This case poses the question whether a broker may liquidate securities, pursuant to a margin call, in the after-hours market, when the agreement permitting liquidation does not stipulate “at any time.”
Krukever vs. TD Ameritrade, Inc., No. 18-21399-CIV (S.D. Fla., 10/5/18).
Plaintiffs are individual investors who opened brokerage and commodities accounts with TD Ameritrade, Inc. (“TDA”) and TD Ameritrade Futures and Forex LLC (“TDAFF”) (collectively “Defendants”) to trade options on futures contracts. To open these accounts, Plaintiffs entered into Futures Client Agreements (“Agreements”) with TDAFF, which gave TDAFF the right “without prior notice and in its sole discretion, to liquidate any assets held by TD Ameritrade Clearing Inc. in a Securities Account” in the event of a margin deficiency or insecurity. On February 5, 2018, TDAFF liquidated Plaintiffs’ option futures investments after the markets had closed for the day. As a result, Plaintiffs lost millions of dollars.
Plaintiffs subsequently filed suit against Defendants asserting claims for: 1) fraud against TDAFF; 2) aiding and abetting fraud against TDA; and 3) breach of the implied covenant of good faith and fair dealing. Specifically, Plaintiffs argue that liquidation in the after-hours market was reckless and commercially unreasonable since the after-hours market was illiquid and dysfunctional due to the volatile market conditions at the time the underlying markets closed. Moreover, Plaintiffs argue that Defendants had no authority to liquidate Plaintiffs’ investments “at any time” and the failure to include that language in the Agreements constituted a fraudulent omission. Defendants subsequently filed a motion to dismiss for failure to state a claim.
With respect to Count I, a fraud-based claim under the Commodities Exchange Act (“CEA”), Defendants argued that Plaintiffs failed to meet the heightened fraud pleading requirements of Federal Rule of Civil Procedure 9(b). To satisfy Rule 9(b)’s pleading requirements, Plaintiffs must assert: 1) precisely what statements were made in what documents or oral representations or what omissions were made; 2) the time and place of each such statement and the person responsible for making same; 3) the content of such statements and the manner in which they misled the plaintiff; and 4) what defendants obtained as a consequence of the fraud. Defendants argue they never obtained anything as a result of the fraud and thus Plaintiffs failed to properly allege fraud in accordance with Rule 9(b). The Court agreed with Defendants and found that Plaintiffs failed to allege facts that would meet Rule 9(b)’s heightened pleading requirements. Accordingly, the Court dismissed Count I of the complaint. The Court also dismissed Count II, a fraud-based claim under federal commodities regulations, for the same reason.
The Court next considered Count III. Count III alleged that TDA aided and abetted the conduct of TDAFF alleged in Counts I and II. With respect to Count III, the Court determined that the only violations of the CEA that the Plaintiffs plausibly alleged were the omissions made by TDAFF in the drafting of the Agreements. The actions to which Plaintiffs point as supporting aiding and abetting happened during or after the liquidation, not during the drafting of the Agreements. Because the complaint alleged no facts showing TDA aided and abetted the drafting of TDAFF’s agreement with Plaintiffs, the Court dismissed Count III for failure to state a claim. Finally, the Court considered Count IV, which alleged a breach of the implied covenant of good faith and fair dealing. Here, the Court determined that resolution of this factual dispute was a matter for summary judgment or trial – not a motion to dismiss. Accordingly, the Court denied Defendants’ motion to dismiss on Count IV.
(B. Wiand) (EIC: Even viscerally, a fraud-based claim for improper margin liquidation seems like overkill. Why didn’t this investor pursue SRO arbitration where pleading requirements would be academic?)
(SOLA Ref. No. 2019-09-08)
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