Rupnow v. E* Trade Sec.

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JOSHUA RUPNOW, PETER SZOSTAK, and others similarly situated, Plaintiffs, v. E*TRADE SECURITIES, LLC., Defendant.

No. 19-CV-10942 (VSB)

United States District Court, S.D. New York

December 9, 2021

Andrei V. Rado Milberg Phillips Grossman LLP Counsel for Plaintiffs

Marc L. Greenwald Quinn Emanuel Urquhart & Sullivan LLP Counsel for Defendant

OPINION & ORDER

VERNON S. BRODERICK, UNITED STATES DISTRICT JUDGE:

Before me is the motion filed by Defendant E*TRADE Securities LLC (“E*TRADE”) to dismiss the class action complaint filed by Plaintiffs Joshua Rupnow and Peter Szostak (“Plaintiffs”). (Docs. 12-14.) Because I find that Plaintiffs' class claim is not preempted by the Securities Litigation Uniform Standards Act, E*TRADE's motion to dismiss is DENIED.

I. Factual Background^[1]

This case involves short selling- “when a trader/investor borrows a stock from a brokerage, sells that stock, and then, later, purchases the stock back in order to return it to the lender.” (Compl.^[2] ¶ 13.) The short selling trades in this case took place on E*TRADE, one of the largest online-focused broker-dealers in the world. (Id. ¶ 7.)

Pursuant to the agreement between E*TRADE and its users (“Agreement”), people who invest through E*TRADE agree to pay all fees and charges related to their trading as set forth in the “Fee Schedule.” (Id. ¶ 11.) The “Fee Schedule” also specifies the rate of interest that customers will pay if they borrow money from E*TRADE with which to buy, or sell short, securities. (Id. ¶ 12.) “In the securities context such borrowed money is referred to as ‘margin.'” (Id.) Specifically, the “Fees and Commissions” section of the Agreement reads as follows:

Fees and Commissions The Account Holder agrees to promptly pay all brokerage commissions, charges, securities-borrowed fees, regulatory passthrough fees, and other fees as may be applicable to the Account or any transaction in the Account based on the then-effective Fee Schedule. The Fee Schedule may require a minimum Account balance, assess fees for inactive Accounts, and assess fees for Account terminations or transfers. In addition, the Account Holder agrees to pay all taxes applicable to the Account, any transaction in the Account, or the use of any Service. The Account Holder authorizes E*TRADE to automatically debit the Account for any such brokerage commissions, charges, fees, and taxes.

The Account Holder understands that the Account Holder will be provided with an indicative “borrow rate” for a hard-to-borrow security at the time the Account Holder previews a short sell order for that security but that the actual “borrow rate” for the security may be different.

The Fee Schedule is available on the E*TRADE website and is incorporated by reference into this Customer Agreement. E*TRADE may modify the Fee Schedule at any time, at its sole discretion, and such fees will be applicable to the Account as of the effective date of such amendment.

(Id. ¶ 11 (emphasis original).)

In short selling parlance, a security is “hard-to-borrow” when a broker's supply of shares that can be loaned to short sellers cannot meet the demand. (Id. ¶ 14.) This usually happens to heavily shorted stocks. (Id.) The rate E*TRADE charges on loans of hard-to-borrow securities is not disclosed in the Fee Schedule. (Id. ¶ 15.) Instead, pursuant to the Agreement, users “will be provided with an indicative ‘borrow rate' for a hard-to-borrow security at the time [they] preview[] a short sell order for that security.” (Id.)

Plaintiff Rupnow opened an investment account on E*TRADE in 2017. (Id. ¶ 5.) He made a series of short trades between December 2017 and January 2018. (Id. ¶¶ 5, 31.) At the time he placed these short trade orders, he was not informed that any of these securities were hard-to-borrow. (Id. ¶ 31.) However, $400.17 in hard-to-borrow interest was later deducted from his account. (Id. ¶ 32.) The hard-to-borrow interest rate was not enumerated in any way on E*TRADE's online trading platform prior to the trades, nor do the monthly statements on which the charges are reflected indicate which short sales resulted in the hard-to-borrow interest. (Id. ¶ 5.) Rupnow never agreed to pay such interest. (Id. ¶ 32.) The money charged was “simply removed from his brokerage account, ” (id. ¶ 5), and he did not have a meaningful opportunity to dispute the charge before it was deducted, (id. ¶ 19).

