McDaniel et al v. Wells Fargo Investments, LLC et al

Filing 34

ORDER by Judge Samuel Conti granting 22 Motion to Dismiss (sclc2, COURT STAFF) (Filed on 7/22/2011)

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1 2 3 4 IN THE UNITED STATES DISTRICT COURT 5 FOR THE NORTHERN DISTRICT OF CALIFORNIA 6 7 8 DOUGLAS K. McDANIEL and BRYAN CLARK, on behalf of themselves, all others similarly situated, and the general public, 9 Plaintiffs, United States District Court For the Northern District of California 10 v. 11 12 13 14 15 WELLS FARGO INVESTMENTS, LLC, a Delaware limited liability company, WELLS FARGO BANK, N.A., a National Association, WELLS FARGO ADVISORS, LLC, a Delaware limited liability company, and DOES 1 through 50, inclusive, 16 Defendants. 17 ) Case No. 10-4916 SC ) ) ORDER GRANTING DEFENDANTS' ) MOTION TO DISMISS ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 18 19 I. INTRODUCTION 20 On July 9, 2010, Plaintiffs Douglas K. McDaniel ("McDaniel") 21 and Bryan Clark ("Clark") (collectively, "Plaintiffs") filed this 22 action in San Francisco County Superior Court on behalf of 23 themselves and all others similarly situated against Defendants 24 Wells Fargo Investments, LLC, Wells Fargo Bank, N.A., and Wells 25 Fargo Advisors, LLC (collectively, "Wells Fargo" or "Defendants"). 26 ECF No. 1 ("Notice of Removal") Ex. A ("Compl."). 27 removed the action on October 29, 2010, pursuant to the Class 28 Action Fairness Act, 28 U.S.C. § 1332(d). Wells Fargo See Notice of Removal. 1 Plaintiffs filed a First Amended Complaint on April 6, 2011. ECF 2 No. 18 ("FAC"). 3 to Federal Rule of Civil Procedure 12(b)(6), arguing that 4 Plaintiffs' state law claim is preempted by federal law. 5 22 ("Mot."). 6 27 ("Reply"), 30 ("Surreply").1 7 1(b), the Court finds the Motion suitable for determination without 8 oral argument. 9 Wells Fargo's Motion and dismisses this action with prejudice. Wells Fargo now moves to dismiss the FAC pursuant The Motion is fully briefed. ECF No. ECF Nos. 24 ("Opp'n"), Pursuant to Civil Local Rule 7- For the reasons stated below, the Court GRANTS United States District Court For the Northern District of California 10 11 II. BACKGROUND Plaintiff McDaniel alleges that he was formerly employed as a 12 13 financial consultant by Wells Fargo Investments, LLC, and Wells 14 Fargo, N.A. 15 employee of Wells Fargo Advisors, LLC. 16 Plaintiffs allege a single claim for violation of California's 17 Unfair Competition Law ("UCL"), Cal. Bus. and Prof. Code § 17200. 18 Id. ¶¶ 25-30. 19 violated section 450 of the California Labor Code by requiring 20 plaintiffs and other California employees to maintain their 21 securities brokerage accounts with and/or obtain their other 22 investment-related services from defendants." 23 450 of the California Labor Code provides in pertinent part: "No 24 employer . . . may compel or coerce any employee . . . to patronize 25 his or her employer, or any other person, in the purchase of any 26 thing of value." FAC ¶¶ 5, 21. Plaintiff Clark alleges he is a former Id. ¶ 6 In their FAC, Specifically, Plaintiffs allege that "defendants Id. ¶ 27. Section Cal. Lab. Code § 450. 27 1 28 Plaintiffs filed a Motion for Leave to File a Surreply and attached a Surreply to the Motion. ECF No. 30. The Court GRANTS leave to file the Surreply and has considered the arguments therein in reaching its decision. 2 1 2 III. LEGAL STANDARDS A motion to dismiss under Federal Rule of Civil Procedure 3 4 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. 5 Block, 250 F.3d 729, 732 (9th Cir. 2001). 6 on the lack of a cognizable legal theory or the absence of 7 sufficient facts alleged under a cognizable legal theory. 8 Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 9 1990). Dismissal can be based "When there are well-pleaded factual allegations, a court United States District Court For the Northern District of California 10 should assume their veracity and then determine whether they 11 plausibly give rise to an entitlement to relief." 12 Iqbal, 129 S. Ct. 1937, 1950 (2009). 