Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 1 of 38
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF FLORIDA
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`
`In re:
`
`JANUARY 2021 SHORT SQUEEZE
`TRADING LITIGATION
`_________________________________/
`
`This Document Relates to the Actions in the
`Other Broker Tranche
`
`
`ORDER
`
`
`
`THIS CAUSE came before the Court on Defendant, Apex Clearing Corporation’s Rule 12
`
`Motion to Dismiss Plaintiffs’ (Fourth) Class Action Complaint [ECF No. 491], filed on June 22,
`
`2022. Plaintiffs, Erik Chavez and Peter Jang, filed a Response [ECF No. 494]; to which Defendant
`
`filed a Reply [ECF No. 496]. The Court has carefully considered the Amended Class Action
`
`Complaint (“Am. CAC”) [ECF No. 483], the parties’ written submissions, the record, and
`
`applicable law. For the following reasons, the Motion is granted.
`
`I.
`
`BACKGROUND
`
`A.
`
`January 2021 Short Squeeze
`
`In January 2021, three publicly traded companies — Gamestop Corporation (GME), AMC
`
`Entertainment Holdings (AMC), and Koss Corporation (KOSS) — experienced significant
`
`volatility in their publicly traded shares (the “Meme Stocks”). (See Am. CAC ¶¶ 3–5). The chaos
`
`began when Plaintiffs and other retail investors realized that hedge funds, market makers, and
`
`other significant players in the financial markets (the “Short Sellers”) had shorted1 the Meme
`
`
`1 To “short” a stock means to borrow shares of it with the expectation that its price will decrease within a
`given period. To exit a short position, a short seller buys shares of the stock — hopefully at a decreased
`price — and profits from the difference between the stock’s price at the outset of the position and the exit.
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 2 of 38
`
`
`Stocks, driving their prices down. (See id. ¶¶ 58–59, 61). Plaintiffs, who liked the Meme Stocks,
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`counterpunched. They started buying up the cheap shares en masse, defying the Short Sellers’
`
`expectations and exerting upward pressure on the stock prices. (See id. ¶¶ 61–62).
`
`The head-on collision between the retail investors and the Short Sellers produced
`
`significant turbulence in the financial markets. Initially, retail appeared to be the more powerful
`
`force, as the increased demand for the Meme Stocks created a “short squeeze”2 that sent their
`
`prices parabolic. (See id. ¶¶ 58–65). For example, between January 26 and January 27, 2021, the
`
`prices of GME (134.84%), AMC (301.2%), and KOSS (480.0%) all more than doubled. (See id.
`
`¶¶ 65–66).
`
`B.
`
`Defendant’s Role
`
`Enter Defendant. Defendant is a broker-dealer, a financial entity that executes securities
`
`trades in the financial markets. (Am. CAC ¶¶ 1, 23–25). It services two types of customers, in
`
`two different roles. (See id. ¶¶ 25, 28).
`
`First are the Shared Customers. Shared Customers are investors who have already sought
`
`out another broker-dealer (an “Introducing Broker-Dealer”) to trade securities. (See id. ¶¶ 25–26).
`
`These Introducing Broker-Dealers lack “direct access to trading platforms and clearinghouses,” so
`
`they require help executing their customers’ orders. (Id. ¶ 26). To plug these gaps, Introducing
`
`Broker-Dealers bring their customers to Defendant, which provides clearing broker services for
`
`their trades. (See id.). The two Plaintiffs who filed the Amended Class Action Complaint — Erik
`
`
`However, if the stock price increases, the short position becomes less valuable, and the short seller loses
`money. (See Am. CAC ¶ 61).
`
` A short squeeze occurs when investors buy significant quantities of a heavily shorted stock, which drives
`the stock price up. In response, short sellers — who have borrowed shares of the shorted stock — must
`buy the shares at the higher price to exit their short position. These additional purchases can drive the stock
`price even higher. (See id. ¶¶ 63–64).
`
` 2
`
`
`
`2
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 3 of 38
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 4 of 38
`
`
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`1.
