Gfl Advantage Fund, Ltd., a British Virgin Islands Corporation v. Douglas R. Colkitt Douglas Colkitt

OPINION OF THE COURT

This matter comes on before this court on defendant Douglas R. Colkitt’s appeal from the district court’s order for summary judgment in favor of plaintiff GFL Advantage Fund, Ltd. against Colkitt entered on April 25, 2000, and on appeal from an order entered on July 17, 2000, denying reconsideration of the April 25 order. For the reasons stated herein, we will affirm the orders of the district court.

I. BACKGROUND

A. FACTUAL HISTORY

Douglas Colkitt, who earned both his medical degree and MBA from the University of Pennsylvania in 1979, is the founder and majority shareholder of two small capitalization medical services businesses— EquiMed, Inc. (“EquiMed”) and National Medical Financial Services Corporation (“National Medical”). As of February 1996, Colkitt held 20,783,638 (73%) of EquiMed’s 28,589,717 outstanding shares of common stock, and as of May 1996, he owned 2.8 million (38%) of National Medical’s 7,426,844 outstanding shares of common stock. See GFL Advantage Fund, Ltd. v. Colkitt, No. 4:CV-97-0526, Memorandum and Order at 4 (M.D.Pa. July 17, 2000).

Beginning in 1996, Colkitt sought financing to pursue various business ventures unrelated to EquiMed and National Medical. After unsuccessfully attempting to secure financing from traditional commercial lending institutions, Colkitt contacted alternative lenders that might be willing to structure “convertible or exchange transactions,” whereby Colkitt would be able *195 immediately to convert his vast stockhold-ings into cash. In particular, Colkitt endeavored to borrow money by pledging his common stock as collateral and providing the lender with the right to convert or exchange the debt for the shares pledged by Colkitt.

In the spring of 1996, Colkitt’s broker identified GFL Advantage Fund, Ltd. (“GFL”) as a possible lender, and on May 24, 1996, Colkitt obtained a loan of $3,000,000 from GFL. Under the terms of the note (“National Medical note”), GFL had the right after 30 days of the date of the note to exchange up to $1.5 million of its outstanding principal for shares of National Medical stock held by Colkitt at an exchange rate of 82% of the average market price. GFL could exchange the remainder of the unpaid balance for shares of National Medical 60 days after the date of the note. The average market price was computed by taking the average of the stock’s closing prices for the five days immediately prior to the exchange request. In essence, the note gave GFL the right to require Colkitt to repay the loan with National Medical stock valued at a discount of 18% of the five-day average closing price, thus giving GFL an immediate paper profit as it would receive stock with a premium value to repay a debt of a lesser amount.

Several months later on August 5, 1996, Colkitt entered into a similar transaction with GFL for a $10,000,000 loan. The structure of the second note (“EquiMed note”) was akin to that of the National Medical note, except the parties agreed that GFL could convert the debt into shares of Colkitt’s other business, EquiMed, Inc., at an exchange rate of 83% of the average market price. In addition, GFL could convert up to $5 million of the outstanding principal after 60 days of the date of the note and could convert the balance of the principal 30 days thereafter.

Nearly four months after issuing the initial $3,000,000 loan to Colkitt, GFL made its first of six exchange demands for National Medical stock. On September 13, 1996, GFL 3 exchanged $250,000 of debt for 34,130 shares of National Medical stock at the average market price of $9.20 and an exchange or conversion price of $7.32. On September 19, 1996, GFL exchanged $135,000 of loan, principal for 18,726 shares at an average market price of $9,075 and a conversion price of $7.21. On October 10, 1996, GFL converted $257,000 of debt into 47,081 shares at an average closing price of $6,925 and a conversion price of $5.46. On December 5, 1996, GFL exchanged $100,000 of unpaid principal for 14,845 shares at an average market price of $8,725 and an exchange price of $6.74. On December 19, 1996, GFL converted $200,000 of debt into 34,588 shares at an average market price of $7,525 and a conversion price of $5.78. Finally, on January 7, 1997, GFL demanded an exchange of $545,000 of loan principal for 100,223 shares, but the request was withdrawn after Colkitt dishonored GFL’s earlier exchange demand for EquiMed stock.

