UBS Financial Services, Inc. v. Zimmerman

Filing 55

ORDER granting 44 Motion to Dismiss for Failure to State a Claim - Defendant's first amended counterclaim is DISMISSED without prejudice. Signed by District Judge Louise Wood Flanagan on 12/1/2016. (Baker, C.)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WESTERN DIVISION
No. 5:16-CV-155-FL

UBS FINANCIAL SERVICES, INC.,

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Plaintiff,
v.

ROBERT ZIMMERMAN,
Defendant.

ORDER

This matter is before the court on plaintiff’s motion to dismiss defendant’s counterclaims,
pursuant to Federal Rule of Civil Procedure Rule 12(b)(6).1 (DE 44). Defendant has responded in
opposition and plaintiff has replied. In this posture, the issues raised are ripe for ruling. For the
following reasons, plaintiff’s motion is granted.
BACKGROUND
On January 6, 2016, defendant initiated an arbitration proceeding against plaintiff and
defendant’s broker, Charles Schwab & Company, LLC (“Schwab”), before the Financial Industry
Regulatory Authority (“FINRA”) (the “FINRA arbitration”). (DE 2-3). On February 9, 2016, in
the arbitration proceeding, plaintiff moved to dismiss the FINRA arbitration on the ground that
defendant was not its “customer,” a designation necessary to compel the arbitration in the absence

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Defendant’s motion for judgment on the pleadings (DE 37) and motion for various relief (DE 41) are also ripe.
However, given the interrelatedness between those motions and plaintiff’s ripening motion for preliminary injunction
(DE 51), the court only addresses herein arguments raised that relate to plaintiff’s motion to dismiss. The court will
address the parties’ remaining arguments once plaintiff’s motion to enforce the court’s preliminary injunction ripens.

of a written agreement to arbitrate. (DE 2-6). By letter dated March 31, 2016, the Director of
FINRA Dispute Resolution denied plaintiff’s motion to dismiss without opinion. (DE 2-7).
On April 7, 2016, plaintiff initiated this action against defendant, seeking to enjoin
defendant from pursuing arbitration against it. (DE 1). That same date, plaintiff filed a motion for
preliminary injunction, made pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 4. (DE
2). On May 4, 2016, defendant filed a motion to dismiss, or in the alternative motion to compel
arbitration. (DE 14). The court issued a temporary restraining order (“TRO”) on May 9, 2016,
restraining defendant from proceeding with the FINRA arbitration pending resolution of plaintiff’s
motion for preliminary injunction. (DE 15). Thereafter, defendant filed an answer to plaintiff’s
complaint, which included counterclaims against plaintiff. (DE 22).
On June 17, 2016, the court held hearing on plaintiff’s motion for preliminary injunction and
defendant’s motion to dismiss. On June 21, 2016, the court entered an order, memorializing its oral
rulings made at hearing. (DE 32). The court denied defendant’s motion to dismiss, or in the
alternative, motion to compel arbitration, and granted plaintiff’s motion for preliminary injunction.
The court also directed the parties to provide to the court an updated status report and directed
plaintiff to post security in the total amount of $5,000.00.
Thereafter, on June 30, 2016, defendant filed a first amended counterclaim. (DE 33).
Defendant’s first amended counterclaim asserts against plaintiff the following claims: (1) abuse of
process; (2) unjust enrichment; (3) common law fraud; (4) securities fraud; and (5) negligent
representation. Pursuant to the court’s June 21, 2016, order, the parties filed separate status reports
and defendant filed a motion for clarification. (DE 35, 36). Included in defendant’s motion for
clarification was a request to amend his answer and counterclaims. (DE 35, 36). Thereafter,

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defendant filed a motion for partial judgment on the pleadings on July 8, 2016, (DE 37), and motion
for miscellaneous relief on July 21, 2016. (DE 41).
On July 25, 2016, the court entered an order denying defendant’s motion for clarification,
which the court construed in part as a motion for reconsideration of the court’s order granting
plaintiff’s motion for preliminary injunction. (DE 42). The court also denied without prejudice
defendant’s motion to amend his answer and counterclaim.
On August 4, 2016, plaintiff filed the instant motion to dismiss defendant’s first amended
counterclaim, pursuant to Rule 12(b)(6).

