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

• Court: District Court, E.D. California
• Decided: January 8, 2024
• Docket: 2:18-cv-00714
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 11 EDWARD ANDERSON, RAYMOND No. 2:18-CV-00714-DJC-AC KEITH CORUM, JESSE AND COLLEEN 12 WORTHINGTON, individually and on behalf of others similarly situated, 13 ORDER Plaintiffs, 14 v. 15 EDWARD D. JONES & CO., L.P., 16 Defendant. 17 18 19 Before the Court is Defendant’s second Motion to Dismiss Plaintiffs’ Third 20 Amended Complaint (“TAC” (ECF No. 82)). (Mot. to Dismiss (“MTD”) (ECF No. 181).) 21 Despite the Ninth Circuit’s ruling that Plaintiffs’ claim is not barred by the Securities 22 Litigation Uniform Standards Act (“SLUSA”), Defendant argues that an expert opinion 23 report produced by Plaintiffs in discovery should be attributed to Plaintiffs and modify 24 Plaintiffs’ TAC such that the suit now falls under the scope of SLUSA. For the reasons 25 below, the Court declines to find that Plaintiffs’ claim has been modified by the report 26 and DENIES Defendant’s Motion to Dismiss. 27 //// 28 //// 1 I. Background 2 A. Factual Background 3 Plaintiffs Edward Anderson, Raymond Keith Corum, and Colleen and Jesse 4 Worthington (“Plaintiffs”) bring the present suit against Defendant Edward D. Jones & 5 Co., L.P. on behalf of themselves and a not yet certified class of similarly situated 6 individuals. (TAC ¶¶ 21–36.) Plaintiffs are former clients of Defendant, a broker-dealer 7 and investment advising firm, who utilized Defendant’s services. ( ¶¶ 21–37.) 8 Initially, Defendant provided a service model where clients received gratuitous 9 investment advice from financial advisors employed by Defendant and paid only 10 commission fees on a per-trade basis. ( ¶¶ 57–62.) However, in 2008, Defendant 11 introduced a new advisory model called “Advisory Solutions” which charged a flat 12 annual management fee corresponding to the total amount of each client’s assets. ( 13 ¶ 63.) Plaintiffs allege that in 2013 Defendant encouraged and incentivized its 14 financial advisors to transition Plaintiffs from the commission-based accounts to 15 Advisory Solutions accounts without conducting a suitability analysis to determine 16 whether the Advisory Solutions accounts were appropriate for them. ( ¶¶ 64 –78, 17 94.) Plaintiffs were advised by financial advisors acting on behalf of Defendant to 18 switch their commission-based accounts to Advisory Solutions accounts, and did so. 19 ( ¶¶ 23 –24, 27 –28, 31 –32.) As “buy and hold” investors who engaged in minimal 20 trading, Plaintiffs allege that the Advisory Solutions accounts were not suitable for 21 their needs, and that switching to those accounts led to Plaintiffs paying higher fees. 22 ( ¶¶ 22, 26, 30, 60, 93–96.) 23 Plaintiffs allege that Defendant breached its fiduciary duty to Plaintiffs by failing 24 to supervise the financial advisors it employed and ensure the advisors were 25 conducting a proper suitability assessment before advising Plaintiffs to switch their 26 accounts. ( ¶¶ 53, 78–82, 91–97.) As a result of this breach, Plaintiffs paid higher 27 fees than they otherwise would have under the commission-based accounts and 28 received lower returns on their investments due to the fees being deducted from their 1 accounts. ( ¶¶ 95–96.) Plaintiffs bring one cause of action against Defendant 2 alleging breach of fiduciary duty under California and Missouri law. 3 B. Procedural Background 4 Plaintiffs initially filed this action on March 30, 2018. ((ECF No. 1).) Since then, 5 Plaintiffs have amended their complaint three times. The First Amended Complaint, 6 (ECF No. 24), was dismissed with leave to amend, (ECF No. 46), and the Second 7 Amended Complaint (“SAC” (ECF No. 47)) was dismissed with prejudice on the basis 8 that SLUSA presented a jurisdictional bar to Plaintiff’s claims (ECF No. 60). Plaintiffs 9 appealed the dismissal of the SAC, and the Ninth Circuit reversed the Court’s 10 dismissal, reasoning that Plaintiffs’ breach of fiduciary duty claim was not based on 11 conduct in connection with the purchase or sale of covered securities, and therefore 12 not within the scope of SLUSA. , 990 F.3d 13 692 (9th Cir. 2021), , 142 S. Ct. 745 (2022). 