GFL waited until November 1996, more than 3 months after the date of the EquiMed note, before making its first exchange demand for EquiMed shares. On November 27, 1996, GFL demanded that Colkitt convert $560,000 in outstanding principal into EquiMed stock. With a five-day average closing price of $4.50, GFL received 150,555 shares of EquiMed at an exchange rate price of $3.72. GFL’s next exchange demand for EquiMed stock occurred on January 3, 1997, when GFL sought to convert $1,430,000 in unpaid principal, but Colkitt dishonored the request.

Unknown to Colkitt at the time, and on the same day in September 1996 as GFL’s first exchange demand for National Medi *196 cal stock, GFL began short selling National Medical stock. As we have explained:

Short selling is accomplished by selling stock which the investor does not yet own; normally this is done by borrowing shares from a broker at an agreed upon fee or rate of interest.... The short seller is obligated, however, to buy an equivalent number of shares in order to return the borrowed shares.... Herein lies the short seller’s potential for profit: if the price of stock declines after the short sale, he does not need all the funds to make this covering purchase; the short seller then pockets the difference. On the other hand, there is no limit to the short seller’s potential loss: if the price of the stock rises, so too does the short seller’s loss, and since there is no cap to a stock’s price, there is no limitation on the short seller’s risk.

Zlotnick v. TIE Communications, 836 F.2d 818, 820 (3d Cir.1988). See also 17 C.F.R. § 240.3b-3 (defining short sale as “any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller”); Black’s Law Dictionary 1339 (7th ed.1999) (defining short sale as the “sale of a security that the seller does not own or has not contracted for at the time of sale, and that the seller must borrow to make delivery”). In other words, short sellers are betting that the stock price will decline between the time they sell the borrowed stock and the time they must “cover,” ie., purchase replacement shares to repay the borrowed stock. Short selling, which is closely regulated, see, e.g., 17 C.F.R. § 240.10a-l, is a legitimate trading strategy for stocks that traders believe are overvalued.

GFL’s first short sale of National Medical stock occurred on September 13, 1996, when it sold 32,500 shares at a price of $10.00 per share. On September 16, 1996, GFL sold short 15,000 shares of National Medical at $9.13 per share. On September 17, 1996, GFL sold short 5,000 shares at $9.25 per share. On October 11, 1996, GFL sold short 3,000 shares at $8.25 per share. Finally, on October 14, 1996, GFL sold short 7,000 shares of National Medical at $8.25 per share. GFL sold short a total of 62,500 shares of National Medical stock over a one-month period.

GFL also sold EquiMed shares short. On November 8, 1996, GFL sold short a total of 18,400 shares of EquiMed — 10,000 shares at $5.50 per share and 8,400 shares at $5.48 per share. On November 11, 1996, GFL sold short 32,500 shares at $5.38 per share. On November 12, 1996, GFL sold.short 16,000 shares at $5.25 per share. On November 14, 1996, GFL sold short 8,500 shares at $5.25 per share. Finally, on November 22, 1996, GFL sold short 3,300 shares of EquiMed stock at $5.00 per share. Over this two-week period in November 1996, GFL sold short a total of 78,700 shares of EquiMed stock.

GFL explains that it engaged in short sales of National Medical and EquiMed stock as a hedging strategy against “delivery risk.” Under the terms of the notes, the exchange price was based on the average closing price during the five trading days preceding the exchange request. Consequently, the exchange price was locked in on the date of the exchange request, thus shifting onto GFL the risk that the stock’s price would drop more than the 17% or 18% discount. In other words, “if the stock price dropped more than the agreed — upon discount before GFL was able to sell the exchanged shares, GFL would be in a loss position.” Br. of Appellee at 7. GFL claims it sold short to protect itself in the event that the price of the stock declined further after *197 GFL made the exchange request but before GFL was able to sell the shares.

The theory of Colkitt’s case, however, is that GFL sold National Medical and EquiMed shares short in an effort to depress the prices of the stocks. Indeed, Colkitt contends that the market price of National Medical dropped 17.5% between GFL’s first and last short sales of National Medical stock, and that the market price of EquiMed declined by 18.5% between GFL’s first short sale of EquiMed stock and GFL’s first exchange demand. 1 Colk-itt argues that GFL purposely depressed the stock prices so that Colkitt would be forced to exchange more shares to retire the same amount of debt. He asserts that GFL was able to obtain an additional 27,-882 shares of EquiMed and an additional 11,658 shares of National Medical due to the respective declines in the stocks’ prices.

