Scattered v. Chicago Stock Exchange

Plaintiff,)
)
v.) Hon. Lee Preston)
CHICAGO STOCK EXCHANGE, INC.,) No. 97 L 11478
a Delaware corporation, MIDWEST )
CLEARING CORPORATION, a Delaware)
corporation, ALLAN A. BRETZER, )
)
Defendants.)

2. Defendant CHX is a Delaware non-stock, mutual benefit corporation licensed to do

business in Illinois with its principal place of business in Chicago, Illinois. It is prohibited by its

Certificate of Incorporation from paying dividends. The CHX is registered as a national securities

exchange within the meaning of § 6(a) of the Securities Exchange Act of 1934 ("1934 Act"), and is also a

self-regulatory organization within the meaning of § 3(26) of the 1934 Act. The CHX operates to serve

and advance the interests of its members to whom it provides trade recording, trade execution, and other

services. The CHX is also intended to operate for the benefit of the investing public, both through the

services it provides CHX members and through its market regulation activities.

3. Defendant MCC is a Delaware corporation and a wholly-owned subsidiary of the CHX

with its principal place of business in Chicago, Illinois. From August 1992 until on or about January 15,

1996, the MCC acted as a clearing agency, as defined by § 3(23) of the 1934 Act. A clearing agency

receives securities from those who have sold them and delivers them to the buyers, collecting and paying

the amounts due in connection with those receipts and deliveries. Members in the MCC are known as

"participants."

4. Defendant Allan A. Bretzer has been the Senior Vice President of Market Regulation for

the CHX since 1994. From 1980 to 1994, Bretzer was the Vice President of Market Regulation. Market

Regulation is charged with enforcing the CHX Rules and regulations approved by the Securities and

Exchange Commission ("SEC") and the provisions of the federal securities laws that govern CHX

members and their activities. Bretzer controls virtually every aspect of the CHX's market regulation

functions. Bretzer is a resident of Chicago, Illinois.

5. Plaintiff Scattered is an Illinois corporation with its principal place of business in

Chicago, Illinois. Scattered at all relevant times was a broker-dealer registered under the 1934 Act and a

member of the CHX. From August 1992 until October 1993, Scattered was a participant in the MCC.

Scattered's principal business during the relevant time herein was buying and selling stocks on the CHX

and other securities exchanges as a market maker. A market maker holds itself out as being willing to buy

and sell a security on its own account on a regular or continuous basis, even when no other purchaser or

seller is willing to do so. By making a market in a specified security, the market maker provides liquidity

in the issue, without which it would trade at artificial prices based on its scarcity, rather than its intrinsic

value.

9. In May and June 1993, Scattered conducted an arbitrage in securities of the bankrupt LTV

Corporation ("LTV"). LTV emerged from bankruptcy proceedings on May 26, 1993, with a court-

approved Bankruptcy Reorganization Plan ("Plan"). Confirmation of the Plan provided that on June 28,

1993, the date the Plan would become effective ("Effective Date"), all existing publicly traded securities of

LTV, including its common stock ("old LTV stock"), could be exchanged for equivalent securities in the

reorganized LTV. For each 100 shares of old LTV stock owned, a shareholder would receive on June 28,

1993, or as soon thereafter as practicable, one warrant ("LTV Warrant") good for the purchase of one half

share of stock in the reorganized LTV Corporation ("new LTV stock"). On the Effective Date, each LTV

Warrant was valued, according to the Plan, at $3.22. Consequently, on the Effective Date each share of

old LTV stock was worth about three cents.

10. From May 26 through June 28, 1993 (the "LTV trading period"), Scattered sold old

LTV stock at prices as high as 30 to 40 cents per share. Because Scattered was a market maker it was

exempt from any requirement that it deliver the old LTV stock by a specified settlement date. Scattered

also purchased at the same time equivalent LTV Warrants and new LTV stock on the "when issued"

market to be delivered in settlement of the sales of the old LTV stock in accordance with exchange rules

governing settlement of contracts. Because each share of old LTV stock sold for substantially more than

the roughly three cents it cost to provide equivalent securities in the new LTV Corporation, Scattered

profited from the LTV arbitrage.

