Overstock.com, Inc. v. Goldman Sachs

Filed 11/25/14 Unmodified opinion attached
CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION ONE

OVERSTOCK.COM, INC. et al.,
Plaintiffs and Appellants,
A135682
v.
GOLDMAN SACHS & CO. et al., (San Francisco City & County
Super. Ct. No. CGC-07-460147)
Defendants and Respondents.
ORDER MODIFYING OPINION
[NO CHANGE IN JUDGMENT]
THE COURT1:
The opinion filed November 13, 2014, is hereby modified as follows:

1. The disposition is changed to read as follows:
The judgment is affirmed as to Goldman, Sachs & Co., Goldman Sachs
Execution & Clearing, L.P., and Merrill Lynch, Pierce Fenner & Smith Inc. As to
Merrill Lynch Professional Clearing Corp., the judgment is reversed as to
plaintiffs’ California securities law claim under sections 25400, subdivision (b)
and 25500, and is affirmed in all other respects.
The parties are to bear their own costs on appeal.
There is no change in judgment.

Dated: _____________________ __________________________
Margulies, Acting P. J.

1
Before Margulies, Acting P. J., Dondero, J. and Banke, J.

1
Filed 11/13/14 Unmodified opinion
CERTIFIED FOR PARTIAL PUBLICATION*

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION ONE

OVERSTOCK.COM, INC. et al.,
Plaintiffs and Appellants,
A135682
v.
GOLDMAN SACHS & CO. et al., (San Francisco City & County
Super. Ct. No. CGC-07-460147)
Defendants and Respondents.

I. INTRODUCTION
Often, it is the federal courts, applying federal law, that wrestle with claims of
cross-state securities fraud involving a nationally-listed stock. Here, plaintiffs of various
states allege defendants, securities firms headquartered on the East Coast, violated
California and New Jersey law through their involvement in massive naked short selling
of Overstock shares. The trial court sustained demurrers to plaintiffs’ New Jersey
Racketeer Influence and Corrupt Organizations (RICO) claim without leave to amend
and subsequently granted summary judgment on plaintiffs’ California market
manipulation claims.
We affirm the dismissal of the belatedly raised New Jersey RICO claim. We also
affirm the summary judgment as to three of the four defendants, but reverse as to Merrill
Lynch Professional Clearing Corporation. The evidence, although slight, raises a triable
issue this firm effected a series of transactions in California and did so for the purpose of

*
Pursuant to California Rules of Court, rules 8.1105(b) and 8.1110, this opinion
is certified for publication with the exception of part III(A), III(B)(4)(d)(ii)–(iv) and
III(B)(4)(e).
1
inducing others to trade in the manipulated stock. In reaching this disposition, we
conclude Corporations Code section 25400, subdivision (b), reaches not only beneficial
sellers and buyers of stock, but also can reach firms that execute, clear and settle trades.
However, as we further explain, such firms face liability in a private action for damages
only if they engage in conduct beyond aiding and abetting securities fraud, such that they
are a primary actor in the manipulative trading.
II. FACTUAL AND PROCEDURAL BACKGROUND
Plaintiffs are Overstock.Com, Inc., an online retailer, and seven of its investors. In
their Fourth Amended Complaint, plaintiffs alleged defendants intentionally depressed
the price of Overstock stock by effecting “naked short sales”—that is, sales of shares the
brokerage houses and their clients never actually owned or borrowed. This practice, and
specifically perpetuating the naked short positions by means of exotic trading schemes,
allegedly increased the apparent supply of the stock, lead to a “pile on” of further short
sales, and thereby decreased the stock’s value—including the value of shares plaintiffs
sold. Plaintiffs claimed defendants’ conduct violated Corporations Code sections 25400
and 25500,2 Business and Professions Code sections 17200 and 17500,3 and New
Jersey’s RICO statute (N.J. Stat. 2C:41-2(c)–(d)). To put plaintiffs’ allegations and the
nature of the evidence proffered during the summary judgment proceedings in context,
we start with an overview of how securities transactions unfold, naked short sales, and
the Security and Exchange Commission’s (SEC) efforts to prohibit abusive short selling.
A. Steps in a Securities Transaction
Securities transactions involve a number of steps. These include, among others,
executing a trade order, clearing a trade, and settling a trade. (See generally Henry F.
Minnerop, Clearing Arrangements (2003) 58 Bus. Law. 917, 919 (Minnerop); 17 C.F.R.
§ 240.11a2–2(T) (2014).)

2
All further statutory references are to the California Corporations Code unless
otherwise indicated.
3
Plaintiffs have not pursued their Business and Profession Code claims on appeal.
Accordingly, we do not mention them further.
2
 Execution is the process of reaching agreement on the terms of a transaction. This
includes, for a buyer, not only finding the best price, but also choosing the right seller
given the size of the order, the nature of the security being traded, and the costs and fees
associated with the trade. (See Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc.
(3d Cir. 1998) 135 F.3d 266, 270 & fn. 2.) Execution can be accomplished manually or
automatically by computer. (See Domestic Securities, Inc. v. S.E.C. (D.C. Cir. 2003)
333 F.3d 239, 243 [in the NASDAQ marketplace, buyers and sellers can automatically
execute trades against quoted prices].)
Upon execution, “the actual transaction has only begun. Thereafter, several steps
must be taken to complete the course of dealing. These steps are typically the
responsibility of a clearing agency” associated with a given stock exchange. (Bradford
Nat. Clearing Corp. v. Securities and Exchange Commission (D.C. Cir. 1978) 590 F.2d
1085, 1091, fn. 2 (Bradford).) “The clearing agency has three functions. First, the
agency ‘compares’ submissions of the seller’s broker with those of the buyer’s to make
sure that there is a common understanding of the terms of the trade. Following this
process, the resulting ‘compared trade’ is ‘cleared.’ Most simply, this amounts to the
clearing agency advising the selling and buying brokers, respectively, of their delivery
and payment obligations.” (Ibid.)
“The final, ‘settlement,’ stage in the process involves the delivery of securities
certificates to the purchasing broker and the payment of money to the selling broker.
Modernization of this task has led to storage of most stock certificates in a depository
affiliated with the clearing agency. Thus, ‘delivery’ amounts to a bookkeeping entry that
removes the security from one account and places it in another.” (Bradford, supra,
590 F.2d at p. 1091, fn. 2; see also Norman S. Poser, The Stock Exchanges of the United
States and Europe: Automation, Globalization, and Consolidation (2001) 22 U. Pa. J.
Int’l Econ. L. 497, 514.)
Some firms, known as clearing firms, specialize in postexecution, “back office”
clearing and settling of trades in conjunction with the appropriate clearing agency, in
which the clearing firm is a “participant.” Such firms may provide these services to

3
“introducing” brokerage firms on a fee-for-service basis.4 (Dillon v. Militano (S.D.N.Y.
1990) 731 F.Supp. 634, 636–637; Douglas M. Branson, Nibbling at the Edges—
Regulation of Short Selling: Policing Fails to Deliver and Restoration of an Uptick Rule
(2009) 65 Bus. Law. 67, 91; see also 15 U.S.C. § 78c(a)(23)–(24) [defining clearing
agency and participant].) Their services tend to include extending credit in margin
accounts; providing written confirmation of executed orders to customers; receiving or
delivering funds or securities from or to customers; maintaining books and records that
reflect transactions, including rendering monthly or periodic statements of account to
customers; providing custody of funds and securities in customer accounts; clearing and
settling transactions effected in customer accounts. (Minnerop, supra, 58 Bus. Law. at
p. 919.)
B. The Parties
Overstock sold shares in May and December 2006 through public offerings
arranged by a San Francisco firm, W.R. Hambrecht + Co. The other seven plaintiffs are
individuals who sold Overstock shares in 2004, 2005, and 2006.
There are four defendants, two related “Goldman” entities and two related
“Merrill” entities. Their ordinary activities can be understood with reference to the stages
in a securities transaction discussed above.
Goldman, Sachs & Co. (hereinafter Goldman Brokerage) executes, clears, and
settles securities transactions. Its operations are centered in New Jersey and New York.
In some cases, Goldman Brokerage performs execution, clearance, and settlement for a
single transaction. In other cases, its clients execute elsewhere and Goldman Brokerage
provides only clearance and settlement services. Goldman Brokerage also houses a

4
“Introducing” brokerage firms may, on their own, open accounts, provide
investment advice, and take customer orders, but they hire clearing firms “to provide
processing and administrative services in connection with securities transactions ordered
by introducing firms for the account of their customers.” (Minnerop, supra, 58 Bus.
Law. at p. 918.) These, typically smaller, brokerage firms “uniformly retain all customer
contact functions . . . and frequently execute their customers’ and their own orders
themselves . . . , while out-sourcing” the components of the trades. (Id. at p. 919.)
4
securities lending department which procures and supplies stock associated with certain
transactions, including, as explained below, short sales. In this case, Goldman
Brokerage’s execution of certain client trades and its own purchase of certain securities in
connection with its securities lending business are primarily at issue.
Goldman Sachs Execution & Clearing, L.P. (hereinafter Goldman Clearing)
likewise executes, clears, and settles securities transactions. It is an SEC-registered
broker-dealer and a member of the National Securities Clearing Corporation. It is
headquartered in New Jersey and has significant operations there, and in New York and
Chicago. It offers its clearing services to other SEC-registered broker-dealers, hedge
funds, and institutions. In this case, Goldman Clearing’s clearing and settlement services
are primarily at issue.
Merrill Lynch, Pierce Fenner & Smith Inc. (hereinafter Merrill Brokerage), like its
Goldman Brokerage counterpart, provides various investment services and runs a stock
lending department that borrows and lends securities. This department conducts its
borrowing, lending, and related transactional activity in New York and Illinois. As with
Goldman Brokerage, it is Merrill Brokerage’s trade execution and lending operations
connected to naked short sales that are primarily at issue.
Merrill Lynch Professional Clearing Corp. (hereinafter Merrill Clearing), like its
Goldman Clearing counterpart, provides various investment services and is an SEC-
registered broker-dealer and a member of the National Securities Clearing Corporation.
Merrill Clearing is a wholly-owned subsidiary of Merrill Brokerage. It is headquartered
in New York and has a substantial presence in New Jersey and Illinois. It also has a San
Francisco customer service office. Merrill Clearing offers only limited execution
services, and most Merrill Clearing clients execute their own trades. Merrill Clearing
uses Merrill Brokerage to procure stocks needed to settle (or close out) a transaction. As
with Goldman Clearing, Merrill Clearing’s clearing and settlement operations are
primarily at issue here.

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 C. “Naked” Short Selling
In a short sale, the seller sells stock the seller does not own. It is a bet against the
stock. In an ordinary short sale, the seller borrows stock from a lender (such as a
brokerage firm’s lending department), sells this stock to a buyer at the going price, and
then purchases replacement stock—hopefully at a lower price—to return to the lender.
Lenders typically charge a borrow fee for lending shares to sell short. The seller profits if
the stock price falls enough to cover all costs and fees associated with the sale, including
borrowing the stock. Otherwise, if the stock price rises or does not fall enough to cover
the costs and fees, the short seller suffers a loss. If the short seller never delivers the
stock to the buyer, a “fail to deliver” occurs. The sale nonetheless appears on the seller’s
and buyer’s books, and is then termed a “naked” short sale.
Stocks that are “hard-to-borrow” (also called “negative rebate” stocks) can
command high borrow fees, given their scarcity and desirability for short selling. During
the 2005 and 2006 timeframe, Overstock was a particularly hard-to-borrow security, and
shares of the company commanded a negative rebate of up to 35 percent of its value on
an annualized basis. Thus, any trader hoping to profit from selling short would ordinarily
need to recoup the borrow fees through a significant decline in the price of the security.
In naked short sales, however, there is no borrowing and thus no borrow fee, and it is
significantly easier to make a profit.
Short selling, itself, is lawful. (GFL Advantage Fund, Ltd. v. Colkitt (3d Cir.
2001) 272 F.3d 189, 207 (GFL). Even short sales resulting in fails to deliver are not
necessarily nefarious and occasionally occur in the regular press of market activity.
(Cohen v. Stevanovich (S.D.N.Y. 2010) 722 F.Supp.2d 416, 424–425 (Cohen)
[“allegations of failures to deliver, without more, are insufficient to state a claim for
market manipulation”].) In Cohen, the alleged naked short selling activity was
untethered to any “distort[tion to] the price” of the stock at issue and so did not constitute
“ ‘willful conduct designed to deceive or defraud investors’ with regard to market
activity.” (Id. at p. 425.) Similarly, in Sullivan & Long, Inc. v. Scattered Corp. (7th Cir.
1995) 47 F.3d 857, 864, the short selling of more shares than could be obtained could not

6
be viewed as manipulative when, under the peculiar circumstances, the selling drove the
stock down to the correct market price, given the terms of a restructuring agreement.
But there are situations in which intentional naked short selling can be employed
to manipulate the market. (See Cohen, supra, 722 F.Supp.2d at pp. 424–425 [“fails to
deliver can occur for a variety of legitimate reasons, and flexibility is necessary in order
to ensure an orderly market and to facilitate liquidity,” but some fails may be “a potential
problem” when “willfully combined with something more to create a false impression of
how market participants value a security”]; Hyperdynamics Corp. v. Southridge Capital
Management, LLC (2010) 305 Ga.App. 283, 288, fn. 8 [noting naked short sales could
“depress the price of a target company’s shares”]; In re Adler, Coleman Clearing Corp.
(S.D.N.Y. 2007) 469 F.Supp.2d 112, 126 [“The Court is persuaded that the evidence
sufficiently establishes that DiPrimo’s conduct, under Gurian’s control, amounted to
concerted, naked short selling whose purpose was to drive down the price of Hanover
House Stocks”]; Regulation SHO Proposed Release, SEC Rel. No. 34–48709, 68
Fed.Reg. 62972, 62975; Amendments to Regulation SHO, 71 Fed. Reg. 41710-01
(Jul. 21, 2006) [“large and persistent fails to deliver . . . can be indicative of manipulative
naked short selling, which could be used as a tool to drive down a company's stock price.
The perception of such manipulative conduct also may undermine the confidence of
investors.”].) Thus, in GFL, supra, 272 F.3d at pages 207–208, the Third Circuit
suggested naked short selling would be actionable if it caused an “artificial depression” in
price, by, for instance, “injection of inaccurate information” or “creation of a false
impression of supply and demand,” such as by means of “ ‘matched buy and sell orders’
to ‘create a misleading appearance of active trading.’ ”
D. Regulation SHO: Regulating Abusive Short Sales
The SEC began to focus on naked short selling and its potential abuses in 2003
and 2004. (See Charles F. Walker, Colin D. Forbes, SEC Enforcement Actions and
Issuer Litigation in the Context of A “Short Attack” (2013) 68 Bus. Law. 687, 691
[relating history of SEC regulation of short sales, particularly through Regulation SHO].)
It recognized manipulative short selling could pose problems for the markets and took

