Charlotte B Milliner et al v. Mutual Securities, Inc.

Filing 87

ORDER Granting in Part and Denying in Part 59 Plaintiffs' Motion for Partial Summary Judgment re: Suitability and Denying 72 Plaintiffs' Motion for Partial Summary Judgment re: Undisputed Material Facts. Signed by Judge Thelton E. Henderson on 3/17/17.(tehlc2, COURT STAFF) (Filed on 3/18/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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CHARLOTTE B. MILLINER, et al.,

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Plaintiffs,
v.

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MUTUAL SECURITIES, INC.,

Case No. 15-cv-03354-TEH
ORDER GRANTING IN PART AND
DENYING IN PART PLAINTIFFS’
MOTIONS FOR PARTIAL
SUMMARY JUDGMENT

Defendant.

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Plaintiffs filed two motions for partial summary judgment: one on December 19,

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United States District Court
Northern District of California

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2016 regarding suitability, ECF No. 59, and one on January 20, 2017 regarding

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“undisputed material facts,” ECF No. 72. Defendant timely opposed, and Plaintiffs timely

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replied, to both motions. The Court heard oral arguments on the motions on February 27,

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2017. After carefully considering the parties’ written and oral arguments, the Court

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GRANTS IN PART AND DENIES IN PART Plaintiffs’ motions for the reasons set forth

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below.

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I. BACKGROUND
As the parties are familiar with the factual background of this case, the Court

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provides only a brief summary of the facts.
This class action is related to another class action separately filed in this Court:

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Milliner v. Bock Evans Financial Counsel, Ltd., No. 15-cv-1763 TEH (the “Bock Evans

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Class Action”).1 The Bock Evans Class Action was brought by the same Plaintiffs as the

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present class action, to challenge the “‘one size fits all’ investment approach implemented

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by their investment advisor, Defendant Bock Evans Financial Counsel, Ltd. (‘BEFC’).”

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ECF No. 1 (“Compl.”) ¶ 1. BEFC provided investment advice and equity portfolio

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management services to individuals solely on a discretionary basis, meaning that BEFC

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Default has been entered in the Bock Evans Class Action. No. 15-cv-1763 TEH, ECF
No. 66 (N.D. Cal. May 18, 2016).

selects which and when securities are to be bought and sold in a client’s account without

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consultation with the client. Id. ¶ 8. Plaintiffs brought the present class action against

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Defendant Mutual Securities, Inc. (“MSI”) because of MSI’s relationship with BEFC.

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Specifically, BEFC required that clients hire MSI as their broker-dealer. Id. ¶ 9.

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Plaintiffs allege one reason BEFC required clients to use MSI is because Thomas Bock

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(“Bock”) and Mary Evans (“Evans”), the principal executive officers of BEFC, were

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registered representatives of MSI. Id. ¶ 9. In other words, Bock and Evans were “dually

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registered as registered representatives and commissioned brokers of MSI and as

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investment advisors and principals of BEFC.” ECF No. 32 at 1:27–2:1. Plaintiffs allege

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BEFC “plac[ed] 100% or nearly 100% of their assets in high risk and highly speculative

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foreign mining stocks, including over-the counter and penny stocks” resulting in the value

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of BEFC’s portfolios going “from $60 million to $4.17 million in just a few years, a drop

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of roughly $55.83 million, or 93%.” Compl. ¶¶ 1–2. Over-the-counter stocks (“OTCs”)

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are securities which are traded through a dealer network rather than through a centralized

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formal exchange. Compl. ¶ 18. OTC trading is done directly between two parties, without

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any supervision of an exchange. Because the issuers of OTC stocks do not meet the

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minimum listing requirements for trading on national nor do they file periodic reports or

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audited statements, OTCs can be among the riskiest investments. Id.