As noted above, Colkitt refused to honor GFL’s exchange request for EquiMed shares on January 3, 1997. Instead, Colk-itt notified GFL in December 1996 and early January 1997 that he intended to prepay all unpaid principal and interest in cash. Colkitt contends that GFL improperly rejected his request to prepay the unpaid balance, even though the notes contemplated such prepayment. GFL responds that it did not reject outright Colk-itt’s offer to prepay, but rather refused to allow Colkitt to dictate the terms of any prepayment and disagreed with Colkitt about the amounts due. GFL admits that it does not believe that Colkitt had a right to prepay, but insists that it “accepted Colkitt’s offer to prepay whatever amount Colkitt believed was then due, reserving for itself the right to contest the disputed balance.” Br. of Appellee at 13. GFL claims that Colkitt neither responded to its overtures nor attempted to prepay or pay any amounts to GFL.

B. PROCEDURAL HISTORY

On April 4, 1997, GFL filed a complaint against Colkitt alleging breach of his obligations on the National Medical and EquiMed notes. On June 6, 1997, Colkitt filed an answer, affirmative defenses, and six counterclaims. The affirmative defenses and counterclaims alleged, inter alia, that GFL engaged in securities fraud and market manipulation in violation of various federal and state securities laws by temporarily depressing the prices of National Medical and EquiMed stock through its concentrated short sales. Colkitt claimed that GFL engaged in the scheme so that it could exchange debt for shares at an artificially low price and earn enormous windfall profits when prices returned to then-normal levels. On March 31, 1998, the district court adopted a magistrate judge’s recommendations that Colkitt’s counterclaims be dismissed. The district court dismissed one counterclaim with prejudice and the balance without prejudice. 2 On April 20, 1998, Colkitt filed amended counterclaims in an effort to cure the deficien- *198 des of the original counterclaims, but on February 2, 1999, the district court again dismissed Colkitt’s inadequately pled counterclaims without prejudice for lack of specificity.

On April 25, 2000, the district court granted summary judgment in favor of GFL based largely on the reasoning of In re Olympia Brewing Co. Securities Litigation, 613 F.Supp. 1286 (N.D.Ill.1985). The court concluded that, because short selling is not an unlawful trading practice, it would not draw the inference that GFL manipulated the market price of EquiMed and National Medical stocks simply because GFL engaged in substantial short selling of the stocks. The court also determined that Colkitt failed to present evidence that GFL’s short sales had an appreciable effect on the prices of the stocks. Finally, the court concluded that even if the short sales did depress prices, Colkitt failed to show that “the declines in price are attributable to false information injected into the market by the short sales and not to information otherwise available to the market.” GFL Advantage Fund, Ltd. v. Colkitt, No. 4:CV-97-0526, Memorandum and Order at 22 (M.D.Pa. Apr. 25, 2000).

On July 17, 2000, the district court denied Colkitt’s motion for reconsideration and entered final judgment in favor of GFL. The court clarified its earlier ruling on GFL’s motion for summary judgment, explaining that the evidence of GFL’s short sales alone was insufficient to establish Colkitt’s claims of securities fraud and market manipulation because selling stocks short is lawful. The court declared that “[tjhere must be some circumstances beyond the mere occurrence of short sales to suggest that the short sales were part of a scheme to manipulate the market,” which Colkitt failed to proffer. GFL Advantage Fund, Ltd. v. Colkitt, No. 4:CV-97-0526, Memorandum and Order at 14 (M.D.Pa. July 17, 2000). The court then proceeded to reject Colkitt’s argument that numerous inferences that he believed should be drawn from the factual record created genuine issues of material fact that precluded summary judgment. The court refused to accept any of Colkitt’s proffered inferences — each of which Colkitt has raised on appeal — and reaffirmed its decision that GFL was entitled to summary judgment as a matter of law.

II. JURISDICTION AND STANDARD OF REVIEW

A. JURISDICTION

The district court had subject matter jurisdiction over GFL’s breach of contract action pursuant to 28 U.S.C. § 1332 based upon diversity of the parties and the amount in controversy. The district court entered final judgment in this case on July 17, 2000, and appellant filed a timely notice of appeal on August 15, 2000. Therefore, we have jurisdiction pursuant to 28 U.S.C. § 1291. 3

