Claims of Unauthorized Trades Fail to Move Beyond the Pleading Stage: McClellon v. Wells Fargo
Posted on Categories Court Decisions, Securities Customers

By Paul J. Dubow

*A claim of unauthorized trading will be dismissed if the plaintiff fails to allege that he was injured thereby. **In order to recover on a claim of unauthorized trading under the Washington Securities Act, a plaintiff must allege that the trades were fraudulent and deceitful and that the defendant made a false representation to him or her. ***A conclusory statement that defendant made a promise of fiduciary care, with no further evidence, is not enough to assert a claim of breach of fiduciary duty.

McClellon vs. Wells Fargo Advisors Financial Network, LLC, No. C18-0852 (W.D. Wash., 10/11/18).

Plaintiff alleged that, in April 2016, defendants made unauthorized trades in his account by selling 4,675 shares of Solar City and purchasing 10,000 shares of Square. He alleged, inter alia, violation of the Washington Securities Act, Washington Consumers Protection Act (WCPA), negligence, fraud, breach of fiduciary duty, and conversion. He demanded that he be made whole by return of his funds with prejudgment interest and requiring defendants to return 519 shares of Tesla and 2,500 shares of Monsanto but, curiously, no return of the Solar City stock, nor did he offer to tender the Square shares back to defendants.

The Court began its reasoning for granting defendants’ motion to dismiss by noting that plaintiff alleged that he was harmed or injured by defendants’ actions or inaction. But, plaintiff did not allege any facts to demonstrate the sale of Solar City stock and purchase of Square stock caused him a loss. Nor did plaintiff allege facts that demonstrated how a return of funds and an award of Tesla and Monsanto stock was connected to his allegedly fraudulent Solar City and Monsanto stock transactions. Absent sufficient facts pled on the issue of injury, it dismissed plaintiff’s WCPA and negligence claims.

The Court then turned to the Washington Securities Act and the fraud claim. To maintain a private action under the state securities act, a plaintiff must establish a fraudulent or deceitful act committed in connection with the offer, sale, or purchase of any security. The elements of common law fraud include misrepresentation of an existing fact or falsity. Plaintiff argued that defendants acted as a “broker” or “clearing house” through which the alleged fraudulent transactions were conducted and that defendants were negligent in not verifying or reversing the alleged fraudulent transactions. But plaintiff did not allege that defendants themselves committed a fraudulent or deceitful act or made a false representation to him. Therefore, plaintiff did not allege facts supporting a reasonable inference that defendants violated the securities act or committed common law fraud.

With respect to the claim of breach of fiduciary duty, plaintiff stated that the parties did not have a signed contract, but that defendants made a promise of fiduciary duty to him. Plaintiff did not provide any other facts about the alleged promise. Plaintiff’s conclusory assertion that defendants made a promise to him was insufficient, standing alone, to establish that defendants owed him a fiduciary duty. Finally, the Court dismissed the conversion claim, because plaintiff failed to allege sufficient facts allowing the Court to draw a reasonable inference that defendants willingly interfered with plaintiff’s assets, wrongfully received funds from plaintiff’s account, or possessed funds that they had an obligation to return to plaintiff.

(P. Dubow: Generally, a client who alleges that his brokerage firm made unauthorized trades in his account, should be able to get past a motion to dismiss. That did not happen here. We conclude that it was the result of inartful pleading. The Court may have also looked at plaintiff with a jaundiced eye, because he alleged that he did not complain about the unauthorized trades until May 2017, thirteen months after the alleged event.)

(SOLA Ref. No. 2018-43-07)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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