Robert McCrary v. Stifel, Nicolaus & Company , 687 F.3d 1052 ( 2012 )

United States Court of Appeals
For the Eighth Circuit
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No. 11-1213
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Robert L. McCrary; Kenneth C. Thompson, Trustee of the Kenneth C. Thompson
Living Trust U/A DTD 3-27-92; Kenneth C. Thompson, As Beneficiary of the
Kenneth C. Thompson IRA
lllllllllllllllllllll Plaintiffs - Appellants
v.
Stifel, Nicolaus & Company, Incorporated; Neil Rolla Harrison; Roger Compton
lllllllllllllllllllll Defendants - Appellees
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Appeal from United States District Court
for the Eastern District of Missouri - St. Louis
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Submitted: March 14, 2012
Filed: August 6, 2012
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Before MELLOY, SMITH, and SHEPHERD, Circuit Judges.
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SHEPHERD, Circuit Judge.
Robert L. McCrary and Kenneth C. Thompson brought suit as individuals and
on behalf of a putative class of investors, alleging that Stifel, Nicolaus & Co. (Stifel)
and two of its employees, Neil Harrison and Roger Compton, violated federal
securities law. Stifel and Compton (Defendants) filed a motion to dismiss the
complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6)
and the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-
4(b). The district court concluded that Plaintiffs’ allegations failed to satisfy the
requirements for class action claims under Federal Rule of Civil Procedure 23(b)(3)
and dismissed Plaintiffs’ complaint with prejudice. We affirm in part, reverse in part,
and remand for further proceedings.
I.
Stifel is a brokerage and investment banking firm headquartered in St. Louis,
Missouri. In October of 2005, Stifel hired Harrison to work as a broker in Stifel’s
branch office in Edwardsville, Illinois. Stifel hired Harrison almost immediately after
he was fired by A.G. Edwards, another investment firm in St. Louis, for soliciting and
obtaining personal loans from his clients. During his time at Stifel, Harrison engaged
in similar misconduct and fraudulent behavior, and Stifel eventually fired Harrison
in October of 2008. Compton served as Harrison’s supervisor at the Edwardsville
branch office.
Plaintiffs held investment accounts with Stifel’s branch office in Edwardsville
between 2006 and 2009. For the majority of that time, Harrison served as Plaintiffs’
registered representative and managed their accounts. After Harrison was fired,
Compton took over the responsibility of managing Plaintiffs’ accounts. Plaintiff
Thompson alleges that his accounts sustained a diminution in value of more than
$750,000 as a result of “churning”1 and unauthorized trading by Harrison and that he
was charged $250,000 in excessive commission fees by Stifel and Harrison. Plaintiff
1
“‘Churning’ occurs when a broker, directing the volume and frequency of
trades, abuses his customer’s confidence for personal gain by initiating transactions
that are excessive in view of the character of the account and the customer’s
objectives as expressed to the broker.” Davis v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 906 F.2d 1206, 1211 n.3 (8th Cir. 1990).
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McCrary alleges damages of $400,000 due to churning and unauthorized trading plus
excessive commission fees in the amount of $40,000.
On April 7, 2009, Thompson executed a submission agreement in which he
agreed to be bound by the rules and the decisions of a Financial Industry Regulatory
Authority (FINRA) arbitration panel. Thompson subsequently filed an arbitration
claim against Stifel, Harrison, and Compton and served Stifel with the claim on June
30, 2009. On December 10, 2009, Thompson participated in a pre-hearing conference
with the selected panel of arbitrators and counsel for Stifel. Over the next few
months, Thompson filed various motions with the arbitration panel and eventually
filed a motion to have his arbitration dismissed without prejudice. This motion was
denied by the panel. The arbitration panel then ordered Thompson to comply with
Stifel’s discovery requests. After Thompson repeatedly failed to respond to the
panel’s orders, the panel held a hearing on June 28, 2010, and dismissed Thompson’s
arbitration claim with prejudice.
