Bourbonnais et al v. Ameriprise Financial Services Inc et al

Filing 45

DECISION AND ORDER granting in part 16 , 20 and 30 motions to dismiss. ECF 2 and 34 are denied as moot. The dismissal is without prejudice and Plaintiffs may file an amended complaint within 30 days of the date of this order. See order for full detail. Signed by Chief Judge William C Griesbach on 2/24/2015. (cc: all counsel) (Griesbach, William)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN

WILLIAM BOURBONNAIS, et al.,
Plaintiffs,
v.

Case No. 14-C-966

AMERIPRISE FINANCIAL SERVICES INC., et al.,
Defendants.

DECISION AND ORDER

Plaintiffs William Bourbonnais and Thomas and Donna Tesch filed this class action suit for
securities fraud against Paul Renard, their former financial advisor, and the two broker-dealers with
whom Renard was registered during the allegedly fraudulent transactions, Ameriprise Financial
Services, Inc. (Ameriprise), and SII Investments, Inc. (SII). Plaintiffs’ complaint asserts that the
defendants sold them and the class members securities they knew to be unsuited for their needs and
goals in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule
10b–5 promulgated thereunder. The complaint also asserts several related state law claims of
negligence and violations of the Wisconsin Uniform Securities Law, Wis. Stats. § 551.501(2), and
the Wisconsin Organized Crime Control Act, § 946.80 et seq. The case is before the court on the
defendants’ motions to dismiss the complaint for failure to state a claim. Defendants also move to
strike the class allegations and compel arbitration. For the reasons that follow, the motion to dismiss
will be granted with leave to plead over.

BACKGROUND
Plaintiffs describe themselves and the class they seek to represent as “ordinary people – retail
investors as the industry calls them – whose accounts were not marked as having a speculative risk
tolerance.” (ECF No. 1, ¶ 3.) Despite this fact, the complaint alleges that the defendants sold them
non-traditional leveraged and inverse exchange-traded funds (ETFs). According to the complaint,
traditional ETFs are funds that track indexes like the NASDAQ-100 Index, S&P 500, Dow Jones
Industrial Average, and so forth. Traditional ETFs “don’t try to beat the market, they try to be the
market.” (Id. ¶ 13.) Non-traditional ETFs, on the other hand, are leveraged or inverse ETFs that
seek to deliver multiples of the daily performance of the index or benchmark they track. “For
example, a non-traditional ETF may seek results that correspond to two times the inverse of the daily
performance of the S&P 500, meaning the leveraged inverse ETF seeks to deliver twice the opposite
of the S&P 500’s daily performance.” (Id. ¶ 17.) Most non-traditional ETFs “reset” daily, meaning
the ETF does not seek to achieve its stated investment objective over a period of time greater than
a single day. According to the Financial Industry Regulatory Authority’s (FINRA) Regulatory
Notice 09-31, non-traditional ETFs are typically unsuitable for retail investors who plan to hold them
for longer than one trading session, particularly in volatile markets. (Id. ¶ 24.)
Paul Renard, the registered agent for the transactions at issue, was registered at SII from
1998 to August 2009 and again from August 2011 to August 2013. He was registered at Ameriprise
in the interim. The complaint alleges that Renard, while registered at SII in 2009, sold Plaintiff
Bourbonnais $105,389.81 of Direxion Daily S&P 500 Bear 3x Shares (BGZ/SPXS), a nontraditional ETF, which Bourbonnais held for more than four years. (Id. ¶ 41.) While registered at
Ameriprise in 2010, Renard sold Bourbonnais an additional $165,905.00 of BGZ/SPXS, which
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Bourbonnais held for more than three years. (Id. ¶ 44.) And in 2011, after being terminated from
Ameriprise and returning to SII, Renard sold Bourbonnais $102,269.50 of another non-traditional
ETF called ProShares Short S&P 500 (SH), which he held for more than two years. (Id. ¶ 48.) The
complaint also alleges Renard sold Plaintiffs Thomas and Donna Tesch $152,798.62 and then
another $75,826.63 of BGZ/SPXS, which the Teschs held for more than three years, while Renard
was registered at Ameriprise in 2010. (Id. ¶ 53.) The complaint alleges Bourbonnais wound up
losing 89% of his investment in BGZ/SPXS and 31% of his investment in SH. (Id. ¶¶ 47, 51.) The
Teschs lost 90% of their investment in BGZ/SPXS. (Id. ¶ 56.)
According to a Letter of Acceptance, Waiver and Consent signed by Renard and FINRA,
which is attached to and referred to in the complaint, Renard recommended at least four of his
customers buy and hold non-traditional ETFs without having reasonable grounds for believing that
the recommended investments were suitable for those customers. (ECF No. 1-2 at 1.) In addition,
because Ameriprise had a policy prohibiting the solicitation of non-traditional ETF transactions,
Renard falsely indicated on the order ticket that the sales were “unsolicited” in many of his
transactions. (Id. at 1–2.) By June 2011, at which time Amerprise terminated its relationship with
Renard, some of Renard’s customers had been holding non-traditional ETFs for more than 600 days.
(Id. at 2.) The complaint also quotes various pleadings and arguments made in the arbitration
proceedings over Renard’s termination by Ameriprise, as well as the proceedings that took place in
federal court when Renard filed a motion to vacate the adverse arbitration award. For example, the
complaint alleges that Ameriprise “expressly admitted” in those proceedings that Renard committed
clear violations of securities laws and rules and defrauded his clients. (ECF No. 1, ¶ 64.)

