Anderson v. Edward D. Jones & Co., L.P.

• Court: District Court, E.D. California
• Decided: November 12, 2019
• Docket: 2:18-cv-00714
• Status: Unknown

Opinion

1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 EASTERN DISTRICT OF CALIFORNIA 9 10 No. 2:18-cv-00714-JAM-AC

11 IN RE EDWARD D. JONES & CO., 12 L.P. SECURITIES LITIGATION ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS 13

15 In March 2018, Plaintiffs filed a federal securities and state 16 breach of fiduciary duty putative class action against investment 17 firm Edward D. Jones, L.P., as well as a set of companies and 18 individuals related to the investment firm (together “Defendants” 19 or “Edward Jones”). Compl., ECF No. 1. Defendants filed a motion 20 to dismiss. ECF No. 29. The Court granted their motion, dismissing 21 all of Plaintiffs’ claims without prejudice. July 9, 2019 Order 22 (“Order”), ECF No. 46. 23 Plaintiffs filed a Second Amended Complaint (“SAC”), ECF No. 24 47, in which they attempted to cure their claims’ deficiencies and 25 raised several new claims. Once again, Defendants move to dismiss 26 Plaintiffs’ claims. Mot. To Dismiss (“Mot.”), ECF No. 48. 27 Plaintiffs oppose this motion. Opp’n, ECF No. 52. The Court, 28 1 however, finds Plaintiffs’ Second Amended Complaint still fails to 2 state a claim for which relief can be granted. For this reason, 3 and the reasons stated below, the Court GRANTS Defendants’ motion 4 to dismiss, and DISMISSES Plaintiffs’ claims WITH PREJUDICE.1 5 6 I. FACTUAL ALLEGATIONS 7 The Parties are intimately familiar with Plaintiffs’ 8 allegations and claims and they will not be repeated in detail 9 here. In short, Plaintiffs contend Defendants improperly moved 10 their Edward Jones commission-based accounts into fee-based 11 accounts. See generally SAC. Plaintiffs allege this account 12 conversion violated § 10(b) of the Securities Exchange Act of 1934 13 (the “1934 ACT”); Rule 10b-5(a), (b), and (c); the Investment 14 Advisers Act of 1940 (the “Advisers Act”); and state common law. 15 SAC ¶ 1. 16 17 II. OPINION 18 A. Judicial Notice and Incorporation by Reference 19 “Generally, district courts may not consider material 20 outside of the pleadings when assessing the sufficiency of a 21 complaint under Rule 12(b)(6) of the Federal Rules of Civil 22 Procedure.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 23 998 (9th Cir. 2018). However, “there are two exceptions to this 24 rule: the incorporation-by-reference doctrine, and judicial 25 notice under Federal Rule of Evidence 201.” Id. 26

27 1 This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was 28 scheduled for October 8, 2019. 1 In its previous Order, this Court took judicial notice of 2 the existence of Edward Jones’ SEC filings, public comments, and 3 reports. November 2018 Motion to Dismiss (“Nov. 2018 Mot.”), 4 ECF no. 29, Exs. 1-6, 34-38, 41, 43-44). See Order at 5-7. 5 This Court also considered documents, under the incorporation- 6 by-reference doctrine: Nov. 2018 Mot., Exs. 7-12, 14-33. See 7 Order at 6-7. The Court, again, considers these exhibits. 8 Defendants also request the Court consider Exhibit 39 under 9 the incorporation by reference doctrine. RJN, ECF No. 49. 10 Defendants contend this exhibit confirms Plaintiff Janet Goral 11 invested in “covered securities” and is relevant to the issue of 12 Securities Litigation Uniform Standards Act (“SLUSA”) 13 preclusion. Id. Plaintiffs oppose this request. RJN Opp’n, 14 ECF No. 53. 15 The incorporation by reference doctrine allows district 16 courts to consider documents attached to a complaint. U.S. v. 17 Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). Courts may also use 18 this doctrine to consider documents not attached to a complaint, 19 but only if “the plaintiff refers extensively to the document or 20 the document forms the basis of the plaintiff’s claim.” Id. A 21 document “forms the basis of the plaintiff’s claim” when the 22 plaintiff’s claim “necessarily depend[s]” upon that document. 