Exhibit A: Order — In re January 2021 Short Squeeze Trading Litigation (Dkt. 528-1, S.D. Fla.)
Summary
An Order (Document 525) of January 9, 2023 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, filed as Exhibit A (Document 528-1) to a notice of appeal entered on the FLSD docket February 6, 2023. The 38-page order grants Defendant Apex Clearing Corporation's Rule 12 Motion to Dismiss Plaintiffs' (Fourth) Class Action Complaint [ECF No. 491], filed June 22, 2022, after a Response [ECF No. 494] by Plaintiffs Erik Chavez and Peter Jang and a Reply [ECF No. 496]. Its background recounts the January 2021 volatility in Gamestop Corporation, AMC Entertainment Holdings and Koss Corporation shares. Done and ordered in Miami, Florida above the name of Chief United States District Judge Cecilia M. Altonaga, it dismisses Plaintiffs' Amended Class Action Complaint [ECF No. 483].
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- Date
- 2023-02-06
Cite this document
“Exhibit A: Order (Dkt. 528-1).”
Original at archive.org, dated 2023-02-06. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2023-02-06-covid-era-misc-dd2d1477-1/
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EXHIBIT A
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 21-2989-MDL-ALTONAGA/Damian
In re:
JANUARY 2021 SHORT SQUEEZE
TRADING LITIGATION
_________________________________/
This Document Relates to the Actions in the
Other Broker Tranche
ORDER
THIS CAUSE came before the Court on Defendant, Apex Clearing Corporation’s Rule 12
Motion to Dismiss Plaintiffs’ (Fourth) Class Action Complaint [ECF No. 491], filed on June 22,
2022. Plaintiffs, Erik Chavez and Peter Jang, filed a Response [ECF No. 494]; to which Defendant
filed a Reply [ECF No. 496]. The Court has carefully considered the Amended Class Action
Complaint (“Am. CAC”) [ECF No. 483], the parties’ written submissions, the record, and
applicable law. For the following reasons, the Motion is granted.
I. BACKGROUND
A. January 2021 Short Squeeze
In January 2021, three publicly traded companies — Gamestop Corporation (GME), AMC
Entertainment Holdings (AMC), and Koss Corporation (KOSS) — experienced significant
volatility in their publicly traded shares (the “Meme Stocks”). (See Am. CAC ¶¶ 3–5). The chaos
began when Plaintiffs and other retail investors realized that hedge funds, market makers, and
other significant players in the financial markets (the “Short Sellers”) had shorted 1 the Meme
1
To “short” a stock means to borrow shares of it with the expectation that its price will decrease within a
given period. To exit a short position, a short seller buys shares of the stock — hopefully at a decreased
price — and profits from the difference between the stock’s price at the outset of the position and the exit.
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Stocks, driving their prices down. (See id. ¶¶ 58–59, 61). Plaintiffs, who liked the Meme Stocks,
counterpunched. They started buying up the cheap shares en masse, defying the Short Sellers’
expectations and exerting upward pressure on the stock prices. (See id. ¶¶ 61–62).
The head-on collision between the retail investors and the Short Sellers produced
significant turbulence in the financial markets. Initially, retail appeared to be the more powerful
force, as the increased demand for the Meme Stocks created a “short squeeze” 2 that sent their
prices parabolic. (See id. ¶¶ 58–65). For example, between January 26 and January 27, 2021, the
prices of GME (134.84%), AMC (301.2%), and KOSS (480.0%) all more than doubled. (See id.
¶¶ 65–66).
B. Defendant’s Role
Enter Defendant. Defendant is a broker-dealer, a financial entity that executes securities
trades in the financial markets. (Am. CAC ¶¶ 1, 23–25). It services two types of customers, in
two different roles. (See id. ¶¶ 25, 28).
First are the Shared Customers. Shared Customers are investors who have already sought
out another broker-dealer (an “Introducing Broker-Dealer”) to trade securities. (See id. ¶¶ 25–26).
These Introducing Broker-Dealers lack “direct access to trading platforms and clearinghouses,” so
they require help executing their customers’ orders. (Id. ¶ 26). To plug these gaps, Introducing
Broker-Dealers bring their customers to Defendant, which provides clearing broker services for
their trades. (See id.). The two Plaintiffs who filed the Amended Class Action Complaint — Erik
However, if the stock price increases, the short position becomes less valuable, and the short seller loses
money. (See Am. CAC ¶ 61).
2
A short squeeze occurs when investors buy significant quantities of a heavily shorted stock, which drives
the stock price up. In response, short sellers — who have borrowed shares of the shorted stock — must
buy the shares at the higher price to exit their short position. These additional purchases can drive the stock
price even higher. (See id. ¶¶ 63–64).
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1. Clearing Broker Obligations
First are the clearinghouse services for which the Shared Customers use Defendant.
Clearinghouses guarantee stock trades once buyers and sellers agree on a price. (See id. ¶¶ 31–
33). This is an inherently risky job. If either the buyer or seller does not perform its obligation on
an agreed trade, the clearinghouse is on the hook. (See id. ¶ 32). If too many agreed-upon trades
fail and the clearinghouse can no longer guarantee them, it places the entire market at risk. (See
id. ¶ 37).
To help offset this risk, clearinghouses rely on margin. (See id. ¶¶ 37–38). Margin is a
percentage of the overall value of a stock trade that investors put up — typically through broker-
dealers — once the buyer and seller have agreed to trade at a specific price, but before the
transaction is completed (the “Gap Period”). 3 (See id. ¶¶ 32, 37–38). When markets are volatile,
the risk that one side of a trade will default during the Gap Period is higher. (See id. ¶¶ 37–38).
Consequently, the clearinghouse may increase the margin requirements during such periods until
the markets calm down. (See id. ¶¶ 35, 37–38, 93).
The clearinghouse at issue here is the National Securities Clearing Corporation (“NSCC”),
a Securities and Exchange Commission-regulated company that serves as the “central counterparty
that clears cash transactions in the U.S. equities markets[.]” (Id. ¶ 32 (alteration added)). Once a
buyer and seller agree to trade a security at a set price, the NSCC guarantees delivery of the security
to the buyer and payment to the seller. (See id.).
The NSCC presides over member clearing brokers, like Defendant. (See id. ¶ 31). To
protect the clearinghouse from defaults, members post collateral for their customers’ transactions.
(See id.). The NSCC collects these funds from members “at the start of each day and intraday in
3
The Gap Period occurs because there is a delay between when a buyer and seller reach agreement and the
completion of a transaction.
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volatile markets” (id. ¶ 38 (alteration added)), and it feeds them into the Depository Trust Clearing
Corporation’s (the “DTCC[’s]”) coffers 4 (see id. ¶¶ 37–38). Volatility is a significant factor in
determining how much collateral a member must post on any given day. (See id. ¶¶ 37–38). As
one might expect, the more volatile a security is, the higher the collateral requirement. (See id.).
During the January 2021 short squeeze, the Meme Stocks were exceedingly volatile.
Between Thursday, January 21 and Wednesday, January 27, GME’s price shot from $43.03 to
$380.00. (See id. ¶ 60, 65). AMC and KOSS also saw meteoric price increases. (See id. ¶ 65).
It thus should have come as no surprise, Plaintiffs allege, that Defendant’s collateral
requirement was at risk of increasing on January 28. (See id. ¶ 39). According to Plaintiffs,
collateral requirements are not a black box, sprung on unsuspecting firms each morning. Rather,
they are informed by hard metrics, which Defendant monitors in real time. (See id. ¶¶ 36–39).
Despite these warnings, Defendant was ill-prepared to meet its collateral requirements on January
28, 2021. (See id. ¶ 39).
2. Broker-Dealer Obligations
Broker-dealer services are a slightly different matter. While clearing brokers are tasked
with guaranteeing a trade once the buyer and seller agree on a price, broker-dealers effectuate the
trade in the first instance. (See id. ¶¶ 33). Two sets of broker-dealer obligations factor into
Plaintiffs’ Amended Class Action Complaint.
First is the Net Capital Rule, a SEC regulation that “requires broker-dealers to ‘at all times
have and maintain net capital’ no less than the greatest of the minimum requirement applicable to
its business.” (Id. ¶ 40 (quoting 17 C.F.R. § 240.15c3-1(a))). This rule ensures that even in times
4
The DTCC is the NSCC’s parent company, and it provides insurance services for NSCC members. (See
id. ¶ 31).
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of volatility, like during a short squeeze, broker-dealers have “sufficient liquid assets to meet all
obligations to customers.” (Id.).
Second are the rules to which registered Financial Industry Regulatory Authority
(“FINRA”) members must adhere. FINRA is a non-governmental securities regulator, of which
Defendant is a registered member. (See id. ¶ 43). FINRA regulations require broker-dealers to
“observe high standards of commercial honor and just and equitable principles of trade” when
dealing with their customers. (Id. ¶ 44 (citation and quotation marks omitted)).
