Salsburg et al v. Invesco Capital Management, LLC
MEMORANDUM OPINION AND ORDER signed by the Honorable Matthew F. Kennelly on 5/6/2022: For the reasons stated in the accompanying Memorandum Opinion and Order, the Court dismisses count one of the plaintiffs' amended complaint but otherwise deni es the defendant's motion to dismiss [dkt. no. 10]. The Court directs the defendants to answer the remaining claims by no later than May 27, 2022. Rule 26(a)(1) disclosures are to be made by June 3, 2022. The parties are directed to confer re garding a discovery and pretrial schedule and are to file on June 10, 2022 a joint status report with an agreed proposed schedule or alternative proposals if they cannot agree. The case is set for a telephonic status hearing on June 17, 2022 at 9:45 a.m. The Court reserves the right to vacate the hearing if it determines a hearing is not needed. (mk)a hearing is not needed.(Kennelly, Matthew)
Case: 1:21-cv-06343 Document #: 44 Filed: 05/06/22 Page 1 of 14 PageID #:697
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
JEREMY SALSBURG, XDG TRADING,
LLC; EAGLE'S VIEW PARTNERS, LTD.;
EAGLE'S VIEW MANAGEMENT, LP;
and FIRST HORIZON BANK AS TRUSTEE
FOR JET SUPPORT SERVICES, INC.,
INVESCO CAPITAL MANAGEMENT, LLC,
Case No. 21 C 6343
MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
Jeremy Salsburg, XDG Trading, LLC, Eagle's View Partners, Ltd., Eagle's View
Management, LP, and First Horizon Bank as Trustee for Jet Support Services, Inc. have
filed this lawsuit against Invesco Capital Management, LLC. The Court's jurisdiction is
based on diversity of citizenship. Invesco is an investment company that offers the
Invesco QQQ Series 1 ETF (the ETF), an ETF 1 that tracks the composition of the
Nasdaq 100 Index. The plaintiffs are investors that engage in arbitrage trading, a kind
of trading that exploits small differences in asset prices between two or more markets.
Invesco occasionally adjusts "the weight and composition of the ETF's securities
to correspond to changes in the Index." Am. Compl. ¶ 17. It may increase or decrease
An ETF or exchange-traded fund is a basket of securities, like stocks and bonds, that
tracks an underlying index.
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the quantity of shares of specific companies that the ETF owns. Invesco may also add
or remove companies from the ETF's basket of securities when those companies are
added or removed from the Index. Invesco regularly publishes data files containing
information about the composition of the ETF, "including the quantity of shares that the
ETF owns for each individual Index constituent company per 50,000 shares of the ETF."
Id. ¶ 16.
The plaintiffs allege that they rely on the daily data file from Invesco to engage in
trading and have done so for at least five years. According to the plaintiffs, however,
the data file that Invesco transmitted on August 28, 2020 contained inaccurate
information regarding the ETF's composition for the August 31, 2020 trading date.
Specifically, the plaintiffs allege that the data file incorrectly represented "that 42,039
shares of Apple and 3,584 of Tesla were in the Basket" and that it "was further
inaccurate by reducing the quantities of each and every one of the other 101 Basket
member stocks by a factor of 1.55 to perfectly offset the inaccurately inflated share
quantities of Apple and Tesla so that the data file error could not be easily detected." Id.
¶¶ 24, 25. The plaintiffs further allege that they relied on this inaccurate information to
engage in trading and lost more than $2.5 million as a result.
The plaintiffs filed this suit in state court, bringing claims for breach of contract,
gross negligence, and negligent misrepresentation. Invesco removed the case to this
district and filed a motion to dismiss for failure to state a claim. Without responding to
Invesco's motion, the plaintiffs filed a motion to remand. The Court later denied the
motion and ordered briefing on Invesco's still-pending motion to dismiss.
The motion is now fully briefed and ready for adjudication. For the following
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reasons, the Court dismisses the plaintiffs' breach of contract claim but declines to
dismiss their other two claims.
The question on a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6) is whether the complaint states "a claim to relief that is plausible on its face."
See Firestone Fin. Corp. v. Meyer, 796 F.3d 822, 826 (7th Cir. 2015) (citation omitted).