14 After the case was remanded, Defendant once again moved to dismiss 15 Plaintiffs’ SAC, but on the basis that Plaintiffs had failed to plead their fraud-based 16 claim with the particularity required by Rule 9(b). (ECF No. 81.) The Court granted 17 this motion with leave to amend. ( ) Plaintiffs then filed the operative Third 18 Amended Complaint, (ECF No. 82) which Defendant again moved to dismiss. (ECF 19 No. 83.) The Court denied Defendant’s Motion to Dismiss the TAC, finding that 20 Plaintiffs sufficiently stated a non-fraud-based claim for breach of fiduciary duty. (ECF 21 No. 93.) 22 Presently before the Court is Defendant’s second Motion to Dismiss Plaintiffs’ 23 Third Amended Complaint. In the interim of the Court’s denial of Defendant’s first 24 Motion to Dismiss the TAC and the present motion, the parties conducted discovery, 25 including producing expert reports and conducting depositions. Defendant now 26 argues that language in one of the Plaintiffs’ expert reports, and that expert’s 27 statements made during deposition, expose Plaintiffs’ attempt to resurrect a theory of 28 //// 1 liability which was previously dismissed and would be jurisdictionally barred by 2 SLUSA. (MTD at 1–2.) 3 Pursuant to the Parties’ stipulation, the Court vacated the hearing on this 4 motion, ( ECF No. 194), and has determined that oral argument is not necessary. 5 This matter is hereby submitted upon the record and briefs of the Parties, without oral 6 argument, pursuant to Local Rule 230(g). 7 II. Legal Standard for Motion to Dismiss 8 A party may move to dismiss a complaint for “lack of subject matter jurisdiction” 9 under Federal Rule of Civil Procedure 12(b)(1). Taking the allegations in the 10 complaint as true, “the court must determine whether a lack of federal jurisdiction 11 appears from the face of the complaint itself.” 12 , 103 F. Supp. 3d 1073, 1078 (N.D. Cal. 2015). “[The] party invoking the 13 federal court's jurisdiction has the burden of proving the actual existence of subject 14 matter jurisdiction.” , 99 F.3d 352, 353 (9th Cir.1996); 15 , 598 F.3d 1115, 1122 (9th Cir. 2010). 16 A Rule 12(b)(1) jurisdictional attack may be facial or factual. , 227 17 F.3d 1214, 1242 (9th Cir. 2000) (citation omitted). “In a facial attack, the challenger 18 asserts that the allegations contained in a complaint are insufficient on their face to 19 invoke federal jurisdiction. By contrast, in a factual attack, the challenger disputes the 20 truth of the allegations that, by themselves, would otherwise invoke federal 21 jurisdiction." , 373 F.3d 1035, 1039 (9th Cir. 2004). A 22 facial attack requires the court to take the pleading as true and construe the 23 allegations in favor of the plaintiff when determining jurisdiction; only in a factual 24 attack may the court look beyond the pleadings. , 227 F.3d at 1242. 25 III. Discussion 26 Claims that fall within the scope of SLUSA are precluded from federal 27 jurisdiction. SLUSA bars a plaintiff from bringing “(1) a covered class action (2) based 28 on state law claims (3) alleging that the defendants made a misrepresentation or 1 omission or employed any manipulative or deceptive device (4) in connection with the 2 purchase or sale of (5) a covered security.” 3 , 904 F.3d 821, 828 (9th Cir. 2018); 15 U.S.C. § 78bb(f)(1). “Courts must ‘look to 4 the substance of the allegations,’ so that ‘plaintiffs cannot avoid preclusion through 5 artful pleading that removes the covered words . . . but leaves in the covered 6 concepts.’” at 829 (quoting , 704 F.3d 1110, 7 1115 (9th Cir. 2013) (internal citations omitted)). 