have had the SelectNet offer been accepted. The resulting net damage was $ 25 on the 1000-share transaction. Failure to disclose the routing of a market order to another brokerage firm that executed the order at the NBBO while a superior price was available on SelectNet constitutes the type of conduct which plaintiffs allege is a fraud. Amended Complaint PP31 and 38.
In two other transactions there is evidence of damage of a more indirect, somewhat speculative nature:
1) Plaintiff Binder's August 19, 1994 purchase order for 7000 shares of Hydron Technologies was placed by defendant PaineWebber with Reich & Co., a current market maker in Hydron Technologies. Affidavit of Thomas Dwyer, PP2 and 6. Reich & Co. entered the order at 13:31:00 and executed it approximately 17 minutes later at 13:48:28 at a price of 2 9/16. Id., Exhibit 2 at 2. An offer preferenced to Lehman Bros. (and therefore not available to Reich & Co.) to sell any quantity of Hydron Technologies up to 3000 shares at a price of 2 1/2 was entered on SelectNet at 13:30:32. The offer was good for three minutes. Certification of Karen L. Barr, Exhibit A, page "1338." Plaintiffs contend that the existence of the Lehman Bros. offer, although not available to Reich & Co. should have served as the reference price by which Reich set the price of its own transaction with Binder. "The contemporaneous availability of a superior price on SelectNet, although not available for Binder's order, indicates that a superior price may have also been available on Instinet." Reply Declaration of Haim Mendelson, P33 at 13-14. The differential of 1/16 between the NBBO and preferenced SelectNet price resulted in net damage to Binder of $ 437.50 on the 7000-share transaction.
2) Plaintiff Zakheim's June 7, 1994 purchase order for 120 shares of U.S. Healthcare was executed by defendant Merrill Lynch, as principal, at 11:11:54 for a price of 42 3/4. Twenty-nine of Merrill Lynch's thirty-four trades in USHC conducted on June 7, 1994 on Instinet were executed at prices better than NBBO. Reply Declaration of Haim Mendelson, PP10-11 at 6-7. The average price improvement over these thirty-four transactions was $ 0.16 per share. Plaintiffs contend that this creates an inference "that it is more likely than not that a better price was available on Instinet between the times Merrill Lynch received and executed Mr. Zakheim's order." Id., P12 at 7. Based on the average price improvement demonstrated in the thirty-four transactions, Zakheim's damage was $ 19.20 on the 120-share transaction.
With respect to this June 7, 1994 transaction, plaintiffs allege an additional theory of damage. No in-house market orders were available for crossing with Zakheim's market order at or about the time this trade was executed. Reply Declaration of Haim Mendelson, P14 at 7. Plaintiffs contend, however, that market orders of other Merrill Lynch customers could have been crossed with each other at the start of trading on the same day. For example, two unexecuted market orders to buy 450 shares in total and two unexecuted market orders to sell 305 shares in total were held by Merrill Lynch as of 9:27:35 on June 7, 1994. Plaintiffs contend that 305 shares could have been exchanged at a price midway between the respective offers at that time without Merrill Lynch's participation in the current spread. Id., PP15-16 at 8. At the time, the NBBO bid price was 41 1/2 and the NBBO ask price was 41 3/4, yielding a spread of 1/4. Zakheim's loss under this theory is based on one-half of the spread which Merrill would have gained by selling to Zakheim at the NBBO asking price rather than crossing his order with another in-house market order, had one been available, at a price midway between NBBO bid and ask. The resultant damage calculation is $ 15 on the 120-share transaction. This damage theory fails to recognize that widely accepted principle, noted by plaintiffs themselves, Plaintiff's Memorandum In Opposition at 43, n.32, that class representatives cannot rely upon injury to absent class members but must allege personal injury. Warth v. Seldin, 422 U.S. 490, 493, 45 L. Ed. 2d 343, 95 S. Ct. 2197 (1975); Cent'l Wesleyan College v. W.R. Grace & Co., 6 F.3d 177, 188 (4th Cir. 1993); Casey v. Lewis, 4 F.3d 1516, 1519 (9th Cir. 1993); Griffin v. Dugger, 823 F.2d 1476, 1482 (11th Cir. 1987), cert. denied, 486 U.S. 1005, 100 L. Ed. 2d 193, 108 S. Ct. 1729 (1988); Brown v. Sibley, 650 F.2d 760, 771 (5th Cir. 1981).
No information on either Instinet prices
, SOES limit order file prices or payment for order flow arrangements was supplied for any of the transactions.
Data on contemporaneous Selectnet prices were supplied in six other transact ions
but no available superior price was shown in any of them. For example, on Sept. 21, 1994, the day of plaintiff Kravitz's 100 share purchase of Safety Components executed by Dean Witter as agent at a price of 19, three SelectNet offers for Safety Components were posted:
1) At 10:18:28 an offer to sell any quantity of 600 shares or less at a price of 18 3/4, good for three minutes, was broadcast to all market makers. The offer was accepted (for all 600 shares at the offered price) at 10:19:21.
