United States District Court, E.D. California
IN RE EDWARD D. JONES & CO., L.P. SECURITIES LITIGATION
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS;
ORDER DENYING PLAINTIFFS' MOTION FOR PRELIMINARY
INJUNCTION AND CORRECTIVE ACTION
MENDEZ, UNITED STATES DISTRICT JUDGE
bring this federal securities and state breach of fiduciary
duty putative class action based upon an alleged
“reverse churning” scheme whereby Defendants
improperly shifted clients' commission-based accounts to
fee-based advisory programs, without providing the clients
full information, without regard to the suitability of
fee-based accounts for those clients, and for no other reason
than collect more fees on previously low-profit accounts.
move to dismiss all claims. Mot., ECF No. 29. Plaintiffs
oppose. Opp'n, ECF No. 35.
reasons set forth below, the Court GRANTS Defendants'
FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND
Plaintiffs Edward Anderson, Colleen Worthington, and Janet
Goral and Named Plaintiffs Raymond Keith Corum and Jesse
Worthington (“Plaintiffs”) each had assets in
commission-based accounts with Edward Jones. Am. Compl., ECF
No. 24, ¶¶ 8-11. After each attended pitch meetings
with Edward Jones financial advisors, the financial advisors
allegedly moved assets from the Plaintiffs'
commission-based accounts to fee-based accounts, causing
Plaintiffs to pay substantially higher fees. Id.
are a set of companies related to and individuals involved
with Edward D. Jones & Co., L.P. and the Jones Financial
Companies, L.L.L.P. (together “Defendants” or
“Edward Jones”). Am. Compl. ¶¶ 12-33.
Edward Jones is an investment firm headquartered in St.
Louis, Missouri and dually registered as a broker-dealer and
as an investment advisor under federal and state securities
laws. Id. ¶ 13.
Jones historically focused on offering commission-based
accounts, whereby clients received free counsel and guidance
and were not charged the flat, per-transaction fee unless and
until they completed a transaction. Id. ¶¶
34-35. This type of account and free arrangement reflected
the buy-and-hold investing strategy Edward Jones advocated to
its clients, many of whom did not trade frequently.
Id. ¶¶ 36-37.
Edward Jones introduced a fee-based platform, Advisory
Solutions, with accounts which charged a set percentage
annual expense fee, regardless of the number of transactions
executed. Id. ¶ 39. Advisory Solutions accounts
also gave clients access to a propriety Edward Jones mutual
fund product called Bridge Builder, which was introduced in
2013. Id. ¶ 40. In 2016, Edward Jones launched
a second fee-based advisory service called Guided Solutions,
which touted more client control than Advisory Solutions and
which included as “Eligible Investments” certain
fund families owned by Edward Jones and from which Edward
Jones could receive additional fees. Id.
¶¶ 57-59. Plaintiffs allege Edward Jones coerced
clients into moving assets from their existing
commission-based accounts into the fee-based Advisory
Solutions and Guided Solutions programs (together, the
“Advisory Programs”), doing so to grow its bottom
line regardless of whether such a move was suitable for and
served the best interests of the clients. Id.
¶¶ 40, 58, 65.
allege Edward Jones aggressively pushed clients into
fee-based accounts not only to increase revenue from clients
who traded infrequently, but also to avoid certain burdensome
disclosure requirements posed by the Department of Labor
(“DOL”) Fiduciary Rule. Id. ¶¶
41-46. Proposed in 2015, the DOL Fiduciary Rule allegedly
would have imposed stricter disclosures requirements and a
fiduciary status on commission-based accounts. Id.
¶¶ 42-44. As relevant here, Plaintiffs allege
Edward Jones received hundreds of millions of dollars
annually from mutual fund companies and insurers as part of
agreements to promote products to Edward Jones clients, and
the DOL Fiduciary Rule would prohibit these recommendations
and promotional payments to financial advisors absent certain
acknowledgements and disclosures. Id. ¶¶
43-46. As alleged by Plaintiffs, Edward Jones framed the DOL
Fiduciary Rule as having a negative impact on its lower- and
moderate-income customers and misled clients by justifying
its shift to fee-based accounts as necessary to avoid those
negative impacts. Id. ¶¶ 49-50, 61, 63.
Plaintiffs contend Edward Jones omitted material information
relevant to these fee-based accounts during the client pitch
meetings, in the Fund Account Authorization and Agreement
Form (“Agreement”) which each Plaintiff signed to
authorize the account change, and in certain accompanying
documents and brochures. Id. ¶¶ 104-108,
also allege Edward Jones furthered this scheme by making the
financial advisors' compensation revenue-based, rather
than commission-based and by providing other incentives for
moving clients to fee-based accounts. Id.
¶¶ 4, 68, 180-184. Moreover, Plaintiffs allege the
financial advisors' computer system was updated around
August 2016 to essentially make fee-based accounts a default
recommendation and make it burdensome to avoid moving clients
into fee-based accounts. Id. ¶¶ 154-156.
allege the Individual Defendants were directly involved in
implementing the policies and procedures which pushed Edward
Jones financial advisors to have their commission-based
clients' assets transferred to fee-based accounts, and
knew of and/or consciously disregarded the material omissions
alleged. Id. ¶¶ 115-147. Plaintiffs
further allege Edward Jones generated $17.2 billion in
revenue during the Class Period specifically from asset-based
fees, pushing its earnings to record highs. Id.
