Apex Clearing has secured dismissal of the fourth class action complaint in a short squeeze lawsuit. On January 9, 2023, Chief Judge Cecilia M. Altonaga of the Florida Southern District Court signed an order granting Apex Clearing’s motion to dismiss the complaint.
The complaint (filed by plaintiffs Erik Chavez and Peter Jang) against Apex Clearing forms part of a multi-district litigation which also targets Robinhood.
The traders who brought this lawsuit insist that securities brokers have a duty to act in good faith and in the best interest of their customers. The traders argue that on January 28, 2021, Apex Clearing Corporation violated its fundamental, well-established duties by taking unprecedented action. It prevented its customers from buying certain highly liquid, in-demand stocks for approximately 3-1/2 hours for their own financial self-interest and to the financial detriment of their customers.
The plaintiffs argue that this Market Suspension was designed to and did cause Apex’s own customers to lose money on the very same stocks that Apex had previously sold to those customers.
Plaintiffs bring four claims against Apex. For all counts, they seek “compensatory damages, punitive damages, restitution, and/or refund of all funds acquired by Defendant from Plaintiffs and the proposed members of the Classes as a result of Defendant’s negligence and unlawful actions.”
- Count I is for negligence.
The Judge said that the plaintiffs have failed to allege that Apex owed them a common law duty of care. Moreover, New York’s economic loss doctrine forecloses finding such a duty. Without a recognized duty of care, there is nothing for the defendant to breach. Count I was thus dismissed.
- Count II is for breach of fiduciary duty.
The Court disagreed with this claim. Defendant cannot breach a fiduciary duty to Plaintiffs if it does not owe Plaintiffs a fiduciary duty.
- Count III, which Plaintiffs allege “in the alternative to Counts I and II”, is for breach of the implied covenant of good faith and fair dealing.
The Judge noted that all parties acknowledge that the Customer Agreement afforded Defendant the “right to refuse to execute transactions for Plaintiffs at any time and for any reason.” Plaintiffs would have the Court amend this provision and impose new conditions governing when and why Defendant is allowed to refuse to execute transactions. But the implied covenant of good faith and fair dealing may not be used to restrict parties’ rights under a contract when doing so would be “inconsistent with other terms of the contractual relationship.” The Court refused to read new restrictions into a Customer Agreement that conflict with the broad rights it affords Defendant. Accordingly, Count III was dismissed.
- Count IV, also alleged in the alterative to Counts I and II, is for tortious interference with a business relationship.
This argument fails for two reasons. First, it depends on the success of the negligence and breach of fiduciary duty claims, both of which fail. Second, even if those claims succeeded, no court applying New York law has ever held that negligence and breach of fiduciary duty independently constitute “wrongful means” for tortious interference purposes. Federal courts applying a state’s laws must proceed with modesty and avoid “creating or expanding that State’s public policy.” The Court declined to extend New York law beyond its established contours here. Accordingly, Count IV was dismissed.
In sum, Plaintiffs’ four claims failed as a matter of law. Counts I and II each fail to allege a duty that Defendant — a clearing broker — owed to Plaintiffs. Count III asks the Court to imply a restriction on Defendant’s contractual right to refuse to execute trades that is inconsistent with the Customer Agreement Plaintiffs signed. And Count IV fails to allege that Defendant employed wrongful means in its interference with Plaintiffs’ business relations, which is a requirement under New York law.
Let’s recall that on January 10, 2022, the Court issued an Order dismissing Plaintiffs’ Amended Consolidated Class Action Complaint. That Order advised Plaintiffs Chavez and Jang that their next amended complaint — this pleading — would be their last. The Court sees no reason to give Plaintiffs another opportunity to amend.
