisions in Stoneridge and Janus1 require a plaintiff claiming market

 6   manipulation to allege that a defendant directly communicated false information

 7   to a victim.  Majority Op. at 10–11.  Because that opinion initially appeared to

 8   foreclose the plaintiffs’ market manipulation claim against Israel Dweck, even

 9   though plaintiffs alleged that he had engaged directly in a manipulation of

10   securities, I dissented on the ground that the opinion conflated the elements of a

11   misrepresentation claim and those of a manipulation claim.  In particular, it

12   appeared to ignore the well‐established theory of reliance based on the

13   fraud‐on‐the‐market doctrine.  See Fezzani v. Bear, Stearns & Co. Inc., 716 F.3d

14   18, 29 (2d Cir. 2013) (Lohier, J., dissenting).  As the Supreme Court recently

15   reaffirmed, that doctrine remains alive and well.  See Halliburton Co. v. Erica P.

16   John Fund, Inc., 134 S. Ct. 2398, 2409, 2413–15 (2014). 



           1
              Stoneridge Inv. Partners, LLC v. Scientific‐Atlanta, Inc., 552 U.S. 148
     (2008); Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011).

                                               1
 1         Prompted in part by the compelling arguments advanced by the Securities

 2   and Exchange Commission as amicus curiae in support of the appellants’ petition

 3   for rehearing, the majority’s denial of the petition helpfully corrects the

 4   misimpressions left by the original majority opinion.  For example, it recognizes

 5   that we have never required “that reliance by a victim on direct oral or written

 6   communications by a defendant must be shown in every manipulation case.”2 

 7   Majority Op. at 10–11.  It also clarifies that “in a manipulation claim, a showing of

 8   reliance may be based on ‘market activity’ intended to mislead investors by

 9   sending ‘a false pricing signal to the market,’ upon which victims of the

10   manipulation rely.”  Id. at 11.  Of course, I agree; as I explained in my prior

11   dissent, to read our jurisprudence otherwise would be a mistake.  See Fezzani,

12   716 F.3d at 28–29 (Lohier, J., dissenting). 

13         Nevertheless, I continue to dissent from the majority’s ongoing refusal to

14   let the plaintiffs’ claims against Dweck proceed.  We should grant the petition for

15   rehearing and vacate the District Court’s dismissal of those claims.  The majority

16   opinion’s denial of the petition is wrong because, in the process of correcting one



           2
           Here, I would replace the phrase “every manipulation case” with “any
     manipulation case.” 

                                                2
 1   apparent error in the original opinion, it falls prey to two others.  

 2         The opinion’s first error is to suggest that the claims against Dweck

 3   founder because they “lump together sales of [manipulated] securities that

 4   Dweck did not park with those of securities he did park,” even though the

 5   plaintiffs also allege that Dweck is responsible for losses in both categories of

 6   securities.  Majority Op. at 13.  This is not a reason to dismiss these claims.  As an

 7   initial matter, the plaintiffs’ treatment of the parked and unparked securities

 8   together does not justify dismissing the complaint as to those securities that

 9   Dweck is alleged to have parked.  More importantly, the opinion ignores the fact

10   that the alleged manipulative scheme here, like most “pump and dump” stock

11   manipulation schemes, involves a cluster of interdependent securities that the

12   defendants—Dweck included—manipulated in tandem by parking certain shares

13   of those securities with knowing nominees while selling other shares to

14   unwitting victims.  As the complaint describes it, “[i]f one security propped up

15   by the misconduct of defendants failed, all would fail.”  J.A., Vol. II, at 255.  In

16   other words, Dweck’s parking of certain securities helped to sustain the

17   defendants’ manipulation of all of the securities, and the allegations in the

18   complaint as to Dweck’s role in the manipulation support a claim for losses


                                                3
 1   associated with the overall market manipulation scheme.

 2         The opinion makes a second, more serious set of errors.  It misunderstands

 3   the relationship between parking transactions and the fraud‐on‐the‐market

 4   doctrine, and it confuses the “signals” theory relating to parking transactions—a

 5   theory the opinion purports to embrace, see Majority Op. at 13—with the direct

 6   misrepresentation theory.  In unraveling these errors, I think it useful to define

 7   “parking,” which, in the context of market manipulation, is no mere infraction;

 8   people go to prison for it.  See, e.g., United States v. Russo, 74 F.3d 1383, 1386,

 9   1393 (2d Cir. 1996); United States v. Regan, 937 F.2d 823, 829–30 (2d Cir.),

10   amended by 946 F.2d 188 (2d Cir. 1991).  We have described “parking” as

11   follows:  “[A]n artificial device to avoid depressing the market price [that] . . .