Plaintiffs allege that FINRA members are subject to a “fundamental responsibility for fair
dealing” that applies “even during times of market stress.” (Id. (citations and quotation marks
omitted; emphasis adopted)). FINRA regulations further obligate each broker-dealer to “engage
in continual risk management of its trading and financial mission critical systems” (id. ¶ 45
(citation, emphasis, and quotation marks omitted), which Plaintiffs interpret as requiring “a duty
of due care and loyalty” and a duty “to implement . . . risk assessment tools to manage potential
operational and credit risks” (id. ¶ 47 (alteration added)). According to Plaintiffs, Defendant’s
response to the short squeeze fell short of these obligations. (See id. ¶ 5).
C. Defendant’s Restrictions on Meme Stock Purchases
When the markets closed on January 27, 2021, the short squeeze appeared to be firing on
all cylinders. After an already-strong five-day run (see id. ¶ 60), all three Meme Stocks more than
doubled in price that day (see id. ¶¶ 65–66). Unfortunately for Plaintiffs, 5 these gains would not
last.
5
After the January 27 trading day concluded, Chavez held 607 shares of AMC, and Jang held 3,500 shares
of GME. (See id. ¶¶ 15, 19).
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At 9:30 a.m. 6 on January 28, Defendant received an unconfirmed report from the NSCC
“showing a projection of a substantially increased clearing deposit for [Defendant].” (Id. ¶ 79
(alteration added)). Defendant knew that Meme Stock volatility was high, but it did not expect a
collateral increase of this magnitude. (See id. ¶¶ 39, 71, 81). Still, it did not reach out to the NSCC
or the DTCC to confirm the projected amount, which exceeded its initial expectations. (See id. ¶¶
77, 83). Rather than wait for clarification (see id. ¶¶ 77–78), Defendant started restricting Meme
Stock trades so that it could avoid a potentially sizable “collateral requirement that NSCC . . . may
impose” (id. ¶ 80 (alteration added)).
At or around 11:30 a.m., Defendant blocked direct and Shared Customers alike from
purchasing more Meme Stock shares. (See id. ¶¶ 70, 72, 79). For direct customers, this was easy
to accomplish. Defendant served as broker-dealer for the direct customers, so it simply refused to
execute any of their buy orders. (See id. ¶ 70). Direct customers who held Meme Stock shares
could sell their position if they pleased, but Defendant disallowed them any new purchases. (See
id.).
For Shared Customers, Defendant was merely the clearing broker, so it had to direct the
Introducing Broker-Dealers to shut off purchase orders for it. (See id.). At or around 11:30 a.m.,
Defendant announced to the Introducing Broker-Dealers that the Meme Stock trades were to be
“liquidation only” until further notice. (Id. ¶ 78). It also set margin requirements for the Meme
Stocks at 100%. (See id.). Introducing Broker-Dealers fell in line and relayed the message to the
Shared Customers. (See id. ¶¶ 72–75). Several, including Webull and Ally, deflected blame for
the restriction, emphasizing that the decision was Defendant’s, not theirs. (See id. ¶¶ 71, 73–75).
6
All times are in Eastern Standard Time.
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Less than 30 minutes after it implemented the restriction, Defendant realized it had
overestimated how much its collateral requirement was set to increase. (See id. ¶¶ 81–82). By
11:41 a.m., the DTCC “knew . . . that [Defendant’s] collateral exposure was going down.” (Id. ¶
82 (alterations added)). It arranged a phone call with Defendant at 11:47 a.m. (see id.), and by
noon, Defendant understood that the new collateral requirement — while greater than the previous
day’s amount — “was in fact lower [than projected at 9:30] and in line with its expectations and
ability to pay” (id. ¶ 81 (alteration added)). The scale of the projected collateral increase then
continued to shrink throughout the trading day until it vanished to nothing. (See id. ¶¶ 85–86). As
it turned out, Defendant was “not required to pay any additional collateral on January 28, 2021[.]”
(Id. ¶ 86 (alteration and emphasis added)).
Plaintiffs allege that even if Defendant’s initial collateral projections were accurate — and
Defendant’s subsequent communications with the DTCC quickly revealed they were not —
Defendant never had any reason to worry that it would not be able to make its collateral
requirement. (See id. ¶¶ 86–87). According to Plaintiffs, Defendant had “headroom in terms of
the capital available to [it] on [its] balance sheet” and “lines of credit that [it] c[ould] call on as
needed.” (Id. ¶ 87 (alterations added)). In fact, the very next day, Defendant considered imposing
further restrictions and declined to do so because it planned on “rais[ing] a few hundred in capital”
over the following weekend. (Id. ¶ 90 (alteration added)).
Despite the clarity that began to emerge in the minutes after the January 28 restriction took
effect, Defendant continued to bar Meme Stock purchase orders until 2:55 p.m. (See id. ¶ 81).
Plaintiffs allege that this three-and-a-half-hour kibosh was unreasonably long. (See id. ¶¶ 83–84).
Plaintiffs acknowledge that temporary trading restrictions on buy and sell orders can sometimes
be justified in times of extreme market volatility, but “industry-recognized” stopgap mechanisms
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like the circuit breaker 7 are supposed to last “mere minutes[,]” not hours; which amounts to a
“figurative lifetime in the multi-trillion-dollar public markets.” (Id. ¶¶ 52–53 (alteration added)).
In sum, Plaintiffs allege that Defendant effectuated a lengthy and unreasonable ban on buy-
side Meme Stock orders, which broke the short squeeze and caused stock prices to “spiral
downwards[.]” (Id. ¶ 6 (alteration added); see also id. ¶ 84). As a result, Plaintiffs had to either
sell their shares “at artificially suppressed prices” or grin and bear it as they watched their gains
dissipate. (Id. ¶ 6). Plaintiffs lay blame for their losses at Defendant’s feet. (See id. ¶ 97).
D. Amended Class Action Complaint
Plaintiffs Chavez and Jang propose two classes. (See id. ¶ 98). First is a Nationwide
Investor Class, consisting of all investors in the United States who (1) held Meme Stock shares or
call options at the end of the January 27, 2021 trading day; (2) sold their shares or options at a loss
between January 28, 2021 and February 23, 2021 (the “Class Period”), or whose options expired
as worthless during that period; and (3) who suffered damages. (See id.). Next is the Apex Broker-
Dealer Class, consisting of all of Defendant’s direct customers and Shared Customers who (1) held
Meme Stock shares or call options at the end of the January 27, 2021 trading day and had to either
sell their shares or options at a loss or whose options expired as worthless during the Class Period;
(2) placed a sale order on Meme Stock shares or call options and whose orders were delayed during
the Class Period; or (3) placed buy orders for Meme Stock shares or call options that were initially
accepted but ultimately rejected by Defendant during the Class Period. (See id.).
Plaintiffs bring four claims against Defendant. (See generally id.). For all counts, they
seek “compensatory damages, punitive damages, restitution, and/or refund of all funds acquired
7
The circuit breaker is a regulatory mechanism that exchanges use to temporarily curb panic selling or
manic buying. Circuit breakers differ from Defendant’s restriction in that they are shorter in duration and
target both sides of the trade, not just the buy side. (See id. ¶¶ 53–54).
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by Defendant from Plaintiffs and the proposed members of the Classes as a result of Defendant’s
negligence and unlawful actions[.]” (Id. 40 (alteration added)). 8
Count I is for negligence. (See id. ¶¶ 105–13). Plaintiffs allege that Defendant owes
investors a duty of care “to act in accordance with the standard of care used by other broker-dealer
professionals.” (Id. ¶ 106). This duty of care, which allegedly implicates Defendant in both its
clearinghouse and broker-dealer service roles (see id.), entails duties to make sure the trading
platforms it either provides or supports are equipped to handle “reasonably foreseeable customer
demands and resulting market conditions” (id. ¶ 107), and to protect direct and Shared Customers’
investments by executing orders lawfully and promptly (see id. ¶ 108). Plaintiffs allege Defendant
breached this duty by failing to prepare for increased collateral requirements in the event of market
volatility, restricting Meme Stock buy orders during the short squeeze, and keeping the restriction
in place after the collateral requirement scare had lapsed. (See id. ¶¶ 110–12).
Count II is for breach of fiduciary duty. (See id. ¶¶ 114–21). Plaintiffs allege that
Defendant is an agent of its direct and Shared Customers and thus owes them “a fiduciary duty of
care, loyalty, and good faith[.]” (Id. ¶ 115 (alteration added)). Defendant allegedly must take
“reasonable steps” to refrain from “self-imposed trading restrictions” that give preference to its
own “interest over that of its customers.” (Id. ¶ 116). Defendant allegedly breached this duty by
restricting Meme Stock purchases in the first instance and then keeping those restrictions in place
“for an unjustified period of time.” (Id. ¶¶ 117–18). This restriction allegedly went beyond the
“mere ministerial clearing conduct” that is typically the domain of clearing brokers and benefitted
Defendant at the expense of its customers. (Id. ¶ 118).
8
The Court uses the pagination generated by the electronic CM/ECF database, which appears in the headers
of all court filings.