7
“steps to restrict or prohibit it in various situations. See Regulation SHO Proposed
Release, SEC Rel. No. 34–48709, 68 Fed.Reg. 62972, 62975–78 (Nov. 6, 2003); Short
Sales, SEC Rel. No. 34–50103, 69 Fed.Reg. 48008, 48009 (Aug. 6, 2004); Amendments
to Regulation SHO, SEC Rel. No. 34–56212, 72 Fed.Reg. 45544 (Aug. 7, 2007);
Emergency Order, SEC Rel. No. 34–58166 (July 15, 2008).” (Pet Quarters, Inc. v.
Depository Trust and Clearing Corp. (8th Cir. 2009) 559 F.3d 772, 776, fn. 3.)
In its 2003 proposal to regulate, the SEC warned: “Naked short selling can have a
number of negative effects on the market, particularly when the fails to deliver persist for
an extended period of time and result in a significantly large unfulfilled delivery
obligation at the clearing agency where trades are settled. At times, the amount of fails to
deliver may be greater than the total public float. In effect the naked short seller
unilaterally converts a securities contract (which should settle in three days after the trade
date) into an undated futures-type contract, which the buyer might not have agreed to or
that would have been priced differently. The seller’s failure to deliver securities may also
adversely affect certain rights of the buyer, such as the right to vote. More significantly,
naked short sellers enjoy greater leverage than if they were required to borrow securities
and deliver within a reasonable time period, and they may use this additional leverage to
engage in trading activities that deliberately depress the price of a security.” (Regulation
SHO Proposed Release, SEC Rel. No. 34–48709, 68 Fed.Reg. 62972, 62975,
fn. omitted.)
The following year, in 2004, the SEC adopted Regulation SHO which imposes
two requirements—“locate” and “delivery”—aimed at curtailing intentional naked short
sales. (Electronic Trading Group, LLC v. Banc of America Securities LLC (2d Cir. 2009)
588 F.3d 128, 135–136 (Electronic Trading), citing 17 C.F.R. § 242.203 (2014).) “The
regulation first imposes “a ‘locate’ requirement . . . . See 17 C.F.R. § 242.203(b)(1)(i)–
(iii) (‘A broker or dealer may not accept a short sale order in an equity security from
another person . . . unless the broker or dealer has: (i) [b]orrowed the security, or entered
into a bona-fide arrangement to borrow the security; or (ii) [r]easonable grounds to
believe that the security can be borrowed so that it can be delivered on the date delivery

8
is due. . . .’). The Regulation SHO also imposes a ‘delivery’ requirement . . . . See
17 C.F.R. § 242.203(b)(3) (with certain enumerated exceptions, ‘[i]f a participant of a
registered clearing agency has a fail to deliver position . . . in a threshold security for
thirteen consecutive settlement days, the participant shall immediately thereafter close
out the fail to deliver position by purchasing securities of like kind and quantity’).”
(Electronic Trading, supra, 588 F.3d at pp. 135–136.)
In other words, Regulation SHO requires brokers to have a reasonable belief they
can “locate” the shares to be sold short and requires “participants”—i.e., clearing firms—
to “deliver” shares on a timely basis. Bona fide market makers’ trades, however, are
exempt from the locate requirement.5 (17 C.F.R. § 242.203(b)(2)(iii) (2014).) Thus,
market makers and their brokers, when engaged in legitimate trading, can commence a
short sale without first worrying about whether they have ready access to the shares. The
delivery requirement, in turn, only applies to “threshold securities,” meaning certain
listed securities already suffering numerous fails to deliver (17 C.F.R. § 242.203(c)(6)
(2014)), and clearing firms can “reasonably” delegate the obligation to deliver shares to
bona fide market maker clients. (17 C.F.R. 242.203(b)(3)(vi) (2014); see also Short

5
“The term ‘market maker’ ” under Regulation SHO “means any specialist
permitted to act as a dealer, any dealer acting in the capacity of block positioner, and any
dealer who, with respect to a security, holds himself out (by entering quotations in an
inter-dealer communications system or otherwise) as being willing to buy and sell such
security for his own account on a regular or continuous basis.” (15 U.S.C. § 78c(a)(38);
17 C.F.R. 242.203(c)(1) (2014).)
“Bona-fide market making does not include activity that is related to speculative
selling strategies or investment purposes of the broker-dealer and is disproportionate to
the usual market making patterns or practices of the broker-dealer in that security. In
addition, where a market maker posts continually at or near the best offer, but does not
also post at or near the best bid, the market maker’s activities would not generally qualify
as bona-fide market making for purposes of the exception. Further, bona-fide market
making does not include transactions whereby a market maker enters into an arrangement
with another broker-dealer or customer in an attempt to use the market maker’s exception
for the purpose of avoiding compliance with Rule 203(b)(1) [Regulation SHO] by the
other broker-dealer or customer.” (Short Sales, S.E.C. Release No. 34-50103, available
at 2004 WL 1697019, *13, fn. omitted.)
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Sales, S.E.C. Release No. 34-50103, available at 2004 WL 1697019, *1, *16, *44.)
Overstock, at all relevant times, was a threshold security.
E. SEC and Exchange Actions Against Market Maker Clients of Defendants
Following the enactment of Regulation SHO, the SEC and several exchanges
brought enforcement actions against a number of market participants for violating locate
and delivery requirements, including two market maker clients of defendants, Steven
Hazan and Scott Arenstein. While Hazan and Arenstein purported to be bona fide market
makers, in fact, they were not.
Hazan, a New York resident, was sanctioned in an August 2009, SEC order for
violating both locate and delivery requirements. (In re the Matter of Hazan Capital
Mgmt., LLC, SEC Release No. 60441 (Aug. 5, 2009) available at 2009 WL 2392842.)
Among numerous other findings, the Commission found Hazan was not acting as a bona
fide market maker and violated Regulation SHO when executing riskless and profitable
“reverse conversion” trades and related “reset” trades.
In the reverse conversion trades, Hazan would sell short a hard-to-borrow
threshold security to a counterparty. He would also buy from that counterparty a call
option in the security and sell to that counterparty a put option in the security, such that
he would eliminate all market risk associated with the short sale. Because all three
components of the reverse conversion were priced interdependently, Hazan was assured
an “agreed-upon” profit. Meanwhile, the counterparty—for instance, a brokerage firm
such as Goldman Brokerage or Merrill Brokerage—was willing to pay this price to
Hazan to “obtain” on its books shares of the hard-to-borrow threshold security, which it
could lend for a profit until the put and call options expired. “Consequently” explained
the SEC, “prime brokers created the demand for the reverse conversion to create
inventory for stock loans on hard to borrow securities and options market makers like
[Hazan] fed this demand.”
Hazan employed additional nefarious trading practices to insure the short sale
portions of the reverse conversions remained “naked” over time. Specifically, when
alerted by clearing firms of his Regulation SHO obligation to deliver shares so settlement

10
could occur, Hazan engaged in “sham reset transactions” that only gave the appearance of
delivery, while actually perpetuating his undelivered short positions. Hazan would
“obtain” the necessary shares for delivery by buying from another market maker who was
also selling short and who similarly never intended to deliver shares to Hazan.
Meanwhile, Hazan would “pair” or hedge his new “purchase” with option trades, creating
what the SEC called “married puts” or “buy-writes,” sometimes using “FLEX options.”
Even though Hazan’s clearing firm—a firm such as Goldman Clearing or Merrill
Clearing—would not receive actual delivery of the shares, it nevertheless would record
the transactions as generating a “close out” and a new long position. There was also an
appearance of delivery of the “purchased” shares back to the other market maker (who
had never delivered them in the first place). In the end, Hazan would reestablish his
previous short position, still naked, while succeeding in having the Regulation SHO
thirteen-day delivery clock, in the clearing firms’ eyes, “reset” to day one. As settlement
dates approached again and again, Hazan would repeat this process until the options on
the original reverse conversion trade “expired or [were] assigned, thus” finally “closing
out the short position and eliminating the synthetic long position that the short position
had hedged.”
Hazan pocketed over $3 million through his trading strategy. The SEC ordered
him to disgorge it, enjoined him from further violations of Regulation SHO, censured his
organization and barred him from association with any broker or dealer, with the right to
re-apply for association after five years. The New York Stock Exchange (NYSE) issued
a similar order regarding the same conduct. (Hearing Board Decisions NYSE AMEX
LLC 09-AMEX-21 and 09-AMEX-22 (Aug. 4, 2009); NYSE ARCA, Inc. 09-ARCA-5
and 09-ARCA-6 (Aug. 4, 2009).) NYSE Amex and NYSE Arca imposed $500,000 in
penalties, and barred Hazan from membership and association with any member for
seven years.
Arenstein was sanctioned in a June 2007 order issued by the American Stock
Exchange (ASE). (In the Matter of Scott H. Arenstein (Jul. 20, 2007, AMEX case No.
07-71.) He admitted engaging in the same reverse conversions and sham reset

11
transactions as Hazan and made at least $1.4 million from his unlawful trades. The ASE
ordered disgorgement, assessed a $3.6 million fine, and barred him from membership and
associating with any member for five years.
In 2011, Keystone, another purported market maker and a Goldman Clearing
client, was sanctioned by the NASDAQ for engaging in the same kind of sham reset
transactions. “[O]n the very same day [Keystone would be] ‘bought-in’ by Keystone’s
clearing firm,” Keystone, on over fifty occasions would “negate[] the clearing firm’s buy-
in and contradict[] guidance provided by the Securities and Exchange commission
requiring that [it] be a net purchaser of the open fail position in the security by selling
near equivalent number of shares.” Keystone was required to disgorge $2 million in
profits, pay a $500,000 fine, and suffer a censure and “three-month suspension in a
supervisory capacity.” (John C. Pickford, Enforcement Counsel, NASDAQ OMX
PHLX, notice of Disciplinary Action Against Keystone Trading Partners to Members,
Member Organizations, Participants and Participant Organizations re FINRA Matter
No. 2010022926 and Enforcement No. 2011-04, Jul. 7, 2011.)
In short, there is no question Hazan, Arenstein and Keystone, purported market
maker clients of defendants, engaged in abusive naked short selling and flagrant
violations of the federal securities laws.
The SEC has continued to target abusive naked short selling, recently pursuing not
only traders, but the firms that enabled their manipulative trading. The SEC pulled no
punches in this regard in In the Matter of OptionsXpress, Inc. et al., in which it ruled the
brokerage firm violated Regulation SHO in connection with sham reset transactions,
similar to those just discussed, designed to avoid delivery: “Because [the firm] knew . . .
shares that were the subject of [a] buy were shares for [it’s client’s] account that were the
subject of simultaneous deep-in-the-money calls, which would be exercised and assigned
so that no shares were delivered to [the clearing agency], optionsXpress engaged in a
sham close-out of its fail to deliver position. . . . [¶] . . . OptionsXpress did not close out
its . . . fail to deliver positions by executing consecutive buy-write transactions and
willfully violated Rules 204 and 204T. [¶] . . . [¶] . . . Feldman [the client] did not

12
mislead those he dealt with at various clearing brokers who knew, directly or indirectly,
that he was not going to the deliver securities if his calls were exercised and assigned;
however, the market as a whole did not have this knowledge. See Wharf (Holdings) Ltd.
v. United Int'l Holdings, Inc., 532 U.S. 588[, 596] (2001) (‘To sell an option while
secretly intending not to permit the option’s exercise is misleading, because a buyer
normally presumes good faith.’); Walling v. Beverly Enter., 476 F.2d 393, 396 (9th Cir.
1973) (“Entering into a contract of sale with the secret reservation not to fully perform it
is fraud cognizable under § 10(b).”); 37 Am. Jur. 2d Fraud and Deceit § 41 (2013)
(‘[F]raud may consist of … the creation of a false impression by words or acts . . . .)[, fns.
omitted].” (In the Matter of OptionsXpress, Inc. et al., S.E.C. Release No. 490 (June 7,
2013), available at 2013 WL 2471113, *72, *75.)6
F. The Instant Lawsuit
1. Pleadings and Demurrer to New Jersey RICO Claim
Plaintiffs filed suit against Merrill Brokerage and Merrill Clearing, and Goldman
Brokerage and Goldman Clearing in 2007, based largely on their suspected involvement
in the Hazan and Arenstein trading schemes. Plaintiffs’ Third Amended Complaint, filed
in April 2009, alleged several causes of action, including as relevant here, violations of
California’s Corporate Securities Law (§§ 25000 et seq.).
In December 2010, plaintiffs filed a motion for leave to file a Fourth Amended
Complaint, seeking to add a cause of action under New Jersey’s RICO statute against the
Merrill and Goldman defendants. According to plaintiffs, the new RICO claim was
simply a new theory based on facts unearthed late in discovery on their California
securities claims.

6
While “SEC no-action letters constitute neither agency rule-making nor
adjudication and thus are entitled to no deference beyond whatever persuasive value they
might have” (Gryl ex rel. Shire Pharmaceuticals Group PLC v. Shire Pharmaceuticals
Group PLC (2d Cir. 2002) 298 F.3d 136, 145), the “precedent value of SEC decisions has
often been recognized by the courts in cases involving different parties” and “[c]itations
to SEC decisions, assuming their precedent value without discussing it, are common.”
(1 Bromberg & Lowenfels on Securities Fraud (2d ed. 2014)§ 1:5, italics added.)
13
 Defendants, though wary of the new complaint, ultimately chose to acquiesce in
its filing and entered into a stipulation with plaintiffs, which became an order of the trial
court in January 2011. In the stipulation, the parties recited their conflicting positions on
the motion for leave to amend (defendants believed the Fourth Amended Complaint was
defective and prejudicial, while plaintiffs did not) and noted the court’s “tentative
inclination,” expressed at a case management conference, “to address any issues of
prejudice . . . by continuing the trial date.” The stipulation also expressly stated
defendants were “not waiving, and expressly reserve[d], all rights to file in response to
the Fourth Amended Complaint any and all pleadings, motions, and other responses on
any grounds available under law or equity.” The complaint was deemed filed, and the
trial date was continued for approximately three months, to December 5.
As advertised, and as pertinent here, plaintiffs’ Fourth Amended Complaint re-
alleged violations of sections 25400 and 25500 and additionally alleged a violation of
New Jersey’s RICO statute (N.J. Stat. 2C:41-2(c)–(d)).
Defendants demurred to the New Jersey RICO claim, arguing California law, not
New Jersey law, should apply and, in any case, plaintiffs failed to state a claim under the
New Jersey law. They did not ask the trial court to dismiss the new complaint based on
prejudicial delay, but sought denial of further leave to amend on that ground. Ruling
from the bench on May 10, the trial court concluded the allegations about conduct in New
Jersey were vague and conclusory, did not disclose whether actionable trade or
commerce occurred in that state, and thus failed to state a claim.
The trial court also found such lack of detail in the pleadings so close to trial
“pernicious to defendants.” However, rather than denying leave to amend outright, it
allowed plaintiffs to submit a proposed Fifth Amended Complaint, stating it would
consider granting leave based on the contents of the proposed pleading. Plaintiffs
promptly submitted a proposed amended complaint with over 50 pages of additional
allegations in support of their New Jersey RICO claim.
After extensive briefing and a lengthy hearing, the trial court, on August 1, 2011,
denied leave to file the proposed Fifth Amended Complaint. It cited two grounds:

14
(1) granting leave to add the new RICO claim would prejudice defendants on the eve of
trial; and (2) the RICO claim “would be futile because the facts as alleged . . . do not
warrant the application of New Jersey RICO [law] to this case under California choice-
of-law principles.”
2. Summary Judgment on the Corporations Code and UCL Claims
Two weeks later, on August 19, 2011, the defendants moved for summary
judgment on the remaining causes of action, including those based on California’s
securities laws.
Defendants advanced several arguments as to plaintiffs’ state-law securities
claims: (1) no actionable conduct occurred in California, (2) defendants did not “effect”
any stock transactions, (3) defendants’ conduct was not manipulative, (4) defendants did
not act for the purpose of “inducing” others to trade in a manipulated stock,
(5) defendants’ conduct did not cause any decline in Overstock’s share price and thus did
not result in injury to plaintiffs, and (6) federal securities laws and regulations preempted
the state-law claims. We do not discuss the parties’ extensive evidentiary showing here,
but do so in the next section in discussing the merits of the motions.
The trial court heard three days of argument on evidentiary objections to the
documents filed in connection with the summary judgment motions and a full day of
argument on the merits. In an order dated January 10, 2012, the court granted the
motions. As to the state-law securities claims relevant here, the court ruled plaintiffs
“failed to raise [any] triable issue of material fact supportive of finding that any act by
any defendant foundational to liability, causation, or damages occurred in California.”
The court declined to reach any of the other grounds for judgment defendants had urged.
It issued a final, comprehensive order on April 11 and entered judgment the following
day.
III. DISCUSSION
On appeal, plaintiffs seek reversal of the dismissal of their New Jersey RICO
claim and reversal of the summary judgment on their California Corporate Securities Law
claims.

