LIVINGSTON, Circuit Judge:
Defendants-Third-Party-Plaintiffs-Cross-Defendants-Appellants J.P. Morgan Securities, Inc. and J.P. Morgan Clearing Corporation (referred to herein collectively as "Bear Stearns"
On appeal, Bear Stearns argues principally that, as a clearing broker engaged in
For the reasons stated below, we conclude that the Levitt Plaintiffs' allegations — principally that Bear Stearns participated in Sterling Foster's fraudulent conduct by, among other things, continuing to clear transactions for Sterling Foster despite alleged knowledge of the ongoing manipulative scheme and by failing to cancel unpaid trades in violation of Federal Reserve Board Regulation T — fail to trigger a duty of disclosure to Sterling Foster's clients such that the Affiliated Ute presumption of reliance applies. The Levitt Plaintiffs therefore fail to satisfy Rule 23(b)(3)'s predominance requirement. Accordingly, we reverse the decision of the district court certifying a class.
Approximately ninety percent of the broker-dealers registered with the Securities and Exchange Commission ("SEC") hire a clearing broker to perform the back-office services associated with securities trading. See Henry F. Minnerop, Clearing Arrangements, 58 BUS. LAW. 917, 917 (2003) ("Clearing Arrangements"). "Major clearing firms ... handle millions of trades daily on behalf of customers of hundreds of [broker-dealers]." J.A. 973 (Expert Affidavit of Henry F. Minnerop). A clearing broker's involvement in any given transaction typically begins after the execution of a trade, when "the clearing firm processes, settles, and clears the transaction and prepares an appropriate trade confirmation" to send to the customer. Clearing Arrangements at 923-24. "The clearing firm ... maintains custody of the customer's securities and funds upon receipt, and may provide margin financing if the introduced customer has signed a margin agreement with the clearing firm." Id. at 924. The broker-dealer typically retains all customer-contact functions, including soliciting customers, recommending the purchase or sale of securities to customers, and monitoring customers' transactions. Under the most common form of agreement between clearing brokers and introducing firms, known as a "fully disclosed" agreement, "the introducing firm discloses the identity of each of its customers to its clearing firm. The clearing firm then establishes on its books and records an account in the name of each introduced customer and `carries' that account with its own net capital." Id. at 920. "Under these circumstances, the clearing firm's primary (and frequently only) source of information about the customer is the introducing firm." In re Bear, Stearns Secs. Corp., Exchange Act Release
Broker-dealers employing the services of a clearing broker are known as "introducing firms," to distinguish them from "self-clearing" broker-dealers, which perform all of the functions of a clearing broker internally. Contracting out for clearance and settlement services relieves introducing firms of the "huge costs associated with [these] `back-office' operations." Dillon v. Militano, 731 F.Supp. 634, 636 (S.D.N.Y.1990).
At all times relevant to the parties here, New York Stock Exchange ("NYSE") Rule 382 permitted clearing brokers contractually to allocate all "know your customer" responsibilities — including "opening, approving and monitoring of accounts [and] safeguarding of funds and securities" — to the introducing firm.
Sterling Foster was established as a broker-dealer in 1994; it retained Bear Stearns to serve as its clearing broker pursuant to an agreement dated April 14, 1994 (the "Agreement"). The Agreement provided that Sterling Foster would be
Bear Stearns issued a so-called "Rule 382 Notice" to Sterling Foster's customers; such notices "inform[ed] ... customers that their brokerage firm had entered into a clearing agreement with a specified clearing firm [here Bear Stearns]," J.A. 959 n. 13 (Minnerop Aff.), and "provide[d] a summary of the allocation of functions and responsibilities between the introducing and clearing firm as set forth in their clearing agreement," id.
