Charlotte B Milliner et al v. Mutual Securities, Inc.

Northern District of California, cand-4:2015-cv-03354

ORDER Granting MSI's {{91}} Motion to Amend Discovery Responses and {{90}} Motion for Leave to File Motion for Partial Reconsideration. Signed by Judge Thelton E. Henderson on 6/15/17. (tehlc2, COURT STAFF)

Interested in this case?

Current View

Full Text

0 1 UNITED STATES DISTRICT COURT 2 NORTHERN DISTRICT OF CALIFORNIA 3 4 CHARLOTTE B. MILLINER, et al., Case No. 15-cv-03354-TEH 5 Plaintiffs, ORDER GRANTING MSI'S 6 v. MOTION TO AMEND DISCOVERY RESPONSES AND MOTION FOR 7 MUTUAL SECURITIES, INC., LEAVE TO FILE MOTION FOR PARTIAL RECONSIDERATION 8 Defendant. 9 10 Presently before the Court are Defendant Mutual Securities, Inc.'s ("MSI") motion 11 to amend discovery responses (ECF No. 91) and motion for leave to file motion for partial 12 reconsideration of the Court's March 18, 2017 Order (ECF No. 90). Plaintiffs timely Northern District of California United States District Court 13 opposed both motions. The Court heard oral arguments on MSI's motions on May 8, 14 2017. During oral arguments, the Court granted Plaintiffs request for an opportunity to 15 respond to MSI's late filing of an exhibit1 (ECF No. 97) in support of its motion. Plaintiff 16 filed a supplemental brief (ECF No. 105), and MSI replied to the supplemental brief (ECF 17 No. 111). After carefully considering the Parties' written and oral arguments the Court 18 GRANTS both of MSI's motions. 19 I. BACKGROUND 20 As the parties are familiar with the factual background of this case, the Court 21 provides only a brief summary of the facts. 22 This class action is related to another class action separately filed in this Court: 23 Milliner v. Bock Evans Financial Counsel, Ltd., No. 15-cv-1763 TEH (the "Bock Evans 24 Class Action").2 The Bock Evans Class Action was brought by the same Plaintiffs as the 25 1 26 MSI stated it inadvertently omitted Exhibit A of the declaration of Mary Evans it filed on April 3, 2017 in support of its Motion to Amend its Discovery Responses. ECF No. 97 at 27 1. Exhibit A was filed on May 1, 2017 and consists of Bock Evans Financial Counsel's Client 2 Information Forms for Plaintiffs Brem and Milliner. 28 Default has been entered in the Bock Evans Class Action. No. 15-cv-1763 TEH, ECF No. 66 (N.D. Cal. May 18, 2016). 0 1 present class action, to challenge the "'one size fits all' investment approach implemented 2 by their investment advisor, Defendant Bock Evans Financial Counsel, Ltd. ('BEFC')." 3 Compl. ¶ 1 (EFC No. 1). Plaintiffs brought the present class action against Defendant 4 Mutual Securities, Inc. ("MSI") because of MSI's relationship with BEFC. Specifically, 5 BEFC required that clients hire MSI as their broker-dealer. Id. ¶ 9. Plaintiffs allege one 6 reason BEFC required clients to use MSI is because Thomas Bock and Mary Evans, the 7 principal executive officers of BEFC, were registered representatives of MSI. Id. ¶ 9. In 8 other words, Bock and Evans were "dually registered as registered representatives and 9 commissioned brokers of MSI and as investment advisors and principals of BEFC." ECF 10 No. 32 at 1:27–2:1. Plaintiffs allege BEFC "plac[ed] 100% or nearly 100% of their assets 11 in high risk and highly speculative foreign mining stocks, including over-the counter and 12 penny stocks" resulting in the value of BEFC's portfolios going "from $60 million to Northern District of California United States District Court 13 $4.17 million in just a few years, a drop of roughly $55.83 million, or 93%." Compl. ¶¶ 1– 14 2. 15 Through prior orders, the Court established "MSI owed Plaintiffs a contractual duty 16 to 'determine the suitability of any investment recommendations and advice' in accordance 17 with the express terms of their Brokerage Agreement," ECF No. 38, 4:27–5:3; that MSI 18 had a duty to supervise the outside advisory investment activities of Thomas Bock and 19 Mary Evans pursuant to FINRA rules, ECF No. 52 at 12; and that this duty to supervise 20 includes a duty to determine suitability, ECF No. 87 at 4:8–9. 21 Presently before the Court are two motions: (1) MSI's Motion to Amend its 22 Discovery Responses, ECF No. 91, and (2) MSI's Motion for Leave to File Motion for 23 Partial Reconsideration of Court's March 18, 2017 Order, ECF No. 90. In short, MSI 24 argues it should be granted leave to amend its responses to its Requests for Admissions 25 because at the time it made its admissions that it did not determine the suitability of trades 26 conducted in Plaintiffs' accounts, MSI had the understanding that Bock and Evans' actions 27 were not done on MSI's behalf. ECF No. 91 at 1:2–8. MSI argues this understanding was 28 rejected by the Court in its March 18, 2017 order, therefore making its admissions no 2 0 1 longer accurate. Id. at 1:18–21. MSI also argues that because these admissions were the 2 sole basis for the Court's determination that MSI failed to determine suitability, MSI's 3 amendment of its responses – should the Court decide to grant them – creates a material 4 difference in law and fact that warrants reconsideration of the issue. See ECF No. 90. 