15
A. New Jersey RICO Claim7
As recited above, in exchange for a three-month continuance of the trial date,
defendants acquiesced to the filing of the Fourth Amended Complaint with plaintiffs’
newly asserted New Jersey RICO claim, while reserving the right to challenge the
complaint by answer, motion, or otherwise. The trial court then employed a somewhat
unusual, but not unprecedented, process to assess defendants’ demurrer to the New Jersey
claim and determine whether to allow further amendment. It first sustained the demurrer,
concluding plaintiffs failed to adequately allege actionable conduct in New Jersey. The
court also worried the paucity of specifics prejudiced defendants given the impending
trial date. It therefore solicited a proposed Fifth Amended Complaint and set a briefing
schedule on leave to amend. After reviewing the proposed amended complaint,
considering the supplemental briefing, and hearing further argument, the court denied
leave to amend. It concluded the New Jersey RICO claim as fleshed out in the proposed
amended complaint was so different from what had been previously alleged that belatedly
injecting it into the litigation would be seriously prejudicial to the defendants. It also
concluded choice of law principles prohibited application of New Jersey’s RICO law to
defendants’ alleged conduct.

7
The standard of review on appeal from a dismissal following the sustaining of a
demurrer without leave to amend is well established: “A demurrer tests the legal
sufficiency of the complaint, and the granting of leave to amend involves the trial court’s
discretion. Therefore, an appellate court employs two separate standards of review on
appeal.” (Roman v. County of Los Angeles (2000) 85 Cal.App.4th 316, 321.) “We
review de novo the trial court’s order sustaining a demurrer. [Citation.] We assume the
truth of all facts properly pleaded, and we accept as true all facts that may be implied or
reasonably inferred from facts expressly alleged, unless they are contradicted by
judicially noticed facts. [Citations.] . . . We give the complaint a reasonable
interpretation and we read it in context. [Citation.] But we do not assume the truth of
contentions, deductions or conclusions of fact or law. [Citation.] We will affirm an order
sustaining a demurrer on any proper grounds, regardless of the basis for the trial court’s
decision.” (Cansino v. Bank of America (2014) 224 Cal.App.4th 1462, 1468 (Cansino).)
16
 1. Demurrer to Fourth Amended Complaint
Given how events unfolded, we first address whether the Fourth Amended
Complaint, standing alone, adequately stated a New Jersey RICO claim.
The trial court gave several reasons for concluding the pleading was lacking:
Plaintiffs did not adequately allege trade or commerce in New Jersey, or conduct
affecting trade or commerce in New Jersey. The allegations of conduct by alleged
“enterprises” were vague and conclusory. Plaintiffs identified some, but not all, of the
conspiring market makers. The conspiracy allegations were vague and conclusory.
Lack of specificity, alone, was sufficient reason to sustain the demurrers. In New
Jersey, it is “unlawful for any person employed by or associated with any enterprise
engaged in or activities of which affect trade or commerce to conduct or participate,
directly or indirectly, in the conduct of the enterprise’s affairs through a pattern of
racketeering activity or collection of unlawful debt.” (N.J. Stat. Ann. § 2C:41-2(c).) To
be liable, a defendant must have been “employed by or associated with a racketeering
enterprise which engaged in trade or commerce in New Jersey or affected trade or
commerce in New Jersey.” (State v. Casilla (2003) 362 N.J.Super. 554, 565.) As
pertinent, “ ‘[r]acketeering activity’ means . . . any of the following crimes which are
crimes under the laws of New Jersey or are equivalent crimes under the laws of any other
jurisdiction: [¶] . . . [¶] (p) fraud in the offering, sale or purchase of securities.” (N.J.
Stat. Ann. § 2C:41-1(a)(1)(p), italics added.) Thus, plaintiffs’ New Jersey RICO claim
was predicated on fraudulent conduct.
Claims under another state’s substantive law, if raised in a California forum, are
subject to California’s procedures for judicial administration, including its pleading
standards. (See Hambrecht & Quist Venture Partners v. American Medical Internat.,
Inc. (1995) 38 Cal.App.4th 1532, 1542, fn. 8; Gervase v. Superior Court (1995)
31 Cal.App.4th 1218, 1229, fn. 6 [state pleading law applies to federal RICO claim, so
long as it does not impose undue barriers to bringing federal claim in state court].)

17
 Under California pleading rules, fraud must be pled with particularity.8
(Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 47.) Thus, it is not
enough to allege a defendant engaged in fraudulent conduct “ ‘to execute the aforesaid
fraudulent scheme’ ” or in relation with such a scheme. (Sepulveda, supra,
14 Cal.App.4th at p. 1716.) But that is all plaintiffs did in their Fourth Amended
Complaint, alleging only “[i]n engaging in the actions described above, each of the RICO
defendants engaged in a least two incidents of racketeering . . . by engaging in fraud in
the offering, sale or purchase of securities.”
While the pleading spoke broadly of a scheme in which defendants and market
makers colluded to use conversions and other exotic trades to inflate the ostensible
supply of Overstock shares and drive down their price—presumably the “actions
described above”—the Fourth Amended Complaint did not assign any particular action to
any particular act of alleged “fraud in the offering, sale or purchase of securities.” Nor
did any portion of the complaint disclose a specific instance of allegedly fraudulent
conduct.9 (See Goldrich v. Natural Y Surgical Specialties, Inc. (1994) 25 Cal.App.4th

8
The same is true in New Jersey. (State, Dept. of Treasury, Div. of Inv. ex rel.
McCormac v. Qwest Communications Intern., Inc. (N.J. Super. Ct. App. Div. 2006)
387 N.J.Super. 469, 484.)
Also, fraudulent conduct, as an underlying predicate act to a RICO offense, is
distinguished from other elements of a RICO claim, such as the “existence of an
enterprise” or a “ ‘pattern of racketeering activity,’ ” which need not be pleaded with the
same level of specificity. Accordingly, Douglas v. Superior Court (1989)
215 Cal.App.3d 155, 159, which plaintiffs cite, is inapposite. While that case addresses
pleading a federal RICO claim, it does not address the requirements for pleading a
predicate act grounded on fraudulent conduct. Indeed, the predicate acts mentioned, mail
and wire fraud, must be pleaded with particularity in a RICO case. (People ex rel.
Sepulveda v. Highland Fed. Savings & Loan (1993) 14 Cal.App.4th 1692, 1715–1716
[applying federal RICO] (Sepulveda); see also Haroco, Inc. v. American Nat. Bank and
Trust Co. of Chicago (7th Cir. 1984) 747 F.2d 384, 405 [“There can be little doubt that
Fed.R.Civ.P. 9(b), which requires that allegations of fraud specify ‘with particularity’ the
circumstances of the alleged fraud, applies to fraud allegations in civil RICO
complaints.”].)
9
Moreover, because the allegations of securities fraud were so vague, it was
impossible for the trial court to make heads or tails of plaintiffs’ statement that “aspects
18
772, 783 [“Even in a case involving numerous oft-repeated misrepresentations, the
plaintiff must, at a minimum, set out a representative selection of the alleged
misrepresentations sufficient to permit the trial court to ascertain whether the statements
were material and otherwise actionable.”].)
Accordingly, the trial court correctly concluded plaintiffs failed to plead their New
Jersey RICO claim with the requisite specificity and properly sustained defendants’
demurrers.
2. Denial of Leave to Amend
In Blank v. Kirwan, the Supreme Court stated with respect to an order denying
leave to amend, “we decide whether there is a reasonable possibility that the defect can
be cured by amendment: if it can be, the trial court has abused its discretion and we
reverse; if not, there has been no abuse of discretion and we affirm.” (Blank v. Kirwan
(1985) 39 Cal.3d 311, 318 (Kirwan).) Plaintiffs read this language as establishing a rigid,
bright-line rule—that a trial court, following the sustaining of a demurrer, must always
allow an amendment that ostensibly cures a pleading defect, regardless of any other
consideration, including how late in the litigation the amendment is offered and the
degree of prejudice to the defense. We do not agree this is a fair reading of Kirwan or
that the case forecloses the particular procedural process the court employed here to fully
understand the nature of plaintiffs’ New Jersey RICO claim and to assess whether its
belated injection into the case would be unduly prejudicial to the defense.
“When a demurrer is sustained, the court may grant leave to amend the pleading
upon any terms as may be just.” (Code Civ. Proc., § 472a, subd. (c), italics added.)
Accordingly, trial courts are statutorily imbued with wide discretion in the matter of
amendment. (See Leader v. Health Industries of America, Inc. (2001) 89 Cal.App.4th
603, 612 [“ ‘[A] litigant does not have a positive right to amend his pleading after a

of the conduct at issue occurred in New Jersey and/or substantially affected trade or
commerce in New Jersey.” Even though plaintiffs averred defendants “effected
transactions at issue” and engaged in other conduct in New Jersey, plaintiffs did not link
these broad descriptors with any particular predicate acts of fraud in New Jersey.
19
demurrer thereto has been sustained. “His leave to amend afterward is always of grace,
not of right.” ’ ”]; Whitson v. City of Long Beach (1962) 200 Cal.App.2d 486, 504
[same].). It has long been recognized a court can take into account the number of
amendments already allowed. (See Consolidated Concessions Co. v. McConnell (1919)
40 Cal.App. 443, 446 [“there is a limit to which the patience of the trial court may be
extended in the matter of allowing repeated attempts to amend a faulty pleading”].) And
at least one case considering leave to amend following a demurrer explicitly recognized
the relevance of prejudice: “California courts have ‘a policy of great liberality in
allowing amendments at any stage of the proceeding so as to dispose of cases upon their
substantial merits where the authorization does not prejudice the substantial rights of
others.’ ” (Douglas v. Superior Court, supra, 215 Cal.App.3d at p. 158, italics added.)
In Kirwan, the Supreme Court addressed only the plaintiff’s many contentions he could
amend to state a viable claim. No countervailing considerations, such as timing and
prejudice, were raised, and the court had no occasion to, nor did it, consider any such
matters. (Kirwan, supra, 39 Cal.3d at pp. 318–331.)
Furthermore, countless cases involving motions for leave to amend outside of the
demurrer context—motions that similarly implicate a trial court’s discretion (Code Civ.
Proc., § 473, subd. (a))—routinely analyze prejudice. (E.g., Duchrow v. Forrest (2013)
215 Cal.App.4th 1359, 1378; Magpali v. Farmers Group, Inc. (1996) 48 Cal.App.4th
471, 486–488 [“It is apparent that adding the new cause of action would have changed
the tenor and complexity of the complaint from its original focus on representations and
demands made to Magpali by his superiors to an exploration of Farmers’ activities and
practices in the entire Southern California area.”]; Estate of Murphy (1978)
82 Cal.App.3d 304, 311 [“Where inexcusable delay and probable prejudice to the
opposing party is indicated, the trial court’s exercise of discretion in denying a proposed
amendment should not be disturbed.”].)
In this case, the trial court was not considering pleadings filed at or near the outset
of the litigation, the usual context in which a demurrer is interposed and where prejudice
is not an issue. Rather, here, the court was dealing with a context equivalent to a motion

20
for leave to amend, namely a request to file an amended pleading very late in the
litigation. Indeed, the court expressed serious concern about prejudice at the time
plaintiffs sought leave to file their Fourth Amended Complaint adding their new RICO
claim. And on discerning the full magnitude of the claim proffered in the Fifth Amended
Complaint, the court concluded it was not just “another theory” as they had represented
in connection with their Fourth Amended Complaint. Rather, it was a fundamentally
different and highly complex claim that could not fairly be injected into the case only two
months before summary judgment motions were due and only six months before the
already re-scheduled trial date. Under these circumstances, the court did not abuse its
discretion in denying leave to amend.
Contrary to plaintiffs’ protestations, it is neither accurate nor fair to say the
proposed Fifth Amended Complaint simply fleshed out the general allegations of the
Fourth Amended Complaint and raised no specter of complexity not already apparent in
that latter pleading. While the Fourth Amended Complaint focused on an alleged
conspiracy between defendants, Hazan and Arenstein, and other unnamed “traders and
market makers,” the Fifth Amended Complaint added allegations about several newly-
named market makers. While the Fourth Amended Complaint alleged five criminal
enterprises, the proposed Fifth Amended complaint alleged ten. Although the Fourth
Amended Complaint and proposed Fifth Amended Complaint both alleged a conspiracy
to violate New Jersey’s RICO statute, the Fourth Amended Complaint only conclusorily
pleaded each “defendant conspired,” while the proposed Fifth Amended Complaint, for
the first time, alleged which defendants allegedly conspired with which market makers.
And not only did the proposed Fifth Amended Complaint allege various iterations of
conspiracies to violate New Jersey’s RICO statute between the defendants and Hazan and
Arenstein, it also alleged conspiracies between the newly-named market makers and
defendants.
In addition, the proposed Fifth Amended Complaint made manifest the New
Jersey RICO claim was based on “conspiracy and indirect liability.” While secondary
conspiracy liability is a feature of a New Jersey RICO claim (N.J. Stats. 2C:41-2(d); State

21
v. Cagno (N.J. Super. Ct. App. Div. 2009) 409 N.J.Super. 552, 582), it is not, as
discussed in the next section of this opinion, a feature of the California securities claims
under sections 24500 and 25500 that had long been the principal claims in the case (see
Kamen v. Lindly (2001) 94 Cal.App.4th 197 (Kamen); California Amplifier, Inc. v. RLI
Ins. Co. (2001) 94 Cal.App.4th 102, 113 (California Amplifier) [noting “legislative
decision to exclude aiders and abettors from . . . liability”]). Indeed, plaintiffs had
repeatedly emphasized their California law claims did not hinge on the liability of the
market makers, but depended solely on the defendants’ own primary conduct. Further, it
was apparent from the proposed Fifth Amended Complaint there would be a focus on
additional New Jersey laws governing defendants’ alleged predicate acts of racketeering.
In short, with the proposed Fifth Amended Complaint, the trial court saw clearly
the road ahead if a New Jersey RICO claim was belatedly added to the litigation and
accurately observed that road looked “extremely complex.” The court did not abuse its
discretion in denying leave to file the proposed pleading.10

10
We therefore need not, and do not, reach defendants’ additional challenges to
the New Jersey RICO claim.
22
B. California Corporate Securities Law Claim11
1. Sections 25400 and 25500
“Corporations Code section 25400, a part of the Corporate Securities Law of 1968
(Corp. Code, § 25000 et seq.), provides that it is unlawful in this state to make false
statements or engage in specified fraudulent transactions which affect the market for a
security when done [for specified purposes].” (Diamond Multimedia Systems, Inc. v.
Superior Court (1999) 19 Cal.4th 1036, 1040 (Diamond), footnote omitted.) “In short, it
prohibits market manipulation.” (Ibid.) Section 25500, in turn, “creates a civil remedy
for buyers or sellers of stock the price of which has been affected by the forms of market
manipulation proscribed by section 25400.” (Ibid., footnotes omitted.) Sections 25400
and 25500 “are patterned after and virtually identical to section 9 . . . of the Securities
Exchange Act of 1934 (15 U.S.C. § 78i (SEA)).” (California Amplifier, supra,
94 Cal.App.4th at pp. 114–115.) Accordingly, California courts often look to federal law
for guidance in interpreting the state statute. (Id. at p. 115; see 1 Marsh & Volk, Practice
Under the Cal. Securities Law (1993) § 14.05[1]–[2], p. 14-60 to 14-61 (Marsh & Volk)
[discussing relationship of federal and California laws].)

