Defendant Apex Clearing Corporation's Reply in Support of its Rule 12 Motion to Dismiss Plaintiffs' (Fourth) Class Action Complaint — In re January 2021 Short Squeeze Trading Litigation (Dkt. 496, S.D. Fla.)
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Defendant Apex Clearing Corporation's Reply in Support of its Rule 12 Motion to Dismiss Plaintiffs' (Fourth) Class Action Complaint (Document 496) in In re: January 2021 Short Squeeze Trading Litigation, Case 1:21-md-02989-CMA, U.S. District Court for the Southern District of Florida, entered on the FLSD docket July 13, 2022. The 35-page reply argues that Plaintiffs fail to explain how Apex's brief exercise of its right to refuse new purchase orders for three meme stocks violated any duty owed to Plaintiffs Chavez or Jang, and that their Opposition reframes the case around a novel duty for clearing brokers with no legal authority or contract behind it. Its headings argue that the negligence and fiduciary duty claims fail because Apex owes no open-ended duty to safeguard Plaintiffs' investments. It carries a certificate of service dated July 13, 2022 signed by Jack E. Pace III.
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- Date
- 2022-07-13
Cite this document
“Defendant Apex Clearing Corporation's Reply in Support of its Rule 12 Motion to Dismiss Plaintiffs' (Fourth) Class… (Dkt. 496).”
Original at archive.org, dated 2022-07-13. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2022-07-13-madison-ave-gourmet-foods-inc-v-finlandia-ctr-inc/
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Case 1:21-md-02989-CMA Document 496 Entered on FLSD Docket 07/13/2022 Page 1 of 35
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 21-2989-MDL-ALTONAGA/Torres
IN RE:
JANUARY 2021 SHORT SQUEEZE
TRADING LITIGATION
_____________________________________/
This Document Relates to All Claims Included
In the Other Broker Tranche
DEFENDANT APEX CLEARING CORPORATION’S REPLY
IN SUPPORT OF ITS RULE 12 MOTION TO DISMISS
PLAINTIFFS’ (FOURTH) CLASS ACTION COMPLAINT
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Table of Contents
INTRODUCTION .......................................................................................................................... 1
ARGUMENT .................................................................................................................................. 1
I. Plaintiffs’ Negligence and Fiduciary Duty Claims Fail Because Plaintiffs Fail to Show
that Apex Owes Plaintiffs an Open-Ended Duty to “Safeguard” Plaintiffs’ Investments
and Accept All Transactions ............................................................................................ 1
A. Whether Evaluated as Clearing Broker or Non-Discretionary Broker, Apex Does
Not Owe Plaintiffs an Open-Ended, Ongoing Common Law or Fiduciary Duty... 2
B. Plaintiffs’ Securities Fraud Cases Do Not Establish that Apex, as a Clearing
Broker, Owed Plaintiffs Any General Common Law Tort or Fiduciary Duties ..... 9
II. Even if This Court Were to Find That Apex Owed Some Duty to Named Plaintiffs,
Those Duties Do Not Include the Novel Duties Plaintiffs Seek to Create Here ............ 12
A. Setting the Record Straight: Plaintiffs’ Complaint in Fact Does Seek to Impose
New Duties (i) to Dicker, (ii) to Rush, and (iii) to Maintain Access to Unlimited
Capital, But Plaintiffs Do Not Defend These Novel Duties in the Opposition .... 12
B. Plaintiffs’ Proposed Duties, Including a New Common Law Duty to Follow
FINRA Rules Proposed in Plaintiffs’ Brief, Are Contrary to Well-Settled Law.. 14
III. Plaintiffs’ Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing
Fails Because the Apex Customer Agreement Expressly Permits Apex to Decline to
Execute Trades at Any Time and for Any Reason ......................................................... 18
IV. Plaintiffs’ Tortious Interference Claim Fails under Both New York and Texas Law,
Particularly Where No Contract Is Alleged .................................................................... 19
V. Plaintiffs Remaining Arguments Are Meritless ............................................................. 21
A. Plaintiffs Fail to Plausibly Plead Causation or Article III Standing ..................... 21
B. Plaintiffs’ Complaint is Preempted Because it Seeks to Enforce Securities Laws
through Conflicting State Tort Law ...................................................................... 22
C. Absent a “Special Relationship,” New York Law Precludes Tort Claims for
Purely Economic Losses ....................................................................................... 23
D. This Court Should Reject Plaintiffs’ Invitation to Use New York Tort Law to
Create Unlimited Negligence Liability ................................................................. 24
CONCLUSION ............................................................................................................................. 25
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TABLE OF AUTHORITIES
Page(s)
FEDERAL CASES
532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr., Inc.,
96 N.Y.2d 280 (N.Y. 2001) .....................................................................................................24
Alfaro v. Wal-Mart Stores, Inc.,
210 F.3d 111 (2d Cir. 2000).................................................................................................9, 11
Am. Dental Ass’n v. Cigna Corp.,
605 F.3d 1283 (11th Cir. 2010) ...............................................................................................17
AMBAC Assur. Corp. v. U.S. Bank N.A,
328 F. Supp. 3d 141 (S.D.N.Y. 2018)......................................................................................23
Anaheim Indus. v. GMC,
2007 Tex. App. LEXIS 9950 (Tex. App. Dec. 20, 2007) ....................................................3, 19
Appert v. Morgan Stanley Dean Witter, Inc.,
2009 WL 3764120 (N.D. Ill. Nov. 6, 2009) ......................................................................22, 23
Ashcroft v. Iqbal,
556 U.S. 662 (2009) .................................................................................................................17
Bank of America, N.A. v. Cartwright,
2021 WL 3912563 (N.D. Ind. Sept. 1, 2021) ..........................................................................15
Barrow-Shaver Res. Co. v. Carrizo Oil & Gas, Inc.,
590 S.W.3d 471 (Tex. 2019) ......................................................................................................2
Bell Atl. Corp. v. Twombly,
550 U.S. 544 (2007) .......................................................................................................5, 17, 22
Berwecky v. Bear Stearns & Co.,
197 F.R.D. 65 (S.D.N.Y. 2000) ...............................................................................................10
Biscone v. JetBlue Airways,
681 F. Supp. 2d 383 (E.D.N.Y. 2010) .......................................................................................8
Bissell v. Merrill Lynch & Co.,
937 F. Supp. 237 (S.D.N.Y. 1996) ............................................................................................6
Blyth v. White,
49 G.A. App. 738 (Ga. Ct. App. 1934) ......................................................................................4
ii
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Bobadilla v. Aurora Loan Servs., LLC,
478 F. App’x 625 (11th Cir. 2012) ......................................................................................8, 12
Bocre Leasing Corp. v. GMC,
84 N.Y.2d 685 (1995) ................................................................................................................6
Burgess v. Religious Tech. Ctr., Inc.,
600 F. App’x 657 (11th Cir. 2015) ......................................................................................8, 15
Busch v. L.F. Rothschild & Co.,
23 A.D.2d 189 (1st Dept. 1965).................................................................................................4
Cannizzaro v. Bache, Halsey, Stuart, Shields, Inc.,
81 F.R.D. 719 (S.D.N.Y. 1979) ...........................................................................................9, 10
Cap. Options Invs., Inc. v. Goldberg Bros. Commodities, Inc.,
958 F.2d 186 (7th Cir. 1992) ...................................................................................................14
Capital Options Invs., Inc. v. Goldberg Bros. Commodities,
1990 WL 180583 (N.D. Ill. Nov. 5, 1990) ................................................................................4
Carvel Corp. v. Noonan,
3 N.Y.3d 182 (N.Y. 2004) .................................................................................................20, 21
Clements v. Withers,
437 S.W.2d 818 (Tex. 1969) ....................................................................................................19
Conway v. Icahn & Co., Inc.,
16 F.3d 504 (2d Cir. 1994).........................................................................................................7
Courtland v. Walston & Co., Inc.,
340 F. Supp. 1076 (S.D.N.Y. 1972)...........................................................................................4
de Kwiatkowski v. Bear, Stearns & Co.,
306 F.3d 1293 (2d Cir. 2002)...............................................................................................3, 14
Deloitte (Cayman) Corp. Recovery Servs., Ltd. v. Sandalwood Debt Fund A, LP,
31 Misc. 3d 1225(A), 929 N.Y.S.2d 199 (Sup. Ct. 2011) .......................................................19
Dep't of Lab. v. McConnell,
305 Ga. 812, 828 S.E.2d 352 (2019)........................................................................................25
Dunn v. Calahan,
2008 Tex. App. LEXIS 9498 (Tex. App. Dec. 17, 2008) ........................................................20
Duradil, L.L.C. v. Dynomax Drilling Tools, Inc.,
516 S.W.3d 147 (Tex. App. 2017) .....................................................................................19, 20
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Erie R.R. Co. v. Tompkins,
304 U.S. 64 (1938) .....................................................................................................................8
Eva Rioseco and Nilda Cruz v. Gamco Asset Management, Inc.,
2011 N.Y. Misc. LEXIS 7279 (N.Y. Sup. Ct. Sept. 23, 2011) ..................................................7
First Nat’l Bank of Eagle Pass v. Levine,
721 S.W.2d 287 (Tex. 1986) ....................................................................................................20
French v. Bache Halsey Stuart, Inc.,
Comm. Fut. L. Rep. ¶ 20,444 (CFTC 1977) ..............................................................................4
Glob. Enter. Grp. Holding, S.A. v. Ottomino,
No. 07-CV-4904 (TCP) (WDW), 2010 WL 11629556 (E.D.N.Y. June 8, 2010) ..........8, 9, 10
Gochnauer v. A.G. Edwards & Sons, Inc.,
810 F.2d 1042 (11th Cir. 1987) .................................................................................................7
Goldberger v. Bear Stearns & Co.,
2000 U.S. Dist. LEXIS 18714 (S.D.N.Y. Dec. 28, 2000) .........................................................3
Griffin v. Dugger,
823 F.2d 1476 (11th Cir. 1987) ...............................................................................................22
Guard-Life Corp. v. S. Parker Hardware Mfg. Corp.,
50 N.Y.2d 183 (N.Y. 1980) .....................................................................................................20
Hamilton v. Beretta U.S.A. Corp.,
96 N.Y.2d 222 (2001) .........................................................................................................6, 25
Hand v. Dean Witter Reynolds Inc.,
889 S.W.2d 483 (Tex. App. 1994) .............................................................................................4
Humphrey v. Hollywood Police Dep’t,
2019 U.S. Dist. LEXIS 35022 (S.D. Fla. Mar. 4, 2019) ..........................................................16
Hux v. S. Methodist Univ.,
819 F.3d 776 (5th Cir. 2016) ...................................................................................................19
In re Blech Sec. Litig.,
961 F. Supp. 569 (S.D.N.Y. 1997) ..........................................................................................10
In re Equifax, Inc. Customer Data Sec. Breach Litig.,
362 F. Supp. 3d 1295 (N.D. Ga. 2019) ....................................................................................24
In re Letterman Bros. Energy Sec. Litig.,
799 F.2d 967 (5th Cir. 1986) .....................................................................................................7
iv
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In re Merrill Lynch & Co. Research Reps. Sec. Litig.,
568 F. Supp. 2d 349 (S.D.N.Y. 2008)......................................................................................21
In re Series 7 Broker Qualification Exam Scoring Litig.,
510 F. Supp. 2d 35 (D.D.C. 2007) .....................................................................................15, 23
Indep. Ord. of Foresters v. Donald, Lufkin & Jenrette, Inc.,
157 F.3d 933 (2d Cir. 1998).......................................................................................................3
Jim Walter Homes, Inc. v. Reed,
711 S.W.2d 617 (Tex. 1986) ......................................................................................................6
Kneese v. Pershing LLC,
2012 WL 13019677 (N.D. Tex. Nov. 14, 2012) ..................................................................9, 10
Kolbeck v. LIT Am.,
923 F. Supp. 557 (S.D.N.Y. 1996) ..........................................................................................25
Koruga v. Fiserv Correspondent Servs.,
183 F. Supp. 2d 1245 (D. Or. 2001) ........................................................................................10
Lange v. Hentz & Co.