In deciding the motion, the court must take "true all well-pleaded factual allegations and
mak[e] all possible inferences from the allegations in the plaintiff's favor." AnchorBank,
FSB v. Hofer, 649 F.3d 610, 614 (7th Cir. 2011) (citation omitted). Still, the plaintiff
must provide "some specific facts to support the legal claims asserted" and cannot rely
on conclusory allegations to sustain his claim. McCauley v. City of Chicago, 671 F.3d
611, 616 (7th Cir. 2011) (citation omitted).
Breach of contract
To state a claim of breach of contract under Illinois law, a plaintiff has to plead
four elements: (1) existence of a contract; (2) the plaintiff's performance under the
contract; (3) the defendant's breach of the contract; and (4) damages sustained as a
result of the breach. Int'l Supply Co. v. Campbell, 391 Ill. App. 3d 439, 450, 907 N.E.2d
478, 487 (2009). The plaintiffs allege that the ETF's prospectus2 is a contract that
obligates Invesco to provide them with accurate information regarding the composition
of the ETF. As previously discussed, they further allege that they performed under the
contract by paying Invesco and that they relied on the data file to engage in arbitrage
A prospectus is a document required by and filed with the Securities and Exchange
Commission containing information about an investment offering to the public.
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trading and lost $2.5 million as a result.
Invesco contends that the Court should dismiss the plaintiffs' claim because they
fail to adequately plead each of the above elements. The Court need not address all of
Invesco's arguments, however, because it finds that the plaintiffs have not adequately
pleaded the third element—the defendant's breach—and dismisses the claim on this
ground. The Court reaches no conclusion regarding Invesco's other arguments.
The key problem with the plaintiffs' breach of contract claim is that they fail to
identify any contractual provision that obligates Invesco to provide them with accurate
data. Although the plaintiffs allege that the prospectus constitutes a contract between
them and Invesco, they do not point to any provision of the prospectus or anything else
that indicates that Invesco is obligated to provide them with accurate data. Instead, the
plaintiffs attempt to establish the existence of this obligation through their allegations
that Invesco corrected the August 31, 2020 error shortly after discovering it and that
Invesco agreed to pay damages in connection with a previously disclosed rebalancing
error. But these allegations are immaterial to the question of whether Invesco had a
contractual obligation to provide accurate data. Even drawing all possible inferences in
the plaintiffs' favor, Invesco's past actions merely suggest that it had a practice to
correct such mistakes. This in no way supports the plaintiffs' contention that Invesco
had a contractual obligation to do so.
The plaintiffs' second claim alleges gross negligence. Under Illinois law, there
are four elements of a negligence claim: duty, breach, proximate cause, and damages.
Jane Doe-3 v. McLean Cnty. Unit Dist. No. 5 Bd. of Dirs., 2012 IL 112479, ¶ 29, 973
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N.E.2d 880, 890. In addition to these elements, claims for gross negligence also
require a showing of "a high degree of negligence, an element of recklessness and the
absence of the slightest degree of care." Samoylovich v. City of Chicago, 2019 IL App
(1st) 172962-U, 2019 WL 1462194. Invesco argues that the plaintiffs fail to adequately
plead duty, breach, and damages.
On the element of duty, Invesco makes three separate points, none of which are
persuasive. First, Invesco essentially rehashes the same arguments that it made on the
breach of contract claim, arguing that it does not have a duty from the prospectus. It
argues that the prospectus is not a contract, and that even if the prospectus is a
contract, it does not obligate Invesco to provide the plaintiffs with accurate data. The
lack of contractual duty, however, does not foreclose the possibility that Invesco has an
extra-contractual duty to provide accurate information to the plaintiffs.