B. STANDARD OF REVIEW

We review the district court’s grant of summary judgment de novo and *199 apply the same standard as the district court applied in the first instance. See Lucent Info. Mgmt., Inc. v. Lucent Tech., Inc., 186 F.3d 311, 315 (3d Cir.1999). We may affirm summary judgment in favor of GFL only if, after drawing all reasonable inferences from the record in the light most favorable to Colkitt, “there is no genuine issue as to any material fact” and GFL is “entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). As the non-moving party, Colkitt must create a genuine issue of material fact by presenting sufficient evidence to permit a jury to find in his favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). To defeat summary judgment, he “cannot rest simply on the allegations in the pleadings,” but “must rely on affidavits, depositions, answers to interrogatories, or admissions on file.” Bhatla v. U.S. Capital Corp., 990 F.2d 780, 787 (3d Cir.1993). Therefore, it will be appropriate to affirm summary judgment for GFL if we conclude that there is insufficient evidence for a reasonable jury to return a verdict for Colkitt.

III. DISCUSSION

A. RESCISSION OF THE NOTES PURSUANT TO SECTION 29

Colkitt contends that the National Medical and EquiMed notes are unenforceable by reason of Section 29 of the Securities Exchange Act of 1934 (“Exchange Act”) because GFL violated the anti-fraud provisions under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Section 29(b) provides in relevant part that:

Every contract made in violation of any provision of this chapter or of any rule or regulation thereunder, ... [or] the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter or any rule or regulation thereunder, shall be void.

15 U.S.C. § 78cc(b) (emphasis added). Colkitt argues that GFL violated Section 10(b) and Rule 10b-5 when it engaged in market manipulation by short selling National Medical and EquiMed stock in an effort to depress the share prices, and when it engaged in fraudulent deception by concealing its plan to short sell National Medical and EquiMed stock. See Br. of Appellant at 24. Colkitt asserts that the notes are void and unenforceable under Section 29(b) because the notes were “made in violation of’ Section 10(b) and Rule 10b-5 insofar as (1) they were part of GFL’s scheme to manipulate the market prices of National Medical and EquiMed stock and (2) they contain omissions of *200 material fact about GFL’s short selling strategy. See Reply Br. of Appellant at 19.

GFL argues that Colkitt’s Section 29(b) affirmative defense fails for two reasons. First, Section 29(b) is a remedial provision that is triggered only when another section of the Exchange Act has been violated. As addressed below, GFL maintains that it did not engage in either market manipulation or securities fraud in violation of Section 10(b), and therefore, there is no underlying offense to trigger Section 29(b). See infra pp. 203-15'. Second, GFL contends that Colkitt fails to state a proper Section 29(b) defense inasmuch as Colkitt alleges that it is GFL’s short selling, not the National Medical and EquiMed notes, that is unlawful. GFL argues that only “unlawful contracts,” not “unlawful transactions” executed pursuant to lawful contracts, may be rescinded under Section 29(b).

We deal with GFL’s second contention first, which is supported by the limited body of case law on the point. For instance, in Slomiak v. Bear Stearns & Co., 597 F.Supp. 676, 677 (S.D.N.Y.1984), plaintiff opened a margin account and a repurchase account with defendant Bear Stearns. He purchased millions of dollars of government bonds in his margin account — less than 10% with cash and the remainder with loans by Bear Stearns. See id. When plaintiff was notified of a margin call on his account and failed to muster the $155,000 in additional margin demanded, Bear Stearns liquidated the government bonds in plaintiffs account. See id. Plaintiff alleged that Bear Stearns violated Section 10(b) and Rule 10b-16 by failing to provide him at the time he opened his accounts with a written statement explaining the terms under which Bear Stearns would extend him credit. See id. Based on these alleged violations, plaintiff sought to rescind all of his bond transactions pursuant to Section 29(b). See id. at 681. The court concluded that plaintiff could not rescind the transactions, explaining:

The complaint alleges that Bear Stearns failed to send plaintiff a written credit disclosure statement in violation of Rule 10b-16 at the time he opened his accounts; it does not allege that the customer agreements establishing his margin and repurchase accounts at Bear Stearns were themselves unlawful.... ‘[U]nder § 29 of the Exchange Act, only unlawful contracts may be rescinded, not unlawful transactions made pursuant to lawful contracts.’

Id. at 681-82 (quoting Zerman v. Jacobs, 510 F.Supp. 132, 135 (S.D.N.Y.1981), aff'd, 672 F.2d 901 (2d Cir.1981) (table)). Because Bear Stearns’s alleged violation of Rule 10b-16 was “clearly collateral to the contract agreement governing the account,” the court determined that the firm’s failure to provide the written statement to plaintiff did “not justify rescission of the account agreement itself or the transactions undertaken pursuant to that agreement.” Id. at 682-83.