418 F. Supp. 1376 (N.D. Tex. 1976) .........................................................................................8
Luxus Aviation, LLC v. Kerwin Media LLC,
91 A.D.3d 569 (N.Y. App. Div. 2012) ................................................................................3, 19
Magnum Corp. v. Lehman Bros. Kuhn Loeb, Inc.,
794 F.2d 198 (5th Cir. 1986) .............................................................................................6, 7, 8
McDaniel v. Bear Stearns & Co., Inc.,
196 F. Supp. 2d 343 (S.D.N.Y. 2002)............................................................................9, 10, 11
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cheng,
697 F. Supp. 1224 (D.D.C. 1988) ..............................................................................................7
Miley v. Oppenheimer & Co., Inc.,
637 F. 2d 318 (5th Cir. 1981) ....................................................................................................7
Murphy v. Am. Home Prods. Corp.,
58 N.Y.2d 293 (1983) ..............................................................................................................18
Nat’l Mkt. Share, Inc. v. Sterling Nat’l Bank,
392 F.3d 520 (2d Cir. 2004).....................................................................................................18
Nat’l Union Fire Ins. Co. of Pitt., Pa. v. Xerox Corp.,
25 A.D.3d 309 (N.Y. App. Div. 2006) ....................................................................................18
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NBT Bancorp Inc. v. Fleet/Norstar Fin. Grp., Inc.,
87 N.Y.2d 614 (N.Y. 1996) .....................................................................................................20
Norwood v. Raytheon Co.,
414 F. Supp. 2d 659 (W.D. Tex. 2006)......................................................................................9
Press v. Chemical Inv. Servs. Corp.,
988 F. Supp. 375 (S.D.N.Y. 1997) ......................................................................................4, 14
Remington v. Newbridge Sec. Corp.,
2013 WL 2444719 (S.D. Fla. June 5, 2013) ..............................................................................7
Robinson v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
337 F. Supp. 107 (N.D. Ala. 1971) ............................................................................................7
Ross v. Bolton,
904 F.2d 819 (2d Cir. 1990).......................................................................................................2
Rozsa v. May Davis Group, Inc.,
187 F. Supp. 2d 123 (S.D.N.Y. 2002)........................................................................................2
Scott v. Dime Sav. Bank of New York, FSB,
886 F. Supp. 1073 (S.D.N.Y. 1995)...........................................................................................7
Turk v. Pershing LLC,
2014 U.S. Dist. LEXIS 190624 (N.D. Tex. Dec. 8, 2014) ........................................................2
Turk v. Pershing LLC,
2014 WL 12572906 (N.D. Tex. Dec. 8, 2014) ........................................................9, 10, 11, 12
Valelly v. Merrill Lynch, Pierce, Fenner & Smith Inc.
464 F. 3d 634 (S.D.N.Y. 2020) ..........................................................................................15, 23
Warth v. Seldin,
422 U.S. 490 (1975) .............................................................................................................3, 22
FEDERAL REGULATIONS
17 C.F.R. § 240.15c3-1 ..................................................................................................................16
FINRA Rule 2010 ..........................................................................................................................16
FINRA Rule 3110 ..........................................................................................................................16
FINRA Rule 4370 ..........................................................................................................................16
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MISCELLANEOUS
U.S. Securities and Exchange Commission, Thinking About Investing in the Latest Hot Stock?:
Understand the Significant Risks of Short-Term Trading Based on Social Media, Investor
Alerts and Bulletins (Jan. 30, 2021), available at https://www.sec.gov/oiea/investor-alerts-
and-bulletins/risks-short-term-trading-based-social-media-investor-alert (last accessed Nov.
19, 2021). .................................................................................................................................17
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INTRODUCTION
Plaintiffs fail to allege or explain how Apex’s brief exercise of its clear right—under
decades-old controlling case law and its contract—to refuse to accept new purchase orders for
three meme stocks violated any duty owed by Apex to Plaintiffs Chavez or Jang or violated any
agreement. In Plaintiffs’ Opposition, Plaintiffs reframe their case as based on a novel duty
requiring clearing brokers not to take actions—such as moving a security to a closing-only
position—that negatively could affect the value of a security purchased through an introducing
broker that uses the clearing broker. Plaintiffs’ latest complaint depends on the new theory that,
once an introduced customer purchases a security, and the purchase is cleared through Apex, Apex
then owes a duty to that downstream customer to continue to facilitate trades of that security to
other investors. Plaintiffs identify no legal authority for their proposed duty because none exists.
Plaintiffs’ theory would upend the roles of clearing brokers and interfere with the intended
functioning of the securities trading system. Nor do Plaintiffs cite a contract, because the relevant
agreement says the opposite of what Plaintiffs propose.
In addition, Plaintiffs continue to argue without support that Apex somehow breached a
common law duty (i) by not protesting against the SEC-regulated market utilities responsible for
collateral requirements, (ii) by not removing its trading restrictions in some amount of time less
than 3 hours and 25 minutes, and (iii) by not having unlimited capital on hand. But Plaintiffs never
identify any authority supporting the existence of a duty Apex could have breached. Nor do
Plaintiffs adequately explain how the trading restriction breached any duty or obligation in the face
of Apex’s unqualified contractual right to refuse to clear Plaintiffs’ trades “at any time and for
any reason.” This Court should dismiss Plaintiffs’ negligence, breach of fiduciary duty, breach
of the implied covenant of good faith and fair dealing, and tortious interference claims with
prejudice.
ARGUMENT
I. Plaintiffs’ Negligence and Fiduciary Duty Claims Fail Because Plaintiffs Fail to Show
that Apex Owes Plaintiffs an Open-Ended Duty to “Safeguard” Plaintiffs’
Investments and Accept All Transactions
Plaintiffs seek to create sweeping, new, open-ended duties between clearing brokers and
introduced customers that simply do not exist, whether viewed under New York or Texas law.
Although Apex asserts that Texas law applies to Plaintiffs’ claims, Mot. 11–12, New York law
1
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also supports dismissal. Plaintiffs assert that Apex owes Plaintiffs a common law duty of care
under New York law that “arises by virtue of the broker-client relationship itself.” Opp. 22. The
duties that Plaintiffs claim Apex owed to named Plaintiffs purportedly include an ongoing duty to
comply with FINRA rules and an ongoing duty to “ensure that [Apex] can continue to provide
investors access to the securities markets during times of extreme market volatility.” Opp. 26. But
Apex owed no such duties to Plaintiffs.
A. Whether Evaluated as Clearing Broker or Non-Discretionary Broker, Apex Does
Not Owe Plaintiffs an Open-Ended, Ongoing Common Law or Fiduciary Duty
1. As the Clearing Broker for Named Plaintiffs’ Introducing Brokers, Apex
Owed Plaintiffs No Common Law or Fiduciary Duty of Care
Plaintiffs admit that Apex was only their clearing broker. 4th Compl. ¶ 14 (“Plaintiff
Chavez is an investor who used Webull Financial LLC (‘Webull’) as his introducing broker dealer
and Apex as his clearing broker dealer.”); 4th Compl. ¶ 18 (“Plaintiff Jang is an investor who used
Ally Invest Securities (‘Ally’) as his introducing broker-dealer and Apex as his clearing broker.”).
As the clearing broker, Apex owed Named Plaintiffs no common law duty of care. Ross v. Bolton,
904 F.2d 819, 824 (2d Cir. 1990); Rozsa v. May Davis Group, Inc., 187 F. Supp. 2d 123, 129
(S.D.N.Y. 2002) (“As a rule, clearing brokers do not have a fiduciary duty to individual
investors.”); id. at 131 (“Courts have determined that clearing brokers do not owe duties to
plaintiffs who are customers of their introducing brokers.”); Turk v. Pershing LLC, 2014 U.S. Dist.
LEXIS 190624, at *15 (N.D. Tex. Dec. 8, 2014) (dismissing investor negligence claims because,
“as a clearing broker, [defendant] owed no common law duty of care to Plaintiffs that could form
the basis of a negligence claim”); see also Order Granting Robinhood Tranche Motion to Dismiss,
ECF No. 453 at 46–47 (Jan. 27, 2022) (“Under both California and Florida law, a clearing broker
does not generally owe fiduciary duties to investors whose transactions it executes.”).
