Brian Barry v. CBOE GLOBAL MARKETS, INC.; CBOE FUTURES EXCHANGE, LLC; and CBOE EXCHANGE, INC.

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 20-1843
BRIAN BARRY, et al.,
Plaintiffs-Appellants,
v.
CBOE GLOBAL MARKETS, INC.; CBOE FUTURES EXCHANGE, LLC;
and CBOE EXCHANGE, INC.,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 18 CV 4171 — Manish S. Shah, Judge.
____________________
ARGUED NOVEMBER 30, 2020 — DECIDED JULY 27, 2022
____________________
Before EASTERBROOK, WOOD, and HAMILTON, Circuit
Judges.
EASTERBROOK, Circuit Judge. This appeal requires us to de-
termine whether Cboe (an initialism used by the Chicago
Board Options Exchange and its affiliates) violated the Secu-
rities Exchange Act of 1934 or the Commodity Exchange Act
by trading options and futures based on a number, called VIX,

-- 1 of 10 --

2 No. 20-1843
designed to estimate the near-term volatility in the Standard
& Poors 500 Index of stocks.
Plaintiffs are traders who contend that unknown entities
(the “Doe Defendants”) bought or sold options on the
Wednesdays that the VIX contracts sedled, in order to affect
the VIX and increase their profits at the expense of honest
traders. The Doe Defendants have not been identified, leaving
the plaintiffs (who we call the Traders) to proceed against
Cboe (as we call all three defendants). The Traders’ claim un-
der the Securities Exchange Act is that Cboe knew that scoun-
drels could take advantage of the formula for determining
VIX on the sedlement dates. The Commodity Exchange Act
claim is that Cboe failed to enforce rules forbidding manipu-
lation. The district court dismissed the Traders’ initial com-
plaint but allowed them to try again. 390 F. Supp. 3d 916 (N.D.
Ill. 2019). Then it dismissed the Traders’ amended complaint
with prejudice. 435 F. Supp. 3d 845 (N.D. Ill. 2020). Claims
against the Doe Defendants are technically open, but the dis-
trict court entered a judgment under Fed. R. Civ. P. 54(b)
wrapping up the litigation against Cboe.
VIX, which is short for Volatility Index, began life as a
number computed by Cboe and posted every 15 seconds. The
number rises when the Standard & Poors Index is expected to
become more volatile in the coming 30 days and lower when
it is expected to become less volatile. Initially the calculation
rested on options prices in just four stocks. (Under the Black-
Scholes option-pricing formula, anticipated volatility can be
inferred from the behavior of options prices, if the market is
competitive.)
In 2003 Cboe made VIX more reliable and replicable (or so
it thought) by increasing the number of options in the formula

-- 2 of 10 --

No. 20-1843 3
from 4 to 130. The Traders say that this change enabled trad-
ers to buy or sell out-of-the-money options strategically and
affect the VIX at slight cost to themselves. In 2004 Cboe cre-
ated futures contracts based on the VIX, and in 2006 it created
options contracts. As the Traders see things, the creation of
these derivative instruments made it possible for manipula-
tors to make money by last-minute trades in thinly traded op-
tions among the large number that affect the index. The Trad-
ers say that this possibility has been realized and point to a
study finding suspicious paderns of trades and price move-
ments. John M. Griffin & Amin Shams, Manipulation in the
VIX?, 31 Review of Financial Studies 1377 (2018). But the
Traders do not say that Cboe knew in 2003, 2004, or 2006 that
this would happen; nor do the Traders say that Cboe is bound
to agree with the conclusions in the Griffin & Shams paper.
Instead they say that Cboe should have known that including
more options in the process of determining VIX increases the
risk of manipulation and that, when unusual paderns devel-
oped, Cboe should have taken more rigorous enforcement ac-
tions. The Traders acknowledge that Cboe did take some en-
forcement actions, but they call them inadequate.
Our description of the VIX, and how the 2003 changes in-
creased the risk of manipulation, is skeletal. The district
court’s opinions supply more detail, as does the Griffin &
Shams paper. We do not go into specifics, however, because
technical issues do not affect the resolution of this appeal. Nor
do we discuss all of the many legal issues that the parties have
briefed. Instead we cut straight to the maders that we deem
dispositive.
To prevail under the Securities Exchange Act, which ap-
plies to options on the VIX, the Traders must establish that