Invesco's second argument is that the economic loss doctrine—known as the
Moorman doctrine—bars the plaintiffs’ claims. See Moorman Mfg. Co. v. Nat'l Tank
Co., 91 Ill. 2d 69, 435 N.E.2d 443 (1982). The doctrine does not apply here, however,
because the plaintiffs allege an extra-contractual duty to provide them with accurate
data. Where the duty arises outside a contract, the economic loss doctrine does not
apply. Golf v. Henderson, 376 Ill. App. 3d 271, 279, 876 N.E.2d 105, 113 (2007) ("The
Moorman doctrine, however, does not apply when a duty arises that is
Lastly, Invesco argues that it does not have an extra-contractual duty to the
plaintiffs, for two reasons. First, Invesco contends that there is a disclaimer in the trust
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agreement 3 that forecloses the possibility of an extra-contractual obligation to provide
accurate information. The trust agreement, which Invesco contends is binding on the
plaintiffs, contains a provision that states that Invesco "may rely in good faith on any
paper, order, notice, list, affidavit, receipt, evaluation [and] opinion . . . submitted to it by
the Trustee." Dkt. no. 12-1 § 7.04(a). Invesco contends that this provision absolves it
of liability because the data file is based on calculations submitted to it by the Trustee.
The trust agreement also states that Invesco shall "have no responsibility for the
accuracy" of any evaluation provided by the Trustee and "shall in no event be deemed
to have assumed or incurred any liability, duty, or obligation, to any Beneficial Owner or
to the Trustee other than as expressly provided for herein." Id. §§ 4.03, 7.04(a).
Regarding this last provision, Invesco contends that "the Trust Agreement is devoid of
any liability, duty, or obligation that Invesco has to Plaintiffs concerning" the data file, so
it does not have such a duty. Defs.' Mot. at 5.
The Court disagrees that the so-called disclaimer forecloses the possibility of an
extra-contractual duty to the plaintiffs (or that it exculpates Invesco from a breach, if that
is what it is contending). Even assuming that the trust agreement represents a contract
between Invesco and the plaintiffs, the language of the cited provision is not sufficient to
relieve Invesco of the specific duty that the plaintiffs allege it breached. Under Illinois
law, an exculpatory clause must "contain clear, explicit, and unequivocal language
referencing the types of activities, circumstances, or situations that it encompasses and
for which the plaintiff agrees to relieve the defendant from a duty of care." Platt v.
The Standard Terms and Conditions of Trust describe the roles and responsibilities of
the Trustee and Sponsor (Invesco) regarding the management of the Trust.
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Gateway Int'l Motorsports Corp., 351 Ill. App. 3d 326, 330, 813 N.E.2d 279, 283 (2004).
The provision in the trust agreement does not meet this requirement. It does not
explicitly state that it relieves Invesco of liability under tort law, and it does not specify
what types of activities it encompasses. Instead, it only generally states that Invesco
has not "assumed or incurred any liability." This is not enough to bar the plaintiffs' tort
Invesco's second argument supporting its contention that it does not have an
extra-contractual duty to the plaintiffs is that public policy considerations weigh against a
duty of care. In Illinois, courts look at four policy considerations to determine whether
there exists a duty of care: (1) the reasonable foreseeability of the injury; (2) the
likelihood of the injury; (3) the magnitude of the burden of guarding against the injury;
and (4) the consequences of placing that burden on the defendant. Camp v. TNT
Logistics Corp., 553 F.3d 502, 511 (7th Cir. 2009). Invesco argues that public policy
supports its position because the plaintiffs’ position would increase exposure of
investment managers to third parties, expanding liability to a potentially infinite degree.
In contrast, the plaintiffs argue that Invesco intended for the data file to reach them and
that it is clearly foreseeable that inaccurate data would cause damages.
The Court agrees with the plaintiffs. The amended complaint plausibly alleges
that losing money from bad trades was a reasonably foreseeable and likely result of
being provided with inaccurate information in the data file. The plaintiffs allege longterm use of the data file for arbitrage trading, a type of trading that requires accurate
information given its reliance on very small differences between asset prices in different
markets. The plaintiffs also sufficiently allege that the burden on Invesco of guarding
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against inaccuracies in its data files is relatively low, given that it already has a strong
business incentive to make the data files as accurate as possible. With respect to
Invesco's argument, the Court finds it unlikely that the plaintiffs' claim would infinitely
increase the legal liability of investment managers as Invesco contends. As discussed
more fully in the next section, the plaintiffs plausibly allege that they were the targets of
Invesco's data file. And they do not suggest, as Invesco contends, that liability should
be extended to all third-party traders. For these reasons, the Court concludes that the
plaintiffs have sufficiently alleged, for purposes of the motion to dismiss, the existence
of an extra-contractual duty on the part of Invesco to provide them with accurate
information in its data files.