23 Khoja, 899 F.3d at 1002. Here, the Court cannot determine 24 whether Plaintiffs’ claim “necessarily depends” on Exhibit 39 25 because the exhibit is completely redacted. Mot., Ex. 39. 26 Moreover, Plaintiffs “concede[] that the case involves ‘covered’ 27 securities,” RJN, at 6 n.2, so the Court need not consider 28 Exhibit 39 for that purpose. The Court therefore DENIES 1 Defendants’ request to incorporate Exhibit 39 by reference. 2 3 B. Analysis 4 1. Breach of Fiduciary Duty 5 Defendants argue Plaintiffs’ breach of fiduciary duty 6 claims under California and Missouri state law remain preempted 7 by SLUSA. Mot. at 14. The Court agrees. The Court previously 8 noted, “SLUSA bars a Plaintiff class from bringing (1) a covered 9 class action (2) based on state law claims (3) alleging that 10 defendants made a misrepresentation or omission or employed any 11 manipulative or deceptive device (4) in connection with the 12 purchase or sale of (5) a covered security.” Northstar Fin. 13 Advisors, Inc. v. Schwab Investments, 904 F.3d 821, 828 (9th 14 Cir. 2018). Notably, this Court clarified that whether SLUSA 15 preempts a state cause of action does not turn on whether 16 plaintiff gives the “same name or title” to the federal and 17 state claims.” Order at 21 (quoting Id. at 829). Rather, SLUSA 18 preemption depends upon “the gravamen or essence the claim.” 19 Id. A state law claim shares the same “gravamen or essence” of 20 a SLUSA claim when “the complaint describes conduct by the 21 defendant that would be actionable under the 1933 or 1934 Acts” 22 and “that conduct necessarily will be part of the proofs in 23 support of the state law cause of action.” Id. In those 24 circumstances, SLUSA bars the state law claim, regardless of 25 whether the underlying conduct is “an essential predicate of the 26 asserted state law claim.” Id. 27 In its July 9, 2019 Order, the Court found SLUSA barred 28 Plaintiffs’ fiduciary duty claims because the allegations 1 underlying those claims served as “the same allegations . . . on 2 which Plaintiffs’ securities claims rel[ied].” Order at 22. 3 Once again, Plaintiffs fail to demonstrate the deceptive conduct 4 alleged in their securities claims, is not also at the heart of 5 their state claims. Plaintiffs argue the “gravamen” of their 6 state claim is Defendants “engag[ed] in self-dealing to 7 Plaintiffs’ detriment by placing them in fee-based accounts 8 without regard to suitability.” Opp’n at 15. Plaintiffs 9 maintain this conduct, unlike the conduct underlying their 10 federal securities claim, is “not based on misrepresentations or 11 omissions.” Opp’n at 12. And yet, when describing their 12 federal securities claim pages before, Plaintiffs characterized 13 Defendants’ failure to conduct a suitability analysis as a 14 “misleading omission.” Opp’n at 2. Defendants’ suitability 15 analysis, or lack thereof was either an omission or it wasn’t— 16 Plaintiffs cannot have it both ways. 17 For the same reasons articulated in this Court’s first 18 dismissal order, SLUSA bars Plaintiffs’ state law fiduciary duty 19 class claims. Accordingly, this Court lacks subject-matter 20 jurisdiction over Plaintiffs’ breach of fiduciary duty claims 21 under California and Missouri Law (Counts I and II). Hampton v. 22 Pac. Inv. Mgmt. Co. LLC, 869 F.3d 844, 847 (9th Cir. 2017) 23 (“[D]ismissals under SLUSA are jurisdictional.”). The Court 24 finds amendment to these claims is futile and DISMISSESS them 25 WITH PREJUDICE. 26 2. Breach of Contract 27 Plaintiffs’ Second Amended Complaint introduces new breach 28 of contract claims. However, Plaintiffs fail to show these 1 allegations are not likewise premised on misstatements or 2 omissions. 3 Defendants argue “Plaintiff’s contract claims are 4 repackaged versions of the Rule 10b-5 claims,” because they 5 assert “false promises or promissory fraud.” Mot. at 15. 6 Plaintiffs deny misrepresentations or omissions are factual 7 predicates to their breach of contract claims. Opp’n at 13. 