On December 21, 2009, McCrary filed an action in Missouri state court against
Stifel alleging violations of Missouri securities law. Before Stifel’s reply was due,
McCrary amended his petition to allege claims against Stifel on behalf of a putative
class. Stifel subsequently removed the case to federal court. McCrary then filed an
amended complaint, adding Thompson as a named plaintiff and adding Compton and
Harrison as defendants. In their amended complaint, Plaintiffs alleged violations of
sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b)
and 78t(a), and violations of Securities and Exchange Commission Rule 10b-5,
17 C.F.R. § 240.10b-5. Specifically, Plaintiffs alleged that: (1) Harrison engaged in
churning and unauthorized trading, in violation of section 10(b) and Rule 10b-5; (2)
Stifel, Compton, and Harrison made material misrepresentations and omissions,
including the repeated failure to disclose the nature of Harrison’s termination from
his prior employment at A.G. Edwards, in violation of section 10(b) and Rule 10b-5;
and (3) Stifel and Compton failed to properly supervise and take steps to prevent
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Harrison’s illegal trading, making them jointly and severally liable for Harrison’s
conduct pursuant to section 20(a). Plaintiffs then requested that the district court
enjoin Stifel from proceeding with the then-ongoing arbitration initiated by
Thompson. The court denied this request after applying the four-factor test set forth
in Dataphase Systems, Inc. v. C L Systems, Inc., 640 F.2d 109 (8th Cir. 1981) (en
banc), finding that Plaintiffs “failed to show that any of these factors weigh in favor
of granting the preliminary injunction.”
On June 4, 2010, Plaintiffs filed a motion seeking class certification and the
appointment of Thompson as lead plaintiff. On June 11, 2010, Defendants filed a
motion to dismiss Plaintiffs’ complaint for failure to state a claim under Federal Rule
of Civil Procedure 12(b)(6). Shortly thereafter, Defendants also requested that the
court defer its consideration of Plaintiffs’ motion for class certification until after the
court had ruled on Defendants’ motion to dismiss.
On December 28, 2010, the district court granted Defendants’ motion to
dismiss. The court recited the standard of review for a Rule 12(b)(6) motion and the
requirements for class-action claims under Federal Rule of Civil Procedure 23. The
court then analyzed Plaintiffs’ churning and material misrepresentation allegations
and determined that neither claim satisfied the requirements for a class action under
Rule 23(b)(3)2 because of the individualized nature of the allegations. The court
concluded by stating: “Having determined that plaintiffs’ claims fail to satisfy Rule
23(b)(3), the Court finds it unnecessary to determine whether the complaint meets the
heightened pleading standard of the PSLRA.” The court dismissed Plaintiffs’ entire
2
Rule 23(b)(3) states that a class action may be maintained if “the court finds
that the questions of law or fact common to class members predominate over any
questions affecting only individual members, and that a class action is superior to
other available methods for fairly and efficiently adjudicating the controversy.” Fed.
R. Civ. P. 23(b)(3).
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complaint with prejudice and denied all pending motions as moot. Plaintiffs
appealed.
II.
Plaintiffs raise three arguments on appeal, contending that: (1) the court failed
to engage in the proper analysis before dismissing Plaintiffs’ individual claims; (2)
the court erred in dismissing Plaintiffs’ class claims as insufficient under Rule 23; and
(3) Thompson’s arbitration was invalid and the district court abused its discretion by
denying Plaintiffs’ motion to enjoin the arbitration. We address each of these
arguments in turn.
A. Plaintiffs’ Individual Claims
We first address Plaintiffs’ argument that the district court erred in dismissing
their individual claims. Generally, the district court’s dismissal of a complaint under
Rule 12(b)(6) and the PSLRA is subject to de novo review. See In re NVE Corp. Sec.
Litig., 527 F.3d 749, 751 (8th Cir. 2008). On a Rule 12(b)(6) motion to dismiss
securities claims, a district court must review the claims to determine their
compliance with the heightened pleading standards of the PSLRA. See Elam v.
