A recommendation of an unsuitable security cannot be the basis for a federal securities fraud claim, but it may state a fiduciary claim.
Robertson vs. MetLife Secs., Inc., No. 16-CV-289 (W.D. N.Y., 3/30/18).
The Facts and Claims
Plaintiff Robertson, as guardian for her disabled sister, Mary Katherine Hart, brought suit alleging that a friend of Hart and her daughter (the Merritts) forged a power of attorney (POA) naming them as agents for Hart. Using that POA, the Merritts met with defendant Williams, a registered representative of MetLife Securities. During that meeting, the Merritts and Williams allegedly made false statements on Hart’s customer profile forms. Plaintiff claims that Williams then made false statements about a MetLife annuity contract, unsuitably recommended that they transfer Hart’s $600,000 pension accumulated over a 40-year career at Xerox to that annuity, and stole money from her pension and 401K accounts. Plaintiff sued defendants for securities fraud and control person liability under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, respectively, and alleged fraud and theft claims under New York state law.
The Limits of an Unsuitability Case
The District Court grants defendants’ motions to dismiss the complaint under Rule 12(b)(6) on the ground that plaintiff does not allege that the challenged conduct was done “in connection with the purchase or sale of a security,” as is required to state a claim under section 10(b). Here, plaintiff did not allege that defendants made misrepresentations as to the value of the securities, but rather as to “the terms of the relationship between the broker and the customer.” In particular, the Court holds that a recommendation of an unsuitable security may state a breach of fiduciary duty claim, but cannot be the basis of a federal securities fraud claim.
With no primary violation, plaintiff cannot prevail on her controlling person claim, so the Court dismisses the section 20(a) claim, too. Furthermore, having dismissed the only federal law claims, the Court declines to exercise supplemental jurisdiction over the remaining state law claims. Finally, it denies plaintiff’s motion for leave to amend the complaint, concluding that amendment would be “futile.”
(J. Gross: I find this decision troublesome, as other courts repeatedly have found that an unsuitable recommendation can form the predicate for a §10(b) violation. Misstatements as to the value of a security are not the only cognizable misstatements of material fact. If other courts followed this reasoning strictly, an investor could never state a suitability claim under §10(b).)
(SOLA Ref. No. 2018-16-09)
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