Gray v. TD Ameritrade, Inc.

• Decision Date: 13 May 2019
• Docket Number: 18 C 00419
• Parties: THACKERY S. GRAY, and YELENA F. GRAY, on behalf of themselves and all others similarly situated, Plaintiffs, v. TD AMERITRADE, INC., and SHEAFF BROCK INVESTMENT ADVISORS, LLC, Defendants.
• Court: U.S. District Court — Northern District of Illinois

THACKERY S. GRAY, and YELENA F. GRAY,on behalf of themselves and all others similarly situated, Plaintiffs, v. TD AMERITRADE, INC., and SHEAFF BROCK INVESTMENT ADVISORS, LLC, Defendants.

18 C 00419

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

May 13, 2019

MEMORANDUM OPINION

CHARLES P. KOCORAS, District Judge:

Before the Court is Defendant TD Ameritrade, Inc. ("TD Ameritrade") and Sheaff Brock Investment Advisors, LLC's ("Sheaff Brock") (collectively, "Defendants") motion to dismiss Plaintiffs Thackery and Yelena Gray's ("Plaintiffs") Class Action Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the following reasons, the Court grants Defendants' motion.

BACKGROUND

For purposes of this motion, the Court accepts as true the following facts from the amended complaint. Murphy v. Walker, 51 F.3d 714, 717 (7th Cir. 1995). All reasonable inferences are drawn in Plaintiffs' favor. Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008).

Plaintiffs are citizens of Illinois. Defendant TD Ameritrade is a New York corporation with its principal place of business in Nebraska. Defendant Sheaff Brock is an Indiana LLC whose members consist of Indiana citizens David Sheaff Gilreath and Ronald Robert Brock.

Plaintiffs and the putative classes they represent are decades-long customers of TD Ameritrade, which provided them with an online trading platform for investment. TD Ameritrade also operates the "AdvisorDirect" program through which it introduces its customers to Registered Investment Advisors ("RIAs"). To participate in the AdvisorDirect program, customers must have a minimum of $500,000 in investable assets.

Plaintiffs participated in the AdvisorDirect program, and TD Ameritrade Investment Consultant Roman Kobrin ("Kobrin") recommended Sheaff Brock to be Plaintiffs' investment advisor. TD Ameritrade provided Plaintiffs with investment brochures and marketing materials for Sheaff Brock's services.

In January 2014, TD Ameritrade set up a meeting between Plaintiffs and Sheaff Brock, which was attended by Plaintiffs, Kobrin, and Sheaff Brock representative Jody Alexander. During this meeting, Sheaff Brock pitched its investment advisory services to Plaintiffs. Kobrin also engaged in the meeting, endorsing Sheaff Brock's trading strategy and answering Plaintiffs' questions.¹

At the meeting, Defendants recommended Sheaff Brock's "put options income" trading strategy. According to Plaintiffs, Kobrin made the following representations about the strategy:

a. Plaintiffs could expect a 4-6% return on investment over and above all fees;

b. Plaintiffs could get out of the strategy and program at any time;

c. The "put options income" strategy works in both up and down markets; and

d. There may be some down months, but in the end the "put options income" strategy will make an annual profit.

Comp. ¶ 37. Additionally, Sheaff Brock made the following representations about the conservative nature of the put options income strategy through its employees and marketing materials:

a. The strategy was "money in their pockets";

b. The strategy was a "cash flow generator" and "It is popular because apparently quite a few folks think getting an extra 6% on top of their big stock position or bonds is attractive";

c. "All we try to do with this strategy is hit bunts over, and over, and over";

d. "As sure as a clock ticks, and time premium erodes, the profits will eventually become realized";

e. The strategy was "a cash flow sausage factory...but the net result, Mmm savory";

f. In the past month the strategy had "created over $1 million in realized put premium for our clients...out of thin air, kind of mind blowing"; and

g. "Best year we have ever had, by a long shot....Many of our customers made enough money in their accounts last year to buy a yacht."

Comp. ¶ 56, 62, 67, 68. Plaintiffs allege that "in the meetings and phone calls...between [the parties involved], the risks and complexities of the strategy were not properly discussed or disclosed."

Based on the information provided, Plaintiffs entered into a Client Options Account Agreement ("Options Agreement")² with Sheaff Brock and TD Ameritrade. Plaintiffs maintain that in the Options Agreement, Defendants agreed to be "bound by the rules of the Options Clearing Corporation, the Financial Industry Regulatory Authority ('FINRA'), and any other self-regulatory organizations that apply to options transactions." Plaintiffs also maintain that Sheaff Brock certified its compliance with all applicable laws, rules, and regulations.