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The Court previously established there was no genuine dispute of material fact that

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“MSI owed Plaintiffs a contractual duty to ‘determine the suitability of any investment

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recommendations and advice’ in accordance with the express terms of their Brokerage

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Agreement.” ECF No. 39 (“MSJ Order I”) at 4:27–5:3 (emphasis omitted). However, the

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Court did not determine whether this duty was triggered by the advice Plaintiffs received

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from BEFC. Id. at 5:3–5. The Court also previously established MSI had a duty to

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supervise the outside advisory investment activities of Bock and Evans pursuant to FINRA

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rules. ECF No. 52 (“MSJ Order II”) at 12.

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In the present motions, Plaintiffs seek a ruling from this Court “establishing that
Defendant breached its duty to supervise its registered representatives, Bock and Evans, by
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failing to determine suitability,” ECF No. 59 at 2:1–3, and an order “establishing [] certain

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specified material facts relating to Defendant’s duty to supervise are not genuinely in

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dispute and treating the facts as established in the case.” ECF No. 72 at 1:26–28.

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II. LEGAL STANDARD
Summary judgment is appropriate when “there is no genuine dispute as to any

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material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.

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56(a). Material facts are those that may affect the outcome of the case. Anderson v. Liberty

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Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute as to a material fact is “genuine” if there

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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

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favorable to the nonmoving party. Id. at 255.
A party seeking summary judgment bears the initial burden of informing the court

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of the basis for its motion, and of identifying those portions of the pleadings or materials in

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the record that demonstrate the absence of a genuine issue of material fact. Celotex Corp.

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v. Catrett, 477 U.S. 317, 323 (1986). Where the moving party will have the burden of

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proof at trial, it “must affirmatively demonstrate that no reasonable trier of fact could find

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other than for the moving party.” Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984

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(9th Cir. 2007). However, on an issue for which its opponent will have the burden of proof

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at trial, the moving party can prevail merely by “pointing out to the district court . . . that

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there is an absence of evidence to support the nonmoving party's case.” Celotex, 477 U.S.

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at 325. If the moving party meets its initial burden, the opposing party must then set out

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specific facts showing a genuine issue for trial to defeat the motion. Anderson, 477 U.S. at

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250.

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III. DISCUSSION

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A. MSI’s Duty under FINRA Rules
Prior to determining whether MSI breached its duty to supervise Bock and Evans by
failing to determine suitability, the Court finds it necessary to discuss what MSI’s duty

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entailed. As previously established by the Court, MSI was required to supervise the

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activities of Bock and Evans under FINRA regulations:

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This Court holds that the NTMs accompanying FINRA Rule
3280 undoubtedly establish that MSI had a duty to supervise
Bock and Evans’ outside advisory investment activities.

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MSJ Order II 12:1–7. FINRA 3280(c)(2) explains that pursuant to this duty, MSI shall
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record such transactions “on the books and records of [MSI]” and that MSI “shall
supervise the person’s participation in the transaction as if the transaction were executed
on behalf of the member.” This duty to supervise includes a duty to determine suitability
as well. Notice to Member (“NTM”) 96-332 explains that when a broker approves an
RR/IA’s participation in private securities transactions for which he or she receives selling

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compensation, the firm must create a recordkeeping system and supervisory procedures
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that “enable the member to properly supervise the RR/IA by aiding the [broker-dealer’s]
understanding of the nature of the service provided by an RR/IA, the scope of the RR/IA’s

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authority, and the suitability of the transactions.” Id. (emphasis added). See also NTM
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16-12 (explaining that when a broker-dealer approves an associated person to engage in
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private securities activities for selling compensation, the supervising broker-dealer must
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ensure “compliance with suitability standards for recommended securities.”).