8 Instead, Plaintiffs assert their breach of contract claims rest 9 upon the allegation “Edward Jones never intended to provide and 10 did not provide the additional services purportedly warranting 11 the fees imposed in Advisory Solutions accounts.” Opp’n at 14. 12 While the Court does not agree that the breach of contract 13 claims repackage Plaintiffs’ specific securities claims, the 14 Court does find that these claims repackage the elements of a 15 security claim, generally. 16 To state a Rule 10b-5 claim, Plaintiffs must allege “(1) 17 material misrepresentation or omission by the defendant; (2) 18 scienter; (3) a connection between the misrepresentation or 19 omission and the purchase or sale of a security; (4) reliance 20 upon the misrepresentation or omission; (5) economic loss; and 21 (6) loss causation.” Halliburton Co. v. Erica P. John Fund, 22 Inc., 573 U.S. 258, 267 (2014). Plaintiffs’ breach of contract 23 claims turn upon Defendants’ alleged misrepresentations or 24 omissions. For example, Plaintiffs describe Defendants’ breach 25 of their promised yearly review (one of the promised additional 26 services) as a “sham” since the review was a “10-minute phone 27 call” that could be made every “18 months to 2 years” instead of 28 yearly. SAC ¶¶ 128-129. The Oxford dictionary defines “sham” 1 as “something...that is not really what it purports to be.” By 2 Plaintiffs’ own terms, these newly-raised breach of contract 3 claims rests upon the old idea that Defendants misrepresented 4 what they were promising. 5 Relying on Pross v. Katz, Plaintiffs argue SLUSA does not 6 preempt their breach of contract claims because the promises 7 made in the contract were not “in connection” with a purchase or 8 sale of security since they were not “part of the consideration 9 for the sale.” Opp’n at 14; 784 F.2d 455, 456-57 (2nd Cir. 10 1986). In Pross, the Second Circuit found a future contractual 11 promise is “in connection” with a sale of securities, if it is 12 “part of the consideration for the sale.” Id. Pross, decided 13 in 1986, is no longer persuasive or reliable authority. In 14 2006, the Supreme Court held SLUSA’s “in connection with” 15 requirement be read broadly, finding it “enough that the fraud 16 alleged ‘coincide’ with a securities transaction.” Merrill 17 Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85 18 (2006). This effectively overruled the Second Circuit’s narrow 19 interpretation of the phrase. Following the Supreme Court’s 20 decision in Dabit, the Ninth Circuit adopted a more expansive 21 interpretation of the phrase “in connection with.” See Fleming 22 v. Charles Schwab Corporation, 878 F.3d 1146, 1155 (9th Cir. 23 2017) (stating SLUSA’s “in connection with” requirement is 24 “satisfied if misrepresentations simply ‘coincide with a 25 securities transaction.’”); Freeman Investments, L.P. v. Pacific 26 Life Ins. Co., 704 F.3d 1110, 117 (9th Cir. 2013)(finding even 27 if plaintiffs cannot satisfy the 10b-5(b) standing requirement, 28 SLUSA may bar state law class actions). Plaintiffs’ breach of 1 contract claims undeniably “coincid[e] with a securities 2 transaction,” since they allege Defendants’ breach was partly 3 due to them not placing its “clients’ interests first” and 4 “profit[ing] at client expense.” See Fleming, 878 F.3d at 1155 5 (emphasizing the false promise of “best execution” is in fact 6 “in connection with” a sale of securities). 7 The Court therefore finds SLUSA also bars Plaintiffs’ state 8 law breach of contract claims. Hampton, 869 F.3d at 847. The 9 Court finds amending these claims is futile and DISMISSES 10 Plaintiffs’ claims WITH PREJUDICE. 11 3. Unjust Enrichment 12 Plaintiffs’ Second Amended Complaint also added an unjust 13 enrichment claim. SAC ¶¶ 155-58. Plaintiffs contend this claim 14 rests upon the same allegations supporting their breach of 15 contract and breach of fiduciary duties claims. SAC ¶ 155. The 16 Court finds Defendants’ alleged misrepresentations and omissions 17 are a factual predicate of this claim. Accordingly, SLUSA bars 18 this claim and deprives this Court of jurisdiction. This claim 19 is DISSMISSED WITH PREJUDICE. 