Milliner v. Mut. Sec., Inc.
| Decision Date | 19 September 2016 |
| Docket Number | Case No. 15-cv-03354-TEH |
| Citation | 207 F.Supp.3d 1060 |
| Court | U.S. District Court — Northern District of California |
| Parties | Charlotte B. MILLINER, et al., Plaintiffs, v. MUTUAL SECURITIES, INC., Defendant. |
Charles David Marshall, Marshall Law Firm, Walnut Creek, CA, David Sturgeon-Garcia, The Law Offices of David Sturgeon-Garcia, Moraga, CA, for Plaintiffs.
Timothy W. Fredricks, Brandon S. Reif, Nazanin Afshar, Shelly C. Yoo, Winget Spadafora & Schwartzberg LLP, Los Angeles, CA, for Defendant.
ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT
On July 27, 2016, Plaintiffs filed a Motion for Partial Summary Judgment re: MSI Duty to Supervise Bock and Evans ( ) (ECF No. 41). After carefully considering the parties' written and oral arguments, the Court GRANTS IN PART and DENIES IN PART Plaintiffs' motion for the reasons set forth below.
This class action is related to another class action separately filed in this Court: Milliner v. Bock Evans Financial Counsel, Ltd. , No. 15–cv–1763 TEH (the "Bock Evans Class Action").1 The Bock Evans Class Action was brought by the same Plaintiffs as the present class action, to challenge the " ‘one size fits all’ investment approach implemented by their investment advisor, Defendant Bock Evans Financial Counsel, Ltd. (‘BEFC’)." Compl. ¶ 1 (EFC No. 1). Plaintiffs brought the present class action against Defendant Mutual Securities, Inc. ("MSI") because of MSI's relationship with BEFC. Specifically, BEFC required that clients hire MSI as their broker-dealer. Id. ¶ 9. Plaintiffs allege one reason BEFC required clients to use MSI is because Thomas Bock and Mary Evans, the principal executive officers of BEFC, were registered representatives of MSI. Id. ¶ 9. In other words, Bock and Evans were "dually registered as registered representatives and commissioned brokers of MSI and as investment advisors and principals of BEFC." MSI's Opp'n to Pls.' Mot. for Partial Summ. J. at 1–2 (ECF No. 32). MSI explicitly approved this dual arrangement when it signed off on both Bock's and Evans' completed "Outside Business Questionnaire" in which they notified MSI they would be providing investment advisory services as BEFC for asset-based compensation. Decl. of Counsel in Supp. of Pls.' Mot. for Partial Summ. J. re: MSI Duty to Supervise Bock and Evans ("Marshall Decl."), Exs. L–M (ECF No. 42). Thereafter, Plaintiffs allege BEFC "plac[ed] 100% or nearly 100% of their assets in high risk and highly speculative foreign mining stocks," resulting in the value of BEFC's portfolios going "from $60 million to $4.17 million in just a few years, a drop of roughly $55.83 million, or 93%." Compl. ¶ 2.
In the present motion, Plaintiffs seek a ruling from this Court that MSI owed Plaintiffs a duty to supervise its registered representatives, Bock and Evans, including a duty to supervise their outside investment advisory activities. Pls.' Mot. at 2.
Summary judgment is appropriate when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). Material facts are those that may affect the outcome of the case. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute as to a material fact is "genuine" if there is sufficient evidence for a reasonable jury to return a verdict for the nonmoving party. Id. The court may not weigh the evidence and must view the evidence in the light most favorable to the nonmoving party. Id. at 255, 106 S.Ct. 2505.
A party seeking summary judgment bears the initial burden of informing the court of the basis for its motion, and of identifying those portions of the pleadings or materials in the record that demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where the moving party will have the burden of proof at trial, it "must affirmatively demonstrate that no reasonable trier of fact could find other than for the moving party." Soremekun v. Thrifty Payless, Inc. , 509 F.3d 978, 984 (9th Cir. 2007). However, on an issue for which its opponent will have the burden of proof at trial, the moving party can prevail merely by "pointing out to the district court...that there is an absence of evidence to support the nonmoving party's case." Celotex , 477 U.S. at 325, 106 S.Ct. 2548. If the moving party meets its initial burden, the opposing party must then set out specific facts showing a genuine issue for trial to defeat the motion. Anderson , 477 U.S. at 250, 106 S.Ct. 2505.
As a preliminary matter, "the existence of a legal duty in a given factual situation is a question of law for the courts to determine." Hayes v. Cty of San Diego , 736 F.3d 1223, 1232 (9th Cir. 2013) (citation omitted). Because the determination of MSI's duty is a question of law, the Court may address this matter at the summary judgment stage. Parsons v. Crown Disposal Co. , 15 Cal.4th 456, 465, 63 Cal.Rptr.2d 291, 936 P.2d 70 (1997).