11. While Scattered was conducting its arbitrage in LTV securities, other CHX members

were simply selling old LTV stock short, without purchasing equivalent new LTV securities, expecting

the price of old LTV stock to decline to less than they sold it for, so that when they had to buy the stock to

deliver to their purchasers, they would make a profit. Members who pursued such a strategy included

CHX Governor David Sullivan, a principal in the firm of Sullivan & Long.

12. Still other CHX members, like Dempsey & Company ("Dempsey"), were buying old

LTV stock, hoping uninformed investors would believe it was stock in the reorganized company and

therefore artificially push up the price. That way, Dempsey could later sell its old LTV stock for more than

it paid. Sales of old LTV stock by Scattered and others resulted in the price going down, however, in the

direction of its true economic value under the Plan. As a result, during the LTV trading period it appeared

Dempsey was going to lose money when it sold its old LTV stock.

13. On or about May 28, 1993, Caroline B. Austin, a Dempsey principal, confronted

Scattered's agent and nominee Laura Bryant, complained about Scattered's sales of old LTV stock, and

demanded to know when Scattered was going to stop selling. The only place Scattered's position in the

stock was reflected was in nonpublic records maintained by the CHX and its subsidiaries, to which

governors and directors of the CHX and its subsidiaries had access. Austin was a director of one of those

subsidiaries, the Midwest Securities Trust Company.

14. On information and belief, Austin or another Dempsey representative also complained to

Bretzer or others at the CHX Market Regulation department about Scattered's sales of old LTV stock.

15. Dempsey's complaint carried weight at the CHX due in part to its special relationship

with Bretzer and the Market Regulation department. A Dempsey principal has allowed Bretzer free use of

his condominium in Hawaii. For his part, Bretzer has declined to enforce CHX Rules against Dempsey

and has improperly influenced the award to Dempsey of assignments to trade as a specialist in particularly

lucrative stocks.

16. On June 4, 1993, and without prior notice the MCC withheld $2.1 million of Scattered's

"pay/collect" funds (the amount due daily to or from Scattered for settled trades). The MCC did not

identify any basis in the MCC Rules for its refusal to tender the funds, nor did it identify how it calculated

the amount of money being withheld.

17. The following business day, Monday, June 7, after 3:00 p.m., when the banks were

closed for business and could no longer transfer money, the MCC informed Scattered that it was required

to deposit, in addition to the $2.1 million already withheld from Scattered, approximately $4.7 million,

due immediately. Not until the following morning did the MCC explain that it was requiring Scattered to

establish a Supplemental Participant's Fund ("SPF").

18. When Scattered first became a participant of the MCC in August 1992, it entered into a

Participant's Fund Agreement with the MCC. The Participant's Fund was intended to protect the MCC

against losses resulting from a participant's failure to deliver securities or to pay amounts due on the

purchase of securities. The amount of the Participant's Fund was dictated by a formula based on a

participant's anticipated usage of MCC services.

19. Scattered's SPF, however, was calculated under a much different formula. Scattered

was required to deposit 3.22 cents per share of its undelivered old LTV stock and 100 percent of the

estimated market value of its purchases of "when issued" LTV securities. The MCC also required a SPF

deposit of 100 percent of Scattered's short value positions in non-LTV securities. (A "short value

position" is a position for which the net open commitment resulting from sales and borrowings exceeds

the net open commitment from purchases of the security.)

20. In devising the SPF formula for Scattered's positions in LTV securities, the MCC

recognized that old LTV stock and the "when issued" LTV securities were equivalent for some purposes

but not others. The MCC's inconsistent position led it to require twice the SPF deposits that would have

been necessary even assuming there was any risk in Scattered's LTV arbitrage, which there was not.

21. On or about June 14 or 15, 1993, the MCC altered the SPF formula so that Scattered

was no longer required to deposit the value of its purchases of "when issued" LTV securities. In so doing

the MCC conceded that there was no risk associated with Scattered's purchases of those securities.