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Count III, which Plaintiffs allege “in the alternative to Counts I and II” (id. ¶ 123), is for
breach of the implied covenant of good faith and fair dealing (see id. ¶¶ 122–27). This claim is
not for breach of contract, but it nonetheless centers on the Customer Agreement that Defendant’s
customers must accept before using its services. (See id. ¶ 124). According to Plaintiffs, every
agreement creates “a duty of good faith and fair dealing in the performance of the agreement such
that neither party shall 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.” (Id. ¶ 125). Plaintiffs allege
Defendant violated this duty when it restricted Meme Stock purchases on January 28, 2021, “with
the intent of causing the trading price . . . to go down[.]” (Id. ¶ 126 (alterations added)).
Count IV, also alleged in the alterative to Counts I and II, is for tortious interference with
a business relationship. (See id. ¶¶ 128–36). Plaintiffs allege that Defendant’s restriction tortiously
interfered with the customer agreements that Shared Customers had with the Introducing Broker-
Dealers. (See id. ¶ 129).
E. Defendant’s Motion
Defendant seeks dismissal of the Amended Class Action Complaint with prejudice. (See
generally Mot.). To start, Defendant argues that Plaintiffs lack standing to sue. (See id. 49– 53,
57). This argument takes two forms. First, Defendant argues that Plaintiffs lack Article III
standing to bring any of their claims. (See id. 49–53). In the alternative, it maintains Plaintiffs
lack standing with respect to the direct customers who use its broker-dealer services because
Plaintiffs only used Defendant’s clearinghouse services. (See id. 53, 57). Plaintiffs insist that
these arguments conflate the standing analysis with the class certification analysis, rendering them
premature at this stage. (See Resp. 24–30).
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Second, Defendant argues that federal securities law preempts Plaintiffs’ claims. (See Mot.
54–57). It asserts that the duties Plaintiffs would have the Court recognize either contradict federal
securities law, or at least would make it more difficult for clearing brokers to comply. (See id. 55–
56). According to Plaintiffs, this argument erroneously attempts to extend to private clearing
brokers legal protections that Congress intended for self-regulatory organizations (“SROs”) like
the DTCC. (See Resp. 58).
Third, Defendant argues that Plaintiffs’ claims fail as a matter of law. (See id. 22–49). As
to the first three counts, Defendant asserts it has no common law duties to Plaintiffs, and even if it
did, Plaintiffs have failed to allege a breach of those duties. (See id. 25–43). Regarding Count IV,
Defendant argues that Plaintiffs do not allege that Defendant employed improper means to
interfere with the relationship between Plaintiffs and the Introducing Broker-Dealers. (See id. 43–
46). Plaintiffs disagree. (See Resp. 32–57).
II. LEGAL STANDARDS
“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
U.S. 662, 678 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A pleading
withstands a motion to dismiss if it alleges “factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678 (citing
Twombly, 550 U.S. at 556). “The mere possibility the defendant acted unlawfully is insufficient
to survive a motion to dismiss.” Sinaltrainal v. Coca-Cola Co., 578 F.3d 1252, 1261 (11th Cir.
2009) (citation omitted), abrogated on other grounds by Mohamad v. Palestinian Auth., 566 U.S.
449 (2012). A complaint’s “well-pled allegations must nudge the claim ‘across the line from
conceivable to plausible.’” Id. (quoting Twombly, 550 U.S. at 570).
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This pleading standard “does not require ‘detailed factual allegations,’ but it demands
more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at
678 (quoting Twombly, 550 U.S. at 555). When considering a motion to dismiss, a court must
construe the complaint in the light most favorable to the plaintiff and take the factual allegations
as true. See Brooks v. Blue Cross & Blue Shield of Fla., Inc., 116 F.3d 1364, 1369 (11th Cir. 1997)
(citing SEC v. ESM Grp., Inc., 835 F.2d 270, 272 (11th Cir. 1988)). Pleadings must contain “more
than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not
do.” Twombly, 550 U.S. at 555 (citation omitted).
Generally, a court must confine its review of a motion to dismiss to the four corners of the
complaint, including any attached exhibits. See Fin. Sec. Assurance, Inc. v. Stephens, Inc., 500
F.3d 1276, 1284 (11th Cir. 2007) (citing Brooks, 116 F.3d at 1368). But courts may take judicial
notice of matters “not subject to reasonable dispute,” including stock prices. LaGrasta v. First
Union Sec., Inc., 358 F.3d 840, 842 (11th Cir. 2004) (citations omitted); see also Fed. R. Evid.
201(b).
District courts must liberally grant leave to amend pleadings “when justice so requires.”
Fed. R. Civ. P. 15(a)(2); see also Bryant v. Dupree, 252 F.3d 1161, 1163 (11th Cir. 2001) (holding
that Rule 15(a)(2) limits district court’s discretion to dismiss pleadings without leave to amend).
Only a “substantial reason” for denying leave to amend will justify the denial. Fla. Power & Light
Co. v. Allis Chalmers Corp., 85 F.3d 1514, 1520 (11th Cir. 1996) (quoting Shipner v. E. Air Lines,
Inc., 868 F.2d 401, 407 (11th Cir. 1989)). A plaintiff who seeks to amend a complaint under
Federal Rule of Civil Procedure 15(a)(2) must request leave by filing a written motion and setting
forth the substance of the proposed amendment. See United States ex rel. Atkins v. McInteer, 470
F.3d 1350, 1361–62 (11th Cir. 2006) (citations and footnote call number omitted).
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III. ANALYSIS
A. Choice of Law
Before proceeding to the parties’ substantive arguments, the Court must decide what law
governs. The first step of this analysis is determining which state’s choice-of-law rules apply. On
this initial point, there is no dispute. When multidistrict litigation is “transferred under 28 U.S.C.
[section] 1407, the transferee court applies the choice-of-law rules of the state in which the action
was filed.” Larsen v. Citibank FSB, 871 F.3d 1295, 1303 (11th Cir. 2017) (alteration added;
citations omitted). Plaintiffs initially filed this action in New York (see Mot. 11; Resp. 19), so
New York’s choice-of-law rules control.
While the parties agree New York choice-of-law rules apply, they disagree about which
state’s law should govern the merits of the dispute. Plaintiffs argue that New York law applies
(see Resp. 30–32), while Defendant argues that Texas law applies (see Mot. 24–25). Under New
York’s choice-of-law rules, the Court must first decide whether the two states’ laws “actual[ly]
conflict.” Booking v. Gen. Star Mgmt. Co., 254 F.3d 414, 419 (2d Cir. 2001) (alteration added;
citation and quotation marks omitted). If there is no conflict, the Court may dispense with any
further choice-of-law analysis and apply New York law. See HSA Residential Mortg. Servs. of
Texas v. Casuccio, 350 F. Supp. 2d 352, 362 (E.D.N.Y. 2003) (citing Curley v. AMR Corp., 153
F.3d 5, 12 (2d Cir. 1998)). But if the two jurisdictions’ laws would yield “relevant substantive
differences that could have a significant impact on the outcome of the case[,]” the Court must
decide which applies. Fin. One Pub. Co. Ltd. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325,
332 (2d Cir. 2005) (alteration added).
Defendant asserts that “no actual conflict exists” because Plaintiffs’ claims supposedly
“fail under both New York and Texas law[.]” (Mot. 24 (alteration added; citation omitted)).
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Plaintiffs are more ambivalent as to whether there is an actual conflict but argue that New York
law should control in either case. (See Resp. 30–31). Neither side identifies a single dispositive
difference in the two bodies of law (compare Mot. 24–25 with Resp. 30–32), so the Court is
inclined to adopt Defendant’s suggestion that there is no actual conflict (see Mot. 24) and apply
New York law, see Curley, 153 F.3d at 12.
Even if an actual conflict exists, New York’s choice-of-law rules militate in favor of
applying New York law. New York rules provide that where an actual conflict exists in a tort case
— and the Amended Complaint alleges four tort claims (see Am. CAC ¶¶ 105–36) — the tie goes
to “the state with the most significant interest in the litigation.” Lee v. Bankers Tr. Co., 166 F.3d
540, 545 (2d Cir. 1999) (citation omitted). The relevant contacts that determine which state has
the greater interest are “the parties’ domiciles and the locus of the tort[.]” 9 Schultz v. Boy Scouts
of Am., 65 N.Y.2d 189, 197 (N.Y. 1985) (alteration added; citations omitted). These favor New
York law here.
New York’s ties to this litigation a re ubiquitous. Defendant is a New York corporation
and has offices in New York. (See Am. CAC ¶ 10). Its “key personnel are New York based.”
(Id.). GME and AMC are listed on the New York Stock Exchange, which is in New York. (See
Resp. 31). The DTCC, whose collateral requirements allegedly prompted Defendant to implement
the January 28, 2021 trade restriction (see Am. CAC ¶ 77–79), is also in New York (see Resp. 31).
Notwithstanding these significant contacts, Defendant argues that Texas has the stronger
tie. (See Mot. 24–25). The Court disagrees.
