In re Jan. 2021 Short Squeeze Trading Litig.
| Citation | 580 F.Supp.3d 1243 |
| Decision Date | 10 January 2022 |
| Docket Number | CASE NO. 21-2989-MDL-ALTONAGA/Torres |
| Parties | IN RE: JANUARY 2021 SHORT SQUEEZE TRADING LITIGATION This Document Relates to the Actions in the Other Broker Tranche |
| Court | U.S. District Court — Southern District of Florida |
THIS CAUSE came before the Court on Defendant, Apex Clearing Corporation's Rule 12 Motion to Dismiss Plaintiffs’ Amended Consolidated Other Broker Tranche Class Action Complaint [ECF No. 422], filed on October 15, 2021. Plaintiffs filed a [Response] in Opposition [ECF No. 435], to which Defendant filed a Reply [ECF No. 440]. The Court has carefully considered the Amended Consolidated Class Action Complaint ("Amended CCAC") [ECF No. 410], the parties’ written submissions, the record, and applicable law. For the following reasons, the Motion is granted.
This putative class action is brought on behalf of Defendant's customers and other individual investors who suffered losses as a result of Defendant's decision to block them from purchasing shares of AMC Entertainment Holdings, Inc. ("AMC"), GameStop Corporation ("GME"), and Koss Corporation ("KOSS") for nearly three-and-a-half hours on January 28, 2021. (See Am. CCAC ¶¶ 1–2, 29, 67, 93). Defendant is a broker-dealer for certain direct customers and provides clearing broker services to introducing broker-dealers and their customers. .
Leading up to January 28, 2021, individual investors began purchasing large numbers of shares of AMC, GME, and KOSS. . The increased demand for these stocks drove share prices up and led to a "short squeeze."1 (See id. ¶¶ 59–64). In a "short squeeze," individual investors like Plaintiffs typically (Id. ¶ 63 (alteration added)).
In response to the ongoing market volatility, at approximately 10:31 a.m.2 on January 28, 2021, Defendant "blocked its direct customers and directed its [i]ntroducing [b]roker-[d]ealers to block [their] [c]ustomers from purchasing shares of AMC, GME, and KOSS." .
Defendant has maintained it restricted trading due to potential future collateral requirements the National Securities Clearing Corporation ("NSCC")3 "appeared it may impose on [Defendant] as part of the margin system NSCC maintains to comply with the [Securities and Exchange Commission]’s standards for covered clearing agencies." (Id. ¶ 77 (alterations added; quotation marks omitted)). Specifically, Defendant received an NSCC report at 8:30 a.m. projecting substantially increased collateral requirements. (See id. ¶ 76).
Yet Defendant did not take any action to "confirm the higher collateral number" from the NSCC. (Id. ¶ 80). Moreover, documents submitted to regulators reveal Defendant knew its NSCC collateral deposit requirement was lower than initially expected at 10:00 a.m. — approximately 30 minutes before it implemented the trading restrictions. . And despite having the opportunity to confirm the lower number on a call with the Depository Trust and Clearing Corporation4 at 10:47 a.m., Defendant waited until 1:55 p.m. to lift the trading restrictions. . In any event, Defendant has subsequently admitted it was never unable to meet its capital requirements. (See id. ¶¶ 83–84).
As a result of Defendant's one-way trading restrictions, Plaintiffs were prevented from purchasing additional shares of these stocks, the prices of these stocks fell, and Plaintiffs were forced to either sell at artificially suppressed prices or continue holding their shares despite depreciating values. .
Plaintiffs assert claims for negligence, breach of fiduciary duty, and tortious interference with a business relationship. (See id. ¶¶ 100–123). Plaintiffs, Erik Chavez (see id. ¶¶ 14–17) and Peter Jang (see id. ¶¶ 18–21), did not file lawsuits in other districts that were then transferred to the Court through the Judicial Panel on Multidistrict Litigation ("JPML" or "Panel"), nor did they file a separate action in this District that was then consolidated with this multidistrict litigation ("MDL"). Instead, Plaintiffs assert claims related to the events of January 28 for the first time directly in this MDL. (See generally id. ).5
Defendant moves to dismiss the Amended CCAC on the grounds that: (1) Plaintiffs’ claims are not properly before the Court as part of this MDL proceeding (see Mot. 22–24)6 ; (2) Plaintiffs lack Article III standing (see id. 24–28); (3) Plaintiffs fail to state claims upon which relief can be granted (see id. 28–57, 61–62); and (4) Plaintiffs’ state law tort claims are preempted by federal securities laws (see id. 57–61). Because the Court agrees that Plaintiffs’ claims have not been properly consolidated in this MDL, and hence the Court lacks subject matter jurisdiction, the Court does not reach Defendant's remaining arguments.