Invesco contends that the plaintiffs fail to adequately plead the requisite mental
state for gross negligence. First, Invesco argues that it could not have been grossly
negligent vis-à-vis the plaintiffs because the data file was not meant for them. Instead,
Invesco argues, the data file was disseminated for select participants that do not include
Although it is conceivable that Invesco may establish this point, it is not a basis
for dismissal for failure to state a claim. The plaintiffs sufficiently allege facts that
support an inference that the data file was directed towards them. Specifically, they
allege that the data file was transmitted to all investors and that they had been using the
information daily for at least five years. Drawing inferences in the light most favorable to
the plaintiffs, the Court finds that the plaintiffs plausibly alleged that the data file was
directed towards them.
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Invesco also argues that the plaintiffs do not adequately plead gross negligence
because they do not allege what Invesco would have gained from publishing an
inaccurate data file. The Court overrules this argument. Nothing in the case law
suggests that, to state a claim of gross negligence, the plaintiff must plausibly allege a
motive for the defendant to act negligently. Doing so would inappropriately increase the
threshold for proving gross negligence to something more akin to intentional conduct.
Because the plaintiffs plausibly allege that Invesco exhibited a high level of negligence
in publishing the inaccurate data file, the Court concludes that they have sufficiently
alleged the breach element of their gross negligence claim.
Invesco contends that the plaintiffs fail to sufficiently plead damages because
they do not specify what trades they made and how they relied on the data file. The
bottom line is that this sort of detail is not required in a federal complaint. The plaintiffs
allege that they engage in arbitrage trading, that they relied on the data file for years to
determine the composition of the ETF, and that their reliance on Invesco's inaccurate
data file caused them losses exceeding $2.5 million. This is sufficient to plead damages
caused by Invesco's gross negligence. The plaintiffs are not required to allege in their
complaint the specific trades that resulted in their losses.
Lastly, the plaintiffs assert a claim for negligent misrepresentation. The elements
of such a claim under Illinois law include:
(1) a false statement of material fact, (2) carelessness or negligence in
ascertaining the truth of the statement by the party making it, (3) an
intention to induce the other party to act, (4) action by the other party in
reliance on the truth of the statement, and (5) damage to the other party
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resulting from such reliance, (6) when the party making the statement is
under a duty to communicate accurate information.
Fox Assocs. v. Robert Half Int'l, 334 Ill. App. 3d 90, 94, 777 N.E.2d 603, 606 (2002).
Invesco contends that the plaintiffs fail to adequately plead each of these elements.
Additionally, it contends that the heightened pleading standard of Federal Rule of Civil
Procedure 9(b) applies to the plaintiffs' purported averments of fraud and that their
allegations fail to satisfy that standard.
Rule 9(b) pleading standards
Invesco contends that the plaintiffs' negligent misrepresentation claim is subject
to the heightened pleading standards of Rule 9(b). Specifically, it points to the plaintiffs’
allegation that it "wrongfully manipulated, engineered and/or doctored" data "to appear
properly balanced" and argues that this allegation demonstrates that the plaintiffs’ claim
sounds in fraud. Am. Compl. ¶ 28. In response, the plaintiffs argue that their claim is
not subject to the Rule 9(b) standards because, under Illinois law, negligent
misrepresentation claims are evaluated under Rule 8. See Tricontinental Indus., Ltd. v.
PricewaterhouseCoopers, LLP, 475 F.3d 824, 838 (7th Cir. 2007) (applying the Rule 8
standard to a negligent misrepresentation claim). Invesco responds that Rule 9(b)
applies to averments—not claims—of fraud, so regardless of the label of the claim, the
Rule applies if the claim "is premised upon a course of fraudulent conduct." See
Borsellino v. Goldman Sachs Grp., 477 F.3d 502, 507 (7th Cir. 2007).
The Court agrees with Invesco that Rule 9(b) applies to averments, not claims,
so the label of the claim is not dispositive. But ultimately the Court concludes that Rule
9(b) does not apply because the plaintiffs' claim is not premised upon a course of
fraudulent conduct. Although the allegation Invesco cites could be interpreted as an
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allegation of fraud, the plaintiffs’ negligent misrepresentation claim overall does not
depend upon a course of fraudulent conduct. The plaintiffs can state a viable claim by
alleging that Invesco was careless or negligent in disseminating the false information;
they need not show that it acted fraudulently. Because the claim is not premised on a
course of fraudulent conduct, Rule 9(b) does not apply.
