Jyll Brink v. Raymond James & Associates, Inc. , 892 F.3d 1142 ( 2018 )

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 16-14144
________________________
D.C. Docket No. 0:15-cv-60334-WPD
JYLL BRINK,
on her own behalf, and on behalf of those similarly situated,
Plaintiff - Appellant,
versus
RAYMOND JAMES & ASSOCIATES, INC.,
Defendant - Appellee.
________________________
Appeal from the United States District Court
for the Southern District of Florida
________________________
(June 8, 2018)
Before JORDAN and JILL PRYOR, Circuit Judges, and REEVES, ∗ District Judge.
∗
Honorable Danny C. Reeves, United States District Judge for the Eastern District of
Kentucky, sitting by designation.
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JILL PRYOR, Circuit Judge:
Jyll Brink appeals the district court’s dismissal of her putative class action
complaint. She argues that the district court erred in determining that her state law
claims for negligence and breach of contract against Raymond James and
Associates, Inc. (“RJA”) were precluded under Title I of the Securities Litigation
Uniform Standards Act of 1998 (“SLUSA”), which prohibits class actions alleging
state law causes of action based on conduct that constitutes federal securities fraud.
Specifically, she disputes that her complaint alleged that RJA made a
“misrepresentation . . . of a material fact in connection with the purchase or sale of
a covered security.” 15 U.S.C. § 78bb(f)(1)(A). After careful review, we reverse
the district court’s order and remand for further proceedings consistent with this
opinion.
I. BACKGROUND 1
As an alternative to a traditional commission-based investment account, RJA
offered a “Passport Account” program that charged customers an annual advisory
fee based on the total value of qualifying assets in the account instead of a
commission based on each individual trade. In addition, Passport Account
customers were charged a flat fee per transaction. In its written agreement with
1
At the motion to dismiss stage, we accept all factual allegations in the complaint as true
and construe them in the light most favorable to the plaintiff, here, Brink. Chaparro v. Carnival
Corp., 693 F.3d 1333, 1335 (11th Cir. 2012).
2
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each Passport Account customer (the “Passport Agreement”), RJA described this
flat fee as a “Processing Fee” for “transaction execution and clearing services” and
stated that the Processing Fees were “not commissions.” Compl. at 2 (Doc. 1).2
RJA published a schedule of the Processing Fees in the Passport Agreement.
Before October 1, 2013, RJA’s Processing Fees ranged from $30.00 to $50.00 per
transaction, depending on the type of security. Beginning October 1, 2013, RJA
reduced the Processing Fees to range from $9.95 to $30.00. But the actual costs
incurred in the execution and clearing of the transactions were much lower than the
Processing Fees charged, allegedly no more than $5.00 per transaction. RJA kept
as profit any amount above the actual costs associated with transaction execution
and clearing.
Brink filed this putative class action complaint alleging state law claims for
breach of contract and negligence. Brink alleged that because Passport Account
customers had agreed only to pay for “expenses incurred in facilitating the
execution and clearing” of their trades, RJA’s undisclosed profit built into the
Processing Fees breached the Passport Agreement. Id. at 3. She also claimed that
RJA breached its duty of care owed to its customers, which she alleged included a
duty to charge customers a reasonable fee for its services.
2
Unless otherwise specified, all citations in the form of “Doc. #” refer to the district court
docket entries.
3
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After class certification discovery, Brink moved for class certification, and
RJA moved for summary judgment. While both of those motions were still
pending, RJA filed a motion to dismiss for lack of subject matter jurisdiction,
arguing that Brink’s state law claims were disguised claims for federal securities
fraud. Thus, RJA claimed, Brink’s putative class action was precluded under
SLUSA. As relevant here, SLUSA provides:
No covered class action based upon the statutory or common law of
any State or subdivision thereof may be maintained in any State or
Federal court by any private party alleging—
(A) a misrepresentation or omission of a material fact in
connection with the purchase or sale of a covered security.
15 U.S.C. § 78bb(f)(1)(A). The district court concluded that Brink’s claims were
precluded because RJA’s alleged conduct constituted “a misrepresentation or
omission of a material fact in connection with the purchase or sale of a covered
security,” id., and granted RJA’s motion to dismiss. This is Brink’s appeal.
II. STANDARD OF REVIEW
“We review de novo . . . the district court’s conclusion that SLUSA
precludes [a plaintiff] from bringing . . . state law claims.” Instituto de Prevision
Militar v. Merrill Lynch, 546 F.3d 1340, 1344 (11th Cir. 2008).