20 4. Rule 10b-5(b) 21 This Court previously dismissed Plaintiffs’ 10b-5(b)claims, 22 since they failed to allege the prima facie elements of these 23 claims. Order at 8. Plaintiffs reassert their Rule 10b-5(b) 24 claims in the Second Amended Complaint. 25 Rule 10b-5 “prohibit[s] making any material misstatement or 26 omission in connection with the purchase or sale of any 27 security.” Halliburton, 573 U.S. at 267. To state a Rule 10b-5 28 claim, Plaintiffs must allege “(1) material misrepresentation or 1 omission by the defendant; (2) scienter; (3) a connection 2 between the misrepresentation or omission and the purchase or 3 sale of a security; (4) reliance upon the misrepresentation or 4 omission; (5) economic loss; and (6) loss causation.” Id. 5 (internal citations and quotations omitted). 6 In its previous Order, the Court made clear that a 7 complaint stating claims under section 10(b) and Rule 10b-5 8 “must satisfy the dual pleading requirements of Federal Rule of 9 Civil Procedure 9(b) and the PSLRA [Private Securities 10 Litigation Reform Act].” Zucco Partners, LLC v. Digimarc Corp., 11 552 F.3d 981, 990 (9th Cir. 2009), as amended (Feb. 10, 2009). 12 Rule 9(b) requires that “circumstances constituting fraud” be 13 “state[d] with particularity.” Fed. R. Civ. P. 9(b). Under the 14 PSLRA, the complaint must “specify each statement alleged to 15 have been misleading, the reason or reasons why the statement is 16 misleading, and, if an allegation regarding the statement or 17 omission is made on information and belief, the complaint shall 18 state with particularity all facts on which the belief is 19 formed.” 15 U.S.C. § 78u-4(b)(1). 20 Defendants argue Plaintiffs have once again “failed to 21 satisfy the heightened pleading standards applicable to their 22 10b-5(b) claims.” Mot. at 2. This Court agrees. 23 a. Material Misstatements or Omissions 24 Under Rule 10b-5(b), it is unlawful “to make any untrue 25 statement of a material fact or to omit to state a material fact 26 necessary in order to make the statements made...not 27 misleading.” 17 C.F.R. §240.10b-5(b). An omitted fact is 28 material if “there is a substantial likelihood that a reasonable 1 [investor] would consider it important.” Omnicare, Inc. v. 2 Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 3 1318, 1333 (2015) (quoting TSC Indus., Inc. v. Northway, Inc., 4 426 U.S. 438, 449 (1976)). “Put another way, there must be a 5 substantial likelihood that the disclosure of the omitted fact 6 would have been viewed by the reasonable investor as having 7 significantly altered the ‘total mix’ of information made 8 available.” TSC Indus., 426 U.S. at 499. 9 As they did in their previous complaint, Plaintiffs 10 continue to frame their claims as based on a set of “material 11 omissions.” SAC ¶¶ 16-78; Am. Compl. ¶¶ 1, 104-114. Plaintiffs 12 allege Defendants “concealed the Suitability and [Department of 13 Labor “DOL”] Fiduciary Rule Omissions and then improperly 14 transferred Plaintiffs’ assets from commission-based accounts 15 into fee-based accounts.” Opp’n at 4. Defendants maintain they 16 provided “clear and robust disclosures” that “foreclose the 17 theories Plaintiffs continue to pursue.” Mot. at 3. The Court 18 agrees. These alleged omissions remain “not actionable in light 19 of the totality of Edward Jones’ disclosures in the Agreement, 20 the Fund Models Brochure, the Account Client Services Agreement, 21 the Schedule of Fees and the ‘Making Good Choices’ brochure.” 22 Order at 8. 23 i. Suitability Omission 24 Plaintiffs allege “Defendants conducted no suitability 25 analysis prior to moving commission-based clients into fee-based 26 accounts.” Opp’n at 2. In its July 9, 2019 Order, this Court 27 found this claim was not actionable because it “dovetails” with 28 the mistaken premise that the costs associated with fee-based 1 accounts were misrepresented. Order at 10. Defendants argue 2 this is still the case. Mot. at 3. The Court agrees. 