In support of its motion, plaintiff submitted a

memorandum of law along with two exhibits. On August 8, 2016, defendant filed an updated status
report, informing the court that he replaced plaintiff UBS Financial Services, Inc. as a party to the
arbitration proceeding with other UBS entities, UBS AG, UBS Group AG, and UBS Securities,
LLC. (DE 47). On August 26, 2016, defendant responded in opposition to plaintiff’s motion to
dismiss, and plaintiff replied on September 12, 2016.
After defendant’s motions for judgment on the pleadings and miscellaneous relief and
plaintiff’s motion to dismiss were submitted to the court, plaintiff filed a motion seeking
enforcement of the preliminary injunction previously ordered by this court. In the alternative,
plaintiff seeks to enjoin defendant from pursuing FINRA arbitration against other UBS entities, UBS
Securities, LLC, UBS AG and UBS Group AG. (DE 51). Defendant’s response to that motion is
due by December 5, 2016.2

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Following the submission of plaintiff’s motion to dismiss, defendant filed another counterclaim on November 23, 2016,
which seeks to further supplement his first amended counterclaim. (DE 53). Pursuant to Rule 15(a), defendant must
seek leave of court or obtain plaintiff’s consent to amend his counterclaim a second time. As defendant’s counterclaim
is not properly before the court, the court considers only the factual allegations as set forth in defendant’s first amended
counterclaim in deciding plaintiff’s motion to dismiss.

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STATEMENT OF FACTS
The facts alleged and incorporated by reference in defendant’s first amended counterclaim
are summarized as follows. Plaintiff is a member of FINRA. (DE 22). Plaintiff underwrites the
electronically traded note, “Monthly Pay 2xLeveraged Exchange Traded Security,” which is
commonly known as a CEFL security. (DE 22 at 24; DE 22-1). The CEFL security is a leveraged
debt security that allows investors to experience up to twice the rate of return of a certain index.
(DE 22 at 24).
On or about November 14, 2014, plaintiff replaced its prospectus for the CEFL security with
a product supplement. (DE 33 at 5). When defendant requested a copy of the prospectus for the
CEFL security, he was told that the prospectus had been replaced with the product supplement and
that a copy of the prospectus for the CEFL security was available online. (Id.). Defendant alleges
that he never received a copy of the original prospectus and that such prospectus is not available
online. (Id.).
Sometime after November 14, 2014, and over the course of two years, defendant purchased
numerous shares of CEFL securities from his broker, Schwab. These purchases were based on
information provided in the product supplement. (DE 22 at 29). Defendant does not have a
brokerage account with plaintiff, (Id. at 30), but he does receive monthly dividends from plaintiff
and pays plaintiff monthly fees for managing the CEFL securities. (Id. at 24).
Since the date defendant purchased the CEFL securities, the value of the securities has
declined. (DE 33 at 5–6). As a result, defendant has suffered substantial losses. (Id. at 10, 12).
Defendant contends that had certain information been disclosed in the CEFL security’s prospectus
and product supplement, he would not have sustained such losses. (Id.). Specifically, defendant

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contends that plaintiff misrepresented itself in the CEFL security’s prospectus and product
supplement by failing to disclose certain information regarding its criminal history, pending
lawsuits, and pending Department of Justice investigations. (DE 22 at 35; DE 22-3).
DISCUSSION
A.