III. DISCUSSION
Before addressing whether SLUSA precludes Brink’s putative class action,
we provide a brief background on the history and purpose of SLUSA. Federal law
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“broadly prohibits deception, misrepresentation, and fraud in connection with the
purchase or sale of any security.” Merrill Lynch v. Dabit, 547 U.S. 71, 78 (2006)
(internal quotation marks omitted). Almost half a century ago, the Supreme Court
recognized an implied right of action for private citizens alleging federal securities
fraud. See Superintendent of Ins. of N.Y. v. Bankers Life & Casualty Co. 404 U.S.
6, 13 & n.9 (1971). Concerned about “significant evidence of abuse in private
securities lawsuits,” H.R. Rep. No. 104-369, at 31 (1995) (Conf. Rep.), Congress
later passed the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Pub.
L. 104-67, 109 Stat. 737 (1995) (codified at 15 U.S.C. §§ 77z and 78u-4). To
combat these “perceived abuses,” the PSLRA implemented multiple reforms in the
context of private federal securities fraud lawsuits, including “heightened pleading
requirements” and limitations on “recoverable damages and attorney’s fees.”
Dabit, 547 U.S. at 81.
Although the PSLRA apparently was effective in deterring nuisance “suits
. . . [based on] federal securities fraud class actions,” it also “prompted at least
some of the plaintiffs’ bar to avoid the federal forum altogether.” Id. at 82.
Troubled by the flood of cases being brought in state court, Congress enacted
SLUSA to “stem this shift from Federal to State courts and prevent certain State
private securities class action lawsuits alleging fraud from being used to frustrate
the objectives” of the PSLRA. Id. (alterations adopted) (internal quotation marks
5
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omitted). To that end, SLUSA provides that “[n]o covered class action based upon
the statutory or common law of any State . . . may be maintained in any State or
Federal court by any private party alleging . . . a misrepresentation of a material
fact in connection with the purchase or sale of a covered security.” 15 U.S.C.
§ 78bb(f)(1)(A). 3
The question before us today is whether Brink’s putative class action alleges
that RJA made such a misrepresentation. If it does, then SLUSA precludes Brink’s
putative class action based on state law causes of action. If it does not, then
SLUSA is inapplicable, and Brink’s case may continue. We conclude that SLUSA
does not prohibit Brink’s putative class action because RJA’s alleged failure to
disclose the hidden profit built into the Processing Fee is not a misrepresentation of
a material fact for purposes of SLUSA. Id.
A. Subject Matter Jurisdiction
As with any case, we first must address our jurisdiction. See Arbaugh v. Y &
H Corp., 546 U.S. 500, 514 (2006). The district court dismissed this case for lack
of subject matter jurisdiction after concluding that SLUSA precluded Brink’s
claims. But this Court suggested in Riley v. Merrill Lynch that we analyze
jurisdiction differently in SLUSA cases depending on whether a state law class
3
SLUSA also precludes covered class actions alleging “that the defendant used or
employed any manipulative or deceptive device or contrivance in connection with the purchase
or sale of a covered security,” 15 U.S.C. § 78bb(f)(1)(B), but neither party suggests that this
provision is at issue here.
6
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action was filed directly in federal court in the first instance or was removed to
federal court under SLUSA’s removal provision. 4 See 292 F.3d 1334, 1336-37
(11th Cir. 2002), abrogated on other grounds by Dabit, 547 U.S. at 89. In the
former circumstance, we must assess diversity jurisdiction before considering
SLUSA preclusion.
In Riley, the trustees of the Performance Toyota, Inc. Profit Sharing Plan
(“Performance Plan”) and the trustee of the Master Packaging, Inc. 401(k) plan
(“Master Packaging”) filed a class action lawsuit against Merrill Lynch in federal
court alleging violations of two Florida statutes. The plaintiffs argued that Merrill
Lynch made material misrepresentations that induced the class members to
purchase and retain shares of a certain fund. Id. at 1336. Merrill Lynch moved to
dismiss, arguing that SLUSA barred the plaintiffs’ class action and that there was
no diversity jurisdiction. Id. While that motion was pending, Performance Plan
voluntarily dismissed and refiled in state court. Master Packaging maintained its
claims in federal court. After Performance Plan refiled in state court, Merrill
Lynch removed the case back to federal court, where it was consolidated again
with the Master Packaging action. Id.