11
The standard of review of a summary judgment is also well established.
(Global Hawk Insurance Company v. Le (2014) 225 Cal.App.4th 593, 600 (Global
Hawk).) “ ‘Code of Civil Procedure section 437c, subdivision (c) provides that summary
judgment is properly granted when there is no triable issue of material fact and the
moving party is entitled to judgment as a matter of law.’ ” (Ibid.) A moving defendant
can meet its initial burden by presenting evidence showing plaintiffs’ causes of action
have no merit or are precluded by an affirmative defense. (Moua, Barker, Abernathy,
LLP (2014) 228 Cal.App.4th 107, 112 (Moua); Code Civ. Proc., § 437c, subd. (p)(2).) If
the defendant makes its initial showing, the burden shifts to plaintiffs to show a triable
issue of material fact exists. (Global Hawk, at p. 600; Code Civ. Proc., § 437c, subd.
(p)(2).) We review the trial court’s ruling de novo (Moua, at p. 112), construing “the
evidence in the light most favorable to the opposition to the motion, and liberally
constru[ing] the opposition’s evidence, while strictly scrutinizing the successful party’s
evidence and resolving any evidentiary ambiguities in the opposition’s favor” (Dameron
Hospital Assn. v. AAA Northern California, Nevada and Utah Insurance Exchange
(2014) 229 Cal.App.4th 549, 558). We will affirm a summary judgment if it is correct on
any ground, as we review the judgment, not its rationale. (Moua, at p. 112.)
23
 Section 25400, subdivisions (a) through (e), address different species of
manipulative conduct “which were common during the so-called pool operations in the
1920’s.” (Kamen, supra, 94 Cal.App.4th at p. 203.) “For instance, section 25400,
subdivision (a) prohibits ‘wash sales,’ i.e., the entering of purchase and sale orders of
equal amounts in order to create the appearance of active trading and raise or depress the
price of a security. Subdivisions (c) and (e) deal with ‘tipster sheets’ where either a
broker-dealer or other person engaged in the pool operations, or a third person employed
by the principals, disseminates information that the price of a security will rise or fall
because of the market operations of the pool.” (Ibid.; see 1 Marsh & Volk, supra,
§ 14.05[2], p. 14-61.)
“[T]he more general and fundamental prohibitions” of section 25400 are set forth
in subdivisions (b) and (d). (1 Marsh & Volk, supra, § 14.05[2], p. 14-61.) Subdivision
(b) makes it unlawful “[t]o effect, alone or with one or more other persons, a series of
transactions in any security creating actual or apparent active trading in such security or
raising or depressing the price of such security for the purpose of inducing the purchase
or sale of the security by others.” (§ 25400, subd. (b).) “Subdivision (d) makes it
unlawful . . . for sellers or buyers of stock to make false or misleading statements of
material facts for the purpose of inducing a purchase or sale.” (Diamond, supra,
19 Cal.4th at p. 1048.)
In this case, we are concerned with subdivision (b), which makes it unlawful “[t]o
effect . . . a series of transactions” that create “actual or apparent active trading” raising
or depressing the price of the security, for the “purpose of inducing the purchase or sale
of such security by others.” (§ 25400, subd. (b).)12 Since “[a]lmost any conceivable

12
Plaintiff’s Fourth Amended Complaint alleged violations of subdivisions (a)
and (b). In their opening brief on appeal, plaintiffs, without providing a detailed analysis,
continued to suggest defendants might face liability for violating subdivision (a)(1)’s
prohibition against “effect[ing] any transaction in a security which involves no change in
the beneficial ownership thereof.” Defendants, citing various SEC regulations and cases,
responded there was no evidence beneficial ownership was not changing hands in the
trades at issue, and certainly no evidence of trades in which the same trader was buying
24
series of transactions in a particular security would necessarily create either actual or
apparent trading or raise or depress the price of the security to some extent, ” the “crucial
question” is “intent.” (1 Marsh & Volk, supra, § 14.05[2][d]; California Amplifier,
supra, 94 Cal.App.4th at pp. 110–111 [as “Marsh & Volk emphasizes,” liability under
section 25400 “extends to everyone whose market trades are affected by the market
manipulation”; “ ‘[i]n view of this potentially enormous and virtually unlimited
liability,’ ” intention is “ ‘a necessary qualification of the defendant’s liability’ ”].)
Before examining the evidence presented in connection with the summary
judgment motions as to the two brokerage firms and two clearing firms, we discuss two
legal issues that are pivotal to the significance of the evidence. The first is the meaning
of the term “[t]o effect” a series of transactions in a security. (§ 25400, subd. (b),
emphasis added.) The second is the distinction between liability as a principal, and aider
and abettor liability. (See California Amplifier, supra, 94 Cal.App.4th at p. 113 [a private
civil action under sections 25400 and 25500 does not reach aiders and abettors].)
2. “Effecting” a Trade Under Section 25400 Is Not Limited to Beneficial Sellers
and Buyers
Defendants contend section 25400, subdivision (b), reaches only the beneficial
sellers and buyers of manipulated securities and does not reach entities that execute, clear
and settle trades for clients. Thus, according to the defendant clearing firms, for example,
no section 25400, subdivision (b), claim can lie against them as a matter of law. Rather,
any claim under this subdivision would have to be advanced against their former trader
clients, such as Hazan and Arenstein, in whose name the manipulative trades were made
and who have been punished by the SEC and major exchanges.
Subdivision (b) could have been drafted to apply only to beneficial sellers and
buyers. But it was not. Rather, this subdivision applies to “any person, directly or

or selling to himself. Rather than respond to these points, plaintiffs, in reply,
acknowledged “the trades were actual trades” and “real,” but argued even “real” trades
can be manipulative under subdivision (b) if done for a prohibited purpose. We therefore
conclude plaintiffs have abandoned any claim under subdivision (a), and pursue a claim
only under section 24500, subdivision (b).
25
indirectly” who “effect[s], alone or with one or more other persons, a series of
transactions.” (§ 25400, subd (b), italics added.) This is in stark contrast to other
provisions of section 25400 that apply to narrower classes of persons. (§ 25400, subd. (a)
[subdivision (a)(1) applies to those who “effect” transactions, while subdivision (a)(2)
and (a)(3) apply only to those who “enter an order or orders”]; id., subds. (c), (d) [both
applying only to “a broker-dealer or other person selling or offering for sale or
purchasing or offering to purchase the security”].)
The verb “ ‘to effect’ means ‘to bring about; produce as a result; cause;
accomplish.’ (Webster’s New World Dict. (3d college ed. 1988) p. 432.)” (People v.
Brown (1991) 226 Cal.App.3d 1361, 1368.) A “Broker-dealer,” in turn, is defined under
California’s securities law as “any person engaged in the business of effecting
transactions in securities in this state for the account of others or for his own account.”
(§ 25004, subd. (a), italics added.) Thus, the plain language of the securities laws
contemplates those “effecting” a transaction can include someone other than the
beneficial seller or buyer, and can include broker-dealers.
Section 9 of the SEA, on which section 25400 was based, also uses the
terminology “effect . . . a series of transactions” (15 U.S.C. § 78i(a)(2)), and that
terminology is construed broadly.13 (United States v. Weisscredit Banca Commerciale E
D’Investimenti (S.D.N.Y. 1971) 325 F.Supp. 1384, 1393–1394.) The legislative history
of the SEA shows “the term ‘effect’ as used in Section 9 of the 1934 Act (15 U.S.C.
§ 78i) and other sections means ‘to (participate) in a transaction whether as principal,

13
Section 9 provides in pertinent part: “It shall be unlawful for any person,
directly or indirectly, by the use of the mails or any means or instrumentality of interstate
commerce, or of any facility of any national securities exchange, or for any member of a
national securities exchange—[¶] . . . [¶] (2) To effect, alone or with 1 or more other
persons, a series of transactions in any security registered on a national securities
exchange, any security not so registered, or in connection with any security-based swap
or security-based swap agreement with respect to such security creating actual or
apparent active trading in such security, or raising or depressing the price of such
security, for the purpose of inducing the purchase or sale of such security by others.”
(15 U.S.C. § 78i(a), italics added.)
26
agent, or both’. S.Rep. No. 972, 73d Cong.2d Sess. 17 (1934).” (Ibid., italics added; see
also 8 Loss et al., Securities Regulation, (4th ed. 2012) p. 540; SEC Release No. 605
(1936), available at 1936 WL 31604.)
Moreover, reading section 9 to reach, as appropriate, agents of beneficial sellers
and buyers also harmonizes the section with other provisions of the SEA and its
regulations, which, like California’s definitional statute, speak of brokers “effecting”
transactions by carrying out various agency and back-office functions, including clearing
and settlement. (See 15 U.S.C. § 78c(a)(4) [a broker “means any person engaged in the
business of effecting transactions in securities for the account of others”]; id.
§ 78bb(e)(3)(C) [“a person provides brokerage and research services insofar as he . . .
effects securities transactions and performs functions incidental thereto (such as
clearance, settlement, and custody)”]; 17 C.F.R. § 240.11a2–2(T)(b) (2014) [“For
purposes of this section, a member ‘effects’ a securities transaction when it performs any
function in connection with the processing of that transaction, including, but not limited
to, (1) transmission of an order for execution, (2) execution of the order, (3) clearance
and settlement of the transaction, and (4) arranging for the performance of any such
function.”]14; see also S.E.C. v. Securities Investor Protection Corp. (D.D.C. 2012)
872 F.Supp.2d 1, 9, fn. 8 [it is the clearing broker who “ ‘actually effectuates the
trade’ ”].)
We therefore conclude the word “effect” in section 25400, subdivision (b),
includes more than the activity of beneficial sellers and buyers, and can include
execution, clearing and settlement activities by brokerage and clearing firms.

14
Regarding this particular rule, the SEC stated it “uses the term ‘effect’ in the
broad sense which the Commission believes that term has in Section 11(a) and other
parts of the Act.” (Securities Transactions by Members of National Securities
Exchanges, SEC Rel. No. 14563 (Mar. 14, 1978), available at 1978 WL 170833, at *10,
italics added.) The purpose of “add[ing] to the rule a definition of the term ‘effect’ that
includes all functions performed in causing a securities transaction to be transmitted,
executed, cleared and settled” was “to eliminate any uncertainty as to the functions
which are comprehended within the term ‘effect’ as used in Section 11(a) and the effect
versus execute rule.” (Id. at *8, italics added.)
27
 Kamen does not hold, contrary to what defendants maintain, that “effecting” a
transaction refers only to beneficial sellers and buyers. Indeed, the case does not even
consider the meaning of the term “effect” in subdivision (b). The complaint in Kamen
“purport[ed] to state a cause of action under section 25400, subdivision (d).” (Kamen,
supra, 94 Cal.App.4th at p. 202, italics added.) That subdivision, in contrast to
subdivision (b), prohibits a “a broker-dealer or other person selling or offering for sale or
purchasing or offering to purchase” a security from making any “false or misleading”
statement “for the purpose of inducing the purchase or sale of such security by others.”
(§ 25400, subd. (d).) While the defendants in Kamen, a corporate officer and an
accounting firm, were accused of making false statements about the company’s
performance, neither sold or offered for sale any of the company’s shares. (Kamen,
supra, 94 Cal.App.4th at p. 200.) Thus, neither was liable under the plain language of
subdivision (d), which is strikingly different from the language of subdivision (b).
(Kamen, at p. 206.)
Defendants also point out the authors of Marsh & Volk were heavily involved in
the drafting of the state securities laws, and their treatise states section 25400 generally
reaches only those “engaged in market activity.” (Marsh & Volk, supra, § 14.05[4],
p. 14-66.) The treatise then continues, “[s]ubdivision (a), dealing with matched orders,
and subdivision (b), dealing with liability for a series of transactions manipulating the
price of a security, by their very nature require that the defendant be a purchaser or seller,
since the conduct prohibited is associated with a market transaction.” (Ibid.) We have no
disagreement with Marsh & Volk’s general observation, as one can “engage in market
activity” by executing, clearing and settling trades. However, for all the reasons we have
discussed, we conclude Marsh & Volk’s second statement is unsupported and incorrect.
In fact, the treatise provides no analysis on this point, let alone any discussion of either
the statutory language or the like provisions of Section 9 of the SEA on which
Corporations Code section 24500 was based. (See Diamond, supra, 19 Cal.4th at p. 1055
[the Marsh & Volk treatise cannot be invoked in favor of a statutory interpretation
contrary to a statute’s plain language].)

28
 3. Primary Versus Aider and Abettor Liability
Having concluded any person who “effect[s] a series of transactions” can include
not only beneficial sellers and buyers of shares, but also brokerage and clearing firms that
execute, clear and settle the trades, we next consider under what circumstances brokerage
and clearing firms can incur liability, given the well-established rule that a private civil
action under sections 25400 and 25500 does not reach aiders and abettors. Rather, only
primary actors are subject to civil liability for damages. (Kamen, supra, 94 Cal.App.4th
at p. 206, citing Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.
(1994) 511 U.S. 164, 179 (Central Bank) [holding no secondary liability under section
10(b) of the SEA]; California Amplifier, supra, 94 Cal.App.4th at p. 113 [“To impose
liability on persons who do not directly participate in a section 25400 violation would be
contrary to the legislative decision to exclude aiders and abettors from section 25500
liability.”]; compare §§ 25530–25536, 2540315 [authorizing enforcement actions by
Commissioner of Corporations and allowing aider and abettor liability in such actions]).16
As did Kamen, we take guidance from Central Bank. The Supreme Court in
Central Bank discussed section 10(b) of the SEA—and specifically its anti-fraud
provision—and concluded: “The absence of . . . aiding and abetting liability does not
mean that secondary actors in securities markets are always free from liability under the

15
Section 25403, for example, provides: “Any person that knowingly provides
substantial assistance to another person in violation of any provision of this division or
any rule or order there under shall be deemed to be in violation of that provision, rule, or
order to the same extent as the person to whom the assistance was provided.” (§ 25403,
subd. (b).)
16
Aider and abettor liability is similarly limited under various federal securities
laws. (Central Bank, supra, 511 U.S. at p. 183 [“various provisions of the [federal]
securities laws prohibit aiding and abetting, although violations are remediable only in
actions brought by the SEC,” citing, for example, “15 U.S.C. § 78o (b)(4)(E) (1988 ed.
and Supp. IV) (SEC may proceed against brokers and dealers who aid and abet a
violation of the securities laws); Insider Trading Sanctions Act of 1984, Pub.L. 98-376,
98 Stat. 1264 (civil penalty provision added in 1984 applicable to those who aid and abet
insider trading violations); 15 U.S.C. § 78u-2 (1988 ed., Supp. IV) (civil penalty
provision added in 1990 applicable to brokers and dealers who aid and abet various
violations of the Act)”].)
29
securities Act. Any person or entity, including a lawyer, accountant, or bank, who
employs a manipulative device or makes a material misstatement (or omission) on which
a purchaser or seller of securities relies may be liable as a primary violator . . . , assuming
all of the requirements for primary liability . . . are met. . . . . In any complex securities
fraud . . . there are likely to be multiple violators . . . .” (Central Bank, supra, 511 U.S. at
p. 191; see In re Enron Corp. Securities, Derivative & ERISA Litigation (S.D. Tex. 2002)
235 F.Supp.2d 549, 582.)17
Thus, section 10(b) liability has been imposed on brokerage and clearing firms
when they have crossed the line from aider and abettor to primary violator. (E.g., Fox
Intern. Relations v. Fiserv Securities, Inc. (E.D. Pa. 2007) 490 F.Supp.2d 590, 609
[liability under section 10(b) possible when not engaging in mere ordinary clearing
services]; In re Mutual Funds Inv. Litigation (D. Md. 2005) 384 F.Supp.2d 845, 857–858
[“the trader defendants are alleged to have been involved in the [section 10(b)] fraudulent
scheme from the outset and to have been at least one of its architects. Moreover,
unquestionably it is the trader defendants who received the profits that were siphoned off
from the mutual funds as a result of late trades and market timed transactions. These are
not the activities of a mere aider and abettor but those of a primary participant in the
unlawful conduct”]; In re Blech Securities Litigation (S.D.N.Y. 1997) 961 F.Supp. 569,