Standard of Review
1. Motion to Dismiss
A motion to dismiss for failure to state a claim under Rule 12(b)(6) tests the legal sufficiency

of the complaint but “does not resolve contests surrounding the facts, the merits of a claim, or the
applicability of defenses.” Republican Party v. Martin, 980 F.2d 943, 952 (4th Cir. 1992). A
complaint states a claim if it contains “sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “Asking for plausible grounds . . . does not impose
a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable
expectation that discovery will reveal [the] evidence” required to prove the claim. Twombly, 550
U.S. at 556.
In evaluating the complaint, “[the] court accepts all well-plead facts as true and construes
these facts in the light most favorable to the plaintiff, “but does not consider legal conclusions,
elements of a cause of action, . . . bare assertions devoid of further factual enhancement[,] . . .
unwarranted inferences, unreasonable conclusions, or arguments.” Nemet Chevrolet, Ltd. v.
Consumeraffairs.com, Inc., 591 F.3d 250, 255 (4th Cir. 2009). When a document is attached to a
motion to dismiss, “a court may consider it in determining whether to dismiss the [claim] if it was
integral to and explicitly relied on in the [pleading] and if the [claimants] do not challenge its

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authenticity.” Am. Chiropractic Ass’n v. Trigon Healthcare, Inc., 367 F.3d 212, 234 (4th Cir.
2004). If additional materials “outside the pleading[s] are presented to and not excluded by the
court, the motion [to dismiss] shall be treated as one for summary judgment . . ., and all parties shall
be given reasonable opportunity to present all material made pertinent to such motion by Rule 56.”
Fed. R. Civ. Pro. 12(b); see Gay v. Wall, 761 F.2d 175, 178 (4th Cir. 1985).
Courts must liberally construe pro se complaints, and a “pro se complaint, however inartfully
pleaded, must be held to less stringent standards than formal pleadings drafted by lawyers.”
Erickson v. Pardus, 551 U.S. 89, 94 (2007). However, courts “cannot ignore a clear failure to allege
facts” that set for a cognizable claim. Johnson v. BAC Home Loan Servicing, LP, 867 F. Supp.
2d 766, 776 (E.D.N.C. 2011). “The ‘special judicial solitude’ with which a district court should
view such pro se complaints does not transform the court into an advocate. Only those questions
which are squarely presented to a court may properly be addressed.” Weller v. Dep’t of Soc. Servs.
for the City of Baltimore, 901 F.2d 387, 391 (4th Cir. 1990).
B.

Analysis
1. Abuse of Process
Abuse of process is “the misuse of legal process for an ulterior purpose.” Fowle v. Fowle,

263 N.C. 724, 728 (1965). “One who uses legal process to compel a person to do some collateral
act not within the scope of the process or for the purpose of oppression or annoyance is liable [for]
damages in a common law action for abuse of process.” Id. at 727. In North Carolina, abuse of
process “requires both an ulterior motive and an act in the use of the legal process not proper in the
regular prosecution of the proceeding, and that both requirements related to defendant’s purpose to
achieve through the use of the process some end foreign to those it was designed to effect.”

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Stanback v.Stanback, 297 N.C. 181, 200 (1979) (quotations omitted). “The ulterior motive
requirement is satisfied when the [claimant] alleges that the prior action was initiated by [the
respondent] or used by him to achieve a collateral purpose not within the normal scope of the
process used.” Id. “The act requirement is satisfied when the [claimant] alleges that once the prior
proceeding was initiated, the [respondent] committed some willful act whereby he sought to use the
existence of the proceeding to gain advantage of the [claimant] in respect to some collateral matter.”
Id.
Defendant’s first amended counterclaim fails to allege sufficient facts to support a cause of
action for abuse of process. Defendant claims that plaintiff filed its complaint against him for the
ulterior purpose of “unlawfully sacrificing an aged and financially strapped [d]efendant in hopes of
expanding the Fourth Circuit’s interpretation of what is and is not a FINRA member firm ‘customer’
to include as a non-customer any person or entity that does not have a brokerage account with the
FINRA member firm, and to intimidate others who may be contemplating the filing of a FINRA
claim from filing that claim.” (DE 33 at 8–9).
However, defendant has not alleged any improper act on the part of plaintiff following the
institution of the proceeding seeking to enjoin defendant from pursuing arbitration against plaintiff.
Rather, defendant merely alleges an improper act in the filing of the action, which cannot constitute
abuse of process. See Melton v. Rickman, 225 N.C. 700, 704 (1945) (“Nor can a cause of action
[for abuse of process] arise out of the issuance of the process alone.”). Accordingly, defendant’s
abuse of process claim against plaintiff must be dismissed.
2. Unjust Enrichment
An unjust enrichment claim is neither wholly tortious nor wholly contractual. Booe v.