Defendant first asserts that Plaintiffs’ Customer Agreements contain choice-of-law
provisions which dictate that Texas law must govern. (See Mot. 25). But those provisions do not
9
Plaintiffs’ domiciles do not factor here, for Chavez is domiciled in Arizona (see Am. CAC ¶ 13), Jang is
domiciled in Maryland (see id. ¶ 17), and the proposed classes are nationwide (see id. ¶ 98).
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apply here. Under New York choice-of-law rules, contractual choice-of-law provisions only
govern contract disputes. See Klock v. Lehman Bros. Kuhn Loeb Inc., 584 F. Supp. 210, 215
(S.D.N.Y. 1984) (“[I]t has been held in New York that a contractual choice of law provision
governs only a cause of action sounding in contract.” (alteration added)).
This is not a contract dispute. Plaintiffs bring four tort claims that arise from allegedly
independently existing duties, not contractual obligations. (See Am. CAC ¶¶ 105–36). These tort
claims are not transformed into contract claims merely because they arise out of a contractual
relationship. See Hamlet at Willow Creek Dev. Co., LLC v. Ne. Land Dev. Corp., 64 A.D.3d 85,
113 (N.Y. Sup. Ct. App. Div. 2009) (observing that “a contracting party may be charged with a
separate tort liability arising from a breach of a duty distinct from, or in addition to, the breach of
contract” (alteration and emphasis added; citations and quotation marks omitted)). The Customer
Agreements’ choice-of-law provisions are inapt here.
Defendant next stresses Texas law should apply because its headquarters — and thus, its
domicile — are in Dallas, Texas. (See Mot. 25). This argument initially appears stronger than the
first, for a party’s domicile weighs heavily in New York’s choice-of-law considerations. See
Padula v. Lilarn Props. Corp., 84 N.Y.2d 519, 521 (N.Y. 1994). It does not move the needle for
Defendant, however.
Perhaps Dallas is Defendant’s nominal principal place of business. Yet, Defendant does
not identify a single corporate officer who works out of the Dallas office, nor does it state that any
decisions relevant to the January 2021 short squeeze — or anything else, for that matter — were
made in Texas. (See Mot. 25; Reply 9–11). Contrast that with the number of Defendant’s officers
who work in New York, as well as the high-level decision-making that occurs there. (See Am.
CAC ¶ 10). Notwithstanding the “headquarters” designation that Defendant gives its Dallas office,
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it may functionally “be said that [Defendant’s] corporate presence is much more pronounced in”
New York, which is what matters for choice-of-law purposes. Weisberg v. Layne-New York Co.,
132 A.D.2d 550, 552 (N.Y. Sup. Ct. App. Div. 1987) (alteration added; citations omitted).
Because New York has a stronger interest in the litigation than Texas, New York law
applies, regardless of whether New York and Texas law conflict. See Lee, 166 F.3d at 545.
B. Standing
There is another hurdle to clear before proceeding to the substance of Plaintiffs’ claims.
The Court must evaluate whether Plaintiffs have standing to bring their claims in the first instance.
Defendant makes three arguments that they do not. The first two concern Plaintiffs’ Article III
standing generally, while the third concerns the claims of direct customers only. (See Mot. 49–
53).
1. Article III Standing
To establish Article III standing, Plaintiffs must demonstrate (1) they have suffered an
“injury in fact — an invasion of a legally protected interest which is (a) concrete and particularized
and (b) actual or imminent, not conjectural or hypothetical[;]” (2) a “causal connection” between
the injury and Defendant’s conduct; and (3) that it is “likely, as opposed to merely speculative,
that the injury will be redressed by a favorable decision.” Aaron Priv. Clinic Mgmt. LLC v. Berry,
912 F.3d 1330, 1336 (11th Cir. 2019) (alteration added; citations and quotation marks omitted).
Defendant argues that Plaintiffs fall short in two ways. First, Defendant states their alleged injury
is too speculative. (See Mot. 50–52). Second, Defendant insists that Plaintiffs lack a legally
protected interest in this litigation because the short squeeze they helped facilitate was an unlawful
market manipulation conspiracy. (See id. 52–53).
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The Court starts with the argument that Plaintiffs’ alleged injury is too speculative. An
alleged injury does not confer standing unless it “actually exist[s].” Spokeo, Inc. v. Robins, 578
U.S. 330, 340 (2016) (alteration added; citation omitted). “[W]holly abstract” claims of injury do
not suffice. Tokyo Gwinnett, LLC v. Gwinnett Cnty., 940 F.3d 1254, 1263 (11th Cir. 2019)
(alteration added).
Plaintiffs easily clear this hurdle. They allege that by shutting off buy-side Meme Stock
orders, Defendant caused prices to “spiral downward[,]” at which point Plaintiffs had to either
watch their gains dissipate or sell their shares at “artificially suppressed prices[.]” (Am. CAC ¶¶
6–7 (alteration added)). In other words, Plaintiffs’ shares were worth one amount on January 27,
Defendant took action that allegedly suppressed the value of the shares the next day, and Plaintiffs
were out the difference. That difference is concrete, not speculative.
Defendant tries to blur the lines between concrete and speculative by likening Plaintiffs’
allegation to one the Eleventh Circuit rejected in Aaron Private Clinic Management LLC. (See
Mot. 51). There, the plaintiff aspired to open a methadone clinic “someday” and sued Georgia
officials for lost profits when the state stopped issuing licenses for narcotic treatment facilities.
Aaron Priv. Clinic Mgmt. LLC, 912 F.3d at 1336–37. The court found plaintiff had taken no
concrete steps toward opening the clinic when Georgia instituted the suspension, nor did the
complaint suggest the plaintiff had anything “more than a bare intention” to open a clinic “at some
unspecified time in the future[.]” Id. at 1337 (alteration added). The lost profits plaintiff alleged
were insufficiently concrete to confer standing because plaintiff failed to allege any facts
“suggesting a likelihood that its business would have come about absent the challenged action.”
Id. at 1338.
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The contrast between Plaintiffs and the would-be clinic proprietor in Aaron Private Clinic
Management LLC is stark. Here, when the alleged violations of law occurred, Plaintiffs had
already purchased securities, the measurable value of which decreased precipitously during the
Class Period allegedly because of Defendant’s actions. (See Am. CAC ¶¶ 6–7). Defendant is free
to dispute the causal connection Plaintiffs illustrate between the Meme Stock price dive and the
restriction it imposed, but that factual issue is distinct from the preliminary question of whether
Plaintiffs have alleged an injury concrete enough to confer standing. That question is easily
answered in the affirmative. See Felzen v. Andreas, 134 F.3d 873, 876 (7th Cir. 1998) (stating that
“a reduction in the market price of one’s stock is injury” for standing purposes).
Defendant also argues Plaintiffs’ apparent role in facilitating the short squeeze bars the
Court from considering the decline in the value of Plaintiffs’ Meme Stock shares to be a legally
protected interest. That is the subject of Defendant’s second standing argument. (See Mot. 52–
53).
Without damage to a legally protected interest, there is no Article III standing. See Aaron
Priv. Clinic Mgmt. LLC, 912 F.3d at 1336. Plaintiffs do not shy away from acknowledging that
the drop in the price of Meme Stock shares is their proffered legally protected interest. (See Resp.
26). According to Defendant, this decline cannot be legally protected if the gains that precipitated
the decline were ill-gotten. (See Mot. 52).
In Schlueter v. Latek — the case upon which Defendant builds this argument (see Mot. 52)
— the Seventh Circuit held that courts will not reward a plaintiff’s wrongdoing by adjudicating a
loss predicated on its own wrongful behavior. See 683 F.3d 350, 355 (7th Cir. 2012). The
archetypical example occurs when a plaintiff sues an accomplice for his cut of funds the two stole
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together. See id. In such cases, courts adhere to the principle that there is no honor among thieves
and decline to find a legally protected interest in the plaintiff’s share of the loot. See id.
Defendant argues that the Court should find similarly with respect to Plaintiffs. (See Mot.
52–53). Defendant states that the short squeeze that drove Meme Stock prices up in the days
preceding January 28 was the product of a vast Internet conspiracy in which Plaintiffs colluded
with other online retail investors to effectuate an illegal “market manipulation scheme[,]” the fruits
of which are not entitled to legal protection. (Id. 52 (alteration added)). This argument, while
creative, is weak. Even if the short squeeze was the product of an unlawful market manipulation
conspiracy in which Plaintiffs were participants — and the Court certainly does not prejudge that
issue here — Defendant’s assertions at best raise a question of fact, inappropriate for resolution on
a motion to dismiss. The Court thus rejects Defendant’s two arguments that Plaintiffs lack Article
III standing generally.