-- 3 of 10 --

4 No. 20-1843
Cboe commided fraud. Intent to deceive (“scienter”) is among
the requirements for a suit under §10(b) of the 1934 Act, 15
U.S.C. §78j(b), and the SEC’s Rule 10b–5, 17 C.F.R. §240.10b–
5. And under the Private Securities Litigation Reform Act of
1995 a suit must be dismissed unless the complaint shows that
the forbidden intent is at least as likely as its absence. 15
U.S.C. §78u–4(b)(2); Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308 (2007). One more relevant rule: private litigants
cannot pursue claims based on a theory that the defendants
aided and abeded a wrongdoer; only an entity that has done
wrong itself can be liable. Stoneridge Investment Partners, LLC
v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008); Central Bank of
Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S.
164 (1994). The district court found that the complaint’s alle-
gations of intent fall short under Tellabs and that the Traders
lose for the additional reason that Cboe did not perform any
of the manipulation.
The district judge explained the lader problem:
[The Traders’] theory is that Cboe knew that its products were
vulnerable to manipulation and, later, that manipulation was oc-
curring. By failing to act, plaintiffs say, Cboe allowed the Doe De-
fendants to manipulate the market, which caused plaintiffs harm.
That is secondary-liability reasoning. See Damato v. Hermanson,
153 F.3d 464, 471 n.8 (7th Cir. 1998) (noting that aiding-and-abet-
ting liability “reaches persons who do not engage in the pro-
scribed activities at all, but who give a degree of aid to those who
do” (quoting Central Bank, 511 U.S. at 176)).
435 F. Supp. 3d at 864. The Traders accuse Cboe of negligence
in designing the index and further neglect in failing to stop
persons who took advantage of the design. The lader part of
the claim, at least, is barred by the holdings of Stoneridge and
Central Bank of Denver. As for the former part, the design

-- 4 of 10 --

No. 20-1843 5
decision: negligence, which is to say failure to do what a rea-
sonable person ought to have done, is not enough to succeed
under the Securities Exchange Act.
It is difficult to see more than negligence on Cboe’s part.
The Traders contend that scienter may be inferred from the
fact that Cboe made money on the trades that the Doe Defend-
ants may have used to manipulate inputs into calculation of
the VIX. But the Traders do not quantify how much Cboe
stood to lose in trading of the VIX options and futures con-
tracts themselves. The VIX was a success, whose market grew
from $200 billion in 2006 to $1.6 trillion in 2016. Between 2010
and 2018 Cboe’s stock price tripled. 435 F. Supp. 3d at 857.
Traders in VIX are sophisticated investors, who could learn
about manipulation (perhaps directly from the Doe Defend-
ants) and would curtail their own trading if they thought that
they could be taken advantage of. The Traders’ observation
that Cboe could gain from the options traded in an effort to
affect VIX does not help their position without a comparison
against what Cboe stood to lose. As far as we can see, poten-
tial losses outweighed potential gains, making it implausible
to adribute wrongful intent to Cboe. That Cboe engaged in
some anti-manipulation enforcement action makes the impu-
tation of fraudulent intent even harder. Tellabs thus resolves
the Securities Exchange Act claim in Cboe’s favor.
This brings us to the Traders’ claim under the Commodi-
ties Exchange Act. Section 7 of that Act (we use the section
numbers in the U.S. Code rather than the enacting legislation)
requires any “contract market” designated by the Commodity
Futures Exchange Commission, a category that includes
Cboe, to trade “only contracts that are not readily susceptible
to manipulation.” 7 U.S.C. §7(d)(3). How susceptible is