5 II. LEGAL STANDARDS 6 a. Motion to Withdraw or Amend Responses to Requests for Admission 7 Under Federal Rule of Civil Procedure 36(b), the Court may permit withdrawal or 8 amendment of an admission under Rule 36 "if it would promote the presentation of the 9 merits of the action and if the court is not persuaded that it would prejudice the requesting 10 party in maintaining or defending the action on the merits." This rule allows the Court to 11 exercise to its discretion to grant relief from an admission only when (1) "the presentation 12 of the merits of the action will be subserved," and (2) "the party who obtained the Northern District of California United States District Court 13 admission fails to satisfy the court that withdrawal or amendment will prejudice that party 14 in maintaining the action or defense on the merits." Conlon v. United States, 474 F.3d at 15 621 (9th Cir. 2007). 16 b. Motion for Reconsideration 17 Civil Local Rule 7-9 establishes the entry of a final judgment, "any party may make 18 a motion before a Judge requesting that the Judge grant the party leave to file a motion for 19 reconsideration of any interlocutory order on the ground set forth in Civil L.R. 7-9(b). No 20 party may notice a motion for reconsideration without first obtaining leave of Court to file 21 the motion." Additionally, Civil L.R. 7-9(b) requires that the party seeking leave to file a 22 motion for reconsideration must show "reasonable diligence in bringing the motion, and 23 one of the following: 24 (1) That at the time of the motion for leave, a material difference in fact or law exists from that which was presented 25 to the Court before entry of the interlocutory order for which reconsideration is sought. The party also must show that in the 26 exercise of reasonable diligence the party applying for reconsideration did not know such fact or law at the time of the 27 interlocutory order; or (2) The emergence of new material facts or a change of law 28 occurring after the time of such order; or 3 0 (3) A manifest failure by the Court to consider material facts or 1 dispositive legal arguments which were presented to the Court before such interlocutory order. 2 3 Motions for reconsideration should not be frequently made or freely granted. See 4 generally Twentieth Century-Fox Film Corp. v. Dunnahoo, 637 F.2d 1338, 1341 (9th Cir. 5 1981). "[T]he major grounds that justify reconsideration involve an intervening change of 6 controlling law, the availability of new evidence, or the need to correct a clear error or 7 prevent manifest justice." Pyramid Lake Paiute Tribe of Indians v. Hodel, 882 F.2d 364 n. 8 5 (9th Cir. 1989). 9 III. DISCUSSION 10 a. Bock and Evans Actions Are Imputed to MSI Under FINRA Rules 11 The Court finds it appropriate to first discuss one of the parties' major disputes 12 made evident in the briefs: whether the Court's March 18, 2017 Order means that Bock Northern District of California United States District Court 13 and Evans actions can be imputed to MSI under FINRA Rules. See ECF No. 93 at 3:23– 14 4:9; ECF No. ECF No. 95 at 4:12–24. In its prior order the Court rejected MSI's theory 15 that because Bock and Evans possessed "full discretion, power and authority" to trade 16 securities on behalf of the Plaintiffs, the trades were "unsolicited" and not recommended 17 by MSI, thus releasing MSI from any duty to determine the suitability of these 18 transactions. ECF No. 87 at 5:9–17. In rejecting this argument, the Court relied on 19 guidance from FINRA and prior opinions from the Securities and Exchange Commission 20 ("SEC"). Id. at 5:16–6:9. FINRA has clarified that "registered representatives who effect 21 transactions on a customer's behalf without informing the customer have implicitly 22 recommended those transactions, thereby triggering application of the suitability rule." 23 FINRA Rule 2111 (Suitability) FAQ, n. 37. The Court also relied on Pinchas v. Sec. Exch. 24 Comm'n, 54 S.E.C. 331, 341 n. 22 (1999) and Kettler v. Sec. Exch. Conn'n, 51 S.E.C. 30, 25 32 n. 11 (1992). These cases provide further guidance on the parties' present dispute. 