False statement of material fact
Invesco argues that the plaintiffs fail to provide sufficient detail regarding the
alleged false statement. Not so. The amended complaint specifies the alleged
misrepresentation and also states what the correct representation should have been. In
paragraph 24, the plaintiffs allege that Invesco's August 28, 2020 "data file was
inaccurate- stating that 42,039 shares of Apple and 3,584 of Tesla were in the Basket."
Am. Compl. ¶ 24. Paragraph 25 contains an allegation that the data file was "inaccurate
by reducing the quantities of each and every one of the other 101 Basket member
stocks by a factor of 1.55 to perfectly offset the inaccurately inflated share quantities of
Apple and Tesla so that the data file error could not be easily detected." Id. ¶ 25.
Lastly, paragraph 27 provides the information that the plaintiffs allege that Invesco
should have included in the first place: "16,325 shares of Apple and 1,113 shares of
Tesla." Id. ¶ 27.
Carelessness or negligence
On this element, Invesco argues that the plaintiffs do not adequately plead
scienter because they do not allege a motive for Invesco to publish inaccurate
information. This is the same argument Invesco makes on the gross negligence claim,
and for the same reasons, the Court overrules it. The plaintiffs are not required to show
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that Invesco would have gained from its misrepresentation. It is enough that the
plaintiffs plausibly allege—as they have—that Invesco was careless or negligent in
publishing the false information.
Duty owed by the defendant
Invesco makes several arguments in contending that the plaintiffs have not
plausibly alleged that it had a duty—all of which mirror arguments that it made regarding
the other claims. First, Invesco argues that it did not owe a duty to the plaintiffs
because the data file was not targeted at them. Second, Invesco contends that it does
not have a duty from the prospectus. Third, it contends that the disclaimer in the trust
agreement forecloses the argument that it had a duty. For the reasons given above, the
Court overrules these arguments.
Intent to induce the plaintiffs to act
Invesco argues that the plaintiffs fail to plausibly allege that it had an intent to
induce them to act because the data file was intended for other people and not the
plaintiffs. As previously stated, whether the data file was directed towards the plaintiffs
involves a factual dispute that is not appropriate for resolution on a motion to dismiss.
The plaintiffs reasonably relied on the data file
Invesco argues that the plaintiffs’ reliance on the data file was not reasonable for
two reasons. Neither warrant dismissal at this point. First, Invesco argues that the
plaintiffs misused the data file because it was intended only for authorized participants.
Again, whether the plaintiffs were Invesco's intended target involves a question of fact
that cannot be determined at this point.
Second, Invesco argues that it was not reasonable for the plaintiffs to rely on the
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data file given the disclaimer in the trust agreement. Whether it was reasonable for the
plaintiffs to rely on the data file, however, is a question of fact. Even with the presence
of the disclaimer, the plaintiffs have sufficiently alleged that they relied on the data file
for years, which suggests that it would be reasonable for them to continue to rely on the
data file. The plaintiffs also make allegations suggesting that it was common for
investors to rely on such data files. Construing these allegations in the light most
favorable to the plaintiffs, the Court finds that they have sufficiently alleged that they
reasonably relied on Invesco's data file.
As with the other claims, Invesco contends that the plaintiffs’ allegations are too
vague and do not describe how their reliance on the data file caused their losses. For
the reasons set out above, the Court overrules this argument.
For the foregoing reasons, the Court dismisses count one of the plaintiffs'
amended complaint but otherwise denies the defendant's motion to dismiss [dkt. no.
10]. The Court directs the defendants to answer the remaining claims by no later than
May 27, 2022. Rule 26(a)(1) disclosures are to be made by June 3, 2022. The parties
are directed to confer regarding a discovery and pretrial schedule and are to file on
June 10, 2022 a joint status report with an agreed proposed schedule or alternative
proposals if they cannot agree. The case is set for a telephonic status hearing on June
17, 2022 at 8:45 a.m. The Court reserves the right to vacate the hearing if it determines
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a hearing is not needed.
MATTHEW F. KENNELLY
United States District Judge
Date: May 6, 2022
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