Luis v. RBC Capital Markets, LLC

Decision Date28 December 2020
Docket NumberNo. 19-2706,19-2706
Citation984 F.3d 575
Parties Gary LUIS; Caryl Luis; Gary A. Mentz; Michael J. Vitse; Merri L. Vitse, individually and on behalf of all others similarly situated, Plaintiffs - Appellants v. RBC CAPITAL MARKETS, LLC, Defendant - Appellee
CourtU.S. Court of Appeals — Eighth Circuit

Counsel who presented argument on behalf of the appellant was David A. Goodwin, of Minneapolis, MN. The following attorneys also appeared on the appellant brief; Vernon Jay Vander Weide, of Minneapolis, MN., Daniel E. Gustafson, of Minneapolis, MN., Gregg Martin Fishbein, of Minneapolis, MN., Daniel C. Hedlund, of Minneapolis, MN., Eric S. Taubel, of Minneapolis, MN., Scott D. Hirsch, of Boca Raton, FL.

Counsel who presented argument on behalf of the appellee was James Kevin Langdon, II, of Minneapolis, MN. The following attorneys also appeared on the appellee brief; Kirsten Schubert, of Minneapolis, MN., Michael E. Rowe, III, of Minneapolis, MN.

Before BENTON, SHEPHERD, and KELLY, Circuit Judges.

BENTON, Circuit Judge.

Gary Luis, Caryl Luis, Gary A. Mentz, Michael J. Vitse, and Merri L. Vitse are former clients of RBC Capital Markets, LLC. Through RBC, the clients invested in reverse convertible notes (RCNs). The clients, individually and for a purported class, sued RBC for breach of contract. The clients alleged that RBC breached its duties to comply with Financial Industry Regulatory Authority (FINRA) rules and to know the clients’ investment profiles. RBC moved for summary judgment, asserting that the plain language of the Client Account Agreement did not create either duty. The district court1 granted summary judgment to RBC. The clients appeal. Having jurisdiction under 28 U.S.C. § 1291, this court affirms.

I.

The Agreement governs the relationship between RBC and each client. Each client received the Agreement and agreed to abide by its terms. See Luis v. RBC Capital Markets, LLC , 401 F. Supp. 3d 817, 823 (D. Minn. 2019).

The Agreement lists the terms each client agrees to. The terms "I" and "me" refer to the client. An introductory paragraph and Paragraph 16 describe the laws and regulations for transactions in the clients’ RBC accounts:

In consideration of [RBC] continuing to or now and hereafter opening an account or accounts (collectively, the "Account") for the purchase and sale of securities and commodities for me, or in my name, I agree that all transactions with respect to any such Account shall be subject to the following terms ....
16. APPLICABLE LAW AND REGULATIONS
All transactions in my Account shall be subject to all applicable laws and the rules and regulations of all federal, state and self-regulatory agencies, including, but not limited to, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the New York Stock Exchange, Inc., ("NYSE"), FINRA, the Board of Governors of the Federal Reserve System, and the constitution, rules, and customs of the exchange or market (and the related clearing facility or entity) where executed, as the same may be amended or supplemented from time to time.

Id.

When opening a new account with RBC, each client completes a Client Account Information form. RBC uses it to collect each client's basic financial information. Clients provide their age, occupation, investment experience, years investing, estimated tax bracket, annual income, net worth, and investment objective, among other things. A client may describe their investment objective as "preservation of principal/income," "balanced/conservative growth," "growth," "aggressive growth," or "speculation." Id. The clients here did not describe their investment objectives as aggressive or speculative. RBC's internal guidelines require its brokers to "look through this ‘Client Account Information,’ in addition to other information gleaned through the broker's own investigation, and determine whether RCNs are ‘suitable’ for a client under RBC's internal rules ...." Id. (citation omitted) (emphasis in original).

RBC purchased RCNs on behalf of the clients. RCNs are "a complex ‘structured financial product,’ that combine the consistent interest rate payments of a bond with the inherent riskiness of a stock." Id. at 820. "[W]hen an investor buys an RCN, they are not buying a traditional bond—they are betting that a reference stock (or basket of stocks) will stay at a certain price level, and are then receiving above-market ‘interest rate payments’ in exchange for taking one side of that bet." Id. (emphasis in original). Because of a substantial risk of loss of the principal, RCNs are "perhaps the riskiest" structured financial product available to retail investors. Id.