26 In Kettler, the SEC conducted a review of NASD disciplinary proceedings against 27 Paul Kettler, a securities investment firm manager. That case centered on unsuitable 28 options traded in a customer's account. Price, the customer, had opened a trading account 4 0 1 at Kettler's firm worth $275,000 with one of Kettler's salesmen, Schweig. Kettler, 51 2 S.E.C. at 31. Although Price had orally given Schweig discretionary authority to trade up 3 to $9,000 in options, Schweig disregarded this instruction and conducted an excessive 4 amount of option trades that resulted in $50,000 in losses for Price and $9,000 in 5 commissions for Kettler's firm. Id. In adjudicating the matter, the SEC recognized there 6 was "a question whether unauthorized trades are 'recommended' within the meaning of 7 NASD suitability provisions." Id. at 32 n. 11. The SEC concluded that "[i]n executing 8 securities transactions on Price's behalf, Schweig implicitly recommended the transactions 9 to her." Id. Therefore, Kettler's firm was found liable for violating the suitability 10 standards of the National Association of Securities Dealers, Inc. ("NASD"). Id. 11 In Pinchas, the SEC conducted a review of NASD disciplinary procedures against 12 Rafael Pinchas, a former general securities representative. Pinchas, 54 S.E.C. at 332. Northern District of California United States District Court 13 Among other things, the SEC affirmed that Pinchas had made unsuitable recommendations 14 when he conducted trades on behalf of two clients, both of whom had granted him 15 discretionary authority to conduct trading on their behalf. Id. at 332. This was because 16 Pinchas, before the trades were executed, failed to make appropriate inquiries about the 17 clients' investment objectives, financial situations, or needs. Id. at 341. Furthermore, the 18 Court found that Pinchas' discretionary authority did not release him from his regulatory 19 duties because "transactions that were not specifically authorized by a client but were 20 executed on the client's behalf are considered to have been implicitly recommended within 21 the meaning of the NASD rules." Id. at 341 n. 22 (quoting Kettler, 51 S.E.C. 30, 32 n. 11 22 (1992). 23 As illustrated by these cases, when a registered representative conducts a trade on 24 behalf of a customer, without the customer's explicit authorization, the trade is implicitly 25 recommended by the registered representative. Therefore, it follows that when Bock and 26 Evans – who were registered representatives of MSI at the time – conducted the trades 27 connected with Plaintiffs' accounts, their actions were imputed to MSI under FINRA rules. 28 Moreover, this rule is consistent with the Court's prior rejection of MSI's attempt to create 5 0 1 a distinction between a dually-registered agent ("RR/RIA") acting as a registered 2 representative or as a registered investment advisor. ECF No. 52 at 15:2–11 ("Notably, 3 none of the above-mentioned NTMs, nor the Commission's interpretation of these NTMs 4 recognize a distinction between RR/IAs acting as registered representatives or as 5 investment advisors."). 6 b. Further Clarification of MSI's Duty under FINRA Rules 7 In an attempt to assist the parties in their future motions and briefing, the Court 8 finds it prudent to provide further guidance on the scope of MSI's duty with regard to 9 Bock and Evans. Plaintiffs are correct in stating that, under FINRA regulations, Bock and 10 Evans cannot supervise themselves. See FINRA Rule 3110(b)(6)(C)(i) (expressly 11 prohibiting registered representatives from supervising their own activities). However, 12 while Bock and Evans' actions in determining the suitability of the Plaintiffs' transactions Northern District of California United States District Court 13 may be imputed to MSI, this does not absolve MSI of further responsibility. MSI was 14 required to undertake additional supervising responsibilities. Again, NTM 96-33 explains 15 that when a broker approves an RR/IA's participation in private securities transactions for 16 which he or she receives selling compensation, the firm must create a recordkeeping 17 system and supervisory procedures that "enable the member to properly supervise the 18 RR/IA by aiding the [broker-dealer's] understanding of the nature of the service provided 19 by an RR/IA, the scope of the RR/IA's authority, and the suitability of the transactions." 