22. In order to continue clearing trades through the MCC, Scattered had no choice but to

make the SPF payments. By June 30, 1993, Scattered had deposited $13,153,274.82 in the SPF. No

other MCC participants, including David Sullivan and William Billings, both of whom were selling old

LTV stock short (and who sat on the CHX Board of Governors at the time), were required to maintain

SPF's in connection with their positions in old LTV stock.

23. Even after Dempsey's complaints and the SPF requirements imposed on Scattered, on

June 17, 1993, Cardin confirmed in an internal memorandum that Scattered's LTV arbitrage was not

violating any rules. (Exhibit 1). Nonetheless, just five days later, Cardin advised Scattered by telephone

that it could no longer sell old LTV stock. Cardin provided no explanation or justification for the directive.

24. Shortly after Cardin's call, Andrew Jahelka and Richard Nichols, principals of

Scattered, went to the Market Regulation office to discuss the directive not to sell old LTV stock. When

they asked who issued the directive, Cardin pointed to Bretzer's office. Jahelka and Nichols then asked

Bretzer to explain his action. Bretzer said, "I've been looking for a way to stop you and I haven't been

able to find one until now," indicating he had been under pressure from someone, presumably Dempsey

and perhaps others as well, for some time to bring a halt to Scattered's trading. Jahelka and Nichols asked

what rule allowed the CHX to halt Scattered's sales in old LTV stock. Bretzer refused to identify any rule

or other authority to support the directive.

25. Jahelka and Nichols explained to Bretzer that the current investor demand for old LTV

stock was approximately 10 million shares each day and that by effectively preventing market makers

from selling any more old LTV stock, the CHX was decoupling two inextricably linked markets, the

markets for old and new LTV securities, and eliminating liquidity in old LTV stock. Bretzer's response

was that it was not Scattered's job to provide liquidity, a response in direct contradiction of the 1934 Act's

definition of a market maker. Bretzer, when confronted with the fact that by disrupting Scattered's

arbitrage in LTV securities, the CHX would also force the price of old LTV stock to skyrocket without a

corresponding increase in the value of the LTV Warrants, responded that he did not care.

26. At that point, Jahelka and Nichols requested that the directive to Scattered not to sell old

LTV stock be put in writing. As they left, Bretzer told them, "I'm going to make sure that you boys are

never able to do this again." Shortly after the LTV trading period closed, CHX President Homer

Livingston reiterated to Scattered's principals that Scattered should leave the Exchange.

27. Within hours of the meeting with Bretzer on June 22, 1993, Cardin delivered a letter to

Scattered, prepared in consultation with legal counsel, stating that it could not sell any more LTV

securities on the CHX "unless and until your firm can deliver or borrow those shares for delivery in

accordance with the "CASH" delivery requirements of [CHX] Article XXII, Rule 3." (Exhibit 2). On its

face, it is clear Article XXII, Rule 3 does not impose any delivery requirement on market maker trades.

(Exhibit 3). Moreover, none of the trades to which the cash delivery requirement would have applied

could have been settled in accordance with the directive, because by the time they settled, the shares would

have already been sent to LTV's transfer agent in anticipation of the upcoming exchange for new LTV

securities on the Effective Date of June 28, 1996. While Scattered protested Bretzer's directive, it

nevertheless complied by ceasing to sell LTV securities on the CHX, confining its sales to other

exchanges.

28. Scattered, through one of its principals, sought assistance from David Sullivan, a CHX

Governor, in obtaining relief from Bretzer's directive. Unbeknownst to Scattered at the time, Sullivan had

been selling short old LTV stock.

29. Sullivan did nothing to assist Scattered, even though he was fully aware of the market

distortions that would result from Bretzer's directive. Instead, Sullivan used the information Scattered had

given him in his capacity as a CHX Governor to further his own interests. Based on the non-public

information regarding Scattered's position in old LTV stock and Bretzer's directive, Sullivan became

concerned that Scattered's inability to meet the new same-day delivery requirement would result in a large

number of buy-ins of Scattered's position, which, he erroneously assumed, would artificially force up the

price of old LTV stock. If the price of old LTV stock rose, Sullivan would have to pay more to buy shares

to deliver than he had been paid for the shares he sold. To cover his short position and to exploit what he

believed would be the rising price of old LTV stock, Sullivan began purchasing old LTV stock and

eventually took a long position in that stock.

