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

United States District Court, E.D. California

November 8, 2019




         In March 2018, Plaintiffs filed a federal securities and state breach of fiduciary duty putative class action against investment firm Edward D. Jones, L.P., as well as a set of companies and individuals related to the investment firm (together “Defendants” or “Edward Jones”). Compl., ECF No. 1. Defendants filed a motion to dismiss. ECF No. 29. The Court granted their motion, dismissing all of Plaintiffs' claims without prejudice. July 9, 2019 Order (“Order”), ECF No. 46.

         Plaintiffs filed a Second Amended Complaint (“SAC”), ECF No. 47, in which they attempted to cure their claims' deficiencies and raised several new claims. Once again, Defendants move to dismiss Plaintiffs' claims. Mot. To Dismiss (“Mot.”), ECF No. 48. Plaintiffs oppose this motion. Opp'n, ECF No. 52. The Court, however, finds Plaintiffs' Second Amended Complaint still fails to state a claim for which relief can be granted. For this reason, and the reasons stated below, the Court GRANTS Defendants' motion to dismiss, and DISMISSES Plaintiffs' claims WITH PREJUDICE.[1]


         The Parties are intimately familiar with Plaintiffs' allegations and claims and they will not be repeated in detail here. In short, Plaintiffs contend Defendants improperly moved their Edward Jones commission-based accounts into fee-based accounts. See generally SAC. Plaintiffs allege this account conversion violated § 10(b) of the Securities Exchange Act of 1934 (the “1934 ACT”); Rule 10b-5(a), (b), and (c); the Investment Advisers Act of 1940 (the “Advisers Act”); and state common law. SAC ¶ 1.

         II. OPINION

         A. Judicial Notice and Incorporation by Reference

         “Generally, district courts may not consider material outside of 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). However, “there are two exceptions to this rule: the incorporation-by-reference doctrine, and judicial notice under Federal Rule of Evidence 201.” Id.

         In its previous Order, this Court took judicial notice of the existence of Edward Jones' SEC filings, public comments, and reports. November 2018 Motion to Dismiss (“Nov. 2018 Mot.”), ECF no. 29, Exs. 1-6, 34-38, 41, 43-44). See Order at 5-7. This Court also considered documents, under the incorporation-by-reference doctrine: Nov. 2018 Mot., Exs. 7-12, 14-33. See Order at 6-7. The Court, again, considers these exhibits.

         Defendants also request the Court consider Exhibit 39 under the incorporation by reference doctrine. RJN, ECF No. 49. Defendants contend this exhibit confirms Plaintiff Janet Goral invested in “covered securities” and is relevant to the issue of Securities Litigation Uniform Standards Act (“SLUSA”) preclusion. Id. Plaintiffs oppose this request. RJN Opp'n, ECF No. 53.

         The incorporation by reference doctrine allows district courts to consider documents attached to a complaint. U.S. v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). Courts may also use this doctrine to consider documents not attached to a complaint, but only if “the plaintiff refers extensively to the document or the document forms the basis of the plaintiff's claim.” Id. A document “forms the basis of the plaintiff's claim” when the plaintiff's claim “necessarily depend[s]” upon that document. Khoja, 899 F.3d at 1002. Here, the Court cannot determine whether Plaintiffs' claim “necessarily depends” on Exhibit 39 because the exhibit is completely redacted. Mot., Ex. 39. Moreover, Plaintiffs “concede[] that the case involves ‘covered' securities, ” RJN, at 6 n.2, so the Court need not consider Exhibit 39 for that purpose. The Court therefore DENIES Defendants' request to incorporate Exhibit 39 by reference.

         B. Analysis

         1. Breach of Fiduciary Duty

         Defendants argue Plaintiffs' breach of fiduciary duty claims under California and Missouri state law remain preempted by SLUSA. Mot. at 14. The Court agrees. The Court previously noted, “SLUSA bars a Plaintiff class from bringing (1) a covered class action (2) based on state law claims (3) alleging that defendants made a misrepresentation or omission or employed any manipulative or deceptive device (4) in connection with the purchase or sale of (5) a covered security.” Northstar Fin. Advisors, Inc. v. Schwab Investments, 904 F.3d 821, 828 (9th Cir. 2018). Notably, this Court clarified that whether SLUSA preempts a state cause of action does not turn on whether plaintiff gives the “same name or title” to the federal and state claims.” Order at 21 (quoting Id. at 829). Rather, SLUSA preemption depends upon “the gravamen or essence the claim.” Id. A state law claim shares the same “gravamen or essence” of a SLUSA claim when “the complaint describes conduct by the defendant that would be actionable under the 1933 or 1934 Acts” and “that conduct necessarily will be part of the proofs in support of the state law cause of action.” Id. In those circumstances, SLUSA bars the state law claim, regardless of whether the underlying conduct is “an essential predicate of the asserted state law claim.” Id.