20 Moreover, the same regulation explains that neither federal securities laws nor other self- 21 regulatory organization rules mandate the supervisory system or structure that a broker 22 dealer must use. Id. Rather, broker-dealers "have tremendous flexibility to develop and 23 implement recordkeeping and supervisory systems that meet the unique nature and scope 24 of their own operations," provided that the systems "ensure that full and complete 25 transaction information is captured, and [are] reasonably designed to detect and/or prevent 26 misconduct that could violate the federal securities laws and [FINRA] Rules." Id. Thus, 27 while these rules do not require that MSI conduct a separate, independent suitability 28 6 0 1 analysis of Bock and Evans' transactions, MSI must still show it had a supervisory system 2 capable of satisfying the requirements of NTM 96-33.3 3 c. MSI's Amendment of its Admissions is Proper 4 As stated above, the Court may exercise its discretion to grant relief from an 5 admission only when (1) "the presentation of the merits of the action will be subserved," 6 and (2) "the party who obtained the admission fails to satisfy the court that withdrawal or 7 amendment will prejudice that party in maintaining the action or defense on the merits." 8 Conlon, 474 F.3d at 621. Both requirements are met here.4 9 i. Amendment Would Promote the Presentation of the Merits of the 10 Action 11 In light of the fact that Bock and Evans' actions are imputed to MSI, for purposes of 12 FINRA rules, it is clear that allowing MSI to amend its responses to Plaintiffs Requests for Northern District of California United States District Court 13 Admissions would promote the presentation of the merits in this case. This is because MSI 14 has submitted a declaration from Mary Evans describing her efforts in making suitability 15 determinations. See ECF No. 91-2. Therefore, because Bock and Evans' actions are 16 imputed to MSI, see supra Section III.a, it appears MSI may have in fact determined the 17 suitability of the transactions at issue in this case. However, the Court previously granted 18 Plaintiffs' motion for partial summary judgment in establishing that MSI breached its duty 19 to determine suitability under FINRA Rules. ECF No. 87 at 8:23–24. This ruling was 20 made solely on the basis of MSI's prior admissions that it did not determine the suitability 21 3 22 As stated in prior orders, although NTM 96-33 refers to NASD art. III, § 40, this rule is a predecessor to FINRA Rule 3280. NASD art. III, § 40 was renamed to NASD Rule 3040, 23 and NASD Rule 3040 was wholly adopted, without substantive change, as FINRA Rule 3280. 4 Therefore, this NTM is directly applicable to FINRA Rule 3280. 24 In their supplemental brief, Plaintiffs also argued that the Judicial Admissions Doctrine prohibits MSI from amending its discovery. ECF No. 105 at 2–5. But as Plaintiffs' own 25 brief acknowledges, this doctrine only applies to factual allegations, not legal conclusions. Id. at 2:11; 29A AM. JUR. 2D Evidence § 783 (2017) ("A judicial admission is a deliberate, 26 clear, unequivocal statement of a party about a concrete fact within that party's knowledge, not a matter of law. . . . In order to constitute a judicial admission, the 27 statement must be one of fact, not opinion."). Here, MSI's prior admission that it did not determine the suitability of the transactions at issue in this case were based on the legal 28 opinion that Bock and Evans' actions were not done on behalf of MSI. Thus, the Judicial Admissions Doctrine does not bar MSI's proposed amendments here. 7 0 1 of any investment recommendations or advice given to the Plaintiffs, and because of 2 Federal Rule of Civil Procedure 36(b) establishes that "[a] matter admitted under this rule 3 is conclusively established unless the court, on motion, permits the admission to be 4 withdrawn or amended." ECF No. 87 at 7:13–8:24. If the Court were to deny MSI's 5 motion to amend its discovery responses, MSI would not have the opportunity to present 6 evidence supporting its position that it did comply with its FINRA obligations and the truth 7 of the matter would be obfuscated. 8 Plaintiffs' arguments to the contrary are simply unpersuasive. Rather than arguing 9 that MSI's amendments would not promote a presentation of the merits, Plaintiffs argue 10 MSI's motion must fail because "if the admissions leave room for Defendant to contest 11 any of the elements of Plaintiffs' claim, Defendant cannot satisfy the first prong of the test 12 under Rule 36(b)." Opp'n at 8:15–17. In support of this argument, Plaintiffs rely on Northern District of California United States District Court 13 several non-binding cases, including two in-circuit decisions which rely on the Ninth 14 Circuit's decision in Conlon – which is binding on this court. But the Court finds these 15 two cases rely on a misreading of Conlon. For example, in Carden v. Chenega Security & 16 Protection Servs., LLC, 2011 WL 1344557 (E.D. Cal. Apr. 8, 2011), the court determined: 17 As to the first part of the test. . . the court in Conlon observed that this part of the test is satisfied when "upholding the 18 admissions would practically eliminate any presentation of the merits of the case." . . . Thus, the question is not whether 19 allowing the deemed admissions would have any effect on a trial on the merits of the case; it is whether it would eliminate 20 the need to reach a trial on the merits at all. Such was the situation in Conlon where summary judgment was granted 21 almost entirely due to a deemed admission. Here, by contrast, the matters deemed admitted by plaintiff's late responses 22 would not completely eliminate a trial on the merits. . . . Therefore, the first part of the Rule 36(b) test is not met here 23 and plaintiff's motion should be denied. 