3 To distance themselves from their failed fees claim in 4 their First Amended Complaint, Plaintiffs attempt to reformulate 5 their suitability omission argument as follows: 6 • Edward Jones was required as a fiduciary and under 7 FINRA regulations to perform a suitability analysis, 8 • Edward Jones did not provide Financial Advisors 9 (“FAs”) with the means to conduct a suitability 10 analysis to assess whether a fee-based account was 11 suitable or otherwise in the best interest of 12 clients, and 13 • FAs did not conduct a suitability analysis. 14 SAC ¶ 160. But this argument’s substance remains virtually 15 unchanged. The crux of Plaintiffs’ suitability omission claim 16 is still that these fee-based accounts “were not suitable for 17 clients who traded infrequently because their fees would 18 increase.” Order at 10; SAC ¶¶ 161-166. 19 As the Court previously determined, this claim fails 20 because Plaintiffs received documents: expressly outlining the 21 schedule of fees for the Advisory Programs, providing a specific 22 estimate of the recipient’s anticipated yearly fees, and 23 conceding that Advisory Programs could “be more expensive than 24 other investment choices over the long term.” Order at 9. 25 These disclosures fatally undermine Plaintiffs’ allegations that 26 Defendants omitted information of these accounts’ suitability. 27 Mot. at 4. 28 Plaintiffs attempt to discredit any disclosures they 1 received on the details of these accounts by arguing Defendants 2 are not permitted under FINRA to put the onus of conducting a 3 suitability review on its clients. Id. At the same time, 4 Plaintiffs concede filling out Defendants’ client questionnaires 5 prior to converting their accounts into fee-based accounts. 6 Order at 10. These questionnaires “were part of the suitability 7 analysis” Defendants conducted, Mot. at 4, further undermining 8 Plaintiffs’ allegations that Defendants did not conduct a 9 suitability analysis. 10 Lastly, as the Court stated in its previous order, “this 11 alleged omission is more accurately stated as a 12 misrepresentation by Edward Jones that the Advisory Programs 13 were suitable for the Plaintiffs.” Order at 10. Absent a 14 genuine allegation that Edward Jones failed to conduct a 15 suitability analysis, Plaintiffs’ suitability-omission theory of 16 liability falls under Rule 12(b)(6). The Court consequently 17 finds Plaintiffs failed to allege a suitability claim. 18 ii. DOL Fiduciary Rule Omission 19 Plaintiffs’ DOL Fiduciary Rule omission claim also remains 20 essentially the same. See Order at 10. Plaintiffs contend 21 Defendants failed to disclose (1) the DOL adopted a Fiduciary 22 Rule (“DOL Fiduciary Rule”) and (2) that this rule “did not 23 require Edward Jones to transfer [Plaintiffs’] assets from 24 commission-based to fee-based accounts.” SAC ¶ 160. 25 In its July 9, 2019 Order, this Court found this claim not 26 actionable, since “Plaintiffs [did] not specifically allege why 27 this omission was material to this investment decision under the 28 circumstances, particularly given Plaintiffs had the choice of 1 signing the authorization [prior to the transfer of their 2 accounts].” Order at 11. Defendants argue “Plaintiffs plead 3 nothing new to change this conclusion.” Mot. at 7. The Court 4 agrees. 5 Once again, Plaintiffs make the conclusory allegation “the 6 DOL Fiduciary Rule Omissions unquestionably would have been 7 material to these clients’ decision to move to fee-based 8 accounts,” without specifically alleging why it would be 9 material. Opp’n at 6. They merely assert “Defendants had a 10 duty to disclose to clients the basis for systematically 11 transferring their assets.” Id. This assertion is rather vague 12 and equally conclusory. The allegations thus still fail to 13 state a claim upon which relief can be granted. 