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File under: huge if true. A group of Wall Street traders maliciously drove down the share price of a Maryland biotech with a promising new brain cancer vaccine, in pursuit of the marginal profits to be made by buying the stock cheaply and selling it back to the market.
That, at least, was the allegation made by Northwest Biotherapeutics in a suit filed against seven broker-dealers including Virtu and Ken Griffin’s Citadel Securities in late 2022.
It accused the firms 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, which led other investors to dump the shares, hammering NWBO’s valuation even as a key clinical trial yielded impressive results.
Predictably, the claims sent conspiracy-minded Redditors — including some of those who previously pumped meme stocks such as Gamestop — into a frenzy. Their refrain for several months has been that hedge funds “want to bury this company”, while largely avoiding mention of factors that might have dissuaded investors from buying into NWBO, such as a study questioning the design of its cancer trial and a negative news report on its results. Northwest had also been mired in governance problems, settling with the SEC over failures in financial reporting oversight.
Last month, NWBO and its Reddit fans were rebuffed by a Manhattan court, which granted Citadel et al’s motion to dismiss the case.
But there was a sting in the tail. In his report recommending dismissal, magistrate Gary Stein concluded that while the company had not yet done enough to tie the trading in question to losses sustained by selling shares at the artificially low prices on specific dates, almost all of NWBO’s other claims were prima facie plausible enough to be allowed to proceed.
An attempted distinction by Citadel Securities and others between orders that were cancelled or merely reduced in volume was “unconvincing”, Stein wrote. He also concluded that at this stage in the litigation, it mattered not whether they were executing orders on behalf of clients, as they exerted “control over the high-speed trading algorithms” behind the trades.
He further found that when “viewed in the light most favourable” to the plaintiff, the “allegations amply support the inference that defendants’ conduct affected the market price for NWBO stock”. In a line that seemed destined to make its way on to the r/wallstreetbets message boards on Reddit, Stein further called the claims “cogent and at least as compelling as the inference that defendants were simply engaged in legitimate trading activity.”
The report came hot on the heels of another spoofing decision in the same New York courthouse, in a civil case brought by Bermudian hedge fund Harrington against Bank of America Merrill Lynch, CIBC and TD Securities. That suit — which was referenced by Stein — survived a motion to dismiss and is currently scheduled to go to trial as early as this year.
NWBO intends to refile its complaint within days. This time around, if a judge finds the deficiencies in the biotech’s case have been fixed, it could pave the way for the so-called discovery process in which Citadel Securities and its co-defendants would be compelled to hand over internal records and relevant communications. Critics of high-frequency trading firms, who claim they have an outsized and malign influence on global markets, will be watching closely.
Citadel Securities labelled the case a “malicious lawsuit [that] blatantly misrepresents how the market functions in an attempt to shake down the world’s leading liquidity providers”, and neither Northwest nor Harrington is necessarily any closer to proving their claims. To date, no spoofing case outside those brought by the US prosecutors or regulators has prevailed.
But the default stance adopted by market-makers — who claim allegations of market manipulation are implausible while declining to divulge the commercially sensitive intricacies of their high-tech platforms — has now been effectively knocked back.
Stein wrote that the fact NWBO did not specify what algorithmic trading programmes were used by defendants to execute their schemes or how they were used was not an impediment to its case. “It is hard to imagine how any spoofing case would survive the motion to dismiss stage if . . . ‘facts solely within the defendant’s knowledge,’ were required to be set forth in the complaint”, he added. In other words, if Citadel Securities and its ilk are to beat this case and prevent a string of copycat suits, they will probably have to give the rest of us more of a peek behind the curtain.
joe.miller@ft.com
