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From Securities Regulation Daily, April 03, 2018

SRO’s private disclosures of strike price adjustment not shielded by regulatory immunity

By Rebecca Kahn, J.D.

An Illinois appellate court reversed and remanded a trial court’s application of regulatory immunity to actions by the Options Clearing Corporation ("OCC"), a quasi-regulatory organization. Such regulatory immunity was inapplicable because the OCC had privately disclosed information about a stock option’s price adjustment to selected market participants before that information had been publicly announced. This conduct was outside the OCC’s regulatory duties and arguably benefited OCC by generating fees (Platinum Partners Value Arbitrage Fund, L.P. v. Chicago Board Options Exchange, Mar. 29, 2018, Gordon, R.).

"Strike price" at issue. Cayman Islands investment funds (plaintiff) invested in options for shares of the India Fund, Inc. (IFN) which were traded by defendant CBOE and cleared and settled by defendant OCC. At issue was plaintiff’s investment in "put" options that gave it the right to sell shares at a predetermined "strike" price. After the market closed on Friday, December 17, 2010, when plaintiffs held some 25,000 IFN options, IFN announced a capital gains distribution of $3.78 per share. On Monday, December 20, 2010, plaintiff purchased over 50,000 additional IFN stock put options. That afternoon, CBOE and OCC publicly announced a downward adjustment of $3.78 to the IFN options strike price, resulting in a loss to plaintiffs. Plaintiffs sued for state securities antifraud violations (Section 12(F) and 12(I) of the Illinois Securities Law of 1953) as well as violations of the Illinois Consumer Fraud and Deceptive Business Practices Act and common law fraud. Each defendant moved for summary judgment.

Trial court rulings. The trial court had denied CBOE’s summary judgment motion but granted OCC summary judgment, finding that OCC was shielded by regulatory immunity. The trial court ruled that the only way that OCC’s disclosures would not be shielded by this doctrine was if the disclosures had been both non-public and for OCC’s own corporate benefit. The trial court had found "no indication that OCC precluded non-members from reaching out and obtaining the same information at issue," and that OCC operated as a not-for-profit business, and there could have been no intent to benefit OCC, since disclosures would have reduced trading.

No regulatory immunity. The Illinois appellate court had previously reversed, finding no regulatory immunity since the OCC had privately disclosed the price adjustment to selected market participants before that information was made publicly available. Absolute regulatory immunity applies only to acts stemming directly from the performance of "a delegated quasi-governmental prosecutorial, regulatory, or disciplinary function". The test for whether the OCC’s acts come under the umbrella of its regulatory immunity is objective, the appeals court had noted, and OCC charged clearing fees for contracts, pays salaries, bonuses, and other operational expenses, and then returns what’s left to its members.

Trial court’s erroneous interpretation. The trial court had found that, while OCC disclosures were nonpublic, there was no intent to benefit OCC because (1) there was "no indication that OCC precluded non-members from reaching out and obtaining the same information at issue, (2) OCC operated as a not-for-profit business, and (3) there could have been no intent to benefit OCC since disclosures would have reduced trading." However, the appeals court previously had articulated only one test for whether regulatory immunity applies: whether the specific acts and omissions were incidental to the exercise of the SRO’s regulatory power.

Private dissemination. The OCC argued that plaintiffs should have known that the strike price would be adjusted and that other investors already knew. But the appeals court ruled that whether plaintiffs knew or should have known about the impending price adjustment was "unrelated" to the fact question: whether OCC privately disseminated information in this case. Evidence showed that OCC help desk employees and employees in its national operations group had privately disseminated information about its upcoming strike price adjustment. On Monday, December 20, 2010, after IFN announced its capital gains distribution but before OCC’s public announcement of a strike price adjustment, the help desk and national operations employees indicated in various private conversations with investors that OCC was going to adjust the strike price, stating that the adjustment was expected or anticipated or simply, flat out, that "there will be an adjustment." In addition, disclosures had been made outside of the Help Desk, including a December 20, 2010 email wherein the OCC corporate actions director indicated to a market participant that OCC would affect the price adjustment on December 29. Additional testimony verified that the email had been sent before the strike price adjustment of IFN options had been publicly announced.

The appeals court declined to review plaintiffs’ cross-motion for summary judgment.

The case is No. 1-17-1316.

Attorneys: (The Miller Law Firm, P.C.) for Platinum Partners Value Arbitrage Fund, Ltd. Partnership and Platinum Partners Liquid Opportunity Fund, Ltd. Partnership. (Sidley Austin LLP) for Chicago Board Options Exchange and Options Clearing Corp.

Companies: Platinum Partners Value Arbitrage Fund, Ltd. Partnership; Platinum Partners Liquid Opportunity Fund, Ltd. Partnership; Chicago Board Options Exchange; Options Clearing Corp.

MainStory: TopStory Derivatives ExchangesMarketRegulation FraudManipulation InvestorEducation IllinoisNews

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