KNAUS v. SCOTTRADE INC
OPINION. Signed by Judge Esther Salas on 3/28/2016. (nr, )
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
Civil Action No. 15-3549 (ES) (JAD)
SALAS, DISTRICT JUDGE
Before the Court is Defendant Scottrade, Inc.’s motion to dismiss pro se Plaintiff Michael
Knaus’s Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). (D.E. No. 7). The Court
has considered the parties’ submissions and decides the motion without oral argument pursuant to
Federal Rule of Civil Procedure 78(b).
For the reasons set forth below, the Court grants
Defendant’s motion to dismiss with respect to all Counts. Plaintiff may file an Amended
Complaint with thirty (30) days of the date of the accompanying Order.
Plaintiff filed the one page Complaint on May 26, 2015. (D.E. No. 1, Complaint
(“Compl.”)). 1 According to Plaintiff, “Defendant violated pattern day trading minimum equity
requirement rules.” (Id.). Plaintiff also alleges that “Defendant violated buying power calculation
rules, conducting an Improper Margin Call on Plaintiff’s account.” (Id.).
Plaintiff’s Complaint is only one page. Accordingly, the Court will not pincite when referencing the Complaint.
The Complaint includes the following nine causes of action: failure to supervise (Count 1);
broker negligence (Count 2); violation of Financial Industry Regulation Authority (“FINRA”)
Conduct Rule 4210(f)(8) (Count 3); violation of New York Stock Exchange (“NYSE”) Rule
431(f)(8) (Count 4); violation of National Association of Securities Dealers (“NASD”) Conduct
Rule 2110 (Count 5); violation of Code of Federal Regulations, Title 17, Chapter II, Part 242,
Section 242.204 (Count 6); violation of Section 6 of the Securities Exchange Act of 1934 (Count
7); unauthorized trading (Count 8); and improper margin call (Count 9). (Id.).
Plaintiff seeks damages in the amount of $279,418,979 for punitive damages, court fees,
and financial losses. (Id.).
On August 24, 2015, Defendant filed the instant motion to dismiss. (D.E. No. 7).
According to Defendant, Plaintiff’s two factual allegations are insufficient to state a claim. (D.E.
No. 8, Brief in Support of Defendant’s Motion to Dismiss (“Def. Mov. Br.”) at 12-14). Moreover,
Defendant asserts that the Court should compel arbitration pursuant to the terms of the April 5,
2006 Brokerage Account Application between Plaintiff and Defendant. (Id. at 6-10; D.E. No. 12,
Defendant’s Reply Brief (“Def. Reply Br.”) at 2).
Plaintiff did not submit a brief in opposition to Defendant’s motion by the required
deadline. Rather, Plaintiff appeared in Court on September 21, 2015 to oppose the motion. 2 (D.E.
Following his September 21, 2015 appearance, Plaintiff submitted responses in
opposition to the motion on October 22, 2015, December 11, 2015, and February 4, 2016. (D.E.
Nos. 13-15). Plaintiff’s submissions contained, among other things, a recitation of the facts
Plaintiff was not required to appear in Court to oppose the motion. September 21, 2015 was the Motion Day for the
instant motion to dismiss, but the Undersigned did not schedule oral argument for September 21, 2015.
surrounding the case, letters from Defendant, and documents related to Defendant’s former FINRA
violations. (See D.E. Nos. 13-15). 3
Plaintiff asserts that “dismiss[al] on procedural grounds . . . would only work an injustice.”
(D.E. No. 11). The motion is now ripe for adjudication.
Before addressing the merits of the instant motion, the Court must determine whether it
has subject matter jurisdiction. A federal district court may exercise subject matter jurisdiction
over an action based upon a federal question, 28 U.S.C. § 1331, or diversity of citizenship, 28
U.S.C. § 1332. Here, Plaintiff asserts violations of the Code of Federal Regulations and the
Securities Exchange Act, both of which support a federal question under 28 U.S.C. § 1331.