That should be the end of the inquiry on all of Plaintiffs’ claims, because each claim,
including Plaintiffs’ claims for breach of the implied covenant of good faith and fair dealing and
tortious interference, depends on Apex owing Named Plaintiffs a duty of care. Barrow-Shaver
Res. Co. v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471, 490 (Tex. 2019) (under Texas law, duty of
good faith and fair dealing arises only in “special” relationships, defined as those creating an
2
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informal fiduciary duty)1; Opp. 45 (arguing that “culpable conduct” requirement of tortious
interference claim under N.Y. law is satisfied by negligence and breach of fiduciary claims).
2. Even if Evaluated under the Standard for Non-Discretionary Brokers, Apex
Did Not Owe Plaintiffs the General, Ongoing Duties Plaintiffs Seek to Impose
Plaintiffs attempt to avoid dismissal by casting Apex as a non-discretionary broker to other
customers who are not the Named Plaintiffs, ignoring that this Court must consider the claims of
only the Named Plaintiffs on a motion to dismiss. See Warth v. Seldin, 422 U.S. 490, 502 (1975);
see also Goldberger v. Bear Stearns & Co., 2000 U.S. Dist. LEXIS 18714, at *3 (S.D.N.Y. Dec.
28, 2000) (“If the named plaintiffs have no cause of action in their own right, their [class action]
complaint must be dismissed, even though the facts set forth in the complaint may show that others
might have a valid claim.” (citing Warth)). Under the standard for non-discretionary brokers, there
is no basis in law for the broad and open-ended duties that Plaintiffs seek to impose here. The
Second Circuit was blunt: “We are aware of no authority for the view that, in the ordinary case,
a broker may be held to an open-ended duty of reasonable care, to a nondiscretionary client, that
would encompass anything more than limited transaction-by-transaction duties.” de Kwiatkowski
v. Bear, Stearns & Co., 306 F.3d 1293, 1306 (2d Cir. 2002) (emphasis added).
On this third round of briefing, Plaintiffs’ continued failure to cite any cases recognizing
their open-ended, ongoing duty of care that clearing brokers owe to the customers of their
introducing brokers is not surprising. “Under New York law, as generally, there is no general
fiduciary duty inherent in an ordinary broker/customer relationship. Such a duty can arise only
where,” unlike here, “the customer has delegated discretionary trading authority to the broker.”
Indep. Ord. of Foresters v. Donald, Lufkin & Jenrette, Inc., 157 F.3d 933, 940–41 (2d Cir. 1998)
(citing Perl v. Smith Barney Inc., 230 A.D.2d 664, 666 (1st Dep’t 1996), and Press v. Chemical
Inv. Servs. Corp., 988 F. Supp. 375, 386–87 (S.D.N.Y. 1997), aff’d, 166 F.3d 529 (2d Cir. 1999)).
“This is because a broker’s fiduciary obligation, if any, ‘is limited to affairs entrusted to the broker,
and [t]he scope of affairs entrusted to the broker is generally limited to the completion of a
1
Texas law should govern, at a minimum, Plaintiffs’ claim for breach of the covenant of good
faith and fair dealing, because that claim arises out of the Customer Agreement, which includes a
Texas choice of law requirement. See Anaheim Indus. v. GMC, 2007 Tex. App. LEXIS 9950, at
*6, 18ff (Tex. App. Dec. 20, 2007); Luxus Aviation, LLC v. Kerwin Media LLC, 91 A.D.3d 569,
570 (N.Y. App. Div. 2012).
3
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transaction.’” Press, 988 F. Supp. at 386 (quoting Bissell v. Merrill Lynch & Co., 937 F. Supp.
237, 246 (S.D.N.Y. 1996)) (emphasis in original).
Thus, contrary to Plaintiffs’ proposed duty to “ensure that [Apex] can continue to provide
investors access to the securities markets during times of extreme market volatility,” Opp. 26, New
York law has in a decades-long, unbroken line of cases made clear that brokers have no obligation
to accept new orders. See Courtland v. Walston & Co., Inc., 340 F. Supp. 1076, 1080 (S.D.N.Y.
1972) (“A stockbroker need not accept the orders of a customer so long as he makes clear at the
time the orders are given that he refuses to perform them.”); Busch v. L.F. Rothschild & Co., 23
A.D.2d 189, 190 (N.Y. App. Div. 1965) (“A broker is not obligated to accept an order of a
customer for execution, even if the customer has a credit balance with the broker.”) (emphasis
added). This decisional law in New York that a broker has no duty to accept new orders is accepted
throughout the United States. See, e.g., Capital Options Invs., Inc. v. Goldberg Bros. Commodities,
1990 WL 180583, at *7 (N.D. Ill. Nov. 5, 1990), aff’d, 958 F.2d 186 (7th Cir. 1992) (“A broker
generally has a duty to accept customer orders to liquidate existing positions, but has no duty to
accept customer orders for new positions. . . . [T]he execution of new contracts exposes the broker,
as well as the customer, to new financial risks. One party should not be able to impose risks on
the other without the other’s consent.”) (emphasis added); French v. Bache Halsey Stuart, Inc.,
Comm. Fut. L. Rep. ¶ 20,444 at 21,806 (CFTC 1977) (same); Blyth v. White, 49 G.A. App. 738,
742 (Ga. Ct. App. 1934) (no cause of action stated for recovery of “speculative damages for loss
growing out of the defendants’ refusal to further act as his broker”).
Texas law is the same. See Hand v. Dean Witter Reynolds Inc., 889 S.W.2d 483, 493 (Tex.
App. 1994) (“the agency or broker/customer relationship does not come into existence until the
order has been placed and the broker has consented to execute it”; if the broker refuses to act as
agent, the broker “has no duty to act” for the customer) (emphasis added); id. at 494 (“Generally,
while a broker has a duty to execute a customer’s order to liquidate existing positions, he has no
duty to accept an order to open new positions unless he accepts the agency.”) (emphasis added);
Apex Motion to Dismiss (ECF No. 491) (“Mot.”) at 11–18 (choice of law, collecting cases). Thus,
while Plaintiffs point to Apex’s decision to suspend purchases, but not sales, as evidence of breach,
Opp. 15, 17, 27 (“one-sided trading suspension”), in fact Apex was required to allow customers
to liquidate existing positions under decisional law.
4
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Recognizing that the duties of non-discretionary brokers are limited to “transaction-by-
transaction” duties, Plaintiffs attempt to recast their proposed duty as “transactional” as it “arose
in connection with the sale of securities to Plaintiffs and the Class.” Opp. 23. 2 But Plaintiffs’
attempt to rewrite the duty of care must be rejected for several reasons.
First, there is nothing “transactional” about the duties Plaintiffs seek to impose. In fact,
Plaintiffs’ Fourth Complaint does not contain a single allegation concerning any transaction
executed by Plaintiffs Chavez or Jang through Apex. Plaintiffs do not even allege that either
Plaintiff Chavez or Jang actually purchased any of the meme stocks in transactions cleared by
Apex. 4th Compl. ¶¶ 14–15, 18–19 (alleging only that Apex was Plaintiffs’ clearing broker, and
separately, that Plaintiffs held meme stocks).
Second, the duty Plaintiffs seek to impose is impossibly broad and would upend
relationships designed to ensure smooth operation of the nation’s securities markets: if Customer
A purchases Security X using Apex as his or her clearing broker, then Apex would now owe
Customer A an indefinite duty to permit new buy orders for Security X by other customers because
“the transaction remains open. Opp. 23. As Plaintiffs admit: no court has ever defined the
“transaction-by-transaction” duty of a clearing or non-discretionary broker in this far-flung, hollow
way. Opp. 26; Opp. 23 (recognizing that there “are no cases” to support their position).
Plaintiffs also attempt to create a common law tort duty to adhere to industry rules and
regulations out of Plaintiffs’ Customer Agreement with Apex. Opp. 27–29. But the Agreement
on which Plaintiffs rely, indicating that transactions are subject to the “constitution, rules,
regulations, customs and usages of the exchange or market,” which separately require “high
standards of commercial honor,” creates no open-ended duty to accept trades. Opp. 27–28. To
the contrary, the imposition of trading restrictions is consistent with the customs and usages of the
2
Plaintiffs’ accusation that Apex intended to drive the prices of the meme stocks down by
imposing trading restrictions on purchases for three hours and 25 minutes in response to an
unprecedented collateral requirement is illogical and implausible. Opp. 26–27. Apex, as a clearing
broker, has no economic incentive to halt trading, because Apex earns its revenue by executing
trades. See Northern Star Inv. Corp. II, Current Report (Form 8-K) (Feb. 21, 2021), Exhibit 99.2
at 10. And in the context of the extraordinary volatility of the markets on January 28, 2021, which
provides an “obvious alternative” explanation for Apex’s behavior, Plaintiffs’ conclusory
allegation that Apex had ill-intent is implausible. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 567
(2007).
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exchange or market. Opp. 27–28; Order Granting Motion to Dismiss Robinhood Tranche, ECF
No. 453 at 15 (“[Robinhood] Plaintiffs acknowledge that other broker-dealers imposed trading
restrictions during the same week.”). In any event, Plaintiffs ignore that the Customer Agreement
expressly permits Apex to decline to execute trades for any reason. Mot. 6, 17–18, 27, 29.
Moreover, Plaintiffs’ attempt to create a common law negligence duty to enforce what Plaintiffs
claim are contractual obligations is precisely the type of tort claim that the economic loss rule was
designed to prohibit. See Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986); Bocre
Leasing Corp. v. GMC, 84 N.Y.2d 685, 688–89 (1995).
Plaintiffs never allege that Apex acted negligently in performing its clearing services for
accepted trades. Nor that Apex refused to clear any of Plaintiffs’ orders. Opp. 26–27 (“Apex is
not charged with turning down any particular trade from an individual customer . . . .”). Rather,
Plaintiffs appear to argue that, because an effect on Named Plaintiffs from a restriction on future
trading by others allegedly was “foreseeable,” Apex owed Named Plaintiffs a duty to “ensure that
[Apex] can continue to provide [other] investors access to the securities markets during times of
extreme market volatility.” Opp. 26 (emphasis added). But under New York law,
“[f]oreseeability, alone, does not define duty—it merely determines the scope of the duty once it
is determined to exist.” Hamilton v. Beretta U.S.A. Corp., 96 N.Y.2d 222, 232 (2001) (emphasis
added). The “injured party must show that a defendant owed not merely a general duty to society
but a specific duty to him or her, for ‘[w]ithout a duty running directly to the injured person there
can be no liability in damages, however careless the conduct or foreseeable the harm.’” Id.
