AER ADVISORS, INC.; WILLIAM J. DEUTSCH; PETER E. DEUTSCH, Plaintiffs, Appellants,
FIDELITY BROKERAGE SERVICES, LLC, Defendant, Appellee.
FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MASSACHUSETTS [Hon. Patti B. Saris, U.S. District Judge]
Graff, with whom Graff Silverstein LLP, Howard Graff, Arent
Fox LLP, Irwin B. Schwartz, Nicholas R. Cassie, and BLA
Schwartz, PC were on brief, for appellants.
Christopher R.J. Pace, with whom Christopher M. Morrison and
Jones Day were on brief, for appellee.
Hammerman, Kevin M. Carroll, Securities Industry and
Financial Markets Association, Colleen P. Mahoney, James R.
Carroll, Alisha Q. Nanda, Immanuel R. Foster, Skadden, Arps,
Slate, Meagher & Flom LLP, on brief for the Securities
Industry and Financial Markets Association (SIFMA), amicus
curiae in support of affirmance.
Thompson, Circuit Judge, Souter, [*] Associate Justice, and
Lipez, Circuit Judge.
THOMPSON, CIRCUIT JUDGE.
William and Peter Deutsch, father and son, together with
their financial advisor, AER Advisors ("AER"), ask
us to undo the district judge's decision dismissing their
complaint against Fidelity Brokerage Services, LLC
("Fidelity") under Fed.R.Civ.P.
12(b)(6). The judge had deemed Fidelity immune from
suit here based on an immunity provision in the Bank Secrecy
Act ("BSA"), 31 U.S.C. § 5318(g)(3)(A) - a
provision that says, most pertinently, that a "financial
institution that makes a voluntary disclosure of any possible
violation of law or regulation to a government agency . . .
shall not be liable to any person under any law or regulation
of the United States, [or] any constitution, law, or
regulation of any State . . ., for such disclosure."
Seeing no reason to reverse the judge's thoughtful
decision, we affirm.
the Case Got Here
the facts from the complaint's allegations, which at this
stage of the litigation we must accept as true and construe
in the light most favorable to plaintiffs. See,
e.g., Schatz v. Republican State Leadership
Comm., 669 F.3d 50, 55 (1st Cir. 2012).
times relevant to this suit, AER operated as a registered
investment advisor, serving wealthy clients nationally. In
2009, AER joined Fidelity's Wealth Central platform,
giving it access to Fidelity's investment technologies -
technologies that AER relied on in advising its clients.
William and Peter were two of AER's clients. And they
were and are, respectively, chairman and chief executive
officer of a billion-dollar company called Deutsch Family
Wine & Spirits.
in 2011 and continuing through part of 2012, the Deutsches
pursued a "China Gold" investment strategy
introduced by AER and supported by Fidelity - a strategy that
resulted in their acquiring millions of shares of China
Medical Technologies, Inc. ("China Medical"), all
in the hopes of making a profit from an eventual management
buy-out or a third-party acquisition of that company. In
March 2012, Fidelity offered the Deutsches the chance to
participate in its "fully paid lending program," in
which they would lend Fidelity their China Medical shares for
an interest-based fee. If they accepted Fidelity's offer,
they probably would have been able to engineer a "short
squeeze." But they declined, saying they had no
interest in lending stock.
unwilling to take no for an answer, Fidelity lent about 1.8
million of the Deutsches' China Medical shares to short
sellers or their brokers between May and early June 2012.
Fidelity made money from these loans. But the Deutsches got
nothing - no notice of what Fidelity was up to, no collateral
to protect their interests, and no compensation.
11, 2012, after "a routine monthly transfer of [China
Medical] shares between the Deutsches' margin
accounts," Fidelity's surreptitious lending
triggered a recall obligation, basically because Fidelity had
loaned more China Medical securities than legally permitted
(fyi, all dates in the rest of this paragraph refer to 2012
as well). Over the next several days, Fidelity issued recall
notices for about 1.8 million shares. The recalls for about
1.2 million shares failed, however, causing Fidelity to
believe a short squeeze would occur. Ultimately, China
Medical's stock price went from $4.00 per share on June
13 to $11.80 per share on June 29. Fidelity ended up buying
roughly 1.2 million shares on the open market between June 19
and June 27. And the Securities and Exchange Commission
("SEC") halted trading in China Medical securities
on July 29.
around July 5, 2012, Fidelity filed a suspicious activity
report ("SAR") with the federal Treasury
Department's Financial Crimes Enforcement Network,
accusing the Deutsches of manipulating China Medical's
stock price. Plaintiffs base this allegation on an internal
memo written by David Whitlock, an employee in Fidelity's
Compliance Department, which they say "upon information
and belief . . . reflects the contents" of the
Whitlock's memo recommended that Fidelity's
Investigations, Evaluation and Response Department
investigate the Deutsches' China Medical-related
activities because they had "the appearance of
attempting to influence a short squeeze in the stock of China
Medical." And "a scheme to manipulate the price or
availability of stock in order to cause a short squeeze is
illegal," his memo added.
August 2012, the SEC kicked off an investigation of both AER
and Peter Deutsch for (in plaintiffs' words)
"possible market manipulation in the equities of China
Medical." AER, for example, received one SEC subpoena
and participated in one SEC interview. Peter also
participated in one SEC interview. State securities agencies
investigated AER as well. William was not investigated at
all, apparently (he makes no allegation that he was).
Ultimately, neither the SEC nor the state agencies pursued
enforcement actions against AER or Peter. Still, AER had to
spend hundreds of thousands of dollars in defending itself
and did not "economically recover" from the ordeal.
Peter had to spend hundreds of thousands of dollars too and
suffered emotional distress as well.
in the Southern District of Florida
diversity jurisdiction, the Deutsches and AER later sued
Fidelity in Florida's federal district court. Their
operative complaint contained an array of Florida-law claims,
including claims predicated on the SAR - e.g.,
negligent reporting and misrepresentation, fraud, and
tortious interference with existing and prospective business
eventually moved to dismiss the complaint or to transfer the
case to Massachusetts's federal district court. Most
pertinently for our purposes, Fidelity's dismissal
arguments pushed the idea that the BSA immunized it from any
civil liability for filing the SAR. And its transfer
arguments pushed the notion that all the events leading to
the suit happened in or around Massachusetts. Plaintiffs
opposed the motion, contending among other things that the
BSA did not shield Fidelity from liability for its "bad
faith" filing of the SAR and that Florida was a
reasonably convenient forum for all concerned.
"the vast majority of the facts underpinning
[p]laintiffs' cause[s] of action did not occur in . . .
Florida," the federal district court in Florida held
that "the locus of operative facts in this case favors a
transfer to the District of Massachusetts." So that
court transferred the action to Massachusetts under 28 U.S.C.
§ 1404(a) and denied Fidelity's "other
arguments and requests" as moot. To use some legalese, the
Florida federal court here was the "transferor
court" and the Massachusetts federal court was the
"transferee court." See Atl. Marine Constr. Co.
v. U.S. Dist. Court for W. Dist. of Tex., 571 U.S. 49,
in the District of Massachusetts
asserting diversity jurisdiction, plaintiffs filed an amended
complaint after the transfer, alleging Florida-law claims for
negligent reporting, interference with existing and
prospective business relations, breach of contract, breach of
good faith and fair dealing, promissory estoppel, breach of
fiduciary duty, unjust enrichment, negligence or gross
negligence, deceptive and unfair trade practices, and
prima facie tort. A common theme in each claim was
that Fidelity filed an SAR ...