September 28, 2021

Regulatory immunity no shield for Options Clearing Corp from accusations some investors got tips on price movement

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By Robert Davis

CHICAGO — The organization known as the world’s largest equity derivative clearinghouse must yet face a lawsuit accusing it of tipping off certain investors to changes in the price of certain options, as a state appeals panel says such private admissions undermine the protections it might otherwise enjoy under regulatory immunity.

In late March, a three-justice panel of the Illinois First District Appellate Court reversed a Cook County judge‘s decision to grant summary judgment to the Options Clearing Corporation (OCC) in its ongoing legal battle with two Cayman Islands-based investment groups, who claim OCC actions cost them big financial losses.

Justice Robert E. Gordon issued the court’s opinion, with Justices Eileen O’Neill Burke and Margaret Stanton McBride concurring.

The case centers around investments made Platinum Partners Value Arbitrage Fund and Platinum Partners Liquid Opportunity Fund, which had purchased some 75,000 “put” options in the India Fund Inc. (IFN) on the Chicago Board Options Exchange (CBOE) in 2010. The trades were “cleared and settled” by the OCC.

A “put” option allows an individual or organization to sell a share to an option seller at a pre-established price, also known as the “strike price.”

After the Cayman Islands-based companies purchased the put options, the OCC reduced the strike price, which, according to the appellants, caused them to sustain financial losses. The funds then filed suit against the CBOE and OCC, alleging that even though OCC guidelines state that it is allowed to adjust the strike price on a “case by case basis,” the downward adjustment “was not required, and that defendant OCC privately disseminated news of the adjustment to a few investors prior to the public announcement,” according to the appellate court’s decision.

The case, which has gone back and forth between the Cook County Circuit Court and the Illinois First District Appellate Court, was initially dismissed by the circuit court, which held that the OCC and CBOE “were shielded from suit under the doctrine of regulatory immunity.”

Regulatory immunity is a legal doctrine in which regulatory agencies are immune from lawsuits for actions that fall within their regulatory responsibilities.

However, the plaintiffs appealed the trial court’s decision, and the Illinois First District Appellate Court reversed the decision, ruling that regulatory immunity was not applicable because the pending change in strike price was revealed to a select group of individuals. The appellate court then sent the case back to the trial court for further proceedings.

But that was not the end of the story.

“After this court remanded the case to the trial court, the trial court subsequently granted summary judgment to defendant OCC on the sole ground of regulatory immunity,” Gordon wrote in the appellate court’s most recent decision. “The trial court stated that it ‘need not reach the merits of [the] plaintiffs’ claims against OCC. Instead of determining whether [the] plaintiffs have proven their causes of action, this court [the Cook County Circuit Court] instead holds that the doctrine of regulatory immunity precludes liability for any cause of actions based on OCC’s activities.’”

Again, the plaintiffs appealed to the First District, arguing that “the trial court disregarded this court’s prior opinion in this case and erred in finding that defendant OCC’s conduct in this case was entitled to regulatory immunity.”

“In essence, [the] defendant argues on appeal primarily that [the] plaintiffs should have known that the strike price would be adjusted and that other investors already knew, while [the] plaintiffs argue that, although an adjustment was permitted, it was not required, and that defendant OCC privately disseminated news of the adjustment to a few investors prior to the public announcement,” Gordon wrote in the decision. “Thus, [the] defendant points to documents suggesting that [the] plaintiffs should have known, while [the] plaintiffs point to documents showing that [the] defendant privately disseminated information.”

The appellate panel, for its part, decided to disregard what the plaintiffs allegedly should have known, and it instead focused on whether the OCC privately told select individuals about the pending change in strike price and if OCC’s actions were protected under regulatory immunity.

“This court already answered the second, purely legal question in our last opinion: private disseminations are not protected by regulatory immunity,” Gordon wrote in the decision. “Thus, the only question left in this case with respect to regulatory immunity is the first, factual question of whether private dissemination occurred.”

To render its decision, the panel looked at evidence of dissemination by the OCC’s employees.

During the trial court’s proceedings, the plaintiffs had produced audio recordings of OCC help desk employees “disclosing to certain investors that [the] defendant was about to adjust the strike price of the IFN option before that announcement was publicly and officially made,” according to the appellate court’s decision.

Additionally, help desk employees had given depositions in which they said they were not allowed to disclose such information before a public announcement, prompting the appellate panel to reverse and remand the trial court’s decision once again.

“This evidence supports [the] plaintiffs’ prior factual allegations that defendant OCC made disclosures of the IFN strike price adjustment privately and prematurely to certain investors,” Gordon wrote in the decision. “In light of this evidence and other evidence like it, we must reverse the trial court’s grant of summary judgment, which was based solely on the doctrine of regulatory immunity. As we previously held, defendant OCC’s private and premature disclosures of the adjustment were not shielded from suit by regulatory immunity.”

IMAGE: Justice Robert E. Gordon

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