In the two years following Sterling Foster's establishment in 1994, the firm underwrote five initial public offerings ("IPOs") for which Bear Stearns served as clearing broker. In each of these offerings, Sterling Foster engaged in stock-manipulation maneuvers whereby it entered into secret agreements with inside shareholders which resulted in substantial profits for Sterling Foster. Under standard "lock-up agreements" with inside shareholders — investors affiliated with the issuing corporation, such as the corporation's founders and inside consultants — these shareholders were prevented from selling their shares for a certain period of time following the IPO, unless the shares were released for sale earlier with the permission of the underwriter, Sterling Foster. The prospectuses for the five offerings represented that Sterling Foster had no prearranged agreements with the inside shareholders to release them from their lock-up agreements. In fact, and unbeknownst to the buying public, Sterling Foster had already entered into agreements with the inside shareholders to purchase their shares at a price substantially below the prevailing market price at the time of the IPO. Then, on the first days of trading in the IPO, Sterling Foster would "use aggressive sales tactics that created a large demand for the offerings" and would "sell shares far in excess of what was being offered,.... creat[ing] a
The Levitt Plaintiffs are former customers of Sterling Foster who purchased securities in the September 4, 1996 IPO of ML Direct, Inc. ("ML Direct"). Although the ML Direct IPO was nominally underwritten by Patterson Travis, Inc. ("Patterson"), and not by Sterling Foster, Sterling Foster was able to engage in a market manipulation scheme similar to that described above.
The ML Direct prospectus (the "Prospectus"), dated August 2, 1996, announced that ML Direct would be offering 480,000 units in its IPO. Each unit consisted of two shares of common stock and one purchase warrant and would be offered at an initial price of $15.00 per unit. In total, approximately 1.1 million common shares of ML Direct would be issued in the IPO. In addition to the public offering, the Prospectus disclosed that ML Direct would also be seeking registration from the SEC for a so-called "shelf offering," which would cover the sale of 2.4 million shares and 2 million warrants that were owned by certain shareholders affiliated with ML Direct (hereinafter the "Selling Securityholders"). The Prospectus disclosed the existence of a standard lock-up agreement with the Selling Securityholders which restricted their ability to sell their shares of ML Direct directly following the commencement of the IPO:
Although the Prospectus stated that Patterson had no existing agreement with the Selling Securityholders to release them from their 12-month lock-up agreement, and no present intention of entering into such an agreement, in fact, Sterling Foster had already caused Patterson to enter into a secret agreement with the Selling Securityholders to sell their shares to Sterling Foster once the IPO was underway.
When trading commenced on September 4, 1996, Sterling Foster purchased nearly all of the 1.1 million shares of ML Direct common stock being offered to the public. But it also sold more than three and a half times the number of shares registered in the IPO, for a total of 3.9 million shares of ML Direct. This resulted in a substantial short position of 2.86 million shares of ML Direct at the end of the first day of trading.
Sterling Foster would have had to pay more than $43.69 million to cover this short position at the prevailing market price of $15.25 per share. But instead of covering its short position of 2.86 million shares by purchasing shares of ML Direct in the market, Sterling Foster caused Patterson to release the Selling Securityholders from the lock-up agreement on September 10. Sterling Foster then purchased the shares of the Selling Securityholders at a price of $3.25 per share, substantially below the prevailing market
According to the Levitt Plaintiffs, in August 1996, prior to the first day of trading on September 4, Sterling Foster's president, Adam Lieberman ("Lieberman"), informed Keith Brigley ("Brigley"), an associate director in Bear Stearns' clearing division, that Sterling Foster intended to create a large short position in ML Direct stock on the first day of trading. Lieberman indicated to Brigley that the short position would be significantly larger than short positions that Sterling Foster had taken in previous IPOs, but assured Brigley that Sterling Foster would cover the short position by purchasing shares of the Selling Securityholders, which Patterson had agreed to release and which Sterling Foster had arranged with the Selling Securityholders to purchase. Bear Stearns had previously received a copy of the Prospectus which stated that Patterson had no present intention of releasing the shares of the Selling Securityholders before the 12-month lock-up period had expired.
After learning of Sterling Foster's plans for the ML Direct IPO, Bear Stearns required Lieberman to sign a personal guarantee (the "Guarantee"). On August 21, Brigley faxed Lieberman a copy of the Guarantee; on the cover letter, he wrote, "[w]e need these items to be addressed now. There is no approval for you to proceed with the deal at Bear until the above items are addressed. Please call ASAP." Brigley testified that the reason for the Guarantee was because "[t]he dollar amount [of the ML Direct offering] was getting huge." (Internal quotation marks omitted). The Guarantee provided that Lieberman
Brigley's cover letter also noted a "need to have more collateral on hand."