2. Standing for Direct Customers’ Claims
Defendant’s final standing argument does not concern Plaintiffs Chavez and Jang’s
standing to assert their own claims, but rather the claims of direct customers, for whom Defendant
was not just a clearing broker but the broker-dealer. (See id. 53). Recall that Jang and Chavez are
Shared Customers, which means they receive broker-dealer services from Introducing Broker-
Dealers and only use Defendant for its clearing broker services. (See Am. CAC ¶¶ 25–28). In the
Background section, see supra Section I.B., the Court distinguished between broker-dealers, who
effectuate trades between buyers and sellers (see Am. CAC ¶ 33); and clearing brokers, who work
with the clearinghouse to help guarantee stock trades during the Gap Period — after a buyer and a
seller have agreed on price and quantity but before the transaction is consummated (see id. ¶¶ 31–
33, 35–36). The Amended Class Action Complaint proposes to lump Shared Customers and direct
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customers together in the same putative classes (see id. ¶ 98), but by Plaintiffs’ own admission,
Defendant performs one role for the Shared Customers and another for direct customers (see id.
¶¶ 24–25).
The Supreme Court has long been clear that “the standing inquiry requires careful judicial
examination of a complaint’s allegations to ascertain whether the particular plaintiff is entitled to
an adjudication of the particular claims asserted.” Allen v. Wright, 468 U.S. 737, 752 (1984).
Because Defendant has different duties when it services Shared Customers and direct customers,
Defendant casts doubt as to whether Shared Customers like Plaintiffs can allege claims on behalf
of direct customers. (See Mot. 53). Yes, the direct customers Plaintiffs wish to include in their
two classes may have standing to sue Defendant on their own. But as Defendant stresses (see id.),
Plaintiffs may not use putative class members to shirk their independent obligation to “establish a
case or controversy between [themselves] and [Defendant]” for “each claim” they wish to assert,
including those on behalf of the direct purchasers, Griffin v. Dugger, 823 F.2d 1476, 1483 (11th
Cir. 1987) (alterations added).
Defendant’s argument may ultimately prove persuasive, but it has little sway in
consideration of a motion to dismiss. On a motion to dismiss, all the Court needs to determine is
that Plaintiffs have standing to assert their own claims. See Blessing v. Sirius XM Radio Inc., 756
F. Supp. 2d 445, 452 (S.D.N.Y. 2010) (“[W]hile there is no question that plaintiffs in a proposed
class action must have standing to sue the defendant on at least some claims . . .[,] whether they
may bring each claim asserted on behalf of the proposed class is properly determined after class
certification is decided.” (alterations added; citation and quotation marks omitted)). Here, they do.
Defendant imposed restrictions on Meme Stock purchases that allegedly caused the prices of
Plaintiffs’ Meme Stock shares to fall — a concrete injury. (See Am. CAC ¶¶ 6–7, 21). That
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satisfies the minimum requirement for Plaintiffs to seek redress against Defendant — at least for
their own injuries. See Aaron Priv. Clinic Mgmt. L.L.C., 912 F.3d at 1336.
As to the direct customers, the Court acknowledges their theories of liability may differ
from Plaintiffs’. But these differences are best explored at or after the class certification stage,
not on a Rule 12(b)(6) motion to dismiss. See Venerus v. Avis Budget Car Rental, LLC, 723 F.
App’x 807, 813–14 (11th Cir. 2018) (admonishing district courts against conflating the
commonality and typicality analysis, which is the purview of class certification motions, with a
standing analysis). Where, as here, “the issue is not whether [] Plaintiffs have standing to sue
Defendant[] — they most certainly do — but whether their injuries are sufficiently similar to those
of the purported Class to justify the prosecution of a nationwide class action,” the “growing
consensus among district courts” is to defer resolution until “the class certification stage, when
this Court may consider commonality and typicality issues with respect to the named plaintiffs and
other putative class members.” In re DDAVP Indirect Purchaser Antitrust Litig., 903 F. Supp. 2d
198, 213–14 (S.D.N.Y. 2012) (alterations added; citations and quotation marks omitted). The
Court joins this growing consensus and defers judgment on Defendant’s final standing argument.10
10
Defendant’s argument may be premature as to standing, but the Court acknowledges that it raises an
important point concerning the viability of Plaintiffs’ four claims. While Plaintiffs purport to sue on behalf
of direct purchasers (see Am. CAC ¶ 98), no direct purchasers are parties to this litigation (see generally
id.). The direct purchasers referenced in the Amended Class Action Complaint are unnamed members of
two putative classes — not Plaintiffs. See In re Cox Enters., Inc. Set-Top Cable TV Box Antitrust Litig.,
835 F.3d 1195, 1203 (10th Cir. 2016) (citing Smith v. Bayer Corp., 564 U.S. 299, 313 (2011)). Accordingly,
if the sufficiency of any claim in the Amended Class Action Complaint depends on the nature of Plaintiffs’
relationship with Defendant, the Court must hold Plaintiffs to their allegations that they are Shared
Customers, not direct customers. (See Am. CAC ¶¶ 14, 18, 29).
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C. Preemption
The final preliminary question the Court must resolve before proceeding to an examination
of the sufficiency of Plaintiffs’ claims is whether federal securities law preempts them. Defendant
argues that it does. (See Mot. 54–57). The Court disagrees.
The Supremacy Clause of the Constitution provides that “the Constitution and the laws of
the United States ‘shall be the supreme Law of the Land.’” Estrada v. Becker, 917 F.3d 1298,
1302 (11th Cir. 2019) (quoting U.S. Const. art. VI, cl. 2.). If federal law is supreme, it follows
that state law must give way when the two conflict. Thus, “any state law that ‘interferes with, or
is contrary to,’ federal law is preempted.” Id. (alterations adopted; quoting Gibbons v. Ogden, 22
U.S. 1, 211 (1824)).
Courts have delineated three categories of preemption: (1) express preemption; (2) field
preemption; and (3) conflict preemption. See Smith v. Teva Pharm. USA, Inc., 437 F. Supp. 3d
1159, 1163 (S.D. Fla. 2020) (citation omitted). Defendant asserts the third applies here. (See Mot.
54). Conflict preemption occurs when a state law either renders it “impossible for a private party
to comply with both state and federal requirements,” or when it “stands as an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress.” Geier v. Am.
Honda Motor Co., 529 U.S. 861, 899 (2000) (Stevens, J., dissenting; citation and quotation marks
omitted). Critically, courts may not presume a conflict exists merely because the state law in
question concerns some activity that federal law also regulates; there must be “an ‘actual conflict’”
between the two. English v. Gen. Elec. Co., 496 U.S. 72, 90 (1990) (citation omitted). There is
no such conflict here.
Defendant asserts that imposing tort liability on clearing brokers who struggle to meet the
DTCC and NSCC’s collateral requirements would somehow interfere with federal clearinghouse
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regulations. (See Mot. 54–57). The Court understands that as self-regulatory organizations
(“SROs”), the DTCC and NSCC are regulated entities. They take their cues from 15 U.S.C. section
78q-1, which lays the groundwork for “the development of uniform standards and procedures for
clearance and settlement” of securities transactions. 15 U.S.C. § 78q-1(a)(1)(D). Congress’s
desire for uniformity would almost certainly come under threat if plaintiffs could assert tort claims
against the DTCC and NSCC for failing to guarantee trades in accordance with each state’s
prescribed common law duty of care. Consequently, if Plaintiffs had named either SRO as a
defendant in this litigation, those claims would be preempted — as other courts have held with
virtual unanimity every time a plaintiff tries to assert common law claims against a securities
market SRO. See In re Series 7 Broker Qualification Exam Scoring Litig., 548 F.3d 110, 114–15
(D.C. Cir. 2008) (collecting cases holding that state law claims against securities market SROs are
preempted).
But Plaintiffs did not sue the DTCC or NSCC. They sued Defendant, a private clearing
broker that — while subject to SROs’ rules and regulations — is not an SRO. (See Am. CAC ¶
5). And while Defendant argues persuasively that common law claims against SROs are
preempted, nowhere in the three-and-a-half pages the Motion devotes to the subject of preemption
does Defendant cite a single case preempting state-law claims against a clearing broker. 11 (See
Mot. 54–57).
11
The closest Defendant comes is Appert v. Morgan Stanley Dean Witter, Inc., No. 08-cv-7130, 2009 WL
3764120 (N.D. Ill. Nov. 6, 2009), which Defendant asserts is “directly on point” (Reply 30). This misstates
things somewhat. In Appert, the court dismissed a breach of contract claim against a financial firm that
was regulated by two SROs. See 2009 WL 3764120, at *2. The contract in question purported to adopt
the SROs’ rules and regulations. See id. In its order granting the defendant’s motion to dismiss, the court
held that the Securities Exchange Act did not provide a private right of action for violations of the SROs’
rules, which the plaintiff tried to smuggle in through a breach of contract claim. See id. at *2–4. The court
did not hold that the Securities Exchange Act, or any other federal law, preempted all contract claims against
the defendant, nor did it even mention tort claims, see generally id., such as the ones Plaintiffs bring here
(see Am. CAC ¶¶ 105–36). The case is thus distinguishable.