30. In yet another effort to obstruct Scattered's trading, Bretzer confiscated tickets

necessary for Scattered to transfer certain positions in old LTV stock from its account at Bear Stearns to its

own clearing account at the MCC. Bretzer wrongfully retained the tickets for two days. During that time,

Bear Stearns repeatedly called Scattered to obtain the tickets. Bretzer's confiscation of Scattered's tickets

damaged Scattered's business relationship with Bear Stearns.

31. On June 28, 1993, the LTV Plan Effective Date, the LTV Warrants and new LTV stock

were issued and old LTV stock was extinguished. By August 5, 1993, Scattered had settled all its sales of

old LTV stock, in accordance with exchange rules governing the settlement of contracts, by delivering the

new LTV securities to the purchasers of old LTV stock, all of whom accepted the equivalent securities.

32. On July 7, 1993, Sullivan commenced a federal class action lawsuit regarding

Scattered's LTV trading. Sullivan's suit was dismissed for failure to state a claim for fraud and failure to

demonstrate any damages resulting from Scattered's arbitrage in LTV securities. Sullivan & Long, Inc. v.

Scattered Corp., 844 F. Supp. 416 (N.D. Ill. 1994). An amended complaint was filed and again

dismissed, this time with prejudice. The dismissal was affirmed by the Seventh Circuit Court of Appeals.

Writing on behalf of a unanimous panel, Chief Judge Posner held (1) the LTV trading was an arbitrage;

(2) the cash delivery directive imposed against Scattered did not exist in the CHX Rules or Rule

Interpretations in effect during the LTV trading period; (3) the LTV arbitrage did not constitute fraud or

market manipulation; (4) the LTV arbitrage did not harm any investors; and (5) the LTV arbitrage

benefitted the securities markets. Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857 (7th Cir. 1995)

(Exhibit 4).

33. After the LTV trading period ended, the MCC again changed the method of calculating

Scattered's deposits to the SPF. The MCC claimed a more appropriate valuation of the LTV warrants

would be their trading price, rather than their value as calculated under the Plan. Though the Plan had

become effective, the MCC insisted that Scattered continue making SPF deposits until LTV settled, at

which time it would review the matter again. Scattered had no choice but to comply with the new formula

for SPF deposits and made all the deposits demanded by the MCC. No other MCC participants had to

meet the SPF requirements imposed on Scattered.

34. By August 5, 1993, Scattered had delivered equivalent new LTV securities to everyone

to whom it had sold old LTV stock. Scattered's position in old LTV common stock was thus eliminated.

The MCC nevertheless continued to demand and collect SPF deposits from Scattered for non-LTV

positions beyond any amounts required of other MCC participants and far in excess of the amount

necessary to cover any alleged risk presented to the MCC by positions still held by Scattered in other

securities.

35. On August 18, 1993, Scattered demanded that $10,652,344 held by the MCC in the

SPF be returned.

36. On August 24, 1993, the MCC reduced the amount required in Scattered's SPF. The

MCC changed the calculation of the SPF from 100% of Scattered's non-LTV short value positions to 50%

of those positions. Even under this arbitrary formula, however, Scattered was required to maintain more

on deposit in the SPF than other MCC participants and more than was necessary to cover any alleged risk

to the MCC from Scattered's short value positions.

37. In October 1993, the MCC ceased to act generally for Scattered. Scattered did not

object to the MCC's decision or seek to appeal it. At the direction of the MCC, Scattered proceeded to

reduce its positions at the MCC by delivering in securities against its remaining short value positions and

moving positions out to other securities firms.