`
`Clearing Broker Obligations
`
`First are the clearinghouse services for which the Shared Customers use Defendant.
`
`Clearinghouses guarantee stock trades once buyers and sellers agree on a price. (See id. ¶¶ 31–
`
`33). This is an inherently risky job. If either the buyer or seller does not perform its obligation on
`
`an agreed trade, the clearinghouse is on the hook. (See id. ¶ 32). If too many agreed-upon trades
`
`fail and the clearinghouse can no longer guarantee them, it places the entire market at risk. (See
`
`id. ¶ 37).
`
`To help offset this risk, clearinghouses rely on margin. (See id. ¶¶ 37–38). Margin is a
`
`percentage of the overall value of a stock trade that investors put up — typically through broker-
`
`dealers — once the buyer and seller have agreed to trade at a specific price, but before the
`
`transaction is completed (the “Gap Period”).3 (See id. ¶¶ 32, 37–38). When markets are volatile,
`
`the risk that one side of a trade will default during the Gap Period is higher. (See id. ¶¶ 37–38).
`
`Consequently, the clearinghouse may increase the margin requirements during such periods until
`
`the markets calm down. (See id. ¶¶ 35, 37–38, 93).
`
`The clearinghouse at issue here is the National Securities Clearing Corporation (“NSCC”),
`
`a Securities and Exchange Commission-regulated company that serves as the “central counterparty
`
`that clears cash transactions in the U.S. equities markets[.]” (Id. ¶ 32 (alteration added)). Once a
`
`buyer and seller agree to trade a security at a set price, the NSCC guarantees delivery of the security
`
`to the buyer and payment to the seller. (See id.).
`
`The NSCC presides over member clearing brokers, like Defendant. (See id. ¶ 31). To
`
`protect the clearinghouse from defaults, members post collateral for their customers’ transactions.
`
`(See id.). The NSCC collects these funds from members “at the start of each day and intraday in
`
`
`3 The Gap Period occurs because there is a delay between when a buyer and seller reach agreement and the
`completion of a transaction.
`
`
`
`4
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 5 of 38
`
`
`volatile markets” (id. ¶ 38 (alteration added)), and it feeds them into the Depository Trust Clearing
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`Corporation’s (the “DTCC[’s]”) coffers4 (see id. ¶¶ 37–38). Volatility is a significant factor in
`
`determining how much collateral a member must post on any given day. (See id. ¶¶ 37–38). As
`
`one might expect, the more volatile a security is, the higher the collateral requirement. (See id.).
`
`During the January 2021 short squeeze, the Meme Stocks were exceedingly volatile.
`
`Between Thursday, January 21 and Wednesday, January 27, GME’s price shot from $43.03 to
`
`$380.00. (See id. ¶ 60, 65). AMC and KOSS also saw meteoric price increases. (See id. ¶ 65).
`
`It thus should have come as no surprise, Plaintiffs allege, that Defendant’s collateral
`
`requirement was at risk of increasing on January 28. (See id. ¶ 39). According to Plaintiffs,
`
`collateral requirements are not a black box, sprung on unsuspecting firms each morning. Rather,
`
`they are informed by hard metrics, which Defendant monitors in real time. (See id. ¶¶ 36–39).
`
`Despite these warnings, Defendant was ill-prepared to meet its collateral requirements on January
`
`28, 2021. (See id. ¶ 39).
`
`2.
`
`Broker-Dealer Obligations
`
`Broker-dealer services are a slightly different matter. While clearing brokers are tasked
`
`with guaranteeing a trade once the buyer and seller agree on a price, broker-dealers effectuate the
`
`trade in the first instance. (See id. ¶¶ 33). Two sets of broker-dealer obligations factor into
`
`Plaintiffs’ Amended Class Action Complaint.
`
`First is the Net Capital Rule, a SEC regulation that “requires broker-dealers to ‘at all times
`
`have and maintain net capital’ no less than the greatest of the minimum requirement applicable to
`
`its business.” (Id. ¶ 40 (quoting 17 C.F.R. § 240.15c3-1(a))). This rule ensures that even in times
`
`
`4 The DTCC is the NSCC’s parent company, and it provides insurance services for NSCC members. (See
`id. ¶ 31).