In Drasner v. Thomson McKinnon Securities, Inc., 433 F.Supp. 485, 488-89 (S.D.N.Y.1977), plaintiffs maintained margin accounts with defendant Thomson McKinnon Securities between 1973 and 1975. Plaintiffs began selling naked options in 1974 and profited handsomely off the transactions until 1975, when the market began spiking upward. See id. Between January and May 1975, plaintiffs incurred substantial losses on their options until Thomson McKinnon finally closed their accounts and liquidated their collateral. See id. at 489. Plaintiffs sought to rescind the options contracts pursuant to Section 29(b) because Thomson McKinnon allegedly violated Regulation T by failing *201 to direct plaintiffs to deposit the required amount of initial margin in their accounts. See id. The court rejected plaintiffs’ claim, stating that Section 29(b) “only renders void those contracts which by their terms violate the Act or the rules and regulations thereunder ... for it is only such contracts which are ‘made in violation of,’ or ‘the performance of which involves the violation of the statute and the rules and regulations thereunder.” Id. at 501-02. The court explained that even if Thomson McKinnon had violated Regulation T, Section 29(b) was inapplicable because the options contracts that plaintiffs sought to rescind were governed by a valid, lawful contract whose terms did not violate the Exchange Act or any regulations promulgated thereunder. See id. at 502.

Colkitt responds to GFL’s argument by citing Regional Properties, Inc. v. Financial and Real Estate Consulting Co., 678 F.2d 552, 560 (5th Cir.1982), which challenges Drasner’s narrow construction of Section 29(b). In Regional Properties, two real estate entrepreneurs brought suit against their broker and his firm, Financial and Real Estate Consulting Co. (“Financial”), alleging that the broker had violated Section 15(a)(1) of the Exchange Act by selling limited partnership interests for them without having registered with the SEC as a broker-dealer. See id. at 556. The entrepreneurs and their affiliated corporations sought to rescind their agreements with Financial pursuant to Section 29(b) in light of the broker’s violations of Section 15(a)(1). See id. The court rejected Drasner’s conclusion that Section 29(b) renders void only those contracts that “by their terms” violate the Exchange Act and instead interpreted Section 29(b) as “render[ing] voidable those contracts that are either illegal when made or as in fact performed.” Id. at 560. The court concluded that rescission was proper because, although plaintiffs sought to avoid contracts that were “perfectly lawful on their face,” the performance of the contracts by Financial nevertheless “resulted in a violation of the Act.” Id. at 561. The court added: “That these contracts, under different circumstances, could have been performed without violating the Act is immaterial.” Id.

Although the court of appeals in Regional Properties rescinded the contracts therein and explicitly rejected Drasner’s narrow reading of Section 29(b), its opinion is nevertheless consistent with the outcomes in Drasner, Slomiak, and Zerman. In particular, the violations of the Exchange Act alleged in Drasner, Slomiak,, and Zerman were “collateral or tangential to the contract between the parties,” whereas the violation alleged in Regional Properties was “inseparable from the performance of the contract” that plaintiffs were attempting to void. Slomiak, 597 F.Supp. at 682. The parties could — and did — perform the contracts at issue in Drasner, Slomiak, and Zerman without committing any violations of the Exchange Act, but the broker in Regional Properties could not carry out his obligations under the agreements without violating the Exchange Act, for performance of the agreements entailed selling partnership interests, which the broker lawfully could not do due to his failure to register as a broker-dealer.

The other two cases cited by Colkitt are also consistent with this analysis. In both cases, the courts voided loan agreements because the banks violated Regulation U, which governs the amount of money that a bank can lend for the purchase of registered securities. In Grove v. First National Bank of Herminie, 489 F.2d 512, 513 (3d Cir.1974) (per curiam), bank employees failed to explain to plaintiff that under federal law, the bank “could lend only a *202 certain percentage of the market value of stock to purchase registered securities.” Concluding that the bank had violated Regulation U, we held that Section 29(b) precluded the bank from recovering a deficiency, “even if the borrower knowingly and intentionally deceives the bank as to the actual purposes of the loans.” Id. at 516.