Neidorff, 544 F.3d 921, 926-27 (8th Cir. 2008). Generally, the court must accept
Plaintiffs’ factual allegations as true and should draw all reasonable inferences in
their favor. See Lustgraaf v. Behrens, 619 F.3d 867, 872-73 (8th Cir. 2010). For
claims with a scienter component, which includes claims under Rule 10b-5, the
allegations should give rise to more than just a plausible or reasonable inference of
scienter. Elam, 544 F.3d at 928; 15 U.S.C. § 78u-4(b)(2)(A) (requiring claims to
“state with particularity facts giving rise to a strong inference that the defendant acted
with the required state of mind”). For material misrepresentation and omission
claims, the court must also determine whether the claims “specify each statement
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alleged to have been misleading [and] the reason or reasons why the statement is
misleading.” 15 U.S.C. § 78u-4(b)(1).
Plaintiffs argue that the district court failed to follow this analysis and
erroneously used the criteria for class certification to dismiss not only Plaintiffs’ class
claims, but their individual claims as well. Plaintiffs point out that the district court
only analyzed the complaint under Rule 23 and expressly declined to address the
sufficiency of the allegations under the PSLRA. Plaintiffs contend that the district
court could not dismiss their individual claims without first reviewing the substance
of those claims under the PSLRA. We agree. The district court recited the correct
standard of review for a Rule 12(b)(6) motion at the outset of its order; however, it
failed to engage in the requisite analysis. Indeed, the court expressly stated that it
found it “unnecessary to determine whether the complaint meets the heightened
pleading standard of the PSLRA,” although a Rule 12(b)(6) motion to dismiss
individual securities claims requires the court to make that precise determination. See
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007); Lustgraaf,
619 F.3d at 873.
Defendants make several arguments in defense of the district court’s decision.
First, they rely on Rowe v. Morgan Stanley Dean Witter, 191 F.R.D. 398 (D.N.J.
1999) and Moscarelli v. Stamm, 288 F. Supp. 453 (E.D.N.Y. 1968), to argue that a
court may dismiss securities fraud allegations similar to the ones in this case when the
claims do not satisfy Rule 23. In Rowe, the court found that the plaintiffs’ churning
claims rested “predominately on individual issues of fact, rather than common
questions,” and could not satisfy Rule 23(b)(3). 191 F.R.D. at 410. However, the
court in Rowe dismissed only the class action allegations of the complaint while
“stay[ing] the individual claims of the Plaintiffs . . . pending the outcome of
arbitration.” Id. at 419. Similarly, in Moscarelli, the court found securities fraud and
churning claims to be deficient under Rule 23 and ultimately granted a motion “to
dismiss the action as a class suit.” 288 F. Supp. at 463 (emphasis added). See also
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Souter v. Tatro, No. 03-CV-6141, 2004 WL 1574562, at *9 (W.D.N.Y. June 21,
2004) (“Plaintiffs’ proposed class action claims are dismissed, and this action is
stayed pending arbitration of plaintiffs’ remaining claims.”). Rowe and Moscarelli
demonstrate that failure to satisfy Rule 23 is grounds to dismiss claims on behalf of
a class. However, these cases do not support the proposition that failure to satisfy
Rule 23 automatically allows for the dismissal of individual claims. To the contrary,
claims that do not meet the required criteria for a class action may still be meritorious
if brought in an individual capacity. See In re “Agent Orange” Prod. Liab. Litig., 818
F.2d 194, 197 (2d Cir. 1987) (“The denial of class certification does not preclude
individual plaintiffs properly before the court from pressing their own claims.”). This
is borne out by the decisions in both Rowe and Moscarelli, where the courts took care
to distinguish their treatment of the class claims and the individual claims.
At oral argument, Defendants suggested that the district court dismissed the
complaint because it did not contain any individual claims. Defendants also posited
that the court did not intend to dismiss Plaintiffs’ individual claims with prejudice
because “the order is very clear in that it only addresses the class action allegations
and the viability of any individual claims [is] not addressed in th[e] order.”
Defendants suggested that McCrary could still file a demand to arbitrate his
individual claims. However, Defendants would not wholly commit to the position
that the district court’s order would have no res judicata effect on McCrary’s
individual claims, instead arguing that any res judicata effect ought to be determined
by an arbitration panel.
After carefully reviewing Plaintiffs’ complaint and the district court’s order,
we reject Defendants’ arguments. The complaint, while perhaps inartfully drafted,
distinctly makes out individual claims on behalf of both Thompson and McCrary.