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Shadrick, 322 N.C. 567, 570 (1988). To establish a claim for unjust enrichment, a party must allege
that it conferred a benefit on the other party, the other party consciously accepted the benefit, and
the benefit was not conferred officiously or gratuitously. Id. at 556. The benefit must also be
measurable. Id.
Defendant fails to allege facts sufficient to state a claim for unjust enrichment under North
Carolina law. In his first amended complaint, defendant merely contends that “UBS has been
unjustly enriched at the expense of the [c]ounterclaimant.” (DE 33 at 10). This conclusory
allegation, however, is insufficient to state a claim for relief. See Nemet 591 F.3d at 255.
To the extent defendant seeks to show that plaintiff was unjustly enriched from defendant’s
purchases of CEFL securities and the corresponding fee payments defendant paid plaintiff each
month, defendant still fails to state a plausible claim for relief. Defendant purchased CEFL
securities from Schwab, not plaintiff. Furthermore, defendant had no brokerage account with
plaintiff. Although plaintiff did receive monthly fee payments from defendant, those payments were
not paid directly by plaintiff, but instead garnished from monthly distributions plaintiff provided
defendant. (DE 22-1 at 2).
Additionally, defendant paid the monthly fees to plaintiff as compensation for managing
defendant’s securities. (DE 22 at 24). Defendant’s first amended complaint does not allege that
plaintiff failed to manage his securities. Rather, defendant’s allegations against plaintiff relate to
disclosures plaintiff allegedly failed to make prior to defendant’s investment purchases.
Accordingly, defendant’s factual allegations fail to create a plausible inference that any benefit
plaintiff may have received as a result of defendant’s purchases was conferred “in a manner . . . not
justified by the circumstances.” Booe, 322 N.C. at 556. Consequently, defendant’s factual

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allegations are insufficient to support a claim of unjust enrichment under North Carolina law.
3. Common Law Fraud
In order to state a claim for fraud under North Carolina law, a claimant must plead with
particularity facts showing (1) a false representation or concealment of a material fact, (2)
reasonably calculated to deceive, (3) made with intent to deceive, (4) which does in fact deceive,
and (5) results in damage to the injured party. Forbis v. Neal, 361 N.C. 519, 526–27 (2007).
Further, fraud based upon concealment requires a duty to disclose. Griffin v. Wheeler-Leonard &
Co., 290 N.C. 185, 198 (1976). “[I]n pleading . . . fraud, the particularity requirement is met by
alleging time, place, and content of the fraudulent representation, identity of the person making the
representation and what was obtained as a result of the fraudulent acts or representations.” Terry
v. Terry, 302 N.C. 77, 85 (1981).
Defendant fails to state a claim for fraud under North Carolina law. Accepting all
defendant’s allegations as true, defendant fails to allege the elements of fraud with the requisite
particularity. Specifically, defendant’s first amended complaint fails to plead with particularity facts
showing how plaintiff’s alleged omission of information regarding its “long history of . . financial
crimes,” would impact the share price of CEFL securities and allow plaintiff to “manipulate . . .the
amount of the monthly dividend to be paid to CEFL shareholders.” (DE 33 at 6–7, 11).
Furthermore, while defendant does allege that plaintiff failed to disclose information
regarding its criminal history “with intent to deceive,” defendant fails to allege sufficient facts
substantiating this conclusory assertion. See Twombly, 550 U.S. at 555 (“[A] plaintiff’s obligation
to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a
formulaic recitation of the elements of a cause of action will not do.”) (internal quotations omitted).