38. The MCC obstructed Scattered's efforts to move its positions. In the Spring of 1994,

the MCC unreasonably delayed for three weeks Scattered's request to move certain positions in Wang

class B and C stock, its only remaining open positions at the MCC, to Prudential Securities, Inc.

("Prudential"), the firm through which Scattered was by then clearing its market maker trades. The MCC

eventually required an SPF deposit of $766,041 from Prudential on Scattered's behalf before it would

transfer the Wang positions. The MCC also withheld $152,615 of Scattered's Participant's Fund deposit

for certain unspecified legal fees. (Exhibit 5).

39. In response to the MCC's refusal to return Scattered's funds, Leon Greenblatt, a

principal of Scattered, confronted CHX President Homer Livingston and Vice Chairman John Fletcher on

the trading floor of the CHX and demanded the return of Scattered's money. Fletcher reacted by

summarily and permanently expelling Greenblatt from the floor, thus denying him access to the services

of the Exchange and preventing him from collecting information pertinent to Scattered's strategic business

decisions. The CHX gave Greenblatt no notice of charges to justify the expulsion and no right of appeal.

40. Upon review, the SEC determined the CHX's failure to give Greenblatt notice of the

charges against him, failure to permit him to address the appropriate CHX committee, either verbally or in

writing, on the matter, and failure to afford him a right of appeal required that his summary expulsion be

vacated. The SEC ruled, "Contrary to the CHX's assertion, we do not believe that Greenblatt was given

`all the `process' he was due.'" (Exhibit 6). As a result, the matter was remanded, whereupon the CHX

dropped it.

41. Once Scattered ceased being an MCC participant and no longer had positions at the

MCC, there was no basis under the MCC Rules for it to retain any of the funds in Scattered's Participant's

Fund or its SPF. The MCC, however, has failed to return $70,532.03 of Scattered's funds. The MCC's

wrongful SPF requirements and delays and refusals in returning Scattered funds resulted in lost profits

from the use of those funds.

42. A CHX member may become a registered market maker "upon application subject to

such requirements of training, experience, and competence as the Exchange may impose." CHX Rules,

Article XXXIV, Rule 13. A registered market maker may make market maker trades in any security (or

"issue"). CHX Rules, however, require that 50 percent of a market maker's quarterly share volume must

be conducted in specifically assigned issues. CHX Rules, Article XXXIV, Rule 16. Scattered became a

registered market maker in August 1992, and remained so throughout the relevant time herein.

43. Scattered also became an MCC participant in 1992, at which time the MCC

automatically opened an account for Scattered designated with a "V" prefix -- its "VLIZSA" account -- in

which its market maker trades were recorded. No CHX Rule at the time required, however, that a market

maker maintain a "V" account.

44. On July 23, 1993, the MCC announced that effective July 26, it would cease to act for

Scattered as to the acceptance of any original trade data. Sometime shortly thereafter, Cardin instructed

Laura Bryant, Scattered's agent, to declare that she was no longer acting as a market maker on Scattered's

behalf. Cardin informed Bryant that Scattered was no longer a market maker because as of July 26 it did

not have a "V" account at the MCC. Cardin could not cite any CHX Rule requiring Bryant to deregister

herself or Scattered. Bryant refused to do so.

45. On July 26, 1993, the CHX deleted Scattered's VLIZSA account from the CHX's

computer system. (Exhibit 7). Later, testifying under oath in a CHX proceeding, Cardin testified that the

CHX "automatically" delisted Scattered from its assigned issues as a result of the MCC's July 23, 1996

cease to act decision. (Exhibit 8). In fact, Scattered was not "automatically" delisted in its assigned issues.

Scattered was delisted as the result of the unilateral, unauthorized, and improper action of the CHX.

(Exhibit 9). The MCC cease to act decision and the deletion of Scattered's VLIZSA account from the

CHX's computer system had no impact on Scattered's registration as a market maker, and it continued to

trade as a market maker.

46. Despite Scattered's continuing status as a duly registered market maker, the CHX

engaged in a concerted effort to prevent Scattered from trading as a market maker. All securities trades

executed on the CHX and other exchanges, including Scattered's market maker trades, must be processed

through a clearing firm. Without a clearing firm willing to process its trades, Scattered could not remain in

the securities market making business.

