WC Capital Mgmt., LLC v. UBS Sec., LLC

• Decision Date: 01 April 2013
• Docket Number: Docket No. 11–122–cv.
• Citation: 711 F.3d 322
• Parties: WC CAPITAL MANAGEMENT, LLC, Plaintiff–Appellant, Willow Creek Capital Partners, L.P., a Delaware Limited Partnership, Willow Creek Short Biased 30/130 Fund, L.P., a Delaware Limited Partnership, Plaintiffs–Counter–Defendants–Appellants, v. UBS SECURITIES, LLC, a Delaware limited liability company, UBS AG, a Swiss company, Defendants–Counter–Claimants–Appellees.
• Court: U.S. Court of Appeals — Second Circuit

711 F.3d 322

WC CAPITAL MANAGEMENT, LLC, Plaintiff–Appellant,

Willow Creek Capital Partners, L.P., a Delaware Limited Partnership, Willow Creek Short Biased 30/130 Fund, L.P., a Delaware Limited Partnership, Plaintiffs–Counter–Defendants–Appellants,

v.UBS SECURITIES, LLC, a Delaware limited liability company, UBS AG, a Swiss company, Defendants–Counter–Claimants–Appellees.

Docket No. 11–122–cv.

United States Court of Appeals,Second Circuit.

Argued: July 18, 2012.

Decided: April 1, 2013.

George Donaldson (Anthony J. Harwood, New York, NY, on the brief), Law Offices of George Donaldson, Berkeley, CA, for Plaintiff–Appellant WC Capital Management, LLC, and Plaintiffs–Counter–Defendants–Appellants Willow Creek Capital Partners, L.P., and Willow Creek Short Biased 30/130 Fund, L.P.

David C. Bohan, Katten Muchin Rosenman LLP, Chicago, IL, for Defendants–Counter–Claimants–Appellees UBS Securities, LLC and UBS AG.

Before: LIVINGSTON, LOHIER, Circuit Judges, and RAKOFF, District Judge.^*

LOHIER, Circuit Judge:

We are asked to determine whether a broker's disclosures to its customers regarding margin maintenance requirements for margin accounts complied with Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b–16, 17 C.F.R. § 240.10b–16, promulgated thereunder. WC Capital Management, LLC (“WC”), Willow Creek Capital Partners, L.P. (“WCCP”), and Willow Creek Short Biased 30/130 Fund, L.P. (“WCSB”) (collectively, “Willow Creek”) started this action against UBS Securities, LLC and UBS AG (together, “UBS”), claiming a violation of Rule 10b–16. Willow Creek claimed that UBS violated Rule 10b–16 by failing to fully disclose its generally applicable margin rules until after it demanded that Willow Creek provide additional collateral for its margin account. Willow Creek also alleged that UBS failed to provide adequate notice before it revised those rules. The United States District Court for the Southern District of New York (Hellerstein, J.) granted UBS's motion for judgment on the pleadings, concluding that the initial disclosure statementprovided by UBS satisfied Rule 10b–16's disclosure requirements.

We affirm. Under Rule 10b–16(a), a broker must disclose “conditions under which additional collateral can be required.” Where, as here, a broker discloses its generally applicable margin policies regarding the circumstances that may lead it to reevaluate the adequacy of the collateral in a customer's account and also indicates that more specific information about its margin policies is available to the customer, it need not disclose the precise, complex formulas it uses to calculate its collateral requirements. Nor did Rule 10b–16(b) require UBS to provide advance notice to Willow Creek before it changed its margin rules. In affirming on these grounds, we need not, and do not, address whether customers have a private right of action under Rule 10b–16.

BACKGROUND

Because Willow Creek appeals from an order dismissing the complaint on the pleadings, we accept as true the facts alleged in the complaint, Graziano v. Pataki, 689 F.3d 110, 114 (2d Cir.2012), and we may consider documents incorporated into or integral to the complaint, L–7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir.2011).

A. Facts

WC is the general partner and manager of WCCP and WCSB, two “long/short” investment partnerships that invest typically in the securities of companies with a market capitalization below $1 billion. In early 2007 UBS agreed to act as Willow Creek's prime broker to provide margin loans and prime brokerage services to WCCP and WCSB. Among other things, UBS maintained custody of WCCP's and WCSB's securities and cash collateral and provided them with loans on margin. Willow Creek relied on UBS's extension of margin credit to leverage its existing capital when acquiring securities. In return, Willow Creek paid UBS interest on the margin loans and other fees, including trading commissions.