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Defendant suggests that this intent is implied since many prospective investors would not have
purchased shares of CEFL securities if they had knowledge of plaintiff’s extensive criminal history.
However, this suggestion is undermined by defendant’s own concession that he “made a small
purchase of CEFL” after learning about plaintiff’s criminal history, despite having alleged that “if
[he] had such foreknowledge, he would not have invested his retirement funds in CEFL.” (DE 33
at 11–12). Accordingly, defendant’s factual allegations fail state a claim of fraud under North
Carolina law. See Raritan River Steel Co. v. Cherry, Bekaert & Holland, 322 N.C. 200, 205 (1988)
(“[I]f a complainant pleads facts which serve to defeat the claim it should be dismissed.”) (internal
citations omitted).3
4. Securities Fraud
Section 10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated thereunder
make misrepresentation in connection with the purchase and sale of securities unlawful. See 15
U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Section 10(b) prohibits any person from “us[ing] or
employ[ing], in connection with the purchase or sale of any security . . . any manipulative or
deceptive device or contrivance in contravention of such rules and regulations as the Commission
may prescribe as necessary or appropriate in the public interest or for the protection of investors.”
15 U.S.C. § 78j(b). Rule 10b-5 “implements [§ 10(b)] by making it unlawful to, among other things,
‘make any untrue statement of material fact or to omit to state a material fact necessary in order to

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In its motion to dismiss, plaintiff also argues that defendant fails to state a claim for fraud on the basis that information
it allegedly failed to disclose was in fact disclosed. In support of this argument, plaintiff attaches to its motion, a copy
of the prospectus and plaintiff’s annual report. (DE 45-1; 45-2). Where defendant disputes the authenticity of these
documents, the court does not consider them in deciding plaintiff’s motion to dismiss. See Phillips v. LCI Intern., Inc.,
190 F.3d 609, 618 (4th Cir. 1999) (noting that the court may consider documents outside of the complaint only when
the authenticity of those documents is not challenged). In order to consider these documents, the court would have to
convert the instant motion to one for summary judgment. Fed. R. Civ. P. 12(d).

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make the statements made, in light of the circumstances under which they were made, not
misleading.’” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37 (2011) (quoting 17 C.F.R.
§ 240.10b-5).
Under § 10(b) and Rule 10b-5, a party must prove “(1) a material misrepresentation or
omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission
and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5)
economic loss; and (6) loss causation.” Id. at 37–38 (internal quotations omitted). Here, defendant’s
securities fraud claim is based upon an omission of material fact. An omission is material if there
is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the ‘total mix’ of information available.” Basic
Inc. v. Levinson, 485 U.S. 224, 231–32 (1988). Additionally, where claims are based upon omission
of material fact, the claimant must allege that the other party owed to it a duty to disclose the omitted
information. See Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988) (“Silence, absent a duty to
disclose, is not misleading [under federal securities laws].”).
To the extent defendant alleges a claim of securities fraud under § 11, defendant must allege
that the registration statement for a security which he purchased contained a material misstatement
or omission. 15 U.S.C. § 77k(a); Herman & MacLean v. Huddleston, 459 U.S. 375, 381–83 (1983).
Additionally, to the extent defendant alleges a claim of securities fraud under § 12(a)(2), defendant
must allege that he purchased a security in response to a materially false or misleading prospectus
or oral communication. See Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874, 899 (4th Cir.
2014).
“Claims of securities fraud are subject to a heightened pleading standard.” Zak v. Chelsea

