May 29 (Reuters) - A federal judge on Wednesday dismissed a lawsuit in which investors accused the parent of the Chicago Board Options Exchange of letting anonymous traders rig Wall Street's main gauge of future stock market volatility at their expense.
U.S. District Judge Manish Shah in Chicago said investors in the proposed class action failed to show that Cboe Global Markets Inc intended to defraud them by allowing manipulation of options and futures tied to the VIX, known as the U.S. stock market's "fear gauge."
"Though Cboe may have designed a process with features that made it vulnerable to manipulation," the investors did not show that it "knew about these flaws at the time it designed the VIX enterprise or that it purposefully designed the market to facilitate manipulation," Shah wrote in a 32-page decision.
Lawyers for the investors did not immediately respond to requests for comment. Cboe's lawyers did not immediately respond to similar requests.
The VIX, short for Cboe Volatility Index, measures expected 30-day volatility for U.S. stocks based on Standard & Poor's 500 options, and often rises when stock prices fall.
Investors had accused Cboe in the lawsuit of knowing for years about systemic manipulation of VIX products but doing nothing in an effort to boost profit and market share.
Cboe called the lawsuit an "unprecedented attempt" to hold a regulator liable based on speculation it allowed manipulation "by unidentified persons on unspecified occasions, leading to unspecified losses by unspecified market participants."
The VIX became a focus for investors in February 2018 when the prices of two products tied to it plunged more than 80 percent, and an anonymous whistleblower alleged manipulation in letters to U.S. financial regulators.
Shah dismissed the investors' claims under federal antitrust, securities and commodity exchange laws without prejudice, meaning they can be brought again.
He dismissed a negligence claim with prejudice because federal law pre-empted it.
The case is In re Chicago Board Options Exchange Volatility Index Manipulation Antitrust Litigation, U.S. District Court, Northern District of Illinois, No. 18-04171. (Reporting by Jonathan Stempel in New York; Editing by Dan Grebler)