(emphasis added). New York courts (and others) repeatedly have held that clearing brokers owe
no duty of care to introduced customers. Even for brokers of non-discretionary accounts, the duty
of care is “generally limited to the completion of a transaction.” Bissell, 937 F. Supp. at 246.
3. Plaintiffs’ Cases Are Inapposite or Support Apex’s Arguments
Not one of the cases that Plaintiffs cite under either New York or Texas law holds that a
broker of a non-discretionary account (much less a clearing broker) has a duty of care to accept
new buy orders.3 And none of the non-New York cases Plaintiffs cite––Remington, Cheng,
3
Plaintiffs’ other cases involve instances where the broker had accepted the order or otherwise
are simply off-point. See Magnum Corp. v. Lehman Bros. Kuhn Loeb, Inc., 794 F.2d 198, 200
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Robinson, Magnum, and Miley (Opp. 23–25)––supports the creation of an open-ended duty of a
broker to accept all transactions. In fact, Robinson supports Apex’s position entirely, because
there the court entered judgment in favor of the defendant broker, explaining that, in the absence
of an advisory relationship, “[t]he relationship of agent and principal only existed between plaintiff
and defendant when an order to buy or sell was placed, and terminated when the transaction was
complete.’” Robinson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 337 F. Supp. 107, 111 (N.D.
Ala. 1971) (emphasis added). Of course, Plaintiffs do not allege any such advisory relationship
with Apex because none exists.
In Remington, while the court considered the plaintiffs’ allegation of unauthorized handling
fees in light of a FINRA rule about brokers’ fees, the court dismissed the plaintiffs’ negligence
claim. Remington v. Newbridge Sec. Corp., 2013 WL 2444719, at *5–7 (S.D. Fla. June 5, 2013).
Nor can the decisions in Cheng and Miley—discussing NASD and NYSE rules in evaluating the
reasonableness of a stockbroker’s unauthorized, high-risk trades—be contorted into an open-ended
duty of perpetual availability. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cheng, 697 F. Supp.
1224, 1228 (D.D.C. 1988); Miley v. Oppenheimer & Co., Inc., 637 F. 2d 318, 333 (5th Cir. 1981)
(“Rather than creating a private right of action for a violation of the NYSE and NASD rules, [the
district court judge] merely allowed the jury to consider a violation of such rules as one of six
factors in determining whether Miley’s account had been excessively traded.”).
Plaintiffs’ reliance on Magnum Corp. v. Lehman Bros. Kuhn Loeb, Inc. (Opp. 23) is also
unavailing. 794 F.2d 198 (5th Cir. 1986). In that case, the defendant Lehman Brothers was held
liable for failing to advise its client that it would be delayed in executing orders it already had
accepted to trade because of massive market moves. Id. at 199 (“stockbroker took orders from
(5th Cir. 1986) (broker already agreed to accept trade); Scott v. Dime Sav. Bank of New York, FSB,
886 F. Supp. 1073, 1080–81 (S.D.N.Y. 1995) (case concerning creditor-debtor fiduciary
relationship); Conway v. Icahn & Co., Inc., 16 F.3d 504 (2d Cir. 1994) (non-discretionary broker
failed to inform customer of margin call and engaged in an unauthorized sell-off of customer’s
assets); In re Letterman Bros. Energy Sec. Litig., 799 F.2d 967, 972 (5th Cir. 1986) (finding no
fiduciary duty; Plaintiffs cite dicta in securities analysis summarizing a case addressing broker
misrepresentations in advice to investor clients); Eva Rioseco and Nilda Cruz v. Gamco Asset
Management, Inc., 2011 N.Y. Misc. LEXIS 7279 (N.Y. Sup. Ct. Sept. 23, 2011) (holding
investment advisor owed fiduciary duty to investor, and distinguishing Rozsa because “a clearing
broker had no fiduciary duties owed”); Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042,
1050 (11th Cir. 1987) (case concerning failure to advise customers of risks of options trading).
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plaintiffs to buy stock at a time when it was trading in the over the counter market at $13.375”;
trades were executed at a higher price of $15.75) (emphasis added). In upholding the district
court’s judgment, the Fifth Circuit made the uncontroversial observation that “when a dealer
accepts a market order from a customer, ‘it must make every reasonable effort to execute . . .
promptly and fully.” Id. at 200 (citation omitted). And Lange v. Hentz & Co. holds that there is
no civil liability for a broker under “Texas securities, fraud, fiduciary and negligence law,” for
failure to abide by [FINRA] rules because “the special class of persons sought to be benefitted or
protected by [FINRA] rules is in reality the class of [FINRA] members themselves and generally
not the public at large.” 418 F. Supp. 1376, 1383 (N.D. Tex. 1976) (Opp. 25).
Plaintiffs cite Ottimo (Opp. 30) to assert that a fiduciary duty “may arise” where an
agreement exists between the clearing agent and the investor. But Ottimo held that the clearing
broker defendant did not owe any fiduciary duties to the introduced customer, and that a clearing
broker could be held liable only in “extenuating circumstances,” such as active participation in a
fraud. 2010 WL 11629556, at *5 (E.D.N.Y. June 8, 2010). Plaintiffs allege no facts in their
original or amended complaints4 that would support the imposition of a fiduciary relationship on
the basis of any “extenuating circumstances.”5 To the extent that Plaintiffs are now attempting to
add new allegations in their opposition briefing, the Eleventh Circuit repeatedly has held that such
tactics are improper. E.g., Burgess v. Religious Tech. Ctr., Inc., 600 F. App’x 657, 665 (11th Cir.
2015) (“We repeatedly have held that plaintiffs cannot amend their complaint through a response
to a motion to dismiss.”).
* * *
Plaintiffs ask this Court to expand the duties of securities brokers and clearing brokers
beyond the clear decisional law of both New York and Texas—something this Court, as a federal
court applying state law for the rule of decision, lacks the constitutional authority to do. Erie R.R.
4
This court may take judicial notice of prior filings at any stage of this proceeding. Bobadilla v.
Aurora Loan Servs., LLC, 478 F. App’x 625, 627 (11th Cir. 2012).
5
Plaintiffs attempt to muddy the water by arguing that Apex owes a duty “to both its direct
customers and to its Shared Customers.” Opp. 22. At the motion to dismiss stage, however, this
Court must evaluate only the Named Plaintiffs’ claims in this proposed class action. Biscone v.
JetBlue Airways, 681 F. Supp. 2d 383, 386 (E.D.N.Y. 2010) (“As a general rule, until a class action
is certified pursuant to Rule 23 of the Federal Rules of Civil Procedure, the claims of potential
class members cannot be considered.”).
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Co. v. Tompkins, 304 U.S. 64, 79 (1938) (overturning the doctrine of Swift v. Tyson of a federal
common law trumping state law as “an unconstitutional assumption of powers by courts of the
United States”); see also Alfaro v. Wal-Mart Stores, Inc., 210 F.3d 111, 115 (2d Cir. 2000) (where
the “applicable duty relationship is well established” a district court lacks authority to expand its
scope on an ad hoc basis); Norwood v. Raytheon Co., 414 F. Supp. 2d 659, 663 (W.D. Tex. 2006)
(“[A] federal court should not ‘expand state law beyond its presently existing boundaries.’”) (citing
to Barfield v. Madison County, 212 F.3d 269, 272 (5th Cir. 2000) (“Nor is it the function of the
federal court to expand the existing scope of state law.”)). 6 Nor should this Court accept Plaintiffs’
invitation (Opp. 23 n.21) to extend this litigation and request certification to the New York or
Texas appellate courts, where the decisional law on this issue is already well-established.
B. Plaintiffs’ Securities Fraud Cases Do Not Establish that Apex, as a Clearing
Broker, Owed Plaintiffs Any General Common Law Tort or Fiduciary Duties
Plaintiffs argue that a clearing firm “exposes itself to liability” when it “moves beyond
performing mere ministerial or routine clearing functions.” Opp. 30. But Plaintiffs use the term
“liability” (rather than “duty” or “negligence”) to gloss over the fact that Plaintiffs rely on a line
of inapposite cases that address liability for brokers aiding and abetting fraud. Opp. 29–32. Those
cases simply do not hold that a clearing broker owes open-ended common law duties of care to its
introduced customers. Rather, those cases address when a clearing firm’s failure to prevent an
introducing broker’s security fraud can be found to constitute aiding and abetting. E.g., McDaniel
v. Bear Stearns & Co., Inc., 196 F. Supp. 2d 343, 346 (S.D.N.Y. 2002) (aiding and abetting
fraudulent conduct of introducing broker-dealer); Cannizzaro v. Bache, Halsey, Stuart, Shields,
Inc., 81 F.R.D. 719, 721 (S.D.N.Y. 1979) (same); Ottimo, 2010 WL 11629556, at *3–4 (same);
Kneese v. Pershing LLC, 2012 WL 13019677, at *2–3 (N.D. Tex. Nov. 14, 2012) (same); Turk v.
Pershing LLC, 2014 WL 12572906, at *5 (N.D. Tex. Dec. 8, 2014) (evaluating claims against
clearing broker for (1) participation in breach of fiduciary duty, (2) aiding and abetting breach of
state fraud laws, and (3) negligence, and dismissing negligence claim for lack of duty).
6
Plaintiffs also point to the fact that their complaint “allege[s] that Apex owed them a common
law duty of care,” but that is immaterial. Opp. 25. “The question of the existence and scope of an
alleged tortfeasor’s duty ‘is, in the first instance, a legal issue for the court to resolve.’” Alfaro,
210 F.3d at 114 (quoting Waters v. New York City Hous. Auth., 69 N.Y.2d 225, 229 (1987)).
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The distinction between aiding and abetting liability and tort duties is crucial, and the court
in McDaniel, on which Plaintiffs rely, explained the issue well. To state a claim for aiding and
abetting fraud under New York law, one element a plaintiff must allege is “substantial assistance
to advance the fraud’s commission.” McDaniel, 196 F. Supp. 2d at 352. Substantial assistance
requires a showing that the defendant “affirmatively assists, helps conceal, or by virtue of failing
to act when required to do so enables the fraud to proceed.” Id. (emphasis added). But where a
defendant does not owe a fiduciary duty directly to the plaintiffs, a defendant’s alleged “failing to
act” cannot constitute actionable aiding and abetting. Id. In the case of clearing broker liability,
the court in McDaniel explained that, because clearing brokers do not owe fiduciary duties to
introduced customers, New York courts require a showing that the clearing broker did more than
simply fail to act—the clearing broker must have “move[d] beyond performing mere ministerial
or routine clearing functions” and instead have become “actively and directly involved” in the
introducing broker’s fraudulent scheme. Id. at 353.