2) At 11:07:11 an offer to sell any quantity of 600 shares or less at a price of 18 1/2, good for three minutes, was broadcast to all market makers. The offer was accepted (for all 600 shares at the offered price) at 11:07:25.
3) At 15:39:41 an offer to purchase exactly 1000 shares at a price of 17 3/4, good for three minutes, was broadcast to all market makers. The offer was withdrawn nineteen seconds later at 15:40:00 without being accepted.
At the time the Kravitz's order was executed by Dean Witter on the SOES system, 13:10, none of the day's three SelectNet orders were open and available. Therefore, with respect to SelectNet, plaintiff Kravitz suffered no damage in this transaction. It is conceivable, but not established, that Instinet or the SOES limit order would show better prices in the transactions for which SelectNet data was supplied as well as in the remaining three transactions
for which no information on any alternative sources of liquidity was provided.
According to plaintiffs, "Throughout the Class Period [November 4, 1992 to November 4, 1994], each Defendant daily took tens of thousands of relatively small orders from their respective retail customers, including Plaintiffs and members of the Class, to buy and sell tens of millions of shares of stock." Amended Complaint P25 (emphasis added). The foregoing examples of just a few of plaintiffs' transactions suggest i) that determining damages under plaintiffs' theory would be no easy task and, ii) more important, the additional inquiries which would have to be made when executing each defendant's tens of thousands of daily relatively small orders might be so time consuming and burdensome that customers would be prejudiced through the inability of broker/dealers to execute customer orders in a timely and inexpensive manner. These considerations must be among those which are causing the regulatory agencies to move with care when devising new rules on this subject. These considerations must also be a reason why the proposed new rules appear to be moving in the direction of modifying the computation of the NBBO rather than imposing additional duties of inquiry upon broker/dealers.
Giving the non-moving party the benefit of the doubt, as is required under summary judgment standards, I will assume, arguendo, that the missing data would reveal some damage in a sufficient number of the transactions to surmount the standing challenge. Such "damages," of course, assume the validity of plaintiffs' substantive claims.
E. - DISCUSSION
Standard For Summary Judgment
A court must grant summary judgment if the moving party establishes that "there is no genuine issue as to any material fact and that . . . [it] is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Once the moving party has carried its burden under Rule 56(c), "its opponent must do more than simply show that there is some metaphysical doubt as to the material facts in question." Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986), rev'g 723 F.2d 238 (3d Cir. 1983). The opposing party must set forth specific facts showing a genuine issue for trial, and may not rest upon the mere allegations or denials of its pleadings. See Celotex Corp. v. Catrett, 477 U.S. 317, 324, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986); First National Bank v. Cities Service Co., 391 U.S. 253, 289, 20 L. Ed. 2d 569, 88 S. Ct. 1575, reh'g denied, 393 U.S. 901, 21 L. Ed. 2d 188, 89 S. Ct. 63 (1968); Sound Ship Bldg. Corp. v. Bethlehem Steel Co, 533 F.2d 96, 99 (3d Cir.), cert. denied, 429 U.S. 860, 50 L. Ed. 2d 137, 97 S. Ct. 161 (1976). In applying Rule 56(c), the Supreme Court has held that:
By it very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, at 247-48, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).
A genuine issue for trial is present whenever "the evidence presents a sufficient disagreement to require submission to a jury." id. at 251-252. In contrast, whenever "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no 'genuine issue for trial.'" Matsushita, 474 U.S. at 587. In evaluating the record, the court must both weigh the evidence and draw inferences from it "in the light most favorable to the party opposing the motion." Whitehead v. St. Joe Lead Co., Inc., 729 F.2d 238, 251 (3d Cir. 1984) (quoting Coastal States Gas Corp. v. Department of Energy, 644 F.2d 969, 979 (3d Cir. 1981)); Wahl v. Rexnord, Inc., 624 F.2d 1169, 1181 (3d Cir. 1980).
A material fact for each party is one which assists in "establishing the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp., 477 U.S. at 322. Although it has been advised that "summary judgment should be used sparingly in complex . . . securities litigation where motive and intent play lead roles and the proof is largely in the hands of the defendants," Allen Organ Co. v. North American Rockwell Corp., 363 F. Supp. 1117, 1124 (E.D. Pa. 1973), if a party fails to establish an essential element upon which it will bear the burden at trial "there can be 'no genuine issue as to any material fact,' since a complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial." Celotex Corp., 477 U.S. at 323.
Fraud under Section 10(b) and Rule 10b-5
In fulfillment of the Congressional purpose "to substitute a philosophy of full disclosure for the philosophy of caveat emptor . . ." SEC v. Capital Gains, 375 U.S. 180, 186, 11 L. Ed. 2d 237, 84 S. Ct. 275 (1963), and pursuant to the authority granted it in Section 10 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(a), the Securities and Exchange Commission has defined fraudulent use of "manipulative and deceptive devices" in the context of the securities industry:
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 exchange,
(a) To employ any device, scheme, or artifice to defraud,