Van der Moolen Holding N.V. acts as a specialty firm (broker-dealer) on the New York Stock Exchange ("NYSE").
The original Complaint charges Van der Moolen, Friedrich M.J. Bottcher, Frank F. Dorjee, James P. Cleaver, Jr., and Casper F. Rondeltap with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. As a specialist on the NYSE, Van der Moolen is required to uphold the rules and requirements of the NYSE. One such requirement that Van der Moolen must adhere to is called the "negative obligation." The negative obligation is the duty to hang back and not trade for the specialist firm's own account when enough public investor orders exist to pair up naturally, without undue intervention. Rather than uphold its duties, Van der Moolen, during the class period, repeatedly violated its duties by engaging in an illegal scheme to drive up the Company's financial results.
More specifically, the Complaint alleges that the Company's statements concerning its financial results during the class period were materially false and misleading because they failed to disclose and misrepresented the following adverse facts, among others: (1) that Van der Moolen engaged in the illegal practice of "front-running" trades at the NYSE, which allowed Van der Moolen to act on nonpublic information to trade ahead of customers lacking that knowledge and pocket a profit on each trade; (2) that Van der Moolen illegally "traded ahead" of customer orders by causing or allowing its traders to put Van der Moolen's own interest ahead of investors by ignoring one investor order in the process of interacting with another investor, thereby creating more illegal profits for the Company; (3) that Van der Moolen, throughout the Class Period, improperly recognized revenue from its illegal scheme in violation of Generally Accepted Accounting Principles ("GAAP"); and (4) as a result of this illegal scheme, Van der Moolen materially overstated and artificially inflated its earnings and net income.
Specifically, the Complaint alleges that on April 17, 2003, the NYSE issued a statement wherein it disclosed that it had begun an investigation of the specialist firms of the NYSE. On news of this, Van der Moolen ADRs fell 4.8% or $0.52 per share to close at $10.19 per share. On April 18, 2003, The Wall Street Journal reported that Van der Moolen and others were the subject of an investigation by the NYSE into illegal trading practices on the floor of the NYSE. Additionally on April 18, 2003, Bloomberg reported that the SEC had also begun an investigation into illegal trading practices by specialist firms, such as Van der Moolen. On news of this, Van der Moolen ADRs fell another 4.7% or $0.48 per share to close at $9.71 per share on April 21, 2003. On September 22, 2003, The Wall Street Journal reported that SEC had intensified its inquiry into the NYSE specialist firms, like Van der Moolen. The article noted that SEC was not only investigating the illegal "front- running" practices of the specialist firms, like Van der Moolen but was now investigating whether floor traders "traded ahead" of customer orders. On news of this, Van der Moolen ADRs fell 4.4% or $0.62 per share to close at $13.35 per share.
The Complaint further alleges that on October 16, 2003, the NYSE announced that the NYSE Enforcement Division had decided to bring disciplinary action against Van der Moolen and the other specialist firms. Additionally, the NYSE stated that for the three- year period ended December 31, 2002, Van der Moolen disadvantaged customers who entered orders via the NYSE's Designated Order Turnaround System ("DOT") through alleged "interpositioning" resulting in losses to customers of approximately $10 million. In the case of such alleged "interpositioning" Van der Moolen is believed to have traded unnecessarily as dealer with DOT orders on one side of the market, and then immediately traded with DOT orders on the opposite side, at a profit to the specialist. The NYSE further stated that Van der Moolen's illegal actions resulted in additional losses to customers of approximately $25 million. In these alleged "one-sided trading" cases, the specialist is believed to have traded unnecessarily, as dealer, on one side of the market only, at a price level where one or more DOT orders could have traded instead. News of this shocked the market. Van der Moolen ADRs fell 14.7% or $1.56 per share to close at $9.05 per share on extremely high volume.
As summarized by the Company’s FORM 20-F for the fiscal year ended December 31, 2005, on October 20, 2003, a Plaintiff, who purported to represent holders of the Company’s ADRs, filed a class action on their behalf in the U.S. District Court for the Southern District of New York against Van der Moolen and the members of the Company’s executive board during the relevant period. The Plaintiff alleged that Defendants violated U.S. federal securities law by failing to disclose the alleged trading activity at issue in the NYSE Specialists litigation and the New York Stock Exchange and SEC investigations into NYSE specialist trading activity. On April 14, 2004, the Court entered an order designating co-lead Plaintiffs. On July 9, 2004, co-lead Plaintiffs filed an amended Complaint seeking unspecified damages. On September 14, 2004, co-lead Plaintiffs filed a Second Amended and Consolidated Class Action Complaint (In re Van der Moolen Holding N.V. Securities Litigation, No. 03-8284 (S.D.N.Y.)), also naming VDM Specialists as a Defendant. On November 22, 2004, Van der Moolen, VDM Specialists and the individual Defendants moved to dismiss the Complaint. On December 15, 2005, the Court granted in part and denied in part Defendants’ motion to dismiss. Van der Moolen, VDM Specialists and the individual Defendants answered the Complaint on February 17, 2006. No class has yet been certified. Discovery commenced in May 2006.
According to a press release dated July 23, 2006, Van der Moolen (NYSE:VDM) (Amsterdam:VDMN) announced that Van der Moolen and Van der Moolen Specialists USA, LLC, a 75% owned subsidiary of VDM, have agreed to settle for $8 million a securities class action lawsuit in the United States brought under US securities laws by Plaintiffs who were holders of VDM Holding's American Depositary Receipts traded on the New York Stock Exchange. The settlement is preliminary and is subject to, among other things, approval by the federal district judge in New York presiding over the case.
On October 13, 2006, a Stipulation and Order of Settlement was filed. Further that day, the Court issued the Order certifying the co-lead Plaintiffs as class representatives. A hearing was scheduled for December 6, 2006.
In a press release dated October 27, 2006, pursuant to an Order of the United States District Court for the Southern District of New York, a hearing was scheduled for December 6, 2006, before the Honorable Robert W. Sweet, United States District Judge for the Southern District of New York (the "Hearing"), in order to consider a proposed settlement (the "Settlement") of a consolidated class action (the "Action"). At the Hearing, the Court will determine whether: 1) the proposed Settlement of the Action, for the sum of Eight Million Dollars ($8,000,000) in cash (the "Gross Settlement Fund") should be approved by the Court as fair, reasonable and adequate; 2) the Action should be dismissed with prejudice; 3) the Plan of Allocation of the Net Settlement Fund is fair and reasonable; 4) the Settlement Class should be certified pursuant to Rule 23 of the Federal Rules of Civil Procedure; and 5) the application of Plaintiffs' Counsel for attorneys' fees and reimbursement of out-of-pocket expenses, should be approved.
According to a press release dated December 7, 2006, Van der Moolen said it received final approval from a US district court in New York for settlement of the stock drop class action with the Plaintiffs. In July, Van der Moolen already announced it had reached this settlement subject to court approval and would pay $8 million USD, an amount it booked in its second-quarter results.
