The opinion of the court was delivered by: Dickinson R. Debevoise, U.S.S.D.J.
DEBEVOISE, Senior District Judge
On March 17, 2000, plaintiff filed this action against Knight/Trimark Group, Inc. and John Does 1-10 in the Superior Court of New Jersey, Hudson County. On June 2, 2000, defendants filed a notice of removal of this action to federal court pursuant to 15 U.S.C. § 78bb(f)(2) of the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") because the case "involves a 'covered security'" under the Act.
On July 5, 2000, plaintiff filed a motion to remand the case to state court, arguing that the case was not removable under SLUSA because it did not involve a covered security. Defendant opposed, and simultaneously moved to dismiss the complaint, alleging that the case was properly removed to federal court under SLUSA's removal provision and that the complaint should be dismissed because plaintiff's claims were preempted by SLUSA. The court concluded that removal of the case to federal district court was proper and that if plaintiff failed to file an amended complaint that conformed with the Private Securities Litigation Reform Act of 1995 ("PSLRA") within a specified period of time the matter would be dismissed.
On November 16, 2000, plaintiff filed an amended complaint that named as defendants Knight Trading Group, Inc., Knight Securities, L.P., and Kenneth D. Pasternak (collectively "defendants"). Presently pending is defendants' motion to dismiss the amended complaint pursuant to Fed. R. Civ. P. 12(b)(6), 9(b) and the PSLRA.
Knight Securities ("Knight") is a "market maker" engaged in the business of executing the purchase and sale of NASDAQ securities for various broker/dealers. (Am. Compl. ¶¶ 7-8.) Plaintiff Yakov Prager engaged in the purchase or sale of NASDAQ-listed securities through TD Waterhouse, a broker/dealer that sends about half of its orders to Knight for execution. (Am. Compl. ¶ 6.) Plaintiff purports to represent a class of all retail purchasers and sellers of NASDAQ-listed securities whose orders were executed through Knight for the period July 8, 1998, through March 3, 2000. (Am. Compl. ¶ 10.) Plaintiff alleges that Knight engaged in a pattern and practice of market manipulation in which it profited from the prices at which it executed trades for the retail customers of broker/dealers by "gaining an informational advantage and trading in advance of such customers and thereafter selling or buying securities for a profit." (Am. Compl. ¶ 1.) Plaintiff asserts violations of Section 10(b) of the Securities Act and Rule 10b-5 and Section 20(a) of the Exchange Act.
Plaintiff alleges that the Rules of Conduct of the National Association of Securities Dealers ("NASD") require brokers to execute retail customers' trades at the best available market price, without excessive markups, that broker/dealers' management committees establish procedures to enforce those requirements, and that market makers fill limit order requests before executing their own trades. (Am. Compl. ¶¶ 17-18.) Further, plaintiff alleges that Knight represented in multiple filings with the Securities and Exchange Commission ("SEC") that it "provides guaranteed, automated, electronic, continuous execution at the National Best Bid or Offer [NBBO] *fn1 or better" for thousands of NASDAQ securities, that it "guarantees to execute, at the opening NBBO, all market-eligible orders it has received before 9:25 a.m.," and that it "is committed to providing a superior execution methodology that emphasizes automated execution and rule compliance, [and] real-time information to customers." (Am. Compl. ¶¶ 20-22, 25-26.)
Plaintiff alleges that at the time those statements were made, Knight was "engaged in a pattern and practice of manipulating the market by profiting from the prices at which it trades with its retail customers, by trading in advance of such retail customers and thereafter buying or selling securities for an unfair profit." (Am. Compl. ¶ 30.)
Specifically, plaintiff alleges that Knight's "exclusive knowledge of large numbers of orders gives it an informational advantage on which it can trade for its own profit. [Knight] takes information about retail customers' intentions to trade and uses that information to improve its own proprietary trading profit at the expense of its customers . . . ." (Am. Compl. ¶¶ 31-32.)
As described by counsel for plaintiff at the hearing on the instant motion, "the allegations essentially come down to manipulation in the pre-opening market to drive the price at the opening to a level that it ordinarily would not have been at." (Tr. at 4:5-8.) Plaintiff's counsel described that alleged manipulation as follows:
There is a practice in the business that's called crossing. When one crosses, one would [buy] the stock at a higher price [than] the lowest sell, . . . [s]o that if the lowest sale price were ten dollars, and Knight wanted to drive it up because it had a position that was higher than ten dollars, it would bid, for argument's sake, ten and a half . . . and, therefore, that would have an effect on the price. It would drive the price up. . . . [If] the order is put in and the market hasn't opened, and [plaintiff's] order is sitting with [Knight] and [Knight] knows that he's looking to buy at a certain price and if, in fact, there's manipulation going on, which is alleged in the complaint, that will push the price up. (Tr. at 5:14-24, 7:15-20.)
Plaintiff asserts that Knight's practice violates NASDAQ rules of conduct, implied and express agreements between plaintiff (and potential class members) and the broker/dealers for whom Knight acts, Knight's fiduciary obligations, and Rule 10b-5. (Am. Compl. ¶ 36.) Additionally, plaintiff alleges that defendants knew (1) that the public statements issued by Knight were materially false and misleading and (2) that they were acting to ...