12   occurs when a broker, unable to keep securities in his trading account, ostensibly

13   sells the same to another broker, with the understanding that the same securities

14   will be purchased back by the ostensible seller before the settlement date.  In this

15   manner the shares are not sold into the [open] market.”  United States v. Corr,

16   543 F.2d 1042, 1045 n.5 (2d Cir. 1976); see also United States v. Bilzerian, 926 F.2d

17   1285, 1290 (2d Cir. 1991) (“‘Parking’ refers to a transaction in which a

18   broker‐dealer buys stock from a customer with the understanding that the


                                                4
 1   customer will buy the stock back at a later date for the purchase price plus

 2   interest and commissions . . . [with] no market risk to the broker‐dealer who is

 3   the owner of the shares in name only.”).  An illegal parking transaction keeps a

 4   significant number of shares in the hands of a “friendly” nominee who agrees not

 5   to sell the security and thereby avoids placing downward pressure on the share

 6   price, as might occur if the security were sold legitimately on the open market.  In

 7   turn, keeping the parked shares out of the market supply enables the defendant

 8   to maintain better control over the tradeable shares and to manipulate the share

 9   price more easily.  

10         So defined, parking indisputably reflects an illegal sham transaction, an

11   artificial device designed to avoid depressing the market price of a security.  We

12   previously have recognized the tie between parking transactions and a fraud on

13   the market.  See Russo, 74 F.3d at 1393 (endorsing a theory pursuant to which a

14   broker‐dealer for whom defendants worked engaged in stock parking and

15   thereby “perpetrated a fraud on the market by divorcing the financial risk of

16   owning [the parked stock] from legal ownership of the stock”).  Commentators

17   have confirmed the connection.  See, e.g., Lewis D. Lowenfels & Alan R.

18   Bromberg, Securities Market Manipulations: An Examination and Analysis of


                                              5
 1   Domination and Control, Frontrunning, and Parking, 55 Alb. L. Rev. 293, 339–41

 2   (1991). 

 3          The majority opinion does not quibble with the fact that the complaint

 4   alleges a parking transaction more or less as defined above.  Instead, it derides

 5   the complaint for not alleging that the specific prices used in Dweck’s parking

 6   transactions “were ever reported in a market” or that the “‘prices’ used in the

 7   parking transactions . . . were ever made known to the buyers of the securities in

 8   question or that the securities were sold to appellants at prices ‘signaled’ by the

 9   prices used in the parking . . . transactions.”  Majority Op. at 12.  But this

10   misunderstands one of the primary functions of parking schemes such as the one

11   alleged here:  to conceal rather than transmit real price information.  Here, the

12   relevant “signals” are not false pricing signals about the specific “prices used in

13   the parking transactions,” but rather include:  (1) creating the false appearance of

14   trading volume or activity in the parked security, (2) making it appear that

15   Dweck (and others) rather than the broker‐dealer was the beneficial owner of the

16   security who bore the financial risk of ownership, when, in fact, Dweck’s

17   financial risk as a nominal holder of the securities was divorced from his legal

18   ownership, (3) masking the number of shares of the manipulated securities that


                                                6
 1   the broker‐dealer actually controlled, and (4) creating the illusion that the parked

 2   securities were trading on the open, liquid market, when in fact they were not.  In

 3   my view, several paragraphs in the complaint plausibly allege that these signals,

 4   among others, were transmitted to the market.  For example:

 5                10.  Defendant[] Isaac R. Dweck . . . also engaged in
 6                parking transactions with the purpose and effect of
 7                creating a false appearance of an active trading market
 8                with the intent of inflating the trading price of the
 9                Manipulated Securities and causing investors, such as
10                plaintiffs to purchase the Manipulated Securities. 