Among the applicable rules are those set forth by FINRA, which among other things prohibit options communications that contain false or misleading statements; omissions of material facts; promises of specific results; exaggerated or unwarranted claims; or that fail to reflect the risks attendant to options transactions. The FINRA rules also provide that a Registered Options Principal—which Plaintiffs allege to be TD Ameritrade—must supervise discretionary accounts. Plaintiffs allege that Defendants violated the FINRA rules by casting the put options income strategy as conservative, when it was actually an "aggressive and speculative strategy" that "augmented risks, as it sought to make money through speculative bets about the future price of theunderlying asset." "Due to the significant exposure the seller faces and the volatility of the investment," Plaintiffs allege that the put options income strategy resulted in "staggering losses" to themselves and the putative classes.

To recover their losses, Plaintiffs, on behalf of themselves and the putative classes, filed the instant complaint on January 19, 2018, asserting state-law claims for breach of contract, breach of fiduciary duty, money had and received, and a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq. On March 15, 2018, Defendants filed a joint motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).

LEGAL STANDARD

A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) "tests the sufficiency of the complaint, not the merits of the case." McReynolds v. Merrill Lynch & Co., 694 F.3d 873, 878 (7th Cir. 2012). The allegations in the complaint must set forth a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). Plaintiffs need not provide detailed factual allegations, but must provide enough factual support to raise their right to relief above a speculative level. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). A claim must be facially plausible, meaning that the pleadings must "allow...the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The claim must be described "in sufficient detail to give the defendant 'fair notice of what the...claim is and the grounds upon which itrests.'" E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007) (quoting Twombly, 550 U.S. at 555). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements," are insufficient to withstand a 12(b)(6) motion to dismiss. Iqbal, 556 U.S. at 678.

DISCUSSION

Defendants urge the Court to dismiss Plaintiffs' complaint because the allegations are barred by the Securities Litigation and Uniform Standards Act ("SLUSA"), 15 U.S.C. § 78bb(f).³ This statute prohibits state-law class-action claims relating to misrepresentations, omissions, or manipulative or deceptive devices in connection with the purchase or sale of covered securities. 15 U.S.C. § 78bb(f)(1). Congress initially enacted the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. §§ 77z-1 and 78u-4, to curb abuses in class action litigation involving nationally traded securities. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81 (2006). However, PSLRA had the unintended consequence of displacing federal securities fraud class action litigation to state courts under the guise of common law actions, such as breach of contract. Id. "To stem this shift from Federal to State courts and prevent certain State private securities class action lawsuits allegingfraud from being used to frustrate the objectives of [PSLRA], Congress enacted SLUSA." Id. at 82.

Consistent with this purpose, "when analyzing SLUSA preclusion, courts are guided by the substance rather than the form of a claim." Bourrienne v. Calamos, 2011 WL 3421559, at *4 (N.D. Ill. 2011); See also Holtz v. JPMorgan Chase Bank, 846 F.3d 928, 930 (7th Cir. 2017) ("...[N]ondisclosure is a linchpin of this suit no matter how [Plaintiff] chose to frame the pleadings."); Rabin v. JPMorgan Chase Bank, 2007 WL 2295795, at *6 (N.D. Ill. 2007) ("Rather than focus on the labels that Plaintiffs assigned to the claims, the Court analyzes the substance of the allegations..."); Denton v. H&R Block Financial Advisors, Inc., 2001 WL 1183292, at *3 (N.D. Ill. 2001) ("...[T]he focus is on the substance of the claim and not the plaintiff's characterization of it."); Feitelberg v. Merrill Lynch & Co., Inc., 234 F.Supp.2d 1043, 1051 (N.D. Cal. 2002) ("...[I]f it looks like a securities fraud claim, sounds like a securities fraud claim and acts like a securities fraud claim, it is a securities fraud claim, no matter how you dress it up."). Accordingly, the Court is not bound by the exact terminology used in the complaint, but rather the underlying essence of the allegations.

To successfully claim SLUSA preclusion, Defendants must show that Plaintiffs' claim is: (1) a covered class action; (2) based on state law; (3) that alleges a misrepresentation or omission of a material fact, or the use of any manipulative or deceptive decide or contrivance; (4) in connection with the purchase or sale of; (5) a covered security. 15 U.S.C. § 78bb(f)(1); Bourrienne, 2011 WL 3421559, at *3....