From September 4, the first day of trading in the ML Direct IPO, through September 11, Bear Stearns carried Sterling Foster's large short position of 2.86 million ML Direct shares on its books. The Levitt Plaintiffs allege that although the provisions of Federal Reserve Board Regulation T required Bear Stearns to cancel customer trades that remained unpaid two days after the settlement date (or submit extension requests to the NYSE), Bear Stearns failed to cancel unpaid trades made on September 4. By the close of business on September 12, Sterling Foster customers owed more than $13.8 million for purchases of ML Direct shares made on September 4. Ultimately, Bear Stearns canceled nearly one-fourth of the purchases by Sterling Foster customers made on that day.
On September 11, the Selling Securityholders delivered their shares, which Sterling Foster had agreed to purchase at the below-market price of $3.25 per share, to Bear Stearns. Bear Stearns issued checks to the Selling Securityholders on September 12.
Finally, Bear Stearns records reveal a number of customer purchases recorded "as of" September 4. Typically the designation "as of" is used when a trade is corrected after the date on which it was originally entered into. Here, however, Sterling Foster employed the designation "as of" even though the trades had never been entered into on the "as of" date, but instead were executed much later. In fact, some of the "as of" trades recorded by Sterling Foster were recorded on behalf of customers who had opened their accounts with Sterling Foster after September 4, thus making it impossible that the trade was originally executed on this date. Designating the trades "as of" allowed Sterling Foster to record trades at the higher September 4 market prices, rather than the actual market prices prevailing at the time of the trade.
The procedural history leading to the present appeal is extended and complex; the proceedings specifically relevant to the present appeal, however, are straightforward. Purchasers of securities in the IPOs underwritten by Sterling Foster brought suit for securities fraud in various district courts across the country. These suits were consolidated and a group of plaintiffs known as the "Rogers Plaintiffs" were appointed lead plaintiffs. In February 1998, the Judicial Panel on Multidistrict Litigation transferred the consolidated cases against Sterling Foster to the United States District Court for the Eastern District of New York (Spatt, J.). After the transfer, the Rogers Plaintiffs amended their complaint to add Bear Stearns as a defendant.
In February 1999, the Levitt Plaintiffs brought suit against Bear Stearns in the United States District Court for the Southern District of New York. See Levitt v. Bear Stearns & Co., Inc., 340 F.3d 94, 100 (2d Cir.2003) ("Levitt I"). They alleged federal causes of action for securities fraud and a state-law cause of action for common-law fraud in connection with the ML Direct IPO. Id. at 100-01. The action was transferred to the United States District Court for the Eastern District of New York (Spatt, J.) in April 1999 as a tag-along to the consolidated class action suit against Sterling Foster by the Rogers Plaintiffs. Id. at 101.
Eventually, after considerable procedural back-and-forth not material here, the district court granted the Levitt Plaintiffs' motion to be appointed lead plaintiffs for the ML Direct class (the Rogers Plaintiffs having since settled). See In re Sterling Foster & Co, Inc., Sec. Litig., MDL Docket No. 1208(ADS), 2008 WL 399296 (E.D.N.Y. Feb. 12, 2008). On September 25, 2009, the Levitt Plaintiffs filed an amended class action complaint (the "Complaint") against Bear Stearns on behalf of a class of "all persons who purchased ML Direct common stock or warrants during the period September 4, 1996 through February 18, 1997, and who lost money on such purchases." The Complaint alleged that Bear Stearns had knowledge of Sterling Foster's plan to manipulate the market for ML Direct stock prior to the commencement of the IPO and that Bear Stearns, knowing of the fraud, joined in, permitted and facilitated said fraud and market manipulation by:
The Complaint asserted four causes of action against Bear Stearns. These were: (1) participation in a fraudulent scheme, in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); (2) knowingly making false statements to purchasers of ML Direct securities in trade confirmations, also in violation of § 10(b); (3) control person liability under § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a); and (4) common-law fraud.
On December 31, 2009, the Levitt Plaintiffs moved for certification of the class "with respect to claims of the class under the Securities Exchange Act, Section 10b and Section 20 and the rules issued thereunder" pursuant to Fed.R.Civ.P. 23(b)(3).
The district court granted certification as to the Levitt Plaintiffs' § 10(b) claims and denied certification on the § 20(a) claim by a June 24, 2010, memorandum decision and order.
The district court denied class certification with respect to the Levitt Plaintiffs' claim under § 20(a), holding that the Complaint's allegations "[fell] short of establishing that Bear Stearns controlled Sterling Foster [because] [t]here is simply no indication ... that Bear Stearns directed Sterling Foster's management and policies, as is required by Section 20(a)." Id. at 135.