8 Defendant attempts to argue that an expert report produced by Plaintiffs — and 9 more primarily, the expert’s answers during deposition — somehow modify the legal 10 theory which the Plaintiffs pursue in their TAC, and that this modified legal theory is 11 jurisdictionally barred by SLUSA. Defendant asserts that: 12 Mr. Schulz has been proffered by Plaintiffs as their key 13 expert witness; his assertions are their assertions. Those assertions are procedurally improper because they are 14 outside the scope of the TAC, but to the extent the Court considers Mr. Schulz’s characterization of Plaintiffs’ claims, 15 they supply the “in connection with” securities transaction element that the Ninth Circuit found was avoided by 16 Plaintiffs’ characterization of their claims on appeal. Mr. Schulz’s characterization of Plaintiffs’ claims therefore 17 triggers SLUSA and the Court should dismiss on jurisdictional grounds. 18 19 (MTD at 8.) Specifically, Defendant points to the expert’s answers during deposition in 20 which the expert said, “there could be a sale in the brokerage account before the 21 money is moved, and there would be purchase of securities in the advisory accounts 22 when the accounts are moved.” ( at 7–8.) In addition, in response to the question 23 “[w]ell, isn’t the essential premise of your analysis, your damages analysis, that you can 24 look at what was in the commission account just prior to the switch, just prior to the 25 sale of securities, and then assume that that would have remained static during the life 26 the fee account?” the expert answered “I thought you asked me that question and I 27 thought [] I said yes.” ( ) The expert also suggested in his report that Plaintiffs may 28 //// 1 have suffered damages because they could have reinvested the funds they paid out in 2 fees and received returns on those additional investments. ( at 12.) 3 While the Court may look beyond the pleadings to resolve disputes 4 regarding the Court’s jurisdiction, , 373 F.3d at 1039, Defendant does not 5 contest particular facts in the TAC which give rise to jurisdiction. Instead, Defendant 6 asks this Court to incorporate Plaintiffs’ expert discovery to modify Plaintiffs’ 7 complaint, despite Plaintiffs intentionally and successfully pleading a claim not within 8 the scope of SLUSA. Defendant cites no legal support for imputing an expert’s report 9 or deposition as a plaintiff’s own assertion, and appears to concede that any 10 comments the expert made regarding the sale of securities are outside the scope of 11 Plaintiffs’ claim, stating “[the expert’s] assertions are procedurally improper because 12 they are outside the scope of the TAC . . . .” (MTD at 8.) 13 A plaintiff is the master of their complaint, and may choose to pursue select 14 legal theories and remedies as the plaintiff sees fit. , 15 317 F. Supp. 2d 646, 651 (D. S.C. 2004) (“Plaintiff has voluntarily restricted the remedy 16 he seeks. Such a tactical move does not violate any principle of federal jurisdiction, 17 and the court will not second-guess Plaintiff's litigation strategy.”).1 Here, Plaintiffs 18 have narrowly fashioned their TAC, limiting their theory of liability to avoid the reach 19 of SLUSA. Plaintiffs' allegations are focused on Defendant’s alleged breach of 20 fiduciary duty which caused them to pay financial advising fees that they otherwise 21 would not have paid. The Ninth Circuit concluded that this cause of action does not 22 implicate the sale or purchase of securities, and therefore avoids SLUSA, stating that 23 “[n]owhere do Plaintiffs allege that they would have purchased or sold different 24 covered securities had Edward Jones conducted a suitability analysis, which might 25 have resulted in Plaintiffs remaining in commission-based accounts . . . . [T]he lack of 26 1 This principle is subject to the “artful pleading” rule, in which a plaintiff cannot avoid “necessary 27 federal questions. , 609 F.3d 512, 518–19 (2d Cir. 2010). Defendant has not argued that Plaintiffs are avoiding a necessary federal question, and the Ninth Circuit’s analysis of Plaintiffs’ 28 claim precludes such an argument. 