17
As defendants point out, there are substantive differences between
section 25400 and section 10(b) of the SEA—for instance, the focus in section 25400,
subdivision (b), is on “effecting transactions” in manipulated securities, whereas
section 10(b) broadly prohibits any person from the knowing use of deceptive practices in
“connection with” the purchase or sale of a security. (15 U.S.C. § 78j(b).) However, that
the conduct prohibited by section 10(b) may be broader, does not suggest the critical
distinction between primary participants and aiders and abettors under that section is not
helpful in defining these roles under California law. (Cf. Kamen, supra, 94 Cal.App.4th
at p. 206, citing Central Bank, supra, 511 U.S. at p. 164.) Indeed, the basic approach to
drawing the line between primary and secondary liability should generally operate
independently of particular substantive statutes. (See Freeman v. DirecTV, Inc. (9th Cir.
2006) 457 F.3d 1001, 1006, fn. 1 [“it is the Supreme Court’s approach to interpreting the
statute, not the actual statute itself, that is significant . . . [t]hus, the fact that the court was
interpreting a different act of Congress—the Securities Exchange Act—is
inconsequential”].)
30
582–585 (Blech II)18 [“Plaintiffs have remedied the defects of their previous complaint by
adding sufficient allegations to give rise to an inference that [clearing firm] Bear Stearns
had actual knowledge of Blech’s fraudulent conduct as well as a motive and opportunity
for engaging in the scheme with Blech and his confederates”]; id. at p. 585 [“Bear
Stearns is alleged to have conceived of and participated in the initiation and clearing of
sham transactions aimed at affecting . . . the price of the Blech Securities”].)
In the Blech cases, Bear Stearns, a clearing firm, was accused of market
manipulation under section 10(b) for directing and clearing trades of an introducing firm
client, Blech. On the one hand, the trades were arguably legitimate efforts to reduce
Blech’s debt balance on Bear Stearns’ books; on the other, they were arguably known by
Bear Stearns to be propping up the price of the traded securities. (Blech II, supra,
961 F.Supp. at pp. 577–578; In re Blech Securities Litigation (S.D.N.Y., Oct. 17, 2002,
No. 94 CIV.7696 RWS) 2002 WL 31356498, *1, *15 (Blech III).) In Blech II, the
district court denied a motion to dismiss. While allegations Bear Stearns cleared or
otherwise “engaged in” manipulative trades were insufficient to state a claim, as even
knowingly processing the sham trades of others does not give rise to direct liability,
additional allegations Bear Stearns “directed” the sales and cleared the resulting trades to
its pecuniary benefit, and did so knowing Blech’s fraudulent purpose, brought Bear
Stearns into the realm of a primary violator. (Blech II, supra, 961 F.Supp. at pp. 584–
585.)
In Blech III, Bear Stearns moved for summary judgment. Evidence corroborated
the plaintiffs’ allegations of Bear Stearns’ orchestration of the trades and knowledge of
the manipulation of the market. Not only did Bear Stearns direct trades, but it decided

18
An earlier decision, In re Blech Securities Litigation (S.D.N.Y. 1996)
928 F.Supp. 1279, is typically referred to as Blech I. At that point, the complaint did not
yet sufficiently “allege that Bear Stearns caused or directed trading by Blech & Co.’s
customers or solicited or induced them to buy Blech Securities at inflated prices.” (Id. at
p. 1295.)
31
with Blech who should be on the purchasing side of his sales.19 (Blech III, supra, 2002
WL 31356498, at p. *11.) Indeed, the plaintiffs alleged “these demands forced parking
and trading between Blech Accounts.” (Id. at p. *15, italics added.) Bear Stearns
contended in turn, its “actions with respect to debit demands were simply consistent with
its agreement . . . to serve as . . . clearing broker,” an agreement that, under NYSE Rule
382, allocated back-office functions to Bear Stearns and compliance with rules and
regulations to Blech as an introducing broker. (Blech III, at pp. *5–*6, *15.)
The district court acknowledged “margin calls by a clearing broker or a failure to
make margin calls, even with suspicion or knowledge of impropriety on the part of the
initiating broker, is an appropriate and essential part of the securities business.” (Blech
III, supra, 2002 WL 31356498, at p. *15.) The court concluded, however, “[a]n
agreement to clear does not constitute an absolution from securities fraud” and concluded
“[t]he contentions here go further.” (Ibid.) “[A] margin call made with knowledge that it
will cause the initiating broker to commit a securities fraud which must be cleared by the
clearing broker, constitutes direct action in connection with a contrivance to manipulate a
security. Here that element of causality is at issue.” (Ibid.)
In In re Mutual Funds Inv. Litigation, the district court also discussed clearing
firm liability and allowed a SEA manipulation claim to proceed against two such firms
when their activity extended beyond mere clearing services to providing clients with
access to trading platforms that allowed for late trades and trades without time stamps.
(In re Mutual Funds Inv. Litigation, supra, 384 F.Supp.2d at p. 862.) “These acts are
‘manipulative or deceptive’ on their face, and by virtue of the trades they enabled, they

19
“Bear Stearns supplied Blech with lists of accounts having unpaid trades so that
Blech would know which accounts needed to sell to the . . . controlled accounts, and Bear
Stearns and Blech directly discussed rebooking trades and switching trades around so that
the Blech Trusts ended up buying stock from some accounts in which there were debits
for unpaid trades. Shulman [of Bear Stearns] stated: ‘If we handle the liquidations and
we don’t sell to him but we sell to the rest of the street, we have a concern that the
outside world may perceive that his world is falling apart and the other market makers
may pull their bids or significantly lower their bids.’ ” (Blech III, supra, 2002 WL
31356498, at p. *11.)
32
affected the worth of mutual fund shares. Thus, they are the functional equivalent in the
mutual fund industry of sham transactions that artificially affect market prices in more
conventional contexts. [Citation.] Moreover, these alleged acts of deception, when
considered with other allegations concerning the extent of Bank of America’s and Bear
Stearns’ activities on behalf of late traders and high-volume market timers, imply that
Bank of America and Bear Stearns did not merely assist in facilitating late trades and
market timed transactions. Rather, it is reasonably inferable that they participated in
initiating, instigating, and orchestrating the scheme. If discovery demonstrates this to be
so, Bank of America and Bear Stearns face primary liability under Central Bank.” (Ibid.)
In contrast, clearing firms were absolved of liability in Fezzani v. Bear, Stearns &
Co., Inc. (S.D.N.Y. 2004) 384 F.Supp.2d 618. The plaintiffs in that case alleged, much
as in Blech, that Bear Stearns engaged in market manipulation under section 10(b)
because it knew of a client’s, Baron’s, activities aimed at inflating stock prices and
“provided financial support to Baron, and directed Baron at times to sell the manipulated
securities to the public.” (Id. at pp. 628–629.) But in Fezzani, the allegations “d[id] not
cross the threshold laid out in Blech III.” (Id. at p. 642.) “All the complaint alleges” is
Bear Stearns “knew of Baron’s fraud and cleared the transactions that were fraudulently
made”; there was no allegation Bear Stearns “contrived and agreed to fund” a
manipulative scheme as in Blech. (Fezzani, at p. 642.)
Scone Investments, L.P. v. American Third Market Corp. (S.D.N.Y., Apr. 28,
1998, No. 97 Civ. 3802 (SAS)) 1998 WL 205338, *1, *7–*8, also distinguished the Blech
cases. In Scone, a bank was “alleged to have directed that . . . securities be sold, not that
the sale be effectuated by way of fraudulent misrepresentation. The Bank’s liquidation
demand is a far cry from the ‘intimate’ ‘hands-on involvement’ and participation in ‘key
decisions’ about the details of the sale which would render it a primary violator.” (Scone,
at pp. *8–*9; see Abrams, supra, 67 Brook. L. Rev. at p. 504.)
The Second Circuit recently addressed the “normal clearing services” standard in
Levitt v. J.P. Morgan Securities, Inc. (2d Cir. 2013) 710 F.3d 454, 458–459, 466–468
(Levitt), in reversing a class certification order. The circuit court concluded Bear Stearns

33
had no duty to disclose a known fraud to the plaintiffs, clients of an introducing firm,
Sterling Foster, which had a clearing agreement with Bear Stearns making Sterling Foster
responsible for monitoring its customers. The plaintiffs maintained Bear Stearns knew of
Sterling Foster’s plan to manipulate the market for a soon-to-be-publicly-offered stock,
ML Direct, by misusing insider shares supposedly subject to a lock-up agreement. They
further alleged Bear Sterns nonetheless agreed to clear transactions in these shares,
extended Sterling Foster unsecured credit, failed to cancel trades as required by an SEC
regulation (Regulation T), and failed to disclose to purchasers Sterling Foster’s 400
percent profit in the underwriting. (Id. at pp. 462–465.)
Levitt observed courts have grouped clearing firm activity into two categories:
“First, in cases where a clearing broker was simply providing normal clearing services,
district courts have declined to ‘impose . . . liability on the clearing broker for the
transgressions of the introducing broker.’ [Citations.] The district courts have so held
even if the clearing broker was alleged to have known that the introducing broker was
committing fraud, [citation]; even if the clearing broker was alleged to have been clearing
sham trades for the introducing broker, In re Blech, 961 F.Supp. at 584; and even if the
clearing broker was alleged to have failed to enforce margin requirements against the
introducing broker—thereby allowing the introducing broker’s fraud to continue—in
violation of Federal Reserve and NYSE rules, [citation].” (Levitt, supra, 710 F.3d at
p. 466.)
“In the second, much more limited category of cases, district courts have found
plaintiffs’ allegations to be adequate—and so have permitted claims to proceed—where a
clearing broker is alleged effectively to have shed its role as clearing broker and assumed
direct control of the introducing firm’s operations and its manipulative scheme. . . . .
Thus in Berwecky v. Bear, Stearns & Co., 197 F.R.D. 65 (S.D.N.Y.2000), the district
court granted class certification in a suit brought by investors against clearing broker
Bear Stearns for its role in the introducing firm . . . scheme to defraud investors. The
Berwecky plaintiffs alleged that Bear Stearns ‘asserted control over [the introducing
firm’s] trading operations by, inter alia, placing Bear, Stearns’ employees at Baron’s

34
offices to observe Baron’s trading activities, approving or declining to execute certain
trades, imposing restrictions on Baron’s inventory, and loaning funds to Baron.’ . . .
[¶] Similarly, the district court in Blech [II], 961 F.Supp. 569, found that the ‘[c]omplaint
crosse[d] the line dividing secondary liability from primary liability when it claim[ed]
that Bear Stearns [the clearing broker] “directed” or “contrived” certain allegedly
fraudulent trades.’ ” (Levitt, supra, 710 F.3d at pp. 466–467.)
Applying this dichotomy to the facts before it, Levitt concluded Bear Stearns did
not have a duty to disclose Sterling Foster’s fraud because plaintiffs “failed to allege
sufficiently direct involvement.” (Levitt, supra, 710 F.3d at p. 468.) “Certainly plaintiffs
here do not allege that Bear Stearns, beyond merely acquiescing in the ML Direct
scheme, went so far as to control and implement that scheme in the manner alleged, for
example, in Berwecky.” (Ibid.) That “Bear Stearns allowed . . .’ . . . putatively sham or
manipulative trades” was not “comparable to directing or instigating such trades.” (Id. at
p. 469.)
Thus, the threshold for primary liability on the part of clearing firms is high. They
do not incur such liability when they provide “normal clearing services”—and that is so
even when a firm knows the trader is committing fraud or knows it is clearing and
settling sham trades. Rather, to qualify as a primary violator a clearing firm must “shed
its role as clearing broker” and engage in conduct akin to “directing” the client’s
manipulative trading, or “deciding with” the client how to engage in the unlawful trading,
or intentionally providing a specialized tool for the client to engage in unlawful trading,
or “initiating, instigating, and orchestrating” the client’s unlawful scheme,” or having
“intimate” “hands-on involvement” and participating in “key decisions” about the
“details” of the client’s unlawful trading, or assuming “direct control of” the client’s
“operations and its manipulative scheme.”
4. The Summary Judgment Evidence
a. Goldman Brokerage
Goldman Brokerage was, itself, a purchaser of reversion conversions, and
plaintiff’s expert, J. Marc Allaire, based on his review of Goldman documents, averred

35
Goldman bought reverse conversions from Hazan and Arenstein. Allaire and other
experts also opined, based on the pricing of these trades, Goldman Brokerage knew the
short sale components of these complex trades would fail and continue to fail for the
duration of the options components of the trades—in short, Goldman knew the trades
were shams and created a “phony” supply of Overstock shares. Indeed, there is evidence
Goldman Brokerage acted as Arenstein’s agent in executing conversion trades with itself,
and acknowledged Arenstein could provide the firm a supply of shares it could not obtain
“in the pits.” In an e-mail, for example, Goldman acknowledged such conversion trades
“create inventory to allow customers to short.” In another email, it acknowledged a
general goal of its Hedging Strategies Group was “to create supply and perpetuate selling
in stocks with a large amount of short interest.” In sum, there is substantial evidence
Goldman Brokerage was, itself, a beneficial purchaser of one species of the exotic trades
in which Hazan and Arenstein engaged to circumvent Regulation SHO.
There is no evidence, however, raising a triable issue Goldman Brokerage’s own
purchases, or its execution of Hazan’s or Arenstein’s or another clients’ sham trades in
Overstock, were made in California. Hazan and Arenstein operated out of New York and
New Jersey.20 Goldman Brokerage operated out of New York, New Jersey and Chicago.
Further, plaintiffs did not rebut Goldman Brokerage’s evidence that any conversion
trades were consummated on regional exchanges outside of California, such as the

20
Although plaintiffs maintained one seller of conversions, Group One, had a
California address, the company’s CEO swore in a 2004 SEC filing the firm, while a
California entity, is headquartered in Chicago. There is no evidence Group One engaged
in trading with Goldman Brokerage from any office in California as opposed to from its
Illinois headquarters. The California address for Group One in some of Merrill
Clearing’s trading records does not suffice to establish the location of trades or other
interactions with Goldman Brokerage. Plaintiffs cited no deposition testimony or other
evidence regarding the location of Group One or any trading history it had with Goldman
Brokerage, in particular. Indeed, while plaintiffs’ expert stated Merrill Clearing’s “blue
sheets show that Group One was located in San Francisco in 2005–2006,” the expert
noticeably refrained from stating Group One conducted manipulative conversion trades
with Goldman Brokerage in California.
36
Chicago Board Options Exchange, Midwest Stock Exchange, or Cincinnati Stock
Exchange.21
Accordingly, summary judgment was properly granted as to Goldman Brokerage.
b. Merrill Brokerage
There is a similar shortcoming in the evidence as to Merrill Brokerage. To begin
with, there is no evidence Merrill Brokerage, in contrast to Goldman Brokerage, was,
itself, a purchaser of reverse conversions in Overstock.
There is evidence Eugene McCambridge, a Merrill broker in Chicago, executed
some trades in Overstock shares for Hazan and Arenstein. However, McCambridge
could not identify which exchange he used for any given trade. He testified at deposition
he would ordinarily route NASDAQ trades through “Arca or P-Coast.” But he was
shown and testified specifically about trade tickets showing Overstock trades on the
Midwest Stock Exchange in Chicago. The “blotters” (the paperwork showing the trades)
also do not identify the exchange used for the trades. Thus, whether McCambridge
executed any Overstock trades on the Pacific Exchange is pure speculation, insufficient
to raise a triable issue Merrill Brokerage executed trades in Overstock in California.
In addition, there is no evidence the trades McCambridge executed were of the
exotic variety designed to avoid Regulation SHO’s delivery requirement. Plaintiffs’
experts purported to identify the alleged manipulative trading and they focused on
Goldman Brokerage’s purchases of conversions and on the clearing firms’ activities.
They made no reference to the trades McCambridge executed.
Accordingly, summary judgment was also properly granted as to Merrill
Brokerage.

