Great Pacific Securities v. Barclays Capital Inc.

• Court: Court of Appeals for the Ninth Circuit
• Decided: July 30, 2018
• Docket: 16-56804
• Status: Unpublished

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS JUL 30 2018 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

GREAT PACIFIC SECURITIES, et al., No. 16-56804

Plaintiffs-Appellants D.C. No. 8:14-cv-01210-DSF-SH v.

BARCLAYS CAPITAL, INC., et al., MEMORANDUM*

Defendants-Appellees.

On Appeal from the United States District Court for the Central District of California Dale S. Fischer, District Judge, Presiding

Argued and Submitted April 13, 2018 San Francisco, California

Before: BEA and MURGIA, Circuit Judges, and MOLLOY, ** District Judge.

This case concerns claims by Plaintiff Great Pacific Securities (“Great

Pacific”) that Barclays Capital Inc. (“Barclays”) made a series of fraudulent

misrepresentations and omissions regarding its Liquidity Cross (“LX”) dark pool.

Dark pools are private stock exchanges where clients can trade securities in real time,

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. ** The Honorable Donald W. Molloy, United States District Judge for the District of Montana, sitting by designation. 1 without contemporaneously disclosing information to the public. Dark pools have

gained popularity as institutional traders seek to avoid computerized High Frequency

Traders (“HFTs”), which use public information about public trades to execute

thousands of trades a second before the publicly known trades are fully executed, to

take advantage of slower moving traders. HFTs skim information off publicly

known buy and sell orders before those orders have been executed and use that

information to profit by “trading ahead” of the publicly known trades to buy stocks

that the HFTs know will appreciate due to a yet unfilled, but publicly known, buy

order.

According to Great Pacific, one of Barclays’ customers, Barclays marketed

LX and other various trading tools to institutional investors as a means to avoid these

“aggressive” HFTs. Great Pacific alleges that, in fact, Barclays misrepresented both

the number of aggressive HFTs trading in LX and its ability and intent to police LX

for aggressive HFT behavior. According to Great Pacific, these misrepresentations

caused institutional investors to execute trades in LX and pay higher prices on

purchases, receive lower prices on sales, and pay fees to Barclays when they would

not have otherwise.

Great Pacific filed a class action lawsuit in the District Court for the Central

District of California on behalf of itself and all other similarly-situated traders

alleging state law claims for concealment, violation of California’s Unfair

2 Competition Law (the “UCL”), Cal. Bus. & Prof. Code §§ 17200210, and violation

of California’s False Advertising Law (the “FAL”), see Cal. Bus. & Prof. Code

§§ 17500509. The lawsuit was transferred to the Southern District of New York

as part of a multi-district litigation against Barclays. In the Southern District of New

York, Great Pacific’s first amended complaint (“FAC”) was dismissed without

prejudice for failure to state a claim. The case was then transferred back to the

Central District, where Great Pacific filed a second amended complaint (“SAC”) and

then filed the operative third amended complaint (the “TAC”). Barclays moved to

dismiss the TAC and the district court granted the motion with leave to amend. Great

Pacific declined the opportunity to amend the TAC and appealed to this court.

We review de novo a district court’s decision to grant a motion to dismiss for

failure to state a claim. Skilstaf, Inc. v. CVS Caremark Corp., 669 F.3d 1005, 1014

(9th Cir. 2012). “To survive a motion to dismiss, a complaint must contain sufficient

factual matter, accepted as true, to state a claim to relief that is plausible on its face.”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted). To

plead a claim for fraud with particularity, as required by Rule 9(b), a party’s

“[a]verments of fraud must be accompanied by ‘the who, what, when, where, and

how’ of the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097,

1106 (9th Cir. 2003) (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)).

The plausibility standard of Rule 8 also applies to cases subject to Rule 9(b). See

3 Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 (9th Cir.

2011).

1. The TAC did not state a claim for concealment. Under California law,

“[c]oncealment is a species of fraud . . . .” Moncada v. W. Coast Quartz Corp., 164

Cal. Rptr. 3d 601, 607 (Ct. App. 2013). “As with all fraud claims, the necessary

elements of a concealment/suppression claim consist of ‘(1) misrepresentation (false

representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter);

(3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5)

resulting damage.’” Hoffman v. 162 N. Wolfe LLC, 228 Cal. App. 4th 1178, 1185–

86 (2014), as modified on denial of reh’g (Aug. 13, 2014) (quoting Alliance Mortg.