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FINRA Rule 2111(a)3 defines what determining suitability means: “a member or an

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associated person must have a reasonable basis to believe that a recommendation
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transaction . . . involving a security or securities is suitable for the customer based on the
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information obtained through the reasonable diligence of the member or associated person
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to ascertain the customer’s investment profile.” A customer’s investment profile includes

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While NTM 96-33 refers to NASD art. III, § 40, this rule is a predecessor to FINRA Rule
3280. NASD art. III, § 40 was renamed to NASD Rule 3040, and NASD Rule 3040 was
wholly adopted, without substantive change, as FINRA Rule 3280. Therefore, this NTM
is directly applicable to FINRA Rule 3280.
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FINRA Rule 2111 was approved by the Securities and Exchange Commission (“SEC”)
on November 23, 2010, see Order Approving Proposed Rule Change, 75 FR 71479-01,
and enacted on October 7, 2011. The Rule was modeled after former NASD Rule 2310
(Suitability). See NTM 11-02. The parties agree this rule applies to the facts of this case.
See ECF No. 59 at 9:15–10:7; ECF No. 65 at 17:18–18:10.
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factors such as the customer’s age, other investments, financial situation and needs, tax

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status, investment objectives, investment experience, investment time horizon, and risk

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tolerance, among other things. Id. The duty to determine suitability cannot be disclaimed.

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FINRA Rule 2111, Supplementary Material .02.
While the parties do not dispute that FINRA rules require a party who has approved

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the outside investment activities of a registered representative to determine the suitability

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of those outside activities, the crux of the parties’ dispute lies in whether the agency

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relationship created by the parties’ agreements excuses MSI from the duty to determine

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suitability. See ECF No. 65 at 15–16. MSI’s theory is that because the Plaintiffs entered

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into a Trading Authorization which designated “[BEFC] as his/her agent and attorney-in-

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fact with full discretion, power and authority” to trade securities on their accounts, all

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trades conducted by Bock and Evans were essentially unsolicited, thus releasing MSI from

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any duty to determine suitability. Id. at 15–17. Similarly, MSI also argues it was not

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required to determine the suitability of Bock and Evans’ transactions because FINRA Rule

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2111 only applies to transactions that are “recommended” by the member, and here MSI

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never recommended any transactions. Id. at 18:2–19:1. But these arguments are foreclosed

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by prior opinions from the SEC.4 “FINRA and the SEC have held that registered

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representatives who effect transactions on a customer’s behalf without informing the

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customer have implicitly recommended those transactions, thereby triggering application

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of the suitability rule.” FINRA Rule 2111 (Suitability) FAQ, n. 37,

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http://www.finra.org/industry/faq-finra-rule-2111-suitability-faq (last visited Mar. 9,

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2017).5 See also Pinchas v. Sec. Exch. Comm’n, 54 S.E.C. 331, 341 n. 22 (1999)

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("Transactions that were not specifically authorized by a client but were executed on the

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client's behalf are considered to have been implicitly recommended within the meaning of

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Again, because of the SEC’s expertise in the securities industry, courts owe deference to
its interpretation of NASD and FINRA rules. See MSJ Order II at 13 (citing Krull v. Sec.
Exch. Comm’n, 248 F.3d 907, 911–912 (9th Cir. 2001).
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As previously determined by the Court, FINRA Rule 3280 does not “recognize a
distinction between RR/IAs acting as registered representatives or as investment advisors.”
MSJ Order II at 15:12–15.
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the NASD rules."); Kettler v. Sec. Exch. Comm’n, 51 S.E.C. 30, 32 n. 11 (1992) (stating

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that transactions a broker effects for a discretionary account are implicitly recommended).

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Additionally, FINRA Rule 2111 does not mention an exception to the duty to determine

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suitability based on whether an account is discretionary or not. And, if MSI were to

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provide Plaintiffs with direct investment advisory services, it would clearly be subject to

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FINRA Rule 2111; therefore, it logically follows that the duty under FINRA Rule 3280 to

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supervise a person’s participation in an outside transaction “as if the transaction were

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executed on behalf of the member” also includes a duty to comply with the suitability

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requirements of FINRA Rule 2111.