The client account agreements between UBS and Willow Creek (the “Client Account Agreements”), dated January 12, 2007 and February 27, 2007, provided that UBS could demand additional collateral from Willow Creek during the course of their relationship. Specifically, the agreements stated that:

[i]f at any time any of the UBS Entities has reasonable grounds for insecurity with respect to [Willow Creek's] performance of any of the Contracts or its Obligations, any of the UBS Entities may demand ... adequate assurance of due performance by [Willow Creek] within 24 hours.... The adequate assurance of performance may include ... the delivery by [Willow Creek] to [UBS] of additional property as Collateral.

The Client Account Agreements also required that Willow Creek “maintain in and furnish to the Accounts such margin ... as is required by Applicable Law and such greater amounts as the UBS Entities may in their sole discretion require.”

When Willow Creek opened its margin accounts, it received a document entitled “Disclosure Statement in Compliance with S.E.C. Rule 10b–16” (the “Initial Disclosure Statement”).¹ The Initial Disclosure Statement explained that UBS had a security interest in the securities held in Willow Creek's margin accounts and discussed UBS's margin policies and the risks associated with margin accounts. In particular, a section entitled “General Margin Policies”disclosed that UBS had “established certain ‘in house’ margin policies” that exceeded the margin requirements of the Federal Reserve Board and the Financial Industry Regulatory Authority, Inc. (“FINRA”).² The same section also contained the following language:

It is [UBS]'s policy to review periodically any account as to which it has credit concerns in light of the value of the assets in the account.... Each account with a debit balance is reviewed on an individual basis with consideration given to factors such as market conditions generally at the time, marketability of the securities in the account, frequency of the activity in the account, duration of the account and concentration of particular securities in the account. Different weight may be given these factors by [UBS], and on the basis of its review, [UBS], in its sole discretion, may require additional collateral, above the amount required by the rules of the self regulatory agencies, as security for your obligations to [UBS].

Similarly, in a section entitled “Risks Associated with Margin Accounts,” the Initial Disclosure Statement provided:

[UBS] can increase its “house” maintenance margin requirements at any time and is not required to provide you with advance written notice. These changes in [UBS] policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause the member to liquidate or sell securities in your account(s).

The Initial Disclosure Statement also explicitly requested that Willow Creek “consult [its] account representative for more specific information with respect to [UBS] general margin policies.”

During a two-year period following the execution of the Client Account Agreements, WCCP and WCSB are alleged to have “performed in a superior fashion,” while UBS earned “millions of dollars” from Willow Creek. In December 2008, however, UBS notified Willow Creek that WCCP's account was in the second day of a margin call for approximately $6.85 million. Two days later, UBS sent Willow Creek a new document entitled “Prime Broker Margin Levels” (“Margin Levels I”), which “provide[d] a description of the margin rules currently in use in the Prime Brokerage Unit of [UBS].” UBS told Willow Creek that the document “explains the margin rules applied to your account.” Margin Levels I consisted of seven pages of detailed information regarding UBS's margin rules for various types of securities. The vast majority of the information in Margin Levels I involved a detailed description of internal margin guidelines in the form of complex formulas and tables that set out various multipliers and “margin add-ons” used by UBS to account for factors such as a portfolio's concentration or liquidity.³ UBS had not previously disclosedthese more detailed and specific internal margin guidelines and formulas. Willow Creek met the December 2008 margin call.

In February 2009 UBS informed Willow Creek that WCCP's account again was in a margin call, for roughly $13 million. UBS then sent Willow Creek a revised version of its Prime Broker Margin Levels document (“Margin Levels II”), which reflected what appear to be several changes to UBS's margin rules, including the adoption of new rules regarding margin adjustments and add-ons relating to a portfolio's liquidity and volatility. Prior to the margin call, Willow Creek received no notice that any changes would be made to UBS's margin rules. Instead, an e-mail from UBS accompanying the document indicated that the new liquidity and volatility adjustments had “affected requirements in [the Willow Creek] portfolio in recent weeks and months.” The revised margin rules significantly increased the amount of collateral Willow Creek was required to maintain in its account, forcing it to liquidate holdings and abandon some of its hedging strategies to raise capital to satisfy the February 2009 margin call.

Willow Creek claims that meeting the margin call ultimately caused it to lose over $25 million.⁴ It later moved its margin accounts from UBS to a different prime broker.

B. Procedural History

Willow Creek sued UBS in April 2010, asserting a claim under Rule 10b–16, as well as state law claims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, fraudulent concealment, negligent misrepresentation, and unjust enrichment. UBS moved for judgment on the pleadings, arguing that the Initial Disclosure Statement satisfied Rule 10b–16(a)'s disclosure requirements, that Rule 10b–16(b) does not require advance written notice before a broker makes...