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Seventh Circuit Affirms Dismissal Of Actions Claiming Market Manipulation Of Volatility Index
01/27/2026On January 15, 2026, the United States Court of Appeals for the Seventh Circuit affirmed the dismissal of two actions brought by an investment advisor and an investment company asserting claims under the Commodity Exchange Act (“CEA”) against certain financial institutions. LJM Partners, LTD., et al. v. Barclays Capital, Inc., et al., --- F.4th ---, 2026 WL 114648 (7th Cir. Jan. 15, 2026). Plaintiffs alleged that defendants manipulated the volatility index (“VIX”)—a Chicago Board Options Exchange (“Cboe”) benchmark index that measures the thirty-day expected volatility of the S&P 500—allegedly causing plaintiffs to suffer damages when volatility skyrocketed after plaintiffs had taken positions in VIX-related futures assuming a low degree of volatility. The district court dismissed the investment advisor’s complaint for lack of Article III standing and the investment company’s complaint as time-barred under the CEA’s two-year statute of limitations. The Seventh Circuit affirmed the dismissal of both complaints; while suggesting that the investment advisor should have been permitted to attempt to cure the standing issue by substituting the real parties in interest, dismissal was nevertheless warranted because such claims would still be time-barred.
Plaintiffs alleged that defendants are Cboe-approved market makers in S&P 500 Index options (“SPX Options”). As market makers, defendants also report bid-ask spreads in SPX Options that are used by Cboe to calculate the VIX. While plaintiffs did not trade in SPX Options, they alleged that they held positions in VIX-related futures listed on the Chicago Mercantile Exchange and their VIX-related futures positions were negatively impacted when defendants allegedly inflated the bid-ask quotes in SPX Options they provided to Cboe for purposes of the calculation of the VIX. Id. at *3.
The district court dismissed the actions. First, the district court held that the investment advisor failed to allege an injury in fact necessary to establish Article III standing, as the only injuries alleged were borne by the investment advisor’s customers; the court further denied the investment advisor’s request to substitute a real party in interest, concluding that was only available to a plaintiff who has Article III standing, and denied leave to amend as futile under the CEA’s two-year statute of limitations period. Id. at *5. The district court further held that the investment company’s claims were time-barred because a CEA claim accrues “when the plaintiff, in the exercise of due diligence, has actual or constructive knowledge of the conduct in question,” which the court concluded was on the day plaintiff learned of its injury—more than four years before it amended its complaint to add the financial institutions as defendants. Id.
The Seventh Circuit affirmed the dismissals. With respect to the statute of limitations, the Court rejected the investment company’s argument that its later amended complaints should relate back to the filing of its original complaint, under Rule 15(c)(1)(C) of the Federal Rules of Civil Procedure, because defendants knew or should have known that they would have been named but for “a mistake concerning the proper party’s identity.” Id. The Court held that plaintiff’s “conscious choice” to file a complaint naming John Doe defendants while it pursued discovery to learn the identity or identities of those allegedly responsible for the complained-of manipulation was not a “mistake” within the meaning of the rule.
In addition, the Court rejected the investment company’s argument that its claim did not accrue until after it discovered defendants’ “scienter”—i.e., their “intent to manipulate or defraud the market”—because only then would it know the “facts that will form the basis” of the claim. Id. at *6. The Court noted that plaintiff was precluded from raising this argument on appeal because it failed to do so with the district court, and that, regardless, plaintiff’s own allegations contradicted its argument because plaintiff’s original complaint alleged that it was “virtually impossible” that the spike in VIX “was the result of legitimate market activity” as opposed to manipulation by (the John Doe) defendants. Id.