21
While plaintiffs’ expert Allaire links the potentially California-based Pacific
Exchange with the clearing firms and various sham reset trades, no linkage is made to
Goldman Brokerage. The omission is striking. It is not enough, as Allaire states, that
Goldman Brokerage purchased conversions whose components were cleared by, for
instance, Merrill Clearing, in a manner that links up with California. The question is
what did Goldman Brokerage do in California. There is no evidence Goldman Brokerage
did anything actionable in California.
37
 c. Goldman Clearing
Goldman Clearing did not have a clearing office in California, and there is no
evidence this clearing firm did anything, in California or otherwise, beyond normal
clearing activity. There is no evidence Goldman Clearing directed, developed, or
instigated—as opposed to acquiesced in—any strategy for repeatedly failing short sales,
shirking delivery obligations, or clearing sham reset transactions. (See California
Amplifier, supra, 94 Cal.App.4th at p. 113 [no aiding and abetting liability]; compare In
re Mutual Funds Inv. Litigation, supra, 384 F.Supp.2d at p. 862, italics added
[“reasonably inferable that they participated in initiating, instigating, and orchestrating
the scheme”].) At best, there is evidence suggesting the firm was clearing purported
market makers’ sham reset transactions, was aware short interest in Overstock was high,
“noticed fails going up rather dramatically . . . at [Goldman Clearing],” and generally
monitored client short sales in Overstock and gave clients notice of their regulatory
obligations to “buy-in.” However, there is no evidence raising a triable issue the firm
“shed its role as clearing broker and assumed direct control” of the scheme to evade
federal securities laws. (Levitt, supra, 710 F.3d at pp. 466–467.) Indeed, the evidence
pertaining to Goldman Clearing does not come close to that pertaining to Merrill Clearing
and to which we now turn.
d. Merrill Clearing
Merrill Clearing, unlike Goldman Clearing, had an office in California and from
that office provided clearing services to traders in Overstock shares, including Hazan and
Arenstein. By February, 2005, Alan Cooper, the head of the office, was having “frequent
interactions” with Hazan—approximately five-to-six times a week by telephone and e-
mail. Cooper, Hazan, and Merrill Clearing’s compliance department discussed
Regulation SHO and, in general, a clearing firm’s responsibility to insure delivery and
not to fail trades. At his deposition, Cooper claimed he and the compliance officer were
not offering opinions on Regulation SHO, but simply explaining how Merrill Clearing
would be implementing it.

38
 In one interaction, in mid-February, Hazan was upset that Merrill Clearing was
automatically borrowing shares to insure delivery, when he expected it would not. In an
internal e-mail, Cooper, based on a conversation with Hazan, relayed “the trader did not
know we were going to be charging [fees to borrow] negatives” and if Merrill Clearing
were to buy-in Hazan on the trade, Hazan would likely re-sell shares to “maintain his
hedge.” Cooper asked if the buy-ins could be stopped.
What Hazan, and in turn, Cooper, were complaining about was what Merrill
termed the “flipping” of all trades for automatic delivery and settlement. This deprived
legitimate market maker clients of Regulation SHO’s exemption from the locate
requirement, and deprived the clearing firm of its right under the regulation to delegate
delivery obligations to bona fide market maker clients. Hazan was not the only Merrill
Clearing client complaining about it. Moreover, Merrill Clearing had had a “do not flip”
practice for market maker clients in place prior to the time Hazan and Arenstein became
clients, and the complained-about automatic “flipping” started with Merrill’s acquisition
of another firm, Sage (for whom Cooper had worked), and its computer system which
was not programmed to “hold back” market maker short sales.
About a week later, Hazan sent Cooper an e-mail noting an interaction with
Merrill Clearing’s compliance department concerning Regulation SHO, and then posing
several questions: Did a clearing firm need to pay to borrow a stock if it’s “being held
for less than 10 days” as would be the case with a “flex or short term option hedge?”
Could the options market maker exemption exempt trades from Regulation SHO’s close-
out requirements if stock did not appear on “the Reg sho list” of threshold securities until
after a short sale as a hedge? If Merrill Clearing were long in the stock, could Hazan use
that position to offset short sales?
On the afternoon of February 23, Cooper told colleagues, in an email, Hazan was
threatening to leave Merrill Clearing for another firm if Merrill could not (without
providing further specifics) “accommodate his trading style.” One colleague responded
“I would say we can’t.” At his deposition, Cooper could not recall what he had meant by
“trading style,” but admittedly knew at the time it involved trading in threshold (hard-to-

39
borrow) stocks, doing “riskless” trades, “delta-neutral” trades, conversions, and reversals.
He also admitted having at least a general understanding Hazan could profit from the
spread between the pricing of the options components of reverse conversions. And he
admitted the reverse conversions the SEC later investigated and for which it imposed
sanctions, were the sort of trade Merrill was clearing.
At around the same time—that is, February 2005—Cooper also began working
with Arenstein. Cooper spoke to Arenstein about possibly opening an account, and
Merrill Clearing’s Managing Director, Curt Richmond, told Arenstein he and Cooper
were “speaking to compliance about Reg-SHO.”
In a March 4, 2005 e-mail, Richmond and Merrill Clearing’s President, Thomas
Tranfaglia, Jr., discussed how Arenstein wanted to talk to Tranfaglia about Regulation
SHO and Merrill Clearing’s related policies. Richmond stated: “After the Hazan incident
I informed [Arenstein] that we had no interest in clearing his ‘Reg-SHO fail with FLEX
Options Strategy.’ ” Richmond noted Arenstein had taken “some of the other side of
Hazan’s closing trades,” but told Tranfaglia “it is your call.” Arenstein particularly
wanted to know if Merrill Clearing would charge market makers lending fees on a fail to
deliver if there was no violation of Regulation SHO, and whether Merrill Clearing would
give its clients a chance to “get out on their own” before Regulation SHO deadlines.
At the end of the month, Cooper relayed to superiors a trading strategy suggested
by Hazan—to use a “one day flex” in which Hazan would buy and sell calls in the same
number of shares. Cooper asked “[c]ould we fail” on those shares “from the assignment
the next day.” The admitted goal was “to reestablish a new short and not borrow it.”
Cooper was asked to discuss the matter in person, and the conversation went offline. At
his deposition, Cooper claimed he did not believe the goal of such a trade was to evade
Regulation SHO, but to address Hazan’s desire to avoid fees related to the supposedly
unnecessary, automated borrowing of shares imposed by the computer system Merrill
Clearing had inherited from Sage.
The following month, in April 2005, Cooper filled in parts of a spreadsheet listing
certain securities Hazan was holding (none of which were Overstock). In the far right

40
column, Cooper marked down checks indicating Hazan “will not pay negative rebate”
and had a “desire to fail.”
In mid-May, Cooper oversaw a “Reg SHO test trade” by Hazan. The trade would
establish a new 350,000 share short position in a security (one other than Overstock) for
which options had been placed before implementation of Regulation SHO, and Merrill
Clearing would not process the trade for delivery.22 At his deposition, Cooper again
claimed the purpose of this exotic trade was not to evade Regulation SHO’s delivery
requirement, but to move a position from a “faulty” account that required borrowing of
shares, to a different account which would allow a bona fide market maker to sell short
without borrowing. In an internal e-mail that same day, Cooper said he told Hazan he
would be subject to Regulation SHO’s buy in requirement, even though Hazan had earlier
hoped for assurances “that the position would not be subject to Reg Sho buy-in in 13
days.”
The compliance department wanted to have further discussions to get more
comfortable with the test trade, and wanted to have a procedure set up to deal with
“hold[ing] these trades back”—a procedure that it would “need . . . to provide to the
SEC.” But the trade was already in motion.
On May 25, 2005, after trade execution, a Managing Director at both Merrill
entities and President and Chief Operating Officer of Merrill Clearing, Peter Melz,
responded to the compliance department’s concern about the trade saying: “fuck the
compliance area—procedures, scmecedures.” At her deposition, Merrill’s compliance
officer stated she watched Melz draft the e-mail and it was made as part of an in-office
jest.

22
Under the version of Regulation SHO in effect between 2005 and 2007, naked
positions put on before a security became a threshold security were “grandfathered” and
not subject to the regulation’s ordinary delivery requirement. (See former 17 C.F.R.
§ 242.203(b)(3)(i)–(ii) [effective to August 28, 2005].) None of the parties have
discussed whether any component of this “test” trade was or was not grandfathered under
the then-effective regulation.
41
 By mid 2005, Merrill Clearing remedied the computer trading system it had
acquired from Sage, and completed implementation of an automated “do not flip”
process. This new process ensured trades in negative rebate securities (those, like
Overstock, with high borrow fees) would not automatically “flip” to settlement when a
market maker was selling short. Thus, Merrill Clearing would no longer inform Merrill
Brokerage of the need to acquire shares to settle such short sales. Both firms were aware
if the brokerage firm kept on its books the shares of negative rebate securities it otherwise
would have provided to comply with Regulation SHO, those shares could be lent out for
profit.
Merrill Clearing claims the “do not flip” process was the means by which, as
allowed by Regulation SHO, it allocated responsibility for delivery to bona fide market
maker clients. Yet, Merrill still had a policy of (1) giving such clients notice of
impending 13-day deadlines to close out fail to deliver positions, and (2) actually “buying
in” clients who did not comply—a “buy in” being a trade ostensibly conducted to close
out a fail to deliver and enable delivery to a waiting buyer.
By summer 2005, discussions within Merrill turned to handling “buy ins.” In late
July, Cooper noted Hazan “trades many hard to borrows and will need as much color
[that is, information] on potential buy-ins as possible.” On August 29, one of Cooper’s
employees, Hugh Skinner, wrote to Cooper that Hazan wanted early notification of buy-
ins because late notice “could prevent him from selling into the buy-in.” At his
deposition, Cooper stated traders like Hazan wanted estimates of impending buy-ins so
they could “sell into it” and, in the case of naked shorts, re-obtain the naked short
position and remain risk neutral. This would, Cooper understood, effectively “reset” the
Regulation SHO clock and give traders, at least from Merrill’s perspective, a new period
of time to complete delivery of shares. As we have discussed, the SEC found this scheme

42
to reset the Regulation SHO clock and avoid delivery to be an egregious violation of the
regulation.23
It was the San Francisco office that provided the notification function for Hazan
and other clients in and around August 2005, but not necessarily for the entire period
relevant here. At his deposition, Cooper denied taking an active role in Hazan’s trades or
the trades of other Merrill Clearing clients, and viewed his role as largely clerical. He
also denied reviewing trades to see if anyone repeatedly used reset transactions to
perpetuate the naked short positions.
Despite Cooper’s assertions of passive ignorance, on August 4, 2005, a Merrill
Clearing director-level employee, Bill Stein, noticed Cooper’s traders “were knowingly
putting on shorts and then basically rolling them every 13 days.” At his deposition,
Cooper said he did not recall exactly what this statement referred to, but conceded Stein
was referring to “beating the Reg SHO obligation.” Certainly by July of 2006, Cooper
understood this regulation-evasion aspect of the trading strategy Hazan and others were
pursuing, noting “FLEXs were being questioned” and wrote in an email “[a] few traders
have figured out how to use the FLEXs to deal with Reg SHO.”
In December 2005, Merrill Clearing’s chief compliance officer sent a bulletin
noting the firm had received regulatory inquiries and scrutiny over “flex trades by two
. . . clients in OSTK.”

23
While Merrill claims the sanction orders found Hazan and Arenstein deceived
their clearing firms and thus exonerated the firms, that is not a fair reading of the orders.
The SEC order against Hazan, for example, describes how, under Regulation SHO, “a
clearing firm is permitted reasonably to allocate a fail-to-deliver position to a broker or
dealer whose short sale resulted in the position” and states Hazan’s clearing firm
“notified” him on numerous occasions it had “allocated” to him the close-out obligation.
The order goes on to point out the prime brokerage firms “created the demand for the
reverse conversion” trades Hazan was making because by purchasing those conversions
they could “create inventory.” It further discusses how Hazan’s “clearing firm,” based on
Hazan’s “purported ‘purchase’ of shares,” would “reset” his “Reg SHO close out
obligation to day one” thus giving him “another thirteen settlement days in which to close
out the short position.” The SEC concluded this strategy was a patent violation of the
regulation—and there is no exoneration of the clearing firms.
43
 In an internal January 2006 telephone call, the compliance officer talked about
Arenstein’s trading, how he was not acting as a bona fide market maker, and how it was
“not okay” to be “recycling” his “short position.” She said: “You know, I—we really—I
got to set up a meeting where we have to talk to the business, because these guys, they
must be spoken to. Like-and not by you. You know what I’m saying? Like this is not
okay. Like you cannot be recycling this short position. I mean, I don’t understand. If
he’s got—If he’s got, you know, a buy-in due today, tomorrow, and the next day, right?
Then he can’t short anymore in these next few days.”
That same month, the compliance officer followed up with an email to Merrill
Clearing executives, telling them “as you know” Arenstein had been involved in trading
activity the NASD was questioning as inconsistent with Regulation SHO, and informing
them of the flex option recycling scheme and how Merrill’s net fails to deliver in
Overstock were not diminishing. She noted if the firm were to drop Hazan and
Arenstein, the database of fails “shrinks unbelievably.” There is also evidence, during
this time frame, of compliance communications with Hazan and Arenstein during which
they insisted they were acting as bona fide market makers, and a telephone call to
Arenstein confronting him about recycling of trades and requesting he to do real buy-ins.
Nevertheless, Merrill Clearing continued to clear Hazan’s and Arenstein’s trades
for another seven months and did not even begin to wind down its “clearing relationship”
with them until August 2006—just before the SEC and New York exchange issued
stipulated sanctions orders against the two traders. Even after Hazan was told to leave
Merrill Clearing, he continued to increase his short positions there for several months
before he was finally terminated.
All told, Merrill cleared Hazan’s and Arenstein’s exotic trades designed to support
perpetually naked short positions for more than a year, and as a result failed to deliver
Overstock shares for settlement every single day between August 1, 2005 and the end of
2006. The number of failed deliveries quickly rose above a million shares, and at one
point reached three million shares.

44
 i.) Triable Issue Merrill Clearing Was a Primary Violator
As we have discussed, even if there is a triable issue Merrill Clearing knew Hazan
and Arenstein’s trades were designed to evade Regulation SHO and knew it was clearing
sham trades, that is not enough to raise a triable issue of primary liability under
sections 25400 and 25500. Rather, the evidence must be such that Merrill Clearing’s
conduct was arguably akin to “directing” Hazan’s and Arenstein’s trading schemes
(Levitt, supra, 710 F.3d at pp. 466–467), or to deciding with them how to effect a
manipulative trade (see Blech III, supra, 2002 WL 31356498, at p. *11), or to providing
calculated “access” to the means to engage in unlawful trading (In re Mutual Funds Inv.
Litigation, supra, 384 F.Supp.2d at pp. 861–862), or to “initiating, instigating, and
orchestrating the scheme” (id. at p. 862), or to having “intimate,” “hands-on
involvement” and participating in “key decisions” about the “details” of the exotic trades
(Scone Investments, L.P. v. American Third Market Corp., supra, 1998 WL 205338, at
pp. *8–*9).
While a close question, we conclude the evidence is sufficient to raise a triable
issue Merrill Clearing did more than provide normal clearing services, bearing in mind
the observation of the district court in Blech III, that “[i]n this difficult distinction . . .
between aiding and abetting and direct action, the line will be drawn with respect to
summary judgment in favor of protecting the investing public rather than the clearing
broker.” (Blech III, supra, 2002 WL 31356498, at p. *15.)
There is clearly a triable issue Merrill Clearing had knowledge, indeed abundant
knowledge, its clients were rolling shorts and engaging in sham reset transactions to
mimic the appearance of genuine trading. There is a triable issue Merrill did not believe,
or, at the very least, could not have reasonably believed, Hazan and Arenstein were bona
fide market makers engaging in legitimate trading. And there is a triable issue Merrill
took an active, direct role in their trading schemes to cause, and to profit from, ongoing
failures to deliver shares in short sales of Overstock, as well as other hard-to-borrow
securities.