FINRA, a self-regulatory organization created under the Securities and Exchange Act, regulates the financial industry with approval by the Securities and Exchange Commission. See Bank of Am. v. UMB Fin. Servs., Inc. , 618 F.3d 906, 909 (8th Cir. 2010), citing 15 U.S.C. § 78s . FINRA issues guidance on industry practices such as the sale and management of structured products like RCNs. FINRA has the authority to "pass rules with the force of law." Luis , 401 F. Supp. 3d at 821. FINRA's issued guidance are called Notices to Members (NTMs).2

FINRA Rule 2111(a), the suitability rule, sets brokers’ obligations in making transactions or investments for a client:

A member [RBC] or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer's investment profile. A customer's investment profile includes, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.

FINRA's NTMs detail the suitability rule. NTM 05-59 gives guidance on brokers’ "obligations when selling structured products." FINRA, Notice to Members 05-59 . It says that brokers "should consider whether purchases of some or all structured products should be limited to investors that have accounts that have been approved for options trading." Id. For investors not approved for options trading, brokers "should develop other comparable procedures designed to ensure that structured products are only sold to persons for whom the risk of such products is appropriate." Id. Suitability for structured products "must be determined on an investor-by-investor basis, with reference to the specific facts and circumstances of each investor." Id. To accomplish this, the brokers must "supervise and maintain a supervisory control system" and "train associated persons." Id.

NTM 10-09 repeats the substance of NTM 05-59 and applies it to RCNs. FINRA, Notice to Members 10-09 . NTM 12-03 requires "heightened supervision" of complex products like RCNs, including that brokers "should have formal written procedures to ensure that their registered representatives do not recommend a complex product to a retail investor before it has been thoroughly vetted." FINRA, Notice to Members 12-03 .

FINRA enforces its rules through administrative proceedings and arbitration. See FINRA Rule 8310 (giving FINRA the authority to impose sanctions on broker-members for violations of FINRA rules); FINRA Rule 12200 (giving a client the authority to compel arbitration for disputes between the client and the broker-member). In 2015, after investigating the sale of RCNs to clients, FINRA entered into a consent decree with RBC. Between 2008 and 2012, RBC approved "approximately 364 [RCN] transactions in approximately 218 customer accounts" that were unsuitable for those customers under RBC's internal guidelines on suitability. Luis , 401 F. Supp. 3d at 824 (citation omitted). RBC paid a $1,000,000 fine to FINRA and $433,898.10 in restitution to harmed clients. Id.

In an earlier case against RBC, the clients asserted claims of common law fraud, fraudulent concealment, violations of the Minnesota Securities Act, common law negligence, breach of fiduciary duty, and breach of contract. See Luis v. RBC Capital Markets, LLC , 2016 WL 6022909, at *2 (D. Minn. 2016). The clients’ claims centered around the allegation that "RBC engaged in a series of actions designed to hide the true risk of [RCNs] from investors, while pushing them on individuals who had expressly indicated an unwillingness to partake in options trading." Id. The district court dismissed the clients’ claims because they were precluded by the Securities Litigation Uniform Standards Act of 1998. See id. at *7.

The clients again sued RBC for breach of contract, alleging that RBC failed to comply with FINRA rules and guidance by not following internal guidelines on RCNs and by pushing RCNs on ineligible clients. Luis , 401 F. Supp. 3d at 827. They argued that Paragraph 16 of the Agreement created a contractual duty that RBC comply with FINRA rules. The clients also argued that the Agreement and Client Account Information form together created an implied duty that RBC "know your customer." The district court granted summary judgment to RBC, ruling that the Agreement did not create a duty that RBC comply with FINRA rules and that the clients did not have a cause of action to enforce them. Id. at 832.

This court reviews de novo the district court's grant of summary judgment. Torgerson v. City of Rochester , 643 F.3d 1031, 1042 (8th Cir. 2011) (en banc). Summary judgment is appropriate when there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. Id. , quoting Fed. R. Civ. P. 56 .

II.

This dispute is governed by Minnesota law. This court must "predict how the Minnesota Supreme Court would...

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