¶ 4. The Individual Defendants allegedly received over
$277 million in compensation during the Class Period, which
Plaintiffs attribute in substantial part to the increase in
fee-based revenue. Id. ¶ 5, 191.
March 30, 2018, Plaintiffs filed an initial class complaint
against Defendants for securities law violations and breaches
of fiduciary duties. ECF No. 1. This Court subsequently
granted an order appointing Lead Plaintiffs and Lead Counsel
for the class. ECF No. 22.
September 24, 2018, Lead Plaintiffs filed the operative
Amended Complaint, bringing class claims for violations of:
(1) § 10(b) of the Securities Exchange Act of 1934, and
Rules 10b-5(a), (b), and (c) promulgated thereunder; (2)
§ 20(a) of the Securities Exchange Act of 1934; (3)
§ 12(a)(2) of the Securities Act of 1933; (4) § 15
of the Securities Act of 1933; and (5) the fiduciary duty
laws of the states of Missouri and California. Am. Compl.,
ECF No. 24. Lead Plaintiffs filed the Amended Complaint on
behalf of a purported class of persons who had their
commission-based accounts with Edward Jones moved into one of
the Advisory Programs between March 30, 2013 and March 30,
2018, inclusive, and who were damaged thereby. Am. Compl.
Judicial Notice and Incorporation by Reference
district courts may not consider material outside the
pleadings when assessing the sufficiency of a complaint under
Rule 12(b)(6) of the Federal Rules of Civil Procedure.”
Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988,
998 (9th Cir. 2018). “There are two exceptions to this
rule: the incorporation-by-reference doctrine, and judicial
notice under Federal Rule of Evidence 201.”
Id. Edward Jones asks this Court to consider 45
documents outside the Amended Complaint through either
judicial notice or under the doctrine of incorporation by
reference. RJN Mot., ECF No. 30. Defendants contend the
undisputed contents of these documents contradict
Plaintiffs' “conclusory allegations.”
Id. Plaintiffs oppose this request. RJN Opp'n,
ECF No. 36.
notice under Rule 201 permits a court to judicially notice an
adjudicative fact if it is “not subject to reasonable
dispute.” Fed.R.Evid. 201(b). A fact is “not
subject to reasonable dispute” if it is
“generally known, ” or “can be accurately
and readily determined from sources whose accuracy cannot
reasonably be questioned.” Id. Judicial notice
of SEC filings is appropriate. Dreiling v. Am. Exp.
Co., 458 F.3d 942, 946 n.2 (9th Cir. 2006). This Court
therefore takes judicial notice of the existence of Edward
Jones' SEC filings and public comments and reports (Mot.,
Exs. 1-6, 34-38, 41, 43-44), but not the truth of the
contents asserted in the filings. See Par Inv. Partners,
L.P. v. Aruba Networks, Inc., 681 Fed.Appx. 618, 620 n.1
(9th Cir. 2017) (granting “requests for judicial notice
of various court filings, public SEC filings, and public
analyst reports for the limited purpose of determining what
information was disclosed to the public during the class
Ninth Circuit has held that “[e]ven if a document is
not attached to a complaint, it may be incorporated by
reference into a complaint if the plaintiff refers
extensively to the document or the document forms the basis
of the plaintiff's claim.” United States v.
Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).
Plaintiffs' claims of alleged material omissions largely
rest on certain information not being disclosed in the
documents provided to clients during their pitch meetings:
the Agreement, the Fund Models Brochure, the Account Client
Services Agreement, the Schedule of Fees, the Client Profile,
and the “Making Good Choices” brochure. Am.
Compl. ¶¶ 106-108; see also Opp'n at 1
n.2. The Court will therefore consider these documents (Mot.,
Exs. 7-12, 14-33) under the incorporation-by-reference
Rule 10b-5(b) Claim
10(b) of the Securities Exchange Act of 1934 and the
Securities and Exchange Commission's Rule 10b-5 prohibit
making any material misstatement or omission in connection
with the purchase or sale of any security.”
Halliburton Co. v. Erica P. John Fund, Inc., 573
U.S. 258, 267 (2014). To prevail on a Rule 10b-5(b) claim, a
plaintiff must prove: “(1) a material misrepresentation
or omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or
sale of a security; (4) reliance upon the misrepresentation
or omission; (5) economic loss; and (6) loss
causation.” Id. (internal citations and
the pleading stage, a complaint stating claims under section
10(b) and Rule 10b-5 must satisfy the dual pleading
requirements of Federal Rule of Civil Procedure 9(b) and the
PSLRA [Private Securities Litigation Reform Act].”
Zucco Partners, LLC v. Digimarc Corp.,552 F.3d 981,
990 (9th Cir. 2009), as amended (Feb. 10, 2009). Under Rule
9(b), in alleging fraud, “the circumstances
constituting fraud” must be “state[d] with
particularity.” Fed.R.Civ.P. 9(b). The PSLRA requires
that the complaint “specify each statement alleged to
have been misleading, the reason or reasons why the statement
is misleading, and, if an allegation regarding ...