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Sep212012

Platinum Partners Value Arbitrage Fund LP v. Chicago Board Options Exchange: Regulatory Immunity Does Not Apply to Private Disclosure of a Regulatory Action

In Platinum Partners Value Arbitrage Fund LP v. Chicago Board Options Exchange, No. 1-11-2903 (Ill. App. Aug. 10, 2012), the appellate court reversed the trial court’s dismissal of the plaintiff’s securities and fraud claims, holding that the doctrine of regulatory immunity did not apply to the private disclosure of a stock option price adjustment by a self-regulatory organization (“SRO”).

The plaintiff, a hedge fund, alleged that an unnamed employee at one of the defendants Chicago Board Options Exchange (“CBOE”) or Options Clearing Corporation (“OCC”) disclosed a pending adjustment to the strike price of options in India Fund, Inc. (“IFN”) to insider market participants before making a public disclosure of that adjustment. The plaintiff further alleged that because it purchased 50,000 IFN put options after the private disclosure but before the public disclosure, it was harmed by the defendants’ private disclosure. The trial court dismissed the case, holding that the CBOE and OCC were absolutely immune from suit because the conduct at issue was undertaken as part of their regulatory duties as SROs.

Regulatory immunity applies to allegations concerning conduct “within the bounds of the government functions” delegated to an SRO. The test for whether conduct is within those bounds is objective and depends on whether “specific acts and forbearances were incident to the exercise of regulatory power.” The court reasoned that although the strike price adjustment was itself an exercise of regulatory power, the private disclosure, which served no regulatory purpose, was not. Thus, the private disclosure was not within the scope of regulatory immunity.

The defendants argued that, even absent regulatory immunity, the plaintiffs had failed to state a claim. The court, however, held that the plaintiffs had properly stated a claim of fraud under sections 12(F) and 12(I) of the Illinois Securities Law (which closely tracks federal securities law), the Illinois Consumer Fraud and Deceptive Business Practices Act, and common law. Section 12(F) claims require that “a complainant must allege that the defendant (1) made a misstatement or omission, (2) of material fact, (3) in connection with the purchase or sale of securities, (4) upon which the plaintiff reasonably relied and (5) that reliance proximately caused the plaintiff’s injuries.” Here, the defendants had a duty to disclose the strike price adjustment, and the plaintiffs adequately pleaded the requisite omission of that disclosure, materiality, reliance, and injury. In addition, the plaintiffs adequately pleaded the scienter element necessary for the other three claims.

Because the defendants’ private disclosure of the strike price adjustment was not within the scope of regulatory immunity, and because the plaintiffs adequately pleaded four fraud claims, the court reversed the trial court’s dismissal of the plaintiff’s claims. It also held that the plaintiff should be allowed to amend its complaint to include new facts and allegations discovered by its replacement counsel, because it was “in the best interests of justice.”

The primary materials for this case may be found on the DU Corporate Governance website.

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