Each and every case Plaintiffs cite (Opp. 29–31) that involved a clearing broker has,
consistent with McDaniel, required that the clearing broker be an active participant in a fraudulent
scheme with the introducing broker to be liable—which is not alleged. McDaniel, 196 F. Supp.
2d at 343 (addressing aiding and abetting fraudulent conduct of introducing broker-dealer);
Berwecky v. Bear Stearns & Co., 197 F.R.D. 65, 67 (S.D.N.Y. 2000) (clearing broker “shed their
role as a mere clearing broker” and participated in introducing broker’s “scheme to defraud
investors of certain publicly-traded securities.”) (emphasis added); Koruga v. Fiserv
Correspondent Servs., 183 F. Supp. 2d 1245, 1246 (D. Or. 2001) (material aid in securities fraud);
In re Blech Sec. Litig., 961 F. Supp. 569, 578–79 (S.D.N.Y. 1997) (fraud claims against clearing
broker for “knowingly execut[ing] manipulative sham transactions” on behalf of introducing
broker.); Cannizzaro, 81 F.R.D. at 721 (addressing clearing broker aiding and abetting securities
fraud for “churning” account); Ottimo, 2010 WL 11629556, at *3–4 (denying leave to amend
claims of clearing broker fraud and aiding and abetting fraud of introducing broker); Turk, 2014
WL 12572906, at *15 (addressing participation in breach of fiduciary duty, aiding and abetting
securities fraud, and negligence claims against clearing broker; dismissing negligence claims);
Kneese, 2012 WL 13019677, at *2 (addressing clearing broker aiding and abetting securities
fraud).
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Far from holding that clearing brokers owe introduced customers ongoing common law
duties of care, the securities fraud cases Plaintiffs cite are premised on the foundation that clearing
brokers owe no duty of care to introduced customers. As the McDaniel court put it, “courts have
refused to hold clearing firms liable for the practices of introducing brokers even where the
clearing firm continued to provide clearing services after it knew or should have known of the
introducing broker’s fraudulent scheme.” McDaniel, 196 F. Supp. 2d at 352 (emphasis added).
Thus, Plaintiffs’ claim that the cases Apex cites “do not address the liability of clearing brokers
for their own misconduct” misses the point. Opp. 31–32. “The existence of a duty is thus a sine
qua non of a negligence claim: ‘In the absence of a duty, as a matter of law, no liability can
ensue.’” Alfaro, 210 F.3d at 114.
The court’s analysis in Turk v. Pershing is instructive, though Plaintiffs misstate the court’s
holding. Opp. 32 n.27 (claiming Turk held a “viable negligence claim pled against clearing firm
when allegation is that its conduct went beyond mere ministerial role”). 7 Contrary to Plaintiffs’
assertion, the Turk court dismissed the plaintiffs’ negligence claim against the clearing broker and
rejected the same argument Plaintiffs make here. Turk, 2014 WL 12572906, at *5. In Turk, the
plaintiffs argued that the clearing broker was liable for negligence (as well as for aiding and
abetting securities fraud) because it moved beyond ministerial clearing services. The plaintiffs in
Turk listed “a series of cases in which courts permitted claims to go forward against clearing
brokers where it was alleged the clearing broker went beyond the provision of merely ministerial
services.” Turk, 2014 WL 12572906, at *5. But Turk rejected the plaintiffs’ reasoning and
dismissed the negligence claim (while maintaining the aiding and abetting claim):
[E]ach of Plaintiffs’ proffered cases pertains to the maintenance of claims based on
violations of various securities laws, not on the existence of a duty of care
supporting a negligence claim. In other words, there is a meaningful distinction
between a clearing broker’s amenability to suit for statutory violations on one hand,
and the existence of an independent duty supporting a negligence claim on the
other. As previously discussed, providing services that are more than ministerial
may indeed expose a clearing broker to statutory liability. But Plaintiffs’ cited
cases do not support their contention that provision of such services also creates
an independent duty of care.
7
Apex alerted Plaintiffs to this error in its last reply brief, ECF No. 440 at 11–12, but in their
renewed briefing on this motion, the Plaintiffs’ have failed to correct the error.
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Turk, 2014 WL 12572906, at *5.
Whether evaluated under New York or Texas law, Plaintiffs cite no authority on which this
Court could create a common law duty of care sufficient to support Plaintiffs’ claims.
II. Even if this Court Were to Find that Apex Owed Some Duty to Named Plaintiffs,
Those Duties Do Not Include the Novel Duties Plaintiffs Seek to Create Here
In their Opposition, Plaintiffs claim to have backed away from the allegations in their
earlier complaint, ECF No. 410 (¶¶ 105–07)8 that Apex had duties to dicker, to rush to resume
purchases of meme stocks, and to maintain unlimited capital. Opp. 39. In their Opposition,
Plaintiffs recast their case as an even broader common law action to enforce FINRA rules. Opp.
26. This Court should reject Plaintiffs’ attempt to use their Opposition to amend their complaint.
More fundamentally, this Court should reject Plaintiffs’ attempt to circumvent the lack of a private
right of action to enforce FINRA rules by alleging Apex breached some sort of common law
FINRA duty.
A. Setting the Record Straight: Plaintiffs’ Complaint in Fact Does Seek to Impose
New Duties (i) to Dicker, (ii) to Rush, and (iii) to Maintain Access to Unlimited
Capital, But Plaintiffs Do Not Defend These Novel Duties in the Opposition
Likely recognizing that there is no support in law for Plaintiffs’ proposed duties, Plaintiffs
retreat from their Fourth Complaint and disclaim their effort to impose a duty to negotiate with the
DTCC and NSCC (a duty to dicker), a duty to rush to resume trading, or a duty to maintain
unlimited capital. Opp. 39. Although couched in terms of “breach” language, those duties are
exactly what the Plaintiffs allege in their latest Fourth Complaint, 4th Compl. ¶¶ 110–12, and
propose at 36 of their Opposition:
Duty to Dicker. “Apex did not bother to even attempt to confirm the higher number
with DTCC.”
Duty to Rush. Plaintiffs complain that Apex chose not to “not lift the self-imposed
trading restriction without confirming the lower number with DTCC.”
Duty of Unlimited Capital. Plaintiffs complain that Apex allegedly did not “explor[e]
an alternative mechanism by which it could satisfy its collateral requirement.”
Opp. 36 (emphasis added).
8
This court may take judicial notice of prior filings at any stage of this proceeding. Bobadilla v.
Aurora Loan Servs., LLC, 478 F. App’x 625, 627 (11th Cir. 2012).
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Plaintiffs also disclaim that they have pleaded a duty of constant availability, or a duty to
act as a public utility. Opp. 26 n.24 (“No such duty is pled.”). But Plaintiffs plead precisely that,
in a “Heads I Win, Tails You Lose” argument that effectively holds clearing brokers liable any
time they suspend trading due to volatility. Opp. 36. Specifically, Plaintiffs argue that either Apex
had sufficient capital on hand to meet the DTCC’s astronomical collateral demand (in which case
they claim Apex breached its duties to Plaintiffs in not agreeing to clear all meme stock purchases
at all times) or Apex did not have sufficient capital on hand to meet the DTCC’s collateral demand
(in which case Plaintiffs claim Apex breached its duty to have unlimited capital).
First, Plaintiffs’ allegation depends on a misleading, selective citation to Ms. Rothschild’s
interview, which Plaintiffs depict as showing that Apex “was not concerned” that it would be able
to satisfy an increased collateral requirement. Opp. 35 (citing 4th Compl. ¶ 87). Ms. Rothschild
made no such statement. The full text of Ms. Rothschild’s answer is provided below, and the full
interview is provided at Pace Decl. Ex. 8 (ECF No. 491-9).
We restricted the trading for approximately three hours on one day due to
anomalous information that we got. We were fine by the end of the day. We have
headroom in terms of the capital available to us on our balance sheet. We have
lines of credit that we can call on as needed. We did stop the trading for three hours,
and then it was resolved and we moved forward, and have not had any issues and
have not looked back. So I would say it was not a similar situation to Robinhood.
Pace Decl. Ex. 8 (emphasis added).
According to Plaintiffs, Apex owed a common law duty to Named Plaintiffs to organize its
business to ensure that it would be in a position to agree to every single trade its introducing
brokers sought to clear through it. Such a duty amounts to a duty of ongoing and constant
availability—a duty that is unsupported in law and counter to industry norms and the customer
agreements. See supra Section I. Plaintiffs admit as much. See Opp. 5 (“member broker-dealers
do have discretion to refuse particular trades”).
But even if this Court were to conclude Apex owed a common law duty to some investors,
Named Plaintiffs do not allege that they themselves sought to, but were prevented from, trading.
See 4th Compl. ¶¶ 13–21, 104–113 (no allegations concerning attempts to trade); see Mot. §§ I.G
(Causation), II (Article III Standing). Plaintiffs seek to impose an even broader duty than the
courts in Courtland and Busch rejected: a duty to Named Plaintiffs that clearing brokers will
accept other investor’s trades. Opp. 26–27 (“Apex is charged with breaching its duty of care to
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customers . . . . by shutting down its entire platform, for hours, to prohibit all of its customers
(direct and introduced) from purchasing in-demand stocks and options. . . .”). Such a duty to
Named Plaintiffs to permit others to continue trading is plainly contrary to established New York
and Texas law.
Nor can Plaintiffs avoid dismissal based on a broad claim that Apex owed a duty to “ensure
that the trading platforms it provided and/or supported were sufficiently equipped to reliably
deliver such services,” and to “safeguard[] the investments of Plaintiffs and Class members by
providing a platform and/or supporting a platform to execute trades.” 4th Compl. ¶¶ 107–08.
