Anderson et al v. Edward D. Jones & Co., L.P. et al

Filing 46

ORDER signed by District Judge John A. Mendez on 7/8/19 GRANTING 29 Motion to Dismiss and dismissing the amended complaint with leave to amend. Plaintiffs' 42 Motion for Preliminary Injunction is DENIED as MOOT. (Kastilahn, A)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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No.
IN RE EDWARD D. JONES & CO.,
L.P. SECURITIES LITIGATION

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2:18-cv-00714-JAM-AC

ORDER GRANTING DEFENDANTS’
MOTION TO DISMISS; ORDER
DENYING PLAINTIFFS’ MOTION FOR
PRELIMINARY INJUNCTION AND
CORRECTIVE ACTION

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Plaintiffs bring this federal securities and state breach of

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fiduciary duty putative class action based upon an alleged

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“reverse churning” scheme whereby Defendants improperly shifted

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clients’ commission-based accounts to fee-based advisory

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programs, without providing the clients full information, without

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regard to the suitability of fee-based accounts for those

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clients, and for no other reason than collect more fees on

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previously low-profit accounts.
Defendants move to dismiss all claims.

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Plaintiffs oppose.

Opp’n, ECF No. 35.

For the reasons set forth below, the Court GRANTS

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Mot., ECF No. 29.

Defendants’ motion.1

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This motion was determined to be suitable for decision without
oral argument. E.D. Cal. L.R. 230(g). The hearing was
scheduled for May 21, 2019.
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I.

FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND

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Lead Plaintiffs Edward Anderson, Colleen Worthington, and

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Janet Goral and Named Plaintiffs Raymond Keith Corum and Jesse

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Worthington (“Plaintiffs”) each had assets in commission-based

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accounts with Edward Jones.

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After each attended pitch meetings with Edward Jones financial

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advisors, the financial advisors allegedly moved assets from the

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Plaintiffs’ commission-based accounts to fee-based accounts,

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causing Plaintiffs to pay substantially higher fees.

Am. Compl., ECF No. 24, ¶¶ 8–11.

Id.

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Defendants are a set of companies related to and individuals

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involved with Edward D. Jones & Co., L.P. and the Jones Financial

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Companies, L.L.L.P. (together “Defendants” or “Edward Jones”).

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Am. Compl. ¶¶ 12–33.

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headquartered in St. Louis, Missouri and dually registered as a

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broker-dealer and as an investment advisor under federal and

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state securities laws.

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Edward Jones is an investment firm

Id. ¶ 13.

Edward Jones historically focused on offering commission-

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based accounts, whereby clients received free counsel and

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guidance and were not charged the flat, per-transaction fee

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unless and until they completed a transaction.

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This type of account and free arrangement reflected the buy-and-

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hold investing strategy Edward Jones advocated to its clients,

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many of whom did not trade frequently.

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Id. ¶¶ 34–35.

Id. ¶¶ 36-37.

In 2008 Edward Jones introduced a fee-based platform,

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Advisory Solutions, with accounts which charged a set percentage

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annual expense fee, regardless of the number of transactions

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executed.

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clients access to a propriety Edward Jones mutual fund product

Id. ¶ 39.

Advisory Solutions accounts also gave

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called Bridge Builder, which was introduced in 2013.

Id. ¶ 40.

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In 2016, Edward Jones launched a second fee-based advisory

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service called Guided Solutions, which touted more client control

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than Advisory Solutions and which included as “Eligible

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Investments” certain fund families owned by Edward Jones and from

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which Edward Jones could receive additional fees.

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Plaintiffs allege Edward Jones coerced clients into moving assets

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from their existing commission-based accounts into the fee-based

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Advisory Solutions and Guided Solutions programs (together, the

Id. ¶¶ 57-59.

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“Advisory Programs”), doing so to grow its bottom line regardless

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of whether such a move was suitable for and served the best

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interests of the clients.

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Id. ¶¶ 40, 58, 65.

Plaintiffs allege Edward Jones aggressively pushed clients

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into fee-based accounts not only to increase revenue from clients

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who traded infrequently, but also to avoid certain burdensome

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disclosure requirements posed by the Department of Labor (“DOL”)

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Fiduciary Rule.

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Fiduciary Rule allegedly would have imposed stricter disclosures

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requirements and a fiduciary status on commission-based accounts.

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Id. ¶¶ 42-44.

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received hundreds of millions of dollars annually from mutual

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fund companies and insurers as part of agreements to promote

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products to Edward Jones clients, and the DOL Fiduciary Rule

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would prohibit these recommendations and promotional payments to

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financial advisors absent certain acknowledgements and

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disclosures.

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Jones framed the DOL Fiduciary Rule as having a negative impact

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on its lower- and moderate-income customers and misled clients by

Id. ¶¶ 41-46.

Proposed in 2015, the DOL

As relevant here, Plaintiffs allege Edward Jones

Id. ¶¶ 43-46.

As alleged by Plaintiffs, Edward

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justifying its shift to fee-based accounts as necessary to avoid

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those negative impacts.