4
“Any covered class action brought in any State court involving a covered security . . .
shall be removable to the Federal district court . . . and shall be subject to [SLUSA’s preclusion
provision].” 15 U.S.C. § 78bb(f)(2).
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We analyzed Merrill Lynch’s motion to dismiss differently as to the two
plaintiffs. As for Performance Plan’s claims, we reasoned that when a defendant
removed a state law class action to federal court pursuant to SLUSA, and “SLUSA
was the only basis for removal,” the first step of our jurisdictional analysis was to
determine “whether SLUSA permitted removal from state to federal court.” Id. at
1337. This required “determin[ing] SLUSA’s applicability to” the action. Id. at
1340. We concluded that because SLUSA applied to and therefore barred
Performance Plan’s claims, the district court properly dismissed those claims rather
than remanding the action to state court. Id. at 1346.
Master Packaging’s claims, however, were filed “in diversity directly in
federal court.” Id. at 1337. We therefore were “required to assess whether
[diversity jurisdiction was present] before addressing the merits of its [state law]
claims and before determining whether SLUSA barred those claims.” Id. at 1336-
37. If “diversity was lacking . . . , this determination eliminate[d] the need to reach
the SLUSA question.” Id. at 1339-40.
Here, Brink filed suit directly in federal court. The district court thus should
have determined whether diversity jurisdiction was present before considering
SLUSA preclusion. Following Riley’s approach, we assess diversity jurisdiction
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before deciding whether SLUSA applies. Because diversity jurisdiction has been
properly pled in this case, we proceed to consider the SLUSA preclusion issue. 5
B. SLUSA Preclusion
SLUSA precludes “covered class action[s]” based on state law causes of
action that allege “a misrepresentation or omission of a material fact in connection
with the purchase or sale of a covered security.” 15 U.S.C. § 78bb(f)(1)(A). It is
undisputed that Brink’s putative state law class action is a “covered” one and that
the securities at issue are covered securities. 6 We thus must determine whether the
conduct alleged in Brink’s complaint—that RJA built a profit into the Processing
Fee while representing to its Passport Account customers that the Processing Fee
covered only the actual costs of transaction execution and clearing—constitutes a
“misrepresentation or omission of a material fact in connection with the purchase
or sale” of those securities, despite Brink having pled claims for breach of contract
5
Before oral argument, Brink moved to amend her complaint to correct her jurisdictional
allegations. That motion was previously denied as unnecessary. We sua sponte reconsider, and
the motion is GRANTED. As amended, Brink’s complaint adequately alleges diversity of
citizenship. See Lowery v. Ala. Power Co., 483 F.3d 1184, 1193 n.24 (11th Cir. 2007)
(explaining that the Class Action Fairness Act modified the diversity requirement for certain
class actions so that “only one member of the plaintiff class—named or unnamed—must be
diverse from any one defendant”). Although Brink fails to identify a diverse class member, at
this stage of the proceedings there is no class action nor any class members. Her allegations are
sufficient because she has shown that there is a “foreseeable possibility” that there will be a
diverse class member upon class certification. Clausnitzer v. Federal Exp. Corp., 621 F. Supp.
2d 1266, 1270 (S. D. Fla. 2008).
6
“A ‘covered class action’ is a lawsuit in which damages are sought on behalf of more
than 50 people. A ‘covered security’ is one traded nationally and listed on a regulated national
exchange.” Dabit, 547 U.S. at 83.
9
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and negligence. See Behlen v. Merrill Lynch, 311 F.3d 1087, 1090, 1094 (11th Cir.
2002) (determining that although the plaintiff had alleged breach of contract, it was
“clear that the crux of the complaint was that the defendants either misrepresented
or omitted crucial facts about the . . . shares, thus causing him and the class to
invest in inappropriate securities”). As Brink does not dispute that her breach of
contract and negligence claims are in fact claims about RJA’s misrepresentation
regarding the Processing Fee, we begin our analysis of whether the alleged
misrepresentation was material.