`
`
`
`5
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 6 of 38
`
`
`of volatility, like during a short squeeze, broker-dealers have “sufficient liquid assets to meet all
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`obligations to customers.” (Id.).
`
`Second are the rules to which registered Financial Industry Regulatory Authority
`
`(“FINRA”) members must adhere. FINRA is a non-governmental securities regulator, of which
`
`Defendant is a registered member. (See id. ¶ 43). FINRA regulations require broker-dealers to
`
`“observe high standards of commercial honor and just and equitable principles of trade” when
`
`dealing with their customers. (Id. ¶ 44 (citation and quotation marks omitted)).
`
`Plaintiffs allege that FINRA members are subject to a “fundamental responsibility for fair
`
`dealing” that applies “even during times of market stress.” (Id. (citations and quotation marks
`
`omitted; emphasis adopted)). FINRA regulations further obligate each broker-dealer to “engage
`
`in continual risk management of its trading and financial mission critical systems” (id. ¶ 45
`
`(citation, emphasis, and quotation marks omitted), which Plaintiffs interpret as requiring “a duty
`
`of due care and loyalty” and a duty “to implement . . . risk assessment tools to manage potential
`
`operational and credit risks” (id. ¶ 47 (alteration added)). According to Plaintiffs, Defendant’s
`
`response to the short squeeze fell short of these obligations. (See id. ¶ 5).
`
`C.
`
`Defendant’s Restrictions on Meme Stock Purchases
`
`When the markets closed on January 27, 2021, the short squeeze appeared to be firing on
`
`all cylinders. After an already-strong five-day run (see id. ¶ 60), all three Meme Stocks more than
`
`doubled in price that day (see id. ¶¶ 65–66). Unfortunately for Plaintiffs,5 these gains would not
`
`last.
`
`
`5 After the January 27 trading day concluded, Chavez held 607 shares of AMC, and Jang held 3,500 shares
`of GME. (See id. ¶¶ 15, 19).
`
`
`
`
`6
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 7 of 38
`
`
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`At 9:30 a.m.6 on January 28, Defendant received an unconfirmed report from the NSCC
`
`“showing a projection of a substantially increased clearing deposit for [Defendant].” (Id. ¶ 79
`
`(alteration added)). Defendant knew that Meme Stock volatility was high, but it did not expect a
`
`collateral increase of this magnitude. (See id. ¶¶ 39, 71, 81). Still, it did not reach out to the NSCC
`
`or the DTCC to confirm the projected amount, which exceeded its initial expectations. (See id. ¶¶
`
`77, 83). Rather than wait for clarification (see id. ¶¶ 77–78), Defendant started restricting Meme
`
`Stock trades so that it could avoid a potentially sizable “collateral requirement that NSCC . . . may
`
`impose” (id. ¶ 80 (alteration added)).
`
`At or around 11:30 a.m., Defendant blocked direct and Shared Customers alike from
`
`purchasing more Meme Stock shares. (See id. ¶¶ 70, 72, 79). For direct customers, this was easy
`
`to accomplish. Defendant served as broker-dealer for the direct customers, so it simply refused to
`
`execute any of their buy orders. (See id. ¶ 70). Direct customers who held Meme Stock shares
`
`could sell their position if they pleased, but Defendant disallowed them any new purchases. (See
`
`id.).
`
`For Shared Customers, Defendant was merely the clearing broker, so it had to direct the
`
`Introducing Broker-Dealers to shut off purchase orders for it. (See id.). At or around 11:30 a.m.,
`
`Defendant announced to the Introducing Broker-Dealers that the Meme Stock trades were to be
`
`“liquidation only” until further notice. (Id. ¶ 78). It also set margin requirements for the Meme
`
`Stocks at 100%. (See id.). Introducing Broker-Dealers fell in line and relayed the message to the
`
`Shared Customers. (See id. ¶¶ 72–75). Several, including Webull and Ally, deflected blame for
`
`the restriction, emphasizing that the decision was Defendant’s, not theirs. (See id. ¶¶ 71, 73–75).