13 court must accept as true all of the allegations contained in a 14 complaint is inapplicable to legal conclusions. 15 recitals of the elements of a cause of action, supported by mere 16 conclusory statements, do not suffice." 17 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Ashcroft v. However, "the tenet that a Threadbare Iqbal, 129 S. Ct. at 1950 18 19 20 IV. DISCUSSION Defendants argue that Plaintiffs' claim is preempted by 21 federal law because it conflicts with the securities regulatory 22 framework established by Congress. 23 Defendants argue that federal regulators have granted firms like 24 Wells Fargo discretion to restrict the external trading activities 25 of their employees in order to prevent abusive practices such as 26 insider trading. 27 claim is preempted because, if successful, it would eliminate this 28 discretion, thereby impeding the accomplishment of Congressional Id. at 2. Mot. at 17-20. Specifically, Defendants contend that Plaintiffs' 3 1 objectives. Id. at 20. Plaintiffs counter by asserting that their 2 claim is not preempted by federal regulations because Wells Fargo 3 could change its policy in a manner that would comply with both 4 federal regulations and California Labor Code Section 450. 5 at 3. Opp'n The Court agrees with Defendants. 6 A. Federal Preemption of State Law 7 Federal laws preempt conflicting state laws under the 8 Supremacy Clause, which states: "Laws of the United States . . . 9 shall be the supreme Law of the Land." U.S. Const. art. VI, cl. 2. United States District Court For the Northern District of California 10 "The phrase 'Laws of the United States' encompasses both federal 11 statutes themselves and federal regulations that are properly 12 adopted in accordance with statutory authorization." 13 York v. FCC, 486 U.S. 57, 63, (1988) (quoting U.S. Const. art. VI, 14 cl. 2.). 15 agency will pre-empt any state or local law that conflicts with 16 such regulations or frustrates the purposes thereof." 17 "[T]he purpose of Congress is the ultimate touchstone of pre- 18 emption analysis." 19 516 (1992). City of New As such, "[t]he statutorily authorized regulations of an Id. at 64. Cipollone v. Liggett Grp., Inc., 505 U.S. 504, 20 Federal law may preempt state law in three ways: (1) express 21 preemption, where Congress explicitly defines the extent to which 22 its enactments preempt state law; (2) field preemption, where state 23 law attempts to regulate conduct in a field that Congress intended 24 federal law exclusively to occupy; or (3) conflict preemption, 25 where it is impossible to comply with both state and federal 26 requirements or where state law "stands as an obstacle to the 27 accomplishment and execution of the full purpose and objectives of 28 Congress." Indus. Truck Ass'n, Inc. v. Henry, 125 F.3d 1305, 1309 4 1 (9th Cir. 1997). 2 B. 3 "The Securities Exchange Act of 1934 created a system of Federal Securities Law and Regulatory Scheme 4 supervised self-regulation in the securities industry" by 5 delegating government power to self-regulatory organizations 6 ("SROs"), such as the New York Stock Exchange ("NYSE") and the 7 National Association of Securities Dealers ("NASD").2 8 Suisse First Boston Corp. v. Grunwald, 400 F.3d 1119, 1128 (9th 9 Cir. 2005). Credit Within this framework, SROs are responsible for much United States District Court For the Northern District of California 10 of the day-to-day regulation of securities markets, while the 11 Securities and Exchange Commission ("SEC") is charged with ultimate 12 responsibility and control of the national market system for 13 securities. 14 (1963). 15 by the SEC, designed to enforce "compliance by members of the 16 industry with both the legal requirements laid down in the Exchange 17 Act and ethical standards going beyond those requirements." 18 Grunwald, 400 F.3d at 1128 (internal citation omitted). 19 this regulatory scheme, SROs are the primary regulators of 20 securities broker-dealers. 21 1209, 1213-14 (9th Cir. 1998). 