Materiality has special meaning in the context of federal securities fraud, as
well as in SLUSA. 7 The Supreme Court has explained that materiality in federal
securities law requires a “substantial likelihood that the disclosure of the omitted
fact would have been viewed by the reasonable investor as having significantly
altered the total mix of information made available.” Basic Inc. v. Levinson, 485
7
We conclude that it is appropriate to look to the meaning of materiality in securities
fraud cases brought under § 10(b) and Rule 10-5 to understand SLUSA’s materiality
requirement. See Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 616 (7th Cir. 2012)
(“The language in SLUSA is similar to that in § 10(b) and Rule 10b-5 and there is no basis to
construe ‘materiality’ differently under these provisions.”); cf. Instituto de Prevision Militar, 546
F.3d at 1348 (explaining that SLUSA’s “in connection with the purchase or sale” language
“covers the same range of activities that the SEC could prosecute as violations of § 10(b) and
Rule 10b-5”). The Supreme Court has explained that when Congress used language in SLUSA
“identical” to the language used in § 10(b) and Rule 10b-5, it intended for that language to have
“the same meaning” in both contexts. See Dabit, 547 U.S. at 85-86 (construing the phrase “in
connection with the purchase or sale” of securities in SLUSA to have the same meaning as the
identical language used in § 10(b) and Rule 10b-5).
10
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U.S. 224, 231-32 (1988) (internal quotation marks omitted). 8 Thus, as RJA
concedes, for SLUSA to preclude a state law class action the misrepresentation
must “make[] a significant difference to someone’s decision to purchase or to sell a
covered security.” Appellee’s Br. at 26 (quoting Chadbourne & Parke LLP v.
Troice, 134 S. Ct. 1058, 1066 (2014)).
Applying this standard, we have concluded that a misrepresentation that
would only influence an individual’s choice of broker is not “material” for federal
securities fraud actions brought under § 10(b) and Rule 10b-5. See SEC v. Goble,
682 F.3d 934 (11th Cir. 2012). As we explained in Goble:
This court has said that the test for materiality in the securities fraud
context is whether a reasonable man would attach importance to the
fact misrepresented or omitted in determining his course of action.
We understand this “course of action” to mean an investment
decision—not an individual’s choice of broker-dealers. . . . We hold
that a misrepresentation that would only influence an individual’s
choice of broker-dealers cannot form the basis for § 10(b) securities
fraud liability.
Id. at 943-44 (citations and internal quotation marks omitted).
8
RJA argues that federal securities fraud cases brought by private plaintiffs, such as
Basic Inc., are inapplicable because the Supreme Court held in Dabit that SLUSA preclusion,
like § 10(b) and Rule 10b-5, sweeps more broadly than the judicially created private right of
action for federal securities fraud. But Dabit concerned the identity of the plaintiffs, not the
materiality of the misrepresentations. Id. at 84, 89. Since Dabit, the Supreme Court has relied
on private securities fraud cases to inform its interpretation of the phrase “material fact in
connection with the purchase or sale” in SLUSA. See Chadbourne & Parke LLP v. Troice, 134
S. Ct. 1058, 1066 (2014) (relying on Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309
(2011), a private securities fraud class action, for the definition of material in SLUSA). We thus
conclude it is appropriate to look to the treatment of materiality in such cases.
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Following this reasoning, the choice of a type of investment account, much
like the choice of a broker-dealer, is not intrinsic to the investment decision itself.
Although RJA’s alleged misrepresentation regarding the Processing Fee might
have influenced a reasonable investor’s decision to pick the Passport Account over
another type of account, that does not make the alleged representation “material”
under SLUSA.
Importantly, RJA did not “mislead [its] customers as to what portion of the
total transaction cost was going toward purchasing securities versus the cost of the
broker’s involvement.” United States v. Litvak, 808 F.3d 160, 176 (2d Cir. 2015).
Further, Passport Account customers chose to trade securities with full knowledge
of the amount of the Processing Fee for each trade and never paid more than they
agreed. We do not believe that a reasonable investor would have made different
investment decisions had she known that some of the Processing Fee—a fee she
had agreed to pay and presumably had included in her cost-benefit calculation
before making each trade—included profit for RJA instead of merely covering the
transaction execution and clearing costs.
We find it persuasive that two other circuits likewise have determined that a
hidden profit on a processing or transaction fee is not material under federal
securities law. In a Second Circuit case, investors alleged that a brokerage firm
charged hidden commissions on transactions, labeled as “transaction fees” on the
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transaction confirmation slips. Feinman v. Dean Witter Reynolds, Inc., 84 F.3d
539, 540 (2d Cir. 1996). 9 The Second Circuit held that the alleged conduct did not
constitute federal securities fraud because the misrepresentation was not material
as a matter of law: “Simply stated, reasonable minds could not find that an
individual investing in the stock market would be affected in a decision to purchase
or sell a security by knowledge that the broker was pocketing a dollar or two of the
fee charged for the transaction.” Id. at 541. Similarly, the Seventh Circuit has held
that SLUSA did not preclude a state law breach of contract claim where the
allegation was that the broker-dealer “improperly inflated the [handling, postage
and insurance fee] to include a profit” because the inflated fee was “not objectively
material to . . . any class members’ investment decisions.” Appert v. Morgan
Stanley Dean Witter, Inc., 673 F.3d 609, 617 (7th Cir. 2012).
