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Media Alerts - Fezzani v. Bear, Sterns & Co., Inc
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February 2, 2015
  Fezzani v. Bear, Sterns & Co., Inc
Headline: Second Circuit Denies Rehearing Petition in Case Alleging Securities Fraud by Bear Stearns, Clarifying Standard for Liability in Market Manipulation Cases

Area of Law: Securities

Issue Presented: Whether a victim's reliance on a defendant's direct communications is a required showing in every market manipulation case.

Brief Summary: After the Second Circuit affirmed the dismissal of their securities fraud claim against Bear Stearns (the clearing broker in their transactions), the plaintiffs-appellants petitioned for a rehearing or rehearing en banc. The SEC filed an amicus brief supporting them, arguing that the Second Circuit's opinion had incorrectly held that in market manipulation cases, liability could only attach to persons who actually communicated a misrepresentation to a victim. The Second Circuit rejected the petition, but clarified that its earlier opinion had "not require[d] that reliance by a victim on direct oral or written communications by a shown in every manipulation case." Rather, a showing of reliance can instead be based on market activity that is designed to send a false pricing signal to the market. Here, however, there was no showing of such market activity, and thus the case was properly dismissed. To read the whole opinion, please visit

Extended Summary: The plaintiffs-appellants petitioned for rehearing from the Second Circuit's related summary order and opinion, which had affirmed the dismissal by the United States District Court for the Southern District of New York of their dismissal of federal securities law fraud claims against a clearing broker (Bear Stearns) and individual investors. They argued that the Second Circuit's affirmance conflicted with another Second Circuit decision, Levitt v. J.P. Morgan, that had been filed just before its ruling in their case. Specifically, they asserted that their case presented very similar factual allegations to those in Levitt, and since the Second Circuit held that a class was properly certified in that case, their case should proceed as well.

The Second Circuit denied their petition. The court first explained that there was no inconsistency, because Levitt had dealt with whether a class was properly certified, rather than the issue here: whether the allegations were sufficient to state a claim for relief.

The Second Circuit also addressed the argument, made by the SEC in an amicus brief, that its earlier dismissal of this case had erroneously conveyed that, in any and all manipulation cases, liability attaches only to persons who communicate a misrepresentation to a victim. Quoting ATSI Commc'ns, Inv. V. Shaar Fund, Ltd., the SEC argued that "the essence of manipulation is not a misrepresentation, but market activity ... that itself creates a 'false pricing signal." The court clarified that "we agree with the propositions of law asserted by the SEC that, in a manipulation claim, a showing of reliance may be based on 'market activity' intended to mislead investors by sending 'a false pricing signal to the market,' upon which victims of the manipulation rely." In this case, however, the plaintiffs-appellants' complaint failed to so plead.

In order to succeed in a private action for damages stemming from false pricing signals to a market, it must involve: (i) particular securities; (ii) manipulated by particular defendants; which (iii) caused the losses to particular buyers. Here, there was no market that existed for the shares that the defendants sold to the appellants. In fact, the court found that the shares in question were not traded in any structure that could be deemed an independent, arms-length transaction. Therefore, the court concluded, there was no plausible claim that the prices paid by appellants were based on "false pricing signal[s]."

Date of Issued Opinion:

Docket Number: 14-3983, 09-4414

Case Alert Author: Eddie Chang

Counsel: Max Folkenflik, Folkenflik & McGerity, for Plaintiffs-Appellants; Kerry A. Dziubek and Michael D. Schissel, Arnold & Porter LLP for Appellees Bear, Stearns & Co. Inc. and Bear, Stearns Securities Corp.; Howard Wilson and Scott A. Eggers, Proskauer Rose LLP for Defendant-Appellee Richard Harriton; Anne K. Small, Michael A. Coley, Jacob H. Stillman, John W. Avery, and Jeffrey A. Berger, for amicus curiae The Securities and Exchange Commission

Author of Opinion: Judge Winter (majority); Judge Lohier (concurring in part, dissenting in part)

Case Alert Supervisor: Emily Gold Waldman

    Posted By: Emily Waldman @ 02/02/2015 10:57 AM     2nd Circuit  

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