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Id. ¶¶ 49-50, 61, 63.

Primarily, Plaintiffs contend Edward Jones omitted material

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information relevant to these fee-based accounts during the

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client pitch meetings, in the Fund Account Authorization and

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Agreement Form (“Agreement”) which each Plaintiff signed to

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authorize the account change, and in certain accompanying

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documents and brochures.

Id. ¶¶ 104-108, 111-112.

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Plaintiffs also allege Edward Jones furthered this scheme by

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making the financial advisors’ compensation revenue-based, rather

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than commission-based and by providing other incentives for

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moving clients to fee-based accounts.

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Moreover, Plaintiffs allege the financial advisors’ computer

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system was updated around August 2016 to essentially make fee-

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based accounts a default recommendation and make it burdensome to

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avoid moving clients into fee-based accounts.

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Id. ¶¶ 4, 68, 180-184.

Id. ¶¶ 154-156.

Plaintiffs allege the Individual Defendants were directly

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involved in implementing the policies and procedures which pushed

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Edward Jones financial advisors to have their commission-based

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clients’ assets transferred to fee-based accounts, and knew of

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and/or consciously disregarded the material omissions alleged.

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Id. ¶¶ 115-147.

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$17.2 billion in revenue during the Class Period specifically

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from asset-based fees, pushing its earnings to record highs.

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Id. ¶ 4.

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million in compensation during the Class Period, which Plaintiffs

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attribute in substantial part to the increase in fee-based

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revenue.

Plaintiffs further allege Edward Jones generated

The Individual Defendants allegedly received over $277

Id. ¶ 5, 191.
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On March 30, 2018, Plaintiffs filed an initial class

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complaint against Defendants for securities law violations and

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breaches of fiduciary duties.

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subsequently granted an order appointing Lead Plaintiffs and Lead

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Counsel for the class.

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ECF No. 1.

This Court

ECF No. 22.

On September 24, 2018, Lead Plaintiffs filed the operative

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Amended Complaint, bringing class claims for violations of:

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(1) § 10(b) of the Securities Exchange Act of 1934, and Rules

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10b-5(a), (b), and (c) promulgated thereunder; (2) § 20(a) of the

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Securities Exchange Act of 1934; (3) § 12(a)(2) of the Securities

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Act of 1933; (4) § 15 of the Securities Act of 1933; and

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(5) the fiduciary duty laws of the states of Missouri and

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California.

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Amended Complaint on behalf of a purported class of persons who

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had their commission-based accounts with Edward Jones moved into

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one of the Advisory Programs between March 30, 2013 and March 30,

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2018, inclusive, and who were damaged thereby.

Am. Compl., ECF No. 24.

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II.

Lead Plaintiffs filed the

Am. Compl. ¶ 2.

OPINION

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A.

Judicial Notice and Incorporation by Reference

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“Generally, district courts may not consider material

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outside the pleadings when assessing the sufficiency of a

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complaint under Rule 12(b)(6) of the Federal Rules of Civil

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Procedure.”

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998 (9th Cir. 2018).

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incorporation-by-reference doctrine, and judicial notice under

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Federal Rule of Evidence 201.”

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to consider 45 documents outside the Amended Complaint through

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either judicial notice or under the doctrine of incorporation by

Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988,
“There are two exceptions to this rule: the

Id.

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Edward Jones asks this Court

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reference.

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undisputed contents of these documents contradict Plaintiffs’

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“conclusory allegations.”

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RJN Opp’n, ECF No. 36.

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RJN Mot., ECF No. 30.

Id.

Defendants contend the

Plaintiffs oppose this request.

Judicial notice under Rule 201 permits a court to judicially

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notice an adjudicative fact if it is “not subject to reasonable

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dispute.”

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reasonable dispute” if it is “generally known,” or “can be

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accurately and readily determined from sources whose accuracy

Fed. R. Evid. 201(b).

A fact is “not subject to

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cannot reasonably be questioned.”

Id.

Judicial notice of SEC

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filings is appropriate.

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946 n.2 (9th Cir. 2006).

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notice of the existence of Edward Jones’ SEC filings and public

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comments and reports (Mot., Exs. 1-6, 34-38, 41, 43-44), but not

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the truth of the contents asserted in the filings.

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Partners, L.P. v. Aruba Networks, Inc., 681 F. App’x 618, 620 n.1

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(9th Cir. 2017) (granting “requests for judicial notice of

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various court filings, public SEC filings, and public analyst

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reports for the limited purpose of determining what information

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was disclosed to the public during the class period.”).

Dreiling v. Am. Exp. Co., 458 F.3d 942,
This Court therefore takes judicial

See Par Inv.

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The Ninth Circuit has held that “[e]ven if a document is not

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attached to a complaint, it may be incorporated by reference into

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a complaint if the plaintiff refers extensively to the document

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or the document forms the basis of the plaintiff’s claim.”

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United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).

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Plaintiffs’ claims of alleged material omissions largely rest on

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certain information not being disclosed in the documents provided

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to clients during their pitch meetings: the Agreement, the Fund
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Models Brochure, the Account Client Services Agreement, the

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Schedule of Fees, the Client Profile, and the “Making Good

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Choices” brochure.