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The complaint alleges Ameriprise, despite its policy mentioned above, was reckless in failing
to maintain a system to ensure Plaintiffs and the class were properly advised of the suitability of their
investments. (Id. ¶ 60.) The complaint alleges Ameriprise knew Renard sold non-traditional ETFs
prior to hiring him, and it alleges that Renard testified in the arbitration proceedings that other
Ameriprise employees encouraged him to sell non-traditional ETFs and to fraudulently mismark
order tickets to circumvent Ameriprise’s policy. (Id. ¶¶ 69, 70.) The complaint also alleges that
regardless of whether the orders were falsified, the sheer number of “unsolicited” sales of nontraditional ETFs to individual retail investors was a “red flag” indicating unsuitable sales that
Ameriprise recklessly disregarded. (Id. ¶ 73.) Finally, the complaint alleges that even after
Ameriprise discovered Renard’s fraud and fired him, the company failed to advise Plaintiffs and the
class of the unsuitable investments they were holding, resulting in further damages to investors. (Id.
¶ 75.)
The complaint alleges SII was also reckless for failing to maintain or even establish a system
for ensuring Plaintiffs and the class were properly advised of the suitability of their investments. (Id.
¶¶ 81–82.) It alleges SII knew Plaintiffs and the class were holding unsuitable investments and losing
money, yet it failed to advise the investors that the products were unsuitable for them. (Id. ¶ 84.)
Despite knowing Renard was fired by Ameriprise and sanctioned by FINRA, the complaint alleges
SII recklessly re-hired Renard and allowed him to continue recommending and selling unsuitable
investments to Plaintiffs and the class. (Id. ¶ 85.)
The complaint also defines the proposed class as all individuals who (1) were retail clients
of Ameriprise or SII; (2) purchased non-traditional ETFs that reset daily; (3) held the non-traditional
ETFs for 21 days or more; and (4) did not have accounts marked for speculative risk tolerance. (Id.
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¶ 92.) It further defines two similar sub-classes consistent with the above but limited to clients of
Renard’s while at Ameriprise and clients or Renard’s while at SII. (See id.)