14 b. Scienter 15 Defendants argue Plaintiffs fall short of adequately 16 pleading a “strong inference” of “scienter.” Mot. at 8. To 17 adequately plead scienter, the complaint must “state with 18 particularity facts giving rise to a strong inference that the 19 defendant acted with the required state of mind.” 15 U.S.C. 20 § 78u-4(b)(2). To meet this state of mind requirement a 21 complaint must “allege that the defendants made false or 22 misleading statements either intentionally or with deliberate 23 recklessness,” where recklessness still “reflects some degree of 24 intentional or conscious misconduct.” In re Daou Sys., Inc., 25 411 F.3d 1006, 1014-15 (9th Cir. 2005), as amended (Aug. 4, 26 1999). To qualify as “strong,” “an inference of scienter must 27 be more than merely plausible or reasonable—it must be cogent 28 and at least as compelling as any opposing inference of 1 nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, 2 Ltd., 551 U.S. 308, 314 (2007). “[C]ourts must consider the 3 complaint in its entirety, as well as other sources courts 4 ordinarily examine when ruling on Rule 12(b)(6) motions to 5 dismiss” to determine “whether all of the facts alleged, taken 6 collectively, give rise to a strong inference of scienter, not 7 whether any individual allegation, scrutinized in isolation, 8 meets that standard.” Id. at 322-23 (emphasis in original). 9 i. Suitability Omission 10 Plaintiffs conclude Defendants had the required scienter 11 because “Defendant Weddle knew or recklessly disregarded that 12 the new computer system did not contain tools necessary to 13 conduct a suitability analysis,” yet continued to direct FA’s to 14 convert Plaintiffs’ accounts. SAC ¶ 183. But Plaintiffs fail 15 to demonstrate how knowledge that a computer program could not 16 conduct a suitability analysis, amounts to knowledge that 17 Defendants were not conducting a suitability analysis at all. 18 As Defendants point out, the computer was not how the 19 “[suitability] work was done”. Mot. at 8. 20 Plaintiffs also imply Defendants’ profits from converting 21 Plaintiffs’ accounts prove Defendant Weddle knew or recklessly 22 disregarded that these accounts were converted without a 23 suitability analysis. See Opp’n at 7 (“significantly, during 24 that time, Defendant Weddle boasted in EDJ’s SEC filings that 25 its fee-based revenue had exploded, largely due to converting 26 existing commission-based accounts into fee-based accounts.”). 27 But, as the Court makes clear in its prior order, “the mere fact 28 that Edward Jones financially benefited from certain clients 1 choosing to move into fee-based accounts,” “does not establish 2 an intent to defraud that is at least as compelling as an 3 opposing inference of nonfraudulent intent.” Order at 13; In re 4 Rigel Pharm,, Inc. Sec. Litig., 697 F.3d 869, 884 (9th Cir. 5 2012)(“allegations of routine corporate objectives such as the 6 desire to obtain good financing and expand are not, without 7 more, sufficient to allege scienter; to hold otherwise would 8 support a finding of scienter for any company that seeks to 9 enhance its business prospects.”). 10 ii. DOL Fiduciary Rule Omission 11 Plaintiffs also fail to establish the requisite scienter 12 for the DOL Fiduciary Rule theory of liability. Notwithstanding 13 the Court’s prior admonition, Plaintiffs merely state they “do 14 not need to [establish scienter] at this stage of the 15 litigation.” Opp’n at 7; see also Order at 12-14 (explaining 16 Plaintiffs needed to “establish an intent to defraud that is at 17 least as compelling as an opposing inference of nonfraudulent 18 intent.”). Plaintiffs thus fail to adequately allege the strong 19 inference of scienter required under Rule 10b-5. 20 c. Reliance 21 Rather than make a traditional reliance argument, 22 Plaintiffs continue to contend they are entitled to a 23 presumption of reliance. “Reliance establishes the casual 24 connection between the alleged fraud and the securities 25 transaction.” Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931, 26 939 (9th Cir. 2009). Traditionally, the most direct way for 27 plaintiffs to demonstrate reliance is “by showing that [they 28 were] aware of a company’s statement and engaged in a relevant 1 transaction...based on that specific misrepresentation.” Erica 2 P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 810 (2011). 3 However, Plaintiffs alleging section 10(b) violations based on 4 omissions of material fact are entitled to a presumption of 5 reliance. Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 6 1999). This presumption, though, “should not be applied to 7 cases that allege both misstatements and omissions unless the 8 case can be characterized as one that primarily alleges 9 omissions.” Id. at 1064. 10 Defendants argue Plaintiffs are not entitled to a 11 presumption of reliance. As the Court determined in its 12 previous order, these claims are more properly characterized as 13 misstatements. Order at 14-15. Since Plaintiffs have not raised 14 any new arguments to persuade the Court to the contrary, the 15 Court maintains this view. 16 d. Loss Causation 17 Plaintiffs’ loss causation allegations in their Second 18 Amended Complaint are largely identical to those in their First 19 Amended Complaint. Plaintiffs argue “Defendants’ Suitability 20 and DOL Fiduciary Rule Omission caused their losses—increased 21 fees and decreased returns—because if Defendants had disclosed 22 those material facts, Plaintiffs would not have moved their 23 assets into fee-based accounts.” Opp’n at 8. Loss causation 24 is “a causal connection between the material misrepresentation 25 and the loss” experienced by the plaintiff. Dura Pharm., Inc. 26 v. Broudo, 544 U.S. 336, 342 (2005). To allege loss causation, 27 a plaintiff “must demonstrate that an economic loss was caused 28 by the defendant’s misrepresentations, rather than some 1 intervening event.” Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 2 1209 (9th Cir. 2016). In turn, “the plaintiff must show that 3 the revelation of that misrepresentation or omission was a 4 substantial factor in causing a decline in the security’s price, 5 thus creating an actual economic loss for the plaintiff.” 6 Nuveen Mun. High Income Opportunity Fund v. City of Alameda, 7 Cal., 730 F.3d 1111, 1119 (9th Cir. 2013) (quoting McCabe v. 8 Ernst & Young, LLP., 494 F.3d 418, 425-26 (3rd Cir. 2007)). But 9 “plaintiffs need only show a causal connection between the fraud 10 and the loss by tracing the loss back to the very facts about 11 which the defendant lied.” Mineworkers’ Pension Scheme v. First 12 Solar Inc., 881 F.3d 750, 753 (9th Cir. 2018) (internal 13 citations and quotations omitted). 14 Plaintiffs again fail to sufficiently allege loss 15 causation. The Court previously noted this is not a typical 16 securities fraud case because Plaintiffs’ allegations do not 17 address the fee-based accounts’ overall performance. Order at 18 16. Rather, Plaintiffs contend the loss causation is merely a 19 result of the higher fees they pay by virtue of being in a fee- 20 based account. Opp’n at 8. The Court has already explained 21 there is no actionable omission related to the increase in fees 22 because the relevant information was disclosed. Order at 16. 23 For these reasons, and those discussed in the Court’s prior 24 order, Plaintiffs have not demonstrated loss causation. 25 e. Conclusion 26 Plaintiffs failed to adequately allege any element in their 27 Rule 10b-5(b) claim under Federal Rule of Civil Procedure 9(b) 28 and PSLRA. This Court therefore DISMISSES these claims WITH 1 PREJUDICE. 2 3 5. Rules 10b-5(a) and (c) 4 Plaintiffs also attempt to revive their 10b-5(a) and (c) 5 claim, this time alleging “Defendants engaged in a scheme to 6 defraud by converting Plaintiffs’ assets from commission-based 7 accounts into fee-based ones without first conducting a 8 suitability analysis” and by not providing financial advisors 9 with a computer system containing suitability analysis tools. 10 Opp’n at 14; see also SAC ¶¶ 215-234. Defendants argue 11 Plaintiffs fail to add anything beyond their 10b-5(b)claim and 12 fail to allege adequate particularized factual allegations 13 suggesting Defendants “committed a manipulative or deceptive 14 act.” Mot. at 11. The Court agrees. 