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n.2.

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Exs. 7-12, 14-33) under the incorporation-by-reference doctrine.

Am. Compl. ¶¶ 106-108; see also Opp’n at 1

The Court will therefore consider these documents (Mot.,

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B.

Rule 10b-5(b) Claim

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“Section 10(b) of the Securities Exchange Act of 1934 and

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the Securities and Exchange Commission’s Rule 10b-5 prohibit

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making any material misstatement or omission in connection with

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the purchase or sale of any security.”

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P. John Fund, Inc., 573 U.S. 258, 267 (2014).

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Rule 10b–5(b) claim, a plaintiff must prove: “(1) a material

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misrepresentation or omission by the defendant; (2) scienter; (3)

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a connection between the misrepresentation or omission and the

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purchase or sale of a security; (4) reliance upon the

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misrepresentation or omission; (5) economic loss; and (6) loss

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causation.”

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Halliburton Co. v. Erica
To prevail on a

Id. (internal citations and quotations omitted).

“At the pleading stage, a complaint stating claims under

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section 10(b) and Rule 10b–5 must satisfy the dual pleading

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requirements of Federal Rule of Civil Procedure 9(b) and the

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PSLRA [Private Securities Litigation Reform Act].”

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Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir.

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2009), as amended (Feb. 10, 2009).

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fraud, “the circumstances constituting fraud” must be “state[d]

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with particularity.”

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that the complaint “specify each statement alleged to have been

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misleading, the reason or reasons why the statement is

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misleading, and, if an allegation regarding the statement or

Under Rule 9(b), in alleging

Fed. R. Civ. P. 9(b).

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Zucco

The PSLRA requires

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omission is made on information and belief, the complaint shall

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state with particularity all facts on which that belief is

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formed.”

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15 U.S.C. § 78u-4(b)(1).

Edward Jones argues Plaintiffs have failed to satisfy the

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pleading standards for their Rule 10b-5(b) claim.

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reasons discussed below, this Court agrees.

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1.

For the

Material Misstatements or Omissions

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Under Rule 10b-5(b) it is unlawful “to make any untrue

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statement of a material fact or to omit to state a material fact

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necessary in order to make the statements made . . . not

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misleading.”

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material if “there is a substantial likelihood that a reasonable

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[investor] would consider it important.”

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Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct.

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1318, 1333 (2015) (quoting TSC Indus., Inc. v. Northway, Inc.,

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426 U.S. 438, 449 (1976)).

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substantial likelihood that the disclosure of the omitted fact

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would have been viewed by the reasonable investor as having

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significantly altered the ‘total mix’ of information made

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available.”

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17 C.F.R. § 240.10b-5(b).

An omitted fact is

Omnicare, Inc. v.

“Put another way, there must be a

TSC, 426 U.S. at 449.

Plaintiffs frame their claims as based on a set of “material

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omissions.”

Am. Compl. ¶¶ 1, 104-114.

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omissions, some of which are in fact alleged misrepresentations,

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are not actionable in light of the totality of Edward Jones’

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disclosures in the Agreement, the Fund Models Brochure, the

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Account Client Services Agreement, the Schedule of Fees, the

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Client Profile, and the “Making Good Choices” brochure.

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///
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However, these alleged

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a.

Accurate Description of Accounts

Plaintiffs allege Edward Jones omitted information necessary

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to provide an “accurate description of the material differences

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between their clients’ commission-based accounts and the fee-

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based accounts in Advisory Programs.”

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However, the “Making Good Choices” brochure, cited by Plaintiffs

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as lacking some of this information, in fact explicitly charts

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and discusses the material differences between the account types.

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Mot., Exs. 30-33 (comparing the level of decision-making clients

Am. Compl. ¶ 112.

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have in each account; how the financial advisor provides

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guidance; which investment choices are available; how the account

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is monitored; the level of account rebalancing; and costs).

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alleged omission is therefore not actionable.

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b.

This

Fees

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Plaintiffs contend Edward Jones financial advisors failed to

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disclose an “accurate description of the fees charged by Advisory

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Programs,” the “cost and impact of the fees charged by Advisory

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Programs,” and that “an Advisory Program would result in a higher

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fee to its formerly commission-based clients.”

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106-108, 112.

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expressly outlining the schedule of fees for Advisory Programs.

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Id. ¶ 107; Mot., Exs. 28-29.

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providing a specific estimate of their anticipated yearly fees in

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the Advisory Programs.

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Choices” brochure is also clear that fees in an Advisory Program

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“can be more expensive than other investment choices over the

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long term.”

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fees are non-actionable.

Am. Compl. ¶¶

But Plaintiffs acknowledge receiving a document

Plaintiffs also received a document

Mot., Exs. 24-26 at 8.

Mot., Exs. 30-33.

The “Making Good

Plaintiffs’ omission claims as to

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c.

Suitability

Plaintiffs allege that “Edward Jones had not conducted a

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sufficient analysis to determine the suitability of a fee-based

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Advisory Program for its commission-based clients.”