24 Id. at *2. Also, in Millennium Labs., Inc. v. Allied World Assurance Co. (U.S.), Inc., No. 25 12cv2280-BAS(KSC), 2014 WL 6632762, at *2 (S.D. Cal. Nov. 21, 2014), the court stated 26 that "Rule 36(b) relief is warranted only when upholding admissions would preclude a 27 litigant from presenting any issues of merit to the jury." However, in Conlon, the Ninth 28 Circuit did not specify that the first part of this test is satisfied only when "upholding the 8 0 1 deemed admissions eliminated any need for a presentation of the merits." Id. at 622. The 2 court merely established that such circumstances are sufficient to satisfy the first part of 3 the test. Indeed, this latter interpretation of Conlon is fully consistent with the plain 4 language of Rule 36(b), which dictates that amendment or withdrawal of admissions may 5 be permitted when it "would promote the presentation of the merits of the action." Fed. R. 6 Civ. P. 36(b). 7 ii. Plaintiffs Failed to Show How MSI's Amendment Would 8 Prejudice Them 9 As mentioned previously, the party relying on the deemed admission has the burden 10 of proving prejudice. Conlon, 474 F.3d at 622. Additionally, the Ninth Circuit has 11 instructed that "[w]hen undertaking a prejudice inquiry under Rule 36(b), district courts 12 should focus on the prejudice that the nonmoving party would suffer at trial." Id. at 623. Northern District of California United States District Court 13 Here, Plaintiffs suggest prejudice exists by arguing that MSI waited too long to 14 withdraw the admissions and by stating that MSI has "fail[ed] to provide any explanation 15 whatsoever for its failure to promptly move to withdraw the admission." Opp'n at 10:25– 16 11:12–13. Notably, however, the burden is on Plaintiffs to show how they would be 17 prejudiced, and Plaintiffs have not shown how this delay would cause them any harm at 18 trial – which has not even been scheduled yet. And to the extent Plaintiffs argue they 19 would be prejudiced as a result of having relied on the admissions in filing prior motions 20 for partial summary judgment, the Ninth Circuit has expressly stated that such reliance 21 does not constitute prejudice. Conlon, 474 F.3d at 624 ("We agree with the other courts 22 that have addressed the issue and conclude that reliance on a deemed admission in 23 preparing a summary judgment motion does not constitute prejudice."). In sum, Plaintiffs 24 failed to meet their burden of proving prejudice.5 25 /// 26 /// 27 5 28 In light of the fact that Plaintiffs failed to show prejudice, the Court rejects Plaintiffs' request for sanctions. 9 0 1 d. Leave for Partial Reconsideration is Proper 2 Because the Court finds MSI's amendments to be appropriate, this change creates a 3 "material difference in fact. . . from that which was presented to the Court before entry of 4 the interlocutory order from which reconsideration is sought." Civil L.R. 7-9(b). 5 Additionally, it is clear that MSI could not have known this material difference existed at 6 the time of the interlocutory order because it was the Court's March 18, 2017 order that 7 rejected MSI's theory that Bock and Evans acted on behalf on the Plaintiffs and not on 8 behalf of MSI when Bock and Evans conducted the trades in dispute. Therefore, the Court 9 GRANTS MSI's motion for leave to file a motion for partial reconsideration of the Court's 10 prior determination that MSI "did not make any suitability determinations for transactions 11 linked to either of the Plaintiffs' accounts." ECF No. 87 at 7:25–26. 12 IV. CONCLUSION Northern District of California United States District Court 13 In sum, for the foregoing reasons, the Court GRANTS both of MSI's motions. MSI 14 shall file its motion for partial reconsideration no later than June 30, 2017. Plaintiffs shall 15 have 14 days to respond, and MSI shall have 7 days from the filing date of Plaintiffs 16 response to file a reply. After receipt of the parties' papers, the Court will take the matter 17 under submission without oral argument. 18 19 IT IS SO ORDERED. 20 21 Dated: 6/15/2017 _____________________________________ THELTON E. HENDERSON 22 United States District Judge 23 24 25 26 27 28 10