         In its July 9, 2019 Order, the Court found SLUSA barred Plaintiffs' fiduciary duty claims because the allegations underlying those claims served as “the same allegations . . . on which Plaintiffs' securities claims rel[ied].” Order at 22. Once again, Plaintiffs fail to demonstrate the deceptive conduct alleged in their securities claims, is not also at the heart of their state claims. Plaintiffs argue the “gravamen” of their state claim is Defendants “engag[ed] in self-dealing to Plaintiffs' detriment by placing them in fee-based accounts without regard to suitability.” Opp'n at 15. Plaintiffs maintain this conduct, unlike the conduct underlying their federal securities claim, is “not based on misrepresentations or omissions.” Opp'n at 12. And yet, when describing their federal securities claim pages before, Plaintiffs characterized Defendants' failure to conduct a suitability analysis as a “misleading omission.” Opp'n at 2. Defendants' suitability analysis, or lack thereof was either an omission or it wasn't- Plaintiffs cannot have it both ways.

         For the same reasons articulated in this Court's first dismissal order, SLUSA bars Plaintiffs' state law fiduciary duty class claims. Accordingly, this Court lacks subject-matter jurisdiction over Plaintiffs' breach of fiduciary duty claims under California and Missouri Law (Counts I and II). Hampton v. Pac. Inv. Mgmt. Co. LLC, 869 F.3d 844, 847 (9th Cir. 2017) (“[D]ismissals under SLUSA are jurisdictional.”). The Court finds amendment to these claims is futile and DISMISSESS them WITH PREJUDICE.

         2. Breach of Contract

         Plaintiffs' Second Amended Complaint introduces new breach of contract claims. However, Plaintiffs fail to show these allegations are not likewise premised on misstatements or omissions.

         Defendants argue “Plaintiff's contract claims are repackaged versions of the Rule 10b-5 claims, ” because they assert “false promises or promissory fraud.” Mot. at 15. Plaintiffs deny misrepresentations or omissions are factual predicates to their breach of contract claims. Opp'n at 13. Instead, Plaintiffs assert their breach of contract claims rest upon the allegation “Edward Jones never intended to provide and did not provide the additional services purportedly warranting the fees imposed in Advisory Solutions accounts.” Opp'n at 14. While the Court does not agree that the breach of contract claims repackage Plaintiffs' specific securities claims, the Court does find that these claims repackage the elements of a security claim, generally.

         To state a Rule 10b-5 claim, Plaintiffs must allege “(1) 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.” Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 267 (2014). Plaintiffs' breach of contract claims turn upon Defendants' alleged misrepresentations or omissions. For example, Plaintiffs describe Defendants' breach of their promised yearly review (one of the promised additional services) as a “sham” since the review was a “10-minute phone call” that could be made every “18 months to 2 years” instead of yearly. SAC ¶¶ 128-129. The Oxford dictionary defines “sham” as “something...that is not really what it purports to be.” By Plaintiffs' own terms, these newly-raised breach of contract claims rests upon the old idea that Defendants misrepresented what they were promising.

         Relying on Pross v. Katz, Plaintiffs argue SLUSA does not preempt their breach of contract claims because the promises made in the contract were not “in connection” with a purchase or sale of security since they were not “part of the consideration for the sale.” Opp'n at 14; 784 F.2d 455, 456-57 (2nd Cir. 1986). In Pross, the Second Circuit found a future contractual promise is “in connection” with a sale of securities, if it is “part of the consideration for the sale.” Id. Pross, decided in 1986, is no longer persuasive or reliable authority. In 2006, the Supreme Court held SLUSA's “in connection with” requirement be read broadly, finding it “enough that the fraud alleged ‘coincide' with a securities transaction.” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85 (2006). This effectively overruled the Second Circuit's narrow interpretation of the phrase. Following the Supreme Court's decision in Dabit, the Ninth Circuit adopted a more expansive interpretation of the phrase “in connection with.” See Fleming v. Charles Schwab Corporation, 878 F.3d 1146, 1155 (9th Cir. 2017) (stating SLUSA's “in connection with” requirement is “satisfied if misrepresentations simply ‘coincide with a securities transaction.'”); Freeman Investments, L.P. v. Pacific Life Ins. Co., 704 F.3d 1110, 117 (9th Cir. 2013)(finding even if plaintiffs cannot satisfy the 10b-5(b) standing requirement, SLUSA may bar state law class actions). Plaintiffs' breach of contract claims undeniably “coincid[e] with a securities transaction, ” since they allege Defendants' breach was partly due to them not placing its “clients' interests first” and “profit[ing] at client expense.” See Fleming, 878 F.3d at 1155 (emphasizing the false promise of “best execution” is in fact “in connection with” a sale of securities).

         The Court therefore finds SLUSA also bars Plaintiffs' state law breach of contract claims. Hampton, 869 F.3d at 847. The Court finds amending these claims is futile ...

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