22 that "SRO rules approved by the [SEC] . . . preempt conflicting 23 state law when the two are in conflict, either directly or because 24 25 26 27 28 See Silver v. N.Y. Stock Exch., 373 U.S. 341, 352 SROs promulgate rules and regulations, subject to approval Within Sparta Surgical Corp. v. NASD, 159 F.3d The Ninth Circuit has made clear 2 In 2007, the NASD and the NYSE consolidated their memberregulation operations into one self-regulatory organization known as the Financial Industry Regulatory Authority ("FINRA"). See Karsner v. Lothian, 532 F.3d 876, 879 n.1 (D.C. Cir. 2008). NASD rules and incorporated NYSE rules remain in effect until superseded by new consolidated FINRA rules. See FINRA Information Notice, "Continuing Application of NASD Rules and Incorporated NYSE Rules," December 8, 2008, 5 1 the state law stands as an obstacle to the accomplishment of the 2 objectives of Congress." Grunwald, 400 F.3d at 1128. 3 The SEC and SROs require securities firms to monitor their 4 employees' personal securities transactions and maintain procedures 5 that each firm determines to be reasonably designed to prevent 6 potential securities violations by employees. 7 Rule 342.21(a) requires member firms to subject trades in listed 8 securities by its employees "to review procedures that the member . 9 . . determines to be reasonably designed to identify trades that For example, NYSE United States District Court For the Northern District of California 10 may violate" securities laws or NYSE rules against conduct such as 11 insider trading. 12 member firms conduct prompt internal investigation into any trade 13 that may have violated any securities law or rules. 14 Similarly, NASD Rule 3010 requires each member to "establish and 15 maintain a system to supervise the activities of each registered 16 representative . . . that is reasonably designed to achieve 17 compliance with applicable securities laws and regulation and all 18 applicable NASD rules." 19 requires each member to designate a principal or principals to 20 establish and maintain supervisory control policies. 21 Rule 3130. NYSE Rule 342.21(a). It further mandates that NASD Rule 3010. Id. Likewise, FINRA Rule 3130 See FINRA 22 The federal securities regulatory framework grants member 23 firms the discretion to determine how to oversee and supervise 24 their employees' trading activities, including the discretion to 25 require employees to maintain their security accounts in house. 26 For example, in 2002, the SEC approved NYSE Rule 407, which 27 expressly provides member firms with discretion to determine if and 28 when an employee may be permitted to open a brokerage account 6 NYSE Rule 407.3 member firms have a legal obligation either to maintain their 3 accounts with their employer's firm or to obtain consent before 4 opening an account or placing trades outside the firm. 5 Defs' RJN Ex. T, James Giannino, Former Non-Registered Employee, 6 NYSE Hearing Panel Dec. 01-7 (NYSE Jan. 17, 2001) (sanctioning 7 former employee of PaineWebber, Inc., and Charles Schwab & Co., 8 Inc. for maintaining an account at another firm).4 9 requirement of "consent" from the firm, rather than mere "notice" 10 United States District Court outside the firm. 2 For the Northern District of California 1 Under Rule 407, employees of by the employee, shows that the rule grants the firm discretion to 11 determine its own compliance policies and to withhold consent for 12 outside accounts. See, e.g., Rule 407's The legislative history of other rules within the federal 13 14 securities regulatory scheme leaves no doubt that firms have 15 discretion to require employees to maintain their accounts in- 16 house. 