Knowles v. TD Ameritrade Holding Corp.
| Decision Date | 15 November 2019 |
| Docket Number | 8:19CV47 |
| Citation | 427 F.Supp.3d 1070 |
| Parties | Russell D. KNOWLES, individually and as attorney in fact for Bernard A. Knowles, on behalf of himself and all others similarly situated; and Bernard A. Knowles, through his attorney-in-fact Russell D. Knowles, on behalf of himself and all others similarly situated, Plaintiffs, v. TD AMERITRADE HOLDING CORPORATION; TD Ameritrade, Inc.; TD Ameritrade Clearing, Inc.; and TD Ameritrade Investment Management, LLC, Defendants. |
| Court | U.S. District Court — District of Nebraska |
Alonzo J. Holloway, Brady R. Thomas, Richardson, Patrick Law Firm, Robert D. Proffitt, Ronald B. Cox, Proffitt, Cox Law Firm, Columbia, SC, Jason W. Grams, Lamson, Dugan Law Firm, Omaha, NE, for Plaintiffs.
Stephen Topetzes, Theodore Kornobis, K & L Gates Law Firm, Washington, DC, Victoria H. Buter, Kutak, Rock Law Firm, Omaha, NE, for Defendants.
This matter is before the Court on defendants TD Ameritrade Holding Corporation, TD Ameritrade, Inc., TD Ameritrade Clearing, Inc., and TD Ameritrade Investment Management, LLC's ("TDAIM" and collectively, "TD Ameritrade") Motion to Dismiss (Filing No. 30) plaintiffs Russell D. Knowles and Bernard A. Knowles's (collectively, "investors") Second Amended Complaint (Filing No. 24). See Fed. R. Civ. P. 12(b)(6). The questions before the Court are whether the investors' claims are precluded by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. §§ 77p and 78bb, and whether the investors have stated valid claims. For the reasons stated below, the Court finds the investors' putative class-action claims should be dismissed.
TD Ameritrade, Inc., TD Ameritrade Clearing, Inc., and TDAIM are wholly-owned subsidiaries of TD Ameritrade Holding Corporation. TD Ameritrade, Inc. is a financial-services company which provides brokerage services to clients nationwide. TD Ameritrade Clearing, Inc. executes trades and provides clearing services, and TDAIM administers investment-advisory and management services for TD Ameritrade, Inc. and its clients.
The investors had a joint taxable-brokerage account with TD Ameritrade.2 In exchange for an annual advisory fee from the investors, TD Ameritrade agreed to manage the investors' account on a discretionary basis. Numerous agreements governed the relationship between the investors and TD Ameritrade, including a TDAIM Service Agreement that incorporated a TD Ameritrade, Inc. Client Agreement and a TDAIM Disclosure Brochure (collectively, "agreements"). Under those agreements, TDAIM assumed all investment duties for the investors, and the investors authorized TDAIM to make investments and trades consistent with the investors' selected strategies. TDAIM held the investors' assets in a portfolio.
TDAIM used only exchange-traded funds ("ETFs") as investment vehicles for the investors' portfolio. The parties agreed TDAIM would The parties' agreements also warned "[t]he actual portfolio allocations from time to time may differ from the target allocations as a result of market movements or TD Ameritrade's adjustments."
Starting around November 15, 2017, TDAIM began offering a "tax-loss harvesting feature" ("TLH feature") in certain portfolios. As described in the Second Amended Complaint, the TLH feature is "a computerized trading feature ... that is designed to sell securities at a loss to offset potential capital gains and also up to $3,000 per year on taxable income." TD Ameritrade designed the TLH feature to avoid violating the Internal Revenue Service wash-sale rule. See 26 U.S.C. § 1091. Under the wash-sale rule, if an investor repurchases a "substantially identical" security within thirty days of selling a security for a loss, the investor cannot claim a tax loss. See id.
The investors enrolled in the TLH feature, the terms of which were set forth in the agreements. The TDAIM Service Agreement explains:
For clients who have enrolled in the TLH feature, each trading day, TDAIM will review your account for any investments that have unrealized losses. Specifically, we look at the individual tax lot to identify investment losses meeting or exceeding a specified loss threshold. If the threshold is met, that tax lot will be sold. To replace the sold security, we will buy shares of a replacement security that is closely correlated to the sold security to help maintain your portfolio's asset allocation and risk characteristics. TDAIM does not represent or guarantee that the objectives of the TLH feature will be met. The performance of the replacement security may be better or worse than the performance of the security that is sold for TLH purposes.