Co. v. Rothwell, 10 Cal.4th 1226, 1239 (1995)). Because concealment requires the

allegation of fraud, the circumstances of the fraud are subject the heightened

pleading standard established by Rule 9(b) and must be pleaded with particularity.

See Vess, 317 F.3d at 1103.

The district court correctly found that the TAC failed to plead reliance with

particularity. Specifically, the TAC failed to plead that Great Pacific received and

was aware of the representations regarding LX which it claims were false. See

Slakey Bros. Sacramento, Inc. v. Parker, 265 Cal. App. 2d 204, 208 (1968) (stating

that a plaintiff “cannot be defrauded by misrepresentations which never reach him

and of which he had no knowledge at the time of his loss”). With the exception of

4 one iteration of a pitchbook distributed by Barclays to its clients, the TAC fails even

to allege that Great Pacific received the specific marketing materials and

representations cited by the TAC. With respect to the one pitchbook the TAC states

Great Pacific received, the TAC fails to plead whether anyone at Great Pacific read

the pitchbook or how Great Pacific personnel relied on the pitchbook. Thus, the

TAC failed to plead with particularity the “who, what, when, where, and how” of its

reliance. See Vess, 317 F.3d at 1103, 1106.1

2. As the district court held, Great Pacific’s FAL and UCL claims based on

Barclays’ alleged misrepresentations fail for the same reasons as its concealment

claim. The FAL makes it unlawful for any person to “induce the public to enter into

any obligation” based on a statement that is “untrue or misleading, and which is

known, or which by the exercise of reasonable care should be known, to be untrue

or misleading.” Cal. Bus. & Prof. Code § 17500. The UCL is intended “to protect

both consumers and competitors by promoting fair competition in commercial

markets for goods and services.” Kasky v. Nike, Inc., 27 Cal. 4th 939, 950 (2002).

Further, the UCL defines “unfair competition” as “any unlawful, unfair or fraudulent

business act or practice and unfair, deceptive, untrue or misleading advertising and

1 The TAC also claims that Barclays defrauded its customers by failing to disclose various regulatory violations. This claim fails because the TAC does not adequately allege that Barclays knew that it was omitting material information, that it intended to deceive its clients, or that Great Pacific would have acted differently had it known of the regulatory violations. 5 any act prohibited by [the false advertising law (§ 17500 et seq.)].” Id.(quoting Cal.

Bus. & Prof. Code § 17200). Violations of the FAL necessarily support a UCL

claim. Id. at 950. Plaintiffs alleging claims under the FAL and UCL are required to

plead and prove actual reliance on the misrepresentations or omissions at issue. See

Kwikset Corp. v. Superior Court, 51 Cal. 4th 310, 326–27 (2011). Just like Great

Pacific’s concealment claim, these allegations are subject to Rule 9(b)’s particularity

standard. See Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009). As

discussed above, the TAC fails to plead reliance with particularity.2

3. The district court did not err in denying Great Pacific’s motion for discovery

after it filed its SAC. “[P]laintiffs must satisfy the pleading requirements of Rule

8 before the discovery stage, not after it.” Mujica v. AirScan Inc., 771 F.3d 580, 593

(9th Cir. 2014) (emphasis in the original). It is not too much to ask that a plaintiff

be able to allege he read and relied on the claimed misleading information before

requiring the defendant to disclose what it knows about which plaintiff relied on its

communications. As a result, the district court did not err in denying Great Pacific

discovery until Great Pacific filed a well-pleaded complaint that satisfied Rule 8’s

requirements. See id.

2 Great Pacific’s UCL claim based on Barclays’ alleged violation of various regulations fails because Great Pacific failed to allege that it suffered an economic injury due to these violations, as required to state a UCL claim. See Kwikset, 51 Cal. 4th at 320 (holding that economic injury caused by the unfair business practice is a necessary element of a UCL claim). 6 In light of the above, we AFFIRM the district court’s judgment dismissing

Great Pacific’s claims and denying Great Pacific’s request for discovery.