Federal judge dismisses Eltek manipulation lawsuit against Morgan Stanley Smith Barney

A federal judge tossed a shareholder suit accusing Morgan Stanley's wealth arm of helping cover up years of stock manipulation in a small Israeli company. 

The May 14, 2026 decision by US District Judge Lewis A. Kaplan, ends, for now, the claims brought against Morgan Stanley Smith Barney LLC by XDOOD LLC, which sued derivatively on behalf of Eltek, Ltd. The case is in the Southern District of New York. The order resolves only MSSB's motion to dismiss; a parallel motion by co-defendant Interactive Brokers Group is not addressed. 

XDOOD's theory was ambitious. It said unknown traders, named in the complaint only as John Does, had been suppressing Eltek's share price since November 2019 through wash trades, matched orders, spoofing and price fixing. Because XDOOD could not identify them, it sued the brokers instead – Interactive Brokers and Morgan Stanley Smith Barney. 

Morgan Stanley's role came down to a single internal call. On or about October 16, 2020, the firm's Fraud Operations Unit rolled out what the complaint calls the P-Trade Policy. For about nine months, MSSB customers could not buy Eltek shares electronically. They could still place orders by phone. The policy ended around July 2021. 

XDOOD argued MSSB was complicit because it did not actively flag the restriction to Eltek shareholders, and because it kept lending Eltek shares for short sales while shutting off electronic buying. The complaint said the result was a one-sided market tilted to the downside – one that, three years later, forced Eltek to raise capital on diluted terms. 

Judge Kaplan was not buying it. He said the plaintiff was trying to dress up an ordinary fraud-control decision as a conspiracy, and that the pleading did not hold together. 

The Section 10(b) claim failed on four independent grounds: no manipulative act, no scienter, no reliance, and no real loss tied to MSSB. Customers, the judge noted, could simply pick up the phone or use another broker. And XDOOD itself acknowledged that MSSB adopted the policy to address detected manipulation - which, in the court's view, is not what fraudulent intent looks like. 

The claim was also too late. XDOOD knew the relevant facts by at least February 2021 but waited more than four years to sue – well past the two-year window under 28 U.S.C. § 1658(b). The common law fraud claim failed Rule 9(b)'s particularity test. XDOOD also failed to make the required demand on Eltek's board. 

For broker-dealer compliance teams, the practical takeaway is useful. A quiet, firm-level decision by a fraud unit to pause electronic trading in a suspect stock is not, by itself, market manipulation under the federal securities laws – even if the policy is not actively publicized to every affected customer. Kaplan left a small opening for the plaintiff, noting it has floated a proposed second amended complaint that the court has yet to weigh. 

The case is XDOOD LLC, derivatively on behalf of Eltek, Ltd. v. Interactive Brokers Group, Inc., Morgan Stanley Smith Barney LLC, and John Does 1-10, No. 25-cv-8536 (LAK), in the United States District Court for the Southern District of New York.