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This is unsurprising. Neither reason nor precedent compels the conclusion that Plaintiffs’
tort claims “actual[ly] conflict” with any federal statute or regulation. English, 496 U.S. at 90
(alteration added; citations and quotation marks omitted). The pleading does not allege that the
DTCC and NSCC should have done anything differently, nor does it purport to impose liability on
the SROs. (See generally Am. CAC).
Instead, it alleges that Defendant should have been better prepared to respond to the
prospect of an increased collateral requirement. (See id. ¶¶ 39, 57). And if the SROs had increased
the requirement beyond what Defendant was prepared to pay — a prospect that, again, never
materialized (see id. ¶¶ 84–85) — Plaintiffs allege that Defendant should have responded by
raising money or tapping into existing lines of credit, not by shutting off purchase orders (see id.
¶¶ 87, 90). If any federal law compels Defendant to be unprepared for collateral increases, or to
shut off purchase orders in response to one, neither the Motion nor Reply identifies it.
In short, Plaintiffs’ four tort claims neither make it “impossible” for Defendant to comply
with state and federal law, nor do they generate any “obstacle to the accomplishment and execution
of the full purposes and objectives of Congress.” Am. Honda Motor Co., 529 U.S. at 899 (citation
omitted). The Court thus finds no conflict and rejects Defendant’s preemption argument.
D. Plaintiffs’ Four Claims
Having rejected Defendant’s two preliminary arguments, the Court now turns to Plaintiffs’
four tort claims on the merits. (See Mot. 25–46). These fare less well.
1. Count I: Negligence
Plaintiffs’ first claim is negligence. (See Am. CAC ¶¶ 105–13). “To establish a prima
facie case of negligence” under New York law, “a plaintiff must demonstrate (1) a duty owed by
the defendant to the plaintiff, (2) a breach thereof, and (3) injury proximately resulting therefrom.”
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Solomon v. City of New York, 66 N.Y.2d 1026, 1027 (N.Y. 1985) (citations omitted). The first
element proves insurmountable to Plaintiffs.
According to the Amended Complaint, Defendant “owes a duty of care to investors to act
in accordance with the standard of care used by other broker-dealer professionals.” (Am. CAC ¶
106). This entails duties to both “ensure that the trading platforms it provide[s] and/or support[s
are] sufficiently equipped to reliably deliver such services under reasonably foreseeable increasing
customer demands and resulting market conditions at issue in this case” (id. ¶ 107 (alterations
added)), and to “exercise reasonable care in safeguarding the investments of Plaintiffs and Class
members by providing a platform and/or supporting a platform to execute trades that is fair and
promptly provides execution of customers trade orders in a lawful manner” (id. ¶ 108). New York
law provides scant basis for these supposed duties.
To begin, New York tort law imposes no general duty to protect against purely economic
losses. In fact, the “economic loss doctrine” suggests the opposite is true. AMBAC Assurance
Corp. v. U.S. Bank Nat’l Ass’n, 328 F. Supp. 3d 141, 159 (S.D.N.Y. 2018) (citations and quotation
marks omitted). Under that doctrine, a defendant cannot be held “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.” 12 Id. (alterations adopted;
citation and quotation marks omitted).
12
The case law applying New York’s economic loss doctrine is messy because courts sometimes conflate
the economic loss doctrine, which requires a special economic relationship before plaintiffs can seek
damages in tort for purely economic losses, with the similarly named economic loss rule, a “related but
distinct” principle that “limits the end-purchaser of a product to contract remedies and precludes a recovery
in tort for purely economic losses — without personal injury or property damage — against a
manufacturer.” AMBAC Assurance Corp., 328 F. Supp. 3d at 158–59 (citations omitted). The latter’s
application has been confined to products-liability cases, see Travelers Cas. & Sur. Co. v. Dormitory Auth.-
State of New York, 734 F. Supp. 2d 368, 378 n.15 (S.D.N.Y. 2010) (collecting cases), so the Court only
considers the former here.
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Pure economic loss, unaccompanied by property damage or physical harm, has
traditionally been the purview of contract law. See id. New York courts prefer to keep it there.
See id. The rationale for the partition is twofold. First, allowing tort claims for purely economic
losses would invite tort law to run roughshod over contract law. See King County, Wash. v. IKB
Deutsche Industriebank AG, 863 F. Supp. 2d 288, 302 (S.D.N.Y. 2012) (citation omitted). Second,
the economic loss doctrine protects defendants from “disproportionate, and potentially limitless,
liability[.]” Id. (alteration added; citation, footnote call number, and quotation marks omitted).
Plaintiffs do not contest that their loss was purely economic. (See Resp. 43–46). To get
around the economic loss rule, they must demonstrate that they enjoyed a “special relationship”
with Defendant. AMBAC Assurance Corp., 328 F. Supp. 3d at 159 (alteration added). Plaintiffs
assert such a relationship exists here. (See Resp. 44 (arguing that the special relationship
“exception to the doctrine is present here where [Defendant] owes a duty to Plaintiffs and the
putative class”) (alteration added)).
Courts have been scattershot in defining the contours of the special relationship exception,
but in 532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Center, Inc., the New York Court of
Appeals identified the key baseline: for a relationship to qualify, it must “require[] the defendant
to protect against the risk of harm to plaintiff.” 96 N.Y.2d 280, 289 (N.Y. 2001) (alteration added;
citation omitted); see also AMBAC Assurance Corp., 328 F. Supp. 3d at 159 (observing that “the
economic loss doctrine centers on whether the defendant owed a duty to protect against the risk of
harm to the plaintiff”). So far, courts have applied the exception to landowners and tenants, see
Finlandia Ctr., Inc., 96 N.Y.2d at 289 (citing Nallan v. Helmsley-Spear, Inc., 50 N.Y.2d 507, 518–
19 (N.Y. 1980)); a “limited” set of professionals 13 dealing with clients, Hydro Inv’rs, Inc. v.
13
Attorneys, see 17 Vista Fee Assocs. v. Teachers Ins. & Annuity Ass’n of Am., 259 A.D.2d 75, 83 (N.Y.
Sup. Ct. App. Div. 1999); accountants, see id.; and architects, see Robinson Redevelopment Co. v.
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Trafalgar Power, Inc., 227 F.3d 8, 18 (2d Cir. 2000); and relationships in which one party owes a
fiduciary duty to the other, see Valentini v. Citigroup, Inc., 837 F. Supp. 2d 304, 329 (S.D.N.Y.
2011) (citations omitted). The first two categories are inapt here, but the third presents a closer
question.
Courts applying New York law have held that when the defendant “owes a fiduciary duty
of undivided loyalty” to the plaintiff, a special relationship exists. AMBAC Assurance Corp., 328
F. Supp. 3d at 159 (citations omitted). Plaintiffs allege Defendant owes its customers a fiduciary
duty. (See Am. CAC ¶ 115). New York law instructs otherwise.
In most cases, clearing brokers like Defendant “do not owe a fiduciary duty to the
customers of an introducing broker.” Greenfield v. Tassinari, 8 A.D.3d 529, 530–31 (N.Y. Sup.
Ct. App. Div. 2004) (collecting cases). 14 That statement describes the present situation, for the
Introducing Broker-Dealers introduced Plaintiffs and the other Shared Customers to Defendant.
(See Am. CAC ¶¶ 1, 14, 18). Consequently, Defendant argues that no fiduciary duty applies,
which in turn bars application of the “special relationship” exception to the economic loss doctrine.
(See Reply 31–32).
Plaintiffs insist there is an exception to New York’s general rule, which purportedly rescues
their claim. (See Mot. 54–55). The exception, which applies only under “certain extenuating
circumstances[,]” Rozsa v. May Davis Grp., Inc., 152 F. Supp. 2d 526, 531 (S.D.N.Y. 2001)
(alteration added; citation omitted), has two requirements. First, the clearing broker must go
Anderson, 155 A.D.2d 755, 756 (N.Y. Sup. Ct. App. Div. 1989); may be subject to the exception when they
violate their professional duties. No court has extended the exception to clearing brokers.
14
While direct customers rely on Defendant for broker-dealer services, no direct customers are party to this
lawsuit. Plaintiffs are Shared Customers, who only use Defendant’s clearing broker services. (See Am.
CAC ¶¶ 14, 18, 29). The Court thus limits its analysis of Plaintiffs’ relationship with Defendant to the
duties a clearing broker owes its clients.
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beyond its traditionally ministerial role of the “conduit” and become “actively engaged” in trades.
Goldman v. McMahan, Brafman, Morgan & Co., No. 85-2236-Civ, 1987 WL 12820, at *22
(S.D.N.Y. June 18, 1987); see also Levitt v. J.P. Morgan Sec., Inc., 710 F.3d 454, 466 (2d Cir.
2013) (observing that fiduciary duties may arise where “a clearing broker is alleged effectively to
have shed its role as clearing broker and assumed direct control of the introducing firm’s operations
and its manipulative scheme”); Glob. Enter. Grp. Holding, S.A. v. Ottimo, No. 07-cv-4904, 2010
WL 11629556, at *5 (E.D.N.Y. June 8, 2010) (same). Plaintiffs allege as much here. Indeed, the
Introducing Broker-Dealers had no desire to halt Meme Stock purchase orders and did so only at
Defendant’s behest. (See Am. CAC ¶¶ 71, 73–75).