11                131.  Parking misl[ed] regulators and customers about
12                the amount of Baron Stocks in Baron’s own inventory,
13                and fictitiously improved Baronʹs net capital . . . .  The
14                placement of such stock also artificially maintained the
15                price of the Manipulated Stocks.  The “parking” was
16                done with the purpose and had the effect of creating a
17                false impression in the minds of Baron customers of the
18                value and liquidity of the “parked” securities and
19                induced Baron customers, including plaintiffs, to make
20                investments based on Baron’s illusion of trading
21                activity. 

22                221.  . . . [Plaintiffs] were unaware that the market for
23                Baron stocks was entirely a fictional mirage.  Month
24                after month, they had received confirmations and
25                monthly statements from Bear Stearns which indicated
26                that the Baron stocks were trading in a bona fide
27                market.  Publicly available information on these stocks
28                further confirmed an active market where large
29                numbers of shares traded freely. . . .  [None of the]


                                              7
 1                 plaintiffs[] knew that Bear Stearns, the Dweck
 2                 Defendants, . . . and all other defendants knew that
 3                 Baron simply cr[e]ated the illusion of an active market
 4                 through parking, wash sales, unauthorized purchases
 5                 and fraud.

 6                 319.  . . . Defendants’ fraudulent and manipulative
 7                 activities as described herein created the appearance
 8                 that the price at which the Manipulated Securities
 9                 traded reflected bona fide supply and demand in a
10                 freely functioning market.  The increasing prices of the
11                 Manipulated Securities appeared to indicate increasing
12                 value, placed by the market, on the businesses
13                 underlying the securities.  Thus, . . . the appearance of
14                 an active, rising market induced plaintiffs to purchase
15                 those securities in reliance upon the “wisdom of the
16                 marketplace.”  Instead, the values placed by the market
17                 on the Manipulated Securities were fictitious and solely
18                 a result of defendants’ manipulative practices. 

19   J.A., Vol. II, at 243, 281, 310, 340.
20
21          The majority opinion summarizes its reasons for denying the petition by

22   suggesting that the plaintiffs did not rely on the signals conveyed by Dweck’s

23   parking transactions, but relied instead on “misrepresentations by Baron sales

24   people as to how the price they were charging for particular securities was

25   arrived at.”  Majority Op. at 14.  The opinion concludes that “Dweck’s role in

26   parking certain securities was unknown to and not relied upon by those who

27   purchased” the securities.  Id.  On the one hand, to the extent that the majority


                                               8
 1   opinion can be understood to conclude that the plaintiffs failed to allege reliance

 2   on Dweck’s role, it misses the point of the manipulative scheme, which was to

 3   conceal rather than disclose Dweck’s role as a confederate who parked securities. 

 4   On the other hand, to the extent that the opinion suggests that the plaintiffs

 5   inadequately alleged reliance on the effect of Dweck’s parking, as well as other

 6   components of the manipulative scheme, that suggestion is contradicted by the

 7   allegations quoted above.  

 8         I can’t help but to end by noting that the majority opinion trots out

 9   Stoneridge yet again to reject the claims against Dweck, this time on the ground

10   that the plaintiffs did not allege “reliance upon the parking transactions.” 

11   Majority Op. at 15.  I have previously explained and will not repeat why

12   Stoneridge does not apply to claims of market manipulation such as the one

13   alleged here, or why plaintiffs were not obliged to allege reliance on the parking

14   transactions themselves.    




                                               9
1         I respectfully dissent from the denial of the petition for rehearing as to the

2   claims against Dweck.3




          3
             The appellants’ arguments in their petition for rehearing relating to Bear
    Stearns and the summary order in this case are not without force.  Nevertheless, I
    agree with my panel colleagues that the appellants’ nearly exclusive reliance on
    Levitt v. J.P. Morgan Securities, Inc., 710 F.3d 454 (2d Cir. 2013), is misplaced. 
    Levitt is not necessarily inconsistent with the summary order and, as a technical
    matter, fails to provide a basis for rehearing under Rule 40(a) of the Federal Rules
    of Appellate Procedure.  I therefore concur in the result as to Bear Stearns.  I do
    not necessarily join the majority’s other reasons for rejecting the petition for
    rehearing as to Bear Stearns.  See, e.g., Majority Op. at 8 (“There is a real danger
    of harm to the financial industry in allowing such allegations to suffice to subject
    clearing brokers to the cost of discovery and perhaps a trial even though there is
    no evidence of participation by the brokers in the fraud or manipulation.”).

                                             10