Federal Rule of Civil Procedure 8(a)(2) provides that all complaints must set forth “a short
and plain statement of the claim showing that a pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).
While the Rule 8 pleading standard does not mandate detailed factual allegations, it does demand
“more than an unadorned, the-defendant-unlawfully-harmed-me-accusation.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (citation omitted). Additionally, a plaintiff’s claim must “give the
defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 555 (2007).
The Court may not review the documentation submitted by Plaintiff in opposition to Defendant’s motion
to dismiss. Indeed, at the Rule 12(b)(6) stage, the Court may not rely on allegations and documents outside
of the complaint unless they are “integral to or explicitly relied upon in the complaint.” In re Burlington
Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997). The allegations and documents submitted in
opposition to the motion are neither integral to nor explicitly relied upon in Plaintiff’s Complaint.
Accordingly, the Court does not rely on these allegations or documents for the purpose of the instant motion.
Indeed, for a complaint to survive dismissal it “must contain sufficient factual matter,
accepted as true, ‘to state a claim to relief that is plausible on its face.’” Iqbal, 556 U.S. at 678
(quoting Twombly, 550 U.S. at 570). Facial plausibility exists when “the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Id. (citation omitted). A court, when evaluating the sufficiency of a
complaint, must accept all well-pleaded factual allegations and draw all reasonable inferences in
favor of the non-moving party. See Phillips v. Cnty. of Allegheny, 515 F.3d 224, 231 (3d Cir.
Lastly, “if a complaint is subject to a Rule 12(b)(6) dismissal, a district court must permit
a curative amendment unless such an amendment would be inequitable or futile.” Phillips, 515
F.3d at 236; see also Ray v. First Nat’l Bank of Omaha, 413 F. App’x 427, 430 (3d Cir. 2011) (“A
district court should not dismiss a pro se complaint without allowing the plaintiff an opportunity
to amend his complaint unless an amendment would be inequitable or futile.”). In that connection,
a “pro se complaint . . . must be held to less stringent standards than formal pleadings drafted by
lawyers.” Erickson v. Pardus, 551 U.S. 89, 94 (2007) (internal quotation marks omitted).
Nevertheless, a “litigant is not absolved from complying with Twombly and the federal pleading
requirements merely because s/he proceeds pro se.” Thakar v. Tan, 372 F. App’x 325, 328 (3d
According to Defendant, the Court should dismiss the Complaint because Plaintiff: (1)
obligated himself to arbitrate his claims, and (2) fails to state a claim upon which relief can be
granted. The Court will address each argument in turn.
First, the Court concludes that Defendant has failed to present a proper basis to compel
arbitration. (See D.E. No. 9-1, Ex. A, Scottrade Brokerage Account Agreement (“Agr.”), Sections
According to Defendant, Plaintiff entered into the Scottrade Brokerage Account
Agreement on April 5, 2006. (Def. Mov. Br. at 4). The Agreement contains an arbitration
provision, which requires Plaintiff to “arbitrate any controversy . . . arising out of or relating in
any way to . . . [Plaintiff’s] Account.” (Agr. Section 29).
On a motion to compel arbitration, the Court must determine whether “(1) there is an
agreement to arbitrate and (2) the dispute at issue falls within the scope of that agreement” before
granting the demand. See Century Indem. Co. v. Certain Underwriters at Lloyd’s, London,
Subscribing to Retrocessional Agreement Nos. 950548, 950549, and 950646, 584 F.3d 513, 523
(3d Cir. 2009). According to the Third Circuit, if arbitrability is apparent on the face of the
complaint, a Rule 12(b)(6) motion to dismiss standard of review should be applied. Guidotti v.