RJA argues that Feinman and Appert are distinguishable because the alleged
hidden profit built into the Processing Fee in this case is much higher than the
charges in those two cases. We are unconvinced. Here, it is true that the alleged
undisclosed profit is more than “a dollar or two,” but this is a distinction without a
difference: Brink, just like the plaintiffs in Feinman and Appert, knew how much
she was being charged for costs associated with each transaction and was never
9
RJA insists that Feinman is “wholly inapplicable because it was decided prior to
SLUSA’s enactment.” Appellee’s Br. at 27. But Feinman construed the materiality requirement
under federal securities law, which, as we explained in the previous footnotes, sheds light on
materiality for SLUSA purposes.
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charged more than she agreed to pay. It is the nature of the fees, not their amount,
that renders the misrepresentation immaterial as a matter of law.
Here, RJA’s alleged undisclosed profit on the Processing Fee for each
transaction—a fee for transaction execution and clearing, known and agreed to in
advance by Passport Account customers—objectively could not make a significant
difference to a reasonable investor’s decision to purchase or sell a covered security.
As the court in Feinman noted, “[i]f brokerage firms are slightly inflating the cost
of their transaction fees, the remedy is competition among the firms in the labeling
and pricing of their services, not resort to the securities fraud provisions.” 84 F.3d
at 541. The conduct alleged in Brink’s complaint is therefore not “a
misrepresentation or omission of a material fact in connection with the purchase or
sale of a covered security.” 15 U.S.C. § 78bb(f)(1)(A) (emphasis added). Because
we conclude that the alleged misrepresentation was not material, we do not
consider whether it was made “in connection with” the purchase or sale of covered
securities.10 SLUSA does not preclude Brink’s putative class action.
10
RJA relies on four out-of-circuit cases in support of its argument that SLUSA bars
Brink’s claims. See Zola v. TD Ameritrade, Inc., 889 F.3d 920 (8th Cir. 2018); Dommert v.
Raymond James Fin. Servs., Inc., No. CIV A 1:06-CV-202, 2007 WL 1018234 (E.D. Tex. Mar.
29, 2007); Broadhead v. Goldman Sachs, No. 2:06CV009, 2007 WL 951623 (E.D. Tex. Mar. 26,
2007); Lewis v. Scottrade, Inc., 204 F. Supp. 3d 1064 (E.D. Mo. 2016). Of course, we are not
bound by these decisions. But we also note that the material facts of each case are
distinguishable from the allegations before us. Indeed, in those cases the plaintiffs alleged that
the broker had “manipulate[d] the price of the securities,” Zola, 889 F.3d at 924, charged fees
that “misle[]d [its] customers as to what portion of the total transaction cost was going toward
purchasing securities,” Litvak, 808 F.3d at 176, or received undisclosed kickbacks and
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IV. CONCLUSION
We reverse the order of the district court dismissing this case for lack of
subject matter jurisdiction and remand the case to the district court for further
proceedings consistent with this opinion.
REVERSED AND REMANDED.
incentives, creating a conflict of interest. For example, in Zola, the defendant’s alleged conduct
“enabled high-frequency traders to manipulate the price of the securities, to the detriment of the
plaintiffs.” 889 F.3d at 924. In Dommert, the defendants allegedly “failed to disclose important
information . . . about fees and financial gain” and “established a system wrought with conflicts
of interest in the form of undisclosed financial incentives.” 2007 WL 1018234, at *2, *8
(internal quotation marks omitted). In Broadhead, the allegations were that the defendants
“add[ed] extra amounts . . . to certain bond purchase prices[,] . . . subtract[ed] certain amounts
. . . from bond sales prices,” and failed disclose the mark ups and mark downs to customers,
providing statements that “only reflect[ed] a net selling or purchase price.” 2007 WL 951623, at
*1. And in Lewis, the defendant allegedly failed to disclose that it routed its customers’ trades to
trading venues that offered the biggest kickbacks to the broker, at the expense of its customers
obtaining a more advantageous price. 204 F. Supp. 3d at 1066, 1068.
15