So many Section 10(b) claims involve claims of misrepresentation that it easy to forget that the rule also makes it unlawful to use manipulative devices in connection with the purchase or sale of securities. However, a recent ruling by Judge Margaret M. Morrow considered whether a plaintiff had adequately pled a claim of manipulative conduct in violation of Section 10(b) and Rule 10b-5. ScripsAmerica, Inc. v. Ironridge Global LLC, 2015 U.S. Dist. LEXIS 105494 (Aug. 11, 2015).
Among other things, the plaintiff alleged that the defendant had engaged in “bid whacking”, a term that I had not heard before. According to Judge Morrow,
[T]here are no reported discussing ‘bid whacking,’ let alone holding that it amounts to manipulative conduct. No secondary legal authority describes bid whacking or suggests that it should be considered manipulative.
For purposes of ruling on the defendant’s motion dismiss, Judge Morrow nonetheless assumed, without deciding, that bid whacking could constitute manipulative conduct.
What exactly is “bid whacking”? According to the plaintiff, “bid whacking” occurs when a selling party offers to sell shares “at the bid” instead of a higher price. Allegedly, this results in lowering bids further and hence the share price. In this case, plaintiff believed that the defendant had an incentive to drive the plaintiff’s stock price down so as to receive additional shares under an agreement between the parties.
Judge Morrow ruled that the plaintiff had failed to adequately plead manipulative conduct. Although the plaintiff had appended 200 pages of trading data to its complaint, it failed to identify a single transaction as manipulative. This lack of particularity led to dismissal of the plaintiff’s claims.