While MSI's duty to Plaintiffs may be determined as a matter of law, here, the determination of the scope of that duty depends on whether the Court may consider the rules of self-regulatory organizations to define the scope of that duty. Therefore, the Court first turns to the statutes and regulations governing MSI and, second, whether it may look to self-regulatory rules in defining MSI's duty to Plaintiffs.
The Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78a –78lll (2015), "created a system of supervised self-regulation in the securities industry whereby [SROs] such as the [National Association of Securities Dealers ("NASD") ] or the [New York Stock Exchange ("NYSE") ] could promulgate their own governing rules and regulations, subject to oversight by the Securities and Exchange Commission." Credit Suisse First Bos. Corp. v. Grunwald , 400 F.3d 1119, 1128 (9th Cir. 2005).
Under the Exchange Act, SROs are required to file all proposed rules with the Securities and Exchange Commission ("Commission"), along with a statement justifying the basis and purpose of the proposed rule. 15 U.S.C. § 78s(b)(1) (2015). In turn, for most proposed rules2 , the Commission must give public notice of the proposed rule and provide an opportunity for comment. Id. Notably, the U.S. Supreme Court has recognized, "[n]o proposed rule change may take effect unless the SEC finds that the proposed rule is consistent with the requirements of the Exchange Act, 15 U.S.C. § 78s(b)(2) ; and the Commission has the power, on its own initiative, to ‘abrogate, add to, and delete from’ any SRO rule if it finds such changes necessary or appropriate to further the objectives of the Act." Shearson/American Exp., Inc. v. McMahon , 482 U.S. 220, 233, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (quoting 15 U.S.C. § 78s(c) ).
The Exchange Act requires, among other things, that broker-dealers register with the Commission before engaging in securities transactions. 15 U.S.C. § 78o (2015). Additionally, the Exchange Act requires broker-dealers to maintain membership with an SRO. Id. § 78o(b)(8) ; Kleinser v. Sec. Exch. Comm'n , 539 Fed.Appx. 7, 9 (2d Cir. 2013). Individuals who work for a registered broker-dealer are recognized as "associated persons", 15 U.S.C. 78(c)(18) (2015), or "registered representatives", SEC. EXCH. COMM'N , Guide to Broker-Dealer Registration , https://www.sec.gov/divisions/marketreg/bdguide.htm (last updated July 29, 2016). Registered representatives, as natural persons associated with a broker-dealer, do not fall within the scope of § 78o ; therefore, they are not required to register with the Commission. Id. However, they may be required to register with the SRO of which their employer is a member. Id. Lastly, "[t]he Commission does not recognize the concept of ‘independent contractors' for purposes of the Exchange Act, even if an arrangement with an associated person satisfies the criteria for ‘independent contractor’ status for other purposes[.]" In the Matter of William V. Giordano , SEC Release No. 36742, 1996 WL 21031 (Jan. 19, 1996), at *4.3
The Financial Industry Regulatory Authority, Inc. ("FINRA")4 is an SRO under the Exchange Act, 15 U.S.C. § 78c(a)(26) (2015), and also "the primary regulatory body for the broker-dealer industry." Godfrey v. Fin. Indus. Regulatory Auth., Inc. , No. CV16–2776 PSG(PJWx), 2016 WL 4224956, at *2 (C.D. Cal. 2016) (citation omitted). FINRA is responsible for regulatory oversight of all securities firms that do business with the public and, to achieve its objectives, the organization may propose rules aimed at governing its member firms and associated individuals. Sacks v. Sec. Exch. Comm'n , 648 F.3d 945, 948 (9th Cir. 2011). Indeed, the Ninth Circuit has recognized that "Congress has vested the Financial Industry Regulation Authority...with the power to promulgate rules that, once adopted by the SEC, have the force of law." McDaniel v. Wells Fargo Invs., LLC , 717 F.3d 668, 673 (9th Cir. 2013) (citing 15 U.S.C. § 78s(b) ). As a condition of FINRA membership, members agree "to comply with the federal securities laws, the rules and regulations thereunder,...the Rules of [FINRA], and all rulings, orders, directions, and decisions issued and sanctions imposed under the [FINRA Rules]." FINRA Bylaws art. IV, § 1(a)(1).5 Registered...
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...other things, that broker-dealers register with the Commission before engaging in securities transactions." Milliner v. Mut. Sec., Inc., 207 F. Supp. 3d 1060, 1064 (N.D. Cal. 2016); 15 U.S.C. § 78o. Thus, it is illegal "for a 'broker' to effect any transaction in, or to induce or attempt to......