-- 5 of 10 --

6 No. 20-1843
“readily” susceptible is a mader commided to the CFTC, for
§7 is enforced by the agency. There is no express private right
of action—and the CFTC has not accused Cboe of violating
§7(d)(3) by designing the VIX or trading futures contracts on
that index. Manipulation by traders is forbidden by 7 U.S.C.
§9(1), but this rule too is enforced by the CFTC, see §9(4)(A),
and at all events no one has identified the Doe Defendants.
This leads the Traders to rely on §25 of the Act, which creates
a private right of action against contract markets.
Section 25(b)(1)(A), 7 U.S.C. §25(b)(1)(A), provides that
any board of trade that fails to enforce a rule that the CFTC
requires it to enforce—including the rule against trading ma-
nipulable contracts—“shall be liable for actual damages sus-
tained by a person who engaged in any transaction on or sub-
ject to the rules of such registered entity to the extent of such
person’s actual losses that resulted from such transaction and
were caused by such failure to enforce or enforcement of such
bylaws, rules, regulations, or resolutions.” This language cre-
ates a problem for the Traders; the reference to “such transac-
tion” implies a need to identify trades on which manipulation
caused losses. The district court ruled that the Traders had not
done this. 435 F. Supp. 3d at 868–74. Instead of addressing that
subject, however, we focus on a different requirement: “A per-
son seeking to enforce liability under this section must estab-
lish that the registered entity … acted in bad faith in failing to
take action or in taking such action as was taken”. 7 U.S.C.
§25(b)(4). For the same reason that the complaint does not
show scienter for the purpose of securities-law liability, it is
hard to see how it alleges “bad faith”.
The Traders do not seriously try to show that Cboe acted
in bad faith as that phrase is normally understood in law.

-- 6 of 10 --

No. 20-1843 7
Instead they observe that Bosco v. Serhant, 836 F.2d 271, 276–
78 (7th Cir. 1987), equates “bad faith” in this statute with neg-
ligence—and, if negligence is the standard, then the com-
plaint is sufficient. The district judge thought that Bosco tied
his hands on this issue, 390 F. Supp. 3d at 936, but we do not
deem Bosco dispositive.
Bosco dealt with a fraud by a trader who raised money in
units of $100,000, promising to invest $97,000 of each unit in
safe instruments while using the remaining $3,000 as a hedge.
In fact he invested 100% of each unit in risky futures contracts,
lost money rapidly, and diverted new investors’ money to
make the earlier investors think that they were making prof-
its. In other words, he ran a Ponzi scheme, which the Chicago
Mercantile Exchange did not detect until more than $20 mil-
lion of investors’ funds been lost. The Mercantile Exchange
was among the defendants in the ensuing litigation. (Serhant,
who ran the scam, was obviously liable, but by then he was in
prison and could not pay any adverse judgment.) A jury re-
turned a modest verdict against the Mercantile Exchange and
larger verdicts against other defendants. We ruled in the Mer-
cantile Exchange’s favor on the merits.
Section 25(b)(4) and its requirement of “bad faith” did not
mader in Bosco for two reasons. First, §25(b)(4) had been en-
acted after Serhant’s scheme collapsed, and as it is not retro-
active the court deemed it irrelevant. 836 F.2d at 276 (stating
that the court proceeded under the Act as it stood before
1982). Bosco instead recognized a private right of action to en-
force one of the Mercantile Exchange’s rules, then decided in
the Exchange’s favor under that rule. In other words, the dis-
cussion of §25(b)(4) was doubly dictum, first because the stat-
ute was inapplicable and second because the Mercantile

