Judge Kaplan Dismisses Suit Alleging Broker’s Trading Restriction Manipulated Stock Price

MANHATTAN (LN) — U.S. District Judge Lewis A. Kaplan on Thursday granted Morgan Stanley Smith Barney LLC’s motion to dismiss a derivative securities fraud complaint. He ruled that the firm’s decision to restrict electronic trading in Eltek, Ltd. stock was not manipulative and that the claims were barred of limitations.

Kaplan concluded that the broker’s “P-Trade Policy,” which barred online purchases of Eltek shares for approximately nine months starting in October 2020, was a legitimate response to detected market manipulation by unknown third parties rather than a deceptive scheme.

The plaintiff, XDOOD LLC, sued on behalf of Eltek, alleging that Morgan Stanley Smith Barney was complicit in a multi-year campaign by “John Doe” shareholders to suppress the company’s stock price through wash trades, spoofing, and price fixing.

According to the amended complaint, the broker’s policy allowed customers to continue buying Eltek shares over the telephone but allegedly failed to proactively notify holders about the restriction. The plaintiff claimed this created a “downward asymmetrical market” that forced Eltek to raise capital on unfavorable terms in early 2024.

Kaplan rejected the theory, noting that the policy was disclosed to customers who attempted online purchases and that the firm’s counsel had disclosed the policy’s adoption by its Fraud Operations Unit in July 2021.

“To be sure, plaintiff tries to wrap a conspiratorial robe around the P-Trade Policy, but even the best seamstress could not stitch together the tatters of cloth that plaintiff holds up as sufficient,” Kaplan wrote.

The judge ruled that the plaintiff failed to plead a manipulative act, sufficient scienter, reliance, or cognizable loss. Kaplan noted that the plaintiff conceded the policy was instituted to address detected manipulation, a motive that did not establish fraudulent intent.

Additionally, Kaplan held that the Securities Exchange Act claim was barred of limitations. The plaintiff knew of the alleged facts by February 2021 but waited more than four years to file the action, exceeding the two-year filing window.

The court also dismissed the plaintiff’s common law fraud claim for failing to comply with Federal Rule of Civil Procedure 9(b), which requires fraud allegations to be made with particularity.

Kaplan declined to rule on whether the plaintiff could file a second amended complaint, stating it was a “singularly inappropriate time” to address the issue before resolving the pending motion.