47. In the fall of 1993, Scattered maintained certain of its market maker positions,

including positions in Wang Laboratories, at the clearing firm of Reynolds Kendrick Stratton, Inc.

("RKS"). On information and belief, the CHX misrepresented to RKS that Scattered was not a market

maker. The CHX's statements to RKS were false; Scattered remained a registered market maker during

1993 and throughout the relevant time herein.

48. In reliance on the CHX's misrepresentations of fact, RKS refused to extend to

Scattered the more favorable capital requirements available to market makers and required Scattered to

deposit $2.50 per share for all of its positions. The deposits required by RKS as a result of the CHX's

misrepresentations were prohibitive and Scattered was forced to cease clearing market maker trades

through RKS.

49. No later than June 1994, the CHX learned that Scattered was clearing its market maker

trades through Prudential. For a year, the CHX voiced no objection to this arrangement. Sometime before

June 8, 1995, however, Prudential asked the CHX whether Scattered's assigned issues included

Transworld Airlines, Inc. ("TWA"). (See Exhibit 10). On information and belief, the CHX failed to

advise Prudential that Scattered was not required to be assigned in TWA to make market maker trades in

the issue, and also informed Prudential that Scattered could not effect market maker trades in any issue on

any securities exchange. The CHX claimed Scattered could not trade as a market maker in any issue,

including TWA, because Prudential had not established a "V" account for Scattered at the MCC in which

Scattered's market maker trades could be recorded. (Id.).

50. The CHX's "V" account requirement did not exist in the CHX Rules or Rule

Interpretations, as the SEC later held. (Exhibit 11). The CHX's statements to Prudential that Scattered

could not trade as a market maker were misrepresentations of fact. Scattered continued to be a registered

market maker able to trade as such in any security, including TWA. Bretzer himself later confirmed that

even though the MCC had closed Scattered's "V" account, "Scattered continues to be qualified as a CHX

market maker firm." (Exhibit 7).

51. As a result of the CHX's misrepresentations of fact, Prudential refused to afford

Scattered market maker status for any of its trading. Consequently, Scattered was unable to conduct the

arbitrage trading strategies which comprised the majority of its business.

52. Also because of the CHX's misrepresentations of fact and Prudential's resulting

decision to cease recognizing Scattered's market maker status, Scattered lost the ability to complete the

other side of arbitrages in which it was engaged at the time. One of those arbitrages was in the securities

of Merry Go Round, in which Scattered lost approximately $800,000 because it could not complete the

sell side of the arbitrage.

53. A month after the CHX's misrepresentations to Prudential, Bretzer announced that

Scattered was not assigned to 13 specific issues. (Exhibit 7, n.1). That statement was false. Scattered was

without dispute continuously assigned to at least one of those issues, Unicom (trading under the UCM

symbol), formerly Commonwealth Edison.

54. Nevertheless, in response to Bretzer's claim that Scattered was not assigned, on

August 3, 1995, Scattered submitted a written request for assignment in the 13 issues. Scattered submitted

its request to the Market Maker Subcommittee of the CHX's Committee on Floor Procedures, in

accordance with CHX Rules, Article XXXIV, Rule 13. Bretzer improperly intercepted Scattered's request

for assignment. Over two months later, Bretzer informed Scattered that he would not allow the request for

assignment to be considered until a clearing firm established a "V" account for Scattered at the MCC.

(Exhibit 12).

55. On review of Bretzer's wrongful interception and refusal to process Scattered's

request for assignment in the 13 issues, the SEC held:

[T]he Exchange's determination not to process Scattered's
application for registration as a market maker limits the firm's
access to the CHX's services. The Exchange has not identified,
nor have we discovered, any CHX rule that required Scattered
to do anything more than it did in seeking to have its application
reviewed by the Exchange.

In re Scattered Corp., Release No. 37249 at 3-4 (May 29, 1996) (Exhibit 11).