Plaintiff Szotak opened an investment account on E*TRADE in 2018. (Id. ¶ 6.) He shorted certain securities in June, July, and August 2019. (Id. ¶ 22.) At the time he placed these short trades, he was not informed that the securities were hard-to-borrow and was not provided with an indicative rate. (Id.) However, he was charged $1, 829.03 for the trades in June, $624.17 for trades in July, and $568.66 for trades in August; these charges were identified on his monthly statements as “hard to borrow interest” and the money was “simply removed from his brokerage account.” (Id. ¶¶ 6 22.)

In June 2019, Szotak shorted a certain company's stock and later became aware through news reports that the stock had been hard-to-borrow at the time he shorted the stock. (Id. ¶ 24.) On June 10, 2019, he communicated with the E*TRADE customer representatives through E*TRADE's live chat messaging on its website. (Id.) He asked a customer representative about the borrow rate for that particular company stock and was told that the rate “was not available on the E*TRADE online platform” and that the customer representative would have to check with the “Stock Loans team” to get the borrow rate. (Id.) After checking, the customer representative informed Szotak that the rate was currently “350%.” (Id.)

The following day, June 11, 2019, Szotak initiated another chat with a customer representative and asked the same question. (Id. ¶ 25.) He was transferred to a trader, who told him that the borrow rate was estimated at 300%. (Id.) The trader also confirmed that the only way for customers to learn the rate is to communicate with a trader by first initiating contact with a customer service representative, who then would need to contact the stock lending department. (Id.)

E*TRADE did not disclose the hard-to-borrow nature of the traded security or the indicative borrow rate prior to trades to its customers until October 2019, when it began to display estimates of the hard-to-borrow rate in the trade preview window. (Id. ¶¶ 2, 28.)

Plaintiffs filed this class action against E*TRADE on behalf of its customers who were charged undisclosed interest on short sales of “hard-to-borrow” securities between November 26, 2013, and October 15, 2019. (Id. ¶¶ 1, 33-45.) Plaintiffs assert a breach of contract claim for E*TRADE's failure to perform its obligation under the Agreement to disclose the indicative borrow rate in a preview window prior to the short selling trades.^[3] (Id. ¶¶ 46-52.)

II. Procedural History

Plaintiffs filed their Complaint on November 26, 2019. (Doc. 1.) On March 5, 2020, Defendant E*TRADE filed its motion to dismiss the Complaint. (Doc. 12.) On April 14, 2020, Plaintiffs filed their opposition to Defendant's motion to dismiss. (Doc. 23.) On April 28, 2020, Defendant filed its reply. (Doc. 26.)

III. Legal Standard

To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), “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 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “Plausibility . . . depends on a host of considerations: the full factual picture presented by the complaint, the particular cause of action and its elements, and the existence of alternative explanations so obvious that they render plaintiffs inferences unreasonable.” L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 430 (2d Cir. 2011).

In considering a motion to dismiss, a court must accept as true all well-pleaded facts alleged in the complaint and must draw all reasonable inferences in the plaintiffs favor. Kassner, 496 F.3d at 237. A complaint need not make “detailed factual allegations, ” but it must contain more than mere “labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” Iqbal, 556 U.S. at 678 (internal quotation marks omitted). Finally, although all allegations contained in the complaint are assumed to be true, this tenet is “inapplicable to legal conclusions.” Id. A complaint is “deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference.” Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002).

IV. Discussion

Defendant E*TRADE argues that the Complaint should be dismissed in its entirety because (1) Plaintiffs' breach of contract claim is barred by Securities Litigation Uniform Standards Act (“SLUSA”); and (2) Plaintiffs fail to plead breach of contract. (MTD^[4] 3.) I am not persuaded by either argument.

A. SLUSA Preemption

1. Applicable Laws

Congress enacted the Private Securities Litigation Reform Act of 1995 (“PSLRA”) to prevent “meritless class actions that allege fraud in the sale of securities.” Spielman v. Merrill Lynch, Pierce, Fenner & Smith Inc., 332 F.3d 116, 122 (2d Cir. 2003) (citation omitted). PSLRA imposes “more stringent pleading requirements and mandatory discovery stays on securities fraud class actions filed in federal courts.” Id. (footnote omitted). However, after the enactment of PSLRA, litigants began to bring securities class actions in state courts where they alleged state law claims involving nationally traded securities. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 82 (2006). To address this...