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¶¶ 106-108, 112.

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Plaintiffs argue the Advisory Programs were not suitable for

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clients who traded infrequently because their fees would

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increase.

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in choosing the Advisory Programs, Plaintiffs filled out client

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questionnaires and acknowledged that they were not “relying on

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the advice or recommendation of Edward Jones” for any decision

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about account type, and represented they “believe[d] the

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investment advisory and other services provided under this

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Agreement will add value to their overall investment experience

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that more than justifies the additional expenses.”

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14-17 at 8, 24; Mot., Exs. 18-19 at 7.

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alleged omission is more accurately stated as a misrepresentation

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by Edward Jones that the Advisory Programs were suitable for the

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Plaintiffs.

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Am. Compl.

This claim dovetails with the fees claim:

This claim fails for the same reasons.

Furthermore,

Mot., Exs.

Additionally, this

The suitability claim is not actionable.
d.

DOL Fiduciary Rule

Plaintiffs contend that Edward Jones omitted certain

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material information when explaining the impact of the DOL

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Fiduciary Rule, including that “the DOL Fiduciary Rule did not

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require them to move their clients with commission-based accounts

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to a fee-based Advisory Program.”

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light of the Amended Complaint alleging Edward Jones used the DOJ

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Fiduciary Rule as a pretext to make these client account changes,

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this is more accurately considered a misrepresentation claim by
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Am. Compl. ¶¶ 110-111.

In

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Edward Jones that an account change was required.

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Plaintiffs do not specifically allege why this omission was

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material to this investment decision under the circumstances,

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particularly given that Plaintiffs had the choice of signing the

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authorization, and the allegations are thus not actionable.

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e.

Nevertheless,

Financial Advisor Incentives

Plaintiffs allege they were never told that “Edward Jones

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was incentivizing its financial advisors by promoting, giving pay

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raises and/or bonuses to, and/or not terminating advisors who

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moved their clients with commission-based accounts to an Advisory

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Program, even when it was not in their clients’ best interest.”

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FAC ¶¶ 106-108, 112-113.

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sufficient disclosures on this topic including that “[a]

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financial advisor will typically earn more in upfront fees and

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commissions when you use brokerage services . . . [and] more over

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time if you invest in [Advisory Programs].”

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at 9; Mot., Ex. 11 at 11; Mot., Ex. 12 at 12.

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received documents stating that fees paid as part of Advisory

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Programs, as well as the amount of assets under care, can “impact

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your financial advisor’s eligibility for a bonus,” and that

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“Program Fees . . . are counted toward qualifying for the

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[Diversification Travel Awards] Program.”

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20; Mot., Ex. 11 at 21-22; Ex. 12 at 22.

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claims based on financial advisor incentives fail.

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2.

However, Plaintiffs received legally

Mot., Exs. 7-8, 10
Plaintiffs also

Mot., Exs. 7-8, 10 at
Plaintiffs’ omission

Scienter

To adequately plead scienter, the complaint must “state with

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particularity facts giving rise to a strong inference that the

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defendant acted with the required state of mind.”
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15 U.S.C. §

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78u–4(b)(2).

To meet the state of mind requirement a complaint

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must “allege that the defendants made false or misleading

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statements either intentionally or with deliberate recklessness,”

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where recklessness still “reflects some degree of intentional or

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conscious misconduct.”

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1014–15 (9th Cir. 2005); In re Silicon Graphics Inc. Sec. Litig.,

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183 F.3d 970, 977 (9th Cir. 1999), as amended (Aug. 4, 1999).

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qualify as “strong,” “an inference of scienter must be more than

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merely plausible or reasonable—it must be cogent and at least as

In re Daou Sys., Inc., 411 F.3d 1006,

To

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compelling as any opposing inference of nonfraudulent intent.”

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Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314

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(2007).

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its entirety, as well as other sources courts ordinarily examine

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when ruling on Rule 12(b)(6) motions to dismiss, in particular,

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documents incorporated into the complaint by reference, and

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matters of which a court may take judicial notice” to

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determine “whether all of the facts alleged, taken collectively,

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give rise to a strong inference of scienter, not whether any

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individual allegation, scrutinized in isolation, meets that

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standard.”

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In this inquiry, “courts must consider the complaint in

Id. at 322–23 (emphasis in original).

Viewing the matter holistically, Tellabs, 551 U.S. at 326,

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this Court concludes that Plaintiffs have failed to adequately

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plead the strong inference of scienter required.

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allege that the Individual Defendants envisioned and implemented

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company-wide policies and procedures to improperly increase

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asset-based revenue through the alleged reverse-churning scheme;

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that defendant Weddle met with financial advisors and encouraged

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them to act according to these policies; that the omitted facts
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Plaintiffs

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were core to Edward Jones’ business; and that Edward Jones

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publicly discussed why fee-based platforms may not be suitable to

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their clients.

4

general awareness of the day-to-day workings of the company’s

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business does not establish scienter—at least absent some

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additional allegation of specific information conveyed to

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management and related to the fraud.”