56. On January 16, 1996, a new CHX Rule, Article XXI, Rule 4(b), became effective,

requiring for the first time that market maker trades be recorded in "V" accounts. Rule 4(b) did not impose

new requirements for registration as a market maker, however, and Scattered remained a registered market

maker after January 16.

57. In or about February 1996, Scattered began making market maker trades in the

securities of Morrison-Knudsen ("MRN"), a company emerging from bankruptcy, pursuant to an

arbitrage strategy similar to that employed in LTV. Scattered submitted a request for market maker

assignment in MRN, along with four other issues, on February 27, 1996. (Exhibit 13).

58. Though Rule 4(b) did not affect the procedure for assignment of issues to market

makers, on March 12, the CHX informed Scattered, "we are holding all of Scattered's pending requests to

14). The documentation referred to in the March 12 letter was a Market Maker Trade Recording

Agreement to be executed by Scattered and its clearing firm, Oppenheimer & Co., Inc. ("OPCO"), to

establish a "V" account in which to record Scattered's market maker trades. (Id.).

59. Scattered executed the Market Maker Trade Recording Agreement with OPCO, who

submitted it to the CHX. The CHX approved the Agreement on April 19, 1996 and determined that the

"Effective first trade date" for Scattered's "V" account was April 24, 1996. (See Exhibit 15).

Notwithstanding this "effective first trade date," three weeks later, in a letter dated May 13, 1996, Cardin

advised OPCO that Scattered's "V" account still had not been activated. Cardin then informed OPCO that

it had to submit an Additional Number Agreement with the National Securities Clearing Corporation

before Scattered's "V" account would become active. (Exhibit 16).

60. On May 17, 1996, Scattered was informed that the final clerical steps necessary to

activate its "V" account, which had been approved and in place since April 19, were being taken. That

same day, the CHX informed its members that Scattered's "V" account would be activated as of May 22,

1996. (Exhibit 17). Scattered therefore gave written instructions to OPCO on May 17 to transfer its market

maker positions, including its positions in MRN, to its "V" account. The transfer of Scattered's market

maker positions to its "V" account would have put Scattered in full compliance with the recording

requirements of Rule 4(b). Nothing in Rule 4(b) or any other rule of the CHX prohibited transfer of the

positions to Scattered's "V" account.

61. OPCO responded to Scattered's direction by asking the CHX whether Scattered "was a

market maker in MRN at any time during the period from February 27 through the present." On behalf of

the CHX, Liberti falsely answered, "Scattered has not been able to conduct a market maker business or

effect market maker trades under CHX Rules and procedures, in any issue, including Morrison Knudsen,

during the time period covered in your letter. This is because Scattered did not have in place a market

maker account (a "V" account) in which to record market maker trades as required under CHX Article

XXI, Rule 4." (Exhibit 18). Liberti's statements were false because Scattered was a registered market

maker able to trade as such in any security, including MRN, throughout the time period described by

OPCO.

62. Liberti's statements were false for the additional reason that Scattered did in fact have a

"V" account "in place" no later than April 19, 1996, when the CHX approved the Market Maker Trade

Recording Agreement. As of that date, Scattered had fully complied with the CHX's instructions of March

12. The CHX acknowledged that Scattered's "V" account was in place by assigning it an "effective first

trade date" of April 24, 1996.

63. In his letter to OPCO, Liberti also stated, "[A]t no time has an assignment in

Morrison Knudsen been made to Scattered as a market maker." (Exhibit 18). Liberti failed to inform

OPCO that assignment in MRN was not required to trade as a market maker in the issue. He further failed

to inform OPCO that Scattered had requested assignment in MRN on February 27, 1996. Liberti also

failed to inform OPCO that the CHX had refused to process Scattered's request for assignment to trade in

MRN at that time only because of Rule 4(b), which should not have affected approval of the request for

assignment, and in any event, that once Scattered's "V" account was in place on April 19, the CHX had

improperly failed to acknowledge the assignment.

