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In re Edward D. Jones & Co., L.P. Securities Litigation

United States District Court, E.D. California

July 8, 2019




         Plaintiffs 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.

         Defendants move to dismiss all claims. Mot., ECF No. 29. Plaintiffs oppose. Opp'n, ECF No. 35.

         For the reasons set forth below, the Court GRANTS Defendants' motion.[1]


         Lead 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.

         Defendants 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.

         Edward 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.

         In 2008 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.

         Plaintiffs 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.

         Primarily, 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, 111-112.

         Plaintiffs 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.

         Plaintiffs 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.

         On 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.

         On 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. ¶ 2.

         II. OPINION

         A. Judicial Notice and Incorporation by Reference

         “Generally, 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.

         Judicial 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 period.”).

         The 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 doctrine.

         B. Rule 10b-5(b) Claim

         “Section 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 quotations omitted).

         “At 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 ...

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