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Northern District of California

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In short, pursuant to FINRA regulations, MSI had a duty to determine the suitability
of Bock and Evans’ recommended transactions.
B. MSI’s Duty Under the Parties’ Brokerage Agreement
Through a previous order, the Court ruled there was “no genuine dispute of material

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fact that, under the suitability clause, ‘MSI owed Plaintiffs a contractual duty to

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“determine the suitability of any investment recommendations and advice” in accordance

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with the express terms of their Brokerage Agreement.’” MSJ Order I, 4:28–5:3 (emphasis

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omitted). However, the parties expressly rejected the Court’s invitation to address the

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question of whether this duty was triggered by the advice Plaintiffs received from BEFC.

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Id. at 5:3–5.

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Now the parties are disputing whether the suitability clause of the parties’

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Brokerage Agreement was ever triggered. Plaintiffs cite the MSJ Order II in arguing that

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“[b]ecause Bock and Evans were ‘associated persons’/‘registered persons’ of MSI at the

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time they advised Plaintiffs regarding their investments, MSI owed Plaintiffs a duty to

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‘determine the suitability of any investment recommendations and advice’ under the

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suitability clause.” ECF No. 69 at 9:11–14 (emphasis omitted). Not so. While the Court

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did previously find that MSI owed the Plaintiffs a duty, this duty was based on FINRA

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rules and obligations – not on the parties’ Brokerage Agreement. Indeed, the Court never

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stated that such a duty arose from the parties’ contractual agreements. Additionally, when
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the Court rejected MSI’s argument that there was a distinction between RR/IAs acting as

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registered representatives or investment advisors, it was done within the scope of

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addressing MSI’s overarching argument that the parties’ agreements could release it from

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its FINRA obligations. See MSJ Order II at 15. In other words, while FINRA rules may

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not recognize a distinction between an RR/IA acting as a registered representative or an

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investment advisor, Plaintiffs provide no legal authority for their proposition that the

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parties’ contractual agreements also do not recognize the distinction.
In light of this lack of legal authority, and because the issue has not been fully

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briefed, the Court cannot say as a matter of law that MSI breached any duty under the

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parties’ Brokerage Agreement. Accordingly, the Court DENIES Plaintiff’s motion for

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partial summary judgment on the issue of whether MSI breached its duty under the parties’

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suitability clause.
C. MSI’s Failure to Determine Suitability is Conclusively Established by its Own

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Admissions

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Rule 36 of the Federal Rules of Civil Procedure states: “A matter admitted under

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this rule is conclusively established unless the court, on motion, permits the admission to

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be withdrawn or amended.” Fed. R. Civ. P. 36(b). “[T]he court and parties are bound by

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such admissions, which cannot be ignored by the district court simply because it finds the

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evidence presented by the party against whom the admission operates more credible.”

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Tillamook Country Smoker, Inc. v. Tillamook Cty. Creamery Ass’n, 465 F.3d 1102, 1112

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(9th Cir. 2006) (internal quotation marks omitted). See also Echo Drain v. Newsted, 307

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F. Supp. 2d 1116, 1122 (C.D. Cal. 2003) (“unlike admissions made in interrogatory

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answers or depositions, admission made in [Requests for Admission] are binding and

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cannot be explained away or contracted by other evidence.”) (citation omitted).
Here, MSI has clearly admitted it did not make any suitability determinations for

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transactions linked to either of the Plaintiffs’ accounts. Plaintiffs made the following

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Requests for Admissions:

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Request for Admission No. 3: MSI did not “determine the
suitability of any investment recommendations and advice”
made in connection with Ms. Brem’s Trust Account.
Request for Admission No. 4: At no time while MSI acted as
broker/dealer did MSI “determine the suitability of any
investment recommendations and advice” made in connection
with Ms. Brem’s Trust Account.
Request for Admission No. 5: MSI never intended to
“determine the suitability of any investment recommendations
and advice” made in connection with Ms. Brem’s Trust
Account.

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ECF No. 60-4 at 3–5. MSI replied to each Request in the same manner:

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Defendant objects to this request as vague, ambiguous,
misleading, and compound.
Notwithstanding the foregoing objections, Defendant admits to
the extent that it exercised some limited supervisory
obligations with regards to Plaintiff’s investment advisory
accounts at issue. Defendant denies to the extent that the
request implies that MSI had the same supervisory obligations
it has for a brokerage account.