Bear Stearns moved for leave to pursue an interlocutory appeal of the district court's June 24 opinion, which a panel of this Court granted on November 10, 2010.
We review a district court's grant of class certification for abuse of discretion, Shahriar v. Smith & Wollensky Rest. Grp., Inc., 659 F.3d 234, 250 (2d Cir.2011), and review the conclusions of law underlying that decision de novo, id. at 251. We also review for abuse of discretion the district court's finding that the Levitt Plaintiffs satisfied the predominance requirement of Rule 23(b)(3), although "we review for clear error the factual findings underlying th[at] ruling." Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196, 201 (2d Cir.2008). "When reviewing a grant of class certification, we accord the district court noticeably more deference than when we review a denial of class certification." In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 480 (2d Cir.2008).
A district court may only certify a class if it determines that each Rule 23 requirement is met. See McLaughlin v. Am. Tobacco Co., 522 F.3d 215, 221 (2d Cir. 2008). Rule 23(a) provides that a class action is appropriate
Fed.R.Civ.P. 23(a). If the Rule 23(a) criteria are satisfied, an action may be maintained as a class action only if it also qualifies under at least one of the categories provided in Rule 23(b). See Brown v. Kelly, 609 F.3d 467, 476 (2d Cir.2010).
The Levitt Plaintiffs sought certification under Rule 23(b)(3), which permits certification "if the questions of law or fact common to class members predominate over any questions affecting only individual members, and ... a class litigation is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b).
"In evaluating a motion for class certification, the district court is required
The principal question in this appeal is whether the district court properly determined that the Rule 23(b)(3) predominance requirement was met. This question largely turns on whether Bear Stearns's conduct in its role as a clearing broker was such that Bear Stearns owed (and breached) a duty of disclosure to Sterling Foster's customers.
Section 10(b) makes it unlawful "for any person, directly or indirectly, ... [t]o use or employ, in connection with the purchase or sale of any security ..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j(b). Rule 10b-5, promulgated thereunder, provides as follows:
17 C.F.R. § 240.10b-5.
In a typical § 10(b) private action "a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008). In addition, for an omission to be considered actionable under § 10(b), the defendant must be subject to an underlying duty to disclose. See Basic v. Levinson, 485 U.S. 224, 239 n. 17, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) ("To be actionable,... a statement must also be misleading. Silence, absent a duty to disclose, is not misleading under Rule 10b-5."); In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir.1993) ("[A]n omission is actionable under the securities laws only when the [defendant] is subject to a duty to disclose the omitted facts."). Finally, an omission of a material fact by a defendant with a duty to disclose establishes a rebuttable presumption of reliance upon the omission by investors to whom the duty was owed. Affiliated Ute, 406 U.S. at 153-54, 92 S.Ct. 1456.
We have previously said that "a clearing agent[] is generally under no fiduciary duty to the owners of the securities that pass through its hands." Edwards
Applying these principles, district courts in this Circuit have distinguished two categories of cases. First, in cases where a clearing broker was simply providing normal clearing services, district courts have declined to "impose[] liability on the clearing broker for the transgressions of the introducing broker." Fezzani v. Bear, Stearns & Co., 592 F.Supp.2d 410, 425-26 (S.D.N.Y.2008); see also, e.g., Cromer Fin. Ltd. v. Berger, 137 F.Supp.2d 452, 470 (S.D.N.Y.2001) ("A clearing broker does not provide `substantial assistance' to or `participate' in a fraud when it merely clears trades."); In re Blech Sec. Litig., 961 F.Supp. 569, 584 (S.D.N.Y.1997) ("[P]rimary liability [under § 10(b)] cannot attach when the fraudulent conduct that is alleged is no more tha[n] the performance of routine clearing functions."). The district courts have so held even if the clearing broker was alleged to have known that the introducing broker was committing fraud, Fezzani, 592 F.Supp.2d at 425; even if the clearing broker was alleged to have been clearing sham trades for the introducing broker, In re Blech, 961 F.Supp. at 584; and even if the clearing broker was alleged to have failed to enforce margin requirements against the introducing broker — thereby allowing the introducing broker's fraud to continue — in violation of Federal Reserve and NYSE rules, Cromer, 137 F.Supp.2d at 471-72.