The second requirement is that the clearing broker must have been actively involved in
fraud. See Glob. Enter. Grp. Holding, S.A., 2010 WL 11629556, at *5 (declining to impose
fiduciary duties where the clearing broker lacked the requisite scienter to participate in the
introducing broker-dealer’s fraud); A.I.A. Holdings, S.A. v. Lehman Bros., Inc., No. 97-4978-Civ,
2002 WL 88226, at *3 (S.D.N.Y. Jan. 23, 2002) (distinguishing between the general rule, which
does not impose fiduciary duties on clearing brokers, and the exception, which applies when the
broker has “actively engaged in a fraud” (citation omitted)); In re Blech Sec. Litig., 961 F. Supp.
569, 584 (S.D.N.Y. 1997) (imposing fiduciary duties where a clearing broker acted “with scienter”
to “direct[] or contrive[] certain allegedly fraudulent trades” (alterations added; quotation marks
omitted)); Goldman, 1987 WL 12820, at *22 (imposing fiduciary duties where the clearing broker
was “actively engaged . . . in creating fraudulent trading losses” (alteration added)). This is where
Plaintiffs miss the mark. They insist that Defendant exceeded its traditionally ministerial role of
guaranteeing trades by actively shutting down buy-side trades. (See Resp. 54). The Court does
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not disagree. But Plaintiffs never allege that Defendant, or anyone else for that matter, engaged in
fraud. (See generally Am. CAC).
This omission is fatal. Plaintiffs cite no New York cases — and the Court is aware of none
— holding that a clearing broker owed its investors a fiduciary duty outside the fraud context. (See
generally Resp.). Notably, every single case that Plaintiffs cite in support of applying New York
law’s extenuating circumstances exception involved fraud allegations. 15 (See id. 54). Because
Plaintiffs do not allege this crucial element, the extenuating circumstances exception does not
apply here.
From here, the journey back to the economic loss doctrine — the starting point for the duty
analysis — is straightforward. If there are no allegations of fraud, the extenuating circumstances
exception to the general rule that clearing brokers owe no fiduciary duty to investors does not
apply. See A.I.A. Holdings, S.A., 2002 WL 88226, at *3. If the extenuating circumstances
exception does not apply, Defendant owes Plaintiffs no fiduciary duty. Rozsa, 152 F. Supp. 2d at
531. If there is no fiduciary duty, Plaintiffs lack the special relationship required to bypass New
York’s economic loss doctrine. See AMBAC Assurance Corp., 328 F. Supp. 3d at 159. Therefore,
the economic loss doctrine applies, barring Plaintiffs’ negligence claim. See Cnty. of Suffolk v.
Long Island Lighting Co., 728 F.2d 52, 62 (2d Cir. 1984) (“New York law holds that a negligence
action seeking recovery for economic loss will not lie.” (citations omitted)).
15
See Levitt, 710 F.3d at 467–68 (declining to apply the extenuating circumstances exception in the context
of section 10(b) securities fraud); Glob. Enter. Grp. Holding, S.A., No. 2010 WL 11629556, at *5 (declining
to impose fiduciary duties where the clearing broker lacked the requisite scienter to participate in the
introducing broker-dealer’s fraud); Stern v. Legent Clearing LLC, No. 09-cv-794, 2009 WL 2244616, at *3
(N.D. Ill. July 28, 2009) (applying the extenuating circumstances exception where the clearing broker had
“actual knowledge that it was aiding and abetting . . . fraud” (alteration added)).
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Even if the economic loss doctrine did not apply, Plaintiffs’ negligence claim would fail
on the first prong. “It is axiomatic to note . . . that before a party may be held liable” for negligence,
“it must first be established that the party in fact owed a duty to act in a certain manner.” Riggs v.
Schappell, 939 F. Supp. 321, 329 (D.N.J. 1996) (alteration added). Plaintiffs allege that Defendant
has duties to “ensure that the trading platforms it provide[s] and/or support[s are] sufficiently
equipped to reliably deliver such services under reasonably foreseeable increasing customer
demands and resulting market conditions at issue in this case” (Am. CAC ¶ 107 (alterations
added)), and to “exercise reasonable care in safeguarding the investments of Plaintiffs and Class
members by providing a platform and/or supporting a platform to execute trades that is fair and
promptly provides execution of customers [sic] trade orders in a lawful manner” (id. ¶ 108). These
allegations run contrary to New York law.
A negligence theory holds defendants liable for their “failure to employ reasonable care —
the care which the law’s reasonably prudent man should use under the circumstances of a particular
case.” McLean v. Triboro Coach Corp., 302 N.Y. 49, 51 (N.Y. 1950). In many cases, New York
law imposes a duty of reasonable care on broker-dealers. See de Kwiatkowski v. Bear, Stearns &
Co., Inc., 306 F.3d 1293, 1305 (2d Cir. 2002) (collecting cases). But while Defendant is a broker-
dealer for direct customers, Shared Customers like Plaintiffs only use Defendant as a clearing
broker. (See Am. CAC ¶¶ 14, 18). The distinction is crucial, for “clearing brokers” simply “do
not owe duties to plaintiffs who are customers of their introducing brokers.” Rozsa, 187 F. Supp.
2d at 131 (citations omitted); see also Glob. Enter. Grp. Holding, S.A., 2010 WL 11629556, at *4
(observing that “a clearing broker owes no duty to individual investors” (citations omitted)). That
fact suffices to stop Count I in its tracks.
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To circumvent this obstacle, Plaintiffs turn to FINRA, whose rules and regulations
allegedly impose upon Defendant a “responsibility for fair dealing” that persists “even during
times of market stress.” (Am. CAC. ¶ 44 (citation and emphasis omitted)). They assert that
Defendant has a “duty in common law tort to comply with” these rules. (Resp. 37). It is unclear
what basis they have for so asserting.
To start, FINRA violations do not give rise to a private cause of action, and Plaintiffs may
not use a negligence claim as a trojan horse to smuggle one in. See Fox v. Lifemark Sec. Corp.,
84 F. Supp. 3d 239, 245 (W.D.N.Y. 2015) (“FINRA does not provide a private right of action, thus
even if defendants violated FINRA rules, plaintiff cannot recover for negligence based on the
alleged violation of FINRA Rule 2310(b)(2)(B).” (citation omitted)). FINRA violations can, in
limited circumstances, help inform whether a defendant violated the industry standard of care that
applies to financial advisors and broker-dealers in tort actions. See, e.g., Rioseco v. Gamco Asset
Management, Inc., No. 15862/10, 2011 WL 4552544 (N.Y. Sup. Ct. Sep. 23, 2011). But that does
not hold true in suits against clearing brokers. 16 See Rozsa, 187 F. Supp. 2d at 131.
Plaintiffs cite no cases applying New York law that purport to hold otherwise. The closest
they come is Rioseco v. Gamco Asset Management, Inc., a trial court case in which plaintiffs sued
their broker-dealer and investment advisor for negligence and breach of “fiduciary duties of care,
loyalty, candor and good faith.” 2011 WL 4552544. The court agreed that FINRA’s Suitability
Rule could be “considered as evidence of industry standards for purposes of a common law
malpractice claim.” Id. Crucially, however, the defendant was a broker-dealer and investment
advisor to the plaintiffs, not their clearing broker. See id. In fact, the court explicitly distinguished
16
And even if it did, evidence of a breach does Plaintiffs little good unless the breached duty of care is one
that negligence law recognizes in the first place. See Gesell v. First Nat’l City Bank of N.Y., 24 A.D.2d
424, 425 (N.Y. Sup. Ct. App. Div. 1965) (“Before there can be a breach of a duty, such duty must be shown
to exist.”).
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between clearing brokers, for whom no duty attached, and broker-dealers. See id. n.22. The Court
thus finds Rioseco inapposite.
The other cases Plaintiffs cite also fail to persuade. Plaintiffs cite Remington v. Newbridge
Sec. Corp. for the proposition that FINRA violations can be used to inform the proper standard of
care in negligence actions. (See Resp. 35–36 (citing 2013 WL 2444719, at *5–6 (S.D. Fla. June
5, 2013)). Remington is inapposite for the same reason Rioseco is: it involved a broker-dealer
defendant, not a clearing broker. See Remington, 2013 WL 2444719, at *1. So, too, for Scott v.
Dime Sav. Bank of New York, FSB, the only other case applying New York law that Plaintiffs cite
for this proposition. 17 (See Resp. 36 (citing 886 F. Supp. 1073, 1080–81 (S.D.N.Y. 1995))).
In sum, Plaintiffs have failed to allege that Defendant owed them a common law duty of
care. Moreover, New York’s economic loss doctrine forecloses finding such a duty. Without a
recognized duty of care, there is nothing for Defendant to breach. See Gesell, 24 A.D.2d at 425.
Count I is thus due to be dismissed.