In Stonehill v. Security National Bank, 68 F.R.D. 24, 28 (S.D.N.Y.1975), a bank sought to recover the outstanding balance on a loan, but the borrower claimed that the loan was void and unenforceable because the bank issued the loan in violation of Regulation U. The bank argued that even if the borrower’s obligations were void due to the bank’s alleged violation of Regulation U, it still could recover from the guarantor. See id. at 33. The court disagreed, holding that “if the principal obligation violates Regulation U, a guarantee of that obligation is void under § 29(b) of the Exchange Act.” Id. The court explained that “allowing] a bank to recover on a guarantee even though the underlying loan violated Regulation U would encourage banks to extend credit in violation of the margin requirements.” Id. at 34.

As with the violation of Section 15(a)(1) in Regional Properties, the violations of Regulation U in Grove and Stonehill were inseparable from the underlying agreements between the parties: the banks could not perform their obligations under the loan agreements (i.e., lend money to the borrowers so that they could purchase securities) without violating Regulation U. In fact, the loans were “made in violation of’ the Exchange Act because a greater percentage of the loans was used to purchase securities than is allowed under Regulation U.

The same cannot be said for GFL’s obligations under the National Medical and EquiMed notes in this case. GFL’s allegedly unlawful short sales of National Medical and EquiMed stock were nothing more than “collateral or tangential” to the notes. Colkitt insists that performance of the contracts “involves a violation of’ securities laws because “performance itself (exchange of shares and repayment of the loan plus interest) ... supports GFL’s illegal short selling by giving GFL shares with which to cover the short sales.” Br. of Appellant at 25 n. 8. Despite the theory of Colkitt’s case, however, GFL’s short sales are completely independent of the parties’ respective obligations under the terms of the notes — namely, GFL’s obligation to lend Colkitt a total of $13,000,000, and Colkitt’s obligation to repay the loans at GFL’s option with shares of National Medical and EquiMed stock. In the end, GFL’s alleged unlawful activity (i.e., its short sales) is too attenuated from the parties’ valid, lawful contracts (ie., the National Medical and EquiMed notes) or GFL’s performance thereunder. Therefore, we conclude that the notes were neither made nor performed in violation of any federal securities laws as is required for rescission under Section 29(b). 4

B. MARKET MANIPULATION

Colkitt argues that the district court erred in rejecting his affirmative defense that the notes are void pursuant to Section 29(b) due to GFL’s alleged market manipulation, as there exist genuine issues of material fact regarding whether GFL’s short sales constituted market manipu *203 lation in violation of Section 10(b) and Rule 10b-5. GFL argues, however, that Colkitt has not presented enough evidence to create triable issues on any of the elements of market manipulation. 5

1. Elements of Market Manipulation Under Section 10(b) and Rule 10b-5

As an initial matter, the parties disagree about the specific elements of market manipulation under Section 10(b) and Rule 10b-5. To complicate matters further, we seem not to have addressed squarely what elements are required to establish a claim of market manipulation, particularly in the context of a Section 29(b) affirmative defense, and the case law from other courts of appeals and district courts on this issue provides limited guidance. Section 10(b) states in relevant part that “[i]t shall be unlawful for any person ... [t]o use or employ, in connection with the purchase or sale of any security ..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations” promulgated by the SEC. 15 U.S.C. § 78j. Rule 10b-5 provides in relevant part that “[i]t shall be unlawful for any person ... [t]o employ any device, scheme, or artifice to defraud.” 17 C.F.R. § 240.10b-5.

Noting that Section 10(b) outlaws but does not define a “manipulative or deceptive device or contrivance,” Colkitt turns to Section 9(a) of the Exchange Act to determine the elements of the offense of market manipulation. Section 9(a) prohibits individuals from effecting “a series of *204 transactions in any security registered on a national securities exchange ... creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.” 15 U.S.C. § 78i(a)(2). Based on this passage and the Supreme Court’s decision in Aaron v. SEC, 446 U.S. 680, 695, 100 S.Ct. 1945, 1955, 64 L.Ed.2d 611 (1980), in which the Court recognized scienter as an element of a Section 10(b) claim, Colkitt maintains that summary judgment was improper because he created genuine issues with respect to each of the following elements of market manipulation: (1) GFL engaged in a series of transactions in the registered securities; (2) the purpose of GFL’s short sales was to induce others to sell the securities; (3) GFL’s short sales created “actual or apparent active trading” in the securities or depressed the prices of the securities; and (4) GFL acted with scienter.

