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File under: huge if true. A group of Wall Street traders maliciously discounted the stock price of a Maryland biotechnology company with a promising new brain cancer vaccine, seeking the marginal profits that could be made by buying the stock cheap and selling it back to the market.
That, at least, was the claim made by Northwest Biotherapeutics in a lawsuit filed against seven broker-dealers including Virtu and Ken Griffin's Citadel Securities in late 2022.
It accused the companies of “repeated spoofing” by using their trading platforms to place tens of millions of orders to sell NWBO that they had no intention of fulfilling. These orders were visible to the rest of the market, the complaint alleged, prompting other investors to dump the stock, hitting the NWBO's valuation even as a major clinical trial produced impressive results.
Predictably, these claims sent conspiracy-minded Redditors into a frenzy — including some who previously pumped meme stocks like Gamestop. Their refrain for months has been that hedge funds “want to bury this company,” largely avoiding mention of factors that might dissuade investors from buying into NWBO, such as a study questioning the cancer trial's design and a negative news report. on its results. Northwest was also mired in management problems, reaching a settlement with the Securities and Exchange Commission over failures to monitor financial reporting.
Last month, a Manhattan court dismissed the NWBO and its Reddit fans, granting a request by Citadel and others to dismiss the case.
But there was a sting in the tail. In his report recommending the dismissal, Judge Gary Stein concluded that while the company had not done enough to date to link the trading in question to the losses it incurred by selling shares at artificially low prices on specific dates, nearly all of the NWBO's other claims were prima facie plausible. . Enough to allow it to move forward.
The attempt by Citadel Securities and others to distinguish between orders being canceled or merely reducing their size was “unconvincing,” Stein wrote. He also concluded that at this stage of the litigation, it did not matter whether they were executing orders on behalf of clients, because they exercised “control over the high-speed trading algorithms” behind the trades.
He also found that when “viewed in the light most favorable” to the plaintiff, “the allegations substantially support a conclusion that the defendants’ conduct affected the market price of NWBO shares.” In a line that seems destined to make its way onto Reddit's r/wallstreetbets message boards, Stein also called the allegations “at least as compelling and persuasive as the inference that the defendants were simply engaged in legitimate business activity.”
This report came on the heels of another plagiarism decision in the same New York court, in a civil case brought by Bermudian hedge fund Harrington against Bank of America Merrill Lynch, CIBC, and TD Securities. That lawsuit — referred to by Stein — survived a motion to dismiss and is currently scheduled to go to trial early this year.
The NWBO intends to resubmit its complaint within days. This time, if the judge finds that the shortcomings in the biotech case have been fixed, it could pave the way for a so-called discovery process in which Citadel Securities and other defendants will be forced to hand over internal records and relevant communications. . Critics of high-frequency trading companies, who claim they have a significant and malignant influence on global markets, will be watching closely.
Citadel Securities described the case as a “malicious lawsuit.” [that] “It grossly misrepresents how the market works in an attempt to dethrone the world's largest liquidity providers,” and neither Northwest nor Harrington are necessarily close to proving their claims. To date, no spoofing case has prevailed outside of those brought by U.S. prosecutors or regulators.
But the default position adopted by market makers – who claim allegations of market manipulation are implausible while refusing to disclose the commercially sensitive intricacies of their high-tech platforms – has been effectively undone.
The fact that the NWBO did not specify which algorithmic trading software the defendants used to implement their schemes or how they used them was not a bar to its case, Stein wrote. “It is difficult to imagine how any plagiarism case could survive a motion to dismiss if… He added that it was necessary to state “facts known only to the defendant” in the complaint. In other words, if Citadel Securities and its ilk wanted to overcome On this issue and barring a rash of copycat suits, they'll probably have to give the rest of us a peek behind the curtain.
joe.miller@ft.com
