United States District Court, E.D. California
IN RE EDWARD D. JONES & CO., L.P. SECURITIES LITIGATION
ORDER GRANTING DEFENDANTS' MOTION TO
MENDEZ, UNITED STATES DISTRICT JUDGE
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.
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
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.
Judicial Notice and Incorporation by Reference
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.”
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
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.
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.
Breach of Fiduciary Duty
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.
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.
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.
Breach of Contract
Second Amended Complaint introduces new breach of contract
claims. However, Plaintiffs fail to show these allegations
are not likewise premised on misstatements or omissions.
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
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
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).
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 ...