Subject matter jurisdiction must be established before a case can proceed on the merits. See Steel Co. v. Citizens for a Better Env't , 523 U.S. 83, 93–95, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998). This is because "[f]ederal courts are courts of limited jurisdiction." Kokkonen v. Guardian Life Ins. Co. of Am. , 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994) (alteration added). It is presumed that a federal court lacks jurisdiction in a case until the plaintiff demonstrates the court has jurisdiction over the subject matter. See id. (citing Turner v. Bank of N. Am. , 4 U.S. 8, 11, 4 Dall. 8, 1 L.Ed. 718 (1799) ; McNutt v. Gen. Motors Acceptance Corp. of Ind. , 298 U.S. 178, 182–83, 56 S.Ct. 780, 80 L.Ed. 1135 (1936) ). "[B]ecause a federal court is powerless to act beyond its statutory grant of subject matter jurisdiction, a court must zealously insure that jurisdiction exists over a case[.]" Smith v. GTE Corp. , 236 F.3d 1292, 1299 (11th Cir. 2001) (alterations added; citations omitted).
A defendant may attack subject matter jurisdiction under Rule 12(b)(1) in two ways — a facial attack or factual attack. See Menchaca v. Chrysler Credit Corp. , 613 F.2d 507, 511 (5th Cir. 1980). A facial attack asserts a plaintiff has failed to allege a basis for subject matter jurisdiction in the complaint. See id. (citation omitted). In a facial attack, the plaintiff's allegations are taken as true for purposes of the motion, see id. (citation omitted); and the plaintiff is afforded safeguards like those provided in challenging a Rule 12(b)(6) motion raising the failure to state a claim for relief, see Lawrence v. Dunbar , 919 F.2d 1525, 1529 (11th Cir. 1990) (citation omitted). A district court may sua sponte convert a motion to dismiss under Rule 12(b)(6) to a Rule 12(b)(1) motion to dismiss relying on a facial challenge to subject matter jurisdiction. See McElmurray v. Consol. Gov't of Augusta-Richmond Cnty. , 501 F.3d 1244, 1247, 1251 (11th Cir. 2007).
In contrast to a facial challenge, a factual attack "challenges the existence of subject matter jurisdiction in fact, irrespective of the pleadings, and matters outside the pleadings, such as testimony and affidavits, are considered." Menchaca , 613 F.2d at 511 (citation omitted). In a factual attack, courts are free to weigh the evidence to satisfy themselves they have the power to hear the case. See Lawrence , 919 F.2d at 1529 (citations omitted). No presumption of truth attaches to the plaintiff's allegations, and the existence of disputed material facts does not prevent the trial court from evaluating for itself the merits of the jurisdictional claim. See id. (citations omitted). "In the face of a factual challenge to subject matter jurisdiction, the burden is on the plaintiff to prove that jurisdiction exists." OSI, Inc. v. United States , 285 F.3d 947, 951 (11th Cir. 2002) ().
"A dismissal for lack of subject matter jurisdiction is not a judgment on the merits and is entered without prejudice." Stalley ex rel. U.S. v. Orlando Reg'l Healthcare Sys., Inc. , 524 F.3d 1229, 1232 (11th Cir. 2008) (citing Crotwell v. Hockman-Lewis Ltd. , 734 F.2d 767, 769 (11th Cir. 1984) ).
Defendant presents a factual challenge to the Court's subject matter jurisdiction over Plaintiffs’ claims under 28 U.S.C. section 1407(a) and the Supreme Court's decision in Lexecon Inc. v. Milberg Weiss Bershad Hynes & Lerach , 523 U.S. 26, 118 S.Ct. 956, 140 L.Ed.2d 62 (1998). (See Mot. 22–24; Reply 34–36). Specifically, Defendant argues both Lexecon and Section 1407 require cases consolidated in an MDL to be remanded to their originating courts once pretrial proceedings have concluded. (See Mot. 22). Because Plaintiffs asserted their claims for the first time directly in the MDL, their claims do not have an originating "home" court to return to (see id. 23); and there is no apparent statutory authority that would permit the Court, sitting in its capacity as custodian of the MDL member cases, to accept new complaints or new claims by new plaintiffs directly within the MDL proceeding . Therefore, Defendant contends the Court lacks subject matter jurisdiction over Plaintiffs, Chavez and Jang's claims. (See Mot. 23; Reply 34–36).7 The Court agrees.
Section 1407 sets forth the procedure by which actions may be added to an MDL. The statute was enacted to authorize the transfer and centralization of existing actions filed in different districts that share common facts. See Gelboim v. Bank of Am. Corp. , 574 U.S. 405, 410, 135 S.Ct. 897, 190 L.Ed.2d 789 (2015) (citing H.R. Rep. No. 1130, 90th Cong., 2d Sess., 2 (1968)). Upon a determination that consolidation would promote convenience and efficiency, the JPML may transfer such actions to a "transferee"...
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