The Court also concluded that the district court did not abuse its discretion in declining to extend the statute of limitations by way of equitable tolling, which the Court emphasized was applied “only sparingly” “where a litigant has pursued his rights diligently but some extraordinary circumstance prevents him from bringing a timely action.” Id. Here, the Court concluded that the external factors plaintiff pointed to—a stay of discovery in a the multi-district litigation to which the action had been assigned, alleged delays from the Cboe in identifying defendants, and an allegedly erroneous dataset provided by the Cboe in the course of discovery—were “ordinary delays inherent to litigation” and “pale[d] in comparison” to plaintiff’s delay in waiting until days prior to the expiration of the two-year limitations period to file suit. Id.
With respect to Article III standing, the Court held that the investment advisor had not sufficiently alleged an injury-in-fact. The Court emphasized that courts have an “obligation to assure ourselves” that each plaintiff has Article III standing. Id. at *8. While the complaint alleged that “LJM” had suffered losses from trading VIX-related futures in artificial and manipulated prices caused by defendants, and even purported to quantify those damages, the Court observed that the complaint also defined “LJM” to include both plaintiff and “the funds it managed,” which were “collectively referred to as the entity harmed by [d]efendants’ conduct.” Id. The Court concluded that, based on that definition in the complaint, it was “entirely possible that [plaintiff] did not lose any of its own money” through the trades in question. Id. at *9 (emphasis in original).
The Court also rejected plaintiff’s alternative argument that it had sufficiently alleged a concrete injury because the complaint alleges that it served as general partner for six limited partnership funds that it managed. The Court observed that the complaint did not allege that those limited partnerships were among the accounts that suffered losses from the trades in question, nor did it allege “exactly how [plaintiff’s] role as a general partner of these funds caused it concrete injury.” Id. (emphasis in original). The Court rejected the argument that a general partner of a partnership “is presumptively injured” whenever the partnership is injured.
The Court further rejected plaintiff’s argument that the alleged market manipulation “caused it to experience loss of future business and damage to its business reputation.” Id. at *10. While the Court emphasized that such allegations can be enough to confer Article III standing, the Court concluded that plaintiff waived the argument by not raising it with the district court, and that in any event the “purported business injuries” were not actually alleged in the complaint. Id. at *10.
Finally, the Court rejected the investment advisor’s arguments that the district court should have permitted it to substitute the real parties in interest under Rule 17(a)(3) of the Federal Rules of Civil Procedure. The Court observed that the Fourth and Sixth Circuits had concluded, like the district court, that a plaintiff lacking Article III standing may not substitute another party as the real party in interest, while the Second Circuit had reached the opposite conclusion. Id. at *11. The Court explained that the approach taken by the Fourth and Sixth Circuits, referred to as the “nullity doctrine,” relies on the proposition that if a plaintiff lacks standing, then the action is a nullity and there is no pending action into which the real party in interest can be substituted. The Second Circuit, however, had reasoned that naming the wrong party “is akin to an error in the complaint’s allegations of jurisdiction,” and that a “plaintiff may cure defective jurisdictional allegations, unlike defective jurisdiction itself, through amended pleadings.” Id. The Seventh Circuit concluded that, “[o]n balance, we tend to think that the Second Circuit has the better approach” because, if an amended complaint can “destroy or create federal subject matter jurisdiction, it is difficult to see why this reasoning should not extend to party substitutions”—particularly given that the rule was “designed to avoid forfeiture of meritorious claims.” Id. at *12. However, the Court emphasized that it “need not definitively decide this issue here” because the claims would be time-barred even if the real parties in interest were substituted. Id.
The Court explained that, for essentially the same reasons as for the investment company’s complaint, the claims asserted by the investment advisor would also be time-barred even if the real parties in interest were substituted. Moreover, while the Court noted that the investment advisor “was more diligent” than the investment company—for example, filing a motion seeking leave to conduct expedited discovery to ascertain the identity of potential defendants—the Court concluded that the district court did not abuse its discretion in declining to apply equitable tolling, and ultimately the investment advisor still “should have anticipated the hurdles in identifying the relevant defendants and adjusted [its] pace accordingly.” Id.