`
`
`6 All times are in Eastern Standard Time.
`
`
`
`7
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 8 of 38
`
`
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`Less than 30 minutes after it implemented the restriction, Defendant realized it had
`
`overestimated how much its collateral requirement was set to increase. (See id. ¶¶ 81–82). By
`
`11:41 a.m., the DTCC “knew . . . that [Defendant’s] collateral exposure was going down.” (Id. ¶
`
`82 (alterations added)). It arranged a phone call with Defendant at 11:47 a.m. (see id.), and by
`
`noon, Defendant understood that the new collateral requirement — while greater than the previous
`
`day’s amount — “was in fact lower [than projected at 9:30] and in line with its expectations and
`
`ability to pay” (id. ¶ 81 (alteration added)). The scale of the projected collateral increase then
`
`continued to shrink throughout the trading day until it vanished to nothing. (See id. ¶¶ 85–86). As
`
`it turned out, Defendant was “not required to pay any additional collateral on January 28, 2021[.]”
`
`(Id. ¶ 86 (alteration and emphasis added)).
`
`Plaintiffs allege that even if Defendant’s initial collateral projections were accurate — and
`
`Defendant’s subsequent communications with the DTCC quickly revealed they were not —
`
`Defendant never had any reason to worry that it would not be able to make its collateral
`
`requirement. (See id. ¶¶ 86–87). According to Plaintiffs, Defendant had “headroom in terms of
`
`the capital available to [it] on [its] balance sheet” and “lines of credit that [it] c[ould] call on as
`
`needed.” (Id. ¶ 87 (alterations added)). In fact, the very next day, Defendant considered imposing
`
`further restrictions and declined to do so because it planned on “rais[ing] a few hundred in capital”
`
`over the following weekend. (Id. ¶ 90 (alteration added)).
`
`Despite the clarity that began to emerge in the minutes after the January 28 restriction took
`
`effect, Defendant continued to bar Meme Stock purchase orders until 2:55 p.m. (See id. ¶ 81).
`
`Plaintiffs allege that this three-and-a-half-hour kibosh was unreasonably long. (See id. ¶¶ 83–84).
`
`Plaintiffs acknowledge that temporary trading restrictions on buy and sell orders can sometimes
`
`be justified in times of extreme market volatility, but “industry-recognized” stopgap mechanisms
`
`
`
`8
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 9 of 38
`
`
`like the circuit breaker7 are supposed to last “mere minutes[,]” not hours; which amounts to a
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`“figurative lifetime in the multi-trillion-dollar public markets.” (Id. ¶¶ 52–53 (alteration added)).
`
`In sum, Plaintiffs allege that Defendant effectuated a lengthy and unreasonable ban on buy-
`
`side Meme Stock orders, which broke the short squeeze and caused stock prices to “spiral
`
`downwards[.]” (Id. ¶ 6 (alteration added); see also id. ¶ 84). As a result, Plaintiffs had to either
`
`sell their shares “at artificially suppressed prices” or grin and bear it as they watched their gains
`
`dissipate. (Id. ¶ 6). Plaintiffs lay blame for their losses at Defendant’s feet. (See id. ¶ 97).
`
`D.
`
`Amended Class Action Complaint
`
`Plaintiffs Chavez and Jang propose two classes. (See id. ¶ 98). First is a Nationwide
`
`Investor Class, consisting of all investors in the United States who (1) held Meme Stock shares or
`
`call options at the end of the January 27, 2021 trading day; (2) sold their shares or options at a loss
`
`between January 28, 2021 and February 23, 2021 (the “Class Period”), or whose options expired
`
`as worthless during that period; and (3) who suffered damages. (See id.). Next is the Apex Broker-
`
`Dealer Class, consisting of all of Defendant’s direct customers and Shared Customers who (1) held
`
`Meme Stock shares or call options at the end of the January 27, 2021 trading day and had to either
`
`sell their shares or options at a loss or whose options expired as worthless during the Class Period;
`
`(2) placed a sale order on Meme Stock shares or call options and whose orders were delayed during
`
`the Class Period; or (3) placed buy orders for Meme Stock shares or call options that were initially
`
`accepted but ultimately rejected by Defendant during the Class Period. (See id.).