1 suitability analysis did not materially affect the purchase or sale of any covered 2 securities.” , 990 F.3d at 705. That the expert opined on other causes of 3 actions or remedies which be available to Plaintiffs does not change the fact that 4 Plaintiffs have chosen not to pursue them in this action. To the extent that the expert 5 has proffered an opinion on causes of action or damages outside the scope of this 6 litigation, that evidence would simply be irrelevant to these proceedings. at 7 708 n.10 ("[a]ctions Edward Jones took after the breach, such as selling securities as 8 part of the transfer of assets into the fee-based accounts, are extraneous to the 9 alleged state law violation.") 10 Defendant cites two post- cases in support of its argument that 11 Plaintiffs’ claims are covertly based on securities purchases or sales. These cases are 12 inapposite, and in fact explicitly distinguish the facts of the present case. In 13 , the Northern District of California found that “the 14 heart of plaintiffs' complaint is that they would have rather purchased securities with 15 the cash defendants let sit in Charles Schwab Bank” where the plaintiffs sought 16 damages based on the returns they would have received had the defendant invested 17 their funds differently. No. 21-CV-07034-PJH, 2022 WL 2047558, at *4 (N.D. Cal. June 18 7, 2022), , No. 22-15932, 2023 WL 4044424 (9th Cir. June 16, 2023). 19 Accordingly, the claims were based on conduct in connection with the purchase or 20 sale of securities. On appeal, the Ninth Circuit confirmed that the 21 plaintiffs had alleged conduct which “directly affected the ‘trading strategies’” and was 22 therefore connected to the purchase or sale of securities, explicitly juxtaposing 23 . , No. 22-15932, 2023 WL 24 4044424, at *1 (9th Cir. June 16, 2023). In , the 25 plaintiff alleged that transitioning to a different account led to a change in trading 26 behavior. No. 22-CV-02716-NYW-SKC, 2023 WL 5748378, at *6 (D. Colo. Sept. 6, 27 2023). The District of Colorado found that the alleged misrepresentations made by 28 the defendant which caused the plaintiff to transition accounts, and thus change her 1 | trading behavior, was therefore in connection with the purchase or sale of securities. 2 | /o. The District of Colorado explicitly distinguished the facts of this case with the 3 | claims in Birchfield. Id. 4 Plaintiffs here allege that they were charged excessive fees, and that had those 5 | fees remained in their accounts, they would have continued to accrue returns. They 6 | do not allege that they would have otherwise used those funds to purchase additional 7 || securities, or that transitioning the accounts changed their trading habits. Anderson, 8 | 990 F.3d at 705 (“Plaintiffs’ ‘buy-and-hold philosophy remained unchanged.’”) The 9 | Ninth Circuit has definitively ruled that Plaintiffs’ claim, as styled, does not allege 10 | conduct in connection with the purchase or sale of securities. If Plaintiffs were to 11 | change course and pursue claims similar to those in Barbiero or Birchfield alleging a 12 | change in trading behavior, those claims would be barred. But Plaintiffs have not 13 | chosen to do so, and the expert's suggestion that such claims or damages may be 14 | available to them does not change that fact. 15 IV. Conclusion 16 For the above reasons, IT |S HEREBY ORDERED that Defendant’s Motion to 17 | Dismiss, ECF No. 181, is DENIED. 18 19 IT IS SO ORDERED. 20 | Dated: _January 5, 2024 “Daniel A CoD tto— Hon. Daniel alabretta 21 UNITED STATES DISTRICT JUDGE 22 23 24 | DJC2 —Anderson18cv00714.mtd 25 26 27 28