8

Corinthian Colleges, Inc., 540 F.3d 1049, 1068 (9th Cir. 2008).

9

Moreover, “allegations of routine corporate objectives such as

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the desire to obtain good financing and expand are not, without

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more, sufficient to allege scienter; to hold otherwise would

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support a finding of scienter for any company that seeks to

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enhance its business prospects.”

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Litig., 697 F.3d 869, 884 (9th Cir. 2012) (holding that “we will

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not conclude that there is fraudulent intent merely because a

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defendant’s compensation was based in part on [achieving key

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corporate goals].”).

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Opp’n at 7-14.

However, “corporate management’s

Metzler Inv. GMBH v.

In re Rigel Pharm., Inc. Sec.

Plaintiffs’ allegations, some of which are conclusory and

19

vague, do not establish an intent to defraud that is at least as

20

compelling as an opposing inference of nonfraudulent intent.

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Edward Jones provided substantial disclosures to the Plaintiffs

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laying out the benefits and drawbacks of the Advisory Programs,

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to help them make this investment decision.

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Edward Jones financially benefited from certain clients choosing

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to move into fee-based accounts does not foreclose that the

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clients may also benefit in the long-run from this new offering

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and that the company fully believes in the value of its product.

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The mere fact that

Plaintiffs fail to adequately allege the strong inference of
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scienter required under Rule 10b-5.

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3

3.

Reliance

“Reliance establishes the causal connection between the

4

alleged fraud and the securities transaction.”

Desai v. Deutsche

5

Bank Sec. Ltd., 573 F.3d 931, 939 (9th Cir. 2009).

6

traditional (and most direct) way a plaintiff can demonstrate

7

reliance is by showing that he was aware of a company’s statement

8

and engaged in a relevant transaction . . . based on that

9

specific misrepresentation.”

“The

Erica P. John Fund, Inc. v.

10

Halliburton Co., 563 U.S. 804, 810 (2011).

11

forward an argument for this traditional reliance on statements

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made by Edward Jones.

13

they are entitled to a presumption of reliance.

14

Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128,

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153-54 (1972) (holding that proof of affirmative reliance is not

16

required for alleged violations of Section 10(b) based on

17

omissions of material fact).

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“the Affiliated Ute presumption should not be applied to cases

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that allege both misstatements and omissions unless the case can

20

be characterized as one that primarily alleges omissions.”

21

Binder v. Gillespie, 184 F.3d 1059, 1064 (9th Cir. 1999).

Opp’n at 15.

Plaintiffs do not put

Rather, Plaintiffs contend
Opp’n at 14-15;

However, the Ninth Circuit has held

22

Edward Jones argues Plaintiffs are not entitled to the

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Affiliated Ute presumption because the claims involve either only

24

misstatements or a mix of misstatements and omissions.

25

15-16.

26

their claims as being based on material omissions (FAC ¶¶ 1, 104-

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114) is a pleading artifice.

28

suitability and DOL Fiduciary Rule omission claims are more

Mot. at

Edward Jones contends Plaintiffs attempt to characterize

Mot. at 7.

14

As discussed above, the

1

properly characterized as misstatements.

2

World, Inc., 379 F.3d 654, 667 (9th Cir. 2004).

3

complaint frames numerous other allegations as misstatements.

4

See Poulos v. Caesars
Moreover, the

Thus, because the allegations here cannot be characterized

5

primarily as claims of omissions, the Plaintiffs are not entitled

6

to the presumption of reliance.

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actual reliance on any of the material misstatements.

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Plaintiffs cannot demonstrate reliance and their claims under

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Rule 10b-5 fail.

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4.

Plaintiffs have not alleged
Thus,

Loss Causation

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Loss causation, “i.e., a causal connection between the

12

material misrepresentation and the loss” experienced by the

13

plaintiff, is a necessary element of pleading a securities fraud

14

claim under Section 10(b) of the Exchange Act.

15

v. Broudo, 544 U.S. 336, 342 (2005).

16

demonstrate that an economic loss was caused by the defendant’s

17

misrepresentations, rather than some intervening event.”

18

v. CVB Fin. Corp., 811 F.3d 1200, 1209 (9th Cir. 2016).

19

“Typically, ‘to satisfy the loss causation requirement, the

20

plaintiff must show that the revelation of that misrepresentation

21

or omission was a substantial factor in causing a decline in the

22

security’s price, thus creating an actual economic loss for the

23

plaintiff.’ ”

24

of Alameda, Cal., 730 F.3d 1111, 1119 (9th Cir. 2013) (quoting

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McCabe v. Ernst & Young, LLP., 494 F.3d 418, 425–26 (3d Cir.

26

2007).

27

of loss causation” and “loss causation is a ‘context-dependent’

28

inquiry as there are an ‘infinite variety’ of ways for a tort to

Dura Pharm., Inc.

A plaintiff “must

Lloyd

Nuveen Mun. High Income Opportunity Fund v. City

However, “[d]isclosure of the fraud is not a sine qua non

15

1

cause a loss.”

2

(internal citations omitted).