The complaint states that the churning, misrepresentation, and control liability
allegations are brought by “Thompson, McCrary, and other class members”; provides
the amount of damages allegedly suffered by Thompson and McCrary individually;
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and highlights the allegedly illegal trading activity in Thompson and McCrary’s
accounts. At various points, the complaint also discusses misrepresentations and
omissions made specifically to McCrary or Thompson. It is clear that the complaint
asserts both class claims and individual claims. The district court dismissed the entire
complaint with prejudice and drew no distinction between Plaintiffs’ individual
claims and the class claims. Whether the district court intended to or not, it dismissed
Plaintiffs’ individual claims with prejudice in its order. We acknowledge that
Plaintiffs could have brought the error to the district court’s attention in a post-
judgment motion, which would have likely resolved the issue more expeditiously.
Nevertheless, we find that the district court erred in dismissing Plaintiffs’ individual
securities fraud claims without either staying the claims pending arbitration or
undertaking an analysis of the claims under the PSLRA.
Finally, Defendants argue that any error by the district court was harmless
because: “Although not ruled upon by the district court, the Complaint fails to comply
with the heightened pleading standards of the PSLRA, as it fails to plead a material
misrepresentation or omission in connection with the purchase or a sale of security,
and does not adequately plead a strong inference of scienter.” Defendants would
have this court review Plaintiffs’ complaint using the proper standard and find that
the dismissal of Plaintiffs’ individual claims was ultimately justified. It is true that
“[w]e may affirm the district court on any basis that is supported by the record,”
Dicken v. Ashcroft, 972 F.2d 231, 233 (8th Cir. 1992). However, where the district
court has erred procedurally and failed to decide the dispositive issues presented by
a motion to dismiss, this court has the discretion to remand or decide the issues. See
Singleton v. Wulff, 428 U.S. 106, 121 (1976) (“The matter of what questions may be
taken up and resolved for the first time on appeal is one left primarily to the discretion
of the courts of appeals, to be exercised on the facts of individual cases.”). Given the
complex procedural history of this case, we remand Plaintiffs’ individual claims for
the district court’s reconsideration. The district court is better placed to determine the
fate of Thompson’s individual claims now that his arbitration has been dismissed, and
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to determine whether McCrary’s individual claims should proceed in federal court,
be dismissed with or without prejudice, or be stayed pending arbitration.3 We
therefore reverse the district court’s order with respect to Plaintiffs’ individual claims
and remand these claims for further consideration.
B. Plaintiffs’ Class Claims
Plaintiffs argue that the court also erred in finding Plaintiffs’ claims ineligible
for class treatment. Plaintiffs assert that the issue of class certification may only be
addressed after a Rule 12(b)(6) analysis of Plaintiffs’ individual claims occurs.
However, Plaintiffs cite no authority for this proposition, and we cannot find any
authority that requires a court to analyze the appropriateness of class treatment only
after the merits of the individual claims have been examined.
As discussed above, class claims that fail to meet the requirements of Rule 23
may be properly dismissed by granting a Rule 12(b)(6) motion. The court did not
perform the proper analysis under the PSLRA for Plaintiffs’ individual claims, but it
found that the individualized nature of the churning, unauthorized trading, and
misrepresentation claims rendered Plaintiffs’ class claims insufficient under Rule
23(b)(3). We agree with this conclusion. First, a churning claim requires the plaintiff
to show “that the trading in his account was excessive in light of his investment
objectives” and that “the broker acted with . . . the wilful and reckless disregard for
the interests of his client.” Mihara v. Dean Witter & Co., 619 F.2d 814, 821 (9th Cir.
3
At oral argument, both McCrary and Defendants agreed that McCrary’s
agreement with Stifel contained an arbitration clause. The parties disagreed,
however, as to whether Defendants had sought to compel arbitration. The only place
this issue is addressed in the record is in Defendants’ motion to dismiss, which notes
that “the claims are appropriately in arbitration or should be ordered to proceed in
arbitration.” Accordingly, we leave this issue for the district court to resolve on
remand.