GFL responds that Colkitt has mischar-acterized the elements of market manipulation by applying an overly broad description of prohibited activities set forth under Section 9(a) and by ignoring the specific requirements of market manipulation that have evolved over time. GFL points out that market manipulation is “virtually a term of art when used in connection with the securities market. It connotes intentional and willful conduct designed to deceive or defraud investors by controlling or artificially affecting • the price of securities.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 1384, 47 L.Ed.2d 668 (1976). GFL asserts that Colkitt disregards two necessary elements of a market manipulation claim — that “GFL injected inaccurate information into the marketplace” and that GFL’s conduct “affected the price” of National Medical and EquiMed stock. Br. of Appellee at 24.

The first disputed element is whether Colkitt must demonstrate that GFL injected inaccurate information into the marketplace or created a false impression of market activity. Like the district court, GFL relies on Olympia Brewing, 613 F.Supp. at 1292, in which the district court emphasized that the “essential element” of a market manipulation claim is the injection of “inaccurate information” into the market. GFL observes that even the cases cited by Colkitt “recognize that market manipulation requires an additional element, something beyond otherwise legal trading, which specifically injects false information into the market and/or creates an artificial demand for the underlying security.” Br. of Appellee at 22 (emphasis added). Colkitt responds, however, that he is not required to present evidence that “GFL injected affirmative misinformation into the market,” but only needs to demonstrate that “GFL’s short trades were made for the undisclosed purpose of artificially depressing share prices.” Reply Br. of Appellant at 9 (emphasis added).

Notwithstanding Colkitt’s assertion to the contrary, the parties appear to be in accord on this point. Indeed, the difference between their positions seems to be one without distinction. Both GFL and Colkitt focus on the need to demonstrate that some action was taken to artificially depress or inflate prices, whether by purposely making false statements or by employing illegitimate, deceptive trading techniques that mislead investors about the price or demand for a stock.

To the extent that the parties’ respective positions are at odds, however, GFL advances a sounder construction of a Section 10(b) market manipulation claim, for it is less vague than Colkitt’s. The Supreme Court has indicated that market manipulation “generally refers to practices, such as wash sales, matched orders, *205 or rigged prices, that are intended to mislead investors by artificially affecting market activity.” Santa Fe Indus. v. Green, 430 U.S. 462, 476, 97 S.Ct. 1292, 1302, 51 L.Ed.2d 480 (1977). “The gravamen of manipulation is deception of investors into believing that prices at which they purchase and sell securities are determined by the natural interplay of supply and demand, not rigged by manipulators.” Gurary v. Winehouse, 190 F.3d 37, 45 (2d Cir.1999). In that vein, courts must distinguish between legitimate trading strategies intended to anticipate and respond to prevailing market forces and those designed to manipulate prices and deceive purchasers and sellers. Although Colkitt’s construction properly reflects the aspiration of Section 10(b) of preventing market activities that artificially depress prices, it provides little guidance on which activities artificially affect prices and which activities legitimately impact prices. .

Requiring a Section 10(b) plaintiff to establish that the alleged manipulator injected “inaccurate information” into the market or created a false impression of market activity cures this problem. Such a construction permits courts to differentiate between legitimate trading activities that permissibly may influence prices, such as short sales, and “ingenious devices that might be used to manipulate securities prices,” Santa Fe Indus., 430 U.S. at 477, 97 S.Ct. at 1303, such as wash sales and matched orders. As the court in Olympia Brewing, 613 F.Supp. at 1292, stated, “[rjegardless of whether market manipulation is achieved through deceptive trading activities or deceptive statements as to the issuing corporation’s value, it is clear that the essential element of the claim is that inaccurate information is being injected into the marketplace.”

The second disputed element is whether Colkitt must establish that GFL’s allegedly manipulative conduct actually depressed the prices of National Medical and EquiMed stock. GFL argues that market manipulation in violation of Section 10(b) and Rule 10b-5 requires that the allegedly unlawful conduct impact a security’s price. GFL cites three cases to support its position, but all three are unhelpful. First, although we stated in Rosenberg v. Hano, 121 F.2d 818, 821 (3d Cir.1941) (footnote omitted), that “the party claiming injury must plead and prove some change in price, because of the prohibited acts,” the case involved an alleged violation of Section 9, not Section 10(b) and Rule 10b-5. Second, the opinion jn United States v. Russo, 74 F.3d 1383, 1394 (2d