Clearing brokers and brokers for non-discretionary accounts do not owe such broad, ongoing
common law duties to individual investors for unaccepted orders, because any such duties begin
and end with accepted transactions. See Sections I, II.B. And “[c]ourts are not equipped to second-
guess the business judgments of professional traders and brokers when it comes to risk
assessments.” Cap. Options Invs., Inc. v. Goldberg Bros. Commodities, Inc., 958 F.2d 186, 191
(7th Cir. 1992); de Kwiatkowski, 306 F.3d at 1306 (fiduciary duties begin only with accepted
trades); see also Press, 988 F. Supp. at 386 (same).
B. Plaintiffs’ Proposed Duties, Including a New Common Law Duty to Follow
FINRA Rules Proposed in Plaintiffs’ Brief, Are Contrary to Well-Settled Law
1. This Court Cannot Create a Novel Private Right of Action to Enforce FINRA
Rules through State Law
Plaintiffs now claim that “Apex owed Plaintiffs the duty in common law tort to comply
with FINRA rules” and that this Court may look to FINRA rules to establish whether Apex
breached those FINRA-established duties. Opp. 25–26. Plaintiffs seek to enforce FINRA rules,
and collect private damages, using state tort law. See, e.g., Opp. 49 (“In the case of Apex, the
regulatory duty to put sufficient measures in place to continue to maintain an orderly market is
undisputed . . . . Apex had a duty of care as a registered broker-dealer and ‘Apex failed to take
reasonable steps to protect its customers and investors in times of market volatility[.]’”) (emphasis
added).9 Plaintiffs implicitly acknowledge that industry rules do not create a private right of action
but insist that their proposed duty comes from New York common law. Opp. 26. As discussed
9
Plaintiffs’ assertion that their characterization of Apex’s regulatory duties is “undisputed”
mischaracterizes Apex’s position. This is the pleading stage. Respectfully, until Plaintiffs state a
claim, Apex will not have occasion to “dispute” Plaintiffs’ many unfounded claims.
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above, however, neither New York nor Texas law recognizes an ongoing duty of care that clearing
brokers (or non-discretionary brokers) owe to introduced customers. See supra Section I.
Moreover, as discussed below, FINRA rules actually support the actions that Apex take, as FINRA
acknowledge in a release after the events of January 2021. For that reason alone, regardless of
whether FINRA rules inform any standard of reasonableness, Plaintiffs’ negligence claim fails.
Moreover, New York courts expressly have rejected Plaintiffs’ theory of common law
negligence liability for failure to abide by industry regulations (such as the FINRA rules on which
Plaintiffs rely). In Valelly v. Merrill Lynch, Pierce, Fenner & Smith Inc., the Southern District of
New York dismissed the plaintiff’s negligence claim that the defendant securities broker failed to
act reasonably by failing to adhere to FINRA rules, on the ground that plaintiffs “cannot
circumvent the lack of a private right of action for violations of industry rules merely by recasting
[their] claim as a violation of a common law duty.” 464 F. Supp. 3d 634, 645–46 (S.D.N.Y. 2020).
In dismissing the plaintiffs’ claims, the court relied upon In re Series 7 Broker Qualification Exam
Scoring Litig., in which the D.C. Circuit rejected a nearly identical argument:
[Plaintiffs] insist their state law claims based on negligence and breach of contract
are permissible. . . . Whether analyzed under preemption doctrine or a theory of
regulatory immunity, the result is the same: plaintiffs cannot raise a common law
complaint against defendants based on duties arising under the Exchange Act.
548 F.3d 110, 113 (D.C. Cir. 2008) (emphasis added); see also Bank of America, N.A. v.
Cartwright, 2021 WL 3912563, at *9 (N.D. Ind. Sept. 1, 2021) (“Mr. Cartwright can’t circumvent
this law by disguising his FINRA claim as a negligence claim.”). Plaintiffs do not cite a single
case under New York law—the law they argue governs here—that supports their argument that
New York common law imposes a general duty to abide by FINRA rules.
2. Plaintiffs Fail to Allege in Their Fourth Complaint that Apex Owes a Duty to
Plaintiffs to Follow FINRA Rules or that Apex Violated Any Such Rules
Even if FINRA rules may be used to inform the standard of reasonableness, and even if
this Court were to conclude that Apex owed Named Plaintiffs a duty of care to abide by FINRA
rules, Plaintiffs fail to allege any facts that would support an inference that Apex violated any such
rules. See Mot. 25–32 (summarizing failure to allege breach of reasonable duty of care).
The Eleventh Circuit has made clear that plaintiffs cannot use an opposition brief to amend
a complaint. Burgess, 600 F. App’x at 665 (“We repeatedly have held that plaintiffs cannot amend
their complaint through a response to a motion to dismiss.”); see also Humphrey v. Hollywood
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Police Dep’t, 2019 U.S. Dist. LEXIS 35022, at *5 (S.D. Fla. Mar. 4, 2019) (“‘[I]t is axiomatic that
the complaint may not be amended by the briefs in opposition to a motion to dismiss.’”).
Plaintiffs do not allege in the Fourth Complaint that Apex owed a common law duty to
Plaintiffs to abide by FINRA rules, as they now claim; rather, the complaint paragraphs on which
Plaintiffs rely merely recite the existence of FINRA rules. Opp. 25–26 (citing 4th Compl. ¶¶ 40,
44–45, 51). In particular, Plaintiffs recite in their Fourth Complaint the following FINRA rules
and notices, which generally deal with disaster recovery and information technology (IT) issues,
or generalized risk management:
Rule 2010: “[I]n the conduct of its business, [a brokerage] shall observe high standards
of commercial honor and just and equitable principles of trade.”
Rule 3110, which Plaintiffs allege requires brokers to “establish, maintain, and enforce
a supervisory system, which includes monitoring its technology and other risks,
including credit and other systemic risks.”
Rule 4370, which Plaintiffs allege requires brokers to “engage in continual risk
management to ensure continuation of its trading and financial ‘mission critical
systems.’”
Regulatory Notice 21-12, which states, “Member firms should maintain strong
procedures, thoughtfully crafted in advance, to reasonably ensure that they can
continue to provide investors access to the securities markets during times of extreme
market volatility,” which include “liquidity management practices.”
4th Compl. ¶¶ 44–46 (emphasis added). Not one of the FINRA rules Plaintiffs cite, nor the Net
Capital Rule, 17 C.F.R. § 240.15c3-1, imposes an open-ended duty of a broker to accept all trades.
In fact, Plaintiffs omit the relevant passage of the FINRA Regulatory Notice 21-12 (March
18, 2021), which even after the January 28, 2021 events confirms the long-standing common law
rule that brokers do not have an open-ended duty to accept customer orders to buy stock:
Member firms are not obligated to receive or accept orders from customers where
the firms believe that the associated compliance or legal risks are unacceptable and
there may be situations where firms determine they must change their order
handling procedures to restrict the entry or acceptance of customer orders to limit
the firm’s exposure to extraordinary market risk.
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FINRA, Regulatory Notice 21-12 at 3 (March 18, 2021) (emphasis added). 10
The actual FINRA guidance, that brokers can reject customer orders, is very similar to the
SEC’s 2021 guidance that brokers may reject customer orders:
[B]roker-dealers may reserve the ability to reject or limit customer transactions.
This may be done for legal, compliance, or risk management reasons, and is
typically discussed in the customer account agreement. In certain circumstances,
broker-dealers may determine not to accept orders where a transaction presents
certain associated compliance or legal risks. 11
The actual FINRA and SEC guidance is entirely consistent with the conduct Plaintiffs challenge.
Moreover, Plaintiffs fail to plead any facts plausibly suggesting that Apex violated any
rule. Twombly, 550 U.S. at 555. Plaintiffs’ allegation that “Apex undertook the extraordinary
measures on January 28, 2021 of suspending trading in the Suspended Stocks without a plan
reasonably designed to correlate its supposed reduction of risk to its extraordinary action,” 4th
Compl. ¶ 68, is exactly the type of conclusion the Supreme Court has held cannot survive a motion
to dismiss. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Twombly, 550 U.S. at 555–56.
Similarly, the Fourth Complaint does not contain any factual allegations that Apex did not
“establish, maintain, and enforce a supervisory system,” nor that Apex failed to “engage in
continual risk management,” nor that Apex failed to “maintain strong procedures” or “liquidity
management practices.” And Plaintiffs do not allege any facts that Apex actually violated the Net
Capital Rule; to the contrary, the trading restrictions Apex put into place were designed to ensure
that Apex would be able to comply with the Net Capital Rule. Plaintiffs’ bare assertion that
violations of such rules “can be used as evidence of negligence,” without any factual matter that
Apex actually violated such rules, cannot state a claim. 4th Compl. ¶ 49; Twombly, 550 U.S. at
556. Nor does Plaintiffs’ allegation that Apex temporarily halted purchases of three of the meme
stocks for three and a half hours plausibly plead a violation of these rules. Iqbal, 556 U.S. at 682
(allegations not plausible in light of “obvious alternative explanation”); see also Am. Dental Ass’n
10
Available at https://www.finra.org/sites/default/files/2021-03/Regulatory-Notice-21-12.pdf
(last accessed Nov. 19, 2021).
11
U.S. Securities and Exchange Commission, Thinking About Investing in the Latest Hot Stock?:
Understand the Significant Risks of Short-Term Trading Based on Social Media, Investor Alerts
and Bulletins (Jan. 30, 2021), available at https://www.sec.gov/oiea/investor-alerts-and-
bulletins/risks-short-term-trading-based-social-media-investor-alert (last accessed Nov. 19, 2021).
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v. Cigna Corp., 605 F.3d 1283, 1290 (11th Cir. 2010) (“[C]ourts may infer from the factual
allegations in the complaint ‘obvious alternative explanation[s],’ which suggest lawful conduct
rather than the unlawful conduct the plaintiff would ask the court to infer.”).
III. Plaintiffs’ Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing
Fails Because the Apex Customer Agreement Expressly Permits Apex to Decline to
Execute Trades at Any Time and for Any Reason
To defend their claim for breach of the implied covenant of good faith and fair dealing,
Plaintiffs do little more than repeat the allegations in their Fourth Complaint that the Customer
Agreement imposes an implied covenant not to “do anything which will have the effect of
destroying or interfering with the right of the other party to receive the benefits of the agreement.”
Opp. 44. But Plaintiffs never address Apex’s argument that Plaintiffs’ proposed implied covenant
directly contradicts the express provision in the Customer Agreement that permits Apex to “refuse
to execute securities transactions” for Plaintiffs “at any time and for any reason.” Pace Decl. Ex.