17 through the Insider Trading and Securities Fraud Enforcement Act 18 ("ITSFEA"), which provided that: For example, in 1988, Congress amended the Exchange Act 19 20 21 22 23 24 25 26 27 28 3 NYSE Rule 407(b) provides: "No member . . . or employee associated with a member organization shall establish or maintain any securities or commodities account or enter into any securities transaction with respect to which such person has any financial interest or the power, directly or indirectly, to make investment decisions, at another member or member organization, or a domestic or foreign non-member broker-dealer, investment advisor, bank, other financial institution, or otherwise without the prior written consent of another person designated by the member or member organization under Rule 342(b)(1) to sign such consents and review such accounts." 4 Both parties filed requests for judicial notice asking the Court to take notice of various statutes, regulations, and associated legislative histories. ECF Nos. 23 ("Defs.' RJN"), 26 ("Pls.' RJN"), 28 ("Defs.' Supp. RJN"). Because the documents submitted are publicly available and not subject to reasonable dispute, the Court GRANTS both RJNs pursuant to Federal Rule of Evidence 201. 7 Every registered broker or dealer shall establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such broker's or dealer's business, to prevent the misuse in violation of this chapter ... of material, nonpublic information by such broker or dealer or any person associated with such broker or dealer. 1 2 3 4 5 6 15 U.S.C. § 78o(g). In passing the ITSFEA, Congress expressed its 7 expectation "that a firm's supervisory system would include, at a 8 minimum, employment policies such as those requiring personnel to 9 conduct their securities trading through in-house accounts or United States District Court For the Northern District of California 10 requiring that any trading in outside accounts be reported 11 expeditiously to the employing firm." 12 (1988), as reprinted in 1988 U.S.C.C.A.N. 6043, 6058-59 (emphasis 13 added). H.R. Rep. 100–910, at *22 14 Similarly, when approving NASD Rule 3050, which requires 15 employees to provide written notice to the member firm before 16 opening a securities account with another member, the SEC stated: 17 18 19 20 21 [T]he NASD is of the opinion that the amendment would prevent instances in which trades may be made on inside information because the employer member was not aware of the existence of the account with another member. The NASD acknowledges the fact that there may be circumstances which dictate that an associated person hold an account with someone other than their employer member, and this amendment would not serve to prevent that. 22 23 Order Approving Proposed Rule Relating to Written Notification of 24 Employer Members By Associated Person Regarding Relations With Each 25 Member, 56 Fed. Reg. 10,931-932 (Mar. 14, 1991) (emphasis added). 26 The SEC's statement suggests that it expected that members would 27 require employee accounts to be held in house except in limited 28 circumstances. Indeed, in 1990, the SEC's Division of Market 8 1 Regulation "undertook a comprehensive review of broker-dealer 2 policies and procedures." 3 Dealer Policies and Procedures Designed to Segment the Flow and 4 Prevent the Misuse of Material Nonpublic Information 1–2 (1990). 5 The review found that "almost all firms require[d] employees to 6 maintain accounts with the firm" and that "[t]his restriction 7 generally extend[ed] to accounts of family members." 8 21. 9 that "at this time, no aspect of current procedures require United States District Court For the Northern District of California 10 SEC Div. of Mkt. Regulation, Broker– Id. at 8 n. The SEC did not criticize such policies, instead determining Commission rulemaking." Id. at 18. 11 C. 12 Plaintiffs argue that California Labor Code Section 450 Plaintiffs' UCL Claim Is Preempted by Federal Law 13 requires Wells Fargo to permit its California employees to open and 14 maintain securities accounts outside the firm, or at least to 15 refrain from charging employees for in-house services. 16 They argue that because no regulation specifically requires Wells 17 Fargo to impose an in-house account requirement, there is no 18 conflict between the federal regulatory scheme and Section 450. 19 Id. 20 not bar their claim because it is not impossible for Wells Fargo to 21 comply with federal securities regulations and Section 450. 