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Northern District of California

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Id (emphasis added). 6 Plaintiff also made the following Request for Admission:

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Request for Admission No. 17: MSI never determined that
OTC Equity Securities were suitable for Ms. Brem’s Trust
Account.

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To which MSI replied stating:

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Admit, because MSI did not make any
recommendations or give any investment advice.

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investment

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ECF No. 60-6 at 11.7 Being how MSI has not sought to withdraw or amend these

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admissions in accordance with Rule 36(b), MSI’s failure to determine suitability is

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conclusively established. Thus, the Court is bound from considering any of MSI’s

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arguments or evidence to the contrary. Echo Drain, 307 F. Supp. 2d at 1122.

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Accordingly, the Court GRANTS Plaintiff’s motion for partial summary judgment in

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establishing that MSI breached its duty to determine suitability under FINRA Rules.

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The Requests and Responses were the same for Ms. Milliner’s Trust and Retirement
accounts. See ECF No. 60-5 at 3–6.
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The Requests and Responses were the same for Ms. Milliner’s Trust and Retirement
accounts. See ECF No. 60-7 at 6.
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D. Affirmative Defenses are Outside the Scope of this Motion

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MSI also opposes the motion by putting forth arguments that its conduct was

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reasonable because Plaintiffs’ actions ratified MSI’s actions and because such conduct

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created an estoppel. See ECF No. 65 at 20:9–19. The Court finds these affirmative

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defenses to be outside of the scope of this motion, particularly because such defenses do

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not actually create a genuine dispute as to whether MSI failed to make suitability

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determinations.8 However, MSI is not precluded from bringing forth such affirmative

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defenses in a later motion.
E. Plaintiff’s Motion for Partial Summary Judgment on “Undisputed Material

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Facts” is Procedurally Deficient

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The Court now turns to address Plaintiff’s motion for partial summary judgment

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regarding “undisputed material facts.” Although Federal Rule of Civil Procedure 56(a)

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allows a party to move for summary judgment on a part of a claim or defense and Federal

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Rule of Civil Procedure 56(g) permits courts to establish certain facts as true when a

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motion for summary judgment is not fully granted, the Plaintiffs have failed to put forth –

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and the Court is unaware of – any legal authority standing for the proposition that Rule 56

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can be used as a stand-alone motion to establish mere independent facts. Indeed, Plaintiffs

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did not clearly set out how these facts are material or how they specifically relate to their

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claims. See ECF No. 72 at 1. The Plaintiffs must explain in their Rule 56 motion – not

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their reply – how their “undisputed material facts” fit within their specific legal claims.

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See Dalton v. Alston & Bird, 741 F. Supp. 1322, 1336 (S.D. Ill. 1990) (Rule 56 “does not

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authorize an independent motion to establish certain facts as true.”). Accordingly,

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Plaintiff’s motion for partial summary judgment regarding undisputed material facts is

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DENIED.9

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In addition, MSI agreed during oral arguments that these affirmative defenses may be
saved for MSI’s own motion for summary judgment.
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This outcome is also warranted by the fact that MSI was not given an opportunity to
counter Plaintiff’s legal arguments because they were not put forth until Plaintiff’s reply,
and because MSI indicated during oral arguments that it might dispute the facts Plaintiff
sought to establish as true.
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IV. CONCLUSION
For the foregoing reasons, the Court GRANTS IN PART AND DENIES IN PART

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Plaintiffs’ motions for partial summary judgment. This Order, however, does not establish

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liability on any of Plaintiffs’ claims, as MSI is not precluded from later presenting

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affirmative defenses.

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IT IS SO ORDERED.

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Dated: 03/17/17

_____________________________________
THELTON E. HENDERSON
United States District Judge

United States District Court
Northern District of California

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