1 (ECF No. 491-2) at 3; Murphy v. Am. Home Prods. Corp., 58 N.Y.2d 293, 304 (1983); see also
Nat’l Union Fire Ins. Co. of Pitt., Pa. v. Xerox Corp., 25 A.D.3d 309, 310 (N.Y. App. Div. 2006)
(ordering dismissal because “[t]he covenant of good faith and fair dealing cannot be construed so
broadly as to effectively nullify other express terms of the contract, or to create independent
contractual rights”). And Plaintiffs’ theory that an implied covenant exists because Apex “directly
interfered with the rights of Plaintiffs by selling them securities . . . [and then] imposing and then
maintaining the Market Shutdown” ignores that, even if that theory were viable, Plaintiffs never
allege that Apex actually sold Named Plaintiffs any of the at-issue meme stocks—through
introducing brokers or otherwise. See 4th Compl. ¶¶ 14–20. Thus, even under Plaintiffs’ own
reading of New York law, this claim fails.12
Because a claim for breach of the implied covenant of good faith and fair dealing is based
in contract, that claim should be governed by laws chosen by the parties to the Customer
12
Plaintiffs also argue that the Fourth Complaint does not allege an enforceable contract. See Opp.
35, 46. While the Customer Agreement alleged in the Fourth Complaint and forming the basis for
Plaintiffs’ claims is very much an enforceable contract, see 4th Compl. ¶¶ 96–97, 124, such an
argument is self-defeating for Plaintiffs’ claim for breach of the implied covenant under New York
law, which requires an underlying contract for a viable claim. See Nat’l Mkt. Share, Inc. v. Sterling
Nat’l Bank, 392 F.3d 520, 525 (2d Cir. 2004) (“In New York, breach of the implied duty of good
faith and fair dealing is merely a breach of the underlying contract.” (internal quotations omitted)).
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Agreement, which in this case is Texas law. See Anaheim Indus., 2007 Tex. App. LEXIS 9950, at
*6, 18 (applying contract’s choice of law provision for analysis of breach of implied covenant of
good faith and fair dealing claim); Luxus Aviation, 91 A.D.3d at 570 (same); Deloitte (Cayman)
Corp. Recovery Servs., Ltd. v. Sandalwood Debt Fund A, LP, 31 Misc. 3d 1225(A), at *3 (N.Y.
Sup. Ct. 2011) (same); Pace Decl. Ex. 2 (ECF No. 491-3) at ¶ 15. Plaintiffs admit that Texas law
does not recognize an implied covenant claim absent a “special relationship,” which Plaintiffs
simply assert exists without factual support. Opp. 44–45. That is unsurprising, as Texas courts
“recognize only one special relationship—that between an insurer and an insured.” See Hux v. S.
Methodist Univ., 819 F.3d 776, 781 (5th Cir. 2016).
IV. Plaintiffs’ Tortious Interference Claim Fails under Both New York and Texas Law,
Particularly Where No Contract Is Alleged
Plaintiffs argue that Apex tortiously interfered with their “business relationship” with their
introducing brokers by “shuttering the Introducing Brokers’ trading platform for hours so as to
prohibit purchases of the Suspended Stocks.” Opp. 45. While Plaintiffs claim to “recogn[ize] . .
. the fact that Plaintiffs had customer agreements with the Introducing Brokers,” Fourth Compl. ¶
129, the only agreement Plaintiffs cite is the agreement between Apex and Named Plaintiffs. See
Opp. 46, citing Pace Decl. Ex. 2 (ECF No. 491-3). Plaintiffs do not provide the actual customer
agreements with their introducing brokers Webull and Ally, nor do they summarize the terms of
those agreements. Absent any indication of what “legal rights” Plaintiffs claim their agreements
with Webull and Ally provide, Plaintiffs fail to plausibly allege that Apex’s conduct interfered
with those rights. Opp. 46 (citing 4th Compl. ¶¶ 129–30).
Moreover, Plaintiffs have failed to plead elements essential to their claims, both under
Texas and New York law. Under Texas law, Plaintiffs must allege that an “obligatory provision
of [a] contract was breached” to state a claim for tortious interference with an existing contract.
See Duradil, L.L.C. v. Dynomax Drilling Tools, Inc., 516 S.W.3d 147, 168 (Tex. App. 2017). But
as discussed above, they fail to do so.
Plaintiffs attempt to rewrite Texas tort law to include an amorphous cause of action that
imposes liability based on an “unjust act by ‘someone’ getting in the way of business dealing with
another party,” by citing two Texas cases: First National Bank and Clements. Opp. 46, citing First
Nat’l Bank of Eagle Pass v. Levine, 721 S.W.2d 287 (Tex. 1986); Clements v. Withers, 437 S.W.2d
818, 821 (Tex. 1969). But those cases do not recognize such an amorphous cause of action under
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Texas law. First National Bank addresses only the statute of limitations (using the analogy to
claims for trespass to identify the proper limitations period), and Clements was about a tortious
interference with an oral contract that did not meet the statute of frauds’ written instrument
requirement, where the specific terms of the oral agreement were evaluated by the court. Neither
applies here. Moreover, since First National Bank and Clements, Texas courts have observed that
“[t]he theory of tortious interference with business relations by a third person includes two causes
of action: (1) tortious interference with existing contracts, and (2) tortious interference with
prospective contractual relations.” Dunn v. Calahan, 2008 Tex. App. LEXIS 9498, at *8 (Tex.
App. Dec. 17, 2008) (citing Sterner v. Marathon Oil Co., 767 S.W.2d 686, 689 (Tex. 1989)).
Plaintiffs do not allege tortious interference with prospective contractual relations. Thus,
Plaintiffs’ claim must be evaluated as a claim for “tortious interference with existing contracts,”
id., and so their failure to allege an obligatory term that Apex induced Introducing Brokers to
breach is fatal to their claim. Duradil, 516 S.W.3d at 168.
Plaintiffs also argue they have stated a claim under New York law because “Plaintiffs have
pled that by directing the shutdown of the Introducing Broker’s trading platform, Apex engaged
in ‘wrongful conduct’ by preventing Plaintiffs and members of the Class from being able to
purchase the Suspended Stocks from the Introducing Brokers.” Opp. 45.
Putting aside Plaintiffs’ mischaracterization of the allegations in their complaint, Plaintiffs’
claim that they meet the “wrongful conduct” element for tortious interference with an ongoing
business relationship under New York law is simply incorrect. Opp. 45–46. In the New York
Court of Appeals’ landmark case on tortious interference with economic relations, Guard-Life
Corp. v. S. Parker Hardware Mfg. Corp., the court held that a plaintiff must prove that the
defendant used “wrongful means” to interfere with plaintiffs’ business relationship. 50 N.Y.2d
183, 191 (1980). The “wrongful means” in Guard-life were “‘physical violence, fraud or
misrepresentation, civil suits and criminal prosecutions, and some degrees of economic pressure.’”
NBT Bancorp Inc. v. Fleet/Norstar Fin. Grp., Inc., 87 N.Y.2d 614, 624 (1996) (quoting Guard-
Life, 50 N.Y.2d at 191).
Plaintiffs represent to this Court that their “claim has been found to be viable under New
York law by the New York Court of Appeals in Carvel Corp. v. Noonan, 3 N.Y.3d 182, 189
(2004),” and that their allegations that Apex committed two independent torts—negligence and
breach of fiduciary duty—are sufficient to constitute “wrongful conduct.” Opp. 46. So Plaintiffs
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concede that their tortious interference claims depend upon the success of their negligence and
breach of fiduciary claims. Plaintiffs also concede in a footnote that their theory has no support in
the case law; it is just that it has not been explicitly rejected yet. Opp. 46 n.32 (“The Court of
Appeals explicitly left open the question as to whether the type of conduct engaged in by Apex
rises to the level of culpable conduct.”). Indeed, Plaintiffs do not cite a single case that has held
that breach of fiduciary duty or mere negligence constitutes sufficiently “culpable conduct” to
sustain a claim for tortious interference with economic relations. And the New York Court of
Appeals stated in Carvel that “[t]he sort of ‘more culpable’ conduct we had in mind in NBT was
described in Guard-Life,” which does not include in its litany of crimes and torts either negligence
or breach of fiduciary duty. Carvel, 3 N.Y.3d at 191. Thus, the court’s statement in Carvel
precludes this Court from holding that mere negligence or breach of fiduciary duty is the sort of
“wrongful conduct” necessary to sustain a tortious interference claim under New York law.
V. Plaintiffs Remaining Arguments Are Meritless
A. Plaintiffs Fail to Plausibly Plead Causation or Article III Standing
Plaintiffs disclaim their earlier pleading describing coordinated trading in online
discussions intended to pump up the prices of meme stocks to create a short squeeze (the Plaintiffs’
chosen name for this litigation). Mot. 4–6, 21. But in the absence of such coordinated trading,
Plaintiffs cannot plausibly allege that the price of the meme stocks would have continued to rise.
Predicting the price path of stocks in times of unprecedented market volatility is an exercise in
pure speculation. Mot. 33–35. Moreover, Plaintiffs’ claims are based on alleged lost value in the
meme stocks named Plaintiffs held, which requires speculation as to when, and at what price,
Plaintiffs would have sold their stock in the but-for world. Plaintiffs make no non-speculative
allegations as to what they would have done in the but-for world. See 4th Compl. ¶¶ 16, 20. Absent
plausible, non-speculative allegations that the Named Plaintiffs would have timed the market
correctly and sold their stock at a greater profit, Plaintiffs have failed to allege any injury in fact
and thus lack Article III standing. See In re Merrill Lynch & Co. Research Reps. Sec. Litig., 568
F. Supp. 2d 349, 363 (S.D.N.Y. 2008) (dismissing for lack of causation where plaintiffs failed to
untangle loss due to defendant’s behavior from losses caused by overall economic conditions
unrelated to defendant’s behavior).
Plaintiffs contrive an argument that Apex’s temporary trading restriction was designed to
depress the price of the meme stocks. Opp. 3, 27. But, even by Plaintiffs’ own admission, Apex’s
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three-and-a-half hour trading restriction was caused by the unprecedented volatility in the market.
