Abrams v. Prudential Securities, Inc.

Prudential Securities, Inc. (Prudential) (defendant) was a brokerage firm that provided services to individuals and entities trading in the financial markets, including market makers on the Chicago Board of Options Exchange (CBOE). In mid-April 1988, Prudential began to purchase call options of Chrysler Corporation from various options market makers (the market makers) (plaintiffs) on the CBOE. Prudential eventually amassed a significant number of Chrysler options at strike prices that were far above the market price. On May 7, 1988, Chrysler announced a merger with German automaker Daimler-Benz AG, which caused the price of Chrysler shares to rise 30 percent over the following three days. The market makers filled Prudential’s trade orders. By the market makers’ estimates, Prudential profited by more than $10 million through the Chrysler trades. Subsequently, the market makers claimed that Prudential had engaged in insider trading. According to the market makers, Prudential’s trades were economically irrational and could be explained only by trading with insider knowledge. The market makers’ theory was that unknown insiders at Daimler-Benz, Chrysler, or both companies tipped off unknown persons at Prudential regarding the potential merger. The market makers claimed that Prudential was a tippee for the purposes of the prohibition on insider trading under the Securities Exchange Act of 1934 (Exchange Act). The market makers filed suit against Prudential in federal court for violation of federal securities law and for negligence under Illinois common law. Prudential moved to dismiss. Among other arguments, Prudential claimed that the market makers failed to plead the securities-law claims with particularity.