45
 For example, there is a triable issue Cooper and others within Merrill Clearing
purposefully developed or “contrived” procedures, at the request of Hazan and Arenstein,
by which Merrill Clearing could, and repeatedly did, effect their one-day FLEX options
“to reestablish a new short and not borrow it.” Arguably, Hazan effectively asked Merrill
Clearing to review and approve the exotic “test trade” he concocted to flagrantly violate
the securities laws. Not only did Merrill give its stamp of approval, it continued to clear
Hazan’s unlawful trades even after compliance personnel made it clear this was “not ok.”
Indeed, Merrill did so for another seven months and only stopped clearing those trades on
the eve of the SEC sanction ruling. Such contriving behavior is akin to that found
actionable in In re Mutual Funds Inv. Litigation, supra, 384 F.Supp.2d at page 862, in
which the clearing firm provided clients with access to trading platforms that enabled
manipulative late trades, and in Blech III, in which the clearing firm and clients discussed
and agreed upon a strategy that would manipulate the market.
Even if Merrill’s do-not-flip procedures were initially designed as a legitimate
means to correct the Sage computer problem, they arguably became deliberately
employed as tools to implement Hazan’s and Arenstein’s well-understood strategy of
perpetuating naked short positions. Similarly, even if buy-in notifications are usually
normal clearing activities, it is arguable Cooper went beyond giving routine notice and
knowingly coached Hazan and Arenstein on handling buy-in obligations for the very
purpose of selling into them and re-obtaining naked short positions. Moreover, the
arguable buy-in coaching of these traders cannot be viewed in isolation from the evidence
showing Merrill Clearing’s involvement with the development, for these same abusive
traders, of the process to “roll shorts.”
Cooper’s techniques were, indeed, known, and ratified, within Merrill Clearing.
Cooper’s clients, said one colleague, “were knowingly putting on shorts and then
basically rolling them every 13 days.” In 2005, Tanfaglia was given the “call” on
whether to add Arenstein as a client given his “FLEX Options Strategy” and the “Hazan
incident”—and Arenstein became a client. In early 2006, a Merrill Clearing compliance

46
officer was aware of Arenstein “recycling” his “short position” and called for action, but
the abusive trading practices continued.
In sum, while close, when the evidence is viewed in the light most favorable to
plaintiffs, as it must be on review from summary judgment, it suffices to raise a triable
issue Merrill Clearing, through its San Francisco office, did more than provide normal
clearing services, and did more than knowingly clear its clients’ manipulative trades and
sham reset transactions. There is enough to commit to a jury the difficult “distinction
between aiding and abetting and direct action.” (Blech III, supra, supra, 2002 WL
31356498, at p. *15.)
ii.) There Is a Triable Issue Merrill Clearing Acted to Induce Trading in
a Manipulated Stock
It is not enough for there to be a triable issue Merrill Clearing crossed the line
from aider and abettor to primary violator in a scheme to evade Regulation SHO for the
benefit of its clients. Rather, to impose liability under section 24500, subdivision (b),
there must be evidence raising a triable issue Merrill participated in Hazan and
Arenstein’s manipulative trading scheme for the purpose of inducing the purchase or sale
of shares of Overstock by someone else.
Plaintiffs’ principal evidence that Merrill Clearing had the requisite purpose of
inducing market activity in Overstock was not the direct statements by defendants
recounted above. Rather, they relied on expert opinions. That is, their experts drew
inferences about the clearing firm’s purpose from its knowing participation in Hazan’s
and Arenstein’s trading schemes and their opinion Merrill benefited financially when the
stock price declined. Since the firm benefitted from price declines, and since market
activity is necessary to generate a decline, the experts opined Merrill must have intended
to induce further market activity.
Plaintiffs’ experts declared the recycling of naked short positions created
downward pressure on Overstock’s price, and plaintiffs’ expert Conner, in particular,
testified the clearing firm benefited from price declines, which would spur further short
selling and increase transaction fees. Also, when the clearing firm had a fail to deliver

47
position, it might have to pay a “mark” to the party not receiving its shares if the share
price rose. If the share price declined, the clearing firm got a “mark.” The clearing firm
thus did not profit directly from price declines, but rather held the mark money in a
reserve account in case the share price rose. Meanwhile, however, the firm and its client
earned interest on the money. Conner, thus, opined Merrill Clearing had a strong
financial incentive to see this play out.24
While the evidence Merrill Clearing had the requisite purpose to induce market
activity in Overstock stock is attenuated, even “weak” evidence can permit an inference
of unlawful intent or purpose, as intent and purpose are rarely established with direct
evidence and are typically questions for the trier of fact. (See Page v. MiraCosta
Community College Dist. (2009) 180 Cal.App.4th 471, 497 [“A subjective state of mind
is rarely susceptible of direct proof, and a trial court will usually have to infer it from
circumstantial evidence.”]; Nazir v. United Airlines, Inc. (2009) 178 Cal.App.4th 243,
283 [Proof of discriminatory intent often depends on inferences rather than direct
evidence such that “ ‘very little evidence of such intent is necessary to defeat summary
judgment’ ” thus “summary judgment should not be granted unless the evidence cannot
support any reasonable inference for plaintiff.”]; id. at p. 286 [intent cases “are rarely
appropriate for disposition on summary judgment, however liberalized” summary
judgment has become]; see also Press v. Chem. Inv. Servs. Corp. (2d Cir. 1999) 166 F.3d
529, 538 [the question of whether a plaintiff has established the requisite intent for a
section 10(b) violation is a factual question “ ‘appropriate for resolution by the trier of
fact’ ”]; S.E.C. v. Masri (S.D.N.Y. 2007) 523 F.Supp.2d 361, 367, 375 [“defendant’s
manipulative intent can be inferred from the conduct itself” and a defendant broker need
not share the same nefarious intent as a client, so long as the intent is actionable].)
Here, plaintiffs presented evidence of opportunity and motive, which, when taken
with all the other evidence of Merrill’s knowing conduct, was at least for now sufficient

24
The trial court overruled defendants’ objections to the pertinent portions of
Conner’s declaration, and defendants have not challenged these evidentiary rulings on
appeal.
48
to survive summary judgment. (See Bains v. Moores (2009) 172 Cal.App.4th 445, 463–
464 [timing and amount of stock transactions may bear on scienter of person accused of
insider trading]; Blech II, supra, 961 F.Supp. at pp. 582–583 [as to pleading scienter,
allegations Bear Stearns was motivated to see prices rise because this would decrease its
financial risks associated with Blech’s transactions and remove debit balances on Blech’s
accounts was sufficient to state 10(b)(5) claim]; CompuDyne Corp. v. Shane (S.D.N.Y.
2006) 453F.Supp.2d 807, 824 [“The FAC has alleged a strong inference of FNY
Millennium’s scienter based upon: (1) its own shorting of CompuDyne stock after being
informed of the confidential non-public PIPE; (2) its continued shorting of CompuDyne
stock after receipt of the Purchase Agreement that unequivocally prohibited any trading
in CompuDyne stock; and (3) its ‘naked’ unlawful shorting of CompuDyne stock in
direct contravention of the Purchase Agreement.”]; cf. McDaniel v. Bear Stearns & Co.,
Inc. (S.D.N.Y. 2002) 196 F.Supp.2d 343, 357–358 [affirming arbitration award as
supported by sufficient evidence of intent to aid and abet a violation of section 10(b):
“Bear had both the motive and the opportunity to engage in Baron’s fraud. One factor
motivating Bear was the simple desire to continue to collect clearing fees and other
income it received from Baron as part of the Clearing Agreement. [Citation.] . . .
[While] the mere desire ‘to prolong the benefits’ of an ordinary clearing relationship is
not enough to support the scienter element of an aiding and abetting claim . . . the Panel
also found that Bear was motivated by its desire to recover from Baron’s on ‘loans above
and beyond the normal clearing debt’—loans the Panel described as ‘extraordinary’. ”].)
Merrill Clearing claims, of course, it was the one being deceived by the likes of
Hazan and Arenstein, and believed these clients were engaged in legitimate options
market making activity and therefore the firm could, under Regulation SHO, delegate its
delivery obligations to them. (17 C.F.R. 242.203(b)(3)(vi) (2014).) However, a clearing
firm can only “reasonably” delegate its delivery obligations. (Ibid.) Plaintiffs’ experts
opined Hazan, Arenstein, and like traders were not plausibly acting as bona fide market
makers and the voluminous, ongoing fails to deliver in Overstock were not due to
inadvertence, but were intentional. Similarly, the SEC and other sanctioning bodies

49
easily concluded Hazan and Arenstein were not engaged in bona fide market making.
Moreover, the evidence supports an inference Merrill Clearing was sufficiently aware of
the supposed market makers’ strategies to avoid Regulation SHO (rolling short, etc.) such
that any delegation of delivery obligations under that regulation would be unreasonable.
Merrill Clearing also views the evidence as showing no more than a desire to
make additional fees and commissions, citing cases holding that is not enough to incur
liability under the securities laws. (E.g., Louisiana Pacific Corp. v. Money Market 1
Institutional Inv. Dealer (N.D. Cal., Mar. 28, 2011, No. C 09-03529 JSW) 2011 WL
1152568 *1, *8 [“The desire to earn commissions or fees is a common motive to all for
profit enterprises, and that motive—without more—is insufficient to give rise to a strong
inference of scienter.”], italics added; Pope Investments II LLC v. Deheng Law Firm
(S.D.N.Y., Nov. 21, 2011, No. 10 Civ. 6608 (LLS)) 2011 WL 5837818 *1, *7 [“Because
plaintiffs do not allege that defendants possessed any motive other than receipt of
professional fees, they do not plead that defendants had a motive to commit securities
fraud.”].) No doubt Merrill was motivated to maximize fees and commissions. But that
does not mean it necessarily had no intent to induce trading in Overstock by others. (Cf.
Rothman v. Gregor (2d Cir. 2000) 220 F.3d 81, 93 [“Although virtually every company
may have the desire to maintain a high bond or credit rating . . . not every company has
the desire to use its stock to acquire another company” in a potentially manipulative
way.].)
iii.) There Is a Triable Issue Actionable Conduct Occurred “In This
State”
There must also be a triable issue the manipulative conduct engaged in for the
purpose of inducing trading activity occurred “in this state.” (§ 25400; Diamond, supra,
19 Cal.4th at p. 1040.)
As we have recited in detail, Cooper, who was in Merrill Clearing’s San Francisco
office, figures prominently in the manipulative trading schemes at issue. That other
Merrill Clearing officers and employees, who interacted with Cooper and the malfeasant
traders, were located in Merrill offices outside California, or that portions of the clearing

50
and settlement processes may have occurred on computers elsewhere, does not mean the
clear connection with California can be ignored. (See Diamond, supra, 19 Cal.4th at
pp. 1051–1052 & fn. 14 [“ ‘in this state’ ” does not “operate to confine liability for
violation of section 25400 to intrastate transactions”].)
Further, plaintiffs’ expert, Conner, based on Merrill Clearing records, declared
part of the clearing process for numerous of the manipulative trades involved providing
trade data to Pacific Clearing Corporation, a regional clearing center located in California
and affiliated with the Pacific Stock Exchange.25 The trial court ruled this expert
testimony lacked foundation, and sustained an objection to it. This was error. Conner’s
testimony was based on his own established expertise and on confirmatory conversations
with another expert with experience (and also personal knowledge, having worked at
Goldman Clearing, in particular). Thus, there was adequate foundation for Conner’s
declaration testimony, and it is for the trier of fact to weigh the credibility of his opinion
and any countervailing opinion or evidence (of which there is currently none).26 (See
Howard Entertainment, Inc. v. Kudrow (2012) 208 Cal.App.4th 1102, 1121 [trial court
erred in excluding expert testimony establishing an industry custom, and thus an
understanding of a contract: “Bauer’s experience in and knowledge of the entertainment
industry is adequate for him to render an opinion on specific practices, even if he was not
a personal manager at the time of the agreement in issue.”].) Crediting Connor’s

25
Pacific Clearing Corp. generates data for the Pacific Exchange and the National
Settlement and Clearing Corp. on stocks sold or bought on the exchanges. The clearing
activity by Pacific Clearing Corp. does not take the place of the clearing functions
performed by clearing firms like Merrill Clearing. Rather, clearing firms, like Merrill,
must send trade data to Pacific Clearing Corp. for trades executed on the Pacific
Exchange as part of the process of clearing trades.
26
That a jury might be precluded from learning of any hearsay statement by
Conner’s confirming source (see Korsak v. Atlas Hotels, Inc. (1992) 2 Cal.App.4th 1516,
1524–1525), does not mean Connor’s opinion lacked foundation. In Korsak, the
testifying expert was not qualified to opine on the topic of the hearsay statements he
related. (Id. at p. 1527 [“Indeed” the expert “admitted he had never dealt with such a
problem before, and had no other reliable data upon which to base an opinion.”].) Here,
in contrast, Conner was accepted as an expert on numerous topics, including “clearing.”
51
testimony for purposes of summary judgment, as we must, it shows Merrill Clearing’s
clearing activity related to the sham reset transactions necessarily occurred, at least in
part, in California.27
We reject Merrill’s assertion section 25008 controls when actionable conduct
occurs “in” California. Section 25008 defines when “[a]n offer or sale of a security is
made in this state” and when “[a]n offer to buy or a purchase of a security is made in this
state.” (§ 25008, subd. (a).) It doe not address where a series of transactions are
“effected.” (See § 25400, subd. (b).) Moreover, the phrases “offer or sale” and “offer to
buy or purchase” pertain most clearly to the language of section 25400, subdivisions (c)
and (e), which prohibit the inducement of certain sale and purchase activity. (See