`
`Plaintiffs bring four claims against Defendant. (See generally id.). For all counts, they
`
`seek “compensatory damages, punitive damages, restitution, and/or refund of all funds acquired
`
`
`7 The circuit breaker is a regulatory mechanism that exchanges use to temporarily curb panic selling or
`manic buying. Circuit breakers differ from Defendant’s restriction in that they are shorter in duration and
`target both sides of the trade, not just the buy side. (See id. ¶¶ 53–54).
`9
`
`
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 10 of 38
`
`
`by Defendant from Plaintiffs and the proposed members of the Classes as a result of Defendant’s
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`negligence and unlawful actions[.]” (Id. 40 (alteration added)).8
`
`Count I is for negligence. (See id. ¶¶ 105–13). Plaintiffs allege that Defendant owes
`
`investors a duty of care “to act in accordance with the standard of care used by other broker-dealer
`
`professionals.” (Id. ¶ 106). This duty of care, which allegedly implicates Defendant in both its
`
`clearinghouse and broker-dealer service roles (see id.), entails duties to make sure the trading
`
`platforms it either provides or supports are equipped to handle “reasonably foreseeable customer
`
`demands and resulting market conditions” (id. ¶ 107), and to protect direct and Shared Customers’
`
`investments by executing orders lawfully and promptly (see id. ¶ 108). Plaintiffs allege Defendant
`
`breached this duty by failing to prepare for increased collateral requirements in the event of market
`
`volatility, restricting Meme Stock buy orders during the short squeeze, and keeping the restriction
`
`in place after the collateral requirement scare had lapsed. (See id. ¶¶ 110–12).
`
`Count II is for breach of fiduciary duty. (See id. ¶¶ 114–21). Plaintiffs allege that
`
`Defendant is an agent of its direct and Shared Customers and thus owes them “a fiduciary duty of
`
`care, loyalty, and good faith[.]” (Id. ¶ 115 (alteration added)). Defendant allegedly must take
`
`“reasonable steps” to refrain from “self-imposed trading restrictions” that give preference to its
`
`own “interest over that of its customers.” (Id. ¶ 116). Defendant allegedly breached this duty by
`
`restricting Meme Stock purchases in the first instance and then keeping those restrictions in place
`
`“for an unjustified period of time.” (Id. ¶¶ 117–18). This restriction allegedly went beyond the
`
`“mere ministerial clearing conduct” that is typically the domain of clearing brokers and benefitted
`
`Defendant at the expense of its customers. (Id. ¶ 118).
`
`
`8 The Court uses the pagination generated by the electronic CM/ECF database, which appears in the headers
`of all court filings.
`
`
`
`10
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 11 of 38
`
`
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`Count III, which Plaintiffs allege “in the alternative to Counts I and II” (id. ¶ 123), is for
`
`breach of the implied covenant of good faith and fair dealing (see id. ¶¶ 122–27). This claim is
`
`not for breach of contract, but it nonetheless centers on the Customer Agreement that Defendant’s
`
`customers must accept before using its services. (See id. ¶ 124). According to Plaintiffs, every
`
`agreement creates “a duty of good faith and fair dealing in the performance of the agreement such
`
`that neither party shall do anything which will have the effect of destroying or interfering with the
`
`right of the other party to receive the benefits of the agreement.” (Id. ¶ 125). Plaintiffs allege
`
`Defendant violated this duty when it restricted Meme Stock purchases on January 28, 2021, “with
`
`the intent of causing the trading price . . . to go down[.]” (Id. ¶ 126 (alterations added)).