ANALYSIS
Renard moves to dismiss Count I for failure to state a claim upon which relief may be
granted. Fed.R.Civ.P. 12(b)(6). In reviewing a motion under Rule 12(b)(6), the court accepts all
well-pleaded factual allegations as true and draws all reasonable inferences in favor of the plaintiffs.
Pugh v. Tribune Co., 521 F.3d 686, 692 (7th Cir. 2008). The complaint must contain “a short and
plain statement of the claim showing that the pleader is entitled to relief[.]” Fed.R.Civ.P. 8(a). In
addition, a securities fraud claim must meet the heightened pleading requirements of Rule 9(b) and
the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4(b)(1), (2).
Rule 9(b) of the Federal Rules of Civil Procedure provides: “In all averments of fraud or
mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” In
Borsellino v. Goldman Sachs Group, Inc., the court explained the rationale for the heightened
pleading requirement in cases alleging fraud:
This heightened pleading requirement is a response to the great harm to the
reputation of a business firm or other enterprise a fraud claim can do. . . . Thus, a
plaintiff claiming fraud or mistake must do more pre-complaint investigation to
assure that the claim is responsible and supported, rather than defamatory and
extortionate. A complaint alleging fraud must provide “the who, what, when, where,
and how.”
477 F.3d 502, 507 (7th Cir. 2007) (internal quotations and citations omitted); see also Ackerman
v. Nw. Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir.1999).

