On May 14, 2026, U.S. District Judge Lewis A. Kaplan in the Southern District of New York granted Morgan Stanley Smith Barney LLC's motion to dismiss a shareholder derivative suit brought by XDOOD LLC on behalf of Eltek Ltd., an Israeli electronics manufacturer. The decision effectively ends, for now, claims that the wealth management unit conspired to suppress Eltek's share price through a selective trading restriction.
XDOOD's complaint alleged that unknown traders, identified only as John Does, had engaged in wash trades, matched orders, spoofing, and price fixing to depress Eltek's stock since November 2019. Unable to identify the traders, XDOOD instead sued the brokers—Interactive Brokers Group and Morgan Stanley Smith Barney—arguing they facilitated the scheme.
The core of the case against Morgan Stanley centered on an internal policy enacted on or about October 16, 2020, by the firm's Fraud Operations Unit. Dubbed the P-Trade Policy in the complaint, it barred MSSB customers from buying Eltek shares electronically for roughly nine months, though phone orders remained available. The restriction ended around July 2021.
XDOOD contended that Morgan Stanley was complicit because it did not actively disclose the restriction to Eltek shareholders and continued lending Eltek shares for short sales while electronic buying was blocked. The plaintiff argued this created a one-sided market that ultimately forced Eltek to raise capital on diluted terms three years later.
Judge Kaplan rejected the theory, stating the plaintiff attempted to recast a routine fraud-control decision as a conspiracy. The Section 10(b) claim failed on four independent grounds: absence of a manipulative act, lack of scienter, no reliance, and no cognizable loss tied to MSSB. The judge noted that customers could simply pick up the phone or use another broker, and that XDOOD itself acknowledged MSSB adopted the policy to address detected manipulation—hardly evidence of fraudulent intent.
The claims were also time-barred. XDOOD knew the relevant facts by at least February 2021 but waited over four years to sue, exceeding the two-year statute of limitations under 28 U.S.C. § 1658(b). The common law fraud claim failed Rule 9(b)'s particularity requirements, and XDOOD did not make the required demand on Eltek's board.
For broker-dealer compliance teams, the ruling offers a practical precedent: a firm-level decision by a fraud unit to pause electronic trading in a suspect stock does not, by itself, constitute market manipulation under federal securities laws—even if the policy is not widely publicized to affected customers. Kaplan left a narrow opening, noting that XDOOD has floated a proposed second amended complaint that the court has yet to consider.
The case underscores the importance of clear internal protocols for handling suspicious trading activity. Advisors should note that while brokers have latitude to implement fraud controls, transparency with clients remains a best practice. For more on regulatory developments, see Reddit's WallStreetBets Submits Formal SEC Comment Against Semiannual Reporting Proposal and Judge halts forensic searches of advisors' devices in Ameriprise-LPL recruiting dispute.