Legal Helpers Debt Resolution, 716 F.3d 764, 774 (3d Cir. 2013). On the other hand, where the
face of the complaint fails to establish that the parties have agreed to arbitrate, or when the party
opposing arbitration has come forward with reliable evidence that it did not intend to be bound by
an arbitration agreement, the Third Circuit has determined that granting a motion to compel
arbitration under a Rule 12(b)(6) standard would not be appropriate. Id. In those instances, either
further factual development is needed or, if the Court is presented with evidence placing the
arbitrability question in issue, the issue must be decided under the Rule 56 summary judgment
standard. Id. If the court determines that further factual development is necessary, it may deny
the motion pending discovery and entertain a renewed motion to compel under a summary
judgment standard. Id. at 776.
Here, the face of the Complaint is silent as to arbitrability. Indeed, the Complaint makes
no reference to the Scottrade Brokerage Account Agreement, which contains the arbitration
provision. Given that the face of the Complaint is silent as to arbitrability, the Court cannot compel
arbitration under a Rule 12(b)(6) standard.
B. Failure to State a Claim
Next, Defendant argues that the Court should dismiss Plaintiff’s Complaint for failure to
state a claim. Defendant argues that Plaintiff only asserts two conclusory allegations that fall short
of Rule 8(a)’s notice pleading requirement. (Def. Mov. Br. at 13).
The Court will address each
Count in turn.
1. Failure to Supervise (Count 1)
Plaintiff alleges that Defendant failed to supervise. (Compl.). The Court concludes that
Count 1 fails to meet the notice pleading standards under Rule 8(a). Indeed, Plaintiff has not pled
any facts with respect to Defendant’s failure to supervise, nor can the Court identify a state or
federal claim or cause of action for failure to supervise. Therefore, the Court grants Defendant’s
motion to dismiss Count 1 of the Complaint without prejudice.
2. Broker Negligence (Count 2)
Plaintiff asserts a broker negligence claim. (Compl.). Broker negligence is recognized as
a claim in the insurance context. There, “insurance brokers and agents owe a fiduciary duty of
care to insureds.” President v. Jenkins, 814 A.2d 1173, 1185 (N.J. Super. Ct. App. Div. 2003). A
broker may be liable for breach of that duty “(1) if the broker neglects to procure the insurance,
(2) if the policy is void, (3) if the policy is materially deficient, or (4) the policy does not provide
the coverage he undertook to supply.” Id. (internal quotation marks omitted). There must be proof
of notice or a specific initiating inquiry from the client insured before a broker can be found to
have an affirmative duty. Id.
Here, Plaintiff failed to allege any facts with respect to any of these requisite elements.
Importantly, Plaintiff has not alleged any facts from which the Court can assume that Defendant
is an insurance broker. Nor did Plaintiff allege any facts with respect to proof of notice or a
specific initiating inquiry. Therefore, the Court grants Defendant’s motion to dismiss Count 2 of
the Complaint without prejudice.
3. Violation of FINRA (Count 3)
Plaintiff alleges a violation of FINRA Conduct Rule 4210(f)(8). According to Plaintiff,
“Defendant violated pattern day trading minimum equity requirement rules.” (Compl.).
Even when holding the Complaint to a less stringent standard, this is a wholly conclusory
allegation that is unsupported by factual assertions. Plaintiff does not allege how the pattern day
trading minimum equity requirement rules were violated, or provide any factual assertions from
which the Court can infer that a violation occurred. Accordingly, the Court grants Defendant’s
motion to dismiss Count 3 of the Complaint without prejudice.
4. Violation of NYSE Rule 431(f)(8) (Count 4)
Plaintiff alleges that Defendant violated NYSE Rule 431(f)(8). (Compl.). A review of the
case law in this Circuit reveals that there is no private right of action for violations of the NYSE
rules. See, e.g., Daniel Boone Area Sch. Dist. v. Lehman Bros., 187 F. Supp. 2d 400, 408 (W.D.
Pa. 2002) (“Although the Third Circuit has not addressed the issue explicitly, it is clear from
numerous District Court opinions that there is no private right of action for a violation of a stock
exchange rule in this Circuit.”). Accordingly, the Court grants Defendant’s motion to dismiss
Count 4 of the Complaint with prejudice.