`
`Count IV, also alleged in the alterative to Counts I and II, is for tortious interference with
`
`a business relationship. (See id. ¶¶ 128–36). Plaintiffs allege that Defendant’s restriction tortiously
`
`interfered with the customer agreements that Shared Customers had with the Introducing Broker-
`
`Dealers. (See id. ¶ 129).
`
`E.
`
`Defendant’s Motion
`
`Defendant seeks dismissal of the Amended Class Action Complaint with prejudice. (See
`
`generally Mot.). To start, Defendant argues that Plaintiffs lack standing to sue. (See id. 49– 53,
`
`57). This argument takes two forms. First, Defendant argues that Plaintiffs lack Article III
`
`standing to bring any of their claims. (See id. 49–53). In the alternative, it maintains Plaintiffs
`
`lack standing with respect to the direct customers who use its broker-dealer services because
`
`Plaintiffs only used Defendant’s clearinghouse services. (See id. 53, 57). Plaintiffs insist that
`
`these arguments conflate the standing analysis with the class certification analysis, rendering them
`
`premature at this stage. (See Resp. 24–30).
`
`
`
`11
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 12 of 38
`
`
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`Second, Defendant argues that federal securities law preempts Plaintiffs’ claims. (See Mot.
`
`54–57). It asserts that the duties Plaintiffs would have the Court recognize either contradict federal
`
`securities law, or at least would make it more difficult for clearing brokers to comply. (See id. 55–
`
`56). According to Plaintiffs, this argument erroneously attempts to extend to private clearing
`
`brokers legal protections that Congress intended for self-regulatory organizations (“SROs”) like
`
`the DTCC. (See Resp. 58).
`
`Third, Defendant argues that Plaintiffs’ claims fail as a matter of law. (See id. 22–49). As
`
`to the first three counts, Defendant asserts it has no common law duties to Plaintiffs, and even if it
`
`did, Plaintiffs have failed to allege a breach of those duties. (See id. 25–43). Regarding Count IV,
`
`Defendant argues that Plaintiffs do not allege that Defendant employed improper means to
`
`interfere with the relationship between Plaintiffs and the Introducing Broker-Dealers. (See id. 43–
`
`46). Plaintiffs disagree. (See Resp. 32–57).
`
`II.
`
`LEGAL STANDARDS
`
`
`
`“To survive a motion to dismiss, a complaint must contain 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 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A pleading
`
`withstands a motion to dismiss if it alleges “factual content that allows the court to draw the
`
`reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678 (citing
`
`Twombly, 550 U.S. at 556). “The mere possibility the defendant acted unlawfully is insufficient
`
`to survive a motion to dismiss.” Sinaltrainal v. Coca-Cola Co., 578 F.3d 1252, 1261 (11th Cir.
`
`2009) (citation omitted), abrogated on other grounds by Mohamad v. Palestinian Auth., 566 U.S.
`
`449 (2012). A complaint’s “well-pled allegations must nudge the claim ‘across the line from
`
`conceivable to plausible.’” Id. (quoting Twombly, 550 U.S. at 570).
`
`
`
`12
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 13 of 38
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`This pleading standard “does not require ‘detailed factual allegations,’ but it demands
`
`
`
`
`more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at
`
`678 (quoting Twombly, 550 U.S. at 555). When considering a motion to dismiss, a court must
`
`construe the complaint in the light most favorable to the plaintiff and take the factual allegations
`
`as true. See Brooks v. Blue Cross & Blue Shield of Fla., Inc., 116 F.3d 1364, 1369 (11th Cir. 1997)
`
`(citing SEC v. ESM Grp., Inc., 835 F.2d 270, 272 (11th Cir. 1988)). Pleadings must contain “more
`
`than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not
`
`do.” Twombly, 550 U.S. at 555 (citation omitted).
`
`
`
`Generally, a court must confine its review of a motion to dismiss to the four corners of the
`
`complaint, including any attached exhibits. See Fin. Sec. Assurance, Inc. v. Stephens, Inc., 500
`
`F.3d 1276, 1284 (11th Cir. 2007) (citing Brooks, 116 F.3d at 1368). But courts may take judicial
`
`notice of matters “not subject to reasonable dispute,” including stock prices. LaGrasta v. First
`
`Union Sec., Inc., 358 F.3d 840, 842 (11th Cir. 2004) (citations omitted); see also Fed. R. Evid.