From October 2018 to December 2018, TD Ameritrade sold and purchased securities for the investors using the TLH feature. On October 5, 2018, TD Ameritrade "purchased a position on Plaintiff's behalf in the iShares Core S & P US Stock Mkt ETF" ("iShares ETF"). On October 12, 2018, pursuant to the TLH feature, TD Ameritrade "sold Plaintiff's position in [the iShares ETF], having purchased an equivalent position in Vanguard Total Stock Market ETF" ("Vanguard ETF"). The TLH feature operated again on December 17, 2018, selling the Vanguard ETF and purchasing an equivalent position in iShares ETF. The TLH feature sold the iShares ETF position on December 24, 2018, but did not contemporaneously purchase a position in a comparable ETF. Instead, the proceeds from the December 24, 2018, TLH sale sat in cash or cash equivalents for eighteen days. During that eighteen-day period, approximately thirty-five percent of the investors' assets were in cash or cash equivalents.
The TLH feature purchased another ETF position on January 11, 2019. The investors allege that, because of the eighteen-day lapse, their "assets, which had dropped in value when sold on December 24, 2018, did not benefit from the subsequent market recovery and increase in value, thereby causing the investment to be worth substantially less as of January 11, 2019, when the funds were finally re-invested."
As alleged in the Second Amended Complaint, TD Ameritrade did not immediately reinvest the investors' assets on December 24, 2018, because TD Ameritrade "failed to cause a sufficient number of comparable broadly based US stock market ETFs to be made available in the pool of investments available" which could be purchased without running afoul of the wash-sale rule. For example, TD Ameritrade could not purchase the Vanguard ETF because only seven days had passed since the prior sale of that security.
On January 31, 2019, the investors brought this putative class action against TD Ameritrade.3 In their Second Amended Complaint, they assert breach-of-contract and negligence or gross-negligence claims under Nebraska law.4 The investors argue TD Ameritrade must compensate them for "financial losses incurred from the improper management and administration of automatic [TLH] sales" because TD Ameritrade failed to (1) contemporaneously purchase a replacement security after the December 24, 2018, TLH sale and to have a sufficient number of replacement securities available, (2) prevent the TLH feature from operating when no replacement securities were available that would not violate the wash-sale rule, (3) keep the investors' assets continually invested with only the agreed portion in cash, and (4) execute trades daily. In short, the investors claim TD Ameritrade is liable because it did not create and manage the TLH feature as agreed.
TD Ameritrade argues the investors' claims are preempted by SLUSA, which "bars class actions brought under state law, whether styled in tort, contract or breach of fiduciary duty, that in essence claim misrepresentation or omission in connection with certain securities transactions." Freeman Inv., L.P. v. Pac. Life Ins. Co. , 704 F.3d 1110, 1114 (9th Cir. 2013). The investors repeatedly state in the Second Amended Complaint that they "do not allege that [TD Ameritrade] made any misrepresentation or omissions of material fact in connection with the purchase or sale of a security," but TD Ameritrade urges the Court to look past those self-serving disclaimers and other tactical language employed to sidestep SLUSA. Alternatively, TD Ameritrade asserts the investors have failed to state their claims.
Federal Rule of Civil Procedure 8(a)(2) requires a complaint to contain "a short and plain statement of the claim showing that the pleader is entitled to relief." A complaint survives a Rule 12(b)(6) motion if it contains "facts sufficient to state a claim that is plausible on its face." Ash v. Anderson Merch., LLC , 799 F.3d 957, 960 (8th Cir. 2015). "A claim has facial plausibility when the plaintiff pleads factual content that allows the [C]ourt to draw the reasonable inference that the defendant is liable for the misconduct alleged." Gomez v. Wells Fargo Bank, N.A. , 676 F.3d 655, 660 (8th Cir. 2012) (quoting Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ). In making this determination, the Court must accept all factual allegations as true and draw all reasonable inferences in favor of the nonmoving party. See Demien Constr. Co. v. O'Fallon Fire Protection Dist. , 812 F.3d 654, 657 (8th Cir. 2016). "[A] complaint must ‘give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests.’ " Huggins v. FedEx Ground Package Sys., Inc. , 592 F.3d 853, 862 (8th Cir. 2010) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 319, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) ).
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