5. Violation of NASD Conduct Rule 2110 (Count 5)
Plaintiff alleges that Defendant violated NASD Conduct Rule 2110. (Compl.). Much like
Count 4 of the Complaint, there is no private right of action for violation of the NASD. See Bloch
v. Prudential–Bache Securities, 707 F. Supp. 189, 195 (W.D. Pa. 1989) (“It seems well settled that
no direct cause of action exists for violations of self-regulatory organizations such as the NYSE or
NASD.”). Accordingly, the Court grants Defendant’s motion to dismiss Count 5 of the Complaint
6. Violation of Code of Federal Regulations (Count 6)
Plaintiff alleges that Defendant violated Code of Federal Regulations, Title 17, Chapter II,
Part 242, Section 242.204. See 17 C.F.R. § 242.204. Section 242.204 is a lengthy provision that
governs delivery of securities for clearance and settlement on long or short sales. See id.
Plaintiff’s conclusory allegations fail to present a short statement of the claim
demonstrating that Plaintiff is entitled to relief. Indeed, it is unclear how Defendant violated
Given that Plaintiff fails to present factual allegations, the court grants
Defendant’s motion to dismiss Count 6 of the Complaint without prejudice.
7. Violation of the Securities Exchange Act (Count 7)
Plaintiff alleges that Defendant violated Section 6 of the Securities Exchange Act of 1934,
15 U.S.C. § 78f. (Compl.). Section 6 provides for security exchange applications under certain
circumstances. 15 U.S.C. § 78f.
First, it is unclear whether Section 6 provides for a private right of action in the instant
context—i.e., a suit against an online investment and brokerage firm. See Ferreri v. Mainardi,
690 F. Supp. 411, 413 (E.D. Pa. 1988) (“It is well established in this circuit that there is no private
right of action against a stock exchange under section 6 for a stock exchange’s refusal or inability
to enforce these rules.”). Moreover, Plaintiff fails to allege any facts with respect to Defendant’s
registration application. Accordingly, the Court grants Defendant’s motion to dismiss Count 7
8. Unauthorized Trading (Count 8)
Plaintiff alleges Defendant engaged in unauthorized trading. (Compl.). According to
Plaintiff, “Defendant violated buying power calculation rules, conducting an Improper Margin
Call on Plaintiff’s account.” (Compl.).
Courts have recognized unauthorized trading as a fraud-based claim where the plaintiff has
demonstrated an omission, misrepresentation, or deception. See Meyers v. Commodity Futures
Trading Comm’n, No. 92-70594, 1994 WL 362727, at *3 (9th Cir. July 13, 1994); Cruse v.
Equitable Sec. of New York, Inc., 678 F. Supp. 1023, 1028 (S.D.N.Y. 1987).
In the instant action, Plaintiff fails to present any facts as to how Defendant engaged in
unauthorized trading. Specifically, Plaintiff fails to demonstrate an omission, misrepresentation,
or deception. Indeed, Plaintiff asserts nothing more than conclusory allegations with respect to
Defendant’s alleged violations. For that reason, the Court grants Defendant’s motion to dismiss
Count 8 without prejudice.
9. Improper Margin Call (Count 9)
In the final Count, Plaintiff asserts that Defendant engaged in improper margin call.
(Compl.). Plaintiff alleges that “Defendant violated the buying power calculation rules when
Defendant conducted an improper margin call on Plaintiff’s account.” (Compl.). The Court is
unable to identify an improper margin call cause of action. Accordingly, the Court grants
Defendant’s motion to dismiss Count 9 of the Complaint without prejudice.
For the foregoing reasons, the Court grants Defendant’s motion to dismiss as to Counts 1,
2, 3, 6, 7, 8, and 9 without prejudice. The grants Defendant’s motion to dismiss as to Counts 4 and
5 with prejudice. Plaintiff may file an Amended Complaint within thirty (30) days. An appropriate
Order accompanies this Opinion.
s/ Esther Salas
Esther Salas, U.S.D.J.
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