-- 7 of 10 --

8 No. 20-1843
Exchange prevailed on other grounds. Dictum maders when
it possesses the power to persuade—but only when it per-
suades. It is not authoritative. And the dictum in Bosco does
not persuade.
Bosco itself explains why: “In ordinary English ‘bad faith’
implies a deliberate wrong rather than just failing to come up
to an objective standard of care, which is what negligence is.”
836 F.2d at 276. See also Black’s Law Dictionary 171 (11th ed.
2019). A court would be justified in departing from that mean-
ing if something in the text or structure of §25 implied that the
phrase had a special meaning, but the Commodity Exchange
Act does not define the phrase, and equating it with negli-
gence is inconsistent with the statute’s structure.
Normally self-regulatory organizations such as contract
markets possess a form of delegated prosecutorial discretion
and are no more liable for non-enforcement decisions than the
CFTC or the Department of Justice would be. See, e.g., Heckler
v. Chaney, 470 U.S. 821 (1985) (non-review of prosecutorial
non-enforcement decisions); Standard Investments Chartered,
Inc. v. National Association of Securities Dealers, Inc., 637 F.3d
112, 116 (2d Cir. 2011) (immunity of trading organizations).
Section 25, alone among provisions in the Commodity Ex-
change Act, authorizes liability for a market’s non-enforce-
ment decision, but by using the phrase “bad faith” makes that
review narrower than the negligence or strict liability stand-
ards would do. Indeed, the point of §25 was to supersede Mer-
rill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353
(1982), which had implied a private right of action under the
Commodity Exchange Act, by substituting an express right of
action with limitations.

-- 8 of 10 --

No. 20-1843 9
We could imagine saying that “bad faith” is an ambiguous
phrase whose meaning may be illuminated by legislative his-
tory, but none of the legislative documents behind §25(b)(4)
equates “bad faith” with negligence. The relevant commidee
reports say that “bad faith” is being used as a limitation to
prevent the right of action implied in Curran from doing dam-
age to the futures exchanges and their regulatory apparatus.
See, e.g., H.R. Rep. No. 97-565, Part 1, at 56 (1982).
Bosco did not discuss the statutory text, context, or history.
Instead it drew a negligence standard from decisions under
judicially created private rights of action. The job of a court
interpreting a statute, however, is to interpret the statute rather
than the work of other judges—especially when the statutory
text is designed to displace the judiciary’s handiwork.
The Second Circuit, which has jurisdiction over the other
principal futures exchanges in this nation, understands “bad
faith” in §25(b)(4) in the traditional way. Sam Wong & Son, Inc.
v. New York Mercantile Exchange, 735 F.2d 653, 670 (2d Cir.
1984) (Friendly, J.), dealt with an exchange’s asserted failure
to enforce rules against price distortions. The Second Circuit
thoroughly explored the meaning of “bad faith” under
§25(b)(4), concluding that a plaintiff sufficiently pleads a vio-
lation if it alleges that “self-interest or other ulterior motive
unrelated to proper regulatory concerns … constitute[s] the
sole or the dominant reason for the exchange action”. See also
Ryder Energy Distribution Corp. v. Merrill Lynch Commodities
Inc., 748 F.2d 774, 780 (2d Cir. 1984) (“A claim of bad faith
must be supported by two allegations: first, that the exchange
acted or failed to act with knowledge; and second, that the
exchange’s action or inaction was the result of an ulterior mo-
tive.”) Bosco cited Sam Wong but did not analyze its holding

-- 9 of 10 --

10 No. 20-1843
or rationale, instead treating it as limited to situations in
which the exchange injured a trader by a discretionary action.
836 F.2d at 278. That’s not how Judge Friendly saw things, nor
can a discretionary vs. nondiscretionary distinction be found
in §25(b)(4). Ryder was not cited at all in Bosco. The result was
an accidental conflict among the circuits.
Because the treatment of §25(b)(4) in Bosco was dictum, it
can be disapproved without the need for formal overruling
under Circuit Rule 40(e). We now deprecate the portion of
Bosco that unnecessarily discussed §25(b)(4), and we bring to
an end the conflict between this court and the Second Circuit.
The Traders’ allegations do not imply bad faith under the
ordinary meaning of that phrase, and they do not satisfy the
Second Circuit’s elaboration. That is to say, the Traders do not
allege that Cboe acted with knowledge of manipulation (the
Traders rely on a “should have known” approach) and do not
contend that Cboe was in cahoots with the Doe Defendants
(an “ulterior motive”). The Traders have a negligence claim,
which does not support their suit under either the Securities
Exchange Act or the Commodity Exchange Act. Remedies, if
any are appropriate, lie with the SEC, the CFTC, and the Na-
tional Futures Association (which could expel or discipline its
members) rather than the judiciary at the behest of private lit-
igants.
AFFIRMED

-- 10 of 10 --