15 As the Court previously stated, Rules 10b-5(a) and (c) make 16 it unlawful for a person to use a “device, scheme, or artifice 17 to defraud,” or engage in “any act, practice, or course of 18 business which operates or would operate as a fraud or deceit,” 19 in connection with the purchase or sale of a security. 17 20 C.F.R. § 240.10b-5. While “the same set of facts may give rise 21 to both a violation of subsection (b) and subsection (a) and/or 22 (c), to state a claim under the latter subsections, a plaintiff 23 must allege a “device, scheme, or artifice to defraud,” or an 24 “act, practice, or course of business which would operate as a 25 fraud,” in addition to the standard elements of a 10(b) 26 violation, See Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 27 552 U.S. 148, 158 (2008); S.E.C. v. Loomis, 969 F. Supp. 2d 28 1226, 1237 (E.D. Cal. 2013)(quoting In re Alstom SA, 406 F. 1 Supp. 2d 433, 475 (S.D.N.Y. 2005)). 2 In its previous Order, the Court dismissed Plaintiffs’ Rule 3 10b-5(a) and (c) claim because it was “nothing more than a 4 repackaging of the Rule 10b-5(b) omission claims....” Order at 5 18. This remains the case. Plaintiffs’ scheme liability claim 6 largely rests on Defendants’ alleged suitability omissions 7 during the conversion of commission-based accounts into fee- 8 based ones. See SAC ¶¶ 216-225. 9 Moreover, Plaintiffs’ scheme liability claim fails again to 10 allege violations actionable as a deceptive scheme. Plaintiffs 11 contend the transaction itself of converting the accounts was 12 deceptive because Edward Jones supposedly did not conduct a 13 suitability analysis, prior to the conversion, through a 14 computer program. SAC ¶ 224, 226-227. But this allegation 15 fails because the deceptive conduct must have had “the principal 16 purpose and effect of creating a false appearance of fact in 17 furtherance of the scheme.” Simpson v. Homestore.com, Inc., 519 18 F.3d 1041 (9th Cir. 2008). As the court noted above, Defendants 19 conducted a suitability analysis; they simply did not conduct 20 one through the computer program Plaintiffs endorse. Defendants 21 failure to conduct a suitability analysis through a non-existent 22 computer program did not have the “principal purpose and effect 23 of creating a false appearance”. 24 The Court further finds Plaintiffs have failed to properly 25 allege the standard elements of a 10(b) violation: reliance, 26 scienter, and loss causation. The Court therefore DISMISSES 27 Plaintiffs’ scheme liability claim under Rules 10b-5(a) and (c) 28 (Count VII) WITH PREJUDICE. 1 6. Section 2 To establish a cause of action under Section 20(a), 3 “plaintiff must first prove a primary violation of underlying 4 federal securities laws, such as Section 10(b) or Rule 10b-5, 5 and then show that the defendant exercised actual power over the 6 | primary violator.” In re NVIDIA Corp. Sec. Litig., 768 F.3d 7 1046, 1052 (9th Cir. 2014). Plaintiffs failed to adequately 8 allege a primary violation under Section 10(b). Plaintiffs’ 9 Section 20(a) control person claim (Count VIII) therefore fails 10 and is DISMISSED WITH PREJUDICE. 11 7. Section 80b-1 et seq. 12 In their Second Amended Complaint, Plaintiffs raised 13 Investment Adviser Act claims for the first time. SAC □□□ 256- 14 294. Defendants argue these claims fail as a matter of law. 15 | Mot. at 14. Rather than respond to this argument in their 16 Opposition to the Motion, Plaintiffs withdrew these claims ina 17 one sentence footnote. Opp’n at 15 n. 13. The Court treats a 18 failure to respond to an argument as a concession. The Court 19 therefore DISMISSES these claims WITH PREJUDICE. 20 21 Til. ORDER 22 For the reasons set forth above, the Court GRANTS 23 Defendants’ Motion to Dismiss in its entirety. Plaintiffs’ 24 Second Amended Complaint is DISMISSED WITH PREJUDICE. 25 IT IS SO ORDERED. 26 Dated: November 8, 2019 27 kA 28 teiren staves odermacr 7008 20