`
`201(b).
`
`
`
`District courts must liberally grant leave to amend pleadings “when justice so requires.”
`
`Fed. R. Civ. P. 15(a)(2); see also Bryant v. Dupree, 252 F.3d 1161, 1163 (11th Cir. 2001) (holding
`
`that Rule 15(a)(2) limits district court’s discretion to dismiss pleadings without leave to amend).
`
`Only a “substantial reason” for denying leave to amend will justify the denial. Fla. Power & Light
`
`Co. v. Allis Chalmers Corp., 85 F.3d 1514, 1520 (11th Cir. 1996) (quoting Shipner v. E. Air Lines,
`
`Inc., 868 F.2d 401, 407 (11th Cir. 1989)). A plaintiff who seeks to amend a complaint under
`
`Federal Rule of Civil Procedure 15(a)(2) must request leave by filing a written motion and setting
`
`forth the substance of the proposed amendment. See United States ex rel. Atkins v. McInteer, 470
`
`F.3d 1350, 1361–62 (11th Cir. 2006) (citations and footnote call number omitted).
`
`
`
`13
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 14 of 38
`
`
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`III. ANALYSIS
`
`A.
`
`Choice of Law
`
`Before proceeding to the parties’ substantive arguments, the Court must decide what law
`
`governs. The first step of this analysis is determining which state’s choice-of-law rules apply. On
`
`this initial point, there is no dispute. When multidistrict litigation is “transferred under 28 U.S.C.
`
`[section] 1407, the transferee court applies the choice-of-law rules of the state in which the action
`
`was filed.” Larsen v. Citibank FSB, 871 F.3d 1295, 1303 (11th Cir. 2017) (alteration added;
`
`citations omitted). Plaintiffs initially filed this action in New York (see Mot. 11; Resp. 19), so
`
`New York’s choice-of-law rules control.
`
`While the parties agree New York choice-of-law rules apply, they disagree about which
`
`state’s law should govern the merits of the dispute. Plaintiffs argue that New York law applies
`
`(see Resp. 30–32), while Defendant argues that Texas law applies (see Mot. 24–25). Under New
`
`York’s choice-of-law rules, the Court must first decide whether the two states’ laws “actual[ly]
`
`conflict.” Booking v. Gen. Star Mgmt. Co., 254 F.3d 414, 419 (2d Cir. 2001) (alteration added;
`
`citation and quotation marks omitted). If there is no conflict, the Court may dispense with any
`
`further choice-of-law analysis and apply New York law. See HSA Residential Mortg. Servs. of
`
`Texas v. Casuccio, 350 F. Supp. 2d 352, 362 (E.D.N.Y. 2003) (citing Curley v. AMR Corp., 153
`
`F.3d 5, 12 (2d Cir. 1998)). But if the two jurisdictions’ laws would yield “relevant substantive
`
`differences that could have a significant impact on the outcome of the case[,]” the Court must
`
`decide which applies. Fin. One Pub. Co. Ltd. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325,
`
`332 (2d Cir. 2005) (alteration added).
`
`Defendant asserts that “no actual conflict exists” because Plaintiffs’ claims supposedly
`
`“fail under both New York and Texas law[.]” (Mot. 24 (alteration added; citation omitted)).
`
`
`
`14
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 15 of 38
`
`
`Plaintiffs are more ambivalent as to whether there is an actual conflict but argue that New York
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`law should control in either case. (See Resp. 30–31). Neither side identifies a single dispositive
`
`difference in the two bodies of law (compare Mot. 24–25 with Resp. 30–32), so the Court is
`
`inclined to adopt Defendant’s suggestion that there is no actual conflict (see Mot. 24) and apply
`
`New York law, see Curley, 153 F.3d at 12.