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The PSLRA raises the pleading burden even higher. For any materially false statement or
omission alleged, “the complaint shall specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint shall state with particularity all facts on
which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). The PSLRA also requires the complaint
“state with particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind.” Id. § 78u-4(b)(2)(A) (emphasis added).
Plaintiffs have asserted what some courts have referred to as a § 10(b) unsuitability claim
against the defendants. See, e.g., Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1031 (2d Cir.
1993); O'Connor v. R.F. Lafferty & Co., Inc., 965 F.2d 893, 897 (10th Cir.1992). To state an
unsuitability claim, a plaintiff must allege:
(1) that the securities purchased were unsuited to the buyer’s needs; (2) that the
defendant knew or reasonably believed the securities were unsuited to the buyer’s
needs; (3) that the defendant recommended or purchased the unsuitable securities for
the buyer anyway; (4) that, with scienter, the defendant made material
misrepresentations (or, owing a duty to the buyer, failed to disclose material
information) relating to the suitability of the securities; and (5) that the buyer
justifiably relied to its detriment on the defendant’s fraudulent conduct. Scienter may
be inferred by finding that the defendant knew or reasonably believed that the
securities were unsuited to the investor’s needs, misrepresented or failed to disclose
the unsuitability of the securities, and proceeded to recommend or purchase the
securities anyway.
Brown v. E.F. Hutton Group, Inc., 991 F.2d at 1031.
“Analytically, an unsuitability claim is a subset of the ordinary § 10(b) fraud claim in which
a plaintiff must allege, inter alia, (1) material misstatements or omissions, (2) indicating an intent to
deceive or defraud, (3) in connection with the purchase or sale of a security.” Id. at 1031; see also
Louros v. Kreicas, 367 F.Supp.2d 572, 586 (S.D.N.Y. 2005) (“An unsuitability claim, then, is similar
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to an ordinary Section 10(b) fraud claim, except that the unsuitability claim requires (a) proof of the
knowing purchase or recommendation of unsuitable securities, and (b) that the misrepresentations
and omissions in question relate to the suitability of the securities, rather than that they be in
connection with their purchase or sale.”).
Plaintiffs’ complaint describes, with supporting references to FINRA publications, the
unsuitable nature of the non-traditional ETFs for so-called retail investors with relatively low risk
tolerance and identifies the named Plaintiffs as just such investors. The complaint describes each of
the sales of non-traditional ETFs to the named Plaintiffs by SII or Ameriprise, the dates of each
transaction and alleges that Renard was the registered representative for each of the transactions.
Absent from the complaint, however, are any particularized allegations as to the who, what, when,
where, and how of the fraud as to them. Although the complaint alleges generally that Renard was
terminated by Ameriprise and sanctioned by FINRA for recommending non-traditional ETFs to
clients for whom such an investment was unsuited, there is no allegation that Renard made any such
recommendation, either orally or in writing, to the named Plaintiffs. There is no allegation of what
he failed to tell them and what he said that made the omission misleading. Also missing are any
allegations as to when the false representations or omissions were made. Indeed, there isn’t even
a particularized allegation as to what Renard omitted in his presentation to the named Plaintiffs.
To be sure, “the exact level of particularity that is required will necessarily differ based on
the facts of the case.” AnchorBank, FSB v. Hofer, 649 F.3d 610, 615 (7th Cir.2011). While a
plaintiff claiming fraud is required “to fill in a fairly specific picture of the allegations in her
complaint, we ‘remain sensitive to information asymmetries that may prevent a plaintiff from offering
more detail.’” Cincinnati Life Ins. Co. v. Beyrer, 722 F.3d 939, 949 (7th Cir. 2013) (quoting Pirelli
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Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 443 (7th Cir.
2011)). But this is not a case in which the named Plaintiffs lack access to the information needed
to meet the particularity standard. Plaintiffs must know what Renard did and did not tell them about
the non-traditional ETFs before they invested in them. Instead of allegations of what Renard
specifically said to the Plaintiffs, the complaint relies on the allegations by Ameriprise and the
findings of FINRA that Renard recommended non-traditional ETFs to his clients in general. But the
fact that Renard may have recommended non-traditional ETFs to some of his retail clients without
explaining the risk and dangers associated with them does not mean he recommended them to the
named Plaintiffs. The complaint contains only conclusory allegations that the defendants knowingly
or in reckless disregard of their duties failed to communicate material information to Plaintiffs
regarding the purchase of non-traditional ETFs, and thereafter continued to remain silent despite the
evidence that their earlier omissions and reckless conduct was continuing to cause Plaintiffs
economic loss. (ECF No. 1, ¶¶ 104, 105, 106.) This is not enough. See Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (“Although for the purposes of a motion to dismiss we must take all of the factual
allegations in the complaint as true, we are not bound to accept as true a legal conclusion couched
as a factual allegation.”) (internal quotation marks omitted).
In truth, Plaintiffs do not really dispute the defendants’ assertion that the complaint fails to
identify individual omissions or misrepresentations with particularity. Instead, they argue that they
are justified in avoiding the required specificity so as to preserve their argument for certification as
a class action. In response to Ameriprise’s contention that their complaint lacks the required
particularity, Plaintiffs contend, “Ameriprise ignores how this is a class action, and ‘to satisfy the
pleading requirements of the PSLRA and still be able to pursue their claims as a class,’ Plaintiffs
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must plead ‘facts demonstrating that [the broker-dealer] engaged in a scheme to defraud its
investors.’” (Pl.’s Resp. To Def. Ameriprise Mot. To Dismiss at 11–12 (quoting Clemens Trust, 485
F.3d at 850)). The fact that Plaintiffs want to bring a class action, however, does not relieve them
of the obligation to comply with Rule 9(b) even if in doing so they undermine their request for class
certification.
For these reasons, Plaintiffs’ § 10(b) securities fraud claim will be dismissed. And because
the remaining claims arise under state law, they will be dismissed also for lack of federal jurisdiction.
See 28 U.S.C. § 1367(c)(3). The dismissals are without prejudice, however, and Plaintiffs may refile an amended complaint within 30 days. It appears clear that Plaintiffs will be able to state a
§ 10(b) claim with the required particularity directly against at least Renard and perhaps under
principles of respondeat superior or apparent authority against Ameriprise and SII. Of course, if a
§ 10(b) claim is asserted, the court will have supplemental jurisdiction over Plaintiffs’ state law
claims. The motions for class certification and to strike the class allegations are denied as moot.
SO ORDERED at Green Bay, Wisconsin this 24th day of February, 2015.

s/ William C. Griesbach
William C. Griesbach, Chief Judge
United States District Court

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