27
Accordingly, the “location” of the Pacific Stock Exchange, itself, while a topic
of great debate amongst the parties is not material. And even if it was, we would readily
conclude it was located in California during all relevant periods. Despite its name change
in 2006, the exchange was undisputedly registered with the SEC as a national exchange
in San Francisco, California. (See Self-Regulatory Organizations et al., Notice of filing
and Immediate Effectiveness of Proposed Rule Change and Amends. No. 1 & 2, etc.,
Release No. 53615 (April 7, 2006), available at 2006 WL 2794649, *1, *2; see also
Bauman v. DaimlerChrysler Corp. (9th Cir. 2011) 644 F.3d 909, 925 [mentioning in
passing the “Pacific Stock Exchange located in San Francisco”], reversed on other
grounds by Daimler AG v. Bauman (2014) 134 S.Ct. 746, 748.) Merrill, itself, wrote to
the Pacific Exchange in San Francisco at 115 Sansome Street. And plaintiff’s expert,
Conner, declared the exchange still houses options trading, and its regulatory and
business functions in San Francisco, even if its computers for securities trading are
located out of state. Merrill’s claim the exchange was “in” the locale where its computers
happened to be, is untenable and lacking in any legal support. Computers can be located
anywhere, including overseas or in multiple places, and they can be moved. Moreover, in
the context of venue, a quintessential question of locale, it is well established an
exchange is located where it is registered, with no mention made of where its computer
hardware happens to be. (See United States v. Geibel (2d Cir. 2004) 369 F.3d 682, 697–
698 [“There was evidence in the record establishing that AMEX is located and
headquartered in New York. Accordingly, since there was evidence in the trial record
establishing that venue in the SDNY was appropriate, we must affirm . . . .”]; United
States v. Svoboda (2d Cir. 2003) 347 F.3d 471, 483–484 [execution of trades on the New
York Stock Exchange and American Stock Exchange is sufficient to establish venue in
the Southern District of New York]; SEC v. Suman (S.D.N.Y. 2010) 684 F.Supp.2d 378,
385 [action against defendants residing in Utah and Canada brought in New York where
they purchased stock on New York-based NASDAQ exchange].)
52
Diamond, supra, 19 Cal.4th at p. 1050.) “[T]o the extent” section 25400, subdivisions (a)
and (b), prohibit selling or offering to sell or purchasing or offering to purchase, section
25008 may provide guidance on when that conduct occurs in this state. (Id. at p. 1051.)
But to the extent these two subdivisions embrace other conduct necessary to “effect, alone
or with one or more other persons, a series of transactions,” section 25008 does not
address the term. (See id. at pp. 1051–1052.)
iv.) There Is a Triable Issue As to Causation and Damages
Section 25500, establishing a private right of action for violations of
section 25400, permits liability only when the plaintiff buys or sells a security “at a price
which was affected by such act or transaction” and sustains “damages.” (§ 25500.)
“Such damages shall be the difference between the price at which [the plaintiff]
purchased or sold securities and the market value which such securities would
[otherwise] have had . . . .” (Ibid.)28
Plaintiffs’ damages expert, Shapiro, discussed two theories of causation and
damages: a quantity theory and a signaling theory. Put simply, the quantity theory states
Overstock’s price declined because naked short sales affected the supply of Overstock
shares; the signaling theory states Overstock’s price declined because naked short sales
falsely signaled to the market Overstock was in a worse position than it really was.
Under the quantity—or supply and demand—theory, Shapiro concluded “all fails
to deliver cause harm” and “even if it is determined that some but not all of the fails . . .
are to be included in this case, I could readily calculate the damages to plaintiffs.”
Merrill Clearing presented no expert testimony rebutting Shapiro’s. Instead,
Merrill contends his quantity theory is unsubstantiated conjecture, based solely on
parroted allegations from plaintiffs’ complaint and without citation to authority.
However, Shapiro never quoted plaintiffs’ complaint and cited two academic
28
While plaintiffs assert defendants never raised causation and damages in their
notice of motion for summary judgment, defendants raised these issues on page 42 of
their combined opening memorandum in the trial court. “An omission in the notice may
be overlooked if the supporting papers make clear the grounds for the relief sought.”
(Luri v. Greenwald (2003) 107 Cal.App.4th 1119, 1125.)
53
publications, statements of witnesses in this case, and statements of government officials
in support of his expert opinion that naked short sales create a false impression of
increased supply without concomitantly changing demand, therefore lowering price.
Shapiro also described the process he would use to calculate damages flowing from the
appearance of increased supply from particular fails to deliver.29
This is not a case, then, where an expert failed to wrestle with other experts’
opinions or ignored inconvenient facts. (See Nardizzi v. Harbor Chrysler Plymouth
Sales, Inc. (2006) 136 Cal.App.4th 1409, 1415.) Nor did Merrill challenge Shapiro’s
expertise and ability to opine on what appears to be a basic matter of economics.30
Indeed, cases suggest a supply and demand model can address both causation and
damages. (E.g., L.C. Eldridge Sales Co., Ltd. v. Azen Manufacturing Pte., Ltd. (E.D.
Tex., Nov. 14, 2013, No. 6:11CV599) 2013 WL 7964028; Burton v. City of Alexander
City, Ala. (M.D. Ala., Mar. 20, 2001, No. Civ. A. 99-D-1233-E) 2001 WL 527415, *1,
*10, fn. 31.)
Especially given the lack of admissible expert testimony rebutting Shapiro’s
methods and conclusions, the trial court’s decision to admit his declaration as to the
quantity theory, over defendants’ foundational objections, was proper. (See Imonex
Services, Inc. v. W.H. Munzprufer Dietmar Trenner GMBH (Fed. Cir. 2005) 408 F.3d
1374, 1381 [“Imonex did not present any competent testimony of its own specifically”

29
Thus, Shapiro provided evidence the naked short positions perpetuated and re-
established by the various reset transactions were manipulative, causing external,
“artificial” pressure on the price of Overstock. (See GFL, supra, 272 F.3d at pp. 207–
208.) Indeed, it was essential to the reset trades that “a manipulator act[] as both the
buyer and seller in order to give the false appearance of actual trades without assuming
any actual risk.” (Cohen, supra, 722 F.Supp.2d at p. 424.)
30
Whether a fail to deliver actually “creates” a phantom share or merely gives the
appearance of extra supply—an issue Merrill raises—is not relevant to Shapiro’s
analysis, as the supply and demand model is based on appearances. Shapiro, in turn,
cited witness testimony and government sources, such as the SEC, as supporting his
conclusion naked short sales create the appearance of additional supply.
54
addressing the reliability of expert testimony; “[t]herefore, this court detects no abuse of
discretion in the district court’s admission of” it].)
Since we conclude Shapiro’s declaration as to the quantity effects theory is
sufficient to defeat summary judgment on the matter of causation and damages, we need
not determine whether his signaling effects theory, alone, would be adequate to do so. At
a minimum, the trial court did not err in allowing his testimony on signaling effects as
corroboration of his quantity effects theory.
Merrill contends Shapiro, in his analysis of signaling effects, improperly relied on
a so-called “Granger Analysis,” which some academics, asserts Merrill, believe shows
correlation but not directional causation. Also, Merrill complains that in his signaling
effects analysis, Shapiro—though he allocated 75.3 percent of defendants’ fails to Merrill
Clearing and 24.6 percent to Goldman Clearing—assumed both firm’s fails to deliver
were all abnormal and manipulative and grouped them, to measure signal strength, in one
large clump, as combining the fails would amplify these effects.
There is nothing untoward, given the facts before us, about Shapiro employing a
Granger Analysis to corroborate his independent conclusion that fails to deliver were
“inject[ing] false information into the market” and causing the observed price decline in
Overstock, based upon his review of market conditions, comparable companies, and
events. (See Pickett v. IBP, Inc. (M.D. Ala., Apr. 10, 2003, No. Civ. 96-A-1103-N) 2003
WL 24275809, *1, *4, fn. 3 [“The Granger causality test should not be used in isolation
to determine causation. When used with other tests and models, however, the Granger
test is an appropriate vehicle from which to base an opinion.”].)
Even if Shapiro’s signaling effects analysis was weakened because it depended on
measuring the aggregated “signal” from all fails to deliver, without accounting for
whether they were manipulative, tied to California, or associated with any particular
clearing firm, portions of the signaling effects model still offered corroboration for the
conclusions of the quantity effects analysis. For example, Shapiro’s event study
demonstrated irregular forces (unrelated to Overstock’s performance and the performance
of the larger market) were aggravating the decline on Overstock’s price.

55
 Accounting for causation and damages in a case so complex and fluid is no easy
task, and Shapiro’s declaration suitably acknowledged and accommodated for this, at
least for purposes of defeating summary judgment. (See CILP Associates, L.P. v.
PriceWaterhouse Coopers LLP (2d Cir. 2013) 735 F.3d 114, 126 (CILP Associates) [as
to a section 10(b) claim, a high “level of precision was not required to defeat summary
judgment for the simple reason that the amount of overstatement relates to damages, not
liability. To defeat summary judgment, the plaintiffs merely had to establish a genuine
dispute as to whether they purchased their shares at inflated prices, regardless of the
amount of the inflation.”].) Further, fact witnesses from defendants and third parties
testified to a link between naked short sales and declining prices.
Thus, while not a particularized showing by any means, plaintiffs provided enough
evidence of causation and damages to raise a triable issue. (See CILP Associates, supra,
735 F.3d at p. 126; see also Kurinij v. Hanna & Morton (1997) 55 Cal.App.4th 853, 864
[“causation . . . is ordinarily a question of fact which cannot be resolved by summary
judgment” and “[t]he issue of causation may be decided as a question of law only if,
under undisputed facts, there is no room for a reasonable difference of opinion”]; GHK
Associates v. Mayer Group, Inc. (1990) 224 Cal.App.3d 856, 873 [“Where the fact of
damages is certain, the amount of damages need not be calculated with absolute certainty.
[Citations.] The law requires only that some reasonable basis of computation of damages
be used, and the damages may be computed even if the result reached is an
approximation.”].)
e. Preemption
Merrill Clearing also raises the specter of preemption and exclusive federal
jurisdiction. It maintains California cannot impose liability for conduct that otherwise
complies with Regulation SHO and asserts federal courts have exclusive jurisdiction over
Regulation SHO claims.
Merrill would be correct if plaintiffs simply alleged violations of Regulation SHO.
Section 27 of the SEA provides: “The district courts of the United States and the United
States courts of any Territory or other place subject to the jurisdiction of the United

56
States shall have exclusive jurisdiction of violations of this title [citation] or the rules and
regulations thereunder, and of all suits in equity and actions at law brought to enforce any
liability or duty created by this title [citation] or the rules and regulations thereunder. . . .”
(15 U.S.C. § 78aa, subd. (a); see Matsushita Elec. Indus. Co., Ltd. v. Epstein (1996)
516 U.S. 367, 381; Lippitt v. Raymond James Financial Services, Inc. (9th Cir. 2003)
340 F.3d 1033, 1037 (Lippitt) [“any claim that properly falls within the scope of § 27 is
necessarily federal in character”].)
But section 28 of the SEA provides: “ ‘The rights and remedies provided by this
chapter shall be in addition to any and all other rights and remedies that may exist at law
or in equity . . . Except as otherwise specifically provided in this chapter, nothing in this
chapter shall affect the jurisdiction of the securities commission (or any agency or officer
performing like functions) of any State over any security or any person insofar as it does
not conflict with the provisions of this chapter or the rules and regulations
thereunder. . . .’ ” (Lippitt, supra, 340 F.3d at p. 1037, quoting 15 U.S.C. § 78bb(a)(1)–
(2).)
“On its face, § 28 preserves both common law and statutory authority over
securities matters and thus reflects Congressional recognition of state competence in the
securities field.” (Lippitt, supra, 340 F.3d at p. 1037; Gold v. Blinder, Robinson & Co.,
Inc. (S.D.N.Y. 1984) 580 F.Supp. 50, 53–54 [“The exclusive jurisdiction of federal courts
over claims under the 1934 Act does not bar a plaintiff from pursuing at its option
cognate remedies based entirely upon state law.”].) This has been recognized by
California courts for as long as the modern Corporate Securities Law has been in force.
(Roskind v. Morgan Stanley Dean Witter & Co. (2000) 80 Cal.App.4th 345, 352
(Roskind) [“ ‘Congress plainly contemplated the possibility of dual litigation in state and
federal courts relating to securities transactions.’ ”]; Twomey v. Mitchum, Jones &
Templeton, Inc. (1968) 262 Cal.App.2d 690, 704–706 [“As has already been pointed out,
the rights and remedies provided by the Securities Exchange Act of 1934 “ ‘shall be in
addition to any and all other rights and remedies that may exist at law or in equity.’ ”].)

57
 In Lippitt, defendants sought removal of plaintiff’s California Unfair Competition
Law claim, asserting it was a thinly-veiled attempt to enforce New York Stock Exchange
(NYSE) rules issued under the SEA. (Lippitt, supra, 340 F.3d at p. 1036.) Although the
plaintiffs’ complaint tracked the language of the NYSE rules, defendants could not
“federalize” the case on that basis. (Id. at p. 1037.) Plaintiff had challenged defendants’
“conduct solely under state law—irrespective of whether it is legal under” NYSE rules.
(Id. at p. 1042.) “That the specific goal of protecting California customers from
dishonest business practices, whether by brokers or otherwise, may comport with the
broader regulatory goals of the Exchange Act and certain NYSE rules and regulations is
not enough to sweep Lippitt’s complaint within the exclusive jurisdictional ambit of § 27
of the SEA.” (Id. at pp. 1043–1044;31 see also Dennis v. Hart (9th Cir. 2013) 724 F.3d
1249, 1252 [complaint’s “repeated references” to federal law “insufficient to confer
jurisdiction” when state, not Federal claims alleged]; Roskind v. Morgan Stanley Dean
Witter & Co. (N.D. Cal. 2001) 165 F.Supp.2d 1059, 1066–1067 [granting motion to
remand, as state common law and the UCL, not NASD rules, defined the scope of
defendant’s liability; violations of NASD rules “are a method to assess defendant's
misconduct, but establishing a violation is not a necessary element of plaintiff’s
claims”].)

31
Key to Lippitt was the lack of any dispositive federal question. (Lippitt, supra
340 F.3d at p. 1042.) This distinguishes Lippitt from Pet Quarters, Inc., supra, 559 F.3d
772, Whistler Investments, Inc. v. Depository Trust and Clearing Corp. (9th Cir. 2008)
539 F.3d 1159 (Whistler), and Nanopierce Technologies, Inc. v. Depository Trust and
Clearing Corp. (2007) 123 Nev. 362 (Nanopierce), cited by Merrill. In all three cases,
plaintiffs challenged the federally-approved operations of a federally-authorized “Stock
Borrow Program.” (Pet Quarters, supra, 559 F.3d at p. 776; Whistler, supra, 539 F.3d at
p. 1167; Nanopierce, supra, 123 Nev. at p. 379) Each court perceived plaintiffs to be
seeking “a determination from a state factfinder that a program declared efficient in rules
approved under federal law was in fact not . . . because imposing state standards of
efficiency would interfere directly with Commission approved operation of” the Stock
Borrow Program. (Pet Quarters, supra, 559 F.3d at p. 781; Whistler, supra, 539 F.3d at
pp. 1166–1167; Nanopierce, supra, 123 Nev. at p. 379.)
58
 Although plaintiffs broadly discuss Regulation SHO, their claim under
sections 25400 and 25500 remains a state-law claim.32 To prove market manipulation
under section 25400, there are a plethora of requirements, none of which is a predicate
violation of Regulation SHO or any other federal securities statute or rule. State laws
against purposeful market manipulation in no way conflict with the SEA regime,
including implementation of Regulation SHO.33
IV. DISPOSITION
The judgment is affirmed as to Goldman, Sachs & Co., Goldman Sachs Execution
& Clearing, L.P., and Merrill Lynch, Pierce Fenner & Smith Inc.. As to Merrill Lynch
Professional Clearing Corp., the judgment is reversed as to plaintiffs’ California
securities law claim under sections 25400 and 25500, subdivision (b), and is affirmed in
all other respects.
The parties are to bear their own costs on appeal.

32
We note that the instant case was for some time consolidated with Avenius v.
Banc of America Securities (S.F. Super. Ct. case No. 06-453422), which also concerns
manipulative naked short selling. The defendants in Avenius, represented by some of the
same lawyers as defendants here, sought removal to the federal district court. The
plaintiff, represented by some of the same lawyers as plaintiffs here, opposed and sought
remand. Citing Lippitt, the district court remanded the case, concluding the bank’s
“intent with respect to delivery [of stock] is central to the proof of Plaintiffs’ claims” and
as such, “the duty or liability is not created by federal law [namely, Regulation SHO];
rather it is created by state statute.” A “substantial disputed question of federal law [is
not a] necessary element of the Section 25400 claim.” (Avenius v. Banc of America
Securities LLC (N.D. Cal., Dec. 30, 2006, No. C06-04458 MJJ) 2006 WL 4008711.) In
this case, defendants did not attempt removal.
33
Plaintiffs’ request for judicial notice filed June 17, 2013, is hereby denied.
59
 _________________________
Banke, J.

We concur:

_________________________
Margulies, Acting P. J.

_________________________
Dondero, J.

A135682, Overstock.com, Inc. v. Goldman Sachs & Co.

60
Trial Judge: The Honorable John E. Munter

Trial Court: San Francisco County and City Superior Court

Theodore A. Griffinger, Jr., Ellen A. Cirangle and Jonathan E. Sommer and Lubin Olson
Niewiadomski LLP and Myron Moskovitz for Plaintiffs Overstock.com, Inc. et al.
Joseph Edward Floren and Morgan, Lewis & Bockius LLP for Defendants Goldman
Sachs & Co. et al.
Matthew David Powers, Andrew J. Frackman and Abby F. Rudzin and O’Melveny &
Myers LLP for Defendants Merrill Lynch, Pierce Fenner & Smith, Inc. et al.

61