In the second, much more limited category of cases, district courts have found plaintiffs' allegations to be adequate — and so have permitted claims to proceed — where a clearing broker is alleged effectively to have shed its role as clearing broker and assumed direct control of the introducing firm's operations and its manipulative scheme. Thus, in Berwecky v. Bear, Stearns & Co., 197 F.R.D. 65 (S.D.N.Y.2000), the district court granted class certification in a suit brought by investors against clearing broker Bear Stearns for its role in the introducing firm A.R. Baron & Company's ("Baron") scheme to defraud investors. The Berwecky plaintiffs alleged that Bear Stearns "asserted control over Baron's trading operations by, inter alia, placing Bear, Stearns' employees at Baron's offices to observe Baron's trading activities, approving or declining to execute certain trades, imposing restrictions on Baron's inventory, and loaning funds to Baron." Id. at 67. The plaintiffs alleged that Bear Stearns
Similarly, the district court in In re Blech, 961 F.Supp. 569, found that the "[c]omplaint crosse[d] the line dividing secondary liability from primary liability when it claim [ed] that Bear Stearns [the clearing broker] `directed' or `contrived' certain allegedly fraudulent trades." Id. at 584. The plaintiffs in Blech had alleged that "Bear Stearns `directed' Blech & Co. [the introducing firm] to sell Blech Securities by demanding that Blech reduce its debit balance with knowledge of Blech's history of sham trading, and that Blech, in response to Bear Stearns's pressure, engaged in manipulative parking transactions, which Bear Stearns cleared." Id. The district court concluded that the alleged "instigation of trading that Bear Stearns knew or should have known would result in fraudulent trades that would artificially inflate the price of the Blech Securities," and Bear Stearns's subsequent "clearing of the resultant fraudulent trades for its own pecuniary benefit" constituted "an attempt to affect the price of the Blech Securities" and was therefore sufficient to state a claim for primary liability under § 10(b). Id. at 584-85 (emphasis added).
We think that the distinctions drawn by these district courts properly implement Rule 382's scheme, which allows clearing and introducing brokers to contractually allocate functions amongst themselves. As noted above, this scheme permits clearing brokers to place the burden of monitoring trades on the introducing broker. In return, the introducing broker has access to the services of the clearing broker and thus avoids the overhead costs associated with providing clearing services in-house. In view of the importance of not holding clearing brokers liable for conduct for which the introducing broker assumed responsibility pursuant to NYSE Rule 382, we here adopt the approach thus far taken by the district courts of this Circuit in § 10(b) suits against clearing brokers governed by Rule 382.
In the present case, however, we conclude that the district court misapplied this approach. As the district court noted, the Levitt Plaintiffs do not argue that Bear Stearns's liability flows directly from its alleged participation in Sterling Foster's scheme. Rather, they contend that this participation triggered a duty to disclose the scheme, rendering Bear Stearns's omission to do so actionable. In our view, however, — and assuming, arguendo, that this theory of liability is otherwise available
Here, the Complaint itself alleges only that Bear Stearns, "knowing of the fraud, joined in, permitted and facilitated said fraud and market manipulation." (emphasis added). The Levitt Plaintiffs do not assert that Bear Stearns instigated or directed the manipulative scheme. Rather, they allege, at most, that Bear Stearns approved the ML Direct offering; that it agreed to serve as clearing broker for the offering; and that it may have violated certain NASD rules and Federal Reserve regulations in connection with the offering. We think substantially more direct participation by the clearing broker is required for a duty of disclosure to exist.
To be sure, the Levitt Plaintiffs have attempted to show that Bear Stearns did more than simply clear trades; in particular, they offer expert testimony that Bear Stearns' activities in connection with the ML Direct IPO were "irregular." These arguments are unavailing.
First, Plaintiffs claim that Bear Stearns' requirement that it approve the ML Direct offering and its demand for a personal guarantee and increased collateral from Sterling Foster were unusual. They do not assert, however, that any of these requirements are atypical in the industry or, even if they are, that this would support the conclusion that Bear Stearns had a duty to disclose Sterling Foster's misconduct. To the contrary, Bear Stearns' expert testified that requirements for increased collateral and approval of large IPOs were standard among clearing brokers and represented an attempt to mitigate the clearing broker's risk. The Levitt Plaintiffs' allegations thus boil down to a claim that the demand for a personal guarantee and increased collateral are "irregular" in the context of Bear Stearns' alleged knowledge that Sterling Foster would attempt to manipulate the market in ML Direct shares by releasing the Selling Securityholders from the lock-up agreement after trading commenced. But as discussed above, a clearing broker's knowledge of the fraud alone is an insufficient basis on which to impose a duty of disclosure on the clearing broker; we do not think otherwise-normal clearing practices become "irregular" simply because they are undertaken with such knowledge. Certainly plaintiffs here do not allege that Bear Stearns, beyond merely acquiescing in the ML Direct scheme, went so far as to control and implement that scheme in the manner alleged, for example, in Berwecky.