3

recently clarified that, to “prove loss causation, plaintiffs

4

need only show a causal connection between the fraud and the loss

5

by tracing the loss back to the very facts about which the

6

defendant lied.”

7

Inc., 881 F.3d 750, 753 (9th Cir. 2018) (internal citations and

8

quotations omitted).

9

Nuveen, 730 F.3d at 1120; Lloyd, 811 F.3d at 1210
Accordingly, the Ninth Circuit

Mineworkers’ Pension Scheme v. First Solar

Plaintiffs fail to sufficiently allege loss causation.

This

10

is not a typical, stock-drop, “fraud-on-the-market” securities

11

fraud case.

12

regarding the overall performance of the fee-based accounts, the

13

clients’ account performance in the fee-based accounts compared

14

to their commission-based accounts, or any changes to performance

15

based on corrective disclosures.

16

is the additional, higher fees Plaintiffs have paid by virtue of

17

being in fee-based accounts rather than commission-based

18

accounts.

19

omission related to the increase in fees and their potential

20

impact on Plaintiffs’ accounts because information regarding the

21

fees was fully disclosed to the Plaintiffs.

22

8, Exs. 28-29, Exs. 30-33.

23

connection between any actionable omission and the loss.

24

The Amended Complaint contains no allegations

Instead, the only alleged loss

But, as discussed above, there is no actionable

Mot., Exs. 24-26 at

Therefore, there is no causal

Moreover, Plaintiffs’ attempt to prove loss causation by

25

arguing that they would not have agreed to switch accounts but

26

for Edward Jones’ withholding material information fails because

27

it focuses solely on transaction causation (or reliance) while

28

ignoring loss causation.

Nuveen, 730 F.3d at 1121 (“We have
16

1

consistently rejected loss causation arguments like Nuveen’s—that

2

a defendant’s fraud caused plaintiffs a loss because it induced

3

them to buy the shares—because the argument renders the concept

4

of loss causation meaningless by collapsing it into transaction

5

causation.”) (internal citations and quotations omitted).

6
7

Thus, Plaintiffs have not demonstrated loss causation and
their claims under Rule 10b-5 fail.

8
9

5.

Conclusion

Plaintiffs allegations of a violation of Rule 10b-5(b) fail

10

to meet the heightened pleading standards of Federal Rule of

11

Civil Procedure 9(b) and the PSLRA.

12

not sufficiently allege an actionable misstatement or omission,

13

does not present a strong inference of scienter, fails to

14

establish reliance, and cannot demonstrate loss causation.

15

Plaintiffs’ Rule 10b-5(b) claim (Count II) is dismissed.

The Amended Complaint does

16

C.

17

Thus,

Rules 10b-5(a) and (c) Claim

Plaintiffs also bring a Rule 10b–5(a) and (c) “scheme

18

liability” claim.

Under Rules 10b–5(a) and (c) it is unlawful

19

for a person to use a “device, scheme, or artifice to defraud,”

20

or engage in “any act, practice, or course of business which

21

operates or would operate as a fraud or deceit,” in connection

22

with the purchase or sale of a security.

23

“[T]he same set of facts may give rise both to a violation of

24

subsection (b) and subsections (a) and/or (c) if [a] plaintiff

25

alleges ‘that the defendants undertook a deceptive scheme or

26

course of conduct that went beyond the misrepresentations.’ ”

27

S.E.C. v. Loomis, 969 F. Supp. 2d 1226, 1237 (E.D. Cal. 2013)

28

(quoting In re Alstom SA, 406 F. Supp. 2d 433, 475 (S.D.N.Y.
17

17 C.F.R. § 240.10b-5.

1

2005)).

2

plaintiff must allege a “device, scheme, or artifice to defraud,”

3

or an “act, practice, or course of business which would operate

4

as a fraud,” in addition to the standard elements of a Section

5

10(b) violation: (1) scienter; (2) connection with the purchase

6

or sale of securities; (3) reliance; (4) economic loss; and

7

(5) loss causation.

8

Atlanta, 552 U.S. 148, 158 (2008).

9

In order to state a claim under Rules 10b–5(a) or (c), a

See Stoneridge Inv. Partners, LLC v. Sci.-

Edward Jones argues that Plaintiffs’ scheme liability claim

10

is nothing more than a repackaging of the Rule 10b-5(b) omissions

11

claims discussed above.

12

Plaintiffs scheme liability claim largely rests on Edward Jones’

13

supposed non-disclosure of certain actions it was taking in

14

pitching and moving clients into the fee-based programs.

15

conduct Plaintiffs allege as violations – including, sales

16

training for financial advisors, changed incentive structures,

17

and a new computer system – is not an actionable deceptive

18

scheme.

19

(9th Cir. 2006), vacated on other grounds sub nom. Simpson v.

20

Homestore.com, Inc., 519 F.3d 1041 (9th Cir. 2008) (holding that

21

to be liable under Rules 10b-5(a) and (c) a defendant “must have

22

engaged in conduct that had the principal purpose and effect of

23

creating a false appearance of fact in furtherance of the scheme”

24

and noting that, for example, “the invention of sham corporate

25

entities to misrepresent the flow of income, may have a principal

26

purpose of creating a false appearance” but that “[c]onduct that

27

is consistent with the defendants’ normal course of business

28

would not typically be considered to have the purpose and effect

Mot. at 17-18.