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1980). Plaintiffs’ complaint alleges that Defendants’ trading activities were excessive
in light of Thompson’s age and in light of McCrary’s job losses and desire to pay for
his son’s college education. These are highly individualized claims that do not satisfy
the uniformity requirements of Rule 23(b)(3). Second, unauthorized trading claims
require a showing that the trades were in fact unauthorized and that Defendants
possessed the requisite scienter for each transaction. See Rowe, 191 F.R.D. at 414-
15. This showing is difficult to make without relying on highly individualized facts,
and Plaintiffs’ claims, with their focus on the trading activity in Thompson and
McCrary’s individual accounts, do not satisfy Rule 23(b)(3)’s criteria for class action
claims. Finally, the complaint does not sufficiently allege materially uniform
misrepresentations and omissions that were made to all members of the class.
Instead, the complaint focuses on omissions and misrepresentations that were made
to Thompson and McCrary and their individual reliance on those misrepresentations.
For these reasons, the district court correctly determined that the complaint fails to
state viable class claims under Rule 23. We therefore affirm the district court’s order
as it applies to Plaintiffs’ class claims.
C. Thompson’s Arbitration
Plaintiffs’ brief raises a host of challenges to Thompson’s arbitration. First,
Plaintiffs argue that Defendants waived their right to arbitrate Thompson’s dispute
because of their “substantial participation” in this litigation. Usually, “[w]e review
de novo the legal determination of waiver but examine the factual findings underlying
that ruling for clear error.” Lewallen v. Green Tree Servicing, L.L.C., 487 F.3d 1085,
1090 (8th Cir. 2007). However, as Defendants correctly point out, the district court
never addressed whether Defendants waived their right to arbitrate because it
dismissed Plaintiffs’ claims on other grounds. “It would . . . be inappropriate for us
to examine the issue of waiver, which requires factual findings, when the district
court did not make such findings because it did not reach the question.” Bank of
Am., N.A. v. UMB Fin. Servs., 618 F.3d 906, 914 (8th Cir. 2010). We therefore
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leave this issue for the district court to resolve when it reconsiders Thompson’s
individual claims on remand.
Plaintiffs also argue that FINRA was automatically divested of jurisdiction
over Thompson’s claim once McCrary filed suit on behalf of a putative class.
Plaintiffs rely on the FINRA Code of Arbitration Procedure (Customer Code),
specifically Rule 12204(d), which prohibits enforcement of an arbitration agreement
against a member of a certified or putative class action until the class is certified or
decertified, or until the member is excluded or withdraws from the class. Again, this
issue was not decided by the district court, and we therefore decline to address it.
Finally, Plaintiffs argue that the district court abused its discretion by denying
Plaintiffs’ request to enjoin Thompson’s arbitration. “We review the denial of a
preliminary injunction for abuse of discretion.” Roudachevski v. All-Am. Care
Cntrs., Inc., 648 F.3d 701, 705-06 (8th Cir. 2011). “An abuse of discretion occurs
where the district court rests its conclusion on clearly erroneous factual findings or
erroneous legal conclusions.” Lankford v. Sherman, 451 F.3d 496, 503-04 (8th Cir.
2006). In its order denying preliminary injunctive relief, the district court properly
applied the four-part Dataphase test, which weighs “(1) the threat of irreparable harm
to the movant; (2) the state of the balance between this harm and the injury that
granting the injunction will inflict on other parties litigant; (3) the probability that
movant will succeed on the merits; and (4) the public interest.” Dataphase, 640 F.2d
at 113. As the district court noted, “[o]ther than a conclusory statement that
Thompson would suffer irreparable harm, plaintiffs omit[ted] any discussion of the
relevant Dataphase factors.” The court also observed that “plaintiffs . . . failed to
provide any legal support for their request to stay the arbitration in light of
Thompson’s agreement to be bound by the panel’s decision.” Under the
circumstances, we cannot say that the district court abused its discretion in denying
Plaintiffs’ request for an injunction.
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III.
We affirm the district court’s refusal to enjoin Thompson’s arbitration and the
dismissal of Plaintiffs’ claims on behalf of a putative class. We reverse the dismissal
of Plaintiffs’ individual claims. The case is remanded to the district court for further
disposition according to the terms set forth herein.
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