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Therapeutics Int’l, LTD., 780 F.3d 597, 606 (4th Cir. 2015). This heightened pleading standard
requires allegations of a securities fraud claim to “state with particularity the facts giving rise to a
strong inference that the defendant acted with the required state of mind regarding the acts allegedly
violating the Exchange Act.” Id. (internal quotations omitted). Furthermore, “[e]valuating the
strength of an inference is necessarily a comparative inquiry.” Yates 744 F.3d at 885.
Accepting defendant’s factual allegations as true, defendant’s claims for securities fraud fail
to state a plausible claim for relief under Rule 12(b)(6). Defendant claims that plaintiff “concealed
material facts from its [p]rospectus and [p]roduct and [p]ricing [s]upplements for its Exchange
Traded Note (ETN) called CEFL, the concealment of which fraudulently induced [defendant] to
invest in the CEFL.” (DE 33 at 12). Specifically, defendant contends that plaintiff failed to disclose
information regarding certain criminal investigations and lawsuits brought against it. While
defendant does allege that plaintiff concealed material information with “intent to deceive,” he fails
to plead with particularity facts showing that plaintiff acted with the requisite scienter in allegedly
omitting certain information regarding its criminal history. (DE 33 at 12); see Twombly, 550 U.S.
at 555 (“[A] plaintiff’s obligation to provide the grounds of his entitlement to relief requires more
than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not
do.”) (internal quotations omitted).
Defendant suggests plaintiff acted with the requisite intent to deceive given that many
investors “would have serious misgivings about purchasing CEFL,” had plaintiff disclosed
information regarding its financial crimes. (Id.). However, these allegations are insufficient to state
a claim under 12(b)(6). Defendant himself concedes that he purchased shares of CEFL securities
after learning about plaintiff’s prior financial crimes. This concession undermines any inference that

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the omissions were material and would have “significantly altered the ‘total mix’ of information
available.” Basic, 485 U.S. at 231–32. Accordingly, defendant’s first amended counterclaim fails
to allege sufficient facts that plaintiff’s alleged omissions were material. Thus, defendant’s first
amended counterclaim fails to state a claim for securities fraud under § 10(b) and Rule 10b-5, § 11,
and § 12(a)(2).
5. Negligent Misrepresentation
“The tort of negligent misrepresentation occurs when a party justifiably relies to his
detriment on information prepared without reasonable care by one who owed the relying party a duty
of care.” Raritan, 322 N.C. at 206 (citations omitted). “To establish justifiable reliance a plaintiff
must sufficiently allege that he made a reasonable inquiry into the misrepresentation and allege that
he was denied the opportunity to investigate or that he could not have learned the true facts by
exercise of reasonable diligence.” Amesen v. Rivers Edge Golf Club & Plantation, Inc., 368 N.C.
440, 454 (2015). “Ordinarily, the question of whether an actor is reasonable in relying on the
representations of another is a matter for the finder of fact.” Marcus Bros. Textiles, Inc. v. Price
Waterhouse, L.L.P, 350 N.C. 214, 224–25 (1999) (internal quotations omitted). “This question is
one for the jury, unless the facts are so clear as to permit only one conclusion.” Id. at 225 (internal
citations omitted).
Defendant’s first amended counterclaim fails to allege a claim for negligent
misrepresentation under North Carolina law. In his first amended counterclaim, defendant suggests
that the prospectus itself is a misrepresentation, which plaintiff negligently prepared by failing to
include information regarding its criminal history. However, defendant fails to allege sufficient facts
indicating that he justifiably relied on the prospectus. Specifically, defendant fails to allege that he

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“made a reasonable inquiry into the misrepresentation . . . or that he could not have learned the true
facts by exercise of reasonable diligence.” Amesen, 368 N.C. at 454. Accordingly, defendant fails
to state a claim for negligent misrepresentation under North Carolina law.
CONCLUSION
Based on the foregoing, the court GRANTS plaintiff’s motion to dismiss defendant’s first
amended counterclaim for failure to state a claim upon which relief can be granted, made pursuant
to Federal Rule of Civil Procedure 12(b)(6). (DE 44). Defendant’s first amended counterclaim is
DISMISSED without prejudice. (DE 33).
SO ORDERED, this the 1st day of December, 2016.

_________________________
LOUISE W. FLANAGAN
United States District Judge

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