This Court agrees.

And the

See Simpson v. AOL Time Warner Inc., 452 F.3d 1040, 1050

18

1

of creating a misrepresentation.”); see also Desai, 573 F.3d at

2

940–41 (finding that actionable “manipulative conduct . . .

3

includes activities designed to affect the price of a security

4

artificially by simulating market activity that does not reflect

5

genuine investor demand.”).

6

deceptive scheme or practice is fatal to this claim, the Court

7

also finds that Plaintiffs have failed to properly allege

8

reliance, scienter, and loss causation. Thus, Plaintiffs’ scheme

9

liability claim under Rules 10b-5(a) and (c) (Count I) is

10

While the lack of an allegedly

dismissed.

11

D.

Section 20(a) Claim

12

Section 20(a) of the Securities Exchange Act of 1934

13

provides for control person liability.

15 U.S.C. § 78t(a).

“To

14

establish a cause of action under this provision, a plaintiff

15

must first prove a primary violation of underlying federal

16

securities laws, such as Section 10(b) or Rule 10b–5, and then

17

show that the defendant exercised actual power over the primary

18

violator.”

19

(9th Cir. 2014).

20

primary violations under Section 10(b), Plaintiffs’ Section 20(a)

21

control person claim (Count III) fails and is dismissed.

In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1052
Because Plaintiffs have not adequately alleged

22

E.

Section 12(a)(2) Claim

23

To prevail on a claim under Section 12(a)(2) of the

24

Securities Act of 1933, a plaintiff must demonstrate “(1) an

25

offer or sale of a security, (2) by the use of a means or

26

instrumentality of interstate commerce, (3) by means of a

27

prospectus or oral communication, (4) that includes an untrue

28

statement of material fact or omits to state a material fact that
19

1

is necessary to make the statements not misleading.”

Miller v.

2

Thane Int’l, Inc., 519 F.3d 879, 885 (9th Cir. 2008); 15 U.S.C. §

3

77l(a)(2).

4

Section 12(a)(2) is “restricted to oral communications that

5

relate to a prospectus.”

6

567–68 (1995) (acknowledging with approval this interpretation by

7

two Courts of Appeals).

8

always requires a prospectus.

9

formal prospectus, and the marketing materials in this case are

An “oral communication” establishing liability under

Gustafson v. Alloyd Co., 513 U.S. 561,

Thus, liability under this section
The Amended Complaint cites no

10

not a substitute for the required prospectus.

Plaintiffs’

11

Section 12(a)(2) claim (Count IV) is therefore dismissed.

12

F.

Section 15 Claim

13

To state a claim for control person liability under Section

14

15 of the Securities Act, a plaintiff must first establish an

15

underlying violation of the act.

16

Litig., 697 F.3d 869, 886 (9th Cir. 2012); 15 U.S.C. § 77o.

17

Because Plaintiffs cannot adequately allege a primary violation

18

under Section 12(a)(2), Plaintiffs’ Section 15 control person

19

claim (Count V) fails and is dismissed.

In re Rigel Pharm., Inc. Sec.

20

G.

State Law Breach of Fiduciary Duty Claims

21

Edward Jones argue Plaintiffs’ claims for breaches of

22

fiduciary duty under California and Missouri law are preempted by

23

SLUSA.

24

Litigation Uniform Standards Act, “to stem the shift of class-

25

action securities lawsuits from federal courts to state courts

26

after passage of the [PSLRA]” by eliminating federal jurisdiction

27

over any claim that could give rise to liability under Section

28

10(b) or Rule 10b-5.

Mot. at 19-20.

Congress enacted SLUSA, the Securities

Northstar Fin. Advisors, Inc. v. Schwab
20

1

Investments, 904 F.3d 821, 828 (9th Cir. 2018); Fleming v.

2

Charles Schwab Corp., 878 F.3d 1146, 1153 (9th Cir. 2017).

3

Accordingly, “SLUSA bars a plaintiff class from bringing (1) a

4

covered class action (2) based on state law claims (3) alleging

5

that the defendants made a misrepresentation or omission or

6

employed any manipulative or deceptive device (4) in connection

7

with the purchase or sale of (5) a covered security.”

8

904 F.3d at 828.

9

Northstar,

The Supreme Court and Ninth Circuit have instructed courts

10

to interpret the provisions of SLUSA broadly.

11

Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 72 (2006);

12

Hampton v. Pac. Inv. Mgmt. Co. LLC, 705 F. App’x 558, 559 (9th

13

Cir. 2017).

14

noted that “SLUSA’s preclusion of a cause of action does not turn

15

on the name or title given to a claim by the plaintiff.

16

instead on the gravamen or essence of the claim.”

17

F.3d at 829 (9th Cir. 2018) (internal citation and quotation

18

omitted).