2. Count II: Breach of Fiduciary Duty
Plaintiffs’ second claim is for breach of fiduciary duty. (See Am. CAC ¶¶ 114–21). Here,
Plaintiffs allege that Defendant acts as its customers’ agent, which gives rise to “a fiduciary duty
of care, loyalty, and good faith[.]” (Id. ¶ 115 (alteration added)). Defendant allegedly breached
its fiduciary duty by imposing the Meme Stock purchase restrictions, which served its interests to
the detriment of its customers. (See id. ¶¶ 117–18).
The Court disagrees. Defendant cannot breach a fiduciary duty to Plaintiffs if it does not
owe Plaintiffs a fiduciary duty in the first place. See Sleppin v. Thinkscan.com, LLC, 55 F. Supp.
17
The other cases Plaintiffs cite for the proposition that FINRA rules impose a common law duty on
Defendant apply other states’ laws. (See Resp. 35–38). They have little bearing on whether the alleged
duty exists under New York law.
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3d 366, 374 (E.D.N.Y. 2014) (“Under New York law, a breach of fiduciary duty claim requires
that the defendant owe the plaintiff a fiduciary duty and breached that duty.” (citation omitted)).
The Court already examined New York’s economic loss doctrine to determine whether Defendant
owed Plaintiffs a fiduciary duty and answered that question in the negative.
Under New York law, clearing brokers do not have a fiduciary duty to investors that broker-
dealers have introduced to them unless the “extenuating circumstances” exception applies. Rozsa,
152 F. Supp. 2d at 531 (citation omitted). That exception requires that the clearing broker
transcend its ordinary ministerial duties and become actively involved in fraud. See A.I.A.
Holdings, S.A., 2002 WL 88226, at *3. Plaintiffs allege no fraud here (see generally Am. CAC),
so the exception does not apply. Because Defendant owes Plaintiffs no fiduciary duty, Count II
is due to be dismissed.
3. Count III: Breach of Good Faith and Fair Dealing
In Count III, Plaintiffs allege the Meme Stock restriction violated the implied covenant of
good faith and fair dealing. (See Am. CAC ¶¶ 122–27). This claim arises from the Customer
Agreement Defendant enters with customers. (See id. ¶ 124). Plaintiffs allege that agreement
generates a corresponding “duty of good faith and fair dealing in the performance of the agreement
such that neither party shall 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.” (Id. ¶ 125).
New York law provides that every contract implies “a covenant of good faith and fair
dealing” that “encompasses any promises that a reasonable promisee would understand to be
included[.]” N.Y.U. v. Cont’l Ins. Co., 87 N.Y.2d 308, 318 (1995) (citations omitted). It prevents
any party to the contract from doing anything that would restrict the other’s ability to reap the
fruits of the contract, or to undermine the other party’s “presumed intentions or reasonable
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expectations.” Spinelli v. NFL, 903 F.3d 185, 205 (2d Cir. 2018) (citations and quotation marks
omitted).
The implied covenant of good faith and fair dealing has not been applied broadly. And
New York courts have held that it does not “nullify other express terms of the contract, or . . .
create independent contractual rights.” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Xerox Corp.,
25 A.D.3d 309, 310 (N.Y. Sup. Ct. App. Div. 2006) (alteration added; citing Fesseha v. TD
Waterhouse Inv’r Servs., 305 A.D.2d 268, 268 (N.Y. Sup. Ct. App. Div. 2003)). Accordingly,
courts must defer to the express terms of the contract when a purportedly implied duty conflicts.
See id.
Here, all parties acknowledge that the Customer Agreement afforded Defendant the “right
to refuse to execute transactions for Plaintiffs at any time and for any reason.” (Mot. 42; see also
Resp. 55). Plaintiffs would have the Court amend this provision and impose new conditions
governing when and why Defendant is allowed to refuse to execute transactions. (See Am. CAC
¶ 127). But the implied covenant of good faith and fair dealing may not be used to restrict parties’
rights under a contract when doing so would be “inconsistent with other terms of the contractual
relationship.” Murphy v. Am. Home Prods. Corp., 58 N.Y.2d 293, 304 (N.Y. 1983). 18 The Court
will not read new restrictions into a Customer Agreement that conflict with the broad rights it
affords Defendant. Accordingly, Count III is due to be dismissed.
18
Murphy is particularly analogous because it illustrates that New York courts regard implied limitations
on express grants of discretion as inconsistent. In Murphy, the contract in question afforded the defendant
— an employer — “an unfettered right” to terminate its employees “at any time.” 58 N.Y.2d at 304. The
court held that the implied covenant of good faith and fair dealing did not impose any limits or restrictions
on the defendant’s right to terminate employees because it “would be internally inconsistent” to restrict a
right intended to be unrestricted. Id. So, too, here. It would be similarly inconsistent for the Court to imply
restrictions on Defendant’s expressly unrestricted right under the Customer Agreement to “refuse to execute
transactions for Plaintiffs at any time and for any reason[.]” (Mot. 42 (alteration added)).
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4. Count IV: Tortious Interference with Business Relationship
The final claim alleges that Defendant tortiously interfered with Plaintiffs and the
Introducing Broker-Dealers’ business relationships. (See Am. CAC ¶¶ 128–36). To state a claim
for tortious interference under New York law, a plaintiff must allege that “the defendant’s sole
motive was to inflict injury and that the defendant employed unlawful[19] means to do so.” Nifty
Foods Corp. v. Great Atl. & Pac. Tea Co., 614 F.2d 832, 838 (2d Cir. 1980) (citations omitted).
The latter requirement is satisfied by “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 (N.Y. 1996) (alteration added; citation and
quotation marks omitted).
Plaintiffs do not allege any of these means. (See Am. CAC ¶¶ 128–36). Plaintiffs merely
allege that Defendant “unjustifiably, without privilege, and in bad faith, tortiously interfered with
the business relationship between Plaintiffs and the Introducing Broker-Dealers.” (Id. ¶ 132). That
does not suffice. See Guard-Life Corp., 50 N.Y.2d at 191 (observing that “persuasion alone
although it is knowingly directed at interference with the contract” does not satisfy the wrongful
means requirement (citation omitted)).
Plaintiffs attempt to salvage the claim by citing Carvel Corp. v. Noonan (see Resp. 56–57),
a New York Court of Appeals case that held open the question of whether “conduct which, though
not a crime or tort in itself, [is] so culpable . . . that it could be the basis for a claim of tortious
interference with economic relations.” 3 N.Y.3d 182, 190–91 (2004) (alterations added; quotation
marks omitted). Plaintiffs assert that because they have alleged “not one, but two independent
New York courts typically use the word “wrongful” instead of “unlawful” when describing the required
19
means. See, e.g., Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., 50 N.Y.2d 183, 191 (N.Y. 1980).
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torts — negligence and breach of fiduciary duty” — Defendant’s action is sufficiently “culpable”
to warrant a finding of wrongful means here. (Resp. 57).
This argument fails for two reasons. First, it depends on the success of the negligence and
breach of fiduciary duty claims, both of which fail. Second, even if those claims succeeded, no
court applying New York law has ever held that negligence and breach of fiduciary duty
independently constitute “wrongful means” for tortious interference purposes. See Noonan, 3
N.Y.3d at 190–91. Federal courts applying a state’s laws must proceed with modesty and avoid
“creat[ing] or expand[ing] that State’s public policy.” St. Paul Fire & Marine Ins. Co. v. Jacobson,
48 F.3d 778, 783 (4th Cir. 1995) (alterations added; citations omitted). The Court declines to
extend New York law beyond its established contours here. Accordingly, Count IV is due to be
dismissed.
IV. CONCLUSION
In sum, Plaintiffs’ four claims fail as a matter of law. Counts I and II each fail to allege a
duty that Defendant — a clearing broker — owed to Plaintiffs. Count III asks the Court to imply
a restriction on Defendant’s contractual right to refuse to execute trades that is inconsistent with
the Customer Agreement Plaintiffs signed. And Count IV fails to allege that Defendant employed
wrongful means in its interference with Plaintiffs’ business relations, which is a requirement under
New York law.
On January 10, 2022, the Court issued an Order [ECF No. 450] dismissing Plaintiffs’
Amended Consolidated Class Action Complaint [ECF No. 422]. That Order advised Plaintiffs
Chavez and Jang that their next amended complaint — this pleading — would be their last. (See
Jan. 10, 2022 Order 17). The Court sees no reason to give Plaintiffs another opportunity to amend.
Accordingly, it is
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ORDERED AND ADJUDGED that Defendant, Apex Clearing Corporation’s Rule 12
Motion to Dismiss Plaintiffs’ (Fourth) Class Action Complaint [ECF No. 491] is GRANTED.
Plaintiffs’ Amended Class Action Complaint [ECF No. 483] is DISMISSED.
DONE AND ORDERED in Miami, Florida, this 9th day of January, 2023.
________________________________________
CECILIA M. ALTONAGA
CHIEF UNITED STATES DISTRICT JUDGE
cc: counsel of record
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