`
`Even if an actual conflict exists, New York’s choice-of-law rules militate in favor of
`
`applying New York law. New York rules provide that where an actual conflict exists in a tort case
`
`— and the Amended Complaint alleges four tort claims (see Am. CAC ¶¶ 105–36) — the tie goes
`
`to “the state with the most significant interest in the litigation.” Lee v. Bankers Tr. Co., 166 F.3d
`
`540, 545 (2d Cir. 1999) (citation omitted). The relevant contacts that determine which state has
`
`the greater interest are “the parties’ domiciles and the locus of the tort[.]”9 Schultz v. Boy Scouts
`
`of Am., 65 N.Y.2d 189, 197 (N.Y. 1985) (alteration added; citations omitted). These favor New
`
`York law here.
`
`New York’s ties to this litigation a re ubiquitous. Defendant is a New York corporation
`
`and has offices in New York. (See Am. CAC ¶ 10). Its “key personnel are New York based.”
`
`(Id.). GME and AMC are listed on the New York Stock Exchange, which is in New York. (See
`
`Resp. 31). The DTCC, whose collateral requirements allegedly prompted Defendant to implement
`
`the January 28, 2021 trade restriction (see Am. CAC ¶ 77–79), is also in New York (see Resp. 31).
`
`Notwithstanding these significant contacts, Defendant argues that Texas has the stronger
`
`tie. (See Mot. 24–25). The Court disagrees.
`
`Defendant first asserts that Plaintiffs’ Customer Agreements contain choice-of-law
`
`provisions which dictate that Texas law must govern. (See Mot. 25). But those provisions do not
`
`
`9 Plaintiffs’ domiciles do not factor here, for Chavez is domiciled in Arizona (see Am. CAC ¶ 13), Jang is
`domiciled in Maryland (see id. ¶ 17), and the proposed classes are nationwide (see id. ¶ 98).
`15
`
`
`
`

`

`Case 1:21-md-02989-CMA Document 525 Entered on FLSD Docket 01/09/2023 Page 16 of 38
`
`
`apply here. Under New York choice-of-law rules, contractual choice-of-law provisions only
`
`CASE NO. 21-2989-MDL-ALTONAGA/Damian
`
`govern contract disputes. See Klock v. Lehman Bros. Kuhn Loeb Inc., 584 F. Supp. 210, 215
`
`(S.D.N.Y. 1984) (“[I]t has been held in New York that a contractual choice of law provision
`
`governs only a cause of action sounding in contract.” (alteration added)).
`
`This is not a contract dispute. Plaintiffs bring four tort claims that arise from allegedly
`
`independently existing duties, not contractual obligations. (See Am. CAC ¶¶ 105–36). These tort
`
`claims are not transformed into contract claims merely because they arise out of a contractual
`
`relationship. See Hamlet at Willow Creek Dev. Co., LLC v. Ne. Land Dev. Corp., 64 A.D.3d 85,
`
`113 (N.Y. Sup. Ct. App. Div. 2009) (observing that “a contracting party may be charged with a
`
`separate tort liability arising from a breach of a duty distinct from, or in addition to, the breach of
`
`contract” (alteration and emphasis added; citations and quotation marks omitted)). The Customer
`
`Agreements’ choice-of-law provisions are inapt here.
`
`Defendant next stresses Texas law should apply because its headquarters — and thus, its
`
`domicile — are in Dallas, Texas. (See Mot. 25). This argument initially appears stronger than the
`
`first, for a party’s domicile weighs heavily in New York’s choice-of-law considerations. See
`
`Padula v. Lilarn Props. Corp., 84 N.Y.2d 519, 521 (N.Y. 1994). It does not move the needle for
`
`Defendant, however.
`
`Perhaps Dallas is Defendant’s nominal principal place of business. Yet, Defendant does
`
`not identify a single corporate officer who works out of the Dallas office, nor does it state that any
`
`decisions relevant to the January 2021 short squeeze — or anything else, for that matter — were
`
`made in Texas. (See Mot. 25; Reply 9–11). Contrast that with the number of Defendant’s officers
`
`who work in New York, as well as the hi