19

describes conduct by the defendant that would be actionable under

20

the 1933 or 1934 Acts.

21

will be part of the proofs in support of the state law cause of

22

action, SLUSA bars the claim, regardless of whether that conduct

23

is an essential predicate of the asserted state law claim.”

24

Merrill Lynch,

Consistent with this approach, the Ninth Circuit has

It turns

Northstar, 904

“The central question [is] . . . whether the complaint

If it does, and that conduct necessarily

Id.

Plaintiffs argue SLUSA does not bar their fiduciary duty

25

claims because the claims do not rely on an alleged misstatement

26

or omission, simply that moving the clients to an Advisory

27

Program was not in the clients’ best interest.

28

Edward Jones contends SLUSA applies even though Plaintiffs do not
21

Opp’n at 19-20.

1

incorporate their allegations of material omissions into the

2

fiduciary duty claims because the substance of the claims is the

3

alleged deceptive conduct.

4

This Court agrees with Edward Jones.

5

Mot. at 20; Reply, ECF No. 37 at 10.

Plaintiffs’ fiduciary duty claims substantively mirror their

6

federal securities claims.

Plaintiffs do not argue that there

7

are no circumstances under which Edward Jones could shift clients

8

from commission-based to fee-based accounts, and such an argument

9

would lack common sense.

Rather, the base allegations are

10

wrongdoing from the manner in which Edward Jones changed the

11

accounts — without providing clients full information and without

12

the shift being in the clients’ best interest.

13

same allegations which serve as the alleged material omissions on

14

which Plaintiffs’ securities claims rely.

15

Jones had provided Plaintiffs with the allegedly omitted

16

information — in particular by informing them that “an Advisory

17

Program would financially benefit Edward Jones at the expense of

18

the clients” — it seems illogical that a client would sign the

19

Agreement and switch accounts.

20

conduct is at the heart of this claim.

21

Northstar, 904 F.3d at 833 (finding that the fiduciary duty

22

claims at-issue “implicitly depend on allegations of

23

misrepresentations or omissions”).

24

any allegation of material omissions with respect to their

25

fiduciary duty claims (Am. Compl. ¶¶ 252, 263), the remainder of

26

the Amended Complaint is replete with allegations of material

27

misstatements and omissions underlying the securities law claims.

28

This Court therefore finds that SLUSA bars Plaintiffs’ state

These are the

Furthermore, if Edward

Put simply, the alleged deceptive

22

Am. Compl. ¶¶ 104-106;

And while Plaintiffs disclaim

1

law fiduciary duty class claims.

SLUSA operates “by depriving

2

the district court of jurisdiction to hear [ ] state-law claims

3

on a class-wide basis.”

4

F.3d 844, 847 (9th Cir. 2017).

5

Court lacks subject-matter jurisdiction over Plaintiffs’ class

6

claims for breaches of fiduciary duty under California and

7

Missouri law (Counts VI and VII) and these claims are dismissed

8

without prejudice.

9

(“[D]ismissals under SLUSA are jurisdictional.”).

Hampton v. Pac. Inv. Mgmt. Co. LLC, 869
Thus, because SLUSA applies, this

Fed. R. Civ. P. 12(b)(1); Hampton, 869 at 847

10

H.

Leave to Amend

11

The Amended Complaint fails to state a plausible federal

12

securities law claim and it appears to this Court that a further

13

attempt to amend the Complaint might prove futile. Nevertheless,

14

this Court grants Plaintiffs leave to amend.

15

Federal Rules of Civil Procedure advises that the court “should

16

freely give leave when justice so requires.”

17

15(a).

18

courts that this policy is “to be applied with extreme

19

liberality.”

20

316 F.3d 1048, 1051 (9th Cir. 2003) (internal citations omitted).

21

The Ninth Circuit has also noted that “[a]dherence to these

22

principles is especially important” in securities fraud cases

23

given that it is a “technical and demanding corner of the law”

24

where plaintiffs must plead their claims with “unprecedented

25

degree of specificity and detail” to meet the requirements of the

26

PSLRA.

27

Plaintiffs one final opportunity to try to properly plead their

28

claims.

Rule 15 of the

Fed. R. Civ. P.

And the Ninth Circuit has repeatedly reminded lower

See, e.g., Eminence Capital, LLC v. Aspeon, Inc.,

Id. at 1052. Following these directives, this Court gives

23

1

III.

ORDER

2

For the reasons set forth above, this Court GRANTS

3

Defendants’ Motion to Dismiss (ECF No. 29) in its entirety.

4

Amended Complaint is dismissed with leave to amend.

5

Court’s Order on this Motion to Dismiss, Lead Plaintiffs’ Motion

6

for a Preliminary Injunction and Corrective Action, which was

7

also scheduled for a hearing on May 21, 2019 (ECF No. 42), is

8

DENIED as moot.

9

The

Given the

If Lead Plaintiffs elect to amend the complaint, they shall

10

file a Second Amended Complaint within twenty days of this Order.

11

Defendants’ responsive pleading is due twenty days thereafter.

12
13

IT IS SO ORDERED.
Dated: July 8, 2019

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