Exceed Investments has filed a complaint against the Chicago Board Options Exchange (CBOE) accusing the options exchange of 'fraudulent inducement', 'promissory estoppel', 'breach of contract', 'misappropriation of trade secrets', and 'violations of the Federal Defend Trade Secrets Act', in relation to structured notes.

According to the complaint, which was filed on last week at the New York Southern District Court, CBOE lied to Exceed, pretending to be interested in a potential investment in the firm in order to get Exceed to reveal its proprietary trade secrets about upcoming financial products.

"In early 2015, CBOE expressed interest in learning more about Exceed, with the potential goal of investing in Exceed to gain a foothold in the marketplace for structured note products," stated the complaint.

The filling states that the structured note industry is dominated by the largest global banks and has a number of characteristics that naturally lend itself to a belief that incremental innovations can bring significant value to the inventor of that particular innovation. 'Due to the product's high level of complexity and specialized nature, few entrepreneurs have attempted to take on the banks and create innovative structured note products,' it said. 'Two companies that have attempted to compete with the big banks in this space are Exceed and Vest Financial Group.'

On February 24, 2015, Exceed which is headed by Joe Halpern (pictured), chief executive, and CBOE signed a Non-Disclosure Agreement (NDA) which stated that each party had certain proprietary and confidential information relating to its business and that both parties were 'evaluating a potential business relationship' on the condition that 'the recipient provides proper safeguards to protect the confidential information'.

After execution of the NDA which had a term of two years, Exceed provided CBOE with broad access to its internal, proprietary information, including its plans for future structured note products, and set up an on-line data room containing all of the information CBOE asked to see.

According to the filling, on September 3, 2015, CBOE prepared a term sheet reflecting a contemplated US$5m investment by CBOE into Exceed, but later on the firm learned that the exchange was in talks to acquire an undisclosed entity in the option strategy space.

'When asked by Exceed whether that potential investment in any way pertained to the products Exceed was developing, CBOE represented to Exceed that the potential transaction was unrelated to the work Exceed was doing or the plans Exceed and CBOE were discussing,' it said. 'This was the first of several false representations made and assurances CBOE gave Exceed, so that Exceed would continue to believe that CBOE has a legitimate interest in Exceed.'

However, on January 2016, CBOE announced its investment in Vest - the competitor of Exceed mentioned above. According to the filling, Exceed did not understand Vest to have any active funds or indices or have any stated intention to launch a mutual fund, index, or exchange-traded fund (ETF), while CBOE kept promising Exceed that a deal was imminent. However, Vest built and launched a new structured note project that, according to the Plaintiffs, was based entirely on the proprietary approach Exceed disclosed to CBOE under the NDA, according to the filling.

Exceed alleges that 'CBOE then took those trade secrets, disclosed them to a newly-acquired CBOE entity, and CBOE and its new subsidiary went to market with competing products ahead of the launch of Exceed's products'.

In addition, on the day of the Vest transaction, the exchange specifically reassured Exceed that it was next in the deal pipeline with CBOE and 'represented to Exceed that Vest's products were and would be "complementary" to, and not competitive with, those of Exceed.'

According to the complaint, between February and June 2016 period, CBOE continually represented to Exceed that deal documents would be forthcoming and apologized for the delay due to a necessary input or two from CBOE senior management. During this same period, Vest built and launched a new structured note project that was based entirely on the proprietary approach Exceed disclosed to CBOE under the NDA.

In April of 2016, Vest launched the first of a series of indexes - CBOE S&P 500 Buffer Protect Indexes that allowed for laddering and rebalancing structured note strategies. In July 2016, VEST launched the CBOE Vest S&P 500 Buffer Protect Strategy Fund, its first mutual fund designed to provide investors with index-based buffer protection based on this strategy.

According to the filling, 'the new Vest product (a) was competitive with, and not complementary to, Exceed's products; (b) was based directly on the future product plans that Exceed had shared confidentially with CBOE and not disclosed publicly; (c) actually beat Exceed to market with its own product, further damaging Exceed in the marketplace'.

In summary, the complaint states that 'while negotiating with Exceed and accessing Exceed's proprietary, non-public information, CBOE acquired Vest, which was competing with Exceed in the structured notes industry'. Exceed alleges that CBOE then made aggressive representations to Exceed that Vest was indeed complementary, rather than competitive with Exceed, and that an investment in Exceed was imminent.

'All while Vest was adding a major product approach to their portfolio that essentially duplicated in style and market strategy what Exceed had already developed and disclosed in confidence to CBOE.

According to the filling, CBOE backed a new competitor to Exceed while at the same time holding Exceed back with the intent of funding that never came. 'Given the startup nature of Exceed, CBOE provided a mortal blow that resulted in significant damage to the company - damage that changed the nature of Exceed's business and from which it has not recovered,' it said.

The amount of damages is to be determined at trial but is clearly in excess of US$5m. Under the Defend Trade Secrets Act, these damages may be tripled to an amount in excess of US$15m.

The US UIT 'defined outcome' segment has seen a number of developments recentloy as well as new firms entering the market such as JVB Financial/Olden Lane Securities, and Alaia Capital. Exceed and CBOE Vest declined to comment.

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