4th Compl. ¶¶ 5, 37, 61, 69, 109. Plaintiffs offer no facts in support of their wild accusation that
Apex intended to affect the price of the at-issue meme stocks, and a claim based on such conclusory
and speculative allegations cannot survive a motion to dismiss. Twombly, 550 U.S. at 555
(“Factual allegations must be enough to raise a right to relief above the speculative level.”); see
also id. (citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235–36 (3d
ed. 2004) (“[T]he pleading must contain something more . . . than . . . a statement of facts that
merely creates a suspicion [of] a legally cognizable right of action.”)).
Plaintiffs attempt to muddy the water by arguing that Apex’s standing argument is better
addressed at the class certification stage. Opp. 17–19. But the applicable rule here is simple: This
Court may consider the claims of only the named plaintiffs when considering whether the Plaintiffs
have Article III standing to assert their claims. Warth, 422 U.S. at 502. Plaintiffs Chavez and
Jang are introduced customers, to whom Apex owes no duties outside of any given transaction,
and who have not alleged that they intended to purchase additional meme stocks but were
prevented from doing so by Apex. The Fourth Complaint must rise and fall with the fate of the
named plaintiffs’ claims. Griffin v. Dugger, 823 F.2d 1476, 1483 (11th Cir. 1987) (“a claim cannot
be asserted on behalf of a class unless at least one named plaintiff has suffered the injury that gives
rise to that claim”). Therefore, whether other potential class members (such as direct customers
of Apex) potentially could assert injury or a claim for negligence, breach of fiduciary duty, breach
of the implied covenant of good faith and fair dealing, or tortious interference is simply not
something that this Court need consider. Lacking Article III standing to bring their own claims,
Plaintiffs Chavez and Jang may not bootstrap their claims using the potential standing of unnamed
and unidentified absent class members.
B. Plaintiffs’ Complaint is Preempted Because it Seeks to Enforce Securities Laws
through Conflicting State Tort Law
Plaintiffs assert that the holding in Appert cited by Apex––that “an investor cannot sustain
a breach of contract claim against a broker-dealer for violation of an exchange rule”––is
“unremarkable and irrelevant.” Opp. 47 n.34, discussing Appert v. Morgan Stanley Dean Witter,
Inc., 2009 WL 3764120, at *4 (N.D. Ill. Nov. 6, 2009)). But Appert is directly on point, because
it rejects the plaintiffs’ common law breach of contract action on the precise ground at issue here:
“Because Plaintiff may not bring a common law cause of action based on the violation of
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exchange rules, for which Congress had not intended to create a private right of action, her breach
of contract claim must be dismissed.” Appert, 2009 WL 3764120, at *4. The same is true here.
Plaintiffs seek to enforce a “regulatory duty to put sufficient measures in place to continue to
maintain an orderly market” through their common law negligence, breach of fiduciary duty,
implied covenant of good faith and fair dealing, and tortious interference claims. Opp. 49
(emphasis added). But those rules and regulations do not create a private right of action, and as
such, Plaintiffs’ claims are preempted and must be dismissed. See Mot. 15, 25.
Plaintiffs incorrectly claim that Apex seeks to “bootstrap itself into the legal protections
afforded to an SRO,” Opp. 47, but Plaintiffs mischaracterize Apex’s argument. Apex does not
claim that it should be afforded immunity akin to an SRO. Rather, Apex merely asks this Court
to apply the same rule that the court in Valelly applied with respect to a securities broker, namely,
that Plaintiffs “cannot circumvent the lack of a private right of action for violations of industry
rules merely by recasting her claim as a violation of a common law duty.” Valelly, 464 F. Supp.
3d at 645–46. In dismissing the Plaintiff’s negligence claim, the court in Valelly relied on the
holding in In re Series 7 Broker Qualification Exam Scoring Litig. that Plaintiffs could not
maintain claims “derived from duties created at common law” where the claims were “nothing
more than disguised actions to enforce regulatory duties” because such actions are preempted by
the Exchange Act. Id. (citing In re Series 7 Broker Qualification Exam Scoring Litig., 510 F.
Supp. 2d 35, 47 (D.D.C. 2007), aff’d, 548 F.3d 110 (D.C. Cir. 2008)). The same rule applies here.
Plaintiffs’ common law claims to enforce their interpretation of Apex’s “regulatory dut[ies]” (Opp.
49) under FINRA rules—which they purport to bring on behalf of any and all investors in meme
stocks—are preempted.
C. Absent a “Special Relationship,” New York Law Precludes Tort Claims for Purely
Economic Losses
Plaintiffs argue that, with respect to the rule barring recovery for purely “economic losses,”
New York law applies. Opp. 32. Even assuming New York law applies, Plaintiffs admit that
under New York law “the touchstone” is “whether Apex owes a duty to Plaintiffs.” Opp. 32. In
AMBAC Assur. Corp. v. U.S. Bank N.A., the court stated that “[u]nder the economic loss doctrine,
a defendant is not liable in tort for purely economic loss unless the plaintiff demonstrates that the
defendant owed a duty, which ‘may arise from a special relationship[.] . . . to protect against the
risk of harm to plaintiff.’” 328 F. Supp. 3d 141, 159 (S.D.N.Y. 2018) (emphasis added). But
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Plaintiffs offer no explanation as to why Apex’s role as Plaintiffs’ clearing broker creates the type
of “special relationship” that would create a duty to protect speculators from the risk of loss in
value of their investments. The reasons are simple: as discussed above, Apex simply does not
owe any ongoing fiduciary or other common law duties to Plaintiffs, and certainly no duty to
protect the value of Plaintiffs’ investments. See supra Sections I–II. Consequently, Plaintiffs have
not alleged any facts describing any “special relationship” that would “define[] the class of
potential plaintiffs to whom the duty is owed.” See 532 Madison Ave. Gourmet Foods, Inc. v.
Finlandia Ctr., Inc., 96 N.Y.2d 280, 289, 292 (2001) (dismissing negligence claims for economic
loss alone, where such claims “fall beyond the scope of the duty owed them by defendants”). Quite
to the contrary, Plaintiffs would have their proposed duties apply to every investor in meme stocks,
regardless of whether such investors had any connection to Apex. Opp. 47–49. Because Plaintiffs
fail to allege any “special relationship” between Apex and Plaintiffs Chavez and Jang, Plaintiffs
may not recover for purely economic losses, and their negligence and breach of fiduciary duty
claims must fail. See 532 Madison Ave., 96 N.Y.2d at 292.
D. This Court Should Reject Plaintiffs’ Invitation to Use New York Tort Law to
Create Unlimited Negligence Liability
Plaintiffs take the extraordinary position that this Court should make law and create a New
York state common law cause of action for negligence against a clearing broker by any investor
in the stock market, regardless of whether that investor used that clearing broker. Opp. 47–49.
Indeed, Plaintiffs advocate, without any New York precedent, that this Court should expand tort
liability under New York law to virtually limitless claimants: “Apex was not and should not be
free to cause consequential damage to all investors as a result of its appalling misconduct that
foreseeably affected the price of the Suspended Stocks––no matter who held them.” Opp. 48.
Instead of citing relevant and good law, Plaintiffs cite Georgia law that has been overruled
by the Georgia Supreme Court on this exact issue. See Opp. 48, citing Bradley Center, Inc. v.
Wessner, 250 Ga. 199, 200–201 (1982), and In re Equifax, Inc. Customer Data Sec. Breach Litig.,
362 F. Supp. 3d 1295, 1325 (N.D. Ga. 2019). In 2019, the Georgia Supreme Court held:
[T]he language in Bradley Center on which McConnell relies was not a holding
concurred in by a majority of this Court, was not supported by the only authority
that the lead opinion cited, was not a correct statement of the law, did not control
the result in that case (which was based on a “special relationship” between the
plaintiff and the defendant), and has never been endorsed in a decision of this Court
that qualifies as precedent. Accordingly, we hereby disapprove Bradley Center to
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the extent that it created a general legal duty “to all the world not to subject [others]
to an unreasonable risk of harm.”
Dep’t of Lab. v. McConnell, 305 Ga. 812, 816 (2019); see also Purvis v. Aveanna Healthcare,
LLC, 563 F. Supp. 3d 1360, 1368 (N.D. Ga. 2021) (noting that Equifax “relied significantly
on Bradley Center—and specifically the statement that, under Georgia law, one owes a general
duty “to all the world not to subject [others] to an unreasonable risk of harm”—to find that a duty
existed under Georgia law in the data breach context).
The New York Court of Appeals rejected a similar argument in Hamilton:
The injured party must show that a defendant owed not merely a general duty to society
but a specific duty to him or her, for “[w]ithout a duty running directly to the injured person
there can be no liability in damages, however careless the conduct or foreseeable the harm.”
96 N.Y.2d at 232 (internal citations omitted). Plaintiffs’ claim that these duties arise out of Apex’s
status “as a broker-dealer” is similarly misplaced, because it is well-established that “[s]ecurities
brokers do not owe a general duty of care or disclosure to the public simply because they are
market professionals.” Kolbeck v. LIT Am., 923 F. Supp. 557, 571–72 (S.D.N.Y. 1996).
CONCLUSION
For the reasons set forth above and those stated in support of Apex’s Motion to Dismiss,
this Court should GRANT Apex’s Motion to Dismiss with Prejudice.
Dated: July 13, 2022
By: /s/ Jack E. Pace III
Jack E. Pace III
Bryan D. Gant
WHITE & CASE LLP
1221 Avenue of the Americas
New York, NY 10020
Tel: (212) 819-8200
Fax: (212) 354-8113
jpace@whitecase.com
bgant@whitecase.com
J. Mark Gidley
WHITE & CASE LLP
701 Thirteenth Street, N.W.
Washington, D.C. 20005
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Tel: (202) 626-3600
Fax: (202) 639-9355
mgidley@whitecase.com
Angela Daker
WHITE & CASE LLP
200 South Biscayne Blvd.
Suite 4900
Miami, FL 33131
Tel: (305) 371-2700
Fax: (305) 358-5744
adaker@whitecase.com
Counsel for Defendant
Apex Clearing Corporation
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Certificate of Service
I HEREBY CERTIFY that, on July 13, 2022, I electronically filed the foregoing
document with the Clerk of the Court using the CM/ECF filing system. I further certify that this
motion was served on all counsel of record via transmission of the Notice of Electronic Filing
generated by the Court’s CF/ECF System.
/s/ Jack E. Pace III
Jack E. Pace III
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