64. The CHX had a duty to inform OPCO of the above information relevant to Scattered's

status as a market maker and request for assignment in MRN. The CHX's misrepresentations of fact and

material omissions regarding Scattered's market maker status and ability to conduct market maker trades

misled OPCO into believing, as the CHX had intended, that Scattered had not been able to effect market

maker trades in MRN. (See Exhibit 19).

65. In reliance on the misrepresentations of fact and material omissions regarding

Scattered's market maker status, OPCO determined that none of Scattered's trades in MRN from February

27 through May 9, 1996 were entitled to the delivery exemptions and capital requirements afforded market

makers (Exhibit 19), and it refused to transfer Scattered's MRN positions to its "V" account where they

could be recorded. (Exhibit 20). OPCO informed Scattered that if it could not locate or borrow MRN

shares that were short in Scattered's account, OPCO would execute a buy order for those shares. (Exhibit

19). Scattered was unable to locate or borrow the MRN shares and OPCO bought in the unsatisfied short

positions. As a result, Scattered was prevented from completing its arbitrage in MRN and earning the

substantial profits that would have resulted.

66. Also as a result of the CHX's misrepresentations and material omissions regarding

Scattered's market maker status and request for assignment in MRN, on May 30, 1996, OPCO terminated

its agreement to clear Scattered's trades, forcing Scattered to search for a new clearing firm and further

disrupting Scattered's business.

67. The CHX and Bretzer owe CHX members, such as Scattered, fiduciary duties of due

care, good faith and fairness. Scattered reposed a special confidence in the CHX and Bretzer who were

bound to act in good faith with due regard to the interests of Scattered.

68. The CHX and Bretzer breached their fiduciary duties of due care, good faith and

fairness owed Scattered by:

a. imposing a bogus cash delivery directive on Scattered's trading in LTV securities;

b. threatening the livelihood of Scattered's principals;

c. wrongfully confiscating Scattered's trading tickets;

d. summarily expelling one of Scattered's principals, Greenblatt, from the CHX floor,

in violation of his due process rights;

e. unilaterally and without authority delisting Scattered in its assigned issues;

f. imposing a "V" account requirement on Scattered when the CHX Rules contained

no such requirement;

g. misrepresenting to RKS that Scattered was not a market maker;

h. misrepresenting to Prudential that Scattered could not trade as a market maker in

TWA;

i. wrongfully intercepting Scattered's request for market maker assignment in 13

issues;

j. refusing to process Scattered's request for market maker assignment in 13 issues

on the basis of the so-called "V" account requirement;

k. misleading OPCO, through false statements and material omissions, to believe that

Scattered had never been qualified as a market maker in MRN.

69. The CHX and Bretzer further breached their fiduciary duties of due care, good faith

and fairness owed to Scattered by causing or not preventing the MCC from:

a. requiring Scattered to maintain an SPF far beyond the risk, if any, presented to the

MCC;

b. requiring Scattered to maintain an SPF when the MCC did not require other

participants to maintain such a fund;

c. requiring Scattered to make additional deposits to the SPF after the short value

positions of old LTV common were eliminated;

d. retaining Scattered's funds when the MCC had no right to do so;

e. unreasonably delaying movement of Scattered's positions in Wang stock to its

clearing firm.

70. The CHX and Bretzer willfully and maliciously breached their fiduciary duties of due

care, good faith and fairness owed to Scattered in retaliation for Scattered's legitimate trading strategies

that put at risk the interests of prominent and influential members of CHX, including Dempsey &

Company and David Sullivan, who served on the boards of the CHX and its subsidiaries.

71.As a proximate result of the above breach of fiduciary duties, the CHX and Bretzer

failed to act with due care, in good faith and fairly with regard to the interests of Scattered, and drove

Scattered off the Exchange and out of the securities market making business.

WHEREFORE, Scattered requests the entry of judgment in its favor and against defendants, in

an amount to be determined at trial, equal to lost profits; costs incurred in resisting the defendants' efforts

to drive Scattered off the Exchange and out of the securities market making business; expenses incurred in

obtaining and trying to locate new clearing firms; punitive damages; attorney's fees and costs; and such

other relief as the Court deems proper.