The Levitt Plaintiffs next assert that the statements on the trade confirmations issued by Bear Stearns to Sterling Foster customers who purchased shares of ML Direct in the IPO contained misleading statements. The confirmations contained boilerplate language indicating that Sterling Foster "makes a mkt [market] in this security [i.e., ML Direct], and acted as principal." Bear Stearns responds that the trade confirmations were automatically populated by Bear Stearns with data imputed by Sterling Foster. Plaintiffs do not contradict this assertion on appeal. Instead, they argue that Bear Stearns had a duty to correct Sterling Foster's misrepresentation.
Plaintiffs argue that Bear Stearns went beyond merely serving as an ordinary clearing broker because "Bear Sterns allowed Sterling Foster to resell ... repurchased shares from September 12 through September 30, 1996, `as of' September 4," at the share price prevailing on September 4, rather than on the date the shares were actually sold. Appellee's Br. 27-28 (emphasis added). Even assuming this characterization of Bear Stearns' actions to be correct (which Bear Stearns contests), we fail to see how allowing or clearing putatively sham or manipulative trades is comparable to directing or instigating such trades, see In re Blech, 961 F.Supp. at 584-85.
Finally, the Levitt Plaintiffs allege that Bear Stearns' conduct was "irregular" because the clearing broker violated Regulation T, 12 C.F.R. pt. 220, in connection with the ML Direct offering. The district court also relied heavily on Bear Stearns' alleged violations of Regulation T, citing the contention of Plaintiffs' expert that Bear Stearns' failure to cancel trades (as Regulation T demanded) "gave Sterling Foster more time to find buyers to purchase the canceled shares, thus enabling Sterling Foster to maintain an artificial price for ML Direct." Levitt, 270 F.R.D. at 134. Even if a clearing broker's violations of Regulation T are "irregular," however, they do not support the conclusion that the clearing broker has a duty to disclose a broker-dealer's misconduct to that broker-dealer's customers.
Regulation T was promulgated by the Federal Reserve Board under § 7 of the Securities Exchange Act, 15 U.S.C. § 78g, see Mfrs. Hanover Trust Co. v. Drysdale Sec. Corp., 801 F.2d 13, 22 (2d Cir.1986), and, as relevant here, sets forth time periods for payment of customer purchases in a broker-dealer account. Regulation T provides that a broker-dealer "shall promptly cancel or otherwise liquidate a transaction ... for which the customer has not made full cash payment within the required time." 12 C.F.R. § 220.8(b)(ii)(4). The Levitt Plaintiffs argue that Bear Stearns violated Regulation T when it failed to cancel unpaid trades in Sterling Foster accounts during the ML Direct IPO. We have held, however, that there is no private right of action under § 7 or under Federal Reserve Board Regulation U, also promulgated under § 7, see Bennett v. U.S. Trust Co. of N.Y., 770 F.2d 308, 312 (2d Cir.1985) (finding no private right of action under § 7 or Regulation U and observing in support of that holding that the "underlying purpose of section 7 is to regulate the use of credit in securities transactions").
Plaintiffs do not directly argue for a private cause of action for a clearing broker's Regulation T violation, but rather urge that Bear Stearns can be held liable as a primary violator of § 10(b) because its violations of Regulation T permitted Sterling Foster to manipulate the market for ML Direct by allowing trades to go unpaid until the Selling Securityholders delivered their shares. But, in the absence of other conduct of Bear Stearns outside the normal course of activities for a clearing broker, deeming the violation of Regulation T to trigger a duty to disclose, and in so doing to constitute a material omission under § 10(b), would be tantamount to the creation of a right of action for a Regulation T violation. The margin and cancellation requirements of Regulation T "are designed to protect the viability of brokerage houses and not to protect investors," Cromer, 137 F.Supp.2d at 472 (citing Bennett, 770 F.2d at 312), and we decline to effectively adopt a private right of action for investors to enforce these regulations.
For the foregoing reasons, we
NYSE Rule 382(b).