22 in this circuit have recently rejected this argument in cases 23 similar to this one. 24 Barney LLC, No. 10-1455, 2011 WL 2161325, at *7 (C.D. Cal. May 23, 25 2011); Heilemann v. Bank of America Corp., No. 10-8623, 2011 U.S. 26 Dist. LEXIS 68155, *5 (C.D. Cal. June 6, 2011). 27 reasons set forth in those decisions, the Court concludes that 28 Plaintiffs' claim is preempted. Opp'n at 3. In other words, Plaintiffs argue that conflict preemption does Courts See Bloemendaal v. Morgan Stanley Smith 9 For the same Conflict preemption applies not only where it is impossible to 1 2 comply with both state and federal law, but also where state law 3 "stands as an obstacle to the accomplishment and execution of the 4 full purpose and objectives of Congress." 5 The federal securities regulatory framework unmistakably provides 6 discretion for firms to decide how best to monitor the trading 7 activities of employees. 8 NYSE Rule 407, as well as from the legislative histories of 9 numerous other regulations.5 Henry, 125 F.3d at 1309. That discretion is plain from the text of Plaintiffs seek to use Section 450 to United States District Court For the Northern District of California 10 eliminate that discretion. Controlling case law prohibits the use 11 of state law to such end. 12 (finding California Judicial Council's disqualification rules 13 preempted because they would remove discretion given to NASD 14 Director of Arbitration); Chae v. SLM Corp., 593 F.3d 936, 942-43, 15 946 (9th Cir. 2010) (finding UCL claim challenging billing 16 statements used by student loan servicer preempted by federal 17 regulations that provided servicers with flexibility concerning 18 billing statements). See Grunwald, 400 F.3d at 1133-34 Grunwald and Chae both involved situations in which regulatory 19 20 rules granted discretion to the defendant and the Ninth Circuit 21 held that plaintiffs could not use state law to impinge upon that 22 23 24 25 26 27 28 5 Plaintiffs argue that even if NYSE Rule 407 preempts their claim against Wells Fargo Bank, N.A. and Wells Fargo Advisors, LLC, its preemptive effect does not extend to their claim against Wells Fargo Investments, LLC, because that entity was not a member of the NYSE during the relevant time period. Opp'n at 10-11. This argument fails because it is not only NYSE Rule 407 that preempts Plaintiffs' claim. The preemptive effect of the Exchange Act, ITSFEA, and NASD rules also bar Plaintiffs' claim. See Bloemendaal, 2011 WL 2161352, at *7 ("[p]reventing Defendant from creating and enforcing a policy that Congress and the [SEC] have expressly and implicitly approved undoubtedly frustrates the Congressional goals behind the Exchange Act and ITSFEA, namely preventing insider trading."). 10 1 discretion. The same applies here. The comprehensive federal 2 regulatory scheme requires securities firms to monitor their 3 employees' trading activities and grants firms discretion in 4 determining effective methods for doing so. 5 SEC have recognized that one such method is requiring employees to 6 conduct their securities trading in-house. 7 does the regulatory scheme limit firms' discretion to require 8 employees who open in-house accounts to incur the normal charges 9 paid by all customers. Both Congress and the Furthermore, nowhere Plaintiffs' attempt to eliminate firms' United States District Court For the Northern District of California 10 discretion would pose a formidable "obstacle to the accomplishment 11 and execution of the full purpose and objectives of Congress." 12 Henry, 125 F.3d at 1309. 13 14 15 V. CONCLUSION For the foregoing reasons, the Court GRANTS the Motion to 16 Dismiss filed by Wells Fargo Investments, LLC, Wells Fargo Bank, 17 N.A., and Wells Fargo Advisors, LLC. 18 Plaintiffs Douglas McDaniel and Bryan Clark's action WITH 19 PREJUDICE. The Court DISMISSES 20 21 IT IS SO ORDERED. 22 23 24 Dated: July 22, 2011 UNITED STATES DISTRICT JUDGE 25 26 27 28 11

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